UK suspended payments from £3bn EU development fund days after Brexit vote

Exclusive: Move exposes almost immediate impact of Brexit on UK economy

Ian Johnston
Tuesday 26 July 2016 09:09 BST
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Graffiti art displaying the European Union (EU) flag and a euro symbol
Graffiti art displaying the European Union (EU) flag and a euro symbol (Getty)

Payments from a £3bn European development fund were suspended indefinitely by the UK Government, just days after the vote to leave the EU, The Independent can reveal.

In a move that exposes the almost immediate impact of Brexit on the UK economy, businesses say they have been told they will not now receive money that was due to be paid out under the European Regional Development Fund (ERDF).

The fund, designed to promote economic growth, has to be matched by payments from member states and there was speculation the UK Treasury may be concerned about whether the Government can afford to continue paying its share, particularly if it had to meet any shortfall for schemes which extend into the post-Brexit period.

A letter to the then Chancellor George Osborne from a group of London-based companies, which has been seen by The Independent, appealed for the “pause” to be lifted.

The letter – written by John Spindler, chief executive of non-profit firm Capital Enterprise, and signed by several other company bosses – said £3.7m in funding had been agreed in March 2016 to help provide expert support to more than 600 tech start-ups in the City under a scheme called CASTS.

“Until last week we were on track to sign the full funding agreement in mid-July,” the letter said. “So it was with alarm that we heard … that, because of the referendum result, the Department of Communities and Local Government has notified the GLA [Greater London Authority] to inform Capital Enterprise that ERDF projects like CASTS, were to be put on ‘pause’ for an indefinite period.

“We would urge you to unblock this funding which is vital to the tech community in London. [The referendum] result has created a lot of uncertainty and raised questions for what it means for tech businesses in London.”

What is Article 50?

It is understood the Department for Communities and Local Government (DCLG) and the Mayor of London’s office have also written to the Treasury asking for the suspension of payments to be lifted.

The suspension came into effect when Mr Osborne was Chancellor and whether to lift it will be a key early decision for his successor Philip Hammond to take. The Government is expected to make an announcement on the situation in the next few days.

The current ERDF began in 2014 and is due to run until 2020, by which point it is expected that the UK will have left the EU. The total amount available from the fund was €3.6bn (about £3bn), but about 20 per cent is thought to have been given out already. This means that just under €3bn (about £2.5bn) is left. However these payments must be “supplemented by national public and private funds”.

Mr Spindler said Capital Enterprises, which was set up by universities and others to help small start-up companies grow quickly, had already spent about £50,000 in expectation of getting the £3.7m and had 20 people lined up to start work next month.

He said they would look for new investors in the public or private sector if the money was not forthcoming.

"It will have a big impact on the tech sector," Mr Spindler said of the prospect of losing the funding. "Combined with the investment uncertainty after Brexit, it means the tech sector, which has been one of the drivers of growth, particularly in London, is not going to come grinding to a halt but will significantly slow down."

It was unclear whether all or just some payments from the ERDF have been suspended by the Treasury. But there are increasing signs that the suspension is affecting a large amount, if not all, of the smaller funding schemes that receive ERDF money. On 12 July, the BBC obtained a leaked report showing Greater Manchester was going to miss out on £320m of EU funding, including £176m from the ERDF. However, at the time, the Government insisted there would be "no immediate change" to EU programmes.

On Friday, The Financial Times reported funding for small businesses in the north of England, provided under an ERDF-backed scheme called Jeremie, could be delayed. Jeremie has provided a total of £415m, mainly to small and medium-sized companies, since 2010.

Last week David Gauke, the Chief Secretary to the Treasury, told parliament he was unable to guarantee the future of EU funds in a shift from the statement given by a Treasury spokesman to the BBC just days earlier. “We will be making an announcement in the not-too-distant future,” he said. Mr Gauke added: “Let me be absolutely clear — as a Government we remain committed to doing everything we can do to strengthen the Northern Powerhouse, to ensure that the north of England fulfils its full potential.”

Roger Vickerman, professor of European economics at Kent University, said that any loss of ERDF funds would hit hardest in areas of the country like Cornwall and the north of England that voted heavily to leave the EU.

"The most significance is on areas that voted most strongly for Brexit – one of the more delicious bits of irony," he said.

Professor Vickerman suggested the Government might be concerned about having to pay for projects that run past the date of Brexit if the EU money is no longer available.

Professor Iain Begg, a research fellow at London School of Economics' European Institute, said any delay to the payment of funds would have to be coming from London, rather than Brussels, as the UK remained entitled to ERDF funds as it is still an EU member state. "I suspect it would be for austerity-type reasons, rather than anything at the [European] Commission level," he said.

He said the UK economy as a whole could survive without European development cash, but it could have a significant impact in regions that had benefitted the most from the development funding.

Asked to comment on the suspension of the ERDF payments, a Government spokesperson said in an email: "The UK remains a member of the EU and that means there is no immediate change to EU programmes.

"We recognise however the need to bring any uncertainty to an end as soon as possible and we have been working urgently to understand the future implications to programmes. We will make an announcement on the short-term arrangements for EU funding soon."

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