Original publication: October 2016
Author: Györgyi NYIKOS, National University of Public Service, Budapest, Hungary
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The role of financial instruments has grown over several programming periods, thanks to their leverage effect on public investment resources, their capacity to combine different forms of public and private resources, and their longer-term financial sustainability. FIs can thus be more sustainable than grants, generate better quality projects, and they may be considered more cost-effective in some circumstances. However, the success of the financial instruments significantly depends on the existence of a properly functioning, cost-effective institutional system, too. This requires a special combination of skills and expertise covering both financial and banking knowledge as well as understanding of and familiarity with cohesion policy implementation. EU financial instruments may be implemented under shared management (with the support of the European Structural and Investment Funds -“ESIF/ESI Funds”) or may be implemented under the European Commission’s direct or indirect management (e.g. “COSME” and “InnovFin” under H2020, the Cultural and Creative Sector Guarantee Facility (“CCS LGF”) within the Creative Europe Programme, the Private Finance for Energy Efficiency (“PF4EE”) and the Natural Capital Financing Facility (“NCFF”) under the LIFE programme etc.)
For the programming period 2014-2020, FIs in cohesion policy are designed to address specific market needs in accordance with the objectives of the ESI Funds programmes. The Common Provisions Regulation (CPR)2 applies to all five ESI Funds and FIs can support all thematic objectives (laid down in Article 9 of the CPR). The legislative framework that governs the implementation of FIs has also become more complex, with the EU level co-legislators aiming at better tailoring rules to the specificities of these instruments. The provisions included in the CPR are complemented by delegated and implementing acts and Guidance documents issued by the European Commission (EC).
The main difference between the 2007-2013 and 2014-2020 regulations is that in the 2007- 2013 programming period there were short and limited rules and later few guidance documents on Financial Engineering Instruments (FEIs) which gave a lot of room for manoeuvre for the Member States without legal certainty. In the 2014-2020 programming period a more detailed regulation has been introduced and several guidance documents have been issued on FIs which are not necessarily in line with the Member State practices that have been in place since 2007- 2013.
In terms of implementation of FIs, the 2014-2020 programming period is at a relatively early phase in the Member States. By 2016, strategic programming has been completed, thus the choices have in many cases been made as regards the forms of support (FIs versus grants), the management structures and modalities of FIs. There is hence available experience in the Member States and first feedback about the new provisions can now be collected.
The aim of the present study is to provide synthetic input about the experience that certain Member States have gained so far in implementing the legislative framework governing FIs in the 2014-2020 programming period under cohesion policy.
Taking into account the state of play of implementation, the study addresses the following specific themes:
- FI related considerations in the strategic planning process (i.e. in the Partnership Agreements and programmes, including the choice about whether to apply Article 39 of the CPR (“SME Initiative”);
- Setting up FIs: ex ante assessment, choices made about implementation modalities, co-operation with EIB; selection of financial intermediaries; choice among the different types of FIs, thematic scope of FIs, possible combination with grants;
- Clarity of provisions, including delegated/implementing acts and guidance documents;
- Public procurement and state aid related challenges.
The methodology comprised a twofold approach:
- desk research – examination of the previous and the new EU legislation, policy documents, collection and processing of secondary data available from the literature and evaluation documents on financial instruments;
- interviews and case studies – eight case studies (PL, HU, CZ, SK, IT, IE, BG, UK) have been selected in agreement with the European Parliament to complement the literature review and consultations/interviews. The thematic chapters and sub-chapters include thematically relevant results from the comparative assessments of the case studies as well as the interviews, in addition to the literature review.
The interview and evaluation questions were the following:
- What is the state of play of the implementation of the 2014-20 financial instruments in the selected Member States? (Including information about the process of setting up FIs: ex ante assessment, choices made about implementation modalities, co-operation with EIB; selection of financial intermediaries, etc.;
- How have choices been made among the different types of FIs? Were there intentions to use FIs in combination with grants or “off the shelf” products or “SME Initiative” and why? What are the challenges linked to the broader thematic scope of FIs that are now available for all thematic objectives under the CPR?
- What is the opinion on the clarity of provisions, including delegated/implementing acts and guidance documents? Is the current legal framework providing legal certainty on FIs? How are the new FIs provisions being applied in the different Member States? What are the main issues emerging at this stage of the implementation (e.g. uncertainties, positive versus negative evolution compared to the previous period, practical challenges, etc.)?
Single examples from both the consultations/interviews and the case studies are used in the narrative or in the text boxes, as well. The challenge of compiling the information into the analysis has been the large amount of qualitative and quantitative information collected (e.g. entire reports or graphs provided by the interviewees).
Key Findings and recommendations
The new provisions in the 2014-2020 period and the European Commission’s legal interpretations changed the operational environment compared to what was in place in 2007- 2013. In several cases, the demand for uniform standards and management methods of the new FIs instigate the use of solutions different from what were used before. However, with the change of the FI architecture it is important to take into account the MS experiences and the need for expertise and administrative capacity is crucial. Additionally, the adjustment of the legal and other conditions is necessary.
On the basis of the research carried out for this study the key findings are that one of the main advantages of using FIs is the added value that revolving instruments have over grants in terms of the efficient use of public resources. Repayable forms of support can also act as an incentive for better quality investments as the investments need to be economically viable so that the final recipient is able to repay the support provided. Restricted access to finance is identified as a problem in all the countries analysed in this study and cost-effectiveness of public funds is an additional rationale in most countries for establishing financial instruments.
The Investment Plan for Europe strongly encourages the use of financial instruments instead of traditional grants in ESIF funding. While the overall amounts delivered through financial instruments should increase, the EC’s implicit general policy line is that there should be consolidation of resources into national or supra-regional instruments.
Ex-ante quantification and justification of FIs is obligatory, however, this is a complex and time-consuming process. Proper functioning of financial instruments requires a well-functioning, cost-effective institutional system and adequate administrative capacity. Involving diverse fund managers creates wider access for SMEs, since they are able to use their range of specialisations to reach out to more companies in need of funding. However, obligatory formal public procurement for the selection of financial intermediaries does not support this approach – several Member States have to change their method for establishing their FI institutional system, despite the fact that setting up FIs within the existing structures minimises operational costs and helps to speed up implementation. On the contrary EIB/EIF in general is exempt from applying EU public procurement rules. Remuneration is the most effective mechanism to ensure that actors perform as expected. It must be attractive for the intermediaries but also in line with state aid rules, therefore designing the right remuneration scheme for a FI is not an easy task.
In the framework of FIs, various kinds of assistance schemes are offered by the CPR. EU level FIs have several advantages, namely that no national co-financing is needed or contracts can be concluded with the EIB/EIF directly by managing authorities without the need for a competitive process/public procurement and the EIB/EIF can select financial intermediaries to manage FIs on the basis of its internal procedures. Despite the advantages mentioned, Member States still prefer the use of national/regional FIs. Off the shelf FIs provide standard terms and conditions compatible with ESI Funds regulations and state aid rules, but they do not always fit with market needs. Due to this, tailor-made solutions are the best tools, nonetheless they are more complicated to implement because of the complexity of the applicable rules. Furthermore in the 2014-2020 period more types of combination will be possible than earlier, which facilitates the transition from a financial support regime based on grants towards the use of revolving FIs. The main financial resource used for FIs is the ERDF, nevertheless a few financial instruments financed by the ESF are also planned (e.g. PL, HU). In the 2014-2020 period there is a more sophisticated regulation and several guidance documents on FIs which are not necessarily in line with Member State practices that have been in place since 2007-2013. There has been a move from under-regulation to overregulation. Despite the clarity of the provisions in the CPR, in several cases the interpretation is not explicit and there is an apparent need to amend the text of the CPR. Risk of “audit freak” of practitioners and final beneficiaries may also lead to inflexible and inefficient use of funds.
On the basis of this research carried out for this study, the following recommendations are made:
1. The legislative gap between financial instruments implemented by the EIB and those implemented at Member State level is wide. It seems that the rules defined for centrally implemented financial instruments allow more room for manoeuvre and they are less strict. For the more effective and efficient use of FIs, it is recommended to align the conditions of these two implementation types so that the rules for national FIs also become more flexible.
2. The correct implementation of FIs may cause challenges: inconsistent rules (cohesion policy, state aid, public procurement regulations), too much guidance in comparison to the volume of legislation or EC interpretation of the rules sometimes making oversight more difficult. For the effective implementation of FIs clearer rules and stronger methodological guidance – or clearer decision on “laissez-faire” – are needed.
3. Regarding the leverage effect, the interpretation of the CPR is not explicit. The regulation should provide a definition for the leverage effect of financial instruments which clearly distinguishes between the leverage of private and national public contributions under the OP and/or of additional private or public capital contributions, and takes into account the type of instrument involved, as well. This definition should clearly indicate how the amounts mobilised by the EU and national public contribution are determined.
4. The new cohesion policy regulations provided opportunities to use financial instruments based mainly on the consideration whether the administrative capacity at national/regional level is available or not. The EIB Group has undoubtedly got the necessary knowledge and administrative capacity, however, the strengthening of the national administrative capacity is also necessary in order to improve the use of financial instruments in the current period and also in the future. The challenges to be faced require more and highly qualified management resources in order to mitigate risks and accomplish the goals set out by the policy plans.
5. For the wider use of tailor-made FIs better harmonization of the applicable rules (cohesion policy, state aid) is needed, especially by ensuring common definitions of the terms used. Requirements in the delegated and implementing acts should be described in a clearer way. More off the shelf products may also be helpful. For the better implementation of combining the different funds, the Member States need encouragement and guidance so that they can use the simplest options.
6. Finally, for the effective and efficient implementation of FIs it will also be vital for the Commission, the EIB and the national authorities to coordinate the use of the FIs under shared and centralised management with the European Fund for Strategic Investments (EFSI), also known as the ‘Juncker Plan’.
Link to the full study: http://bit.ly/573-449
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