EN Official Journal of the European Union C 146/73

Opinion of the Committee of the Regions on financing SME growth

(2007/C 146/11)

THE COMMITTEE OF THE REGIONS

— strongly recommends the continuous use of SME impact assessments for any new EU legislation and policies that might directly affect how SMEs develop;

— recommends measures to provide SMEs with easy access to the intermediate financial institutions and organisations responsible for providing CIP and JEREMIE. The CoR also recommends that the EIB group be more proactive in communicating its role, added value and the methods of accessing the new instruments CIP and JEREMIE;

— strongly recommends that the European Commission include regional best practices in its further discussions at European level. Regions can stimulate the potential private capital available by creating and financing networks of ‘informal capital’, bringing private investors in contact with companies in seed and start-up phase;

— strongly recommends that financial measures be accompanied by complementary instruments. Regions are important providers of the necessary infrastructures for facilitating SMEs, such as cluster development and professional training. Regions also have valuable experience to offer in (ESF funded) incubator housing with common facilities and personnel policy, by supporting innovation, coaching and offering investment readiness programmes. There is also a need to include entrepreneurship in education programmes. It is precisely the complementarity of such measures which ensures that starters have a greater chance of success.

Reference document

Communication from the European Commission to the Council, the European Parliament, to the Economic and Social Committee and to the Committee of the Regions: Implementing the Community Lisbon programme: Financing SME growth — Adding European value

COM(2006) 349 final

THE COMMITTEE OF THE REGIONS,

Having regard to the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions; Implementing the Community Lisbon Programme — Financing SME Growth — Adding European Value — Modern SME Policy for growth and employment COM(2006) 349 final;

Having regard to the decision of the European Commission of 29 June 2006 to consult the Committee of the Regions on the subject, under the first paragraph of Article 265 of the Treaty establishing the European Community;

Having regard to the decision of the CoR Bureau of 25 April 2006 to instruct its Commission for Economic and Social Policy to draw up an opinion on this subject;

Having regard to its Draft Opinion CdR 338/2006 rev. 1 adopted on 15 December 2006 by its Commission for Economic and Social Policy (Rapporteur: Mr Harry Dijksma (NL/ALDE), Member of the Executive Council of the province of Flevoland;

Whereas:

23 million SMEs throughout Europe are responsible for the delivery of 67 % of the EU's GDP and the creation of 75 million jobs and that in certain sectors SMEs are accountable for delivering up to 80 % of total employment, with 99 % of all enterprises classified as micro-enterprises (consisting of 1 to 9 persons)

adopted the following opinion at its 68th plenary session, held on 13-14 February 2007 (meeting of 13 February)

1. The Committee of the Region's views

THE COMMITTEE OF THE REGIONS

Supporting the Lisbon process

1.1 welcomes the European Commission's Communication on Financing SME Growth, which gives a clear analysis of the problems and instruments of the institutions of the Community and the Member States;

1.2 supports the spring council conclusions, emphasizing that an integrated financial market and sufficient access to finance are crucial for the growth of small and medium sized enterprises. The Lisbon process offers a framework for improving access to finance, through reforms at national and EU levels. The involvement of local and regional authorities is a key factor for the success of the Lisbon reforms. To support a true partnership between the different levels of government, the Committee of the Regions has undertaken a European-wide survey on the involvement of local and regional authorities in the development of the National Reform Programmes, an analysis of the local and regional authority dimensions in the NRPs and launched a Lisbon monitoring platform.

A better environment for risk capital investment

1.3 acknowledges that — despite considerable advances in recent years — it is clear that more action is required and more instruments need to be developed if Europe is to meet the goals of the Lisbon agenda. European risk capital markets are still operating at levels below their full potential. This is a reflection of the failure of the market in (pre-)seed and early-stage equity finance due to problems both in the supply of, and in the demand for, risk capital. As a result, potential innovations are not being fully exploited leading to lower economic growth and lower levels of employment. Moreover, very few European early stage companies using innovative technologies have grown to become global leaders in their sector;

1.4 welcomes the intention of the Community institutions and the Member States to create the conditions allowing a sustainable threefold increase in investment by venture capital funds in seed and start-up companies by 2013;

1.5 acknowledges that both the capital and banking systems used in Europe still vary significantly among the Member States and that there is a need for further harmonisation to ensure that SMEs have a level playing field to harness the potential of the internal market to drive forward growth and employment;

1.6 agrees with the Commission that an exit strategy is of the utmost importance for any successful venture capital investment. The CoR concurs with the Commission that many European stock markets have established good alternatives to allow growth companies to raise capital and therefore welcomes measures facilitating EU wide access to financing through growth stock markets;

1.7 acknowledges that the existing gap in early-stage financing inhibits growth and innovation in the EU. The CoR agrees with the Commission that a further specialisation of funds and the development of special sectoral expertise is required for successful investments;

1.8 agrees with the Commission that professional venture capital managers should be able to raise capital and invest across borders in a single market without having to incur excessive tax costs or face heavy bureaucratic burdens. The Committee calls upon Member States to take appropriate measures to ensure fair competition on an equal footing for cross-border investments, which would harmonise tax costs and cut bureaucratic burdens on a reciprocal basis;

1.9 welcomes the new proposal for a European Patent ensuring reduced costs for SMEs. The high costs of the present European Patent hamper the rapid economic development of innovations.

More debt finance for SMEs

1.10 acknowledges that bank loans continue to be the main source of finance for small and medium sized enterprises. The Committee regrets that Basel II will raise the weighting on riskier commercial lending by 50 %, which will almost certainly increase the cost of borrowing for starting and innovating enterprises;

1.11 regrets that a key problem regarding SMEs' access to finance is the withdrawal of large banks from local markets in rural and under populated or economically weak areas. As a result, this leads to greater reliance on locally anchored banks which specialize in lending to SMEs. A change of regulation in this field could have an important impact on the availability of funding to SMEs;

1.12 acknowledges that Europe is characterised by a number of cultural traits, which also constitute a potential source of growth. Small and medium-sized enterprises should be encouraged to improve their attitude towards risk-taking and their entrepreneurial spirit, as a means of counteracting obstacles to growth.

The EU contribution to SME financing

1.13 acknowledges that there is a need for concrete, tailor-made solutions for the target group in order to provide risk capital. The options open to regional authorities to provide capital for risk capital funds are limited and the Committee therefore welcomes the opportunity for the ERDF to provide capital for regional risk capital funds. The provision of public funding against profitable conditions changes the risk-return relation for private investors and makes them more willing to enter the venture capital market;

1.14 welcomes the EU instruments of the 7th Framework Programme for Research and Development, the Competitiveness and Innovation Framework Programme (CIP) and JEREMIE;

1.15 welcomes the opportunity provided for by the European Fund for Regional Development Regulation which would involve using EU co-funding to set up a knowledge voucher system to foster innovation-access to the market;

1.16 acknowledges that the European Investment Bank (EIB) and the European Investment Fund (EIF) are not equipped to have direct relations with SMEs, but to provide technical assistance and capital along with the instruments of JEREMIE and CIP via intermediate financial institutions and organisations in the Member States and their regions;

1.17 acknowledges that EU instruments are largely focused on starters and high flyers, despite the fact that 75 % of SMEs fall into a different category.

2. The Committee of the Regions' recommendations

THE COMMITTEE OF THE REGIONS

Supporting the Lisbon process

2.1 recommends that the Commission encourage a wide range of solutions for improving SMEs' access to finance, so that financing can be offered tailor-made to meet the financing needs of individual SMEs. The diversity of European SMEs is one of the main assets of the European economy;

2.2 therefore strongly recommends the continuous use of SME impact assessments for any new EU legislation and policies that might directly affect how SMEs develop.

A better environment for risk capital investment

2.3 recommends that the Commission and the Member States should make more use of the facilities for risk capital investments and risk sharing models, to create incentives for private investors to use risk capital instruments for SMEs;

2.4 recommends policies to address changes of culture and encourage risk taking, which will help achieve the Lisbon Agenda. The CoR also recommends that, in their policies, the Commission and Member States continue to remove the ‘stigma of failure’ related especially to the non-fraudulent bankruptcy issue.

More debt finance for SMEs

2.5 believes that the current diversity of credit institutions on the European retail banking markets reflects the variety of the demand for financial products and services by individuals, SMEs, corporations and local authorities. To ensure that this demand is continuously met, it therefore recommends that EC legislation should not favour any particular banking model, or type of customer, over another;

2.6 recommends that the experiences of local and regional authorities are taken on board in the process of exchanging knowledge and best practices in the thematic work conferences and Round Tables organized by the Commission. The exchange of knowledge between the key players in the Member States is of key importance for keeping up to date in the relatively small world of risk capital supply;

2.7 foresees that — due to the aging population — a larger number of firms will be put up for sale and that, accordingly, the financing of take-overs (buyout and buy-in) deserves attention.

The EU contribution to SME financing

2.8 recommends measures to improve SME — especially micro-enterprise — access to the co-operation programmes within the FP7;

2.9 recommends measures to provide SMEs with easy access to the intermediate financial institutions and organisations responsible for providing CIP and JEREMIE. The CoR also recommends that the EIB group be more proactive in communicating its role, added value and the methods of accessing the new instruments CIP and JEREMIE;

2.10 recommends continuous monitoring of the specific opportunities and challenges on the European finance market, such as the effects of demographic changes;

2.11 recommends a more important role for EIF in providing assistance for regional risk capital funds. EIF should therefore consider providing knowledge and experience to regional funds below a minimum size of 35 million euros;

2.12 recommends combining existing SME information shops at EU, national and regional level to create a transparent and easy accessible one stop information shop. The use of existing regional institutions and the internet functions of government services (E-government) should be encouraged.

Better governance

2.13 strongly recommends that the European Commission include regional best practices in its further discussions at European level. Regions can stimulate the potential private capital available by creating and financing networks of ‘informal capital’, bringing private investors in contact with companies in seed and start-up phase;

2.14 strongly recommends that financial measures be accompanied by complementary instruments. Regions are important providers of the necessary infrastructures for facilitating SMEs, such as cluster development and professional training. Regions also have valuable experience to offer in (ESF funded) incubator housing with common facilities and personnel policy, by supporting innovation, coaching and offering investment readiness programmes. There is also a need to include entrepreneurship in education programmes. It is precisely the complementarity of such measures which ensures that starters have a greater chance of success;

2.15 recommends that Member States and the EU step up their efforts to complete the single market, implement corresponding single market legislation and remove any unwarranted administrative impediments to cross border cooperation — including fiscal and export credit insurance barriers — to improve the competitiveness and openness of the European market in a global economy;

2.16 recommends encouraging the involvement of business angels in regional economic development across Europe and vice versa. It is well known that business angels prefer to do business in their own regions, that is within a ratio of 100 to 150 km of the ‘angel's’ place of residence. Business angel networks need greater visibility;

2.17 recommends the use of a regional revolving fund instrument, where public participation is channelled through a fund or funds structure to leverage private sector investment capability. The new state aid rules should enable regions to continue working with this sustainable instrument;

2.18 recommends that EU instruments on risk capital support regional and national instruments. Additional co-funding generates a higher volume and critical mass for the size of the fund and its success rate could be improved through such portfolio diversity. It should also enable cross-border investments, lead to the harmonisation of schemes and to lower market fragmentation in the EU.