Opinion of the Economic and Social Committee on "SMEs in EU island regions"

(2002/C 149/15)

On 30 May 2001 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure, decided to draw up an opinion on "SMEs in EU island regions".

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 9 April 2002. The rapporteur was Mr Vassilarás.

At its 390th plenary session on 24 and 25 April 2002 (meeting of 25 April), the Economic and Social Committee adopted the following opinion by 87 votes to 1, with 7 abstentions.

1. Introduction

1.1. The Committee's purpose is to make the Council and Commission aware of a new policy approach which has arisen from the conclusions of the Nice summit (7 and 8 December 2000, point J (57)). Its proposals are also intended to contribute to the necessary special measures which will have to be taken to help SMEs in island regions to develop, as part of EU policies.

1.2. The Committee is convinced that island SMEs' lack of competitiveness within the single market stems from the permanent problems caused by the regions' island status.

1.3. The Committee takes note of the "First progress report on economic and social cohesion"(1), which devotes a paragraph to "areas suffering from severe geographical or natural handicaps", as repeatedly requested by the Committee. It also considers the recognition of criteria for defining an island (maritime environment, the size of an island and its distance from the next landfall), and of the accumulation of handicaps in the case of certain islands (island nature, mountainous and thinly populated) to be a step in the right direction.

1.4. Having regard to:

a) the legal basis provided by Article 158 of the Amsterdam Treaty;

b) the attached Declaration No 30;

c) the forthcoming enlargement of the Community;

d) the review of the Cohesion Fund and regional policy after 2006;

e) competition and globalisation;

f) the seasonal nature of SME employment in island regions;

g) the lack of variety in economic activity;

h) its earlier opinions;

i) the NUTS classification system used in implementing the Structural Funds and the Cohesion Fund;

j) implementation of the European Charter for Small Enterprises;

the Committee intends to examine existing European policies for SMEs, and current practice concerning aid and subsidies under Community legislation.

2. Features of island SMEs

2.1. The Community is made up of regions with varying levels of development. For this reason, they are divided for regional policy purposes into different levels or Objectives (1 and 2). Nevertheless, the development of the disadvantaged island regions is lagging behind, despite the fact that 95 % of the population of the islands are eligible for Objective 1 and 2 support.

2.2. Island SMEs are however experiencing difficulty in participating in these programmes because of problems with implementing projects, lack of own resources, their geographical position, demographic situation, small size of the local market, dependence on larger urban centres, vulnerable economy, the seasonal nature of employment and the lack of economic diversity.

2.3. Island SMEs have little capacity for administrative organisation and management, which leaves them effectively beyond the reach of the information and management procedures provided under the various national or Community programmes. Such programmes are often felt to be technocratic and inappropriate to the situation of micro-enterprises, which want things to be more straightforward. Even more seriously, this management shortfall leaves them without the means to deal with the banking and non-banking financial sector: they cannot easily communicate - and therefore negotiate - with it, making cooperation virtually impossible. Poor access to information in general makes it difficult to obtain Community funding and assistance from banks. Isolation, lack of skills and poor information provision are the main reasons for this. Special liaison centres such as the Info Centre networks are a good way of tackling some of these problems, which should be assessed and analysed.

2.4. In spite of the major efforts which have been made over recent years, often with the help of the EU, island regions continue to lag behind, with many of them in decline. The reason is that because of their island status, not even Objective 1 benefits them when it groups them together with the corresponding part of the mainland, or with the relevant Member State.

2.5. Europe's islands have a total surface area of 110000 km2 (3,4 % of EU territory) and some 14 million inhabitants (or 3,5 % of the EU population). Despite the differences in their size or population, the islands face many of the same problems, e.g. economic and social, which often vary only in degree (see Eurostat, Eurisles table in Appendix I).

2.6. These disadvantaged island regions, covered by Article 158 of the Amsterdam Treaty, share common problems regardless of their size, as frequently pointed out by the Committee in its opinions.

2.6.1. These problems are:

- networks in general (transport, and particularly its high cost, energy, telecommunications, water supply);

- migration, especially of young people towards developed centres;

- SME development and competitiveness, and lack of information about the real needs of micro-enterprises;

- health, education, vocational training and apprenticeships;

- the environment;

- the lack of economic diversity;

- inadequate cooperation with mainland regions and with regions in non-EU countries;

- the seasonal nature of employment and economic activity;

- the vulnerability of historical and cultural assets and sites.

2.7. Infrastructure must be in place if island SMEs are to achieve development and competitiveness. Transport, energy, telecommunications and water supply are all infrastructure elements vitally important to sustainable development in the islands. The inhabitants of the island regions are striving to enhance their local living conditions: this depends on economic development and employment. Action under EC policies must fit in with this approach, regardless of the territorial unit or human potential involved.

2.8. The major centres of economic development and European mainland regions can more easily benefit from regional policy. People find work and enjoy better conditions in mainland towns, areas and settlements. It is thanks to regional policy that there are now motorways, and high-speed trains and that airports have been built or renovated. All types of network can clearly be extended more easily in such regions than in their island counterparts. Such infrastructure facilitates the development of mainland SMEs and makes them competitive. However smooth the cooperation and involvement of island inhabitants in development may be, as long as rules are not enshrined in legislation and networks not extended to the island regions, their populations will be headed for decline.

2.9. The ratio of SMEs is often far greater in island than in mainland regions. Density also increases in line with two structural factors:

- Geography: southern Europe, particularly the Mediterranean, has the highest density of SMEs.

- Sector: the highest density, with the greatest distinctiveness from the rest of the EU is, as might be expected, in the tourism, transport, energy and communications sectors.

2.10. When talking about island SMEs, we often think of a web of micro-enterprises with fewer than 10 employees, or even a very large number of sole traders with no employees. One-person businesses and micro-enterprises together sometimes represent over 90 % of island businesses, and more than 70 % of total employment.

2.11. This is why island micro-enterprises have both a social and an economic role. Not only are they not very profitable, but often they suffer from poor social protection, which has implications for healthcare, pensions, etc. When considering the social dimension of island businesses, it is necessary to look at family and local community ties and to take specific needs into account.

3. Proposals to assist island SMEs

3.1. An appropriate economic environment through the public sector

3.2. One of the first principles to be observed in order to take account of the particular features of island SMEs is therefore to ensure a favourable general economic climate, in which more effective equality of opportunities can be promoted. Creating such a climate is the concern equally of the public authorities, occupational and economic bodies, and businesses themselves. Island SMEs and micro-enterprises must benefit from specific support measures.

3.2.1. It must be ensured that the basic public services providing island SMEs and end users with high-quality, regular access to energy, water, fuel, transport, research and innovation etc., are available at the same prices as those which are, on the mainland, generated by competition between large bodies. Balancing mechanisms can range from a national adjustment system to compensation systems tailored to each service or territorial unit. This type of action to help island SMEs falls within the bounds of economic and social cohesion, and should be stepped up in the light of recent Commission decisions in the wake of the Treaties and the Nice summit. Derogations from the general status (possibly even micro-derogations for micro-markets) should be introduced, without distorting competition conditions but rather opening the way to fair competition.

3.3. Because they are geographically isolated, small island businesses cannot - despite the explosion of the internet - obtain the information and services which are vital to their development in a constantly-changing enterprise environment, meaning that it is impossible for them to hone the competitiveness without which they cannot survive. The small size of the local market, and the difficulties they encounter in penetrating the larger market, also serve to undermine business activity within their sphere. Difficulties arise with regard to vocational skills, with adapting to quality and security requirements and with promotional, marketing and even export activities.

3.4. On the local market, producers in the island regions must show they can compete with their mainland European counterparts who benefit from economies of scale of a completely different order to their own. Beyond a certain threshold, which varies from product to product, the lower transport costs are not enough to offset the difference in production costs. Agri-foodstuffs imported from mainland Europe often supplant local produce - even the most commonplace - on supermarket shelves.

3.4.1. On the immediately surrounding market, businesses in the island regions must not only strive to sell goods and services produced with European social and wage cost levels, but must also overcome the various tariff and non-tariff customs barriers which may be imposed by third countries. All these factors come into play against a backdrop of WTO and ACP regulations, under which the EU is assisting production in third countries.

3.4.2. Lastly, it is difficult for producers in the island regions to be competitive on the European market. They are faced with either products from their neighbours, which are much less expensive because social and wage costs are lower or economies of scale are greater, or European mainland producers, who are free of the same transport constraints and whose immediately surrounding market is infinitely larger. Compensation must be available per regulation to SMEs in the island regions by way of derogation from the common European rules.

3.5. In conclusion, the introduction of effective support mechanisms and specific measures to support island businesses requires real creativity, and also entails substantial costs, which neither island economies nor the regional public authorities concerned can meet from their own resources.

4. Access to private finance

4.1. Improving SME access to finance in general, and to bank loans in particular, is a task for central banks, European institutions, chambers of commerce, etc. In a credit market which has, in global terms, become supply-dominated, small island businesses - which are excluded from the move to more open and globalised financial markets - still experience difficulty in finding the financial resources they need to carry out successfully their strategy for growth and investment. Meeting the need for long-term resources is not, however, the only problematic aspect for these businesses.

4.2. To get away from a banking approach to risk analysis, measures should be introduced to try and reduce banking risk or the cost of guarantees requested by banks, e.g. in start-ups by young people. Given that islands sometimes have a weaker business culture than the mainland, young people should be encouraged by supporting entrepreneurship and creativity so as to prevent them leaving the islands or even persuade those who have left to return.

4.3. There is a real need for information. In an economic environment marked by wide diversity of actors, going far beyond the quantitative differences illustrated by numbers of employees, balance sheets or turnover, specialist tools to analyse the viability of island SMEs are needed. An approach based on consideration of different modes of production should enable the characteristic variety of island SMEs to be encompassed, revealing the features of the markets in which they operate, and the different strategic positions, types of organisation, and production and financial structures which flow from this.

4.4. The Economic and Social Committee should propose and help introduce a procedure to assess SMEs' ability to secure access to financial resources. The procedure should be put to use internally for banks and businesses, and also externally for suppliers and public bodies in their dealings with SMEs, and for the Commission.

5. Specific development aid

5.1. The Economic and Social Committee believes that action to help island SMEs should have a dual aim: to safeguard and modernise island SME structures, to promote and encourage island SMEs.

5.2. Safeguarding and modernising island SME structures

5.2.1. The Committee believes that SMEs must be helped to preserve the social and employment fabric of these regions. This objective must be refined and adjusted in accordance with the category of each island, and with the economic sectors in which they are active. Particular attention must be paid to "traditional" businesses producing high-quality - often non-standard - products designed for the local market (agri-foodstuffs, cultural products, etc.).

5.2.2. From the studies carried out by the Commission, it is important to identify the real needs of island-based micro-enterprises and small companies. Implementing the recommendations of the European Charter for Small Enterprises and improving the interplay with businesses should make it easier to define these needs(2).

5.2.3. Numerous Community programmes are addressed to SMEs for this purpose. Care must be taken to ensure that island SMEs are brought into this process, which is already well under way in mainland regions.

5.2.4. The Committee stresses the need in particular to strengthen training instruments at all levels: initial training, vocational training, continuing training, apprenticeships, etc. In the case of island micro-enterprises, training must include company managers as much as employees. As well as establishing training centres or enhancing programmes, support must be provided for an active strategy of exchanging trained staff.

5.3. Promoting and encouraging island SMEs

5.3.1. The Committee thinks that pilot schemes tailored to the specific conditions of island markets should be introduced concomitantly, covering that part of economic activity which is specific to the local economy, in order to allow island SMEs either to develop such markets or to enter market sectors outside their own islands. This should be done in full compliance with the specific development strategies of both public and private enterprises.

5.3.2. The Committee emphasises in particular the need to establish support structures for micro-enterprises and very small companies with fewer than 50 employees. These mediating structures should receive strong backing so that they can ensure that the practical needs of small island businesses, as identified in the future, are really met. They are a strategic aspect of any coherent policy towards the business fabric on islands. One of the priorities in connection with these support structures should be to establish back-up and monitoring facilities for projects based on quality advice. Recruitment of permanent staff for these facilities is one of the only ways to provide:

- support for monitoring and management of Community programmes;

- environmental protection or technology mediators;

- back-up facilities for preparation and follow-up of bank dossiers;

- quality and security control.

5.3.3. Always with the requirements of island micro-enterprises and small companies in mind, the Committee stresses the need to promote and strengthen all networks that link micro-enterprises and small companies on islands, in order to facilitate the exchange of good management practice and communication.

5.3.4. The Committee proposes that 2005 be declared the European Year of Islands. To mark this occasion, the Commission could assess the measures already taken to help islands and use the reform of the Structural Funds and regional policy to endorse a more ambitious policy.

6. Towards an integrated policy for all the islands of the EU

6.1. In addition to measures to develop policies on micro-enterprises and small companies, the Committee would draw the Commission's attention to the need to introduce an integrated policy which will provide for specific measures to support the outermost island regions and islands. Three measures seem appropriate for achieving this general objective, which must provide a framework for three sectoral policies.

6.2. The Committee would like the meaning of Article 158 of the EC Treaty to be clarified to reflect the spirit of Declaration No 30 and the conclusions of the European Council in Nice. This article must be strengthened by including specific reference to the principle of territorial cohesion and to the various regions facing long-term structural problems, such as island regions, thinly populated regions or upland regions suffering from the same handicaps. The "First Progress Report on Economic and Social Cohesion"(3) notes "the extent of the Community territory comprising mountain, coastal and maritime areas, islands and archipelagos".

6.2.1. The Committee hopes that the reform of the Structural Funds in 2006 should make provision for the establishment of a specific financial instrument for non-Objective 1 regions suffering from permanent geographical or demographic handicaps - including, in particular, islands. It must be possible to use this instrument among other things to co-finance fixed or mobile transport infrastructure, but also to strengthen all the networks on which islands depend (energy, waste water, etc.)(4).

6.2.2. The Community added value of such an arrangement is that it enables the effectiveness of procedures to be better assessed and provides support for interregional exchanges to establish the best project design, for benchmarking, etc.

6.3. Finally, the proposals in the White Paper on governance should give greater recognition to islands. The Commission should make a systematic effort to adopt an interdepartmental approach or even set up a directorate-general to oversee the policies concerning and affecting islands and integrate their management.

6.4. The Committee thinks that this integrated approach, backed up by national mechanisms for prior consultation of the Member States whenever legislation affects islands, would establish a true partnership between island regions, governments and the Commission.

Brussels, 25 April 2002.

The President

of the Economic and Social Committee

Göke Frerichs

(1) COM(2002) 46 final.

(2) ESC opinion on the European Charter for Small Companies, OJ C 204, 18.7.2000, p. 57.

(3) COM(2002) 46 final, p. 16.

(4) ESC Opinion "Extending the trans-European networks to the islands of Europe".