Special Report No 2/2012 ‘Financial instruments for SMEs co-financed by the European Regional Development Fund’
Date: 2012-03-28
Institutions: European Court of Auditors
Subjects: European Regional Development Fund, aid to undertakings, co-financing, economic and social cohesion, small and medium-sized enterprises

EUROPEAN
COURT OF AUDITORS

FINANCIAL INSTRUMENTS FOR SMEs
CO-FINANCED BY THE EUROPEAN 
REGIONAL DEVELOPMENT FUND

4
3
8
0
-
1
3
8
1
N
S
S

I

2
1
0
2

2
o
N

t
r
o
p
e
R

l

a
i
c
e
p
S

EN

 
 
 
 
Special Report No 2 

 2012

FINANCIAL INSTRUMENTS FOR SMEs
CO-FINANCED BY THE EUROPEAN 
REGIONAL DEVELOPMENT FUND

(pursuant to Article 287(4), second subparagraph, TFEU)

EUROPEAN COURT OF AUDITORS

EUROPEAN COURT OF AUDITORS
12, rue Alcide De Gasperi
1615 Luxembourg
LUXEMBOURG

Tel. +352 4398-1
Fax +352 4398-46410
E-mail: eca-info@eca.europa.eu
Internet: http://eca.europa.eu

Special Report No 2 

 2012

A great deal of additional information on the European Union is available on the Internet.
It can be accessed through the Europa server (http://europa.eu).

Cataloguing data can be found at the end of this publication.
Luxembourg: Publications Office of the European Union, 2012

ISBN 978-92-9237-487-7
doi:10.2865/59371

© European Union, 2012
Reproduction is authorised provided the source is acknowledged.

Printed in Luxembourg

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

3

CONTENTS

Paragraph

GLOSSARY

I–VIII	

EXECUTIVE	SUMMARY

1–17	

INTRODUCTION

4–5	

EU	COHESION	POLICY

6	

EU	FINANCIAL	ENGINEERING	SUPPORT	TO	SMEs	OTHER	THAN	COHESION	POLICY

7–11	

ERDF	FINANCIAL	ENGINEERING	SUPPORT	TO	SMEs

12–17	

FINANCIAL	INSTRUMENT	MECHANISMS

18–25	

AUDIT	SCOPE	AND	APPROACH

26–115	 OBSERVATIONS

26–40	

	QUALITY	OF	THE	ASSESSMENT	OF	THE	SME	FINANCING	GAP

29–30	

	2000–06:	GENERALLY	NO	GAP	ASSESSMENTS

31–40	

	2007–13:	SIGNIFICANT	SHORTCOMINGS

41–83	

	THE	SUITABILITY	OF	THE	ERDF	FRAMEWORK	FOR	IMPLEMENTING	FINANCIAL	INSTRUMENTS

43–65	

	THE	SPECIFIC	NATURE	OF	THE	DIFFERENT	FINANCIAL	INSTRUMENTS	IS	NOT	SUFFICIENTLY	CONSIDERED

66–77	

78–83	

	CURRENT	CHARACTERISTICS	OF	THE	ERDF	HAMPERED	THE	SOUND	FINANCIAL	MANAGEMENT		
OF	FINANCIAL	INSTRUMENTS

	COMMISSION	AND	MEMBER	STATE	MONITORING	AND	INFORMATION	SYSTEMS	DO	NOT	ADDRESS	
THE	SPECIFICITIES	OF	FINANCIAL	INSTRUMENTS

84–115	

	EFFECTIVENESS	AND	EFFICIENCY	OF	THE	FINANCIAL	INSTRUMENTS	IN	ACHIEVING	RESULTS

85–93	

WIDESPREAD	DELAYS

94–101	

LEAKAGE	EFFECTS

102–115	

	POOR	RECORD	OF	THE	ERDF	IN	ATTRACTING	PRIVATE	MONEY

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

	
4

116–124	 CONCLUSIONS	AND	RECOMMENDATIONS

116–118	 QUALITY	OF	THE	ASSESSMENT	OF	THE	SME	FINANCING	GAP

119–121	

SUITABILITY	OF	THE	ERDF	FRAMEWORK	TO	IMPLEMENT	FINANCIAL	INSTRUMENTS

122–124	

EFFECTIVENESS	AND	EFFICIENCY	OF	THE	FINANCIAL	INSTRUMENTS	IN	ACHIEVING	RESULTS

ANNEX	I	 —	 COMMITMENTS	AND	PAYMENTS	TO	FINANCIAL	ENGINEERING	INSTRUMENTS

ANNEX	II	 —	

	SCHEMATIC	OVERVIEW	OF	THE	LEVERAGE	CONCEPT	AS	APPLIED	TO	EQUITY,		
LOAN	AND	GUARANTEE	INSTRUMENTS

ANNEX	III	 —	 EXAMPLES	OF	OFF-THE-SHELF	INSTRUMENTS	AND	VEHICLES

REPLY	OF	THE	COMMISSION

Special Report No 2 / 2012 – Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

	
	
	
GLOSSARY

5

Business	transfer: Transfer of an undertaking, business or part of an undertaking or business by its owner to 
another person. 

CEB: Council of Europe Development Bank

CIP: competitiveness and innovation framework programme (see EIP below)

Critical	mass: Amount determined in function of the relationship between the size of a fund and its return. 
With larger investments, a more favourable rate of return may be provided and the transaction costs are gen-
erally reduced.

Default: In the context of this audit, failure of an SME to repay its credit under the contractual conditions. 
In the case of guarantees, default is the moment when a guarantee is executed and the guarantee fund, the 
counter-guarantee fund, or both, take on the duty to pay the outstanding amount.

DG: directorate-general

EBRD: European Bank for Reconstruction and Development

EIB: European Investment Bank

EIF: European Investment Fund (EIB Group’s specialist fund providing equity and guarantee instruments to SMEs)

EIP: entrepreneurship and innovation programme — an SME programme of the Enterprise and Industry DG, 
part of the CIP, managed by the EIF under the supervision of the Economic and Financial Affairs DG. On the 
basis of Decision No 1639/2006/EC, this SME aid scheme includes five facilities, of which three aim at improv-
ing access to finance for SMEs: High Growth and Innovation Facility I and II (GIF I and GIF II) and the SME Guar-
antee Facility (SMEG). They succeed to the MAP facilities (see below).

Equity: Risk capital invested or held in a firm in the form of equity instruments or instruments of equivalent 
ranking (e.g. convertible and subordinated loans).

ERDF: European Regional Development Fund

ERP: European Recovery Programme — in the context of this audit, the German Marshall funds and their legacy 
funds. The ERP has not been fixed by any programme period term and has not been implemented regionally. As 
an evergreen national fund for the benefit of Germany’s enterprises, it is revolving; legacy funding cannot be 
transformed back into grants. KfW is the ERP funds’ trustee and regional managing authorities are not involved 
in their management. More information on the ERP and the Marshall funds in Germany is available on KfW’s 
website.

ETF-Start-up: European Technology Facility Start-up (see MAP)

Evergreen: A financial instrument or fund without a fixed maturity or term.

Financial	engineering	instruments	(or	financial	instruments): Term used by the Commision to designate 
various repayable instruments offered by the Structural Funds in order to improve SME access to finance, urban 
development and energy efficiency. In the context of this audit, these instruments are equity, loan and guar-
antee instruments for SMEs.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

6

Financial	institution: Firms whose financial activities are central to their business, such as taking deposits, 
investing funds or dealing. All financial institutions are financial intermediaries.

Financial	intermediary: Entity acting as an intermediary between sources of capital supply and demand 
(e.g. bank, holding fund, fund).

Financing	gap: Mismatch between the demand and the supply of financial resources. In the context of this 
audit, the financing gap only concerns the gap in the different types of financial instruments for SMEs in 
a given area of the EU.

Fund: A segregated portfolio of financial engineering instruments managed by one or several fund man-
agers following defined investment policies and targets. A fund can be legally constituted or constituted as 
a separate block of finance within a financial institution. The fund has segregated accounts and operations. In 
this report, the term ‘fund’ applies to the co-financed operations, whereas ‘Fund’ is the term reserved for the 
Structural Funds.

Fund	manager: The general partner or entity responsible for implementing a fund’s investment strategy and 
managing its portfolio of financial instruments, as set out contractually.

GIF: High Growth and Innovation Facility (see EIP)

Grant: Non-reimbursable budgetary contribution from the EU or any Member State public institution. Also 
referred to as ‘public subsidy’.

Guarantee: In the context of this audit, an undertaking by a party (the guarantee fund) to bear at a predefined 
guarantee rate principal and interest due in case of default of a loan extended by a financial intermediary 
(a bank) to an SME. A guarantee always leaves some of the risk with the lender and the SME remains liable for 
the loan. Guarantees can take effect on first demand or not.

Holding	fund: Legally constituted fund that has a controlling interest in several subsidiary equity funds, guar-
antee funds or loan funds.

ISME: innovative SME active in high-technology activities

Jeremie: Joint European Resources for Micro to Medium Enterprises (a Commission/EIB Group initiative for 
SME financing strictly using the Structural Funds).

KfW: Kreditanstalt für Wiederaufbau is Germany’s federal development bank experienced in SME financing. 
Notably acting as a subcontractor of the Council of Europe Bank, it is active as an international financial institu-
tion on the central and east European SME finance market.

Leakage	effect: Any effect reducing the amount of money available to grant financial instruments to SMEs.

Legacy	funding: The prospective surplus of a fund attributable to the public sector contribution, which can, 
once available, be used to assist SMEs.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

7

Leverage	effect: In the context of this performance audit, leverage has been expressed in terms of how many 
euro of funding (public and private) have been raised and paid for SME finance for each euro of public (EU and 
Member State) funding paid. Annex II gives a schematic overview of how leverage works for each main cate-
gory of financial instruments and, in the context of the ERDF, how the concept of leverage is to be understood.

Loan: The lending of money at interest to a borrower who must repay the amount lent.

Management	costs: In the context of this audit, management costs are all costs borne by the financial inter-
mediary or the SME in relation to the cost of managing financial instruments. A non-exhaustive list of such 
costs includes arrangement fees, guarantee fees, handling fees, membership fees, monitoring fees, perform-
ance fees, processing fees, as well as fund manager overheads. Interest payments and dividends are not con-
sidered as management costs.

Managing	authority: The public authority of the Member State managing the Structural Funds (including the 
ERDF) on behalf of the Member State.

MAP: multiannual programme for enterprise and entrepreneurship — an SME programme of the Enterprise 
and Industry DG, managed by the EIF under the supervision of the Economic and Financial Affairs DG. Follow-
ing Decision 2000/819/EC and amended by Decision No 1776/2005/EC, this programme has been implemented 
via two SME facilities managed by the EIF: the ETF-Start-up Facility (venture capital instruments, ‘ETF-Start-up’) 
and the SME Guarantee Facility (guarantee instruments, ‘SMEG’). The successor programme of MAP is the CIP/
EIP (see above).

Mezzanine: Type of high-yielding debt finance often seen in leveraged buy-out transactions and often featur-
ing an option or right to acquire shares in a firm at a preferential rate. Mezzanine finance often takes the form 
of subordinated convertible loans.

Microcredit: In the context of this audit, small loans (usually up to 25 000 euro) granted to micro-enterprises 
(as defined by the EU). Usually, these micro-enterprises obtain free business advisory and mentoring as well.

Moital: Ministry of Industry, Trade and Labour of the State of Israel

MoU: memorandum of understanding

NUTS: nomenclature des unités territoriales statistiques — a standard term defined by Eurostat. In the context of 
the ERDF, the Commission uses the so-called NUTS 2 regions.

Pari passu	treatment: Legal term used to describe the fact that two or more financial instruments have the 
same class in terms of repayment rights. The opposite of pari passu treatment is preferential investor/private 
sector treatment.

Preferential	investor	treatment: Term used in the context of this audit to describe situations when the 
public sector is not treated pari passu because the private sector (e.g. commercial banks, private investors) is 
treated preferentially. That means that public sector funds are in a lower class in terms of repayment rights.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

8

Public	funding: In the context of this audit and in conformity with the Structural Funds regulations, any pub-
lic contribution to the financing of financial engineering operations whose origin is the budget of the EU, the 
Member State, regional and local authorities and any similar expenditure.

Revolving: The concept that contributions to financial instruments, after a first utilisation (or cycle), get 
revolved (or reutilised, recycled). 

SBIC: Small Business Investment Companies Program — one of the financial assistance programmes available 
through the US Small Business Administration (SBA). It was created by the US Congress in 1958 to bridge the 
gap between entrepreneurs’ need for capital and traditional financing sources. The structure of the programme 
is unique in that SBICs are privately owned and managed investment funds, licensed and regulated by the SBA, 
that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments 
in qualifying small businesses. It is a government-sponsored fund of funds which invests long-term capital in 
privately owned and managed investment firms (licensees). The SBA does not invest directly into small busi-
ness through the SBIC program. The SBA provides support without any regional differentiation.

SME: small and medium-sized enterprise (as defined by the Commission) — in the 2007–13 programming 
period, this could also be any small business

SMEFF: SME Finance Facility — a facility under the Enlargement DG’s Phare programme (‘Poland and Hungary: 
Assistance for Restructuring their Economies’).

VC: venture capital — a specialist form of equity finance provided to new, small or risky unquoted firms

Winding	up: liquidation — a process that entails selling all the (holding) fund’s assets, paying off creditors, 
distributing any remaining assets to the owners and dissolving the fund

Working	capital: an enterprise’s current assets (short-term inventory + receivables + cash equivalents + cash) 
minus its current liabilities (short-term liabilities + prepayments)

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

9

EXECUTIVE  
SUMMARY

I.
Small and medium-sized enterprises (SMEs) are the 
backbone of the EU’s economy, generating employ-
ment, innovation and wealth. However, SMEs may suf-
fer from financing gaps, in that they cannot obtain 
access to the type and the amount of finance they 
need at a given time.

II.
To support entrepreneurship, the European Union 
(EU) mainly uses its enterprise policy and its cohe-
sion policy.

III.
Cohesion policy mainly uses grants and increasingly, 
in the European Regional Development Fund (ERDF) 
framework, financial instruments. 

IV.
Financial instruments are repayable and revolving 
instruments  that  ensure  that  successive  waves  of 
SMEs can benefit.

V.
The Court’s audit focused on the financial engineer-
ing measures co-financed by the ERDF during the 
2000–06 and the 2007–13 programming periods. The 
audit findings are based on a direct review of a sample 
of projects and on an examination of the Commission 
and Member States’ management, monitoring and 
information systems.

VI.
The main objective of the audit was to assess whether 
ERDF spending on financial engineering measures for 
SMEs had been effective and efficient.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

10

EXECUTIVE 
SUMMARY

VII.
The Court found that the effectiveness and efficiency 
of measures were hampered by important shortcom-
ings, mainly due to the inappropriateness of the cur-
rent regulatory framework of the Structural Funds:

(a)  The SME financing gap assessments, if available, 

suffered from significant shortcomings.

(b)  The Structural Funds regulations, originally de-
signed for grants, contain four important weak-
nesses, as they do not address the specificities of 
financial instruments (see paragraph 119).

(c)  Before funds reach SMEs, delays were significant 
and,  compared  with  other  EU  programmes  for 
SMEs, the ERDF’s ability to leverage private invest-
ments was poor.

VIII.
The Court recommends that:

(a)  When proposing financial engineering measures, 
the managing authorities should make sure that 
their proposal is duly justified by an SME gap as-
sessment of sufficient quality, including a quanti-
fied analysis of the financing gap. 

(b)  When approving operational programmes includ-
ing financial engineering measures, the Commis-
sion should verify their consistency with the SME 
gap assessment and make sure of the quality of 
the latter.

(c)  When  designing  proposals  for  the  Structural 
Funds  regulations,  the  legislator  and  the  Com-
mission  should  address  the  different  specific 
weaknesses mentioned in the report (see para-
graphs 48 to 77). More generally, the legislator 
and the Commission should provide a more ad-
equate regu latory framework so that the design 
and the implementation of financial engineering 
measures do not suffer from the deficiencies of 
the Structural Funds’ regulatory framework, geo-
graphical constraints and scattering effects. 

(d)  The  Commission  should  provide  a  reliable  and 
technically robust monitoring and evaluation sys-
tem specific to financial instruments. As a result, 
financial instruments should be segregated from 
pure grants in the Commission’s monitoring, re-
porting and auditing processes and the amount 
of  money  actually  paid  to  the  SMEs  should  be 
transparent. In particular, the Commission and the 
Member States should agree on a small number of 
measurable, relevant, specific and uniform result 
indicators for financial instruments.

(e)  The  Commission  should  explore  the  possibility 
of supplying to the Member States off-the-shelf 
financial engineering structures and instruments 
for SMEs (e.g. grants with royalties, dedicated in-
vestment vehicles) in order to speed up imple-
mentation and reduce management costs.

(f )  Member  States,  with  the  suppor t  of  the  Com-
mission, should aim at the inclusion of all ERDF 
co-financed financial instruments for SMEs into a 
single operational programme per Member State. 
This would rationalise the planning process and 
remove one of the key delaying factors found.

(g)  Apart from defining the concepts and definitions 
of leverage and recycling in the Structural Funds 
regulations,  the  Commission  should,  depend-
ing on the type of holding fund or fund, require 
contractually binding minimum leverage ratios, 
minimum revolving periods and data for the cal-
culation of leverage indicators.

(h)  If the above recommendations cannot be imple-
mented under the cohesion policy framework, the 
Court invites the legislator and the Commission 
to consider alternative ways of pursuing SME sup-
port through financial engineering instruments. 
In such a case, such instruments should either be 
supported by progammes centrally managed by 
the Commission, dedicated investment vehicles in 
cooperation with the Commission and the Mem-
ber States or by the Member States directly.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

INTRODUCTION

11

1  SMEs are defined in this 
report as per Commission 
Recommendation 2003/361/
EC of 6 May 2003 concerning 
the definition of micro, 
small and medium-sized 
enterprises (OJ L 124, 
20.5.2003, p. 36). An SME 
is an enterprise which 
employs fewer than 
250 employees and which 
has an annual turnover not 
exceeding 50 million euro 
and/or an annual balance 
sheet total not exceeding 
43 million euro. It must also 
satisfy the criterion of being 
an autonomous enterprise.

2 

‘Giving SMEs the credit 

they need’, Enterprise & 
Industry online magazine, 
European Commission, 
12.2.2009 and COM(2005) 551 
final of 10 November 2005.

3  Observatory of 
European SMEs, Analytical 
Report, November 2006–
January 2007, Flash 
Eurobarometer.

1.	

2.	

3.	

4.	

5.	

Small and medium-sized enterprises (SMEs)1 are the backbone of the EU 
economy, representing 99 % of all enterprises2. However, the financial 
markets are wary of investing in SMEs because they are perceived as 
riskier than large companies, especially if the SMEs are in innovative 
markets (ISMEs). 

According to the Observatory of European SMEs 3, limited access to fi-
nance is a problem for SMEs in Europe. Recent financial crises, which 
have  hit  some  Member  States  particularly  hard,  have  worsened  the 
situation. 

As the public sector has an important role to play in supporting SMEs, 
in particular the provision of suitable financing, the Commission has 
provided access to finance in various ways.

EU	COHESION	POLICY

The  EU  cohesion  policy  aims  at  strengthening  economic,  social  and 
territorial cohesion within the EU by reducing disparities between the 
EU regions. In the framework of cohesion policy, the ERDF explicitly 
provides for the possibility to contribute to SME access to finance by 
using overwhelmingly one-off grants that are, by their very nature, not 
reimbursable by the recipient. 

In the 2000–06 ERDF programming period and, to a greater extent, in 
the 2007–13 ERDF programming period, financial engineering instru-
ments (repayable instruments) have been used by the Commission and 
most Member States in the context of the EU cohesion policy. It is the 
development of these ERDF financial instruments which is the subject 
of this performance audit.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

12

EU	FINANCIAL	ENGINEERING	SUPPORT	TO	SMEs	
OTHER	THAN	COHESION	POLICY

6.	

As securing and improving access to finance for SMEs is so important, 
the EU has supported SME access to finance by two major means:

(a)  The development of specific programmes, the multiannual pro-
gramme for enterprise and entrepreneurship (MAP), which was suc-
ceeded by the entrepreneurship and innovation programme (EIP). 
The MAP and EIP combined represented 1,6 billion euro, from 2001 
to 2013. They are implemented by the European Investment Fund 
(EIF). The SME Guarantee Facility (SMEG), which is a part of the MAP 
and the EIP, has recently been the subject of an audit by the Court4.

(b)  The European Investment Bank (EIB) has implemented loan pro-
grammes amounting to approximately 70 billion euro (2001–10) 
aiming at improving access to finance for SMEs. These programmes 
are mainly funded by the EIB’s resources and without any funding 
from the EU budget5.

ERDF	FINANCIAL	ENGINEERING	SUPPORT	TO	SMEs

7.	

Over the last two programming periods, in the context of the cohesion 
policy, the Commission has encouraged repayable forms of assistance 
through financial engineering instruments. According to the Commis-
sion, this represents about 12 billion euro of the EU budget committed in 
favour of financial engineering measures across the EU Member States 6: 
1,6 billion euro (2000–06) and 10,4 billion euro (2007–13), out of which, 
respectively, 1,5 billion euro and 7,9 billion euro in payments to holding 
funds or funds contributing to financial engineering instruments. 

4  The objective of that 
Court’s ‘Audit of the 
SME Guarantee Facility’ 
(SR 4/2011) was to assess 
the effectiveness of the 
SMEG (see Glossary), 
notably the design and 
planning, the management 
of its operations and the 
achievement of its objectives. 
The Court considered 
that the framework for 
the management of daily 
operations is appropriate.  
The full report can be found 
on the Court’s website 
(http://eca.europa.eu).

5  Estimated number 
consolidated on the basis of 
the following EIB documents: 
SME Consultation 2007/2008 
of May 2008, Annual Report 
2006 of June 2007 and 
Annual Report 2010 of  
May 2011.

6  Amounts drawn from 
SFC database, European 
Commission, 8 June 2011.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

13

7  As stated by the 
Commission services, 
Member States have 
misinterpreted the 
classification rules of 
allocations and may have 
included other forms of 
finance than financial 
engineering instruments. 

8  For that period, financial 
instruments include 
instruments for enterprises 
that do not fit the EU’s SME 
definition, as well as urban 
development projects and 
energy efficiency projects.

9  See paragraph 4.32 of the 
Court’s 2010 Annual Report.

10  Council Regulation (EC) 
No 1083/2006 of 11 July 2006 
laying down general 
provisions on the European 
Regional Development Fund, 
the European Social Fund 
and the Cohesion Fund and 
repealing Regulation (EC) 
No 1260/1999 (OJ L 210, 
31.7.2006. p. 25).

11  The EIF is currently the 
holding fund manager in 
Bulgaria, Cyprus, Greece, 
Latvia, Lithuania, Malta, 
Romania and Slovakia, as 
well as for the French region 
of Languedoc-Roussillon 
and the Italian regions of 
Campania and Sicily.

8.	

9.	

10. 

11. 

12. 

Figures are indicative and should be treated with care 7, in particular 
for the 2007–13 programming period 8. This is mainly the result of the 
Commission not having detailed information on the funding of finan-
cial engineering instruments9. In addition, it remains unknown to what 
extent SMEs actually benefited from the amounts granted to holding 
funds and funds.

A brief summary of the total amounts involved per programming period 
is available in Annex I.

Currently, the regulation 10 specifies that financial engineering instru-
ments  can  be  used  for  three  purposes:  funds  for  the  support  of  en-
terprises, primarily SMEs, urban development funds and funds for the 
promotion of energy efficiency. 

The same regulation foresees that Member States may involve the EIF 
in the implementation of financial engineering instruments in three 
different ways:

 ο

 ο

preparing evaluations, i.e. the SME financing gap assessments;

acting as a holding fund; this is currently the case for eight Member States 
and three regions11;

 ο

acting as an adviser to national or regional authorities.

FINANCIAL	INSTRUMENT	MECHANISMS

The implementation of access to finance programmes requires the active 
involvement of financial intermediaries, which transform public funds 
into financial instruments for SMEs. Additional funds provided by the 
private sector may be added to the public funding, increasing the total 
amount available for investments in SMEs; this is how the Court defines 
the leverage effect. The leverage effect is schematically explained per 
category of financial instrument in Annex II.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

14

13. 

The majority of funds contributed by the operational programmes go 
to a selected holding fund (managed by the EIF, national institutions or 
others) then to selected intermediaries (see the Figure). Alternatively 
they may be transferred directly to selected financial intermediaries. 
In the context of financial engineering instruments, beneficiaries are 
financial intermediaries and SMEs are final recipients. 

FIGURE

FLOW	OF	FUNDS	FROM	AN	OPERATIONAL	PROGRAMME	DOWN	TO	THE	SME		
(SIMPLIFIED	ILLUSTRATION)

Operational programme

ERDF contribution

National contribution

Holding fund

(Optional)

Equity fund

and/or

Loan fund

and/or

Guarantee fund

Funding vehicle

Lending institution

-
-
-
-
-
-
-
-
-
-

Bank

SMEs

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

15

14. 

15. 

16. 

17. 

Three main types of financial instruments are to be distinguished:  equity, 
loan and guarantee instruments. They are all eligible instruments for 
ERDF co-financing, but must comply with EU and national eligibility 
rules (e.g. business transfer, working capital, state aid).

In the case of equity and loans, proceeds generated by, respectively, 
selling equity or servicing debt are supposed to be reused to finance 
additional financial instruments for other SMEs; this is the revolving 
effect.

12  COM(2010) 700 final 
of 19 October 2010, ‘The 
EU budget review, pp. 
4 and 20; ‘Management 
Plan 2010 (final version)’, 
Regional Policy DG, 
10  May 2010, pp.  6–7; 
‘Fifth report on economic, 
social and territorial 
cohesion,’ November 2010 
(preliminary version), 
pp. xv–xvi and 213–218.

In the case of guarantees, only in case of default is money actually being 
spent. If there is no default, the amounts contributed can be released 
when the underlying contractual conditions have been met.

According to recent strategic papers published by the Commission, it is 
very likely that financial engineering instruments will be developed fur-
ther in the next programming period12. Indeed, the responsible depart-
ment at the Commission, the Regional Policy DG, considers the leverage 
and revolving effects as the main advantages of financial instruments 
as opposed to grants. Other advantages of financial instruments often 
put forward are that they can: 

(a) 

supply sustainable SME funding on market-friendly terms;

(b) 

increase the financial expertise and know-how of public author-
ities and SMEs;

(c)  provide greater upfront financing for SME investment projects as 

compared to grants.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

AUDIT SCOPE AND APPROACH

16

The main objective of the audit was to assess whether ERDF spending 
on financial engineering instruments13 for SMEs has been effective and 
efficient.

13  In the context of this 
audit, these instruments are 
equity, loan and guarantee 
instruments for SMEs (see 
the Glossary).

The  Cour t  addressed  the  following  key  issues  of  effectiveness  and 
efficiency:

(a) 

the quality of the assessment of the SME financing gap;

(b) 

the  suitability  of  the  ERDF  framework  to  implement  financial 
instruments;

(c) 

the effectiveness and the efficiency of the financial instruments in 
achieving results.

The audit was carried out at the Commission and in five Member States 
(Germany, Hungary, Portugal, Slovakia and the United Kingdom). Based 
on figures provided by the Commission, these five Member States rep-
resent approximately 46 % and 30 % of the ERDF allocations to finan-
cial engineering instruments, respectively during the 2000–06 and the 
2007–13 programming periods. In selecting these Member States, atten-
tion has been paid to ensure sufficient diversity of financial instruments, 
funding structures and geographical balance.

A sample of 34 operations co-financed by the ERDF was assessed, 24 from 
the 2000–06 programming period and 10 from the 2007–13 program-
ming period. Annex I gives an overview of the total amounts committed 
and paid covered by this report, including their proportion out of the 
total of the ERDF.

18. 

19. 

20. 

21. 

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

17

22. 

23. 

24. 

25. 

Audit  work  included  documentation  review  and  meetings  with  rep-
resentatives of various public authorities and financial intermediaries 
responsible for the design, implementation and management of the 
financial engineering measures and instruments for SMEs.

Evidence has also been gathered from financial audits undertaken by 
the Commission or European Court of Auditors (‘the Court’) during the 
two  programming  periods,  desk  research  and  audit  meetings  at  the 
Commission and the EIF14.

The audit work at the EIF concerned two of the three kinds of services 
it delivered in the context of ERDF financial engineering measures for 
SMEs: preparing SME financing gap assessments and acting as a holding 
fund.

14  As a result, a number of 
additional observations were 
made concerning Germany, 
Estonia, Greece, Spain, France, 
Italy, Poland and the United 
Kingdom.

15  ERP in Germany, Moital’s 
programmes in Israel, the 
SBIC in the United States of 
America. See also Annex III.

16  The ETF-Start-up and 
GIF programmes for equity 
instruments, the SMEFF for 
loan instruments and the 
SME Guarantee Facility for 
guarantee instruments.

In the context of its benchmarking exercise, the Court has considered as 
good practice certain internationally reputable programmes15, as well as 
certain comparators found among centrally managed EU programmes 16. 
Indeed, all these programmes follow a similar intervention logic as SME 
access to finance programmes under the cohesion policy (except for 
the broad territorial cohesion objective). Indeed, they all have in com-
mon the pursuit of economic growth and job creation objectives by the 
development of enterprises through financial instruments.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

OBSERVATIONS

18

QUALITY	OF	THE	ASSESSMENT	OF	THE	SME	
FINANCING	GAP

26. 

The mismatch between the demand and the supply of the different types 
of financial instruments for SMEs, called the financing gap, constitutes 
the rationale for public intervention in the market. To be effective in 
meeting the real needs in terms of SME finance, ERDF operations should 
be based on a sound assessment of the financing gap17.

27. 

The Court examined the quality of the gap assessments and, in particular, 
whether the gap assessments:

(a) 

identified and quantified a need for public sector action in favour 
of financial engineering measures for SMEs;

(b)  were linked with the related operational programmes; 

(c)  were  made  available  sufficiently  in  advance  to  all  stakeholders 

concerned.

17  See Article 44(1) of 
Commission Regulation 
(EC) No 1828/2006 
of 8 December 2006 
setting out rules for the 
implementation of Council 
Regulation (EC) No 1083/2006 
laying down general 
provisions on the European 
Regional Development Fund, 
the European Social Fund and 
the Cohesion Fund and of 
Regulation (EC) No 1080/2006 
of the European Parliament 
and of the Council on 
the European Regional 
Development Fund (OJ L 371, 
27.12.2006, p. 1) and 
Commission/EIF memorandum 
of understanding (MoU) of 
May 2006.

Although  all  EIF  gap  assessments  followed  a  standard  methodology 
(i.e. a common template), they markedly showed uneven levels of qual-
ity. However, the Court identified the EIF’s gap assessment for Sweden 
as good practice and used it as a benchmark (see Box 1).

28. 

BOX	1

THE	EIF’S	GAP	ASSESSMENT	FOR	SWEDEN,	A	CASE	OF	GOOD	PRACTICE

The EIF’s gap assessment finalised in January 2007 included:

 ο a full analysis of nationwide demand and supply of SME finance by type of financial instrument and, where 

applicable, taking regional specificities into account;

 ο areas where the existence of financing gaps could or could not reasonably have been established;

 ο references to previous ERDF support or other EU access to finance schemes, including on the role of the 

EIB Group;

 ο information on the intended structuring of the co-financed funding of SME finance (fund allocation), includ-

ing a link with the operational programme submitted to the Commission for approval;

 ο information on which potential financial intermediaries could be capable of implementing the funding.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

19

29. 

30. 

31. 

32. 

2000–06:	GENERALLY	NO	GAP	ASSESSMENTS

During the 2000–06 programming period, the Commission and the Mem-
ber States generally did not assess the SME financing gap. Although 
1,60 billion euro had been spent on SME financial engineering measures, 
gap assessments were neither mandatory, nor recommended by the 
Commission.

Ex ante evaluations, as foreseen by the Structural Funds regulations18, 
did not include a proper SME financing gap assessment. For instance, in 
Portugal, SME schemes were funded without any preceding gap assess-
ment, whilst in Germany (regions of Berlin and North Rhine-Westphalia), 
the assessments made were not specific and their actual use by the 
relevant bodies is uncertain.

18  Council Regulation 
(EC) No 1260/1999 of 
21 June 1999 laying down 
general provisions on the 
Structural Fund (OJ L 161, 
26.6.1999, p. 1).

19  Commission/EIF 
memorandum of  
understanding of 
May 2006, point 4, 
second paragraph, p. 2. For 
the legal basis, see Article 45 
(Technical assistance at the 
initiative of the Commission) 
of Council Regulation (EC) 
No 1083/2006.

2007–13:	SIGNIFICANT	SHORTCOMINGS

For the 2007–13 programming period, there are no specific legal require-
ments for the existence and the use of SME financing gap assessments at 
operational programme level. However, the Commission, aware of their 
usefulness, decided in partnership with the EIF to co-finance gap assess-
ments carried out at the request of Member States and free of charge 19. 
These would be used for the preparation of operational programmes 
in order to set out objectives and resources to improve SME access to 
finance. 

Between 2006 and 2009, the EIF prepared 55 gap assessments at the 
optional request of 20 Member States, out of which 18 were reviewed 
during the audit. Apart from the gap assessments concerning audited 
Member States, additional gap assessments made for Spain, France and 
Poland were reviewed, as these three Member States represented the 
bulk of the gap assessments.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

20

20  Jeremie conference 
in Poznan, 8 April 2008, 
Regional Policy DG note to 
the file dated 23 May 2008 
and internal Regional Policy 
DG note ‘Contribution 
from GU to the Jeremie 
Steering Committee’ dated 
24 June 2008. Mission 
report, Warsaw, 17 July 2008, 
Regional Policy DG note to 
the file of 28 July 2008.

21  ‘Operations evaluation’, 
EIB Synthesis Report (Lessons 
learnt, p. iv) with Commission 
comments (released in 
September 2011).

33. 

34. 

35. 

36. 

37. 

38. 

THE	EIF	IDENTIFIED	AND	QUANTIFIED	A	NEED	FOR	PUBLIC	SECTOR	ACTION

For all gap assessments reviewed, the EIF quantified the financing gap 
and concluded that there was a need for public sector actions in favour 
of financial engineering for SMEs. 

However, the EIF only made scarce reference to previous EU SME  access 
to finance support within or without the context of the ERDF. If and when 
the EIF referred to such support, it did not attempt drawing lessons.

NO	CLEAR	LINK	WITH	THE	OPERATIONAL	PROGRAMMES

In none of the cases reviewed did the EIF gap assessments establish 
a link with the ERDF operational programmes they were pertaining to. 
The gap assessments prepared by the EIF were conducted independently 
from the operational programme process, often subject to delays and 
leading to a sub-optimal fund allocation from operational programme 
measures to financial instruments. 

As a result, when subsequent framework agreements (between Member 
States and holding fund managers) had to be negotiated, considerable 
operational programme constraints (e.g. allocation between different 
types of instruments, territorial constraints, monitoring and reporting 
requirements), not addressed in the gap assessments, resurfaced.

For instance, the Polish regional authorities were not satisfied with the 
level of quality of five regional gap assessments20. In other cases, the gap 
assessments were largely ignored in the context of the implementation 
of the operational programmes (e.g. Andalusia, Hungary).

The Commission did not require an independent evaluation or quality 
review of the gap assessments it ordered from the EIF. However, the EIB 
conducted an evaluation, which rated the gap assessments to be ‘partly 
unsatisfactory’, mainly criticising the delayed gap assessment process 
and a ‘variety of external problems’, including regulatory problems21.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

21

39. 

40. 

41. 

GAP	ASSESSMENTS	WERE	NOT	SYSTEMATICALLY	MADE	PUBLIC

In order to optimise the size and the quality of the supply of SME finance, 
it is necessary to raise as much as possible the stakeholders’ awareness 
of the specific SME financing needs. This means providing financial in-
termediaries as well as various SME interest groups and networks with 
the full gap assessments at the same time as the managing authorities.

22  Commission/EIF 
memorandum of  
understanding, Results  
of evaluations,  p. 2, 
30 May 2006.

Against the provisions of the memorandum of understanding22, in the 
majority of cases, the full reports were not published, but the Commis-
sion only published executive summaries. 

THE	SUITABILITY	OF	THE	ERDF	FRAMEWORK	FOR	
IMPLEMENTING	FINANCIAL	INSTRUMENTS	

An adequate regulatory and administrative framework is a critical success 
factor in delivering SME access to finance effectively and efficiently for 
the Member States and the numerous regions and financial institutions 
involved.

42. 

The Court examined whether:

(a) 

the legal and management frameworks took sufficient account of 
the specific nature of the different financial instruments;

(b) 

the use of the ERDF as a mechanism for the delivery of financial 
instruments was conducive to sound financial management;

(c)  Commission  monitoring  and  information  systems  were  fit  for 

purpose.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

22

23  For the 2007–13, 
programming period, 
Council Regulation (EC) 
No 1083/2006, implemented 
by Commission Regulation 
(EC) No 1828/2006 and 
subsequent amendments. 
For the 2000–06 
programming period, 
Council Regulation (EC) 
No 1260/1999, implemented 
by Commission Regulation 
(EC) No 1685/2000 and 
subsequent amendments.

24  Council Regulation (EC, 
Euratom) No 1605/2002 of 
25 June 2002 on the Financial 
Regulation applicable to 
the general budget of the 
European Communities 
(OJ L 248, 16.9.2002, p. 1), as 
amended on 14 April 2007.

25  Advice from the Regional 
Policy DG IAA (final report), 
4 March 2010, points taken 
from pp. 6–10.

43. 

44. 

45. 

46. 

THE	SPECIFIC	NATURE	OF	THE	DIFFERENT	FINANCIAL	INSTRUMENTS	
IS	NOT	SUFFICIENTLY	CONSIDERED	

The current Structural Funds regulations23 state that financial instruments 
include venture capital (a form of equity finance), loan and guarantee 
funds. They do not include any additional specific provisions on equity, 
loan and guarantee funds, which are fundamentally different, both from 
non-repayable instruments (grants) and between each other. The Finan-
cial Regulation24 is not specific to financial instruments either. 

As a result, the Commission manages repayable assistance to SMEs under 
the same legal framework as non-repayable grants. 

The Commission has recognised that this causes problems. For instance, 
a 2010 internal audit report 25 found that the design of the regulatory 
and strategic framework was not best suited to achieving objectives, and 
that the inadequate system design might have a strong adverse impact 
on performance and the reputation of the Commission. 

With the aim of helping Member States understand how the Structural 
Funds regulations should apply to support financial instruments, the 
Commission first issued two interpretative notes, limited in scope, in 
July 2007 and December 2008. Not until February 2011, four years after 
the start of the current programming period, did the Commission issue a 
comprehensive and relevant interpretative note on financial engineering 
instruments, which distinguishes the main types of financial instruments.

47. 

However, the Commission’s February 2011 interpretative note is not le-
gally binding and four major deficiencies in the Structural Funds regula-
tions remain:

 ο

 ο

 ο

insufficient leverage and fund revolving provisions;

the possibility to commit unjustified allocations to financial instruments;

the possibility for unjustified recourse to preferential treatment of the pri-
vate sector;

 ο

unclear eligibility conditions for working capital.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

48. 

49. 

50. 

51. 

INSUFFICIENT	LEVERAGE	AND	FUND	REVOLVING	PROVISIONS

A first deficiency is the absence in the Structural Funds regulations of 
clear reference to leveraging funds and revolving legacy funds in general 
and, in particular, as to how and until when these concepts are applic-
able26. As reiterated by the Commission on many occasions, these are key 
features of financial engineering instruments and even of the Structural 
Funds in the current programming period27.

The Structural Funds regulations do not stipulate a specific duration 
(10, 20, 30 years) or recycling factor (at least once, twice, three times) for 
the reuse of legacy funding where the latter has not been exhausted. In 
addition to that, the way in which equity, loan and guarantee funds le-
verage funding is fundamentally different, which has not been reflected 
in the regulations.

Whilst the February 2011 note acknowledges differences in the type of 
financial instruments, it makes little reference to their leverage effect, 
referring to the benefits of leverage, without defining it and setting any 
leverage requirements (leverage ratios, frequency and reutilisation of 
legacy funds)28.

Regarding the revolving nature of the funds, the interpretative note 
provides guidance by encouraging the ‘reallocation for the same type 
of action in the same region covered by the operational programme’ of 
public resources returned after a first investment cycle29. Nevertheless, 
managing authorities could always apply considerable discretion in the 
reutilisation of legacy funds, if any, as these could always be transformed 
back into non-reimbursable grants30, reducing the potential benefits of 
financial engineering instruments.

23

26  Paragraphs 106 to 113 
explain the poor leverage 
ratios achieved for equity and 
loan instruments.

27  Non-exhaustive examples 
include: Commission/ EIF 
MoU of 30 May 2006 signed 
by the Commissioner for 
Regional Policy and the EIF’s 
CEO, p. 4; Fourth Report 
on Economic and Social 
Cohesion of 30 May 2007, 
pp. 3–4, interpretative 
note COCOF/07/0018/01 
addressed to the Member 
States on 16 July 2007, p. 4.

28  ‘Selecting more than 
one financial engineering 
instrument may produce 
the best possible leverage 
effects for public resources 
contributed by the oper-
ational programme to involve 
as much as possible available 
resources and expertise from 
the private sector and to 
maximise opportunities to 
achieve the investment and 
development objectives of 
the operational programme. 
[…]’, interpretative note 
COCOF/10/0014/00, 
point 2.2.2.

29  Interpretative note 
COCOF/10/0014/00, point 
9.2.3.

30  See Commission 
Regulation (EC) No 
1685/2000 of 28 July 2000 
laying down detailed rules for 
the implementation of  
Council Regulation (EC) 
No 1260/1999 as regards 
eligibility of expenditure of 
operations co-financed by 
the Structural Fund  
(OJ L 193, 29.7.2000, p. 39) 
(Annex, Rule 8, Condition 2.6) 
and Article 43 of Regulation 
(EC) No 1828/2006.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

24

52. 

53. 

54. 

55. 

56. 

57. 

In Andalusia, for instance, the winding-up provision just mentioned that 
the remaining liquidated funds should be transferred to the regional 
treasury and then freely be used by the regional government. This meant 
that the legacy funding could be used to cover regular expenditure of 
the regional government or in the form of grants to other economic 
operators than small enterprises31.

Additionally, as explained later in paragraphs 78 to 83, the monitoring 
and information systems in place do not allow verification of whether 
an investment strategy, an exit policy and the winding-up provisions32 
effectively set out the terms and conditions under which legacy fund-
ing could be revolving. As a result the Commission does not receive 
sufficient information to monitor the revolving nature of the funds.

31  The Court’s Annual 
Report 2010, paragraph 4.33, 
example 4.4 (c).

32  Provisions as defined 
by the Commission under 
Article 43 of Regulation 
(EC) No 1828/2006 and as 
subsequently amended.

33  Article 44 of Regulation 
(EC) No 1083/2006.

POSSIBILITY	TO	COMMIT	UNJUSTIFIED	ALLOCATIONS	TO	FINANCIAL	INSTRUMENTS

A second deficiency is that under the current Structural Funds regula-
tion 33, Member States that have implemented holding funds are not 
subject to automatic decommitments during the life of the operational 
programme when holding fund disbursements have not taken place. 

As  mentioned  in  paragraph  32,  Member  States  were  not  obliged  to 
under take SME gap assessments. Hence, the legislator offered the pos-
sibility to make over-sized allocations to financial instruments.

It is only at the closure of the programme, more than two years after the 
end of the seven-year programme period, that the Commission will be 
in a position to regularise the situation.

One telling example of such an over-sized fund allocation is a guarantee 
fund in Italy (see Box 2).

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

25

POSSIBILITY	OF	UNJUSTIFIED	RECOURSE	TO	PREFERENTIAL	TREATMENT		
OF	THE	PRIVATE	SECTOR

A third deficiency is that Structural Funds regulations34 allow, without fur-
ther specification, the recourse to preferential private sector treatment 
over the public sector, in this case, the Structural Funds. This preferential 
treatment effectively occurs when contracts do not grant the ERDF the 
same repayment rights as the private co-funders (i.e. non-pari passu).

34  Regulations (EC) 
No 1685/2000 and 
(EC) No 1828/2006 as 
subsequently amended.

Preferential treatment may be justified to attract private investors or 
lenders by increasing their chances of getting reimbursed and receiving 
a better risk/return reward. However, its use must be carefully justified 
as it restricts the capacity to raise sufficient legacy funding for the next 
wave of SMEs.

58. 

59. 

BOX	2

CASE	OF	OVER-SIZED	FUND	ALLOCATIONS:	ERDF	GUARANTEES	IN	ITALY	(SARDINIA)

The managing authority of Sardinia did not request any gap assessment. Considering the target financial leverage 
of 10 combined with an average guarantee rate of 65 % laid down in the managing authority’s business plan35, 
the 233 million euro endowment of the fund would result in new guarantees to be issued of at least 3 585 mil-
lion euro, i.e. 51 % higher than the maximum expected amount of new guarantees as per the business plan.

This represents approximately 38 % of the outstanding loan stock of all Sardinian enterprises (currently at 
11 803 million euro), which is unrealistic. By mid-2011, 1,5 million euro out of a total endowment of 233 mil-
lion euro had been pledged against this fund. This excessive endowment is not subject to automatic decom-
mitments.

35  The managing authority’s business plan, in line with Article 43(2) of Regulation (EC) No 1828/2006, should be understood as the 
equivalent of the ‘investment strategy and planning’ further to the amendment required by Commission Regulation (EC) No 846/2009 
of 1 September 2009 amending Regulation (EC) No 1828/2006 setting out rules for the implementation of Council Regulation (EC) 
No 1083/2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion 
Fund and of Regulation (EC) No 1080/2006 of the European Parliament and of the Council on the European Regional Development Fund 
(OJ L 250, 23.9.2009, p. 1).

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

 
26

For this reason, managing authorities should assess whether preferen-
tial treatment exists and whether it is justified36. However, the current 
Structural Funds regulations do not specify this further, nor do the Com-
mission’s interpretative notes. 

Three cases of unjustified recourse to preferential treatment have been 
found in the English regions of, respectively, London, Merseyside, and 
Yorkshire and the Humber. If only one  of  the  lower-tier  funds  of  the 
holding funds had defaulted, the holding fund would have had to first 
repay the bank at the expense of the non-defaulting funds.

A fourth case was found in Hungary, where equity investors secured 
their return using a yield restriction clause at the expense of the public 
contributor and limited their risk by using a loss mitigation clause. As 
a result, the public contributor bears the full risk, but not the upside in 
the reward.

36  During the previous 
programming period, the 
Commission recognised 
that precautions should 
be taken to minimise 
distortion of competition 
in the venture capital 
and lending markets (see 
Condition 2.6 of Regulation 
(EC) No 1685/2000, as 
subsequently amended.

37  Interpretative note 
COCOF/10/0014/00, 
points 3.2.6 and 3.2.7. 

38  Commission reply of 
12 February 2009 to the EIF’s 
letter of 11 December 2008.

UNCLEAR	ELIGIBILITY	CONDITIONS	FOR	WORKING	CAPITAL

A fourth deficiency is the eligibility conditions for working capital, which 
has not been addressed in the Structural Funds regulations. In the in-
terpretative note of February 2011, the Commission considers that the 
financing of working capital that is not associated with a plan for the 
creation or expansion of an enterprise should not be supported through 
financial instruments37.

The use of the ambiguous term ‘expansion capital’ and the many excep-
tions to the use of working capital caused confusion among the financial 
institutions in the Member States. Indeed, the Commission took the view 
that working capital eligibility ‘must be examined and implemented on 
a case-by-case basis, taking properly into account and respecting ap-
plicable state aid legislation and rules’38.

The consequence of this legal uncertainty could, for instance, be felt in 
Hungary, where the managing authority stated that the Commission’s 
conditions were difficult to interpret, could not be monitored and in-
creased the risk to financial intermediaries to such an extent that they 
have lost interest in granting working capital under the ERDF.

60. 

61. 

62. 

63. 

64. 

65. 

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

27

39  Article 13 of Regulation 
(EC) No 1260/1999 and 
Article 35 of Regulation (EC) 
No 1083/2006. Interpretation 
confirmed to the Court’s 
auditors by the Regional 
Policy DG during the audit 
meeting of 1 December 2010.

40  SEC(2005) 433 final of 
6 April 2005, COM(2005) 
121 final of 6 April 2005.

66. 

67. 

68. 

69. 

70. 

CURRENT	CHARACTERISTICS	OF	THE	ERDF	HAMPERED	THE	SOUND	
FINANCIAL	MANAGEMENT	OF	FINANCIAL	INSTRUMENTS	

The characteristics of the ERDF that hampered the sound financial man-
agement of financial instruments are mainly its territoriality and its insuf-
ficient critical mass (scattering effect). These characteristics affected the 
ERDF throughout the different programming periods.

ERDF:	TERRITORIALITY	WITH	FAR-REACHING	CONSEQUENCES	FOR	SME	FUNDS

The first inherent characteristic of ERDF is its territorial approach. For its 
implementation, the 27 Member States have been divided into 271 sta-
tistically defined regions, i.e. usually at the level of NUTS 239.

This approach is in contradiction with a Commission statement that 
the competition, which European firms face, is increasingly global and 
innovation is seen as a global phenomenon that is not successful and 
sustainable in a closed environment40. Indeed, unlike ERDF co-financed 
repayable assistance, other SME financial instruments (ETF-Start-up, GIF, 
SME Finance Facility (SMEFF), SMEG, etc.) managed by the Commission 
are not subject to such territorial restrictions within the EU. 

In addition to that, several cases of good practice without regional re-
strictions were identified by the Court in the EU (Germany) and outside 
the EU (United States of America and Israel), some of which have been 
further explained in Box 3.

This regional split-up prevents the use of typical indicators pertaining 
to  financial  instruments  such  as  the  percentage  of  foreign  equity  in 
SME balance sheets, banking intermediation rates, default rates, loan 
rejection rates or equity-to-debt ratios. Indeed, such statistics, in many 
instances, do not exist at regional level or, at least, at the level of the 
regional split-up underpinning ERDF support.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

28

ERDF	DOES	NOT	PREVENT	THE	CREATION	OF	FUNDS	BELOW	CRITICAL	MASS		
(SCATTERING	EFFECT)

During the operational programme fund allocation process, public au-
thorities typically not acquainted with SME finance allocate public con-
tributions to funds in such a fashion that their size often reaches below 
critical mass. This is not only the result of the territorial approach as 
mentioned earlier on, but also of possibly different thematic operational 
programmes with multiple economic, environmental, social and terri-
torial objectives.

41  ‘Comparative Study of 
Venture Capital and Loan 
Funds Supported by the 
Structural Funds’, Final 
Report commissioned by the 
Regional Policy DG (Centre 
for Strategy and Evaluation 
Services, 2007).

Providing access to finance with fund sizes below critical mass is very 
likely to be unsustainable. This is because the overhead costs and the 
risks associated with investments or loans cannot be spread over a suf-
ficient number of SMEs41.

71. 

72. 

BOX	3

GOOD	PRACTICE	FOUND	IN	OTHER	SME	PROGRAMMES

In Germany, the European Recovery Programme (ERP) has not been fixed by any programme period term and 
has not been implemented regionally. As an evergreen national fund for the benefit of Germany’s enterprises, 
it is truly revolving, as legacy funding cannot be transformed back into grants.

The Small Business Investment Companies Program (SBIC) in the United States of America and the Ministry 
of Industry, Trade and Labour of the State of Israel (Moital)42 R & D Fund, Yozma and Technological Incubators 
programmes in Israel provide access to finance to small businesses without applying regional differentiation. 
For the SBIC, the focus is the accreditation and control of financial intermediaries, whereas for Moital, it is the 
strict focus on high-technology SMEs.

All these programmes emphasise other main factors, although important regional differences exist in Germany, 
the United States and Israel. 

42  See Annex III.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

 
29

73. 

In  the  United  Kingdom  and  Germany,  respectively,  433  million  and 
204 million euro were scattered during the 2000–06 programming pe-
riod across 31 regions in the United Kingdom (c. 14 million euro per 
region on average) and 21 regions in Germany (c. 10 million euro per 
region on average). In particular, 14 regional funding structures had less 
than 10 million euro to finance SMEs in the developed and populated re-
gions of Berlin, London, North Rhine-Westphalia and the West Midlands 
through several financial instruments. Moreover, in the case of Berlin, 
the funds had to distinguish SMEs according to their business location 
in five different territorial units43. 

43  In application of Articles 3, 
4 and 6 of Regulation (EC) 
No 1083/2006: Objective 1 
(core or transitional areas), 
Objective 2 (core or 
transitional areas) and 
non-eligible areas.

74. 

Table 1 shows fund sizes, including the private contribution, where ap-
plicable, in four different EU regions.

TABLE	1

FUND	SIZES	IN	THE	ERDF	REGIONS	OF	BERLIN,	NORTH	RHINE-WESTPHALIA,	
LONDON	AND	WEST	MIDLANDS	(FUND	NAMES	HAVE	BEEN	ANONYMISED)

COUNTRY

REGION

FUND NAME

FUND SIZE
(in million euro)

GERMANY

Berlin

Loan Fund A (Objective 1 compartment)

Loan Fund A (Objective 2 compartment)

Equity Fund A (Objective 1 compartment)

Equity Fund A (Objective 2 compartment)

North Rhine-Westphalia

Equity Fund D

Equity Fund O (Objective 2)

Equity Fund N (Objective 2)

London

Loan Fund H (loans operation)

Loan Fund G 

Loan Fund H (mezzanine operation)

UNITED KINGDOM

West Midlands

Equity Fund P

Equity Fund L

Loan Fund J

Equity Fund Q

Equity Fund M

Loan Fund I

Note: ECB pound sterling/euro rate as of 31.12.2008 (payment closure date): 1,0499.

4,52

7,22

1,26

4,14

0,41

7,98

5,95

3,62

1,88

0,82

13,12

13,08

7,08

6,23

3,46

1,00

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

30

75. 

76. 

77. 

In the case of three funds, respectively covering the regions of London, 
North Rhine-Westphalia and the West Midlands, the combined risk pro-
file and the small fund size actually put the entire fund portfolio at risk, 
because of an insufficient diversification of the risk taken by the fund. 

The risk that ERDF managing authorities may scatter SME finance is rele-
vant to the 2007–13 programming period as well. At the time of the 
audit, there was no evidence that the regions concerned would have 
fund sizes endowed with sufficient critical mass. A telling example has 
been highlighted in Box 4 (Slovakia).

Conversely, the setting-up of holding funds and funds with sufficient 
critical mass is facilitated when, according to its national laws, a Member 
State can consider its territory as a single region (Lithuania) or earmark 
financial engineering measures for one specific operational programme 
at multi-regional level (Portugal). At the same time, this facilitates im-
plementation, since only one managing authority has to be involved.

BOX	4

SUB-CRITICAL	MASS	IN	SLOVAKIA

In Slovakia, for instance, sub-critical fund sizes had originally been sourced from up to five different national 
operational programmes against the explicit advice of the EIF, the holding fund manager. 

The sub-critical mass size problem has been worsened by the application of the Commission concepts of ‘as-
sisted’ and ‘non-assisted’ areas, which are used in the context of compliance with EU state aid rules and are 
unrelated to the concept of the SME financing gap.

In order to secure a national exemption from state aid rules, the Slovak authorities defined Bratislava as a ‘non-
assisted region’. A third of all Slovak SMEs and half of Slovakia’s potential in research and development are based 
in the capital region. As a result, numerous SMEs have been excluded from the benefit of guarantee instruments 
and were allocated a very small amount in equity instruments.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

31

78. 

79. 

80. 

81. 

COMMISSION	AND	MEMBER	STATE	MONITORING	AND	INFORMATION	
SYSTEMS	DO	NOT	ADDRESS	THE	SPECIFICITIES	OF	FINANCIAL	
INSTRUMENTS

The combined complexity of financial instruments, shared management 
and the state aid and Structural Funds rules called for specific informa-
tion, communication and monitoring systems between the Commis-
sion, the managing authorities and the beneficiaries (the financial inter-
mediaries). In addition to that, given the new provisions of the 2007–13 
regulatory framework, Member States and other stakeholders particularly 
sought the Commission’s guidance and advice.

44  Advice by the Regional 
Policy DG IAA (final report), 
4 March 2010.

45  Advice by the Regional 
Policy DG IAA (final report), 
4 March 2010.

Under both the 2000–06 and 2007–13 programming periods, Member 
States and managing authorities have to correspond with the Regional 
Policy DG’s so-called ‘geographical desks’. Based on the Regional Policy 
DG’s internal audit findings, these desks were affected by a poor flow of 
information and limited transparency44.

During the 2007–13 programming period, the Commission set up a unit 
with responsibility, inter alia, for SME financial instruments supported 
by the ERDF. However, most staff were assigned to other unit activities. 

In practice, only three full-time equivalent staff were assigned to SME 
financial engineering instruments. With internal calls for sharing knowl-
edge and expertise with other directorates-general not having been 
followed45 and no specific information technology application accessible 
to Member States and stakeholders, the Commission may not have the 
means to provide appropriate guidance and advice.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

32

46  Articles 34 to 37 
of Regulation (EC) 
No 1260/1999 and Articles 63 
to 68 of Regulation (EC) 
No 1083/2006.

47  Article 35 of Regulation 
(EC) No 1260/1999 and 
Article 65 of Regulation 
(EC) No 1083/2006. Two 
exceptions, specific to the 
United Kingdom, have 
been found in London and 
the West Midlands, where 
monitoring committees met 
specifically to address the 
programming of financial 
engineering measures and 
instruments.

48  During the 2000–06 
programming period, in the 
regions audited in England 
and Germany, amounts 
labelled by the Commission 
under the ‘Financial 
engineering’ indicator have 
been found to comprise 
a majority of grants to SMEs 
or organisations supporting 
SMEs. For the 2007–13 
programming period, the 
Commission’s ‘Financial 
engineering’ indicator 
disappeared altogether.

49  E.g. ‘jobs maintained, 
created’, ‘actions in favour of 
local initiatives’, ‘enterprises 
having improved quality.’’

50  Interpretative note 
COCOF/10/0014/00, Annex II 
Template Monitoring Report 
(Commission, February 2011).

51  In the context of this 
performance audit, only 
leakage effects in the form 
of unjustified management 
costs have been considered.

82. 

The standard cohesion policy monitoring instruments put in place for 
the ERDF46 are inadequate or not adapted for the purpose of financial 
instruments.

(a)	 Annual	implementation	reports, with the exception of the United 
Kingdom, do not report specifically on the performance of financial 
engineering instruments.

(b)  The legal remit of monitoring	committees is to monitor at oper-
ational programme level47. Consequently, they are generally not in 
the position to address the specificities of the different types of 
financial engineering instruments. 

(c)	 Operational	programme	indicators do not make the distinction 
between financial instruments (repayable instruments) and grants 
(non-repayable instruments)48. As a result, most of the indicators 
used — output-oriented ‘macro-indicators of development’ 49 —
are not helpful for assessing the progress of financial engineering 
instruments.

83. 

Aware of this weakness, in its interpretative note of February 2011 the 
Commission recommended to the 27 Member States that they report 
on over 100 suggested indicators50.

EFFECTIVENESS	AND	EFFICIENCY	OF	THE	FINANCIAL	
INSTRUMENTS	IN	ACHIEVING	RESULTS

84. 

When assessing the effectiveness and efficiency of the ERDF in delivering 
financial instruments, the Court examined whether and to what extent:

(a)  SME finance was subject to delays;

(b)  unjustified management costs reduced funds actually available for 

SME financing (leakage effects)51; 

(c) 

the public funds leveraged private funding.

WIDESPREAD	DELAYS

85. 

The timeliness of delivering SME access to finance could be assessed 
as compared with the start of the respective operational programmes, 
respectively, in 1999/2000 and 2007.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

33

Apart from the reputational risk that delays to access to finance pro-
grammes may cause, the likely knock-on effects of delays would affect 
the capacity of the Commission to recycle funds in the 2007–13 pro-
gramming period and in the following programming periods. 

Whenever delays in delivering SME access to finance occur, funds cannot 
spend the money SMEs could be entitled to in the form of financial in-
struments. From the point of view of the managing authority, this entails 
that the alternative, using grants for SMEs, becomes more attractive.

The main causes of delays in both programming periods have been sum-
marised in Table 2. Delays have been widespread across Member States. 
Some causes of delay have re-occurred in the current programming 
period and, apart from ‘obtaining private sector contribution’, delays are 
less related to volatile financial circumstances than to administrative, 
legal, organisational or strategic reasons.

86. 

87. 

88. 

TABLE	2

MAIN	CAUSES	OF	DELAY	IN	IMPLEMENTING	ERDF	FINANCIAL	INSTRUMENTS

CAUSES FOR DELAYS

MEMBER STATES OR REGIONS

2000–06

Time-consuming structuring and negotiations

Berlin, London, North Rhine-Westphalia, Portugal, West Midlands

State aid issues in Objective 2 regions

Commission guidance on fund structures

Obtaining private sector contribution

London, North Rhine-Westphalia, West Midlands

Berlin, London

London

2007–13

Time-consuming structuring and negotiations

Greece, London, Hungary, Poland, Slovakia

Obtaining private sector contribution

Administrative reasons

Management cost negotiations

Governance arrangements

Uncertainty of working capital eligibility 

Negotiating entity not a managing authority

London, West Midlands, Hungary

Andalusia, Greece, Poland, Sardinia

Poland, Slovakia

Greece, Slovakia

Hungary

Slovakia

Note: Delays may not concern all types of financial instruments to be supplied; delays of less than two years from operational 
programme approval date have been ignored; categories have been simplified by the auditors; all categories based on 
evidence.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

34

52  Letter addressed 
to Poland’s Supreme 
Audit Institution dated 
3 January 2011, the contents 
of which have been verified 
with Regional Policy DG 
internal files.

89. 

90. 

91. 

92. 

93. 

A few telling examples have been set out in the following paragraphs, 
one taken from the previous and three from the current programming 
period.

In Germany, funds started very late in the 2000–06 programming period, 
causing at least three funds in Berlin and North Rhine-Westphalia to be 
unable to spend the foreseen amounts of SME financing of, respectively, 
24,4 million euro, 13,6 million euro and 2,6 million euro. This represented 
underutilised funds ranging from 18 % to 87 % of the amount originally 
planned. 

In Greece, the holding fund agreement was signed in June 2007 and 
well before that Member State’s sovereign debt crisis unfolded. As of 
30 June 2011, only 0,21 % of the 250 million euro holding fund has ef-
fectively been paid out to SMEs. It is only since April 2011 that Greek 
SMEs started receiving ERDF support. As the Hellenic Republic and the 
EIF signed the holding fund agreement early, calls for tenders could have 
been issued directly by the holding fund manager if only the Member 
State had not delayed the holding fund’s governance arrangements, 
notably by making these dependent on appointments within managing 
authorities involved and in the fund’s investment board.

In Slovakia, as of June 2011 and five years after the EIF and the Slovak 
Republic signed a memorandum of understanding, SMEs have been left 
without ERDF funding. The fund allocation from the different operational 
programmes and the terms and conditions with respect to the estab-
lishment of the holding fund were only finalised in January 2011. The 
financial intermediaries have not been procured and management costs 
have already been incurred since October 2009.

In Poland, from 2008 until June 2011, SMEs have not been funded by the 
ERDF. After deciding not to appoint the EIF as holding fund manager, the 
Republic of Poland appointed its development bank, Bank Gospodarstwa 
Krajowego, which has yet to agree with five regional authorities on a uni-
form system of management costs. The Polish Ministry of Regional Devel-
opment referred to the legal and organisational difficulties of the Joint 
European Resources for Micro to Medium Enterprises (Jeremie) initiative 
and, in particular, to the need to widely interpret the Structural Funds 
regulations in view of their complexity52.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

35

94. 

95. 

96. 

97. 

LEAKAGE	EFFECTS

It is normal market practice that SMEs can be charged management 
costs by financial intermediaries. However, in the context of the ERDF, 
such costs are generally paid directly from the operational programme 
to the financial intermediaries as reimbursement or compensation for 
managing the funds53.

53  Drawn from Interpretative 
note COCOF 10/0014/04, 
point 2.6.

ADDITIONAL	CHARGES	TO	THE	SMEs	…

Commission guidance (including two interpretative notes of 2007 and 
2011) does not set the terms and conditions, which would prevent SMEs 
being charged costs that are not based on actual SME risk taken or ser-
vice provided by the financial intermediaries. 

In Saxony-Anhalt (Germany) and Estonia, the financial intermediaries 
appointed by the respective managing authorities charged individual 
SMEs for the refinancing and processing costs, a practice found follow-
ing Court audits in 2009. Refinancing and processing costs are items of 
ordinary operating expenditures for financial intermediaries.

In England as well, SMEs were charged arrangement, handling, moni-
toring and other types of fees on top of the usual market charges. The 
status of handling and monitoring fees in terms of impact on eligible 
expenditure declarations at closure is currently being investigated by 
the Commission as part of audit inspections conducted in the English 
regions.

...	NOT	ALWAYS	VERY	TRANSPARENT	

98. 

Because the Commission does not legally consider the SME to be the 
beneficiary and because Member States do not always report manage-
ment costs correctly, there have been instances where management 
costs borne by the SMEs are unknown.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

36

54  According to the 
Commission communication 
COM(2011) 662 on the ‘EU 
debt and equity platforms’ 
(p.7), leverage can be 
achieved through co-
financing by international 
financial institutions or 
through the additional debt 
volumes banks and guarantee 
institutions are requested to 
provide final beneficiaries 
(in the Communication SMEs 
are here referred to as ‘final 
beneficiaries’).

55  In some very rare cases, 
Member States’ co-financing 
takes the form of private 
commercial loans.

99. 

100. 

Out of the 16 equity funds audited, the management costs of four of 
them could not be estimated due to a lack of available data at the time 
of the audit. 

For instance, in North Rhine-Westphalia, neither the managing authority, 
nor the appointed fund manager, could provide information about the 
management costs actually incurred by the region. Indeed, documenta-
tion on the calculation of the interest rate charged, including the mar-
gin for financing management costs, could not be provided. Additional 
costs for supporting SMEs (including costs of external consultants) were 
financed through the funds in the case of one early stage equity fund, 
but an overview of these costs could not be provided either. 

101. 

The absence of robust management cost information is not confined 
to equity funds, but is a more widespread problem. In 11 out of the 
34 operations audited, management cost rates could not be established, 
because information on management costs was not available or was not 
reliable.

POOR	RECORD	OF	THE	ERDF	IN	ATTRACTING	PRIVATE	MONEY

102. 

The Commission and other international players in the field of SME fi-
nance (see paragraph 25) consider that attracting private sector funding 
is one of the main advantages of supporting SMEs through financial 
instruments 54. As a result, the Court defines leverage as the extent to 
which private funding has been attracted, as set out in Box 5.

103.  When public funding is limited to the EU contribution (like in EU cen-
trally managed programmes) both calculations give the same result. 
However, the situation is generally different in the context of cohesion 
policy. Member States’ co-financing of operational programmes gener-
ally constitutes public funding. This may be national funding, regional   
funding or could take other forms of public aid55.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

37

104.  Whereas the Commission includes Member State co-financing to an 
operational programme as a contribution in the multiplier effect, the 
Court's ratio does not consider this as a contribution to the leverage 
effect. Indeed, Member State co-financing is not specific to financial 
instruments. Such Member State co-financing exists for any cohesion 
policy action, including also traditional non-reimbursable grants.

105. 

At the level of the holding funds, the audit did not come across signifi-
cant leverage from the private sector. This was true for both program-
ming periods. Indeed, there are typically no explicit leverage require-
ments in the funding agreements between the managing authorities 
and the financial intermediaries, except for certain equity funds in the 
United Kingdom, which had binding leverage requirements for private 
co-investors.

BOX	5

LEVERAGE

The Court calculated leverage as follows:

Finance	to	final	recipients 
Public	contributions56

Using the Court’s calculation method, Annex II gives a schematic overview of how leverage works for 
each main category of financial instrument and, in the context of the ERDF, how the concept of leverage 
is to be understood. For instance, a leverage ratio of 1,00 means that no private funding was raised at all.

In August 2011 the Commission formalised the concept of ‘multiplier effect’, which corresponds to:

Finance	to	final	recipients
EU	contribution

The numerator of both the Court's leverage ratio and the Commission's multiplier ratio are identical. 
Regarding the denominator, while the Court sums up all public funding, the Commission solely takes 
into account the EU contribution.

56  This includes both the ERDF contribution and, as is normal for the ERDF, co-financing provided by the Member State. 
In the exceptional case of the United Kingdom, the private sector provided the Member State’s funding in accordance with the 
regulations’ co-financing rules; this funding was taken into account as private funding and not as public funding, applying the 
principle of substance over form.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

38

57  External evaluation of the 
EIP for the Enterprise and 
Industry DG, pp. xi, 63 and 67, 
30 April 2009. Evaluator 
figures deemed plausible 
on the basis of a preceding 
and independent evaluation 
of MAP (2001–05) for the 
Enterprise and Industry DG, 
which mentioned already 
in 2004 that ET-Start-up 
reached a leverage of 4,00. 
Furthermore, based on the 
June 2009 figures of the EIF 
quarterly report (issued after 
the 2009 evaluation), the 
figures for the programmes 
were 4,91 and 6,52, 
respectively, for equity 
instruments that started 
under the 1998 and the 2001 
programmes.

58  Weighted figures for 
Germany, Portugal and the 
United Kingdom based on 
Tables 3a and 3b, Annual 
Report ETF-Start-up, 
21 October 2009, data as 
at 30 June 2009.

106. 

For  equity  and  loan  instruments,  the  Court  found  that  the  leverage 
achieved has not been significant and lower than comparator bench-
marks. For guarantee instruments, in contrast, leverage was very high. 

LEVERAGE	OF	ERDF	EQUITY	INSTRUMENTS

107. 

For this type of financial instrument, the Court audited:

(a) 

five VC funds focusing on high-technology SMEs (ISMEs);

(b)  12 risk capital funds with less or no focus on high technology.

108. 

109. 

110. 

Table 3 shows that the leverage ratios achieved ranged from around 1 
(no leverage of private funding) to 2,75. 

As a benchmark, the Court has used the ETF-Start-up Facility, which 
is funded centrally by the Commission and is accessible to all eligible 
financial intermediaries in the EU under the fiduciary management of 
one fund manager, the EIF. The facility is designed for VC and focuses 
on relatively risky SMEs.

The ETF-Start-up Facility has achieved an average aggregate leverage 
ratio of 4,6 (1998–2008) and 6,50 (2001–08) and also succeeded in gen-
erating revenues for the Commission 57. More specifically, in Germany, 
Portugal and the United Kingdom, where the ERDF was equally active, 
leverage ratios achieved by the ETF-Start-up Facility were, respectively, 
4,88, 5,93 and 5,0358. On the other hand, from April 2000 until June 2010, 
leverage ratios achieved by the ERDF for the audited funds (in Table 3) 
ranged from 1,09 to 2,75.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

39

TABLE	3

LEVERAGE	OF	EQUITY	INSTRUMENTS	AUDITED		
(FUND	NAMES	HAVE	BEEN	ANONYMISED)

Member States

Fund name

Product description

Leverage ratio

High-technology funds

Germany

United Kingdom

Equity Fund B

Equity Fund L

VC (high-tech)

VC equity (high-tech)

United Kingdom

Equity Fund M

VC equity (early stage high-tech)

United Kingdom

Germany

Other funds

Germany

Portugal

Portugal

United Kingdom

Germany

United Kingdom

Hungary

Hungary

Portugal

Equity Fund N

Equity Fund D

Equity Fund A

Equity Fund G

Equity Fund H

Equity Fund O

Equity Fund C

Equity Fund P

Equity Fund E

Equity Fund F

Equity Fund I

VC equity (early stage high-tech)

VC (early stage high-tech)

Risk capital (multi-sector)

VC equity fund-of-funds

VC equity (multi-sector)

VC equity (early stage creative)

Risk capital (multi-sector)

Film fund

VC equity (multi-sector)

VC equity (multi-sector)

VC equity (tourism sector)

United Kingdom

Equity Fund Q

VC equity (early stage creative)

Slovakia

Slovakia

Equity Fund J

Equity Fund K

VC equity outside Bratislava region

VC equity in Bratislava region

2,26

2,01

1,95

1,89

1,33

2,75

2,22

2,12

1,89

1,88

1,78

1,72

1,43

1,33

1,09

-

-

Notes: 
—  Equity Funds E and F were in the investment start-up phase at the time of the audit visit.
—  Leverage  ratios  calculated  on  the  basis  of  figures  transmitted  during  the  audit  by  the  fund  manager  or  the 

managing authority.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

40

111. 

112. 

LEVERAGE	OF	ERDF	LOAN	INSTRUMENTS

Irrespective of any benchmark, Table 4 shows that 5 out of the 10 loan 
funds did not leverage any private funding at all, whereas the other loan 
funds showed very limited leverage.

As a benchmark, the Court has used the SME Finance Facility (SMEFF), 
which  was  used  in  central  and  east  European  countries  that  joined 
the EU in 2004 and 2007 before they achieved that status. The SMEFF 
pro vided grants (mainly performance fees, but also so-called ‘techni-
cal assistance’) to networks of local financial intermediaries through 
international financial institutions 59. These grants were conditional to 
the effective set-up and the revolving of SME debt portfolios of a pre-
defined size. 

59  The Commission worked 
with three international 
financial institutions: CEB/KfW, 
EBRD and EIB.

60  SMEFF — EIB’s Semi-
Annual Report 2009, p.1. EU/
EBRD SME Finance Facility 
Semi-annual Operational 
Report, p. 70, June 2009.

61  End Report on the MAP 
(SMEG), 31 December 2006, 
p. 7.

113. 

The EU’s SMEFF leveraged private funding achieving leverage ratios usu-
ally exceeding 5 and reaching up to 12,5 and 19,2 60. From 1998 until 
June 2009 and depending on the implementing financial intermediary, 
SMEFF achieved leverage ratios ranging from 2 to 12,5 in Hungary and 
from 4 to 10 in Slovakia. 

114. 

115. 

LEVERAGE	OF	ERDF	GUARANTEE	INSTRUMENTS

Fewer guarantee funds were subject to the audit (six, see  Table 5), as 
the United Kingdom and the regions audited in Germany generally do 
not use ERDF guarantees.

The leverage ratios achieved varied greatly, with the highest being 171. 
Even the lowest ratio (4,16) of a guarantee fund in Hungary and which 
started  operating  in  November  2008  is  a  higher  leverage  ratio  than 
achieved by any of the equity and loan funds. These levels of leverage 
compare well with the SME Guarantee Facility (SMEG, see paragraph 6(a)) 
that cumulatively leveraged 67 times each euro of public money spent 
from 2001 until 200661.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

41

TABLE	4

LEVERAGE	OF	LOAN	INSTRUMENTS	AUDITED		
(FUND	NAMES	HAVE	BEEN	ANONYMISED)

Member States

Fund name

Product description

Leverage ratio

Other funds

United Kingdom

United Kingdom

United Kingdom

Hungary

Hungary

Germany

Hungary

Hungary

Hungary

United Kingdom

Loan Fund G

Loan Fund H  
(2 operations)

Loan Fund I

Loan Fund B

Loan Fund C

Loan Fund A

Loan Fund D

Loan Fund E

Loan Fund F

Loan Fund J

Long-term senior loans to social enterprises

Senior loans (multi-sector)

Senior loans (multi-sector)

Microcredits, small loans

Microloans (multi-sector)

Microloans, loans

SME loans

Working capital loans

Working capital loans

Microloans (multi-sector)

1,67

1,67

1,41

1,33

1,10

1,00

1,00

1,00

1,00

1,00

Note:  Leverage  ratios  calculated  on  the  basis  of  figures  transmitted  during  the  audit  by  the  fund  manager  or  the 
managing authority.

TABLE	5

LEVERAGE	OF	GUARANTEE	INSTRUMENTS	AUDITED		
(FUND	NAMES	HAVE	BEEN	ANONYMISED)

Member States

Fund name

Product description

Leverage ratio

Portugal

Portugal

Portugal

Portugal

Hungary

Slovakia

Guarantee Fund B

Guarantees

Guarantee Fund C

Guarantees

Guarantee Fund D

Guarantees

Guarantee Fund E

Counter-guarantees

Guarantee Fund A

Guarantees

Guarantee Fund F

First loss portfolio guarantees

171,00

114,00

80,00

11,00

4,16

-

Note:  Leverage  ratios  calculated  on  the  basis  of  figures  transmitted  during  the  audit  by  the  fund  manager  or  the 
managing authority.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

CONCLUSIONS AND RECOMMENDATIONS

42

QUALITY	OF	THE	ASSESSMENT	OF	THE	SME	
FINANCING	GAP

116.  Generally, during the 2000–06 programming period, gap assessments 

did not exist at all.

117.  During the 2007–13 programming period, where they existed, all SME 
gap  assessments  concluded  that  there  was  a  need  for  public  sector 
intervention in various forms and they quantified the SME financing 
gap. However, in the 2007–13 programming period, there are signifi-
cant shortcomings in the quality of the gap assessments. In particular, 
the critical link between the different programme allocations and the 
financing gap identified was not established.

118. 

An independent review of the quality of the gap assessments and of 
their underlying process did not take place.

RECOMMENDATION	1

(a)  When proposing financial engineering measures, the managing authori-
ties should make sure that their proposal is duly justified by an SME gap 
assessment of sufficient quality, including a quantified analysis of the 
financing gap. 

(b)  When approving operational programmes including financial engineer-
ing measures, the Commission should verify their consistency with the 
SME gap assessment and make sure of the quality of the latter.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

43

SUITABILITY	OF	THE	ERDF	FRAMEWORK	TO	
IMPLEMENT	FINANCIAL	INSTRUMENTS	

119. 

The Structural Funds regulations, which were originally designed for 
grants, contain four important weaknesses, as they do not address the 
specificities of financial instruments. These weaknesses regard the insuf-
ficient provisions for leverage and revolving funds, the justification of 
allocations to financial engineering, the conditions to justify the recourse 
to preferential private sector treatment and the eligibility conditions 
for working capital. Not until February 2011, four years after the start of 
the current programming period, did the Commission issue a compre-
hensive and relevant interpretative note on financial instruments (see 
paragraphs 46 and 47). 

120.  Delegating the implementation of co-financed financial instruments to 
a large number of public authorities means that the same amount of 
ERDF funding that could theoretically be available for all SMEs in a Mem-
ber State under a single framework has to be scattered across a large 
number of EU regions, thus affecting the critical mass of the funds.

121.  Where they existed, suitable monitoring and information systems were 
ill-equipped to inform on and monitor  the  sound financial  manage -
ment of the funds. Despite the experience of the 2000–06 programming 
 period, this prevented the Commission from reporting relevant informa-
tion that was useful to decision-makers and stakeholders operating in 
the context of the cohesion policy. 

RECOMMENDATION	2

(a)  When designing proposals for the Structural Funds regulations, the le-
gislator and the Commission should address the different specific weak-
nesses mentioned in the report (see paragraphs 48 to 77). More gener-
ally, the legislator and the Commission should provide a more adequate 
regulatory framework so that the design and the implementation of 
financial engineering measures do not suffer from the deficiencies of 
the Structural Funds’ regulatory framework, geographical constraints 
and scattering effects.

(b) 

The Commission should provide a reliable and technically robust moni-
toring and evaluation system specific to financial instruments. As a re-
sult, financial instruments should be segregated from pure grants in 
the Commission’s monitoring, reporting and auditing processes and 
the amount of money actually paid to the SMEs should be transparent 
(see paragraph 8). In particular, the Commission and the Member States 
should agree on a small number of measurable, relevant, specific and 
uniform result indicators for financial instruments. 

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

44

122. 

123. 

EFFECTIVENESS	AND	EFFICIENCY	OF	THE	FINANCIAL	
INSTRUMENTS	IN	ACHIEVING	RESULTS

The implementation of financial instruments for SMEs through the ERDF 
has been affected by widespread delays. Some of the reasons for delays 
during the 2000–06 programming period have recurred in the 2007–13 
programming period. 

ERDF co-financed financial instruments have also been subject to leak-
age effects in terms of management costs. In particular, some SMEs have 
been charged additional costs not based on the SME risk taken and the 
reporting of management costs has not always been transparent

124. 

Except for guarantees, leverage ratios for ERDF co-financed funds im-
plementing financial instruments (as defined by the Court) were poor.

RECOMMENDATION	3

(a) 

The Commission should explore the possibility of supplying to the Mem-
ber States off-the-shelf financial engineering structures and instruments 
for SMEs (e.g. grants with royalties, dedicated investment vehicles) in 
order to speed up implementation and reduce management costs. 
 Examples of such structures have been described in Annex III.

(b)  Member States, with the support of the Commission, should aim at the 
inclusion of all ERDF co-financed financial instruments for SMEs into a 
single operational programme per Member State. This would rationalise 
the planning process and remove one of the key delaying factors found.

(c) 

Apart from defining the concepts and definitions of leverage and re-
cycling in the Structural Funds regulations, the Commission should, 
depending on the type of holding fund or fund, require contractually 
binding minimum leverage ratios, minimum revolving periods and data 
for the calculation of leverage indicators.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

45

GENERAL	RECOMMENDATION	

If the above recommendations cannot be implemented under the cohesion 
policy framework, the Court invites the legislator and the Commission to con-
sider alternative ways of pursuing SME support through financial engineering 
instruments. In such a case, such instruments should either be supported by 
programmes centrally managed by the Commission, dedicated investment 
vehicles in cooperation with the Commission and the Member States or by the 
Member States directly.

This report was adopted by Chamber II, headed by Mr Harald NOACK, Member of 
the Court of Auditors, in Luxembourg at its meeting of 11 January 2012.

For t he  Co u r t  of Au di t ors

Vítor Manuel da SILVA CALDEIRA
President

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

46

A N N E X 	 I

CO M M I T M E N T S 	 A N D 	 PAYM E N T S 	TO 	 F I N A N C I A L 	 E N G I N E E R I N G	
I N S T R U M E N T S

2000–06

Audited Member 
States

Commitments 
(in million euro)

%

Payments
(in million euro)

%

Germany

Hungary

Portugal

Slovakia

United Kingdom

Total

204

-

106

-

433

742

13

-

7

-

27

46

170

-

88

-

410

668

11

0

6

0

27

45

EU	TOTAL

1	596

100

1	497

100

2007–13

Audited Member 
States

Allocations  
(in million euro)

%

Payments
(in million euro)

%

Germany

Hungary

Portugal

Slovakia

United Kingdom

Total

EU	TOTAL

1 370

770

292

30

614

3	075

10	393

Source: European Commission (Regional Policy DG).

13

7

3

0

6

30

100

710

669

233

27

230

1	868

7	879

9

8

3

0

3

24

100

Remarks:
 ο

Sums of percentages may differ due to rounding before the decimal.

 ο

 ο

For the 2000–06 programming period, final recipients were exclusively SMEs.

For the 2007–13 programming period, financial instruments include instruments for enterprises that do not fit the EU’s 

SME definition, as well as urban development projects and energy efficiency projects. 

 ο

At least for the 2007–13 programming period, the accuracy of figures is subject to caution, as Member States have 

misinterpreted the classification rules of allocations and may have included other forms of finance than financial 

engineering instruments.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

47

A N N E X 	 I I

S C H E M AT I C 	 O V E R V I E W 	 O F 	T H E 	 L E V E R AG E 	 CO N C E P T 	 A S 	 A P P L I E D 	TO	
E Q U I T Y,	 LO A N 	 A N D 	 G UA R A N T E E 	 I N S T R U M E N T S

E Q U I T Y

Operational programme

ERDF contribution

National contribution

1 million euro

+

4 million euro

5 million euro

Equity Fund A

Banks

10 million euro

Funding vehicle

Funding vehicle

20 million euro

10 million euro

Equity Funds B
Investors C, D

Equity Funds B
Investors C, D

SME

SME

SME

SME

SME

SME

Leverage	ratio:

Funding	available	to	SMEs:	20	million	euro	
Operational	programme	funding:	5	million	euro

Leverage	ratio	=	4

Remarks:
 ο

This schematic overview is purely given for illustration purposes.

 ο

The public contribution corresponds to the operational programme funding.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

48

A N N E X 	 I I

LO A N S

Operational programme

ERDF contribution

National contribution

1 million euro

+

2 million euro

Loan fund

Banks

5 million euro

8 million euro

Lending institution

Capital markets

10 million euro

18 million euro

SME

SME

SME

SME

SME

SME

Leverage	ratio:

Funding	available	to	SMEs:	18	million	euro		
Operational	programme	funding:	3	million	euro

Leverage	ratio	=	6

Remarks:
 ο

This schematic overview is purely given for illustration purposes.

 ο

The public contribution corresponds to the operational programme funding.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

49

A N N E X 	 I I

G UA R A N T E E S

Operational programme

ERDF contribution

National contribution

2 million euro

+

4 million euro

Guarantee fund

Banks

-

-

-

Guarantees for 6 million euro in 
portfolio losses (no money flow)

-

-

-

-

SME
credit risk portfolio

120 million euro

120 million euro

SME

SME

SME

SME

SME

SME

Leverage	ratio:

Funding	available	to	SMEs:	120	million	euro	
Operational	programme	funding:	6million	euro

Leverage	ratio	=	20

Remarks:
 ο

This schematic overview is purely given for illustration purposes.

 ο

The public contribution corresponds to the operational programme funding.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

 
 
 
 
 
 
 
50

A N N E X 	 I I I

E X A M P L E S 	 O F 	 O F F - T H E - S H E L F 	 I N S T R U M E N T S 	 A N D 	V E H I C L E S

GRANTS	ASSORTED	WITH	ROYALTY	PAYMENTS:	THE	EXAMPLE	OF	MOITAL,	ISRAEL

In Israel, most aid schemes for SMEs (R & D Fund, Technological Incubators, Heznek, …), even though they use 
non-reimbursable grants, condition the payment of the grant to the commitment of the beneficiary SME to pay 
royalties in case of success. Royalties are calculated on the basis of sales or profit. The benefit of grants assorted 
with royalty payments is that they are less complex than financial engineering instruments, whilst focusing on 
SMEs with potential in research and development. For more information, see http://www.moital.gov.il/.

DEDICATED	INVESTMENT	VEHICLES

 ο European	Recovery	Programme: ERP is an evergreen national fund managed by KfW for the benefit of 
Germany’s enterprises with, as one of its main characteristics, its revolving nature. For more information, 
see http://www.bundesfinanzministerium.de/

 ο Israel’s	Yozma	Fund: When it was still a state-owned fund, its principle was the co-investment of public 
funds and private investor funds under a minimum leverage ratio requirement of 2,5. It invested in Israeli 
start-up companies in high-technology sectors. A key feature of this programme was that it provided both 
the Israeli government and private investors to share the profit pari passu. As the private sector partners 
were given an option to buy the government’s share during the first five years at a cost of LIBOR+1 plus 
royalties until the end of the funding period, the government could subsequently reinvest these proceeds 
in new funds or SMEs. For the Israeli government, Yozma yielded 40 million US dollars in profit. For more 
information, see http://www.yozma.com/overview/

 ο The	European	Progress	Microfinance	Facility: The Commission’s European Progress Microfinance Facility 
does not directly provide financing to SMEs, but enables microfinance institutions in the EU countries to 
increase lending to them. This is done by issuing guarantees to microfinance institutions thereby sharing 
their risk and by increasing their microcredit volume through funded instruments (i.e. loans and equity). For 
more information, see http://ec.europa.eu/social/

 ο The	European	Fund	for	Southeast	Europe	(EFSE): EFSE’s main investment activity is the refinancing of 
selected partner lending institutions in the region of south-east Europe and the European eastern neighbour-
hood region with senior or subordinated credit lines, whereby the borrower obliges himself to on-lend the 
funds to the final target groups, including micro and small enterprises and low-income private households. 
A large sponsorship characterises this fund, which includes international financial institutions (EBRD, EIB, 
KfW, etc.), the Commission, as well as public and private financial institutions. For more information, see 
http://www.efse.lu

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

51

REPLY OF THE 
COMMISSION

EXECUTIVE	SUMMARY

IV.
The revolving character of financial instruments may not 
be  present  in  financial  instruments  implemented  under 
other policy areas, for which the resources returned to the 
financial instruments at the end of the investment period 
or at winding up must be returned to the EU budget. This 
specific feature embedded in the Structural Funds regula-
tions1 will be continued in the future2.

VII.	(a)
The  Commission  agrees  on  the  impor tance  to  provide 
funding  to  financial  instruments  corresponding  to  the 
needs as identified in a gap analysis. 

The relevant observations by the Court are partly covered 
by the proposal for CSF regulation COM(2011) 662 final.

VII.	(b)
The  regulator y  framework  for  the  period  2007–13  may 
have  been  insufficiently  detailed  to  provide  the  neces-
sary environment for a significant increase of the cohesion 
policy assistance delivered through financial engineering 
instruments.

The  Commission  proposals  for  the  next  programming 
period  take  into  account  the  experience  gained  in  the 
previous  periods,  providing  a  detailed  implementation 
framework.

VII.	(c)
Those delays were in most cases explained by the novelty 
of the instruments in cohesion policy and by the state aid-
related  issues.  Financial  instruments  financed  from  the 
ERDF are implemented in a shared management manner. 
There is a certain trade-off between the application of the 
subsidiarity principle (implementation by Member States 
and their managing authorities at regional level as close as 
possible to the final recipients and in accordance with the 
diversity of their needs) and the slower implementation.

1 

In paragraph 2.6 of Rule 8 under Commission Regulation 

(EC) No 1685/2000, Article 78(7) of Council Regulation (EC) No 1083/2006.

2  As  proposed  by  the  Commission  in  Articles  38  and  39  of  the 
Commission’s proposal on the common provisions for the funds under 
shared management for the period 2014–20 (COM(2011)  615 of 6  October 
2011).

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

52

REPLY OF THE  
COMMISSION

VIII.	(f )
The Commission can concur with the aims of this recom-
mendation. In the proposals for the new cohesion policy 
framework, the Commission has opened the possibility of 
Member States contributing to EU-level instruments. Fur-
thermore they include incentives where the whole priority 
axis is delivered through financial instrument4.

However,  the  implementation  of  cohesion  policy  pro -
grammes and the underlying actions (including financial 
instruments) under shared management and by national 
or regional authorities are fundamental elements of cohe-
sion policy.

VIII.	(g)
In  the  2014–20  period,  the  concepts  and  definitions  of 
le verage and revolving will be developed in the secondary 
legislation, which will also be aligned as much as possible 
with the concepts used for all instruments implemented 
with EU budget funding, as foreseen in the Commission 
communication COM(2011) 662 on the ‘EU debt and equity 
platforms’  and  which  will  also  be  regulated  in  the  dele-
gated  act  regarding Title VIII  of  the  amended  Financial 
Regu lation. However, achieving high leverage ratios must 
be  balanced  with  public  policy  objectives  of  co hesion 
policy.

VIII.	(h)
The Commission welcomes the Court’s recommendations 
for  the  improvement  of  the  legal  framework  for  imple -
menting financial instruments as part of the cohesion pol-
icy. With the experience gained in the current and previous 
programming periods and the improvement of the regu-
latory  framework  in  line  with  the  Court’s  recommenda-
tions the Commission considers that financial instruments 
should continue to be used as important instruments for 
the implementation of the cohesion policy, including their 
possible extension to new thematic areas, as a more sus-
tainable  and  efficient  way  of  delivering  EU  resources  to 
support cohesion policy objectives.

4  Article 110(5) of the Commission proposal COM(2011) 615.

VIII.	(a)
The Commission welcomes this recommendation which 
is covered by the Commission’s proposal for the new the 
cohesion policy framework3.

This requirement will be further detailed in the implement-
ing legislation.

VIII.	(b)
For  the  future  programming  period  the  emphasis  will 
be  placed  in  ensuring  that  each  financial  instrument  is 
‘based  on  an  ex  ante  assessment  which  has  identified 
market failures or suboptimal investment situations, and 
investment needs’. When approving the operational pro-
grammes emphasis will be placed on ensuring alignment 
with EU2020 strategic priorities, identification/fulfilment of 
ex ante conditionalities and evaluation of the rationale for 
the form of support proposed.

VIII.	(c)
Given the expected increase in the importance of financial 
instruments in the future, the Commission’s proposals for 
the future CSF regulations include more detailed and clear 
rules  regarding  the  use  of  financial  instruments. These 
rules build upon the experience accumulated in the cur-
rent programming period and will be further detailed in 
the implementing legislation.

VIII.	(d)
The Commission welcomes this recommendation which is 
already covered in the Commission’s proposals for the new 
cohesion policy framework. These proposals also include 
specific provisions regarding monitoring and reporting of 
financial instruments. Furthermore, the Commission notes 
that already in the current programming period it man-
aged to gather important monitoring information on exist-
ing financial instruments, and this without the legal obli-
gation of the Member States to provide such information.

VIII.	(e)
The Commission welcomes the Court’s recommendation 
regarding off-the-shelf instruments which is covered in the 
proposal for the new programming period.

3  Article 32 of the Commission proposal COM(2011) 615 requiring that 
financial instruments should be ‘based on an ex ante assessment which 
has identified market failures or suboptimal investment situations, and 
investment needs’.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

53

REPLY OF THE  
COMMISSION

38.
The gap assessments were carried out by the EIF, the body 
of the EU with special expertise and responsibility in imple-
menting EU budget support to enterprises, thus an inde-
pendent assessment was not deemed necessary.

40.
The Commission and the EIF made available the full reports 
to  the  relevant  authorities  of  the  Member  States  con-
cerned. National authorities were entirely free to publish 
the full reports and some of them did so6.

43.–44.	Common	reply	
The  Commission  acknowledges  that  current  Structural 
Funds regulations as well as the Financial Regulation do 
not contain specific provisions on venture capital, loans 
and guarantee funds.

However,  the  proposed  Structural  Funds  regulations  for 
the 2014–20 programming period as well as the proposal 
for the revision of the Financial Regulation contain detailed 
provisions in that area.

In addition, the Commission made sure that both set of 
proposals are coherent with each other.

46.
The Commission made significant efforts to improve the 
guidance framework for the implementation of financial 
engineering instruments in cohesion policy. The Commis-
sion guidance notes issued in 2007 and 2008 addressed 
the  issues  which  were  identified  at  the  time  as  need-
ing specific clarification. The Commission guidance note 
issued in February 2011 is more comprehensive and cov-
ers a much wider range of issues which were raised by the 
national authorities and partners concerned as part of the 
process of the rolling out of financial engineering instru-
ments throughout the vast majority of Member States and 
regions.

6  http://ec.europa.eu/regional_policy/archive/funds/2007/jjj/doc/pdf/
jeremie_sme_access.pdf 

INTRODUCTION

8.
In July 2011, Member States did provide the Commission 
with data on their implementation of financial engineering 
instruments on voluntary basis.

The proposed amendment of the current Structural Funds 
regulations and the next generation of these regulations 
(2014–20) will require Member States to provide this kind 
of information on a regular basis.

12.
The  Commission  has  a  different  concept,  measur ing 
the  multiplier  effect  of  the  EU  contribution.  See  para-
graph 102 and reply5.

AUDIT	SCOPE	AND	APPROACH

25.
The ‘internationally reputable programmes’ identified by 
the report have limitations to be used as benchmarks for 
EU cohesion policy instruments since the cohesion policy 
objectives and the regulatory framework have specificities 
not present in other programmes.

OBSERVATIONS

31.
The  Commission  agrees  that  there  was  no  such  legal 
requirement  at  the  level  of  programming.  However,  at 
the level of each financial engineering instrument there is 
a legal requirement of gap assessment. The result of this 
assessment should be reflected in the funding agreement.

The  Commission’s  proposals  for   2014–20  include  the 
requirement that the ex ante evaluation should cover inter 
alia ‘the rationale for the form of support proposed’.

34.
At   t h e   t i m e   o f   p re p a r i n g   g a p   a s s e s s m e n t s,   m o s t   o f 
the 2000–06 programmes were still ongoing.

5  Such a concept has been expressed in the 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’ (COM(2011) 662 of 19 October 2011), Section 2.3.4.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

54

REPLY OF THE  
COMMISSION

47.
Although the Commission guidance notes are not legally 
binding, they provide technical guidance to the attention 
of public authorities, practitioners, beneficiaries or poten-
tial beneficiaries, and other bodies on how to interpret and 
apply the EU rules in this area, on the basis of the applic-
able EU Law.

47.	first	indent
The Commission refers to its replies to relevant paragraphs 
below.

47.	second	indent
The Commission refers to its replies to relevant paragraphs 
below.

47.	third	indent
The Commission refers to its replies to relevant paragraphs 
below.

47.	fourth	indent
The Commission refers to its replies to relevant paragraphs 
below.

48.
For the 2014–20 period, the Commission intends to intro-
duce provisions regarding leverage in the implementation 
framework, while ensuring sufficient flexibility to accom-
modate the characteristics of each product, each market 
gap to be addressed, beneficiaries targeted and financial 
intermediaries involved.

Regarding  the ‘funding  revolving  provisions’,  they  were 
amply  de veloped  in  the  Commission  guidance  note 
of 2011 7. There are references to the revolving nature in 
the cohesion policy legal framework8.

The  details  on  how  and  when  this  concept  is  applic-
able  var y  between  the  type  of  the  financial  instrument 
and between the regions (the gap assessment will show 
needs and features of the specific financial instrument). 
These details should be therefore reflected in the funding 
agreements.

49.–50.	Common	reply	
The Structural Funds regulations for the periods 2000–06 
a n d   2 0 0 7 – 1 3   a l l owe d   t h e   re u s e   o f   re s o u rc e s   fo r   a n 
indefinite  per iod  until  exhaustion.  Howe ver,  for  the 
period 2014–20 the Commission’s proposals foresee a mini-
mum period of 10 years.

51.
The Commission agrees with the Court’s observation. For 
the current period the regulations require that resources 
re t u r n e d   to   t h e   o p e r a t i o n   f ro m   i nve s t m e n t s   u n d e r -
taken  shall  be  reused  by  the  competent  authorities  of 
the Member Sate concerned for the benefit of SMEs. For 
the 2014–20 period the Commission proposes that Mem-
ber  States  should  have  provisions  in  place  to  ensure 
the revolving nature of financial instruments for at least 
10 years.

52.
The point raised during a DAS audit by the Court has been 
followed  up. The  relevant  winding-up  provisions  have 
subsequently  been  amended  to  be  consistent  with  Art-
icle 78(7) of Regulation (EC) No 1083/2006.

53.
Under shared management and in line with the subsidi-
arity principle, the Commission does not monitor in detail 
the  implementation  of  individual  operations,  I t  is  the 
responsibility of national authorities to ensure that indi-
vidual operations are implemented in accordance with the 
applicable legal provisions. In 2011, the Commission devel-
oped an audit framework shared with Member State audit 
authorities to verify the correct implementation of finan-
cial instruments until closure of the programmes.

7  Sections 5.2 and 9.2 as they correspond to legal obligations under 
Article 78(7) of Regulation (EC) No 1083/2006 and Article 43(3)(d) and 
Article 44(2)(i) of Regulation (EC) No 1828/2006.

8  Second paragraph of Article 78(7) of Regulation (EC) No 1083/2006 
on the use of resources returned to the operation from investments 
undertaken and Article 43(3)(d) and Article 44(2)(i) of Regulation (EC) 
No 1828/2006 concerning the provisions in the funding agreement on 
the reutilisation of resources returned.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

55

REPLY OF THE  
COMMISSION

54.
The holding fund needs to have certain liquidity to ensure 
smooth investments in enterprises. The investment strat-
egy and/or business plan required by the regulations must 
give proper estimation of funds needed.

60.
The Commission guidance note 10 considers that, on the 
basis of state aid legislation, investment shall be effected 
pari passu. However, different arrangements, subject to the 
approval of a specific state aid scheme, are also possible.

The  Commission  guidance  notes  of  2008  and  2011  rec-
ommended  Member  States  or  managing  authorities  to 
exercise restraint regarding payment of contributions into 
funds, namely by making such payments in phases in line 
with the underlying investment strategy and/or business 
plan.

The  Commission’s  proposals  for  the  2014–20  regulation 
provide for more strict discipline, imposing that amounts 
disbursed to FEIs be effectively invested in final recipient.

55.
The Commission refers to its reply to paragraph 31.

56.
The Commission refers to its reply to paragraph 54.

58.
Preferential treatment of the private sector as foreseen in 
the  regulations  is  an  important  factor  to  attract  private 
investors to co-invest with public funds in areas of high 
risk/low return, pursuing public policy objectives.

The overall purpose is to address market gap failures when 
implementing  financial  engineering  through  Structural 
Funds, which can require non-pari passu aspects. All non-
pari passu instruments must comply with state aid rules 
enforced by the Commission.

59.
Preferential treatment concerns only the gains and other 
earnings  generated  by  investments,  as  foreseen  in  the 
regulations9.

9  Article 43(5) of Regulation (EC) No 1828/2006 and paragraph 2.6 of 
Rule 8 of Regulation (EC) No 1685/2000.

Each  managing  authority  must  take  a  deliberate  policy 
decision, as part of the investment strategy and business 
plan,  as  to  the  degree  of  private  sector  involvement  in 
addressing public policy objectives and the level of legacy 
funds expected to be created.

61.
The cases mentioned by the Court cannot be considered 
as  cases  of  unjustified  preferential  treatment  of  private 
investors. The first priority for the allocation of resources 
retur ned  to  the  funds  was  the  discharge  of  existing 
debt, with a view to reduce the funds’ liabilities (includ-
ing interest on debt) and free liquid resources for onward 
investments.

62.
Yield restriction clauses are in line with the regulations. 
Preferential treatment is an important factor to attract pri-
vate investors to co-invest with public funds in areas of 
high risk/low return, pursuing public policy objectives.

63.
Structural Funds should not be used just to finance a nor-
mal business activity for enterprises which do not corres-
pond  to  the  eligibility  requirements  of  the  regulation 11. 
The possibility of financing working capital as part of the 
expansion of a business activity was already foreseen in 
the Commission guidance note of 16 July 2007 and was 
further developed in the Commission guidance note of 21 
February 2011 to make clearer that financing of working 
capital in early stages, or as part of the seed capital for new 
enterprises is acceptable.

10  COCOF 10-0014004, paragraphs 8.1.7 and 8.1.8.

11  Article 45 of Regulation (EC) No 1828/2006 provided for support to 
enterprises only at their establishment, in the early stages, including seed 
capital, or an expansion.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

56

REPLY OF THE  
COMMISSION

64.
The term ‘expansion’ referred to in Structural Funds regula-
tions is in line with the approach and the terminology of 
state aid legislation12.

65.
The Commission guidance was further developed in 2011 
to  make  clear  that  financing  of  working  capital  in  early 
stages, or as part of the seed capital for new enterprises 
can be financed. In this respect, the Commission does not 
share the observation of the Hungarian managing author-
ity that conditions were difficult to interpret.

The Commission considers it is good practice in line with 
cohesion policy that a Member State did not finance work-
ing capital under the ERDF.

66.
Territoriality and insufficient critical mass have impact on 
the attractiveness of the financial instrument and certain 
financial  conditions  (relatively  high  management  cost). 
These  elements  are  known  a  priori  (in  a  business  plan/
strategy) and should be then assessed by the managing 
authority.

68.
The Commission’s staff working document quoted by the 
Court refers to a financial instrument which implements 
enterprise  policy.  It  should  therefore  not  be  compared 
with regional policy which has different objectives13.

69.
The Commission considers that the examples mentioned 
by the Court cannot be used as a comparator for finan-
cial engineering instruments implemented under cohesion 
policy. These cases do not share cohesion policy objec-
tives, as expressed in the Treaty14.

12  Section 4.3.2 of the Community guidance on state aid to promote risk 
capital investments in SMEs (2006).

13  The objective of cohesion policy is to create new opportunities and 
reduce gaps in income levels between regions, while the objective of 
SMEFF is to enhance the competitiveness at European level.

14  Regarding economic, social and territorial cohesion and the aim to 
reduce ‘disparities between the levels of development of the various regions 
and the backwardness of the least favoured regions’.

71.
The  operational  programme  allocations  were  agreed 
in 2007. At that time in certain regions/countries the gap 
assessments and strategies did not exist. For many Member 
States this is the first attempt to develop financial instru-
ments. This is why certain critical mass was not reserved in 
the relevant programmes.

72.
The  Commission  shares  the  view  that  it  is  necessary  for 
a holding fund to have a critical mass but it considers that 
in  some  circumstances  it  is  justified  to  have  funds  with 
smaller sizes to achieve cohesion policy objectives.

75.–76.	Common	reply	
The managing authorities and fund managers decided and 
accepted to implement such funds on the basis of their 
potential viability.

78.
Under the policy and legal framework applicable to Struc-
tural Funds the approval, monitoring and control of indi-
vidual operations fall within the responsibility of managing 
authorities. For its part the Commission must satisfy itself 
that the Member States set up adequate management and 
control systems.

The Member States sought and the Commission provided 
guidance  on  2007–13  provisions  not  only  on  financial 
engineering,  but  also  on  other  impor tant  elements  of 
implementation.

79.
T h e   fo l l o w - u p   m a d e   b y   t h e   s a m e   i n t e r n a l   a u d i t   i n 
2011 considered that the advice given by the report men-
tioned by the Court had been addressed and therefore this 
matter was considered closed.

80.
The ‘financial engineering’ unit set up within the Regional 
Policy DG has a broader mission.

81.
Following the internal audit report the situation described 
has been overcome. Namely, comprehensive guidance has 
been provided to Member States, and working arrange-
ments  with  other  DGs  have  been  intensified  as  well  as 
internal information sharing and training.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

57

REPLY OF THE  
COMMISSION

However  and  in  parallel  to  this  process,  the  EIF  worked 
with  the  regions  on  the  implementation  proposals  and 
negotiated contractual arrangements.

95.–98.	Common	reply
The Commission’s guidance note of 21 February 2011, did 
provide  elements  regarding  possible  conflict  between 
costs  and  fees  charged  to  final  recipients  and  manage-
ment costs and fees declared to the Commission as eli-
gible  expenditure. Whenever  the  Commission  detected 
additional  charges  to  SMEs,  these  were  corrected. The 
Commission  issued  additional  guidance  to  prevent  the 
occurrence of this situation.

101.
The 2007 CSES ‘Comparative study of venture capital and 
loan  funds  supported  by  the  Structural  Funds’  includes 
very useful information regarding management costs. The 
study is available at http://ec.europa.eu/regional_policy/
sources/docgener/studies/pdf/2007_venture.pdf.

102.-103.	and	Box	5	Common	reply
The Commission has a different concept, measuring the 
multiplier effect of the EU contribution.

Box 5 
S e c t i o n   2 . 3 . 4   o f   t h e   C o m m i s s i o n   c o m m u n i c a t i o n 
COM(2011) 662 final emphasises the importance of lever-
age effect.

The Commission refers to its reply to paragraph 104.

The  Commission  formalised  the  concept  of ‘multiplier 
effect’ with a view to harmonising various concepts and 
calculation  methods  to  measure  leverage  for  financial 
instruments supported by the EU budget.

104.
In accordance with the applicable regulations, cohesion 
policy co-financing obligation is set at programme level. 
Individual operations (e.g. funds) may have national co-
financing or not at all. Therefore the Commission does not 
agree with the approach used by the Court to calculate 
leverage for the ERDF.

82.
Please refer to the Commission’s reply to paragraph 78.

88.
Setting up financial engineering instruments under Struc-
tural Funds implied a whole new concept for some Mem-
ber States, which required a learning process. In the future 
programming period either the already established funds 
will continue or new funds based on models proposed by 
the Commission can be established, an element which is 
expected to avoid delays.

90.
Resources not used through financial engineering instru-
ments can be reprogrammed for other forms of assistance.

91.
The  signature  of  the  Jeremie  holding  fund  agreement 
between the EIF and Greece for the initial amount of 100 
million euro took place in June 2007, while the related cost 
letter was signed in October 2008. In June 2009, Greece 
transferred the amount of 100 million euro from EU ERDF 
funds to the Jeremie fund, to be transformed into finan-
cial engineering to enhance access to finance to SMEs in 
Greece.

On  5  Oc tober  2010,  Greece  and  the  EIF  entered  into 
a  funding  agreement  whose  purpose  was,  inter  alia,  to 
restate  and  replace  the  initial  funding  agreement  and 
cost  letter,  and  increase  the  relevant  amount  from  100 
million euro to 250 million euro. The additional funds of 
150 million euro transferred to the holding fund in early 
November 2010 are earmarked to support the ICT sector 
and  IC T-related  projects,  an  area  of  significant  strategic 
importance for Greece to foster innovation and improve its 
competitiveness.

92.
The funding agreement marking the start of the fund was 
signed in October 2009, after which the first payments to 
the holding fund took place.

93.
The delay in Poland was also related to issues of national 
regulatory framework, i.e. the requirement for all benefi-
ciaries (including holding funds) to provide collateral in 
the amount of ERDF financing received to guarantee good 
per formance  of  the  contract.  Since  only  BGK,  the  state-
owned bank, was formally exempt from that regulation, the 
Ministry of Regional Development needed to amend this 
le gislation. This process, in consultation with the Ministry 
of Finance, took a considerable amount of time.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

58

REPLY OF THE  
COMMISSION

CONCLUSIONS	AND	RECOMMENDATIONS

116.
The Commission considers that the requirement on the ex 
ante evaluation of the operational programme 16 serves as 
gap assessment for financial engineering instruments as 
a specific type of assistance.

117.
The  Commission  agrees  on  the  impor tance  to  provide 
funding  to  financial  instruments  corresponding  to  the 
needs as identified in a gap analysis.

The relevant observations by the Court are partly covered 
by the proposal for CSF regulation (COM(2011) 662 final). 
More exhaustive provisions will be included in the second-
ary legislation.

The gap assessments should obviously have an adequate 
level of quality.

118.
Each  gap  assessment  was  provided  to  the  managing 
authority  concerned  and  to  the  respective  ser vices  of 
the Commission to be taken account in programming of 
co hesion  policy  resources  and  in  the  identification  and 
selection of operations to be funded. The gap assessments 
were  carried  out  by  the  EIF,  the  EU  body  with  special 
expertise and responsibility in implementing EU budget 
support to enterprises through financial instruments.

Recommendation 1 (a)
The Commission welcomes this recommendation which 
is  covered  by  the  Commission’s  proposal  for  the  new 
co hesion policy framework17.

This requirement will be further detailed in the implement-
ing legislation.

16  Article  41  of  Regulation  (EC)  No  1260/1999  requires  that  ex ante 
evaluation covers inter alia: analysis of strengths, weaknesses and potential 
of the Member State, region or sector concerned; assessment of the 
consistency between the strategy and targets. It should take into account 
the situation in small and medium enterprises.

17  Article 32 of the Commission proposal COM(2011) 615 requiring that 
financial instruments should be ‘based on an ex ante assessment which 
has identified market failures or suboptimal investment situations, and 
investment needs’.

106.
See the reply to paragraph 25. The key objectives of the 
cohesion policy as expressed in the Treaty are economic, 
social and territorial cohesion and the aim to reduce ‘dis-
parities  between  the  levels  of  development  of  the  vari-
ous regions and the backwardness of the least favoured 
regions’. The Commission notes that the comparators used 
by the Court do not primarily reflect these objectives.

108.
Since  ERDF  financed  equity  instruments  were  mainly 
implemented in assisted areas and aimed to address sec-
tors of market failure, the Commission considers that the 
achieved leverage ratio as measured by the Court is signifi-
cantly positive15.

109.
Applying  the  Commission’s  methodology  for  calculat-
ing the multiplier effect to both the Structural Funds and 
the ETF would bring the ratios closer. However, the Com-
mission considers that the ETF has limitations to be used 
as  a  comparator  for  risk  capital  investments  supported 
through the Structural Funds.

110.
Please refer to the reply to paragraph 102.

111.
See the reply to paragraph 102.

112.-113.	Common	reply
I t  is  not  appropriate  to  compare  SMEFF  with  financial 
engin eering  instruments  implemented  under  cohesion 
policy.

The  SMEFF  is  a  facility  providing  banks  with  financial 
incentives to promote bank lending to SMEs. The SMEFF 
did not co-finance loans, as did the ERDF funds covered 
by the report, therefore they are not comparable products.

Moreover, loans funded by the ERDF target directly SMEs 
and are focused on regional funding, where private sector 
investment remains more difficult.

15  The ‘Community  guidelines  on  state  aid  to  promote  risk  capital 
investments in small and medium sized enterprises’ clearly define the case 
for public support to risk capital investments in areas of market failure. One 
of the conditions for compatibility of public support with state aid rules is 
that ‘at least 50 % of the funding of the investments made under the risk 
capital measure must be provided by private investors, or for at least 30 % 
in the case of measures targeting SMEs located in assisted areas’.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

59

REPLY OF THE  
COMMISSION

121.
The policy and legal framework applicable to Structural 
Funds is such that the approval, monitoring and control 
of  individual  operations  fall  under  the  responsibility  of 
managing authorities 18. For its part the Commission must 
satisfy itself that the Member States set up adequate man-
agement and control systems.

The Commission underlines that, despite the lack of a legal 
basis,  in  the  course  of  2011,  it  carried  out  an  extensive 
mapping of the financial engineering instruments in place, 
based  on  information  provided  by  Member  States  and 
managing authorities on a voluntary basis. 

Recommendation 2 (a)
Given the expected increase in the importance of financial 
instruments in the future, the Commission’s proposals for 
the future CSF regulations include more detailed and clear 
rules  regarding  the  use  of  financial  instruments. These 
rules build upon the experience accumulated in the cur-
rent programming period and will be further expanded in 
the secondary legislation.

Recommendation 2 (b)
The Commission welcomes this recommendation which is 
already covered in the Commission’s proposals for the new 
cohesion policy framework. These proposals also include 
specific provisions regarding monitoring and reporting of 
financial instruments. Furthermore, the Commission notes 
that already in the current programming period it man-
aged to gather important monitoring information on exist-
ing financial instruments, and this without any legal basis 
to do so.

18  Consistently with the principles of subsidiarity and proportionality, 
Articles 60 and 72 of Regulation (EC) No 1083/2006 clearly spell out the 
division of responsibilities between the managing authorities and the 
Commission. Furthermore, Articles 2 to 10 and 12 to 26 of Regulation (EC) 
No 1828/2006 clearly spell out the information measures and management 
and control systems which the managing authorities must have in place.

Recommendation 1 (b)
For  the  future  programming  period  the  emphasis  will 
be placed on ensuring that each financial instrument is 
‘based  on  an  ex  ante  assessment  which  has  identified 
market failures or suboptimal investment situations, and 
investment needs’. When approving the operational pro-
grammes, emphasis will be placed on ensuring alignment 
with EU2020 strategic priorities, identification/fulfilment of 
ex ante conditionalities and evaluation of the rationale for 
the form of support proposed.

119.
The  regulator y  framework  for  the  period  2007–13  may 
have  been  insufficiently  detailed  to  provide  the  neces-
sary environment for a significant increase of the cohesion 
policy assistance delivered through financial engineering 
instruments.

The  Commission  guidance  notes  provided  in  2007  and 
2008 tried to solve the possible areas of perceived lack of 
clarity that were identified at that time. The Commission 
note of February 2011 provided more comprehensive and 
relevant guidance, based on the accumulated experience 
in the implementation of funds during the previous years.

The  Commission  proposals  for  the  next  programming 
period  take  into  account  the  experience  gained  in  the 
previous  periods,  providing  a  detailed  implementation 
framework.

120.
Cohesion  polic y  programmes  are  implemented  under 
shared management by national or regional authorities. 
This is a fundamental element, fully consistent with the 
principles of subsidiarity and proportionality. Even if for 
the future the Commission proposals for the CSF regula-
tions open the possibility of national and regional authori-
ties contributing to EU-level instruments with cohesion 
policy resources, which would be ring-fenced for invest-
ments  in  line  with  the  objectives  of  specific  cohesion 
policy programmes, national and regional authorities must 
always have the option of implementing instruments at 
national or regional level, designed to meet their specific 
needs.

Special Report No 2/2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

60

REPLY OF THE  
COMMISSION

Recommendation 3 (c)
In  the  2014–20  period,  the  concepts  and  definitions  of 
le verage and revolving will be developed in the secondary 
legislation, which will also be aligned as much as possible 
with the concepts used for all instruments implemented 
with EU budget funding, as foreseen in Commission com-
munication  COM(2011)  662  on  the ‘EU  debt  and  equity 
platforms’  and  which  will  also  be  regulated  in  the  dele-
gated  act  regarding Title VIII  of  the  amended  Financial 
Regu lation. However, achieving high leverage ratios must 
be  balanced  with  public  policy  objectives  of  cohesion 
policy.

General	recommendation
The Commission welcomes the Court’s recommendations 
for  the  improvement  of  the  legal  framework  for  imple-
menting financial instruments as part of the cohesion pol-
icy. With the experience in the current and previous pro-
gramming periods and the improvement of the regulatory 
framework in line with the Court’s recommendations the 
Commission considers that financial instruments should 
continue  to  be  used  as  impor tant  instruments  for  the 
implementation of cohesion policy, including their pos-
sible extension to new thematic areas, as a more sustain-
able and efficient way of delivering EU resources to sup-
port cohesion policy objectives.

19  Article 110(5) of the Commission proposal COM(2011) 615.

122.
Those delays were in most cases explained by the novelty 
of the instruments in cohesion policy and state aid-related 
issues. As demonstrated, however, by the mapping exer-
cise carried out in 2011, on average the rate of progress in 
the implementation of financial engineering instruments is 
not lower than the rate of implementation of other actions 
financed through cohesion policy.

It is expected that in the next programming period, the 
development of off-the-shelf instruments will contribute 
to limiting significantly delays.

123.
The Commission guidance note of February 2011 did pro-
vide elements regarding possible conflict between costs 
and fees charged to final recipients and management costs 
and fees declared to the Commission as eligible expendi-
ture.  Whenever  the  Commission  detec ted  additional 
charges to SMEs, these were corrected. The Commission 
issued additional guidance to prevent the occurrence of 
this situation.

124.
Please refer to the reply to paragraph 102. The Commission 
considers that the comparators established by the Court 
do not reflect the different levels of intervention for differ-
ent types of the funds, implemented under different mar-
ket conditions and with different target beneficiaries and 
objectives than those implemented under cohesion policy.

Recommendation 3 (a)
The Commission welcomes the Court’s recommendation 
regarding off-the-shelf instruments, which is covered in 
the proposal for the new programming period.

Recommendation 3 (b)
The Commission can concur with the aims of this recom-
mendation. In the proposals for the new cohesion policy 
framework, the Commission has opened the possibility of 
Member States contributing to EU-level instruments. Fur-
thermore, they include incentives where the whole priority 
axis is delivered through financial instruments19.

However  the  implementation  of  cohesion  polic y  pro-
grammes and the underlying actions (including financial 
instruments) under shared management and by national or 
regional authorities are fundamental elements of co hesion 
policy.

Special Report No 2 / 2012 — Financial instruments for SMEs co-financed by the European Regional Development Fund

61

European Court of Auditors

Special	Report	No	2/2012
Financial	instruments	for	SMEs	co-financed	by	the	European	Regional	Development	Fund

Luxembourg: Publications Office of the European Union

2012 — 60 pp. — 21 × 29.7 cm

ISBN 978-92-9237-487-7
doi:10.2865/59371

HOW	TO	OBTAIN	EU	PUBLICATIONS

Free	publications:

• 

• 

via EU Bookshop (http://bookshop.europa.eu);

at the European Union’s representations or delegations. You can obtain their contact details 
on the Internet (http://ec.europa.eu) or by sending a fax to +352 2929-42758.

Priced	publications:

• 

via EU Bookshop (http://bookshop.europa.eu).

Priced	subscriptions	(e.g.	annual	series	of	the	Official Journal of the European Union	
and	reports	of	cases	before	the	Court	of	Justice	of	the	European	Union):

• 

via one of the sales agents of the Publications Office of the European Union 
(http://publications.europa.eu/others/agents/index_en.htm).

 
 
Q
J
-
A
B
-
1
1
-
0
1
6
-
E
N

-
C

SMALL  AND  MEDIUM-SIZED  ENTERPRISES  ARE THE  BACKBONE  OF THE 

EU’S ECONOMY, GENERATING EMPLOYMENT, INNOVATION AND WEALTH.  

THE  COUR T  AUDITED THE  PERFORMANCE  OF THE  COHESION  POLICY’S 

F I N A N C I A L  I N S T R U M E N T S  FAC I L I TAT I N G  T H E I R  ACC E S S  TO  F I N A N C E.  

THE COURT FOUND THAT THE EFFECTIVENESS AND EFFICIENCY OF THESE 

INSTRUMENTS WERE HAMPERED BY IMPORTANT SHORTCOMINGS, MAINLY 

DUE TO THE INAPPROPRIATENESS OF THE CURRENT STRUC TURAL FUNDS 

REGULATIONS,  INSUFFICIENT  QUA L I T Y  OF  NE E DS  A SSE SSM E NTS  A N D 

WIDESPREAD DELAYS IN THEIR IMPLEMENTATION. FINALLY, THE ABILITY TO  

LEVERAGE IN PRIVATE INVESTMENTS WAS POOR AS COMPARED WITH OTHER 

EU PROGRAMMES FOR SMEs.

EUROPEAN COURT OF AUDITORS