The ERDF perspective
Guarantee financial instruments to support SMEs
Due to their ability to unlock bank lending, guarantee financial instruments are expected to continue to be used to support lending in the SME sector. In the 2014-2020 period, thanks to the high multiplier effect of guarantees, an estimated 365 000 final recipients benefited from finance supported by ERDF backed guarantees.
This represents approximately 65% of the total number of final recipients supported by ERDF financial instruments, a strong performance as only approximately 26% of programme resources were committed to guarantee instruments.
Due to their straightforward and market orientated nature, guarantee financial instruments offer a well-established mechanism to mobilise finance from participating banks to support access to finance for SMEs. This risk-sharing arrangement makes financial institutions more willing to provide loans, even to businesses or individuals with a higher perceived risk profile. This enables banks to diversify their client portfolio by reaching potentially untapped or new target groups.
The guarantees open doors to a broader spectrum of borrowers, including those with limited access to traditional financing. This diversification helps banks spread their lending risk across various sectors and clients, enhancing the stability of their overall portfolio.
Face Verticale – SME benefiting from ERDF guarantee support
The FOSTER TPE-PME guarantee financial instrument supported a loan to the company Face Verticale which was created by three high-altitude mountain guides who had a vision to offer a graduate training programme for rope access technicians. The investment was used for the rehabilitation and transformation of an old water tower into a training place. This allows the company to welcome bigger groups and to recreate specific working environment such as an industrial chimney for instance.
Slovak Investment Holding – multi-sector financial instruments in Slovakia
Slovak Investment Holding (SIH) was created by the Slovak Government in 2014 to manage the holding fund of EU shared management financial instruments. SIH manages over EUR 1 billion of EU shared management fund programme resources, through a number of loan, guarantee and equity financial instruments.
A portfolio risk sharing loan instrument has been implemented via SZRB (Slovak Guarantee and Development Bank) with a contribution of EUR 34.2 million. Two first-loss portfolio guarantee instruments have been deployed via selected financial intermediaries (UniCredit Bank and Slovenská sporiteľňa), one standard and another targeting RDI projects with a total net allocation of EUR 5.6 million for the former and EUR 3.78 million for the latter.
Biznesmax – ERDF guarantee supporting SMEs in Poland
This video case study explains how the ERDF-powered Biznesmax with a simple first-loss portfolio guarantee is supporting the development of innovative entrepreneurs in small and medium-sized enterprises (SMEs) in Poland. The instrument is combined with an interest rate subsidy. It was able to quickly adapt to changing circumstances by using the new regulatory flexibilities of the Coronavirus Response Investment Initiative (CRII and CRII Plus).
Guarantee financial instruments supporting the green transition
Guarantee financial instruments support the green transition across a range of sectors including SME support and energy efficiency in residential buildings.
ERDF guarantee financial instruments can be adapted to support investment in green infrastructure, energy efficiency and renewable energy measures. Typically, an investment strategy for a guarantee instrument may include a requirement that a minimum percentage of investments shall be targeted at green investments. Combination with grant may be included in such measures to reduce the cost of borrowing through an interest rate subsidy or meet part of the investment cost.
Due to their ability to leverage private sector investment through the multiplier effect, guarantee financial instruments are expected to play an increasing role in financing energy efficiency improvements to buildings, both residential and public/commercial. The RePowerEU Plan and the European Green Deal programme has identified saving energy through improved energy efficiency as a priority to secure the EU’s energy security and resilience in the future.
In 2020 the European Commission published its strategy, ‘A Renovation Wave for Europe – Greening our buildings, creating jobs, improving lives ’ which included an action plan with the aim of doubling the annual energy renovation rate by 2030.
In the renewable energy sector, guarantee financial instruments may play an increased role in the future to support investment in less established renewable energy sources (RES), such as geothermal, solar thermal, ocean energy and biofuels, as they are associated with significantly higher risks due to less tested business models and technologies.
At the same time, they are generally characterised by capital intensity and uncertain return on investment. Therefore, private financing is rather limited in these sub-sectors, which creates market opportunities for financial instruments such as guarantees.
There are examples of guarantee support being developed to support urban development (see for example IFRRU 2020), although in general, the risk sharing loan has proved to be more successful at this stage. A novel approach was taken in Bulgaria in the 2014-2020 programming period where a guarantee product was used to support private co-investment into urban development funds (UDFs).
Residential energy efficiency financial instruments in Lithuania
Financial instruments, in combination with grants, have been used by Lithuania’s Ministry of Finance and Ministry of Environment to fund loans to support investment in energy efficiency in apartment block buildings in Lithuania.
A number of different financial instruments have supported the development of a single product for homeowners known as the ‘Modernisation Loan’ which forms the centrepiece of the Lithuanian government’s programme to improve energy efficiency in residential properties. This included a first loss portfolio guarantee instrument designed to attract significant additional private sector investment.
Guarantee financial instruments supporting other sectors
Within the environment sector, investment areas related to municipalities, such as water services, waste treatment, air quality and flood risk prevention, do not generate direct streams of revenues and generally need to wait many years to break even. Under such circumstances, guarantees providing long-term debt financing with preferential conditions could offer a solution, potentially in combination with a grant component that could cover the infrastructure connection costs in smaller municipalities in remote areas.
Moreover, as the CPR now permits the combination of financial instruments with capital rebate in a single operation, a product may be developed whereby the municipalities could receive a type of bonus at the end of the investment’s timeline if the project meets certain financial and environmental criteria defined on the outset.
In the ICT sector, broadband infrastructure projects in sparsely populated areas are characterised by high investment costs per capita. Financial instruments can help make these projects more bankable and address the high risks with these investments. Similar to environment infrastructure interventions, a combination with grant can provide a solution. The grant component would be used to connect the sparsely populated areas to the infrastructure, while the guarantee can allow the final recipients to receive long-term debt with preferential terms to finance the other services once the connection is established.
In the transport sector, financial instruments could provide the critical mass for smaller municipalities by aggregating their projects that would not be able to receive the necessary financing in acceptable conditions on their own. This way, via guarantee financial instruments, these municipalities can receive loans with improved financing conditions, with longer maturity and lower interest rates. The financing can be combined with grants to both address viability issues and provide additional project development and implementation capacity.
The financing needs as well as the scope for public intervention related to RDI projects in the SME sector depends on the development stage of the company and of the project. Grants represent the main source of support during the initial phase, when the project does not generate revenues. Financial instruments become relevant when an innovative project reaches its commercialisation phase. ERDF-funded guarantee products providing risk protection to the banks can unlock access to private sector financing to support the delivery of the new product to the market. Such intervention is deemed reasonable as long as the RDI project has not reached its market maturity, when it can already be fully financed by the private sector without incentives from the public sector.