Briefing The EU budget and SMEs Background information for the BUDG Committee Public Hearing on "The EU budget and SMEs" on 15 July 2015 in the European Parliament in Brussels Introduction Small and medium-sized enterprises (SMEs) play a central role in the EU economy, especially in southern euro-area countries. They provide more than two-thirds of private sector jobs, accounting for more than 98 % of all enterprises and almost 60 % of added value. However, SMEs frequently have difficulties in obtaining capital or credit, particularly in the early start-up phase. Most SMEs perceive access to finance as the most pressing problem together with difficulties in attracting customers. The prolonged economic crisis has amplified this challenge, preventing SMEs from getting the sufficient finance they need to operate. For their external funding SMEs depend almost exclusively on banks, because of the relative high transaction costs owing to the lack of scale and disclosure practices, which makes SMEs relatively unattractive counterparts for other financiers. Reduced bank lending volumes to SMEs are partly due to the low demand for credit. But, they are also the result of banks restricting the supply of credit as they deleverage, build capital and repair balance sheets. Moreover, as banks become more risk-averse, they ask for higher risk margins and offer more demanding conditions. Given the importance of bank financing for SMEs, the EU has been especially helpful in supporting private-sector lending to SMEs. EU financing programmes are generally not provided as direct funding. Aid is channelled through local, regional, or national authorities, or through financial intermediaries such as banks and venture capital organisations that provide funding through financial instruments. The financial instruments in current EU programmes include Horizon 2020, the European Structural and Investment Funds (ESIF), and the programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME). The complete list of budget lines providing financial support for SMEs can be found in the annex. The European Parliament has committed several studies and other analyses on the subject of the EU budget supporting the SMEs, which are listed below. Policy Department D - Budgetary Affairs Authors: Rita CALATOZZOLO and Jenna Karoliina KIVIMAKI European Parliament PE 490.709 EN
Policy Department D: Budgetary Affairs The Competitiveness and Innovation Framework Programme (CIP) Peer Review. March 2013 (Policy Department on Budgetary Affairs) http://www.europarl.europa.eu/regdata/etudes/etudes/join/2013/490672/ipol- JOIN_ET(2013)490672_EN.pdf The study on The Competitiveness and Innovation Framework Programme (CIP) (2007-2013) summarises the results, and highlights the conclusions and recommendations of the programme. According to statistics, the main type of beneficiaries targeted with financial instruments comprises SMEs with fewer than 10 employees and less than 100.000 annual turnover. The sector most frequently reached is the manufacturing sector. SME beneficiaries are mainly males. The study recommendations point out that the support to SMEs should be better structured according to SME size distribution, industrial sector, level of innovation and in-house research capacities, age, geographical position and lifecycle stage in line with measurable, defined overall objectives. The study concludes several problems on EU support for SMEs. First, support instruments concentrate on high-growth companies and do not acknowledge other forms of innovation; second, the heterogeneity of SMEs is not sufficiently in focus when support actions are prepared; and third, entrepreneurs with ideas are reluctant to use repayable loans rather than direct funding. Funding schemes and financial instruments would have much more impact by taking into account differences in the lifecycle as well as the degree of use of innovation and the associated needs and challenges. Also, it is not clear-cut if the reason for the financing obstacles faced by SMEs primarily stem from their poor economic performance or from major limitations to credit supply. Weak profitability and financing obstacles could reinforce each other: inadequate access to finance reduces profitability, thereby increasing non-performing loans and contributing to deterioration of banks balance sheets, which in turn reduces the banks ability to supply credit. When evaluating the CIP, it was noted that there should be improved coordination between the DGs involved in implementation of the CIP and the European Commission DG for Regional Policy. There are funds available through Cohesion Policy Funds for supporting innovation activities. These resources are managed by the DG for Regional Policy, national and regional authorities. For example, Cohesion Policy Funds could provide the resources for regions to build up research and innovation capacity, enabling them to take part in the CIP; while the CIP initiatives could help regions implement more effective regional innovation policies. Also, lessons emerging from the CIP activities are likely to be relevant to the improved utilisation of the Cohesion Policy resources and vice versa. The countries benefiting most from the Cohesion Policy Funds may choose to participate less in CIP activities and hence the potential for lessons from the CIP activities to reach those at the national and regional levels in these countries may be low. At the same time there is a danger of overlaps and/or learning in parallel that could be associated with inefficiencies. Last, the monitoring indicators should be developed to allow better ex-post evaluation of programme effectiveness. The indicators being introduced should also provide the basis for monitoring and evaluating the programme as a whole. Page 2 of 7
The EU budget and SMEs Success stories in the field of competitiveness, education, R&D, innovation and SMEs, and social policy agenda. April 2014 (Policy Department on Budgetary Affairs) http://www.poldepnet.ep.parl.union.eu/poldept/webdav/site/poldept/shared/poldep_d/internal %20Policy/SS_Competitiveness_09_04_2014.pdf The note summarizes the results achieved from EU budget resources devoted to policies in the field of Competitiveness, Education, R&D, Innovation and SMEs as well as the Social Policy agenda. It represents the achievements reached by The Competitiveness and Innovation Programme (CIP) in the field of supporting SMEs during period 2007-2013. Some of the achievements the CIP programme 2007-2013 had: Over EUR 14 billion of loans mobilised and EUR 2.3 billion of venture capital for SMEs across Europe. More than 240 000 SMEs have been helped to access loans; the estimated number of jobs created is more than 240.000. Contact with more than 2 million SMEs per year; for partnership services the impact on turnover was on average EUR 200 000; the total impact on sales growth is estimated at EUR 625 million; between 2008-2012 4 429 jobs have been created by firms under partnership agreement. Support for market application of more than 200 eco innovation projects; 1 euro of public investment is estimated to lead to a gross revenue leverage factor of x 20,2 years after project end; the average net employment is around 8 persons per project (full-time); 1 euro of public investment has generated 10 euros in environmental benefits; the monetised benefit (damage and avoidance costs) for projects worth 86,6 million in EU funding is estimated at EUR 833 million (after two years). The average time for start-up of a private limited company was reduced from 12 to 5,4 days between 2007 and 2012 and the costs were reduced from EUR 485 to EUR 372 over the same period, partly due to best practice exchanges and benchmarking projects. State Aid to Banks and Credit for SMEs: Is There a Need for Conditionality? February 2015 (Policy Department on Economic and Scientific Policies) http://www.europarl.europa.eu/regdata/etudes/stud/2015/518754/ipol_stu(2015)518754_en. pdf The study assesses whether the system of banks receiving State aid to provide additional access to finance small and medium-sized enterprises is legally justified and economically beneficial. The relevant cases have been examined and the link to SME lending has been analysed in a qualitative and a quantitative way. The State aid granted to European banks during the crises can be divided across four broad types: recapitalisation, asset relief measures, guarantees and other liquidity measures. The granting of guarantees for lending to SMEs is the most immediate form of support to foster bank lending to SMEs. In contrast to the recapitalisation, asset relief and the liability measures, the guarantees on SME loans are mostly granted to the SMEs themselves rather than to the bank. Page 3 of 7
Policy Department D: Budgetary Affairs Overall, the findings of the study suggest that conditionality to State aid linked to SME lending does not necessarily result in more lending activity, at least not during the first years after the aid. Therefore, continued close monitoring of their activities is needed. Finance Access of SMEs, Monetary Dialogue. July 2013 (Policy Department on Economic and Scientific Policies) http://www.europarl.europa.eu/regdata/etudes/note/join/2013/507469/ipol- ECON_NT(2013)507469_EN.pdf The current fragmentation in financial markets is largely the result of severe market failures in the allocation of key inputs, including finance. High unemployment and externalities would argue in favour of public intervention for a greater and easier access to finance for SMEs. However, past experiences have shown that without repairing bank balance sheets and resuming economic growth, targeted initiatives to help SME financing - particularly in distress EU countries - will have limited success. Ultimately, it is the improvement in financial markets and the return of trust that will make the difference. In the monetary dialogue, the topic of finance access of SMEs is approached from different point of views from different authors. First, it was noted in the study that previous European initiatives were able to support only a tiny fraction of Europe s SMEs, and merely stepping-up these programmes is unlikely to result in a breakthrough. Banking system soundness is seen as the key to more SME financing. Of the possible initiatives for fostering SME access to finance, a properly designed scheme for targeted central bank lending seems to be the best complement to the banking clean-up, but other options, such as increased European Investment Bank lending and the promotion of securitisation of SME loans, should also be explored. There are arguments in favour of stepping-up all three main options: lending by development banks, public support for securitisation, and central bank liquidity provision. However, more lending by development banks has limitations. Public support for securitisation could either leave most of the risk with the banks, or might transfer substantial risk to public accounts, which could be undesirable and could limit the scope for such support. And securitisation does not address the problem of high bank funding costs in southern Europe, and there are questions over the risk/return/liquidity characteristics of such securities. Cheap long-term liquidity provision by central banks, especially if it is fully conditional on expanding lending to SMEs, can be an effective tool to alleviate problem of high bank funding costs. Only central banks can provide such funding on a massive scale. Since central bank funding is provided against collateral, the increase in the risk exposure of the central bank would be limited. However, the main conclusion is that without repairing bank balance sheets and resuming economic growth, targeted initiatives to help SMEs gain access to finance will have limited success. Next in the study, the SME finance problems are viewed from the point of view of the ECB. The ECB can take some actions to address the weak supply of credit for SMEs such as reducing the haircuts on credit claims and purchasing securities backed by loans to SMEs. However, overall, it is unlikely that ECB-related policy initiatives will have much impact on the supply of credit to small firms. Tailored policy measures to address the SME sector s credit needs are unlikely to have a major impact. He points out that Europe needs to sort out the deep structural problems with its banking sector. While the various policy initiatives, such as the single supervisor, the upcoming asset quality review and stress tests followed by recapitalisations and bail-ins are welcome, the process is occurring at a very slow pace and is likely to be years away from the European banking sector Page 4 of 7
The EU budget and SMEs playing its vital role in funding the economy. All in all, every attempt should be made to complete the process of banking union and bank restructuring as soon as possible. SMEs are more handicapped in accessing bank finance than large companies, but they have alternative ways of finding finance notably by delaying payments of bills. It is argued that the financial difficulties of small businesses are caused by the austerity policies pursued in most Member States, which destroy financial wealth. SMEs are handicapped by their corporate structure to get a fair share in a shrinking pie of available finance. It is suggested that SME finance should be seen in the larger context of macroeconomic lending conditions. A flow of fund framework is used to analyse the impact of monetary, fiscal and structural reform policies on lending conditions in the euro area and it is shown under what conditions these policies may stimulate access to finance for the non-financial corporate sector and crowd in investment. It is then argued that the particular character of SMEs, which are collateral constrained and dependent on relational finance, requires improved transparency to overcome their handicap relative to larger corporations. A purpose-made Transparency Index reveals that at least in 14 EU Member States lack of transparency is a problem. The combined effects of a strong bank deleveraging to comply with higher capital requirements, an increased risk aversion in a context of reduced activity and a severely impaired monetary transmission mechanism have resulted in large financing disparities across euro-area frontiers. Some policy measures are presented to address the design and implementation of SME financing in the short and medium term, concluding that enhancing equity and debt financing of SMEs should be a real alternative to bank financing and a step in the right direction. Conversely, a fullfledged level plain field for the financing of euro area SMEs can only be achieved with the completion of the banking union. Finally, feasible options to improve finance access of SMEs, available to EU institutions as well as to the ECB in the context of its price stability mandate are assessed. Because of non-negligible moral hazard issues, a stronger involvement of the ECB in the (indirect) financing of SMEs through the securitisation of banks' loans or their use as collateral for monetary policy operations is assessed sceptically. The paper concludes with some proposals for extending finance access of SMEs, including through mutual guarantee institutions along the lines. Page 5 of 7
Policy Department D: Budgetary Affairs Annex: Budget lines providing for support to SMEs in 2015 Budget and 2016 Draft Budget BudgLine Title MFF 2015 Budget 2016 Draft Budget Difference (DB-Bud) cat Commitments Payments Commitments Payments Commitments Payments 01 04 51 Completion of programmes in the field of small and middle-sized 1.1 p.m. 100.267.609 p.m. 96.000.000 0-4.267.609 enterprises (SMEs) (prior to 2014) 02 01 01 Expenditure related to officials and temporary staff in the Internal market, Industry, Entrepreneurship 5.2 89.939.993 89.939.993 90.329.198 90.329.198 389.205 389.205 and SMEs policy area 02 01 03 Expenditure related to information and communication technology equipment and services of the Internal market, Industry, 5.2 5.709.934 5.709.934 5.834.308 5.834.308 124.374 124.374 Entrepreneurship and SMEs policy area 02 01 06 01 Executive Agency for Small and Medium-sized Enterprises Contribution from Competitiveness of enterprises 1.1 8.154.177 8.154.177 8.786.033 8.786.033 631.856 631.856 and small and medium-sized enterprises (COSME) 02 02 02* Improving access to finance for small and middle-sized enterprises (SMEs) in the form of equity and 1.1 174.791.725 99.027.161 160.447.967 100.000.000-14.343.758 972.839 debt 02 02 77 14 Pilot project Rapid and efficient enforcement of outstanding claims by small and medium-sized 3 p.m. p.m. p.m. p.m. 0 0 enterprises (SMEs) operating across borders 02 02 77 17 Pilot project Business Transfers to employees and Cooperative Model: ensuring the Sustainability of SMEs 1.1 500.000 250.000 p.m. 350.000-500.000 100.000 Page 6 of 7
The EU budget and SMEs 02 03 02 02 02 04 02 03 07 01 06 01 08 01 06 03 08 02 02 03 15 04 01 33 04 77 04 Support to organisations representing small and middlesized enterprises (SMEs) and societal stakeholders in standardisation activities Increasing innovation in small and medium-sized enterprises (SMEs) Executive Agency for Small and Medium-sized Enterprises Contribution from LIFE Executive Agency for Small and Medium-sized Enterprises Contribution from Horizon 2020 Increasing innovation in small and medium-sized enterprises (SMEs) Strengthening the financial capacity of SMEs and organisations in the European cultural and creative sectors, and fostering policy development and new business models Pilot project Training for SMEs on consumer rights in the digital age 1.1 3.816.286 2.175.774 3.843.000 3.700.000 26.714 1.524.226 1.1 34.105.989 17.650.787 35.643.862 18.500.000 1.537.873 849.213 2 5.608.850 5.608.850 4.471.642 4.471.642-1.137.208-1.137.208 1.1 21.056.283 21.056.283 24.877.409 24.877.409 3.821.126 3.821.126 1.1 36.588.561 33.186.975 35.967.483 31.169.883-621.078-2.017.092 3 9.000.000 7.445.136 23.829.000 22.133.220 14.829.000 14.688.084 3 1.000.000 500.000 p.m. 500.000-1.000.000 0 (*)The programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) is improving access to finance for SMEs through two financial instruments: 1) The Loan Guarantee Facility (LGF) Part of the COSME budget funds guarantees and counter-guarantees for financial intermediaries to help them provide more loan and lease finance to SMEs. This facility also includes the securitisation of SME debt-finance portfolios. 2) The Equity Facility for Growth (EFG) Part of the COSME budget is dedicated to investments in risk-capital funds that provide venture capital and mezzanine finance to expansion and growth-stage SMEs, in particular those operating across borders. Page 7 of 7 Disclaimer The content of this document is the sole responsibility of the author and any opinions expressed therein do not necessarily represent the official position of the European Parliament. It is addressed to the Members and staff of the EP for their parliamentary work. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. Contact: poldep-budg@europarl.europa.eu Manuscript completed in July 2015.