COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL A framework for the next generation of innovative financial instruments - the EU equity and debt platforms
Date: 2011-10-19
Institutions: European Commission
Subjects: EIB loan, financing method, innovation, new technology, private investment, small and medium-sized enterprises, sustainable development, trans-European network, venture capital

EUROPEAN COMMISSION 

Brussels, 19.10.2011 
COM(2011) 662 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

A framework for the next generation of innovative financial instruments - the EU equity 
and debt platforms 

 
 
 
 
  
 
TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

Introduction .................................................................................................................. 3 

Innovative financial instruments in EU budget spending ............................................ 4 

Scope and sectors ......................................................................................................... 4 

Management of risks for the EU budget ...................................................................... 5 

The rationale for innovative financial instruments ...................................................... 6 

2.3.1.  Pursuit of EU policy objectives.................................................................................... 6 

2.3.2. 

Increasing efficiency and effectiveness of public resources ........................................ 6 

2.3.3.  Promoting enhanced performance and financial discipline ......................................... 7 

2.3.4.  Multiplier effect of the EU budget ............................................................................... 7 

3. 

Assessment of the implementation of innovative financial instruments in the 2007-
2013 Financial Framework .......................................................................................... 8 

3.1. 

Lessons learned from existing instruments .................................................................. 8 

3.1.1.  Experience to build on ................................................................................................. 8 

3.1.2. 

Innovative financial instruments provide needed access to finance, promote product 
development and best practices.................................................................................... 8 

3.1.3. 

Increased coherence and consistency between instruments......................................... 9 

3.1.4.  Governance and control issues for EU level instruments ............................................ 9 

3.1.5.  More can be done to raise visibility and transparency of instruments....................... 10 

3.1.6.  New risk-sharing arrangements could achieve higher finance volumes.................... 10 

4. 

5. 

Innovative financial instruments for the 2014-2020 Financial Framework............... 11 

A new framework for Innovative Financial Instruments ........................................... 12 

5.1. 

Common rules for streamlining and rationalising instruments .................................. 12 

5.1.1.  EU instruments........................................................................................................... 12 

5.1.2.  Structural funds instruments ...................................................................................... 13 

5.1.3.  External dimension of internal policy instruments .................................................... 14 

5.1.4.  External policy instruments........................................................................................ 14 

5.2. 

The content of the EU equity and debt platforms ...................................................... 14 

5.2.1.  The scope of the platforms......................................................................................... 14 

5.2.2.  Specific operational requirements.............................................................................. 14 

5.2.3.  Delivery of financial instruments............................................................................... 15 

6. 

Conclusion and next steps.......................................................................................... 15 

Annex: Description of innovative financial instruments in the 2007-2013 Financial Framework 

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1. 

INTRODUCTION 

Innovative financial instruments should play an increasingly important role in the EU budget 
spending  of  the  2014-2020  Multiannual  Financial  Framework  (MFF).  This  Communication 
presents  the  Commission's  view  on  the  design  and  management  of  innovative  financial 
instruments. The Commission's aim is to develop innovative financial instruments that pursue 
the Europe 2020 Strategy's objectives of smart, sustainable and inclusive growth in a highly 
efficient  and  effective  manner,  based  on  the  solid  experience  already  gained  through  the 
management of instruments which are operational in the current MFF. 

Some of the effects of the economic and financial crisis are likely to spill over into the first 
years of the next MFF and impact the functioning of financial markets in the years to come. 
Fiscal  consolidation  measures  will  continue  to  reduce  the  capacity  for  national  public 
investments, at the same time as structural changes in the regulation of financial institutions 
lead to changes in the appetite of such institutions for certain asset classes and types of risk. 
Macroeconomic  market  developments  will  continue  to  impact  the  availability  of  venture 
capital for high growth and innovative activity supporting the Europe 2020 objectives. There 
will be a need to mitigate the prevailing risk aversion to ensure access to capital for growth 
generating activity such as infrastructure, SMEs and innovation throughout the MFF period, 
and innovative financial instruments can play an important role in this respect. 

Innovative  financial  instruments  combined  with  appropriate  regulatory  measures  can  also 
contribute to the development and consolidation of financial (capital and equity) markets as 
well as higher EU financial market integration, opening up alternative sources of finance for 
the  growth  generating  sectors.  The  Single  Market  Act1  underlines  the  key  role  financial 
markets development will play in paving the way towards new forms of growth. The reforms 
undertaken  in  the  area  of  financial  services  regulation  will  provide  a  crucial  contribution  to 
the  promotion  of  sustainable  and  inclusive  growth  based  on  a  strengthened  confidence  in 
Europe's financial markets and actors. 

Moreover,  by  catalysing  investment  related  to  improving  energy  efficiency,  to  renewable 
energy  sources  and  related  infrastrucure,  such  instruments  can  contribute  to  promoting  the 
transition to a low-carbon and climate-resilient economy and society.  

Innovative financial instruments are firmly anchored in the strategic documents which aim to 
shape the future EU funding. In the Commission's Communication on the next MFF2 and the 
Budget Review3 it is noted that innovative financial instruments could provide an important 
new financing stream for strategic investments, supporting long-term, sustainable investment 
at a time of fiscal constraint. In order to demonstrate EU value added, the instruments should 
be  focused  on  addressing  identifiable  market  failures/imperfections  that  can  be  adequately 
addressed at EU level, taking into account the state of national financial markets, the legal and 
regulatory environment and the needs of final beneficiaries. 

The  Europe  2020  Strategy4  envisages  an  increased  mobilisation  of  innovative  financial 
instruments  as  part  of  a  consistent  funding  strategy  pulling  together  EU  and  national  public 

1 
2 
3 
4 

COM(2011) 206. 
COM(2011) 500 "A Budget for Europe 2020". 
COM(2010) 700 "The EU Budget Review". 
COM(2010) 2020 "EUROPE 2020 - A strategy for smart, sustainable and inclusive growth". 

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and  private  funding  to  pursue  the  Strategy’s  objectives  of  smart,  sustainable  and  inclusive 
growth. It aims to exploit the opportunity of the on-going revision of the Financial Regulation 
(FR)  to  develop  the  potential  of  innovative  financial  instruments,  whilst  ensuring  sound 
financial management. In its proposal for amendment of the FR in the context of the triennial 
review,  the  Commission  included  a  new  Title  dedicated  to  the  budgetary  management  of 
financial instruments5. 

Moreover, the Europe 2020 Strategy also aimed to address the  present fragmentation of EU 
funding instruments. In this respect, a cross-policy grouping of instruments (e.g. instruments 
that are mutually reinforcing and/or complementary) rather than a "one instrument per policy" 
approach  would  promote  the  achievement  of  the  objectives  under  the  Europe  2020  flagship 
initiatives, not the least because the geographical and sectorial diversification resulting from a 
multi-policy approach will help attract investors to Europe 2020 priority areas by reducing the 
overall  risk.  Finally,  the  Europe  2020  Strategy  emphasised  the  role  of  public-private 
partnerships (PPPs) in innovative financing. As underlined in the PPP Communication6, PPPs 
can  provide  more  effective  ways  to  deliver  sustainable  infrastructure  and  strategic  public 
goods and services. 

The  present  Communication  takes  stock  of  the  analysis  work  on  a  new  framework  for 
innovative financial instruments which has been carried out by the Commission's services – in 
collaboration  with  its  financing  partners  and  other  stakeholders  and  building  on  formal 
evaluations and assessments – throughout the phase of preparation of the next MFF. It looks 
at  the  design  and  management  of  innovative  financial  instruments  across  policy  sectors  and 
sets  out  the  next  steps  in  achieving  the  Commission's  ambition  of  a  more  streamlined, 
comprehensive and highly efficient and effective toolbox of innovative financial instruments 
to support the Europe 2020 Strategy objectives.  

2. 

INNOVATIVE FINANCIAL INSTRUMENTS IN EU BUDGET SPENDING 

2.1. 

Scope and sectors 

EU budget expenditure through innovative financial instruments is not a new feature, as the 
first  use  of  EU  budget  in  such  instruments  dates  back  more  than  ten  years.  The  term 
“innovative financial instrument” is used in this Communication for interventions other than 
pure grant funding. Innovative financial instruments in this sense cover a broad range of cases 
where financial support from the budget is provided in other forms than pure grants, including 
cases  where  EU  grants  are  blended  with  loans  from  financial  institutions.  The  intention 
behind  an  increased  use  of  innovative  financial  instruments  is  however  not  to  replace  grant 
funding with financial instruments, as grants will still be necessary in a range of areas, but to 
complement the grant funding by supporting projects pursuing EU policy objectives through 
other forms of intervention.  

The  innovative  financial  instruments  dealt  with  in  this  Communication  include  instruments 
which  provide  equity/risk  capital,  or  debt  instruments  (such  as  loans  or  guarantees  to 

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COM(2010)  260.  The  proposal  builds  on  the  premise  that  the  FR  should  contain  the  fundamental 
principles and the basic rules of budgetary and financial management, leaving the details to be specified 
in the Implementing Rules (or rather, following the new Treaty, the delegated act replacing the current 
Implementing  rules,  for  which  a  proposal  has  not  yet  been  made)  and  soft  law  such  as  internal 
guidelines. 
COM(2009)  615  "Mobilising  private  and  public  investment  for  recovery  and  long  term  structural 
change: developing Public Private Partnerships". 

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intermediaries  that  provide  financing  to  a  large  number  of  final  recipients  who  have 
difficulties in accessing finance, or risk sharing with financial institutions in order to increase 
the  volume  of  finance  and  hence  the  impact  resulting  from  the  EU  budget  intervention). 
Where  appropriate,  such  EU  support  can  be  provided  indirectly  via  dedicated  investment 
vehicles, in particular if participation of private investors alongside public investors is sought. 
A short description of main current instruments is provided in the Annex. 

Financial instruments are particularly suited  to addressing sub-optimal investment  situations 
in a broad range of policy areas, e.g. for business activities or infrastructures that are capable 
of being financially viable (in terms, for example, of revenue generating capacity), but do not 
(yet) attract sufficient funding from market sources. They are in particular relevant: 

– 

– 

– 

to  foster  the  capacity  of  the  private  sector  to  deliver  growth,  job  creation,  social 
inclusion  and/or  innovation,  notably  through  support  to  start-ups,  SMEs,  micro-
enterprises,  social  enterprises,  investment  in  human  capital,  research  institutions, 
business/science parks, knowledge/technology transfer, or investment in intellectual 
property rights. 

to  build  infrastructures  with  an  earmarked  revenue  stream,  making  use  of  adequate 
funding structures such as PPPs, to reinforce EU competitiveness and sustainability 
in areas such as transport, environment, energy and digital infrastructures. 

to support mechanisms that mobilise private investments to deliver public goods such 
as climate and environment protection. 

These  objectives  should  be  attained  without  creating  market  distortions,  ineffective  market 
structures  or  preserving  inefficient  firms,  in  line  with  state  aid  rules  as  clarified  by  the 
Commission's  decision-making  practice  regarding  the  currently  operational  innovative 
financial instruments. 

2.2.  Management of risks for the EU budget 

It  is  important  to  stress  that  budget  spending  through  financial  instruments  does  not  imply 
more financial risk than grants, as it is ensured through the design and contractual set-up of 
the financial instrument that the risk for the EU budget is in all cases limited to the budgetary 
contribution.  Contrary  to  grants,  where  financial  instruments  involve  investment  of  the 
committed  EU  funds,  the  budget  contribution  can  even  create  proceeds  such  as  interest  or 
return on capital.  

the  European  Investment  Bank  (EIB)  and 

A  recent  study  carried  out  for  the  European  Parliament7  with  regard  to  instruments  co-
financed  with 
the  European  Bank  for 
Reconstruction  and  Development  (EBRD)  confirmed  that  there  “are  in  fact  few,  if  any, 
concerns in a formal sense in terms of budgetary liability. All of the co-financed instruments 
involve allocations to programmes which are capped in size and so none of these instruments 
pose  a  risk  to  the  budget  beyond  that  which  is  initially  committed.  Even  in  those  cases  in 
which the financial instrument involves a form of guarantee there remains no liability beyond 
that which was originally committed during the design of the instruments”. 

7 

Study  commissioned  by  the  European  Parliament's  Committee  on  Budgets:  “The  implications  of  EIB 
and EBRD co-financing for the EU budget”, May 2011. 

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As set out in the Budget Review, the norm for projects with long-term commercial potential 
should  be  that  EU  funds  are  used  in  partnership  with  the  financial  and  banking  sector, 
particularly  the  EIB  Group  or  Member  States’  financial  institutions  with  a  public  policy 
mission, but also with other international financial institutions (IFIs) and the private financial 
sector.  This  ensures  a  unique  blending  of  expertise  and  knowledge  of  these  institutions  and 
Commission  services  in  the  design  and  implementation  of  schemes  in  pursuit  of  EU 
objectives.  Moreover,  a  well  thought-out  design  of  financial  instruments,  in  particular 
ensuring an adequate incentive and interest alignment framework (through the remuneration 
scheme  and  appropriate  risk  sharing  arrangements)  with  the  financial  institutions  partnering 
with  the  Commission,  reduces  implementation  risks  and  promotes  the  achievement  of  the 
policy objectives targeted by the instruments. 

2.3. 

The rationale for innovative financial instruments 

2.3.1.  Pursuit of EU policy objectives 

Innovative financial instruments pursue specific EU policy objectives by ensuring necessary 
finance  for  areas  of  EU  interest,  be  it  for  innovation,  sustainable  growth,  job  creation,  etc. 
They aim to correct market failures/imperfections that give rise to an insufficient funding of 
such areas from market sources, for instance because the field is perceived as too risky by the 
private  sector.  Innovative  financial  instruments  can  thus  complement  and  go  beyond  the 
regulatory interventions aiming to provide the conditions under which the desired activity can 
flourish, by providing concrete financial support in a proactive way even before the potential 
is recognized by the business community.  

In addition  to the financial impact, financial instruments  implemented  at EU  level  can have 
important  non-financial  effects  such  as  demonstration  effects  in  the  targeted  markets, 
triggering wider application to other sectors. The consistent application and promotion of best 
practices through the EU instruments may foster a qualitative development of certain markets, 
such as for instance the venture capital markets, and increase intermediary sophistication over 
time, while contributing to a less fragmented EU market. 

The  expertise  of  the  EU  and  the  financial  institutions  responsible  for  the  implementation  of 
EU-level  innovative  financial  instruments  can  be  transferred  to  national,  regional  or  local 
authorities. Transferring skills and knowledge across frontiers could play a significant role in 
aligning  national  policies  to  growth  and  innovation-oriented  measures,  reducing  the  gap 
between  European  economies  and  enhancing  competitiveness.  The  full  impact  of  such  non-
financial  effects  can  only  be  reached  if  the  instruments  are  designed  and  managed  in  a 
consistent way.  

2.3.2. 

Increasing efficiency and effectiveness of public resources  

By pooling resources from various sources, financial instruments can catalyze investments for 
identified market gaps, achieve economies of scale and/or minimize the risk of failure in areas 
where it would be difficult for individual Member States to achieve the required critical mass.  

The EU intervention must adhere to the subsidiarity principle; as pointed out by the Court of 
Auditors, expenditure from the EU budget must offer clear and visible benefits for the EU and 
for  its  citizens  which  could  not  be  achieved  by  spending  only  at  national,  regional  or  local 

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levels8. The EU added value of an EU level instrument is demonstrated if its results (in terms 
of efficiency or scale) go beyond what could have been achieved by funding under national 
schemes. 

Assuming  the  EU  value  added  of  an  EU  level  instrument  can  be  demonstrated,  the  cost-
benefit  ratio  of  such  an  instrument  is  likely  to  be  more  advantageous  than  for  a  series  of 
financial  instruments  at  national,  regional  or  local  level,  due  to  higher  volumes  under 
management,  cost  efficiencies  through  harmonised  implementation  standards  and  terms  and 
lower implementation costs, e.g. management fees charged by the financial intermediaries.  

2.3.3.  Promoting enhanced performance and financial discipline 

Well-designed innovative financial instruments can promote enhanced performance by setting 
appropriate success indicators suited to the achievement of public policy objectives. Financial 
discipline is promoted by harmonising to the extent possible the implementation frameworks 
and management principles in accordance with best practices.  

National and local institutions can benefit from the EU institutions’ knowledge in the design 
of financial products which otherwise would not have been available to them. An example is 
the  European  guarantee  schemes  implemented  under  the  Competitiveness  and  Innovation 
Framework Programme (CIP): In many Member States, guarantee societies do not exist and a 
European  counter-guarantee  scheme  is  important  also  for  newer  guarantee  institutions  still 
building up their portfolios. The presence of a European guarantee and/or counter-guarantee 
either  provides  the  possibility  for  new  guarantee  institutions  to  boost  their  volumes  in  the 
early stage, or facilitate the creation of such schemes, thus making a considerable contribution 
to "institution building". 

2.3.4.  Multiplier effect of the EU budget 

Innovative  financial  instruments  create  a  multiplier  effect  for  the  EU  budget  by  facilitating 
and  attracting  other  public  and  private  financing  for  projects  of  EU  interest  throughout  the 
various  levels  of  the  implementation  chain  (intermediaries  and  final  beneficiaries).  Through 
risk  coverage  or  risk  participations,  the  EU  intervention  may  induce  investors  to  invest  or 
invest  more  in  cases  where  they  would  have  not  invested  at  all  or  invested  less  without  the 
support  from  the  EU  budget.  Such  financial  "leverage"  or  multiplier  effect  can  be  achieved 
through  co-financing  by  international  financial  institutions  or  through  the  additional  debt 
volumes  banks  and  guarantee  institutions  are  requested  to  provide  to  final  beneficiaries.  By 
way  of  example,  under  the  Risk  Sharing  Finance  Facility  (RSFF)  projects  worth  more  than 
EUR 6 bn had been supported at the end of 2010, where the total EU budgetary commitments 
amounted to around EUR 0,5 bn.  

Furthermore, an additional multiplier effect is achieved during the lifetime of the innovative 
financial instrument, if repayments of capital or interest and proceeds of an investment can be 
reused for the instrument. Such "revolving" character can considerably increase the reach of 
instruments.  After  this  period,  repayments  of  the  initial  investment  plus  an  eventual 
participation  upside  will  flow  back  to  the  general  budget,  which  also  positively  impacts  the 
overall cost-efficiency of the intervention. 

8 

"Response  by  the  European  Court  of  Auditors  to  the  Commission's  communication  "Reforming  the 
budget,  Changing  Europe",  Opinion  1/2010:  Improving  the  financial  management  of  the  European 
Union budget: Risks and challenges", and Audit of the SME Guarantee Facility. 

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3. 

ASSESSMENT  OF  THE  IMPLEMENTATION  OF  INNOVATIVE  FINANCIAL  INSTRUMENTS 
IN THE 2007-2013 FINANCIAL FRAMEWORK 

3.1. 

Lessons learned from existing instruments 

3.1.1.  Experience to build on 

For  some  of  the  currently  existing  innovative  financial  instruments  (mainly  those  under  the 
CIP), assessments in the form of audits, interim and ex post evaluations and studies have been 
carried  out9.  Other  instruments  are  still  in  a  too  early  stage  of  implementation  to  have  been 
evaluated.  Moreover,  significant  practical  experience  has  been  gained  by  the  Commission's 
services in the management of such instruments, including the budgetary management. A key 
conclusion  at  this  juncture  is  that  due  to  the  individual  manner  in  which  the  existing 
innovative financial instruments have been developed, some instruments overlap in terms of 
areas and beneficiaries targeted and their design and management models vary, which could 
create confusion among stakeholders and beneficiaries. 

In  the  design  of  the  new  generation  of  financial  instruments  for  the  2014-2020  MFF,  if 
instruments are to be rolled out at larger scale, focus should be on exploiting the experience 
with  the  existing  financial  instruments  in  order  to  establish  appropriate  rules,  guidance  and 
standardisation  for  the  design  and  management  of  innovative  financial  instruments  in 
accordance  with  market  requirements  and  best  practices,  to  avoid  overlaps  and  simplify 
implementation modalities. This – together with an appropriate cross-policy grouping of the 
innovative  financial  instruments  proposed  at  EU  level  and  enhanced  consistency  with  such 
instruments  implemented  at  national,  regional,  transnational  or  cross  border  level  under 
structural  funds  programmes  –  will  ensure  an  optimisation  of  their  impact  and  EU  value 
added in the next MFF.  

3.1.2. 

Innovative financial instruments provide needed access to finance, promote product 
development and best practices  

The  audits  and  evaluations  carried  out  of  existing  innovative  financial  instruments  are  in 
particular positive regarding their output. Existing instruments have provided funding in cases 
where  beneficiaries  did  not  have  any  other  option  for  obtaining  the  funds  needed,  or  could 
only have obtained less than needed. In addition, instruments have helped encourage financial 
intermediaries  to  develop  and  offer  new  financial  products  at  local  level.  The  international 
financial institutions to which the implementation of EU programmes has been delegated have 
enabled  the  EU  to  offer  instruments  across  a  wide  range  of  countries  by  providing  expert 
skills on how to run such instruments and promote best practice in a direct way. 

Findings are however mixed as regards the EU value added of instruments. The evaluation of 
RSFF  found  that  this  instrument  remained  one  of  the  few  financial  instruments  available  to 

9 

Audit  of  the  SME  Guarantee  Facility,  European  Court  of  Auditors  Special  Report  No.  4/2011,  Final 
Evaluation  of  the  Entrepreneurship  and  Innovation  Programme  (April  2011),  Centre  for  Strategy  & 
Evaluation Services and EIM Business and Policy Research; Combined ex-ante evaluation and impact 
assessment  of  the  successor  to  the  Entrepreneurship  and  Innovation  Programme  under  the 
Competitiveness and Innovation Framework Programme 2007-2013 (May 2011), Economisti Associati 
in collaboration with EIM Business & Policy Research, The Evaluation Partnership, Centre for Strategy 
and Evaluation Services, and Centre for European Policy Studies; Public consultation on the future EU 
support to competitiveness and innovation (2011); Mid-Term Evaluation of the Risk-Sharing Financial 
Facility (RSFF), Report of the Group of Independent Experts (July 2010); as well as the COBU study 
mentioned in footnote 6. 

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innovative firms and organisations at a time when banks and other financial institutions were 
reducing access to finance for high risk investments in R&D and innovation areas . As regards 
the SME Guarantee Facility under CIP, the Court of Auditors found the EU value added of 
SMEG  not  demonstrated,  as  the  results  from  SMEG  "might  also  have  been  achieved  by 
funding under national schemes". By contrast, the final evaluation of the EIP found that the 
"SMEG  loan  and  micro  credit  windows  […]  fulfil  a  demand  for  finance  which  otherwise 
would  not  have  been  met".  The  Commission,  while  stressing  that  there  was  a  strong 
presumption  of  EU  value,  as  observed  by  the  independent  evaluation,  accepted  the 
recommendation to consider how EU value added could be maximised in any successor to the 
instrument.  This  is  being  taken  into  account  with  an  increased  focus  on  ensuring  EU  added 
value in the planning for the next generation of financial instruments in the 2014-2020 MFF. 

3.1.3. 

Increased coherence and consistency between instruments 

The RSFF evaluation mentions that the very broad range of activities supported by EU funds 
–  "from  frontier  research  under  FP7,  to  regional  research  capacity  building  under  the 
Structural  Funds  and  access  to  innovative  financing  mechanisms  under  the  CIP"  –  all 
contribute to the general development of the research and innovation capacity of the EU. The 
RSFF  was  found  to  be  "complementing  rather  than  competing"  with  other  funding 
instruments. However, due to the ad-hoc manner in which some instruments have been set up 
in the current financial framework, there are cases of incoherence and inconsistency and even 
undesirable duplication of instruments supported by the EU budget. There is also currently a 
fragmentation  of  financial  support  schemes  and  panoply  of  delivery  mechanisms  in  use.  By 
way of example, the EIP final evaluation pointed out that overlaps exist between the financial 
instruments  under  CIP  and  the  structural  funds,  or  between  CIP  and  the  Progress 
Microfinance  Facility  (see  description  in  Annex)10.  It  is  an  important  aim  of  the  new 
framework  to  avoid  incoherence  and  optimise  the  overall  efficiency  of  the  innovative 
financial instruments. 

3.1.4.  Governance and control issues for EU level instruments 

While the implementation of innovative financial instruments has been entrusted to financial 
institutions  offering  the  necessary  assurances  in  terms  of  sound  financial  management  and 
adequate  procedures,  the  Commission  has  maintained  control  and  influence  on  the  policy 
objectives and strategic directions of centrally managed EU level instruments by participating 
in appropriate governance structures, e.g. in steering committees or supervisory bodies. This 
does  not  imply  involvement  in  the  day-to-day  management  of  the  innovative  financial 
instruments,  as  this  falls  under  the  expertise  and  responsibility  of  duly  appointed 
managers/management committees. 

Much  can  be  achieved  by  ensuring  an  intelligent  and  well-suited  design  of  the  innovative 
financial  instruments  from  the  outset,  building  on  the  expertise  gained  from  the  existing 
instruments in assessing and managing risks. In addition, checks and balances are built into 
the system in the case of EU level instruments, enabling the Commission and the competent 
budgetary authority to exert adequate budgetary control in compliance with applicable rules, 

10 

In  the  field  of  micro-finance,  first  steps  in  establishing  a  more  coherent  approach  has  been  taken  by 
agreeing allocation guidelines for deals signed between the EIF and microfinance providers. In the next 
MFF,  EU  level  micro-finance  support  for  EU-based  micro-enterprises  would  be  concentrated  and 
include institution and capacity building in one instrument under the new Union Programme for Social 
Change and Innovation.  

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including  in  the  form  of  results-oriented  monitoring  and  reporting  by  the  financial 
intermediaries, tailored to the objectives and identified key risks of the individual instrument. 

It  is  necessary  that  the  EU  intervention  is  conditioned  upon  acceptance,  by  the  financial 
intermediaries and final recipients of the right of the European Anti-Fraud Office (OLAF) to 
carry out on-the-spot checks and inspections in order to to protext the EU's financial interests. 
The  intermediaries  shall  be  obliged  to  cooperate  with  OLAF  and  communicate  to  the 
Commission  any  suspicion  pointing  at  fraud  or  irregularities  affecting  the  EU's  financial 
interests.  

3.1.5.  More can be done to raise visibility and transparency of instruments 

Findings  point  to  low  stakeholder  and  final  recipient  awareness  of  the  EU  contribution  to 
financial instruments.  As also pointed out, this is hardly surprising, as  financial  instruments 
are typically delivered through a chain of intermediaries, including local intermediaries, who 
are  ultimately  responsible  for  disbursing  the  funds  to  final  recipients,  making  the  EU’s  role 
somewhat  opaque.  This  underlines  the  importance  of  e.g.  visibility  clauses  in  contractual 
arrangements  with  intermediaries,  to  ensure  appreciation  of  EU  added  value  for  example  in 
the  form  of  job  creation  or  capacity  building  and  other  indicators.  However,  awareness 
remains  low  despite  the  fact  that  such  clauses  are  applied  to  a  large  extent  in  existing 
contractual arrangements, and visibility should be further pursued. 

Importantly,  findings  also  show  that  multiplication  of  schemes  covering  the  same  financing 
needs may actually serve to reduce political and market visibility. This is a point where the 
proposed  new  framework  aspires  to  promote  rationalisation  of  innovative  financial 
instruments, which should serve to enhance their visibility. Evaluations and studies of existing 
instruments  also  refer  to  more  general  issues  such  as  the  need  to  ensure  more  transparent 
information and better communication to intermediaries. This is necessary to increase market 
understanding  of  the  suitability  and  availability  of  EU  financial  instruments  delivering  debt 
and equity financing.  

3.1.6.  New risk-sharing arrangements could achieve higher finance volumes 

In line with the general principle of proportionality of public support, private (co-)investment 
is sought to demonstrate private commitment, promote sharing of investment risks and avoid 
risks  of  crowding  out.  Depending  on  the  structure  of  the  markets  and  of  the  presence  of 
private  investors,  private  and  public  investment  in  line  with  the  market  economy  investor 
principle may be treated equally, or incentives may be needed to stimulate private investment 
in important policy areas, e.g. through asymmetrical risk/return structures as described below, 
but must not go beyond the minimum necessary to ensure commercial viability of investment 
projects based on realistic business plans. 

Current  risk-sharing  instruments  are  based  on  a  project-by-project  risk  assessment  or  on  a 
"pari passu" financial risk sharing between the EU budget and the financial institutions, such 
as  the  EIB  Group  or  other  financial  institutions  including  national  public  banks  which  are 
willing  to  share  the  risk  with  the  Commission.  As  the  Mid-Term  Evaluation  of  the  RSFF 
carried  out  by  a  group  of  independent  experts  has  shown,  the  current  approach  limits  the 
capacity  to  take  into account  the  market  needs  for  a  higher  volume  of  risk  based  financing. 
The experts recommended that the Commission should consider a different approach to risk-
sharing regarding the use of its capital contribution to meet expected and unexpected losses 
on loans. In particular, there is a need to develop a portfolio approach to risk sharing, i.e. that 
losses  are  covered  for  a  portfolio  of  loans  provided  to  specific  target  groups  to  allow  for  a 

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distribution  of  risk  and  thus  increase  the  volume  of  finance  which  can  be  generated  with  a 
certain amount of budgetary funds set aside to cover provisions and capital allocations. 

One variant or further development of this approach in the area of debt finance could be that 
the EU contribution would be used to cover potential first losses up to a defined percentage 
("first-loss" cushion) as a way to attract sufficient private involvement in financing higher risk 
(and  high  EU  value  added)  operations.  A  first-loss  approach  where  the  EU  takes  a 
subordinated  position  would  further  increase  the  multiplier  effect  of  the  EU  funds,  without 
going beyond the limits of a fixed EU budget contribution. It could be considered for future 
risk-sharing  instruments  to  be  set  up  with  EU  budget  funds,  but  needs  in  any  event  to  be 
accompanied  by  appropriate  rules  and  guidance,  such  as  limits  for  the  first-loss  piece  and 
requirements regarding the part of the unexpected and/or expected loss risk which should be 
retained by the Commission's financing partners.  

In  the  area  of  equity  finance,  the  EU  contribution  could  be  used  to  provide  adequate 
incentives to private  investors, notably in the form of preferential returns or priority returns 
not exceeding a fair rate of return ensuring commercial viability of their investments. Beyond 
that  fair  rate  of  return,  profits  shall  be  shared  proportionately  between  public  and  private 
investors in order to avoid overcompensation. 

Such specific requirements and minimum standards on risk and return would be developed in 
the context of the equity and debt platforms as explained in section 5.2.2. In all circumstances, 
alignment of interest between the Commission and our financial partners needs to be ensured.  

4. 

INNOVATIVE  FINANCIAL 
FRAMEWORK 

INSTRUMENTS  FOR  THE  2014-2020  FINANCIAL 

Part  II  of  the  MFF  Communication  outlines  a  number  of  the  Commission's  sector-specific 
proposals for innovative financial instruments in the next MFF.  

To support investments in research and innovation (RDI) under Horizon 2020, two financial 
instruments  are  planned:  1)  a  debt  instrument  providing  loans  to  single  beneficiaries  for 
investment  in  RDI,  guarantees  to  financial  intermediaries  making  loans  to  beneficiaries, 
combinations of loans and guarantees and guarantees and/or counter-guarantees for  national 
or  regional  debt-financing  schemes,  and  2)  an  equity  instrument  that  would  (i)  invest  in 
technology transfer and intellectual property vehicles and in venture capital funds providing 
equity finance to early stage RDI-intensive SMEs, and (ii) support investments in RDI sectors 
by  targeting  thematically  focused,  multi-country  funds-of-funds  with  a  broad  investor  base, 
including private institutional and strategic investors. 

Likewise, to support competitiveness and SMEs, two financial instruments are proposed:  

(1) 

– 

– 

An  equity  facility  for  growth-phase  investment,  which  will  provide  commercially 
oriented reimbursable equity financing primarily in the form of venture capital (VC) 
through financial intermediaries to SMEs. Two measures are envisaged: 

Direct investments in VC funds which operate across borders within the EU and are 
focused  on  investing  in  growth-oriented  enterprises  not  primarily  based  on 
innovation or research. 

“Funds-of-funds” investing across borders in VC funds which subsequently invest in 
enterprises, in particular in their international expansion phase. 

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(2) 

A  loan  facility,  providing  direct  or  other  risk  sharing  arrangements  with  financial 
intermediaries  to  cover  loans  for  SMEs  and  provide  cross-border  lending  or  multi-
country lending with a high leverage effect. 

Furthermore,  to  promote  self-employment,  micro-enterprises  and  social  enterprises,  the 
the 
European  Union  Programme  for  Social  Change  and  Innovation  proposed  by 
Commission11  includes  a  Microfinance  and  Social  Entrepreneurship  axis  which  builds  upon 
and  continues  the  existing  Progress  Microfinance  Facility12.  It  extends  its  coverage  through 
supporting  the  building-up  of  the  institutional  capacity  of  microcredit  providers,  and 
complements it by a financial instrument with an EU contribution to provide equity, debt, and 
risk  sharing  instruments  to  social  investment  funds  and  other  financial  intermediaries  for 
financing social enterprises. 

Financial  instruments  under  the  Connecting  Europe  Facility  for  infrastructure  are  likely  to 
include 1) a risk-sharing instrument covering loans and bonds (incl. the Europe 2020 Project 
Bond  Initiative)  to  respond  to  the  requirements  of  multiple  financing models  applied  across 
the  EU,  the  size  and  sector  of  projects  and  the  stage  of  development  of  project  finance  and 
capital  markets  in  general,  and  2)  an  equity  instrument  to  complement  the  toolbox  of 
infrastructure  instruments  with  the  objective  of  further  developing  EU-wide  risk  capital 
markets. 

In  the  area  of  education  and  culture,  guarantee  facilities  are  developed  to  contribute  to  the 
EU2020  objectives:  a  student  loan  guarantee  facility  to  enable  master  level  students  to 
undertake  studies  in  another  country,  contributing  to  the  objective  that  20%  of  higher 
education  students  participate  in  cross-border  learning  mobility,  and  a  guarantee  facility 
(possibly  to  be  combined  with  another  SME  financing  instrument)  to  incentivise  financial 
intermediaries  to  extend  loans  to  SMEs  in  the  cultural  and  creative  sectors  (CCS),  which 
include  producers,  music  companies,  video  game  developers,  publishers  and  distributors 
whose  assets  are  mostly  intangible  (such  as  intellectual  property  rights),  often  resulting  in 
financial intermediaries percieving the CCS as too risky to finance.  

An  increasing  share  of  support  under  the  structural  funds  will  be  delivered  by  means  of 
financial  instruments,  in  particular  support  to  enterprises  and  other  projects  or  investment 
activities  that  generate  revenues,  notably  in  the  areas  of  climate  change,  environment, 
innovation,  ICT  and  infrastructure.  Member  States  and  regions  will  also  be  encouraged  to 
support financial instruments under the European Social Fund (e.g. for students, job creation, 
mobility of workers, social inclusion and social entrepreneurship).  

5. 

A NEW FRAMEWORK FOR INNOVATIVE FINANCIAL INSTRUMENTS 

5.1. 

Common rules for streamlining and rationalising instruments 

5.1.1.  EU instruments 

The envisaged new framework for streamlining and rationalising the design and management 
of  the  new  generation  of  financial  instruments  is  based  on  what  has  been  dubbed  the  EU 
equity and debt platforms. The platforms are a set of common rules and guidance for equity 
and debt instruments (including guarantees and risk sharing) for internal policies, ensuring a 

11 
12 

COM(2011) 609 
See section 3.1. of the Annex for details. 

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consistent  approach  to  such  instruments  where  they  are  supported  by  the  EU  budget.  The 
common  rules  and  guidance  also  aim  to  streamline  relations  with  financing  partners,  in 
particular  the  international  financial  institutions  and  provide  transparency  vis-à-vis  the 
markets on how the EU intervenes by means of equity and debt instruments, ensuring higher 
visibility of the EU's intervention. 

The  EU  equity  and  debt  platforms  would  form  part  of  a  coherent  body  of  horizontally 
applicable principles, rules and guidance; the Financial Regulation (FR) and the delegated act 
replacing the Implementing Rules would set out the overall principles for innovative financial 
instruments in terms of budgetary/sound financial management, while more detailed specific 
operational requirements would be developed in full accordance with these overall principles, 
and  would  contain  the  specific  financial  parameters  reflecting  best  practice  in  the  design  of 
new financial instruments in the internal market (see 5.2.2. below). 

In  the  FR,  intervention  through  financial  instruments  should  be  made  conditional  on  the 
existence  of  a  market  failure/imperfection,  the  demonstration  of  the  added  value  of  the  EU 
intervention,  the  mobilisation  of  additional  public  and  private  finance  through  the  EU 
contribution ("multiplier effect"), the non-distortion of competition in the internal market and 
the implementation of measures ensuring alignment of interest between the Commission and 
the  financial  institution  entrusted  with  the  implementation  of  the  financial  instrument.  The 
delegated act replacing the Implementing Rules and the specific operational requirements to 
be set out in Commission guidance would reflect these principles. 

5.1.2. 

Structural funds instruments 

Although  the  shared  management  principle  means  that  EU  level  instruments  and  the 
instruments implemented by Member States under structural funds programmes are governed 
by  different  sets  of  rules,  the  highest  possible  consistency  should  be  achieved  between  the 
instruments in shared and direct management and overlaps be avoided, in order to prevent that 
several instruments target the same beneficiary groups at EU and national/regional level while 
offering  different  terms.  It  should  be  made  attractive  to  Member  States  to  contribute  to  EU 
level instruments with their structural funds, or to use "off-the-shelf solutions" mirroring the 
EU instruments, coupled with strong incentives. 

A  3-options  approach  has  been  proposed  within  the  framework  of  the  Structural  Funds 
Regulations:  

(3) 

(4) 

(5) 

Member States continue creating tailor-made instruments under shared management 
principles,  aligned  with  some  common  rules  inspired  by  the  EU  equity  and  debt 
platforms under development for the EU instruments;  

Creation  of  "off-the-shelf  instruments"  under  shared  management  principles  which 
would  facilitate  the  set-up  of  instruments  for  Member  States  as  well  as  ensure 
compatibility with the EU-level instruments;  

Member  States  would  be  encouraged  to  invest  part  of  their  structural  funds  in 
compartments of EU level instruments "ring-fenced" for investments in regions and 
policy  areas  covered  by  operational  programmes  from  which  structural  funds 
resources are contributed (“joint instruments”). 

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5.1.3.  External dimension of internal policy instruments 

To  promote  coherence  during  the  planning  and  implementation  of  the  instruments,  closer 
market  integration  as  well  as  optimal  use  of  the  instruments  once  operational,  it  should  be 
considered  –  when  setting  up  new  financial  instruments  –  to  which  extent  internal  policy 
instruments  which  include  an  external  dimension  can  be  extended  to  allow  neighbouring 
countries to participate, while avoiding multiplication of schemes covering the same financing 
needs. 

5.1.4.  External policy instruments 

The MFF Communication proposed further use of innovative financing in all external policy 
instruments  (where  appropriate  through  regional  investment  facilities)  so  as  to  mobilise 
additional funding – including from the private sector – in support of EU priorities and cover 
the investment needs of partner countries. This will be facilitated by the entry into force of the 
proposed  new  provisions  in  the  FR  on  financial  instruments,  and  with  the  establishment  of 
common  principles  for  such  instruments  to  the  degree  appropriate  to  the  environment  of 
external actions.  

The use of innovative financial instruments in external policies should be supported under the 
EU platform for external cooperation and development combining the respective strengths of 
the Commission, Member States and European bilateral and multilateral financial institutions 
(notably the EIB) active in the external development and cooperation field. The platform will 
contribute  to  fostering  EU  coherence,  effectiveness,  efficiency  and  visibility  in  external 
financing, while taking account of the specificities of the EU's external partners.  

5.2. 

The content of the EU equity and debt platforms 

5.2.1.  The scope of the platforms 

The  platforms  will  cover  distinct  financial  and  technical  parameters  (such  as  maximum 
ceilings  for  risk-sharing  arrangements  or  minimum  levels  of  equity  participations  and  other 
key parameters) for the design and implementation of innovative financial instruments, with a 
view to their streamlining and rationalisation. Such parameters have been defined on the basis 
of the experience gained with the design and implementation of current financial instruments, 
taking due account of relevant industry practices. They will cover standard issues which are 
not  policy-specific,  while  issues  such  as  political  objectives,  target  population  and  specific 
eligibility criteria could be addressed in the sector-specific proposals. 

5.2.2. 

Specific operational requirements 

The  common  set  of  specific  operational  requirements  and  guidance  to  complement  the 
principles of the FR and delegated act replacing the Implementing Rules will treat issues such 
as: 

– 

– 

Where appropriate and not covered by the general rules, specific requirements for the 
ex-ante  evaluation/impact  assessment  of  financial  instruments.  These  could  be 
matched with similar requirements for the interim and ex-post evaluations; 

Minimum standards or ranges with regard to multiplier effect, risk/return profile and 
risk diversification, aiming to protect the EU budget resources during the life of the 
instrument  and  ensure  a  fair  balance  of  risk  taking  with  the  various  financial 
intermediaries  involved  in  the  process,  while  allowing  the  terms  of  individual 

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instruments to be modulated, within the specified and reasonable ranges, taking into 
account the nature and scale of market imperfections or failures that give rise to an 
insufficient funding from market sources; 

Requirements  in  relation  to  managers  of  investment  vehicles  such  as  for  instance 
equity  funds,  covering  inter  alia  the  incentive  framework  to  ensure  alignment  of 
interest, remuneration schemes and criteria for removal; 

An  integrated  monitoring  and  governance  system  to  provide  reasonable  assurance 
that  EU  funds  are  used  for  the  purposes  intended,  making  use  of  (minimum) 
performance/results oriented indicators, tracking mechanisms (e.g. for climate related 
expenditure13),  and  standardised  reporting  formats  aiming  to  facilitate  comparative 
analysis of the success of instruments.  

The  establishment,  implementation  and  evaluation  of  risk-tailored  fraud  prevention 
measures ensuring a high level of protection for the EU's interests. 

– 

– 

– 

Some  parameters  will  be  common  for  equity  and  debt  instruments,  while  others  will  be 
specific to either type of instruments. In the case of instruments combining equity and debt, 
the rules and guidance will apply to the distinct parts of the “hybrid” instrument.  

5.2.3.  Delivery of financial instruments 

Financial  instruments  are  typically  delivered  through  a  cascade  of  actors,  starting  with  the 
Commission and involving the EIB Group or other financial institutions and financial market 
participants (such as equity funds or banks).  

Financial instruments can be implemented directly by the Commission or indirectly through 
financial  institutions  with  the  necessary  technical  and  financial  capacity  to  implement  such 
financial instruments. There are basically two main forms of delivery of financial instruments: 
through  financial  institutions  (e.g.  the  EIB  Group,  the  EBRD,  other  IFIs,  national  public 
financial  institutions)  or  through  dedicated  investment  vehicles  (DIVs).  Minimum  rules  for 
EU participation in DIVs will be included in the platforms. 

Agreements  with  the  implementing  bodies  incorporating  the  rules  and  principles  of  the 
platforms should be standardised as far as possible and, in the context of financial institutions 
preferably  be  preceded  by  framework  agreements  covering  issues  such  as  implementation, 
management,  trust  accounts,  accounting,  tracking  reporting,  monitoring  and  evaluation, 
appropriate  anti-fraud  clauses,  etc.  This  would  facilitate  and  speed  up  the  start  of  new 
financial instruments, while allowing for harmonisation of general conditions of cooperation. 

6. 

CONCLUSION AND NEXT STEPS 

Important  ground  work  on  the  innovative  financial  instruments  has  been  undertaken  by  the 
Commission and its financing partners since the launch of the Europe 2020 Strategy and the 
preparations  for  the  next  Multiannual  Financial  Framework,  including  in  the  context  of 
discussions  on  the  future  of  specific  financial  instruments  (such  as  the  CIP  or  RSFF). 
Discussion has also begun with Council and Parliament in the context of the revision of the 

13 

The  Commission  intends  to  increase  the  proportion  to  at  least  20%  with  contribution  from  different 
policies,  subject  to  impact  assessment  evidence.  The  framework  for  innovative  financial  instruments 
should  contribute  to  a  low-carbon  and  climate-resilient  Europe  and  to  the  tracking  of  the  climate 
relevance of EU budget expenditure through these instruments as specified in COM (2011)500. 

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Financial Regulation. Strong focus has been put on the importance and relevance of financial 
instruments for the attainment of EU policy objectives.  

In  addition,  there  is  broad  agreement  on  the  necessity  of  streamlining  and  harmonising 
existing  instruments  and  having  fewer  and  more  focused  EU  level  instruments,  as  well  as 
increased coherence with the structural funds instruments. In the latter respect, the proposal to 
establish joint instruments is deemed a particularly promising avenue.  

It  is  in  this  spirit  that  the  framework  for  the  financial  instruments  for  the  next  Multiannual 
Financial Framework will be developed. And it is in this spirit that the Commission is looking 
forward to discussing further with Council and Parliament in the coming months, both on the 
general framework to be created by the Financial Regulation and the Delegated Act replacing 
its Implementing Rules, and on the specific legislative proposals for the next MFF which will 
be  successively  adopted  by  the  Commission  in  4th  Quarter  2011.  The  equity  and  debt 
platforms will help ensuring that this spirit of streamlining and cooperation is translated into 
effective and  efficient  instruments designed and  managed  in  accordance with the  applicable 
rules.  

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ANNEX  

DESCRIPTION OF INNOVATIVE FINANCIAL INSTRUMENTS IN THE 2007-2013 
FINANCIAL FRAMEWORK 

1. 

EU level risk capital/equity instruments: CIP/GIF, Marguerite 

1.1. 

CIP – High Growth and Innovative SME Facility (GIF) 

Innovative  financial  instruments  form  part  of  the  Entrepreneurship  and  Innovation 
Programme  (EIP),  one  of  the  three  specific  programmes  under  the  CIP.  Their  overall 
objective is the improvement of access to finance for start-up and growth of SMEs in order to 
support the investments of such companies in innovation activities, including eco-innovation.  

The High Growth and Innovative SME Facility (GIF), with a budget of over EUR 600 million 
of  which  a  part  is  specifically  earmarked  for  eco-innovation,  aims  to  increase  the  supply  of 
risk  capital/equity  for  innovative  SMEs  in  their  early  stages  (GIF1)  and  in  the  expansion 
phase  (GIF2).  It  is  operated  by  the  European  Investment  Fund  (EIF)  on  behalf  of  the 
Commission (representing the EU). The EIF enters into investment agreements with venture 
capital  (VC)  funds  which  support  such  SMEs.  GIF  is  a  long-term  facility  under  which 
investments in VC funds with a lifetime of up to 12 years may be made. The majority of the 
capital  invested  in  any  VC  fund  is  to  be  provided  by  market-oriented  investors  and  all 
investments are made pari passu (Like Risk, Like Reward) with private investors. 

1.2. 

The Marguerite Fund 

The  2020  European  Fund  for  Energy,  Climate  Change  and  Infrastructure  (the  Marguerite 
Fund)  is  a  pan-European  equity  fund  for  infrastructure  investments  in  the  transport,  energy 
and  renewables  sectors.  The  EU  has  invested  EUR  80  million  from  TEN-T  budget  in 
Marguerite  out  of  a  total  committed  fund  size  of  EUR  710  million  (target  size:  EUR  1,5 
billion). The other investors are public banks, but the fund is open to participation of private 
investors. Investments are made pari passu. The fund has endeavoured to invest a total sum 
equivalent to 3.5 times the EU contribution into TEN-T projects. 

The Fund was established as a regulated, specialised investment vehicle under Luxembourg 
law. The Commission, representing the EU, has a seat on the Supervisory Board responsible 
for setting the overall strategy of the Fund, but is not involved in the day-to-day management 
of  the  Fund  or  in  individual  investment  decisions,  as  this  is  the  responsibility  of  the 
Management  Board  and  Investment  Committee  of  the  Fund.  All  decisions  must  be  taken  in 
compliance with the investment policy of the Fund, which was established together with the 
Commission.  

2. 

EU level debt instruments (guarantees/risk sharing): CIP-SMEG, RSFF, LGTT 

2.1. 

Risk Sharing Finance Facility (RSFF)  

The Risk Sharing Finance Facility aims to support the financing of risky projects in the field 
of  Research,  Development  and  Innovation  (RDI)  by  private  and  public  sector  promoters 
which do not have easy access to the capital markets. The instrument was developed jointly 
by the Commission and the EIB to share the risk on the Bank's direct loans or guarantees for 
loans  supporting  RDI  investments  in  thematic  priority  areas  of  the  Seventh  Framework 
Programme for Research and Technological Development (FP7).  

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The  pooling  of  the  EU  contribution  of  EUR  1  billion  from  the  FP7  budget  and  the  EIB 
contribution  of  EUR  1  billion  from  its  own  resources  provides  a  capital  cushion  to  cover 
potential  losses  incurred  for  the  financing  of  estimated  EUR  10  billion  of  loans  over  the 
period 2007-2013. Based on its own financial evaluation and in accordance with its credit risk 
policy guidelines, the EIB assesses – on a project-by-project basis – the level of financial risks 
for  which  it  is  required  to  set  aside  provisioning  and  capital  allocation  (for  expected  and 
unexpected loss), in accordance with normal banking rules, and requests a contribution from 
the EU to cover the provisioning and capital allocation. The Commission is represented in the 
RSFF  Steering  Committee  which  oversees  the  implementation  of  the  instrument  in 
accordance with the policy objectives of the instrument. 

2.2. 

CIP – SME Guarantee Facility (SMEG) 

The SME Guarantee Facility (SMEG), with a budget of EUR 500 million, provides counter-
guarantees  to  national  guarantee  schemes  as  well  as  direct  guarantees  to  financial 
intermediaries in order to increase and enhance the supply of debt finance to SMEs. SMEG is 
operated by the European Investment Fund (EIF) on behalf of the Commission (representing 
the EU). 

The  financial  intermediaries  supported  by  the  EU  guarantee  in  turn  provide  debt  finance  to 
SMEs  while  passing  on  the  advantage  of  the  guarantee  to  the  final  beneficiaries,  e.g.  by 
accepting  a  higher  risk  profile  or  less  collateral,  or  by  charging  lower  interest  rates  or 
providing similar advantages compared to their ordinary financing activities. Under SMEG a 
portion  of  each  individual  transaction  is  guaranteed,  typically  50%  (guarantee  rate).  The 
overall  exposure  for  the  EU  budget  is  however  limited  by  a  contractually  agreed  maximum 
cap on portfolio losses (cap rate). 

2.3. 

Loan Guarantee Instrument for TEN-T projects (LGTT)  

The  Loan  Guarantee  Instrument  for  TEN-T  projects  (LGTT)  aims  at  facilitating  larger 
participation  of  the  private  sector  in  the  financing  of  Trans-European  Transport  Network 
infrastructure (TEN-T). Attracting private sector funding in core European transport projects 
can be challenging due to the relatively high levels of revenue volatility in the projects' early 
operating stages. The LGTT partially covers this revenue risk and consequently improves the 
financial viability of such TEN-T projects.  

LGTT is financed with a capital contribution of up to EUR 500 million from the EU budget. 
Technically,  the  LGTT  Guarantee is issued in favour of  commercial banks which  provide a 
stand-by liquidity facility (SBF) to the project. Such SBF can be drawn upon by the project 
company in case of unexpected reduction of traffic/usage related income of the project during 
the initial operating period in order to insure the service of the senior debt facilities. 

In  terms  of  governance,  the  Commission  is  represented  in  the  Steering  Committee  of  the 
instrument. The role of the Steering Committee is to review the progress and achievement of 
the strategic objectives of LGTT and make recommendations in order to achieve these. 

3. 

Instruments combining equity and debt support  

3.1. 

European Progress Microfinance Facility (EPMF) 

In the most recent EU level  innovative financial instruments, structures have been set up to 
combine equity and debt support. The European Progress Microfinance Facility (EPMF), set 
up in 2010, consists of two parts: 1) a guarantee instrument to providers of micro-credit (i.e. 

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loans of up to EUR 25,000, in particular to vulnerable groups in risk of social exclusion, for 
the purpose of setting small commercial operations) and 2) a structured investment vehicle set 
up  under  Luxembourg  law,  the  European  Progress  Microfinance  Fund,  which  offers  senior 
loans,  subordinated  loans  (financing  subordinated  to  senior  creditors),  risk-sharing  loans 
(senior  loans  combined  with  risk  participation  in  the  micro-credit  portfolio)  and  equity 
participation to micro-credit providers. The EU has invested EUR 100 million in the Facility.  

A  budget  of  EUR  25  million  is  allocated  for  the  guarantee  instrument.  The  maximum 
guarantee  rate  is  75%  of  the  underlying  microcredit  or  guarantee  portfolio,  while  a  cap  is 
agreed for each guaranteed portfolio, based on the expected cumulative losses of the portfolio. 
The maximum liability for the EPMF is set at 20% of each guaranteed portfolio.  

The European Progress Microfinance Fund has the EU (represented by the Commission) and 
the  EIB  as  investors  while  the  EIF  act  as  Management  Company.  The  EU  holds  the  junior 
shares,  which  means  that  it  bears  the  first  net  losses  affecting  the  fund’s  assets,  within  the 
agreed cap, while the EIB is protected as holder of the senior shares against the losses borne 
by the junior shares. 

3.2. 

European Energy Efficiency Fund (EEEF) 

The European Energy Efficiency Fund (EEEF) was set up this year using unspent funds from 
the European Energy Programme for Recovery. The fund is a structured finance vehicle set up 
under  Luxembourg  law  to  invest  either  directly  in  smaller  scale  energy  efficiency  and 
renewable energy projects of local authorities or invest in such projects indirectly via financial 
institutions.  The  Fund  will  notably  support  the  development  of  energy  service  companies 
(ESCOs), 

The EU, represented by the European Commission, is investing EUR 125 million in the junior 
tranche  of  the  fund,  while  the  EIB  and  the  Italian  Cassa  Depositi  e  Prestiti  (CDP)  are 
investing EUR 75 million and 60 million, respectively, in the mezzanine and senior tranches. 
Deutsche Bank will act as Investment Manager of the fund and has invested EUR 5 million in 
the mezzanine tranche. The target size of the fund is EUR 500-600 million. 

4. 

Structural Funds 

Member States and Managing Authorities have the option of using part of the resources made 
available  to  them  through  the  European  Regional  Development  Fund  (ERDF)  and  the 
European  Social  Fund  (ESF)  to  support  financial  engineering  instruments.  The  ERDF 
resources  are  primarily  used  for  support  to  enterprises  (mainly  SMEs),  urban  development 
and  regeneration,  energy  efficiency  and  use  of  renewable  energy  in  buildings,  while  ESF  is 
used  for  support  to  self-employment,  business  start-ups  and  micro-enterprises.  Nearly  all 
Member  States  today  implement  a  range  of  equity  and/or  debt  (loan  and  guarantee) 
instruments  in  at  least  one  of  these  areas,  either  directly  by  contributing  resources  from  an 
operational programme to a venture capital fund, loan or guarantee fund, or through holding 
funds  set  up  to  invest  in  several  funds.  Instruments  are  implemented  through  a  variety  of 
governance models and legal structures specific to each Member State or region. 

In  many  cases,  instruments  are  implemented  through  investment  into  holding  funds.  Under 
the  JESSICA  initiative  (Joint  European  Support  for  Sustainable  Investment  in  City  Areas), 
holding  funds  are  implemented  through  the  EIB.  Under  the  JEREMIE  initiative  (Joint 
European  Resources  for  Micro  to  Medium  Enterprises),  holding  funds  are  generally 
implemented  through  the  EIF  or  a  range  of  national  or  regional  institutions.  In  general, 

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depending on the areas of intervention, the EIB or the EIF can receive a mandate to carry out 
holding  fund  tasks  through  a  direct  award  of  a  contract  by  Member  States  or  Managing 
Authorities.  Other  financial  institutions  can  also  be  selected  to  implement  operations 
organised through a holding fund, either by way of public procurement or by way of a grant. 

5. 

External policy instruments in the pre-accession area 

The  Western  Balkans  Investment  Framework  (WBIF)  was  introduced  in  2009  as  a  joint 
initiative  of  the  European  Commission  together  with  the  CEB,  the  European  Bank  for 
Reconstruction  and  Development  (EBRD)  and  the  EIB,  pooling  grant  resources  in  order  to 
leverage loans for the financing of priority infrastructure in the Western Balkans, as well as 
SME financing and energy-efficiency. The WBIF provides grant resources to projects likely 
to be supported by loans from the partner banks, for project preparation, accelerating existing 
loans or enabling projects by bridging a funding gap.  

An  example  of  the  use  of  innovative  financial  instruments  in  the  pre-accession  area  is  the 
European  Fund  for  Southeast  Europe  (EFSE)  which  offers  long-term  funding  to  qualified 
local  financial  institutions  in  the  South-eastern  European  and  Southern  Caucasus  countries. 
The funds are used to provide security and leverage private investors' capital at large scale for 
development purposes (business loans to micro and small enterprises, rural business loans and 
housing loans to low-income private households with limited access to financial services via 
local financial institutions). EFSE is based on a public-private partnership model initiated by 
the  German  KfW  Entwicklungsbank.  The  investors  of  the  fund  are  the  Commission 
(representing  the  EU)  who  has  invested  EUR  120  million,  other  public  donors  and 
international finance institutions, including the EIB and the EBRD. 

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