EUROPEAN COMMISSION Brussels, 13.11.2015 SWD(2015) 206 final COMMISSION STAFF WORKING DOCUMENT Activities relating to financial instruments Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on financial instruments supported by the general budget according to Art. 140.8 of the Financial Regulation as at 31 December 2014 {COM(2015) 565 final}



Table of Contents I. INTRODUCTION II. OVERVIEW TABLE III. GENERAL CONTEXT 1. The EU Economy in 2014 2. Strategic Target Groups 2.1. EU SMES 2.2. EU Midcaps 2.3. EU Micro-enterprises 3. Strategic Sectors 3.1. Research and Innovation 3.2. Transport 3.3. Energy Infrastructure and Energy Efficiency 3.4. ICT/Broadband 3.5. Social Enterprises 3.6. Education 4. Strategic Non-EU Regions 4.1. Enlargement Countries

4.2. Neighbourhood Countries 4.3. Countries covered by the Development Cooperation Instrument (DCI) 5. Conclusion 6. Annex-Additional Information on the European Equity Market 6.1. The structure of the European Equity Market 6.2. Regulatory framework for the Venture Capital market IV. INFORMATION ON FINANCIAL INSTRUMENTS according to Article 140.8 of the Financial Regulation 1. Equity Instruments 1.1. The High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP) 1.2. Equity Facility under COSME 1.3. InnovFin SME Venture Capital (Horizon 2020) 2. Guarantee Instruments 2.1. The SME Guarantee Facility (SMEG07) under the Competitiveness and Innovation Framework Programme (CIP) 2.2. European Progress Microfinance Guarantee Facility (EPMF – G) 2.3. EaSI Microfinance and Social Entrepreneurship 2.4. Loan Guarantee Facility under COSME 2.5. RSI (Pilot guarantee facility for R&I-driven SMEs and Small Midcaps) under FP7 2.6. SMEs & Small Midcaps R&I Loans Service under Horizon 2020 2.7. The Cultural and Creative Sectors Guarantee Facility 2.8. Student Loan Guarantee Facility - ERASMUS+

2.9. Private Finance for Energy Efficiency Instruments (PF4EE) 3. Risk Sharing Instruments 3.1. Risk-Sharing Finance Facility under the FP7 (RSFF) 3.2. Horizon 2020 Loan Services for R&I Facility 3.3. Loan Guarantee Instrument (LGTT) 3.4. Project Bond Initiative 3.5. Risk sharing debt instrument under the Connecting Europe Facility (CEF DI) 3.6. Natural Capital Financing Facility (NCFF) 3.7. EU SME Initiative 4. Dedicated Investment Vehicles 4.1. The European Progress Microfinance FCP-FIS (PMF FCP-FIS) 4.2. The 2020 European Fund for Energy, Climate Change and Infrastructure – (Marguerite) 4.3. European Energy Efficiency Fund (EEEF) 5. Financial Instruments in the Enlargement Countries 5.1. Guarantee Facility under the Western Balkans Enterprise Development and Innovation Facility 5.2. Enterprise Expansion Fund (ENEF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) 5.3. Enterprise Innovation Fund (ENIF) under the Western Balkans Enterprise Development and Innovation Facility (EDIF) 5.4. European Fund for Southeast Europe (EFSE) 5.5. Green for Growth Fund (GGF) 5.6. SME Recovery Support Loan for Turkey (RSL)

6. Financial Instruments in Neighbourhood and Countries covered by the DCI 6.1. Neighbourhood Investment Facility (NIF) 6.2. Investment Facility for Central Asia (IFCA) & Asian Investment Facility (AIF) 6.3. Latin America Investment Facility (LAIF) 6.4. Support to the Facility for Euro-Mediterranean Investment Partnership (FEMIP) 6.5. Global Energy Efficiency and Renewable Energy Fund (GEEREF) V. REFERENCES VI. LIST OF ACRONYMS



I. INTRODUCTION This Staff Working Document (SWD) constitutes an Annex to the report of the Commission to the European Parliament and the Council on financial instruments supported by the general budget according to Article 140(8) of the Financial Regulation as at 31 December 2014. Complementing the information given in the main report, it provides additional specific information on individual financial instruments, on progress made in their implementation and on the environment in which they operate. In many Member States access to finance for SMEs remains challenging and may jeopardise the economic recovery. At the same time, infrastructure investment needs for transport, energy and broadband networks are estimated at EUR 1 trillion through 2020. Hence, the risk of a funding gap in Europe remains acute, against the backdrop of continuing deleveraging pressures and still significant fragmentation in financial markets across Member States. In this context, the real economy in the Union and beyond can benefit from EU financial instruments, which aim to alleviate financial market failures – as identified in the relevant ex-ante evaluations – while at the same time leveraging on the positive effects of EU-wide actions. In general, funds available for public policy are limited and therefore additional resources are needed to pursue public objectives more effectively. For this reason, financial instruments can play a very useful role in catalysing private and public funds by sharing some of the financing risks through limited Union resources, thus providing financial leverage. Financial instruments also ensure policy leverage by incentivising financial intermediaries to pursue common objectives through alignment of interest, and institutional leverage by mobilising EU policy expertise of the institutional actors involved in the implementation chain. Based on this rationale, financial instruments have already played a significant role by reaching out to important target groups such as SMEs, innovative enterprises and microenterprises, and supporting high-value projects in strategic sectors like transport and energy. They helped address market failures and were able to mobilise significant additional resources from the private and the public sector. For example, the main EU-level 2007-2013 financial instruments dedicated to SME support (CIP-GIF, CIP-SMEG 07 and RSI) and micro-SME support (EPMF) with an overall contribution of more than EUR 1,6 billion (commitments from Union budget), by the end of 2014 supported lending of over EUR 20 billion and also mobilised equity investments of about EUR 1 billion, thus enhancing access to finance for almost 373 000 SMEs. With the experience gained in the course of implementation, and in the context of programme evaluations, audits and consultations with a wide range of stakeholders, several lessons have been learned on how to further improve the design and management of financial instruments. In particular, the following best practices have been capitalised for the design of the 2014-2020 facilities. First, more consistency has been achieved in the governance, supervision and control of these instruments through the regulatory framework established in the Financial Regulation, and via standardised contractual arrangements with entrusted entities (Financial and Administrative Framework Agreements, Template for Delegation Agreements, etc.). These efforts have been largely supported by the Financial Instruments Inter-service Expert Group at the Commission level and by the Commission Expert Group 'EU Platform for Blending in External Cooperation' (EUBEC). Secondly, Financial Instruments will now cover all main types of final recipients over the full funding cycle and will include offer of both pro- and counter-cyclical products to respond flexibly to market needs, based on demand-driven implementation. Thirdly, effectiveness and efficiency have been enhanced through fewer instruments with larger volumes, ensuring critical mass in full consistency with State aid rules. Further, alignment of interest with entrusted entities and financial intermediaries is ensured through risk sharing and fees and incentives. Financial instruments are thus a proven way to achieve EU policy objectives. They use EU funds to support economically viable projects and attract significant volumes of additional public and private financing. By injecting money into the real economy, financial instruments contribute to the achievement of the EU policy objectives enshrined in the Europe 2020 Strategy, notably in terms of employment, innovation, climate change and energy sustainability, education and social inclusion.

In consequence of the expanded role of financial instruments, this SWD not only provides quantitative information on performance of financial instruments such as leverage and volume of financing supported, but also analyses the macro-financial context of potential final recipients and financial intermediaries, outlining general market developments in the EU policy areas supported and their implications for the financial ecosystem. Compared to last year, the present SWD has been enriched, notably with further information on instrument performance, volume of financing supported and fiduciary accounts. The SWD is divided into six parts. After the present Introduction (Part I), it offers an overview table (Part II) of the financial instruments covered. Thereupon, with the aim to provide a rationale for use of financial instruments in a given policy area, the general context (Part III) describes the EU economic environment in 2014 taking into consideration strategic target groups, sectors, and non-EU regions. Thereafter, Part IV provides detailed information on each financial instrument. This part is divided into six chapters dealing with equity instruments, guarantee instruments, risk-sharing instruments, and dedicated investment vehicles, as well as instruments in the enlargement and neighbourhood countries and in countries covered by the Development Cooperation Instrument. Finally, Parts V and VI contain references and acronym lists, respectively. II. OVERVIEW TABLE Organisation Policy Targets Implementation Financials Financial Instruments Type Basic Act DG in charge IB Objective Final Recipients Sector Indicative Aggr. Budget Envelope (EUR mln) Aggr. Commit-ments 2007-2014 (EUR mln) Aggr. Pay- ments 2007-14 (EUR mln) Financing supported (EUR mln) N° of final recipients benefited Revenues and Repayments (EUR mln) Admin Expenditure (EUR mln) GIF (CIP) E Old Dec N° 1639/2006/EC GROW ECFIN EIF Increase the supply of equity for innovative SMEs SMEs SMEs with no specific sector / innovative 605,70 625,20 358 984* 3 204** 371* 19,5 18,5 EFG (COSME) E New Reg. N° 1287/2013 GROW EIF Increase the supply of equity for SMEs SMEs SMEs with no specific sector focus 633,00 51,67 32.50 2 600 to 3 900*** 360 to 540*** n/a 1,4 InnovFin SME Venture Capital(H2020) E New Reg. N° 1291/2013; 1290/2013 RTD EIF Improve access to risk finance by early-stage R&I-driven SMEs and small midcaps Innovative SMEs & Small Midcaps R&I 430,00 n/a n/a n/a n/a n/a n/a SMEG07 (CIP) GOld Dec N°1639/2006/EC GROW ECFIN EIF Increase the supply of debt financed to SMEs SMEs SMEs with no specific sector focus 637,80 649,90 336.15 18 600* 25 445** 356 589* 12,1 17,08 EPMF-G G Old Dec N° 283/2010/EU EMPL ECFIN EIF Enhances access to microfinance by reducing microfinance providers' risk Micro-enterprises/ Households Micro-finance/no specific focus 23,60 23,87 18,47 160,26* 279,03** 14 448* 0,27 1,84 EaSI-G G New Reg. (EU) N ° 1296/ 2013 EMPL n/a Microfinance for vulnerable groups/ Support social enterprises Micro-enterprises/ Households Micro-finance 190,00 28,40 0 528*** 1 350*** Soc. Entr. and 41 000*** Microfin. n/a n/a Loan Guarantee Facility (COSME) G New Reg. (EU) N° 1287/ 2013 GROW EIF Increase the supply of debt financed to SMEs SMEs SMEs with no specific sector focus 686,00 89,13 41,74 14 300 to 21500* 330 000* n/a 2,45 RSI (2007-2013) G Old Reg. (EU) N ° 1291/ 2013; 1290/ 2013 RTD EIF Address the financing gap for innovative SMEs and Small Midcaps Innovative SMEs & Small Midcaps R&I 270,00 270,00 270,00 831* 3 301** 1 376* 1,32 12,6 InnovFin SME Guarantee (H2020) G New Reg. (EU) N° 1291/ 2013; 1290/ 2013 RTD EIF Address the financing gap for innovative SMEs and Small Midcaps Innovative SMEs & Small Midcaps R&I 1 060,00 168,6 168,6 11* 475** 9 500*** 21* 61 000 4,72 The CCS Guarantee Facility G New Reg. (EU) N° 1295/ 2013 EAC EIF Strengthen the competitiveness of the cultural and creative sectors SMEs Arts & Culture 121,00 n/a n/a 690*** n/a n/a n/a Student Loan Guarantee Facility G New Reg. (EU) No 1288/ 2013 EAC EIF Support mobility, equity and study excellence Students Education 517,00 28,4 n/a 3 000*** 200 000*** n/a 2 PF4EE G New Reg. (EU)N° 1293/ 2013 CLIMA EIB Support access to finance and/or better financing conditions to EE investors Private individuals, associations SMEs Energy 80,00 30 6 540*** n/a n/a n/a RSFF (2007-2013) RS Old Reg. (EU) N° 1291/ 2013; 1290/ 2013 RTD EIB Improve access to risk finance for R&I projects Large firms, large & medium Midcaps, Research Institutes R&I 960,73 960,73 960,73 9 556* 11 313** 98* 136,11 79,69 InnovFin Large Projects InnovFin MidCap Growth Finance InnovFin MidCap Guarantee (H2020) RS New Reg. (EU) N° 1291/ 2013; 1290/ 2013 RTD EIB Improve access to risk finance for R&I projects Large firms, large & medium Midcaps, Research Institutes R&I 1 060 483 483 1 157,2* 2 446,4* 13 250*** 15* None 15,53 LGTT RS Old Reg. (EC) N° 680/ 2007; 670/2012 MOVE EIB Enhance risk-sharing in transport infrastructure for TEN-T projects Infrastructure Projects Transport 250,00 250,00 211,88 497* 497** 6* 35,4 2,56 Project Bond Initiative RS Old Reg. (EU) N° 670/ 2012; 1316/ 2013 MOVE ENER CONNECT EIB Stimulate capital market financing for infrastructure projects Infrastructure Projects Transport, Energy, Broadband 230,00 230 146 493* 840** 5* 7,04 3,71 Risk Sharing debt instruments (CEF) RS New Reg. (EU) N° 670/ 2012; 1316/ 2013 MOVE ENER CONNECT EIB Stimulate capital market financing for infrastructure projects in transport, energy, broadband networks Infrastructure Projects Transport, Energy, Broadband n/a n/a n/a 18 000 to 45 000*** n/a n/a n/a NCFF RS New Reg. (EU) N° 1293/ 2013 ENV CLIMA EIB Promote the preservation of natural capital Infrastructure Projects Environment 60,00 10 3,25 100-200*** n/a n/a n/a EU SME Initiative RS New Reg. (EU) N° 1287/ 2013; 12 91/ 2013; 1303/ 2013 REGIO RTD GROW ECFIN EIF Enhance SMEs financing SMEs SMEs with no specific sector focus 815 n/a n/a 5 723*** n/a n/a n/a FCP-FIS (PMF FCP-FIS) DIV Old Dec N° 283/2010/EU EMPL ECFIN EIF Increase access to microfinance Micro-enterprises/ Households Micro-finance/no specific focus 80,00 80,00 63,43 114* 292,1** 16 025* Revenues 8,7 Repaym. 13,4 3,62 Marguerite DIV Old Reg. (EC) N° 680/2007 MOVE M.A Support infrastructure investment: transport, energy, renewables sectors Infrastr. Projects Transport, Energy, Environment 80,00 80,00 31,32 4 900* 10 000** 10* n/a 7,8 EEEF DIV Old Reg. (EU) N ° 1233/ 2010 ENER Deu-tsche Bank Invest in energy efficiency, renewable energy, clean urban transport Infrastr. Projects Energy 146,34 146,3 98,55 200* 265** 9* n/a 5,2 Guarantee Facility under the WBEDIF EnC Old Reg. (EC) N°1085/2006 NEAR EIF Create the preconditions for the emergence and growth of innovative and high-potential companies SMEs SMEs with no specific sector focus 21,90 21,90 21,90 32,46* 97,9** 532* n/a 1,35 ENEF under EDIF EnC Old Reg. (EC) N°1085/2006 NEAR EIF Enhance socio-economic growth of the Western Balkans through equity investments SMEs R&I 11,00 11,00 10,40 77** 10-14** n/a 0,4 ENIF under EDIF EnC Old Reg. (EC) N°1085/2006 NEAR EIB, EIF, EBRDKfW Enhance socio-economic growth of the Western Balkans through equity investments SMEs R&I 21,20 21,20 21,20 n/a n/a n/a n/a EFSE EnC Old Reg. (EC) N°1085/2006 NEAR EIF Extend loans to local comm.banks and micro-finance institutions in the Western Balkans Micro-enterprises/ Households Microfinance/ no specific focus 87,68 26,23 26,00 3 200* 496 716* n/a 0,55 GGF EnC Old Reg. (EC) N°1085/2006 NEAR EIF Provide dedicated financing for energy efficiency and renewable energy Micro-enterprises/ Households Energy 38,60 38,6 38,6 185,1* 281*** 11 375* n/a 0,32 SME Recovery Support Loan for Turkey EnC Old Reg. (EC) N°1085/2006 NEAR EIB Mitigate the crisis impact for SMEs and contribute to the development of the Turkish economy and employment SMEs SMEs with no specific sector focus 30,00 30,00 30,00 299,64* 299,34** 265* n/a 0,36 NIF NDC Old Reg. (EC) N° 1638/ 2006 NEAR EFI Mobilise investments to support prosperity and good neighbour. Infrastructure Projects, SMEs SMEs, Environment., Energy, Water/Sanit., Social Sector, Transport 1 159 1 159 448,85 26 000* 101* n/a 12,15 IFCA & AIF NDC Old Reg. (EC) N° 1905/ 2006 DEVCO EFI Promote investments and key infrastructure Infrastructure Projects SMEs, Environment, Energy, Water/Sanit., Social Sector, Transport 171,57 171,57 45,43 465* IFCA 2 046* AIF 15* IFCA 13*AIF n/a 4,83 LAIF NDC Old Reg. (EC) N°1905/2006 DEVCO EFI Promote investments and infrastructures Infrastructu-re Projects, SMEs SMEs, Environment, Energy, Water/Sanit., Social Sector, Transport 210,4 210,4 104,86 6 600 * 1 400-1 750*** 27* n/a 3,77 Support to FEMIP NDC Old Reg. (EC) N°1638/2006 NEAR EIB Provide capital to the private sector of Mediterranean partner countries SMEs Private Sector 224,00 224,00 224,00 6 700* n/a 6,8 23,9 GEEREF NDC Old Reg.(EC) N°1905/2006 DEVCO EIB,EIF Promote energy efficiency and renewable energy SMEs Energy 81,1 81,1 79,5 1 000* n/a n/a 0,56 Further explanations: *Financing supported - Target – the amount of finance that the operations envisaged to be signed by the entrusted entity with financial intermediaries (or final recipients) are targeted to provide to eligible final recipients. **Financing supported - Expected – the amount of that the operations already signed by the entrusted entity with financial intermediaries (or final recipients) are expected to provide to eligible final recipients. ***Financing supported - Achieved - the amount of finance that the operations already signed by the entrusted entity with financial intermediaries (or final recipients) have provided to eligible final recipients. III. GENERAL CONTEXT 1.The EU Economy in 2014 In order to outline the macroeconomic background against which EU financial instruments operated in 2014, the fundamental evolution of key macro-financial variables is sketched out below in this section. Real GDP The economic recovery that had started in the EU and in the euro area in the second quarter of 2013 continued, but it struggled to gather momentum in 2014. The subdued pace of the recovery was very much in line with expectations about the rebound following a deep economic and financial crisis. But apart from the crisis-related factors behind the weak growth momentum, in 2014 the uncertainty about the geopolitical situation, commitments to future policy initiatives and energy-price developments have gained importance. While net exports had been the main growth driver in 2013, in 2014 private consumption has become the main growth factor, whereas investment has moderately recovered. In 2014, real GDP grew by 1.4% and 0.9% respectively in the EU and in the euro area, almost entirely driven by domestic demand (Figure 1). Looking ahead, with the help of relatively low oil prices, a lower external value of the euro, and policy support, including the ECB's asset purchase programme ("quantitative easing"), a broadly neutral fiscal policy stance, and the Investment Plan for Europe, economic activity is forecast to accelerate. Real GDP growth is expected to increase in the euro area and in the EU to 1.5% and 1.8% respectively in 2015 and further to 1.9% and 2.1% in 2016. Figure 1: Real GDP, EU Figure 2: Labour market, EU Note: Figures above horizontal bars are annual growth rates.

Source: European Commission (2015)

Labour market Since the start of the recovery in the second quarter of 2013 and in 2014, employment picked up comparatively fast and strong in response to output developments. Unemployment rates continued following a moderate downward trend throughout 2014 (Figure 2). In December 2014, in the EU the unemployment rate stood at 9.9%, about 0.5 pps. lower than a year earlier, with significant differences across Member States, in respect to unemployment rate, duration and age profile. Thus, the situation in the labour market continues to be reason of concern, in particular in the more vulnerable economies. The expected strengthening of the economic recovery together with structural reforms should trigger stronger net job creation in the second half of 2015 and even more so in 2016. Public finance On the public finance side, the general government deficit in the EU has continued to decline further from 3.2% of GDP to 2.9% during 2014. According to the European Commission (2015) forecast, non-consolidated deficits should continue falling in the EU to 2.5% in 2015 and 2.0% in 2016. The deficit in the euro area should also continue the decline observed in 2014 (to 2.4%, from 2.9% in 2013), falling to 2.0% in 2015 and 1.7% in 2016.

Inflation and the exchange rate Prices were stable throughout 2014, and declined mildly in December (0.1% in the EU, 0.2% in the euro area). Besides the impact of lower energy prices, the persistence of low inflation can also be associated with the remaining slack in the economy and weak domestic demand, as private sector balance sheets had to adjust further and credit channels remained impaired. The depreciation of the trade-weighted euro exchange rate that began in mid-2014 only partly offset the decline in US-dollar-denominated oil prices, and therefore only slowed the decline in headline inflation in 2014. Financial markets On the financial side, monetary policy in the euro area has become even more accommodative since mid-2014 and some Member States outside the euro area have also cut interest rates. Following the decisions by the ECB Governing Council, short-term money-market rates have declined to close to (or below) zero and also longer-term rates have shifted down. Low policy interest rates, the announcement of additional "quantitative easing" measures (extended asset purchase programme) and reinforced market expectations of a stronger pace of asset purchases by the ECB have supported the upward movement of stock prices at the end of 2014. In combination with expectations about the forthcoming normalisation of monetary policy in the US, the external value of the euro declined vis-à-vis the US dollar. Investor sentiment towards euro area banks has continued to strengthen amid further progress in bank balance sheet repair and an improved macro financial environment. EU banks have increased their capital levels in recent years, thereby increasing their resilience to market conditions. During 2014, the build-up of capital buffers in anticipation of the ECB's comprehensive assessment and the EBA Stress Test has exceeded EUR 100 bn. Therefore, funding conditions have improved, due to the progressive repair of bank balance sheets and the reduction in the sovereign spread of more vulnerable Member States. Moreover, by proceeding with the Banking Union in 2014, progress has been made in weakening the links between sovereigns and banks. The establishment of the Single Supervisory Mechanism and regulatory initiatives – such as new bail-in rules – have been crucial in this respect. However, the continued significant correlation between the borrowing costs of euro area banks and sovereigns highlights the need for continued progress. Both banks and governments continued to take action in 2014 to address legacy risks from the crisis. At the same time, progress by euro area governments in implementing fiscal consolidation and structural reforms continued, although the pace was uneven across countries. The improved sentiment has resulted in significantly declining yields on lower-rated euro area government bonds, which in some cases reached levels last seen before the eruption of the euro-area-centred second wave of the global financial crisis in 2010. Despite this progress by both banks and governments, financial stability challenges persist. The financial stability risks faced by the euro area during 2014 can be divided into two broad categories. First, “legacy” issues from the global financial crisis, while receding throughout the year, remained a concern. For the euro area, these mainly related to insufficient progress in addressing weaknesses on the part of both the banking sector and governments. Notwithstanding the strengthening of banks' balance sheets, the banking system was still in need to address remaining fragilities and uncertainties. Persistently weak bank profitability could become a systemic concern if it limited banks’ ability to improve their shock-absorbing capacity via retained earnings and provisioning. This could prevent banks from engaging in new lending activities and lead to more structural business model-related concerns in a low growth environment. In such circumstances, banks might have been tempted to take on more risk to improve profitability, which in turn could have made them more vulnerable to future shocks. The second broad sets of risks were “emerging” risks, which mainly stemmed from a continued global search of banks for yield, as noticed above. This has left the financial system more vulnerable to an abrupt surge in risk premia, which might involve all asset classes. Figure 3: Euro Area interest rates on loans to non-financial entities (1-year maturity) Source: European Commission In this context, the prospect of a gradual normalisation of benchmark interest rates coexisted in 2014 with financial market fragmentation across Member States (Figure 3), which continued to reflect the sovereign debt crisis and the vicious spiral between sovereign and bank debt: on the one hand, Governments accumulate debt to support ailing banks, on the other EU banks look at treasuries as a preferred asset. The trend of interest rates on loans will be analysed more in detail in the next section with specific focus on SMEs. Relevance of the macro-financial context for financial instruments The macro-financial dynamics depicted above are bound to affect the performance of EU financial instruments through various channels. For example, the demand of EU financial instruments by financial intermediaries is affected by overall economic activity and interest rates, which inevitably impact on the final recipients' demand for loans and equity. In addition, favourable labour market conditions may encourage the job creation targeted by financial instruments. As a further example, public finance retrenchment may impair a Member State's resource availability, and hence prompt additional demand for loans and equity on the part of financial instruments' final recipients. Moreover, changes in the internal or external value of the currency may affect firms' competitiveness and hence their need for EU financing support. The following sections analyse in more detail the economic and financial situation of target groups that are of particular interest for policy-making, underlining the rationale for their support through EU financial instruments. 2.Strategic Target Groups

The EU has identified recipients in the business sector based on firm employment, turnover and/or balance sheet, including SMEs (i.e. micro, small and medium-sized enterprises) and midcaps. EU SMES Small and Medium-sized Enterprises (SMEs) in the EU amount to almost 22 million, and constitute the connective tissue of the EU productive fabric: they represent 99.8% of EU companies, almost 60% of GDP (total value added) and near 70% of the total workforce. Yet despite their economic importance, SMEs typically face greater problems than larger firms in several aspects, including access to finance, especially (but not exclusively) during financial crises. 2.1.1.SME Loan Market 2.1.1.1.Demand for SME loan finance According to the UEAPME (2015), the overall business environment for European SMEs in the second semester of 2014 improved by almost 8.5% from the corresponding period in 2013, recording three consecutive upticks since the first semester 2013 (Figure 5). For the first time since 2012, the Index has risen above its neutral level of 70%, reaching 71.7 percentage points in the second semester of 2014. Figure 5: SME Business Climate Index Note: The UEAPME SME Business Climate Index is calculated as the average of the current situation and the expectations for the next period, resulting from the sum of positive and neutral (meaning: no change) answers pertaining to the overall situation for the business. For example, for “semester A” with 25% positive, neutral 55%, and 20% negative answers, the Index would be (25 + 55 =) 80, and for “semester B” with 40% positive, 30% neutral, and 30% negative answers, it would fall to (40 + 30 =) 70. However, the respective balances of positive minus negative answers would show an opposite result, growing from “semester A” (25 – 20 =) 5% to “semester B” (40 – 30 =) 10%. Therefore, these balances should also be examined, and are reported in UEAPME (2014). Source: EIF (2014) (based on UEAPME 2014) The trend for the EU is rising, indicating that EU enterprises envisage the beginning of a recovery (UEAPME 2014). Remarkable progress can be noticed especially in the countries of the EU South and the Periphery (Croatia, Cyprus, Greece, Ireland, Italy, Malta, Portugal, Slovenia and Spain) – "South" in the graph. The SME Business Climate Index for these countries has increased by 7.9% in 2014, which is higher than the increase in the EU North and Centre (Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Romania, Slovakia, Sweden and UK) – "North” in the graph (4.5%). As a result, the gap between the two country groups has narrowed, with the current wedge equal to 11.8%, which is the lowest figure since the beginning of the sovereign debt crisis (UEAPME 2014). 2.1.1.2.Supply of SME loan finance The current status of bank lending to non-financial corporations – including SMEs – is analysed in the ECB Bank Lending Survey. The survey reports the net percentage of banks contributing to tightening credit standards for SMEs. As shown by Figure 6, a general decrease in net tightening for loans to SMEs has occurred since the first quarter of 2013. In January 2014, a negative net tightening (i.e. a net easing) has been attained for the first time after almost seven years. Henceforth, during 2014 the overall SME net tightening of credit standards stayed essentially unchanged, while remaining slightly higher for large enterprises. Figure 6: Changes in credit standards applied to the approval of loans or credit lines to enterprises (SMEs versus large enterprises) Note: A positive net percentage indicates that a larger proportion of banks has tightened credit standards (“net tightening”), whereas a negative net percentage indicates that a larger proportion of banks has eased credit standards (“net easing”). Source: EIF (2014). In the last two quarters of 2014, several factors including the costs related to bank's capital position, the expectation regarding the general economic outlook and access to finance contributed in net terms to the easing of credit standards for SMEs (Figure 7). It is interesting to notice that the expectations concerning the industry (or firm) specific outlook contributed in the last quarter of 2014 to a tightening of credit standards, whereas the expectation concerning the general economic outlook in the same period contributed to the easing of credit standards. Figure 7: Factors contributing to tightening credit standards for SMEs

Note: The net percentages for responses to questions related to the factors are defined as the difference between the percentage of banks reporting that the given factor contributed to a tightening and the percentage reporting that it contributed to an easing. Source: EIF (2014). 2.1.1.3.Market loan volumes and interest rates Volumes of SME loans Credit growth and lending conditions for the private sector in general, and SMEs in particular, have not yet fully incorporated the change in the business climate and financial stability.This picture of still difficult conditions for corporate lending in some Member States and especially for SMEs has been compounded by the continued grim situation in regard to lending volumes. Using again small loans (below EUR 1 million) as a proxy, new SME loan volumes decreased continuously by 36% from their April 2009 peak until June 2013, and stayed essentially stable thereafter, remaining by year-end 2014 21% below their 2003 levels. In comparison, large loans stand today 6% above their 2003 levels. Only small loans up to EUR 0,25 million (data available only since June 2010) are increasing. Across the Euro Area, new bank lending to SMEs continues to decline from pre-crisis peaks through 2014, but at a slower pace (Figure 8). Among the "South" countries, there were some signs of pickup in Spain in 2014, where economic recovery is taking hold, and a slight uptick in Italy, based on 12-month cumulative flows. In Greece and Cyprus, where liquidity pressures remain acute and credit quality has significantly deteriorated, new lending to SMEs continues to decline sharply. In EU "North" countries, lending volumes have slightly decreased during 2014 across the board, except for Germany. Comparing Figure 8a with Graph 8b, the scale of the volume reduction in the "South" appears much larger than in the "North", so that the former countries lie mostly below the average, whereas the latter remain above. Figure 8: Loan Volumes (New Business) Note: End 2004= 100; Loans up to and including EUR 1 million. Source: ECB Data Warehouse Outside the Euro Area, new loans to SMEs in the UK increased by over 23% through November 2014 compared with the previous year, although in net terms, the stock of loans fell as repayments remained larger than new lending. Available data from national central banks on outstanding loans to SMEs – elaborated by IIF (2015) – reports a decline in outstanding loans in Ireland and Portugal since 2012, while in France, loans stocks increased by over 4% from 2012Q1 to 2014Q3. Interest rates on SME loans For the Euro area as a whole, medium-size loans (from EUR 0,25m up to EUR 1m) had a rather stable spread over large loans (over EUR 1m), averaging 62 basis points (bp) for the period June 2010 to April 2014 (Figure 9). The interest rate spread between small loans (below EUR 0,25m) and large loans was higher, but relatively stable at an average level of 145bp from the start of the time series in June 2010 until July 2011; in the following months, this spread showed an increasing trend until August 2012 when it reached a record high of 279bp. Since then, the spread has also been rather stable, averaging 211bp. Thus, financing conditions remain persistently tighter for SMEs than for large firms (ECB 2014), as a consequence of lacking collateral and a supposed divergence in firm-specific risks. Figure 9: SME Loan Interest Rates Source: EIF Small Business Finance Outlook, December 2014 Interest rates on new loans to businesses up to €1 million have mostly declined since the start of 2014, with Ireland as an exception, and the spreads between "North" and "South" countries have narrowed, while remaining substantial (Figure 10).

Figure 10: Interest Rates on New Loans to SMEs. Comparison EU South and Periphery vs EU North and Centre Figure 10a: EU "South" Figure 10b: EU "North" Source: IIF "Addressing SME Financing Impediments in Europe: A Review of Recent Initiatives"Loans up to and including EUR 1 million. In particular, the difference between the loan pricing conditions for small and large firms remained high in more vulnerable countries, where SMEs remained more dependent on bank funding. 2.1.1.4.Access to loan finance of EU SMEs As a consequence of this bleak credit dynamics, access to finance is still among the top concerns of the small and medium sized EU enterprises. Younger and smaller firms are the most badly affected, according to the latest "Access to Finance" survey covering the whole EU, released by the European Commission and European Central Bank. Small EU businesses are increasingly optimistic about their growth prospects but many are still concerned about the lack of access to finance: 13% of survey respondents see access to finance as the most important problem for their companies. Indeed, more than a third of SMEs surveyed did not manage to get the full bank loan financing they needed during 2014. In particular, 13% of SME bank loan applications were rejected a slight increase from 11% in 2013 and 18% of companies received less than they applied for. In addition, 4% declined the loan offer from the bank because they found the conditions unacceptable and 8% of SMEs were even too discouraged to ask, because of anticipated rejection. The fear of rejection was most often reported in Greece (29% of SMEs), Slovenia (22%), Cyprus (17%) and Ireland (15%). This was particularly the case for young companies: 11% of those who have been in business between 2 and 5 years did not apply for a loan because of fear of rejection. The survey also shows that SMEs are confronted with higher rejection rates compared to larger corporations, a feature magnified in vulnerable Member States. It is also younger and smaller firms that are more likely to obtain only part of the finance they request, or to be outright rejected. The highest rejection rate was among micro companies employing fewer than 10 people (20%) and among SMEs, which had been active for less than 2 years (30%). While SMEs reported a welcome fall in interest rates for loans, and believe that bank financial conditions have improved during 2014 with respect to loan interest rates, in contrast, SMEs reported a substantial net increase in collateral and other loan requirements by banks to which they had applied for loans. Collateral requirements were considered as tightened by SMEs in all EU countries, with the highest average increases in Cyprus, Greece and Slovenia, while the lowest average increases were reported in Poland, Slovakia and the Czech Republic. Figure 11 illustrates the change in availability of bank loans for SMEs in the euro area. Figure 11: Change in availability of bank loans for euro area SMEs (over the preceding 6 months; % of respondents) Note: “Net percentage” means the difference between the percentage of firms reporting an increase (or an improvement) for a given factor and that reporting a decrease (or deterioration). Source: EIF Small Business Finance Outlook, December 2014 Based on Commission analysis, it can be estimated that up to 10% of EU SMEs that have had difficulty in accessing loan finance are in fact financially viable, in the sense that have experienced a positive turnover growth in the previous six months. The difficulty in accessing finance is compounded by the fact that a majority of SMEs look at external financing as their only source of financing, and bank loans are a relevant source of external finance for 57% of SMEs. The situation is worse for SMEs undertaking R&I, as banks typically lack the ability to value knowledge assets, and are therefore often unwilling to invest in knowledge-based companies or do so only with a risk premium. In consequence, many established and innovative SMEs find it hard to obtain loans for R&I activities. The above is also valid for cultural and creative sectors SMEs. Due to sector specificities such as importance of intangible assets, lack of uniform sector definition, asymmetries of information, under-capitalisation, low investment readiness, atypical cash-flow plans and project-centric plans, the SMEs are perceived as riskier. This results in the reluctance of financial institutions to finance SMEs from the cultural and creative sector.

The above circumstances underline again the importance of the EU programmes and Facilities aimed at SME support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue. 2.1.2.SMEs and the European Equity Market 2.1.2.1.SME Demand for equity By looking at the demand for equity financing, the latest Survey on Access to Finance of Small and Medium Enterprises in Europe (SAFE) shows that SMEs’ needs for equity financing increased in 2014 compared to 2013, with a net increase from 2% to 7%. However, only 20% of SMEs felt confident to discuss financing and obtaining the desired results with equity investors and venture capital enterprises, while 32% did not feel confident. Smaller and non-innovative firms are less confident in their financial competences. In fact, 25% of SMEs considers equity financing not applicable to their firm. As a consequence, only 3% of EU SMEs used equity financing in the last six months in 2014, registering a decrease from the 5% measured in the 2013 wave (Figure 12). Figure 12: SMEs that used equity financing in the last 6 months, Euro Area Source: European Commission Elaboration based on SAFE Survey Access to equity financing is nearly twice as common among larger businesses (6% of those with 250+ employees) in the EU, reflecting SMEs' difficulties in accessing this specific financial instrument. 2.1.2.2.Supply of equity for SMEs In 2014, most categories of enterprises reported an increase in the willingness of investors to invest in equity or debt (Figure 13). Among the 47% of EU SMEs expressing an opinion about the willingness of investors to invest in equity in the past 6 months, most reported no change (31%), 10% reported an improvement while the 6% reported a deterioration. Figure 13 : Change over the past six months in the willingness of investors to invest in firm equity or debt securities Note: The results presented in this figure refer only to those SMEs that considered debt securities, equity capital, other loans or other sources of financing relevant to their enterprise. Among the four discerned sectors, a negative net effect is reported by construction only (-1%) with the remaining three reporting a positive net effect. Source: SAFE However, the lack of equity finance in Europe is increasingly being recognised as a key bottleneck to the provision of further overall SME funding. Among the different opportunities of equity financing for SMEs, a crucial role is played by Venture Capital financing. Spanning from the seed to the growth phase of companies' development, Venture Capital investments serve 86% of European SMEs seeking equity financing, and 78.5% in terms of total amounts invested in SMEs. For the purpose of this document, it is thus useful to focus on the Venture Capital market to gain a better understanding of the dynamics of equity financing of European SMEs. 2.1.2.3.Access to Venture Capital of EU SMEs From a broad supply perspective, the structural challenges in the European Venture Capital market, the difficult fundraising environment, and the still somewhat risk-averse market sentiment, are all sources of significant problems for fund managers in the access to funding in general, and for new funds in particular. Moreover, markets for analysis are underdeveloped, and both private and public investors are disadvantaged in accessing credit information, and therefore find it harder to operate on an equal footing with established players in the debt-financing sector. This supports a view that public backing is necessary, especially for the early stage segment of the market.

The latest available figures from EVCA (2015a) point to the following trends in the European Venture Capital sector: a) Fundraising Venture Capital fundraising in Europe totalled EUR 4,1 billion in 2014 which represents a decrease of 12% compared to the EUR 4,6 billion raised in 2013 and is broadly in line with the lower volumes recorded since 2009 (Figure 14). Government agencies remained the most prominent provider of funding, representing more than 35% of the total funds raised (compared to 14% in 2007) Figure 14: Venture Capital – Funds raised by type of investor Note: Incremental amount raised during the year - % of total Source: EVCA 2015a As regards the geographic breakdown, 46% of the funding came from France and the Benelux region (Belgium, the Netherlands and Luxembourg), followed by 13% from North America and 10% from the UK. b) Investments The total amount of Venture Capital invested in 2014 reached EUR 3,6 billion, up 6% from the total investment volume of EUR 3,4 billion recorded in 2013. This figure is in the same order of magnitude as the volumes recorded each year since 2009 and significantly lower than pre-crisis levels. More than 3,200 companies were backed by Venture Capital funds in 2014. Start-up companies were at the centre of Venture Capital funds' attention, as they received 52% of the total amounts invested and represented 60% of the total number of supported companies. As regards sectors, life sciences, computer and consumer electronics, and communications accounted over than 70% of all Venture Capital investments. In terms of geographic breakdown by equity amount invested in 2014, most of the Venture Capital funds' investment went to France and the Benelux region and to the DACH region (Germany, Austria and Switzerland) with the UK and Ireland each receiving approx. EUR 1 billion of investments. While Seed/Start-up/Early Stage funds invested 95% of their capital in SMEs (representing 99% of their target group, Figure 15) ; Private Equity funds operating in the Growth stage only invested 55% of their capital in SMEs (which still constitute 81% of their target group). Figure 15: Venture Capital – Investment by portfolio company size Note: Amount and number of companiesSource: EVCA 2015a c) Divestments Venture Capital divestments decreased to EUR 1,9 billion in 2014, up from the EUR 2,2 billion in 2013 but still lie well within the range of EUR 1,9 to 2,4 billion recorded since 2008. Trade sales were the most common exit routes, representing 45% of all divestments.

The number of exited companies stood just above one thousand. The highest financial volumes earned in exits were realised in life sciences, computer and consumer electronics, and communications (Figure 16). The volumes earned in exits in financial services decreased from 18,3% in 2013 to 1,2% in 2014. Figure 16: Divestments at cost by sector – Venture Capital / Buyout / Growth Source: EVCA 2015a As shown above, in 2014, around 35% of funding for Venture Capital came from government agencies, according to EVCA (2015a), and the total amount raised from such agencies for Venture Capital funds in Europe was just under EUR 1,4 billion with government agencies significantly stepping up investments over the past few years. Figure 17: Government investments and Venture Capital fundraising in EU Source: EVCA 2015a However, such efforts target mostly national Venture Capital markets, thus contributing less to the emergence of a robust pan-European Venture Capital industry, a crucial factor when it comes to the overall innovative and high-growth capacity of the EU economy. Importantly, public grants usually dry up as a concept moves from the basic research stage through to applied research, and then to piloting, while private capital is not available until the later stages, when technological and commercial risks have diminished. These considerations point towards the importance of stepping up the EU intervention in Venture Capital markets in its role as a pan-European institution capable of supporting this asset class by complementing funding sources at both the private market level and national public level. 2.1.2.4.Equity Financing Gap for Innovative SMEs A recent study commissioned by the European Parliament's Committee on Industry, Research and Energy (ITRE) draws on and synthesises the outputs of a wide range of sources to examine, amongst other topics, the interrelated questions of whether innovative EU SMEs suffer from an insufficient supply of Venture Capital and if Venture Capital funds suffer from a lack of demand for what these funds have to offer. The study found that the supply of Venture Capital is low in Europe because many institutional investors either withdrew from the Venture Capital market following losses from the bursting of the dot.com bubble and have not returned, or, in the wake of the financial crisis, have ceased to invest in Venture Capital or have moved their focus from seed and start-up Venture Capital investments to later-stage Venture Capital or private equity investments. Europe lacks a pool of large pension funds, university endowments, foundations and family offices willing and able to fill the gap, though public efforts have gone some way to compensate, with government agencies significantly stepping up investments over the past few years. In addition, Europe suffers from a problem in the quality of the funds supplying Venture Capital: not many are large enough to attract institutional investors or sufficiently experienced in selecting promising companies. Furthermore, the persistent segmentation of the market along national lines reduces cross-border operations and undermines attempts to achieve economies of scale in both fund-raising and investment. On the demand side, the study found that a common complaint of Venture Capital funds in Europe is the limited number of high-potential firms available for investing in, especially in the early stages, and particularly firms that can be expected to deliver an acceptable rate of return. The causes identified include low relative and absolute levels of R&D expenditure in most Member States, disadvantaging the generation of new ideas; insufficient investment in mechanisms supporting TT and commercialisation; lack of business skills on the part of company management teams and a raft of framework conditions linked to IP rights, public procurement practices, tax regimes, and the flexibility of labour markets. In the study on financial instruments accompanying the impact assessment for COSME, the authors reject the idea of equating the aggregate financing gap in the EU with the amount that would be needed to approach the ratio of Venture Capital investments to GDP found in the US. They argue that this method overlooks structural differences between the two economies and neglects issues of absorption capacity, such as difficulties in increasing the numbers of skilled Venture Capital fund-managers, or the dearth of investment opportunities. Instead, their approach is to target a doubling of the recent level of Venture Capital investments over five years, requiring, so the authors estimate, a progressively gap-filling increment of about EUR 800 million per year. The above circumstances underline again the importance of the EU programmes and Facilities aimed at SMEs support and addressing market gaps or sub-optimal market situations, especially with respect to the 'access to finance' issue of early-stage enterprises, including in their expansion phase. In this context, the equity instruments adopted by the EU represent an important measure to address equity financing gaps by leveraging EIB funds while minimising market distortions.

EU Midcaps While SMEs are at the centre of EU policy initiatives, mid-sized companies (usually defined as having 250-2999 employees) are increasingly recognised for their important role in growth and employment. At this stage of the economic cycle and following the constraints posed for the whole EU economy by the financial crisis, mid-caps will play a key role in economic recovery, growth and employment in Europe. Characteristically mid-sized or mid-cap companies benefit from better name recognition, longer credit history and better product track record than SMEs. In case of mid-sized companies with a stable growth trajectory, this reduces information asymmetries and allows them to have better access to finance than SMEs (1-250 employees), including access to capital market financing. But several mid-caps in the EU are facing the challenge of being obliged to expand and innovate or lose their competitive edge. Those mid-caps need usually to invest in research and development (R&D) and pursue a more active internationalisation strategy than SMEs, with the corresponding needs for equity and debt finance. A recent study (PricewaterhouseCoopers 2012) estimates the number of mid-caps in the EU to be around 28 000, with about half of them being innovative midcaps. A great part of them has mainly relied on debt finance as their main source of external finance in the recent past. The study also suggests that the market gap in getting access to finance is smaller for mid-sized companies than for SMEs. Most recent data indicates that credit standards were eased on loans to corporations of all sizes. EU Micro-enterprises While SMEs represent 99,8% of EU companies, microenterprises constitute 92% of them. As such they are thus decisive for boosting jobs, growth and investment in Europe. In addition, they play an even more important role when it comes to the impact on job creation for vulnerable groups and a resulting positive social inclusion effect. Nevertheless, microenterprises share the same problems as other SMEs, yet typically to a higher degree. Thus, when looking at the expected developments for turnover of SMEs by size classes in 2014, micro-enterprises show a decrease for the last semester, which offsets the positive judgement of the first semester. According to their expectations, micro-enterprises will continue facing more difficulties than other SMEs (Figure 18). Figure 18: Overall situation of SMEs by class size Source: UEAPME(2015) Microenterprises typically face even more difficulties in obtaining financing. Data from the latest Survey on the Access to Finance of Enterprises show that micro-enterprises in the Euro area reported “access to finance” as their third most pressing problem, while it is in fifth place for small enterprises, and sixth for the medium and large ones. Compared to the previous survey wave, the percentage of companies listing access to finance as their most pressing problem has increased for all enterprises, except for micro enterprises. The main channel of financing of microenterprises is the microfinance market. The European microfinance market is as diverse as its actors. To a large extent, this diversity of institutional structures is related to differences in the national legal environment for loan provision, differences in the established financial systems and the variety of microenterprise promotion and underlying policy directions. The main institutional forms are Non-bank financial institutions (NBFIs), Non-Governmental Organisations (NGOs) or Foundations, Credit Unions and Cooperatives, Microfinance Associations and banks (Figure 19). The decrease of MFIs surveyed structured as NGOs and corresponding rise of NBFIs might be explained by a maturing of the European microfinance sector: existing NGOs may be scaling down their business and consequently changing their legal status to NBFI, since NBFIs can offer a wider range of services and access commercial sources of capital, as they operate under a license from the central bank. Figure 19: Distribution of MFIs by institutional type Source: EMN (2014)

In addition to the institutional variety, the European microfinance markets are characterised by a large diversification of the products offered, especially the underlying product features: current average loan term, average interest rate and the presence of additional fees. Based on the most recent EMN Overview Survey, the average micro loan was reported to have featured an interest rate in the range of 10% with large variations across countries. The European microfinance sector provides mainly microloans (up to EUR 25 000) tailored to micro-enterprises (92% of all European businesses). In 2013, all MFIs covered by the EMN Survey disbursed 387 812 microloans (including personal loans) amounting to a total volume of around EUR 1 530 million. The EU-based organisations surveyed alone reported 207 335 loans with a total volume of EUR 1 260 million. Combined with the results of the past EMN surveys, this indicates a steady growth of the observed micro-lending activities among the MFIs surveyed in Europe since 2009. The number of loans disbursed increased by more than 400%, and the reported total loan volume has more than doubled since 2009. National aggregate results from Evers & Jung (2014) show that a total volume of EUR 2,4 billion was issued in the form of microloans in the EU-28 plus Switzerland, Norway and Iceland between 2010 and 2012. The aggregate EU-28 level demand for microloans, calculated along clusters of European countries, is estimated up to a total value of EUR 5,1 billion, highlighting a financing gap of around EUR 2,7 billion in terms of total volume issued. At the level of general supply of microfinance in Europe, commercial banks are expected to keep reducing their lending to small start-ups and micro-enterprises. If commercial banks continue to reduce their already limited exposure to risky small scale loan operations over the coming years, the financing gap for micro-financing may be expected to widen. Over the past two years, support for microfinance initiatives remained high on the agenda of policy makers in many European countries. Especially in Western Europe, the provision of microloans is regarded as a suitable tool for addressing financial exclusion by commercial banks and creating employment opportunities in the microenterprise sector. After years of continuous political support, the sector is expected to deliver on a larger scale its promises to ease the ongoing situation of high unemployment rates, low economic growth and unstable financial sector. Despite success in widening the sector’s outreach, the development of stable funding patterns remains a challenge for microfinance providers in many countries. Aside from public sources, the availability of affordable funding is limited and prone to external influences. Besides job creation, there is a new trend on the agenda – promoted by politicians as well as researchers – green microfinance. Around 13% of the responding MFIs stated that they offer specific green microloans to finance renewable energy, energy efficiency and environmentally friendly activities. In addition, another 37% mentioned that they cover such activities with their normal microcredit programs.

The general public support for microfinance provision is expected to decline in the coming years, due to budget restrictions and high deficits at national and regional levels. MFIs are attempting to prepare for this by developing more efficient and lean processes and reducing costs. Many of them are already looking for additional sources of funding. Especially fast growing organisations report a need for additional equity to secure lending operations and to collect funding in the formal financial market. In this context, the micro-finance instruments adopted by the EU represent an important measure to address microenterprises' financing gaps by leveraging public and (possibly) private funds while minimising market distortions. 3.Strategic Sectors At the sectorial level, the infrastructure sector performs a crucial role in both development and sustainable growth, in contexts where private enterprises of all sizes and public entities interact to provide the necessary output. Infrastructure improves the productivity of the rest of the economy, enabling growth, and facilitates the interconnection of the internal market. The EU infrastructure market has been evolving extremely quickly. Whereas institutional investors in Europe were reluctant to enter the long-term infrastructure financing market until a couple of years ago, recent months have witnessed an increased liquidity in the market although largely targeted at a restricted number of countries and sectors. In this context, analysing the existing trends and correctly forecasting the medium-to-long-term orientation of the market will be crucial for creating successful financial instruments. A fundamental challenge for the EU will be to build capacity to perform such tasks covering a variety of sectors. Investment needs for transport, energy, and telecom infrastructure networks of EU importance – that is, cross-border and of large amounts – are estimated at EUR 1 trillion for the period up to 2020. Significant investment will also be needed in human capital and in R&D, new technologies and innovation as well as energy efficiency under the Europe 2020 strategy and the 2030 climate and energy package. Given the scale of the investment required, the reduction in infrastructure investment by the majority of Member States, it is clear that private sector financing will be important, and should be complemented by possible interventions at a global (e.g., EU) level. In order to increase the ability of the private sector to undertake these investments, EU financial instruments can contribute to provide financing which otherwise would not be available and absorb some of the risks, which the private sector is not able or willing to take. Given that one of the key market failures emerging in infrastructure is the lack of mature projects, efforts should be concentrated not only on the development of appropriate instruments but also on the provision of technical assistance to assist national authorities to prepare eligible projects. In this respect, additional efforts will be made to extend the pipeline of projects benefiting from EU financial instruments outside of the core sectors and core geographical markets. The long-term financing required to fund infrastructure embodies some key features that the policy-maker should take in due consideration: It finances productive activities which support growth by reducing costs, diversifying means of production and creating jobs in a smart, sustainable and inclusive way; It is patient, in that investors take into account the long-term performance and risks of their investments, rather than short-term price fluctuations. This long-term perspective acts in a counter-cyclical manner and promotes financial stability; It is committed, in that investors take longer-term aspects such as environmental, social, governance issues into account in their investment strategies. The climate of uncertainty and risk aversion created by the financial and economic crisis has affected both the demand and the supply of long-term financing. On the demand side, this has been evidenced by reduced demand from SMEs, Private Public Partnerships and other investment projects requiring long-term financing, resulting in a suboptimal level of long-term investment and financing. On the supply side, the crisis has increased risk aversion, leading to a preference for liquidity. This, together with bank deleveraging, has affected the economy's ability to finance itself at long maturities. The sub-optimal levels of long-term financing also reflect market failures and inefficiencies in the intermediation chain. Research and Innovation The financial crisis had a significant negative impact on innovation. Since 2012, the percentage of firms that managed to bring new or improved products to the market has declined across all industries in the EU-27. There are various reasons for this: public support for innovation decreased in several countries because of the priority given to fiscal consolidation; a fragile banking sector forced to restore its balance sheets meant that innovating firms had additional difficulties finding external financing; the reduced demand for goods and services, together with greater uncertainty about the future, made long-term R&D projects with high sunk costs more risky (OECD 2012). The above effects were only partially compensated by other offsetting factors. First, there was a shift of focus towards process innovation, aiming at reducing costs and prices. Second, by lowering demand, the financial crisis reduced the opportunity costs of spending on innovation rather than output (OECD 2012, Barlevy 2007). Nonetheless, EU Industrial R&D Investment Scoreboard data and PCT patent applications from the WIPO database show that innovation activities declined. As compared with pre-recession levels, a large proportion of European firms decreased their spending on innovation following the outbreak of the crisis. Indeed, the 2009 Innobarometer also provides evidence of the negative impact of the crisis, showing a substantial impact on firms in the medium and high innovation-intensive sectors. Against this backdrop, an effective pursuit of the Europe 2020 Strategy's objectives and headline targets requires a recovery of R&D activities, and possibly an acceleration to meet the 2020 target of 3% R&D expenditure over GDP. To this purpose, the effectiveness of the R&I financing can be enhanced by the adoption of dedicated EU financial instruments.

Transport The existence and quality of an integrated transport network (comprising road, rail, inland waterways, maritime, airports and air traffic management) is strongly correlated with international competitiveness of the country, due to reduced travel and transportation times, better interconnections between the modes of transport, and integration of regional and national production sites with distribution and selling channels targeting the national and global markets. Transport infrastructure is therefore fundamental for the mobility of persons and goods in the internal market, and for the economic, social, and territorial cohesion of the European Union. According to DG MOVE data, the EU comprises 5 000 000 km of paved roads, of which circa 65 000 km are motorways, over 213 000 km of rail lines, of which more than 110 000 km electrified, and nearly 43 000 km of navigable inland waterways. In order to address those transport investment from a systemic perspective, the EU adopted in 2013 a regulation on Union guidelines for the development of the trans-European transport network (TEN-T Guidelines). The regulation establishes a legally binding obligation for the Member States to develop the so-called "core" and "comprehensive" TEN-T networks. In addition, the regulation identifies projects of common interest and specifies the requirements to be complied with in the implementation of such projects. The core network overlays the comprehensive network and consists of its strategically most important parts. It constitutes the backbone of the multi-modal mobility network Europe's citizens and businesses need. It concentrates on those components of TEN-T with the highest European added value: cross-border missing links, key bottlenecks and multi-modal nodes. The core network is to be in place by 31 December 2030 at the latest. The cost of EU transport infrastructure development is estimated at over EUR 1,5 trillion for 2010-2030. The completion of the TEN-T network alone requires about EUR 550 billion until 2020 out of which some EUR 215 billion can be referred to the removal of major bottlenecks. This compares with total investment on transport infrastructure during the period 2000-2006 of EUR 859 billion. The Connecting Europe Facility (CEF) Regulation, adopted in December 2013 laid down a financial envelope for the period 2014-2020 of EUR 33 billion, of which EUR 26 billion are allocated for the transport sector. The overall contribution to the CEF financial instruments is up to 10% of the overall financial envelope of the CEF budget. The CEF regulation established detailed provisions for the design and implementation of financial instruments in support of TEN financing needs. Due to the proposal of the Commission on the establishment of the European Fund for Strategic Investments (EFSI), it is expected that EUR 2,7 billion will be transferred from the Transport CEF funding towards this new initiative. In January 2014, the Commission adopted a Communication and a delegated act (EU) N° 275/2014 setting the transport funding priorities for the CEF implementation 2014-2020. In July 2014, the Commission concluded the ex-ante assessment required for setting the new financial instruments under the CEF. The assessment led to the design of a new CEF Debt Instrument, funded with EUR 2,6 billion, in which all previously existing instruments, namely PBI and LGTT will be merged into. As foreseen in the regulation, the Commission will entrust the implementation of the CEF Debt Instrument. The implementation will be entrusted with the EIB by means of a new Delegation Agreement. In September 2014, the Commission launched a call for proposals for co-financing projects with EUR 11,9 billion of EU funding to improve European transport connections. This is the largest ever single amount of EU funding earmarked for transport infrastructure. Applicants had until 3 March 2015 to submit their bids. Most of the CEF funds should be focused on major cross-border projects and main bottlenecks on the 9 TEN-T multimodal Corridors, as well as on traffic management systems, which allow making the best use of the existing infrastructure (European Rail Traffic Management System (ERTMS) for railways, and deployment of new generation of air traffic management technologies and procedures (SESAR) for aviation). The CEF will support primarily projects listed in Part I of the Annex to the CEF Regulation, which have been pre-identified by the Commission in consultation and cooperation with the Member States concerned. The transport infrastructure investments require long term commitments from the national authorities in charge of infrastructure planning and procurements in order to establish the necessary credibility and transparency among all actors involved in the planning and financing of infrastructure, including the public and the private sectors. The transport infrastructure lifecycles, depending on the sector, are very long term (above 30 years for roads, with necessary maintenance cycles), which in the absence of sufficient supply from long-term bank lending (corresponding to the lifetime of the infrastructure financing, including the spending on the maintenance), or high expectations on the rates of return from the equity providers, leads in many cases to postponement of the planned infrastructure investments and their upgrades and to a decline in new investments. Against this backdrop, several market imperfections have been identified in the transport sector, requiring the consideration of public intervention: 1.Decline in gross investments and expenditure on maintenance in the transport sector in most EU countries since the financial crisis 2.Insufficient bank lending for long-term infrastructure assets at the European level 3.Lack of a planning framework for the European projects of common interest 4.Barriers around the Public Private Partnerships (PPPs) In addition, there are other reasons, varying across Member States, why most of transport infrastructure is financed by the public side. Public funding of the basic transport infrastructure has been considered in many European countries as a "service d'intérêt public" and expression of the "acquis of the welfare state" and therefore not subject to the user-pays principle. It estimated that over the last 20 years, 90-95% of transport investments have been financed through national government budgets. When transport infrastructure is privately financed, it is usually based on a public-private partnership (PPP) with a project finance underpinning. Project financing is well established in the road, port and airport sector, whereas for inland waterways currently the first PPP projects are in preparation. An exception is the rail sector, where projects are often financed on a corporate finance basis by the railway infrastructure companies. The scarcity of funding, due to slow growth rates and constraints on the public expenditure, coupled with insufficient long-term bank lending, has made it necessary to consider other infrastructure financing possibilities, including private-public partnerships and financial instruments possibly at the EU level to alleviate parts of the risk inherent to the projects.

Energy Infrastructure and Energy Efficiency Major efforts are needed to modernise and expand Europe's energy infrastructure as well as to increase energy efficiency and renewable energy and interconnect networks across borders to meet the Union's core energy policy objectives of competitiveness, sustainability, and security of supply. For the next years to come the EU is projected to invest annually at least some EUR 200bn on average in the energy sector, with energy efficiency measures alone amounting to some EUR 80bn. Since the Commission's Communication on energy infrastructure priorities for 2020 and beyond, adopted on 17 November 2010, the existing Trans-European Networks for Energy (TEN-E) policy and financing framework have been overhauled to coordinate and optimise network development on a pan-continental scale. The main aim is to ensure the completion of the internal energy market and the security of energy supply, while promoting energy efficiency and energy saving as well as the development of new and renewable forms of energy. The framework for the policy is now defined in the TEN-E guidelines regulation adopted in April 2013. It is estimated that in electricity alone the transmission grid expansion to accommodate these changes would require EUR 104 billion to 2022 (or, extrapolating, EUR 207 billion to 2030) in addition to the normal replacement of assets, estimated at EUR 76 billion to 2035. In addition, approximately EUR 40 billion will be required by 2020 for a smart grid investment on the transmission level. Some EUR 70 billion will need to be invested by 2020 in gas transmission assets of European importance such as gas interconnectors, storages, Liquefied Natural Gas (LNG) reception terminals. These costs will be predominantly financed from network fees paid by the energy end-users. The projects will be developed by Transmission System Operators (TSOs) i.e. companies set up specifically to develop and run the electricity and gas transmission networks. TSOs operate in a highly regulated business environment. Although regulations differ from Member State to Member State, they frequently include aspects such as agreed investment volumes, maximum debt ratios, maximum debt remuneration, etc. The regulatory approved revenue is normally linked to the book value of the assets they operate, the so-called Regulated Asset Base (RAB). The scale of the undertaking only partially financed from network fees paid by the energy end-users as well as its cross-country nature and its strategic importance as a public-interest infrastructure warrant a substantive intervention at the EU level, which can be effectively implemented through financial instruments. ICT/Broadband The Digital Agenda for Europe (DAE) recognises the role of fast and ultra-fast broadband access platforms for innovation and growth and sets ambitious targets for broadband coverage and take-up: (i) making basic broadband access available to all EU by 2013, (ii) making broadband access at internet speeds of above 30 Mbps available to all EU by 2020 and (iii) ensuring that by 2020 50% of EU households subscribe to internet broadband of 100 Mbps or higher. Full coverage with basic broadband has recently been achieved (with a combination of fixed, mobile and satellite technologies) and the focus is now shifting to the challenges associated with the deployment of Next Generation Access (NGA) networks and take-up. The second and third broadband targets ("NGA targets") require substantial investments in the modernisation of access networks. Total investment needs are difficult to quantify with precision, but indicative estimates from different sources suggest that total investment costs for NGA may exceed EUR 200 billion. Despite projects being initiated at various levels, current investment plans in fixed network infrastructure are subject to frequent revisions. However, even if they were fully implemented they would most likely not be sufficient to achieve the necessary coverage for the Digital Agenda NGA targets, especially as far as rural areas are concerned. All in all, the current pace of NGA roll-out is likely to leave a sizeable investment gap in the years to 2020. Traditionally, the bulk of network investment in telecoms has been shouldered by vertically integrated telecom network and cable operators and to an increasing extent by alternative telecom carriers and municipalities. Along with these actors, a number of alternative investors and new business models have been recently emerging. An alternative group of investors is represented by regional or local utilities, especially in the energy sector. Network investments initiated by municipalities or regional governments represent another class of projects. For instance, municipal fibre networks account for a significant share of NGA coverage in Sweden. Models with public sector participation also comprise PPP structures for broadband, which have been pioneered, for example, by local and regional public authorities in France. In addition, there is a growing trend of investment initiatives from private open access providers operating on a purely commercial basis, who provide fibre network services, from rolling out to maintenance, to municipalities or regional governments. These companies remain relatively small compared to traditional telecom operators, provided they are mostly relying on their own funds to develop. The correlation of NGA investment increasing costs with decreasing population density gives rise to a specific issue: a significant part of the EU population lives in areas situated between urban clusters (where there is a clear business case for commercially-driven roll-out). In such rural regions broadband deployment without public support is often not conceivable, although exceptions exist. If a number of conditions are fulfilled, a business case exists for these areas; however, this business case is usually not as compelling and clear-cut as in or at the fringe of conurbations. Specifically, the question is often whether expected revenues and cash-flows can adequately remunerate the risks associated with the project. Equally, there is often a mismatch between the risk-return profile of projects and the type of investments targeted by investors providing the bulk of financing. On the debt side, long payback cycles combined with high levels of construction and demand risk (at least in the early stages of operation) mean that NGA projects may not qualify for standard senior bank lending; where lenders are ready to extend credit, loan tenors often do not match the long asset lives of telecom networks. At the same time, debt capital market solutions may not be available to fill the gap because transaction costs are prohibitive in relation to the relatively small size of the projects. On the equity side, the weakness of NGA investments is that they do not fit the definition of popular asset classes: NGA projects carry greater risk than more traditional infrastructure in transport, energy or water and are by no means comparable to the high-risk/high-return strategies with short- to medium-term exit of other fund investors. The above constraints are exacerbated by additional factors, which impede the matching process between investors and candidate projects. Both senior lenders and other investors have difficulties with appraising the risks associated with broadband projects and with valuing telecom network assets. Especially, regulatory risk is perceived as a major hindrance in the telecommunications sector, and regulatory uncertainty on potential open access obligations of NGA networks severely impedes investment decisions. Moreover, small ticket sizes and lack of standardisation across projects may further complicate the deal-making process. These factors drive transaction costs and often prove to be a decisive obstacle. Against this backdrop, EU financial policies, facilitating access to well-designed financing solutions which optimise risk allocation and address the specific challenges associated with NGA investments, can give a decisive boost to the economics of projects and greatly improve NGA roll-out dynamics. Social Enterprises

Traditionally, the European social model has always been characterised by the prominent role played by a variety of organisations that differ from mainstream private corporations and traditional non-profit organizations/social economy entities. These private organisations that are grouped under the notion of "social enterprise" pursue an explicit and primary social aim. Their main purpose is to achieve measurable, positive social impacts, rather than to generate financial gains for their owners or stakeholders. They provide goods and services which generate a social return and/or employ methods of production of goods or services that embody a social objective. There are 2 million social economy enterprises in Europe, representing 10% of all businesses in the EU. The Social Business Initiative of the Commission in 2011, which focussed on social entrepreneurship, recognised the importance of social economy organisations in this field: "The specific legal statuses of the social economy are particularly suited to social enterprises as their method of governance favours participation and openness". The social economy employs more than 14 million people – about 6.5% of the EU’s employees. Social economy organizations are traditionally organized in the legal forms of cooperatives, mutual undertakings, associations and foundations. They have various objectives ranging from agriculture and banking to provision of employment and sheltered workshops. These enterprises, which have been active in Europe for nearly two centuries, have been recognised and regulated in many countries through specific legal forms (including in particular the cooperative, the mutual, the foundation and the association, as well as other legal forms and business models recently developing), have set up their own representative organisations to interact with public authorities, and have contributed in various ways to the social and economic development of Europe. In fact recent studies highlight the correlation (and at some point the causality) relationship between social capital and economic growth. Moreover, the recent crisis has pointed out the fragility of an economic and financial system merely based on the profit maximisation benchmark. Social enterprises play an important role in complementing the action of public authorities, not least because of their innovative nature. They also create jobs - often more sustainable and of better quality than those in the mainstream economy. However, they face a number of obstacles to growth, notably (but not exclusively) in accessing finance. Particularly in some Member States the social enterprise sector is still underdeveloped. In the Social Business Initiative, the Commission pointed out that “the funding system for social enterprises is underdeveloped in relation to that used by other businesses”. This was confirmed by a 2013 study on imperfections in the social investment market as well as by a number of national studies. For instance, in a UK survey with 865 social enterprises, lack of/poor access to/affordability of finance (45%) was ranked first among the barriers for start-ups, before cash flow (22%), lack of appropriate skills/experience (19%) and lack of awareness of social enterprise among customers (15%). As the UK is one of the most developed markets for social entrepreneurship finance, it can be expected that the demand for capital is not met in most parts of Europe. Another factor is the investment readiness of social enterprises. There is often a lack of understanding on both sides (supply and demand for social finance), an unwillingness to pay interest rates, an orientation towards the so-called grant economy or a lack of necessary documents such as impact reports or business plans. Analysing the supply side, investors often complain that they do not have enough investment opportunities. There is thus a mismatch between existing supply and demand. A recent study outlines several constraints to starting and scaling-up social enterprise activity. Access to finance was identified across almost every European country as a significant barrier. For example, over a third of social enterprises in Denmark do not have any lines of credit and in the Netherlands this figure is 40%. Moreover, a number of Member States have highlighted the limited range of financial instruments available to social investors. Stakeholders in Hungary noted that financing options available to SMEs (such as investment funds and state guarantees) were not available for social enterprises. In contrast, although available private funds are significant in Germany, they are usually conservatively managed and not necessarily accessible for innovative social enterprises or start-ups. The EU can play an active role in supporting the development of the supply and demand sides of the social investment markets and in facilitating the access of social enterprises to funding. Through the new Programme for "Employment and Social Innovation" (EaSI), the Commission aims to facilitate and improve the access to finance for social enterprises by providing specific financial support for their development. In addition, the ESF and ERDF investment priorities promoting support to social entrepreneurship, envisaged in the MFF 2014-2020, can be used to raise awareness and recognition of social enterprises and contribute to the development of this sector within Europe. To help mobilise additional public or private investments, these investment priorities can be implemented via financial instruments. Education Education and training are at the core of the Europe 2020 Strategy and of the Integrated Guidelines for the Economic and Employment Policies of the Member States. Arguably none of the Europe 2020 objectives and headline targets will be reached without strong investment in human capital. There is a positive and statistically significant relationship between the level of cognitive skills in a population, productivity and economic growth. For example, an average increase of 25 points in PISA performance across the EU countries could lead to a 3% gain in GDP per capita. The increase in average educational attainments by emerging countries makes the human capital accumulation for EU an even more important challenge in light of international competition for growth. The benefits of learning mobility are clear with significant benefits to graduate employability as well as personal development. This importance is recognised by the agreement of the EU and 'Bologna' mobility target that by 2020, at least 20% European Higher Education Area graduates should have had a study or training period abroad. The total amount of investment in education over the last years has been dampened by adverse economic and financial conditions on both the demand and supply side. In particular: The financial crisis increased uncertainty and risk aversion, lowering long-term private investments in human capital and hampering cross-border student mobility. The sovereign debt crisis led to fiscal consolidations, especially in peripheral countries exhibiting low growth / high debt dynamics (such as Greece, Spain, Portugal, Italy), jeopardising previous levels of public spending in education. The EU could play an effective role in supporting investment in education, both on a long-term basis and as a means to accelerate recovery from the current financial and sovereign crisis. The use of EU financial instruments, envisaged in this sector for the first time for the MFF 2014-2020, is likely to boost student mobility by providing financial support on a larger scale than otherwise possible. 4.Strategic Non-EU Regions The European Union is a global economic and political player, with regional and global interests and responsibilities. Its network of international agreements with partners and organisations all over the world, not matched by individual Member States, gives all of them influence in almost all fields of international relations. This delicate role can be primarily developed by maintaining sound international relations, also in view of the growth of the world's economy, especially through the financial support to strategic world economies, with possible gains in terms of trade with Member States.

Besides this, the EU international role is particularly important to prepare access to the Union to Enlargement countries, through economic, technical and administrative support. Enlargement Countries Enlargement countries are composed of five candidates, one applicant which has put the accession negotiations on hold and two potential candidates. Source: DG NEAR The Treaty on the European Union states that any European country may apply for membership if it respects the democratic values of the EU and is committed to promoting them. The first step is for the country to meet the key criteria for accession. These were mainly defined at the European Council in Copenhagen in 1993 and are hence referred to as 'Copenhagen criteria'. Countries wishing to join need to have: stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; a functioning market economy and the capacity to cope with competition and market forces in the EU; the ability to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union. The EU also needs to be able to integrate new members. In the case of the countries of the Western Balkans additional conditions for membership, were set out in the so-called 'Stabilisation and Association process', mostly relating to regional cooperation and good neighbourly relations. To ensure that enlargement brings maximum benefits to both the EU and to countries in the process of joining it, the accession process needs to be carefully managed. Hence the Commission has a stake in the support of socio-economic development in enlargement candidates by providing both financial assistance through the Instrument for Pre-Accession Assistance and technical assistance, through TAIEX, which is the Commission’s Technical Assistance and Information Exchange instrument. Neighbourhood Countries There are 16 neighbourhood countries to the East and the South of the EU. The European Neighbourhood Policy offers these partners political association and economic integration with the EU. Available instruments are of a political, sectorial, and financial nature. The ENP rests on two regional dimensions: the Eastern Partnership (EaP) for the East and the Partnership for Democracy and Shared Prosperity and the Union for the Mediterranean (UfM) in the South. The ENP builds upon the legal agreements in place between the EU and the partner in question: Partnership and Cooperation Agreements (PCA) or Association Agreements (AA). Central to the ENP are the bilateral Action Plans or Association Agendas between the EU and each ENP partner (12 of them have been agreed so far). These set out an agenda of political and economic reforms with short and medium-term priorities of 3 to 5 years. Financial cooperation with European Neighbourhood Partner Countries is one of the key areas of interest, where funding focuses on shared political objectives and underpins reforms set out in agreements or Action Plans/Association Agendas with the partners. The bulk of funding comes from the European Neighbourhood Instrument (ENI), with over €15bn for 2014-2020. Apart from providing grants, the EU is also leveraging additional, substantial funding through cooperation with International Financial institutions (EIB, EBRD, WB, etc), and notably through a specific mechanism, the Neighbourhood Investment Facility. The Ukraine crisis, the ongoing Syrian conflict and its regional spill-over effects, tense situations in Egypt and the significantly worsening state of internal affairs and security situation in Libya also underline the need for effective partnerships and will form part of the ongoing review of the European Neighbourhood Policy, launched by the European Commission and the External Action Service in early 2015..

Countries covered by the Development Cooperation Instrument (DCI) Investment needs in EU partner countries are huge. Governments and other public donors' funds are far from sufficient to cover all substantial needs in EU partner countries. In parallel global realities have changed in the past 15 years. Many emerging economies are now thriving, with incomes in some upper middle-income countries outscoring those of EU countries. At the same time, disparities within developing countries are increasing. The strategic role of the EU in sustainable social and economic growth of the DCI countries as a condicio sine qua non for poverty reduction lies in its capacity to mobilise a critical mass of financial and political support, having a significant impact on a given social or economic issue. The European Union, through its common resources and the available national capabilities, has means, experience and expertise to act efficiently and in a cost-effective way. There is a growing importance of EU partner countries due to their increasing share in world growth. Financial instruments, such as the EU blending facilites contribute to achieving EU development policy objectives in line with regional and national priorities of partner countries. In particular, the SME and infrastructural sectors that the EU already supports domestically represent targets of interest also in to reduce poverty and foster economic growth. The Agenda for Change emphasises the support of inclusive growth and job creation as a key priority of EU external cooperation. In this context blending, combining EU grants with loans or with equity from other public and private financiers as a financial instrument, is a useful tool to leverage additional resources, increasing the impact of EU aid and driving sustainable growth as a basis for poverty reduction. 5.Conclusion The set of potential recipients, as outlined above, are struggling to finance their activity; each country and sector of the real economy shares a common difficulty arising from the global financial crisis, but also presents its own financial issues and has therefore been targeted through specific financial instruments. Addressing these issues is a priority for Europe. The capacity of the European economy to make long term financing available, reinforcing the competitiveness of the productive sectors, depends on its ability to channel savings through an open, safe and competitive financial system. In this context, the financial instruments adopted by the EU represent an important measure to address financing gaps by leveraging public and (possibly) private funds while minimising market distortions. Indeed, in times of a European crisis, a central EU intervention and the combination and better use of public resources carry a strong political message about the European construction that would not only be captured by investors and originators alike and contribute to the creation of a broader and more standardised market, but it would also give a strong signal to the public of the joint effort to fight the crisis enforcing the message to markets. Against this backdrop, the Commission has to ensure a consistent and effective roll-out of centrally-managed financial instruments for the 2014-2020 MFF. 6.Annex-Additional Information on the European Equity Market The structure of the European Equity Market The European equity market is composed of different types of private equity investment funds. The nature of such funds depends on the stage of the company's development the funds invest in. Although different definitions and terminologies exist, a commonly accepted approach to split equity funds' investments is described in Box 1: Box 1: Equity investment stages 1. Pre-Seed/Seed: in this phase the major focus of the company's activities is on research activities and product development, so as to transfer the new idea into usable results, and set up a functional prototype. It is at this stage that company founders need to prepare a sustainable business plan in order to attract potential investors. 2. Start-up and Early Stage: this phase includes the planning and preparation of production. Targeted project management is important in order to keep control of the market entry schedule as well as the cost of R&D projects. 3. Emerging Growth: this phase is characterised by the establishment of the company at both the organisational and institutional level. At this stage it is crucial to establish and expand manufacturing capacities and sales channels so as to ensure revenue growth. 4. Development: beyond the breakeven point, profits enable the company to expand the product portfolio and tap new markets. A company is usually considered to be an established company if it reaches the fifth year after its foundation. Further information is contained in Figure 20, which also links the different stages of SME development with a set of equity instruments that are the most appropriate to address the needs of the market. Figure 20: Different stages of SME's development and most typical financial sources.

Source: European Commission (2014), based on EIF (2014) Box 2 further expands on the characteristics of the different markets depicted above and discusses key data on alternative equity financing sources. Box 2: Characteristics of equity market stages Technology Transfer Institutions, Business angels, Crowdfunding The term Technology Transfer Institutions (TTIs) is used to describe organisations which help the staff at research organizations to i) identify and manage the organization’s intellectual assets, including protecting intellectual property and transferring or licensing rights to other parties to enhance prospects for further development, and ii) create new companies (spin-offs) to develop or commercialise an invention such as Technology Parks and Incubators. Business angels are individual investors, usually with business experience, who provide capital for firms in early-stage. They are an important source of equity for small firms long before they become attractive for venture capital funds. The expression crowdfunding refers merely to a channel of financing promoted through internet and social media, which can be used in many different ways. Financing can come in the form of donations (donation-based crowdfunding), or contributions based on rewards and/or product pre-sales. Other crowdfunding campaigns may also offer some form of financial return, by promising a share of future profits. Security-based crowdfunding involves issuing equity or debt to contributors (crowd investing). Finally, crowd lending campaigners borrow money from people and promise to pay back the capital on specified terms with (or in certain cases without) interests. Venture Capital Funds Venture Capital (Venture Capital) Funds are typically private partnerships or closely-held corporations pooling money from private and public pension funds, endowment funds, foundations, corporations and wealthy individuals, to provide equity investment for young, rapidly growing companies that have the potential to develop into significant economic actors. The equity investment is usually provided to companies placed between the s