Financial Instruments in Practice : Uptake and Limitations

Wishlade, Fiona and Michie, Rona (2017) Financial Instruments in Practice : Uptake and Limitations. [Report]

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    Abstract

    Financial instruments in the form of loans, guarantees and equity have long been important economic development policy measures in many countries, but have only recently become prominent in EU Cohesion Policy. The growing interest in financial instruments at the EU level partly owes to the perceived “sustainability” benefits of repayable instruments against the backdrop of budgetary constraints. Reflecting this, the European Commission has increasingly emphasised the role that financial instruments can play in the delivery of Cohesion Policy. In 1994-99, European Regional Development Fund (ERDF) spend in the form of financial instruments was estimated at just EUR 300 million, rising to some EUR 1.2 billion in 2000-06 (CSES, 2007); the most recent summary of financial instrument spend for 2007-13 (European Commission, 2016) shows ERDF and European Social Fund (ESF) Operational Programme (OP) commitments to financial instruments of just over EUR 12 billion.1 In 2014-20, the role of financial instruments is being reinforced further, with the Commission encouraging member states to double the use of financial instruments in European Structural and Investment Funds (ESIF), in line with the objectives of the Investment Plan for Europe (European Commission, 2014). Implementation of the 2014-20 plans remains at a comparatively early stage, especially in the case of financial instruments, but indications from the operational programmes are that member states planned to commit over EUR 20 billion on financial instruments. 2 That said, it is important to note that the vast bulk of ESIF spend remains in the form of grants: even if the increase in ESIF financial instrument commitments from EUR 12 billion to EUR 20 billion materialises in 2014-20, this will only represent around 6% of total ESIF commitments, as opposed to about 4% in 2007-13. Against this background, the aim of this paper is to explore the experiences related to the use of financial instruments and policies to encourage their uptake, as relevant to the remit of the Directorate-General for Regional and Urban Policy (DG REGIO) of the European Commission.3 It draws on the experiences with financial instruments, principally in the EU member states, and considers both purely domestic and co-financed instruments. This paper complements a contribution by Ross Brown and Neil Lee which offers a theoretical perspective on the circumstances in which financial instruments are particularly effective and the limits to their usefulness (Brown and Lee, 2017).