Table of Contents

I. INTRODUCTION.. 3

II. EXECUTIVE SUMMARY.. 5

1. Strategic Target Groups. 5

1.1. EU SMEs and Small Midcaps. 5

1.2. EU Microenterprises. 6

2. Strategic Sectors. 7

2.1. Research and Innovation (R&I) 7

2.2. Infrastructure and Energy Efficiency. 8

2.3. Social Enterprises. 9

2.4. Education. 10

3. Strategic Non-EU Regions. 10

3.1. Enlargement Countries. 10

3.2. Neighbourhood Countries. 11

3.3. Countries covered by the Development Cooperation Instrument (DCI) 11

III. OVERVIEW TABLE.. 13

IV. GENERAL CONTEXT. 21

4. The EU Economic Environment in 2013. 21

5. Strategic Target Groups. 23

5.1. EU SMEs. 24

5.2. EU Midcaps. 31

5.3. EU Micro-enterprises. 32

6. Strategic Sectors. 34

6.1. Research and Innovation. 36

6.2. Transport 36

6.3. Energy Infrastructure and Energy Efficiency. 38

6.4. ICT/Broadband. 39

6.5. Social Enterprises. 41

6.6. Education. 42

7. Strategic Non-EU Regions. 42

7.1. Enlargement Countries. 43

7.2. Neighbourhood Countries. 44

7.3. Countries covered by the Development Cooperation Instrument (DCI) 44

8. Conclusion. 45

9. Annex - Additional Information on the European Equity Market 46

9.1. The structure of the European Equity Market 46

9.2. Regulatory framework for the Venture Capital market 48

V. THE RATIONALE FOR THE FINANCIAL INSTRUMENTS. 50

VI. INFORMATION ON FINANCIAL INSTRUMENTS according to Article 140.8 of the Financial Regulation 52

10. Equity Instruments. 52

10.1. The High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP) 52

10.2. CEF Equity Instrument 61

10.3. Equity Facility under COSME.. 64

10.4. InnovFin SME Venture Capital (Horizon 2020) 69

11. Guarantee Instruments. 74

11.1. The SME Guarantee Facility (SMEG07) under the Competitiveness and Innovation Framework Programme (CIP) 74

11.2. European Progress Microfinance Guarantee Facility (EPMF – G) 81

11.3. EaSI Microfinance and Social Enterprise. 88

11.4. Loan Guarantee Facility under COSME.. 91

11.5. Risk-sharing Instrument (RSI) 2012-2013 - Pilot guarantee facility for R&I-driven SMEs and Small Midcaps and its successor InnovFin SME Guarantee 2014-2020 under HORIZON 2020. 96

11.6. The Cultural and Creative Sectors Guarantee Facility. 101

11.7. Student Loan Guarantee Facility. 104

11.8. Private Finance for Energy Efficiency Instruments (PF4EE) 106

12. Risk Sharing Instruments. 109

12.1. Risk-Sharing Finance Facility (2007-2013) and its successors InnovFin Large Projects, InnovFin MidCap Growth Finance and InnovFin MidCap Guarantee (2014-2020) 109

12.2. Loan Guarantee Instrument (LGTT) 115

12.3. Pilot Phase of the Project Bond Initiative (MFF 2007-2013) & Risk sharing debt instrument under the Connecting Europe Facility (CEF), (including the successor to the pilot phase of the Project Bonds Initiative (2014-2020) 122

12.4. Natural Capital Financing Facility (NCFF) 131

12.5. EU SME Initiative. 136

13. Dedicated Investment Vehicles. 143

13.1. The European Progress Microfinance FCP-FIS (PMF FCP-FIS) 143

13.2. The 2020 European Fund for Energy, Climate Change and Infrastructure – (Marguerite) 149

13.3. European Energy Efficiency Fund (EEEF) 158

14. Financial Instruments in the Enlargement Countries 163

14.1. Guarantee Facility under the Western Balkans Enterprise Development and Innovation Facility 163

14.2. Enterprise Expansion Fund (ENEF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) 169

14.3. Enterprise Innovation Fund (ENIF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) 173

14.4. European Fund for Southeast Europe (EFSE) 173

14.5. Green for Growth Fund (GGF) 173

14.6. SME Recovery Support Loan for Turkey (RSL) 173

15. Financial Instruments in Neighbourhood and Countries covered by the DCI. 173

15.1. Neighbourhood Investment Facility (NIF) 173

15.2. Investment Facility for Central Asia (IFCA) & Asian Investment Facility (AIF) 173

15.3. Latin America Investment Facility (LAIF) 173

15.4. Support to the Facility for Euro-Mediterranean Investment Partnership (FEMIP) 173

15.5. Global Energy Efficiency and Renewable Energy Fund (GEEREF) 173

VII. REFERENCES. 173

VIII. LIST OF ACRONYMS. 173

I. INTRODUCTION

This Staff Working Document (SWD) constitutes an Annex to the report of the Commission to the European Parliament and the Council on financial instruments supported by the general budget according to Article 140(8) of the Financial Regulation[1] as at 31 December 2013. It provides specific information on individual financial instruments, their progress made in implementation and their environment in which they operate.[2]

Financial instruments are a proven way to achieve EU policy objectives. They use EU funds to support economically viable projects and attract very significant volumes of public and private financing. By injecting money into the real economy, financial instruments contribute to the achievement of the EU policy objectives enshrined in the Europe 2020 Strategy, notably in terms of employment, innovation, climate change and energy sustainability, education and social inclusion.

In general, funds available for public policy are limited and therefore additional resources are needed to pursue public objectives more effectively. In this context, financial instruments can play a very useful role as they enable the Commission to mobilise additional funds, thus leveraging limited public resources (financial leverage). They also ensure policy leverage by incentivising financial intermediaries to pursue common objectives through alignment of interest, and institutional leverage by benefiting from the expertise of the actors involved in the implementation chain.

In the past, financial instruments played a significant role by reaching out to important target groups such as SMEs, innovative enterprises and microenterprises, and supporting high-value projects in strategic sectors such as transport and energy. They helped address market failures and were able to mobilise significant additional resources from the private and the public sector. For example, in the 2007-2013 period, the main EU-level financial instruments dedicated to SMEs support (CIP-GIF , CIP-SMEG 07 and RSI) and micro-SMEs support (EPMF) with an overall contribution (EU commitments) of more than EUR 1.6 billion, mobilised lending of nearly EUR 17.9 billion and also supported equity investments of about EUR 2.8 billion, thus enhancing access to finance for more than 336,000 SMEs.

In consequence of the expanded role of financial instruments, the SWD thus provides not only quantitative data on performance of financial instruments such as leverage and volume of financing supported, but also analyses the macro-financial context of potential final recipients and financial intermediaries, describing general market developments in the EU policy areas supported and their implications for the financial ecosystem.

The SWD is divided into six parts. After the initial part (Part I), it offers an executive summary (Part II) and an extensive overview table (Part III) of the financial instruments covered.

Thereupon, with the aim to provide a rationale for use of financial instruments in a given policy area, the general context (Part IV) describes the EU economic environment in 2013 taking into consideration strategic target groups, sectors, and non-EU regions, and a specific section (Part V) illustrates further implications of the use of those instruments.

Finally, the detailed information on each financial instrument can be found in "Information on financial instruments according to Article 140(8) of the Financial Regulation" (Part VI). This part is divided into six chapters dealing with equity instruments, guarantee instruments, risk-sharing instruments, and dedicated investment vehicles, as well as instruments in the enlargement and neighbourhood countries and in countries covered by the Development Cooperation Instrument.

II. EXECUTIVE SUMMARY 1. Strategic Target Groups

1.1. EU SMEs and Small Midcaps

Generally, SMEs emerge as the business category experiencing particular difficulties in accessing finance, and all the more so since the start of the financial and sovereign debt crises.

Since SME loan volumes have contracted and conditions have worsened – at least in part due to market failures linked to asymmetric information – several guarantee facilities have been set up to extend more loan volumes at better conditions to a riskier set of enterprises. These facilities aim to foster the development of a pan-European SME finance market as well as address market failures that are more appropriately tackled at EU level given their widespread nature, their potential to achieve economies of scale and their suitability to diffuse best practices:

The SME Guarantee Facility (SMEG07) under the Competitiveness and Innovation Framework Programme (CIP) has been enhancing access to debt finance for small and medium-sized enterprises (SMEs). As a result, 311,633 SMEs benefited from EUR 16,108.5 million in guaranteed loans over 2007-2013. The COSME Loan Guarantee Facility, the successor of SMEG07, will provide SMEs with capped guarantees for debt financing via loans or leasing, which aims to reduce the particular difficulties that viable SMEs face in accessing finance due to their perceived high risk or lack of sufficient available collateral. It is estimated that the cumulative total amount of financing mobilised for 2014-2020 will range from EUR 14.3 to 21.5 billion; for 2014, the overall value of financing supported by the Union contribution is expected to range from EUR 2 to 3 billion. The Risk Sharing Instrument (RSI) under the 7th Framework Programme is a guarantee facility dedicated for loan and lease finance addressing the finance gap for innovative SMEs and Small Midcaps (enterprises with up to 499 employees). The Risk-Sharing Instrument has so far provided over EUR 1.59 billion in guarantees and counter-guarantees to 37 banks and guarantee societies: this will enable them to support up to an estimated 3000 innovative SMEs and small midcaps. Furthermore, for the period 2014-2020, it is expected that the successor facility InnovFin SME Guarantee under Horizon 2020 with an Union contribution of around EUR 1 billion could mobilise a total loan volume of around EUR 9 billion. For 2014, the overall value of financing supported by the Union contribution is expected to be around EUR 700 million. The Cultural and Creative Sectors Guarantee Facility under Creative Europe programme shall provide guarantees to banks dealing with cultural and creative SMEs, thereby strengthening the financial capacity of the cultural and creative sectors. The guarantee scheme will begin in 2016 and the overall amount of loans supported by the Union contribution of EUR 120 million until 2020 is estimated to hover around EUR 700 million of additional financing in these sectors. The EU SME Initiative, designed as a crisis-response instrument, will provide uncapped guarantee and/or securitisation to improve access to finance for SMEs including innovative SMEs as well as high risk SMEs. The Initiative is a joint-instrument, combining EU funds available under COSME and Horizon 2020 and ERDF-EAFRD resources in cooperation with EIB/EIF in view of generating additional lending to SMEs. With a commitment from aggregate ESIF amount of up to EUR 815 million, the volume of SME loans supported in the participating Member States (ES and MT) is expected to reach some EUR 4 billion.

SMEs also endure particularly challenging conditions in raising equity capital, for European venture capital has suffered a slow-down in private equity activity during the period 2008-2013 in terms of fund raising, investment levels and divestment conditions, and it remains fragmented across countries and dependant on a lifeline from public investors.

Support via EU-level financial instruments is key to tackling this fragmentation, as truly multi-country funds often face difficulties in obtaining support from national programmes. Thus, several equity finance facilities have been set up, with the purpose of strengthening the internal market for venture capital by tackling the market failures encountered, especially by early stage SMEs that have the potential to achieve high growth, to bring innovation to the market and to create high added value jobs:

The High Growth and Innovative SME Facility (GIF) under the CIP aims to increase the supply of equity for innovative SMEs in their early stages (GIF1) and in the expansion phase (GIF2). By the end of 2013, a total of EUR 587.1 million in net commitments from the Union budget supported 46 venture capital funds and 349 investees, catalysing nearly EUR 2.8 billion in equity finance. The Equity Facility for Growth (EFG) under COSME, the successor of GIF2, shall aim to stimulate the take-up and supply of equity finance for SMEs in their expansion phase. For the 2014-2020 period, it is expected that an indicative commitment amount of EUR 633 million will support venture capital investments in the order of EUR 2.6 to 3.9 billion, going to some 360 to 540 SMEs. The InnovFin SME Venture Capital under Horizon 2020, the successor of GIF1, is designed to improve access to risk finance by early-stage R&I-driven SMEs and small midcaps. A commitment of EUR 430 million indicatively foreseen for the period 2014-2020 is expected to support around EUR 2.5 billion of equity financing.

1.2. EU Microenterprises

The European microfinance sector is characterised by continuously decreasing bank lending, the limited capacity of national governments to support microfinance and the strong demand for microfinance on the market. This suggests that there is still a clear rationale for intervention at EU-level by providing risk-sharing solutions to microfinance providers.

More specifically, "in several EU member states high levels of youth unemployment call for ongoing support of inclusive entrepreneurship as an option to (re-)enter the labour market. Microloan provision is an important tool for this."[3] The large diversification of both institutional actors and products offered calls for specific micro-finance facilities, which aim at easing loan and equity access for micro-enterprises, who continue facing more difficulties than other SMEs:

The European Progress Microfinance Guarantee Facility, as part of the PROGRESS programme (2007-2013) provides up to 20% capped guarantees on portfolios of micro-credit loans granted by intermediaries to micro–enterprises. Furthermore, the Fonds Commun de Placement – Fonds d’Investissement Spécialisé under this Programme is a specialised investment fund whose objective is to increase access to a range of financial products and services in the area of microfinance.

As of 30 September 2013, both instruments provided 13,850 micro-loans to final recipients reaching the volume of EUR 133 million, compared to the initial programme target of 46,000 micro-loans with the volume of EUR 500 million. The Facility is on track to reach the initial programme target, as new loan inclusions will take place until 2018.

2. EaSI Microfinance and Social Enterprise – Microfinance, the successor of both instruments, will aim at increasing access to microfinance for vulnerable groups, by providing support to microfinance providers. The indicative EU contribution of EUR 86 million will target to support 41.000 microloans, worth around EUR 440 million to be provided to final recipients.

2. Strategic Sectors

2.1. Research and Innovation (R&I)

Evidence that larger, established R&I-intensive firms have problems in accessing debt finance to fund innovation projects is mixed and harder, methodologically, to establish. However, a recent econometric study[4] as well as empirical experience suggest that demand for the debt financing of R&I is much higher than what the market currently provides.

To address R&I financing needs, which can hardly be met at the national level, the Commission has set up the Risk-Sharing Finance Facility (2007-2013) and its successor InnovFin Large Projects, InnovFin MidCap Growth Finance and InnovFin MidCap Guarantee under Horizon 2020:

The Risk-Sharing Finance Facility (2007-2013) and its successor Loans Service for R&I (2014-2020) both offer loans and hybrid or mezzanine finance to improve access to risk finance for R&I projects. The 2007-2013 Union contribution of EUR 960 million under RSFF supported an active accounting for over EUR 15 billion, whereas the 2014-2020 Union contribution of EUR 1 billion under the successor is expected to support debt financing of at least EUR 5 to 6.5 billion before the end of 2020.

2.2. Infrastructure and Energy Efficiency

Infrastructures in the transport, telecommunications and energy sectors perform a crucial role in both development and sustainable growth, in contexts where private enterprises of all sizes and public entities interact to provide the necessary output. Infrastructure improves the productivity of the economy, enabling growth, and facilitates the interconnection of the internal market.

Also, energy efficiency and its promotion are becoming increasingly important within the Union, in particular in view of the achievement of the Union’s 2020 20% headline target on energy efficiency and of further energy efficiency objectives beyond that date.

The goal of the EU financial intervention in these sectors is to contribute to overcoming the deficiencies of European capital markets. The summary below comprises EU financial instrument programmes for different sub-sectors (transport and energy infrastructure, energy efficiency including environment and climate action and ICT) launched in the 2007-2013 period:

The Loan Guarantee Instrument for Trans-European Transport Network Projects (LGTT) is a debt instrument for project finance. To date, six TEN-T projects worth a cumulated capital cost of EUR 11,716 million have been supported, using almost EUR 500 million of guarantees and attracting EUR 6 billion of private financing. The Pilot Phase of the Project Bond Initiative (PBI, MFF 2007-2013) & the Risk sharing debt instrument under the Connecting Europe Facility (CEF) including the PBI.

The Project Bond Initiative aims to stimulate capital market financing for infrastructure projects in the areas of Trans-European networks in transport and energy as well as broadband networks. Several transactions have reached financial close under the Pilot Phase of the PBI so far; in 2013, the Union contribution under TEN-E of EUR 10 million supported a project bond-credit enhancement of EUR 54.9 million for a project size of EUR 421 million. Moreover, in 2014 the Union contribution under TEN-T supported the financing of a Greenfield transport project for A11 Motorway in Belgium through a EUR 578 million-project bond issue (with a EUR 115 million EU contribution) and of the new A7 Autobahn in Germany through a EUR 430 million project bond issue (with a EUR 85 million contribution).

In addition, also in 2014 the budget contribution of EUR 20 million for the ICT sector enabled credit enhancement of ca. EUR 38 million in support of a ca. EUR 189 million bond issue by a French provider of broadband services.

The Risk sharing debt instrument including the PBI will target projects of common interest in the sectors of transport, broadband, and energy networks. The expected Union contribution of EUR 121 million in 2014 is estimated to support financing for EUR 720-1,800 million.

The Equity Instrument under the Connecting Europe Facility (CEF) will aim to provide risk capital for actions contributing to projects of common interest in the field of transport, energy and broadband. The goal of the instrument shall be to attract capital market financing by providing equity and quasi-equity investments to European infrastructure projects. The instrument will be designed at a later stage. The Private Finance for Energy Efficiency Instruments (PF4EE), financed under the LIFE programme, shall provide inter alia a Risk Sharing Facility, designed to reduce the credit risk faced by financial intermediaries when lending to the energy efficiency sector. The Union budget commitment of EUR 80 million is expected to support a total investment up to about EUR 650 million for 2014-2020. The 2020 European Fund for Energy, Climate Change and Infrastructure – (Marguerite) is a Pan-European equity fund which supports infrastructure investment within the transport (TEN-T), energy (TEN-E) and renewables sectors in MS. The Union contribution of EUR 80 million is expected to support funding volumes around EUR 10.2 billion. The European Energy Efficiency Fund (EEEF), a spin-off of the European Energy Programme for Recovery (EEPR), invests in energy efficiency, renewable energy projects, and clean urban transport. By the end of March 2014, the Fund fully allocated the EU contribution (EUR 125 million) for a total of EUR 219 million investment in projects. From the Technical Assistance envelope, EUR 17.7 million has been allocated to support project preparation by the same date. The Natural Capital Financing Facility (NCFF) will finance upfront investment and operating costs for revenue-generating or cost-saving pilot projects, which promote the conservation, restoration, management, and enhancement of natural capital in the areas of Nature and Biodiversity and Climate Change Adaptation. The initial Union contribution is foreseen at EUR 60 million.

2.3. Social Enterprises

Among the business suffering from access to credit difficulties, social enterprises qualify as deserving particular attention due to the correlation between social capital and economic growth. Their primary objective is the achievement of measurable and positive social impacts.

The fact that social enterprises are not primarily seeking the maximisation of profits exposes them, however, to more acute difficulties in accessing finance, due to the reluctance and difficulty of traditional bankers to assess their business plans. A new financial instrument provided by the EU in 2014-2020 for social enterprises is the EaSI Microfinance and Social Enterprise – Social Enterprise, which aims to support the development of social enterprises.

2.4. Education

Education, as a form of human capital accumulation, is a primary source of economic growth; yet, to the extent it is made accessible to students of different social and economic backgrounds, it also contributes to social equity and cohesion. Moreover, student mobility represents a key factor, which has been proven to significantly affect social and economic development.

A new EU financial instrument – The Student Loan Guarantee Facility ('Erasmus + Masters Loans', a guarantee facility under the Erasmus+ programme) – will aim to support mobility, equity and study excellence via guarantees to financial institutions which agree to offer loans for Master's studies in other Programme countries on favourable terms for students. The Union contribution of EUR 517 million foreseen for 2014-2020 is expected to support loans for up to EUR 3 billion.

3. Strategic Non-EU Regions

3.1. Enlargement Countries

Access to loan finance remains one of the biggest difficulties for SMEs in the Western Balkans, in spite of SMEs becoming the most efficient segment of their economies' transition and a pillar for growth and employment. In addition, access to bank financing for SMEs in their early stage is almost impossible due to their lack of financial history and access to finance in the energy sector appears rather vulnerable.

The Guarantee Facility under the Western Balkans Enterprise Development and Innovation Facility aims to enhance socio-economic growth of the Western Balkans by promoting preconditions for the emergence and growth of innovative and high-potential companies. The Union contribution of almost EUR 22 million committed under the Facility is estimated to support a total investment of more than EUR 110 million. The Enterprise Expansion Fund (ENEF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) aims to enhance socio-economic growth in the Western Balkans by creating the preconditions for the emergence and growth of innovative and high-potential companies. The financial envelope of EUR 11 million will leverage a total investment by other investors in ENEF of EUR 55 million. On the whole, given the association of ENEF to EBRD’s co-financing facility, the Union contribution will support an overall investment amount of approximately EUR 110 million to final recipients. The Enterprise Innovation Fund (ENIF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) contributes to the enhancing of socio-economic growth in the Western Balkans, through the setting up of preconditions for the emergence and growth of early stage innovative companies. The Union contribution of EUR 21 million committed under the instrument is expected to support an investment of approximately EUR 40 million over the 2014-2020 period. The European Fund for Southeast Europe (EFSE) is a form of public-private-partnership, with the objective of attracting capital from the private sector. The Union contribution of EUR 83.9 million supports a total investment in the Enlargement region of EUR 580 million. In 2010, the Group of 20 (G-20) selected EFSE as the best worldwide model of catalysing finance for small and medium enterprises (SME) through the online competition “G-20 SME Finance Challenge.” The Green for Growth Fund (GGF) provides dedicated financing for energy efficiency and renewable energy projects to help the target countries reduce CO2 emissions and energy consumption. The Union contribution of EUR 38.6 million committed to this Fund is expected to leverage a total investment of EUR 200 million to final recipients. The SME Recovery Support Loan for Turkey aims to mitigate the crisis impact for SMEs and contributes to the development of the Turkish economy and employment sector. The Union contribution amounts to EUR 30 million and has mobilised a total of EUR 150 million in lending.

3.2. Neighbourhood Countries[5]

The EU funded programmes aim to foster sustainable, inclusive growth and a favourable investment climate in the European Neighbourhood Policy (ENP) partner countries. Indeed, establishing better energy and transport infrastructure interconnections between the EU and neighbouring countries, addressing threats to our common environment and promoting smart growth through support of small and medium enterprises represent the strategic objectives to which the EU is committed in pursuing its neighbourhood policies:

The Neighbourhood Investment Facility (NIF) aims to increase energy and transport infrastructure and interconnectivity in the region, addressing threats to the environment including climate change, promoting socio-economic development through support for SMEs and the social sector. For the period 2007-13, some EUR 753 million committed to the Facility have leveraged EUR 9.6 billion in loans from European Financial Institutions, with total project costs estimated at EUR 20.8 billion.

2. The Support to the Facility for Euro-Mediterranean Investment Partnership (FEMIP) provides capital to the private sector of Mediterranean partner countries pari passu with other commercial investors in the region. The current overall Union contribution under the programme is EUR 224 million.

3.3. Countries covered by the Development Cooperation Instrument (DCI)

The lack of a well-established institutional framework able to ensure property rights, address market failures and provide incentives for private initiatives in some non-European countries often accounts for the underdevelopment of the SME sector, the shortage of infrastructures and the deficiency of the overall investment level in health, education and environmental protection. Addressing these problems by financing worthy SMEs, infrastructure and productive investments is the main challenge for the EU in its external policy:

1. The Investment Facility for Central Asia (IFCA) & Asian Investment Facility (AIF) aim to promote additional investments and key infrastructures with a priority focus on better energy infrastructure, increased protection of the environment and growth of SMEs. The current overall budget is EUR 145.56 million. So far, IFCA contributions of EUR 64 million leveraged approximately EUR 425 million in financing whereas AIF contributions of EUR 36 million leveraged approximately EUR 889 million in financing.

2. The Latin America Investment Facility (LAIF) aims to promote additional investments and infrastructures in the transport, energy, and environment sectors and to support social sectors and private sector development in the Latin American countries. So far, the Union contribution of EUR 189.6 million (including the additional funds from the Climate Change Window) enabled approval of 25 projects, mobilising a total investment amount of EUR 5.5 billion.

3. The Global Energy Efficiency and Renewable Energy Fund (GEEREF) aims to promote energy efficiency and renewable energy in developing countries and economies in transition. The Union contribution was raised to EUR 101 million (Union budget + EDF). The Fund currently maintains an active pipeline of five potential private equity fund investments which are targeting to mobilise approximately EUR 500 million in equity capital for renewable energy and energy efficiency projects in Africa, Asia, and Latin America.

III. OVERVIEW TABLE

|| Organization || Policy || Implementation || Draft Budget 2015 || Financial Accounting Data ||

Financial Instruments || Type || New /Old || Basic Act || DG in charge || IB[6] || Objective || Final Recipients || Sector || Indicative Aggr. Budget Envelope || Aggr. Commit-ment 2007-213 || Aggr. Payment 2007-13 || Indicative Commit-ments || Indicative Payments || Reve-nues and Repayments || Impair-ments/ Called Gua-rantees || AdminExpen-diture [7] ||

GIF (CIP)* || E[8] || Old || Dec N° 1639/2006/EC || DG ENTR ECFIN || EIF || Increase the supply of equity for innovative SMEs || SMEs || SMEs with no specific sector / innovative || EUR 605.70 mln || EUR 625.20 mln || EUR 338.93 mln || not appl. || Total CIP (equity and loan guarantee): EUR 95 mln || EUR 19.47 mln || EUR 2.69 mln || EUR 16.78 mln ||

CEF Equity Instruments || E || New || Reg. N° 1316/ 2013 || DG MOVEENER CONN-ECT || EIB || Provide equity & quasi-equity investments in transport, energy telecom || Infra- structure Projects || Transport Energy Telecom || n/a || n/a || n/a || Total CEF (equity AND debt): EUR 154,1 mln || Total CEF (equity AND debt): EUR 105,9 mln || n/a || n/a || n/a ||

EFG (COSME) || E || New || Reg. N° 1287/ 2013 || DG ENTR || EIF || Increase the supply of equity for SMEs || SMEs || SMEs with no specific sector focus || EUR 633.00 mln || n/a || n/a || EUR 70.75 mln || Total COSME (equity and loan guarantee): EUR 99,2 mln || n/a || n/a || n/a ||

InnovFin SME Venture Capital (H2020) || E || New || Reg. N° 1291/ 2013; 1290/ 2013 || DG RTD || EIF || Improve access to risk finance by early-stage R&I-driven SMEs and small midcaps || Innovative SMEs & Small Midcaps || R&I || EUR 430.00 mln || n/a || n/a || EUR 50.00 mln || EUR 50.00 mln || n/a || n/a || n/a ||

SMEG07 (CIP)* || G[9] || Old || Dec N° 1639/ 2006/EC || DG ENTR ECFIN || EIF || Increase the supply of debt financed to SMEs || SMEs || SMEs with no specific sector focus || EUR 637.80 mln || EUR 649.90 mln || EUR 259.70 mln || not applicable || Total CIP (equity and loan guarantee): EUR 95 mln || EUR 12.09 mln || EUR 116.55 mln || EUR 12.51 mln ||

EPMF-G* || G || Old || Dec N° 283/ 2010/EU || DG EMPL ECFIN || EIF || Enhances access to microfinance by reducing microfinance providers' risk || Micro-enterprises/ Households || Micro-finance/ no specific focus || EUR 23.60 mln || EUR 23.80 mln || EUR 17.50 mln || not applicable || EUR 8.2 mln[10] || EUR 0.21 mln || EUR 1.35 mln || EUR 1.65 mln ||

EaSI || G || New || Reg. (EU) N ° 1296/ 2013 || DG EMPL ECFIN || n/a || Microfinance for vulnerable groups/ Support social enterprises || Micro-enterprises/ Households || Micro-finance || EUR 193.00 mln || n/a || n/a || EUR 24.96 mln || EUR 11.84 mln || n/a || n/a || n/a ||

Loan Guarantee Facility (COSME) || G || New || Reg. (EU) N° 1287/ 2013 || DG ENTR || EIF || Increase the supply of debt financed to SMEs || SMEs || SMEs with no specific sector focus || EUR 686.00 mln || n/a || n/a || EUR 90.76 mln || Total COSME (equity and loan guarantee): EUR 99.2 mln || n/a || n/a || n/a ||

RSI (2007-2013) || G || Old || Reg. (EU) N ° 1291/ 2013; 1290/ 2013 || DG RTD || EIF || Address the financing gap for innovative SMEs and Small Midcaps || Innovative SMEs & Small Midcaps || R&I || EUR 270.00 mln || EUR 270.00 mln || EUR 270.00 mln || not applicable || not applicable || Incl. under RSFF || Incl. under RSFF || Incl. under RSFF ||

InnovFin SME Guarantee (H2020) || G || New || Reg. (EU) N° 1291/ 2013; 1290/ 2013 || DG RTD || EIF || Address the financing gap for innovative SMEs and Small Midcaps || Innovative SMEs & Small Midcaps || R&I || EUR 1,060.00 mln[11] || n/a || n/a || EUR 101.10 mln || EUR 101.10 mln || n/a || n/a || n/a ||

The CCS[12] Guarantee Facility || G || New || Reg. (EU) N° 1295/ 2013 || DG EAC || EIF || Strengthen the competitiveness of the cultural and creative sectors || SMEs || Arts & Culture || EUR 121.00 mln || n/a || n/a || EUR 1.00 mln || EUR 0.70 mln || n/a || n/a || n/a ||

Student Loan Guarantee Facility || G || New || Reg. (EU) No 1288/ 2013 || DG EAC || EIF || Support mobility, equity and study excellence || Students || Education || EUR 517.00 mln || n/a || n/a || EUR 33.00 mln || EUR 15.30 mln || n/a || n/a || n/a ||

PF4EE || G || New || Reg. (EU)N° 1293/ 2013 || DG CLI-MA || EIB || Support access to finance and/or better financing conditions to EE investors || Private individuals, associations SMEs || Energy || EUR 80.00 mln || n/a || n/a || EUR 20.00 mln || EUR 27.50 mln || n/a || n/a || n/a ||

RSFF (2007-2013) || RS[13] || Old || Reg. (EU) N° 1291/ 2013; 1290/ 2013 || DG RTD || EIB || Improve access to risk finance for R&I projects || Large firms, large & medium Midcaps, Research Institutes || R&I || EUR 960.73 mln || EUR 960.73 mln || EUR 960.73 mln || not appl. || not appl. || EUR 95.03 mln || None[14] || EUR 78.40 mln ||

InnovFin Large Projects InnovFin MidCap Growth Finance InnovFin MidCap Guarantee (H2020) || RS || New || Reg. (EU) N° 1291/ 2013; 1290/ 2013 || DG RTD || EIB || Improve access to risk finance for R&I projects || Large firms, large & medium Midcaps, Research Institutes || R&I || EUR 1,060.00 mln || n/a || n/a || EUR 97.50 mln || EUR 97.50 mln || n/a || n/a || n/a ||

LGTT || RS || Old || Reg. (EC) N° 680/ 2007; 670/2012 || DG MOVE || EIB || Enhance risk-sharing in transport infrastructure for TEN-T projects || Infra- structure Projects || Transport || EUR 250.00 mln || EUR 250.00 mln || EUR 155.00 mln || not appl. || EUR 45.00 mln || EUR 13.99 mln || none || EUR 6.49 mln ||

Pilot Phase of the Project Bond Initiative || RS || Old || Reg (EU) N° 670/ 2012; 1316/ 2013 || DG MOVEENER CONN-ECT || EIB || Stimulate capital market financing for infrastructure projects || Infra- structure Projects || Transport, Energy, Broadband || EUR 230.00 mln || EUR 230.00 mln || EUR 67.00 mln || n/a || n/a || EUR 1.9 mln || none || EUR 4.28 mln ||

Risk Sharing debt instruments (CEF) || RS || New || Reg. (EU) N° 670/ 2012; 1316/ 2013 || DG MOVEENER CONN-ECT || EIB || Stimulate capital market financing for infrastructure projects in transport, energy, broadband networks || Infra- structure Projects || Transport, Energy, Broadband || EUR 3,300.00 mln || n/a || n/a || See CEF Equity Instruments (row 2) || See CEF Equity Instruments (row 2) || n/a || n/a || n/a ||

NCFF || RS || New || Reg. (EU) N° 1293/ 2013 || DG ENV CLI-MA || EIB || Promote the preservation of natural capital || Infra- structure Projects || Environment || EUR 60.00 mln || n/a || n/a || EUR 20.00 mln || EUR 16.00 mln || n/a || n/a || n/a ||

EU SME Initiative || RS || New || Reg (EU) N° 1287/ 2013; 1291/ 2013; 1303/ 2014 || DG REGIORTD ENTR AGRI || EIF || Enhance SMEs financing || SMEs || SMEs with no specific sector focus || up to EUR 815 mln || n/a || n/a || EUR 12.00[15] mln || EUR 20.00[16] mln || n/a || n/a || n/a ||

FCP-FIS (PMF FCP-FIS) || DIV || Old || Dec N° 283/2010/EU || DG EMPL ECFIN || EIF || Increase access to microfinance || Micro-enterprises/ Households || Micro-finance/ no specific focus || EUR 80.00 mln || EUR 80.00 mln || EUR 63.43 mln || not applicable || EUR 8.2 mln[17] || n/a || none || EUR 3.08 mln ||

Marguerite || DIV || Old || Reg. (EC) N° 680/2007 || DG MOVEECFIN || M.A.[18] || Support infrastructure investment: transport, energy, renewables sectors || Infra- structure Projects || Transport, Energy, Environ-ment || EUR 80.00 mln || EUR 80.00 mln || EUR 28.52 mln || not applicable || EUR 16.10 mln || n/a || none || EUR 4.31 mln ||

EEEF || DIV || Old || Reg. (EU) N ° 1233/ 2010 || DG ENER || Deut-sche Bank || Invest in energy efficiency, renewable energy, clean urban transport || Infra- structure Projects || Energy || EUR 146.34 mln || EUR 146.3 mln || EUR 55.8 mln || not applicable || EUR 20.00 mln || n/a || none || EUR 3.17 mln ||

Guarantee Facility under the WBEDIF[19] || EnC[20] || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIF || Create the preconditions for the emergence and growth of innovative and high-potential companies || SMEs || SMEs with no specific sector focus || EUR 21.90 mln || EUR 21.90 mln || EUR 21.90 mln || **** || **** || n/a || n/a || EUR 1.35 mln ||

ENEF under EDIF || EnC || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIF || Enhance socio-economic growth of the Western Balkans through equity investments || SMEs || R&I || EUR 11.00 mln || EUR 11.00 mln || EUR 10.40 mln || **** || **** || n/a || n/a || n/a ||

ENIF under EDIF || EnC || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIB, EIF, EBR-D, KfW || Enhance socio-economic growth of the Western Balkans through equity investments || SMEs || R&I || EUR 21.20 mln || EUR 21.20 mln || EUR 21.20 mln || **** || **** || n/a || n/a || n/a ||

EFSE || EnC || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIF || Extend loans to local comm.banks and micro-finance institutions in the Western Balkans || Micro-enterprises/ Households || Micro- finance/ no specific focus || EUR 83.90 mln || EUR 26.20 mln || EUR 26.00 mln || EUR 0.00 mln || EUR 0.00 mln || n/a || n/a || EUR 0.53 mln ||

GGF || EnC || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIF || Provide dedicated financing for energy efficiency and renewable energy || Micro-enterprises/ Households || Energy || EUR 38.60 mln || EUR 19.58 mln || EUR 19.58 mln || EUR 0.00 mln || EUR 0.00 mln || n/a || n/a || EUR 0.31 mln ||

SME Recovery Support Loan for Turkey || EnC || Old || Reg. (EC) N°1085/2006 || DG ELAR || EIB || Mitigate the crisis impact for SMEs and contribute to the development of the Turkish economy and employment || SMEs || SMEs with no specific sector focus || EUR 30.00 mln || EUR 30.00 mln || EUR 30.00 mln || not applicable || EUR 0.00 mln || n/a || n/a || EUR 0.36 mln ||

NIF** || NDC[21] || Old || Reg. (EC) N° 1638/ 2006 || DG DEV-CO || EFI[22] || Mobilise investments to support prosperity and good neighbourliness || Infra- structure Projects, SMEs || SMEs, Environment., Energy, Water/Sanit., Social Sector, Transport || EUR 789.42 mln || EUR 777.42 mln || EUR 422.46 mln || *** || *** || n/a || n/a || EUR 10.76 mln ||

IFCA & AIF || NDC || Old || Reg. (EC) N° 1905/ 2006 || DG DEV-CO || EFI || Promote investments and key infrastructure || Infra- structure Projects || SMEs, Environment, Energy, Water/Sanit., Social Sector, Transport || EUR 145.56 mln || EUR 145.57 mln || EUR 31.01 mln || *** || *** || n/a || n/a || EUR 3.04 mln ||

LAIF || NDC || Old || Reg. (EC) N°1905/2006 || DG DEV-CO || EFI || Promote investments and infrastructures || Infra- structure Projects, SMEs || SMEs, Environment,Energy, Water/Sanit., Social Sector, Transport || EUR 196.65 mln || EUR 196.65 mln || EUR 78.88 mln || *** || *** || n/a || n/a || EUR 3.52 mln ||

Support to FEMIP || NDC || Old || Reg. (EC) N°1638/2006 || DG DEV-CO || EIB || Provide capital to the private sector of Mediterranean partner countries || SMEs || Private Sector || EUR 224.00 mln || EUR 224.00 mln || EUR 192.00 mln || *** || *** || EUR 3.43 mln || EUR 5.99 mln || EUR 18.75 mln ||

GEEREF || NDC || Old || Reg.(EC) N°1905/2006 || DG DEV-CO || EIB,EIF || Promote energy efficiency and renewable energy || SMEs || Energy || EUR 76.10 mln || EUR 76.10 mln || EUR 75.00 mln || *** || *** || n/a || n/a || EUR 0.48 mln ||

|| || || || || || || || || || || || || || || || ||

General Remark: in heading 1a, most of existing instruments under the 2007-2013 programmes are referred as "not applicable" in DB 2015 indicative commitment column as no commitment can be done after the legal act has expired. ||

*The executed budget is computed including EFTA contributions and third countries contribution paid by Participating Countries and/or regularised interest. ||

**Compared to Art.38,5, the executed budget includes also EUR 12 million stemming from the regional programme in the Neighbourhood for Sustainable Urban Demonstration Projects of which part is implemented through NIF ||

*** The level of commitments and payments for 2015 for the financial instruments concerned is not yet known. Currently the discussions concern the annual budgetary allocations for different blending facilities (regrouping various financial instruments) for 2014. Financial instruments being regrouped in blending facilities are financed via the regional envelopes of the different instruments (e.g. DCI, ENI) and currently the regional Annual Action Plans are being prepared to be submitted to the different Committees. ||

**** EDIF (Enterprise Development and Innovation Facility) comprises the Guarantee Facility, ENEF and ENIF. EUR 20 million is indicatively foreseen in CA and PA for the EDIF under the DB 2015. ||

IV. GENERAL CONTEXT 4. The EU Economic Environment in 2013

While GDP growth has turned positive in the second quarter of the year, increasingly driven by domestic demand, the legacy of the financial crisis – deleveraging, financial fragmentation, elevated uncertainty and rebalancing needs – has continued during 2013 to weigh on EU and EA growth (+0.1% and -0.4%, respectively) and on unemployment rates (10.9% of the EU labour force). EU GDP is now expected to rise by 1.5% in 2014 and 2.0% next year, while GDP growth in the euro area is expected to be 1.2% in 2014 and 1.8% in 2015.

Graph 1: Real GDP, EU

Figures above horizontal bars are annual growth rates. Source: European Commission "Winter Economic Forecast," 2014

Insofar as debt in several sectors of the economy remains too high, unemployment is at record levels and the adjustment of previous imbalances is incomplete, EU growth risks remaining stuck in low gear. Labour market conditions have stabilised in mid-2013, and employment appears to have turned the corner. Yet rather slow growth and the usual lags imply that unemployment has still remained close to its peak levels.

On the public finance side, after years of front-loaded fiscal consolidation, the aggregate fiscal stance has gotten close to neutral, although efforts are still required in a number of Member States. Headline fiscal deficits are set to shrink further in 2014 (to around 2.7% of GDP in the EU and 2.5% of GDP in the euro area) before stabilising in 2015 assuming no policy change.

After lacklustre 2013, economic activity outside the EU is expected to accelerate to about 4% this year and 4.5% in 2015. Global trade is forecasted to rise more than GDP, with world import growth doubling from 2.5% in 2013 to about 5% in 2014 and rising to 6% in 2015, reflecting both the strengthening of the global recovery and the impetus from trade-intensive sectors.

Over the forecast horizon, oil prices are assumed to continue declining, supported by adequate supply. The nominal exchange rate of the euro against main trading partners (based on the technical assumption of unchanged nominal exchange rates) is now projected about 2% higher than last autumn.

On the financial side, financial markets in Europe have gone through a significant process of stabilisation over recent months. The reasons are several: a global reassessment of risk, some redirection of funds from emerging markets, a still accommodative monetary policy and firmer views on the economic situation and outlook.

Funding conditions have thereby improved considerably, due in particular to the progressive repair of bank balance sheets and the reduction in sovereign spreads of more vulnerable Member States.

Graph 2: Euro Area interest rates on loans to non-financial entities (1-year maturity)

Source: European Commission

However, the prospect of a gradual normalisation of benchmark interest rates and liquidity coexist with financial market fragmentation across Member States, which in 2013 has continued to reflect the sovereign debt crisis and the vicious spiral between sovereign and bank debt: on the one hand, Governments accumulate debt to support ailing banks, on the other EU banks look at treasuries as a preferred asset.

It is also because of financial fragmentation that credit growth and lending conditions, as well as Venture Capital provision for the private sector in general, and SMEs in particular, have not yet fully incorporated the change in the business climate and financial stability. So far, the recovery has remained essentially creditless.

Looking ahead, credit growth could remain anaemic if the implementation of the Banking Union and the Asset Quality Review (AQR) and stress tests fail to clean up balance sheets and restore confidence, in addition to the still high deleveraging needs in the private sector. The resulting prolonged weakness of credit supply would impose a limit on the recovery of investment.

Looking at the conditions of the real economy (non-financial businesses and consumers), the Economic Sentiment Indicator (ESI) reveals an increase in economic confidence throughout the year, to reach a value for the EU index of 103.5 in December, overshooting its long-term average of 100 for the first time since July 2011.

Graph 3: Economic sentiment indicator (s.a.)

Source: European Commission services

The Euro area Business Climate Indicator also signals an overall increase in business confidence throughout 2013. Business data, however, portray a more nuanced, if overall similar, picture. The data for 2013 indicate a slow recovery of industrial production in the EU, as expectations in manufacturing have become more optimistic since the beginning of 2013. Overall, services have been hit less badly than the construction, manufacturing and mining industries. Market services, information, & communication, and real estate activities have continued to grow during the crisis. Demand expectation for services closely follows that of manufactured goods. The indicator for services has been positive since early 2013 showing that the majority of service industries that participate in the survey believe that demand will increase in the coming months.

The most recent business surveys indicate that expectations of demand in services have been even more optimistic since summer 2013.[23]

5. Strategic Target Groups

The EU has identified recipients in the business sector characterised by a firm size, taking into account a threshold of 250 employees.

5.1. EU SMEs[24]

According to the UEAPME SME Business Climate Index, the overall business environment for European SMEs, which was deteriorating for four consecutive semesters, improved at the end of 2013 by more than 3%. The index (68.5%) for the second half-year of 2013 still stands below its neutral level of 70%, but it has already left the previous one of 65.3%, which represented the low point of the entire recession so far.

Graph 4: SME Business Climate Index

Source: EIF Small Business Finance Outlook, December 2013 (based on UEAPME Study Unit, 2013)

Note: The UEAPME SME Business Climate Index is calculated as the average of the current situation and the expectations for the next period, resulting from the sum of positive and neutral (meaning: no change) answers pertaining to the overall situation for the business. For example, for “semester A” with 25% positive, neutral 55%, and 20% negative answers, the Index would be (25 + 55 =) 80, and for “semester B” with 40% positive, 30% neutral, and 30% negative answers, it would fall to (40 + 30 =) 70. However, the respective balances of positive minus negative answers would show an opposite result, growing from “semester A” (25 – 20 =) 5% to “semester B” (40 – 30 =) 10%. Therefore, these balances should also be examined, and are reported in UEAPME’s EU Craft and SME Barometer.

The trend for the EU is rising, which could indicate that European SMEs are on their way out of the current recession. Remarkable progress can be noticed especially in the more vulnerable Member States. The SME Business Climate Index for these countries has increased by 7.5 % in the second half-year of 2013, which is higher than the increase in “the rest of the EU” (1.1 %). As a result, the imbalance between the two diverse country groups has diminished again, with the current gap equal to 7.3% (UEAPME Study Unit, 2013).

Credit growth and lending conditions for the private sector in general, and SMEs in particular, have not yet fully incorporated the change in the business climate and financial stability. In some large funding markets, such as in Spain or Italy, there is hardly any clear trend of business lending rates falling. Corporate lending rates are on average still around 4% in Spain or 3.5% in Italy. Not only have these rates hardly fallen over recent months and in Spain have even risen, but they remain in clear contrast with corresponding conditions in countries like Germany or France, with annual interest rates below 2%. In addition, using small loans (up to EUR 1 million and up to EUR 0.25 million) as a proxy for the financing cost of SMEs, it can be shown that financing conditions remain persistently tighter for SMEs than for large firms (ECB, Monthly Bulletin, May 2014), as a consequence of a supposed divergence in firm-specific risks.

This picture of still difficult conditions for corporate lending in some Member States and especially for SMEs has been compounded by the continued grim situation in regard to lending volumes: lending to enterprises is stagnating in Germany and France, and still falling by around 6% annually in Italy and Portugal and even more so in Spain. Using again small loans (below EUR 1 million) as a proxy, SME loan volumes decreased continuously by 36% from their April 2009 peak until June 2013, and are today 20% below their 2003 levels. Also small loans up to EUR 0.25 million (data available only since June 2010) are still in a declining trend. In comparison, large loans stand today 6% above their 2003 levels.

The situation is worse for SMEs undertaking R&I, as banks typically lack the ability to value knowledge assets, and are therefore often unwilling to invest in knowledge-based companies or do so only with a risk premium. In consequence, many established and innovative SMEs find it hard to obtain loans for R&I activities.[25]

The above is also valid for cultural and creative sectors SMEs. Due to sector specificities such as importance of intangible assets, lack of uniform sector definition, asymmetries of information, under-capitalisation, low investment readiness, atypical cash-flow plans and project-centric plans, the SMEs are perceived as riskier. This results in the reluctance of financial institutions to finance SMEs from the cultural and creative sector.[26]

5.1.1. Access to loan finance of EU SMEs

As a consequence of this bleak credit dynamics, access to finance is still among the top concerns of the EU's small and medium sized enterprises. Younger and smaller firms are the most badly affected, according to the latest "Access to Finance" survey covering the whole EU, released by the Commission and European Central Bank.

About one third of the SMEs surveyed have not managed to get the full financing they had planned for during 2013 and 15% of survey respondents see access to finance as a significant problem for their companies. 13% of SMEs loan applications were rejected and 16% of companies received less than they applied for. In addition, 2% declined the loan offer from the bank because they found the conditions unacceptable and 7% of SMEs were even too discouraged to ask, because of anticipated rejection. This was particularly the case for young companies: 11% of those who have been in business between 2 and 5 years did not apply for a loan because of possible rejection.

The survey also shows that SMEs are confronted with higher rejection rates compared to larger corporations, a feature magnified in vulnerable Member States. It is also younger and smaller firms that are more likely to obtain only part of the finance they request, or to be rejected outright. The highest rejection rate was among micro companies employing fewer than 10 people (18%) and among SMEs, which had been active for less than 2 years (28%). In general, companies believe that bank-financing conditions have worsened during 2013, with respect to interest rates and collateral requirements. Fig. 1 illustrates the change in availability of bank loans for SMEs in the euro area.

Graph 5: Change in availability of bank loans for euro area SMEs

(over the preceding 6 months; % of respondents)

Source: EIF Small Business Finance Outlook, December 2013 (based on ECB-European Commission: SAFE Survey, November 2013)

Based on Commission analysis,[27] it can be estimated that up to 10% of EU SMEs that have had difficulty in accessing loan finance[28] are in fact financially viable, in the sense that have experienced a positive turnover growth in the previous six months. The problem is compounded by the fact that a majority of SMEs look at external financing as their only source of financing, and bank loans are the primary external funding source for 32% of SMEs.

The above circumstances underline again the importance of the EU programmes and Facilities aimed at SMEs support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue.

5.1.2. Access to equity finance of EU SMEs

5.1.2.1. SMEs and the European Equity Market

By looking at the demand for equity financing, the latest Survey on Access to Finance of Small and Medium Enterprises in Europe (SAFE) shows that only 5% of EU SMEs used equity financing in the last six months in 2013, registering a decrease from the 7% measured in the 2011 wave. Access to equity financing is nearly twice as common among larger businesses (9% of those with 250+ employees) in the EU, reflecting SMEs' difficulties in accessing this specific financial instrument. Only 16% of EU SMEs were able to provide an opinion about the willingness of investors to invest in equity in the past 6 months, the great majority of SMEs considering this as not applicable to their firm. Among those EU SMEs expressing an opinion, most reported no change (12%), 2% reporting both an improvement and deterioration (overall net balance of -1%). This represents a small improvement on 2011 levels (-3%).

Source: EIF Small Business Finance Outlook, December 2013 (based on ECB-European Commission: SAFE Survey, November 2013)

Among the different opportunities of equity financing for SMEs, a crucial role is played by Venture Capital financing. Spanning from the seed to growth phase of companies' development, Venture Capital investments serve 86% of European SMEs seeking equity financing, and 78.5% in terms of total amounts invested to SMEs.[29]

For the purpose of this document, it is thus useful to focus on the Venture Capital market to gain a better understanding of the dynamics of equity financing of European SMEs.

5.1.2.2. Access to Venture Capital of EU SMEs

From a broad supply perspective, the structural challenges in the European Venture Capital market, the difficult fundraising environment, and the still somewhat risk-averse market sentiment, are all sources of significant problems for fund managers in the access to funding in general, and for new funds in particular. Moreover, as described in the Bain and Company 2013 report, markets for analysis are underdeveloped, and both private and public investors are disadvantaged in accessing credit information, and therefore find it harder to operate on an equal footing with established players in the debt-financing sector. This supports a view that public backing is necessary, especially for the early stage segment of the market.

The latest available figures from the EVCA 2013 European Private Equity Activity report point to the following trends in the European Venture Capital sector:

a) Fundraising

· Venture Capital fundraising in Europe totalled EUR 4 billion in 2013 which represents an increase of 4% compared to the EUR 3.9 billion raised in 2012 and is broadly in line with the lower volumes recorded since 2009. Government agencies remained the most prominent provider of funding, representing more than 38% of the total funds raised (compared to 14% in 2007).

· As regards the geographic breakdown, 47% of the funding came from France and Benelux region (Belgium, the Netherlands and Luxembourg), followed by 15% from the UK and Ireland and 13% from North America.

b) Investments

· The total amount of Venture Capital invested in 2013 reached EUR 3.4 billion, up 5% from the total investment volume of EUR 3.2 billion recorded in 2012. This figure is in the same order of magnitude as the volumes recorded each year since 2009 and significantly lower than pre-crisis levels.

· More than 3,000 companies were backed by Venture Capital funds in 2013. Start-up companies were at the centre of Venture Capital funds' attention, as they received 55% of the total amounts invested and represented 59% of the total number of supported companies.

· As regards sectors, life sciences, computer and consumer electronics, communications and energy, and environment accounted for more than 70% of all Venture Capital investments.

· In terms of geographic breakdown by equity amount invested in 2013, most of the Venture Capital funds' investment went to the France and Benelux region and to the DACH region (Germany, Austria and Switzerland), each receiving approx. EUR 1 billion of investments, followed by the UK and Ireland with EUR 0.7 billion.

c) Divestments

· Venture Capital divestments reached EUR 2.2 billion in 2013, up from the EUR 1.9 billion in 2012 but still well within the range of EUR 1.9 to 2.4 billion recorded since 2008. Trade sales were the most common exit routes, representing 54% of all divestments.

· The number of exited companies stood just below one thousand.

· The highest financial volumes earned in exits were realised in life sciences, computer and consumer electronics, and financial services.

Graph 6: Overview of the Venture Capital Market

Source: European Commission (2014), based on EVCA (2014)

In addition, while Seed/Start-up/Early Stage funds invested 98% of their capital in SMEs (representing 99% of their target group),[30] Private Equity funds operating in the Growth stage only invest 55% of their capital in SMEs (which still constitute 84% of their target group).

Moreover, in 2012, just under 40% of funding for Venture Capital came from government agencies, according to EVCA (2012 EVCA Yearbook), and the total amount raised from such agencies for Venture Capital funds in Europe was just under EUR 1.2 billion with government agencies significantly stepping up investments over the past few years. However, such efforts usually only target national Venture Capital markets, thus contributing less to the emergence of a robust pan-European Venture Capital industry, a crucial factor when it comes to the overall innovative and high-growth capacity of the EU economy.

Importantly, public grants usually dry up as a concept moves from the basic research stage through to applied research, and then to piloting, while private capital is not available until the later stages, when technological and commercial risks have diminished.[31]

5.1.2.2.1. Equity Financing Gap for Innovative SMEs

A recent study commissioned by the European Parliament's Committee on Industry, Research and Energy (ITRE)[32] draws on and synthesises the outputs of a wide range of sources to examine, amongst other topics, the interrelated questions of whether innovative EU SMEs suffer from an insufficient supply of Venture Capital and if Venture Capital funds suffer from a lack of demand for what these funds have to offer.

The study found that the supply of Venture Capital is low in Europe because many institutional investors either withdrew from the Venture Capital market following losses from the bursting of the dot.com bubble and have not returned, or, in the wake of the financial crisis, have ceased to invest in Venture Capital or have moved their focus from seed and start-up Venture Capital investments to later-stage Venture Capital or private equity investments. Europe lacks a pool of large pension funds, university endowments, foundations and family offices willing and able to fill the gap, though public efforts have gone some way to compensate[33], with government agencies significantly stepping up investments over the past few years:

Graph 7: Government investments and Venture Capital fundraising in EU

Source: EVCA

In addition, Europe suffers from a problem in the quality of the funds supplying Venture Capital: not many are large enough to attract institutional investors or sufficiently experienced in selecting promising companies. Furthermore, the persistent segmentation of the market along national lines reduces cross-border operations and undermines attempts to achieve economies of scale in both fund-raising and investment.

On the demand side, the study found that a common complaint of Venture Capital funds in Europe is the limited number of high-potential firms available for investing in, especially in the early stages, and particularly firms that can be expected to deliver an acceptable rate of return. The causes identified include low relative and absolute levels of R&D expenditure in most Member States, disadvantaging the generation of new ideas; insufficient investment in mechanisms supporting TT and commercialisation; lack of business skills on the part of company management teams and a raft of framework conditions linked to IP rights, public procurement practices, tax regimes, and the flexibility of labour markets.

In the study on financial instruments accompanying the impact assessment for COSME,[34] the authors reject the idea of equating the aggregate financing gap in the EU with the amount that would be needed to approach the ratio of Venture Capital investments to GDP found in the US. They argue that this method overlooks structural differences between the two economies and neglects issues of absorption capacity, such as difficulties in increasing the numbers of skilled Venture Capital fund-managers, or the dearth of investment opportunities. Instead, their approach is to target a doubling of the recent level of Venture Capital investments over five years, requiring, so the authors estimate, a progressively gap-filling increment of about EUR 800 million per year.

The above circumstances underline again the importance of the EU programmes and Facilities aimed at SMEs support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue of early-stage enterprises, including in their expansion phase. In this context, the equity instruments adopted by the EU represent an important measure to address equity financing gaps by leveraging EIB funds while minimising market distortions.

5.2. EU Midcaps[35]

While SMEs are at the centre of EU policy initiatives, mid-sized companies (usually defined as having 250-2999 employees) are increasingly recognised for their important role in growth and employment.

A recent study (PricewaterhouseCoopers 2012) estimates the number of mid-caps in the EU to be around 28,000, with about half of them being innovative midcaps. A great part of them has mainly relied on debt finance as their main source of external finance in the recent past. The study also suggests that the market gap in getting access to finance is smaller for mid-sized companies than for SMEs. Most recent data (ECB's January 2014 Bank Lending Survey) indicates that credit standards for loans to corporations, including mid-caps, continued to tighten albeit at a slowing pace, while for SMEs the situation improved for the first time since mid-2007, although in absolute terms still remaining worse than for mid-caps.

At this stage of the economic cycle and following the constraints posed for the whole EU economy by the financial crisis, mid-caps will play a key role in economic recovery, growth and employment in Europe.

Characteristically mid-sized or mid-cap companies benefit from better name recognition, longer credit history and better product track record than SMEs. In case of mid-sized companies with a stable growth trajectory, this reduces information asymmetries and allows them to have better access to finance than SMEs (1-250 employees), including access to capital market financing. But several mid-caps in the EU are facing the challenge of being obliged to expand and innovate or lose their competitive edge. Those mid-caps need usually to invest in research and development (R&D) and pursue a more active internationalisation strategy than SMEs, with the corresponding needs for equity and debt finance.

5.3. EU Micro-enterprises[36]

5.3.1. The European micro-finance market

The European microfinance market is as diverse as its actors. To a large extent this diversity of institutional forms is connected to national differences in the legal environment for loan provision and microenterprise promotion. The main institutional forms are Non-Governmental Organizations (NGOs) or foundations, Non-bank financial institutions, Microfinance Associations and banks. A recent increase in the market share of banks (from 8 to 10%) and credit unions/cooperatives denotes increased institutional diversification of the market.

The European microfinance sector is characterised by a large diversification of the products offered. The majority of the European MFIs provide their microloans as individual loans (92%), 27% of which are individual stepped loans. Unlike the international microfinance market, group loan approaches so far play only a minor role in the European market.

Based on a recent EIF survey among 35 microfinance institutions across the EU28, the average micro loan was reported to have featured an interest rate in the range of 8% - 10.7% and maturity in the range of 3.2 – 5.2 years. However, as previously stated, there are significant differences in the average micro loan pricing between banks, promotional institutions and non-bank MFIs.

The European microfinance sector consists mainly of microloans (up to EUR 25,000) tailored to micro-enterprises (92% of all European businesses).[37] In 2011, all MFIs covered by the EMN[38] Overview Survey disbursed 204,080 microloans (including personal loans) amounting to a total volume of around EUR 1,047 million. The EU-based organisations surveyed alone reported 122,370 loans with a total volume of EUR 872 million. The scale of microcredit provision in the EU continues to grow, mainly as a result of various enhancing measures in some national contexts (e.g. favourable regulatory frameworks, improved funding through EU initiatives, banks downscaling into microfinance).

When looking at the business climate of micro-enterprises, the EU Craft and SME barometer shows that, on balance, micro-enterprises assessed their overall situation less favourably than other SMEs in the first half of 2013. However, micro-enterprises, on balance, expected some improvement in their business situation in the second half of 2013 (a decline of 7.5% compared to a decline of 17.9% in the first half of 2013). Similar results were reported for the survey questions on turnover, employment and orders in the first half of 2013. Overall, micro-enterprises will continue facing more difficulties than other SMEs.

Source: UEAPME (2013)

Data from the latest ECB SAFE (Survey on the Access to Finance of SMEs in the Euro area) show that micro-enterprises reported “access to finance” as the second of their most pressing problems, while it is in fourth place of the “most pressing problems” for small enterprises, and sixth for the medium and large ones. Compared to the previous survey wave, the percentage of companies listing access to finance as their most pressing problem has decreased for all enterprises except for micro-enterprises.

5.3.2. Assessment of the European micro-finance market

National aggregate results from the latest EMN Overview Survey show that a total volume of EUR 2.4 billion was issued in the form of microloans in the EU-28 plus Switzerland, Norway and Iceland between 2010 and 2012. At the level of general supply of microfinance in Europe, commercial banks are expected to continue reducing their lending to small start-ups and micro-enterprises. If commercial banks continue to reduce their already limited exposure to risky small scale loan operations over the coming years, the financing gap for micro-financing may be expected to widen.

Results from Evers & Jung (2014, forthcoming) show that the aggregated EU-28 level demand for microloans, calculated along clusters of European countries, is estimated up to a total value of EUR 5.1 billion, highlighting a financing gap of around EUR 2.7 billion in terms of total volume issued.

Political attention on the sector has been high in the past two years, especially in Western Europe, where microfinance is positioned as an important instrument to counteract the effects of the ongoing crisis in job creation and access to finance. The EMN foresees a decline of the general public support for microfinance provision in the coming years, due to budget restrictions and high deficits at national and regional levels.[39] MFIs plan to react to this by developing more efficient and lean processes as well as by reducing costs. Many of them are already looking for additional sources of funding. Especially fast growing organisations report a need for additional equity to secure lending operations and to collect funding in the formal financial market. In this context, the micro-finance instruments adopted by the EU represent an important measure to address microenterprises' financing gaps by leveraging public and (possibly) private funds while minimising market distortions.

6. Strategic Sectors

At the sectorial level, the infrastructure sector performs a crucial role in both development and sustainable growth, in contexts where private enterprises of all sizes and public entities interact to provide the necessary output. Infrastructure improves the productivity of the rest of the economy, enabling growth, and facilitates the interconnection of the internal market.

The EU infrastructure market has been evolving extremely quickly. Whereas institutional investors in Europe were reluctant to enter the long-term infrastructure financing market until a couple of years ago, recent months have witnessed an increased liquidity in the market although largely targeted at a restricted number of countries and sectors. In this context, analysing the existing trends and correctly forecasting the medium-to-long-term orientation of the market will be crucial for creating successful financial instruments. A fundamental challenge for the EU will be to build capacity to perform such tasks covering a variety of sectors.

Investment needs for transport, energy, and telecom infrastructure networks of EU importance – that is, cross-border and of large amounts – are estimated at EUR 1 trillion for the period up to 2020. Significant investment will also be needed in human capital and in R&D, new technologies and innovation as well as energy efficiency under the Europe 2020 strategy and the 2030 climate and energy package. Given the scale of the investment required, the reduction in infrastructure investment by the majority of Member States, it is clear that private sector financing will be important, and should be complemented by possible interventions at a global (e.g., EU) level. In order to increase the ability of the private sector to undertake these investments, EU financial instruments can contribute to provide financing which otherwise would not be available and absorb some of the risks, which the private sector is not able or willing to take.

Given that one of the key market failures emerging in infrastructure is the lack of mature projects, efforts should be concentrated not only on the development of appropriate instruments but also on the provision of technical assistance to assist national authorities to prepare eligible projects. In this respect, additional efforts will be made to extend the pipeline of projects benefiting from EU financial instruments outside of the core sectors and core geographical markets.

The long-term financing required to fund infrastructure embodies some key features that the policy-maker should take in due consideration:

It finances productive activities which support growth by reducing costs, diversifying means of production and creating jobs in a smart, sustainable and inclusive way; It is patient, in that investors take into account the long-term performance and risks of their investments, rather than short-term price fluctuations. This long-term perspective acts in a counter-cyclical manner and promotes financial stability; It is committed, in that investors take longer-term aspects such as environmental, social, governance issues into account in their investment strategies.

The climate of uncertainty and risk aversion created by the financial and economic crisis has affected both the demand and the supply of long-term financing. On the demand side, this has been evidenced by reduced demand from SMEs, Private Public Partnerships and other investment projects requiring long-term financing, resulting in a suboptimal level of long-term investment and financing. On the supply side, the crisis has increased risk aversion, leading to a preference for liquidity. This, together with bank deleveraging, has affected the economy's ability to finance itself at long maturities. The sub-optimal levels of long-term financing also reflect market failures and inefficiencies in the intermediation chain.

6.1. Research and Innovation

The financial crisis had a significant negative impact on innovation. Since 2012, the percentage of firms that managed to bring new or improved products to the market has declined across all industries in the EU-27. There are various reasons for this:

public support for innovation decreased in several countries because of the priority given to fiscal consolidation; a fragile banking sector forced to restore its balance sheets meant that innovating firms had additional difficulties finding external financing; the reduced demand for goods and services, together with greater uncertainty about the future, made long-term R&D projects with high sunk costs more risky (OECD 2012).

The above effects were only partially compensated by other offsetting factors. First, there was a shift of focus towards process innovation, aiming at reducing costs and prices. Second, by lowering demand, the financial crisis reduced the opportunity costs of spending on innovation rather than output (OECD 2012, Barlevy 2007).

Nonetheless, EU Industrial R&D Investment Scoreboard data and PCT patent applications from the WIPO database show that innovation activities declined. As compared with pre-recession levels, a large proportion of European firms decreased their spending on innovation following the outbreak of the crisis. Indeed, the 2009 Innobarometer also provides evidence of the negative impact of the crisis, showing a substantial impact on firms in the medium and high innovation-intensive sectors.[40]

Against this backdrop, an effective pursuit of the Europe 2020 Strategy's objectives and headline targets requires a recovery of R&D activities, and possibly an acceleration to meet the 2020 target of 3% R&D expenditure over GDP. To this purpose, the effectiveness of the R&I financing can be enhanced by the adoption of dedicated EU financial instruments.

6.2. Transport

The existence and quality of an integrated transport network (comprising road, rail, inland waterways, maritime, airports and air traffic management) is strongly correlated with international competitiveness of the country, due to reduced travel and transportation times, better interconnections between the modes of transport, and integration of regional and national production sites with distribution and selling channels targeting the national and global markets.

Transport infrastructure is therefore fundamental for the mobility of persons and goods in the internal market, and for the economic, social, and territorial cohesion of the European Union. According to DG MOVE data, the EU comprises 5,000,000 km of paved roads, of which circa 65,000 km are motorways, over 213,000 km of rail lines, of which more than 110,000 km electrified, and nearly 43,000 km of navigable inland waterways. In order to address those transport investment from a systemic perspective, the EU adopted in 2013 a regulation on Union guidelines for the development of the trans-European transport network[41] (TEN-T Guidelines).

The regulation establishes a legally binding obligation for the Member States to develop the so-called "core" and "comprehensive" TEN-T networks. In addition, the regulation identifies projects of common interest and specifies the requirements to be complied with in the implementation of such projects.

The core network overlays the comprehensive network and consists of its strategically most important parts. It constitutes the backbone of the multi-modal mobility network Europe's citizens and businesses need. It concentrates on those components of TEN-T with the highest European added value: cross-border missing links, key bottlenecks and multi-modal nodes. The core network is to be in place by 31 December 2030 at the latest.

The cost of EU transport infrastructure development is estimated at over EUR 1.5 trillion for 2010-2030. The completion of the TEN-T network alone requires about EUR 550 billion until 2020 out of which some EUR 215 billion can be referred to the removal of major bottlenecks. This compares with total investment on transport infrastructure during the period 2000-2006 of EUR 859 billion.

The Connecting Europe Facility (CEF) regulation[42], adopted in December 2013 laid down a financial envelop for the period 2014-2020 of EUR 33 billion, of which EUR 26 billion are allocated for the transport sector. The CEF regulation established detailed provisions for the design and implementation of financial instruments in support of TEN financing needs.

In January 2014, the Commission adopted a Communication and a delegated act setting the transport funding priorities for the CEF implementation 2014-2020. Most of the CEF funds should be focused on major cross-border projects and main bottlenecks on the 9 TEN-T multimodal Corridors, as well as on traffic management systems, which allow making the best use of the existing infrastructure (ERTMS for railways, SESAR for aviation).

The CEF will support primarily projects listed in Part I of the Annex to the CEF Regulation, which have been pre-identified by the Commission in consultation and cooperation with the Member States concerned. The transport infrastructure investments require long term commitments from the national authorities in charge of infrastructure planning and procurements in order to establish the necessary credibility and transparency among all actors involved in the planning and financing of infrastructure, including the public and the private sectors.

The transport infrastructure lifecycles, depending on the sector, are very long term (above 30 years for roads, with necessary maintenance cycles), which in the absence of sufficient supply from long-term bank lending (corresponding to the lifetime of the infrastructure financing, including the spending on the maintenance), or high expectations on the rates of return from the equity providers, leads in many cases to postponement of the planned infrastructure investments and their upgrades and to a decline in new investments.

Against this backdrop, several market imperfections have been identified in the transport sector, requiring the consideration of public intervention:[43]

Decline in gross investments and expenditure on maintenance in the transport sector in most EU countries since the financial crisis Insufficient bank lending for long-term infrastructure assets at the European level Lack of a planning framework for the European projects of common interest Barriers around the Public Private Partnerships (PPPs)

In addition, there are other reasons, varying across Member States, why most of transport infrastructure is financed by the public side.[44] Public funding of the basic transport infrastructure has been considered in many European countries as a "service d'intérêt public" and expression of the "acquis of the welfare state" and therefore not subject to the user-pays principle. It estimated that over the last 20 years, 90-95% of transport investments have been financed through national government budgets. When transport infrastructure is privately financed, it is usually based on a public-private partnership (PPP) with a project finance underpinning.[45] Project financing is well established in the road, port and airport sector, whereas for inland waterways currently the first PPP projects are in preparation. An exception is the rail sector, where projects are often financed on a corporate finance basis by the railway infrastructure companies.

The scarcity of funding, due to slow growth rates and constraints on the public expenditure, coupled with insufficient long-term bank lending, has made it necessary to consider other infrastructure financing possibilities, including private-public partnerships and financial instruments - possibly at the EU level - to alleviate parts of the risk inherent to the projects.

6.3. Energy Infrastructure and Energy Efficiency

Major efforts are needed to modernise and expand Europe's energy infrastructure as well as to increase energy efficiency and renewable energy and interconnect networks across borders to meet the Union's core energy policy objectives of competitiveness, sustainability, and security of supply. Since the Commission's Communication on energy infrastructure priorities for 2020 and beyond, adopted on 17 November 2010,[46] the existing Trans-European Networks for Energy (TEN-E) policy and financing framework have been overhauled to coordinate and optimise network development on a pan-continental scale.

The main aim is to ensure the completion of the internal energy market and the security of energy supply, while promoting energy efficiency and energy saving as well as the development of new and renewable forms of energy.

The framework for the policy is now defined in the TEN-E guidelines regulation[47] adopted in April 2013. It is estimated that in electricity alone the transmission grid expansion to accommodate these changes would require EUR 104 billion to 2022 (or, extrapolating, EUR 207 billion to 2030)[48] in addition to the normal replacement of assets, estimated at EUR 76 billion to 2035.[49] In addition, approximately EUR 40 billion will be required by 2020 for a smart grid investment on the transmission level. Some EUR 70 billion will need to be invested by 2020 in gas transmission assets of European importance such as gas interconnectors, storages, Liquefied Natural Gas (LNG) reception terminals. These costs will be partially financed from network fees paid by the energy end-users.

The projects will be developed by Transmission System Operators (TSOs) i.e. companies set up specifically to develop and run the electricity and gas transmission networks. TSOs operate in a highly regulated business environment. Although regulations differ from Member State to Member State, they frequently include aspects such as agreed investment volumes, maximum debt ratios, maximum debt remuneration, etc. The regulatory approved revenue is normally linked to the book value of the assets they operate, the so-called Regulated Asset Base (RAB).[50]

The scale of the undertaking - only partially financed from network fees paid by the energy end-users - as well as its cross-country nature and its strategic importance as a public-interest infrastructure warrant a substantive intervention at the EU level, which can be effectively implemented through financial instruments.

6.4. ICT/Broadband

The Digital Agenda for Europe (DAE) recognises the role of fast and ultra-fast broadband access platforms for innovation and growth and sets ambitious targets for broadband coverage and take-up: (i) making basic broadband access available to all EU by 2013, (ii) making broadband access at internet speeds of above 30 Mbps[51] available to all EU by 2020 and (iii) ensuring that by 2020 50% of EU households subscribe to internet broadband of 100 Mbps or higher. Full coverage with basic broadband has recently been achieved (with a combination of fixed, mobile and satellite technologies) and the focus is now shifting to the challenges associated with the deployment of next generation access (NGA) networks and take-up.

The second and third broadband targets ("NGA targets") require substantial investments in the modernisation of access networks. Total investment needs are difficult to quantify with precision, but indicative estimates from different sources suggest that total investment costs for NGA may exceed EUR 200 billion.

Despite projects being initiated at various levels, current investment plans in fixed network infrastructure are subject to frequent revisions. However, even if they were fully implemented they would most likely not be sufficient to achieve the necessary coverage for the Digital Agenda NGA targets. All in all, the current pace of NGA roll-out is likely to leave a sizeable investment gap in the years to 2020.

Traditionally, the bulk of network investment in telecoms has been shouldered by vertically integrated telecom network and cable operators and to some extent by alternative telecom carriers and municipalities. Along with these actors, a number of alternative investors and investment models have been recently emerging.

One alternative group of investors is represented by regional or local utilities, especially in the energy sector. Network investments initiated by municipalities or regional governments represent another class of projects. For instance, municipal fibre networks account for a significant share of NGA coverage in Sweden. Models with public sector participation also comprise PPP structures for broadband, which have been pioneered, for example, by local and regional public authorities in France.

The variation of NGA investment costs with customer density and population across Member States gives rise to a specific issue: a large part of the population lives in areas situated between urban clusters (where there is a clear business case for commercially-driven roll-out) and very rural regions where broadband deployment without public support is nowadays hardly conceivable. If a number of conditions are fulfilled, a business case exists for these areas; however, this business case is usually not as compelling and clear-cut as in or at the fringe of conurbations. Specifically, the question is often whether expected revenues and cash-flows can adequately remunerate the risks associated with the project.

Equally, there is often a mismatch between the risk-return profile of projects and the type of investments targeted by investors providing the bulk of financing. On the debt side, long payback cycles combined with elevated levels of risk (at least in the early stages of operation) mean that NGA projects may not qualify for standard senior bank lending; where lenders are ready to extend credit, loan tenors often do not match the long asset lives of telecom networks. At the same time, debt capital market solutions may not be available to fill the gap because transaction costs are prohibitive in relation to the relatively small size of the projects.

On the equity side, the weakness of NGA investments is that they do not fit the definition of popular asset classes: NGA projects carry greater risk than more traditional infrastructure in transport, energy or water and are by no means comparable to the high-risk/high-return strategies with short- to medium-term exit of other fund investors.

The above constraints are exacerbated by additional factors, which impede the matching process between investors and candidate projects. Both senior lenders and other investors have difficulties with appraising the risks associated with broadband projects and with valuing telecom network assets. Moreover, small ticket sizes and lack of standardisation across projects may further complicate the deal-making process. These factors drive transaction costs and often prove to be a decisive obstacle.

Against this backdrop, EU financial policies, facilitating access to well-designed financing solutions which optimise risk allocation and address the specific challenges associated with NGA investments, can give a decisive boost to the economics of projects and greatly improve NGA roll-out dynamics.

6.5. Social Enterprises

Traditionally, the European social model has always been characterised by the prominent role played by a variety of organisations that differ both from private corporations and from public institutions. These are private organisations, which typically pursue goals other than profit. Their main purpose is not to generate financial gains for their owners or stakeholders but to provide goods and services either to their members or to the community at large.

These organisations, which have been active in Europe for nearly two centuries, have been recognised and regulated in many countries through specific legal forms (including in particular the cooperative, the mutual, and the association, as well as other legal forms and business models recently developing), have set up their own representative organisations to interact with public authorities, and have contributed in various ways to the social and economic development of Europe. Most recent studies highlight the correlation (and at some point the causality) relationship between social capital and economic growth.[52] Moreover, the recent crisis has pointed out the fragility of an economic and financial system merely based on the profit maximization benchmark.

Based on available evidence, it is estimated that the social economy in Europe (measured as the aggregate of cooperatives, mutuals, associations and foundations) engages over 14.5 million paid employees, equivalent to about 6.5% of the working population of the EU-27 and about 7.4% in EU-15 countries.[53] These figures also include a high number of social enterprises, as they contain all social enterprises using social economy legal forms, such as social cooperatives and entrepreneurial associations. Interestingly, the social economy has increased more than proportionately between 2002-03 and 2009-10, increasing from 6% to 6.5% of total European paid employment and from 11 million to 14.5 million jobs. Incidentally, this is a phenomenon that is not confined to Europe but is gathering strength around the world, as exemplified by the data on cooperatives published in the recent World Cooperative Monitor by Euricse and the International Cooperative Alliance.

The EU role, subsidiary to national interventions, entails promoting a high level of quality and sustainable employment, guaranteeing adequate and decent social protection, combating social exclusion and poverty and improving working conditions, possibly using financial instruments.

6.6. Education

Education and training are at the core of the Europe 2020 Strategy and of the Integrated Guidelines for the Economic and Employment Policies of the Member States.[54] Arguably none of the Europe 2020 objectives and headline targets will be reached without strong investment in human capital.

There is a positive and statistically significant relationship between the level of cognitive skills in a population, productivity and economic growth. For example, an average increase of 25 points in PISA performance across the EU countries could lead to a 3 % gain in GDP per capita. The increase in average educational attainments by emerging countries makes the human capital accumulation for EU an even more important challenge in light of international competition for growth. The benefits of learning mobility are clear with significant benefits to graduate employability as well as personal development.[55] This importance is recognised by the agreement of the EU and 'Bologna' mobility target that by 2020, at least 20% European Higher Education Area graduates should have had a study or training period abroad.

The total amount of investment in education over the last years has been dampened by adverse economic and financial conditions on both the demand and supply side. In particular:

The financial crisis increased uncertainty and risk aversion, lowering long-term private investments in human capital and hampering cross-border student mobility. The sovereign debt crisis led to fiscal consolidations, especially in peripheral countries exhibiting low growth – high debt dynamics (such as Greece, Spain, Portugal, Italy), jeopardising previous levels of public spending in education.

The EU could play an effective role in supporting investment in education, both on a long-term basis and as a means to accelerate recovery from the current financial and sovereign crisis. The use of EU financial instruments, envisaged in this sector for the first time for the MFF 2014-2020, is likely to boost student mobility by providing financial support on a larger scale than otherwise possible.

7. Strategic Non-EU Regions

The European Union is a global economic and political player, with regional and global interests and responsibilities. Its network of international agreements with partners and organisations all over the world, not matched by individual Member States, gives all of them influence in almost all fields of international relations.

This delicate role can be primarily developed by maintaining sound international relations, also in view of the growth of the world's economy, especially through the financial support to strategic world economies, with possible gains in terms of trade with Member States.

Besides this, the EU international role is particularly important to prepare access to the Union to Enlargement countries, through economic, technical and administrative support.

7.1. Enlargement Countries

Enlargement countries are composed of five Candidate countries[56] and three Potential candidates.[57]

The process whereby these countries will – at various stages – join the European Union, under the guidance of the Commissioner for Enlargement, may pose challenges, due to compliance with all the EU's standards and rules. These require, inter alia, "a functioning market economy and the capacity to cope with competition and market forces in the EU", as well as "the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union."[58]

For the Western Balkans, additional conditions apply, mostly related to regional cooperation and good relations with neighbouring countries (the so-called ‘Stabilisation and association process conditionality’). To ensure that enlargement brings maximum benefits to both the EU and to countries in the process of joining it, the accession process needs to be carefully managed. Hence the Commission has a stake in the support of socio-economic development in enlargement countries by providing finance and supporting strategic investments, particularly in infrastructure, energy efficiency, private sector development including SMEs, and technical assistance.

7.2. Neighbourhood Countries

Neighbourhood countries are those situated on the eastern border and the North African, and the Middle Eastern countries bordering the Mediterranean Sea.

Economic and financial EU relations with these countries, also through trade and international financial cooperation, are crucial in view of economic and political stability and job creation in the area. Notably the signature of the Association Agreements including the Deep and Comprehensive Free Trade Agreements with Georgia, Moldova and Ukraine are important steps towards market integration with the EU. A comprehensive and robust European assistance intervention aims at fostering sustainable and inclusive growth, thus setting the conditions for a democratic transformation and civil society consolidation.

In the Southern Mediterranean countries, average GDP growth in 2013 is still below 2005-2010 averages. Moreover, recent disruptive political events, such as the Ukraine crisis, the ongoing Syrian conflict and its regional spill-over effects, tense situations in Egypt and the significantly worsening state of internal affairs and security situation in Libya also underline the need for effective partnerships in view of democracy and shared prosperity between the EU and Neighbourhood countries.

7.3. Countries covered by the Development Cooperation Instrument (DCI)

Governments and other public donors's funds are far from sufficient to cover all substantial needs in EU partner countries..

The strategic role of the EU in sustainable social and economic growth of these countries as a condition sine qua non for poverty reduction lies in its capacity to mobilise a critical mass of financial and political support, having a significant impact on a given social or economic issue. The European Union, through its common resources and the available national capabilities, has means, experience and expertise to act efficiently and in a cost-effective way.

There is a growing importance of EU partner countries also due to their increasing share in world growth. Financial instruments contribute to achieving EU development policy objectives in line with regional and national priorities of partner countries. By 2015, 90% of world growth is expected to be generated outside Europe, with a third from China alone. Both developing and emerging countries are likely to account for nearly 60% of world GDP by 2030, compared to less than 50% today. The EU has maintained its 17.5% share in world trade on average over the last decade despite the rise of other economies.

The changing world order, as established by the new outstanding influence that China, India and Brazil are exerting on the global economy, stim