Recommendations

Against the background of these broad conclusions, a number of recommendations can be put forward, while acknowledging current Commission proposals for a so-called ‘omnibus’ Regulation, which seeks to address some of these issues. These recommendations fall under three broad headings: a reappraisal of the roles of ESIF cofinanced FIs, EU level instruments and other initiatives; greater regulatory stability; and the refocusing of guidance and support.

6.2.1. A reappraisal of the roles of ESIF co-financed FIs, EU level instruments and other initiatives

Concern at under investment in the European economy has led to a number of EU level initiatives for financial instruments addressing a range of objectives, including SMEs, infrastructure and R&D&I; at the same time, EU Cohesion policy objectives have widened to embrace Europe 2020 aims, while budgetary pressures and concerns with efficiency have emphasised the use of financial instruments as a Cohesion policy tool, with an extended range of implementation options.

The net outcome is a complex pattern of financial instruments of very varied types and scale, which may complement one another, but also overlap and compete. The tendency to ‘rebrand’ EU initiatives when implemented nationally, or to incorporate existing initiatives within another ‘wrapper’ or ‘window’, as under EFSI, contributes to the difficulty in establishing the exact scale and source of the funding available. At the same time, political pressure to take up certain instruments and ensure a given geographical spread can result in the proliferation of measures at the point of delivery with distinct regulatory and other requirements, but ultimately similar policy objectives and arguably limited additionality.

Figure 6.1: Estimating the scale of EU FIs by source and objective

R&D&I ICT SME E&E Infrastructure Social

EU level instruments EFSI ESIF

H2020 ( 2.8 billion) TO1 ( 3.7 billion)

TO2 COSME ( 1.4 b)

TO3 ( 11.3 billion) TO4 TO5 TO6 ( 4.9 billion)

Connecting Europe Facility (inc Cohesion Fund) ( 14.6 billion)

TO8, 09, 10

19.9 billion 26 billion 21.7 billion

NCFF PF4EE EASI Creative Europe Erasmus+ TO7

Notes: The boxes representing budget commitments are broadly to scale. In the case of EFSI, the breakdown of commitments as at November 2016 has been used as a proxy to disaggregate the commitment by objective for illustrative purposes, though clearly the past may not be a guide to the future.

Source: EPRC calculations based on Regulations underpinning the various initiatives and OP budget commitments for ESIF.

Against this background, there is a need to consider the respective role of different instruments and improve the legibility of the financial instrument roadmap. ‘Synergies’ have become the holy grail of policy implementation, but the practicalities involved in achieving them are onerous, with different instruments driven by different regulatory requirements so that only the most determined, and those with the requisite

administrative capacity, are likely to be willing and able to achieve the coordination required.

Cohesion policy FIs offer strengths and weaknesses in this environment. Among their strengths are the capacity to adapt to local conditions, develop regional financial markets and improve the geographical equity of spend – there is a tendency for horizontal instruments to be demand-driven, with uptake higher in the more prosperous regions and to be unresponsive to local needs. Cohesion policy FIs also have weaknesses – some of the regulatory aspects demand significant administrative capacity and some monitoring and reporting requirements, as well as constraints on management costs and fees, risk being a disincentive to the involvement of financial intermediaries. At the same time, many Cohesion policy FIs are small and may lack the critical mass needed to be effective, and cost-effective.

In this context, some have promoted the SMEI as a ‘hybrid’ option which avoids the State aid and procurement issues faced by tailor-made instruments, and yet allows a degree of adaptation to specific conditions. However, it is premature to draw conclusions on the performance and satisfaction with SMEI as time is needed to understand to what extent SMEI meets regional requirements, and / or potentially undermines capacity building.

In parallel, it is open to question whether it is realistic or desirable to seek to increase further the use of FIs in Cohesion policy, especially in areas that come within the realm of horizontal policies and when the scope for comparatively large numbers of standardised applications (as is possible in the areas of SME support and to some extent energy efficiency) is limited. However, this of course touches on the more fundamental issue of the role of Cohesion policy in delivering sectoral elements of the Europe 2020 agenda, a question which is beyond the purview of the present study.

6.2.2. Greater regulatory stability

For many Managing Authorities and regional economies, the use of FIs in Cohesion policy represents an important cultural shift away from grant-based intervention. In this context the regulatory challenges have been significant – sparse rules and limited guidance in 2007-13, followed by detailed rules and delayed guidance in 2014-20. Many Managing Authorities are increasingly convinced of the merits of FIs in appropriate circumstances, but frustrated by the complexity of the rules and their revision on a seven-year cycle.

Against this background, there is a compelling argument for regulatory stability, enabling policy practice to develop to meet regional economic needs, rather than being dominated by concerns with compliance; in both the 2007-13 and 2014-20 policy cycles, discussions about the effectiveness of financial instruments have been overshadowed by issues of compliance and process, rather than policy design and a focus on ‘what works in what circumstances’ to address specific economic development objectives.

The proposed omnibus Regulation168 _{is designed to address a number of specific issues}

in the rules on financial instruments, notably, in the present context, in relation to

168

_{European Commission Proposal for a Regulation of the European Parliament and of the}

Council on the financial rules applicable to the general budget of the Union and amending Regulation (EC) No 2012/2002, Regulations (EU) No 1296/2013, (EU) 1301/2013, (EU) No

1303/2013, EU No 1304/2013, (EU) No 1305/2013, (EU) No 1306/2013, (EU) No 1307/2013, (EU) No 1308/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014,(EU) No 283/2014, (EU) No 652/2014 of the European Parliament and of the Council and Decision No 541/2014/EU of the European Parliament and of the Council, COM(2016)605 final of 14 September 2016.

contracting directly with national promotional banks for the implementation of FIs and facilitating the application of only one set of rules in the case of combinations of measures (such as ESIF and EFSI). However, there is a strong case for resisting further tinkering and allowing policy to bed down, enabling policymakers to focus on how well policy is working and to facilitate policy learning over several programming periods, rather than ‘relearning’ policy frameworks with each new cycle. As part of this, thought could be given to the scope to roll forward as seamlessly as possible those instruments which are considered to be performing well, without, for example, imposing a need to re- procure financial intermediaries just to coincide with the OP planning cycle. A further move that would enable the rapid set-up of FIs would be to undertake the ex ante assessment for FIs in parallel with the ex ante evaluation of OPs, which would also help avoid situations in which grants can be made available more quickly.

6.2.3. Refocusing guidance and support

Partly related to the second recommendation, there is a case for shifting the emphasis of guidance and support. The more detailed guidance provided in 2014-20 has generally been appreciated by Managing Authorities and financial intermediaries, but has also been criticised on several counts and steps could be taken to refocus support to target specific implementation needs, especially against the backdrop of regulatory stability.

First, in the 2007-13 and 2014-20 funding periods FI guidance has not been timely, but has often been published considerably later than the regulatory frameworks to which it relates. This creates uncertainty and / or delays in implementation since Managing Authorities must decide whether to proceed in the absence of guidance or await specific instruction. Greater stability in the regulatory framework would facilitate the simultaneous publication of the rules and guidance.

Second, and related, the status of guidance and the role of audit need to be clarified. The presence of guidance can be double-edged – the absence of guidance implies scope for discretion, but once guidance is available there is a widespread perception that auditors treat the content as mandatory, even where it may simply be intended to be illustrative or reflect good practice.

Third, financial instruments have become prominent in the EU economic development toolkit, but the term embraces mechanisms that are very diverse in objectives, scope, scale, design and governance. At the same time, administrative capacity and experience differ considerably. This implies the need for more tailored support, including: the development of off-the-shelf instruments that address a wider range of needs; targeted coaching and exchange of best practice, notably in specialised fields or under the ESF or EMFF where there is less experience to date; and more direct communication between Managing Authorities and the Commission to address specific issues.