Do different types of support compete and if so, what drives this?

The relationship between different forms of support is an important one. Unless the various instruments are appropriately tailored to meet policy and market requirements, and dovetailed with one another, there are risks that measures compete, overlap or leave some needs unmet.

Some respondents considered that there was no competition between different types of support, at least in their own programmes, though sometimes this was simply because forms other than FI are not offered, or because programmes have been shaped to ensure different forms of support work alongside one another.

“Different forms of support are complementary to each other. In the case of FIs - beneficiaries can receive whole amount of financing, when starting the project… which needs to be repaid, but in the case of grant - beneficiary needs to attract co-financing and pre-financing, which may need to be repaid in case of failure. Therefore, attractiveness of grants versus FI is questionable…. specific support criteria are being designed, which determine if the project can receive FIs or grants. Competitiveness of the project determines which form of support should be used in each case. In this respect different forms of support can't be in competition with one another.”

“In relation to TO9 there is no competition as support is only offered through FIs” “The current division of financing forms is done in a way to make sure the instruments are not in competition each to the other. From the point of view of final recipients grants are more attractive, but - basically - they are not offered in TO 3 which is the most important objective in which we plan to use financial resources.” “The OP is designed in such a manner that FIs and grants are not compatible. There is no competition.”

In the main, Managing Authorities considered financial instruments and other forms of support to complement one another, and some had explicit mechanisms to ensure this.

Box 4.2: Mechanisms to ensure complementarity of forms of support

“The MA endeavoured to set up the implementation system so that grants and FIs were complementary (ex ante assessment was very helpful). The MA uses mechanisms:

(1). assessment of projects according to internal rate of return at the level of projects (used for projects focused on energy savings. This rate is assessed by independent auditor. The beneficiary can run for credit in all cases but the project is eligible for grants only in case that the internal rate of return is below a predefined level)

(2). regional mechanism (e.g. for technologies - technologies are supported via FIs in all regions and grants are available only in regions with specific problems).”

Source: Managing Authority interview.

Other were less explicit in their explanations, but made clear that steps had been taken to ensure complementarity, especially in the light of experience in 2007-13.

“No, the different forms of support are designed to be in complement with one another”. (Managing Authority interview)

“No. This has been made impossible, because the whole process of setting-up FI is participatory (with regions and the Ministry for Economic development). Firms

themselves see these instruments as complementary (this emerged from interviews and focus groups).” (Managing Authority interview)

“grants and FIs can be combined. Therefore, they complement each other” (Managing Authority interview)

“… this was a common problem in the 2007-2013 programming period, where ERDF and other types of support often were cannibalised. In the 2014-2020 programming period this issue will be resolved by the ex ante assessment.” (Managing Authority interview)

“From the entrepreneurs' point of view grants could be competing with FIs, as grants are cheaper source of funding. However, different FIs are focused to different objectives and, therefore, they don't overlap and provide an opportunity to select the most appropriate type of support for a particular project. Entrepreneurs can select the most appropriate form of FIs taking into account his/hers needs and possibilities.” (Managing Authority interview)

“Specialised calls are useful…[to prevent competition between forms of support]. The risk is over-specialising that usually results in a markedly narrow scope of potential beneficiaries. Ideally, different forms of support could be offered for companies which have achieved different phases in the project lifecycle. Disbursement of grant assistance for R+D+I projects may have reduced, hopefully temporarily, the interest in applying for loan finance.” (Managing Authority interview)

Other Managing Authorities take the view that different forms of support do compete. In part this owes to overlap in the objectives of the measures concerned, but is also due to the preference of final recipients, who often continue to prefer grants. Some respondents also noted that FIs were potentially disadvantaged by the amount of time they took to establish.

“To some degree the FIs are considered to be in competition with grants, they are more risky …environment is not used to this form of the assistance… time disadvantage of the FIs – the EC does not clarify sufficiently all the conditions and that makes the MAs start with grants.” (Managing Authority interview)

“In relation to TO4 there can be some competition but it mainly depends on the strength of the business case of the project whether a project would be considered for grants or FIs.” (Managing Authority interview)

“When similar activities are financed using grants and FI, grants reduce the attractiveness of the financial instruments.” (Managing Authority interview)

Although there is often a presumption that grants would be more attractive to final recipients, this is not always thought to be so.

“there is also some path dependence among final Recipients, as they prefer grants rather than FIs” (Managing Authority interview)

“beneficiaries would mostly opt for FIs since procedures are significantly reduced in comparison with grants. For grants you need specialized consultants, not just for application but also for the implementation and reporting. For FI, loans for example, beneficiaries approach banks in ordinary fashion as if no EU funds are concerned. FIs are complicated to set-up and monitor implementation but only for involved institutions, once launched FIs are quite fast and simple for final recipients.” (Managing Authority interview)

“Not only different but the same forms of support may compete. Project promoters optimise and always look for finance with the most favourable terms. Long-term grant beneficiaries are now shifting towards combined products (grant + loan). Also, an SME can apply for support under various TOs; they will scrutinize price and administrative burden and are likely to devise their application to fit into the scheme with the lowest costs and simplest administration. Pricing helps the elimination of competition, e.g. the interest rate under TO3 related lending schemes is at 0% while the interest rate of the loan element of the combined product under the same TC is 2,5%. Grant rate is to be maximised, probably around 30% for the SME combined product. Early repayment is now penalised to exclude project promoters who want to access grants through the scheme and who are actually in no need of a loan.” (Managing Authority interview)

Last, although the emphasis on respondents was on grants and FIs, competition is not limited to grants and FIs:

“Experience with equity investors in the previous period revealed potential competition between equity and loans, too. Equity funds diversified their portfolio as a natural way to reduce the relatively high risk they bear. Consequently, these funds also undertook investments that could have proven bankable should the company have approached a bank.” (Managing Authority interview)

Box 4.3: What drives competition between different delivery modes?

There are clearly risks that different forms of intervention that target the same or similar activity can overlap or undermine one another. The key issues in relation to competition between financial instruments and other modes of intervention include:

 The need for grants and FIs, if both exist, to have a different focus. For example, grants to support general investment by SMEs could readily be substituted by loans; if the two co- exist, there is likely to be a preference for grants.

 The need for grants to target investments where a clear incentive effect is required so that intervention alters the behaviour of the recipient – for example, to undertake a risky innovation project that would not have happened otherwise.

 The need for applications for FI support to be no more complex than those for grants. The need for FIs to be up-and-running early in the programming period.

Competition may also be present among guarantee mechanisms and or loans, depending on the coverage or interest rate, and there is some evidence of perceived competition between ESI Fund co-financed FIs and those funded through EFSI. This is discussed in more detail in Section 5 below.