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Views and opinions expressed in the adaptation are the sole responsibility of the authors of the adaptation and are not endorsed by The World Bank. podkarpackie Voivodeship Administration Agreement between the European Commission and the International Bank for Reconstruction and Development on the Part II Europe 2020 Programmatic Single-Donor Trust Fund Trust Fund No. TF072592 EC Contract No. CCI201 Financial Instruments – Podkarpackie Region Investment strategy in relation to financial instruments created based on the support funds returned from financial engineering instruments of the Podkarpackie Regional Operational Programme for 2007-2013 20 March 2017 Acknowledgements This report was prepared by a core team comprised of Maciej Gajewski and Jan Szczucki, and coordinated by Paul Kriss, Marcel Ionescu-Heroiu, and Grzegorz Wolszczak. The team would also like to thank Commissioner Corina Crețu for initiating the Initiative, Minister Jerzy Kwiecinski from the Poland’s Ministry of Economic Development for his invaluable support, and the European Commission’s team for outstanding engagement and support, especially Mr. Patrick Amblard, Mr. Wolfgang Munch, Ms. Justyna Podralska, Ms. Magdalena Horodynska, and Ms. Karolina Tilman from the DG REGIO. The team would also like to thank Arup Banerji, David Sislen, Carlos Pinerua, Marina Wes, and Isfandyar Zaman Khan for the advice and guidance provided throughout the elaboration of this report and Agnieszka Boratynska for her excellent support. The team is also indebted to all counterparts for the support offered in the elaboration of this study, the timely feedback, the excellent collaboration throughout, and their passion for developing their regions, especially: Danuta Cichoń, Bartosz Jadam, Jerzy Baran from the Podkarpackie Marshal Office, Marek Ignor from the Dolnośląski Development Fund, and to the representatives of all the financial intermediaries implementing projects within Podkarpackie Regional Operational Programme 2007-2013. The report was completed in March 2017. What is the Lagging Regions Initiative The scope of the EU Cohesion Policy is to narrow development gaps and reduce disparities between Member Countries and regions. To this extent, around €454 billion of ESI (European Structural and Investment) Funds have been allocated to help EU regions become more competitive. However, not all EU regions have been able to fully take advantage of the benefits of EU growth, due to the effects of the 2008 economic crisis and due to a host of structural problems. To this end, Corina Crețu, the Commissioner for Regional Policy, together with the Task Force for Better Implementation has started the Lagging Regions Initiative. The aim of the Initiative is to identify what holds back growth in less developed regions, and to provide targeted actions for unlocking their growth potential. Thus, these lagging regions will be assisted to involve a broad range of stakeholders (regional and local administrations, educational institutions, business support institutions, SMEs, entrepreneurs, investors, NGOs, IFIs) to help respond to concrete needs they have and to maximize the impact of regional investments. Two types of lagging regions have been identified: • LOW GROWTH REGIONS, which cover the less developed and transition regions that did not converge to the EU average between the years 2000 and 2013 in Member States with a GDP per Capita (PPS) below the EU average in 2013. These include almost all the less developed and transition regions in Greece, Italy, Spain and Portugal • LOW INCOME REGIONS, covering all the regions with a GDP per Capita (PPS) below 50% of the EU average in 2013. This group covers the less developed regions of Bulgaria, Hungary, Poland and Romania. Lagging Regions in the EU Source: DG REGIO Poland and Romania are the first countries to pilot this initiative, with two regions each – Swietokrzyskie and Podkarpackie in Poland, and North-West and North-East in Romania. In April 2016, Commissioner Crețu together with Marshal Adam Jarubas in Swietokrzyskie and Marshal Wladyslaw Ortyl in Podkarpackie have officially launched the Polish part of the Lagging Regions Initiative called „Catching-up Regions Poland”. The „Catching- up Regions Poland” is an implementation-focused program that aims at providing tailored support to the two Polish regions to boost the impact of EU and private investments in specific areas selected by the two regions. Over a year of joint work, the World Bank provided hands-on technical assistance and helped coordinate five activities that were selected by the Podkarpackie and Swietokrzyskie regions in coordination with the European Commission, Ministry of Economic Development, and the Bank. The five selected activities were: • Improving the commercialization of Research & Development (R&D) results generated by public research facilities and enabling better utilization of existing technology transfer centers in the Podkarpackie region. • Strengthening the vocational education and training system in the Swietokrzyskie region, using best practice examples from around the world and tailoring them to the regional context. • Activating entrepreneurship in deprived areas in the Podkarpackie and Swietokrzyskie regions. • Identifying ways to improve conditions for starting a business in the Podkarpackie and Swietokrzyskie regions. • Supporting the creation of in-house financial instruments in the Podkarpackie region. This report constitutes one of the outputs of the “Catching-up Regions Poland” work. More outputs, including an overview report and reports for individual activities in both English and Polish can be accessed on the World Bank’s website. Overview/7 Summary/8 1. Financial instruments in Podkarpackie ROP 2014-2020/9 1.1 Priority Axis I (Thematic Objective 3, Investment Priority 3c)/11 1.2 Priority Axis VII (Thematic Objective 8, Investment Priority 8iii)/14 1.3 The size of financing gap in Podkarpackie/14 Contents 1.4 Conclusions for development of financial instruments strategy beyond Podkarpackie ROP 2014-2020/15 2. Findings from field research in the scope of assessing the interest and formulating conditions concerning financial instruments/20 2.1 The overall situation regarding financial instruments and the demand for them/21 2.2 The models of financial instruments implementation based on funds from 2007-2013/22 2.3 Financial products/23 3. Investment strategy – financial instruments created on the basis of funds returned from financial instruments of Podkarpackie ROP 2007-2013/25 3.1 Assumptions concerning financial instruments deployed as part of funds returned from financial instruments of Podkarpackie ROP 2007-2013/26 3.2 Financial instruments in a long-term perspective/29 3.3 Financial products/29 4. Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013/33 4.1 Model 1/34 4.2 Model 2/36 4.3 Model 3/40 4.4 Main conclusions and recommendations/41 5. Appendices/44 List of people/institutions with whom extended individual interviews were conducted/45 5 List of Tables Table 1. Financial instruments in Podkarpackie ROP 2014-2020/10 Table 2. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014- 2020 – standard loan in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante evaluation of financial instruments/11 Table 3. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014- 2020 – innovative loan in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante evaluation of financial instruments/11 Table 4. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014- 2020 – guarantee in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante assessment of financial instruments/12 Table 5. Division of allocations between the types of financial instruments/products in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on the recommendations of the Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation/12 Table 6. Division of allocation in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on recommendations of Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation/13 Table 7. Division of the allocation in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 according to the instrument value and size category of final recipient based on the recommendations of the Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation/13 Table 8. Estimation of the minimum number of loans/guarantees provided in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on the recommendations of Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation/13 Table 9. Parameters of the products planned as part of the financial instruments in Podkarpackie ROP 2014- 2020 – loan in Measure 7.3 of Podkarpackie ROP/14 Table 10. Financing gap in SME sector in Podkarpackie based on the Ex-ante evaluation of financial instruments of Podkarpackie ROP 2014-2020 and currently programmed allocation/15 Table 11. Map of financial instruments according to the type and source of financing/26 Table 12. General structure of financial instruments deployed from funds returned from financial instruments of Podkarpackie ROP 2007-2013/28 Table 13. Financial product 1 – general purpose working capital loan/30 Table 14. Financial product 2 – working capital loan for development purposes/31 Table 15. Financial product 3 – working capital loan, co-financing or pre-financing of EU projects/32 Table 16. The outline of key strengths and weaknesses – MODEL 1/36 Table 17. The outline of main strengths and weaknesses – MODEL 2/37 Table 18. The outline of main strengths and weaknesses – MODEL 3/41 6 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Overview This Report has been prepared as part of the pilot project of the European Commission titled: Catching-up Regions Initiative, implemented in 2016-2017 in selected regions of two European Union states, i.e. Poland and Romania. In Poland, the pilot project included Świętokrzyskie and Podkarpackie regions.1 The initiative objective is the identification of economic growth restrains in lagging regions of Europe and – on that basis – provision of advisory assistance consisting of individualised activities (specific for each region), contributing to the reduction of those restrains to improve conditions for investment and economic growth. The scope of advisory activities was determined with participation of the European Commission, regional and central government (in Poland: Marshal Offices of both regions and the Ministry of Economic Development) and the World Bank which also played the role of an entity implementing advisory services. One of the intervention areas, agreed for the action plan for Podkarpackie, were matters related to the development of regional mechanism of supporting micro, small and medium enterprises in accessing financing (Task no. 4). The subject of advisory services performed by the World Bank experts specifically concerned management of funds allocated in the region under the Regional Operational Programme for 2007-2013 (Podkarpackie ROP 2007-2013) to financial engineering instruments, subject to return following project implementation by financial intermediaries (approximately PLN 135 million). The objective was, therefore, to develop a strategy for this and to choose organisational form and to design operational model of re-engagement of funds, also considering the next programming perspective of EU aid (European Structural and Investment Funds) for 2014-2020, which also includes support of financial instruments. As part of advisory services, activities leading to incorporation of a limited liability company in Podkarpackie have been taken already. The company is to be called Podkarpacki Fundusz Rozwoju [Podkarpacki Development Fund - PDF]2 and it will take over tasks related to the organisation and management of financial instruments based on funds returned from Podkarpackie ROP 2007-2013 financial instruments and (like in the past) other financing sources. This document constitutes final report on advisory services performed from November 2016 to March 2017 in the scope described above. Warsaw, March 2017 1 http://ec.europa.eu/regional_policy/pl/policy/how/improving-investment/lagging_regions/ 2 Resolution of Podkarpackie Voivodeship Self-government (Sejmik) as of 27 February 2017 on consent to creation of a company under the name: Podkarpacki Fundusz Rozwoju Spółka z ograniczoną odpowiedzialnością [Podkarpackie Development Fund Limited Liability Company]. 7 Summary It is very important to design the rules of return of the funds allocated previously to the implementation of financial instruments under Podkarpackie ROP 2007-2013 (which will be the subject of separate “exit policy” developed by the representatives of the Marshal Office supported by WB consultants) and their further use in a way that would not compete with the funds of Podkarpackie ROP 2014-2020. This document contains an analysis of various aspects of regulating this last issue in the context of targeting financial instrument implementation under current programming perspective for 2014-2020. In Podkarpackie region the demand for loan instruments, and to a certain degree also guarantees, should be considerable, regardless of the financial instruments available in the current programming period. This thesis is supported by the estimated financing gap. Additionally, purely working capital loans may raise special interest. In the longer term, offering equity instruments may be considered. Possibility to freely design instruments, without restrictions of the EU fund application rules, is very important (and it is also a chance to ensure new instruments’ success), obviously maintaining compliance with applicable laws and regulations, including in particular regulations on eligibility for public aid. This also enables testing of new innovative instruments – previously very rare or non-existent on the regional financing market. The financial intermediaries interviewed are comparatively open to accept new solutions, although they are also rather cautious, indicating very limited cooperation between financial intermediaries in the region, and also between financial intermediaries and the Marshal Office. It is a common opinion that the capacity and experience of local financial intermediaries should be utilised. At this stage, we propose designing two types of working capital loans and loans for pre-financing and co- financing of projects implemented by SMEs under Cohesion Policy 2014-2020. Obviously, in a longer term, the range of financial instruments should be developed and expanded based on the needs analysis and sufficient demarcation between 2014-2020 funds. In terms of instrument implementation models, we propose three models for consideration, each based on a different level of involvement of the institution created at the regional level (Podkarpackie Development Fund). 1) Model 1 is the most traditional and is based on purely coordinating and accounting role of the regional fund (Podkarpacki Development Fund). It is very similar to the model previously used in Podkarpackie ROP 2007-2013, where virtually all lending activities were performed by local financial intermediaries. 2) Model 2 assumes execution of all lending activities at the regional level (by the regional fund). Financial intermediaries and their employees deal exclusively with identification and preliminary analysis of potential borrowers and support in the loan repayment monitoring process. 3) In turn, the model recommended by us – Model 3, is to a certain degree a combination of the first two models; it provides for loans to be granted by local financial intermediaries, they are fully liable for their repayment (obviously with certain loss ratio limits), and the loans are granted from a sub-account of Podkarpackie Development Fund to which financial intermediaries are authorised. Loans are also repaid to the account of Podkarpackie Development Fund. PDF is also responsible for determining the parameters of individual financial products offered by local intermediaries. The types and parameters of individual products should be determined with consideration given to the identified needs of regional micro, small and medium enterprises. Application of each model of financial instruments implementation, in particular of Models 2 and 3, will require ensuring specific organisational capacity (managerial) of the regional fund, provision of capital and other necessary assets, including knowledge of its staff and access to advisory services. We have specified those issues in the final part of this Report, underlining also their immense importance. 8 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Activity 4 Financial Instruments – Podkarpackie Region 1 Financial instruments in Podkarpackie ROP 2014-2020 9 In Podkarpackie ROP 2014-2020, using General scheme of instruments financial instruments as a form of support programmed in Podkarpackie ROP to micro, small and medium enterprises is presented in the table below.The and entrepreneurship is planned in two investment strategy contained in the Ex- priority axes of the Programme, i.e. in: ante evaluation for Podkarpackie ROP financial instruments considers various • Priority Axis I (titled: Competitive and recommendations concerning the design Innovative Economy) in Measure of the products planned under individual 1.4 SME Support (Sub-measure 1.4.2 financial instruments. The tables below Financial Instruments) and contain a summary of determinations of the Ex-ante evaluation in this regard.5 • Priority Axis VII (titled: Regional Labour Market) in Measure 7.3 Entrepreneurship Development Support (Project Type 2). Table 1. Financial instruments in Podkarpackie ROP 2014-2020 Measure Financial Source for / Sub- Beneficiary Target group Allocation3 instrument parameter setting measure EUR 44.72 • Standard loan Sub- million • Innovation loan measure Micro, small and medium enterprises ≈ PLN 192.3 • Guarantee 1.4.2 BGK as million Recommendations implementing of the Ex-ante entity of the Persons at least 29 years old who are evaluation of financial EUR 5.73 fund of funds unemployed or economically inactive, instruments4 Measure million including farmers and their family members, • Loan 7.3 ≈ PLN 24.6 running individual farms up to 2 ha, million intending to abandon agricultural activities. Source: Detailed Description of Priority Axes of Podkarpackie ROP 2014-2020 (version as of 07.02.2017) 3 Conversion to Polish zloty at the EUR 1 = PLN 4.3 rate. In further parts of this Report, making estimations related to the planned use of the allocation, we considered only its value arising from the support from European Union funds (on the basis of values set out in Detailed Description of Priority Axes of Podkarpackie ROP for 2014-2020). We do not consider additional amounts which will be contributed to the instruments by the implementing institution. In accordance with the Detailed Description of Priority Axes of Podkarpackie ROP, maximum percentage level of total co-financing of eligible expenditure at the project level (EU funds + potential co-financing from the state budget or other sources granted to beneficiaries by relevant institution) amounts to 95%. This means that the results of the estimations are slightly distorted – in reality, following allocation supplementation, they will be slightly higher. The calculations also do not consider allowances for costs and charges related to instrument management (those issues are also not considered in the Ex-ante evaluation for Podkarpackie ROP financial instruments which is our main reference here – so in general, results of all calculations are indicative only). 4 Ocena ex-ante instrumentów inżynierii finansowej w ramach RPO WP 2014-2020, Rzeszów 2014 (Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020). 5 The Ex-ante evaluation is in many places rather general and some of its findings / recommendations are controversial, often their description is unclear (for the present analysis the document is not that useful – this in fact means that it must be verified and updated when the implementation of financial instruments would be started; considering the purpose of the present Report, we do not analyse here those defects). However, in our opinion some general description of the products planned is useful from the point of view of designing products / instruments provided from funds returned from Podkarpackie ROP 2007-2013 financial instruments and re-engaged. We consider those parts of the analysis that refer to measures/sub-measures of the Programme where (in the current Programme version) the premise of the financial instruments application was maintained. 10 ACTIVITY 4 - Financial Instruments – Podkarpackie Region 1.1 Priority Axis I (Thematic Objective 3, Investment Priority 3c) Table 2. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014-2020 – standard loan in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante evaluation of financial instruments Financial instrument product parameters Remarks Maximum loan value Up to PLN 120,000 - Maturity Up to 5 years - • Loans up to PLN 20,000 – 2% p.a. • PLN 20,000 to PLN 60,000 – 6% p.a. Interest rate Variation depending on loan value • PLN 60,000 to PLN 120,000 – 10% p.a. One-time or flexible (3 months per annual Grace period 6 months repayment period) Security Any legal form (material and non-material) - General focus on “enterprise development Purpose Undefined support” Specific requirements - Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 Table 3. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014-2020 – innovative loan in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante evaluation of financial instruments Financial instrument product parameters Remarks Maximum loan value Up to PLN 400,000 - Maturity Up to 5 years - • Loans up to PLN 60,000 – 2% p.a. Interest rate Depending on loan value • PLN 60,000 and more – 6% p.a. One-time or flexible (3 months per Grace period 6 months twelve-month period) Security Any legal form (material and non-material) - Innovative undertakings, including purchase of assets based on This assumption indicates the investment Purpose technologies known on the domestic market not longer than for 2 purpose of financing years, supporting “launch of new products in new markets” Specific requirements - - Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 1 - Financial instruments in Podkarpackie ROP 2014-2020 11 Table 4. Parameters of the products planned as part of financial instruments in Podkarpackie ROP 2014-2020 – guarantee in Sub-measure 1.4.2. of Podkarpackie ROP – based on Ex-ante assessment of financial instruments Financial instrument product parameters Remarks Maximum loan value Up to PLN 500,000 Maximum share of guarantee in secured liabilities is not defined Maturity Up to 6 years - Up to 2% of guarantee value per Interest rate No details defined (one-time, for each year on current value of guarantee) annum Grace period 6 months One-time or flexible (3 months within twelve-month repayment period) Non-material, as an exception – all Blank bill of exchange with bill of exchange declaration; other forms in Security legal forms case of identification of higher risk of undertaking Purpose All types of projects Enterprises without appropriate security for liabilities incurred Specific requirements - - Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 In case of loans and guarantees, included • in terms of the assumptions in Sub-measure 1.4.2 of Podkarpackie concerning allocation division ROP, the Ex-ante evaluation contains to individual types of financial recommendations concerning: (1) instruments/products:also a division of the allocation between conclusion was formed (with individual types of financial instruments reference to other studies) that (and in case of loans – also products), general distribution of financial (2) directing financing to investment instruments, due to their investment and working capital purposes, and (3) vs. working capital purposes, should recommendations related to territorial follow 3:1 ratio of intended use for de-limitation of final recipients of financial investment and working capital instruments, indicating the need to purposes: focus some instruments on the so-called marginalised areas. As follows6: Table 5. Division of allocations between the types of financial instruments/products in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on the recommendations of the Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation Value Standard loans Innovation loans Guarantees PLN 192.3 million Allocation – Sub-measure according to the Detailed Description 1.4.2 Podkarpackie ROP PLN 128.8 mln PLN 26.9 mln PLN 36.6 mln of Priority Axes of Podkarpackie ROP 2014-2020 2014-2020 Share 100% 67% 14% 19% Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 and Detailed Description of Priority Axes of Podkarpackie ROP 2014-2020 (version of 07/02/2017) 6 The distribution scheme of support allocation in Sub-measure 1.4.2 of Podkarpackie ROP presented in the tables below constitutes fairly specific recommendations for the entity implementing the fund of funds in Podkarpackie, however, the entity managing the fund of funds, i.e. BGK, will have – as we assume – certain freedom in verification of those assumptions to better adjust them to the current situation in the region in terms of financial instrument supply and demand and the scale of the financing gap (it is justified even just considering the time that has passed since the issue of Ex-ante evaluation of financial instruments). 12 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Table 6. Division of allocation in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on recommendations of Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation Investment Working capital Value purposes purposes PLN 192.3 million Allocation – Sub-measure 1.4.2 according to the Detailed Description of Priority Axes PLN 144.2 mln PLN 48.1 mln Podkarpackie ROP 2014-2020 of Podkarpackie ROP 2014-2020 Share 100% 75% 25% Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 and Detailed Description of Priority Axes of Podkarpackie ROP 2014-2020 (version of 07/02/2017) • it was proposed that 25% of the should be received by micro and allocation of support under the small enterprises based in villages and Programme should be reserved for towns of populations not exceeding debt financing intended for low-value 20,000 – estimation of this value, i.e. the (up to PLN 20,000) loans for micro number of loans/guarantees granted enterprises7:it was proposed that in marginalised areas, in a simplest way contracts with financial intermediaries possible (i.e. considering the allocation should contain solutions ensuring more value and assuming that individual extensive penetration into economically loans and guarantees will be granted and socially marginalised areas – it was at their maximum value) gives the decided that 25% of loans/guarantees following result: Table 7. Division of the allocation in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 according to the instrument value and size category of final recipient based on the recommendations of the Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation Allocation for loans Other loans Loans up to PLN 20,000 (standard and innovation) (up to PLN 400,000) Allocation – Sub-measure 1.4.2 PLN 155.7 million PLN 32.2 mln PLN 123.5 mln Podkarpackie ROP 2014-2020 Share 100% 20.7% 79.3% Category (size) of final recipient Micro enterprise SME Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 and Detailed Description of Priority Axes of Podkarpackie ROP 2014-2020 (version of 07/02/2017 Table 8. Estimation of the minimum number of loans/guarantees provided in Sub-measure 1.4.2 of Podkarpackie ROP 2014-2020 based on the recommendations of Ex-ante evaluation of financial instruments in Podkarpackie ROP and currently programmed allocation8 Financial instrument/product Allocation Maximum value Number 25% Standard loans up to PLN 20,000 PLN 32.2 mln PLN 20,000 1 610 403 Standard loans up to PLN 120,000 PLN 96.6 mln PLN 120,000 805 202 Innovation loans PLN 96.6 mln PLN 400,000 68 17 Guarantees PLN 36.6 mln PLN 500,000 74 19 PLN 192.3 mln Total according to the Detailed Description of - 641 641 Priority Axes of Podkarpackie ROP 2014-2020 Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020 and Detailed Description of Priority Axes of Podkarpackie ROP 2014-2020 (version of 07/02/2017) 7 In the table, the allocation value for those products is calculated based on the allocation value for standard loans (25% * PLN 128.8 mln). This means that the share of such products in the total allocation for debt instruments (standard and innovation loans) will be about 20.7%. 8 To simplify, it was assumed that the average value of financing will be equal to the maximum value, which obviously will not be the case. It may be therefore assumed that the number of loans and guarantees will be in reality higher than those indicated, even by 30-40%. 1 - Financial instruments in Podkarpackie ROP 2014-2020 13 1.2 Priority Axis VII (Thematic Objective 8, Investment Priority 8iii) Ex-ante evaluation of financial Detailed Description of Priority Axes instruments provides also for a loan of Podkarpackie ROP 2014-2020, it structured as a typical instrument was determined, for the purposes of supporting undertaking business activity implementation of Measure 7.3, that and at the same time playing the role of a the loans offered out of its funds will be labour market intervention instrument (in allotted for persons at least 29 years old, the area of supporting self-employment unemployed or economically inactive, Table 9. Parameters of the products planned as part of the financial instruments in Podkarpackie ROP 2014- 2020 – loan in Measure 7.3 of Podkarpackie ROP Financial instrument product parameters Remarks Maximum loan value Up to PLN 60,000 - Maturity Up to 5 years - Depending on the loan value – interest rate growing Interest rate From 0.7% to 7% with the loan value (no details provided) Grace period 12 months To be used throughout maturity period Loans up to PLN 10,000 secured by guarantee by Security Non-material natural person(s) No limits – financing for investment and working Purpose Undefined capital purposes ("mixed" purpose possible) Maintaining business activity for at This requirement seems to suggest that this is a product Specific requirements least 18 months for newly created entities Source: Ex-ante evaluation of financial engineering instruments under Podkarpackie ROP 2014-2020 processes among the unemployed). including farmers and their family The investment strategy in the Ex-ante members, running individual farms up to evaluation of financial instruments 2 ha, who intend to abandon agricultural proposes the following configuration activities. Currently, no other, more of that type of loans:Eventually, with specific determinations on configuration reference to the current version of of such loans are available. 1.3 The size of financing gap in Podkarpackie The estimation of the financing gap in for Podkarpackie ROP 2014-2020 has led the regional SME sector made in the Ex- to a finding that the size of the gap per ante evaluation of financial instruments annum is from PLN 235 to 305 million9. 9 Ex-ante evaluation of financial instruments…, op. cit., p. 24. 14 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Finally, estimation at the level of about annual financing gap determined10. As PLN 300 million per annum was accepted a result of such assumption, the Ex-ante as justified. At the same time, the authors evaluation determined the total value of the Ex-ante evaluation assumed, of financing gap for 2014-2020. It was considering the specificity of the methods assumed that in Podkarpackie, the size of used to estimate the gap, that thanks to financing gap in SME sector is at the level them it is possible to assume the lack of about PLN 2 billion. of any trend changing the value of the Table 10. Financing gap in SME sector in Podkarpackie based on the Ex-ante evaluation of financial instruments of Podkarpackie ROP 2014-2020 and currently programmed allocation Model approach (AFN) (PLN mln) Start-ups (PLN mln) Enterprise Statistical approach size category (PLN mln) Total Equity gap Debt gap Annually Bi-annually Micro 604 563 293 265 485 180 Small 528 969 406 546 122 423 558 046 Medium 1 115 681 886 396 229 285 978 781 SME Total: 1 644 650 1 292 942 351 708 2 141 390 Source: Ex-ante evaluation of financial engineering instruments for Podkarpackie ROP 2014-2020, p. 24-25. 1.4 Conclusions for development of financial instruments strategy beyond Podkarpackie ROP 2014-2020 Characteristics of the proposed financial financing gap in Podkarpackie in the instruments/products outlined in the upcoming years constitute a context investment strategy in the Ex-ante to plan instruments created from funds evaluation of financial instruments for returned from financial instruments Podkarpackie ROP 2014-2020, and distributed in Podkarpackie under estimations concerning the size of Podkarpackie ROP 2007-2013. 10 This assumption is not fully convincing. Disregarding changes occurring in the financing market and also more general changes – in the whole economic system – is a little reckless (in the gap calculations – in some of the methods used – the Ex-ante evaluation uses data from 2012). However, for the purposes of this Report that estimation is not without use. In our opinion, it may determine the initial size of the gap. Its potential growth does not matter as it will (even more so) confirm justification of the use of financial instruments as a form of supporting enterprises (for example, in relation to access to financing sources or creation of incentives to invest). On the other hand, there are no obvious reasons which would justify a thesis that the gap will significantly decrease (for example, the cost of financing was not deemed in the Ex-ante evaluation a condition significantly affecting the gap size – therefore, the recent decline in the market level of interest rate of debt instruments should not play an important role). Naturally, cyclical study of the financing gap would greatly facilitate financial instrument programming. 1 - Financial instruments in Podkarpackie ROP 2014-2020 15 Below, we present 10 most important returned from financial instruments conclusions crucial for development of invested under Podkarpackie ROP 2007- financial instruments based on funds 2013: 1 Existence of a gap in access to economic activity financing sources justifies further deployment/provision of financial instruments. The size of anticipated financial gap for funds and targeted at improvement SME sector in the region justifies the of economic activity financing source need for further deployment/provision availability in the region. of financial instruments based on public Financing gap – its size means that there is no risk of internal competition among financial 2 instruments supported by various sources (instruments created basing on funds returned from Podkarpackie ROP 2007-2013 vs. deployed under Podkarpackie ROP 2014-2020). The scale of the financial gap in the during a period of a few years), in region suggests that there is no special comparison to the estimated annual gap risk of excessive (unreasonable) scale of at the level only slightly lower (PLN 235- financial instrument support. The sum 305 million) than the total allocation (under of allocation for financial instruments in both programming perspectives). The Podkarpackie ROP 2014-2020 and the claim that the value of public support is volume of funds to be returned from excessive and it may consequently lead to financial instruments of Podkarpackie mutual competition between individual ROP 2007-2013 is about PLN 350 million instruments is therefore unjustified. (although that amount will not be Obviously, the form of individual financial available at one time, and Podkarpackie products will also be of certain significance ROP 2007-2013 funds will be returned (this means that variation is still desirable). 3 There is demand for non-bank debt financing. Reporting information of the Polish according to evaluation – high level Association of Loan Funds shows (“Each year, loan funds are becoming that interest in debt financing for more important in ensuring access to business purposes, offered by non- external financing to SME sector”11). The bank institutions (traditional financial loans offered are largely preferential intermediaries distributing financial instruments – with low interest rates, instruments based on allocations under and that naturally raises the level of aid programmes), is at a stable and – interest in them. 4 There is demand for non-bank guarantee instruments. The range of financial instruments of assumptions). It should be noted that Podkarpackie ROP 2014-2020 includes the situation in guarantee sector (local programming of funds intended for and regional non-bank guarantee funds) guarantees (Measure 1.4.2 provides for has improved recently. This is supported that purpose about 19% of the allocation by the reporting data of the National – according to Ex-ante evaluation Association of Guarantee Funds. In 11 Rynek funduszy pożyczkowych w Polsce - Raport 2015 [Loan fund market in Poland: 2015 Report], PZFP, Warszawa 2015, p. 21. 16 ACTIVITY 4 - Financial Instruments – Podkarpackie Region 2015 both the number and the value for guarantee provision is therefore of guarantees provided increased justified – but rather to limited extent (while 2014 was the worst period (it has been programmed that way in in this regard in the last few years). terms of financial instruments under Inclusion in Podkarpackie ROP support ROP 2014-2020). 5 Financial instruments in Podkarpackie ROP 2014-2020 – majority of financial products directed for investment financing. Details of allocation for financial allocation). It may be therefore assumed instruments under Podkarpackie ROP that in the practice of implementing 2014-2020 show that financing will be in financial instruments under Podkarpackie majority used for investment instruments ROP 2014-2020, investment instruments (in accordance with Ex-ante evaluation, in will dominate, although it is not ruled out Measure 1.4.2 of Podkarpackie ROP 2014- that part of the allocation will be used for 2020, it will be probably about 75% of the working capital products12. 6 There is demand for non-bank debt instruments used for working capital financing (products – working capital loans). Activities of loan funds (throughout regulatory framework for provision of Poland, and also in Podkarpackie) are loans by funds limited the possibility of focused mainly on development – their use in products for working capital investment capital financing. “The financing. On the other hand, however, number of investment loans provided in interest in working capital loans is 2015 was almost two times higher than significant – such targeting of a part the number of working capital loans or of financing would allow even more working capital and investment loans; comprehensive support of enterprise it was the same in terms of their value13“. development14 by non-bank institutions At the same time, however, the Polish and would constitute an important Association of Loan Funds stresses that element of reducing the financing gap15. 12 In the 2014-2020 programming period for EU financing, the possibility of directing funds to financial instruments used for working capital purposes has been finally clarified and – in accordance with the latest interpretation – is allowed (in the previous programming period there were many ambiguities in this regard). Currently, possibilities (and rules) of financing working capital are described in relevant guidance of the European Commission of 27 March 2015. (EGESIF_14_0041-1), see Guidance for Member States on Article 37(4) CPR – Support to enterprises/ working capital, [https://www.fi-compass.eu/publication/ec-regulatory-guidance/ec-regulatory-guidance-guidance-member-states-article- 374-cpr]. This means that instruments for financing of working capital needs may be present as part of Podkarpackie ROP 2014-2020 funds. However, we assume that instruments will eventually be diversified in such way that funds from 2014-2020 perspective will serve mainly for financing of investment, as determinations of the Ex-ante evaluation indicate such scenario. Moreover, it should be added that to finance working capital from funds of 2014-2020 perspective, although allowed, will be subject to the requirement to justify a given undertaking in the business plan (which will constitute certain burden on the part of final recipient, and also financial intermediary who will analyse such document). So, we would like to stress that a business plan is also required when the purpose of financing is “delivery of capital for the strengthening of the general activities of an enterprise (such as activities aimed at stabilising and defending the existing market position, strengthening of capacity utilisation)” – conclusion on the basis of the answer to questions related to the presentation of financing issues + EGESIF of 17 December 2014. Therefore, for example, making a decision on provision of financing for general working capital purposes cannot be limited to a justification based on historic data. To sum up, working capital financing based on funds from 2014-2020 perspective is allowed, but it requires certain level of documentation justifying that type of financing. 13 Loan Fund Market…, op. cit., p. 35. 14 Op. cit. 15 For example, this assumption is very strongly reflected in the offer of Dolnośląski Fundusz Rozwoju (Dolnośląski Development Fund – regional institution managing financial instruments funded from funds returned from Dolnośląskie ROP 2007-2013), under which funds are provided to intermediaries to grant two types of working capital loans: (1) to fund ongoing expenditure and (2) to fund current expenses related to the needs of manufacturing operations. 1 - Financial instruments in Podkarpackie ROP 2014-2020 17 (1) Podkarpackie ROP 2014-2020 – mainly financial instruments for investment purposes; 7 (2) Funds returned from Podkarpackie ROP 2007-2013 – mainly financial instruments for working capital financing. Current allocation of funds with a division (for example, loans connected with into orientations of financing provided in lease transactions for financing of own Podkarpackie ROP 2014-2020 leads to contributions, factoring service provision programming solutions where financial or also – in the sphere of guarantee instruments supported by funds services – guarantees to secure liabilities returned from ROP 2007-2013 would be arising from tendering security deposits, focused on working capital financing, and also guarantees to lease liabilities). and funds from current perspective Also, note that financing under financial (Podkarpackie ROP 2014-2020) would instruments based on the funds from be used mainly for investment purposes. 2007-2013 will not be subject to time Moreover, instruments realised based restrictions related to achievement of on “returned” funds from Podkarpackie specific indicators and limited period of ROP 2007-2013 could also be allotted to eligibility of expenditure within 2014- financing less common (unconventional) 2020 period. As a result, more balanced instruments, in terms of previous and in-depth preparation of specific practices and experiences of non-bank scope of proposed financial instruments financial intermediaries in Podkarpackie will be possible. 8 As clear and specific demarcation of financial instruments as possible, depending on the financing source. Demarcation proposed above, due to the 2007-2013), their preferentiality would purpose of the financing, should be – as be lower (higher interest rates – at much as possible – clear and specific16. market level or slightly lower), and they At the same time, it would be reflected would be instruments intended for in varied preferentiality. We therefore working capital financing. Such solution assume that instruments realised based would guarantee complementarity of the on funds from 2014-2020 perspective whole scheme of financial instruments would contain a strong incentive in Podkarpackie. Promotional activities element (for example, zero or low interest should also be planned appropriately, to rate, higher amount of financing for the indicate such complementarity. Also, as client), boosting interest in obtaining was indicated above, instruments based such financing for investment purposes. on funds returned from Podkarpackie In case of financial instruments funded ROP 2007-2013 could include from returned funds (Podkarpackie ROP unconventional instruments/ products. 9 An expansion of the range of financial instruments by equity instruments (to target early stages of enterprise development) is recommended. Also, establishment of support for equity to comparatively extensive capacity instruments in Podkarpackie should be of universities in Rzeszów (students/ assumed, to target early development graduates as the main group of idea stages of innovative undertakings. This originators) and the fact that financing of argument seems to be justified due such financial instruments is not planned 16 We should remember, however, our previous conclusion which indicates that significant level of the financing gap means that some overlap of the purpose of financial instruments/products should not pose special risk of internal competition between instruments/products funded from various sources (funds returned from Podkarpackie ROP 2007-2013 vs. Podkarpackie ROP 2014-2020). 18 ACTIVITY 4 - Financial Instruments – Podkarpackie Region within Podkarpackie ROP 2014-2020 in obtaining such type of financing by funds17, and also practices/experiences of potential final recipients (idea originators, other regions in deployment of this type of start-up initiators20). It is also not without instruments18. Preparation and deployment significance that Podkarpackie today of this type of financial instruments justifies hosts manufacturing specialisations, also (and in particular), on the one hand, especially predisposed to generate their lack in Podkarpackie (very limited innovative solutions (in particular, aviation local sources19), on the other hand, interest and related industries). There is a possibility of unconstrained development of financial instruments created basing on the funds returned from financial instruments of Podkarpackie 10 ROP 2007-2013, to design instruments simple in terms of procedure for financial intermediaries, and also instruments varied in terms of the type and method of financing of the needs of final recipients. Financial instruments created basing on use of funds (also too rigorous parameters funds from 2007-2013 perspective may be of allowed loss ratio). designed rather freely. Their engagement is not subject to legal regulations usually The possibility of flexible design of financial applicable to European structural instruments based on funds returned from financing (and, depending on approach, Podkarpackie ROP 2007-2013 also enables its consequences). Therefore, the aim is designing instruments that had not been to design instruments in such a way that available before in the range offered by they are not bound by many restrictions/ regional financial intermediaries. This difficulties of formal/bureaucratic means instruments mentioned above nature. As indicated by interviews held described as “unconventional”. Without a with financial intermediaries, it was one doubt, considering this kind of solutions of the factors attracting numerous critical will contribute to diversification of non- opinions on the support of financial bank financing products, which in turn instruments in Podkarpackie in 2007- would give the possibility of better, 2013 perspective. The criticism is usually more universal reaction in relation to the justified by the presence of several attempts to reduce the financing gap in difficulties related to accounting for the the region. 17 This aspect is not considered in the Ex-ante evaluation of financial instruments for Podkarpackie ROP 2014-2020. 18 We can again look at the example of Dolnośląski Development Fund that is planning to invest some of the funds in equity instruments, targeted at financing seed and start-up phases of enterprises (innovative projects, including those based on the results of research and development activities). 19 In Podkarpackie, availability of “indigenous” (regional) investment vehicles specialising in financing early phases of development, is very limited. For example, in Measure 3.1 of the Operational Programme Innovative Economy (2007-2013), among 70 supported investment incubators only one was located in Rzeszów (based on: PAG Uniconsult and Imapp Analiza zasadności zastosowania poszczególnych form finansowania projektów I osi priorytetowej Przedsiębiorcza Polska Wschodnia, Etap 1 - Raport końcowy, Warszawa 2016, p. 75-79). In another report, in turn, (M. Gajewski, J. Szczucki, J. Witkowska, R. Kubajek Ewaluacja ex-post projektu systemowego , PAG Uniconsult, Warszawa 2015), one small private investment fund based in Rzeszów was identified. 20 We refer here to the experiences and conclusions related to the execution of another advisory component under the Catching up Regions Initiative, i.e. Activity 1, concerning the creation of a Regional Technology Transfer Office (RTTO). At the early stages of advisory works under Activity 1, it was discussed that one of the operational components of RTTO would be some financing mechanism for early development stages of ideas generated in RTTO. Those discussions were supported by identified interest of potential beneficiaries. In the end, however, that component was not included, assuming correctly that this may be realised (and would be more appropriate) within the component dedicated to financial instruments. In the future, development of equity instruments in Podkarpackie should be realised in connection with tasks/support offered as part of RTTO. It should be added here that the context of supporting equity instruments in Podkarpackie contains also another support instrument, executed as a pilot project under Operational Programme Eastern Poland 2014-2020 (OPEP). These are the so called Start-up Platforms (in Rzeszów some of the undertakings of Kielce Start-up Platform - Technopark Business Hub - are animated), developed under Sub-measure 1.1.1 OPEP (titled: Starting Platforms for New Ideas) and their accompanying instrument (Sub-measure 1.1.2 OPEP titled Start-up Development in Eastern Poland), in which the start-ups created in the Platforms may be capitalised through development subsidies (granted in competitions through the Polish Agency for Enterprise Development) of up to PLN 800,000. Without a doubt, the functioning of the Platforms and capitalisation support could be appropriately connected with the future offer of equity instrument support in Podkarpackie (provided that the pilot project brings positive results and consequently both measures are continued – which should be known at the latest by mid-2018). 1 - Financial instruments in Podkarpackie ROP 2014-2020 19 Activity 4 Financial Instruments – Podkarpackie Region 2 Findings from field research in the scope of assessing the interest and formulating conditions concerning financial instruments 20 ACTIVITY 4 - Financial Instruments – Podkarpackie Region As part of preparation of this strategy, may be indicated as regards the direct interviews were successfully implementation of financial instruments conducted with representatives of almost under Podkarpackie ROP 2014-2020, but all financial intermediaries implementing also (which is most important from the financial instruments under Podkarpackie point of view of this Report) as regards the ROP 2007-2013. potential design of financial instruments to be implemented on the basis of funds Based on the interviews, certain deriving from financial instruments conclusions and recommendations implemented in the 2007-2013 period. 2.1 The overall situation regarding financial instruments and the demand for them According to the respondents, the of information between individual demand for financial instruments remains institutions of the business environment at a relatively stable level, although it is implementing financial instruments obviously influenced by various factors. remains a serious problem for financial The following issues are the most intermediaries. As recently as a few important: years ago, when there was the National System of Services for SMEs coordinated • The interest in financial instruments by the Polish Agency for Enterprise offered on the basis of public funds Development and when meetings and increases during periods when training sessions were organised, the non-repayable financing is already things looked much better, whereas unavailable, both under regional and now, individual institutions are practically national operational programmes. left to themselves. According to the Such tendency is observed in 2007- respondents, the Marshal Office also 2013, and 2014-2020 will probably be does not make any visible effort leading similar. to a better integration and cooperation • The interest in financial instruments between financial intermediaries. also depends on the investment plans of enterprises, and obviously decreases As a result, in most cases smaller institutions (at least as far as investment financing find it rather difficult to monitor the current is concerned) during periods of situation on the refundable financing downturns in the country’s economic market or to exchange experiences21. situation, whereas it increases during Furthermore, no training is offered to good economic times. those institutions with quite specific • For many sectors, demand is seasonal, needs. Perhaps, this will change thanks to although this concerns to a greater initiating the implementation of financial extent the financing provided for instruments as part of the 2014-2020 working capital purposes, which – period and the role of Bank Gospodarstwa as a rule – was not offered under Krajowego as the manager of the fund of Podkarpackie ROP 2007-2013 or funds. On the other hand, also knowledge under OP DEP 2007-2013. of the principles of implementing financial instruments in 2014-2020 and of the As indicated by some respondents, financial intermediary selection mode is very limited cooperation and exchange very limited. 21 On a national scale, though, a positive role is played by the activity of the Polish Association of Loan Funds and the National Association of Guarantee Funds. 2 - Findings from field research in the scope of assessing the interest and formulating conditions concerning financial instruments 21 2.2 The models of financial instruments implementation based on funds from 2007-2013 According to most respondents, an ideal which intermediaries acting at the local solution from their point of view would level would intermediate in providing be an extension of the existing contracts loans offered by an entity acting at and at the same time waiver of the the regional level. It seems that more requirement to document management well-thought-out opinions could be expenditure and its settlement on a obtained if a specific offer of cooperation flat-rate basis. However, such solution is were presented to the intermediaries, relatively difficult to implement due to including also information on the detailed legal doubts as to its acceptability (the principles of dividing tasks and the rules issue of extending the existing contracts) of remuneration. The intermediaries as well as due to the serious challenge emphasised that (which is of great interest of demarcating the financing offered in to them) it would be very important (and relation to the allocation of funds under objectively justified) to use the capacity Podkarpackie ROP 2014-2020; yet, of financial intermediaries acting at the these issues are not actually known or local level. comprehensible to the representatives of financial intermediaries (which is quite According to some opinions, version understandable, taking into account the based on the financial intermediation different perspectives). model would still be markedly better than the model adopted for 2014-2020 The implementation of funds deriving in which the selection of intermediaries from Podkarpackie ROP 2007-2013 will be carried out through public was assessed relatively positively, even procurement, and that makes many though serious problems with the intermediaries concerned due to the lack clearance of management expenditure of relevant experience and (possibly) the were commonly indicated, as well as necessity to establish consortia composed the very long time of accepting the of a greater number of entities. clearance by the Marshal Office. The institutions that had the opportunity to Majority of respondents also pointed to carry out projects under the Operational the fact that – regardless of the finally Programme Development of Eastern adopted solutions – the financing offered Poland22, assessed cooperation with BGK and information about it should be easily very positively. It is worth emphasising available at the local level. In addition, it here that projects under OP DEP were of was pointed out that the requirement to repayable type and the funds gradually document the costs incurred should be returned to BGK as the loans were repaid. definitely waived. The respondents demonstrated a rather According to the majority of respondents, cautious (and sometimes definitely using the capacity of local financial critical) attitude to the little known intermediaries should make it possible, and so far rarely applied (although on the one hand, to effectively reach some exceptions may be found in this potential borrowers, and on the other context) model of implementation hand, to mitigate the risks related to based on financial intermediation, under providing a loan, thanks to the better 22 i.e. the Regional Development Agency in Mielec and the Regional Chamber of Commerce in Stalowa Wola. 22 ACTIVITY 4 - Financial Instruments – Podkarpackie Region knowledge of at least some potential In turn, in the event of establishment clients. It was further emphasised that – of an institution to manage financial at least for a considerable part of financial instruments in the whole region (or intermediaries – providing a loan is very using an existing institution for that often correlated with advisory provided purpose), some respondents pointed by the financial intermediary’s staff out that it was very important for its concerning such aspects as financing head (management board president) to business development or obtaining be a person possessing experience in external funds, including those non- the implementation or management of repayable. Not only does such advisory financial instruments or at least to have minimise the risks related to the project very good knowledge of the principles financed with the loan, but it may also of SME support. have a positive impact on other areas of activity of a given enterprise. 2.3 Financial products The respondents had in general very financing provided from national limited ideas as regards financial products funds (“First Business – Support at that may be implemented on the basis of the Start” programme, implemented, funds in the 2014-2020 perspective. The among others, by the Regional majority of them pointed out that most Development Agency in Mielec), and of the products offered so far have been they will presumably be offered as designed properly, with several minor part of Podkarpackie ROP 2014-2020. changes suggested, i.e.: • The validity of extending the product • The majority of respondents indicated range with working capital financing that loans should be offered for was also indicated; according to the relatively longer periods, even up to respondents such products would be 10 years, while the decisions on the in high demand. maturity of specific loans should be • None of the intermediaries made by financial intermediaries. interviewed mentioned validity of Extending the maturity of products deployment of financial products will facilitate access to financing due targeted at a specific sector/group to enhanced creditworthiness of of enterprises. According to the borrowers, whereas it will obviously respondents, “general” products increase the risk borne by financial principally targeted at a broad group intermediaries. of SMEs have proven the most • The validity of maintaining (or effective and there is no need to build possibly even developing) the specialised products. Such attitude, support for persons starting business even if not necessarily legitimate, is activity, including young people, as perfectly understandable as most the ones having the most difficulty financial intermediaries are small in obtaining commercial financing, entities with neither the experience was also highlighted. Nevertheless, nor the means to analyse the market it must be remembered that such in depth, which leads to the obvious products are offered thanks to the preference for general products. 2 - Findings from field research in the scope of assessing the interest and formulating conditions concerning financial instruments 23 • According to the respondents, Polish regions) has been dramatically working capital products related to delayed. which is also caused by the EU financing in 2014-2020, i.e. loans fact that some of the implementation to ensure an own contribution or arrangements are quite new for the to pre-finance a project, should also regions. be of interest to entrepreneurs and numerous intermediaries. If it was The restrictions concerning the possible to provide such loans, many acceptable level of loss ratio for the loans would be interested in incorporating remains a immensely important issue. them into their offer. According to the respondents, it should • Some intermediaries pointed out that be at least 15% of the portfolio value, and part of their clients are companies even 20-25% for higher risk products with hindered access to commercial (for example, loans for persons starting financing, not only due to a short a business or companies with short duration of the business, but also existence on the market). Lower loss ratio due to the fact that sometimes limits will lead to a more conservative some portion of their revenues is lending policy under which loans will not properly recorded in their official be provided mainly to companies with financial documents. It is possible longer duration of existence (i.e. to those to finance such companies only at a that already have relatively easy access to local level thanks to the knowledge commercial financing), and additionally of the specific ways they function intermediaries will require very extensive and the ability to obtain additional collateral. information of an informal nature regarding their actual profitability. In turn, guarantee instruments offered by intermediaries at the local or regional It remains a rather evident issue that level, similar to other regions of Poland, some financial intermediaries fail to have been moderately popular for some notice (or refuse to notice) that the time now, which is caused by a range interest of the financing offered by of factors, especially the limited capital them is based, to a considerable extent, endowment (and thus, the ability to on its preferential interest rates, which provide guarantees of greater value), the would have to be much higher under competition of programmes offered at normal market conditions. As a result, the national level (especially de minimis most institutions have a rather limited guarantees), and also the preference experience in promoting its products and among chain banks for guarantors designing them in such way that they capable of collaborating with a network are attractive also for reasons other than of banks across the country (offering purely financial benefit. country-wide unified guarantee offer). Demarcation between the funds of One respondent also pointed to the 2007-2013 and 2014-2020 period is a fact that the offer of so-called bid complex issue which goes practically guarantees (profitable and entailing unnoticed by financial intermediaries, minimum risk at the same time), which for obvious reasons. Naturally, from the has been developing quite rapidly on a point of view of the Marshal Office, it is national scale, also has its limitations since essential to quickly spend the funds of the it is usually not linked to a wider range current programming period provided of services, such as that provided by for financial instruments, which process insurance companies which usually offer (both in the Podkarpackie and in other contract performance guarantees too. 24 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Activity 4 Financial Instruments – Podkarpackie Region 3 Investment strategy – financial instruments created on the basis of funds returned from financial instruments of Podkarpackie ROP 2007-2013 25 3.1 Assumptions concerning financial instruments deployed as part of funds returned from financial instruments of Podkarpackie ROP 2007-2013 Taking into account the suggestions up, the logic in demarcating financial resulting from the Ex-ante evaluation instruments in Podkarpackie is based on of financial instruments as part of the assumption that on the basis of funds Podkarpackie ROP 2014-2020, and returned from instruments financed also due to the new opportunity for under Podkarpackie ROP 2007-2013, the supporting financial instruments as part following instruments will be deployed of the funds returned from Podkarpackie in the first place: ROP 2007-2013, and additionally taking into account the conclusions from • debt instruments used for the interviews with non-banking financial financing of working capital, and intermediaries in Podkarpackie, leads to Table 11. Map of financial instruments according to the type and source of financing Source of financing (public funds) Financial instrument Instrument target Funds returned from financial Funds allocated to financial type instruments of Podkarpackie instruments of Podkarpackie ROP 2007-2013 ROP 2014-2020 Debt XXX X or XX Working capital financing Guarantee XXX Unconventional X Debt XXX Grace period Security Guarantee XXX Purpose Unconventional X/XX Development financing Equity – stock XXX Priority: XXX – high importance, XX – medium importance, X – low importance. Source: own elaboration. the design of the following distribution • equity instruments, used for the of financial instruments and the financing of early development accompanying sources of financing from stages of innovative enterprises public funds, as follows: from allocation (business undertakings), regardless of provided under Podkarpackie ROP or in connection with the functioning 2014-2020 and funds returned from of the Regional Technology Transfer financial instruments distributed under Office (RTTO) (in the event that it is Podkarpackie ROP 2007-2013.Summing launched) as well as in cooperation 26 ACTIVITY 4 - Financial Instruments – Podkarpackie Region with Start-up Platforms for New Ideas that had not been offered by the developed under the Operational regional non-banking sector thus far. In Programme Eastern Poland 2014- this manner, in parallel to developing 2020 (Sub-measure 1.1.1 of OP EP) (if standard (debt) instruments, new the pilot project carried out in 2016 financing solutions and mechanisms may and 2017 is evaluated positively and be tested. With time and as the financial - therefore - the measure continued). capability increases, according to testing results, it will be possible to launch Due to the greater complexity of completely new instruments on the implementing equity instruments as well regional market, adjusted to the specific as the lack of regional experience in this needs of the regional SME sector. scope, the short-term implementation priority will be attributed to debt At the current planning stage, the instruments. following unconventional instruments may be indicated: Deployment of support for equity instruments will have to be preceded by • factoring (micro-factoring – the the Podkarpacki Development Fund (the financing of low-value current entity implementing financial instruments liabilities) – in the scope of financing based on the funds of Podkarpackie ROP the needs for working capital, 2007-2013, and subsequently also based especially in the segment of micro on other sources) obtaining knowledge (mainly) and small enterprises, and advisory services leading to the design of an equity support mechanism, • financing of deposits (own probably including the involvement of contribution) in lease transactions equity investment funds in the process (analogously – to micro and small of implementing it (seed/start-up enterprises – in the scope of selected capital) as well as taking into account capital goods). potential cooperation with other related instruments (Start-up Platforms). Detailed The unconventional instruments operational solutions concerning equity mentioned above do not constitute the instruments should be elaborated entire catalogue of potential solutions. gradually and simultaneously with the The task of the authority managing the implementation of debt instruments funds returned from financial instruments intended to finance working capital of Podkarpackie ROP 2007-2013 should needs. Therefore, we assume that this will be the identification of the needs of the be one of the tasks of the Podkarpacki regional SME sector in the scope of access Development Fund. to sources of financing and – according to the results of such identification – Funds returned from financial designing and testing new instruments/ instruments of Podkarpackie ROP 2007- solutions in this scope. We consider this 2013 should also serve for deployment “open” element of experimenting to be of unconventional instruments, both an important part of the tasks of the in the group covering the financing of authority managing the support funds working capital purposes as well as (naturally, it is also complemented by investment projects. In this scope, the ongoing observation/monitoring of the financing of intermediaries will be used financing gap on the regional financial to “experiment” with new instruments market). 3 - Investment strategy – financial instruments created on the basis of funds returned from financial instruments of Podkarpackie ROP 2007-2013 27 Table 12. General structure of financial instruments deployed from funds returned from financial instruments of Podkarpackie ROP 2007-2013 Purpose of Financial Products Final recipient types Importance23 financing instrument type • General purpose working capital loan • Working capital loan for the financing Micro, small and medium Debt XXX Working capital of supplies and services related to enterprises financing enterprise development • Micro-factoring Unconventional Micro and small enterprises X • Possibly other Investment • Micro-factoring Unconventional Micro and small enterprises X financing • Possibly other • Capital contributions/ investments for Micro-companies – start-ups the financing of the Proof-of-Principle (a portfolio created, among (PoP) phase24 other things, based on projects Development • Capital contributions in exchange Equity generated in RTTO) and with XXX financing for shares (financing of the Proof-of- potential cooperation with Start- Concept phase - PoC)25 up Platforms in Eastern Poland • Capital co-investment contributions (Lublin, Kielce) (with business angels) Priority: XXX – high importance, XX – medium importance, X – low importance Source: own elaboration The range of financial instruments – however, most probably, these will presented in the above table is correlated be working capital instruments related with financial instruments planned for to enterprise development. They may implementation under the allocation especially be expected in the case of of Podkarpackie ROP 2014-2020 (in loans provided for in Measure 7.3 of accordance with the classification Podkarpackie ROP 2014-2020; yet, the presented in the introduction – Table 11). In allocation for these loans is relatively this way, financial instruments from various small – it amounts to approximately sources will complement each other. PLN 24.6 million – see Table 1 and additionally Table 9; instruments of this “Overlapping” of financial instruments type may also be present in the case of occurs only to a certain extent as regards some standard loans in Sub-measure the working capital financing. It may be 1.4.2 of Podkarpackie ROP 2014-2020. assumed that some of the instruments In both cases, however, these will be (lesser part of them, actually) supported “working capital” instruments for which under Podkarpackie ROP 2014-2020 justification will be required in relevant will also cover working capital financing business plans26, and therefore, they 23 Operational importance in the support offered by Podkarpackie Development Fund. 24 The Proof-of-Principle is usually defined as a R&D&I project phase, consisting of early verification of an idea, during which industrial testing is conducted as well as experimental development work, preliminary evaluation of the R&D&I project potential, analysis of the competitive environment, definition of the research plan and the first milestones in project development. This phase may be carried out, for example, at research centres or by individuals or special project teams (inventors, originators). Conducting it is not principally related to a legally separated entity intended for the implementation of the project. 25 The Proof-of-Concept phase is a R&D&I project phase consisting of the proper verification of an idea, during which industrial testing is conducted as well as experimental development works whose results (if positive) will typically enable full patent application or transition to the international phase of claiming priority in the PCT mode or commercial use of the project outcome. It is usually carried out by a legally separated entity intended for the implementation of the R&D&I project. 26 The requirement resulting from EU guidance on working capital financing in the current period of structural fund programming (2014-2020). 28 ACTIVITY 4 - Financial Instruments – Podkarpackie Region will be naturally targeting working decision on targeting the financing of capital needs simultaneously applying debt instruments under Podkarpackie to development purposes. Naturally, ROP 2014-2020 strictly to investment the above considerations may be of no purposes in exchange for a high degree importance in the event of making a of instrument preferentiality27. 3.2 Financial instruments in a long-term perspective In a long-term perspective, the problem which will allow it to design instruments of appropriate demarcation of financial in such manner as to reflect as much as instruments will become limited due possible the current and future needs to the concentration of instruments of the regional sector of micro, small management in one regional entity and medium enterprises. Concentrating ( Podkarpacki Development Fund ). the function of managing financial From this point of view, the decision instruments will enable designing and on entrusting such role (financial implementing them as complementary instruments managing authority) to and non-competitive instruments Podkarpacki Development Fund is reflecting a broad spectrum of needs and completely justified. The funds from the regional economic sphere specificity. financial instruments implemented Also for that purpose, Podkarpacki under Podkarpackie ROP 2014-2020 – Development Fund should monitor in analogy to the 2007-2013 perspective the situation on the regional financing – will be managed by this institution, market. 3.3 Financial products In this part of the Report, we present managing financial instruments in the suggested parameters/specification the region. According to the previous of three financial products whose conclusions, these are the products deployment will constitute a starting concerning the financing of working point for the activity of the entity capital needs of enterprises. 27 Decisions in this scope will be made by BGK as the entity implementing the fund of funds in Podkarpackie based on the resources of Podkarpackie ROP 2014-2020. We assume that such decisions will be made in consultation with the Programme Managing Authority and with proper consideration of the suggestions included in this Report. 3 - Investment strategy – financial instruments created on the basis of funds returned from financial instruments of Podkarpackie ROP 2007-2013 29 Table 13. Financial product 1 – general purpose working capital loan No. Loan parameters – Type 1 A. General parameters Micro, small and medium enterprises residing or conducting business activity in A1 Final recipient Podkarpackie region A2 Loan amount Up to PLN 100,000 Capital for the financing of general needs of the enterprise related to its current activity A3 Target (purpose of financing) (financing current expenditures) A4 Repayment period Up to 12 months A5 Other - B. Cost parameters and repayment terms On market terms – considering the reference rate determined by the financial intermediary in accordance with the risk assessment methodology applied by the intermediary and B1 Interest rate considering the recommendations of the Commission Communication on the revision of the method for setting the reference and discount rates28 – increased by 1 percentage point Commissions charged by the B2 1-4% financial intermediary B3 Repayment terms At financial intermediary’s discretion B4 Other - C. Documentation parameters Confirmation of payment of the C1 At the financial intermediary’s discretion (declaration or another form(s) of confirmation) borrower’s statutory liabilities Restrictions – ban on the repayment C2 Acceptance by the borrower by a declaration of statutory liabilities out of the loan Restrictions concerning the loan C3 Specified within the loan contract purpose C4 Other - D. Securities D1 Basic Blank promissory note D2 Additional At the financial intermediary’s discretion – in line with the loan security methodology applied E. Other – organisational Maximum one loan per borrower (further loans must not be provided during the E1 Involvement repayment period) Deadline for portfolio development From 9 to 18 months (finally determined in the agreement with the financial intermediary) E2 by financial intermediary Alternatively: no deadline 10-15% of the amount of funds disbursed from the loan financing account (used limit for E3 Loss ratio limit Type 1 loans), to be finally determined and settled E4 Debt collection costs The cost of debt collection is reimbursed by PDF in whole or in part (e.g. 80%) Provision of capital for the From the limit awarded – disbursements from the account: each loan upon conclusion of E5 disbursement of loans loan contract E6 Other - Source: own elaboration 28 OJ L C 14 as of 19.1.2008, p. 6. 30 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Table 14. Financial product 2 – working capital loan for development purposes No. Loan parameters – Type 2 A. General parameters A1 Final recipient Micro, small and medium enterprises residing or conducting business activity in Podkarpackie A2 Loan amount Up to PLN 200,000 Financing the expenditure related to developing manufacturing activity: materials and raw A3 Target (purpose of financing) materials, services, and other – as indicated Up to 12 months (with the possibility of one extension maximum by further 12 months based on a simplified analysis/ verification of the borrower’s financial standing) – loan A4 Repayment period extension if sales increase at 25% of the loan value is documented (benchmark – sales at the date of concluding the loan contract) A5 Other - B. Cost parameters and repayment terms On market terms – considering the reference rate determined by the financial intermediary in accordance with the risk assessment methodology applied by the intermediary and B1 Interest rate considering the recommendations of the Commission Communication on the revision of the method for setting the reference and discount rates29 Commissions charged by the B2 1-4% financial intermediary B3 Repayment terms At financial intermediary’s discretion B4 Other - C. Documentation parameters Confirmation of payment of the C1 At the financial intermediary’s discretion (declaration or another form(s) of confirmation) borrower’s statutory liabilities Restrictions – ban on the repayment C2 Acceptance by the borrower by a declaration of statutory liabilities out of the loan Restrictions concerning the loan Specified within the loan contract – for the indicated types of expenditure/ expense group C3 purpose Loan clearance based on invoices (in full or at least 70-80% of loan value, to be determined) C4 Other - D. Securities D1 Basic Blank promissory note D2 Additional At the financial intermediary’s discretion – in line with the loan security methodology applied D3 Other - E. Other – organisational Maximum one loan per borrower (further loans must not be provided during the repayment E1 Involvement period; one type 1 loan may be provided) Deadline for portfolio development From 9 to 18 months (finally determined in the financial intermediary agreement) E2 by financial intermediary Alternatively: no deadline 10-15% of the amount of funds paid from the loan financing account E3 Loss ratio limit (used limit for Type 2 loans) E4 Debt collection costs The cost of debt collection is reimbursed by PDF in whole or in part (e.g. 80%) Provision of capital for the From the limit awarded – disbursements from the account: each loan upon conclusion of E5 disbursement of loans loan contract E6 Other - Source: own elaboration 29 OJ L C 14 as of 19.1.2008, p. 6. 3 - Investment strategy – financial instruments created on the basis of funds returned from financial instruments of Podkarpackie ROP 2007-2013 31 Table 15. Financial product 3 – working capital loan, co-financing or pre-financing of EU projects No. Loan parameters – Type 3 A. General parameters Micro, small and medium enterprises residing or conducting business activity in A1 Final recipient Podkarpackie and carrying out projects under Cohesion Policy 2014-2020 A2 Loan amount Up to PLN 1 million A3 Target (purpose of financing) Pre-financing or financing of own contribution in a project financed by EU funds A4 Repayment period For the project implementation period, possibly + maximum 12 months A5 Other - B. Cost parameters and repayment terms On market terms – considering the reference rate determined by the financial intermediary in accordance with the risk assessment methodology applied by the intermediary and B1 Interest rate considering the recommendations of the Commission Communication on the revision of the method for setting the reference and discount rates30+ 0.5 percentage point Commissions charged by the B2 1-4% financial intermediary B3 Repayment terms At financial intermediary’s discretion C. Documentation parameters Confirmation of payment of the C1 At the financial intermediary’s discretion (declaration or another form(s) of confirmation) borrower’s statutory liabilities Restrictions – ban on the repayment C2 Acceptance by the borrower by a declaration of statutory liabilities out of the loan Restrictions concerning the loan Specified within the loan contract – for the indicated types of expenditure/ expense group C3 purpose Loan clearance based on invoices (in full or at least 70-80% of loan value, to be determined) C4 Other - D. Securities D1 Basic Blank promissory note At the financial intermediary’s discretion – in line with the loan security methodology applied, D2 Additional especially assignment of grant agreement D3 Other - E. Other – organisational E1 Involvement Maximum one loan per borrower Deadline for portfolio development From 9 to 18 months (finally determined in the financial intermediary agreement) E2 by financial intermediary Alternatively: no deadline E3 Loss ratio limit 10-15% of the amount of funds paid from the loan financing account E4 Debt collection cost The cost of debt collection is reimbursed by PDF in whole or in part (e.g. 80%) Provision of capital for the From the limit awarded – disbursements from the account: each loan upon conclusion of E5 disbursement of loans loan contract E6 Other - Source: own elaboration 30 OJ L C 14 as of 19.1.2008, p. 6. 32 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Activity 4 Financial Instruments – Podkarpackie Region 4 Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 31 33 When lending activity is financed from Two of them are more traditional and the publicresourcesandincircumstanceswhere third one is less common – it is based on the the institution organising procurement or experiences of Dolnośląski Development competition for loan granting may also Fund. Below, we discuss each model grant loans independently32, three basic with indication of their strengths and implementation models may be identified. weaknesses. 4.1 M o d e l 1 In the first model, which is most of the loans granted (such as value, common, as a result of competition maturity). procedure, financial intermediaries are • Characteristics of final recipients – selected to grant loans. At the same time, enterprise size, industry, allocation the institution which provides financing, of the loan to financing of specific usually sets certain conditions relating to expenses, etc. such issues as: • Maximum permissible share of In this model, the institution selecting loans with significant repayment financial intermediaries is not involved delays and bad loans (uncollectible) in the process of granting loans at all. and the consequences of possible Financial intermediaries selected only exceeding of the limits agreed. In handle that and the institution only case when such limits are exceeded, monitors the process of project execution, various sanctions may be applied. verifies if the assumed outcomes have For example, if the outcomes of been achieved, and performs clearance lending activity are worse than it was of expenses incurred by individual assumed, the financial intermediary institutions. The intermediaries are is obliged to cover losses (above therefore accountable for the outcomes agreed limit) out of its own funds and achieved only. At the same time, the is subject to other “penalties”, such as institution transferring funds to them for example, reduction of allocation has virtually no influence on operational for financing of management costs. implementation of projects and the • The structure of loan portfolio whole process of loan granting and in the form of certain territorial settlement. These issues, according to distribution of final recipients (by the terms of the contract with the funds setting a minimum level of financial provider, fall under the responsibilities of intermediary loans in portfolio that financial intermediaries. were granted to the borrowers residing or conducting business The table on the opposite page activities in a specific territory) or in summarizes strengths and weaknesses the form of certain characteristics of this model. 31 The models presented and discussed in this section provide solutions that may be used by the entity implementing financial instruments in Podkarpackie (Podkarpackie Development Fund), based on the funds returned from the financial instruments under Podkarpackie ROP 2007- 2013, and in the future also with the use of different sources. Due to the implementation priority which has been assigned to debt financial instruments, these solutions refer to such instruments. 32 As we expect, we will be dealing with such situation in the case of funds returned from Podkarpackie ROP 2007-2013. 34 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Table 16. The outline of key strengths and weaknesses – MODEL 1 Strengths Importance Weaknesses Importance When loans are granted by many fairly small The high level of task delegation, no requirement financial intermediaries, it usually results in limited to involve the donor in the technical aspect of the XXX XXX effectiveness of activities and the lack of the lending process. economics of scale. Implementation model well known among financial intermediaries in the region (and beyond). The Deployment of new loan products is always time- possibility of obtaining information from financial consuming and organizationally complex. It usually XXX XX intermediaries on possible modifications leading requires new procurement procedure and contract to its improvement. The model is relatively easy to award to select financial intermediaries. implement. Transfer of risk to financial intermediaries usually does not take place in a fully flexible manner – with a given (excessive) level of risk to intermediaries (permissible low level of bad loans – for example, a Limited level of market disruption thanks to the few percentage points), they may not be interested diversification of implementation structure – it is in using loan funds. This may, potentially, lead to possible to involve various entities, both from non- XX XX the expectation/demand of higher remuneration banking sector and banks (e.g. cooperative bank or, during the implementation stage, result in sector), to act as financial intermediaries. intermediaries' behaviours aimed at elimination (substantial limitation) of high risk undertakings in their portfolio (which eventually may be contradictory to the intervention logic). When the function of financial intermediaries is Following contract award in regard to the selection performed by various entities residing in various of financial intermediaries and contract execution, the parts of the region, it is easy to access final recipients possibility of adjustment of the rules of loan provision (better penetration of territory targeted for loans), and XX is very limited (definitely more difficult, however, a X consequently, it is easier to get better knowledge lot depends on relevant contractual provisions – for of final recipients; this also creates the possibility to use such information in the process of feasibility example, providing for the possibility to require evaluation of undertakings and borrower reliability. intermediaries to implement certain adjustments). When financial products offered by financial intermediaries are not identical (in terms of value, It is practically possible to transfer full risk of lending maturity, and other parameters), any promotional and XX X activity to individual financial intermediaries. informational activities are a bit more difficult at the regional level. Centralized promotion is more difficult – it cannot contain details of the products offered. The transfer of lending activity risk to the intermediaries will in general motivate them to professional and responsible behaviours, especially XX when it is possible to add relevant financial incentives. A model which results in the creation (development) of local community of financial intermediaries who are well located and have good knowledge of the X needs of local enterprises, and who are motivated to develop their own loan products. Implementation period is relatively short due to the experiences connected with the mode of X distribution of support to financial intermediaries at the regional level in this/similar model. Source: own elaboration 4 - Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 35 Analysing strengths and weaknesses seem to be too high in comparison to the of this model, it seems that its pivotal value of the loans (excessive fixed costs benefit is the fact that in this solution the per loan). So, this model may cause less institution responsible for the supervision effective allocation of resources. of financial instruments implementation, as of the moment when the procedure Moreover, when a certain number of for selection of financial intermediaries is financial intermediaries grants loans as a finished, does not have to be materially result of finished competitive procedures, involved in the whole lending process. It it is very difficult (in case of changing suffices that the institution focuses on the economic conditions or a change of the monitoring of implementation progress strategy applied by the managing entity/ only, and in the case of material problems local authorities) to launch a new loan it takes steps upon consultation with the product based on the same funds, as it intermediaries to find a solution. would demand a different manner of using the funds which have already been On the other hand, relatively low transferred to intermediaries (probably effectiveness is a serious weakness of through negotiations of contract this model. When loans are granted amendment, which is not easy when by a significant number of financial the public procurement regulations are intermediaries, fixed costs (mainly applied and it always requires mutual resulting from the requirement to agreement of the parties). Possible maintain staff by each intermediary withdrawal of funds is also very difficult and provide software supporting (it is highly unlikely it would be possible management of the lending process) at all). 4.2 M o d e l 2 In another model, comparatively less The basic difference in relation to Model common, loans are granted by the 1 is the fact that funds remain in full at institution offering financing to final the disposal of the donor who directly recipients, at the same time using the disburses the loans and then monitors support of a network of institutions or their repayment. The donor plays in fact individuals throughout the region who, the role of a regional financial instrument however, play auxiliary role only – they (regional loan fund), operating conduct promotional and informational independently and with intermediation activities, search for potential clients, assist of the appointed representatives, aiming in collection of appropriate documents this way to direct its services to the whole and (depending on the arrangements region. with the donor) perform full or simplified loan application assessment (hereafter On the opposite page, we present main those institutions are referred to as local strengths and weaknesses of this model. representatives or LRs)33. 33 Such model is used, for example, in the process of implementation of the First Business - “Support at the Start” programme (delivered by the Agency of Enterprise Development in Mielec, playing the role of implementing entity of this programme in several regions of Poland). 36 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Table 17. The outline of main strengths and weaknesses – MODEL 2 Strengths Importance Weaknesses Importance The use of the economics of scale and other positive When the majority of risk is borne by the regional consequences of concentrating funds in one fund, the significance of risk resulting from the lack institution. All lending operations are executed by XXX XXX of (or limited) accountability of intermediaries for the one entity at the regional level, local entities play loans granted increases greatly. auxiliary role only. Concentration of capital and activities in one entity (regional fund) will result in positive effects in relation to the assessment of financial and operational capacity of the fund by third party The need to fundamentally strengthen the regional entities. This in turn will cause improved ability to fund in terms of staff and infrastructure, for example, effectively obtain capital from external sources (for provide software for application processing, example, sources preferring to fund undertakings on XXX management of loan portfolio, monitoring of XXX a large scale and in a wide extent – e.g. programmes loan repayments, information exchange with LRs, offered from the European level by the European and collaboration within the network (network Investment Fund). The scale and capacity of the management), etc. fund may bring various outcomes in the scope of collaboration with major financial (and other) institutions from the environment34. Fund distribution model not very common, in general unknown among the financial intermediaries in the region (and outside the Freedom, flexibility and ease of deployment of new region). This may lead to cautious approach to the loan products. Each deployment of a new loan participation in the system (or even no interest in the product is relatively simple, requires mainly design participation, in particular, when support for financial of a new product, development of the rules of its XX instruments under Podkarpackie ROP 2014-2020 XXX implementation, training of own staff and local is available). Consequently, new solution will have representatives, and potentially execution of new contracts or amendment of the existing contracts to be promoted35 without guarantee that it will be (for handling the new products) with LRs. accepted at the expected scale. Significant time factor – establishment of the model and interest in it may require time which is difficult to estimate. Promotion of the model will also give rise to costs. Depending on specific organisational solutions, the risk of not using some of the capacity of the existing The possibility to conduct common, independently local financial intermediaries (on the part of LRs, there targeted promotional strategy at the scale of the will be some doubling effect – own products vs. whole region (with positive consequences in XX distribution of regional fund products – with difficult XX terms of costs of this type of activities). Easy launch to anticipate consequences for the regional fund, for of concentrated informational and promotional activities. example, we may expect that undertakings funded by the regional fund, proposed by LRs, will be on average burdened with a greater risk). Impact on the development of positive image of the region (and regional authorities, as the author/ The need to design the system of LRs selection and co-author/participant of the undertaking), resulting the rules of their remuneration; additional analysis will X XX from the existence of financially significant and be needed to establish the extent of applicability of long-lasting regional entity, specialising in financing the public procurement law to the whole system. the economy sphere. Source: own elaboration 34 A lot will depend, however, on the objectives set for the regional fund and the action strategy developed for the fund, as well as determination in its implementation, leading (in the long-term) to the development of regional fund as the key financial institution of the region, active in the particularly deficient areas of the financial market. 35 It is recommended that this type of activities are preceded by deeper research of attitudes/positions of financial intermediaries as to their perception of this type of solution. If a decision is made to implement this solution, it will be necessary to consider potential promotional activities, including identified attitudes and the level of readiness, and also terms of potential collaboration. 4 - Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 37 Table 17. The outline of main strengths and weaknesses – MODEL 2 (continued from previous page) Strengths Importance Weaknesses Importance Potentially significant level of market disruption caused by the activity of a major size entity (in particular, domination in relation to non-bank lending institution sector), operating throughout the region. X There will be a risk of blocking development and marginalisation of previously growing non-bank financial intermediaries. Very difficult to connect the final quality of loan portfolio with remuneration of local representatives. X This problem will grow in proportion to the number of LRs collaborating with the regional fund. Time – relatively long, due to no experience in the execution of that type of mechanism, and also due to the need to undertake further analytical activities (development of business plan of the undertaking/ X estimation of the financial effect + implementation strategy, ensuring relevant human and technical resources by the regional fund). Source: own elaboration As may be expected, key strengths design and implement (and maintain) of this model are to some extent high-quality selection mechanism of symmetrical to the weaknesses of investment targets in terms of risk Model 1. First of all, with proper design of the undertakings being funded36. of the implementation mechanism, Some limitation (understood rather as identification of appropriately active and a challenge in the organisation and competent local representatives, and also management) will also arise from the with design of appropriate mechanism need of involvement in management of of remuneration for local representatives, the whole network of LRs (especially at considering not just the assistance in the the start) and its management, including provision of a high number of loans of resolving potential disputes that may certain value, but also (possibly) specific (and probably will) arise at the level of diversification of loans and final recipients network participants (for example, in (in terms of territory, sector and enterprise relation to competing for customers, size), the system may be highly effective etc.). Competences and experience in this sphere and exceed the benefits of in this scope will be invaluable – the Model 1. question is, however, how fast they will become available or how long it will On the other hand, the main downsides take to develop them (and what the of this solution are related to the fact consequences will be until the whole of direct involvement of the fund in distribution network is developed and lending activity, resulting in the need to stabilised). 36 We cannot really expect that those functions may be “safely” (from the point of view of the interest of the regional fund, in particular in relation to the credit risk control) assigned to the level of LRs, without the need to create very restrictive solutions burdening the local representatives with risk. However, even assuming that this could succeed, it would still be necessary to establish, at the level of the regional fund, the final verification function in relation to investment decisions (and not just approval of the formal aspect of investment decisions made by LRs). 38 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Also, issues related to the uncertainty Moreover – and this is without a doubt as to the functioning of the new a very important factor, crucial for solutions should be considered, as they the stability of the whole network – will most likely arise among financial design of appropriate scheme of LR intermediaries in the region as this new remunerations, depending on the loan mechanism will be very different from portfolio, will be a great challenge. For the schemes of supporting financial sure, sufficiently attractive remuneration instruments known to them. This specific scheme may trigger great interest and innovation of the model may give rise to more willingness to participate. We various reservations and consequently should, however, remember that in little willingness (or even unwillingness) this case major restriction is related to to cooperate as a local representative the postponement in time, from the of the regional fund. More so, that moment of granting a loan, of potential almost simultaneously the financial problems with repayment, and also the intermediaries will be able to apply question to what extent activities of a for capital under financial instrument local representative may be connected implementation under Podkarpackie with the loan repayment – in this case ROP 2014-2020. It is also true that the certain role may be played by activities extent of this kind of attitudes may be of the entity granting the loan (such as: reduced by two factors: conducting appropriate monitoring, review of expenses covered by the loan, • uncertainty as to the effectiveness and also consent or lack thereof to amend of obtaining support under the loan contract, for example, to change Podkarpackie ROP 2014-2020 (and the repayment schedule and allow potential failure to obtain capital for temporary grace periods in repayment loans) and of the principal), over which the local representative will have no control. • potential conducting of lending activities directly by the regional fund, without the use of local representatives (reducing this problem at least for some time, i.e. until achievement of better understanding of the new solution and its establishment as an efficient mechanism of loan distribution in the region)37. On the other hand, the expectation that the regional fund might be able to make its offer easily accessible in the whole region, maintaining the standards of acceptable risk and conducting proper risk management in comparatively short time is not realistic. Therefore, there are several important restricting factors here that arise from the attempt to change common (established) mechanisms of financial instrument support used by financial intermediaries before. 37 However, this solution will be burdened with a major risk. 4 - Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 39 4.3 M o d e l 3 The third proposed model is based on of PDF from which the loan capital the solution following the model used by is provided (PDF places in that the Dolnośląski Development Fund. It is sub-account funds up to the limit founded on the combination of lending granted to a given intermediary). activity based on a regional fund (in this Loan repayment also occurs through case: Podkarpacki Development Fund), another separate PDF’s account however, using the capacity and at the which financial intermediary may risk of local financial intermediaries. The access to monitor if the loan is repaid basic characteristics of this model are as as scheduled. follows: • The risk related to granting a loan • All funds for provision of loans remain is borne in full by the financial at the disposal of the Podkarpacki intermediary above the permissible Development Fund. limit of bad loans. Enforcement activities are conducted by financial • Financial intermediaries who are intermediaries and the cost thereof to provide loans are selected are covered in full or in part by PDF. in a competition mode, i.e. in a procurement procedure or • Interest on the loans granted competition – final legal form constitutes PDF’s income in full, and should be consulted with the Legal the interest rate is regulated in the Department of the Podkarpackie contract between PDF and financial Marshal Office or other experts, intermediaries. PDF does not cover considering rather unusual method of the management cost. Financial financing the costs borne by financial intermediaries fund their activities intermediaries. As a result, a group of only from commissions charged to about 3-7 financial intermediaries in enterprises the limits of which are the region is selected. determined in the contract executed by financial intermediaries and PDF. • Financial intermediaries are Intermediaries do not charge any responsible for the identification other fees to borrowers (variant: they of potential borrowers and charge only additional fees set out in evaluation of their financial standing, the contract with PDF). creditworthiness, and potential collateral. In case of positive • This model is useful in case of debt evaluation, intermediaries sign financing. In case of equity instruments appropriate loan contract, at the and guarantee instruments, Model 1 same time notifying Podkarpacki or Model 2 should be used. Development Fund accordingly. • Loans are granted by a financial intermediary but based on funds located with PDF. Intermediary holds an authorisation to separate and periodically credited sub-account 40 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Table 18. The outline of main strengths and weaknesses – MODEL 3 Strengths Importance Weaknesses Importance Novelty of the model and the related need Combination of both models discussed above, for precise regulation of technical, legal and thanks to the use of the economics of scale organisational details. and competences of the regional fund with the XXX Possibly very cautious approach to this type XXX experience of staff and market knowledge of local of solutions by financial intermediaries (due to financial intermediaries (FIs). innovativeness), and also unwillingness to implement such model. The need to fundamentally strengthen the staff Stimulation of activity of financial intermediaries and infrastructure of the regional fund, although to thanks to making them completely dependent on XXX XXX a clearly lesser extent than it would be necessary in income on the value of loans granted. Model 2. The need to design and implement several Laying foundations for development of region-wide detailed legal and organisational solutions of fairly system using the capacity of the regional fund and high level of complexity (sub-account system for local financial intermediaries that could in the future XXX XXX financial intermediaries, rules of selecting financial also manage funds from 2014-2020 period, after intermediaries, contents of the contract between PDF they are used. and financial intermediaries). Similar to Model 2, freedom, flexibility and ease of The need to train representatives of financial deployment of new loan products. Conditions of XX intermediaries in the rules of functioning of the new XX deployment of a new product are virtually identical. model. Similar to Model 2, the possibility to conduct common, independently targeted promotional strategy at the scale of the whole region (with positive consequences in terms of costs of this type XX of activities). Easy launch of concentrated informational and promotional activities. Impact on the development of positive image of the region (and regional authorities, as the author/ co-author/participant of the undertaking), resulting from the existence of financially significant regional X entity, specialising in financing the economy sphere. Facilitation of the ability to obtain funds from other institutions. Source: own elaboration 4.4 Main conclusions and recommendations All three models presented above seem in the region, and also following extensive possible to use in Podkarpackie and the analysis of arguments for and against decision on applying one of them (or each of the models described above their compilation, depending on the type (and potentially also other). In the opinion of financial instrument) should be made of the authors of this Report, Model 3 is after consultations with representatives the best as it combines the strengths of of key financial intermediaries operating Models 1 and 2. 4 - Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 41 Additionally, it should be kept in mind be to establish consortia. In theory, we that in the case of funds allocated cannot rule out a situation where all key to financial instruments under parts of procurement procedures for Podkarpackie ROP 2014-2020, solutions 2014-2020 will be awarded to one or rather similar to Model 1 will be used – two strongest intermediaries and then financial intermediaries selected in a continuation of operations at appropriate procurement procedure will grant loans level will be a serious challenge for the and the institution playing the role of others (due to lack of capital limiting the fund of funds (Bank Gospodarstwa their operational capacity). This in turn Krajowego) will only supervise the whole may (and probably will) force them to process, monitor accounting for eligible accept other solutions (innovative – in expenditure and the level of achievement comparison to their previous practices), of the anticipated indicators. This for example, solutions based on Models 2 means that most likely the majority and 3 described in this Report. Obviously, of intermediaries active in the region this tendency will be affected by should be able to realise projects under subjective assessment of proposed terms Podkarpackie ROP 2014-2020 funds, and of collaboration, including in particular the as a result maintain their human resources assessment of the terms of remuneration capacity required for this purpose. A lot, for participation and operation in the however, depends on the actual form network of local representatives, and of procurement conducted by BGK and also the prospects arising from such how willing financial intermediaries will collaboration. Ensuring appropriate, professional staff of the Podkarpacki Development Fund is a particularly important issue, vital to its success. Other various assets will also be important. As follows: PDF must have appropriate human resources – here, we list people possessing the following experience and qualifications: Person(s) managing the whole institution, with at least a few years of experience in a managerial a role with an institution providing repayable financing (bank, loan or guarantee fund, equity investment funds). 1 People designing loan products and managing ongoing collaboration with financial intermediaries b (2 or 3 persons). They should have experience in specific matters related to lending activities. Person responsible for promotional and informational activities implemented directly and through c the network of financial intermediaries. Person (external company) responsible for the functioning of monitoring system for the transfer of d funds to financial intermediaries and loan repayment. The fund must be equipped with hardware (computer network, server, work stations), software, remote 2 connectivity devices, and vehicles relevant to the activities conducted. The provision of consultancy services for the regional fund, in particular in relation to the design of strategic solutions and selected operational issues: in the area of design of the model of cooperation with intermediaries, independent monitoring of its functioning, verification of adequacy of the financial products offered, evaluation of the needs of enterprises in relation to access to external financing sources, evaluation of financial intermediaries, forming recommendations in relation to improvement of the functioning of the whole mechanism (in terms of its capacity and efficiency), and also obtaining 3 funds from external sources. An important aspect of consultancy services is also related to the assistance in designing regional fund organisational solutions in the scope of financial management, credit risk management, reporting system, public information on the effects of lending activities, in accordance with the European Code of Good Conduct for Microcredit Provision38 – it’s an important factor in the context of the ability to obtain financial support from funds provided at the European level (by the European Investment Fund39). 38 http://ec.europa.eu/regional_policy/sources/thefunds/doc/code_bonne_conduite_pl.pdf For example, the latest initiative of support for financial institutions under European programme EaSI (EaSI Capacity Building Investments 39 Window), see http://ec.europa.eu/regional_policy/sources/thefunds/doc/cod _bonne_conduite_pl.pdf 42 ACTIVITY 4 - Financial Instruments – Podkarpackie Region Below, we present recommendations concerning the adoption of the model of financial instruments implementation based on Podkarpackie ROP 2007-2013 funds. All activities related to the selection of one out of the three models described above (in our opinion, Model 3 if most relevant), should be executed after appointment of the institution responsible for funds management at the region-wide level and after commencement of activities described above aimed at 1 reinforcement (provision) of that institution’s capacity. Ideally, this would occur by the end of Q2 2017. Until then, talks need to be conducted with financial intermediaries to establish the rules of return of funds from financial instruments of Podkarpackie ROP 2007-2013 and (in general) the terms of collaboration between the regional fund and financial intermediaries. When the Podkarpacki Development Fund is ready to conduct operations or it is realistically anticipated 2 that such readiness would be achieved in relatively short time, the decision on the use of selected implementation model must be made (and implemented)40. The decision on the implementation model selection should be accompanied by the preparation of PDF’s business plan considering the cost of implementation of the model selected (and also – PDF activities 3 as a whole). The business plan should be based on a realistic prognosis of the rate and volume of funds obtained (returned) from financial instruments of Podkarpackie ROP 2007-2013. The rate and scale of returns will determine the actual operational capacity of PDF41. The decisions on the demarcation of products offered in the region by PDF and – on the other hand – by BGK as the fund of funds for the purposes of financial instruments distribution under Podkarpackie ROP 2014-2020 should be made as soon as possible. Those decisions should refer to the recommendations 4 made in this Report, although they obviously may lead to slightly different development of financial instruments/products distribution (it is an opinion of the authors of this Report, however, that the proposal presented herein is close to the optimal solution). During the initial period of PDF existence, it should focus on offering support to financial intermediaries that will enable them to implement a limited number of financial products – this should be appropriately 5 correlated with the planned volume of funds to be managed by the PDF (the starting point for those determinations should be proposals presented in this Report – two debt financing products for working capital needs of enterprises). 40 A solution anticipating the use of a “mixed” mechanism, combining different implementation models, should not be ruled out. Although this is perfectly viable, in our opinion, the use of a “mixed” variant is not advisable already at the initial stages of PDF functioning. During the “start up” stage, the Fund should not overly complicate its proposal or its operating mechanism. This type of organisational activities/modifications will be reasonable after full operational stability and capacity is achieved. 41 Those matters will be agreed with financial intermediaries who are currently managing the funds invested in the financial instruments distributed under Podkarpackie ROP 2007-2013. 4 - Model of implementation of financial instruments deployed from the funds returned from financial instruments of Podkarpackie ROP 2007-2013 43 Activity 4 Financial Instruments – Podkarpackie Region 5 Appendices 44 ACTIVITY 4 - Financial Instruments – Podkarpackie Region List of people/institutions with whom extended individual interviews were conducted Individual extended interviews were conducted in January 2017 GF/LF/ No. Name Title Institution BEI* Podkarpacki Fundusz Poręczeń Kredytowych Sp. z o.o. GF [Podkarpacki Loan Guarantee Fund] 1 Krzysztof Staszewski Stowarzyszenie na Rzecz Promocji i rozwoju Podkarpacia Board President „Pro Carpathia” BSI [Association for Promotion and Development of Podkarpacie] Rzeszowska Agencja Rozwoju Regionalnego 2 Janusz Fudała [Regional Development Agency in Rzeszów] Board President LF 3 Józef Twardowski Board President Mielecka Agencja Rozwoju Regionalnego & „MARR” S.A. LF Michał Pękalski [Regional Development Agency in Mielec] Fund Manager 4 Poręczenia Kredytowe Sp. z o.o. 5 Elżbieta Mroszczyk [Loan Guarantees Ltd - Branch in Łańcut] Branch Manager GF Marek Jagusiak Fund Director Leżajskie Stowarzyszenie Rozwoju 6 [Leżajsk Development Association] LF Krzysztof Rogowski Fund Expert Tarnobrzeska Agencja Rozwoju Regionalnego S.A. 7 Witold Pycior [Regional Development Agency in Tarnobrzeg] Manager LF Podkarpacka Izba Gospodarcza w Krośnie Chamber 8 Grzegorz Kubal [Podkarpackie Chamber of Commerce in Krosno] President LF President of the Chamber’s Ryszard Kapusta Regionalna Izba Gospodarcza w Stalowej Woli Management 9 [Regional Chamber of Commerce in Stalowa Wola] Board LF Jolanta Budkowska Fund Director * GF – guarantee fund, LF – loan fund, BSI – business support institution 5 - Appendices 45