R (on the application of Rotherham Metropolitan Borough Council and Others) v Secretary of State for Business, Innovation and Skills

Heard on 22 and 23 October 2014

( with whom Lord Hodge agrees)

1. This appeal is about the distribution of European Structural Funds among the regions of the United Kingdom. It arises out of the complaint of a number of local authorities in Merseyside and South Yorkshire about the way in which it is proposed to distribute funds allocated to the United Kingdom for the years 2014 to 2020. The appellants say that they should receive more and other regions correspondingly less.

2. Article 174 of the Treaty on the Functioning of the European Union requires the European Union to "aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions". Article 175 requires Member States to conduct their economic policy in such a way as to further this objective and the Union to support it by distributions from the "European Structural and Investment Funds" (or "ESI Funds"). These funds are the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund. For present purposes the most significant of them are the Social Fund and the Regional Development Fund.

3. The Social Fund was established under article 162 of the Treaty, whose terms identify its purpose:

"In order to improve employment opportunities for workers in the internal market and to contribute thereby to raising the standard of living, a European Social Fund is hereby established in accordance with the provisions set out below; it shall aim to render the employment of workers easier and to increase their geographical and occupational mobility within the Union, and to facilitate their adaptation to industrial changes and to changes in production systems, in particular through vocational training and retraining."

Article 176 established the Regional Development Fund. This fund, which is much the largest of the Structural Funds, is

"intended to help to redress the main regional imbalances in the Union through participation in the development and structural adjustment of regions whose development is lagging behind and in the conversion of declining industrial regions."

4. The distribution of money from the EU Structural Funds is a shared responsibility of the Commission and the authorities of the Member States. The Commission is solely responsible for the allocation of funds to each Member State. The money is then used to co-finance programmes, the Union contribution currently varying between 50% and 85% and the rest being met from national budgets. The expenditure of sums allocated by the Commission within a Member State is jointly determined by the Commission and the Member State. In the United Kingdom this is the responsibility of the Secretary of State for Business, Innovation and Skills.

5. Funds are allocated from the EU budget to programmes co-financed by the European Structural Funds for successive seven-year funding periods. The transition to a new funding period will commonly involve a measure of disruption. Funding budgets rise and fall. Strategic priorities both at Union and at national level change. The number and definition of the various categories of region entitled to funding support also change. Statistical tests for funding support, which commonly depend on the relationship between indices of regional development and the corresponding EU averages, may be significantly affected by the accession of new Member States. There may or may not be transitional provisions to ease the passage from one funding period to the next.

6. The allocation of funds for programmes co-financed by the European Structural Funds for 2014–2020 is governed by Regulation (EU) 1303/2013, which I shall call the 2013 Regulation. The legal base of the 2013 Regulation is article 177 of the Treaty on the Functioning of the European Union, which requires the European Parliament and the Council to make regulations to "define the tasks, priority objectives and the organisation of the Structural Funds". So far as the current period is concerned, these objectives are summarised in the recitals to the 2013 Regulation. The overall objective is succinctly expressed in Recital (3). It is to provide a framework within which the "Union and Member States should implement the delivery of smart, sustainable and inclusive growth, while promoting harmonious development of the Union and reducing regional disparities". This recital reflects one of the main features of the scheme, which is that it has been designed on the footing that there is a close interaction between the reduction of regional imbalances and the promotion of growth generally.

7. This is reflected in the drafting of the 2013 Regulation, which is directed not just to the reduction of regional disparities but to economic development in its broadest sense. Under article 89(1) of the 2013 Regulation, the Structural Funds are required to contribute to two "missions". One is the "actions of the Union leading to strengthening of its economic, social and territorial cohesion" in the broad sense envisaged in article 174 of the Treaty. The other is the "delivery of the Union strategy for smart, sustainable and inclusive growth". Both missions are to be fulfilled by pursuing two "goals" identified in article 89(2), namely "investment for growth and jobs in Member States and regions", and European territorial co-operation. Of the two goals, the first is much the most important. Article 91 provides for an overall budget of (in round figures) EUR 322 billion, representing the global resources allocated for the years 2014–2020 to the Social Fund and the Regional Development Fund (together with the Cohesion Fund from which the United Kingdom does not benefit). Under article 92, 96.33% of this global amount is allocated to the "Investment for growth and jobs goal" and of this, specified proportions are allocated to three categories of region: less developed, transition and more developed. The regions in question are standard geographical units used for statistical purposes by the Commission and known as "NUTS2" regions (Nomenclature of Territorial Units for Statistics, Level 2). The categorisation of regions depends on the ratio of their average GDP per capita to that of the Union as a whole: see article 90 of the 2013 Regulation. Less developed regions have a GDP per capita below 75% of the EU average; transition regions have a GDP per capita between 75% and 90% of the EU average; and more developed regions have a GDP per capita over 90% of the EU average.

8. To calculate a Member State's allocation from the Structural Funds, the Commission notionally allocates an annual amount of funding to each region within that state in accordance with a methodology prescribed for each of the three categories of region by Annex VII of the 2013 Regulation. In each category, the calculation is based mainly on the region's GDP per capita relative to the EU average. The Commission uses the resulting figures to calculate an aggregate amount for each of the three categories of region in that Member State. The sum of the three categories is then allocated to the Member State, plus a sum from the Cohesion Fund in the case of those Member States (not including the United Kingdom) which are supported by that fund.

9. In contrast to the allocation of Structural Funds among Member States, which is prescribed by the 2013 Regulation in detail, there is no formula for the allocation of funds among regions within Member States. Instead, what is prescribed is a detailed administrative procedure for arriving at the internal regional allocations under a scheme of shared management involving the Commission, the Member States, and local entities. The initiative, or right of proposal, belongs to the Member State. Article 4.4 provides:

"Member States, at the appropriate territorial level, in accordance with their institutional, legal and financial framework, and the bodies designated by them for that purpose shall be responsible for preparing and implementing programmes and carrying out their tasks, in partnership with the relevant partners referred to in Article 5, in compliance with this Regulation and the Fund-specific rules."

The critical instrument is the Partnership Agreement, which determines the allocation of resources between regions and programmes to be co-financed. It is defined by article 2.20 as

"a document prepared by a Member State with the involvement of partners in line with the multi-level governance approach, which sets out that Member State's strategy, priorities and arrangements for using the ESI Funds in an effective and efficient way so as to pursue the Union strategy for smart, sustainable and inclusive growth, and which is approved by the Commission following assessment and dialogue with the Member State concerned."

The function of the Partnership Agreement is described by Recital (20). It is to

"translate the elements set out in the [Common Strategic Framework] into the national context and set out firm commitments to the achievement of Union objectives through the programming of the ESI Funds. The Partnership Agreement should set out arrangements to ensure alignment with...