Opinion of the Economic and Social Committee on the 'Proposal for a Council Decision on measures of financial assistance for innovative and job-creating small and medium-sized enterprises (SMEs) - The growth and employment initiative` (98/C 157/17)

On 24 February 1998 the Council decided to consult the Economic and Social Committee, under Article 130(3) of the Treaty establishing the European Community, on the above-mentioned proposal.

The Committee instructed its Section for Industry, Commerce, Crafts and Services to prepare its work on the subject. The Economic and Social Committee decided to appoint Mr Pezzini to act as rapporteur-general.

At its 353rd plenary session (meeting of 26 March 1998), the Economic and Social Committee unanimously adopted the following opinion.

1. Introduction

1.1. Whilst the majority of measures to stimulate employment have to be taken by the Member States, as a consequence of the decisions taken at the special European Council for Employment, held in Luxembourg in November 1997, the European Commission has been charged with making proposals for new financial instruments to support innovatory and job-creating small and medium-sized enterprises (SMEs); using Article 130 (Industrial Policy) as the legal base is a notable development in an area where the Community has not been particularly active.

1.2. The Economic and Social Committee welcomes these developments, which accord with its views on this subject set out in a number of opinions ().

2. Gist of the Commission proposal

2.1. The European Parliament has earmarked resources from the Community budget for the support of SMEs under its 'Growth and Employment Initiative`.

2.2. Using its right of initiative, the present proposal by the Commission for a Council Decision sets out a programme for the application of these funds in a way that complements existing actions by the European Investment Bank (EIB) and the European Investment Fund (EIF), as well as other current Community instruments. In doing so, it places particular emphasis on the financial needs of innovative () and job-creating SMEs, including technology based companies, who may be unable to raise funds from conventional sources because of the level of risk associated with their ventures.

2.3. The Commission proposal covers three distinct actions:

- improving access to early-stage and seed capital by innovative enterprises from private-sector venture capital funds through the making of investments, managed by the EIF, in specialist investment funds;

- fostering transnational joint ventures by SMEs within the EU by the provision of financial assistance during the planning and start-up phase, as well as a contribution towards the cost of fixed assets, for which few sources of funding now exist. This project will be managed by the Commission and national intermediaries; and,

- a loan guarantee facility, again managed by the EIF, for SMEs with growth potential. This will lead to a sharing of risk between the Commission and national guarantee schemes, mutual guarantee schemes and other suitable institutions, including the EIB in cases where its statutes would otherwise prohibit participation because of the level of risk involved.

3. General remarks

3.1. In terms of the objective of the Commission proposal, the most important criterion is the job-creation potential of encouraging and supporting SMEs.

The aim must be, first and foremost, to create skilled, sustainable employment.

This must also be the main criterion in assessing eligibility for assistance. This objective must be a constant priority.

Also, subsequent evaluation of projects should be sufficiently detailed for lessons to be learned for future application.

3.2. The Commission points out that far less early-stage and seed capital is available in Europe than in the USA, but even there only some 2 % of companies actually receive funding from this source. In Europe, not only are there considerable differences in the level of venture capital available between Member States; it tends to be more risk averse, with a high proportion of available funds going to support Management Buy-Outs and Management Buy-Ins in well-established companies of fairly substantial size. There is no doubt that a financing gap exists and the European Parliament and the Commission are to be congratulated on making efforts to address it, not because of the actual number of potential beneficiaries, but in view of their economic potential.

3.3. The programme must work on commercial principles. particularly taking into account the high level of risk involved in making investments of this type. In particular, the degree of innovation claimed for each project must be properly evaluated by persons with knowledge of the area of activity concerned and at least some market research conducted. Even so, it is recognised that any final decision as to whether a project is worthy of support will almost certainly be largely based on the perceived managerial abilities of those engaged in the venture.

3.4. One of the prime objectives of the European Investment Fund was to provide SMEs with loan guarantees. So far, the number assisted in this way has been disappointing, perhaps because of an over cautious attitude by the European Investment Fund. It is hoped this new initiative will correct the situation.

3.5. It is essential that all three initiatives are widely publicized, so becoming known to as many as possible in the small business community, as well as potential entrepreneurs. This will require not only the use of existing Commission-supported channels of information (BC-Net, Euro-Info Centres etc.) but the widespread mobilisation of professional intermediaries and organizations. The Committee suggests that the European Commission entrust professional intermediaries and organizations with a special mission of identifying and accompanying projects

3.6. It is important that projects are assessed taking fully into account the principle of equal opportunities.

4. Specific comments

Article 3 - The ETF (European Technology Facility) Start-up Facility

4.1. A major barrier faced by venture capital funds when contemplating making relatively small investments is the cost of carrying out a 'due diligence` examination of the company and providing long-term advice and support. Frequently, the level of such costs makes an investment in all but a handful of particularly promising schemes uneconomic. If the Commission wishes this programme to have a major impact it should consider making an advance contribution to the initial evaluation costs of a fund, repayable on the basis of the overall success of a defined portfolio of investments made under this scheme. It is appreciated that this is not immediately possible for lack of budgetary resources, but the Committee hopes future possibilities will be investigated by the Commission.

In addition, a possible role in assisting in the evaluation of projects by professional intermediaries should be examined.

Article 4 - The Joint European Venture-JEV

4.2. The Committee welcomes this initiative, which it had itself called for. Indeed, the Committee sees the lack of any ad hoc financial instruments as one of the reasons for the disappointing number of joint ventures within the Union. However, the Committee calls on the Commission to address the other obstacles (legal, fiscal, etc.) in order to ensure the success of this excellent initiative.

Article 5 - The SME Guarantee facility

4.3. The Committee has advocated a facility of this type on previous occasions () and fully approves of this valuable new financial instrument.

Article 6 - Reporting and Evaluation

4.4. A period of four years before the Commission prepares an in depth evaluation of this programme, although preceded by annual reports, may seem a long time. In the case of venture capital type investments it may be too short, particularly given that it will be some time before actual investments are made and these could have a life of up to sixteen years, with an average of from seven to ten. What should be proper reporting periods requires further evaluation.

Annex I - Point 5

4.5. If the Employment and Growth Initiative is to be a long-term success, venture capitalists will need to be able to exit from their investments, otherwise the pool of available funds will tend to become frozen. This illustrates the importance of the Commission's current examination of the barriers to the growth of capital markets which are attuned to the needs of SMEs and how these might be overcome. This, however, will only provide a partial answer, given that only a minority of firms will ever float their shares on a stock market.

Annex II - Point 2

4.6. The quality of the financial intermediaries involved will be a significant determinant of the success of the three proposed financial instruments. In order to attract the interest of the broadest possible cross-section of the financial community, it is hoped that at least short notices announcing the call for expressions of interest in the Joint European Venture scheme, will be inserted in the main financial/commercial newspapers in the EU.

5. Conclusions

Subject to the above remarks, the Committee endorses these three initiatives as they promise to make a real contribution to the financing of SMEs in those areas where identifiable gaps do exist. It is hoped that these programmes will have a high public profile, be extremely successful and eventually become permanent. In this way they should make a major contribution to the creation of high quality new employment.

Brussels, 26 March 1998.

The President of the Economic and Social Committee

Tom JENKINS

() Opinions of the ESC on the Role of mutual guarantee systems (OJ C 169, 6.7.1992); Financial problems experienced by SMEs (OJ C 388, 31.12.1994); Improvement of the fiscal environment of SMEs (OJ C 397, 31.12.1994); Third multiannual programme for SMEs in the EU (OJ C 295, 7.10.1996) and Second Integrated Programme for SMEs and the Craft Sector (OJ C 56, 24.2.1997).

() Definition of innovation given in the Commission's Green Paper on Innovation. 'In brief, innovation is: the renewal and enlargement of the range of products and services and the associated markets; the establishment of new methods of production, supply and distribution; the introduction of changes in management, work organization, and the working conditions and skills of the workforce`.

() The role of mutual guarantee systems (OJ C 169, 6.7.1992), SMEs in frontier regions (OJ C 206, 7.7.1997).