Synthesis Report - European Commission - Europa

Synthesis Report Ex-post Evaluation of the ERDF 2000-2006
measure which most needs careful justification. This is because the intervention involved is
explicitly aimed at influencing the efficiency of firms and their ability to compete in both the
internal market and markets in the rest of the world. As such, it potentially distorts competition
by assisting some firms rather than others.
The rationale for enterprise support is that it is aimed at correcting market failure, that without it,
businesses in lagging regions or in regions historically reliant on traditional industries would have
little or no prospect of survival and expanding into new markets. If market forces were left free to
operate, competition, it is argued, would drive firms out of business before they had the
opportunity to invest and modernise. This argument applies, in particular, to SMEs which possess
neither the resources to develop and expand nor the access to borrowing to do so because of
gaps in the financial market and the reluctance of lenders to invest in small firms, especially if
they wish to innovate and enter new, and uncertain, areas of business.
In the EU10, the argument applies more generally. In Poland, for example, the programming
documents emphasise the problems facing Polish firms on accession to the EU, given their
concentration in activities in which they can compete only in terms of cheap labour. Since this is a
transitory comparative advantage, firms of all sizes need support in order to invest in new
technology and more efficient methods of production.
In Objective 1 regions in the EU15, as well as in Objective 2 regions, the case is essentially to help
bring about the restructuring of the economy which is unlikely to occur, or at least, not for a long
time 20 , without intervention. The need is to provide SMEs with funding as well as various support
services to assist them make the necessary changes in methods of production or in the kinds of
product produced. It is equally to support the creation of new firms through similar means.
Once the case for intervention is accepted, it is still necessary to identify firms which not only
need support but are capable of using that support productively to become profitable and grow.
The risk is that the funding provided is either likely to be lost as the firms assisted eventually go
out of business or it will lead to the continuing need for support to keep the firms in operation.
The opposite risk is that funding is given to firms which do not actually need it, that they would
have made the investment concerned even without financial help. The funding provided in such
cases, therefore, is a waste of public resources. This ‘deadweight’ cost, it is widely argued, is
most likely to occur in respect of support to large enterprises, which can be expected to have
greater access to financing opportunities as well as to business expertise.
A further consideration is that if the investment turns out to be successful, the profits that result
will accrue to the firm and not to the public authority which provided the finance. For this reason,
there has been an increasing concern – made explicit in the guidance to managing authorities at
the beginning of the programming period – to shift support from (non-repayable) grants to
(repayable) loans and equity finance. This has the further advantage of the firms concerned
sharing in the risk of the venture, which should add to their incentive to make it a success.
In addition, in many cases, there were conflicts between the objective of maintaining and, if
possible, expanding employment, which was a major concern when programmes were drawn up,
and that of restructuring, which almost inevitably involved allowing traditional industries to
20 It is possible that market forces would eventually bring about the desired change without intervention, but these
tend to be very slow working. The case for intervention can, therefore, be expressed in terms of accelerating the
restructuring process rather than in term of market failure as such.
66