Guarantees as an efficient and effective ingredient of SME support policies

Transcription

1 Guarantees as an efficient and effective ingredient of SME support policies A comparative view derived from AWS-internal programme-evaluations Norbert G. Knoll (Programme Evaluation Strategy) n.knoll@awsg.at

2 Overview Some thoughts about the ideal SME support scheme, the mechanics of instruments and the logic of intervention A brief look at the administrative costs & specific conditions for application of grants soft loans guarantees and equity Effects of support schemes on parameters of the firms financial resource base and of project implementation Contributions of supported projects to strategic goals & level of employment November

3 What is the ideal support scheme like? A multidimensional assessment grid Strategic dimensions for assessing support instruments, measures, programmes and portfolios from the perspective of the main stakeholders (Source: AWS 2012) The owner(s) of the measure(s), programme(s) etc. (e.g. Federal State) LOW IMMEDIATE COSTS (budgetary requirements in the year of allocation) LOW RISK AND FUTURE COSTS (budgetary requirements after allocation of funds) HIGH EFFECTIVENESS (effect in the sense of broader outcome and impact) SHORT LEAD TIMES (regarding introduction, adaptation and termination of measures) HIGH COVERAGE (size of potential and actually addressed target group) The agency (e.g. AWS/ERP-Fonds) Companies (clients of support measures) LOW EXTENT OF PREPARA- TORY WORK (before start incl. design & communications) HIGH LEVEL OF SYNERGIES (between new & existing measures; regarding expertise & specialised skills) LOW OTHER ADMINISTRATIVE COSTS (over the lifecycle of measures) LOW COSTS OF IMPLEMEN- TATION (processing the applications, selection of eligible projects) HIGH COST COVERAGE HIGH CHANCES FOR SUCCESS (efforts required to find adequate support, probability to obtain approval, intensity of support) HIGH CUSTOMER BENEFIT (access to and structure as well as cost of financing, access to relevant know how and information, reduced risk of failure) LOW OVERALL ADMINISTRATIVE BURDEN OF PARTICIPATION (if nec. including assistance through intermediaries) SHORT WAITING PERIOD BETWEEN APPLICATION AND APPRAISAL OF SUPPORT November

4 The mechanics of SME support instruments THE GENERAL FRAMEWORK OF PUBLIC SME SUPPORT SCHEMES SOURCE: AWS/ERP-FONDS; 2013 FEDERAL MINISTRY INITIATING BUSINESS SUPPORT SCHEME KNOWLEDGE TRANSFER INITIATIVES KT DIRECT ADVISORY & INFORMATION SERVICES A&I PUBLIC FUNDS PF LEVERAGE FOR FUNDING HF SUPPORT AGENCY INSTITUTIONS AND ORGANISATIONS PROVIDING KNOWLEDGE (EDUCATION, R&D, TECHNOLOGY TRANSFER etc.) EXTERNAL KNOWLEDGE KP KNOWLEDGE RESOURCE BASE KB FINANCIAL RESOURCE BASE FB PRIVATE FUNDS PF INNOVATIVE GROWTH PROJECT P INNOVATING SME GROWTH & COMPETITIVENESS PRIVATE LOANERS AND LENDERS OF CAPITAL GC EMPLOYMENT OPPORTUNITIES & STRUCTURAL CHANGE E&S SEGMENT OF THE CORPORATE SECTOR, e.g. SPECIFIC INDUSTRIES OR REGIONS INPUT OUTPUT OUTCOME IMPACT November

5 The logic of intervention Monetary support programmes and the main levels of their logic of intervention Programme objectives Objectives with respect to financial needs of the supported company improve information base for project decisions facilitate access to finance improve structure of corporate finance reduce costs of finance diminish or redistribute risk of project failure Objectives with respect to the conduct of the supported project enable viability of the project improve quality of planning and conduct enlarge project size, prevention of cost cutting bring forward the start and reduce duration of project generate financial scope for projectrelated activities Overriding strategic goals of companies conducting supported projects Outcome: Increase competitiveness & realise potential for growth Competencies & product portfolio Capacity to supply goods and services extend capacities modernise capacities reduce unit costs augment portfolio with innovative products, components and services (new to market, new to firm, of high quality) specialisiation and technological leadership in particular market segments repositioning along the value chain Structure of customers & markets attract new customers and enrich the business portfolio open up new, international markets and consolidation of position in existing export markets Parameters of overriding policy goals Impact: Supported companies/projects improve structure & stimulate dynamics of economic activities (regionally, overall economy) Emplyment opportunities in the corporate sector Level of employment Structure of employment (qualification, income) Competitiveness of domestic corporate sector under conditions of international division of labor Structure of domestic production of goods and services Structure of supplies, investment and tradeflows Regional spezialisation and regional potential for further development Polycentric regional structure of the economy Cohesion and catching up of underdeveloped regions November

6 Adminstrative costs & specific conditions of application GRANTS q Grants are the type of support instrument with lowest possible administrative effort, although the examination of large projects (ex ante, billing) might require significant efforts q grants are characterized by good scalability and meet clients expectations at best (support = grant) q if intermediaries are involved in delivery, grants can be combined easily with their products and services q Without contribution of beneficiaries to administrative costs q Grants are the cheapest source of new finance, improve capital structure and neither require debt repayment nor the distribution of dividends q suitability for use is almost without limitation, including projects with high risks of failure and intangible investments with uncertain or low cash flows q range of application is mainly limited through budgetary constraints and state aid rules November

7 Adminstrative costs & specific conditions of application SOFT LOANS q Soft loans cover long periods (usually 5-10 years) q administrative costs depend heavily on project size (preparation time of projects) and availability of / needs for collaterals q intermediary agents can become useful for marketing and sales but might require compensation of expenses q administrative costs during the repayment period are not negligible qusually, beneficiaries do not contribute to administrative costs q Soft loans are of a long-term nature and enable improvements of capital structure (matching the long-term financing mix to assets being financed in terms of both timing and cash flows) q However, financing projects through soft loans implies obligations that must be serviced, independent of a project s success and the actual timing of earnings q often need for preliminary/ complementary funding November

8 Adminstrative costs & specific conditions of application GUARANTEES q Guarantees cover long periods (often 6-12 years) and in order to reduce default rates the screening and examination of projects and companies has to be in depth q the agency s information need persists over the whole project duration q building and managing a portfolio has to be considered q defaults and the management of recoveries contribute to future (administrative) costs q cost sharing between beneficiaries and the public q Guarantees lower or redistribute risk to be taken on by one ore more financing partners of a specific project q they are therefore predominantly utilized when projects (or entrepreneurs) imply relatively high risk of failure q guarantees reduce the demand for collaterals in particular when financial partners find it difficult to evaluate project-related risks (e.g. technologies, markets) properly q guarantees may be considered a special feature of soft loans and can easily be integrated into a support package November

9 Adminstrative costs & specific conditions of application EQUITY q As with guarantees, equity requires careful examination of applications q provision of financing for large projects requires cooperation with additional investors q to build up and manage a portfolio of investments entails non-negligible surveillance costs over longer periods q costs of exit intended or unintended has to be taken into account q cost sharing and profit sharing between beneficiaries and the public q Equity financing results in dilution of share ownership, control and earnings q however, equity is a cornerstone of an adequate financing mix q cost of equity is typically higher than the cost of debt q equity schemes compensate market failure in early stages of companies development (good project ideas, but neither proven products nor proven management skills, relatively small customer base etc.) November

10 A brief look at the outcomes: Efficiency of instruments Main effects of support with respect to financial needs by type of instrument (Source: AWS/ERP-Fonds) Improving the knowledge base for project planning Enabling access to (external) sources of finance Diminishing or redistributing risk of project failure Improving structure of corporate finance Reducing costs of financing Awareness, Advisory & Information Services (AAIS) Stand-alone products or side-effect of (intensive) examination of applications Specific products enabling the matching between companies and investors/financial institutions Specific information/ advisory services (markets, technologies) conceivable Specific information/ advisory services conceivable e.g. signaling to investors) Specific information/ advisory services conceivable e.g. signaling to investors Guarantees Information generated by intensive screening of projects might improve planing and risk evaluation Access to external sources of finance (mostly loans) is the central effect of guarantees Risk of investors granting loans or providing equity is definitively reduced by guarantees Guarantees allow for a better long-term financing mix (matching maturities) Due to reduced risk investors allow for lower rates of return; guarantee fees have to be taken into account Soft Loans Positive side-effects possible, if project screening is sufficiently intensive and generates relevant information Side-effects, indirect effects possible (e.g. loan covers a stable/ substantial share of fin. requirements) Side-effects, indirect effects possible (e.g. loan covers a stable/ substantial share of fin. requirements) Substantial effects on long-term financing mix (matching maturities) Because of structural improvements the effect goes beyond the numeric monetary value Grants Positive side-effects possible, if terms for provision of grants include specific planning requirements (e.g. business plan ) Indirect effects, depending on intensity of support (IS), i.e. the grant s share of overall project costs Effects depending on IS, i.e. negligible if small grants are provided and vice versa Grant reduces requirements for other external sources of finance; IS is the decisive parameter IS is the decisive parameter whether substantial reductions in financing costs can be reached Equity As with guarantees and soft loans, positive side-effects possible due to screeening and examination of projects In addition to immediate effects of fresh equity, indirect effects (signal / leverage for additional debt) Positive effects: Improvement of capital and liquidity ratios Substantial positive effects (e.g.matching maturities, liquidity, access to further external funding) Equity itself is usually quite costly (investors expect high rates of return to compensate for high risk) November

11 Selected results from a survey of AWS-supported companies AWS WIRKUNGSMONITORING 2013 (WM-2013): Sample composition by support measures Source: AWS 2013; sample size n=404 UD-Z; 70 17% INL-G; 21 5% JU-H; 27 7% MIK-H; 17 4% SEED; 25 6% UD-H; 32 8% PROTRANS;30 7% ERP-KlK; 55 14% JU-Z; 77 19% IMPULSE; 22 6% ERP-KMU+REG; 28 7% November

12 level of agreement [in%] level of agreement [in%] level of agreement [in%] level of agreement [in%] Effects of support on parameters of financial resource base 10 EFFECT ON FINANCIAL RESOURCE BASE "Support facilitated access to finance (debt, equity)" 10 EFFECT ON FINANCIAL RESOURCE BASE "Support reduced financing costs" ,7 74,7 66,5 73,5 76,3 83,1 84,8 82,4 10 EFFECT ON FINANCIAL RESOURCE BASE "Support improved structure of corporate finance" (capital structure, financing mix)" 10 EFFECT ON FINANCIAL RESOURCE BASE "Support generated financial scope for project-related activities" ,3 71,1 59,8 65,8 64,9 66,3 71,4 68, November

13 level of agreement [in%] level of agreement [in%] level of agreement [in%] level of agreement [in%] Effects of support on parameters of project implementation 10 EFFECT ON THE CONDUCT OF SUPPORTED PROJECTS "Support enabled the project" 10 EFFECT ON THE CONDUCT OF SUPPORTED PROJECTS "Support enlarged project size" (on a larger scale, without cost cutting) ,0 45,8 51,3 53,7 68,0 47,0 59,8 59,2 10 EFFECT ON THE CONDUCT OF SUPPORTED PROJECTS "Support accelerated project implementation" (earlier, shorter duration) 10 EFFECT ON THE CONDUCT OF SUPPORTED PROJECTS "Support led to qualitative improvements of the project " (improved quality of planning and/or implementation) ,8 51,8 57,6 56,7 53,6 42,2 62,1 55, November

14 Zustimmung in Prozent Zustimmung in Prozent level of agreement [in%] Contributions of project implementation to the overriding strategic goals 10 SUBSTANTIAL CONTRIBUTION OF IMPLEMENTED PROJECTS' TO SELECTED STRATEGIC GOALS "Modernisation of capacities" (process innovation) 10 SUBSTANTIAL CONTRIBUTION OF IMPLEMENTED PROJECTS' TO SELECTED STRATEGIC GOALS "Extension of capacities" (manufacturing capacity, initial site investment etc.) ,3 67,5 42,4 47,8 73,2 67,5 61,6 65,6 10 SUBSTANTIAL CONTRIBUTION OF IMPLEMENTED PROJECTS' TO SELECTED STRATEGIC GOALS "Enriched product portfolio with innovative products and services" (product innovation either 'new to the firm' or 'new to the market') ,3 48,2 57,6 52, November

15 level of agreement [in%] level of agreement [in%] Effects of project implementation on the level of employment 10 PROJECTS' EFFECTS ON EMPLOYMENT "Due to project implementation the level of employment increased substantially" 10 PROJECTS' EFFECTS ON EMPLOYMENT "Project implementation secures level of employment (in the long run)" ,6 42,2 54,5 51,7 68,0 75,9 62,9 66, November

16 Concluding remarks on guarantees Key characteristics in particular leverage of private funds make guarantees a very attractive instrument Redistribution effects within a programme portfolio are not confined to public funds Valuable instrument for supporting specific target groups Very effective, when it comes to facilitating access to finance and improving structure of corporate finance AWS-guarantees quite frequently function as enabler of projects Via guarantees supported projects frequently focus on extension of capacities which in turn increases employment November