Financial Instruments under the Structural Funds - Lessons learned

Financial instruments (FIs) represent a small but increasing and high-profile proportion of programme resources under the European Structural and Investment Funds (ESIF). Uptake of FIs under ESIF programmes has roughly doubled since the 2007-13 programming period.

The European Commission has encouraged the use of Financial Instruments in Cohesion policy on the basis that:-

  • they are more sustainable because funds are recycled to be spent again in the same region
  • they may generate better quality projects, as funds have to be repaid and commercial expertise in project appraisal can enhance project selection
  • they can constitute a more efficient use of public funds since private finance can be leveraged in to supplement public spending

However, the main rationale for the use of Financial Instruments is that facilitating access to finance by using Financial Instruments can contribute to sustainable regional economic development. Importantly, Financial Instruments are only suitable for investments that are potentially revenue-generating or cost-saving.

According to the ESPON project, Financial Instruments and Territorial Cohesion findings increasing emphasis on financial instruments under the Structural Funds has a number of implications for territorial cohesion. For example, many of the obstacles to development in more disadvantaged regions also make the implementation of financial instruments more challenging. Additionally, the pressure to disburse budgets and avoid decommitment, endangers financial instruments to simply reinforce existing spatial disparities in access to finance.

The project mapped examples of FIs that proactively target disadvantaged areas, in an effort to ensure that financial instruments do not increase negative consequences for territorial cohesion: The JESSICA programme for Rotterdam, focused on deprived urban areas through an ITI (Integrated Territorial Investment), when the BRUSOC fund (2007-2013) in the Brussels region targeted entrepreneurs in the former Objective 2 areas. Outside the EU, the Norwegian Regional Risk Loan is restricted to designated aid areas, and even within these, it is targeting explicitly to projects outside the main population centres.

It is encouraging that most of the FIs generated a positive impact in terms of diversification of sources of financing both for firms and urban projects, especially in those regions that suffered from strong financial constraints during the financial crisis. Financial intermediaries and international financial institutions such as the EIB/EIF have played an important role in this success.

But the tendency for the banking sector to become more centralised and more reliant on automated credit rating systems has also had direct implications for the quality of local knowledge in the sector, the same as a decline in ‘relationship’ banking, especially in rural areas.

This is an important setback, as one of the key positive outcomes of the FI is the generation of innovative and entrepreneurial culture and know-how transfer among the actors involved. This according to the case studies of the project,  from Lombardia, Mellersta Norrland, Andalucía, Wielkopolskie and Norway that highlighted this effect as one of the most positive ones, which can be relevant to the long-term economic performance of the regions.

Another factor that impedes the operation of FI is the seven-year programming period; this timescale is arbitrary and short, especially given the delays involved in the planning and approval of operational programmes. The progress in implementing FIs has been slow in 2014-20, even among managing authorities with longstanding experience of operating FIs.

And from an economic development perspective, there is no logic to the need to close funds at the end of the programming period and retender for fund managers. The management of the Norwegian Regional Risk Loan offers some lessons here. In particular, the loss fund budget provided by the Ministry (KMD) to back the scheme is not reimbursed or clawed back but rolled over from one year to the next on a continuous basis. As such, there is no incentive to use up year-end monies and because Innovation Norway requires that applicants have exhausted commercial funding options before approaching it for support, this promotes a more policy-focused use of funds, rather than one driven by absorption pressures.

There is no need for publicly-backed FIs to replicate what the private sector can do. It is more useful to intervene where it cannot or is unwilling to at the scale required. It is also worth bearing in mind that during 2007-13, the focus of FIs was restricted to SME support, and to a much lesser degree urban and energy efficiency projects. This may have a bearing on the location of investment. The widening of thematic coverage of FIs in 2014-20 may change investment patterns, though early indications from Commission reporting on the 2014-20 period suggest that implementation in areas other than SME support has been very slow.

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Article edited by Nikos Lampropoulos, Project Expert Press and Media Activities