Conclusion 1: Market developments were not matched by timely changes in the Facility, and the intervention logic of grant support to the Facility became less valid over time
97. Over time the original intervention logic underlying the Facility became less about addressing market failures in the broader sense, and more about filling remaining gaps in developing markets, that were quickly approaching those of the ‘old’ member states with regard to the availability of SME financing at similar tenors and conditions. This represented a significant shift in positioning and ethos of the Facility that was not matched by appropriate changes in objectives or methodologies. Instead, changes in objectives paved the way for cooperation with additional sponsors to ensure ‘balanced’ regional coverage. This approach does not allow for a policy-driven approach to market segments or regions. The introduction of the Rural Sub-Window was a welcome innovation, but at such a limited scale that it cannot be said to represent a substantive shift in Facility thinking.
98. Furthermore, it is questionable whether Phare, as a pre-accession instrument, should have continued its high level of support to the Facility in these new market conditions. Funding for the Facility, while certainly popular with stakeholders as they expanded opportunistically in the new environment, also comes at a cost to the Phare programme overall in terms of opportunities lost for funding other sectors/initiatives that suffer from financial constraints, such as environmental remediation, phyto-sanitary controls at borders, civil society development, etc., all of which are high on the accession agenda. For continued Phare funding at these high levels, the case for the Facility, based on analysis of clearly identifiable and agreed objectives and impacts, should have been made. The previous IE Report offered the opportunity to do so, and this opportunity was largely lost.
Conclusion 2: Catalytic effects of grant support diminished over time
99. Catalytic effect refers to the ability of the Phare support to catalyse a priority accession- driven action which would otherwise not have taken place or which would have taken place at a later date. The previous IE concluded that there was scope for the Facility as an instrument to be more responsive to regional differences, differing market segments and in adapting to meet changing needs to ensure its continued relevance. However there is little evidence that the Facility was reoriented to focus on clearly identified market failures in relation to particular regions, countries or segments. Changes in the availability of funds to PFIs and generally to SMEs has been driven by the market, not the Facility – average loan size has decreased, and maturity of loans and percentage of loans to regionally-based SMEs have increased, but there is no evidence that this is significantly attributable to the Facility rather than to the evolution of the competitive environment. Where changes were made, for example an increased focus on micro-credits, this was largely at the initiative of the IFIs, rather than part of a strategic re- orientation of the programme.
100. Catalytic impacts of the TA-based projects were highest in the early stages, and in some cases elements of Facility -related TA have been carried forward. In most cases, however, the fast changing business environment has required further evolution of the SME lending business model. Many PFIs openly acknowledge the main impact of the Phare grant on their business is to increase the attractiveness of the IFI credit line. However, while this raises concerns about possible distortionary effects of Phare grants, including displacement of funds from other
sources (particularly private sector sources), minor market distortions may in some instances be justified by the development objectives pursued.
Conclusion 3: More attention is needed to ensuring that the Facility delivers additionality within the Phare context
101. While the IFIs can satisfy their internal definitions of additionality in developed markets (i.e. where the supply of funds to SMEs in the candidate countries and new member states, is at tenors and conditions approaching those of the EU-15 member states), the case for additionality according to the Phare definition has eroded over time. The step changes in the business environment created new challenges for the Facility to maintain relevance and additionality. However, with accession firmly in sight, increased availability of alternative funding, growing interest by other financial institutions in the SME segment, and the ability to buy in or transfer skills and methodologies either from the parent bank or from other sources, eroded the additionality of the Facility funds. This is not to say that there were no instances where the Facility could continue to deliver additionality, but how this was defined and ensured at individual project level (and particularly in the case of second credit lines with the same PFI) was not consistently and clearly addressed.
Conclusion 4: Cost-effectiveness of the Phare support declined over time.
102. On the Commission Services side, only comparatively limited resources needed to be deployed, and the participating IFIs have delivered considerable outputs in terms of numbers of loans and leases made, staff trained and technical assistance contracts completed. This came at an ostensibly modest cost to the Commission (the 1.2% to 1.25% management fee to the IFIs). However, analysis of cost-effectiveness must also include: a) the Performance Fees that support disbursement of credit lines, and b) the extent to which the Facility is fulfilling the Commission’s policy objectives. In relation to the Performance Fees, these are the main part of the Commission input to the Facility and represent a significant amount. When seen in the light of the limited achievement of attributable capacity building, cost-effectiveness of the Phare support is low, and as currently structured, the Facility is weighted in favour of disbursement of sponsor IFI credit lines.
Conclusion 5: The TA model stimulated capacity building under certain conditions, particularly in the early stages.
103. The credit line + incentive + technical assistance model has the most potential to deliver (and has delivered) capacity building at PFI level. The evaluation found that in practice, where immediate impacts were high, these were attributable to the TA-driven model. The TA stimulated organisational changes and raised the levels of competence of the PFIs, both in the early stages of the transition period, and in their development, when the potential for failure was at its highest. For the TA to respect the principles of additionality and deliver impacts, certain conditions need to be met, including lack of access to technical know-how, a good fit between the needs of the PFI and the assistance delivered, commitment of PFI senior management and active management by the sponsor IFI, based on output and impact indicators. However, the TA did not have the anticipated significant sustainable impacts at the level of the PFIs, due partly to developments in the competitive market environment, including takeover by foreign banks, which resulted in changes to business models and practices. Moreover, technical assistance did not provide for value added in banks that benefited from being owned by foreign banks and additional technical know-how.
Conclusion 6: The case needs to be clearly made for non-TA based interventions
104. For non-TA based projects (i.e. comprising incentive only), it is difficult to identify and attribute changes in bank behaviour to the intervention. Supporting non-TA based interventions needs careful agreement on what capacity building will be supported, how this will be measured and how this will be sustained in the longer term.
Conclusion 7: The limited amount of total funding restricted wider impact
105. Individual projects with participating financial institutions were not designed to have demonstration effect and there is little evidence of widespread take-up of Facility models. The volume of funding involved was insufficient to make an appreciable contribution to the volume of finance available (barely the amount of a small bank). It must also be noted that the Facility was never intended to be a significant presence in the markets, thus the potential for wider impact lies principally its ability to deliver demonstration effect (both within and between PFIs). However, whilst the increasing competitive pressures in the market forced banks to respond quickly, the Facility moved too slowly to be effective.
Conclusion 8: Sustainable change is difficult to attribute to the Facility
106. The tools used by the Facility, with the exception of TA combined with risk-based incentives, have proved to be insufficient to induce sustainable changes. Where changes have taken place in the absence of TA, it is difficult to establish a causal connection between the Phare grant plus the credit line, and the changes. Feedback from the interviews and surveys indicate that the technical assistance did improve capacity in the participating financial institutions, particularly in the early stages.
4.2 Recommendations
107. There are two key areas in which the recommendations are made for action: redesign of the Facility and need for proactive strategic management.
Action 1: Redesigning the Facility
Recommendation 1: Before launching a new facility, thorough re-assessment and redesign of grant support is required.
108. There is a need for a full review of the future role and operations of a new SME Finance Facility, and its introduction under the Instrument for Pre-accession Assistance (IPA) should be preceded by a thorough re-assessment and consequent redesign. The future facility must have a clear intervention logic, establishing the case for any grant support to the new instrument. Recommendation 2: The thorough re-assessment and redesign of the Facility should be based on detailed analysis of differences in the maturity of economies and markets.
109. The redesigned instrument would need to be examined critically and reconstructed at every level, starting with an examination of the areas of market failure or a differentiation in the level of market maturity or market underdevelopment that can reasonably be addressed. Any methods and tools proposed should take account of the differing regional and country
conditions and market segments. Specific objectives relating to micro-credit institutions or development/promotional banks should be clearly identified.
Recommendation 3: Redesign should respect the principles of catalytic impact and additionality
110. The principles of catalytic impact and additionality should be set up as positive criteria by the Commission Services that must be met by the individual arrangements with the IFIs, and clearly reflected in individual project proposals with PFIs.
Action 2: Need for proactive strategic management
Recommendation 4: The Commission Services should be proactively at the heart of strategic decision-making on the development of the Facility
111. As the entire Facility instrument is largely driven by absorption of the Phare grant, the Commission Services (DG Enlargement, DG ECFIN, DG Enterprise and other Commission stakeholders) should be at the heart of strategic decision-making on the development and implementation of Facility. This would involve clarity about the policy objectives at regional or segment level that the Commission is pursuing and the role of the Facility in achieving these objectives. This should be set out in a series of working papers outlining the Commission’s expectations of the Facility, guidelines for ensuring additionality and catalytic effect and a set of core monitoring indicators linked to specific policy objectives.
Recommendation 5: The management of strategic operations of the Facility should have the appropriate tools and resources to tailor the Facility’s response to changing conditions 112. It should be the responsibility of the Facility strategic management to equip itself with the tools and methodologies to identify in which countries and market segments the Facility intervention is warranted (to be informed by and consistent with the intervention logic as described above). Decisions about programmes should be placed firmly within the context of the competitive environment at the time a programme decision is taken. Fulfilment of the Commission Services’ requirements for catalytic impact and additionality should also be ensured. Changes should trigger a process of review and refinement, for example to accelerate or stop implementation mid-programme if necessary. This would be particularly applicable where the original intervention logic is no longer relevant or where a Commission Services definition of additionality can no longer be met. Achievement of the policy objectives should be made central to strategic management by linking instrument design, management structures, performance measures and reporting tools to the underlying intervention logic.