The integration of financial instruments alongside traditional grant mechanisms has become an increasingly prominent feature of Cohesion Policy programmes over the last decade – although uptake has been more enthusiastic in some Member States and regions than others. This blog explores some of the practical insights gained by programme managers from the implementation of financial instruments, gathered from their accumulated experiences and best practices.
The role of knowledge exchange
Implementation of financial instruments can be complex and technically challenging. Knowledge exchange, peer-to-peer learning and European Commission initiatives such as the fi-compass hub have played an important role in supporting programmes along the steep learning curve. The IQ-Net network, comprising programme authorities from a wide range of EU Member States and regions, has also been an important forum for sharing experiences and best practices on FIs. Currently, about half of IQ-Net programmes are actively implementing FIs.
Added value of FIs
Three main arguments have been used for the use of financial instruments where appropriate. These are: sustainability, efficiency and quality. Because funds are, in principle, repaid, they can generate a legacy to be reinvested. They can leverage-in private capital lessening the strain on public funds. The due diligence process and the need for repayment may mean increase the commitment to success by firms and project promoters.
Ten key lessons learned
As the landscape of financial instruments matures, programme managers in the IQ-Net network have reflected on their experiences over several programme periods and have been able to identify valuable lessons:
- The ex ante assessment is fundamentally important. While regulatory requirements for ex ante assessments have softened over time, their significance cannot be overstated. These assessments provide the foundation for designing effective FI interventions. They provide a useful point at which to review previous experience – for example, the impact of specific 2014-20 FI products was analysed in the 2021-27 ex ante assessments in Portugal. Regular reviews ensure that interventions remain relevant and impactful.
- Address Systemic Market Failures. Recognising systemic market failures legitimises a sustained public sector role in debt and equity markets. Long-term intervention models ensure sustainability without undermining private sector efforts e.g. by operating on a fully commercial basis (as with the Scottish Co-Investment Fund).
- Keep on top of identifying emerging gaps. Continuous monitoring of regional needs is crucial. In Wales, for example, this type of review resulted in the Development Bank for Wales successfully expanding into new areas such as property.
- Develop flexible Investment Strategies. Flexibility gives the ability to adapt investment strategies in response to changing circumstances. This was essential in Pomorskie during the COVID-19 pandemic when it allowed for the introduction of grace periods, payment holidays, extended repayment periods etc.
- Choose generic over sectoral funds. While sector-specific interventions might be necessary in some cases (e.g. for the life sciences) they should be the exception, as a generalist approach to funds typically yields better results.
- Achieve critical mass. Funds must be substantial enough to be self-sustaining over time. This ensures that they can operate on an evergreen finance model, continuously reinvesting in regional development.
- Invest in building trust and partnerships. Strong, transparent relationships among stakeholders are vital. An environment where participants feel comfortable raising concerns can lead to more effective collaboration and problem-solving.
- Leverage regional knowledge for regional impact. Partnering with regional financial institutions enhances the contextual understanding necessary for effective implementation. In Pomorskie, this helped to build local capacity and fostered a sense of ownership among stakeholders.
- Simplify administrative processes and find efficiencies where you can. Using financial instruments (and institutions) can streamline administrative requirements for beneficiaries. In Czechia, for example, coordination through commercial banks and the national promotional bank has reduced the burden on recipients. Also, careful tendering can accelerate the contracting process. Bundling financial products in a single tender can streamline operations, facilitating quicker access to funding for SMEs.
- Seek expert assistance. Don’t hesitate to tap into external expertise, such as that offered by the European Investment Bank. This can enhance the design and operation of FIs, particularly in complex areas like venture capital.
FIs are not always embraced by Cohesion Policy programmes. Almost half of IQ-Net countries/regions do not plan to use FIs in 2021-27. This is often because there is already financial support available from national/regional sources (as in Denmark and Finland). This, along with their perceived regulatory and administrative complexity, and the demands this places on MAs’ stretched administrative capacity, can deter programme authorities from introducing FIs.
Looking ahead
As we consider the future of EU Cohesion Policy, lessons learned from experienced programme managers can help to provide a roadmap for future initiatives. Flexibility, collaboration and staying in tune with regional needs will help to enhance the effectiveness and sustainability of future financial instruments.
When they work, FIs can give regions a unique opportunity to create a sustainable and evergreen funding source for future regional development. We have seen a great example of this in Wales, where European Structural Funds provided a launch pad for the Development Bank of Wales. The Bank has now developed beyond delivering co-funded FIs and operates 14-15 different funds, providing a sustainable source of funding in a post-Structural Funds landscape.
Rona Michie is a Senior Research Fellow in the European Policies Research Centre. Financial instruments in the IQ-Net programmes were recently discussed in a paper presented at the December 2023 network meeting in Hungary. EPRC’s previous work on financial instruments includes a report for ESPON (with Nordregio, RED2RED Consultores and TU Delft) on Financial Instruments and Territorial Cohesion.