Combination of repayable financial instruments with grants Interest rate subsidies and guarantee fees subsidies Grants in combination with repayable financial engineering instruments Opening Presentation DG Regional Policy Unit D.3. and Panel Members of Workshop II JEREMIE Networking Platform 5th Plenary Meeting Brussels, 20 May 2011

Panel Members Agencia IDEA (Agencia de Innovacion y Desarrollo de Andalucia) - Mr Francisco Jiménez Luque Bank Gospodarstwa Krajowego (BGK) - Mr Maciej Grupinski COMPETE - Programa Operacional Factores de Competitividade - Mr Nelson de Souza Finlombarda S.p.A. (Financial Agency of the Lombarda Region) - Mrs Barone Anna INVEGA (Lithuania) - Mr Audrius Zabotka - Lithuania European Investment Fund – Mr Bruno Robino 2 2

Content Rational of the combination Examples Points for discussion Annex: What do we find in the Regulation? 3

Rational of the combination (1) Ensure a smooth transition towards an innovative financing approach by combining grants and repayable financial instruments Modulate mix of grant and repayable financial instruments according to different projects typologies and final recipients => higher aid intensity levels for more innovative projects in sectors of regional interest with higher difficulties to access to traditional financing Ensure a leverage effect on the use of public resources but responding to SME financing needs in the aftermath of the financial crisis Maximising the effectiveness of EU public spending by promoting subsidiarity at the regional level, mutual accountability and prompt and timing interventions

Rational of the combination (2) Render more attractive to SMEs financial engineering mechanisms instead of grants Contribution from national private co-investors required for part not co-financed by grants Help to face the two critical financing questions for SME: access to credit (=> ERDF guarantee) and cost of credit (=> interest rate subsidies)

Rational of the combination (3) availability of risk capital to SMEs with high growth potential => start-ups and micro enterprises - lack of external financing due to lack of collateral, short credit history, … more flexible approach – fit purpose more accurately (system more complementary with FIs) create more transparent and less bureaucratic system (better understanding by FIs and SMEs) allow to obtain leverage on EU Funds by stimulating growth share of FIs increasing the absorption of EU funds Public authorities may continue to verify the consistency of the directions of public assistance with the strategic objectives

Example of combining repayable financial instrument with grants (1) (Based on input by BGK) Two forms of support from the same OP are applied (under de minimis rules) to support separate expenditure items for the same project e.g. an SME receives an ERDF loan (40% of the project cost) to invest in equipment and receives a grant (25% of the project cost) to install special systems on the equipment an SME receives a commercial loan (50% of the project cost) which is secured by a ERDF guarantee (e.g. 80%) to buy equipment and receives grant (25% of the Project cost) to install special systems on the equipment. 7

Example of combining repayable financial instrument with grants (2) (Based on input by BGK) The SF Regulation does not allow that for the same project an SME receives an ERDF loan as temporary support, which is to be paid back from a grant. Cumulation of State aid is respected (de minimis rules) Most of the loans are at regular market interest rate. If the loan is below regular market interest rate, loan is offered under de minimis rules Guarantees: no State aid if: market-conform: max 80% coverage - SME safe-harbour premiums or under de minimis guarantee schemes: max. guarantee EUR 1.5 million, 80% coverage, max. 13% default rate. all de minimis State aid amounts are summarized in order not to overcome the maximum State aid intensity under the grant scheme.

Example of combining repayable financial instrument with grants (1) (INVEGA experience)

Example of combining repayable financial instrument with grants (3) (INVEGA experience) Project financed by means of grant, ERDF guarantee provided for the benefit of FI providing soft loan to SME and SME own funds to finance the non-eligible expenditure. Soft loan: State Aid equivalent is calculated =>difference between reference rate plus 400 bps and the actual interest rate set in the loan agreement, multiplied by the amount and the term of the loan. Question of collateral needed by FIs is important. A guarantee up to 80% of the soft loan is provided also as the de minimis State Aid => equivalent of 13% of the guarantee amount is calculated as the aid amount to SME. If there is a possibility for SME to receive the interest rate rebates on the soft loan, then additional de minimis State Aid is calculated, which equals to the amount of the interest to be compensated. All de minimis State Aid amounts are summarized in order not to overcome the maximum State aid intensity under the grant scheme, the amount of the grant is usually minimized, because without the use of FEI the project could not be implemented.

Example of combining repayable financial instrument with grants (3) (INVEGA experience) “When there is support to the project only by grant, all amount of eligible expenditures is estimated when calculating the maximum State Aid intensity... So why not to take the all amount of the FEI into account when calculating the amount of the eligible expenditures of the projects... Because the aid equivalent in the form of FEI is taken into consideration when calculating the maximum state aid intensity to the project finance by grant and FEI...” Accumulated amount of support by grant and FEIs (de minimis aid equivalent) to the eligible expenditures of the project could never exceed the set maximum aid intensity under the measure, so SMEs, that could not implement the projects without the FEI are forced to come to decrease the rate of the support in the form of the grant... Because the FEI has the repayable nature, because of use of the FEI the amount of non-repayable grant is always lower...

Example of combining interest rate and/or guarantee fee subsidies with loans and/or guarantees Linhas de Crédito PME Investe I e II (soft loans for SME): (i) the bank provides a loan to SME and benefits from public guarantee supported by ERDF funds; (ii) the company benefits from an interest rate subsidy and guarantee fee subsidy.

Points for discussion Different operating model for managing combined financial instruments grant/revolving (holding fund manager manages only revolving quota? Does it provide additional mentoring / technical assistance services? Different rationales for modulating the mix of grant/revolving quotas (based on typologies of projects, priority sectors, final recipients, etc.) The rationality and efficiency to combine the Financial Engineering Instruments with grants as more efficient way of SME support, as the State Aid intensity is lower and less public resources are used (as the grants)... Other

Annex: What do we find in the Regulation?

Applicable Structural Funds’ Regulation Article 44 of Regulation (EC) No 1083/2006 (“General Regulation“) Articles 3(2)(c), 4(1), 5(1)(d) and 6(2)(a) of Regulation (EC) No 1080/2006 ("ERDF Regulation“) Article 11(1) of Regulation (EC) No 1081/2006 ("ESF Regulation“) Articles 43 to 46 of Regulation (EC) No 1828/2006 ("Implementing Regulation“) Guidance Note on Financial Engineering Instruments under General Regulation (COCOF_10-0014-04-EN FINAL VERSION 21/02/2010) (“Guidance Note”)

Section 3.1.2. of the Guidance Note “Consequently, where an operational programme provides grant assistance from either of the Structural Funds or from the Cohesion Fund as well as contributions to financial engineering instruments from the Structural Funds, final recipients may be simultaneously supported by (i) grants from the Structural Funds or from the Cohesion Fund and (ii) investments from financial engineering instruments co-financed with Structural Funds.”

Section 3.1.3. of the Guidance Note For the avoidance of doubt, whenever a final recipient benefits from grant assistance delivered through aid schemes or through any other type of operation financed under an operational programme and from investments provided by financial engineering instruments, Article 54(5) of the General Regulation as well as the State aid rules regarding the cumulation of aid must be respected. In line with State aid guidelines, cumulation of different measures of assistance is possible, as long as they concern different identifiable eligible costs.

Section 4.3.2. of the Guidance Note (1) Interest rate subsidies, guarantee fee subsidies and equivalent measures can be considered to be a part of the financial engineering instrument and of the repayable investment, in the sense of Article 44 and 78(6) of the General Regulation, only when associated and combined with ERDF loans or guarantees in a single financing package.

Section 4.3.2. of the Guidance Note (2) In the context of ERDF pure interest rate subsidies or pure guarantee fee subsidies are similar to grants, they are not repaid as such, nor do they support risk-sharing as such. They should be treated as grants under the operational programme.

Section 4.3.2. of the Guidance Note (3) Measures such as loan discounts or capital rebates can be assimilated to interest rate subsidies provided that the overall amount reimbursed by the final recipients until maturity is not expected to be lower than the principal of the loans on which interest was calculated.

Thank you for your attention! DG Regional Policy – Unit D.3 – Financial engineering & major projects