Financial instruments for development in a Post-Crisis Era economic and social effects of combined microcredit in Hungary

Transcription

1 Financial instruments for development in a Post-Crisis Era economic and social effects of combined microcredit in Hungary Dr. Györgyi NYIKOS 1 Paper for 24th World Congress of Political Science Abstract In the Post-Crisis Era one of the main problems is access to financing which is also one of the most important components for the creation, survival, performance and growth of SMEs. The combined microcredit is a unique financial development tool where micro-credit and non-repayable assistance can be requested within one construction. The paper focuses on the Hungarian experiences in the financial period and the primary source of data is on one hand information from the Managing Authority and beneficiary surveys carried out by the author together with the FEA (a financial intermediary, manager of the national microcredit IT system). The paper responds to the question, whether this unique tool may be able to achieve the top priority also in practice: effectively supporting SME competitiveness and improving economic and social situation in the age of austerity. The findings showed that it is crucial to strengthen complementarities and synergies between different development instruments and the use of financial instruments complemented with grants and support services can be one of the solutions. Providing this is not so easy for the institutional system, but necessary for the simplification and reduction of the administrative burden. Key Words: financial instrument, combined-microcredit I. Introduction The global economic and financial crisis has brought about a sharp drop in investments across Europe thus hampering essential investment in infrastructure and innovation and SME financing. Access to appropriate and affordable finance remains an important issue for SMEs even if it varies considerably across countries and types of businesses. 11% of surveyed businesses mentioned access to finance as the most important problem 2. Because of the financial crisis and the subsequent recession and low economic growth, promoting employment and social inclusion has become also one of the most important priorities. Today 22.5 million people are unemployed in the EU, 6.5 million more than before the crisis, 20% or 4.5 million, of them are young people 3. The current and projected number of refugees 4 arriving in Europe, many of them under 25, could further increase this number and might make it more difficult to integrate the young unemployed into the labour market. Also as a reaction of this background, promoting self- 1 Györgyi Nyikos PhD is an Associate Professor, National University of Public Service. Her teaching and research interests are in Public Finance Management, Cohesion Policy and Public Procurement SME Survey by the European Central Bank 3 European Commission, According to the ECHO website by the end of February 2016, over 1.1m people entered the European Union. 1

2 employment 5 and entrepreneurship has been recognised as crucial in increasing employment in the Europe 2020 Strategy 6. The paper focuses on the Hungarian experiences of using micro-credit 7 programming period, based on in the EU - a desk review of relevant documents (calls for expression of interest, evaluations, programme documentation and other materials), - with attention also on the specific framework of EU cohesion policy, - interviews with the informed persons from the Managing Authority (MA), the Holding Funds and the fund managers as well as final recipients, and - experiences from managing and implementing operational programs and projects. The primary source of data is on one hand information from the Hungarian Development Bank (holding fund/manager of fund of funds), and on the other hand from the Fejér Enterprise Agency (FEA is a financial intermediary), particularly the result of a beneficiary survey carried out twice by the FEA. The findings showed that to enhance the impact of microfinance and to make the efficient use of the resources available, it is crucial to strengthen complementarities and synergies between different instruments and the use of financial instruments complemented with the more traditional delivery instruments (grants and support services) can be a solution. The Hungarian experience shows a strong need for using combined microcredit, which indicates that the tool can meet primarily the need of access to finance for those excluded from conventional financing. However, providing the adequate mix of access to finance and guidance is crucial. Financing needs to be complemented by intelligent support services tailored to the needs of businesses at their different stages of development and for the beneficiaries 8 /final recipients 9 especially for micro-entrepreneurs - the one stop shop for the access to different sources is the best solution. Providing this is not so easy for the institutional system because of the different European and national regulations (state aid, different funds etc.), but necessary for the simplification and reduction of the administrative burden. One of the main lessons learnt seems to be that besides the detailed knowledge of the tools and implementation schemes, it is also highly recommended to analyze the intermediary institutional system and to further simplify the procedures and finally, yet importantly, the public sector has to learn a lot for the effective use of these financial tools. 5 Self-employment is an important source of employment with accounting for more than 16% of employment across Europe. In a more diverse, connected and mobile society with fast technological and IT-based changes, the way one looks at work and life is changing as well micro-credit and non-repayable assistance together 8 A public or private body and, for the purposes of the EAFRD Regulation and of the EMFF Regulation only, a natural person, responsible for initiating or both initiating and implementing operations; and in the context of State aid schemes, the body which receives the aid; and in the context of financial instruments it means the body that implements the financial instrument or the fund of funds as appropriate 9 A legal or natural person receiving financial support from a financial instrument (CPR Art 2 (12)) 2

3 II. Microfinance using cohesion policy funds in Europe Microfinance is an essential tool to facilitate necessity-driven business creation, when a combination of poor labour market prospects and poverty drives people to start new businesses. The ideas and aspirations behind micro-finance are not new. Today, micro-finance is a field that has received an increased policy attention and donor interest. These issues have been studied worldwide and are well known in less developed countries as well as in EU development policy 10. Microcredit 11 aims at people (micro-entrepreneurs) who wish to enter into business but face obstacles in accessing traditional banking services due to banks lending conditions and it could help to set up a new enterprise. However microcredit can be useful even in the EU Member States also to encourage new businesses, self-employment and stimulate economic growth Figure: People at risk of poverty or social exclusion (percentage of total population) Source: European Small Business Finance Outlook 2016 EIF Working paper, based on data from Eurostat The so-called financial instruments 13 have been used for delivering investments for European Structural Funds since the programming period. Their relative importance has increased during the programming period , and in the light of the current economic situation and the 10 EU manages the Microfinance Programmes within the 9th European Development Fund (EDF) in ACP (African, Caribbean and Pacific), worth 15 million. A further investment of 15 million is foreseen in the 10th EDF. 11 Microcredit is defined as a loan of up to ; but in reality many businesses need even smaller amounts of capital in some cases as little as to set up their business, with the majority being around See Commission Staff Working Paper, Microcredit for European small businesses, 2004, p Report on Implementation of the European Progress Microfinance Facility, COM/2011/0195 final 13 FIs are defined in the Financial Regulation as measures of financial support provided from the budget in order to address one or more specific policy objectives by way of loans, guarantees, equity or quasi-equity investments or participations, or other risk-bearing instruments, possibly combined with grants. 3

4 increasing scarcity of public resources, they seem to be one of the key tools to achieve the strategic objective in the current programming period, and according to several experts and policymakers financial instruments are expected to be the future of the cohesion policy. The using of the cohesion policy sources for microcredit started already in the programming period when several initiatives were launched (e.g. EQUAL MFI in Germany, specific of Global Grants in Spain, regional ESF programme in Tuscany). In the period some Member States set up microcredit schemes using financial instruments from the start, but others had to introduce them following the economic and financial crisis. The three principal forms of FI used in Cohesion Policy programmes were equity, loans and guarantees. Figure 2: FIs by specific fund-type classification Form Equity Loan Guarantee Description Direct investment in the share capital of an undertaking. Involves ownership and capacity to influence governance of the investee firm. May cover seed, start-up and expansion capital. May also be known as venture capital, which is a subset of private equity, strictly defined. Can take various forms, with different levels of risk. Risks for investors may be high (depending on security), just like returns (depending on performance). Borrowing to finance businesses or projects over a period of time and at an agreed rate of return, typically on the basis of the quality of cash flow and strength of the underlying assets; may be on commercial or subsidized terms. Underwriting funds to provide security for firms that are unable to obtain financing otherwise; may cover all or part of the capital. May take the form of guarantees on bank loans, micro-credit or equity. May involve a fee or higher interest rate for the borrower. Source: Michie and Wishlade (2011) 3. Figure: Sums disbursed to final recipients by type of FI and target ( m and % of total) Source: European Commission Summary Report The EU Member States have followed 2 main different organizational models for SME support by FIs: some of them used national development organizations (e.g. the Hungarian institutional model; Germany: Mikrokreditfonds by Germany GLS bank; Lithuania: Entrepreneurship Promotion Fund by INVEGA; Spain: Microcredit Initiative INCYDE) and several management authorities have called upon 4

5 the expertise of the EIB/EIF to manage these instruments. The fund size was also a sensitive issue: they neither should be excessive 14 nor below critical mass, therefore was a gap-assessment supported by a proper ex ante evaluation of the SMEs financing needs was/is necessary to be carried out. The new EU regulation puts increasing importance on the use of FIs as a more efficient alternative to traditional grant based financing. The regulatory texts on FIs for the period show that the legislators have attempted to address many of the challenges that have arisen in the previous programming period in the regulatory provisions and address issues raised by managing authorities and the European Court of Auditors 15. The specific provisions on financial instruments are set out in the common provisions regulation (CPR) 16 and the delegated and implementing acts linked to the relevant articles of this regulation. Other relevant provisions for financial instruments (e.g. information on priorities/measures, co-financing, eligible expenditure etc.) can be also found in the fund-specific regulations and applicable horizontal regulations Figure: Changes on FI regulation relating to the ERDF 18 and ESIF Scope Set-up Implementation options Payments Support for enterprises, urban development, energy efficiency and renewable energies in building sector Voluntary gap analysis for enterprises and at the level of holding fund Financial instruments at national or regional level tailor made only Possible to declare to the COM 100% of the amount paid to the fund not linked to disbursements to final Support for all thematic objectives covered under a programme Compulsory ex-ante assessment Financial instruments at national or regional level, transnational or crossborder level: tailor made OR off-theshelf OR MA loans/guarantees Contribution to EU level instruments Phased payments linked to disbursements to final recipients National co-financing which is expected 14 MAs are usually tempted to make oversized allocations to financial instruments for the purpose of increasing absorption and avoiding N+2/N+3 automatic decommitments. 15 For example, revised provisions relating to the ex-ante evaluations that must be undertaken before FIs are established in the OPs. It has been made clear that ex-ante evaluations will relate the findings related to market gaps more closely to the objectives and priorities of the OPs, and will include more information on what type of financial products should be put in place. 16 Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (CPR) 17 The Financial Regulation and its Implementing Rules 18 European Regional Development Fund 19 European Structural and Investment Funds 5

6 Management cost and fees, interest, resources returned, legacy Reporting recipients Legal basis set out in successive amendments of the regulation and recommendations/interpretations set out in COCOF notes Compulsory reporting only from 2011 onwards to be paid can be included in the request for the interim payment Detailed provisions set out in basic, delegated and implementing acts Compulsory reporting from the outset Source: Financial instruments in ESIF programmes A short reference guide for Managing Authorities European Commission Any financial instrument supported by the ESIF must comply with the relevant programme, its objectives under priorities (and focus areas for EAFRD), eligibility rules (under measures for EAFRD), expenditure related provisions, co-financing elements, monitoring and reporting requirements. The regulation also frequently refers to the need to ensure compliance with state aid requirements, public procurement rules and there is some clarification on management fees and costs (with further provisions to be included in the secondary legislation) as well as the use of revolving resources. In addition the Commission released and intends to release several guidance on different aspects of FIs, and these documents in several cases seem to be more restrictive than the regulation 20. Evidently the main differences in the relevant and regulation are that while in the period we had short and limited rules and lately few guidance on FEIs which gave a lot of space for maneuver for the Member States, in the period we will have more sophisticated regulation with several guidance on FIs, which are not always in line with the current Member State practices. The questions arrive how it is possible to establish an effective and efficient system of microfinance in these conditions. 20 See detailed explanation in Nyikos: The Role of Financial Instruments in Improving Access to Finance, Combined Microcredit in Hungary EStIF

7 III. The Hungarian case the economic situation and the different FIs During the early 1990s, after the political changes in Hungary, the first entrepreneurship promotion projects were implemented within the framework of the PHARE 21 programme. The programme provided financing at favourable interest rates (on the level of the prevailing central bank prime rate) for micro entrepreneurs excluded from traditional banking services. While in the 2000s there was a relatively high number (20) of state subsidized FIs in Hungary and the volume of bank loans was in steady increase throughout the first half of the decade, the country still lagged behind the European average in access to finance. In the Hungarian Programmes financed by EU funds there were no financial instruments, but in the financial period the situation changed: several FIs were first introduced in Hungary in the programme period. During the OP development process, three documents 22 analyzed the market, evaluating the necessity of the use of FIs. They stated that the financial sector s contribution to the financing of SMEs was limited. The principal factors behind the market insufficiencies were information asymmetry due to short business history, and the economies of scale problem arising from the high fixed unit costs of financial service providers. The SME development strategy was based on these documents. Consequently, in the period Hungary decided to use FIs to provide access to finance for SMEs. According to programme documents, the main objective of FIs was to overcome the limited access of finance on the market, but the idea of introducing financial instruments was also strongly driven by the assumption that their FIs may represent more efficient forms of SME support than grants. The total amount of FIs set up as a percentage of the ERDF support was around 6% 24 and FIs were mainly financed from the Economic Development Operational Programme Programme of Community aid to the countries of Central and Eastern Europe (Phare) was the main financial instrument of the pre-accession strategy for the Central and Eastern European countries 22 EIF (2007): SME access to finance. Evaluation study //Ministry of Economy and Transport (2007): SME access to finance, analyses of market failures supporting the elaboration of the financial instruments of the Economic Development OP // Ministry of Economy and Transport (2007): SME development strategy. 23 Ministry of Economy and Transport (2007): SME development strategy The financial allocation of the EDOP 4 th priority (financial instruments) was increased by 3% in 2009 through Operational Programme (OP) modification. 25 Economic Development Operational Programme CCI number: 2007HU161PO

8 Figure 5: FIs in the OPs in Hungary Ops Economic Development Operational Programme (EDOP) which covers the convergence regions (6 regions out of 7) Central Hungary Operational Programme (CHOP) for the Regional Employment and Competitiveness objective 6 Regional Development Operational Programmes 28 (RDOP) for the Convergence regions Source: author s compilation Budget of OP (without TA) EUR 3,257 million EUR 1,663 million EUR 4,881 million FI forms in the OP Credit, Guarantee, VC Credit, Guarantee, VC VC ERDF support between FI budget in the OP EUR 727 million (the total FI priority axis) ca EUR 117 million (FIs cover part of the 1 st priority) EUR 7 million /OP (in Strengthening the region s SME sector priorities) FI in % of the OP FI% of the total ERDF 22% 26 5% 7% 0,7% 0,8% 0,3% EUR 14,44 1 million 6% Support through FIs is provided in the form of loans, guarantees and venture capital. The instruments were replicated between EDOP and CHOP, so the available schemes were the same in the two operative programmes (mirror-scheme) except that the EDOP targeted the convergence regions (every region except Central Hungary) while the CHOP targeted Central Hungary. Figure 6: The concrete forms of FIs OP FIs Short description EDOP, CHOP EDOP, CHOP EDOP, CHOP EDOP, New Széchenyi Combined Micro Credit and Grant New Hungary Micro Credit New Széchenyi Credit New Hungary Small and Medium Credit 29 Launching the program For SMEs, for 120 months Min HUF 1 million, max HUF 20 million (ca min EUR 3,500, max EUR 70,000) % own resources, 45% micro credit, 45% grant The programme was among the very first ones launched in the EU. Its main objective was to narrowly target SMEs that have never had a loan before but are creditworthy. Max. amount of loan was EUR ,219 (HUF 10 million) For micro and small enterprises, for 36/120 month (depending on the type of the credit, e.g. investment or asset) Max. amount of loan was gradually increased during the 2011 programming period reaching EUR 1.61 million (HUF 500 million) in For small and medium sized enterprises, for 10 years % of EDOP sources, in total EUR 703 million, was finally allocated to FEIs by 2014 (KPMG 2013; EDOP AIR 2014; EDOP 2007) 27 Central Hungary Operational Programme CCI number: 2007HU162PO Regional Development Operational Programmes together with the Hungarian Development Bank. At the end of 2008 in cooperation with MFB (Hungarian Development Bank) two new credit products were introduced targeting primarily medium-sized enterprises: the so-called SME investment credit (SME Credit) and the New Hungarian Working Capital Credit (UMFOR). However, these products became not as popular as expected mainly due to their complex operational procedures. 8

9 CHOP EDOP, CHOP EDOP, CHOP EDOP, CHOP EDOP, CHOP EDOP, CHOP EDOP, CHOP EDOP, CHOP 7 RDOPs New Hungary Working Capital Loan 30 New Hungary Portfolio Guarantee Programme New Széchenyi Credit Guarantee Programme New Széchenyi Counter Guarantee Programme New Hungary Venture Capital Programme Joint Fund New Szechenyi Venture Capital Programmes - Joint Growth Fund New Szechenyi Venture Capital Programmes - Joint Seed Fund Sub programme Source: author s compilation Min HUF 10 million, max HUF 100 million (ca min EUR 35,000, max EUR 350,000) For small and medium sized enterprises, for 1-2 years Min HUF 1 million, max HUF 200 million (ca min EUR 3,500, max EUR 700,000) (closed in 2012) 2009 (closed in 2010) Up to 80% 2008 Max. % of guarantee as a share of loans is 80% Max. % of guarantee as a share of loans is 85%. Underwent some modifications in 2013: The rate of counter guarantee has increased from 85% to 100% Trough venture capital fund management firms, tasked with raising a fixed proportion of additional private funding to the resources committed by Venture Finance Hungary Plc. The abovementioned partners were selected by open tender in the second half of At least 20% of projects has to be either innovative or in their early start-up phase 2012 This capital programme focused on start-ups. At least 50% of projects has to be either innovative or in their early start-up phase 2012 Equity fund Venture capital in the regions The top sectors benefiting from the most volume of credit/ guarantee schemes are: - Commerce; - Manufacturing; and - Tourism; as compared to the leading role of firms with a strong R&D profile in the case of the venture capital funds. The FI schemes were planned with a great attention being paid to maximizing consistency and minimizing any overlaps and competition between them. 9

10 7. Figure: Different FIs in the business development cycle Ca. EUR EUR EUR EUR million New Széchenyi Venture Capital Joint Seed New Hungary Microcredit Combined Microcredit New Széchenyi Credit New Széchenyi Portfolio Guarantee New Hungary Venture Capital Joint Fund New Széchenyi Venture Capital Joint Growth New Széchenyi Credit Guarantee New Hungary SME Credit New Hungary Working Capital Loan Source: Financial agreements and Fontium (2015) Until the end of 2011, only 27.91% of the EDOP/CHOP sources was provided to final recipients, but the absorption of resources was largely accelerated in the second half of the programme period. The New Hungary Joint Fund (27.62 %), the Combined Microcredit (24.85%) and the New Széchenyi Loan (18.14) were the top three products with the highest share of the allocated funds. 8. Figure: Absorption process of the different Hungarian FIs Source: Fontium, Hungarian Development Bank, author s own compilation 10

11 Overall, while the credit schemes have over-performed in terms of financial targets, in the case of the guarantee and venture capital schemes we could observe a very slow take up and consequently, slower progress in the allocation of funds. Reasons for the differences in the financial performance indicators are manifold due to partly institutional and regulative (e.g., time-consuming institutional set up process in the first half of the programming period and perception of regulatory burden in case of guarantee schemes) and partly, strategic (higher demand for credit schemes, especially for those combined with nonrefundable grants) issues that I will discuss in the next chapter in more detail. III. The Hungarian case the use of the combined microcredit and the effects The global financial and sovereign debt crisis has had a detrimental impact on the poverty and social exclusion situation of the people. People at risk of poverty are a potentially important group of business creators, since a decision to start a business often arises out of necessity. According to the Eurobarometer Survey on Entrepreneurship 31, the majority of self-employed people indicated that dissatisfaction with their previous work was an important decision to start a business. The majority of entrepreneurs start businesses to improve their economic situation 32. Regarding the rate of necessity-driven entrepreneurs Hungary is not among countries with the highest rates (Croatia, Bulgaria and Slovenia), but still has a high rate of entrepreneurs starting their business because they had no better options in the labour market. 9. Figure: Necessity-driven entrepreneurial rates (2015) Source: GEM 2015/16 Global Report 31 European Commission, OECD (2014a) 11

12 In Hungary the loan/credit was the earliest 33 financial engineering instrument, with an aim to develop SMEs that have no or not enough access to commercial bank loans. However, because of the economic crisis in Hungary it became practically impossible for SMEs to receive commercial bank loans even for financing their own (co-financing) contribution to the investment supported by grants. To tackle this problem, the objective was to develop the methods of financing and to increase the amount of available resources. As a possible solution in 2011, the already functioning credit programmes were supplemented with a new combined microcredit plus grant scheme 34 financed by European funds. In the combined scheme the SMEs could receive an amount of maximum 45% of the tender project value or 10 million HUF grant, maximum 60% of the tender project value or 20 million HUF micro credit and contribute with own resources to 10% of the total investment. The amount of grant cannot exceed that of repayable assistance and application requirements stipulate that applicants have to make 10 % own contribution available, which cannot be financed by any other subsidized loan. In the decision process first the amount of the loan has to be calculated where the amount of 10 % own contribution will be automatically considered and then the remaining gap can be covered by a grant in accordance with the conditions of the call. Figure 10: Combined microcredit - project structure/financing Own Resources min. 10% Micro-loan HUF 1-20 million (EUR 3,300-65,400) max. 60% of project value Grant HUF 1-10 million (EUR 3,300-33,000) max. 45% of project value Source: author s compilation The admission and assessment of loan applications, the disbursement of loans, and the management of loan accounts were carried out by the financial intermediaries. In the one-stop-shop system, the SMEs applied to the financial intermediaries that granted the micro credit part, while the stateowned intermediary body decided on the grant (evaluation and decision within 30 days). In order to facilitate co-operation between the individual institutional actors, to ensure transparency and avoid duplication, the managing authority published procedural rules that the financial intermediaries had to observe. All of the combined microcredit priority sources were given to SMEs. This scheme was also open for start-up businesses. 33 The calls for tender for the banks and micro financing institutions were launched in October 2007, while the first contracts with the intermediaries were concluded in December In January 2008 the first micro credit transactions were carried out. 34 This scheme was officially run under EDOP in the EDOP /M call. It used the funds allocated at EDOP PA 4 for the repayable part and the funds of EDOP PA 2 for the non-repayable part. EUR million refers to the nonrepayable part. 12

13 Figure 11: Combined microcredit grants and loans 35 Grants Refinanced sources 12,00 10,00 8,00 6,00 4,00 2,00 - Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q EDOP-2.1.1/M CHOP-1.2.1/M Source: Figures from the Hungarian Development Bank, 29 Feb 2016 The combined microcredit started in 2011 and was the best-selling product. The planned funds (~EUR 200 million) were fully absorbed by the end of the period. The evaluation of the socio-economic impact of the combined microcredit recommended using the logical steps of the model below: 12,00 10,00 8,00 6,00 4,00 2,00 - Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Microfinance institutions Financial enterprises Saving co-operatives / Co-operative saving org. 12. Figure: The logic model for evaluating enterprise support programmes A C E Funds are allocated to selected enterprises Subsidies are capable of modifying in the desired way the investment choices of firms, compared to what would have happened without the subsidy ADDITIONALITY Enterprises are declared eligible for the subsidy and are informed of the availability of the subsidy Enterprises find the subsidy worth applying for as expected benefits exceed the cost of application TAKE UP BY ELIGIBLE FIRMS Rationing occurs if demand for subsidies exceeds the budget Some rationing device is put in place, such as rankings based on objective criteria or lotteries SOME APPLICANTS ARE REJECTED Programme-induced improvements in the perfomance of subsidized firms generate some socio-economic improvements for the areas in which the incentives are available AREA LEVEL EFFECTS B D F Subsidies cause changes in desirable outcomes (employment, sales, investment) through a variety of mechanisms FIRM LEVEL EFFECTS Socio-economic improvements in the targeted areas spill over into the larger economy ECONOMY WIDE EFFECTS Source: Final Report to DG Regional Policy Counterfactual Impact Evaluation of Cohesion Policy Work Package 1: Examples from Enterprise Support, According to absorption data at October 2014 the resource utilization of EDOP-2.1.1/M was 100%; and of CHOP-1.2.1/M 100% too. 13

14 Apparently, the combined model reached a large number of final recipients through a good blending of private and public resources and adequate risk sharing between SMEs, financial intermediaries and public sector. Looking for the results so far, the data shows that the recipients of the combined microcredit were generally micro enterprises. The increase of the net revenues of the beneficiaries after the project closure compared to the initial status was 3.5%. Figure 13: Breakdown of the combined microcredit beneficiaries 41% Man 59% Woman 47% Urban 53% Rural 8% 92% under 30 year above 30 year 74% 26% Starter SME Existing SME Source: Figures from the CREDINFO IT system, used by all local foundations for enterprise promotion (16) and by 14 micro financial enterprises and compiled by the author Clearly, the combined microcredit in Hungary is supporting and helping female beneficiaries (41%) and entrepreneurs working in rural territories (47%) also; according to this data it seems that the combination has had an impact even in the problematic areas. Microenterprises are important contributors to employment. Micro-business seems to be relatively more important in countries with elevated unemployment levels: in Italy, Portugal and inter alia in Hungary. 14

15 14. Figure: Relative employment share by microenterprises compared to other enterprise size Source: EUROSTAT The result of a beneficiary survey carried out by the FEA with almost 400 respondents (392) shows that the combined microcredit used by the respondents contributed to retaining 452 jobs and creating 349 new jobs. The SMEs involved even indicated that during the next 1 year they are planning to hire 2270 new employees. It seems to be a high figure. Hopefully they are not overoptimistic about the economic opportunities. According to the answers of the SMEs which used combined microcredit, the plans and expectations are positive also, namely they are planning during the next 1 year further investments, technological developments, training and education, innovation or R&D expenditure, to purchase tangible assets and to start a new activity. Figure 15: Rate of the beneficiary SMEs planning different future development activities 33% During the next 1 year planning... 23% 47% 21% 5% 20% Source: Figures from the result of the beneficiary survey carried out by the FEA Social Impact Assessment of Microcredit Questionnaire and compilation by the author 15

16 To the question of how the combined microcredit of FEA helped to improve the living conditions only 102 (26%) answered that it did not have an effect on the living conditions; all the other 290 (74%) respondents indicated improvement (significant or slight) in the living conditions, besides the positive economic effects linked to the project. Figure 16: How the combined microcredit of FEA helped to improve the living conditions? 26% it have an significant or slight positive effect on the living conditions 74% it did not have an effect on the living conditions Source: Figures from the result of the beneficiary survey by carried out by the FEA Social Impact Assessment of Microcredit Questionnaire and compiled by the author Based on the results so far, in Hungary combined microcredit has helped to bring activities from the non-formal to the formal sector by financing small businesses. The combination of grants and loans allows to combine a static approach (investment oriented) for grants with a dynamic approach (cash flow oriented) for financial instruments and make the financial conditions better for access to resources, especially for micro-entrepreneurs. IV. The Hungarian case institution system and cost of the implementation The usual management structure of FIs involves a cascade system whereby a holding fund manager is responsible for launching a call for interest looking for possible financial intermediaries who will then reach final recipients on the ground. In 2007 the Hungarian government decided to implement FIs itself instead of using the European Investment Fund (EIF) with the newly created Venture Finance Hungary Plc. acting as a holding fund manager 36. According to the cohesion policy regulation in the selection process of financial intermediaries, the Member States have to follow open, transparent, proportionate and nondiscriminatory procedures, avoiding conflicts of interest. It was/is a time-consuming process, not only in Hungary. Implementation delays in FIs for SMEs have been attributed to factors, such as the time taken to structure FIs and to negotiate them with the Commission; obtaining private sector 36 According to the European Commission (2013) Summary of data on the progress made in financing and implementing financial engineering instruments co-financed by Structural Funds, September 2013 in terms of the overall pattern of management, in the EU the holding funds were managed by either national financial institutions (42 percent), were put out to public tender (15 percent), or were managed by the EIF or EIB (43 percent). Most of the 73 operating holding funds reported by the Member States were set up in 2009 or in

17 contributions; negotiation of management costs; agreeing the governance arrangements; uncertainty over the eligibility of working capital; and other administrative issues 37. It is important to notice that it is not obvious that the governance structure of the Hungarian implementation system is fully in line with the EU-standard structure envisaged by the EU regulations. The main factor of the misinterpretation is that the high number of financial intermediaries (in EC terminology: beneficiaries or fund managers) did not correspond in reality to a high number of financial instruments. Hungary has run 12 different FI schemes (see earlier) managed by one MA, one central Holding Fund Manager and several financial intermediaries. The schemes of a given FI type was offered by the different intermediaries, however, these were essentially the same since standardized framework calls and funding agreements were used during implementation. In Hungary a widespread external intermediary network was set up. Corresponding to the highest share of allocated funds and transactions, loans have been offered by three types of financial intermediaries (credit institutions, financial enterprises and local enterprise development agencies). Banks were the primary providers of guarantees and the counter-guarantee programme, which is exclusively offered by the public guarantee organization (Garantiqa Ltd). Companies registered as venture capital funds were invited to offer equity products. Figure 17: Types and number of financial intermediaries Number of agreements concluded with financial intermediaries Type of products Financial intermediaries Dec Dec Dec Dec Dec Loan Combined microcredit Guarantee Venture capital Venture Capital Fund Managers X Commercial banks X - X - Financial enterprises X X - - Saving co-operatives / Cooperative saving org. Microfinance institutions / enterprise agencies X X X X - - Total Source: Figures from the Hungarian Development Bank, 31 December There was also a set of financial intermediaries with long record of accomplishment in providing enterprise support services and microcredit (and working capital loans), the so called local enterprise development agencies (LEDAs). They are traditionally more embedded and experienced and operate in less developed areas, which was a crucial point for the success of the combined microcredit. LEDAs have been operating in every county of Hungary since early 1990s - with the main purpose of supporting SME development. The motivation starting to provide combined microcredit by LEDAs 37 Van Ginkel J, Vyas L, Cairns R, Michie R, Granqvist K and Atkinson S (2013) 17

18 was to improve the outreach of the FIs by utilizing the local networks or the already existing agent networks in the allocation of the JEREMIE-type funds. Throughout the program this approach was verified to some extent as the banks and saving cooperatives turned out to be less interested in the small-scale financial schemes, while the majority of operations were delivered by financial enterprises and LEDAs. Figure 20: The evolution of the median and mean value of loans provided by banks and financial enterprises under the credit schemes Source: Fontium (2015) Figure 21: Type of financial intermediaries and their investments Financial intermediaries number of the projects EDOP/CHOP disbursements/investments in the final beneficiaries in HUF Venture Capital Fund Managers Commercial banks Financial enterprises Saving co-operatives / Cooperative saving org. Microfinance institutions / enterprise agencies Guarantee Source: Figures from the Hungarian Development Bank, 31 March 2016 and compiled by the author In the programming period the management cost may not exceed on a yearly average 2% of the capital contributed from the operational programme to the holding fund 38. In Hungary for the combined microcredit scheme no management cost was eligible from the program sources. The financial intermediaries were attracted by the profit gained from the difference between the low source cost (the refinancing interest rate was 0.5%) and the interest paid by the clients (maximum of 9%, in the practice 6-7% interest rate). It was also an effective incentive for the financing activity. 38 Article 43/4 of Commission Regulation No 1828/2006 of December

19 In the programming period the Member States can "designate one or more intermediate bodies to carry out certain tasks of the managing or the certifying authority under the responsibility of that authority" applicable to the Funds 39. One of the criteria to be applied when evaluating the offer of the body implementing a financial instrument is the level of the management costs and fees, which constitute the "price" of the services provided to the managing authority. However, for period, there are more detailed provisions and stricter limits and the imposition of specific methodologies for establishing costs and fees that seem likely to lower management fees overall. Figure 22: Remuneration of financial intermediaries and fund of funds 40 Max. amount that may be used in the eligibility period (in percentage of programme contribution, per year) Fund of funds 7% Intermediary providing capital share Intermediary providing loans Intermediary providing guarantees Intermediary providing microloans Financial intermediary providing grants, interest subsidies, guarantee fee subsidies 20% 8% Basic fees Schedule of eligible fees Performance based remuneration (per year) 3% in the first 12 months, 1% in the next 12 months, 0.5% per year after that 2.5% per year in the first % months, 1% per year after that 10% 1.5% 10 % 0.5% per year 1.5% 6% 0.5% Source: own compilation based on Commission Delegated Regulation 480/2014/EU The question arises whether the real cost would be in line with the prescribed remuneration matrix for financial intermediaries, especially if looking for microfinance we have to count also with extra risk and also with extra activities such as special assistance by preparation of project, by loan application of SMEs etc. The success of the financial instruments significantly depends on the properly functioning, cost-effective institutional system as well and linking the access to microcredits to business support services, especially to services such as mentoring, coaching and peer-learning. For both of them the FIs need experts to build up a strong administrative capacity. 1% V. Conclusion Based on the data until 2013 the Hungarian SME sector did not fully recover from the initial shock of the crisis in However, the overall ranking of Hungary in access to finance for SMEs is in line 39 Article 123(6) of the CPR, Article 66(2) of Regulation (EU) No 1305/2013 for EAFRD 40 Commission Delegated Regulation 480/2014/EU 19

20 with the EU average 41 mostly due to specific financing schemes. Despite all this, the financing situation for most SMEs remains difficult. Figure 23: Corporate investment needs Micro Small Medium Large the company has financial problems the company is stable, able to invest with support the company is stable, able to invest without support Source: HDB survey Figure 24: Financing instruments planned to be use by companies for investments in the next year Grant Supported credit Leasing, factoring Owner contribution Commercial credit Combined credit Supplier credit Guarantee Venture capital Source: HDB survey Access to bank loans has gradually improved, but still some 28 % of SMEs in Hungary reported that banks are less willing to grant loans, compared to 26 % in the EU. The ESIF financial instruments of the programming period, especially the combined microcredit can help to improve this situation. Accordingly and in line with the Investment Plan for Europe (Juncker-plan) - Hungary is planning to use 60% of the ESIF sources to support SMEs and also to provide the SMEs adequate access to funding even if the market actors are not sufficiently 41 according to 2014 SBA Fact Sheets 42 MFB INDIKATOR 2015 Autumn 43 MFB INDIKATOR 2015 Autumn 20

21 motivated yet to do that. The planned tools of the financial instruments are i) credit, leasing and factoring, ii) combined products, iii) venture capital programmes and iv) guarantee instruments. Based on the positive experiences of the combined products, besides of the increasing cost effectiveness of public funds the combined schemes also foster entrepreneurial culture through the mandatory use of financial instruments and the socio-economic effects are positive too. Following the new conditions given by the new cohesion regulation and the European Commission legal interpretations the demand of the uniform standards and management methods of the new FIs is pushing the structure in several cases (also in the case of Hungary) to other solutions than what were used before. However, it is recommended to analyze the economic-financial conditions as well as the intermediary institutional system closely and try to find an effective and efficient solution and to further simplify the procedures. 21

22 References Economic Development Operational Programme CCI number: 2007HU161PO Central Hungary Operational Programme CCI number: 2007HU162PO Regional Development Operational Programmes Annual Implementation Reports 2009 and 2010: Economic Development Operational Programmes, Central Hungary Operational Programmes, Regional Development Operational Programmes. European Commission (2012): Financial Instruments in Cohesion Policy, Commission Staff Working Document, 27 February 2012; ents_2012_en.pdf Access to Finance in EU Member states/regions carried out by EIF in the Context of the JEREMIE. Initiative from European Investment Fund: JEREMIE Progress Report on Evaluation and Implementation Activities in 27 EU member state. 1 January 2006 to 1 July essreport_ pdf Ministry of Economy and Transport (2007): SME access to finance, analyses of market failures supporting the elaboration of the financial instruments of the Economic Development OP Ministry of Economy and Transport (2007): SME development strategy New Szechenyi Plan (2011). Midterm evaluation of Economic Development Operational Programme Nyikos: The Role of Financial Instruments in Improving Access to Finance, Combined Microcredit in Hungary EStIF