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'
Date: 1998-03-26
Institutions: European Economic and Social Committee
Subjects: European Investment Fund, economic growth, financial aid, job creation, small and medium-sized enterprises

25.5.98

EN

Official Journal of the European Communities

C 157/71

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 (1).

2. Gist of the Commission proposal

The European Parliament has

2.1.
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 instru-
ments. In doing so, it places particular emphasis on the
financial needs of innovative (2) 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.

The Commission proposal covers three distinct

2.3.
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.

(1) Opinions of the ESC on the Role of mutual guarantee
systems (OJ C 169, 6.7.1992); Financial problems experi-
enced 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).

(2) 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’.

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Official Journal of the European Communities

25.5.98

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.

(BC-Net, Euro-Info Centres etc.) but the widespread
mobilisation of professional intermediaries and organ-
izations. The Committee suggests that the European
Commission entrust professional
intermediaries and
organizations with a special mission of identifying and
accompanying projects

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

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

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

4. Specific comments

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

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 Com-
mittee 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

The Committee welcomes this initiative, which
4.2.
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 (1) and fully approves of this
valuable new financial instrument.

(1) The role of mutual guarantee systems (OJ C 169, 6.7.1992),

SMEs in frontier regions (OJ C 206, 7.7.1997).

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C 157/73

Article 6 — Reporting and Evaluation

provide a partial answer, given that only a minority of
firms will ever float their shares on a stock market.

A period of four years before the Commission
4.4.
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 II — Point 2

the financial

The quality of

4.6.
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.

Annex I — Point 5

5. Conclusions

If the Employment and Growth Initiative is to
4.5.
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

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