Finance for Growth

Finance for Growth

Report of the High Level Expert Group (HLEG) on SME and Infrastructure Financing, 2013.

CICA Summary

Financial crisis revealed substantial gaps in the way Europe finances its economic activities.This report addresses problems in SME and Infrastructure financing and offers a policy guideline as possible solutions to the problems aroused by the crisis.

  1. Key issues that characterize the debate of access to financing for SMEs and infrastructure projects

The crisis has been characterized by the unwillingness of market participants to commit for the long term. In addition it has led to fractionalisation of the conditions available across EU Member States. The HLEG calls for the implementation of banking union able to offer a more harmonized conditions between the EU Member States. In addition, Europe has shown its over reliance on banks for financing. The HLEG argues for stimulating the role of capital market financing.

  1. Current conditions characterizing the SMEs and infrastructure

The SMEs represent over 99% of companies across the EU27. They are also regarded as carrying higher risk aversion which makes it harder for them to get a loan.

One third of Infrastructure investment in the EU is financed by the public sector.  The remainder, financed by the private sector, comes mainly in two forms: through 1) corporate finance , or 2) through project finance. Historically, the EU project finance debt has been dominated by banks. The decline in bank lending and the financing of long-dated projects led to a high drop in project finance volumes. A similar trend was followed in the PPP financing volumes.

  1. SMEs and Infrastructure common difficulties in accessing finance

A sound financial environment, characterized by stability and confidence in financial institutions and markets is essential for greater financing of the SMEs and the Infrastructure projects. The creation of a Banking Union would decrease the fragmentation of the EU financial markets induced in 2008 and diminish the competitive disadvantage derived from divergence in credit conditions, affecting the most the vulnerable countries. In addition, SMEs and Infrastructure investments are evidently highly sensitive to the Business environment. Ineffective Bankruptcy and Enforcement Rules can adversely affect the quantity and price of funding. Greater financing by capital markets and institutional investors requires a transparent and credible rating environment in which the evaluation of corporate and project risks are accurate. Credit Ratings and Data Infrastructure are the key to achieving greater transparency needed for the encouragement of investors. They both suffer from lack in comprehensive data.

  1. HLEG addresses the Fragmentation

Pooled Investment Vehicles are able to attract more investors if differences across the EU Members, especially differing taxes, legal and regulatory frameworks and the “lack of both standardization and visibility”, are diminished. In addition greater cooperation between National/Public Development Banks across borders.

  1. Challenges specific to the SMEs in their access to financing

The availability of data of SMEs would lead to an increase in transparency, permitting the investors further portfolio and credit analysis. Also, the use of wider range of financing options, such as venture capital, covered bonds, private placements, public equity markets and funds of loans has to be developed. The use of capital market options as sources of financing for SMEs are strongly welcome, such as securitisation of SME loans, as a complement and alternative to traditional bank financing channels.

  1. Recommendation for addressing challenges specific to Infrastructural financing

Adequate tools to minimize information failures and unnecessary uncertainty over the life of infrastructural projects could be achieved thanks to minimizing diversity among Member States practices.

 

Download the full HLEG report here

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