Market Gaps on Access to Finance - Bank of Valletta

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Few financial instruments were co-financed directly through the ESF in the 2007-2013 Programming Period. According to the EC, this is mainly due to a narrower scope of possible revolving interventions, limited in practice until now to micro-credit schemes or guarantee funds for micro-credits 106 . Thirteen OPs in five Member States co-financed financial instruments with ESF resources, but this only represented 0.7% of declared ESF eligible expenditures 107 . The PROGRESS Programme is a financial instrument developed under the Employment, Social Affairs and Inclusion Policy supporting the development and coordination of EU policy in the areas of employment, social Inclusion and social protection, working conditions, anti- discrimination and gender equality 108 . Another facility that falls under the Employment, Social Affairs and Inclusion Policy is the EPMF, which was already referred to in Section 3.5.2. Several managing authorities in other Member States had shown interest in setting up similar financial instruments. For the 2014-2020 MFF, the EC has presented a new European Social Entrepreneurship Funds regime that will enable EU funds to specialise in this field and to be marketed across the EU under a specific and distinctive label. Under the EU Programme for Social Change and Innovation (2014- 2020), the EC is proposing a specific Microfinance and Social Entrepreneurship Axis that will support financing for social enterprises, apart from financial support to microfinance for microenterprises and assistance to build up the institutional capacity of microcredit providers, as explained in Box 3.5.4.3 109 . Under the new common provisions covering all five EU funds, including the ESF, financial instruments are being envisaged to support investments that are expected to be financially viable but which do not give rise to sufficient funding from market sources. In addition, the common framework also allows for the combination of financial instruments with other forms of support, including grants. The following table provides an assessment of the financing needs and local scope for further financing for social enterprises. 106 European Commission (2012), Financial Instruments in Cohesion Policy 107 European Commission (2012), Financial Instruments in Cohesion Policy, pgs. 17-18. Two examples of ESF-funded instruments include “Microcredits and Guarantees” in Calabria, Italy (through a public financial institution managing a holding fund) and the “Guarantee Fund for microcredits” in Germany (public bank acting as guarantee fund manager) 108 European Commission (2012), Employment, Social Affairs and Inclusion 109 European Commission (2011), An action plan to improve access to finance for SMEs, pg. 9 Page | 66
Table 8: Mapping of financial instruments with local social enterprises Economic sectors Current financing needs Current financing options Scope for financial instruments Social enterprises The main current issues that are impacting local social enterprises are the protection of capital resources, lack of economies of scale, and the need for specialist human resources. The new policy framework for social enterprises would determine the legal ‘personality’ of the enterprise, and this recognition would in return ensure it could operate on the market with the necessary capital. However, the implementation of the new framework will not only bring about greater protection/ rights, but also increased obligations. These relate to meeting operational benchmarks for management, human resources, services-driven income, liquidation and reporting mechanisms. They will also be subject to a social audit to monitor the quality of their service provision. Lack of legal recognition, hindering funding possibilities Need to invest in capital and human resources Government policy to provide a new legal/ regulatory framework Greater regulation means more (costly) obligations A number of local social enterprises are off-shoots of charities, seeking to engage their clients in the world of work with a service offering from which to derive income. This income would then be ploughed back into the enterprise to expand its infrastructure or workforce. The limit is thus imposed by the enterprises’ internal means. Current financing options relate to donations, sponsorships and other fund-raising initiatives. Bank financing is very often limited due to the collateral requirement. In the case of EU funding, restrictions relate to the legal status of the social enterprise, the eligibility rules and the limited number of calls earmarked for such enterprises. Significant number of potential “social enterprises” Limit to growth imposed by internal sources Few national/ EU earmarked schemes, and various competing enterprises Lower access to bank financing Page | 67 The new framework aims to create the necessary legal provisions to recognise these social enterprises separately from other business structures. This will facilitate the operations of these enterprises on the market, with the necessary capital. For instance, not-for-profit principles, a social objective and democratic control would qualify a social enterprise for EU funding. Such recognition could also facilitate access to bank financing. Potentially, considering the collateral restrictions, EU schemes combining loan guarantee instruments and grants would be best suited for such enterprises. In addition, concepts of social venture capital and the development of social corporate venturing, allowing for shares to be acquired in a social enterprise, are also often mentioned within this context. However, these options are potential sources of finance at a later stage of the social enterprise lifecycle. In Malta, the options mentioned in the previous paragraph are likely to be more attractive to local social enterprises. Box 3.5.4.3 and 3.5.4.7 are examples of MFF financial instruments being proposed for this sector. A proposal for crowd funding has also been put forward by the Creative Economy Working Group to finance community arts and heritage projects with potential inclusion of civil society causes and community sports projects. Increased potential for bank financing Greater scope for schemes aimed at social enterprises Other innovative concepts could relate to social venture capital, social corporate venturing and crowd funding
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Market Gaps on Access to Finance - Bank of Valletta

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