Market Gaps on Access to Finance - Bank of Valletta

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Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 many times greater than grant assistance, giving them a particular added value and relevance in times of budgetary constraints, as explained in the figure below 67 . These financial instruments are also seen as a way of encouraging a move away from public funding grant dependency. However, the EC has also commented that its intention is not to replace grant funding since this form of funding will still be necessary in a range of areas, but rather to blend such grants with financial instruments, such as loans from financial institutions 68 . Figure 3: Comparison of grants and revolving instruments Support based on Grants Tax Revenues Grant programmes Target Projects MONEY IS LOST Reallocation to Funds Leverage ratios 69 vary significantly by type of instrument. For equity-related financial instruments the EC refers to a leverage ratio of up to 3.4x 70 . For guarantee-related instruments, a higher ratio of up to 7.5x is referred to 71 . The loan-related instruments’ benchmark leverage ratio mentioned by the EC is up to 2x 72 . A short description of the JEREMIE scheme, the only currently available financial instruments in Malta, is provided in the section below, including take-up to date. 67 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms 68 Ibid 69 In this context, leverage is referred to as the relationship between EU funds and total projected/ attained investment. 70 European Commission (2012), Financial Instruments in Cohesion Policy, pg. 3. In the Court of Auditors report, lower ratios are mentioned. For instance, for five venture capital funds in Germany and the UK focusing on high-technology SMEs, the leverage ratio ranged between 1.33x and 2.26x. For ten risk capital funds in Germany, Hungary, Portugal and the UK with less/ no focus on high technology, the ratio ranged from 1.09x to 2.75x. As a benchmark, the same audit report refers to the ETF-Start-up Facility, which is designed for venture capital and focuses on relatively risky SMEs. The average aggregate leverage ratio stood at 6.5x between 2001 and 2008 (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs. 38-39) 71 European Commission (2012), Financial Instruments in Cohesion Policy, pg. 3. In the Court of Auditors report, leverage ratios for guarantee instruments ranged from 4.2x (Hungary) to a maximum of 171.0x (Portugal). As a benchmark, the SMEG Guarantee Facility had a cumulative leverage of 67.0x from 2001 until 2006 (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs 40-41). Another EC report provides a range of between 1.8x and 7.7x for 10 selected guarantee funds through ERDF contributions (European Commission (2012), Financial Engineering Instruments implemented by Member States with ERDF contributions, pg. 27) 72 European Commission (2012), Financial Instruments in Cohesion Policy, pgs. 3-4. The same report mentions an interim evaluation of soft loans in Northern Italy that found a leverage ratio of 4.5x, while a group of capital grants to similar enterprises generated no significant leverage. The Court of Auditors report refers to the EU’s SME Finance Facility (used in Central and East European countries before they joined the EU), which led to leverage ratios usually exceeding 5.0x and reaching up to 12.5x and 19.2x. However, according to the Court of Auditors’ report, 5 out of the 10 audited loan funds did not leverage any private funding at all, while the other loan funds showed very limited leverage ranging between 1.3x and 1.7x (European Court of Auditors (2012), Financial instruments for SMEs – audit report, pgs. 39-40) Page | 32 Revolving Instruments Tax Revenues FUNDS Target Projects MONEY REMAINS IN CIRCULATION
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 3.5.2 Innovative financial instruments in the 2007-2013 Programming Period The 2007-2013 Programming Period included a number of financial instruments that comprised interventions other than pure grant funding which provide equity/risk capital, debt instruments (such as loans and guarantees), as well as instruments combining equity and debt support. The following sub-sections provide short descriptions related to these financial instruments 73 . 3.5.2.1 EU level risk capital/equity instruments High Growth and Innovative SME Facility (GIF) – The GIF is aimed at increasing the supply of risk capital/equity for innovative SMEs in their early stages (GIF1) and in the expansion phase (GIF2). It is operated by the EIF on behalf of the EC. The EIF enters into investment agreements with venture capital funds which support such SMEs, generally under a longterm facility of up to 12 years. The majority of the capital invested in any VC fund is to be provided by market-oriented investors and all investments are made pari passu (Like Risk, Like Reward) with private investors The Marguerite Fund – this is a pan-European equity fund for infrastructure investments in the transport, energy and renewables sectors. Apart from investment from the EU, the other investors in this fund are public banks, but the fund is also open to participation from private investors. Investments are made pari passu. The fund has endeavoured to invest a total sum equivalent to 3.5 times the EU contribution into TEN-T projects. All decisions must be taken in compliance with the investment policy of the Fund, which was established together with the EC. 3.5.2.2 EU level debt instruments (guarantees/risk sharing) Risk Sharing Finance Facility (RSFF) – the RSFF aims to support the financing of risky projects in the field of RD&I by private and public sector promoters that do not have easy access to the capital markets. The instrument was developed jointly by the EC and the European Investment Bank (EIB) to share the risk on the EIB's direct loans or guarantees for loans supporting RD&I investments in thematic priority areas of the Seventh Framework Programme for Research and Technological Development (FP7). The facility was set up through the pooling of the EU contribution and the EIB contribution and provides a cover for potential losses incurred. Based on its own financial evaluation and in accordance with its credit risk policy guidelines, the EIB assesses – on a project-by-project basis – the level of financial risks for which it is required to set aside provisioning and capital allocation (for expected and unexpected loss), in accordance with normal banking rules, and requests a contribution from the EU to cover the provisioning and capital allocation. According to the evaluation report, this instrument remained one of the few financial instruments available to innovative firms and organizations at a time when banks and other financial institutions were reducing access to finance for high risk investments in R&D and innovation areas 74 . SME Guarantee Facility (SMEG) - his facility provides counter-guarantees to national guarantee schemes as well as direct guarantees to financial intermediaries in order to increase and enhance the supply of debt finance to SMEs. SMEG is operated by the EIF on behalf of the EC. The financial intermediaries supported by the EU guarantee in turn provide debt finance to SMEs while passing on the advantage of the guarantee to the final beneficiaries, e.g. by accepting a higher risk profile or less collateral, or by charging lower 73 European Commission (2011), A framework for the next generation of innovative financial instruments – the EU equity and debt platforms. This report also makes reference to financial instruments in pre-accession areas (Western Balkans, Southeast Europe) such as the European Fund for Southeast Europe (EFSE), which is based on a public-private partnership model initiated by a German bank. The investors of the fund are the EC, other public donors and international finance institutions such as the EIB and the European Bank for Reconstruction and Development (EBRD). 74 Group of Independent Experts (2010), Mid-Term Evaluation of the Risk-Sharing Financial Facility; European Investment Bank (2010), Evaluation of activities under the Risk-Sharing Financial Facility Page | 33
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