The allocation of regional policy funds varies dramatically across regions even when one controls for regional development indicators. We investigate the impact of local government performance as well as spillovers in knowledge, financial means and social relations as determinants of regional fund absorption. Government performance is derived within a Data Envelopment Analysis approach. Spillovers are investigated using a spatial Durbin model. Results show that government performance has a positive impact on fund absorption. Spillovers occur in knowledge as well as in financial means. The empirical analyses focus on Special Accession Program for Agriculture and Rural Development in Slovakia using panel data.