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Future of SME promotion - May 2003      Activities  Comments on current EU aid measures targeted at SMEs The members of NEFI, eight specialised financial institutions from seven different Member States, each entrusted with a public mission and dedicated to promote SMEs, have utilised and benefited from the current EU aid measures in favour of small and medium-seized enterprises. The main EU sources used by NEFI members for supporting their SME clients have been the former SME Guarantee Facilities “Growth and Environment”, “Growth and Employment” as well as the various financial instruments for SMEs of the current Multiannual Programme (MAP) for entrepreneurship and enterprises (2001-2005). In addition to that some NEFI partners include EFRD means to offer SME specific loans with subsidised interest rates in the context of regional development promotion. We regard the support of the EU budget in the form of co-guarantees for loans extended to SMEs as a generally very helpful instrument to improve access to finance for SMEs. These guarantees can be embedded easily into existing or newly launched SME financing schemes on a portfolio basis. As risk mitigation is the key issue for banks to lend to SMEs, the guarantee instrument focuses on the core obstacle. The relatively high leverage of such guarantees constitutes an efficient use of limited EU budget resources. In that respect, the MAP´s approach of providing the SME Guarantee Facility has proven to be successful. However, NEFI would like to pinpoint some less positive aspects of the MAP and its instruments. The MAP approved in December 2000 has only become operational since one year due to the clarification process within the Commission services. The newly introduced equity window of the SME Guarantee Facility is still being discussed whether it complies with state aid rules, thus questioning its operationality. Regarding loan guarantees, the SME Guarantee Facility does not foresee any particular window for SME investments in important and dynamic areas as environmental protection or innovation. Given that importance, NEFI assumes that SME finance in these areas can nevertheless be covered on a portfolio basis by the broadly defined loan guarantee window. Regarding the formal handling of MAP guarantees, reporting requirements could be more relaxed (semi-annually instead of quarterly, less data in general). Furthermore, investment support out of the MAP is just beginning to unfold in the Accession Countries (AC). In our view, the conditions set by the MAP rules do not encourage intermediaries from current EU Member States to extend their lending to SMEs in the AC as they cannot be direct beneficiaries of the guarantees provided. A more flexible approach by the Commission towards EU financial intermediaries partnering with banks in the AC would surely improve access to finance for SMEs in the AC. Regarding EU aid measures designed to help SMEs to further internationalise and better explore opportunities of the internal market, the Joint European Venture Programme (JEV) established in 1998 and embedded into the MAP since 2001, has identified a market gap not being covered by existing EU support programmes (JOP, ECIP) at that time. Despite that promising approach, the JEV Programme has rarely been used by NEFI members and most other banks accredited as financial intermediaries due to a number of reasons. The JEV Programme offered only limited support via a small grant which was even split into two disbursements, its procedures were widely judged as too bureaucratic, and it was not actively promoted by the Commission itself to make it a well-known instrument in the SME community. The JEV Programme might be a “good example” for low cost-benefit-ratios of EU support measures providing grants instead of more advanced instruments like interest-subsidized loan schemes or guarantees. Support in the form of grants usually involves a much higher degree of direct monitoring by the Commission services in order to prevent fraud, while at the same time achieving only a limited leverage effect. Hence, the NEFI members propose to take into account the experience made with the JEV Programme when designing any future initiatives at EU level to assist SMEs in their internationalisation efforts. In terms of flexibility of EU programmes, NEFI regrets that the JEV scheme has not been extended to cover also projects in the AC. Well-knowing that JEV was originally designed for joint ventures in EU Member States and EEA countries, there was a demand for an extension to the AC from the SME community which could not be satisfied. Future needs for promoting SMEs supported by EU financing NEFI has identified a number of areas in which active support for SMEs in Europe is still necessary and justifiable. Future support instruments at EU level should be shaped along the particular needs of SMEs, and their design ought to take into account proven best practices in EU Member States and from EU support schemes. In this context state aid requirements especially for small loan amounts which are above all needed for financing new enterprises should be reduced to a minimum. NEFI, therefore, proposes in particular to -Raise the budget of a subsequent new MAP. With the enlargement of the European Union, NEFI partners fear that the budget of a “new” MAP could not be sufficient to support SMEs in the old and the new Member States. -Extend guarantees and broaden their scope. Guarantees are a cost-efficient, flexible instrument with high leverage on the provision of SME financing, both for loans and equity. EU-backed guarantees should particularly be provided to facilitate the succession of companies in European countries and to stimulate SME investments in innovation and technology. EU-backed guarantees should be flexible and easily embeddable for intermediaries in the Member States. -Provide loan subsidies as an alternative to grants. The provision of guarantees is not always the most appropriate instrument in all NEFI member states. Subsidising loan interest rates has also proven to be an effective promotional instrument for SMEs. As traditional loan finance will remain the most important source of external finance for SMEs in the future, interest-subsidised loans should be considered as an alternative particularly to grants which are still a very common feature of EU financial aid programmes. By using EU budget resources for subsidising loan interest rates, the overall volume of financing made available to SMEs could be multiplied. -Support the internationalisation of SMEs in the enlarged European Union. Currently, support at EU level to help SMEs to internationalise is insufficient. New initiatives should draw on the lessons learned from previous EU schemes (JOP, JEV) and be tailored to the needs of an enlarged European Union. Such new initiatives should include grant elements where appropriate as well as more advanced tools like interest-subsidised loan schemes, guarantees or equity investments. -Foster investments in the Accession Countries.Existing instruments like the SME Guarantee Facility of the MAP should be handled with greater flexibility, giving intermediaries of all EU countries access to EU guarantees directly when providing loan finance to SMEs in the AC. As regards the SME Finance Facility II set up in 2000, its scope should be extended to investments in environmental and climate protection (example given: investments in housing insulation). -Facilitate SME participation in the area of research and development. A large part of SME support at EU level is provided outside the MAP and its financial aid instruments. One significant source for SMEs is the recently launched 6th Framework Programme (2002-2006) for promoting research, development and innovation in Europe. Due to the relative complexity of transnational research projects eligible for EU co-financing, SMEs may find it too difficult to participate and obtain funding. The European Commission should explore ways and means on how access to EU funding could be facilitated for SMEs, and how national SME financiers could play a stronger complementary role in ensuring sound overall financing of European R&D projects with SME participation. -Try innovative ways of channelling EU funding for SMEs. EU support programmes usually formulate common objectives and also determine the mechanisms and instruments (i.e. grants) which have to be applied uniformly in all Member States (top-down approach). Alternative ways of using EU budget funding for supporting SMEs could be envisaged allowing, within the frame of common objectives defined at EU level, own initiatives by national promotional institutions in the Member States (bottom-up approach). The EU could delegate the concrete design of schemes and the selection of instruments regarded as appropriate to national institutions. EU funding could thus be utilised in a more flexible way, supporting measures specifically tailored to the needs of target groups in each Member State. As a general principle, NEFI proposes to take into account best practices in EU Member States and to make use of the specific know-how of national institutions promoting SMEs. Any new support scheme or initiative at EU level should take into account proven best practices in the Member States whenever possible. NEFI offers its expertise on best practices and developments in financing SMEs to the EU institutions. Already successful initiatives in EU countries might be easily adaptable for designing EU-wide support schemes, thus avoiding “reinventing the wheel”. (May 2003) printversion