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[July 13, 2014]
Leveraging financial instruments for SME Growth - The Malta Case Study [Malta Independent, The]
(Malta Independent, The Via Acquire Media NewsEdge) With a population of fewer than half a million persons, SMEs in particular micro enterprises (that is enterprises that employ between 1 and 9 persons) are the backbone of the economy. Aviation, tourism, manufacturing, maritime services, financial services and back-office operations are the main economic sectors. Malta's main export earners are tourism including the cruise liner business with over 1.9 million tourists each year, and the 300 foreign direct investments that operate within the manufacturing sector followed by Internet Gaming, financial services and maritime related activities. Malta's accession into the European Union in 2004 and the implementation of the aqcuis communitaire brought about increased challenges and opportunities on both the public and private sectors. Facts on Maltese SMEs As the end of 2013, Malta had 26,346 SMEs accounting for 99.8% of all enterprises which employed 92,702 persons. Maltese SMEs provide about 80% of all jobs in the business economy and create 71.5% of the overall value added: for both variables, this is about 14 percentage points more than the EU average. Manufacturing, which has 13 large enterprises, is the only sector with a significant number of large firms, and is more labour-intensive. The most important sectors for SMEs are manufacturing, wholesale and retail trade, just like the EU as a whole. Together, both sectors account for more than 46% of SMEs value added and employment. Maltese SMEs on the whole have weathered the financial crisis relatively well. When compared to their European counterparts SMEs in Malta faired relatively well in terms of new firms opening and the number of persons employed over the last five years.
Table 1 SME Data for Malta Number of enterprises Number of employees Value added Malta EU27 Malta EU27 Malta EU27 Number Share Share Number Share Share Billion € Share Share Micro 24,837 94.1% 92.1% 41,660 36.0% 28.7% 1 29.1% 21.1% Small 1,244 4.7% 6.6% 25,100 21.7% 20.4% 1 21.6% 18.3% Medium-sized 265 1.0% 1.1% 25,942 22.4% 17.3% 1 20.6% 18.3% SMEs 26,346 99.8% 99.8% 92,702 80.0% 66.5% 3 71.4% 57.6% Large 45 0.2% 0.2% 23,126 20.0% 33.5% 1 28.6% 42.4% Total 26,391 100.0% 100.0% 115,828 100.0% 100.0% 4 100.0% 100.0% Jeremie – Joint European Resources for Micro to Medium Enterprises During the 2007-2013 Programming Period, the European Commission in cooperation with the European Investment Bank, the European Investment Fund and member states designed a number of financial instruments and technical capacity building programmes to assist in further improving the financing of SMEs and urban regeneration programmes, among others. Certainly, the main programme that had a considerable impact on the ground was the Jeremie initiative. This was designed to improve the access to finance for SMEs through loan guarantees and risk capital in the form of Seed and Venture Capital. This initiative was aimed especially for SMEs. Jeremie meant that SMEs in Nuts 2 regions ( Nuts 2: basic regions for the application of regional policies) were able to benefit from tailored financial engineering products that improved the access to finance by bridging the financing gap found in different regions of the European Union. The EU gave the mandate to the European Investment Fund to administer Jeremie and other financial instruments. As a result of the co-guarantees offered by the Jeremie financial engineering instrument, local banks were able to leverage and improve the medium- to long-term capital investment for SMEs. When drafting their operational programmes to be submitted to the European Commission, member states needed to maintain a balanced fiscal position in the short- to medium-term as required by the EU Treaties. A further challenge was to determine the amount of national and EU financing that was going to be channelled to the traditional grant schemes compared to the innovative financial engineering instruments. Many member state authorities were initially sceptical of financial engineering instruments as they did not have any experience in handling them. Particularly, member states did not have the required expertise and specialisation in the creation of Special Purpose Vehicles and Holding Funds with the formation of Public Private Partnerships to manage these financial engineering instruments. The outbreak of the financial crisis also created a negative perception among national and regional authorities as a significant amount of public funds were needed to bailout the European banking system. The principal benefits of Jeremie when compared to traditional grant schemes are various and can be summarised as follows: Flexibility: Contributions from the Operational Programmes to the Jeremie Holding Fund were eligible for interim up-front payment by the European Regional Development Fund and the European Social Fund giving managing authorities more flexibility in allocating these resources; Structural Fund contributions to the Holding Funds that needed to be invested in SMEs by 2015 (the N +2 rule); Recycling of funds: The Holding Fund is of a revolving nature, receiving repayments from the financial intermediaries for further investments in the SME sector. This makes SME support via EU Structural Funds sustainable compared to using the pure grant approach. The amount of funds that could be recycled depended on the amount of loan defaults registered. The lower the amount of defaults resulted in the greater amount of funds that could be recycled.
Leverage: A significant advantage of Jeremie is its potential ability to engage the financial sector, either at the Holding Fund level, with additional capital from financial institutions, and/or at the level of the financial instruments through Public/Private co-financing, example as in cooperation with the European Investment Bank; Financing Gap in Malta One of the main challenges is the inability of SMEs to raise enough capital to support their business venture. This is known as the Financing Gap. The main reasons of the Financing Gap in Malta were identified by a Gap Analysis commissioned by the European Investment Fund. The main findings of the Gap Analysis were: • Lack of a venture capital market as most SMEs depend of commercial bank financing for their working and investment capital requirements; • Little presence of business angels; • High collateral requirements (security) and pricing of debt (cost of borrowing); • Capital markets not economically viable for small ventures; and • Commercial banks being the main source of finance for SMEs despite that they do not provide risk capital.
Jeremie in Malta During the first part of the 2007-2013 programming period, the Maltese authorities signed a Memorandum of Understanding for the creation of a Malta Jeremie Holding Fund to be managed by the European Investment Fund. The Maltese authorities initially allocated €10m of Malta's European Regional Development Funds. These were later topped up in August 2013 by an additional €2m following the successful take-up of the first tranche. The European Investment Fund and the Maltese authorities had set three main objectives for the Maltese Jeremie initiative, namely: • To support local SMEs including Micro Enterprises and Start-ups; • Reduce their difficulties in accessing finance through the provision of credit risk protection; and • Loans being offered at advantageous interest rates and lower collateral requirements.
Once all the structures were established, the European Investment Fund issued a public tender for the Maltese financial intermediaries to create a loan portfolio of €51m against the 75% guarantee on each loan offered by the €10m co-guarantees. A set cap rate of 23% of the loan portfolio was agreed to. The soft loans to be offered by SMEs ranged from €5,000 to €500,000. The soft loans were applicable for all the sectors of the economy except agriculture, construction, fisheries, transport and real estate. The European Investment Fund and the Maltese authorities wanted to ensure that a significant number of SMEs benefitted through this initiative to carry out capital investment projects to improve their competitiveness vis-à-vis their European counterparts. Some of the targeted sectors covered by the Jeremie initiative included: • Tourism and related services including accommodation, catering activities, laundry and cleaning services; • Waste Management; • Creative sector including archaeology, restoration, traditional crafts, audio visual, arts, entertainment and recreation; • Media, Information, Communication and technology; • Manufacturing of traditional and new products and services including printing and traffic sign management; • Professional, scientific and technical services; • Educational Services; and • Wholesale, retail and the associated storage services.
Results of Jeremie in Malta The Maltese Jeremie initiative had a leverage of 5.8, meaning that for every euro of European tax payer money offered as a co-guarantee the financial intermediary issued €5.8 worth of loans. The Malta Jeremie initiative is managed by Bank of Valletta plc which is one of the largest financial intermediaries found in the Maltese Islands. It has been projected that by the closure of the initiative over 700 loans would have been sanctions to assist over 600 SMEs. The total project value would be over €100m of which over €62m would be financed through Jeremie and over €38m involving private sector investment. Typical projects financed by Jeremie included: • The setting up of new catering establishment / office / retail outlet for SMEs; • Refurbishment of existing business premises in order for the SMEs to strengthen their competitiveness vis-à-vis their European counterparts; • Purchase of tangible assets like computer hardware for SMEs that operate in the e-commerce markets; • Acquisition of LED billboards for innovative advertising; • Investment in dental equipment for a new clinic that is tapping into the international dental medical tourism market; • Purchase of an aircraft, engine and the construction of a hangar for one of Malta's leading Flying School; and • Purchase of energy efficient equipment.
Communication Strategy Certainly, the successful take-up of the Jeremie initiative in Malta is also the result of a successful communication strategy. This strategy involved the utilisation of a number of communication and marketing channels. Bank of Valletta through its EU Research department coordinated its communication strategy that involved the organisation of over 40 information session organised with different SME stakeholders, brochures, over 1,000 one-to-one meetings, phone enquires, bill boards and television adverts, SMS campaign reaching over 10,000 business customers. Furthermore, articles and press release were prepared for national and pan European media outlets. The traditional television and radio media backed up by the more recent social media online advertising were also used to promote this initiative. It was critical that the above objectives were quantified and monitored on an ongoing basis by means of a report and data-mining tools. The effectiveness of the various marketing channels used was an important indicator in monitoring the promotional mix for the organisation attaining its set targets. Corrective measures were taken when the desired marketing initiatives were not attained.
Following the positive experience in handling both the original Jeremie tender followed up by an additional top-up of €2m, Bank of Valletta managed to tap into the last window available under the Competitive Innovation Programme Micro Credit Guarantee Window (CIP 2007 - 2013). Through the CIP programme, the bank agreed to create a loan portfolio of €6m of microcredit business loans for start-ups (that is loans of up to €25,000) for a three-year period that commenced in December 2013. This was the first time for a Maltese financial institution to tap into a financial engineering instrument being financed through EU Brussels based funds.
Access to Finance: The 2014-2020 Financial Perspective 85% of net new jobs in the EU are created by SMEs. Surveys show that EU SMEs are to a very large extent dependent on bank loans for their external financing and that they practically have very few alternatives, namely 30% of companies are using bank loans and 40% bank credit lines or overdraft facilities. 63% of SMEs bank loans are also the most preferable external financing solution to realise firms' growth ambitions or new ventures. However, as a result financial crisis within the EU, the situation of SME access to finance remains difficult. Recently, the EU commissioned an exante assessment on access to finance in 28 EU member states and the following resulted: • Up to 4.1% of all SMEs were unsuccessful in obtaining loan finance even though "financially viable" i.e. approximately up to 860,000 SMEs did not manage to raise funding through the banking system; • The EU-wide loan financing gap for the non-financial sector in the period 2009-2012 is quantified at up to €112bn; • The future evolution of the SME gap financing in the EU 28 member states will likely improve. However, that reduction will be far from sufficient to fill the loan financing gap.
For the current Multiannual Financial Framework 2014-2020, the European institutions have proven their worth and, through the leverage effects involved, they assure more efficient use of the limited EU budgetary resources. During the State of the Union address on 11 September 2013, President Barroso said: "We need to step up our game in implementing the Multiannual Financial Framework. The EU budget is the most concrete lever we have at hand to boost investments. In some of our regions, the EU budget is the only way to get public investment because they don't have the sources at national level. Both the European Parliament and the Commission wanted more resources. We have been in that fight together. But even so, one single year's EU budget represents more money, in today's prices, than the whole Marshall plan in its time! Let us now make sure that the programmes can start on 1 January. The results are being felt on the ground. And that we use the possibilities of innovative financing, from instruments that have already started, to EIB money, to project bonds." The European institutions have taken a four pillar approach to further improve the access to finance for SMEs. The initiatives involved are the adoption of an accommodative monetary policy by the European Central Bank, the increase in the European Investment Bank's share capital of €10bn which will lead to €60bn of additional lending resulting in a multiplier of €180bn over three years. Furthermore, the EU has developed a number of financial engineering opportunities that involve both guarantee and risk capital schemes that will be available both at member state and the centralised EU programmes under COSME (EU programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises) and Horizon 2020 (Horizon 2020 is the financial instrument implementing the Innovation Union, a Europe 2020 flagship initiative aimed at securing Europe's global competitiveness).
Recommendations for the next generation of financial engineering instruments The following are some recommendations that can further strengthen the uptake of the next generation of financial engineering instruments: • Working capitaland capital investment: In May 2013, the President of the European Central Bank Mario Draghi said that "The key obstacle to a growth recovery seems to be the blocked credit channel to SMEs." It would be ideal that financial engineering instruments would finance both capital investment and working capital. When it comes to working capital an extended interpretation would be used to include the concept of "financing expansion working capital". Recently discussions between the European Commission and the Spanish authorities have clearly highlighted that the uptake of the SME initiative needs to cover working capital guarantees if it has to be a success. There are clear market demands that Spanish SMEs are finding problems when it comes to raise working capital within the current challenging period that the Spanish SMEs are facing. Between 2011 and 2012, it has been calculated that 21.8% of the 3.2 million SMEs were unable to obtain bank financing even though being financial viable. It is estimate that the Spanish loan financing gap is between €6 to 26.4bn." • Financing of Intangible Assets: Most of European economies are moving towards becoming more a knowledge based economy. Within a knowledge based economy, SMEs would need to finance intangible assets and financial engineering instruments like Jeremie would assist to open the funding from traditional banks that find it hard to finance intangible investment. These SMEs would have a significant amount of human resources costs for example to finance information technology that is human resources costs. It is important that EU financial engineering instruments cater for knowledge based enterprises.
• Take-up of the SME Initiative: In the aftermath of the economic crisis, European banks have been forced to deleverage their risky assets, repair their balance sheets and comply with tight regulatory requirements particularly concerning their capital level through Basel III and the Capital Requirement Directive IV. These have resulted in a reduction in the volume of lending, market fragmentation and impaired money transmission to the real economy. As a result of this, the European institutions have come out with the SME Initiative which has two main options being: • (a) An Uncapped guarantee instrument that involves a blend of European Regional Development Funds, European Rural Development Funds, European Social Funds, funds from Horizon 2020 and COSME and finally both the European Investment Fund and European Investment Bank own resources; and • (b) Joint securitisation instrument for new and existing loans portfolios.
Both are very interesting options particularly bring capital relief for banks and lowering collateral and the cost of borrowing for SMEs thereby increasing the access to finance for SMEs. Till to-date, only three EU member states have shown an interest in this innovative financial instrument. It would be beneficial for SMEs if more EU member states show an active interest in this financial instrument.
(c) 2013 Standard Publications Ltd. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info).
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