COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 25.10.1996 
COM(96) 522 final 
THIRD REPORT OF THE COMMISSION 
relative to the implementation of the Decision regarding 
the provision of Community interest subsidies 
on loans for small and medium-sized enterprises 
extended by the European Investment Bank under its temporary lending facility 
(the SME Facility) 

SUMMARY 
1. INTRODUCTION 
2. LEGAL FRAMEWORK 
3. DESCRIPTION OF THE FUNCTIONING OF THE SME FACILITY 
3.1. EIB global loans 
3.2. The role of national agents 
3.3. Agreements with intermediaries and agents 
3.4 Characteristics of the subsidized SME loans 
3.5. Characteristics of the subsidy 
3.6. Incentives for early j ob creation 
3.7. Improving the take-up of loans 
3.8 Priority for small SMEs 
3.9. State aid rules 
3.10. Control and supervision 
3.11. Promotion of the SME Facility 
4. IMPLEMENTATION 
4.1. Planned job creation 
4.2. Take-up of loans from the Facility 
4.3. Priority for small SMEs 
5. BUDGETARY ASPECTS 
ANNEXES : 5 
z 
I. INTRODUCTION 
The present report has been established in the framework of Council decision 94/217/EC of 19 
April 1994 0), relative to the provision of Community interest subsidies on loans for small and 
medium-sized enterprises extended by the European Investment Bank under its temporary 
lending facility (the SME Facility). The report constitutes an update of the second one, which 
was made available by the Commission on 30 October 1995 (COM(95)485). The next report 
(i.e. the fourth one) will also be the final one, as the Bank expects to finalize all subsidy 
disbursements by the end of 1997. The Commission intends to issue this final report as soon as 
all the statistical information on this final phase of the life of the SME Facility has been 
collected, and ideally before the end of 1997. 
The SME facility was established at the Copenhagen European Council (21-22 June 1993), 
which invited the EIB to increase the size of its temporary lending facility by 3 bn Ecu, of 
which 1 bn Ecu would be allocated to the strengthening of the competitiveness of European 
small and medium-sized enterprises. The Ecofin Council was invited to examine how the part 
of appropriations available for SMEs could benefit from interest rate subsidies linked to 
employment creation. 
On 4 July 1996, the European Parliament adopted a report on the Commission's second report 
on the SME Facility (1484/140147/96; rapporteur: Mrs Ewing), containing a resolution on this 
report, as well as a number of recommendations and requests for clarification. The present 
report will provide further comments on the various points raised in the Ewing report, while 
some of the points will be dealt with more extensively in the next report, particularly the ones 
requiring further investigation. Parliament's suggestions will also be integrated in the 
preparation of the ELISE scheme'2*, which favours investment and job creation by small firms 
through the extension of loan guarantees. 
2. LEGAL FRAMEWORK 
Following the introduction of a legislative proposal by the Commission (3), and the opinion of 
Parliament of 24 February 1994 (4), the legal base for extending Community subsidies was 
enacted by the Council on 19 April 1994. This Decision specifies that the interest subsidies 
shall be: 
linked to Ecu 1000 million of EIB loans to SMEs in the Community; 
restricted to investment projects involving the creation of employment; 
- fixed at 200 basis points (2 %); 
extended for a period of 5 years to the beneficiaries of the loans. 
(1) O.J. L107 of 28.04.94, p. 57. Article 3 of the Decision specifies that the Commission shall send 
to the European Parliament and the Council a yearly report evaluating the implementation of the 
Decision. 
O.J. C 146 of 21.05.96, p. 6. 
COM(93)332 of 9.07.93, subsequently amended by COM(93)577 of 16.11.93 (O.J. C10 of 
14.01.94, p.13). 
(4> O.J. C114 of 25.04.94. 
3 !! 
The decision also indicates that the facility shall be administered by the EIB on behalf of the 
Community and that the detailed arrangements for implementing the interest subsidy 
mechanism shall be laid down in a cooperation agreement between the Commission and the 
EIB. This agreement was signed in Luxembourg on 14 June 1994. The EIB has proceeded 
rapidly with the operational setting up of the SME Facility, through defining detailed 
procedures for its network of participating global loan intermediaries and reinforcing it by 
nomination of national agents (cf. 3.1 and 3.2). In December 1994, the Commission and the 
Bank agreed the modalities for the enlargement of the SME Facility to enterprises from the 
three acceding Member States (Austria, Sweden, Finland) from 1 January 1995 onwards. In 
July 1995, the Commission and the Bank also agreed to extend the Facility to the end of 1995 
and to include specific provisions regarding the re-allocation of unused shares. 
3. DESCRIPTION OF THE FUNCTIONING OF THE SME FACILITY 
3.1. EIB global loans 
The largest part of EIB lending (75.5 % of operations within the Union in 1995) to projects 
takes the form of direct loans, whereby loan applications are appraised by the Bank's own staff. 
Direct lending is generally practiced for operations exceeding a certain size (e.g. infrastructure 
or larger industrial projects). 
For smaller loans, and SME loans in particular, the Bank has recourse to global lending 
procedures, whereby framework agreements are signed with various financial intermediaries 
operating in the Member States. These intermediaries are then entitled to draw upon EIB 
resources up to certain ceilings for the purpose of extending subloans to projects which are in 
conformity with the rules and conditions laid down in the framework agreement. The financial 
intermediaries carry out the project appraisal (subject to criteria previously agreed upon with 
the Bank and to subsequent EIB approval) and handle all relations with the beneficiaries. The 
intermediaries are furthermore responsible vis-à-vis the Bank for the full and timely repayment 
of the global resources on-lent to the final beneficiaries. In the context of the SME Facility, 
the role of the financial intermediaries is largely comparable as they have assessed all individual 
applications and have decided whether they were eligible for subloans. 
3.2. The role of national agents 
In most Member States, the management of the interest subsidies has been entrusted to a single 
national agent per country. These agents act under the Bank's supervision and process all 
requests for subsidies within a single country; the final beneficiaries however have no direct 
contacts or links with the agent in question as the latter receive all the necessary information 
through the financial intermediaries. In some countries, the agent can also be an intermediary. 
The agents ensure that approved applications for subsidies are registered and processed in 
sequence on a "first come, first served" basis. They are also responsible for the processing and 
verification of the evidence which the beneficiaries are invited to submit in relation to 
employment creation, as well as for the actual payment (and whenever needed the recovery) of 
the subsidy. The agents therefore play an important role in ensuring that potential and actual 
beneficiaries are treated in a uniform way and that all administrative procedures linked to the 
verification and payment of the subsidy requests are handled in a timely and consistent manner. 
M 
3.3. Agreements with intermediaries and agents 
As soon as the legal framework for extending Community subsidies was in place, the Bank has 
started signing the necessary agreements with financial intermediaries during the second half of 
1994, either by amending global lending arrangements which were already in existence or 
otherwise by signing new agreements. 
The Bank has appointed the national agent for each Member State after consultation with 
national authorities. Where no agent has been appointed (as is the case in Ireland), the Bank 
assumes this role. The list of agents and intermediaries is provided in annex 1. Each agent has 
been assigned an initial share of the total facility so as to allow him to start operations; a 
subsequent (and final) allocation has been assigned in the course of April 1995 on the basis of 
the actual commitments on the first tranche. As agreed between the Commission and the EIB 
in July 1995, the uncommitted balance of the Facility, which only amounted to 1.65 % of its 
total size, was redistributed on 15 December 1995 in favour of applicants on the reserve list. 
The SME Facility was thus fully taken up by the end of 1995. 
3.4. Characteristics of the subsidized SME loans 
The subsidized subloans (SME loans) extended by the financial intermediaries to the 
beneficiaries are limited to 30.000 Ecu times the number of jobs created. If the loan request 
exceeds this maximum amount (e.g. if 200.000 Ecus of loans are applied for but only 5 new 
jobs are created), the loan amount additional to the ceiling imposed by the number of jobs 
created (50.000 Ecus) is unsubsidized. 
Inversely, if the loan amount is smaller than the maximum amount (e.g. if the size of the 
investments is limited to 100.000 Ecu, although 5 additional jobs would allow for a loan size of 
up to 150.000 Ecus), the total amount of subsidies will always be limited to 10 % of the size of 
the loan. This explains why the average loan size per job is smaller than 30.000 Ecus in certain 
countries (cf. annex 3). 
Subsidized loans have a maturity of at least 5 years; voluntary repayment is not allowed during 
the first 5 years (except upon repayment of the subsidy). The loans cannot be combined with 
other loans at reduced rates offered by the EIB under other agreements or with ECSC loans. 
No restriction is imposed on the loan currency or on the repayment characteristics (repayment 
schedule, grace period, ...). Loans can be either fixed or floating rate. 
3.5. Characteristics of the subsidy 
The Council Decision sets the subsidy rate at two percentage points. As the loans allocations 
to SMEs can be expressed in various currencies and as the loans can also have different 
repayment schedules (depending on the maturity, the length of the grace period, etc.), the 
actual value of the subsidy could differ between beneficiaries, even for an identical loan size. 
In order to ensure fair and similar treatment of all beneficiaries, the interest subsidy is therefore 
calculated and paid on the basis of a notional 5 year bullet loan in Ecu. For this type of loan, 
an interest subsidy of 2 % per annum for a total of 5 years corresponds in total to 10 % of the 
SME loan amount (i.e. up to 3.000 Ecus per job). 
r 
3.6. Incentives for early job creation 
In view of the objectives of the SME Facility (employment creation, sustainment of growth 
through productive investment), special incentives are offered to applicants so as to encourage 
early job creation and rapid execution of investment plans. Firstly, the applications for 
subsidized loans from the SME Facility must be received until a certain deadline date (initially 
set at 31 July 1995, subsequently postponed to 15 December 1995). In addition, the total 
amount of interest subsidies (i.e. up to 3000 Ecus per extra job) is made available to the 
beneficiaries in a single payment, as soon as the following conditions relating to the investment 
and the creation of jobs have been met: 
the SME loan has been effectively disbursed; 
the first interest payment has come due; 
the new jobs have been in place for at least 6 continuous months; 
the evidence relative to these conditions has been presented to the national agent 
(through the intermediary). 
While applicants have a clear incentive to go ahead as soon as possible with their planned 
recruitments, experience shows that the creation of new employment may take considerable 
time (e.g. because the jobs are linked to the implementation of an extensive investment 
programme). Applicants have therefore some flexibility regarding the timing for introducing 
their requests for the subsidy. In any event, jobs must be created no later than 31 December 
1996, and requests for subsidy payment must be submitted by the beneficiaries no later than 30 
June 1997. 
Applicants creating less jobs than originally applied for (i.e. less than the number stated in the 
loan application), only receive subsidies for the jobs effectively created. In the opposite case 
(more jobs created than originally envisaged), the subsidies are only paid in relation to the 
number of jobs indicated in the application. 
3.7 Improving the take-up of loans 
In order to avoid that subsidies available under the present mechanism are ineffectively or only 
partially used, two specific provisions exist as regards the re-allocation of unused credits. 
Each of these redistribution mechanisms is based on the reserve lists, which national agents are 
allowed to constitute if strong demand exists in their country for loans from the Facility. 
A first re-allocation mechanism has operated across countries and has allowed for the 
apportioning of any indicative shares which were still unallocated by 15 December 1995 in 
favour of applicants on the reserve lists (cf. section 3.3 above). This one-time redistribution 
has occured on the basis and in the sequence of the dated application record maintained by the 
national agents. 
The second type of re-allocation takes place on a continuous basis and exclusively among 
applicants within the same country. Applicants on the reserve list, who have satisfied all the 
necessary conditions regarding job creation, hereby gain the possibility to receive the subsidies 
which had initially been set aside for other applicants, in particular when the latter appear to 
€ 
have overestimated the number of jobs which they would be able to create within the imposed 
time frame. This re-allocation process will be completed by the end of September 1997. 
3.8. Priority for small SMEs 
The EIB's customary global lending arrangements with its financial intermediaries define SMEs 
as enterprises with net fixed assets not exceeding 75 Mecus, less than 500 employees and not 
more than one third of the equity owned by a company which is not an SME. In the 
framework of the SME facility, the agents and intermediaries have been asked to put special 
emphasis on smaller enterprises, particularly the ones having not more than 250 employees, 
and either a turnover not exceeding 20 Mecus or total assets not exceeding 10 Mecus. 
In order to favour these smaller enterprises, at least 60 % of the number of beneficiaries of 
subsidized loans should belong to this category of enterprises. In addition, the size of the SME 
loans to enterprises of this category is unrestricted, while subsidized loans to larger SMEs are 
limited to 810.000 Ecus (corresponding to the creation of 27 jobs). 
3.9. State aid rules 
The SME Facility is compatible with state aid rules applying in the Member States and 
complies with the Community rules for accelerated clearance (1), which specify limitations on 
the amount of aid which can be granted, notably in relation to the total size of the investment 
cost, the amount of aid per job created, etc. In view of the relatively limited amounts of aid 
granted, administrative controls in relation to state aid can thus be kept to a strict minimum. 
3.10. Control and supervision 
The agents verify the entitlement of each beneficiary to its respective subsidy on the basis of 
the declarations made by intermediaries and beneficiaries and agreement of the EIB that its 
criteria are satisfied. In addition, besides the usual monitoring of its global loans, the Bank will 
also carry out sample checks on the documentary evidence presented in relation to the requests 
for subsidy payments. In the event that documents presented or statements made by a 
beneficiary are materially incorrect or misleading, particularly in connection with elements 
allowing the verification of employment creation, the payment of subsidies will be cancelled 
and the beneficiary will be required to repay to the intermediary institution the corresponding 
amounts received. The Bank has made appropriate arrangements with the agents and 
intermediaries to allow the Court of Auditors to exercise its mission and to verify the regularity 
of the interest subsidy payments. 
3.11. Promotion of the SME Facility 
The promotion and success of the SME Facility depends to a considerable extent on the wide 
availability of information about the existence and operation of the SME Facility, particularly 
among potential beneficiaries. 
The Commission and the EIB have devoted special attention to this aspect and have prepared 
an information brochure, summarizing the purpose and operation of the interest subsidy 
mechanism, as well as the list of intermediaries to whom applications should be addressed. 
0) Communication to the Member States on the accelerated clearance of aid schemes for SMEs 
and of amendments of existing schemes (92/C213/03 of 02.07.92); O.J. C213 of 19.08.92, p.10. 
The brochure is available in all Community languages and has been distributed through the 
network of financial intermediaries taking part in the mechanism. In addition, the Euro Info 
Centres have been invited to play an active role in disseminating information about the Facility 
and the modalities for taking part in it. 
4. IMPLEMENTATION 
4.1 Planned j ob creation 
The impact of the SME Facility on the creation of additional employment has been carefully 
monitored. As the beneficiaries are entitled to receive 30.000 Ecus of subsidized loans for 
every new job created, and as the total volume of EIB loans from the Facility amounts to 1 
billion Ecus, the SME Facility will thus support the creation of at least 33.333 jobs. 
The statistical information on planned job creation indicates that this objective has already been 
largely exceeded at this stage as the total for the Union currently amounts to around 45.500 
jobs (corresponding to Ecu 1 billion of loan commitments). The number of jobs which are 
planned to be created in each Member State are provided in annex 2, while annex 3 provides 
the average loan amount per additional job. 
In setting the various eligibility conditions, notably the ones on employment creation, the 
Commission and the Bank have attempted to strike the right balance between the need to 
ensure genuine added value (in terms of extra jobs, investment generation, etc.) and the 
aspiration to avoid excessive red tape and administrative burden for the beneficiary enterprises. 
This implies the balancing of sometimes conflicting objectives, such as the additionally of the 
extra jobs, and their structural or permanent nature. In addition, excessive conditionality as 
regards the new jobs created has been avoided as this typically runs against broader economic 
policy objectives (such as the need to maintain a sufficient degree of labour market flexibility) 
and as the permanency of jobs cannot be fully controlled by the beneficiary enterprises (e.g. 
voluntary departures). 
It should be kept in mind that, besides encouraging the creation of additional employment, the 
SME Facility has also attempted to further and accelerate productive investment, hence 
stimulating the competitiveness of SMEs and overall economic growth. The total volume of 
additional investment associated with the Facility is estimated at 4 billion Ecu. 
In some countries jobs have been created with a lower average loan size than in other 
countries. Here it is important to note that capital intensity is not the same throughout 
industries and throughout the Community. Extra employment in the service industry for 
instance can be created with a much lower investment size than a job in a capital-intense 
manufacturing enterprise. As on average the loan size per job turned out to be lower than 
foreseen, more jobs could be created than was originally anticipated. 
4.2. Take-up of loans from the Facility 
The loan allocation profile in each individual Member State is provided in annex 4. The 
amount of allocated loans is indicated in black, while the size of the reserve lists is indicated in 
grey. 
As the Facility has been fully used up, the total volume of allocated loans amounts to 1.000 
Mecu. The cumulative reserve list exceeds 436 Mecu. 
The take-up of loans from the SME Facility has been satisfactory in the large majority of 
Member States. Relative differences can possibly be explained by the availability in some 
countries of other sources of public support (from regional, national or Community levels) 
at more attractive terms. In addition, the structure of the banking system in each individual 
country could have influenced the absorption capacity, as some countries have established 
specialized institutions for channelling public aid to enterprises. Finally, the number and 
type of intermediaries in each country could also have played a role. 
As far as the sectoral breakdown of loan allocation is concerned, only preliminary figures 
exist, the majority part of operations being in the secondary (71%) and tertiary sectors 
(28%) of the economies. The most prominent sector metalworking and mechanical 
engineering accounted for about 20 %, followed by private and public-sector services for 
19%. Major other sectors (5 - 7 % each) were foodstuffs, commerce, woodworking, 
rubber and plastics processing, as well as paper/pulp and printing. 
4.3 Priority for small SMEs 
Annex 5 illustrates that financial intermediaries in each Member State have largely exceeded 
the requirement to allocate at least 60 % of all loans to small SMEs. The average figure for 
the Union amounts to about 95 %, while 80 % have been committed to enterprises with less 
than 50 employees. 
5. BUDGETARY ASPECTS 
Budgetary appropriations in relation to the payment of interest subsidies amounted to 65.5 
Mecus for 1994, of which 45.5 Mecu were transferred to the Bank in mid-1994 and the 
remaining 20 Mecu at the end of 1994 following budgetary transfers decided by Parliament at 
the end of the exercise. The amount proposed by the Commission in the 1995 Preliminary 
Draft Budget (22.75 Mecu) was reduced correspondingly, and credits amounting to 2.75 Mecu 
have been approved for the 1995 budget (and paid out in early 1995). The budgetary authority 
approved an amount of 57.75 Mecu under budget line B5-322 "Employment and Growth" for 
1996. 7.75 Mecu for interest subsidies was paid out in early 1996. It is estimated that a further 
18 Mecu is needed to fully cover the cost of the Facility; this amount will most probably be 
paid out during the last quarter of 1996. In terms of disbursements to the beneficiaries, 31.6 
Mecu has been paid out by the Bank as of the end of August 1996. 
All financial resources entrusted to the EIB for the payment of interest subsidies are credited 
on a special Community account within the Bank; interest earned on the account is credited 
monthly. As of the end of August 1996, the amount of accrued interest generated on the 
Community account within the EIB exceeded 7 Mecu. Any amount outstanding at the time of 
termination of the SME facility will be repaid to the Community budget. 
9 
ANNEX 1 
IMPLEMENTATION OF THE SME FACILITY IN EACH MEMBER STATE 
(Situation as of September 1995) 
Member State Agent Intermediaries 
Austria BÛRGES INVESTKREDIT 
Belgium SNCI/NMKN SNCI plus other EIB global loan 
intermediaries through SNCI 
Denmark FIH FIH 
Germany KfW Whole banking system through KfW 
Greece Ministry for the All global loan intermediaries 
National Economy 
Spain ICO Whole banking system through ICO 
France CDC BFCM, CCCC, CCBP, CFD, CNCA, 
CNCM, CMB, CBG-PARIBAS, CCF 
Ireland EIB ICC and AIB 
Italy MCC All global loan intermediaries 
Luxembourg SNCI SNCI 
Netherlands MB NIB, ING, ABN AMRO 
Portugal IAPMEI All global loan intermediaries 
Sweden SËK SËÏC 
Finland KERA KERA 
United Kingdom Barclays Barclays, Barclays MBF, Midland, Royscot 
Trust, The Royal Bank of Scotland, Bank 
Scotland, Clydesdale, Northern Bank 
^o 
ANNEX 2 
PLANNED JOB CREATION 
(Situation as of 31 July 1996; in units) 
A 1 
ANNEX 3 
AVERAGE LOAN SIZE PER JOB CREATED 
(Situation as of 31 July 1996; in Ecus) 
•\t 
ANNEX 4 
LOAN ALLOCATION 
(Situation as of 31 July 1996; in A4 ecus) — 0) 
£ I 
cc O 
0 • 
I i 
ANNEX 5 
PERCENTAGE OF SMALL SMEs 
(Situation as of 31 July 1996; in percent) 
"W 
ISSN 0254-1475 
COM(96) 522 final 
DOCUMENTS 
EN 08 
Catalogue number : CB-CO-96-527-EN-C 
ISBN 92-78-10411-6 
Office for Official Publications of the European Communities 
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if