Special Report Are financial instruments 
a successful and 
promising tool in the rural 
development area?EN 2015  NO 05
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Are financial instruments 
a successful and 
promising tool in the rural 
development area?
(pursuant to Article 287(4), second subparagraph, TFEU)Special ReportEN 2015  NO 05
02
 Audit team
The ECA’s special reports set out the results of its performance and compliance audits of specific budgetary areas or 
management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks 
to performance or compliance, the level of income or spending involved, forthcoming developments and political and 
public interest.
This performance audit was produced by Audit Chamber I — headed by ECA Member Rasa Budbergytė — which spe -
cialises in preservation and management of natural resources spending areas. The audit was led by ECA Member Kersti 
Kaljulaid, supported by Peeter Lätti, head of private office; Helder Faria Viegas, head of unit; Bertrand Tanguy, team 
leader; Jan Huth, deputy team leader; Christine Kleinsasser, auditor; Ioannis Papadakis, auditor; Roberto Resegotti, auditor 
and Jolanta Zemailaite, auditor.
From left to right: J. Zemailaite, I. Papadakis, B. Tanguy, R. Resegotti, K. Kaljulaid,  
H. Faria Viegas, J. Huth, C. Kleinsasser.
03
 Contents
Paragraphs
 Abbreviations and technical terms
I–IX  Executive summary
1–15  Introduction
4 Previous Court audits
5–7 The rationale for the financial instruments
8 Recent developments
9–12  Financial instruments in rural development
13–15  Management of the financial instruments in rural development
16–20  Audit scope and approach
21–95  Observations
21–50  Were financial instruments set up and capitalised properly in the 2007–13 programming period?
22–29  The programming framework was not satisfactorily prepared
30–40  However spending rules are advantageous for Member States
41–50  Significant overcapitalisation of financial instruments
51–71  Did financial instruments perform well in the 2007–13 period?
53–61  Financial instruments performed poorly in revolving money
62–68  Leverage effect rarely occurs and some of the funds were set up too late
69–71  The monitoring of financial instruments in 2007–13 did not provide enough relevant information on 
performance achieved
04 Contents
72–80  Were adequate winding up and exit policy conditions in place in the 2007–13 period?
75–77  Closure had not yet been well prepared and provisions were interpreted differently by the Member States 
and the Commission
78–80  Lack of clarity regarding exit policy provisions
81–95  Does the 2014–20 framework have the potential to provide the necessary improvements for 
financial instruments?
82 There are some notable improvements in the new legal framework …
83–95  … but certain obstacles remain
96–103  Conclusions and recommendations
 Annex I —  Estimate of the overcapitalisation of the guarantee funds at 31 December 2013 
according to the risk exposure ratio 
 Annex II  —  Overview of the main weaknesses reducing the performance of the financial 
instruments audited 
 Reply of the Commission
05
 Abbreviations and  
technical terms
Abbreviations
EAFRD : European Agricultural Fund for Rural Development
ESI funds/ESIF : European structural and investment funds
FEI/FI : Financial engineering instrument. Renamed Financial Instrument for the 2014–20 period.
RDP : Rural development programme
Technical terms
Axis (plural axes) : A coherent group of measures with specific goals resulting directly from their implementation 
and contributing to one or more of the objectives of the rural development policy. For instance, axis 1 measures 
contribute towards improving the competitiveness of the agricultural and forestry sector, whereas axis 3 measures 
aim to contribute towards the quality of life in rural areas and the diversification of the rural economy.
Disbursement rate : For loan funds, the share of the capital invested in the fund which is paid out to final 
recipients. For guarantee funds, the share of the capital invested in the fund which is used to guarantee loans to 
final recipients.
Final recipient : Individual or body that receives support from a financial instrument.
Funding agreement : Agreement between a Member State (or a managing authority) and a fund manager laying 
down the terms and conditions for funding.
Fund manager : A body responsible for implementing an investment strategy and managing a portfolio of 
investments related to a financial instrument.
Guarantee : A commitment by a third party (guarantor) to pay the debts of a borrower. When borrowers cannot 
repay them themselves, the guarantor is liable.
Guarantee funds : Guarantee funds provide financial guarantees for credit sought by rural businesses or 
organisations, thus making it easier for them to obtain funding from banks. These funds are said to ‘revolve’ 
because, as individual projects pay back their loans, the guarantees are released and new guarantees can be issued. 
Guarantee funds revolve through a multiplier of the fund capital.
Leverage : Calculated here in terms of how many euros in (public and/or private) funding have been guaranteed or 
paid out for rural activities for each euro of public (EU and Member State) funding.
Loan funds : Funds that provide money for loans for small business development projects. They are said to ‘revolve’ 
because money becomes available for new loans as individual projects pay back the previous ones.
06 Abbreviations and technical terms 
Managing authority : A national or regional body designated by a Member State to manage a rural development 
programme.
Measure : An aid scheme for implementing a policy. Investment measures are measures that provide financial 
support for investments in machinery and equipment, building and/or other works.
Outputs and results : Outputs are activities directly realised by the financial instruments. For example, the ‘number 
of guarantees issued’ would be an output for a guarantee fund. Results are the direct effects or changes that result 
from the implementation of a project. For example, obtaining a loan from a bank is a ‘result’ for the final recipients.
Overcapitalisation : This situation occurs when the amount paid into the capital of an FEI is too large in relation to 
the amount provided to final recipients in the form of loans or guarantees issued.
Paying agency : A national or regional body responsible for assessing, calculating and paying out agricultural 
subsidies.
Programming period : The  period covered by the rural development programmes.
Revolving fund : The system whereby money raised for financial instruments is reused, or ‘revolved’, after it has 
been used once.
Risk exposure ratio : The upper default limit that is considered acceptable in the management of a given guarantee 
fund. For instance, the risk exposure ratio would be 1/5 if it were anticipated that a maximum of 20 % of the 
guarantees could be in default.
Shared management : One of the ways that the EU budget is implemented. Management is said to be ‘shared’ 
where EU-funded projects are managed by national or regional bodies (here, the ‘managing authorities’). The 
Commission has supervisory duties.
Venture capital funds : Profit -making private funds that provide capital, usually in new, high potential, high risk 
businesses.
Winding up : In the context of the closure of the RDPs at the end of the programming period, the procedure applied 
to the fund in order to determine the eligible amount for EAFRD co -financing.
07
 Executive  
summary
I
Financial instruments (known, until 2014, as ‘financial 
engineering instruments’) were first applied to agri -
culture in the 2000–06 programming period and were 
extended to 2007–13 with a view to helping farmers 
and small rural businesses obtain private funding for 
rural investment projects. These instruments, via loan 
funds and guarantee funds, are meant both to attract 
additional public and/or private capital (leverage 
effect) and allow the initial allocations of funds to be 
reutilised (revolving factor). At the end of 2013, the 
EU and the Member States had contributed around 
700 million euro in financial instruments in the area of 
rural development.
II
The financial instrument framework has also been 
extended for the 2014–20 period, when the Commis -
sion intends to maximise the impact of EU funds. It 
also expects their use to increase in the forthcoming 
years and wants the Member States to commit them -
selves to increasing their use, at least twofold, in key 
investment areas.
III
In this audit, the Court addressed the question of 
whether financial instruments had been successful in 
the area of rural development and whether they were 
likely to be so in the future. In order to do so, it sought 
to establish whether they had been well designed and 
managed in the 2007–13 programming period and to 
what extent the changes introduced for 2014–20 were 
likely to have a significant impact on the key short -
comings identified.IV
Overall, the Court concluded that financial instru -
ments had been unsuccessful in the field of rural 
development and although the 2014–20 period is 
potentially promising, it will be a considerable chal -
lenge to achieve the desired impact. The Court found 
that no clear case had been made for setting up finan -
cial instruments in the 2007–13 programming period 
and that they were overcapitalised. In particular, the 
legal framework did not take into account the specific 
characteristics of rural development policy and there 
had been no assessment of real needs.
V
The Court also concluded that there was no reliable 
quantifiable information to justify the type of financial 
instruments established, determine demand for finan -
cial instruments in the field of agriculture and show 
that the amount of capital earmarked for the fund 
was appropriate. The Court estimated that guarantee 
funds were overcapitalised by 370 million euro at the 
end of 2013.
VI
The Court further concluded that the financial instru -
ments had not worked as expected and, consequently, 
had not provided their full potential benefits in terms 
of the revolving and leverage effects. This had partly 
been due to delays in implementation (including the 
fact that they had been set up late or not at the most 
appropriate time). Moreover, the legal framework 
had not included adequate provision to encourage 
the achievement of the expected benefits. Finally, 
neither the Commission nor the Member States had 
introduced appropriate monitoring systems to provide 
reliable data to show whether the instruments had 
achieved their objectives effectively.
08 Executive summary 
VII
The Court’s analysis included an examination of wind -
ing up and exit policies. The Court concludes that pre -
cise conditions to establish the balance of the financial 
instruments to be paid at the end of the programming 
period and exit policy conditions were not in place 
in the 2007–13 period, mainly because of an absence 
of clear rules and guidance from the Commission on 
these issues.
VIII
The Court found that the 2014–20 framework has the 
potential to provide the necessary improvements. 
However, certain obstacles to a more extensive use of 
financial instruments remained and although the new 
legal framework contained new specific provisions to 
limit the recurrent problem of overcapitalisation, the 
risk may persist. Also, it placed insufficient focus on 
long-term effects, and financial instruments risked 
remaining too dependent on grants. Finally, the key 
performance issues of leverage and revolving effects 
were not adequately addressed.
IX
The Court recommends that:
(a) the Commission should:
• increase incentives for Member States to set 
up financial instruments for rural development 
by identifying the challenges, specific charac -
teristics and obstacles faced in this field and 
actively encourage Member States to use such 
instruments where appropriate;
• provide guidance and actively promote the 
quality of the mandatory Member States’ ex 
ante  assessments, which are intended to serve 
as key tools to avoid overcapitalisation;• set appropriate standards and targets for lev -
erage and revolving effects;
• provide precise operational implementing 
rules, in due time, before the closure of the ru -
ral development programming period 2007–13 
(including an appropriate exit policy).
(b) the Commission and Member States should decide 
clear transitional rules between programming 
periods.
(c) the Member States should:
• consider setting aside a certain share of the 
available EAFRD budget for financial instru -
ments and make these instruments more 
attractive than grants in clearly defined 
circumstances;
• validate the risk exposure ratio with the help 
of appropriate technical expertise, in order to 
avoid overcapitalisation;
• implement the new legal provisions in such 
a way as to ensure the greatest level of flex -
ibility, for instance by establishing a single 
financial instrument (providing both loans and 
guarantees) capable of tackling the needs;
• pay particular attention to potential risks of 
deadweight or displacement effects when 
assessing applications for funding by apply -
ing appropriate indicators. Where such risks 
apply, financial instruments could become the 
preferred option;
• examine how grants and financial instruments 
can be combined to provide the best value 
for money, by optimising leverage/revolving 
effects.
09
 Introduction
01 
Financial instruments (known until 
2014 as ‘financial engineering instru -
ments’) are EU budget tools used to 
enable beneficiaries to obtain funding 
in the form, for example, of loans, 
guarantees or equity investments. 
They differ from grants mainly because 
they are repayable as illustrated in 
Figure 1 .
02 
Financial instruments have been used 
in almost all major areas of the EU 
budget (for internal policies managed 
by the Commission centrally or jointly 
with financial institutions, for cohesion 
and rural development policies where 
the management of funds is shared 
between the Commission and Member 
States and for external policies1).03 
Within shared management areas fi -
nancial instruments have mainly been 
used in the area of cohesion policy. 
There were over 941 financial instru -
ments in this policy area and support 
from the EU budget and national 
contributions amounted to 14.3  bil-
lion euro at the end of 20132.1 Under the 2007–13 
multiannual financial 
framework a little over 1 % of 
the EU budget 
(13,6 billion euro) was 
allocated to financial 
instruments for internal and 
cohesion policies.
2 Commission report on the 
progress made in financing 
and implementing financial 
engineering instruments 
reported by the managing 
authorities in accordance with 
Article 67(2)(j) of Council 
Regulation (EC) No 1083/2006 
of 11 July 2006 laying down 
general provisions on the 
European Regional 
Development Fund, the 
European Social Fund and the 
Cohesion Fund and repealing 
Regulation (EC) No 1260/1999 
(OJ L 210, 31.7.2006, p. 25), 
programming period 2007–13, 
situation as at 
31 December 2013. Document 
dated 19 September 2014 and 
referenced 
EGESIF_14-0033-00.
Grant‑based schemes in comparison to financial 
instruments
Backﬂows
Returned
to FundFINANCIAL INSTRUMENTS GRANT-BASED SCHEMES
ProjectsGrants€€
Final 
RecipientsFinancial 
Instrument
Funds stay in cycleBudgetary Funds (EU/State/Region) Budgetary Funds (EU/State/Region)
€
Funds are spent onceFigure 1
Source:  Interact, Financial Instruments in European Territorial Cooperation Programmes , 2013.
10 Introduction
Previous Court audits
04 
So far, the Court has audited financial 
instruments predominantly in the 
cohesion policy area3. The European 
Parliament requested the Court of 
Auditors to audit them over all policy 
areas4. This report responds to this 
request with regard to rural develop -
ment. In this area, Member States had 
contributed around 700  million  euro 
in financial instruments by the end of 
2013.The rationale for the 
financial instruments
05 
At a time of fiscal constraint on public 
budgets, achieving more investments 
with less public money is of key impor -
tance. Financial instruments have a po -
tential to improve the use of scarce 
public resources by providing funding 
for more investments with the same 
budget. The funds are expected to 
reutilise the initial allocation of money 
used to set them up (revolving factor) 
and stimulate the achievement of the 
policy objectives further by attracting 
additional public or private capital 
(leverage effect). The rationale for the 
financial instruments is outlined in 
Box 1 .3 See e.g. Special Report 
No 2/2012 ‘Financial 
instruments for SMEs 
co-financed by the European 
Regional Development Fund’. 
The main conclusion is that 
‘the effectiveness and 
efficiency of measures were 
hampered by important 
shortcomings, mainly due to 
the inappropriateness of the 
current regulatory framework 
of the Structural Funds’( http://
eca.europa.eu ).
4 Resolution of the European 
Parliament of 10 May 2012 
with observations forming an 
integral part of its Decision on 
discharge in respect of the 
implementation of the general 
budget of the European Union 
for the financial year 2010, 
Section III — Commission and 
executive agencies 
(paragraph 20).
The rationale for the financial instruments
‘Pursuit of EU policy objectives:  Innovative financial instruments pursue specific EU policy objectives by ensur -
ing necessary  finance for areas of EU interest […]. They aim to correct market failures/imperfections that give 
rise to an insufficient funding of  such areas from market sources, for instance because the field is perceived as 
too risky by the  private sector.’5
‘Leveraging investment: By working with the private sector on innovative financial instruments it is possible 
to magnify the impact of the EU budget, enabling a greater number of strategic investments to be made, thus 
enhancing the EU’s growth potential.’6
‘Multiplier effect of the EU budget: An additional multiplier effect is achieved during the lifetime of the inno -
vative financial instrument, if repayments of capital or interest and proceeds of an investment can be reused 
for the instrument. Such ‘revolving’ character can considerably increase the reach of instruments’7.
5 COM(2011) 662 final of 19 October 2011 ‘A framework for the next generation of innovative financial instruments — the EU equity and debt 
platforms’.
6 COM(2011) 500 final of 29 June 2011 ‘A Budget for Europe 2020’.
7 COM(2011) 662.Box 1
11 Introduction
06 
The Council8 and the Commission 
expected that the use of financial 
instruments would increase under the 
multiannual financial framework for 
2014–20 as compared with 2007–13.
07 
In its discharge resolution for the year 
20109, the European Parliament stated 
that the Commission had promoted an 
increased use of financial instruments 
for the next multiannual financial 
framework10.
Recent developments
08 
In its recent communication ‘An Invest -
ment Plan for Europe’11 the Commis -
sion states that it intends to maximise 
the impact from EU funds. It therefore 
invites Member States to increase sig -
nificantly their use of financial instru -
ments in key investment areas under 
the ESI Funds12 for the programming 
period from 2014 to 2020 in order to 
achieve at least an overall doubling 
of expenditure. In this regard it also 
recommends target percentages for 
their use.13Financial instruments in 
rural development
09 
The EU’s rural development policy is 
implemented through rural devel -
opment programmes (RDPs). Each of 
these programmes covers a period of 
7 years. Financial instruments have 
been part of rural development policy 
since 2000.
10 
For this field, the main legislation 
for the 2007–13 programming pe -
riod is Commission Regulation (EC) 
No 1974/200614, which envisaged three 
types of financial instrument: venture 
capital funds, guarantee funds and 
loan funds. In reality, the Member 
States established 11 guarantee funds 
(in Bulgaria, France (Corsica), eight 
different Italian regions and Romania) 
and three loan funds (in Greece, Latvia 
and Lithuania) between 2009 and 2014 
but no venture capital fund (see Fig -
ure 2 ).8 See e.g. paragraph 26 of the 
conclusions of the European 
Council (24/25 October 2013) 
(EUCO 169/13) which states: 
‘the programming 
negotiations of the European 
Structural and Investment 
Funds (ESIF) should be used to 
significantly increase the 
overall EU support from these 
funds to leverage based 
financial instruments for SMEs 
in 2014–20, while at least 
doubling support in countries 
where conditions remain 
tight. ’
9 European Parliament decision 
of 10 May 2012 on discharge in 
respect of the implementation 
of the general budget of the 
European Union for the 
financial year 2010, 
Section III — Commission 
(COM(2011) 473 final — C7-
0256/2011 — 2011/2201(DEC)) 
P7_TA(2012)0153.
10 COM(2011) 662 final, ibid.
11 COM(2014) 903 final of 
26 November  2014.
12 The European Regional 
Development Fund, European 
Social Fund, Cohesion Fund, 
European Agricultural Fund 
for Rural Development and 
European Maritime and 
Fisheries Fund.
13 Member States are 
recommended to deliver, 
through financial instruments, 
a specific percentage of the 
allocations made in their 
partnership agreements to 
each of the key investment 
areas as follows: 50 % in the 
field of SME support, 20 % in 
the field of CO2 reduction 
measures, 10 % in the field of 
information and 
communication technology, 
10 % in the field of sustainable 
transport, 5 % in the field of 
support for research 
development and innovation 
and 5 % in the field of 
environmental and resource 
efficiency.
14 Commission Regulation (EC) 
No 1974/2006 of 
15 December 2006 laying 
down detailed rules for the 
application of Council 
Regulation (EC) No 1698/2005 
on support for rural 
development by the European 
Agricultural Fund for Rural 
Development (EAFRD) (OJ 
L 368, 23.12.2006, p. 15).
12 Introduction
Financial instruments in the rural development area in the 2007–13 programming 
periodFigure 2
Source:  Data from the relevant funding agreements.Member States/Regions having established 
ﬁnancial instruments
GF: Guarantee fund
LF: Loan fund(20XX): Fund capitalisation date
Corsica: GF (2012)Latvia: LF (2010)
Lithuania: LF (2009)
Romania: GF (2010)
Bulgaria: GF (2011)
Greece: LF (2013)
Calabria: GF (2010)
Basilicata, Campania, Molise,Puglia, Sicily: GF (2011)Lazio: GF (2012)Umbria: GF (2014)
13 Introduction
11 
Member States are using financial 
instruments to target activities under 
axes 1 and 3 of the RDP for measures 
such as the modernisation of agricul -
tural holdings, adding value to agricul -
tural and forestry products, or business 
creation and development. Guarantee 
funds provide financial guarantees 
for credit sought by businesses or 
organisations, thus aiming to make it 
easier for them to obtain funding from 
banks. As individual project owners 
pay back their loans, the guarantees 
are released and new guarantees can 
be issued. Loan funds provide money 
for loans for business development 
projects. Money becomes available for 
new loans as individual projects pay 
back the previous ones.12 
From the total amount of 700 mil -
lion  euro15 contributed to financial 
instruments (see paragraph 4), public 
money represented 564  million  euro 
and the EU share of this amounted 
to approximately 440  million  euro. 
Figure 3  shows the allocations broken 
down by Member State.
Funding of financial instruments at the end of 2013Figure 3
Source:  Data from the business plans, the relevant 2013 annual progress reports and ECA calculations.050100150200250300
Bulgaria
France (Corsica)Greece
Italy (Sicily) Italy (Puglia) Italy (Lazio)
Italy (Campania)Italy (Umbria) Italy (Molise)Italy (Basilicata)Italy (Calabria)LatviaLithuania RomaniaMillion euro15 This amount included an 
amount of 138 million euro of 
private money paid into the 
loan fund in Greece in 
addition to 115 million euro of 
public money.
14 Introduction
Management of the 
financial instruments in 
rural development
13 
The Commission and Member States 
share the management of the financial 
instruments. The Commission ap -
praises and approves RDPs prepared 
and submitted by the Member States, 
which adopt all the legislative, stat -
utory and administrative provisions 
required to ensure that the financial 
instruments work correctly. The four 
main players in the Member States 
are the managing authority (generally 
the Ministry of Agriculture), the fund 
manager, the financial institutions (e.g. 
banks and credit institutions) and the 
final recipients (e.g. agricultural hold -
ings or food processing companies).
14 
The managing authorities design and 
supervise the financial instruments. 
The fund managers are required to implement the investment strategy 
and verify whether the investments 
actually achieve their intended objec -
tives. The financial institutions assess 
the economic viability of the projects 
presented and analyse the creditwor -
thiness of the final recipients. The 
latter enter into (loan or guarantee) 
contracts with the fund managers 
and/or financial institutions. The final 
recipients are also responsible for ac -
tually executing the investments and 
reimbursing the financial institutions 
in accordance with the provisions of 
their contracts.
15 
The specific responsibilities and tasks 
of the various players also depend 
on the type of financial instrument 
applied, as loan funds function in 
a different way from guarantee funds. 
For instance, flows of money go out of 
loan funds, which is not the case for 
guarantee funds, unless the recipient 
defaults.
Financial instruments in brief
 οRepayable instruments: money can be reused in the programme area. The revolving effect is important at a time 
when public budgets are constrained.
 οAnother key expected effect is to attract additional private capital for the pursuit of EU policy objectives: this is 
called leverage.
 οLittle experience and low materiality for rural development, as the main field for financial instruments so far has 
been cohesion.
 οGuarantee funds are used predominantly but some loan funds have also been established.
 οManagement responsibilities are shared between the Commission and the Member States.
 οThe Commission promotes the use of financial instruments but implementation difficulties and risks exist.
15
 Audit scope and  
approach
16 
The purpose of this audit was to 
determine whether financial instru -
ments implemented under the rural 
development policy had been well 
designed and managed in the 2007–13 
programming period. Also, the main 
EU regulations for the 2014–20 rural 
development programming period 
have recently been approved. This al -
lowed the Court to consider the extent 
to which the changes introduced by 
the new legal framework were likely 
to have a significant impact on the key 
shortcomings identified through the 
audit.
17 
The overall audit question was:
Are financial instruments a  successful 
and promising tool in the area of rural 
development?
More specifically, the audit aimed to 
answer the following questions:
 — Were financial instruments set up 
and capitalised properly in the 
2007–13 programming period?
 — Did financial instruments perform 
well in the 2007–13 period?
 — Were adequate winding up and 
exit policy conditions in place in 
the 2007–13 period?
 — Does the 2014–20 framework have 
the potential to provide the neces -
sary improvements for financial 
instruments?18 
The Court established audit criteria 
concerning the design, implemen -
tation and monitoring/evaluation of 
financial instruments. These criteria 
were developed from previous Court 
audits, legislation, Commission doc -
uments and other publications. The 
Court also consulted experts from the 
OECD16 on the validity and feasibility 
of these audit criteria and carried out 
a review of existing OECD literature.
19 
Audit visits were carried out in France, 
Greece, Lithuania, Romania and Italy, 
ensuring the inclusion of both guar -
antee funds17 and loan funds18. In each 
Member State, audit evidence was col -
lected and examined against the audit 
criteria by means of interviews and 
the analysis of documents and data. 
Through desk reviews, the auditors 
also collected and analysed additional 
information on financial instruments 
implemented by Member States or re -
gions that were not visited (particular -
ly Bulgaria and Latvia). They also held 
interviews with Commission officials 
and analysed relevant documents.
20 
The Court surveyed a sample of 37 
managing authorities, 32 of which 
had not implemented any financial 
instruments under rural development 
policy in the 2007–13 period. At the 
end of 2013, these managing author -
ities had absorbed about 90 % of the 
EAFRD payments for core investment 
measures under which financial instru -
ments were used19. The purpose of the 
survey was mainly to identify the rea -
sons which had contributed specifical -
ly, in the planning and design phase, 
towards preventing them from setting 
up one or more financial instruments.16 Organisation for Economic 
Cooperation and 
Development.
17 France (Corsica), Italy (Puglia 
and Sicily) and Romania.
18 Greece and Lithuania.
19 Namely measure 121 
(Modernisation of agricultural 
holdings) and measure 123 
(Adding value to agricultural 
and forestry products).
16
 Observations
Were financial 
instruments set up and 
capitalised properly in the 
2007–13 programming 
period?
21 
Careful preparation of the 2007–13 
programming period was necessary in 
order to provide a solid basis for the 
financial instruments. In particular, the 
legal framework for the financial in -
struments needed to take into account 
the specific characteristics of rural 
development policy and there had to 
be an assessment of real needs, based 
on reliable quantifiable information 
that justified the type of FEI required, 
determined the market demand for 
FEI support and demonstrated that 
the amount of capital earmarked for 
the fund was appropriate. The Court 
examined these main features of the 
design of financial instruments during 
the 2007–13 programming period.
The programming frame ‑
work was not satisfactorily 
prepared
22 
This section assesses whether the legal 
framework for financial instruments 
took into account the specific charac -
teristics of rural development policy 
and a solid assessment of needs. It also 
provides information from the survey 
sent to the Member States on the low 
utilisation of financial instruments in 
the 2007–13 period.The 2007–13 legal framework for 
financial instruments was not 
specifically designed for rural 
development purposes
23 
The Court found that the 2007–13 legal 
framework for financial instruments in 
rural development was predominantly 
influenced by cohesion policy. The 
Commission was not able to show that 
it had evaluated and addressed the 
specific characteristics of rural devel -
opment when designing this frame -
work. In rural development, unlike 
cohesion, for example, most potential 
beneficiaries were small farms, which 
were accustomed to non -reimburs -
able grants and the projects were also 
very small. Furthermore, the Member 
State managing authorities had not 
had sufficient experience with types of 
funding other than grants.
24 
The Commission had not had suf -
ficient past experience of financial 
instruments in rural development 
upon which to base the 2007–13 
programming period. While a separate 
financial engineering measure had 
actually been available in the 2000–06 
programming period, in practice, only 
Portugal and four Italian regions20 had 
set up financial instruments. Financial 
engineering was the least implement -
ed measure.20 Basilicata, Calabria and Puglia 
(under EAGGF -Guidance) and 
Marche (under 
EAGGF -Guarantee).
17 Observations
Examples of objectives used for financial instruments
In Greece, the intended objectives for setting up the loan fund were mentioned in general terms in the re -
vised RDP; they included enhancing liquidity for final recipients/borrowers and allocating loans from banks 
on favourable conditions so as to support entrepreneurship, and speeding up the absorption of the EAFRD 
funds.
In Lithuania, the objective for the loan fund included in the RDP was to provide access to credit for invest -
ments that pursue the objectives listed in the measures.
In Italy (Puglia and Sicily), the objective assigned to the financial instrument was to increase access to credit 
for agricultural holdings. The RDPs did not develop any further objectives.
In the Romanian RDP , the objectives of the guarantee schemes were the following: improved access to credit 
for rural development and increased interest and confidence of the financial institutions in the rural economy.Box 225 
Only three types of instrument were 
included in the 2007–13 legal frame -
work (see paragraph 10), without 
any explanation. Furthermore, in the 
literature produced by the OECD and 
the FAO21, and through exchanges 
held with OECD experts and national 
authorities during the Member State 
visits, the Court found that other types 
of instrument were actually used in 
the farming sector, such as warehouse 
receipt financing22.Objectives were general and there 
was no clear assessment of real 
needs
26 
The Member States that used the 
instruments did not establish specific 
and measurable objectives. The ob -
jectives they did provide were rather 
vague and were therefore not con -
sidered useful for assessing whether 
the credit gap had been reduced. 
Examples of how the objectives were 
defined are included in Box 2 .
27 
The assessment of real needs was not 
based on reliable quantifiable informa -
tion and formal gap assessments were 
not available for any of the Member 
States that implemented financial 
instruments. Although the legislation 
did not actually require a gap assess -
ment, there was also no other type 
of analysis with a similar probative 
value, such as quantified information on the nature of the needs and the 
most appropriate type of financial 
instrument. All programmes merely 
reported a lack of liquidity and general 
difficulties for the agricultural sector in 
obtaining access to credit. This weak -
ness in the initial assessment of needs 
resulted in a large number of over -
capitalised financial instruments (see 
paragraph 43).21 Food and Agriculture 
Organisation of the United 
Nations.
22 Receipts are issued as 
evidence that specified 
commodities of stated 
quantity and quality have 
been deposited at particular 
locations by named 
depositors. The latter can use 
them as collateral to obtain 
financing.
18 Observations
Financial instruments were 
not considered useful by most 
Member States
28 
The Court survey confirmed that most 
Member States did not consider the 
financial instrument tool to be useful23. 
The suitability of financial instruments 
in relation to the characteristics of 
most EAFRD beneficiaries was a key 
problem for the managing authorities. 
The main reason mentioned was that 
there was a lack of demand for the 
financial instruments as potential ben -
eficiaries were unfamiliar with them 
and were used to funding projects 
with grants.29 
The table below confirms the limited 
interest in financial instruments in 
the 2007–13 programming period as 
around 1.5 % of the EAFRD amounts 
spent for the relevant rural devel -
opment axes 1 and 3 was paid out 
via financial instruments ( Table 1 ).1 
Source: DG Agriculture and Rural 
Development — Annex to infor -
mation note on rural development 
programmes — Rural Development 
Committee — 19 November 2014.
However spending rules are 
advantageous for Member 
States
30 
The Court found that financial in -
struments were attractive for some 
Member States because they allowed 
faster spending, thus helping to ease 
the application of certain provisions 
in relation to absorption of EU mon -
ey. They could also generate revenue 
(interest).23 The main reasons were as 
follows: the specific 
characteristics of rural 
development are not (or not 
properly) addressed by the 
governing legal framework, 
the population of 
beneficiaries, notably farmers, 
are accustomed to receiving 
grants, sufficient advantages 
of using financial instruments 
compared to other support 
measures were not identified, 
support via financial 
instruments would not match 
the standard characteristics of 
common EAFRD beneficiaries 
and no need or no demand for 
financial instruments in the 
area of rural development was 
identified.
EAFRD amounts paid into financial instruments in the total of EAFRD spending
Amount  
(in million euro)Percentage compared to EAFRD pay -
ments for axes 1 and 3 until 15 Octo -
ber 2014 (including advances)
Cumulative EAFRD declared expenditure for axes 1 and 3 
(Q4 2006 to Q3 2014)1 32 767 100.00  %
Financial instruments (available maximum EAFRD share of the 
fund capital until the 3rd Q2014 declaration)2 530 1.62  %Table 1
1 Source : DG Agriculture and Rural Development — Annex to information note on rural development programmes — Rural Development 
Committee — 19 November 2014.
2 ECA calculation based on the quarterly declarations of expenditure.
19 Observations
Contributions to financial 
instruments are treated as 
incurred expenditure
31 
Council Regulation (EC) No 1290/2005 
states that the Commission must make 
intermediate payments in order to 
reimburse the expenditure incurred in 
implementing the programmes24. Com -
mission Regulation (EC) No 1974/2006 
states that expenditure declared to 
the Commission as incurred must 
include the total expenditure paid in 
establishing or contributing towards 
financial instruments25. This provision 
allowed the Member States to declare 
higher spending levels than occurred 
in reality.
Interest earned accrues to 
Member States
32 
The legislation also allows the full 
amount of fund capital to be claimed 
and paid from the outset to financial 
instruments. There was an incentive 
for Member States to do so as they 
could then earn interest by investing 
the fund capital. The case that illus -
trates this best was found in Romania 
where the full amount of fund capital 
was paid in a single contribution and 
held in national accounts. The type of 
financial instrument established (guar -
antee fund) and the low default rate26 
(below 1 %) meant that the Member 
State did not actually have to spend 
the bulk of the capital, enabling it to 
generate a significant amount of in -
terest. Up to the end of 2013, Romania 
earned a total of about 50 million euro 
in this way.Released guarantees at the end 
of the programming period were 
eligible for EU co -financing
33 
Any loans issued to final recipients 
and then paid back to the fund, or 
guarantees which were issued to cover 
loans and then released, were deemed 
eligible at the end of the programming 
period for EAFRD co -financing. This led 
to a situation where money could be 
kept by the Member State concerned, 
even if, in the end, it was no longer at 
risk (loan paid back) or no real cost or 
money flow ever occurred (guarantees 
released). Although this is backed by 
an implementing regulation27, the 
Court stresses that the principles of 
sound financial management are not 
respected when released guarantees 
are considered as eligible expenditure 
as they were never actually spent in 
monetary terms (see also paragraphs 
75 to 77).24 Article 26 of Council 
Regulation (EC) No 1290/2005 
of 21 June 2005 on the 
financing of the common 
agricultural policy (OJ L 209, 
11.8.2005, p. 1).
25 Article 52(1) of Commission 
Regulation (EC) No 1974/2006.
26 This is defined as the amounts 
of guarantees in default 
compared to the amounts of 
guarantees issued.
27 Commission Regulation (EC) 
No 1974/2006.
20 Observations
Financial instruments set up 
so that public money (loans/
guarantees) helps spend public 
money (grants)
34 
Financial instruments were used main -
ly to help release EAFRD spending in 
the 2007–13 period but their impact on 
grant consumption was not always cor -
roborated by available data. Structural 
factors also hampered this impact (see 
Box 3 ).35 
Financial instruments were set up so 
that public money (loans/guarantees) 
could help spend other public money 
(grants), rather than providing an alter -
native to grants. For all the financial in -
struments implemented in 2007–13 by 
the Member States visited, the Court 
found that only grant applicants could 
access them (indirect access).
Structural difficulties in obtaining access to credit in Romania
The paying agency estimated that, ultimately, approved projects totalling 700 million euro, under all invest -
ment measures, could not be executed as the potential beneficiaries had not been able to obtain credit or 
lacked collateral. Approximately 69 % of project cancellations up to June 2014, were due to the absence of 
a co -financing share. Because of structural factors (little interest in agriculture on the part of the banks, no 
credit history, no other adequate security, projects that the banks thought economically unviable), even with 
a financial instrument, the Romanian credit gap remained and the absorption of grants related to guarantees 
was still low. Available data until 31 March 2014 show that around 15 % of all grant spending was backed by 
a guarantee from the EU co -financed guarantee fund on borrowings required to fund the projects.Box 3
36 
The Court found specific cases in Italy 
(Puglia and Sicily), Lithuania and Ro -
mania where the total amount of the 
grant and financial instrument togeth -
er was either close to the amount of 
the eligible cost of the project, equal 
to it or even higher. Therefore, at the 
end of the 2007–13 programming 
period, there was a risk of projects ac -
tually being financed up to 100 % with 
public money.37 
In the policy area of cohesion, this situ -
ation is explicitly prevented, as finan -
cial instruments and grants operate 
separately. Financial instruments are 
not allowed to cover costs of a proj -
ect which are already supported by 
a grant.
21 Observations
In certain cases, financial 
instruments contributed towards 
helping to alleviate  
the application of the 
de-commitment rule
38 
Council Regulation (EC) No 1290/2005 
includes a mechanism for stimu -
lating the financial execution of 
programmes. It contains a rule that 
requires the Commission to ‘de -com -
mit’ (cancel) any portion of an annual 
budget which has not been used 
within a period of 2 years (known 
as the ‘N+2’ rule28). The purpose of 
this rule is ‘to speed up execution of 
programmes and contribute to sound 
financial management29’. The Court has 
already pointed out, on several occa -
sions, that there is a risk that financial 
instruments might contribute towards 
circumventing this rule30.39 
The Commission also acknowledges 
this risk in relation to some Member 
States31. The Court found that such 
risk existed in Bulgaria, Greece ( Box 4 ) 
and Italy (Sicily) at the time when their 
funds were established.28 Article 29 of Council 
Regulation (EC) No 1290/2005.
29 DG Agriculture and Rural 
Development 2013 Annual 
Activity Report, annex 10, 
p. 158.
30 Court annual reports 
concerning the financial years 
2010 (paragraph 4.33) (OJ 
C 326, 10.11.2011) and 2012 
(paragraph 4.7) (OJ C 331, 
14.11.2013); Court’s Opinion 
No 7/2011 on the proposal for 
a Regulation of the European 
Parliament and of the Council 
laying down common 
provisions on the European 
Regional Development Fund, 
the European Social Fund, the 
Cohesion Fund, the European 
Agricultural Fund for Rural 
Development and the 
European Maritime and 
Fisheries Fund covered by the 
Common Strategic Framework 
and laying down general 
provisions on the European 
Regional Development Fund, 
the European Social Fund and 
the Cohesion Fund and 
repealing Regulation (EC) 
No 1083/2006 (paragraph 49) 
(OJ C 47, 17.2.2012), Special 
Report No 2/2012 (paragraph 
54);Court document (2014), 
‘Agriculture and cohesion: 
overview of EU spending 
2007–13’ (paragraph 21) 
(http://eca.europa.eu ).
Situation as regards the ‘N+2’ rule in Greece
In Greece, a payment of 115 million euro in public money was made to a loan fund in December 2013. The 
Court found that there was a high risk that the establishment of the fund also served the purpose of limiting 
the application of the ‘N+2’ rule. This was because:
 οthe amount allocated represented a significant share of the funds available32;
 οinsignificant amounts were disbursed to final recipients (see Box 5 );
 οthe risk of de -commitment was significant in 2013.
32 Between 10 % and 30 % of the budget available for the measures concerned.Box 4
22 Observations
40 
Therefore, in three out of the seven 
Member States that set up financial 
instruments in the 2007–13 program -
ming period, financial instruments 
were established and were also used 
to withhold and retain EU payments 
rather than address the officially com -
municated needs and objectives. By 
accepting such practices the Commis -
sion did not ensure that the principles 
of sound financial management had 
been adhered to33.Significant overcapitalisation 
of financial instruments
41 
A situation of overcapitalisation occurs 
when the amount paid into the capital 
of the financial instruments is too large 
in relation to the amount provided to 
final recipients in the form of loans or 
guarantees issued.
42 
Figure 4  shows that the process starts 
with the determination of the poten -
tial market for the financial instrument. 
This information serves to estimate the 
fund capital. A wrong estimate might 
lead to an overcapitalisation of the 
financial instrument:31 In its reply to the Court’s 
annual report concerning the 
financial year 2012, the 
Commission recognises that it 
‘itself has observed that some 
Member States make 
extensive use (…) of financial 
engineering instruments 
which can have the effect of 
reducing or avoiding a loss of 
funds under the N+2 rules.’
33 Article 9(2) of Council 
Regulation (EC) No 1290/2005 
and Article 73 of Council 
Regulation (EC) No 1698/2005 
of 20 September 2005 on 
support for rural development 
by the European Agricultural 
Fund for Rural Development 
(EAFRD) (OJ L 277, 21.10.2005, 
p. 1).
Factors contributing to overcapitalisationFigure 4
Activity of
the ﬁnancial
instrument(Risk exposure
ratio only for GF)
(Revolving of the GF)(Disbursement rate of the LF)
Overcapitalisation
of the ﬁnancial
instrumentOverestimation
of the fund
capitalDemand for the
ﬁnancial
instrumentGuarantees
provided to ﬁnal
recipientsLoans provided
to ﬁnal recipients
Amount actually
paid in the fund
capitalAmount of
the fund
capitalPotential market
for the ﬁnancial
instrument
23 Observations
Amount of fund capital generally 
overcapitalised
43 
The Commission supervised the 
process of determining the amount 
of fund capital provided for financial 
instruments. Despite this supervision, 
the Court observed significant over -
capitalisation in Bulgaria, Greece, Italy 
(Basilicata and Sicily), Lithuania and 
Romania. The Commission only took 
concrete action in the case of Bulgar -
ia, leading to a reduction in the fund 
capital. Examples of overcapitalisation 
are provided in Box 5 .One reason for overcapitalisation 
is the absence of a sound analysis 
of the demand for financial 
instruments in the Member States
44 
The Court found that attempts had 
been made by Member States, in op -
erational documents such as business 
plans, to estimate the demand for 
established financial instruments, but 
they were based on rough estimates 
of grant consumption. Similar weak -
nesses were found for all the financial 
instruments audited in the Member 
States (see paragraph 19), with the 
exception of France (Corsica). Infor -
mation collected for review shows 
that similar weaknesses also existed in 
Bulgaria. Some examples are described 
in Box 6 .
Examples of the overcapitalisation of financial instruments
In Greece, the loan fund benefitted from public funding amounting to 115 million euro, to be spent in the 
2014–15 period. In reality, only 0.5 million euro has been paid to final recipients until November 2014.
In Lithuania, a fund size of over 130 million euro was initially planned, but in practice the maximum fund al -
location was only 52 million euro. At the end of 2013, the fund capital was reduced to 13.8 million euro.
In Italy (Sicily), the amount paid into the guarantee fund was around 38 million euro. This amount was largely 
overestimated considering that the uptake was around 5 million euro. (see paragraph 55).Box 5
24 Observations
45 
The Court found that the attractive -
ness of the financial instruments for 
potential final recipients depended 
mainly on the cost of the credit, which, 
in turn, depended on market interest 
rates. This can be illustrated by the 
case of Lithuania. The periods when 
the contracts with final recipients were 
actually concluded largely coincided 
with the periods when the loan fund 
was attractive in terms of interest 
rates35. This illustrates the fact that de -
mand for financial instruments needs 
to be assessed thoroughly, and over 
the long term, as it depends on a com -
bination of intrinsic circumstances and 
situations as well as external trends.Another reason for the 
overcapitalisation of guarantee 
funds: Risk exposure ratios poorly 
determined
46 
For guarantee funds, the risk exposure 
ratio gives the upper default limit that 
is considered acceptable in the man -
agement of the fund. If the amount of 
capital multiplied by the risk exposure 
ratio is too high in relation to the 
guarantees issued to final recipients, 
a situation of overcapitalisation occurs.35 Interest rates offered by the 
loan fund compared with 
interest rates proposed by the 
market.Examples of the failure to analyse the demand for financial instruments
In Italy (Puglia and Sicily), the principle applied was to estimate the potential demand for guarantee funds. 
This corresponded to around 75 % (Puglia) and 50 % (Sicily) respectively of the expected loans to be provided 
by the banking sector for financing the private part of projects linked to the investment measures concerned. 
This resulted in an estimated demand (312 million euro in Puglia and 120 million euro in Sicily) that signifi -
cantly exceeded the real demand. The estimated demand for guarantee funds for only two regions (Puglia 
and Sicily) was 8 % higher than the total guarantees provided by the fund manager for the whole country34 as 
at July 2014.
In Bulgaria, the authorities considered that the guarantee fund would cover 75 % of total potential invest -
ments. The potential demand for the guarantee fund was then established at around 600 million euro for 
the 2012–15 period. This was 12 times higher than the real market at the end of April 2014. The Commission 
reviewed the process without challenging the fact that the 75 % hypothesis, upon which the calculations were 
based, was not substantiated.
In Romania, no evidence of an ex ante analysis was provided to back the estimates. They were stated to have 
been based on prior experience and the SAPARD programme, without quantifying the volumes of guarantees 
in the period beforehand.
34 The fund manager (ISMEA) is a public body that provides information and financial services to the farming sector in Italy. It manages a national 
guarantee fund and is also the fund manager for six regional guarantee funds supported by the EAFRD.Box 6
25 Observations
47 
The value of the risk exposure ra -
tio heavily influences the amount 
of capital to be paid into guarantee 
funds. There is a need to adapt the 
value used for the risk exposure ratio 
according to the value of the default 
rate actually observed. For instance, in 
Romania, the level of default (below 
1 %, see paragraph 32) observed at 
the end of 2013 was much lower than 
the upper limit of 20 %, which was the 
basis used for capitalising the guaran -
tee fund.
Estimate of overcapitalisation of 
the guarantee funds
48 
The Court estimated the amount of 
overcapitalisation of the guarantee 
funds at 31 December 2013 on the ba -
sis of the exposure ratios used by the 
national authorities. The calculations 
in Annex I  show that the total amount 
for the guarantees issued at the end of 
2013 for all financial instruments im -
plemented in 2007–13 could have been 
provided with total capital of around 
50 million euro paid into the funds. In 
reality, around 420  million  euro had 
been invested. This shows a massive 
overcapitalisation at the end of the 
year 2013, as the amounts invested 
were eight times higher than realisti -
cally required.Examples of cautious approaches 
in capitalising the funds were also 
observed
49 
Despite the overestimation of a po -
tential demand, the Italian region of 
Puglia applied a prudent step -by-step 
approach and limited payments into 
the fund to 20 % of the estimated fund 
capital to avoid overcapitalisation. 
This decision proved to be relatively 
in line with the guarantees issued (see 
paragraph 55). Such an approach also 
existed in other Italian regions (Cam -
pania and Molise).
50 
A similar approach was observed in 
France (Corsica). Only half of the ini -
tially planned fund capital was actually 
paid into the fund, in correspondence 
with the guarantees issued. Nonethe -
less, taking the risk exposure ratio into 
account the financial instruments in It -
aly (Puglia) and France (Corsica) would 
also have been fully operational with 
a much lower capital endowment.
26 Observations
36 See paragraphs 5.33 to 5.36: 
According to the latest 
Commission figures, only 37 % 
of the 8,4 billion euro that had 
been paid into financial 
instruments from 2007 to the 
end of 2012 had actually been 
paid out or guaranteed to the 
final recipients.Did financial instruments 
perform well in the 2007–
13 period?
51 
For financial instruments to perform 
well, certain conditions should hold. 
Only when sufficient financial instru -
ment resources reach the final recip -
ients in due time, the instruments 
work as expected and, consequently, 
provide their full potential benefits (re -
volving and leverage effects). The EU 
legal framework would be expected to 
include adequate provision to stimu -
late the achievement of these benefits. 
Setting up of the financial instruments 
in good time during the programming 
period should also help these expect -
ed advantages to be achieved. There 
should also be monitoring systems 
that produce reliable data to make it 
possible to judge whether the instru -
ments achieve their results.
52 
The Court assessed whether these key 
conditions for performance were in 
place when the financial instruments 
were implemented in the 2007–13 
programming period. Overall, it found 
that this was not the case.Financial instruments per ‑
formed poorly in revolving 
money
53 
The Court’s annual report concerning 
the 2013 financial year highlights the 
low level of assistance to final recipi -
ents provided by the financial instru -
ments in the policy area of cohesion36. 
It stated that the disbursement rates 
were  ‘still too low to expect that all 
funds available [would] be used at 
least once’. This audit confirmed that 
this situation also existed for rural 
development. As at 31  December  2013, 
only 45 % of the 700 million euro 
financial instrument fund capital (of 
both the loan and guarantee funds) 
had actually been guaranteed or paid 
out to the final recipients of both the 
loan and guarantee funds.
54 
One of the main effects that can be ex -
pected from financial instruments con -
sists in obtaining a revolving effect. 
However, there is no legal requirement 
for any degree of revolving and insuf -
ficient disbursement rates can delay 
revolving effects from developing. The 
audit also confirms this situation for 
rural development.
27 Observations
For guarantee funds, revolving 
effects were insufficient to date
55 
The potential of a guarantee fund is 
to go far beyond the capital available 
through a multiplier effect. It is then 
possible to provide more guarantees 
than the capital available. Howev -
er, the multiplier or revolving effect 
achieved in the Member States was 
insufficient. According to the Court’s 
data, the revolving effect for the 11 ex -
isting guarantee funds was 0.53 at the 
end of 2013, as illustrated in Table 2 .56 
The revolving effect for some Italian 
guarantee funds (Basilicata, Calabria, 
Sicily, and Umbria) was particularly 
low. Only in three of the guarantee 
funds shown in Table 2  (in Italy (Cam -
pania, Molise and Puglia)) were more 
guarantees provided than fund capital, 
generating only a slight revolving 
effect.Table 2Revolving effect of the guarantee funds
Member States/ 
Region(s)Maximum amount 
paid into the fund until 
31.12.2013  
(in million euro)
ATotal of amounts guaran -
teed to final recipients as 
at 31.12.2013  
(in million euro)
BRevolving effect  
(multiplier 
— 31.12.2013)
B/ATargeted maximum 
multiplier
Bulgaria 171.29 50.0010.29 5
France (Corsica) 0.60 0.40 0.67 3
Italy (Sicily) 37.63 5.48 0.15 32
Italy (Puglia) 5.00 6.58 1.32 12.52
Italy (Lazio) 2.50 0.92 0.37 12.5
Italy (Campania) 2.25 3.26 1.45 12.5
Italy (Umbria) 4.80 0.00 0.00 3
Italy (Molise) 2.45 2.45 1.00 3
Italy (Basilicata) 14.86 1.70 0.11 3
Italy (Calabria) 10.00 1.68 0.17 2
Romania 220.00 177.17 0.81 5
TOTAL 473.80 249.64 0.53 -
1 Guarantees issued up to 3 0 April 2014 .
2 The maximal value for the multiplier was set at 12,5 both in Puglia and Sicily. However, in Puglia, the amount of the fund capital was determined on 
the basis of this value while in Sicily the value of 3 was used.
Source:  Data from the business plans, the relevant annual progress reports 2013 and ECA calculation.
28 Observations
57 
Bulgaria reduced the fund capital, 
respectively by more than a quarter in 
2013 (from 171.29 to 121 million euro) 
and Romania reduced it by nearly 
a half (from 220 to 115 million euro) 
in 2014. Corresponding EAFRD mon -
ey was transferred back from the 
guarantee fund to the grants part of 
the applicable investment measures. 
These reductions in fund capital had 
the effect of increasing the multiplier/
revolving effect.
58 
By taking these reductions into ac -
count and estimating the guarantees 
provided in the first three quarters of 
2014, no multiplier effect had been 
achieved as at 30 September 2014 
for all 11 existing guarantee funds. 
This was still far below the multipli -
er targeted by the Member States 
themselves (see Table 2 , last column) 
and the situation presented in Annex I . 
This means that the capital paid into 
the guarantee funds still exceeded the 
amount for the guarantees issued to 
final recipients, weakening the poten -
tial of the instrument.For loan funds, the revolving 
effect is equally low
59 
According to the Court’s data, the 
average disbursement rate for the two 
operational loan funds at the end of 
2013 was 0.75, as illustrated in Table 3 .
60 
In Greece, no loans were actually 
provided until mid-2014. For Lithuania 
and Latvia, the figures mask a situation 
where the funds worked in a discon -
tinuous manner. In Lithuania, not one 
single contract had been signed since 
the first quarter of 2012 (see paragraph 
45). No effort was made to adapt the 
fund conditions to market needs. In 
Latvia, the situation was similar: no 
new loans had been provided since 
June 2012. The solution found in Lith -
uania and Latvia was to gradually re -
duce the fund capital, by around three 
quarters and two thirds respectively 
until the end of 2013. This reduction 
practice continued in 2014.Table 3Disbursement rate of the loan funds
Member States/ 
Region(s)Maximum amount paid into the 
fund until 31.12.2013  
(in million euro)Total of amounts paid out to final 
recipients as at 31.12.2013
(in million euro)Disbursement rate with maxi -
mum amount paid into the fund 
until 31.12.2013
Latvia137. 6 0228.25 0.75
Lithuania 52.45 39.05 0.74
TOTAL 90.05 67.30 0.75
1 In accordance with the exchange rate of the Bank of Latvia 1 EUR = 0.702804 LVL.
2 ECA estimation following the Latvian quarterly declarations, including the 4th quarter 2013.
Source:  Data from the relevant annual progress reports 2013 and ECA calculation.
29 Observations
61 
For the loan funds, the revolving effect 
can only kick in once a loan has been 
repaid by the final recipient. For those 
funds, the Court found that no revolv -
ing effect was actually occurring at the 
end of the year 2013.
Leverage effect rarely occurs 
and some of the funds were 
set up too late
62 
In its reply to the Court’s annual 
report concerning the financial year 
2013 (paragraph 5.36), the Commis -
sion emphasised the limits of a single 
indicator like the disbursement rate as 
a tool for assessing the performance of 
financial instruments and considered 
that ‘the assessment of performance 
should also focus on the achievement 
of results by the co -funded financial 
instruments, including the revolving 
and leveraging effects’.
Leverage effect rarely occurs
63 
Financial instruments are meant to 
leverage public aid by incentivising 
the involvement of the private sector. 
If, for example, every euro provided 
by public sources is matched by one 
euro from private funding, the total 
amount that benefits final recipients 
is doubled. However, there is no legal 
requirement to achieve a given degree 
of private participation (leverage).64 
Article 223 of the implementing reg -
ulation to the Financial Regulation37 
states that financial instruments shall 
‘(…) aim at achieving a leverage effect 
of the Union contribution by mobil -
ising a global investment exceeding 
the size of the Union contribution’ 
and that the ‘leverage effect of Union 
funds shall be equal to the amount 
of finance to eligible final recipients 
divided by the amount of the Union 
contribution. ’38 However, in the context 
of the EAFRD, this concept considers 
normal public co -financing provided 
by the Member States as part of the 
leverage even where no private fund -
ing was raised at all.
65 
The Common Provisions Regulation39 
defines the ‘expected leverage effect’ 
as ‘an estimate of additional public 
and private resources to be potential -
ly raised by the financial instrument 
down to the level of the final recipient 
(…). ’ In line with this concept, in the 
context of this performance audit, the 
Court considers leverage in terms of 
how many euros of funding (public 
and private) have been guaranteed or 
paid out for financing rural develop -
ment projects for each euro of public 
(EU and Member State) funding. There -
fore, the Court calculated the leverage 
effect40 as follows:
Finance to final recipients
Public contributions37 Regulation (EU, Euratom) 
No 966/2012 of the European 
Parliament and of the Council 
of 25 October 2012 on the 
financial rules applicable to 
the general budget of the 
Union and repealing Council 
Regulation (EC, Euratom) 
No 1605/2002 (OJ L 298, 
26.10.2012, p. 1).
38 See Commission Delegated 
Regulation (EU) No 1268/2012 
of 29 October 2012 on the 
rules of application of 
Regulation (EU, Euratom) 
No 966/2012 of the European 
Parliament and of the Council 
on the financial rules 
applicable to the general 
budget of the Union (OJ L 362, 
31.12.2012, p. 1).
39 See Article 37(2) of Regulation 
(EU) No 1303/2013 of the 
European Parliament and of 
the Council of 
17 December 2013 laying 
down common provisions on 
the European Regional 
Development Fund, the 
European Social Fund, the 
Cohesion Fund, the European 
Agricultural Fund for Rural 
Development and the 
European Maritime and 
Fisheries Fund and laying 
down general provisions on 
the European Regional 
Development Fund, the 
European Social Fund, the 
Cohesion Fund and the 
European Maritime and 
Fisheries Fund and repealing 
Council Regulation (EC) 
No 1083/2006 (OJ L 347, 
20.12.2013, p. 320).
40 See Special Report No 2/2012, 
paragraph 102.
30 Observations
66 
The Member States did little to achieve 
a leverage effect. The Court’s audit 
visits showed that no leverage was 
achieved, for example, in Latvia, Lith -
uania and Italy (Sicily), as the imple -
mentation of the financial instruments 
did not attract any additional private 
capital to rural development projects. 
A certain degree of leverage was ob -
served in France (Corsica), Italy (Puglia) 
and Romania, for the non -guaranteed 
part of the loans41 provided to final 
recipients.67 
Greece and Italy (Umbria)42 were 
the only Member States where the 
funds had been explicitly designed 
to achieve leverage. In Greece, it was 
expected that a certain level of lever -
age would be attained as, in addition 
to the public contribution a private 
bank acted as part -financing partner43. 
However, as at mid-2014 no leverage 
had actually been achieved as no loan 
had been issued.41 Example: the guarantee in 
France (Corsica) covers 65 % of 
the loan, while in Romania this 
can go up to 80 %.
42 In Italy (Umbria), for 
a guarantee fund which was 
not audited on the spot, the 
business plan states that at 
least 20 % of the resources for 
the fund must come from the 
private sector.
43 The full capital invested in the 
loan fund was 
253.025 million euro, out of 
which 115 million euro was the 
public part and 
138.025 million euro was the 
private part invested by the 
Piraeus Bank.Box 7Leverage achieved by the six financial instruments audited on the spot
From the sample of Member States/regions visited on the spot in the course of the audit, leverage was as 
follows:
Corsica
(GF)Greece
(LF)Lithuania
(LF)Puglia
(GF)Romania
(GF)Sicily
(GF)
Leverage
(Amount of the credit distributed/Capital paid into 
the FEI)1.47 Not yet n/a 2.24 1.4110.28
1 The calculation in this table uses the maximum fund capital of 220 million euro.
Some financial instruments were 
set up too late
68 
Several financial instruments were 
established late, thus reducing their 
performance within the 2007–13 pro -
gramming period. This was the case 
in France (Corsica) (June 2012) and 
Bulgaria (February 2012), but more par -
ticularly in Greece and Italy (Calabria) 
(see Box 8 ).
31 Observations
44 These two performance 
indicators (leverage effect and 
revolving effect) are also 
considered to be relevant by 
the Commission (see 
paragraph 62).
45 These lists mentioned also the 
measures concerned, the 
amount of the loans, the 
amount of the guarantees (if 
applicable), the currencies, the 
state of play of the loans 
(repayment stage), etc.The monitoring of financial 
instruments in 2007–13 did 
not provide enough relevant 
information on performance 
achieved
69 
The Court’s view is that the following 
main indicators measure financial 
instrument performance:
 — leverage effect,
 — revolving effect44,
 — default rates.
70 
This set of indicators provides informa -
tion on performance. The Court noted 
that the rural development framework 
did not include any specific targets or 
indicators to enable the effectiveness 
and impact of financial instruments 
to be measured and observed that 
the Member States predominantly monitored disbursement rates. Mem -
ber States had exhaustive lists of the 
final recipients concerned45, but they 
did not establish any performance 
or result indicators to monitor per -
formance against the three criteria 
(revolving and leverage effects and 
default rate).
71 
The Court also found cases where the 
figures included in the annual progress 
reports to the Commission were not al -
ways complete or reliable (see Box 9 ).In Greece and Italy (Calabria), timing reduced the performance of the funds
The Greek managing authority proposed the establishment of a loan fund in January 2011 and the European 
Commission approved it in May 2011. It was expected to enhance liquidity for investors and entrepreneurs in 
the rural sector. In reality, the loan fund only started in January 2014. In the specific context of an acute eco -
nomic crisis, which, according to the national authorities, explained the delays, the loan fund was implement -
ed only 2 years before the end of the programming period at the end of 2015. This reduced its performance 
over the whole 2007–13 period.
The Court found that an important gap existed between the time when in Italy (Calabria) a fund was set 
up administratively and the fund capital paid in, on the one hand, and the time when first guarantees were 
issued, on the other. The guarantee fund was set up in 2010, but the first guarantees were only provided in 
2013.Box 8
32 Observations
Were adequate winding 
up and exit policy 
conditions in place in the 
2007–13 period?
72 
The management of financial in -
struments does not follow the usual 
system for managing grants either at 
the level of the Member State admin -
istrations or at that of the final recip -
ients. Financial instruments needed 
a completely new architecture in the 
Member States, especially to comply 
with Articles 50 to 52 of Regulation 
(EC) No 1974/2006. Key features of this 
specific financial instrument architec -
ture are winding up and exit policies.
73 
Furthermore, rural development 
legislation requires winding up and 
exit policy issues to be included in 
key documents (business plans and 
funding agreements). Therefore, clear 
rules should exist for winding up the 
financial instruments at the end of 
the programming period (31  Decem -
ber 2015), and conditions should be set to prevent remaining funds being 
used for any purpose other than the 
original rural development objective 
of the RDP measure. They should also 
only be used for the benefit of individ -
ual undertakings. Finally, the Com -
mission should provide the Member 
States with guidance to reduce their 
administrative burden, and an appro -
priate risk management system should 
be introduced to tackle specific risks 
linked to financial instruments (like the 
protection of public money).
74 
The Court assessed the approaches fol -
lowed by Member States and the Com -
mission to match these requirements 
and found that both clear rules and 
Commission guidance were lacking.Reporting not complete and reliable
Romania included the amounts for ineligible guarantees, and reported guarantees that had been cancelled 
without any loans being provided. Romania also reported guarantees that were not active because the guar -
antee commission had not been paid by the final recipients.
Lithuania included loans which had never become active because the contracts were cancelled and France 
(Corsica) reported on data which did not match the certified information included in the fund manager’s 
database.Box 9
33 Observations
Closure had not yet been 
well prepared and provisions 
were interpreted differently 
by the Member States and 
the Commission
75 
The programmes will be closed at 
the end of the rural development 
programming period 2007–13. In this 
connection, it will be determined what 
FEI expenditure is eligible and the cor -
responding amounts that can be kept 
by the Member States (paying the bal -
ance of the financial instruments) (see 
paragraph 33). It will also be decided 
what exit and winding up provisions 
will enter into force. The Court found 
out that this crucial event had not 
been soundly prepared by either the 
Member States or the Commission.
76 
During the 2007–13 programming pe -
riod, the Commission and the Member 
States have interpreted the applica -
ble FEI rules differently, especially 
in the case of guarantee funds. The 
legislation considers two categories 
of guarantee as eligible: released and 
ongoing guarantees. The Commission 
stated that all released guarantees are 
eligible at closure. According to the 
Commission ongoing guarantees are 
not eligible in total but a ‘risk exposure 
ratio’ has to be applied for them at 
closure, reducing the amounts which 
can be kept by Member States.77 
The Court observed that DG Agri -
culture and Rural Development’s 
approach here was in line with the in -
terpretation provided by DG Regional 
and Urban Policy in its guidance note, 
but this is not backed up by the text 
of the legislation. The Member States 
visited during the audit had divergent 
interpretations of these rules. Italy 
understood that it had to apply this 
ratio to all guarantees (released and 
ongoing), while France (Corsica) and 
Romania did not want to apply a ratio 
at all.
Lack of clarity regarding exit 
policy provisions
78 
There are currently no precise exit and 
winding up provisions for Member 
States. The EU rural development rules 
only require that resources returned 
to the operation after the final eligi -
bility date of the rural development 
programme should be used by the 
Member States concerned, for the 
benefit of individual undertakings. The 
Member States visited during the audit 
all considered that the future of all the 
audited funds was still open: it was not 
clear if the funds would continue, for 
how long and for what purpose.
34 Observations
79 
According to the Commission’s inter -
pretation46, individuals outside rural 
development and the farming sector 
can receive support, but no clear defi -
nition of these individual undertakings 
was available. The Court considers 
that there is a risk of resources initially 
dedicated to rural development, for 
potential beneficiaries of agricultural 
policy, being transferred to sectors 
other than those concerned by rural 
development.
80 
Finally, the Court found that the Com -
mission did not intend to monitor this 
provision in the period after closure, 
in order to ensure that the funding 
capital and returning resources are, 
in the mid- and long term, not used 
by the Member States for purposes 
other than for the benefit of individual 
undertakings.
Does the 2014–20 
framework have the 
potential to provide the 
necessary improvements 
for financial instruments?
81 
A new legislative framework for the 
2014–20 policies in the areas of social 
affairs, fisheries, cohesion and rural 
development was adopted at the end 
of 2013. In compliance with the Finan -
cial Regulation47, for cases of shared 
management, the common provisions 
regulation for the 2014–20 period 
sets out principles to be respected for 
financial instruments for all areas. The 
Court assessed to what extent these 
legal changes could increase the per -
formance of the financial instruments 
in rural development.There are some notable 
improvements in the new 
legal framework …
82 
The Court noted that the legal frame -
work on financial instruments provides 
certain improvements, in particular:
 — compulsory ex ante  assessments 
for all instruments which should 
result among other things in a bet -
ter estimate of the fund capital 
required;
 — phased -in payments linked to the 
level of actual disbursements to 
final recipients for loan funds, or 
actual uptake for guarantee funds 
which should reduce the risk of 
overcapitalisation;
 — the option of setting up different 
types of financial instrument at 
different levels (national, regional, 
transnational or cross -border) 
e.g. via fund of funds (holding 
funds48), specific tailor -made or 
off-the -shelf instruments (both to 
be set up by the Member States) or 
via contributions to EU level instru -
ments; and
 — compulsory reporting from the 
outset, including on a range of 
indicators linked to the Financial 
Regulation49.46 Opinion of the legal service of 
DG Agriculture and Rural 
Development in a note to the 
auditors dated 8 October 2014.
47 Article 139(5) of Regulation 
(EU, Euratom) No 966/2012.
48 Funds set up to invest financial 
resources in venture capital 
funds, guarantee funds, loan 
funds, or funds or other 
incentive schemes providing 
loans, guarantees for 
repayable investments or 
equivalent instruments.
49 E.g. managing authorities will 
need to provide specific 
reporting on operations 
comprising financial 
instruments as an annex to the 
annual progress report. This 
will include a number of 
elements (leverage, 
performance) to bring the 
reporting in line with the 
Financial Regulation. For the 
EAFRD this reporting is 
a novelty.
35 Observations
… but certain obstacles 
remain
83 
The Court identified that the risk of 
overcapitalising financial instruments 
remained and that the conditions re -
quired to guarantee their long-term ef -
fects were still not in place. The Court 
also found that performance issues 
were still not adequately addressed 
in the EU legal framework for 2014–20 
and that financial instruments risked 
remaining too dependent on grant 
schemes.
Overestimating the capital 
needed and then overcapitalising 
the funds are risks which remain
84 
The new provision on phased -in 
payments (Article 41 of the common 
provisions regulation) provides that 
payments from the EAFRD budget to 
fund capital depend on the spending 
activity of financial instruments. This 
provision may limit overcapitalisation, 
but there is still a risk that it will not be enough to remedy the problem of 
‘parking funds50’ with a view to circum -
venting the application of the de -com -
mitment rule.
85 
One of the main purposes of the new 
mandatory ex ante  assessment is to 
quantify how much should be commit -
ted for funding financial instruments. 
The quality of this assessment is there -
fore of key importance as it has direct 
financial effects. The legislation in 
force does not require the Commission 
to check such quality.
86 
Based on the 2007–13 experience, 
there is a risk that the new provision 
on phased -in payments may be insuf -
ficient to ensure that funds are not too 
large, particularly if the ex ante  assess -
ments are inadequate. The amount of 
the first 25 % instalment51 depends on 
the amount committed for the finan -
cial instrument under the relevant 
funding agreement (see Table 4 ).Table 4Potential impact of phased‑in payments (in million euro)
Amount planned to 
be committed to the 
financial instrument 
under the relevant 
funding agreementInterim pay -
ment subject 
to a  maximum 
ceiling of 25 %MultiplierMaximum 
amount to be 
provided in 
guaranteesLatest amounts 
issued as 
guaranteesIn % of the maxi -
mum amount 
Bulgaria 121.00 30.25 5 151.25 50 33.0 %
Italy (Puglia) 25.00 6.25 12.5 78.125 6.6 8.5 %
Italy (Sicily) 39.50 9.875 12.5 123.44 5.5 4.4 %50 In Italy (Sicily), for instance, 
guarantees were provided in 
a continuous manner, but, 
overall, only a small share of 
the capital was actually used. 
The guarantee fund therefore 
acted as a ‘parking fund’.
51 The common provisions 
regulation states that each 
amount paid from the 
programme to the financial 
instrument shall not exceed  
25 % of the total amount of 
programme contributions 
committed to the financial 
instrument.
36 Observations
The risk remains that financial 
instruments may be set up too 
late
87 
Implementing a financial instrument 
in good time and at an early stage 
of the programming period is a key 
condition for enhancing its perfor -
mance throughout the programming 
period. The Court considers that the 
way the current financial instruments 
are cleared in December 2015 will im -
pact the decision and the process for 
setting up financial instruments under 
the new framework. Overall, as no 
RDPs had been approved at 1 Decem -
ber 2014 and no ex ante  assessments 
had been finalised for the new finan -
cial instruments, there was a high risk 
that implementation would only start 
from 2016 onwards, thus reducing 
the time during which they could be 
operational.
Risk of insufficient focus on the 
long -term effects
88 
The Court found that some Member 
States, such as Lithuania and Latvia, 
implemented financial instruments 
to respond to individual difficulties 
caused by the economic and finan -
cial crisis. However, the funds had 
stopped running once the situation on 
these countries’ financial markets had 
improved (see paragraphs 45 and 60). 
However, for repayable instruments of 
this type to be able to deliver signif -
icant effects, they need to work on 
a long -term basis. In Corsica, even if 
the credit lasted over a longer peri -
od, the guarantees were limited to 
60 months. In its recent communica -
tion (see paragraph 8) the Commission 
also underlined the need to consider 
long -term growth adequately and sup -
port long -term investment projects.89 
The Court considers that one condi -
tion for ensuring that the financial 
instruments work in the long term is to 
have clear transitional rules between 
programming periods to avoid discon -
tinuities linked to the management of 
programming cycles. There is no such 
provision in the new legal framework.
Leverage and revolving 
effects: performance issues not 
adequately addressed
90 
The Court found that performance was 
not monitored in 2007–13 (see para -
graphs 69 and 70). There was, there -
fore, no useful information to feed 
a ‘lessons learnt’ process for the next 
programming period.
91 
Mandatory private participation 
(leverage) is still not required in the 
new legal framework and the new 
legislation does not set any appro -
priate targets or provide any data for 
calculating leverage indicators. The 
Court considers that the concept of 
leverage, as proposed in paragraph 64, 
is not suited to financial instruments in 
the area of rural development for the 
2014–20 programming period52.52 Article 59(2) of Regulation (EU) 
No 1305/2013 of the European 
Parliament and of the Council 
of 17 December 2013 on 
support for rural development 
by the European Agricultural 
Fund for Rural Development 
(EAFRD) and repealing Council 
Regulation (EC) No 1698/2005 
(OJ L 347, 20.12.2013, p. 487) 
states that ‘The EAFRD 
contribution shall be 
calculated on the basis of the 
amount of eligible public 
expenditure.’
37 Observations
92 
Furthermore, the new framework does 
not include any minimum contractu -
ally binding revolving periods. Ac -
cording to Article 45 of the common 
provisions regulation, resources paid 
back to financial instruments during 
a minimum period of 8 years must be 
used in accordance with the aims of 
the programme(s). Whilst the defi -
nition of such a minimum period is 
welcomed, the provision allows for 
the reduction of the fund capital and 
the reuse of such financial instrument 
resources as grants, thus limiting the 
advantage provided by the revolving 
system.
There is a risk that the 
dependence of financial 
instruments on grants remains in 
the 2014–20 period
93 
Previous audits by the Court on rural 
development53 found problems in the 
way grants had been managed for in -
vestment measures. There were often 
deadweight, displacement effects and 
selection weaknesses. The measure 
which supports investment in the pro -
cessing of agricultural products was 
found to be the most prone to error54. 
As financial instruments benefit from 
additional expertise in assessing the 
viability of projects (see paragraph 14) 
they have the potential to mitigate the 
risks identified in relation to the use of 
grants.94 
Any final recipient that fulfils the eligi -
bility and selection criteria for access -
ing a financial instrument can apply 
directly without the need to submit an 
application for the grant schemes. This 
represents a direct access to a financial 
instrument. Contrary to the situation 
found in the 2007–13 programming 
period (see paragraphs 34 and 35) di -
rect access increases the scope of the 
intervention by the financial instru -
ments, and therefore their potential 
impact.
95 
A Commission guidance paper55 for 
the 2014–20 programming period 
identified the possibility of direct 
access to financial instruments as one 
of the main changes between the two 
programming periods. However, the 
Court considers that the move from 
indirect to direct access cannot be 
attributed to the new legal framework, 
as indirect access was not required 
by the legislation applicable to the 
2007–13 period56. The approach used 
for cohesion involves direct access, 
and rules have been determined by 
DG Regional and Urban Policy on how 
to combine financial instruments and 
grants. Nothing similar was done by 
DG Agriculture and Rural Development 
in 2007–13 (see paragraph 37).53 See e.g. Special Report 
No 8/2012 ‘Targeting of aid for 
the modernisation of 
agricultural holdings’; Special 
Report No 1/2013 ‘Has the EU 
support to the 
food -processing industry 
been effective and efficient in 
adding value to agricultural 
products?’ and Special Report 
No 6/2013 ‘Have the Member 
States and the Commission 
achieved value for money with 
the measures for diversifying 
the rural economy?’ ( http://
eca.europa.eu )
54 Special Report 23/2014 ‘Errors 
in rural development 
spending: what are the causes, 
and how are they being 
addressed?’ ( http://eca.
europa.eu )
55 European Commission; 
Financial instruments in ESIF 
programmes 2014–20, a short 
reference guide for Managing 
Authorities, 2.7.2014.
56 Council Regulation (EC) 
No 1698/2005 and 
Commission Regulation (EC) 
No 1974/2006.
38
 Conclusions and 
recommendations
96 
Overall, the Court concluded that 
financial instruments had been un -
successful in the field of rural devel -
opment57 and although the 2014–20 
period is potentially promising, it will 
be a considerable challenge to achieve 
the desired impact. No clear case had 
been made for taking into account the 
specific characteristics of rural devel -
opment policy and there had been no 
assessment of real needs. The Court 
therefore found that the potential 
benefits of moving ‘away from grant 
dependency culture’58 had not been 
demonstrated by the actual imple -
mentation of financial instruments in 
2007–13.
97 
The Court found that the 2014–20 
framework has the potential to provide 
the necessary improvements. However, 
certain obstacles to a more extensive 
use of financial instruments remain. 
Although new specific provisions 
were introduced to limit the recurrent 
problem of overcapitalisation, the risk 
still persists. Finally, the key perfor -
mance issues of leverage and revolving 
effects have not yet been adequately 
addressed (paragraphs 81 to 95).
98 
The Court found that no clear case had 
been made for setting up financial 
instruments in the 2007–13 program -
ming period and that they were over -
capitalised (paragraphs 21 to 50). The 
demand for financial instruments in 
2007–13 was particularly low and there 
will therefore be a need to provide 
specific incentives to use them in the coming years. In 2007–13, there had 
no longer been a separate ‘financial 
engineering’ measure, like the one 
in the 2000–06 period, and financial 
instruments could only be embedded 
in a selection of investment measures. 
Having the possibility to set up the 
financial instruments, either as part of 
an investment measure or as a sepa -
rate measure, leads to more flexibility 
in managing the money invested, 
while weakening the link with grants. 
The 2014–20 framework does not en -
visage this possibility either.
Recommendation 1
In order to increase incentives for 
Member States to set up financial 
instruments for rural development, 
the Commission should identify the 
challenges, specific characteristics and 
obstacles faced in this field and ac -
tively encourage Member States to use 
such instruments where appropriate. 
In order to stimulate demand, an op -
tion for Member States could be to set 
a certain share of the available EAFRD 
budget aside for financial instruments 
and make those instruments more at -
tractive than grants in clearly defined 
circumstances.
99 
The problem of the overcapitalisation 
of financial instruments was recurrent 
in the 2007–13 period, leading to an 
excess amount of 370 million euro (see 
paragraph 48). Though specific provi -
sions (mandatory ex ante  assessments, 
phased -in payments) were introduced 
into the 2014–20 legal framework to 
limit this problem, the risk may persist.57 See also Annex II  of this 
report.
58 European Commission; 
Financial instruments in ESIF 
programmes 2014–20, a short 
reference guide for Managing 
Authorities, 2.7.2014.
39 Conclusions and recommendations
Recommendation 2
In the field of rural development, the 
Commission should provide guidance 
and actively promote the quality of 
the mandatory ex ante  assessments 
for financial instruments, which are 
intended to serve as key tools to avoid 
overcapitalisation. In addition, the risk 
exposure ratio used should be validat -
ed by Member States by appropriate 
technical expertise.
100  
Financial instruments performed 
insufficiently in the 2007–13 program -
ming period (paragraphs 70 and 71). 
They performed poorly in revolving 
money and leveraging additional 
private resources to the benefit of 
rural development policy. The report -
ing procedure was not designed to 
illustrate the financial instruments’ 
activities in a comprehensive manner 
and provide relevant information on 
the performance achieved. Therefore, 
the Commission did not perform its 
shared management supervisory du -
ties adequately. Nevertheless, the im -
provements introduced in the 2014–20 
legal framework do have the potential 
to remedy main reporting weaknesses 
found (see paragraph 82).
Recommendation 3
In the field of rural development and 
in order to increase the effectiveness 
of the financial instruments for the 
programming period 2014–20, the 
Commission should set appropriate 
standards and targets for leverage and 
revolving effects.101  
Financial instruments need to work 
over the long term to provide their 
full effects. The Court found that 
insufficient focus had been put on 
this aspect. For instance, loan funds 
answered a short term problem of 
lack of liquidity in the context of the 
recent economic crisis. They therefore 
only ran over a limited period of time 
despite the significant administrative 
effort which had been invested in 
setting them up.
Recommendation 4
In order to promote the long -term 
effects of financial instruments, the 
Commission and the Member States 
should decide on clear transitional 
rules between programming periods. 
The Member States should implement 
the new legal provisions in such a way 
as to ensure the greatest level of flex -
ibility. In this context, the Commission 
could encourage Member States to 
establish a single financial instrument 
which is able to provide both loans 
and guarantees, thus increasing its 
activity and critical mass.
102  
Previous audits by the Court on rural 
development found problems (dead -
weight, displacement effects and 
selection weaknesses) in grants’ man -
agement for investment measures (see 
paragraph 93). Financial instruments 
have the potential to mitigate the risks 
identified related to the use of grants.
40 Conclusions and recommendations
Recommendation 5
Member States should pay particular 
attention to potential deadweight or 
displacement effects when assessing 
applications for funding. In order to do 
so, they should apply appropriate in -
dicators, such as return on investment 
and projected cash flow statements. 
For eligible activities, where the risk 
of deadweight/displacement effects is 
particularly high, financial instruments 
could become the preferred option. 
Member States should examine how 
grants and financial instruments can 
be combined to provide the best value 
for money, by optimising leverage/re -
volving effects.103  
Finally, the Court concludes that 
precise conditions to establish the 
balance of the financial instruments to 
be paid at the end of the programming 
period and exit policy conditions were 
not in place in the 2007–13 period, 
mainly because of an absence of clear 
rules from the Commission on these 
issues (paragraphs 72 to 80).
Recommendation 6
The Commission should provide in 
due time in 2015 precise operational 
implementing rules before the closure 
of the 2007–13 programming period, 
including the exit policy.
This Report was adopted by Chamber I, headed by Mrs Rasa BUDBERGYTĖ, 
Member of the Court of Auditors, in Luxembourg at its meeting of 25 March 2015.
 For the Court of Auditors
 Vítor Manuel da SILVA CALDEIRA  
 President

41
Estimate of the overcapitalisation of the guarantee funds at 31 December 2013 
according to the risk exposure ratio
Amount paid into 
the Fund as at 
31.12.2013
(in euro)Amount of 
guarantees issued 
to final recipients 
at 31.12.2013
(in euro)Maximum 
level of 
default 
expectedRisk exposure ratio 
used to determine 
the amount paid 
into the fund
(1 to X)Estimate of over 
-capitalisation of 
the Fund
(in euro)
Bulgaria 121 000  000.00 50 006  000.00 20.0  % 5.0 110 998 800.00
France (Corsica) 600  000.00 403 795.00 33.3  % 3.0 465 401.67
Italy (Sicily) 37 628  950.00 5 485 210.23 33.3  % 3.0 35 800 546.59
Italy (Puglia) 5 000  000.00 6 585 275.50 8.0 % 12.5 4 473 177.96
Italy (Lazio) 2 500  000.00 920 105.60 8.0 % 12.5 2 426  391.55
Italy (Campania) 2 250  000.00 3 262  536.52 8.0 % 12.5 1 988 997.08
Italy (Umbria) 4 800  000.00 0.00 33.3  % 3.0 4 800  000.00
Italy (Molise) 2 450  000.00 2 451 400.00 33.3  % 3.0 1 632 866.67
Italy (Basilicata) 14 860  000.00 1 699 990.00 33.3  % 3.0 14 293  336.67
Italy (Calabria) 10 000  000.00 1 678  400.00 50.0  % 2.0 9 160 800.00
Romania 220 000  000.00 177 173  471.00 20.0  % 5.0 184 565 305.80
Total 421  088  950.00 249 666 183.85   370  605  623.98
Capital needed (in euro) 50 483 326.02
Overcapitalisation (expressed as a factor) 8.34
Source:  ECA audit findings.Annex IAnnexes
42 Annexes
Overview of the main weaknesses reducing the performance of the financial 
instruments audited
France 
(Corsica)Italy 
Romania Greece Lithuania 
Puglia Sicily
Type GF GF GF GF LF LF
Late setting up W W
Over‑estimation of the demand W W W W W W
Risk exposure ratio too low (for GF) W W NA NA
Excessive capital endowments W W W W
Low disbursement rate W W W
Insufficient level of revolving W W W W W W
Insufficient level of leverage W W W W W W
No reporting on performance W W W W W W
GF: guarantee fund; LF: loan fund; NA: Not applicable
W Weakness identified.
Source:  ECA audit findings.Annex II
43
The requirement of carrying out an appropriate ex 
ante  assessment of expected losses was introduced 
in 2011 as regards EAFRD co -financing of opera -
tions comprising guarantee funds3. As regards the 
2014–20 programming period, the undertaking of 
an ex ante  assessment is obligatory for any opera -
tion comprising financial instruments co -financed 
by the EAFRD4. The legislation provides incen -
tives to MS to use financial instruments and gives 
them the possibility to immediately launch them 
based on ready -to-implement models such as the 
off-the -shelf models. The Commission also provides 
the necessary guidance to MS and stakeholders and 
will continue doing this throughout the rest of the 
period 2014–20.
V
Guarantee funds need to have certain liquidity to 
ensure smooth investments in enterprises.
After an updated assessment of needs by the Mem -
ber States and preparation for closure of guarantee 
funds, the figure was reduced to 362.69 million euro 
by the end of 2014.
VI
The financial instruments supported by the EAFRD 
were set up within the legally allowed period, in 
line with the EU legislation.
The Commission would like to remind that rural 
development is implemented under shared man -
agement, with the Member States being fully 
responsible for monitoring of operations.
The Commission notes that as regards the period 
2007–13, it gathered important reporting informa -
tion on existing financial instruments. Moreover, 
a comprehensive reporting on financial instruments 
is designed for the 2014–20 programming period.5
3 Commission Regulation (EU) No 679/2011 from 14 July 2011.
4 Article 37(2) of Regulation (EU) No 1303/2013.
5 Article 46 of Regulation (EC) No 1303/2013.Executive summary
I
While the attraction of private capital is one of the 
value -addeds associated with financial instruments, 
the EU legislation1 in the field of rural development 
in 2007–13 does not explicitly link financial engi -
neering instruments to private funding.
III
The Commission notes that the programming 
period 2014–20 has just started and most of the 
ESIF programmes, including RDPs, have not yet 
been adopted. Moreover, financial instruments may 
be set up by MS at any time of the programming 
period.
IV
The Commission notes that financial instruments 
were implemented in seven Member States in 2007–
13 which is a significant improvement compared to 
the 2000–06 period where only two Member States 
used them.
The EU legal framework for the 2007–13 program -
ming period provides for large flexibility in the 
implementation of the rural development measures. 
The Commission is of the opinion that the 2007–13 
legal framework takes into account the specifici -
ties of rural development and this is reflected in 
the financial instruments supported by the EAFRD. 
Council Regulation No 1698/2005 and Commission 
Regulation (EC) No 1974/2006 define the scope and 
area of intervention of the EAFRD, including specific 
support measures2. Each rural development mea -
sure contains various eligibility rules and provisions, 
which must be respected by financial instruments 
created under the measure and should form part of 
the funding agreement.
1 Council Regulation (EC) No 1698/2005 and Commission 
Regulation (EC) No 1974/2006.
2 For instance support for investments in modernisation of 
agricultural holdings, adding value to agricultural and forestry 
products, creation and development of micro -enterprises in 
rural areas, diversification into non -agricultural activities, village 
renewal, etc.Reply of the  
Commission
Reply of the Commission 44
The issue of overcapitalisation is addressed by 
the provisions of Article 41 of Regulation (EU) 
No 1303/2013 where phased -in payments, based on 
achievement of concrete disbursement results, have 
been introduced as a general rule for all financial 
instruments in 2014–20.
The key performance issues are well addressed in 
the monitoring of financial instruments supported 
by ESIF, as defined in Article 46 of Regulation (EU) 
No 1303/2013. Moreover, the Commission points out  
four performance indicators enshrined in Article 12 
of Regulation (EU) 480/2014.
In addition, in order to encourage the use of finan -
cial instruments, the Commission strengthened 
its cooperation in the field of agriculture and rural 
development with the European Investment Bank 
(EIB) and signed a Memorandum of Understanding 
on 14 July 20147. This cooperation includes the pos -
sibility of utilising the experience and the knowl -
edge of the EIB Group on financial instruments and 
its application in rural development.
The Commission has also launched ‘ fi‑compass ’, 
a comprehensive technical assistance platform, 
which will provide methodological guidance and 
awareness-raising support to the Commission, MS 
and stakeholders in the field of financial instru -
ments supported by ESI Funds in the period 2014–
208. As part of its working programme, ‘ fi‑compass ’ 
will produce also EAFRD -specific products.
IX (a) First bullet
The Commission accepts to identify the challenges, 
specific characteristics and obstacles to set up 
financial instruments in EAFRD.
Such analysis will be undertaken in the framework 
of the activities of the ‘ fi‑compass ’, a comprehensive 
technical assistance platform, which provides meth -
odological guidance and awareness-raising support 
to the Commission, MS and stakeholders in the field 
of financial instruments supported by ESI Funds in 
period 2014–209.
7 See Statement 14/225 of 14.07.2014.
8 See more at http://www.fi -compass.eu
9 See more at http://www.fi -compass.euThe Commission is of the opinion that the assess -
ment of the benefits of the financial instruments 
should be made also in the context of the financial 
crisis affecting the access to finance in some Mem -
ber States.
VII
The Commission notes that it is the responsibility 
of national authorities to ensure that individual 
operations are implemented in accordance with 
the applicable legal provisions. The Commission 
evaluates the issues related to financial instruments 
during its audit missions.
According to the applicable EU legislation for 2007–
13, the winding up and exit arrangements are to be 
defined by the managing authority in the funding 
agreement with the fund manager, ensuring that 
the relevant provisions are adequately taken on 
board.
Under shared management and in line with the 
subsidiarity principle, the Commission must satisfy 
itself that the Member States set up adequate man -
agement and control systems.
For the period 2007–13, the Commission gave guid -
ance to any MS which has requested it. The guide -
lines on closure of the 2007–13 rural development 
programmes were adopted in 20156. The respect of 
the legal rules and guidance will be verified during 
the clearance of accounts.
The Commission will provide more consolidated 
and improved guidance for the period 2014–20.
VIII
The Commission considers that the new legal 
framework for the programming period 2014–20 
addresses the concerns raised by the Court suffi -
ciently well.
6 C(2015) 1399 final from 5.3.2015.
Reply of the Commission 45
IX (b)
The Commission accepts this recommendation, 
which is currently being implemented.
The transitional rules for the 2007–13 period have 
been adopted.
With regard to 2014–20, discussions with Mem -
ber States will take place when the closure of the 
2014–20 period approaches and transitional rules 
have to be defined.
IX (c)
This recommendation is for the Member States.
Introduction
05
The EU legislation for 2007–13 does not impose 
a rule on reutilisation of the initial allocation 
used for the setting up of financial instruments. 
Resources not used can be reprogrammed for other 
forms of assistance.
06
The Commission notes that the programming 
period 2014–20 has just started and most of the 
ESIF programmes, including RDPs, have not yet 
been adopted. Moreover, financial instruments may 
be set up by MS at any time of the programming 
period.
12
After an updated assessment of needs by the Mem -
ber States and preparation for closure of guarantee 
funds, the 2013 figure was reduced to 362.69 mil -
lion euro by the end of 2014.IX (a) Second bullet
The Commission accepts this recommendation 
which is already partially implemented.
In the context of the ESIF technical assistance plat -
form ‘fi‑compass’ general and fund -specific guid -
ance on ex ante assessments is provided. This covers 
also the whole EAFRD, as well as specific sectors, 
such as agriculture and forestry.
IX (a) Third bullet
The Commission accepts this recommendation, 
which is already partially implemented.
The Commission has provided standard models 
for loan and guarantee funds in rural develop -
ment. Under the ESIF technical assistance platform 
‘fi‑compass’  it is currently investigating the opportu -
nity for another model such as for energy efficiency 
and renewable energy, which delivery is planned 
for end of 2015.
With regards to the cooperation with the EIB Group, 
the Commission signed a specific Memorandum 
of Understanding (MoU) in respect of coopera -
tion in agriculture and rural development, under 
which it is expected the EIB will offer a specific FI 
scheme to MS to be implemented under the EAFRD. 
A specific event on this MoU is already planned for 
23 March 2015.
IX (a) Fourth bullet
The Commission accepts this recommendation, 
insofar as rules for the closure of rural development 
programmes 2007–1310 are under its scope.
The Commission notes that according to the appli -
cable EU legislation for 2007–13 the development 
of precise operational implementing rules, includ -
ing the appropriate exit policy for each financial 
engineering instrument, is the responsibility of the 
Member States.
10 C(2015) 1399 final from 5.3.2015.
Reply of the Commission 46
23
The Commission considers that it has adequately 
evaluated and addressed the specific character -
istics of rural development when designing the 
2007–13 legal framework. In particular, Regulation 
(EC) No 1698/2005 outlines more than 30 different 
measures targeting a well -defined group of bene -
ficiaries and incorporates the eligibility criteria as 
well as specific requirements with which financial 
instruments supported by the EAFRD have to com -
ply. This is further elaborated in the provisions of 
the implementing Regulation No 1974/2006.
See also the reply to paragraph 21.
The Commission notes that beneficiaries in rural 
development are farms of all sizes. Small -scale 
farming in the EU has different dimensions and is 
country-, region- and/or sub -sector- specific. At the 
same time, farmers are not the only beneficiaries in 
rural development.
Cohesion policy, in principle, does not support 
agriculture, but similarly to rural development pol -
icy covers many micro and small non -agricultural 
enterprises.
26
The EU legal framework for the 2007–13 program -
ming period provides for large flexibility in the 
implementation or rural development measures. 
In this context, the Commission takes the view that 
needs and opportunities are described with suffi -
cient clarity to make the programming of the finan -
cial instruments appropriate and possible. When 
approving the RDPs or their modifications, the 
Commission carries out an analysis to assess that 
programmes and measures are consistent with the 
EU strategic guidelines, relevant national strategy 
plans and that they comply with the relevant legal 
provisions.13
According to the principles of subsidiarity and 
shared management, the setting up of financial 
instruments, their implementation and the evalu -
ation of the demand lie within the responsibility 
of Member States. This covers the adoption of all 
legislative, statutory and administrative provisions 
at national or regional level, including funding 
agreements.
The Commission monitors how MS implement their 
RDPs and in this context verifies how MS implement 
financial instruments supported by the EAFRD.
The Commission notes that Paying Agencies play an 
important role in the context of rural development 
policy and its implementation.
Audit scope and approach
20
The Commission notes that financial instruments 
in rural development may support also other 
investment measures such as 311 (diversification of 
agricultural activities), 312 (creation and develop -
ment of micro -enterprises in rural areas), 313 (rural 
tourism), 321 (basic services and infrastructure), 
etc … Support provided under LEADER should also 
be taken into account.
Observations
21
The rules for financial instruments in rural develop -
ment in 2007–13 have been substantially improved 
in comparison with the 2000–06 period.
22
The Commission is of the opinion that electronic 
surveys carried out at closure do not fully capture 
the reasons for not setting up financial instruments 
in the beginning of a programming period.
Reply of the Commission 47
27
The requirement of carrying out an ex ante  assess -
ment of expected losses was introduced in 2011 as 
regards EAFRD co -financing of operations compris -
ing guarantee funds11. Such ex ante  assessments 
shall take into account current market practices 
for similar operations for the type of investments 
and the market concerned for which the guarantee 
funds are to be established.
As regards the 2014–20 programming period, the 
undertaking of an ex ante  assessment, the content 
of which is legally defined, is obligatory for any 
operation comprising financial instruments co -fi-
nanced by the EAFRD12.
In 2007–13, the legislation required the candidates 
for fund managers to submit a business plan with 
a concrete content, which had to be evaluated by 
the managing authority.
The Commission notes that all financial instru -
ments supported by the EAFRD in 2007–13 were 
set up in the context of the financial and economic 
crisis during which access to credit was burdened 
and liquidity problems were evident throughout 
Europe.
In Bulgaria, for instance, an ex ante assessment of 
the expected losses/gap analysis was done prior to 
fixing the exposure rate and determining the final 
amount of the fund’s capital. In Romania, an ongo -
ing assessment took place following the change in 
the 2007–13 legislation which required the under -
taking of ex ante  assessment of expected losses for 
guarantee funds as of 2011. In the context of the 
discussions in the RDC on closure of financial instru -
ments, Italy officially confirmed its approach with 
regards to the undertaking of ex ante assessments 
in the 2007–13 period.
Lack of liquidity and/or difficulties for farmers in the 
access to credits are also serious reasons justifying 
the use of specific financial tools by Member States.
11 Commission Regulation (EU) No 679/2011 from 14 July 2011.
12 Article 37(2) of Regulation (EU) No 1303/2013.Each rural development measure under which 
financial instruments were supported had clearly 
and well-established objectives, in line with the EU 
legislation and the National Strategy Plans. The EU 
legislation does not require the setting up of solely 
measurable objectives.
As regards the 2014–20 programming period, 
ex ante quantified targets are set for each of the 
focus areas of the EU priorities in relation to the 
EAFRD. The content of the programme shall con -
tain a description of the strategy and show that the 
selected measures in relation to the EU priorities are 
based on sound intervention logic supported by an 
ex ante evaluation.
Box 2
The objectives indicated were consistent with the 
general situation of absence of credit facilities. 
RDPs develop further objectives in the context of 
the measures under which financial instruments 
are supported. Funding agreements between MS 
and fund managers may also contain justifications 
and objectives related to the respective financial 
instrument.
These general reasons explain the need to set up 
a loan fund. The details regarding the full justifi -
cation for the use, the specific objectives to reach 
and the exit strategy are all points that are included 
in the ‘Financing Agreement’ signed between 
ETEAN (fund manager) and the Ministry (managing 
authority).
This confirms the consistency of the programming 
approach and its compliance with the EU legisla -
tion. Lithuania and Romania were suffering a very 
severe credit crunch which made it impossible for 
beneficiaries to secure bank loans for their projects.
Further objectives are defined under the measures.
See above for Romania.
Reply of the Commission 48
32
The payment of a full amount in a single contribu -
tion from the RDP to the fund was in line with the 
EU legislation. The amount of interest generated 
remained at the disposal of the Guarantee Fund 
for providing new guarantees. This amount will be 
cleared at the closure of the financial instruments.
The placement of unused EAFRD amounts into 
interest -bearing accounts, which generates addi -
tional income that can be used by the financial 
instruments, is considered a good practice. EAFRD 
funds that are to be used for grants under the pro -
grammes can also be placed into interest -bearing 
accounts.
In the case of Romania, an ongoing evaluation 
of expected losses has been undertaken and the 
overall budget of the financial instruments oper -
ating there and supported by the EAFRD has been 
adjusted to reflect the results from this assessment.
33
Article 52(3) of Regulation (EC) No 1974/2006 
defines strictly what happens with resources 
returned to the operation during the programming 
period from investments undertaken by funds or 
left over after a guarantee has been honoured (i.e. 
they have to be used according to the funding 
agreement, or cleared in the context of the annual 
accounts).
A guarantee provided is backing up a loan which 
a final recipient is taking from a financial interme -
diate. By returning that loan back (and any poten -
tial interest associated with it) the final recipient 
confirms the implementation of an operation sup -
ported by the EAFRD and as a result it releases the 
guarantee, which can no longer be associated with 
the EAFRD budget as it is already ‘consumed’, i.e. 
used at least once. The Commission does not con -
sider this as being against the principles of sound 
financial management.28
Financial instruments in rural development are 
suitable for all potential investors in enterprises that 
could be supported by the EAFRD.
In 2007–13 period the Commission improved the 
legislation by introducing a requirement for ex ante  
assessment of expected losses for guarantee funds.
With regard to the 2014–20 programming period, 
an assessment of needs will be required in all cases 
where a MS decides to contribute EAFRD funding 
to a financial instrument13. In addition the provi -
sions on phased -in payments provide an additional 
safeguard.
See also replies to paragraphs 21 and 22.
30
The Commission notes that contributing to funds 
is not sufficient for considering the contributed 
amounts eligible at closure.
31
The Commission would like to emphasise that the 
declared expenditure was accounted for correctly. 
However, the Commission has also observed during 
its own audits in some Member States that transfers 
to the funds of financial instruments have been rel -
atively excessive in relation to the follow up uptake 
of the instruments by the final recipients.
The Commission notes that the nature of the 
financial instruments does not allow immediate 
spending of all amounts transferred to it. Financial 
instruments need time to develop into well -func -
tioning mechanisms and need an initial liquidity to 
ensure smooth investments in enterprises.
The issue of overcapitalisation14 is addressed by 
the provisions of Article 41 of Regulation (EU) 
No 1303/2013 where phased -in payments, based on 
achievement of concrete disbursement results, have 
been introduced as a general rule for all financial 
instruments in 2014–20.
13 Article 37(2) of Regulation (EU) No 1303/2013.
14 The Court, in its audit SR 2/2012 refers to over -sizing of financial 
instruments, and not overcapitalisation.
Reply of the Commission 49
In accordance with Articles 15, 71(5) and 71(2) of 
Regulation (EC) No 1698/2005 applicants willing to 
receive support provided by a financial instrument 
were evaluated against the selection criteria fixed 
for the respective measure by the competent body, 
as expenditure was eligible for an EAFRD contribu -
tion only where incurred for operations decided 
by the managing authority of the programme in 
question or under its responsibility, in accordance 
with the same selection criteria.
The Commission considers that the programming of 
financial instruments was done in accordance with 
the EU legislation and the applicable state aid rules.
36
There is no EU legal requirement in rural develop -
ment for the 2007–13 programming period that 
obliges the sum of all forms of support combined 
not to exceed the total amount of the expenditure 
item concerned. It is also to be noted that guaran -
tees, in principle, back up to 80 % of the (private) 
part of the investment.
See also the replies to paragraphs 34 and 35.
37
See Commission reply to paragraph 34.
38
Commission audits also pointed out this risk. 
However, it is difficult to conclude that the level 
of the transfer in capital is automatically linked to 
the purpose of circumventing the N+2 rule rather 
than a slower than foreseen execution of the pro -
gramme. In several cases, the MS transferred the full 
budgeted capital even though they did not have 
a ‘N+2 issue’.
Contributions from the RDPs to financial instru -
ments may be done at any time of the program -
ming period.
See also the reply to paragraph 26.At closure, the eligible expenditure of guarantee 
funds covers all guarantees that have been released 
following successful returns of loans within the 
programming period as well as an amount covering 
only the risk associated with the active guarantees 
(but not the overall amount of active guarantees 
that are issued). The part of the active guarantees 
which is not considered eligible is to be returned to 
the programme.
See also reply to paragraph 31.
34
Financial instruments supported by the EAFRD 
ensured access to funding to beneficiaries for 
whom the financial markets have not been offer -
ing an option of covering the project or its private 
co-financing part. In relation to the 2014–20 pro -
gramming period financial instruments cannot be 
used to pre -finance grants, grants cannot be used 
to reimburse support under financial instruments 
and the combination of support provided through 
grants and financial instruments may cover the 
same expenditure item provided that the sum of 
all forms of support combined does not exceed the 
total amount of the expenditure item concerned15.
Box 3
Financial instruments played an important role in 
the context of the financial and economic crisis, 
especially for MS where the financial conditions 
were tight and/or where co -financing was difficult 
to be provided by beneficiaries.
35
The Commission notes that the EAFRD contrib -
utes to financial instruments with public amounts 
(EAFRD and national co -financing).
Financial instruments are not necessarily an alter -
native to grant, as grants and financial instruments 
can be used together within the context of a single 
operation and in line with the applicable rules on 
state aid.
15 Article 37(7) (8)(9) of Regulation (EU) No 1303/2013.
Reply of the Commission 50
The determination of the potential market, which is 
a very broad concept, is not the only factor used to 
define and estimate the fund’s capital. Factors such 
as the total available budget under the measures, 
investment needs, assessment of the value added 
of the financial instruments, contribution of the 
financial instruments to measures’ objectives, etc. 
have to be taken into account as well.
43
In the case of Bulgaria, the proposal covered mea -
sures under which financial instruments cannot be 
established.
As regards Italy, at the time of payment to the guar -
antee fund, the amounts declared by the regions 
did not appear disproportionate.
See also the reply to paragraph 39 concerning Sicily.
In the case of Lithuania, the overcapitalisation only 
occurred when the credit crunch eased and the 
banks started giving loans. Lithuania decided to 
reduce the size of the financial instrument.
In Romania, the overcapitalisation reflected the 
inability of the financial instruments to mobilise 
commercial credits in a context of a deep finan -
cial crisis and contraction of the demand, where 
the profitability of any investment was seriously 
questioned.
See also the reply to paragraph 32.
Box 5
The limited use of the Fund in 2014 can be 
attributed to the late set up (December 2013), the 
continuing reluctance of investors in view of the 
severe economic crisis in the country, the lack of 
sufficient experience with this type of instruments 
and other developments in the country which were 
not conducive to investments.
The Commission considers it a good practice which 
shows how a MS operates with budgets in accor -
dance with evolving financial situation in the pro -
gramme area and existing demand for funding.Box 4
The intention was to speed up the activation of 
the Loan Fund because discussions and negotia -
tions had taken longer than anticipated. All parties 
involved wanted to launch the financial instruments 
without further delays. The administrative prepara -
tions ended in December 2013 when the Loan Fund 
was formally set up.
The Commission notes that even within the maxi -
mum range of these estimates, the funds remain -
ing for grants (between 70 % and 90 %) are quite 
significant.
Resources not used through financial instruments 
can be reprogrammed for other forms of assistance.
See also replies to paragraphs 31, 38 and 39.
40
The Commission acted in accordance with the rules.
The Commission notes that in case of a lower 
spending, MS have to return funds to the pro -
grammes which will increase the risk of de -com -
mitment for the year in which the reprogramming 
occurs.
See also Commission replies to paragraphs 31 and 
Box 4.
41
See Commission reply to paragraph 31.
42
The Commission notes that the determination of 
the potential market is made ex ante , while the 
instruments may operate by the closure of the RDPs 
and in the context of changing financial markets 
and economic conditions. The situation of the 
financial instruments operating at EU level is similar.
Reply of the Commission 51
46
The Commission notes that there is no EU definition 
of the risk exposure ratio in the EU legislation for 
the period 2007–13.
For the 2014–20 programming period, assessment 
of risk exposure ratio referred to in Article 42(1)(b) of 
Regulation (EU) No 1303/2013 as ex ante risk assess -
ment, reflects the need for appropriate programme 
contribution to cover expected and non -expected 
losses from the new loans.
47
The Commission considers that a guarantee fund 
guaranteeing 20 % of the loan portfolio and at the 
end having only 1 % of the guarantees called in is, 
in fact, an example of well-performing loans.
The multiplier ratio should be calculated on a case- 
by-case basis, but the 20 % in this case is rather 
low and should not raise questions of possible 
overcapitalisation (even under general state aid 
framework a guarantee cap of 25 % can be auto -
matically exempted from the notification threshold 
cf. Article 21 of GBER).
It is also the opinion of the Commission that the low 
level of default reflected also the unwillingness of 
the banking sector to support riskier operations.
48
The Commission notes that the total amount of 
guarantees issued to final recipients by the end of 
2013 is 249,6 million euro, which is about 60 % of 
the contribution to the funds.
The Commission notes that financial instruments 
audited by the Court are still active and will con -
tinue with their activities in 2014–15.
See also replies to paragraphs 12 and 39.An ex post comparison does not mean that at the 
time of setting up the financial instruments the 
amount foreseen was overestimated. There were 
also other reasons justifying the contribution from 
the RDP to the Fund such as those as described in 
point 42.
44
See Commission reply to paragraph 28.
Box 6
Resources not used through financial instruments 
can be reprogrammed for other forms of assistance.
See also the reply to paragraph 31.
As regards Bulgaria, the initial investment potential 
proposed by the MS was reduced following the 
Commission’s review. The responsibility for the set -
ting up and implementation of the financial instru -
ments, including the undertaking and examination 
of the ex ante assessment, lies with the MS. It is 
not for the Commission to provide specific region -
alised or national type of expertise for calculation 
of specific technical elements linked to financial 
instruments.
As regards Romania, see Commission reply to para -
graph 43.
45
Financial markets are dynamic and can change 
as proven by the recent financial and economic 
crisis. Therefore long -term predictions may prove 
unreliable. For this reason, the EU legislation for 
the 2014–20 programming period allows each ex 
ante  assessment to contain provisions on possible 
reviews and updates in the medium to long -term 
to reflect accurately potential changing market 
conditions.
Reply of the Commission 52
58
There is still time for disbursement of funds under 
these instruments. The Commission can only con -
firm how much is paid to final recipients at the end 
of the programming period.
See also Commission reply to paragraph 55.
59
See Commission replies to paragraphs 52 and 58.
60
The Commission considers that the use of public 
funding in well-functioning markets (or those which 
are significantly restoring their proper functioning) 
needs to be carefully evaluated for avoiding distor -
tion of competition.
In the case of Greece, the fund was only set up in 
late 2013 and therefore the actual disbursement to 
final beneficiaries only started in mid-2014. In the 
case of Lithuania, the banking system managed to 
restart the normal credit flow at the end of 2012, 
rendering EAFRD resources partly unnecessary. The 
same was the case with Latvia where the fund had 
also a specific focus.
61
The EU legislation does not require MS to use 
immediately the resources paid back to the fund. 
The arrangements for revolving are agreed in the 
funding agreement and depend on the particular 
situation and the context in which the financial 
instrument operates. MS, for example, may want to 
‘collect’ resources paid back and launch a financial 
instrument for a new financial product or a new 
target. The 2007–13 legislation allows the reuse of 
resources for financial instruments for an indefinite 
period.
62
For the 2014–20 period an improved system of 
monitoring and reporting has been put in place, 
enshrined in the provisions of Article 46 of Regu -
lation (EU) No 1303/2013, allowing the assessment 
of performance in terms of revolving and leverage 
effects.49
Such step -by-step approaches were also under -
taken in Lithuania and Latvia where loan funds were 
set up.
52
The Commission notes that some financial instru -
ments became operational at the end of the audit 
and still have two more years of implementation.
53
The average disbursement rate calculated for the 
entire population of financial instruments does not 
reflect the speed of the implementation of particu -
lar funds. In the area of the cohesion policy, a sig -
nificant number of funds were established only in 
2012. For these funds the low absorption rate at the 
end of 2012 should not be worrying.
The financial instruments can only be assessed in 
terms of revolving impact at the end of their life 
cycle, especially as regards those set up at the end 
of the programming period.
55
In reality, the situation in the financial market 
improved and there are fewer failures than in the 
past (see earlier example in paragraph 47 with 
a guarantee of 20 % which resulted in 1 % lost loans 
only).
56
See Commission reply to paragraph 55.
57
These modifications reflected the actual needs 
of the financial instruments. Resources not used 
through financial instruments were reprogrammed 
and used for other forms of assistance.
Reply of the Commission 53
66
See also replies to paragraphs 63–65.
67
See Commission reply to paragraph 60.
Box 7
The Commission considers that estimates should 
take into acount actual amounts made available to 
the funds after most recent RDP modifications as 
they impact on the calculation of leverage.
68
Setting up financial instruments under the EAFRD 
implied a whole new concept for some Member 
States which required a learning process. The delays 
were in most cases explained by the novelty of the 
instruments in rural development policy, public 
procurement and state aid-related issues.
The Commission deployed intensive promotion and 
information activities on the use of financial instru -
ments throughout rural development committees, 
networks, trainings and awareness-raising activities, 
bilateral meetings with Member States and compre -
hensive guidelines.
For the new programming period, the Commission 
also provided the necessary guidance in relation to 
the implementation of the financial instruments. 
In particular, the Commission informed the Mem -
ber States on the different available options to put 
managing authorities in a position to use the finan -
cial instruments as appropriate.
In 2014–20, the already established funds will con -
tinue or new funds based on models proposed by 
the Commission (such as the off -the-shelf instru -
ments)16 can be established. It is expected that in 
this way delays will be significantly reduced.
16 Commission Implementing Regulation (EU) No 964/2014 
of 11 September 2014 laying down rules for the application of 
Regulation (EU) No 1303/2013 of the European Parliament and of 
the Council as regards standard terms and conditions for financial 
instruments.63
Achieving high leverage is not the main objective of 
financial instruments. Financial instruments are the 
delivery mode of support from the programme to 
final recipients. The effects produced by the finan -
cial instruments (e.g. revolving or leverage) are the 
advantages but not the objectives themselves.
The leverage which may vary between sectors, 
regions, financial products should be agreed on in 
the funding agreement in relation to the specific 
financial instrument.
As regards the participation of private investors, 
the Commission would like to refer to the state 
aid legislation on risk capital finance (GBER) which 
requires certain participation of a private investor. 
The Commission’s definition of leverage mechanism 
includes all contributions (private and public) in 
addition to the EU funds.
64
The definition of leverage embedded in the Finan -
cial Regulation states that any public contribution 
in addition to EU Contribution counts as leverage.
The EAFRD does not represent any exception to the 
rest of the shared management funds.
65
Article 37(2) of Regulation (EU) No 1303/2013 does 
not provide a definition of the leverage and in no 
way should be treated as derogation to provisions 
under the Financial Regulation. It only requires 
the ex ante assessment to take into account the 
expected leverage effect from the setting up of 
financial instruments. However, Article 39(5) of 
CPR, for example, provides a way for calculating 
leverage.
In accordance with the applicable regulations, rural 
development policy co -financing obligation is set 
at the programme level. Individual operations (e.g. 
funds) may or may not have national co -financing.
Reply of the Commission 54
As regards the 2014–20 framework, performance 
indicators are set in Article 12 of Regulation (EU) 
No 480/2014. In addition, Member States are 
obliged to report on financial instruments on a reg -
ular basis as required by Article 46 of Regulation 
(EU) No 1303/2013.
Common Commission reply to 
paragraphs 72 to 75
The winding up and exit arrangements are to be 
defined by the managing authority in the funding 
agreement with the fund manager, ensuring that 
the relevant provisions are adequately taken on 
board.
Under shared management and in line with the 
subsidiarity principle, the Commission must satisfy 
itself that the Member States set up adequate man -
agement and control systems.
For the period 2007–13, the Commission gave 
guidance to any MS which has requested it. The 
Commission is currently preparing guidelines on 
the closure of the 2007–13 programmes.
The Commission will provide more consolidated 
and improved guidance for the period 2014–20. 
The respect of the legal rules and guidance will be 
verified during the clearance of accounts.
77
These provisions are not included in the legisla -
tion. The Commission recommends to the Member 
States to comply with the provisions included in the 
guidelines.
The divergent interpretations were clarified in the 
context of the RDC discussions in 2014.
78
See replies to paragraphs 61 and 72–75.Box 8
In some Member States, the financial crash and 
subsequent economic crisis provoked a situation 
of insolvent demand (failed or bankrupted compa -
nies). This, among other external factors, explains 
the delays and low uptake of the Funds.
69
The Commission considers that the assessment 
of performance of financial instruments should 
also focus on the achievement of results by the 
co-funded financial instruments, including the 
revolving and leveraging effects. Moreover, the 
assessment should take account of the different sit -
uations that can occur. The evolution of the values 
for each indicator will need to be carefully judged 
against the context. Indicator values taken in isola -
tion cannot assess the performance.
Financial instruments are the means of delivering 
programme support to final recipients. The main 
performance indicator is therefore the programme 
contribution spent in line with the programme 
objectives.
The Commission considers that the effect of lever -
age and revolving are negatively correlated (the 
higher the leverage, the lower the revolving).
Moreover, the Commission points out four perfor -
mance indicators enshrined in Article 12 of Regula -
tion (EU) 480/2014.
70
The Commission notes that there were no com -
mon indicators for the financial instruments in the 
2007–13 CMEF. However, CMEF foresees the use of 
additional indicators17 to be defined by the MS to 
allow the monitoring and evaluation of the speci -
ficities of the RDPs. There is a balance to be found 
between a reasonable amount of common indica -
tors to be monitored by all RDPs and the additional 
indicators to be monitored for some RDPs where 
necessary. Any performance indicators should be 
agreed on between the managing authority and the 
financial instrument.
17 Article 81(2) of Regulation 1698/2005.
Reply of the Commission 55
85
The legislator placed the examination of ex 
ante  assessment in the remit of the managing 
authorities.
86
In addition to the mandatory ex ante  assessments 
and the phased-in payments, the new legislation 
contains other adequate safeguards to mitigate this 
potential risk, such as monitoring and comprehen -
sive reporting.
The Commission also notes that in 75 % of the cases 
(9 out of 12), the used risk exposure ratios are within 
the range of 2 to 5.
As a general rule, in 2014–20, the payment of the 
subsequent instalments is conditional on the previ -
ous capital absorption.
87
According to the EU legislation financial instru -
ments can be set up at any time during the pro -
gramming period 2014–20. The implementation 
in the period 2014–20 can start immediately after 
the adoption of the new programmes and already 
in 2015. For example, in January 2015 the Dutch 
RDP 2014–20 was adopted, which also foresees the 
setting up of a financial instrument supported by 
the EAFRD18.
See also Commission reply to paragraph 68.
88
Financial instruments should provide programme 
support in the situation of market failures and/
or suboptimal investment or specific investment 
needs. Continuing with programme support 
in the market where public intervention is not 
needed anymore is not in line with the state aid 
rules and against the principle of sound financial 
management.
18 See the respective presentation on http://www.fi -compass.eu79
The Commission notes that EAFRD resources 
returned to funds after being used at least once 
are no longer EU resources. After closure it is the 
responsibility of Member States to use them for the 
benefit of individual undertakings as established by 
the EU legislation, respecting the applicable rules 
on state aid. These resources can also be used for 
other financial instruments.
See also replies to paragraphs 5, 33, 61 and 72–75.
80
The Commission is undertaking its responsibilities 
in relation to the closure of RDPs 2007–13.
Any activity going beyond the closure of the pro -
grammes and not concerning the EU budget is the 
responsibility of the Member States.
82
It is the Commission’s opinion that there are many 
other legal provisions in the new legislation appli -
cable to financial instruments in rural development 
(e.g. provisions on control, eligibility of expenditure, 
reuse of funds, combinations of financial instru -
ments with grants, the possibilities of appointing 
various bodies as fund managers, including the 
options provided for managing authorities, selec -
tion of intermediates and final recipients, manage -
ment costs and fees, etc.).
83
The Commission considers that the new legisla -
tion sufficiently addresses the issue and mitigates 
potential risks.
See also Commission replies to paragraphs 31 and 41.
84
See Commission replies to Box 4 and paragraph 31.
Reply of the Commission 56
In the period 2014–20 a common guidance is pro -
vided for the policies under shared management on 
issues related to financial instruments and the same 
approach is established towards access to funds 
across all these policies.
Conclusions and recommendations
96
The Commission notes that financial instruments 
were implemented in 7 Member States in 2007/2013 
which is a significant improvement compared to the 
2000/2006 period where only two Member States 
used them.
The EU legal framework for the 2007–13 program -
ming period provides for a large flexibility in the 
implementation or the rural development measures 
The Commission is of the opinion that the 2007–13 
legal framework takes into account the specifici -
ties of rural development and this is reflected in 
the financial instruments supported by the EAFRD. 
Council Regulation No 1698/2005 and Commission 
Regulation (EC) No 1974/2006 define the scope and 
area of intervention of the EAFRD, including specific 
support measures19. Each rural development mea -
sure contains various eligibility rules and provisions, 
which must be respected by financial instruments 
created under the measure and should form part of 
the funding agreement.
The requirement of carrying out an appropriate ex 
ante  assessment of expected losses was introduced 
in 2011 as regards EAFRD co -financing of operations 
comprising guarantee funds20.
19 For instance support for investments in modernisation of 
agricultural holdings, adding value to agricultural and forestry 
products, creation and development of micro -enterprises in 
rural areas, diversification into non -agricultural activities, village 
renewal, etc.
20 Commission Regulation (EU) No 679/2011 from 14 July 2011.
21 Article 37(2) of Regulation (EU) No 1303/2013.The term of the financial product will depend pri -
marily on the type of investment to be supported. 
Long-term investment in infrastructure projects will 
have a different life cycle than short-term invest -
ments in micro -credit.
See also replies to paragraphs 43, 60 and Box 5.
89
See Commission reply to paragraph 5.
90
As regards the EAFRD, the performance is mainly 
assessed through evaluations. The mid -term 
evaluations concerning the 2007–13 implementing 
period came too early to evaluate the results and 
performance of financial instruments. Assessing the 
impact of rural development can only be done after 
sufficient time has passed, hence more results are 
expected in the context of the ex post evaluations 
carried out by the Member States, which will be 
synthesised by the Commission in 2017.
See also Commission reply to paragraph 70.
91
Private participation is not considered leverage in 
the Financial Regulation.
The leverage ratio depends on the type of financial 
instrument, the region and the type of projects. 
Therefore leverage target cannot be part of a reg -
ulatory framework. The Commission is currently 
developing guidance on leverage.
95
EAFRD support in 2007–13 is provided under the 
agricultural state aid rules and in line with Council 
Regulation (EC) No 1698/2005 and Commission 
Regulation (EC) No 1974/2006.
See also Commission replies to paragraphs 35 and 37.
Reply of the Commission 57
The Commission has also launched ‘ fi‑compass ’, 
a comprehensive technical assistance platform, 
which will provide methodological guidance and 
awareness-raising support to the Commission, MS 
and stakeholders in the field of financial instru -
ments supported by ESI Funds in the 2014–20 
period.23 As part of its working programme, ‘ fi‑com ‑
pass ’ will produce also EAFRD -specific products.
98
According to the principles of subsidiarity and 
shared management, the setting up of financial 
instruments, their implementation and the evalua -
tion of the demand lie within the responsibility of 
Member States.
Setting up financial instruments under the EAFRD 
implied a whole new concept for some Member 
States which required a learning process. The 
Commission deployed intensive promotion and 
information activities on the use of financial instru -
ments throughout rural development committees, 
networks, trainings and awareness-raising activities, 
bilateral meetings with Member States and compre -
hensive guidelines.
The Commission considers that the new legislation 
provides sufficient incentives (e.g. higher co -fi-
nancing rate24, national co -financing provided later 
during the implementation period, pre -financing 
of investment as opposed to reimbursement of 
occurred expenditure in the case of grants) and 
investment-related ones (e.g. different eligibility of 
VAT25, eligibility of working capital26) offer enough 
advantages in comparison with grants.
23 See more at http://www.fi -compass.eu
24 According to Article 59(4)(d) of Regulation (EU) No 1305/2013, 
the contribution rate applicable to the measure concerned shall 
be increased by additional 10 percentage points for contributions 
to FIs as referred to in point (b) of Article 38(1) of Regulation (EU) 
No 1303/2013, and shall be 100 % for Union -level FIs referred to 
in point (a) of Article 38(1) of Regulation No 1303/2013. Similar 
approach is undertaken for the contributions to FIs by the ERDF 
and the CF.
25 Article 37(11) of Regulation (EU) No 1303/2013.
26 Article 45(5) of Regulation (EU) No 1305/2013.As regards the 2014–20 programming period, the 
undertaking of an ex ante  assessment is obligatory 
for any operation comprising financial instruments 
co-financed by the EAFRD21. The legislation provides 
incentives to MS to use financial instruments and 
gives them the possibility to immediately launch 
such instruments based on ready -to-implement 
models such as the off -the-shelf models. The Com -
mission is also providing the necessary guidance to 
MS and stakeholders, and will continue doing this 
throughout the rest of the period 2014–20.
97
The Commission is of the opinion that the legal 
framework for the programming period 2014–20 
addresses the concerns raised by the Court suffi -
ciently well.
The issue of overcapitalisation is addressed by 
the provisions of Article 41 of Regulation (EU) 
No 1303/2013 where phased -in payments, based on 
achievement of concrete disbursement results, have 
been introduced as a general rule for all financial 
instruments in 2014–20.
The key performance issues are well addressed in 
the monitoring of financial instruments supported 
by ESIF, as defined in Article 46 of Regulation (EU) 
No 1303/2013. Moreover, the Commission points out  
four performance indicators enshrined in Article 12 
of Regulation (EU) 480/2014.
In addition, in order to encourage the use of finan -
cial instruments, the Commission strengthened 
its cooperation in the field of agriculture and rural 
development with the European Investment Bank 
(EIB) and signed a Memorandum of Understanding 
on 14 July 201422. This cooperation includes the pos -
sibility of utilising the experience and the knowl -
edge of the EIB Group on financial instruments and 
its application in rural development.
22 See Statement 14/225 of 14.07.2014.
Reply of the Commission 58
Recommendation 2
The Commission accepts this recommendation 
which is already partially implemented.
In the context of the ESIF technical assistance plat -
form ‘fi‑compass’  general and fund -specific guid -
ance on ex ante  assessments is provided. This covers 
also the whole EAFRD, as well as specific sectors, 
such as agriculture and forestry.
100
The Commission considers that the performance is 
mainly assessed through evaluations. Assessing the 
impact of rural development can only be done after 
sufficient time has passed, hence more results are 
expected in the context of the ex post evaluations 
carried out by the Member States, which will be 
synthesised by the Commission in 2017.
Managing authorities reported specific information 
on operations comprising financial instruments as 
an annex to the annual progress reports, such as 
leverage and performance.
The Commission considers that it has performed its 
supervisory duties adequately.
Recommendation 3
The Commission accepts this recommendation, 
which is already partially implemented.
The Commission has provided standard models 
for loan and guarantee funds in rural develop -
ment. Under the ESIF technical assistance platform 
‘fi‑compass’  it is currently investigating the opportu -
nity for another model such as for energy efficiency 
and renewable energy, which delivery is planned 
for end of 2015.
With regard to the cooperation with the EIB Group, 
the Commission signed a specific Memorandum 
of Understanding in respect of cooperation in 
agriculture and rural development, under which 
it is expected the EIB will offer specific FI scheme 
to MS to be implemented under the EAFRD. A spe -
cific event on this MoU is already planned for 
23 March 2015.In 2014–20, the already established funds will con -
tinue or new funds based on models proposed by 
the Commission (such as the off -the-shelf instru -
ments)27 can be established.
The legislator defined financial instruments as 
a type of support in the 2007–13 and 2014–20 
programming periods for the implementation of 
specific rural development measures.
Recommendation 1
The Commission accepts to identify the challenges, 
specific characteristics and obstacles to set up 
financial instruments in EAFRD.
Such analysis will be undertaken in the framework 
of the activities of the ‘ fi‑compass ’, a comprehensive 
technical assistance platform, which provides meth -
odological guidance and awareness-raising support 
to the Commission, MS and stakeholders in the field 
of financial instruments supported by ESI Funds in 
period 2014–20.28
The remaining elements of the recommendation 
are addressed to the Member States.
99
According to the principles of subsidiarity and 
shared management, the setting up of financial 
instruments, their implementation and the evalua -
tion of the demand lie within the responsibility of 
Member States.
Financial instruments need to have certain liquidity 
to ensure smooth investments in enterprises.
27 Commission Implementing Regulation (EU) No 964/2014 
of 11 September 2014 laying down rules for the application of 
Regulation (EU) No 1303/2013 of the European Parliament and of 
the Council as regards standard terms and conditions for financial 
instruments.
28 See more at http://www.fi -compass.eu
Reply of the Commission 59
For the period 2007–13, the Commission gave guid -
ance to any MS which has requested it. The guide -
lines on closure of the 2007–13 rural development 
programmes were adopted in 201529. The respect of 
the legal rules and guidance will be verified during 
the clearance of accounts.
The Commission will provide more consolidated 
and improved guidance for the period 2014–20.
Recommendation 6
The Commission accepts this recommendation, 
insofar as rules for the closure of rural development 
programmes 2007–1330 are under its scope.
The Commission notes that according to the appli -
cable EU legislation for 2007–13 the development 
of precise operational implementing rules, includ -
ing the appropriate exit policy for each financial 
engineering instrument, is the responsibility of the 
Member States.
29 C(2015) 1399 final from 5.3.2015.
30 C(2015) 1399 final from 5.3.2015.101
Financial markets are dynamic and can change 
as proven by the recent financial and economic 
crisis. Therefore long -term predictions may prove 
unreliable. For this reason, the EU legislation for 
the 2014–20 programming period allows each ex 
ante assessment to contain provisions on possible 
reviews and updates in medium to long -terms 
to reflect accurately potential changing market 
conditions.
Recommendation 4
The Commission accepts this recommendation, 
which is currently being implemented.
The transitional rules for the 2007–13 period have 
been adopted.
With regard to the 2014–20 period, discussions with 
Member States on closure will take place when clo -
sure of the 2014–20 period approaches and transi -
tional rules have to be defined.
The Commission provided in 2014 its guidance to 
managing authorities on financial instruments in 
ESIF programmes 2014–20.
Recommendation 5
This recommendation is for the Member States
103
The Commission notes that it is the responsibility 
of the national authorities to ensure that individual 
operations are implemented in accordance with 
the applicable legal provisions. The Commission 
evaluates the issues related to financial instruments 
during its audit missions.
According to the applicable EU legislation for 2007–
13, the winding up and exit arrangements are to be 
defined by the managing authority in the funding 
agreement with the fund manager, ensuring that 
the relevant provisions are adequately taken on 
board. Under shared management and in line with 
the subsidiarity principle, the Commission must sat -
isfy itself that the Member States set up adequate 
management and control systems.

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The Court examined the success of financial instruments 
(loan and guarantee funds) in rural development during 
2007–13 and their potential for the 2014–20 period. It found 
that they had so far been unsuccessful, mainly because they 
were overcapitalised and had not fulfilled their potential in 
terms of the desired leverage and revolving effects. As for 
2014–20, despite improvements in the background 
legislation, the Court concluded that it would still be 
a considerable challenge to achieve the desired impact.
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