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The term absorption capacity (as a part of EU Cohesion Rolicy) stands for the degree to which a country is able to effectively and efficiently spend the financial resources received from the European Funds. In other words, it defines the possibility of the EU member state to ‘digest and consume’ the funds it obtained in order to foster its development and thus improve the economic and social situation in the country. Therefore, it is necessary to have, on the one hand, an absorption capacity from the institutional system created by the particular state in order to manage the funds at issue and, on the other hand, an absorption capacity from the beneficiaries whom these funds address. For that reason two sides of absorption capacity can be defined: (1) the supply side and (2) the demand side.
The Demand side stands for the ability of potential beneficiaries - private and public - to generate appropriate and acceptable projects The Supply side of absorption capacity is determined by three main factors, which divide abortion capacity on: (i) macroeconomic, (ii) financial, and (iii) administrative.
i. Macroeconomic absorption capacity indicates the rate of EU funding in terms of the GDP of the country-beneficiary. The capacity to absorb macroeconomic effects generated by the inflow of the suplimentary investments is also related to the macroeconomic absorption capacity.
ii. In order to increase the incentive for the funds efficient use, EU structural assistance only finances a part of the total costs of a program or a project, which means that there is a need for national co-financing. Financial absorption capacity means the ability to co-finance EU-supported programmes and projects, to plan and guarantee these national contributions in multi-annual budgets, and to collect these contributions from several partners (state, regional and local authorities, private bodies), interested in a program or project.
iii. Administrative absorption capacity can be defined as the ability and skills of central, regional and local authorities to prepare acceptable plans, programmes, and projects in due time, to decide on programmes and projects, to arrange co-ordination among the principal partners, to cope with the vast amount of administrative and reporting work required by the Commission, and to finance and supervise implementation properly, avoiding fraud as far as possible.

Source: NEI Regional and Urban Development: “Key Indicators for Candidate Countries to Effectively Manage the Structural Funds” Rotterdam, 2003 Image File history File links Broom_icon. ...