Opinion of the Economic and Social Committee on "SMEs in EU island regions"
Date: 2002-04-25
Institutions: European Economic and Social Committee
Subjects: EU regional policy, European Union, island region, regional aid, small and medium-sized enterprises

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Opinion of the Economic and Social Committee on ‘SMEs in EU island regions’

(2002/C 149/15)

On 30 May 2001 the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure,
decided to draw up an opinion on ‘SMEs in EU island regions’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 9 April 2002. The
rapporteur was Mr Vassilara´s.

At its 390th plenary session on 24 and 25 April 2002 (meeting of 25 April), the Economic and Social
Committee adopted the following opinion by 87 votes to 1, with 7 abstentions.

1.

Introduction

e)

competition and globalisation;

1.1.
The Committee’s purpose is to make the Council and
Commission aware of a new policy approach which has arisen
from the conclusions of the Nice summit (7 and 8 December
2000, point J (57)). Its proposals are also intended to contribute
to the necessary special measures which will have to be taken
to help SMEs in island regions to develop, as part of EU
policies.

1.2.
The Committee is convinced that island SMEs’ lack of
competitiveness within the single market stems from the
permanent problems caused by the regions’ island status.

The Committee takes note of

the ‘First progress
1.3.
report on economic and social cohesion’ (1), which devotes a
paragraph to ‘areas suffering from severe geographical or
natural handicaps’, as repeatedly requested by the Committee.
It also considers the recognition of criteria for defining an
island (maritime environment, the size of an island and its
distance from the next landfall), and of the accumulation
of handicaps in the case of certain islands (island nature,
mountainous and thinly populated) to be a step in the right
direction.

1.4.

Having regard to:

a)

the legal basis provided by Article 158 of the Amsterdam
Treaty;

b)

the attached Declaration No 30;

c)

the forthcoming enlargement of the Community;

d)

the review of the Cohesion Fund and regional policy after
2006;

(1) COM(2002) 46 final.

f)

the seasonal nature of SME employment in island regions;

g)

the lack of variety in economic activity;

h)

its earlier opinions;

i)

j)

the NUTS classification system used in implementing the
Structural Funds and the Cohesion Fund;

implementation of the European Charter for Small Enter-
prises;

the Committee intends to examine existing European policies
for SMEs, and current practice concerning aid and subsidies
under Community legislation.

2.

Features of island SMEs

The Community is made up of regions with varying
2.1.
levels of development. For this reason, they are divided for
regional policy purposes into different levels or Objectives
(1 and 2). Nevertheless, the development of the disadvantaged
island regions is lagging behind, despite the fact that 95 % of
the population of the islands are eligible for Objective 1 and 2
support.

Island SMEs are however experiencing difficulty in
2.2.
participating in these programmes because of problems with
implementing projects, lack of own resources, their geographi-
cal position, demographic situation, small size of the local
market, dependence on larger urban centres, vulnerable econ-
omy, the seasonal nature of employment and the lack of
economic diversity.

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2.3.
Island SMEs have little capacity for administrative
organisation and management, which leaves them effectively
beyond the reach of the information and management pro-
cedures provided under the various national or Community
programmes. Such programmes are often felt to be techno-
cratic and inappropriate to the situation of micro-enterprises,
which want things to be more straightforward. Even more
seriously, this management shortfall leaves them without the
means to deal with the banking and non-banking financial
sector: they cannot easily communicate — and therefore
negotiate — with it, making cooperation virtually impossible.
Poor access to information in general makes it difficult
to obtain Community funding and assistance from banks.
Isolation, lack of skills and poor information provision are the
main reasons for this. Special liaison centres such as the Info
Centre networks are a good way of tackling some of these
problems, which should be assessed and analysed.

2.4.
In spite of the major efforts which have been made
over recent years, often with the help of the EU, island regions
continue to lag behind, with many of them in decline. The
reason is that because of their island status, not even Objec-
tive 1 benefits them when it groups them together with the
corresponding part of the mainland, or with the relevant
Member State.

a

total

Europe’s

islands have

2.5.
area of
110 000 km2 (3,4 % of EU territory) and some 14 million
inhabitants (or 3,5 % of the EU population). Despite the
differences in their size or population, the islands face many
of the same problems, e.g. economic and social, which often
vary only in degree (see Eurostat, Eurisles table in Appendix I).

surface

2.6.
These disadvantaged island regions, covered by
Article 158 of the Amsterdam Treaty, share common problems
regardless of their size, as frequently pointed out by the
Committee in its opinions.

2.6.1.

These problems are:

— networks in general (transport, and particularly its high

cost, energy, telecommunications, water supply);

— migration, especially of young people towards developed

centres;

— SME development and competitiveness, and lack of
information about the real needs of micro-enterprises;

— health, education, vocational training and apprentice-

ships;

— the environment;

— the lack of economic diversity;

— inadequate cooperation with mainland regions and with

regions in non-EU countries;

— the seasonal nature of employment and economic

activity;

— the vulnerability of historical and cultural assets and

sites.

2.7.
Infrastructure must be in place if island SMEs are to
achieve development and competitiveness. Transport, energy,
telecommunications and water supply are all infrastructure
elements vitally important to sustainable development in the
islands. The inhabitants of the island regions are striving to
enhance their local living conditions: this depends on econ-
omic development and employment. Action under EC policies
must fit in with this approach, regardless of the territorial unit
or human potential involved.

2.8.
The major centres of economic development and
European mainland regions can more easily benefit from
regional policy. People find work and enjoy better conditions
in mainland towns, areas and settlements. It is thanks to
regional policy that there are now motorways, and high-speed
trains and that airports have been built or renovated. All types
of network can clearly be extended more easily in such regions
than in their island counterparts. Such infrastructure facilitates
the development of mainland SMEs and makes them competi-
tive. However smooth the cooperation and involvement of
island inhabitants in development may be, as long as rules are
not enshrined in legislation and networks not extended to the
island regions, their populations will be headed for decline.

2.9.
The ratio of SMEs is often far greater in island than in
mainland regions. Density also increases in line with two
structural factors:

— Geography: southern Europe, particularly the Mediter-

ranean, has the highest density of SMEs.

— Sector: the highest density, with the greatest distinc-
tiveness from the rest of the EU is, as might be expected,
in the tourism, transport, energy and communications
sectors.

2.10. When talking about island SMEs, we often think of a
web of micro-enterprises with fewer than 10 employees, or
even a very large number of sole traders with no employees.
One-person businesses and micro-enterprises together some-
times represent over 90 % of island businesses, and more than
70 % of total employment.

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2.11.
This is why island micro-enterprises have both a
social and an economic role. Not only are they not very
profitable, but often they suffer from poor social protection,
which has implications for healthcare, pensions, etc. When
considering the social dimension of island businesses, it is
necessary to look at family and local community ties and to
take specific needs into account.

3.4.
On the local market, producers in the island regions
must show they can compete with their mainland European
from economies of scale of a
counterparts who benefit
completely different order to their own. Beyond a certain
threshold, which varies from product to product, the lower
transport costs are not enough to offset the difference in
production costs. Agri-foodstuffs imported from mainland
local produce — even the most
Europe often supplant
commonplace — on supermarket shelves.

3. Proposals to assist island SMEs

3.1. An appropriate economic environment through the public

sector

3.2.
One of the first principles to be observed in order to
take account of the particular features of island SMEs is
therefore to ensure a favourable general economic climate, in
which more effective equality of opportunities can be pro-
moted. Creating such a climate is the concern equally of the
public authorities, occupational and economic bodies, and
businesses themselves. Island SMEs and micro-enterprises must
benefit from specific support measures.

It must be ensured that the basic public services
3.2.1.
providing island SMEs and end users with high-quality, regular
access to energy, water, fuel, transport, research and innovation
etc., are available at the same prices as those which are, on the
mainland, generated by competition between large bodies.
Balancing mechanisms can range from a national adjustment
system to compensation systems tailored to each service or
territorial unit. This type of action to help island SMEs falls
within the bounds of economic and social cohesion, and
should be stepped up in the light of recent Commission
decisions in the wake of the Treaties and the Nice summit.
Derogations from the general status (possibly even micro-
derogations for micro-markets) should be introduced, without
distorting competition conditions but rather opening the way
to fair competition.

Because they are geographically isolated, small island
3.3.
businesses cannot — despite the explosion of the internet —
obtain the information and services which are vital to their
development in a constantly-changing enterprise environment,
meaning that it is impossible for them to hone the competi-
tiveness without which they cannot survive. The small size of
the local market, and the difficulties they encounter in
penetrating the larger market, also serve to undermine business
activity within their sphere. Difficulties arise with regard
to vocational skills, with adapting to quality and security
requirements and with promotional, marketing and even
export activities.

3.4.1.
On the immediately surrounding market, businesses
in the island regions must not only strive to sell goods and
services produced with European social and wage cost levels,
but must also overcome the various tariff and non-tariff
customs barriers which may be imposed by third countries.
All
these factors come into play against a backdrop of
WTO and ACP regulations, under which the EU is assisting
production in third countries.

Lastly,

3.4.2.
it is difficult for producers in the island
regions to be competitive on the European market. They are
faced with either products from their neighbours, which are
much less expensive because social and wage costs are lower
or economies of scale are greater, or European mainland
producers, who are free of the same transport constraints and
whose immediately surrounding market is infinitely larger.
Compensation must be available per regulation to SMEs in the
island regions by way of derogation from the common
European rules.

3.5.
In conclusion, the introduction of effective support
mechanisms and specific measures to support island businesses
requires real creativity, and also entails substantial costs, which
neither island economies nor the regional public authorities
concerned can meet from their own resources.

4. Access to private finance

4.1.
Improving SME access to finance in general, and to
bank loans in particular, is a task for central banks, European
institutions, chambers of commerce, etc. In a credit market
which has, in global terms, become supply-dominated, small
island businesses — which are excluded from the move to
more open and globalised financial markets — still experience
difficulty in finding the financial resources they need to carry
out successfully their strategy for growth and investment.
Meeting the need for long-term resources is not, however, the
only problematic aspect for these businesses.

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4.2.
To get away from a banking approach to risk analysis,
measures should be introduced to try and reduce banking risk
or the cost of guarantees requested by banks, e.g. in start-ups
by young people. Given that islands sometimes have a weaker
business culture than the mainland, young people should be
encouraged by supporting entrepreneurship and creativity so
as to prevent them leaving the islands or even persuade those
who have left to return.

4.3.
There is a real need for information. In an economic
environment marked by wide diversity of actors, going far
beyond the quantitative differences illustrated by numbers of
employees, balance sheets or turnover, specialist tools to
analyse the viability of island SMEs are needed. An approach
based on consideration of different modes of production
should enable the characteristic variety of island SMEs to be
encompassed, revealing the features of the markets in which
they operate, and the different strategic positions, types of
organisation, and production and financial structures which
flow from this.

4.4.
The Economic and Social Committee should propose
and help introduce a procedure to assess SMEs’ ability to
secure access to financial resources. The procedure should be
put to use internally for banks and businesses, and also
externally for suppliers and public bodies in their dealings with
SMEs, and for the Commission.

5. Specific development aid

5.1.
The Economic and Social Committee believes that
action to help island SMEs should have a dual aim: to safeguard
and modernise island SME structures, to promote and encour-
age island SMEs.

5.2.

Safeguarding and modernising island SME structures

5.2.1.
The Committee believes that SMEs must be helped
to preserve the social and employment fabric of these regions.
This objective must be refined and adjusted in accordance with
the category of each island, and with the economic sectors in
which they are active. Particular attention must be paid to
‘traditional’ businesses producing high-quality — often non-
standard — products designed for the local market (agri-
foodstuffs, cultural products, etc.).

5.2.2.
From the studies carried out by the Commission, it
is important to identify the real needs of island-based micro-
enterprises and small companies.
Implementing the rec-
ommendations of the European Charter for Small Enterprises
and improving the interplay with businesses should make it
easier to define these needs (1).

(1) ESC opinion on the European Charter for Small Companies, OJ

C 204, 18.7.2000, p. 57.

5.2.3.
Numerous Community programmes are addressed
to SMEs for this purpose. Care must be taken to ensure that
island SMEs are brought into this process, which is already
well under way in mainland regions.

5.2.4.
The Committee stresses the need in particular to
strengthen training instruments at all levels: initial training,
vocational training, continuing training, apprenticeships, etc.
In the case of island micro-enterprises, training must include
company managers as much as employees. As well as estab-
lishing training centres or enhancing programmes, support
must be provided for an active strategy of exchanging trained
staff.

5.3.

Promoting and encouraging island SMEs

The Committee thinks that pilot schemes tailored to
5.3.1.
the specific conditions of island markets should be introduced
concomitantly, covering that part of economic activity which
is specific to the local economy, in order to allow island SMEs
either to develop such markets or to enter market sectors
outside their own islands. This should be done in full
compliance with the specific development strategies of both
public and private enterprises.

5.3.2.
The Committee emphasises in particular the need to
establish support structures for micro-enterprises and very
small companies with fewer than 50 employees. These
mediating structures should receive strong backing so that
they can ensure that the practical needs of small
island
businesses, as identified in the future, are really met. They are
a strategic aspect of any coherent policy towards the business
fabric on islands. One of the priorities in connection with
these support structures should be to establish back-up and
monitoring facilities for projects based on quality advice.
Recruitment of permanent staff for these facilities is one of the
only ways to provide:

— support for monitoring and management of Community

programmes;

— environmental protection or technology mediators;

— back-up facilities for preparation and follow-up of bank

dossiers;

— quality and security control.

Always with the requirements of

5.3.3.
island micro-
enterprises and small companies in mind, the Committee
stresses the need to promote and strengthen all networks that
in
link micro-enterprises and small companies on islands,
order to facilitate the exchange of good management practice
and communication.

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5.3.4.
The Committee proposes that 2005 be declared
the European Year of Islands. To mark this occasion, the
Commission could assess the measures already taken to help
islands and use the reform of the Structural Funds and regional
policy to endorse a more ambitious policy.

6. Towards an integrated policy for all the islands of the

EU

In addition to measures to develop policies on micro-
6.1.
enterprises and small companies, the Committee would draw
the Commission’s attention to the need to introduce an
integrated policy which will provide for specific measures to
island regions and islands. Three
support
measures seem appropriate for achieving this general objective,
which must provide a framework for three sectoral policies.

the outermost

the EC Treaty to be clarified to reflect

The Committee would like the meaning of Article 158
6.2.
of
the spirit of
Declaration No 30 and the conclusions of the European
Council in Nice. This article must be strengthened by including
specific reference to the principle of territorial cohesion and to
the various regions facing long-term structural problems, such
as island regions, thinly populated regions or upland regions
suffering from the same handicaps. The ‘First Progress Report
on Economic and Social Cohesion’ (1) notes ‘the extent of

the Community territory comprising mountain, coastal and
maritime areas, islands and archipelagos’.

The Committee hopes that the reform of the Structur-
6.2.1.
al Funds in 2006 should make provision for the establishment
of a specific financial instrument for non-Objective 1 regions
suffering from permanent geographical or demographic handi-
caps — including, in particular, islands. It must be possible to
use this instrument among other things to co-finance fixed or
mobile transport infrastructure, but also to strengthen all the
networks
(energy, waste
water, etc.) (2).

on which

depend

islands

6.2.2.
The Community added value of such an arrangement
is that it enables the effectiveness of procedures to be better
assessed and provides support for interregional exchanges to
establish the best project design, for benchmarking, etc.

6.3.
Finally, the proposals in the White Paper on govern-
ance should give greater recognition to islands. The Com-
mission should make a systematic effort to adopt an interde-
partmental approach or even set up a directorate-general to
oversee the policies concerning and affecting islands and
integrate their management.

6.4.
The Committee thinks that this integrated approach,
backed up by national mechanisms for prior consultation of
the Member States whenever legislation affects islands, would
establish a true partnership between island regions, govern-
ments and the Commission.

(2) ESC Opinion ‘Extending the trans-European networks to the

(1) COM(2002) 46 final, p. 16.

islands of Europe’.

Brussels, 25 April 2002.

The President

of the Economic and Social Committee

Göke FRERICHS