1 The World Bank Sandro Zanus-Michiei St. Petersburg – March 2003 The role of Development Agencies in promoting and fostering SMEs

2 What are the basic conditions for developing SMEs ? 1. efficient administrative and legal system 2. supportive and transparent fiscal system 3. adequate infrastructure 4. developed financial and banking system

3 The financial constraints for SMEs:  obtaining capital  cost of capital

4 - Regional Development Agencies – The Italian experience A public-private partnership to promote and foster enterprises, on a regional basis

5 - Over 30 years of experience -  Regional Investment Agencies  Regional Leasing Agencies for Development  Regional Guarantee Agencies

6 Regional Investment Agencies

7 What is and how does it work a Regional Investment Agency ? - legal entity established with the private sector and partially funded by (local) government to invest in SMEs - the Agency provides a variety of “products” (financial and non) to SMEs at (marginally) subsidized terms

8 - Roles - 1 – Investment Company sets out to create and to develop businesses with shareholdings in risk capital, loans, consultancy and expert assistance 2 – Development Agency implements policies for the promotion and economic growth of the Region

9 - The products offered - Financial: - Private Equity - Loans - Venture Capital - “Promotion investments” to SMEs and micro-enterprises - Joint-venture financing Non-Financial: - Advisory services

10 Regional Investment Agency SMEs Advisory Equity Loans

11 Equity investments: - although a “silent investor”, a Board seat is required for one of its investment staff for the duration of the investments - limited amount of investments, max 35% of subscribed capital - risk based investment (no collateral) - average duration 5 years (SME call option) - average investment decision (45 days) - required audited financial statements

12 Loans: - collateralization of the amount of the investment - average duration 3-5 years - interest rate slightly subsidized - Loan/Equity mix

13 Why does the system work ? - the Agency builds an unique knowledge of the local business environment: staff gains a wide and comprehensive expertise that enables them to provide highly specialized assistance and professional advice, tailor-made to meet entrepreneurs’ needs. - “pull factor” for co-financing from commercial banks - networking business opportunities

14 Regional Leasing Agencies for Development

15 What is and how does it work a Regional Leasing Agency ? - leasing company established with the private sector and partially funded by (local) government - provides leasing to small entrepreneurs at (marginally) subsidized terms

16 Regional Leasing Agency SME Supplier/ Manufacturer Goods Ownership Lease

17 - The products offered - (i)real-estate leasing (ii) equipment leasing

18 - does not require any collateral (!) - fiscally advantageous (!?) - it is easier and faster to obtain than a Loan - it is a “pull factor” for technology devel. (i.e. induces SMEs to replace obsolete machinery and equipment faster) - the cost (interest) is competitive with working capital Loans Advantages

19 Regional Guarantee Agencies

20 What is and how does it work a Regional Guarantee Agency ? - legal entity established by SMEs - SMEs subscribe a Guarantee Fund that will be used to guarantee Loans, granted only to member SMEs, by the banks - Guarantee Fund is (often) subsidized by (regional) public funding - majority of Guarantee Committee is formed by small and medium entrepreneurs - limited staff

21 Regional Guarantee Agency Shareholders: - SMEs Subsidized by: - public (local) funds Bank 50% Guarantees Loans Member SMEs Banks

22 Scope of the Guarantee Agencies:  facilitate granting of Loans to SMEs  reduce cost of Loans (by reducing the Bank’s lending risk)

23 Why does the system work ? - is co-financed by the entrepreneurs - entrepreneurs are involved in the mgmt (Guarantee Committee) - more efficient use of public funds - reduced risk for the banking system therefore there is a higher incentive for the Banks to grant loans to SMEs - by guaranteeing 50% of the Bank’s Loan, the Agency negotiates a ‘base’ int. rate for all its member SMEs with each Bank