Financial Engineering – a tool for the implementation of the EUSBSR Sheila Maxwell INTERACT External Expert

Cymraeg

EUSBSR Writing the strategy is the easiest part, implementation requires interpretation, commitment and good administrative skills Also requires political commitment – and leadership? Also requires public acceptance, important to keep the public informed An optimistic outlook also helps!

Money! Practitioners view of financial engineering initiatives Funding possibilities related to the alignment or linking of funds

EUSBSR priority To improve the prosperity of the region through: Investment in firms Innovation in SMEs and entrepreneurship RTD activities and infrastructure Strong economic growth is achieved by growth in the private sector especially new and innovative SMEs

Why use financial engineering? European Commission opinion: The most efficient and sustainable use of structural funds (in the period) The use of expertise ensures that investments maintain their impact and contribute to the long term development of the regions Financial engineering supported by structural funds addresses the Venture Capital market gap as institutional investors are not investing in start ups due to high risk and long term yield expectations

Factors to consider Size of funds bigger is better, critical mass, spread of risk Market failure goes across borders Involvement of EIB, EIF, ‘local’ banks e.g. Nordic Investment Bank, and their expertise Working with clusters Working with the private sector The need for business support activities Financial engineering and energy opportunities

What does financial engineering deliver? Improved access to finance for the public and private sector, especially SMEs, for business growth Financial and managerial expertise e.g. use of EIB group Strong incentives for successful implementation – loans must be repaid Ensuring long term sustainability through revolving funds

Basic principles of financial engineering Financial Engineering Fund SF + Public/private funds ERDF/ ESF Private and/or public funds Fund Managers Fund ‘instruments’ Micro- enterprises SMEs Eligible expenditure Spend Recycled plus interest

Spend vs. eligible expenditure Spend occurs when the funds are drawn down from the EC, usually at the start of the project and before there is any distribution of the funds Spend is included in the payment claim to the Commission and is included in the N+2/3 calculation Setting up financial engineering schemes has on occasion been overambitious in order to avoid an automatic decommitment

Spend vs. eligible expenditure For the ‘spend’ to be converted into eligible expenditure the funds must be distributed (the first time) to the beneficiary SME, micro- enterprise, public-private partnership etc Eligible expenditure must occur in the eligible programme period Any money remaining in the fund which has not been distributed must be proportionately paid back to the EU at the time of the closure of the programme

Re-cycling of funds During the functioning of the scheme funds are distributed via loans, equity investments, guarantees etc The scheme normally has a finite ‘life’ at the end of which loans need to be repaid, shares sold etc. The scheme is then closed, and the investors repaid. At the time of closure the fund can be smaller or larger than at its start. The EU portion of the funds are not returned to the Commission but re-cycled in accordance with the terms of the scheme.

Practical experience - challenges Understanding market failure – are there common factors? State aid challenges – EU level Finding a private sector partner – now assisted by EIB and EIF Setting up a new ‘independent’ organisation – now assistance from EIB and EIF Eligibility - deciding which SMEs to support and what activities

Practical experience - challenges Out of area spend, may not be a problem if wider area for fund ‘Overambitious’ Fund Managers Ensuring that all funds become ‘eligible expenditure’ within the programme period Political considerations in cases of investment in companies that fail Managing the recycling of the funds, different countries may have different ideas.

Additional challenges for cross border working Protectionism – ‘fear’ of sharing Need to create an integrated financial market Improving the conditions for fundraising Improving the regulatory framework including state aid Reducing tax obstacles Mutual recognition of national frameworks Commission summary report – ‘Cross-border venture capital in the EU (Dec 2009) Report – Obstacles to Nordic VC funds, 2009

Aligning/linking of funds Need for a practical solution for the short term as well as the long term Utilisation of existing funds – from all sources Achieved through cooperation and coordination Possible to use the flexibility introduced in the SF General Regulation regarding interregional cooperation with other MS Actions only limited by the scope of the Programme

Linking and communication