EUROPEAN COMMISSION

Brussels, 13.11.2015

SWD(2015) 206 final

COMMISSION STAFF WORKING DOCUMENT

Activities relating to financial instruments

Accompanying the document

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

on financial instruments supported by the general budget according to Art. 140.8 of the Financial Regulation as at 31 December 2014

{COM(2015) 565 final}

Table of Contents

I. INTRODUCTION    

II. OVERVIEW TABLE    

III. GENERAL CONTEXT    

1.    The EU Economy in 2014    

2.    Strategic Target Groups    

2.1.    EU SMES    

2.2.    EU Midcaps    

2.3.    EU Micro-enterprises    

3.    Strategic Sectors    

3.1.    Research and Innovation    

3.2.    Transport    

3.3.    Energy Infrastructure and Energy Efficiency    

3.4.    ICT/Broadband    

3.5.    Social Enterprises    

3.6.    Education    

4.    Strategic Non-EU Regions    

4.1.    Enlargement Countries    

4.2.    Neighbourhood Countries    

4.3.    Countries covered by the Development Cooperation Instrument (DCI)    

5.    Conclusion    

6.    Annex-Additional Information on the European Equity Market    

6.1.    The structure of the European Equity Market    

6.2.    Regulatory framework for the Venture Capital market    

IV. INFORMATION ON FINANCIAL INSTRUMENTS according to Article 140.8 of the Financial Regulation    

1.    Equity Instruments    

1.1.    The High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP)    

1.2.    Equity Facility under COSME    

1.3.    InnovFin SME Venture Capital (Horizon 2020)    

2.    Guarantee Instruments    

2.1.    The SME Guarantee Facility (SMEG07) under the Competitiveness and Innovation Framework Programme (CIP)    

2.2.    European Progress Microfinance Guarantee Facility (EPMF – G)    

2.3.    EaSI Microfinance and Social Entrepreneurship    

2.4.    Loan Guarantee Facility under COSME    

2.5.    RSI (Pilot guarantee facility for R&I-driven SMEs and Small Midcaps) under FP7    

2.6.    SMEs & Small Midcaps R&I Loans Service under Horizon 2020    

2.7.    The Cultural and Creative Sectors Guarantee Facility    

2.8.    Student Loan Guarantee Facility - ERASMUS+    

2.9.    Private Finance for Energy Efficiency Instruments (PF4EE)    

3.    Risk Sharing Instruments    

3.1.    Risk-Sharing Finance Facility under the FP7 (RSFF)    

3.2.    Horizon 2020 Loan Services for R&I Facility    

3.3.    Loan Guarantee Instrument (LGTT)    

3.4.    Project Bond Initiative    

3.5.    Risk sharing debt instrument under the Connecting Europe Facility (CEF DI)    

3.6.    Natural Capital Financing Facility (NCFF)    

3.7.    EU SME Initiative    

4.    Dedicated Investment Vehicles    

4.1.    The European Progress Microfinance FCP-FIS (PMF FCP-FIS)    

4.2.    The 2020 European Fund for Energy, Climate Change and Infrastructure – (Marguerite)    

4.3.    European Energy Efficiency Fund (EEEF)    

5.    Financial Instruments in the Enlargement Countries    

5.1.    Guarantee Facility under the Western Balkans Enterprise Development and Innovation Facility    

5.2.    Enterprise Expansion Fund (ENEF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF)    

5.3.    Enterprise Innovation Fund (ENIF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF)    

5.4.    European Fund for Southeast Europe (EFSE)    

5.5.    Green for Growth Fund (GGF)    

5.6.    SME Recovery Support Loan for Turkey (RSL)    

6.    Financial Instruments in Neighbourhood and Countries covered by the DCI    

6.1.    Neighbourhood Investment Facility (NIF)    

6.2.    Investment Facility for Central Asia (IFCA) & Asian Investment Facility (AIF)    

6.3.    Latin America Investment Facility (LAIF)    

6.4.    Support to the Facility for Euro-Mediterranean Investment Partnership (FEMIP)    

6.5.    Global Energy Efficiency and Renewable Energy Fund (GEEREF)    

V. REFERENCES    

VI. LIST OF ACRONYMS    

I. INTRODUCTION

1 2 This Staff Working Document (SWD) constitutes an Annex to the report of the Commission to the European Parliament and the Council on financial instruments supported by the general budget according to Article 140(8) of the Financial Regulation as at 31 December 2014. Complementing the information given in the main report, it provides additional specific information on individual financial instruments, on progress made in their implementation and on the environment in which they operate.

In many Member States access to finance for SMEs remains challenging and may jeopardise the economic recovery. At the same time, infrastructure investment needs for transport, energy and broadband networks are estimated at EUR 1 trillion through 2020. Hence, the risk of a funding gap in Europe remains acute, against the backdrop of continuing deleveraging pressures and still significant fragmentation in financial markets across Member States.

In this context, the real economy in the Union and beyond can benefit from EU financial instruments, which aim to alleviate financial market failures – as identified in the relevant ex-ante evaluations – while at the same time leveraging on the positive effects of EU-wide actions.

In general, funds available for public policy are limited and therefore additional resources are needed to pursue public objectives more effectively. For this reason, financial instruments can play a very useful role in catalysing private and public funds by sharing some of the financing risks through limited Union resources, thus providing financial leverage. Financial instruments also ensure policy leverage by incentivising financial intermediaries to pursue common objectives through alignment of interest, and institutional leverage by mobilising EU policy expertise of the institutional actors involved in the implementation chain.

Based on this rationale, financial instruments have already played a significant role by reaching out to important target groups such as SMEs, innovative enterprises and microenterprises, and supporting high-value projects in strategic sectors like transport and energy. They helped address market failures and were able to mobilise significant additional resources from the private and the public sector. For example, the main EU-level 2007-2013 financial instruments dedicated to SME support (CIP-GIF, CIP-SMEG 07 and RSI) and micro-SME support (EPMF) with an overall contribution of more than EUR 1,6 billion (commitments from Union budget), by the end of 2014 supported lending of over EUR 20 billion and also mobilised equity investments of about EUR 1 billion, thus enhancing access to finance for almost 373 000 SMEs.

With the experience gained in the course of implementation, and in the context of programme evaluations, audits and consultations with a wide range of stakeholders, several lessons have been learned on how to further improve the design and management of financial instruments. In particular, the following best practices have been capitalised for the design of the 2014-2020 facilities.

3 First, more consistency has been achieved in the governance, supervision and control of these instruments through the regulatory framework established in the Financial Regulation, and via standardised contractual arrangements with entrusted entities (Financial and Administrative Framework Agreements, Template for Delegation Agreements, etc.). These efforts have been largely supported by the Financial Instruments Inter-service Expert Group at the Commission level and by the Commission Expert Group 'EU Platform for Blending in External Cooperation' (EUBEC).

Secondly, Financial Instruments will now cover all main types of final recipients over the full funding cycle and will include offer of both pro- and counter-cyclical products to respond flexibly to market needs, based on demand-driven implementation.

Thirdly, effectiveness and efficiency have been enhanced through fewer instruments with larger volumes, ensuring critical mass in full consistency with State aid rules. Further, alignment of interest with entrusted entities and financial intermediaries is ensured through risk sharing and fees and incentives.

Financial instruments are thus a proven way to achieve EU policy objectives. They use EU funds to support economically viable projects and attract significant volumes of additional public and private financing. By injecting money into the real economy, financial instruments contribute to the achievement of the EU policy objectives enshrined in the Europe 2020 Strategy, notably in terms of employment, innovation, climate change and energy sustainability, education and social inclusion.

In consequence of the expanded role of financial instruments, this SWD not only provides quantitative information on performance of financial instruments such as leverage and volume of financing supported, but also analyses the macro-financial context of potential final recipients and financial intermediaries, outlining general market developments in the EU policy areas supported and their implications for the financial ecosystem.

Compared to last year, the present SWD has been enriched, notably with further information on instrument performance, volume of financing supported and fiduciary accounts.

The SWD is divided into six parts. After the present Introduction (Part I), it offers an overview table (Part II) of the financial instruments covered.

Thereupon, with the aim to provide a rationale for use of financial instruments in a given policy area, the general context (Part III) describes the EU economic environment in 2014 taking into consideration strategic target groups, sectors, and non-EU regions.

Thereafter, Part IV provides detailed information on each financial instrument. This part is divided into six chapters dealing with equity instruments, guarantee instruments, risk-sharing instruments, and dedicated investment vehicles, as well as instruments in the enlargement and neighbourhood countries and in countries covered by the Development Cooperation Instrument.

Finally, Parts V and VI contain references and acronym lists, respectively.

II. OVERVIEW TABLE

III. GENERAL CONTEXT    

1.The EU Economy in 2014

In order to outline the macroeconomic background against which EU financial instruments operated in 2014, the fundamental evolution of key macro-financial variables is sketched out below in this section.

Real GDP

The economic recovery that had started in the EU and in the euro area in the second quarter of 2013 continued, but it struggled to gather momentum in 2014. The subdued pace of the recovery was very much in line with expectations about the rebound following a deep economic and financial crisis. But apart from the crisis-related factors behind the weak growth momentum, in 2014 the uncertainty about the geopolitical situation, commitments to future policy initiatives and energy-price developments have gained importance. While net exports had been the main growth driver in 2013, in 2014 private consumption has become the main growth factor, whereas investment has moderately recovered.

In 2014, real GDP grew by 1.4% and 0.9% respectively in the EU and in the euro area, almost entirely driven by domestic demand (Figure 1). Looking ahead, with the help of relatively low oil prices, a lower external value of the euro, and policy support, including the ECB's asset purchase programme ("quantitative easing"), a broadly neutral fiscal policy stance, and the Investment Plan for Europe, economic activity is forecast to accelerate. Real GDP growth is expected to increase in the euro area and in the EU to 1.5% and 1.8% respectively in 2015 and further to 1.9% and 2.1% in 2016.

Note: Figures above horizontal bars are annual growth rates.
Source: European Commission (2015)

Labour market

20 Since the start of the recovery in the second quarter of 2013 and in 2014, employment picked up comparatively fast and strong in response to output developments. Unemployment rates continued following a moderate downward trend throughout 2014 (Figure 2). In December 2014, in the EU the unemployment rate stood at 9.9%, about 0.5 pps. lower than a year earlier, with significant differences across Member States, in respect to unemployment rate, duration and age profile. Thus, the situation in the labour market continues to be reason of concern, in particular in the more vulnerable economies. The expected strengthening of the economic recovery together with structural reforms should trigger stronger net job creation in the second half of 2015 and even more so in 2016.

Public finance

On the public finance side, the general government deficit in the EU has continued to decline further from 3.2% of GDP to 2.9% during 2014. According to the European Commission (2015) forecast, non-consolidated deficits should continue falling in the EU to 2.5% in 2015 and 2.0% in 2016. The deficit in the euro area should also continue the decline observed in 2014 (to 2.4%, from 2.9% in 2013), falling to 2.0% in 2015 and 1.7% in 2016.

Inflation and the exchange rate

Prices were stable throughout 2014, and declined mildly in December (0.1% in the EU, 0.2% in the euro area). Besides the impact of lower energy prices, the persistence of low inflation can also be associated with the remaining slack in the economy and weak domestic demand, as private sector balance sheets had to adjust further and credit channels remained impaired.

The depreciation of the trade-weighted euro exchange rate that began in mid-2014 only partly offset the decline in US-dollar-denominated oil prices, and therefore only slowed the decline in headline inflation in 2014.

Financial markets

On the financial side, monetary policy in the euro area has become even more accommodative since mid-2014 and some Member States outside the euro area have also cut interest rates. Following the decisions by the ECB Governing Council, short-term money-market rates have declined to close to (or below) zero and also longer-term rates have shifted down. Low policy interest rates, the announcement of additional "quantitative easing" measures (extended asset purchase programme) and reinforced market expectations of a stronger pace of asset purchases by the ECB have supported the upward movement of stock prices at the end of 2014. In combination with expectations about the forthcoming normalisation of monetary policy in the US, the external value of the euro declined vis-à-vis the US dollar.

Investor sentiment towards euro area banks has continued to strengthen amid further progress in bank balance sheet repair and an improved macro financial environment. EU banks have increased their capital levels in recent years, thereby increasing their resilience to market conditions. During 2014, the build-up of capital buffers in anticipation of the ECB's comprehensive assessment and the EBA Stress Test has exceeded EUR 100 bn. Therefore, funding conditions have improved, due to the progressive repair of bank balance sheets and the reduction in the sovereign spread of more vulnerable Member States.

Moreover, by proceeding with the Banking Union in 2014, progress has been made in weakening the links between sovereigns and banks. The establishment of the Single Supervisory Mechanism and regulatory initiatives – such as new bail-in rules – have been crucial in this respect. However, the continued significant correlation between the borrowing costs of euro area banks and sovereigns highlights the need for continued progress. Both banks and governments continued to take action in 2014 to address legacy risks from the crisis. At the same time, progress by euro area governments in implementing fiscal consolidation and structural reforms continued, although the pace was uneven across countries. The improved sentiment has resulted in significantly declining yields on lower-rated euro area government bonds, which in some cases reached levels last seen before the eruption of the euro-area-centred second wave of the global financial crisis in 2010.

Despite this progress by both banks and governments, financial stability challenges persist.

The financial stability risks faced by the euro area during 2014 can be divided into two broad categories. First, “legacy” issues from the global financial crisis, while receding throughout the year, remained a concern. For the euro area, these mainly related to insufficient progress in addressing weaknesses on the part of both the banking sector and governments. Notwithstanding the strengthening of banks' balance sheets, the banking system was still in need to address remaining fragilities and uncertainties. Persistently weak bank profitability could become a systemic concern if it limited banks’ ability to improve their shock-absorbing capacity via retained earnings and provisioning. This could prevent banks from engaging in new lending activities and lead to more structural business model-related concerns in a low growth environment. In such circumstances, banks might have been tempted to take on more risk to improve profitability, which in turn could have made them more vulnerable to future shocks.

The second broad sets of risks were “emerging” risks, which mainly stemmed from a continued global search of banks for yield, as noticed above. This has left the financial system more vulnerable to an abrupt surge in risk premia, which might involve all asset classes.

Figure 3: Euro Area interest rates on loans to non-financial entities

(1-year maturity)

Source: European Commission

In this context, the prospect of a gradual normalisation of benchmark interest rates coexisted in 2014 with financial market fragmentation across Member States (Figure 3), which continued to reflect the sovereign debt crisis and the vicious spiral between sovereign and bank debt: on the one hand, Governments accumulate debt to support ailing banks, on the other EU banks look at treasuries as a preferred asset.

The trend of interest rates on loans will be analysed more in detail in the next section with specific focus on SMEs.

Relevance of the macro-financial context for financial instruments

The macro-financial dynamics depicted above are bound to affect the performance of EU financial instruments through various channels. For example, the demand of EU financial instruments by financial intermediaries is affected by overall economic activity and interest rates, which inevitably impact on the final recipients' demand for loans and equity. In addition, favourable labour market conditions may encourage the job creation targeted by financial instruments. As a further example, public finance retrenchment may impair a Member State's resource availability, and hence prompt additional demand for loans and equity on the part of financial instruments' final recipients. Moreover, changes in the internal or external value of the currency may affect firms' competitiveness and hence their need for EU financing support.

The following sections analyse in more detail the economic and financial situation of target groups that are of particular interest for policy-making, underlining the rationale for their support through EU financial instruments.

2.Strategic Target Groups

The EU has identified recipients in the business sector based on firm employment, turnover and/or balance sheet, including SMEs (i.e. micro, small and medium-sized enterprises) and midcaps.

EU SMES 21

Small and Medium-sized Enterprises (SMEs) in the EU amount to almost 22 million, and constitute the connective tissue of the EU productive fabric: they represent 99.8% of EU companies, almost 60% of GDP (total value added) and near 70% of the total workforce.

Yet despite their economic importance, SMEs typically face greater problems than larger firms in several aspects, including access to finance, especially (but not exclusively) during financial crises.

2.1.1.SME Loan Market

2.1.1.1.Demand for SME loan finance

According to the UEAPME (2015), the overall business environment for European SMEs in the second semester of 2014 improved by almost 8.5% from the corresponding period in 2013, recording three consecutive upticks since the first semester 2013 (Figure 5). For the first time since 2012, the Index has risen above its neutral level of 70%, reaching 71.7 percentage points in the second semester of 2014.

Figure 5: SME Business Climate Index

Note: The UEAPME SME Business Climate Index is calculated as the average of the current situation and the expectations for the next period, resulting from the sum of positive and neutral (meaning: no change) answers pertaining to the overall situation for the business. For example, for “semester A” with 25% positive, neutral 55%, and 20% negative answers, the Index would be (25 + 55 =) 80, and for “semester B” with 40% positive, 30% neutral, and 30% negative answers, it would fall to (40 + 30 =) 70. However, the respective balances of positive minus negative answers would show an opposite result, growing from “semester A” (25 – 20 =) 5% to “semester B” (40 – 30 =) 10%. Therefore, these balances should also be examined, and are reported in UEAPME (2014).

Source: EIF (2014) (based on UEAPME 2014)

The trend for the EU is rising, indicating that EU enterprises envisage the beginning of a recovery (UEAPME 2014).

Remarkable progress can be noticed especially in the countries of the EU South and the Periphery (Croatia, Cyprus, Greece, Ireland, Italy, Malta, Portugal, Slovenia and Spain) – "South" in the graph. The SME Business Climate Index for these countries has increased by 7.9% in 2014, which is higher than the increase in the EU North and Centre (Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Romania, Slovakia, Sweden and UK) – "North” in the graph (4.5%). As a result, the gap between the two country groups has narrowed, with the current wedge equal to 11.8%, which is the lowest figure since the beginning of the sovereign debt crisis (UEAPME 2014).

2.1.1.2.Supply of SME loan finance

The current status of bank lending to non-financial corporations – including SMEs – is analysed in the ECB Bank Lending Survey. The survey reports the net percentage of banks contributing to tightening credit standards for SMEs. As shown by Figure 6, a general decrease in net tightening for loans to SMEs has occurred since the first quarter of 2013. In January 2014, a negative net tightening (i.e. a net easing) has been attained for the first time after almost seven years. Henceforth, during 2014 the overall SME net tightening of credit standards stayed essentially unchanged, while remaining slightly higher for large enterprises.

Figure 6: Changes in credit standards applied to the approval of loans or credit lines to enterprises (SMEs versus large enterprises) 

Note: A positive net percentage indicates that a larger proportion of banks has tightened credit standards (“net tightening”), whereas a negative net percentage indicates that a larger proportion of banks has eased credit standards (“net easing”). 

Source: EIF (2014).

In the last two quarters of 2014, several factors including the costs related to bank's capital position, the expectation regarding the general economic outlook and access to finance contributed in net terms to the easing of credit standards for SMEs (Figure 7). It is interesting to notice that the expectations concerning the industry (or firm) specific outlook contributed in the last quarter of 2014 to a tightening of credit standards, whereas the expectation concerning the general economic outlook in the same period contributed to the easing of credit standards.

Figure 7: Factors contributing to tightening credit standards for SMEs

Note: The net percentages for responses to questions related to the factors are defined as the difference between the percentage of banks reporting that the given factor contributed to a tightening and the percentage reporting that it contributed to an easing.

Source: EIF (2014).

2.1.1.3.Market loan volumes and interest rates

Volumes of SME loans

22 Credit growth and lending conditions for the private sector in general, and SMEs in particular, have not yet fully incorporated the change in the business climate and financial stability.This picture of still difficult conditions for corporate lending in some Member States and especially for SMEs has been compounded by the continued grim situation in regard to lending volumes. Using again small loans (below EUR 1 million) as a proxy, new SME loan volumes decreased continuously by 36% from their April 2009 peak until June 2013, and stayed essentially stable thereafter, remaining by year-end 2014 21% below their 2003 levels. In comparison, large loans stand today 6% above their 2003 levels. Only small loans up to EUR 0,25 million (data available only since June 2010) are increasing.

Across the Euro Area, new bank lending to SMEs continues to decline from pre-crisis peaks through 2014, but at a slower pace (Figure 8). Among the "South" countries, there were some signs of pickup in Spain in 2014, where economic recovery is taking hold, and a slight uptick in Italy, based on 12-month cumulative flows. In Greece and Cyprus, where liquidity pressures remain acute and credit quality has significantly deteriorated, new lending to SMEs continues to decline sharply. In EU "North" countries, lending volumes have slightly decreased during 2014 across the board, except for Germany. Comparing Figure 8a with Graph 8b, the scale of the volume reduction in the "South" appears much larger than in the "North", so that the former countries lie mostly below the average, whereas the latter remain above.

Figure 8: Loan Volumes (New Business)

Note: End 2004= 100; Loans up to and including EUR 1 million.

Source: ECB Data Warehouse

23 Outside the Euro Area, new loans to SMEs in the UK increased by over 23% through November 2014 compared with the previous year, although in net terms, the stock of loans fell as repayments remained larger than new lending.

24 Available data from national central banks on outstanding loans to SMEs – elaborated by IIF (2015) – reports a decline in outstanding loans in Ireland and Portugal since 2012, while in France, loans stocks increased by over 4% from 2012Q1 to 2014Q3.

Interest rates on SME loans

For the Euro area as a whole, medium-size loans (from EUR 0,25m up to EUR 1m) had a rather stable spread over large loans (over EUR 1m), averaging 62 basis points (bp) for the period June 2010 to April 2014 (Figure 9).

The interest rate spread between small loans (below EUR 0,25m) and large loans was higher, but relatively stable at an average level of 145bp from the start of the time series in June 2010 until July 2011; in the following months, this spread showed an increasing trend until August 2012 when it reached a record high of 279bp. Since then, the spread has also been rather stable, averaging 211bp. Thus, financing conditions remain persistently tighter for SMEs than for large firms (ECB 2014), as a consequence of lacking collateral and a supposed divergence in firm-specific risks.

Figure 9: SME Loan Interest Rates

Source: EIF Small Business Finance Outlook, December 2014

Interest rates on new loans to businesses up to €1 million have mostly declined since the start of 2014, with Ireland as an exception, and the spreads between "North" and "South" countries have narrowed, while remaining substantial (Figure 10).

Figure 10: Interest Rates on New Loans to SMEs. Comparison EU South and Periphery vs EU North and Centre

Source: IIF "Addressing SME Financing Impediments in Europe: A Review of Recent Initiatives"Loans up to and including EUR 1 million.

25 In particular, the difference between the loan pricing conditions for small and large firms remained high in more vulnerable countries, where SMEs remained more dependent on bank funding.

2.1.1.4.Access to loan finance of EU SMEs

As a consequence of this bleak credit dynamics, access to finance is still among the top concerns of the small and medium sized EU enterprises. Younger and smaller firms are the most badly affected, according to the latest "Access to Finance" survey covering the whole EU, released by the European Commission and European Central Bank.

Small EU businesses are increasingly optimistic about their growth prospects but many are still concerned about the lack of access to finance: 13% of survey respondents see access to finance as the most important problem for their companies.

Indeed, more than a third of SMEs surveyed did not manage to get the full bank loan financing they needed during 2014.

In particular, 13% of SME bank loan applications were rejected a slight increase from 11% in 2013  and 18% of companies received less than they applied for. In addition, 4% declined the loan offer from the bank because they found the conditions unacceptable and 8% of SMEs were even too discouraged to ask, because of anticipated rejection. The fear of rejection was most often reported in Greece (29% of SMEs), Slovenia (22%), Cyprus (17%) and Ireland (15%). This was particularly the case for young companies: 11% of those who have been in business between 2 and 5 years did not apply for a loan because of fear of rejection.

The survey also shows that SMEs are confronted with higher rejection rates compared to larger corporations, a feature magnified in vulnerable Member States. It is also younger and smaller firms that are more likely to obtain only part of the finance they request, or to be outright rejected. The highest rejection rate was among micro companies employing fewer than 10 people (20%) and among SMEs, which had been active for less than 2 years (30%).

While SMEs reported a welcome fall in interest rates for loans, and believe that bank financial conditions have improved during 2014 with respect to loan interest rates, in contrast, SMEs reported a substantial net increase in collateral and other loan requirements by banks to which they had applied for loans. Collateral requirements were considered as tightened by SMEs in all EU countries, with the highest average increases in Cyprus, Greece and Slovenia, while the lowest average increases were reported in Poland, Slovakia and the Czech Republic. Figure 11 illustrates the change in availability of bank loans for SMEs in the euro area.

Figure 11: Change in availability of bank loans for euro area SMEs

(over the preceding 6 months; % of respondents)

Note: “Net percentage” means the difference between the percentage of firms reporting an increase (or an improvement) for a given factor and that reporting a decrease (or deterioration).

Source: EIF Small Business Finance Outlook, December 2014

26 27 Based on Commission analysis, it can be estimated that up to 10% of EU SMEs that have had difficulty in accessing loan finance are in fact financially viable, in the sense that have experienced a positive turnover growth in the previous six months. The difficulty in accessing finance is compounded by the fact that a majority of SMEs look at external financing as their only source of financing, and bank loans are a relevant source of external finance for 57% of SMEs.

28 The situation is worse for SMEs undertaking R&I, as banks typically lack the ability to value knowledge assets, and are therefore often unwilling to invest in knowledge-based companies or do so only with a risk premium. In consequence, many established and innovative SMEs find it hard to obtain loans for R&I activities.

29 The above is also valid for cultural and creative sectors SMEs. Due to sector specificities such as importance of intangible assets, lack of uniform sector definition, asymmetries of information, under-capitalisation, low investment readiness, atypical cash-flow plans and project-centric plans, the SMEs are perceived as riskier. This results in the reluctance of financial institutions to finance SMEs from the cultural and creative sector.

The above circumstances underline again the importance of the EU programmes and Facilities aimed at SME support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue.

2.1.2.SMEs and the European Equity Market

2.1.2.1.SME Demand for equity

By looking at the demand for equity financing, the latest Survey on Access to Finance of Small and Medium Enterprises in Europe (SAFE) shows that SMEs’ needs for equity financing increased in 2014 compared to 2013, with a net increase from 2% to 7%. However, only 20% of SMEs felt confident to discuss financing and obtaining the desired results with equity investors and venture capital enterprises, while 32% did not feel confident. Smaller and non-innovative firms are less confident in their financial competences. In fact, 25% of SMEs considers equity financing not applicable to their firm.

As a consequence, only 3% of EU SMEs used equity financing in the last six months in 2014, registering a decrease from the 5% measured in the 2013 wave (Figure 12).

Figure 12: SMEs that used equity financing in the last 6 months, Euro Area

Source: European Commission Elaboration based on SAFE Survey

Access to equity financing is nearly twice as common among larger businesses (6% of those with 250+ employees) in the EU, reflecting SMEs' difficulties in accessing this specific financial instrument.

2.1.2.2.Supply of equity for SMEs

In 2014, most categories of enterprises reported an increase in the willingness of investors to invest in equity or debt (Figure 13). Among the 47% of EU SMEs expressing an opinion about the willingness of investors to invest in equity in the past 6 months, most reported no change (31%), 10% reported an improvement while the 6% reported a deterioration.

Figure 13 : Change over the past six months in the willingness of investors to invest in firm equity or debt securities

Note: The results presented in this figure refer only to those SMEs that considered debt securities, equity capital, other loans or other sources of financing relevant to their enterprise. Among the four discerned sectors, a negative net effect is reported by construction only (-1%) with the remaining three reporting a positive net effect.

Source: SAFE

However, the lack of equity finance in Europe is increasingly being recognised as a key bottleneck to the provision of further overall SME funding.

30 Among the different opportunities of equity financing for SMEs, a crucial role is played by Venture Capital financing. Spanning from the seed to the growth phase of companies' development, Venture Capital investments serve 86% of European SMEs seeking equity financing, and 78.5% in terms of total amounts invested in SMEs.

For the purpose of this document, it is thus useful to focus on the Venture Capital market to gain a better understanding of the dynamics of equity financing of European SMEs.

2.1.2.3.Access to Venture Capital of EU SMEs

From a broad supply perspective, the structural challenges in the European Venture Capital market, the difficult fundraising environment, and the still somewhat risk-averse market sentiment, are all sources of significant problems for fund managers in the access to funding in general, and for new funds in particular. Moreover, markets for analysis are underdeveloped, and both private and public investors are disadvantaged in accessing credit information, and therefore find it harder to operate on an equal footing with established players in the debt-financing sector. This supports a view that public backing is necessary, especially for the early stage segment of the market.

The latest available figures from EVCA (2015a) point to the following trends in the European Venture Capital sector:

a) Fundraising

Venture Capital fundraising in Europe totalled EUR 4,1 billion in 2014 which represents a decrease of 12% compared to the EUR 4,6 billion raised in 2013 and is broadly in line with the lower volumes recorded since 2009 (Figure 14). Government agencies remained the most prominent provider of funding, representing more than 35% of the total funds raised (compared to 14% in 2007)

Figure 14: Venture Capital – Funds raised by type of investor

Note: Incremental amount raised during the year - % of total

Source: EVCA 2015a

As regards the geographic breakdown, 46% of the funding came from France and the Benelux region (Belgium, the Netherlands and Luxembourg), followed by 13% from North America and 10% from the UK.

b) Investments

The total amount of Venture Capital invested in 2014 reached EUR 3,6 billion, up 6% from the total investment volume of EUR 3,4 billion recorded in 2013. This figure is in the same order of magnitude as the volumes recorded each year since 2009 and significantly lower than pre-crisis levels.

More than 3,200 companies were backed by Venture Capital funds in 2014. Start-up companies were at the centre of Venture Capital funds' attention, as they received 52% of the total amounts invested and represented 60% of the total number of supported companies.

As regards sectors, life sciences, computer and consumer electronics, and communications accounted over than 70% of all Venture Capital investments.

In terms of geographic breakdown by equity amount invested in 2014, most of the Venture Capital funds' investment went to France and the Benelux region and to the DACH region (Germany, Austria and Switzerland) with the UK and Ireland each receiving approx. EUR 1 billion of investments.

While Seed/Start-up/Early Stage funds invested 95% of their capital in SMEs (representing 99% of their target group, Figure 15) 31 ; Private Equity funds operating in the Growth stage only invested 55% of their capital in SMEs (which still constitute 81% of their target group).

Figure 15: Venture Capital – Investment by portfolio company size

Note: Amount and number of companiesSource: EVCA 2015a

c) Divestments

Venture Capital divestments decreased to EUR 1,9 billion in 2014, up from the EUR 2,2 billion in 2013 but still lie well within the range of EUR 1,9 to 2,4 billion recorded since 2008. Trade sales were the most common exit routes, representing 45% of all divestments.

The number of exited companies stood just above one thousand.

The highest financial volumes earned in exits were realised in life sciences, computer and consumer electronics, and communications (Figure 16). The volumes earned in exits in financial services decreased from 18,3% in 2013 to 1,2% in 2014.

Figure 16: Divestments at cost by sector – Venture Capital / Buyout / Growth

Source: EVCA 2015a

As shown above, in 2014, around 35% of funding for Venture Capital came from government agencies, according to EVCA (2015a), and the total amount raised from such agencies for Venture Capital funds in Europe was just under EUR 1,4 billion with government agencies significantly stepping up investments over the past few years.

Figure 17: Government investments and Venture Capital fundraising in EU

Source: EVCA 2015a

However, such efforts target mostly national Venture Capital markets, thus contributing less to the emergence of a robust pan-European Venture Capital industry, a crucial factor when it comes to the overall innovative and high-growth capacity of the EU economy.

32 Importantly, public grants usually dry up as a concept moves from the basic research stage through to applied research, and then to piloting, while private capital is not available until the later stages, when technological and commercial risks have diminished.

These considerations point towards the importance of stepping up the EU intervention in Venture Capital markets in its role as a pan-European institution capable of supporting this asset class by complementing funding sources at both the private market level and national public level.

2.1.2.4.Equity Financing Gap for Innovative SMEs

33 A recent study commissioned by the European Parliament's Committee on Industry, Research and Energy (ITRE) draws on and synthesises the outputs of a wide range of sources to examine, amongst other topics, the interrelated questions of whether innovative EU SMEs suffer from an insufficient supply of Venture Capital and if Venture Capital funds suffer from a lack of demand for what these funds have to offer.

The study found that the supply of Venture Capital is low in Europe because many institutional investors either withdrew from the Venture Capital market following losses from the bursting of the dot.com bubble and have not returned, or, in the wake of the financial crisis, have ceased to invest in Venture Capital or have moved their focus from seed and start-up Venture Capital investments to later-stage Venture Capital or private equity investments. Europe lacks a pool of large pension funds, university endowments, foundations and family offices willing and able to fill the gap, though public efforts have gone some way to compensate, with government agencies significantly stepping up investments over the past few years.

In addition, Europe suffers from a problem in the quality of the funds supplying Venture Capital: not many are large enough to attract institutional investors or sufficiently experienced in selecting promising companies. Furthermore, the persistent segmentation of the market along national lines reduces cross-border operations and undermines attempts to achieve economies of scale in both fund-raising and investment.

On the demand side, the study found that a common complaint of Venture Capital funds in Europe is the limited number of high-potential firms available for investing in, especially in the early stages, and particularly firms that can be expected to deliver an acceptable rate of return. The causes identified include low relative and absolute levels of R&D expenditure in most Member States, disadvantaging the generation of new ideas; insufficient investment in mechanisms supporting TT and commercialisation; lack of business skills on the part of company management teams and a raft of framework conditions linked to IP rights, public procurement practices, tax regimes, and the flexibility of labour markets.

34 In the study on financial instruments accompanying the impact assessment for COSME, the authors reject the idea of equating the aggregate financing gap in the EU with the amount that would be needed to approach the ratio of Venture Capital investments to GDP found in the US. They argue that this method overlooks structural differences between the two economies and neglects issues of absorption capacity, such as difficulties in increasing the numbers of skilled Venture Capital fund-managers, or the dearth of investment opportunities. Instead, their approach is to target a doubling of the recent level of Venture Capital investments over five years, requiring, so the authors estimate, a progressively gap-filling increment of about EUR 800 million per year.

The above circumstances underline again the importance of the EU programmes and Facilities aimed at SMEs support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue of early-stage enterprises, including in their expansion phase. In this context, the equity instruments adopted by the EU represent an important measure to address equity financing gaps by leveraging EIB funds while minimising market distortions.

EU Midcaps 35

While SMEs are at the centre of EU policy initiatives, mid-sized companies (usually defined as having 250-2999 employees) are increasingly recognised for their important role in growth and employment.

At this stage of the economic cycle and following the constraints posed for the whole EU economy by the financial crisis, mid-caps will play a key role in economic recovery, growth and employment in Europe.

Characteristically mid-sized or mid-cap companies benefit from better name recognition, longer credit history and better product track record than SMEs. In case of mid-sized companies with a stable growth trajectory, this reduces information asymmetries and allows them to have better access to finance than SMEs (1-250 employees), including access to capital market financing. But several mid-caps in the EU are facing the challenge of being obliged to expand and innovate or lose their competitive edge. Those mid-caps need usually to invest in research and development (R&D) and pursue a more active internationalisation strategy than SMEs, with the corresponding needs for equity and debt finance.

36 A recent study (PricewaterhouseCoopers 2012) estimates the number of mid-caps in the EU to be around 28 000, with about half of them being innovative midcaps. A great part of them has mainly relied on debt finance as their main source of external finance in the recent past. The study also suggests that the market gap in getting access to finance is smaller for mid-sized companies than for SMEs. Most recent data indicates that credit standards were eased on loans to corporations of all sizes.

EU Micro-enterprises 37

While SMEs represent 99,8% of EU companies, microenterprises constitute 92% of them. As such they are thus decisive for boosting jobs, growth and investment in Europe. In addition, they play an even more important role when it comes to the impact on job creation for vulnerable groups and a resulting positive social inclusion effect. Nevertheless, microenterprises share the same problems as other SMEs, yet typically to a higher degree. Thus, when looking at the expected developments for turnover of SMEs by size classes in 2014, micro-enterprises show a decrease for the last semester, which offsets the positive judgement of the first semester. According to their expectations, micro-enterprises will continue facing more difficulties than other SMEs (Figure 18).

Figure 18: Overall situation of SMEs by class size

Source: UEAPME(2015)

38 Microenterprises typically face even more difficulties in obtaining financing. Data from the latest Survey on the Access to Finance of Enterprises show that micro-enterprises in the Euro area reported “access to finance” as their third most pressing problem, while it is in fifth place for small enterprises, and sixth for the medium and large ones. Compared to the previous survey wave, the percentage of companies listing access to finance as their most pressing problem has increased for all enterprises, except for micro enterprises.

The main channel of financing of microenterprises is the microfinance market. The European microfinance market is as diverse as its actors. To a large extent, this diversity of institutional structures is related to differences in the national legal environment for loan provision, differences in the established financial systems and the variety of microenterprise promotion and underlying policy directions. The main institutional forms are Non-bank financial institutions (NBFIs), Non-Governmental Organisations (NGOs) or Foundations, Credit Unions and Cooperatives, Microfinance Associations and banks (Figure 19). The decrease of MFIs surveyed structured as NGOs and corresponding rise of NBFIs might be explained by a maturing of the European microfinance sector: existing NGOs may be scaling down their business and consequently changing their legal status to NBFI, since NBFIs can offer a wider range of services and access commercial sources of capital, as they operate under a license from the central bank.

Figure 19: Distribution of MFIs by institutional type

Source: EMN (2014)

39 In addition to the institutional variety, the European microfinance markets are characterised by a large diversification of the products offered, especially the underlying product features: current average loan term, average interest rate and the presence of additional fees. Based on the most recent EMN Overview Survey, the average micro loan was reported to have featured an interest rate in the range of 10% with large variations across countries.

40 41 The European microfinance sector provides mainly microloans (up to EUR 25 000) tailored to micro-enterprises (92% of all European businesses). In 2013, all MFIs covered by the EMN Survey disbursed 387 812 microloans (including personal loans) amounting to a total volume of around EUR 1 530 million. The EU-based organisations surveyed alone reported 207 335 loans with a total volume of EUR 1 260 million. Combined with the results of the past EMN surveys, this indicates a steady growth of the observed micro-lending activities among the MFIs surveyed in Europe since 2009. The number of loans disbursed increased by more than 400%, and the reported total loan volume has more than doubled since 2009.

National aggregate results from Evers & Jung (2014) show that a total volume of EUR 2,4 billion was issued in the form of microloans in the EU-28 plus Switzerland, Norway and Iceland between 2010 and 2012. The aggregate EU-28 level demand for microloans, calculated along clusters of European countries, is estimated up to a total value of EUR 5,1 billion, highlighting a financing gap of around EUR 2,7 billion in terms of total volume issued. At the level of general supply of microfinance in Europe, commercial banks are expected to keep reducing their lending to small start-ups and micro-enterprises. If commercial banks continue to reduce their already limited exposure to risky small scale loan operations over the coming years, the financing gap for micro-financing may be expected to widen.

42 Over the past two years, support for microfinance initiatives remained high on the agenda of policy makers in many European countries. Especially in Western Europe, the provision of microloans is regarded as a suitable tool for addressing financial exclusion by commercial banks and creating employment opportunities in the microenterprise sector. After years of continuous political support, the sector is expected to deliver on a larger scale its promises to ease the ongoing situation of high unemployment rates, low economic growth and unstable financial sector. 

Despite success in widening the sector’s outreach, the development of stable funding patterns remains a challenge for microfinance providers in many countries. Aside from public sources, the availability of affordable funding is limited and prone to external influences. Besides job creation, there is a new trend on the agenda – promoted by politicians as well as researchers – green microfinance. Around 13% of the responding MFIs stated that they offer specific green microloans to finance renewable energy, energy efficiency and environmentally friendly activities. In addition, another 37% mentioned that they cover such activities with their normal microcredit programs.

The general public support for microfinance provision is expected to decline in the coming years, due to budget restrictions and high deficits at national and regional levels. MFIs are attempting to prepare for this by developing more efficient and lean processes and reducing costs. Many of them are already looking for additional sources of funding. Especially fast growing organisations report a need for additional equity to secure lending operations and to collect funding in the formal financial market. In this context, the micro-finance instruments adopted by the EU represent an important measure to address microenterprises' financing gaps by leveraging public and (possibly) private funds while minimising market distortions.

3.Strategic Sectors    

At the sectorial level, the infrastructure sector performs a crucial role in both development and sustainable growth, in contexts where private enterprises of all sizes and public entities interact to provide the necessary output. Infrastructure improves the productivity of the rest of the economy, enabling growth, and facilitates the interconnection of the internal market.

The EU infrastructure market has been evolving extremely quickly. Whereas institutional investors in Europe were reluctant to enter the long-term infrastructure financing market until a couple of years ago, recent months have witnessed an increased liquidity in the market although largely targeted at a restricted number of countries and sectors. In this context, analysing the existing trends and correctly forecasting the medium-to-long-term orientation of the market will be crucial for creating successful financial instruments. A fundamental challenge for the EU will be to build capacity to perform such tasks covering a variety of sectors.

Investment needs for transport, energy, and telecom infrastructure networks of EU importance – that is, cross-border and of large amounts – are estimated at EUR 1 trillion for the period up to 2020. Significant investment will also be needed in human capital and in R&D, new technologies and innovation as well as energy efficiency under the Europe 2020 strategy and the 2030 climate and energy package. Given the scale of the investment required, the reduction in infrastructure investment by the majority of Member States, it is clear that private sector financing will be important, and should be complemented by possible interventions at a global (e.g., EU) level.

In order to increase the ability of the private sector to undertake these investments, EU financial instruments can contribute to provide financing which otherwise would not be available and absorb some of the risks, which the private sector is not able or willing to take.

Given that one of the key market failures emerging in infrastructure is the lack of mature projects, efforts should be concentrated not only on the development of appropriate instruments but also on the provision of technical assistance to assist national authorities to prepare eligible projects. In this respect, additional efforts will be made to extend the pipeline of projects benefiting from EU financial instruments outside of the core sectors and core geographical markets.

The long-term financing required to fund infrastructure embodies some key features that the policy-maker should take in due consideration:

It finances productive activities which support growth by reducing costs, diversifying means of production and creating jobs in a smart, sustainable and inclusive way;

It is patient, in that investors take into account the long-term performance and risks of their investments, rather than short-term price fluctuations. This long-term perspective acts in a counter-cyclical manner and promotes financial stability;

It is committed, in that investors take longer-term aspects such as environmental, social, governance issues into account in their investment strategies.

The climate of uncertainty and risk aversion created by the financial and economic crisis has affected both the demand and the supply of long-term financing. On the demand side, this has been evidenced by reduced demand from SMEs, Private Public Partnerships and other investment projects requiring long-term financing, resulting in a suboptimal level of long-term investment and financing. On the supply side, the crisis has increased risk aversion, leading to a preference for liquidity. This, together with bank deleveraging, has affected the economy's ability to finance itself at long maturities. The sub-optimal levels of long-term financing also reflect market failures and inefficiencies in the intermediation chain.

Research and Innovation

The financial crisis had a significant negative impact on innovation. Since 2012, the percentage of firms that managed to bring new or improved products to the market has declined across all industries in the EU-27. There are various reasons for this:

public support for innovation decreased in several countries because of the priority given to fiscal consolidation;

a fragile banking sector forced to restore its balance sheets meant that innovating firms had additional difficulties finding external financing;

the reduced demand for goods and services, together with greater uncertainty about the future, made long-term R&D projects with high sunk costs more risky (OECD 2012).

The above effects were only partially compensated by other offsetting factors. First, there was a shift of focus towards process innovation, aiming at reducing costs and prices. Second, by lowering demand, the financial crisis reduced the opportunity costs of spending on innovation rather than output (OECD 2012, Barlevy 2007).

43 Nonetheless, EU Industrial R&D Investment Scoreboard data and PCT patent applications from the WIPO database show that innovation activities declined. As compared with pre-recession levels, a large proportion of European firms decreased their spending on innovation following the outbreak of the crisis. Indeed, the 2009 Innobarometer also provides evidence of the negative impact of the crisis, showing a substantial impact on firms in the medium and high innovation-intensive sectors.

Against this backdrop, an effective pursuit of the Europe 2020 Strategy's objectives and headline targets requires a recovery of R&D activities, and possibly an acceleration to meet the 2020 target of 3% R&D expenditure over GDP. To this purpose, the effectiveness of the R&I financing can be enhanced by the adoption of dedicated EU financial instruments.

Transport

The existence and quality of an integrated transport network (comprising road, rail, inland waterways, maritime, airports and air traffic management) is strongly correlated with international competitiveness of the country, due to reduced travel and transportation times, better interconnections between the modes of transport, and integration of regional and national production sites with distribution and selling channels targeting the national and global markets.

44 Transport infrastructure is therefore fundamental for the mobility of persons and goods in the internal market, and for the economic, social, and territorial cohesion of the European Union. According to DG MOVE data, the EU comprises 5 000 000 km of paved roads, of which circa 65 000 km are motorways, over 213 000 km of rail lines, of which more than 110 000 km electrified, and nearly 43 000 km of navigable inland waterways. In order to address those transport investment from a systemic perspective, the EU adopted in 2013 a regulation on Union guidelines for the development of the trans-European transport network (TEN-T Guidelines).

The regulation establishes a legally binding obligation for the Member States to develop the so-called "core" and "comprehensive" TEN-T networks. In addition, the regulation identifies projects of common interest and specifies the requirements to be complied with in the implementation of such projects.

The core network overlays the comprehensive network and consists of its strategically most important parts. It constitutes the backbone of the multi-modal mobility network Europe's citizens and businesses need. It concentrates on those components of TEN-T with the highest European added value: cross-border missing links, key bottlenecks and multi-modal nodes. The core network is to be in place by 31 December 2030 at the latest.

The cost of EU transport infrastructure development is estimated at over EUR 1,5 trillion for 2010-2030. The completion of the TEN-T network alone requires about EUR 550 billion until 2020 out of which some EUR 215 billion can be referred to the removal of major bottlenecks. This compares with total investment on transport infrastructure during the period 2000-2006 of EUR 859 billion.

45 The Connecting Europe Facility (CEF) Regulation, adopted in December 2013 laid down a financial envelope for the period 2014-2020 of EUR 33 billion, of which EUR 26 billion are allocated for the transport sector. The overall contribution to the CEF financial instruments is up to 10% of the overall financial envelope of the CEF budget.

The CEF regulation established detailed provisions for the design and implementation of financial instruments in support of TEN financing needs. Due to the proposal of the Commission on the establishment of the European Fund for Strategic Investments (EFSI), it is expected that EUR 2,7 billion will be transferred from the Transport CEF funding towards this new initiative.

In January 2014, the Commission adopted a Communication and a delegated act (EU) N° 275/2014 setting the transport funding priorities for the CEF implementation 2014-2020.

In July 2014, the Commission concluded the ex-ante assessment required for setting the new financial instruments under the CEF. The assessment led to the design of a new CEF Debt Instrument, funded with EUR 2,6 billion, in which all previously existing instruments, namely PBI and LGTT will be merged into. As foreseen in the regulation, the Commission will entrust the implementation of the CEF Debt Instrument. The implementation will be entrusted with the EIB by means of a new Delegation Agreement.

In September 2014, the Commission launched a call for proposals for co-financing projects with EUR 11,9 billion of EU funding to improve European transport connections. This is the largest ever single amount of EU funding earmarked for transport infrastructure. Applicants had until 3 March 2015 to submit their bids. Most of the CEF funds should be focused on major cross-border projects and main bottlenecks on the 9 TEN-T multimodal Corridors, as well as on traffic management systems, which allow making the best use of the existing infrastructure (European Rail Traffic Management System (ERTMS) for railways, and deployment of new generation of air traffic management technologies and procedures (SESAR) for aviation).

The CEF will support primarily projects listed in Part I of the Annex to the CEF Regulation, which have been pre-identified by the Commission in consultation and cooperation with the Member States concerned. The transport infrastructure investments require long term commitments from the national authorities in charge of infrastructure planning and procurements in order to establish the necessary credibility and transparency among all actors involved in the planning and financing of infrastructure, including the public and the private sectors.

The transport infrastructure lifecycles, depending on the sector, are very long term (above 30 years for roads, with necessary maintenance cycles), which in the absence of sufficient supply from long-term bank lending (corresponding to the lifetime of the infrastructure financing, including the spending on the maintenance), or high expectations on the rates of return from the equity providers, leads in many cases to postponement of the planned infrastructure investments and their upgrades and to a decline in new investments.

46 Against this backdrop, several market imperfections have been identified in the transport sector, requiring the consideration of public intervention:

1.Decline in gross investments and expenditure on maintenance in the transport sector in most EU countries since the financial crisis

2.Insufficient bank lending for long-term infrastructure assets at the European level

3.Lack of a planning framework for the European projects of common interest

4.Barriers around the Public Private Partnerships (PPPs)

47 48 In addition, there are other reasons, varying across Member States, why most of transport infrastructure is financed by the public side. Public funding of the basic transport infrastructure has been considered in many European countries as a "service d'intérêt public" and expression of the "acquis of the welfare state" and therefore not subject to the user-pays principle. It estimated that over the last 20 years, 90-95% of transport investments have been financed through national government budgets. When transport infrastructure is privately financed, it is usually based on a public-private partnership (PPP) with a project finance underpinning. Project financing is well established in the road, port and airport sector, whereas for inland waterways currently the first PPP projects are in preparation. An exception is the rail sector, where projects are often financed on a corporate finance basis by the railway infrastructure companies.

The scarcity of funding, due to slow growth rates and constraints on the public expenditure, coupled with insufficient long-term bank lending, has made it necessary to consider other infrastructure financing possibilities, including private-public partnerships and financial instruments possibly at the EU level to alleviate parts of the risk inherent to the projects.

Energy Infrastructure and Energy Efficiency

Major efforts are needed to modernise and expand Europe's energy infrastructure as well as to increase energy efficiency and renewable energy and interconnect networks across borders to meet the Union's core energy policy objectives of competitiveness, sustainability, and security of supply.

49 For the next years to come the EU is projected to invest annually at least some EUR 200bn on average in the energy sector, with energy efficiency measures alone amounting to some EUR 80bn. Since the Commission's Communication on energy infrastructure priorities for 2020 and beyond, adopted on 17 November 2010, the existing Trans-European Networks for Energy (TEN-E) policy and financing framework have been overhauled to coordinate and optimise network development on a pan-continental scale.

The main aim is to ensure the completion of the internal energy market and the security of energy supply, while promoting energy efficiency and energy saving as well as the development of new and renewable forms of energy.

50 51 52 The framework for the policy is now defined in the TEN-E guidelines regulation adopted in April 2013. It is estimated that in electricity alone the transmission grid expansion to accommodate these changes would require EUR 104 billion to 2022 (or, extrapolating, EUR 207 billion to 2030) in addition to the normal replacement of assets, estimated at EUR 76 billion to 2035. In addition, approximately EUR 40 billion will be required by 2020 for a smart grid investment on the transmission level. Some EUR 70 billion will need to be invested by 2020 in gas transmission assets of European importance such as gas interconnectors, storages, Liquefied Natural Gas (LNG) reception terminals. These costs will be predominantly financed from network fees paid by the energy end-users.

53 The projects will be developed by Transmission System Operators (TSOs) i.e. companies set up specifically to develop and run the electricity and gas transmission networks. TSOs operate in a highly regulated business environment. Although regulations differ from Member State to Member State, they frequently include aspects such as agreed investment volumes, maximum debt ratios, maximum debt remuneration, etc. The regulatory approved revenue is normally linked to the book value of the assets they operate, the so-called Regulated Asset Base (RAB).

The scale of the undertaking only partially financed from network fees paid by the energy end-users as well as its cross-country nature and its strategic importance as a public-interest infrastructure warrant a substantive intervention at the EU level, which can be effectively implemented through financial instruments.

ICT/Broadband

54 The Digital Agenda for Europe (DAE) recognises the role of fast and ultra-fast broadband access platforms for innovation and growth and sets ambitious targets for broadband coverage and take-up: (i) making basic broadband access available to all EU by 2013, (ii) making broadband access at internet speeds of above 30 Mbps available to all EU by 2020 and (iii) ensuring that by 2020 50% of EU households subscribe to internet broadband of 100 Mbps or higher. Full coverage with basic broadband has recently been achieved (with a combination of fixed, mobile and satellite technologies) and the focus is now shifting to the challenges associated with the deployment of Next Generation Access (NGA) networks and take-up.

The second and third broadband targets ("NGA targets") require substantial investments in the modernisation of access networks. Total investment needs are difficult to quantify with precision, but indicative estimates from different sources suggest that total investment costs for NGA may exceed EUR 200 billion.

Despite projects being initiated at various levels, current investment plans in fixed network infrastructure are subject to frequent revisions. However, even if they were fully implemented they would most likely not be sufficient to achieve the necessary coverage for the Digital Agenda NGA targets, especially as far as rural areas are concerned. All in all, the current pace of NGA roll-out is likely to leave a sizeable investment gap in the years to 2020.

Traditionally, the bulk of network investment in telecoms has been shouldered by vertically integrated telecom network and cable operators and to an increasing extent by alternative telecom carriers and municipalities. Along with these actors, a number of alternative investors and new business models have been recently emerging.

An alternative group of investors is represented by regional or local utilities, especially in the energy sector. Network investments initiated by municipalities or regional governments represent another class of projects. For instance, municipal fibre networks account for a significant share of NGA coverage in Sweden. Models with public sector participation also comprise PPP structures for broadband, which have been pioneered, for example, by local and regional public authorities in France.

In addition, there is a growing trend of investment initiatives from private open access providers operating on a purely commercial basis, who provide fibre network services, from rolling out to maintenance, to municipalities or regional governments. These companies remain relatively small compared to traditional telecom operators, provided they are mostly relying on their own funds to develop.

The correlation of NGA investment increasing costs with decreasing population density gives rise to a specific issue: a significant part of the EU population lives in areas situated between urban clusters (where there is a clear business case for commercially-driven roll-out). In such rural regions broadband deployment without public support is often not conceivable, although exceptions exist. If a number of conditions are fulfilled, a business case exists for these areas; however, this business case is usually not as compelling and clear-cut as in or at the fringe of conurbations. Specifically, the question is often whether expected revenues and cash-flows can adequately remunerate the risks associated with the project.

Equally, there is often a mismatch between the risk-return profile of projects and the type of investments targeted by investors providing the bulk of financing. On the debt side, long payback cycles combined with high levels of construction and demand risk (at least in the early stages of operation) mean that NGA projects may not qualify for standard senior bank lending; where lenders are ready to extend credit, loan tenors often do not match the long asset lives of telecom networks. At the same time, debt capital market solutions may not be available to fill the gap because transaction costs are prohibitive in relation to the relatively small size of the projects.

On the equity side, the weakness of NGA investments is that they do not fit the definition of popular asset classes: NGA projects carry greater risk than more traditional infrastructure in transport, energy or water and are by no means comparable to the high-risk/high-return strategies with short- to medium-term exit of other fund investors.

The above constraints are exacerbated by additional factors, which impede the matching process between investors and candidate projects. Both senior lenders and other investors have difficulties with appraising the risks associated with broadband projects and with valuing telecom network assets. Especially, regulatory risk is perceived as a major hindrance in the telecommunications sector, and regulatory uncertainty on potential open access obligations of NGA networks severely impedes investment decisions. Moreover, small ticket sizes and lack of standardisation across projects may further complicate the deal-making process. These factors drive transaction costs and often prove to be a decisive obstacle.

Against this backdrop, EU financial policies, facilitating access to well-designed financing solutions which optimise risk allocation and address the specific challenges associated with NGA investments, can give a decisive boost to the economics of projects and greatly improve NGA roll-out dynamics.

Social Enterprises

55 Traditionally, the European social model has always been characterised by the prominent role played by a variety of organisations that differ from mainstream private corporations and traditional non-profit organizations/social economy entities. These private organisations that are grouped under the notion of "social enterprise" pursue an explicit and primary social aim. Their main purpose is to achieve measurable, positive social impacts, rather than to generate financial gains for their owners or stakeholders. They provide goods and services which generate a social return and/or employ methods of production of goods or services that embody a social objective. There are 2 million social economy enterprises in Europe, representing 10% of all businesses in the EU.

56 The Social Business Initiative of the Commission in 2011, which focussed on social entrepreneurship, recognised the importance of social economy organisations in this field: "The specific legal statuses of the social economy are particularly suited to social enterprises as their method of governance favours participation and openness". The social economy employs more than 14 million people – about 6.5% of the EU’s employees. Social economy organizations are traditionally organized in the legal forms of cooperatives, mutual undertakings, associations and foundations. They have various objectives ranging from agriculture and banking to provision of employment and sheltered workshops.

57 These enterprises, which have been active in Europe for nearly two centuries, have been recognised and regulated in many countries through specific legal forms (including in particular the cooperative, the mutual, the foundation and the association, as well as other legal forms and business models recently developing), have set up their own representative organisations to interact with public authorities, and have contributed in various ways to the social and economic development of Europe. In fact recent studies highlight the correlation (and at some point the causality) relationship between social capital and economic growth. Moreover, the recent crisis has pointed out the fragility of an economic and financial system merely based on the profit maximisation benchmark.

Social enterprises play an important role in complementing the action of public authorities, not least because of their innovative nature. They also create jobs - often more sustainable and of better quality than those in the mainstream economy. However, they face a number of obstacles to growth, notably (but not exclusively) in accessing finance. Particularly in some Member States the social enterprise sector is still underdeveloped.

58 59 60 In the Social Business Initiative, the Commission pointed out that “the funding system for social enterprises is underdeveloped in relation to that used by other businesses”. This was confirmed by a 2013 study on imperfections in the social investment market as well as by a number of national studies. For instance, in a UK survey with 865 social enterprises, lack of/poor access to/affordability of finance (45%) was ranked first among the barriers for start-ups, before cash flow (22%), lack of appropriate skills/experience (19%) and lack of awareness of social enterprise among customers (15%). As the UK is one of the most developed markets for social entrepreneurship finance, it can be expected that the demand for capital is not met in most parts of Europe.

Another factor is the investment readiness of social enterprises. There is often a lack of understanding on both sides (supply and demand for social finance), an unwillingness to pay interest rates, an orientation towards the so-called grant economy or a lack of necessary documents such as impact reports or business plans. Analysing the supply side, investors often complain that they do not have enough investment opportunities. There is thus a mismatch between existing supply and demand.

61 A recent study outlines several constraints to starting and scaling-up social enterprise activity. Access to finance was identified across almost every European country as a significant barrier. For example, over a third of social enterprises in Denmark do not have any lines of credit and in the Netherlands this figure is 40%. Moreover, a number of Member States have highlighted the limited range of financial instruments available to social investors. Stakeholders in Hungary noted that financing options available to SMEs (such as investment funds and state guarantees) were not available for social enterprises. In contrast, although available private funds are significant in Germany, they are usually conservatively managed and not necessarily accessible for innovative social enterprises or start-ups.

The EU can play an active role in supporting the development of the supply and demand sides of the social investment markets and in facilitating the access of social enterprises to funding. Through the new Programme for "Employment and Social Innovation" (EaSI), the Commission aims to facilitate and improve the access to finance for social enterprises by providing specific financial support for their development.

In addition, the ESF and ERDF investment priorities promoting support to social entrepreneurship, envisaged in the MFF 2014-2020, can be used to raise awareness and recognition of social enterprises and contribute to the development of this sector within Europe. To help mobilise additional public or private investments, these investment priorities can be implemented via financial instruments.

Education

62 Education and training are at the core of the Europe 2020 Strategy and of the Integrated Guidelines for the Economic and Employment Policies of the Member States. Arguably none of the Europe 2020 objectives and headline targets will be reached without strong investment in human capital.

63 There is a positive and statistically significant relationship between the level of cognitive skills in a population, productivity and economic growth. For example, an average increase of 25 points in PISA performance across the EU countries could lead to a 3% gain in GDP per capita. The increase in average educational attainments by emerging countries makes the human capital accumulation for EU an even more important challenge in light of international competition for growth. The benefits of learning mobility are clear with significant benefits to graduate employability as well as personal development. This importance is recognised by the agreement of the EU and 'Bologna' mobility target that by 2020, at least 20% European Higher Education Area graduates should have had a study or training period abroad.

The total amount of investment in education over the last years has been dampened by adverse economic and financial conditions on both the demand and supply side. In particular:

The financial crisis increased uncertainty and risk aversion, lowering long-term private investments in human capital and hampering cross-border student mobility.

The sovereign debt crisis led to fiscal consolidations, especially in peripheral countries exhibiting low growth / high debt dynamics (such as Greece, Spain, Portugal, Italy), jeopardising previous levels of public spending in education.

The EU could play an effective role in supporting investment in education, both on a long-term basis and as a means to accelerate recovery from the current financial and sovereign crisis. The use of EU financial instruments, envisaged in this sector for the first time for the MFF 2014-2020, is likely to boost student mobility by providing financial support on a larger scale than otherwise possible.

4.Strategic Non-EU Regions

The European Union is a global economic and political player, with regional and global interests and responsibilities. Its network of international agreements with partners and organisations all over the world, not matched by individual Member States, gives all of them influence in almost all fields of international relations.

This delicate role can be primarily developed by maintaining sound international relations, also in view of the growth of the world's economy, especially through the financial support to strategic world economies, with possible gains in terms of trade with Member States.

Besides this, the EU international role is particularly important to prepare access to the Union to Enlargement countries, through economic, technical and administrative support.

Enlargement Countries

64 65 66 Enlargement countries are composed of five candidates, one applicant which has put the accession negotiations on hold and two potential candidates.

Source: DG NEAR

The Treaty on the European Union states that any European country may apply for membership if it respects the democratic values of the EU and is committed to promoting them.

The first step is for the country to meet the key criteria for accession. These were mainly defined at the European Council in Copenhagen in 1993 and are hence referred to as 'Copenhagen criteria'. Countries wishing to join need to have:

stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;

a functioning market economy and the capacity to cope with competition and market forces in the EU;

the ability to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union.

The EU also needs to be able to integrate new members.

In the case of the countries of the Western Balkans additional conditions for membership, were set out in the so-called 'Stabilisation and Association process', mostly relating to regional cooperation and good neighbourly relations.

To ensure that enlargement brings maximum benefits to both the EU and to countries in the process of joining it, the accession process needs to be carefully managed. Hence the Commission has a stake in the support of socio-economic development in enlargement candidates by providing both financial assistance through the Instrument for Pre-Accession Assistance and technical assistance, through TAIEX, which is the Commission’s Technical Assistance and Information Exchange instrument.

Neighbourhood Countries

67 There are 16 neighbourhood countries to the East and the South of the EU. The European Neighbourhood Policy offers these partners political association and economic integration with the EU. Available instruments are of a political, sectorial, and financial nature.

The ENP rests on two regional dimensions: the Eastern Partnership (EaP) for the East and the Partnership for Democracy and Shared Prosperity and the Union for the Mediterranean (UfM) in the South.

The ENP builds upon the legal agreements in place between the EU and the partner in question: Partnership and Cooperation Agreements (PCA) or Association Agreements (AA). Central to the ENP are the bilateral Action Plans or Association Agendas between the EU and each ENP partner (12 of them have been agreed so far). These set out an agenda of political and economic reforms with short and medium-term priorities of 3 to 5 years.

Financial cooperation with European Neighbourhood Partner Countries is one of the key areas of interest, where funding focuses on shared political objectives and underpins reforms set out in agreements or Action Plans/Association Agendas with the partners. The bulk of funding comes from the European Neighbourhood Instrument (ENI), with over €15bn for 2014-2020. Apart from providing grants, the EU is also leveraging additional, substantial funding through cooperation with International Financial institutions (EIB, EBRD, WB, etc), and notably through a specific mechanism, the Neighbourhood Investment Facility.

The Ukraine crisis, the ongoing Syrian conflict and its regional spill-over effects, tense situations in Egypt and the significantly worsening state of internal affairs and security situation in Libya also underline the need for effective partnerships and will form part of the ongoing review of the European Neighbourhood Policy, launched by the European Commission and the External Action Service in early 2015..

Countries covered by the Development Cooperation Instrument (DCI)

Investment needs in EU partner countries are huge. Governments and other public donors' funds are far from sufficient to cover all substantial needs in EU partner countries. In parallel global realities have changed in the past 15 years. Many emerging economies are now thriving, with incomes in some upper middle-income countries outscoring those of EU countries. At the same time, disparities within developing countries are increasing.

The strategic role of the EU in sustainable social and economic growth of the DCI countries as a condicio sine qua non for poverty reduction lies in its capacity to mobilise a critical mass of financial and political support, having a significant impact on a given social or economic issue. The European Union, through its common resources and the available national capabilities, has means, experience and expertise to act efficiently and in a cost-effective way.

There is a growing importance of EU partner countries due to their increasing share in world growth. Financial instruments, such as the EU blending facilites contribute to achieving EU development policy objectives in line with regional and national priorities of partner countries. In particular, the SME and infrastructural sectors that the EU already supports domestically represent targets of interest also in to reduce poverty and foster economic growth.

The Agenda for Change emphasises the support of inclusive growth and job creation as a key priority of EU external cooperation. In this context blending, combining EU grants with loans or with equity from other public and private financiers as a financial instrument, is a useful tool to leverage additional resources, increasing the impact of EU aid and driving sustainable growth as a basis for poverty reduction.

5.Conclusion

The set of potential recipients, as outlined above, are struggling to finance their activity; each country and sector of the real economy shares a common difficulty arising from the global financial crisis, but also presents its own financial issues and has therefore been targeted through specific financial instruments.

Addressing these issues is a priority for Europe. The capacity of the European economy to make long term financing available, reinforcing the competitiveness of the productive sectors, depends on its ability to channel savings through an open, safe and competitive financial system.

In this context, the financial instruments adopted by the EU represent an important measure to address financing gaps by leveraging public and (possibly) private funds while minimising market distortions. Indeed, in times of a European crisis, a central EU intervention and the combination and better use of public resources carry a strong political message about the European construction that would not only be captured by investors and originators alike and contribute to the creation of a broader and more standardised market, but it would also give a strong signal to the public of the joint effort to fight the crisis enforcing the message to markets.

Against this backdrop, the Commission has to ensure a consistent and effective roll-out of centrally-managed financial instruments for the 2014-2020 MFF.

6.Annex-Additional Information on the European Equity Market

The structure of the European Equity Market

The European equity market is composed of different types of private equity investment funds. The nature of such funds depends on the stage of the company's development the funds invest in. Although different definitions and terminologies exist, a commonly accepted approach to split equity funds' investments is described in Box 1:

Box 1: Equity investment stages

Further information is contained in Figure 20, which also links the different stages of SME development with a set of equity instruments that are the most appropriate to address the needs of the market.

Figure 20: Different stages of SME's development and most typical financial sources.

Source: European Commission (2014), based on EIF (2014)

Box 2 further expands on the characteristics of the different markets depicted above and discusses key data on alternative equity financing sources.

Box 2: Characteristics of equity market stages

Regulatory framework for the Venture Capital market

The regulatory framework varies significantly between Member States, and hence the Venture Capital market is highly fragmented, with each country having created a different operating environment for Venture Capital. Cross-border fundraising and investing, while possible, is complex and costly, with funds usually needing to set up an additional legal entity in each Member State concerned.

In addition, fund managers are confronted with problems of double taxation, tax-related administrative obstacles, and uncertainties over tax treatment. In this context:

The European Venture Capital Funds Regulation 69 (EVCFR) creates an opt-in regulatory regime for fund managers whose funds are below the EUR 500 million threshold requiring registration under the Alternative Investment Fund Managers Directive (AIFMD). EVCFR introduces the protected designation of "European Venture Capital Fund" (EVCF).

70 After a domestic registration process, a fund manager can market EVCF-qualified funds in all Member States without further national registration or approval by national regulators. The hypothesis is that the implementation of EVCFR will lead to larger and more cost-effective funds that can also specialise by type of investment or sector, increased competition between funds, a wider diversification of funds' investments, and hence to SMEs having greater access to equity finance.

Despite diminishing obstacles to cross-border fund-raising, EVCFR will not in itself solve any taxation problems that funds invested across borders may face, because the Regulation does not contain rules on taxation. In 2010 a group of tax experts published a report 71 on the taxation problems, which might arise when Venture Capital is invested across borders.

72 However, the 2012 Commission's public consultation on Venture Capital-related cross-border direct tax problems did not yield sufficient evidence to conclude either that the potential tax problems identified occur in practice, or to be able to estimate the real extent of such problems, the frequency with which they occur, and their financial impact. Given this outcome, the Commission is currently reflecting on what, if any, steps it could take in the tax field.

The prudential regulation of Venture Capital investors, such as Solvency II for insurers, has increased investors' risk aversion and further constrained fundraising.

The Commission has adopted on 15.1.2014 new guidelines 73 setting out the conditions under which Member States can grant aid to facilitate access to finance by European SMEs and companies with a medium capitalisation (the so-called "midcaps"). These guidelines are part of the Commission's State Aid Modernisation (SAM) strategy, which aims at fostering growth in the Single Market. The guidelines will enter into force on 1 July 2014.

IV. INFORMATION ON FINANCIAL INSTRUMENTS according to Article 140.8 of the Financial Regulation

1.Equity Instruments

1.1.The High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP)

A -Summary

*Initial commitments (GIF 550 million EUR), including the CBS programme reallocations (73 million EUR).

**Including increase in budget commitments from 2008 to 2013. The initial split of the Competitiveness and Innovation Framework Programme (CIP) budget between the GIF and SMEG instruments was only indicative. During the lifetime of the CIP programme, the share of the SMEG instrument in the total CIP budget was increased in line with market needs, therefore leading to a lower current overall programme budget for GIF, compared to its initial situation.

***Including EUR 19,5 million EFTA contributions and third countries contribution paid by Participating Countries as well as regularised interest.

****Including EUR 19,5 million EFTA contributions and third countries contribution paid by Participating Countries as well as regularised interest, capital repayments and dividends generated on the trust accounts until 31/12/2012. Relevant interest, capital repayments and dividends generated on the trust accounts during 2013 were not recovered to the EU budget due to shortages in the balance of the trust account. Relevant interest, capital repayments and dividends generated on the trust accounts during 2014 were not yet calculated nor recovered on the fiduciary account at writing date.

74 The overall objective of GIF is to improve the access to finance for the start-up and growth of small and medium-sized enterprises (SMEs) in order to support their investment in (eco-) innovation activities, through increasing investment volumes of risk capital funds. GIF used 94,3% of its allocated budget of EUR 625,2 million, with a leverage ratio of 5,5 to 1. It invested in 43 venture capital funds, therefore supporting 433 final recipients and creating more than 3 000 jobs as of December 2014.

GIF's added value is to contribute to the establishment and financing of SMEs and the reduction of the equity and risk capital market gap, which prevents SMEs from exploiting their growth potential, with a view to improving the European venture capital market. Moreover, it supports innovative SMEs with high growth potential, including in their cross-border expansion of their business activities. In this context, GIF provided a critical lifeline of public support to the European VC market throughout the recent crisis. The leverage effect of more than 5 means that the impact of the aggregate budgetary commitments on the overall economy is expected to reach EUR 3 billion of funding to recipient SMEs.

B - Description

(a)Identification of the financial instrument and the basic act;

75 Decision No 1639/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a Competitiveness and Innovation Framework Programme (2007 to 2013)

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

Financial instruments are part of the Entrepreneurship and Innovation Programme (EIP), one of the three specific programmes under the Competitiveness and Innovation Framework Programme (CIP).

The overall objective of the financial instruments under the CIP is the improvement of access to finance for the start-up and growth of small and medium-sized enterprises (SMEs) in order to support their investment in innovation activities, including eco-innovation. Under GIF, this is done by increasing investment volumes of risk capital funds and other investment vehicles.

Implementation arrangements

The High Growth and Innovative SME Facility (GIF) is implemented by the EIF on behalf of the Commission. It aims to increase the supply of equity for innovative SMEs in their early stages (GIF1) and in the expansion phase (GIF2). Investment proposals by financial intermediaries are selected based on a notice of implementation (OJ C 302 of 14.12.2007).

The total budgetary commitments for the CIP financial instruments for the whole period of 2007-2013 were foreseen to be EUR 1,13 billion, with an original indicative split of EUR 623 million for GIF (including eco-innovation) and EUR 506 million for the SME Guarantee Facility.

GIF funds equity or quasi-equity investments in intermediaries, which then must provide long term equity or quasi-equity capital (including subordinated or participating loans and convertible bonds) to innovative SMEs. Such intermediaries operate in the Member States and other participating countries and target in their investment policy more than 50% of investments in eligible final recipients (SMEs meeting the GIF criteria).

Moreover:

i)The GIF EU Investments typically consist of 5-12 year positions in intermediaries, the amount committed to a single such vehicle requiring a critical mass and not exceeding EUR 30 million (or equivalent). At the same time, GIF 1 was required to invest at least 10%, but not more than 25% of the total commitments to an intermediary (the maximum limit could reach 50% exceptionally, including for eco-innovation focused venture capital funds). GIF 2 had to invest at least 7,5% and no more than 15% of total commitments to an Intermediary (the maximum limit could reach 25% exceptionally, including for eco-innovation focused venture capital funds). GIF may co-invest with other EIF-managed resources.

ii)The GIF EU Investment is required to rank pari passu (i.e. Like Risk, Like Reward) with market-oriented investors investing in the same intermediary. These will represent the majority of the capital invested in any intermediary, in order to catalyse private sector investments. GIF normally invests at the first closing of an intermediary and avoids risk capital funds targeting buy-out or replacement capital intended for asset stripping.

iii)The GIF targets commercially-oriented intermediaries managed by independent management teams combining the appropriate mix of skills and experience which demonstrate the necessary capability and credibility to manage a risk capital fund. They are required to demonstrate a clear strategy, create adequate deal flow, establish appropriate exit policies, and apply good market practice in areas such as legal structure, investment principles, reporting, and valuation.

Added value

The added value of the GIF instrument consisted in addressing specific market needs, structuring input, and providing catalytic effects.

As response to market needs, GIF supported numerous first time teams, composed of motivated professionals, to raise their first independent fund. It also addressed regional equity and risk capital market failure, including by developing an appropriate private equity infrastructure in the less-developed Member States and participating countries.

GIF contributed to filling the sizable gap in access to finance for local young SMEs in their development phase, as well as helping companies in their international expansion strategy. It also increased competition in the market, spread best practices around the region, and highlighted to other private equity teams the support the European Union is providing as well as motivated them to raise independent funds of their own.

In terms of structuring input, EIF, as entrusted entity for the GIF Facility, assisted Fund Managers to fine-tune their investment strategies, including by positioning themselves in relation to current and future competition. It also contributed to the alignment of interest between the LPs and the GPs, including by increasing the management team's commitment and optimising the composition of the Managers' Boards.

GIF helped introduce and spread best market practices, including standard LP protective clauses, establishing transparent legal fund structures, and implement AML/KYC procedures.

In terms of catalytic effects, the GIF provided a strong signalling effect, which helped attract private and institutional investors, therefore ensuring viable and timely closings of funds, which offered the possibility to implement the envisaged strategy and provide proper risk diversification and risk-commensurate return expectation. The venture capital funds' reaching critical mass, enabled by the GIF investment, allowed the intermediaries to support longer their investee SMEs, thus optimizing the exit timing, and therefore valuations for all participating investors.

(c)The financial institutions involved in implementation;

The Commission empowers and mandates the EIF to provide EU venture capital investments in its own name but on behalf of and at the risk of the Commission, under a Fiduciary and Management Agreement ('FMA', signed 22/11/2007).

Furthermore, the EIF is responsible for identifying, evaluating and selecting the Financial Intermediaries ('FI') by applying selection criteria and processes set out in the Investment Policy, which is part of the FMA. Under the FMA, the EIF examined, on a continuous basis, proposals collected based on a published call for expression of interests.

C - Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 625 197 747

Aggregate budgetary payments as at 31/12/2014 EUR 358 038 250

(e)The performance of the financial instrument, including investments realised;

GIF Impact on employment

77 In addition, for the entire period as of 31 December 2014, GIF programme achievements were as follows:

Number of employees at final recipients (SMEs) at date of first investment (number of jobs created or maintained): 6 844

GIF number of employees at the assessment date): 9 908

78 79 The estimated number of jobs created under GIF is over 3 000; the number of employees in GIF-final recipients as at 31 December 2012 was 9 908.

Additional GIF operational information

For the period 2007-2013, EUR 1 275,1 million of commitment appropriations were made available for the CIP financial instruments, of which EUR 625,2 million for GIF. The appropriations were fully committed.

Out of the amount committed, EUR 358 million was paid for GIF to the fiduciary account, managed by the EIF on behalf of the Commission, for the implementation of the programme. Funds are drawn down from the fiduciary account when investments are being made into financial intermediaries.

By the end of 2014, 43 agreements had been signed by the EIF on behalf of the Commission with financial intermediaries (venture capital funds) for a total of EUR 553 million in net commitments from the Union budget. Given that the EIF is entitled to fees up to 6% of its net commitments to Financial Intermediaries, the maximum amount available for deals under GIF is of EUR 588,9 million over the period 2007-2013.

80 81 82 This implies that the GIF budget had an utilisation rate of 94,3% of commitments available for deals. Out of the fore-mentioned 43 funds, 18 funds have a multi-country focus and the remaining 25 funds target investments in specific countries. 12 venture capital funds are investing in eco-innovation, supported by signed EU investments for a total amount of EUR 200,8 million. By the end of September 2014, 433 investees had received equity finance facilitated by financial support provided under GIF.

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

More than 90% of EUR 19,5 million has been used for the venture capital transactions under the instrument.

(g)The balance of the fiduciary account;

Aggregate balance of the fiduciary account as at 31/12/2014EUR 81 554 621

(h)Revenues and repayments;

Aggregate additional resources as at 31/12/2014 EUR 19 474 357

(i)The value of equity investments, with respect to previous years;

84
As at 31 December 2014 a total of EUR 248,8 million of the GIF had been invested in final recipients, and that investment has a valuation of EUR 241,5 million.The difference between the two figures reflects Realized Investment Gains/Losses on Exits, Realized Investment Losses through Write-Offs, and Unrealized Investment Gains/Losses.

(j)The accumulated figures on impairments of assets of equity;

(k)The target leverage 85 effect, and the achieved leverage 86 effect;

87
88 The aggregate budgetary commitments for 2007-2013 amounted to EUR 625,2 million. The expected leverage effect on GIF is 5 which means that the impact of the aggregate budgetary commitments on the overall economy is expected to reach EUR 3 billion of funding to recipient SMEs.The achieved leverage effect for CIP GIF (Actual intermediary size= actual size of the VC funds / GIF net approved capital) is around 5,5. 

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification 89 ;

As at the end of 2014, the GIF already contributed to provide nearly 1 billion (984 million) EUR of financing to 371 eligible Final Recipients (SMEs) and had thus an important impact on the real economy of the EU as described below.

The impact of the EU's Financial Instruments for SMEs

90 91
In 2014 the GIF component (providing venture capital) of the CIP programme again provided an essential contribution to SMEs' support in the eligible participating countries, as outlined above and confirmed by independent final evaluation results, summarised hereafter, concerning relevance, effectiveness, efficiency, utility, sustainability and European added value.As regards Relevance, the EIP final evaluation concluded that the instrument met a clear need for finance on the part of the recipients and demonstrated that gaps in SME finance can be addressed. GIF recipients stated in 39% of cases that this financing scheme was the only option available for them; another 23% stated that without this instrument they would have been able to receive only part of the funding needed. In total, 62% of the GIF recipients indicated that the support was crucial to find the finance needed.

As regards Effectiveness, the overall evaluation conclusion was that the funds are getting through to the intended recipients and have the desired effects in terms of innovation, growth and employment. 77% of GIF recipients stated that receiving the equity financing made it easier to obtain additional financing. More than 90% of the GIF recipients indicated that the financial support had a positive or fairly positive impact on their long term growth prospects. 62% of GIF recipients expected an increase in turnover and in most of these cases, a growth of between 26% and 100% was expected. 83% of GIF recipients identified themselves as engaged in product or service innovation.

Apart from the financial means, GIF recipients also received other support (appointment of a non-executive director, advice on general business planning, access to a network, financial advice, special business advice or mentoring).

As regards Efficiency, the evaluation noted that general stakeholders have the impression that the instruments are administered efficiently and that money is not wasted. As regards Utility, a large part of GIF recipients indicated that the financial support received was the only option for obtaining the funds needed.

92

As regards Sustainability, the evaluators noted that possible improvements raised by EIPC members and representatives of business organisations, related only to more general issues and that no improvements were suggested relating to the details of the instruments.Finally, as regards European value-added, the evaluation report recognised the leverage effect achieved, the fact that 80% of GIF recipients operate on an international market and that venture capital funds i) have a broader geographical focus and ii) operate across boundariesAlthough the overall effect of EU programmes on SMEs' financing remains limited (by nature, EU intervention is limited to market gaps or sub-optimal market situations, meaning by far the largest part of financing is provided by banking and finance market players), the GIF components of CIP contributed very positively to the development and sustainability of EU SMEs throughout 2014.

Graph 2 : Geographical distribution of signatures by the Designated Service under GIF

Source: ECFIN

E -Other key points and issues

Main issues for implementation:

oEuropean venture capital remains fragmented and dependant on a lifeline from public investors. The support via EU-level financial instruments is key in tackling this fragmentation, as truly multi-country funds often face difficulties in obtaining support from national programmes.

oThe programmes are also essential to maintain venture capital in Europe and support it until it becomes fully sustainable.

Main risks: implementation under control, no specific risks identified.

oThe monitoring visits carried out for GIF during 2014 by the Commission allowed to confirm the eligibility of international financial intermediaries (IFI's) and final recipients, contractual compliance (transposal of the Commission's requirements into the contractual documentation), process compliance (observance of processes prescribed by the Commission) and performance (achievement of predefined targets/objectives). Compliance reporting covering the situation did not indicate major deviations.

oAudits and internal controls:

as confirmed in ECFIN's AAR 2014, no issue is pending, and ECFIN received a positive DAS letter by ECA as at 31/3/2014.

In February 2012 IAS and ECFIN IAC finalised their audit on the implementation by the EIF of the High Growth and Innovative SME Facility. The audit resulted in 6 recommendations.  All recommendations were implemented during 2013. No additional findings or recommendations were made in 2014.

During 2014, the Designated Service continued to follow-up the implementation of OLAF's recommendations in two cases (OF/2011/1176 and OF/2013/0107), where fraud was detected at the level of the fund manager and at the level of a final beneficiary. Corrective actions for both cases were progressing normally during 2014.

A declaration of assurance has been received from the EIF on 31/3/2015.

oEfficiency:

number of findings/minor observations (stemming from ECFIN L2's monitoring activities): for Equity: 0 (out of 0, 100% closed).

Number of OLAF inquiries: 2 inquiries (implementation of recommendations ongoing).

Number of IAC inquiries for Equity: NONE.

Number of open recommendations in action plans established following ECA, IAS, IAC or ex-post control recommendations: NONE.

Number of operations outside official procedures (2014) : NONE.

Number of erroneous operations (2014): NONE.

Return to Trust Account (2014) linked to errors : NONE.

Results on the checks on the balance of the TA (2014): no errors/discrepancies.

General outlook:

odemand for investments by venture capital funds is larger than the budgets of EU-funded programmes.

oThe EU programmes therefore need to focus specifically on areas, sectors and stages where the EU added value and policy impact can be maximised, and, if possible, increase the budgetary contributions to achieve a better critical mass.

1.2.Equity Facility for Growth under COSME

A -Summary

The equity investments offered for funds investing into European SMEs at the growth- and expansion stage will be implemented by the EIF under the COSME Delegation Agreement signed in July 2014.

The overall value of risk capital investments, including venture capital and mezzanine finance, such as subordinated and participating loans, to be mobilised by the EU contribution will range from EUR 2,6 billion to EUR 3,9 billion.

According to relevant stakeholders, there is a significant shortage for growth capital and the EIF started screening a number of applications which are expected to result in the signature of fund agreements in the course of 2015.

B -Description

(a)Identification of the financial instrument and the basic act;

Equity Facility for Growth (EFG) under the Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME) – 2014 to 2020

Regulation (EU) No 1287/2013 of the European Parliament and of the Council of 11 December 2013 establishing a Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME) (2014 – 2020) and repealing Decision No 1639/2006/EC (O.J. L347 of 20 December 2013)

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The overall policy objective of COSME Financial Instruments is to improve access to finance for SMEs in the form of equity and debt. Actions shall aim to stimulate the take-up and supply of both equity and debt finance, which may include seed funding, angel funding and quasi-equity financing subject to market demand but excluding asset stripping.

In line with the above, the Equity Facility for Growth (EFG) provides enhanced access to risk capital for which significant market gaps exist in Europe and support the development of a pan-European risk capital market. The later will be achieved by focusing predominantly on those risk capital funds which invest cross-border.

Implementation arrangements

The EFG is implemented as a window of a single Union equity financial instrument supporting EU enterprises’ growth and research and innovation from the early stage, including seed, up to the growth stage. It focuses on funds that provide venture capital and mezzanine finance, such as subordinated and participating loans, to expansion and growth-stage enterprises, in particular those operating across borders, while having the possibility to make investments in early stage enterprises in conjunction with the equity facility for Research, Development and Innovation (RDI) under Horizon 2020. Support is given in the form of direct investments made by the entrusted entity in financial intermediaries that provide equity or quasi-equity financing to SMEs.The Delegation Agreement signed with the EIF ensures that the EFG is accessible for a broad range of financial intermediaries provided that these are professionally and independently managed and display the capacity to successfully support SMEs in their growth and expansion phase. From a technical point of view, the EIF is instructed to invest on a pari-passu basis with other private and public investors. Target final recipients are SMEs of all sizes without a specific sector focus. The equity instrument is planned to last until 31 December 2034 (until last operations are wound down).

Added value

The added value for the Union of the Financial Instruments lies, inter alia, in strengthening the internal market for venture capital and in developing a pan-European SME finance market as well as in addressing market failures that cannot be addressed by Member States

(c)The financial institutions involved in implementation;

The implementation of the EFG has been entrusted to the EIF and the Delegation Agreement has been signed on 22 July 2014. The related continuous open call for expression of interest for financial intermediaries published by the EIF is available at

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 51 657 588

Aggregate budgetary payments as at 31/12/2014 EUR 32 500 000

(e)The performance of the financial instrument, including investments realised;

Not yet applicable

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

(h)Revenues and repayments;

EUR 0

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

EUR 0

(k)The target leverage effect, and the achieved leverage effect;

The target leverage effect indicated in the COSME legal base is in the 1 to 4 – 1 to 6 range for the equity instrument over the lifetime of the programme, with an overall value of venture capital investments mobilised by the EU contribution ranging from EUR 2,6 billion to EUR 3,9 billion.

These amounts have been computed on the basis of the initially allocated budget for the COSME financial instruments, which is 60% of the total amount allocated to the COSME programme as set out in the basic act (EUR 2 298 243 000).

It has been assumed (as documented in the legislative financial statement accompanying the basic act) that the split between the two financial instruments would be 52% for the Loan Guarantee Facility (LGF) and 48% for the Equity Facility for Growth (EFG).

The achieved leverage effect 

As no operations have been signed in 2014 with financial intermediaries under the EFG, no achieved leverage effect can be computed for 2014.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

In line with the Europe 2020 strategy, the COSME programme is designed to create the conditions for European enterprises to flourish and to ensure that SMEs are able to take full advantage of the single market’s enormous potential, as well as encouraging them to look beyond it. There needs to be a special effort to promote the development of SMEs, a major source of economic growth and job creation in the Union.

More specifically, it is recognised that many of the Union’s competitiveness problems involve SME’s difficulties in obtaining access to finance because they struggle to demonstrate their credit-worthiness and have difficulties in gaining access to risk capital. Those difficulties have a negative effect on the level and quality of the new enterprises created and on the growth and survival rate of enterprises, as well as on the readiness of new entrepreneurs to take over viable companies in the context of a transfer of business/succession.

Corresponding to the specific objective for the financial instruments under COSME which is to improve access to finance for SMEs in the form of equity and debt, the EFG has been set up to provide enhanced access to risk capital for which significant market gaps exist in Europe and to support the development of a pan-European risk capital market. The later will be achieved by focusing predominantly on those risk capital funds which invest cross-border.

The overall value of venture capital investments to be mobilised by the EU contribution will range from EUR 2,6 billion to EUR 3,9 billion, with a number of firms receiving venture capital investments ranging from 360 to 540.

The EFG was launched at the beginning of August 2014 through an open call for expression of interest published by the EIF. Since then, the EIF started screening a number of potential fund proposals for eligibility under the EFG and approved a first equity operation in March 2015. The signature of this first operation is expected to take place in the first half of 2015.

E -Other key points and issues

Main issues for the implementation:

ocompared to the due diligence required for the signature of guarantee agreements, the due diligence process for equity is much more complex, and necessitates more time (e.g. due to the fund-raising process involved from various investors).

Main risks:

owhile the EIF was screening in 2014 already a number of potential fund proposals for eligibility under the COSME EFG, no due diligence process was completed at the end of the year.

General outlook:

ofurthermore, even EIF Board approval does not necessarily translate into signed agreements as fund managers may fail to raise the required private capital in the existing adverse market conditions to reach the first closing of the fund. Industry statistics indicate that the fund-raising conditions remain very challenging.

1.3.InnovFin SME Venture Capital (Horizon 2020) 96

A -Summary

*See Section 8.1 on GIF

**This amount includes EFTA appropriations for 2014 and is subject to the outcome of discussions on the budget profile.

97 The InnovFin SME Venture Capital succeeds and refines the GIF-1 scheme under CIP, and is part of a single equity financial instrument supporting the growth of enterprises and their R&I activities. It is designed to improve access to risk finance by early-stage R&I-driven SMEs and small midcaps through supporting early-stage risk capital funds that invest, on a predominantly cross-border basis, in individual enterprises.

SMEs and small midcaps located in Member States or in Associated Countries will be eligible as final recipients. The COSME programme's Equity Facility for Growth complements this facility, which, supported by a set of accompanying measures, will support the achievement of Horizon 2020 policy objectives.

In terms of Union added value, the InnovFin SME Venture Capital will complement national and regional schemes that cannot cater for cross-border investments in R&I. The early-stage deals will also have a demonstration effect that can benefit public and private investors across Europe. For the growth phase, only at European level is it possible to achieve the necessary scale and the strong participation of private investors that are essential to the functioning of a self-sustaining venture capital market.

Current Overall (2014-2020) Programme Budget amounts to EUR 430 million.

B -Description 98

(a)Identification of the financial instrument and the basic act;

99 Regulation (EU) No 1291/2013 of the European Parliament and of the Council of 11 December 2013 establishing Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020) and repealing Decision No 1982/2006/EC

100 Regulation (EU) No 1290/2013 of the European Parliament and of the Council of 11 December 2013 laying down the rules for participation and dissemination in "Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020)" and repealing Regulation (EC) No 1906/2006 

101 Council Decision of 3 December 2013 establishing the specific programme implementing Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020) and repealing Decisions 2006/971/EC, 2006/972/EC, 2006/973/EC, 2006/974/EC and 2006/975/EC

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

102 This facility succeeds and refines the GIF-1 scheme under CIP, and is part of a single equity financial instrument supporting the growth of enterprises and their R&I activities. It is designed to improve access to risk finance by early-stage R&I-driven SMEs and small midcaps through supporting early-stage risk capital funds that invest, on a predominantly cross-border basis, in individual enterprises. SMEs and small midcaps located in Member States or in Associated Countries will be eligible as final recipients. The COSME programme's Equity Facility for Growth (EFG) complements this facility.

Implementation arrangements

103 The European Investment Fund (EIF) will make and manage equity investments into risk-capital funds. EIF will be able to invest in a wide range of financial intermediaries, including those cooperating with business angels. The funds concerned will make VC and quasi-equity (including mezzanine capital) early-stage investments in enterprises, which are likely to be mainly SMEs. In the case of multistage funds (i.e., covering both early- and growth-stage investments), funding can be provided pro rata from this facility and COSME's growth-stage equity facility, EFG.

This is a demand-driven facility, with no prior allocations between sectors, countries, or regions. However, subject to the successful conclusion of negotiations, the Commission will incentivise EIF, via an appropriate performance indicator, to make a particular effort to ensure that a proportion of final recipients are eco-innovative SMEs and small midcaps. R&I-driven SMEs or small midcaps wishing to apply for an investment should contact one or more of the funds signing an agreement with EIF.

Added value

In terms of Union added value, the InnovFin SME Venture Capital will complement national and regional schemes that cannot cater for cross-border investments in R&I. The early-stage deals will also have a demonstration effect that can benefit public and private investors across Europe. For the growth phase, only at European level is it possible to achieve the necessary scale and the strong participation of private investors essential to the functioning of a self-sustaining venture capital market.

(c)The financial institutions involved in implementation;

The implementation of the InnovFin SME Venture Capital will be made through an entrusted entity, EIF in Luxembourg, subject to the successful conclusion of a Delegation Agreement with the Commission.

The Delegation Agreement to be signed with the entrusted entity will ensure that the InnovFin SME Venture Capital is accessible for a broad range of venture capital funds and public and private funds-of-funds which are experienced in financial transactions with early-stage R&I-driven SMEs and small midcaps or which have the capacity to enter into financial transactions with early-stage R&I-driven SMEs and small midcaps.

Financial intermediaries, selected by entrusted entities for the implementation of financial instruments pursuant to Article 139(4) of Regulation (EU, Euratom) No 966/2012 on the basis of open, transparent, proportionate and non- discriminatory procedures, may include private financial institutions as well as governmental and semi-governmental financial institutions, national and regional public banks as well as national and regional investment banks.

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

EUR 430 million indicatively foreseen for the period 2014-2020

(e)The performance of the financial instrument, including investments realised;

Not applicable

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

Not applicable

(g)The balance of the fiduciary account;

Not applicable

(h)Revenues and repayments;

Not applicable

(i)The value of equity investments, with respect to previous years;

Not applicable

(j)The accumulated figures on impairments of assets of equity;

Not applicable

(k)The target leverage effect, and the achieved leverage effect;

The leverage of the Equity facility - defined as the total funding (i.e. Union funding plus contribution from other financial institutions) divided by the Union financial contribution - is expected to be around 6, depending on market specificities.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

104 The Innovation Union Europe 2020 Flagship Initiative of 2010 contains the following commitment:

On the basis of Commission proposals, the EU should put in place financial instruments to attract a major increase in private finance and close the market gaps in investing in research and innovation. Union contribution should create a major leverage effect and expand on the success of FP7 and CIP.

The Commission will work with the European Investment Bank Group, national financial intermediaries and private investors to develop proposals addressing the following critical gaps: (i) investment in knowledge transfer and start-ups; (ii) venture capital for fast growing firms expanding in EU and global markets; (iii) risk-sharing finance for investments in R&D and innovation projects; and (iv) loans for innovative fast growing SMEs and midcaps. The proposals will ensure a high leverage effect, efficient management and simple access for businesses.

105 In 2011, the Commission proposed that Horizon 2020 and COSME, the programmes succeeding FP7 and CIP, should jointly support an equity and a debt financial instrument designed to foster the growth of SMEs and small midcaps and their ability to undertake R&I, with Horizon 2020 also providing debt finance for larger entities.

For equity, the Commission proposed that both programmes should make seed, early-stage and growth-stage investments, with Horizon 2020 mainly focusing on risk-capital funds investing in seed, start-up and early-stage R&I-driven SMEs and small midcaps, and COSME mainly focusing on venture capital, (VC), and mezzanine funds investing in SMEs in the expansion and growth phases.

The InnovFin SME Venture Capital , supported by a set of accompanying measures, will support the achievement of Horizon 2020 policy objectives. To this end, they will be dedicated to consolidating and raising the quality of Europe's science base; promoting research and innovation with a business-driven agenda; and addressing societal challenges, with a focus on activities such as piloting, demonstration, test-beds and market uptake. The budget envelope of EUR 430 million is targeted to mobilize EUR 2,5 billion of new equity investments.

E -Other key points and issues

The Union-level InnovFin SME Venture Capital is needed to help improve the availability of equity finance for early and growth-stage investments and to boost the development of the Union venture capital market. During the technology transfer and start-up phase, new companies face a 'valley of death' where public research grants stop and it is not possible to attract private finance. Public support aiming to leverage private seed and start-up funds to fill this gap is currently too fragmented and intermittent, or its management lacks the necessary expertise. Furthermore, most venture capital funds in Europe are too small to support the continued growth of innovative companies and do not have the critical mass to specialize and operate transnationally.

Specific support actions such as information and coaching activities for SMEs should be provided. Regional authorities, SMEs associations, chambers of commerce and relevant financial intermediaries may be consulted, where appropriate, in relation to the programming and implementation of these activities.

106 Given the generally pro-cyclical nature of the activities of equity investors, the health of the economy overall is very likely to dominate the evolution of both Europe's VC and BA industries, though some analysts advocate and predict a considerable downsizing of the VC sector in both Europe and the USA in order for a smaller number of funds to enjoy a reasonable level of return and profitability.

107 At EU level, EIF plays a crucial role: by end-2011, its total net equity commitments came to EUR 5,9 billion (with a record EUR 1,1 billion in 2011 alone), covering investments in over 370 funds and over 300 fund manager teams.

108 109 In the Member States, the lack of sufficient capital flows from private VC funds into, in particular, early-stage innovative firms has led to the creation of a large number of public-sector schemes, taking several forms, at the regional and country level. In France, for example, CDC Enterprises manages the EUR 2,2 billion France-Investissement programme, while in Germany there is the EUR 500 million ERP-EIF Dachfonds managed by EIF plus the EUR 272 million High-Tech Gründerfonds. In the UK, a series of government-backed investment funds have provided over EUR 1 billion of public money in support of VC.

110 In many Member States, however, with pressure mounting to reduce budget deficits, the relatively modest returns achieved by some VC operations backed with public funds, coupled with the significant management costs involved, may undermine support for future initiatives.

The implementation of the Horizon 2020 InnovFin SME Venture Capital should start towards the end of 2014, after the EIF FAFA and the Delegation Agreement for the Horizon 2020 Financial Instruments between the EU (represented by the Commissioner for Research and Innovation), EIB and EIF were signed.

Potential risks regarding the implementation of the Horizon 2020 Equity Facility for early-stage investments may concern publication obligations of financial intermediaries for final recipients and full compliance of combined eligibility criteria for final recipients by multi-stage funds receiving funding from Horizon 2020 and COSME.

However, such potential risks should be mitigated through contractual arrangements between the Commission and the EIF and subsequently, through contractual agreements between the EIF and financial intermediaries (passing-on of eligibility, reporting and monitoring obligations throughout the delivery chain).

2.Guarantee Instruments

2.1.The SME Guarantee Facility (SMEG07) under the Competitiveness and Innovation Framework Programme (CIP)

A -Summary

*Initial voted commitments (SMEG07 506 million EUR).

**Including increase in budget commitments from 2008 to 2013.

***Including EFTA contributions and third countries contribution paid by Participating Countries as well as regularised interest.

****Including EFTA contributions and third countries contribution paid by Participating Countries as well as regularised interest generated on the trust accounts until 31/12/2012. Relevant interest generated on the trust accounts during 2013 was not recovered to the EU budget due to shortages in the balance of the trust account. Relevant interest generated on the trust accounts during 2014 was not yet calculated nor recovered on the fiduciary account at writing date.

The CIP market-oriented instruments under GIF and SMEG have shown high efficiency and relevance to the current market conditions. SMEG07 acts as counter-cyclical measure, ensuring provision of finance to a vulnerable SME segment, which was one of the most hard hit market segments in the wake of the financial crisis. It is a cost-effective financial instrument which is demonstrated by the high leverage ratio. Compared to grants, where 1 EUR of budgetary resources provide 1 EUR of financing, the SMEG is expected to support 31,4 EUR of finance to SMEs for 1 EUR of the Union contribution.

Moreover, the instrument offers tailor-made solutions that are based on the common principles set out in the guarantee policy and operational guidelines of the programme. Due to the embedded flexibility of the programme, countries', and intermediaries' specific needs could be effectively addressed when considering an appropriate guarantee product.

In this regard, SMEG07 has a wide geographical coverage. The instrument involves 57 financial intermediaries, which have been providing finance to SMEs in 24 participating countries (The loans associated with that guaranteed amount account for EUR 18,6 billion)..

According to the 2011 ECA's Performance Audit, the Facility should be able to reach the number of 315 000 supported SME recipients as foreseen in the ex-ante assessment under CIP. This target has already been trespassed, as 356 589 SMEs were already supported by the end of September 2014.

B -Description

(a)Identification of the financial instrument and the basic act;

111 Decision No 1639/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a Competitiveness and Innovation Framework Programme (2007 to 2013)

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

Financial instruments are part of the Entrepreneurship and Innovation Programme (EIP), one of the three specific programmes under the Competitiveness and Innovation Programme (CIP).

The overall objective of the financial instruments under the CIP is the improvement of access to finance for the start-up and growth of SMEs in order to support their investment in innovation activities, including eco-innovation. Under the SME Guarantee Facility, this is done by providing leverage to SME debt financing instruments to increase the supply of debt finance to SMEs.

Implementation arrangements

The SME Guarantee Facility (SMEG) is operated by the EIF on behalf of the Commission. It provides counter- or co-guarantees to guarantee schemes and direct guarantees to Financial Intermediaries operating in eligible countries with the aim of increasing lending volumes available to SMEs. The Facility is a demand-driven instrument, with only indicative country-based allocations, in order to ensure wide geographical coverage.

The initial Union budget for the CIP financial instruments for the whole period of 2007-2013 was foreseen at EUR 1,13 billion, with an original indicative split of EUR 506 million for the SME Guarantee Facility and EUR 623 million for the High Growth and Innovative SME Facility.

Until the end of budgetary commitment period in 2013, the Designated Service was actively involved in financial intermediary approval process. Each deal was to be approved by the EIF Board of Directors and the Commissions Designated Service. The Designated Service will continue its monitoring and reporting obligations until the wind-up of the facility (estimated 2026).

The EIF continues to implement this guarantee instrument, which is delivered by financial intermediaries (private banks, promotional banks, private and public guarantee institutions). The EIF provides a capped guarantee that covers potential losses against a commitment of the financial intermediary to provide more debt financing (loans, leases or guarantees that support loans and leases) to target SMEs. Financial intermediaries commit to providing more finance to SMEs in terms of increased volumes, providing finance to riskier SMEs (start-ups and young companies) or SMEs with less available collateral.

Value added

Thanks to the guarantee provided by the EIF, financial intermediaries provide more financing to SMEs or they are moving to more risky and previously not serviced segments of vulnerable SMEs, such as start-ups, young companies and companies lacking sufficient collateral.

112 Regarding the sustainability and European value-added, the effectiveness of the instruments used has increased over time; notwithstanding the scope for further improvements, European value-added is evident in the development of facilities that are at the cutting-edge of provision for SMEs.

(c)The financial institutions involved in implementation;

The Commission empowered and mandated the EIF to provide EU Guarantees in its own name but on behalf of and at the risk of the Commission, under a Fiduciary and Management Agreement ('FMA', signed on 20/9/2007).

The EIF was responsible for identifying, evaluating, and selecting the Financial Intermediaries ('FIs') according to the Guarantee Policy, which is part of the FMA. The EIF examined, on a continuous basis, proposals collected based on a call for expression of interests.

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 649 886 744

Aggregate budgetary payments as at 31/12/2014  EUR 336 154 006

(e)The performance of the financial instrument, including investments realised;

Additional operational information

For the period 2007-2013, EUR 1 275,1 million of commitment appropriations were made available for the CIP financial instruments, of which EUR 649,9 million for SMEG. The appropriations were fully committed.

Regarding the payments appropriations for the period 2007-2014, out of the EUR 694,2 million made available for the CIP financial instruments, EUR 336,15 million were paid to the SMEG fiduciary account, managed by the EIF on behalf of the Commission. Funds are drawn down from the fiduciary account as and when defaults occur under SMEG.

120
121 By the end of September 2014 (latest available figures as at writing date), 73 guarantee agreements with 57 Financial Intermediaries from 24 countries had been approved by the Commission, with a total of EUR 587,6 million guarantee cap from the Union budget for direct and counter-guarantees. By the end of September 2014, 356 589 SMEs had received debt finance facilitated by financial support provided under SMEG, through nearly 431 561 loans.As at September 2014, the EIF had signed agreements for a cumulative total amount guaranteed of EUR 13 193,3 million. The loans associated with that guaranteed amount account for EUR 18,6 billion. 

SMEG impact on employment

For the entire period as of 31 September 2014 (latest available figures as at writing date), SMEG achievements under CIP were as follows:

number of employees at final recipients (supported SMEs) at inclusion date: 1 264 307;

number of jobs created or maintained: 356 589 122 .

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

For the period 2007-2014, the amount of EUR 12,1 million returned to the instrument (point (h)) has been more than 60% used for further transactions in line with the policy objectives of the Programme.

(g)The balance of the fiduciary account;

Aggregate balance of the fiduciary account as at 31/12/2014EUR 150 799 792

(h)Revenues and repayments (Art.140. 6);

Aggregate additional resources as at 31/12/2014 EUR 12 089 883,9

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on called guarantees for guarantee instruments;

(k)The target leverage effect, and the achieved leverage effect;

123 The achieved leverage effect for CIP SMEG 07 at the level of entrusted entity (total loan volume received by the recipient SMEs / EU guarantee cap amount) is 31,6.

124 The expected CIP SMEG07 leverage effect for signed operations (calculated as maximum portfolio loan volume / EU guarantee cap amount) is estimated around 31,4 for the entire duration of the programme.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

As at the end of 2014, the SMEG07 already contributed to provide nearly 18,6 billion EUR of financing to nearly 357 000 Final Recipients (SMEs) through more than 431 000 underlying loans, accounting for an estimated 27,3 billion EUR investment amount, and had thus an important impact on the real economy of the EU as described below.

The latest evaluations related to GIF and SMEG financial instruments reiterated that the financial instruments appeared to be on track to achieve the targets set and confirmed that the effectiveness of the financial instruments has increased over time. In more detail, regarding:

a) Effectiveness and efficiency

125 The financial instruments appear to be on track to achieve the targets set and seem to be acquiring a certain momentum that may lead them to exceed expectations. 

In addition, there have been improvements in monitoring systems at the level of both EIF (entrusted entity) and financial intermediaries involved in implementation which contributed to tracking comprehensively performance of the instrument and thus more effectively pursuing the policy objectives of the instrument.

b) Relevance

126 The relevance of the instrument as assessed by the recipient SMEs is significant:

46% stated that the EU financing scheme was the only option available for them to get financing,

18% stated that without the EU support they would have received only part of the funding needed, 42% stated that the EU support helped them to get additional finance and

64% stated that EU support was crucial to find the finance needed.

Moreover, the instrument offers tailor-made solutions that are based on the common principles set out in the guarantee policy and operational guidelines of the programme. Due to the embedded flexibility of the programme, countries', and intermediary's specific needs could be effectively addressed when considering an appropriate guarantee product.

In this regard, the SMEG Facility has a wide geographical coverage. The instrument involves 57 financial intermediaries, which have been providing finance to SMEs in 24 participating countries.

Based on the financing volumes supported so far (see the relevant sections above), the CIP market-oriented instruments under both GIF and SMEG have shown high efficiency and relevance in addressing current market conditions, dominated in recent years by a tightening of credit conditions and more difficult access to finance for SMEs. The SMEG Facility is a counter-cyclical instrument and has helped final recipients to face difficulties arising from the economic conditions since the crisis, namely to obtain or maintain access to finance and to create or maintain jobs over the period.

In this respect, although the overall effect of EU programmes on SMEs' financing remains limited (by nature, EU intervention is limited to market gaps or sub-optimal market situations, meaning by far the largest part of financing is provided by banking and finance market players), the Facility did, however, make a very positive contribution to the development and sustainability of EU SMEs.

Graph 3: Geographical distribution of SMEG Net Signatures, million EUR

Source: ECFIN

E -Other key points and issues

During the SMEG implementation period, the following presumptions have been identified as necessary:

oa clear and complete target goal of the financial instrument so as there is no ambiguity as to what needs to be achieved in terms of SME access to finance (including keeping potential deadweight as small as possible);

oa first class delivery mechanism, such as the EIF, that has proven expertise in working with the SME loan and guarantee provision chain at European level;

osufficient flexibility in the structure of the programme to accommodate and sustain shifts in the SME credit market (including force majeure and crisis conditions);

oin line with suggestions from the European Court of Auditors, the new generation of guarantee financial instruments has been designed by considering, inter alia, the following:

improved definition of the target group (final recipients) and reduced deadweight of the instrument;

selection of the Financial Intermediaries performed on the basis of open, transparent, objective and non-discriminatory procedures.

The monitoring visits carried out by both the EIF and the Commission for SMEG during 2014 allowed to confirm the eligibility of financial intermediaries (FI's) and final recipients, contractual compliance (transposal of the Commission's requirements into the contractual documentation), process compliance (observance of processes prescribed by the Commission) and performance (achievement of predefined targets/objectives). The EIF monitoring report 2014 did not indicate major deviations.

Audits and internal controls:

oAs stated in ECFIN L2's 2014 Annual Activity Report, no issue is pending.

oA Declaration of Assurance letter was received by European Court of Auditors (ECA) as at 31/3/2015.

oIn August 2012 DG ECFIN launched an ex-post control of the EIF guarantee calls paid under CIP. The provisional scope and objective of this ex-post control includes reviewing of the sample of guarantee calls initiated since 2007 to-date with the objective to examine their legality and regularity and to review related sound financial management aspects. CIP Financial Intermediaries (FI) have been sampled. The control report is still pending, but ECFIN has not been informed of any critical issues so far.

oDG ECFIN also accompanied the ECA to an audit visit to SEF (Slovenia), within the framework of the ECA's controls for the DAS 2014 (ECA's random selection process). The related report from ECA has not been communicated as at writing date. No finding has been communicated to DG ECFIN so far.

oEfficiency indicators regarding SMEG:

number of findings/minor observations (stemming from ECFIN's monitoring activities) : 2 (of which, 100% closed);

number of OLAF inquiries: none;

number of IAC inquiries: none;

number of open recommendations in action plans established following ECA, IAS, IAC or ex-post control recommendations: none;

number of operations outside official 2014 procedures: none;

number of erroneous operations in 2014: none;

return to fiduciary account in 2014 linked to errors: none;

results on the checks on the balance of the TA in 2014: no errors/discrepancies.

Regarding the SMEG, which is a counter-cyclical instrument, there was a high demand for guarantees by financial intermediaries during the period 2007-2013; indeed, the share of the SMEG instrument in the total CIP budget (SMEG and GIF) was increased compared to the original split between the two Facilities, in line with the specific market needs.

The commitment period for the SME Guarantee facility ended on 31 December 2013 but the instrument will exist until it is wound up after 2026.

The successor of SMEG is the Loan Guarantee Facility (LGF) under COSME, further detailed in this document.

2.2.European Progress Microfinance Guarantee Facility (EPMF – G)

A -Summary

* including regularized interest of EUR 0,3 million.

The EPMF Guarantee Facility has been implemented by the European Investment Fund in accordance with the Fiduciary and Management Agreement entered into on 1 July 2010 between the European Union, represented by the Commission and EIF. Under the Agreement, the Commission mandated EIF to provide direct guarantees and counter guarantees on micro credit loans in its own name, but on account and risk of the European Union.

In accordance with the Agreement, the Project Signing Period runs from July 1, 2010 until 31 December 2016, or any later date as notified in writing by the Commission to EIF.

The aim of the instrument is to increase access to and availability of microfinance. The instrument covers part of the losses incurred under the guarantees up to a pre-determined cap amount by setting maximum Guarantee rate of 75% and maximum Guarantee cap rate at 20% - hence requiring a minimum leverage effect of 6,67.

As of 30/09/2014, EIF has signed 35 guarantee agreements in 18 member states for a total cap amount of EUR 22,56 million, supporting EUR 279,03 million of aggregate volume of micro-loans. During the implementation of the Facility, 14 448 micro-borrowers and vulnerable persons have been supported and 21 939 jobs have been created.

As of 31 December 2014, the European Progress Microfinance Facility including both Guarantees and Funded instruments already provided 31 371 micro-loans to final recipients reaching the volume of EUR 291,7 million.

Currently the market demand exceeds the original budgetary allocation of EUR 23,9 million. Further budget is envisaged for the EaSI microfinance guarantee, the successor of the EPMF-G (section 2.3), will is also likely to be fully utilised.

B -Description

(a)Identification of the financial instrument and the basic act;

127 128 Decision No 283/2010/EU of the European Parliament and of the Council of 25 March 2010 establishing a European Progress Microfinance Facility for employment and social inclusion.

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The aim of the European Progress Microfinance Guarantee Facility is to enhance access to microfinance by reducing microfinance providers' risk.

The EPMF Facility will provide Union resources to increase access to, and availability of, microfinance for:

1.persons who have lost or are at risk of losing their job, or who have difficulties entering or re-entering the labour market, as well as persons who are facing the threat of social exclusion or vulnerable persons who are in a disadvantaged position with regard to access to the conventional credit market and who want to start or further develop their own micro-enterprise, including self-employment,

2.micro-enterprises, especially in the social economy, as well as micro-enterprises which employ persons referred to in point (a).

Implementation arrangements

The EPMF Guarantee Facility provides capped guarantees up to 20% to portfolios, which include micro-credit loans granted by intermediaries to micro–enterprises, including self-employed persons. The micro-credit guarantee covers up to 75% of the individual micro-credit loans included in the respective portfolio.

Guarantees provided by the EIF in accordance with the Agreement shall be open to any intermediaries being public or private bodies established on national, regional and local levels in the Member States, which provide microfinance to persons and micro-enterprises in the Member States, such as financial institutions, microfinance institutions, guarantee institutions or any other institution authorised to provide microfinance instruments.

The EPMF Guarantee Facility is implemented via direct guarantees and counter-guarantees. The implementation foresees also support measures, such as communication activities, monitoring, control, audit and evaluation which are directly necessary for the effective and efficient implementation of the Decision No 283/2010/EU and for the achievement of its objectives.

EPMF Guarantee Facility is subject to the following requirements and restrictions that have to be respected by the participating Microfinance providers:

Additionality

Promotion and visibility

Monitoring, control and audit

Compliance with State aid rules

Reporting

The Facility also seeks to promote a balanced geographic distribution and the set target is to cover at least 12 Member States until 31 December 2016. As of 30/09/2014, the Facility covers 18 Member States. The EPMF Guarantee Facility shall remain in full force and effect until 31 December 2020. However, as the budget of the EPMF Guarantee Facility has been fully utilised by Q2 2014, no new transactions with financial intermediaries are expected to take place.

Added value

This Facility allows microfinance providers to reach out to target groups, who could normally not be served; for instance, because persons from these groups could not provide sufficient collateral or because the interest rates, which they would have to pay in accordance to their actual risk, profile are too high.

(c)The financial institutions involved in implementation;

The Commission empowers and mandates the EIF to provide EU Guarantees in its own name but on behalf of and at the risk of the Commission, under a Financial management Agreement ('FMA', signed 01/07/2010).

The EIF is responsible for identifying, investigating, evaluating and selecting the Financial Intermediaries ('FI') by applying selection criteria and processes set out in Annex 1 of the FMA: Operational Guidelines. Under the FMA, the EIF examines, on a continuous basis, proposals collected based on a call for expression of interest.

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 23 873 348

Aggregate budgetary payments as at 31/12/2014 EUR 18 473 348

(e)The performance of the financial instrument, including investments realised (as of 30/09/2014 129 );

Impact on employment

For the entire period as of 30 September 2014, EPMF achievements for the Guarantee Facility component of the programme were as follows:

Number of micro-loans: 14 973

Total amount of micro-loans: EUR 160,26 million

Total number of employees (in the supported micro-enterprises): 21 939

Additional operational information

As of 30/09/2014, 35 Guarantee Agreements have been signed in 18 Member States for a total guarantee cap amount of EUR 22,56 million, with a clear geographical balance between Eastern and Western Europe.

Based on forecasts subject to variations a further EUR 137 million in microloans is expected to benefit from the Guarantee facility until September 2015.

In 2015, the demand from microfinance providers will remain significant and the new EaSI Microfinance Guarantee should be ready to cover fast and effective the needs of the microfinance market. The envisaged EPMF-G successor is EaSI Microfinance Guarantee.

Additional information at the aggregate EPMF level, including both Guarantee facility and Funded instruments

As of 31 December 2014, the European Progress Microfinance Facility including both Guarantees and Funded instruments already provided 31 371 micro-loans to final recipients reaching the volume of EUR 291,7 million, compared to the initial programme target of 46,000 micro-loans with the volume of EUR 500 million. The Facility is on track to reach the initial programme target, as new loan inclusions will take place until 2018.

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

Given the high demand for additional commitments due to the success of the EPMF Guarantee facility all the proceeds (see point (h)) received of the fiduciary account were used for the purposes of the Facility (as foreseen in the FMA).

(g)The balance of the fiduciary account;

At the end of the financial year 31/12/2014 EUR 4 419 882

(h)Revenues and repayments;

Aggregate additional resources as at 31/12/2014 EUR 273 348

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on impairments on called guarantees for guarantee instruments;

(k)The target leverage effect, and the achieved leverage effect;

As of 30/09/2014, based on the signed Guarantee agreements, the total guarantee cap amounts to EUR 22,56 million and the expected volumes of micro-loans to final recipients are estimated to EUR 279,03 million that brings the expected leverage effect to 12,37 which is much higher than the minimum target leverage estimated at 6,67.

As for achieved leverage until 30/09/2014, the total guarantee cap amount of EUR 22,56 million has supported so far EUR 160,26 million of new micro-loans, implying a leverage of 7,1.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

131 See below some information on the impact of the EU's Financial Instruments for micro-entrepreneurs SMEs (The economic environment for micro-finance).

132 At the aggregate EPMF Facility level (including both Guarantee and Funded Instruments), the gender breakdown for the 30 473 natural persons benefitting from loans under the Facility show that considerable outreach to females was achieved (36,5% of the micro-borrowers guaranteed were women).

In addition, the majority of individual micro-borrowers who received support under the Facility so far, were either unemployed or inactive at the time they received their loan (61,2%). Further, a clear majority (75,4%) of micro-enterprises, which received financing under the Facility, were established no earlier than three years since the micro-loan inclusion date.

At Facility level, individuals which were final recipients of micro-loans were, by and large, educated at the secondary level (38,7%). Nevertheless, EPMF continues to be of importance in serving the financing needs of individuals with more substantial education beyond the secondary level (41,0%).

Regarding the age group, with respect to final recipients who are natural persons the outreach to individuals in disadvantaged age groups (younger and older people combined) remains at noteworthy levels (16,3%). As of 31 December 2014, the European Progress Microfinance Facility including both Guarantees and Funded instruments already provided 31 371 micro-loans to final recipients reaching the volume of EUR 291,7 million.

E -Key points and issues

Main issues for the implementation & general outlook:

oin terms of the number of micro-loans disbursed, the European microfinance sector as a whole continued to grow in 2014, which is also reflected by the guarantee activity under EPMF. The continuously decreasing bank lending, the limited capacity of national governments to support microfinance and the strong market demand for microfinance still suggest that there is a clear rationale for intervention at EU-level by providing risk-sharing solutions to Microfinance providers.

oRoom for improvement has been identified for accompanying mentoring and training for micro-entrepreneurs since it is considered as important factor for the sustainability of the micro-enterprises. The issue of Microfinance providers’ institutional capacity concerning mainly small non-bank microfinance institutions is a bottleneck which hurdles the disbursement of the agreed micro-loans and affects negatively their prospects in the microfinance market.

oThe provision of regulatory capital relief under the Guarantee Agreements has been identified as important issue in attracting qualified microfinance providers. During the negotiations with EIF many Intermediaries, mainly banks, raised this issue especially when EIF asked Intermediaries to pass the EPMF benefit to the final recipients through price reduction.

oFinally, critical is further budgetary allocation in the new EaSI Microfinance Guarantee Facility – the budgetary commitment of EUR 23,9 million for the current EPMF Facility was fully allocated to guarantee agreements by 2014 Q2 almost two years before the end of the Facility's signing period. For the programming period 2014-2020 on the basis of the current Facility's utilisation the market need for Guarantees is estimated approximately to EUR 56 million.

Main risks and solutions in place to mitigate these:

ocontractual and process compliance of the microfinance providers is ensured through contractual reporting and monitoring after the signature of the guarantee agreements in accordance with the EIF internal procedures.

oIn addition, Commission as Designated Service safeguards that the requirements included in the Facility's Fiduciary and Management Agreement are fully respected by both EIF and the microfinance providers.

oIn order to encourage utilisation by the microfinance provider, a commitment fee is charged if not at least specific percentage of the Agreed Portfolio is reached during a contractually defined Availability Period.

o Furthermore, the observance of specific requirements set out in the Facility's Fiduciary and Management Agreement with regard to reporting, monitoring and auditing, data protection, promotion and visibility, protects the interests of the Union against any risks of contractual, processes and performance non-compliance.

2.3.EaSI Microfinance and Social Entrepreneurship

A -Summary

134 As has been shown by ex-ante evaluations, it is essential to provide financial instruments for microfinance and social enterprises in order to successfully achieve the objectives of the EaSI programme. In line with the outcome of ex ante evaluations, debt finance, risk-sharing instruments, and equity investments are likely to be used.

B -Description

(a)Identification of the financial instrument and the basic act;

135 Regulation (EU) No 1296/2013 of the European Parliament and of the Council of 11 December 2013 on a European Union Programme for Employment and Social Innovation ("EaSI") and amending Decision No 283/2010/EU establishing a European Progress Microfinance Facility for employment and social inclusion

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

EaSI Microfinance and Social Entrepreneurship aims at fulfilling the following objectives:

to increase access to, and the availability of, microfinance for vulnerable groups who want to set up or develop their business as well as for existing micro-enterprises,

to build up the institutional capacity of microcredit providers,

to support the development of social enterprises, in particular by facilitating access to finance.

The instruments will do so by providing support not directly to final recipients, but rather to relevant intermediaries, i.e. microfinance providers and social enterprise investors.

"Microfinance Instrument" will target:

Vulnerable people, i.e. persons who are in a disadvantaged position with regard to access to the conventional credit market and who want to start or further develop their own micro-enterprise, including self-employment; (the Regulation gives special focus to young people as vulnerable group).

Micro-enterprises, meaning an enterprise, including a self- employed person, that employs fewer than 10 people and whose annual turnover or annual balance sheet total does not exceed EUR 2 million, in accordance with Commission Recommendation 2003/361/EC (OJ L124/36, 20.05.2003).

"Social Entrepreneurship financial Instrument" will target: 

social enterprises, regardless of their legal form 136 .

Implementation arrangements 

The negotiation of the Delegation Agreement with the EIF started in 2014 in view to be operational from 2015 onwards.

Added value

The Delegation Agreement signed with the EIF will ensure that EaSI Microfinance and Social Entrepreneurship is accessible for a broad range of financial intermediaries (microcredit providers, both banks and non-banks, and social enterprise investors) which are experienced in financial transactions with self-employed and micro-entreprises.

From a technical point of view, the EIF will be instructed to provide guarantees to the financial intermediaries to cover a portion of expected losses of a portfolio of newly generated self-employed and micro-entreprises transactions with a higher risk profile.

(c)The financial institutions involved in implementation;

The EIF, microcredit providers (both banks and non-banks) and social enterprise investors.

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

137 Aggregate budgetary commitments as at 31/12/2014 EUR 28 400 200  

(e)The performance of the financial instrument, including investments realised;

Not yet applicable

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

Not applicable for 2014 as no transactions were signed during this year. The financial instrument is not fully operational yet. 

(g)The balance of the fiduciary account;

Not yet applicable

(h)Revenues and repayments;

Not yet applicable

(i)The value of equity investments, with respect to previous years;

Not yet applicable

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

Not yet applicable

(k)The target leverage effect, and the achieved leverage effect;

The leverage effect, agreed with the EIF in the Delegation agreement, is 5,5 over the lifetime of the financial instrument for the guarantees part (which with the Union contribution of EUR 96 million is intended to support about EUR 528 million of financing volumes) and not yet available for the funded instruments funds.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

138 The ex-ante evaluation 'Study on imperfections in the area of microfinance and options how to address them through an EU financial instrument' has indicated that "The crisis in several EU Member States with high levels of youth unemployment calls for ongoing support of inclusive entrepreneurship as an option to (re-) enter the labour market. Microloan provision is an important tool for this."

In most European countries, a significant market gap in the provision of microloans to persons using self-employment as a way out of social and financial exclusion can be identified. Based on estimations the total gap in EU-28 member states and selected EFTA countries amounts to 2,7 billion EUR. Microfinance providers in Europe need additional external funding to be able to close this gap via an extension of their loan providing activity." In line with these findings, EaSI Microfinance should provide debt finance, risk-sharing instruments, and equity investments. The EaSI guarantee should contribute to supporting about 528 million of financing volumes. The EaSI financial instruments are intended to reach a target of 1 350 eligible FRs for Social Entrepreneurship and 41 000 for Microfinance.

The ex-ante evaluation 'Imperfections in the social investment market and options on how to address them' identified guarantees, direct investments and grants as necessary instruments in order to "Increase the capital base, through a signalling effect for other investors; facilitate lending for social enterprises; and reduce the risk for capital providers and provide capacity building in the social investment market".

Both studies have provided analysis of the geographical element within the EU.

E -Other key points and issues

Main issues for the implementation:

oat this stage of preparation, the main issues are related to the design of the instruments and the selection of entrusted entity/DIV manager.

oIn order to successfully face these challenges the EC commissioned two studies (as indicated above) which have served as ex ante evaluations.

Main risks:

oin comparison to the existing Progress Microfinance (EPMF-G), EaSI may provide a strengthened capacity-building element to help mitigate this risk.

oThe risks related to social enterprises are linked to the fact that that market has not yet developed and the EU financial instrument has to help building it. Given the level of its development and the changes in the socio-economic environment, the market also tends to change very rapidly. This might cause a situation where the instrument in question may not be fit anymore for future situations.

General outlook:

obased on the experience with the Progress Microfinance and its current levels of implementation, we expect an initial slower take up in the area of social entrepreneurship followed by significantly higher levels of implementation in the next years.

2.4.Loan Guarantee Facility under COSME

A -Summary

The capped portfolio guarantees offered under the LGF and implemented by the EIF under the COSME Delegation Agreement signed in July 2014 have created strong market demand from financial intermediaries.

The first guarantee agreements which have been signed in late 2014 will make a significant contribution to providing financing for riskier SME transactions. It is expected that especially start-ups and smaller SMEs, which find it hardest to access finance, will benefit from the LGF and that about 13 000 SMEs will receive financing for a total financing value of almost EUR 851 million over the next two years.

B -Description

(a)Identification of the financial instrument and the basic act;

Loan Guarantee Facility (LGF) under the Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME) – 2014 to 2020 -Regulation (EU) No 1287/2013 of the European Parliament and of the Council of 11 December 2013 establishing a Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME) (2014 – 2020) and repealing Decision No 1639/2006/EC (O.J. L347 of 20 December 2013)

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The specific objective of COSME Financial Instruments is to improve access to finance for SMEs in the form of equity and debt. Actions shall aim to stimulate the take-up and supply of both equity and debt finance, which may include seed funding, angel funding and quasi-equity financing subject to market demand but excluding asset stripping.

In line with the above, the Loan Guarantee Facility (LGF) provides:

ocounter-guarantees and other risk sharing arrangements for guarantee schemes;

odirect guarantees and other risk sharing arrangements for any other financial intermediaries meeting the eligibility criteria.

The LGF consists of:

oguarantees for debt financing via loans, including subordinated and participating loans, or leasing, which shall reduce the particular difficulties that viable SMEs face in accessing finance either due to their perceived high risk or their lack of sufficient available collateral;

osecuritisation of SME debt finance portfolios, which shall mobilise additional debt financing for SMEs under appropriate risk-sharing arrangements with the targeted institutions. Support for those transactions is conditional upon an undertaking by the originating institutions to use a significant part of the resulting liquidity or the mobilised capital for new SME lending within a reasonable period of time. The amount of this new debt financing will be calculated in relation to the amount of the guaranteed portfolio risk and will be negotiated, together with the period of time, individually with each originating institution.

The LGF covers, except for loans in the securitised portfolio, loans up to EUR 150 000 and with a minimum maturity of 12 months. The LGF may also cover loans above EUR 150 000 in cases where SMEs who meet the criteria to be eligible under the COSME programme do not meet the criteria to be eligible under the SME window in the Debt Facility of the Horizon 2020 programme (the InnovFin SME Guarantee Facility), and with a minimum maturity of 12 months. The LGF is designed in such a way that it will be possible to report on SMEs supported, both in terms of number and volume of loans.

Implementation arrangements

The Delegation Agreement signed with the EIF ensures that the LGF is accessible for a broad range of financial intermediaries (guarantee societies, national promotional institutes, commercial banks, cooperatives, etc.) which are experienced in financial transactions with SMEs or which have the capacity to enter into financial transactions with SMEs.

From a technical point of view, the EIF is instructed to provide to financial intermediaries capped portfolio guarantees which will cover a portion of expected losses of a portfolio of newly generated SME transactions which have a higher risk profile.

In as far as securitisation transactions are concerned, the EIF is instructed to provide guarantee coverage on a part of the mezzanine tranche of a securitised SME lending portfolio coupled with an undertaking by the financial intermediary to build up a new SME loan portfolio.

Target final recipients under the capped portfolio guarantees and the securitisation transactions are SMEs of all sizes without a specific sector focus. The range of financial products which can be supported through the capped guarantees is very broad so as to not discriminate amongst the SME population which has very differing financing needs depending on a company’s stage of development and the sector/industry in which it operates.

The guarantee instrument is planned to last until 31 December 2034 (until last operations are wound down). Individual guarantee agreements to be signed by the entrusted entity will have a maximum duration of 10 years.

The LGF may also contribute to the financial instruments to be deployed under the SME initiative, a joint instrument combining EU funds available under COSME and/or Horizon 2020 and ESIF resources in cooperation with EIB/EIF with a view to generate additional lending to SMEs in specific Member States. This contribution may take the form of uncapped portfolio guarantees or securitisation operations and cover the mezzanine tranche of the portfolio.

Added value

The added value for the Union of the Financial Instruments lies, inter alia, in strengthening the internal market for venture capital and in developing a pan-European SME finance market as well as in addressing market failures that cannot be addressed by Member States.

More specifically, the EIF provides under the LGF (counter-)guarantees for a portfolio of newly generated SMEs transactions which have a higher risk profile than transactions offered by the financial intermediary under its normal business practice, thereby providing financing to SMEs who might otherwise not be able to obtain financing.

(c)The financial institutions involved in implementation;

The implementation of the LGF has been entrusted to the EIF and the Delegation Agreement has been signed on 22 July 2014. The related open call for expression of interest for financial intermediaries published by the EIF is available at

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014EUR 89 129 526

Aggregate budgetary payments as at 31/12/2014EUR 41 744 830

(e)The performance of the financial instrument, including investments realised;

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

(h)Revenues and repayments;

EUR 0

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

EUR 0

(k)The target leverage effect, and the achieved leverage effect;

The target leverage effect indicated in the COSME legal base is in the 1 to 20 – 1 to 30 range for the debt instrument over the lifetime of the programme, with an overall value of financing mobilised by the EU contribution ranging from EUR 14,3 billion to EUR 21,5 billion.

These amounts have been computed on the basis of the initially allocated budget for the COSME financial instruments, which is 60% of the total amount allocated to the COSME programme as set out in the basic act (EUR 2 298 243 000).

It has been assumed (as documented in the legislative financial statement accompanying the basic act) that the split between the two financial instruments would be 52% for the Loan Guarantee Facility (LGF) and 48% for the Equity Facility for Growth (EFG).

The achieved leverage effect 

As the first operations with financial intermediaries under the LGF have only been signed in December 2014, and financial intermediaries have not yet disbursed loans to SMEs under the COSME guarantees, no achieved leverage effect can be computed for 2014.

The "Expected Leverage for Signed Operations" 

For the three operations signed with financial intermediaries in 2014, the maximum financing available to SMEs amounts to almost EUR 851 million. Based on the overall 2014 budgetary commitments for the LGF (i.e. EUR 89 million), the expected leverage for the operations signed in 2014 is 1 to 10. This leverage is expected to increase significantly in 2015 as additional operations related to the 2014 LGF budgetary commitments will be signed throughout the year.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

In line with the Europe 2020 strategy, the COSME financial instruments are designed to address the market gaps in access to finance for SMEs in their start-up, growth and transfer phase and to support the creation of a pan-European finance market.

Under the LGF, this will be achieved by incentivising financial intermediaries to provide financing predominantly to those SMEs which the financial intermediary would under its normal business practices not finance due to the higher risks involved.

The market response for this facility, which was launched at the beginning of August 2014 through an open call for expression of interest, has been very positive. By the end of 2014, the EIF had concluded due-diligence and signed guarantee agreements with three financial intermediaries from three different participating countries for a total guarantee cap amount of EUR 42,4 million (which is the amount of EU budget allocated to the guarantee agreements signed).

In addition, the EIF had received a significant number of additional applications which were at different stages of the screening/due diligence process and which are expected to lead to signature of guarantee agreements in the course of 2015.

Under the three agreements signed, it is expected that about 13 000 SMEs will receive financing for a total financing value of almost EUR 851 million over the next two years thereby contributing to the achievement of the overall LGF target to finance between 220 000 and 330 000 SMEs with a total volume of financing ranging from EUR 14,3 to 21,5 billion over the lifetime of the COSME programme.

E -Other key points and issues

Main issues for the implementation:

oas the EIF has only started at the end of 2014 signing guarantee agreements with financial intermediaries it is too early to judge whether technical issues will arise during the implementation phase of the programme. It appears that requirements for financial instruments stemming from the Financial Regulation have been accepted by the financial intermediaries (e.g. in relation to ex-post publication requirements), but these points will be carefully monitored.

oThe financial intermediaries have responded positively to the fact that under the COSME LGF they have the possibility to offer higher risk SME products which can be tailored towards the needs of the SMEs serviced by such intermediary.

Main risks:

oin the course of 2014 no risks were identified with regard to eligibility of financial intermediaries and final recipients, contractual compliance process and performance.

General outlook:

odespite the fact that leverage targets have not been met in 2014, the guarantee agreements concluded by the EIF with financial intermediaries have paved the way for the achievement of the leverage targets as well as other targets set (in terms of financing volume and number of SMEs financed).

oAfter the launch of the call for expression of interest in August 2014, which spells out the detailed technical requirements of the Loan Guarantee Facility, the EIF as well as the Commission received positive feed-back from relevant stakeholders on the usefulness of the instrument. This has been further confirmed by the strong pipeline presented by the EIF to the Commission. As of March 2015, the EIF had received 20 applications and expected another 20 to 25 applications to come through until summer 2015. If all of these applications were to materialise, the budget made available for the LGF in 2014 and 2015 would be insufficient to cover market demand.

2.5.RSI (Pilot guarantee facility for R&I-driven SMEs and Small Midcaps) under FP7

A -Summary

RSI (Risk-Sharing Instrument for SMEs and small midcaps, with maximum 499 employees) was launched to improve access loan finance for RDI investments. The RSI guarantee facility is part of the RSFF implementation and is carried out by the European Investment Fund (EIF). The EU budget coming from FP7 (plus additional EFTA and Third Country appropriations to FP7) for the period 2012/2013 amounted to EUR 270 million.

The Risk-Sharing Instrument has so far provided over EUR 1,59 billion in guarantees and counter-guarantees to 37 banks and guarantee societies: this has enabled them to support up to an estimated 3 000 innovative SMEs and small midcaps with the loan volume of EUR 3 301 million. In only two years' time, these financial intermediaries now cover 18 countries in the European Union and Associated Countries.

B -Description

(a)Identification of the financial instrument and the basic act;

Decision No 1982/2006/EC of the European Parliament and of the Council of 18 December 2006 concerning the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007-2013) (OJ L 412, 30.12.2006, p. 1).

Council Decision 2006/971/EC of 19 December 2006 concerning the specific programme ‘Cooperation’ implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013) (OJ L 400, 30.12.2006, p. 86).

Council Decision 2006/974/EC of 19 December 2006 on the Specific Programme: ‘Capacities’ implementing the Seventh Framework Programme of the European Community for research, technological development and demonstration activities (2007 to 2013) (OJ L 400, 30.12.2006, p. 299).

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The RSFF, co-developed by the European Commission and the EIB, was established in June 2007. In early 2012, within this programme a new pilot guarantee facility, RSI (Risk-Sharing Instrument for SMEs and small midcaps, with maximum 499 employees) was launched to improve access loan finance for RDI investments.

Implementation arrangements

The RSI guarantee facility is part of the RSFF implementation (see the relevant section in this report) and is carried out by the European Investment Fund (EIF).

For this RSI pilot guarantee facility, the Union budget coming from FP7 for the period 2012/2013 amounted to EUR 270 million (plus additional EFTA and Third Country appropriations to FP7).

Added value

RSI is a dedicated guarantee facility for loan and lease finance addressing the finance gap for innovative SMEs and Small Midcaps (with up to 499 employees). Through risk-sharing via guarantees provided by the EIF to financial intermediaries, it made a significant contribution to support innovative smaller companies by improving their access to loan finance.

(c)The financial institutions involved in implementation;

European Investment Fund (EIF)

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 270 000 000

Aggregate budgetary payments as at 31/12/2014 EUR 270 000 000

(e)The performance of the financial instrument, including investments realised;

The instrument has so far provided over EUR 1,59 billion in guarantees and counter-guarantees to 37 banks and guarantee societies: this will enable them to support up to an estimated 3000 innovative SMEs and small midcaps via loans, financial leases, and loan guarantees.

The aggregate number of applications from financial intermediaries is 47, including four guarantee increases.

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

(h)Revenues and repayments;

For the period 2012-2014, the following revenues and repayments were received by the EU on the EU RSI Account:

Total operating revenues: EUR 1 323 335

Repayments: none

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on impairments of assets of equity;

Called guarantees as at 31/12/2014 EUR 1 646 715

(k)The target leverage effect, and the achieved leverage effect;

The achieved leverage effect is above 12 with an amount of financing expected to be provided by financial intermediaries of EUR 3 301 million and an EU contribution of EUR 270 million.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

The Risk Sharing Instrument (RSI) under the 7th Framework Programme is a guarantee facility dedicated for loan and lease finance addressing the finance gap for innovative SMEs and Small Midcaps (enterprises with up to 499 employees). The Risk-Sharing Instrument has so far provided over EUR 1,59 billion in guarantees and counter-guarantees to 37 banks and guarantee societies: this has enabled them to support up to an estimated 3 000 innovative SMEs and small midcaps with the loan volume of EUR 3 301 million. In only two years' time, these financial intermediaries now cover 18 countries in the European Union and Associated Countries.

E -Other key points and issues

The Risk Sharing Instrument (RSI) has paved the way to the financial instrument SMEs & Small Midcaps R&I Loans Service under Horizon 2020 which is implemented on a larger scale as well in term of budget than geographical coverage or specific target groups.

A -    Summary

*Please note that the total indicative budget for SME/ small midcap guarantee instruments is EUR 1,060 million that also includes the Horizon 2020 contribution to the SME Initiative. The minimum Horizon 2020 contribution to the SMEs and Small Midcaps Loan Service for R&I is EUR 880 million but might be increased depending on the actual size of the contribution from Horizon 2020 to the SME Initiative.

This instrument addresses the financing gap for innovative SMEs and Small Midcaps (with up to 499 employees) for their investments in innovative products and processes containing significant technology or application risks

The EU and the EIF, as risk-sharing partners at EU level, support loan finance to such innovative SMEs and Small Midcaps through direct or indirect guarantees which the EIF will provide to financial intermediaries.

Due to the advantages the InnovFin SME Guarantee offers, notably in the form of risk-sharing and capital relief for banks, guarantee institutions and other financial intermediaries, this instrument is able to successfully address the financing gap for innovative small companies.

Based on the foreseen Union budget coming from Horizon 2020, the risk-sharing arrangements between the EU and EIF as well as between the EIF and its financial intermediaries, a significant loan and lease volume in support of innovative small companies and their investment can be expected. For the period 2014-2020, it is expected to mobilize a loan and lease volume of approximately EUR 9,5 billion in support of 3 000 innovative companies and their investments in RDI.

B -    Description

(a) Identification of the financial instrument and the basic act;

Regulation (EU)No 1291/2013 of the European Parliament and of the Council of 11 December 2013 establishing Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020) (OJ L 347/104, 20.12.2013)

Regulation(EU) No 1290/2013 of the European Parliament and of the Council of 11 December 2013 laying down the rules for participation and dissemination in "Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020)" (OJ L 347/81, 20.12.2013)

Council Decision 2013/743/EU of 3 December 2013 establishing the specific programme implementing Horizon 2020 - the Framework Programme for Research and Innovation (2014-2020) (OJ L 347/965, 20.12.2013).

(b) Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

This guarantee facility succeeds and refines the RSI pilot under the RSFF in FP7, and is part of a single debt financial instrument supporting the growth of enterprises and their R&I activities. It targets R&I-driven SMEs and small midcaps (up to 499 employees) requiring loans of between EUR 25 000 and EUR 7,5 million. A loan of more than EUR 7,5 million will be considered on a case-by-case basis.

Implementation arrangements

The European Investment Fund (EIF) implements this facility by providing direct guarantees to financial intermediaries such as banks, who will extend the actual loans to final recipients. The guarantee covers up to 50% of intermediaries' potential losses. EIF also offers counter-guarantees to financial intermediaries (such as guarantee institutions) providing risk protection to banks extending loans to R&I-driven SMEs and small midcaps. This facility is available since 10 June 2014.

R&I-driven SMEs or small midcaps wishing to apply for a loan should contact one of the financial intermediaries signing an agreement (see Selection procedure) with EIF. This is a demand-driven facility, with no prior allocations between sectors, countries or regions. However, the Commission incentivises EIF to make a particular effort to ensure that a significant proportion of final recipients are eco-innovative SMEs and small midcaps.

Selection procedure:

a) For financial intermediaries: EIF issues calls for expression of interest, with eligibility and selection criteria defined as part of each call after consultation with DG Research & Innovation.

b) For loans: according to the internal processes of the intermediary bank or other financial institution that the SME or small midcap applies to, using normal commercial criteria.

Added value

Expected impact: R&I-driven SMEs and small midcaps able to carry out a greater amount of R&I. The indicators are the number of agreements signed with financial intermediaries and the number and volume of loans made.

(c) The financial institutions involved in implementation;

European Investment Fund (EIF)

The EIF implements this guarantee instrument, which will be delivered by financial intermediaries (such as banks). Financial intermediaries will be guaranteed against a proportion of their potential losses by EIF, which will also offer counter-guarantees to guarantee institutions.

This is a demand-driven instrument, with no prior allocations between sectors, countries or regions, or types or sizes of firms or other entities.

Financial intermediaries selected by entrusted entities for the implementation of financial instruments pursuant to Article 139(4) of Regulation (EU, Euratom) No 966/2012 on the basis of open, transparent, proportionate and non- discriminatory procedures, may include private financial institutions as well as governmental and semi-governmental financial institutions, national and regional public banks as well as national and regional investment banks

C -    Implementation

(d) The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014 EUR 168,6 million

Aggregate budgetary payments as at 31/12/2014 EUR 168,6 million

(e) The performance of the financial instrument, including investments realised;

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6; 

(Note: the requirement applies only as from 2015 for 2014-2020 financial instruments) 

(g)The balance of the fiduciary account;

(h)Revenues and repayments;

Revenues: EUR 61 000

(i)The value of equity investments, with respect to previous years;

NA

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

None

(k)The target leverage effect, and the achieved leverage effect;

The target leverage effect equals 9 with an amount of financing expected to be provided by financial intermediaries of EUR 9 500 million and an EU contribution of EUR 1060 million.

The expected leverage effect as at 31/12/2014 equals 2,82 with an amount of financing expected to be provided of EUR 475 million and an EU contribution of EUR 168,6 million.

D -    Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

The dedicated InnovFin SME Guarantee makes the following contribution to the objectives of Horizon 2020:

increase in private finance and address the financing gap for innovative SMEs and Small Midcaps seeking loan finance for their riskier investments in RDI;

support, via risk-sharing (guarantees and counter-guarantees), for innovative SMEs and Small Midcaps investing across Horizon 2020 Societal Challenges through better access to longer-term loan and lease finance, for loan amounts between EUR 25,000 and 7.5 million;

allow, in combination with the COSME Loan Guarantee Facility which focuses on increasing the competitiveness of SMEs in general, improved access to finance for SMEs (and Small Midcaps) as part of a single EU debt financial instrument for SMEs.

In terms of incentivizing the implementation of the InnovFin SME Guarantee and its geographical coverage (EU Member States and Associated Countries), similar milestones and indicators are in place, as part of the Delegation Agreement with the EIF, to make sure that within the period 2014-2020, the instrument will be rolled out successfully and in an efficient manner.

The InnovFin SME Guarantee is a dedicated guarantee facility for loan and lease finance addressing the finance gap for innovative SMEs and Small Midcaps (with up to 499 employees). Through risk-sharing via guarantees provided by the EIF to financial intermediaries, it makes a significant contribution to the Horizon 2020 policy objective to support innovative smaller companies by improving their access to loan finance.

The InnovFin SME Guarantee focuses on the important target group of innovative smaller companies and complements the Loan Service for R&I instrument under Horizon 2020. With the EU contribution of EUR 1 060 million, the instrument is targeted to support the amount of financing of EUR 9 500 million, implying 3 000 final recipients.

E -    Other key points and issues

Main issues for the implementation:

oit will be crucial for the implementation of the InnovFin SME Guarantee to attract a sufficient number of financial intermediaries (banks and guarantee institutions) as risk-sharing partners of the EIF and loan providers to final recipients.

oIn this context, the fees charged to financial intermediaries need to reflect the risk taken at EU level while, at the same time, offering risk-sharing and capital relief for financial intermediaries.

oThe contractual arrangements between the European Commission (represented by DG RTD) and EIF allow for flexibility as regards product development for the period 2014-2020.

Main risks :

ono particular risks

General outlook:

obased on the very successful implementation of the Pilot guarantee facility (RSI) during the period 2012-2013, it can be reasonably expected that the InnovFin SME Guarantee will successfully be taken up by the market.

oDemand for longer-term (up to 10 years) loan finance in the range of EUR 25,000 to 7,5 million for the target group innovative SMEs/ Small Midcaps should remain high across EU Member States and Associated countries, due to the incentives built into the instrument (regulatory capital relief of the 50% uncapped guarantee per loan for financial intermediaries).

oProvided that the InnovFin SME Guarantee instrument can be implemented as foreseen, it would be able to make a significant contribution to addressing the loan finance gap for innovative smaller companies.

2.7.The Cultural and Creative Sectors Guarantee Facility  

A -Summary

The Cultural and Creative Sectors Guarantee Facility is a facility under which the European Commission through the European Investment Fund (EIF) will provide guarantees and counter-guarantees on debt financing to Financial Intermediaries in order to improve access to finance to SMEs from cultural and creative sectors. Thanks to the CCS GF, Financial intermediaries selected by the EIF will be able to provide additional debt financing to SMEs in Participating Countries. In addition, the action will provide expertise/capacity building to the financial institutions wishing to build dedicated portfolios of loans targeting cultural and creative SMEs. This may result in an increase in the number of financial institutions which are willing to work with cultural and creative SMEs as well as maximising the European geographical diversification of targeted financial products for the sector.With a total budgetary appropriation for CCS GF of EUR 121million in the 2016-2020 period and a targeted leverage effect of 5,7 the financial instrument may leverage around EUR 690 million of additional funding or the cultural and creative industries.

B -Description

(a)Identification of the financial instrument and the basic act;

143 REGULATION (EU) No 1295/2013 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 11 December 2013 establishing the Creative Europe Programme (2014 to 2020) and repealing Decisions No 1718/2006/EC, No 1855/2006/EC and No 1041/2009/EC. 

Thereof: Art 14 and Annex 1 on the Cultural and Creative Sectors Guarantee Facility specific political and operational objectives.

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The Cultural and Creative Sectors Guarantee Facility (CCS GF) is part of the Creative Europe programme. The general objective of the Cultural and Creative Sectors Guarantee Facility is in line with those of the Creative Europe Programme which is to foster the safeguarding and promotion of European cultural and linguistic diversity, and strengthen the competitiveness of the cultural and creative sectors, with a view to promoting smart, sustainable and inclusive growth, in line with the Europe 2020 strategy.

The Cultural and Creative Sectors (CCS) count for more than 1 million enterprises and represent nearly 4,5% of the total business economy in Europe. The sector employs over 3,2 million people, predominantly in very small enterprises, and provides work to many self-employed people. CCS grow quickly yet suffer from negative stereotypes when it comes to assessing their economic performance. Hence the operational objectives are:

to provide guarantees to banks dealing with cultural and creative SMEs resulting in easier access to bank credits;

to provide expertise/capacity building to the financial institutions;

to increase the number of financial institutions which are willing to work with cultural and creative SMEs;

to maximise the European geographical diversification of financial institutions willing to work with cultural and creative SMEs.

Implementation arrangements

The European Commission retains an overall responsibility for managing the CCS GF but day-to-day management will be entrusted to the European Investment Fund (EIF) under a Delegation Agreement.

Added value

144 The Guarantee Facility has been the subject of an impact assessment, in-depth analysis of the pre-existing market gap, market testing with a sample of financial institutions and a dedicated study on 'Access to finance for cultural and creative sectors'. 

CCS GF aims at strengthening the competitiveness of the cultural and creative sector, by providing guarantees or counter guarantees to financial institutions lending to cultural and creative SMEs in Participating Countries (i.e. EU 28 + Norway and Iceland). A capacity building scheme (technical assistance) will be an integral component of the CCS GF.

Hence the implementation of a Cultural and Creative Sector Guarantee Facility will improve access to finance for companies and organisations in the cultural and creative sectors, leading to the strengthening of their financial capacity and competitiveness.

(c)The financial institutions involved in implementation;

European Investment Fund

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Commitments:

none for 2014.

EUR 1 000 000 for year 2015 (indicative: this amount will come from recoveries from the preceding financial instrument, the MEDIA Production Guarantee Fund (MPGF).

EUR 14 828 833 for year 2016.

EUR121 million for 2016-20 (indicative) 145 .

Payments:

no payments made in 2014;

EUR 1 000 000 for year 2015 (to be sourced from expected recovery from MPGF).

EUR 14 077 550,58 for year 2016.

(e)The performance of the financial instrument, including investments realised;

NA

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

NA

(h)Revenues and repayments;

NA

(i)The value of equity investments, with respect to previous years;

NA (guarantee fund)

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

NA

(k)The target leverage effect, and the achieved leverage effect;

The targeted leverage is 5,7. With a total budgetary appropriation of EUR 121 million in the 2016-2020 period the financial instrument may leverage around EUR 690 million of additional funding for the cultural and creative industries.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

The use of a financial instrument may have a strong structuring effect on the CCS, thanks to the leverage effect on EU funds and to the expected progressive transition from grants to loan support for some types of supports and beneficiaries, such as: micro-loans for all types of individual cultural project development; funding for independent game developers; funding for publishers of books or sound recordings; loans to exhibitors for the digitisation of cinema theatres; working capital loans to distributors to cover distribution costs (print, marketing, advertising, dubbing and subtitling) etc.

Additionally, companies will be able to build closer relationships with the financial sector, both thanks to the capacity-building arm of the scheme addressed to the financial intermediaries and the training programmes for operators of the sector that will be provided under the Creative Europe Programme.

The contribution of the CCS GF to the achievement of the objectives of the Creative Europe programme will be measured by the indicators established in the legal basis:

I)the volume of loans guaranteed in the framework of the Guarantee Facility, categorised by national origin, size and sectors of SMEs and micro, small and medium- sized organisations;

II)the volume of loans granted by participating financial intermediaries, categorised by national origin;

III)the number and geographical spread of participating financial intermediaries;

IV)the number of SMEs and micro, small and medium- sized organisations benefiting from the Guarantee Facility, categorised by national origin, size and sectors;

V)the average default rate of loans;

VI)the achieved leverage effect of guaranteed loans in relation to the indicative leverage effect (1 to 5,7).

E -Other key points and issues

Main issues for the implementation:

otimely agreement and adoption of Delegation Agreement with the EIF.

oA sufficient critical mass of Financial Intermediaries to ensure a successful start to the programme.

Main risks:

ono specific risk identified.

General outlook:

obased on market testing carried out by the EIF and direct contacts and an info session with potential Financial Intermediaries, there is a positive forecast demand for the guarantees.

oThe scheme itself will start in earnest after a signature of Delegation Agreement between the European Commission and the EIF, expected in Q4 of year 2015.

2.8.Student Loan Guarantee Facility - ERASMUS+

A -Summary

The Erasmus+ Master Student Loan seeks to make EUR 0,5 billion (EUR 33 million in 2015) of guarantees to support mobility, equity and study excellence via guarantees to financial institutions which agree to offer loans for Master's studies in other Erasmus+ Programme countries on favorable terms for mobile students, (regardless of their social background) with an expected leverage of 5,7, unlocking EUR 3 billion in student loans. The main priority in 2015 is to ensure a rapid implementation so that students will be able to access loans supported through the facility in 2015.

B -Description

(a)Identification of the financial instrument and the basic act;

Regulation (EU) No 1288/2013 of the European Parliament and of the Council of 11 December 2013 establishing 'Erasmus+': the Union programme for education, training, youth and sport and repealing Decisions No 1719/2006/EC, No 1720/2006/EC and No 1298/2008/EC.

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The objective of Erasmus + Master Student Loan (a guarantee facility under the Erasmus+ programme), is to incentivise commercial/retail banks, promotional banks, student loan bodies and other financial intermediaries (“Intermediaries”) to extend loans (up to a maximum of EUR 12 000 for one-year, up to EUR 18 000 for a two-year programme) to mobile students pursuing a full higher education degree (Masters’ programme) in a country which is neither their country of residence nor the country in which they obtained their qualification giving them access to Master's studies.

Implementation arrangements

The Facility aims at granting students access to Master’s programmes through loans provided by financial institutions, at favourable conditions because of effective portfolio credit risk transfer (via a guarantee or a counter-guarantee) by the EIF on behalf of the Commission.

Added value

The Facility was created to support Master students, who will make an increasingly important contribution to innovation and entrepreneurship in Europe but who also face difficulties in accessing finance, especially for transnational student mobility where a market gap has been identified.

(c) The financial institutions involved in implementation;

European Investment Fund

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Commitments:

EUR 28,35 million made in 2014

EUR 33 million foreseen in 2015

EUR 456 million for 2015-20 (indicative)

Payments:

No payments made in 2014

EUR 25,6 million foreseen for 2015

EUR 31,1 million for 2016-17 (indicative)

(e)The performance of the financial instrument, including investments realised;

As the Delegation Agreement was signed in December 2014, no investments were made during 2014.

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

As at 31/12/2014, no transfer to the fiduciary account had yet been made made (10 million foreseen).

(h)Revenues and repayments;

NA

(i)The value of equity investments, with respect to previous years;

NA (guarantee fund)

(j)The accumulated figures on impairments of assets of equity or risk-sharing instruments, and on called guarantees for guarantee instruments;

NA

(k)The target leverage effect, and the achieved leverage effect;

The targeted leverage is 5,7.

EU contribution of 517 million € is targeted to unlock about EUR 3 billion in student loans.

D -Strategic importance/relevance

(l)The contribution of the financial instrument to the achievement of the objectives of the programme concerned as measured by the established indicators, including, where applicable, the geographical diversification;

To support mobility, equity and study excellence, the Student Loan Guarantee Facility (EU contribution of EUR 517 million unlocking EUR 3 billion in student loans) will enable up to 200 000 students, regardless of their social background; to take their Master degree in another Erasmus+ Programme country.

The Student Loan Guarantee Facility will be available to financial institutions, which agree to offer loans on favourable terms to such mobile students. This additional and innovative tool for learning mobility will neither replace any current, nor impede the development of any future grant or loan system supporting student mobility at local, national, or Union level.

E -Other key points and issues

Three main issues for the implementation:

oa sufficient critical mass of Financial Intermediaries to ensure a successful start to the programme.

oThe build-up towards an adequate geographical spread of Financial Intermediaries, so as to ensure wide availability of the student loans across the 33 Erasmus+ Programme Countries.

oThe number of loans supported through the instrument are sufficient to meet student demand.

Main risks:

o     no specific risk identified.

General outlook:

obased on market testing carried out by the EIF and direct contacts at information events for potential Financial Intermediaries, there is a positive forecast demand for the guarantees.

oHowever, a rapid turnaround of the contracting process will be necessary to ensure loans can be made available for the academic year 2015-16.

2.9.Private Finance for Energy Efficiency Instruments (PF4EE)

A -Summary

The PF4EE is a guarantee instrument providing access to finance for energy efficiency (EE) investments which implement National Energy Efficiency Action Plans (NEEAP) of Participating Countries, or other programmes in line with EU Directives relating to Energy Efficiency. The final recipients include private individuals, home-owner associations, SMEs, corporates and/or public institutions/bodies.

It is implemented under indirect management by the European Investment Bank. The delegation agreement (DA) was signed on 8 December 2014.

The instrument aims to increase lending activity and to improve financing conditions for final recipients through, among others, lower pricing, longer maturities and lighter securities requirements.

The target leverage effect as indicated in the Delegation Agreement is 8. The EU budget allocation foreseen for the programming period (2014-2017) amounts to EUR 80 million (including EUR 3,2 million for the Expert Support Facility). It is estimated that the total amount of investments/loans supported would be EUR 540 million, at least EUR 430 million made by the EIB, to which the possible investments of about 110 million made by financial intermediaries have to be added.

B -Description

(a)Identification of the financial instrument and the basic act;

Regulation (EU) N° 1293/2013 of the European Parliament and of the Council of 11 December 2013 on the establishment of a Programme for the Environment and Climate Action (LIFE) Article 17 148 .

(b)Description of the financial instrument, implementation arrangements and the added value of the Union contribution;

Policy objectives and scope

The PF4EE is a guarantee instrument which is implemented under indirect management by the European Investment Bank. The delegation agreement (DA) was signed on 8 December 2014.

The PF4EE is conceived as a pilot initiative in the years 2014-2017 to provide access to adequate and affordable commercial financing for eligible energy efficiency (EE) investments targeted by schemes developed by Participating Countries to implement their National Energy Efficiency Action Plans (NEEAP) or other programmes in line with EU Directives relating to Energy Efficiency.

Implementation arrangements

The PF4EE instrument provides to financial intermediaries (FIs):

a portfolio-based credit risk protection (Risk Sharing Facility or RSF), combined with

expert support services for the FIs in order to support the implementation of the PF4EE instrument and

long-term financing.

The RSF is designed to mitigate the credit risk faced by FIs when lending to final recipients undertaking eligible EE investments. By means of collateral deposited on the collateral account, the RSF will cover losses at the collateral rate incurred under EE loans included in the portfolio to be built by the FIs for the financing of EE investments.

The size of the EE loans provided to beneficiaries range from EUR 40 000, which can be reduced to accommodate small investments within the residential sector, to EUR 5 million and in exceptional cases up to EUR 15 million.

EU added value

The RSF aims to increase lending activity and to improve financing conditions for final recipients through, among others, lower pricing, longer maturities and lighter securities requirements. The EIB loan for EE to the FIs may complement the RSF. Such EIB loans for EE will be provided by the EIB at competitive rates and with long-maturities.

The final recipients include private individuals, home-owner associations, SMEs, corporates and/or public institutions/bodies, undertaking EE investments in line with the NEEAP of each Member States.

(c)The financial institutions involved in implementation;

European Investment Bank (EIB)

C -Implementation

(d)The aggregate budgetary commitments and payments from the budget;

Aggregate budgetary commitments as at 31/12/2014EUR 30 000 000

Aggregate budgetary payments as at 31/12/2014EUR 6 000 000

(e)The performance of the financial instrument, including investments realised;

The PF4EE delegation agreement was signed on 8 December 2014. No operations started by 31/12/2014

(f)An evaluation of the use of any amounts returned to the instrument as internal assigned revenue under paragraph 6;

NA

(g)The balance of the fiduciary account;

EUR 6 000 000