Episode 9: The implementation of an EAFRD guarantee instrument in Greece

Good morning, everyone. Welcome to a new episode of the fi-compass Jam Sessions podcast. I am Nivelin Noev and I will be your host today. We welcome Costas Apostolopoulos, Head of the Evaluation and Institutional Support Unit at the Greek managing authority for Rural Development. We're here to talk about the implementation of the Guarantee Financial Instrument, which was set-up under the Rural Development Programme 2014-2020 for Greece.

Тhis instrument will be presented in detail at our upcoming annual conference on financial instruments for agriculture, which will be on 18th of November, so if you want to learn more about it, please register on the website of fi-compass. So welcome, Costas, and thank you for joining us.

Good morning, Nivelin!

Good morning to all listeners and thank you and fi-compass for inviting me to this podcast.

Costas, let’s start. Your managing authority is implementing a financial instrument under the current Rural Development Programme. Which were the reasons behind the decision to set up a Guarantee Fund?

Well, the ex-ante assessment conducted by the European Investment Bank has identified a large financial gap in the Greek agri-food sector. This gap has been developed mostly because producers and small processors of agricultural products cannot commit their own capital for investment since they needed to have working capital needs.

And at the same time, they cannot cover their investment needs through the banking sector since the required guarantees are quite high, reflecting mostly the lack of credit history, which is a very common characteristic of this group of potential borrowers in Greece.

In this context, the portfolio Guarantee Fund was the best option because it covers the losses expected at the portfolio level of each financial intermediary. And these benefits are not retained by the banks, but are transferred to the farmers and processors, translated to lower collateral requirements, lower interest rates and reduced transaction fees.

Moreover, by increasing the risk tolerated by each participating bank, this instrument stimulates lending to a broader base of farmers and small processors, familiarising them with the banking system and allowing them to develop a more solid credit history.

We have seen recently that financial instruments are growing in importance for agriculture and that more and more managing authorities are becoming interested in this subject. As many of them seem to face the topic for the first time and often lack sufficient knowledge, for example, оn how to start the process or how to design a product: I was curious, what was your experience? Could you please share with us some insights from the preparatory work you undertook?

It is absolutely true that financial instruments, and especially their concepts and terminology, might look quite scary when faced for the first time and at least our managing authority didn’t have officers already trained for this form of support. The solution to this came from the excellent work of fi-compass, its workshops and publications and, above all, the provision of the targeted coaching. This latter helped us understand the terminology, get to know the specificities of each type of financial instrument, be it risk-sharing loans or guarantee financial or equity facilities. Another valuable source of information was the ex-ante assessment of the potential use of financial instruments in the Greek agri-food sector, which boosted our understanding of the sector and the particular ways farmers and small processors are using to try to get financing for their investments and also for their day-to-day capital needs. All these helped us build the required confidence to take the first steps towards setting up our first financial instrument.

What can you tell us about the relationships that need to exist between a managing authority, a fund manager, paying agency, implementing bodies, in other words within the whole implementation chain of the instrument?

First of all, the selection of the highly skilled and experienced fund manager is critical for both the design and the implementation of the financial instrument. The building of the strong trust relationship between the fund manager and the managing authority during the process of drafting the funding agreement is of paramount importance.

This interaction may also increase substantially the capacity of the managing authority to design and set-up a financial instrument, while at the same time the fund manager relies on the managing authority’s knowledge of the sector and of the national specificities to develop a sound investment strategy. So, this is a very crucial relationship, and it must be a win-win relationship, but this relationship is not enough. A paying agency also plays pivotal role in the management and control of the resources of the European Agriculture Fund for Rural Development, and it must be brought on board from the very beginning.

In Greece, the paying agency participated in the targeted coaching sessions which we had with the fi-compass team, was informed in every step about the outcomes of the ex-ante assessment, and was actively involved in the drafting of the funding agreement. All these are very important, but the financial instrument cannot exist without the financial intermediaries, the implementing bodies of the instrument that leverage the resources contributed by the Rural Development Programme and actually provide the financing to the final recipients. In order to increase participation of banks to our guarantee fund, considering that they don't have equal engagement with the agri-food sector—actually, they are quite differentiated in their connection with the agri-food sector—we try to be as inclusive as possible by inviting all the banks in regular meetings and inform them in every step of the process, from the outcomes of the ex-ante assessment, all the way to the investment strategy and the business plan included in the funding agreements.

Thank you Costas, this is really interesting as a process and it obviously takes a lot of effort from all sides.

Now let us switch towards the results of the instrument. Although it is still early for a proper assessment, what is you first evaluation? How is it going?

Our fund managers signed the first guarantee agreement in August 2020 and continued with six more agreements until the end of November 2020, we now have seven banks participating in the instrument, three of them are cooperative banks, the rest have national reach. We launched this instrument on the 1st of December 2020 by means of a dedicated IT tool, which we use for this management.

A very strong demand started to build up from the first week, and we have now more than 1 200 applications, amounting to slightly more than EUR 110 million. This is a very, very big demand, and banks, on the other hand, have started to assess these applications and approve new loans. Based on official data reported by the fund manager for the second quarter of 2021, we are now expecting the third quarter to see how it goes, but based on these data, participating banks have approved more than 70 loans, amounting approximately to EUR 4 and a half million. Given the time required for the banks to develop their products and communicate the instrument to their network and of course, the COVID 19 pandemic and the way it affects the decisions made by the borrowers, we're very optimistic about the progress so far.

Based also own the Union's response to the COVID 19 pandemic we have amended the guarantee agreement to include the COVID 19 working capital notes, which we expect will further increase the absorption of the instrument.

Of course, there are and will always be difficulties in the implementation of the instrument, but the most important is the timely support the instrument provides. We started the instrument nine months ago, and we have already completed investments that help farmers and processors modernise their operations and make them more sustainable.

You just mentioned an IT tool that allows you to constantly monitor the performance of the Guarantee Fund. Can you tell us a bit more on this? And is it handy for a Managing Authority to have such data at any point in time?

Yes, we have developed this web-based application which allows the final recipients to submit their applications very easily. It is a matter of a few minutes to submit the application. Then these applications are transferred to the bank themselves, to the bank the application is addressed, so they can assess them. More importantly, this IT tool interoperates with the AJAX database, with the database the paying agency uses, to register the data of each farmer. This connection provides automatic calculation of the economic size of the final recipient’s farm, its utilised area, and its type of farming, while it performs several other tasks, including, let's say, allowed levels of working capital. Based on these checks and calculations, most of the eligibility criteria are automatically evaluated, thus lowering the risk of error and the administrative burden for the participating banks and the final recipients.

On top of that, the application has connections with other IT tools used for the management of grant schemes, allowing the identification of combinations between grants and financial instruments, and providing the banks and grant scheme implementing bodies, with valuable information to assess compliance with the maximum levels of support illustrated in Annex 2 of the Rural Development Regulation.

So it is not only useful for banks and final beneficiaries, but it's also useful for implementing bodies that manage the grant schemes, which have access to the information needed to assess the combination between the grant scheme and the financial instrument.

And finally, this tool provides several reports that allow close monitoring of the demand and the progress of the instrument and provide something that is much needed for the managing authority: it provides a basis for a thorough evaluation of the financial instrument by including all the data required in one single application.

Thank you, Costas for this very interesting explanation. It seems quite an inventive approach, and I am sure that more and more managing authorities will be interested to have similar IT tools. Now, let me switch you attention to the future. I know you are currently very busy with the preparation of the Greek Common Agricultural Policy (CAP) Strategic Plan. It is still in early days, but do you see a role for financial instruments in it or at least a continuation of the current one?

Our ex-ante assessment on the use of financial instruments has been completed by 2018 and the outcomes of this report have been also reaffirmed by a recent report undertaken by the fi-compass regarding the financial needs in the agricultural sector in 24 Member States.

These reports have identified a very big financial gap in the agri-food sector in Greece and in an era of reduced budgets, especially for rural development interventions, and where the agri-food sector must grow more efficient, but also more sustainable under, of course, the pressure of a changing climate, we believe it is imperative to continue our efforts to use available resources as efficiently as possible through the continuation of current financial instruments and the set-up maybe of new ones. We also have already requested and we are looking forward to a second round of fi-compass targeted coaching to learn more about the future and explore the possibilities provided by the new Regulation framework and the InvestEU.

Finally, what would be your recommendation or lessons learned that you would like to pass to other managing authorities interested in using financial instruments under their CAP Strategic Plans?

I think everyone should start by making use of the resources provided by fi-compass, especially the targeted coaching. Then they should select the fund manager that they trust and start the journey to setting-up the instrument, bringing on board the paying agency and the financial intermediaries. In this process, and this is something that I would certainly do if I was starting over the process of setting-up the instrument, should be that they should not forget the potential final recipients. These potential final recipients must be clearly informed on what a financial instrument can do and what it cannot, aligning this way, expectations with reality. My advice would be make most use of that knowledge that has already been accumulated in the Member States and compiled in different reports and publications, mostly by the fi-compass. Just give financial instruments a try.

Thanks a lot, Costas, for these very interesting insights and for sharing your experience and expectations for the future. It was a real pleasure to talk to you today.

The pleasure was all mine, Nivelin. Thank you for this opportunity and I hope colleagues from other managing authorities will find this information useful in overcoming difficulties on the preparation and implementation of their financial instruments.