ESIF Financial Instruments in
14-20 Programme Period
Jane Worthington, DCLG Legal Advisers, Regeneration and
Commercial Team, a division of TSOL
Date: 14 March 2014
ESIF Financial Instruments
14-20 Programme
• Purpose of this Session
– A quick look back at the 2007-13 Regulations:
Experiences/lessons learned
– How experience of 2007-13 has influenced 2014-20
ESIF Regulations; and
– Summary of main parts of new legislation. NB - This
session will not cover state aid.
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ESIF Financial Instruments
14-20 Programme
• Looking back: Experience from past programme
– Themes to be explored:
• Ex ante assessment and Scope
• Selection and implementation, including legal
documentary requirements
• Co-finance or co-investment
• Costs/fees
• Interest and returns
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ESIF Financial Instruments
14-20 Programme
• Experience from 2007-13 – EAA/Scope
– Art. 44 of the General Regulation (as amended)
provided for 3 ‘types’ of instrument (SME funds, urban
development funds, energy efficiency funds); and
– The Rules required PMC to be consulted on selection
criteria, and OP to include for financial engineering
measures, but whilst the EIF/EIB had a funding gap
analysis for JEREMIE/JESSICA, there was no specific
requirement for an Ex Ante Assessment (EAA).
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ESIF Financial Instruments
Experience from past programme
Experience from 2007-13 – Selection
• Art. 44 of the General Regulation (as amended) provided
that a Holding Fund could be implemented in one of three
ways:
– Award of a publically procured contract
– (Where not subject to procurement) - Award of a grant provided in
accordance with a national law compatible with the Treaty;
– Award of a contract direct to EIB/EIF
• Where no Holding Fund, the 2007-13 Regulations did not
set specific provisions in terms of selecting financial
intermediaries or their legal structure; MA had to assess
whether contributing to an FEI as a procurement or a grant.
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ESIF Financial Instruments
Experience from past programme
Experience from 2007-13 – Implementation
• Art 43 of the Implementing Regulation:
– Requirement for independence/separate block of finance, no
shareholding/partnership for Commission
– Requirement for Fund to submit a Business case
– Requirement for a Funding agreement covering certain key terms
• COCOF Guidance Note para 2.4.4 and 2.5.5 included other items
to be covered in the funding agreement: Interest, returns, audit
requirements, fees/costs
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ESIF Financial Instruments
Experience from past programme
• All FEIs (with or without a HF) required to conclude a funding
agreement covering:
– Investment strategy and operational guidelines;
– Monitoring;
– The exit policy for the operational programme contribution;
– The winding-up provisions (FEIs and HFs), including for the reutilisation of resources returned.
• Where a HF utilised the funding agreement between the MA and the
HF also had to include :
– provisions regarding the selection and appraisal of the FEI
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ESIF Financial Instruments
Experience from past programme
• Experience from 2007-13 – Co-finance/Coinvest funds
– Drafting of Article 78(6) led to many MS setting up
large co-financed funds – MA able to declare and claim
against payment to Fund rather than payment linked to
progress.
– COCOF Guidance Note section 2.5. Rules in relation
to co-investment model only clarified in 2011.
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ESIF Financial Instruments
Experience from past programme
• Experience from 2007-13 – Costs/fees
• Art 43 of the Implementing Regulation:
– Where procured, market defined remuneration
– Where not procured – annual average caps based on
capital included in the fund (ERDF plus match)
– Permitted front-loading provided costs came within
annual average by closure
– Confusion over timeframe for calculation –
programming period or fund lifecycle?
– No requirement for performance based remuneration
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ESIF Financial Instruments
Experience from past programme
• Experience from 2007-13 – Interest/Returns
• Use of Interest – General Regulation Art. 78(7) first
subparagraph:
– ‘Idle funds’ interest cannot be treated as a national
resource per Art. 82 of the General Regulation.
– ‘Idle funds’ interest must be utilised for the purposes for
which the money was originally received.
– If not, must be deducted from eligible expenditure on
closure and repaid.
– ‘Idle funds’ interest may not be used to cover the costs
of borrowing money in the financial market.
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ESIF Financial Instruments
Experience from past programme
• Experience from 2007-13 – Interest/Returns
• Resources returned– General Regulation Art. 78(7) second
subparagraph requires returns to be recycled:
– No definition of the phrase in the Regulation
– COCOF Guidance Note 3 defined ‘Resources
returned/Returns’ as the principal capital element
and/or the income receipts.
– Article 43(5) Implementing Regulation – requires an
Exit Policy and allows preferential allocation of income
based receipts (returns). Confusion as to meaning of
‘legacy’/residual funds referred to in COCOF
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ESIF Financial Instruments
Experience from past programme
• Experience from 2007-13 – Interest/Returns
• Resources returned– General Regulation Art. 78(7) second
subparagraph:
– COCOF Guidance Note 3 amplified the Regulations:
– If Returns are ‘exited’ from the fund they should be
allocated to ‘competent authorities’ to be re-used for
the same type of action;
– ‘good practice’ dictates the re-use should take place in
the same area covered by the Operational Programme.
– The ‘re-use’ can take place beyond the date of closure
of the Operational Programme.
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ESIF Financial Instruments
Experience from past programme
• Returns continued - Q&A papers on CIRCA
• Returns:
– can be used to make further investments through the
fund or to pay management costs/fees;
– can be matched against ‘clean’ ERDF to make further
investments or pay management costs/fees–either as
an extension of the fund or establishment of a new
fund;
– cannot be used to contribute the match funding to the
actual fund that generated the return, or to cover the
cost of borrowing the match;
– (principal capital element only) cannot be allocated
preferentially
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Found at
http://ec.europa.eu/regional_policy/information/legi
slation
• Includes (as at March 2014)
– The Common Provisions Regulation: Regulation (EU) No
1303/2013 of the European Parliament and of the Council
– The ERDF Regulation: Regulation (EU) No 1301/2013 of the
European Parliament and of the Council of 17 December 2013
– The ETC Regulation: Regulation (EU) No 1299/2013 of the
European Parliament and of the Council
• NOTE: Delegated and Implementing legislation
awaited.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• EC has recently published a reference
guide to accompany legislation on financial
instruments (also available on same
website):
– “Financial Instruments in ESIF
Programmes 2014-2020 (Ref.
Ares(2014)401557 - 18/02/2014)
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Scope
• European Court of Auditors published its “Special Report
No 2/2012 — Financial instruments for SMEs co-financed
by the European Regional Development Fund”.
• Report noted insufficient market analysis undertaken
before committing structural funds to FIs, which in some
instances led to over-capitalised funds and/or funds being
set up in areas where the market failure and therefore the
need for/basis of the instrument was unclear.
• As a result, MS are now required to undertake an EAA per
Article 37 of the Common Provisions Regulation.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Scope
• EC promoting use of financial instruments. Setting up a TA
platform to assist.
• New opportunity to participate in EU level instruments and
MS can use tailor-made/off the shelf models
• No longer just 3 main types of instrument – can be set up
in relation to any thematic objective within a programme
• Financial incentive- 10% uplift intervention rate if whole
priority dedicated to financial instrument/100% co-financing
rate for participation in EU level instrument
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Ex Ante Assessment
• Regulation prescriptive as to the contents of an EAA.
• NOT same as a programme ‘ex ante evaluation’
• Intended to be a “living document” - undertaken in stages
and reviewed periodically to ensure the assumptions hold
good.
• Can be completed at high level to inform drafting of a
programme and later refined.
• Exception to rule – detail must be included if MA wishes to
make use of the 10% incentive or 100% for a whole priority
axis targetting EU level instrument.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Selection and Implementation
5 models intended to provide maximum flexibility:
• Entrusted entity
–
–
–
–
•
•
•
•
EIB/EIF
IFI in which MS is a shareholder
SGEI type financial instruments
Any body governed by public/private law
Investment in share capital of existing/newly created entity.
MA directly managed loan/guarantee fund.
EU level instrument (all except SME)
EU level instrument (SME)
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Selection and Implementation cont.
Nota Bene:
• Art. 38(4) final subparagraph: “The Commission shall be
empowered to adopt delegated acts in accordance with
Article 149 laying down additional specific rules on the
role, liabilities and responsibility of bodies implementing
financial instruments, related selection criteria and
products that may be delivered through financial
instruments in accordance with Article 37. The
Commission shall notify those delegated acts
simultaneously to the European Parliament and the
Council by 22 April 2014.”
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Selection and Implementation cont.
Delegated Act is being finalised, but covers:
• Due diligence matters - requirement to ensure the body
selected to implement FI fulfils minimum criteria e.g:
–
–
–
–
–
Capacity
Economic and financial viability
Internal and external control system, governance arrangements
Accurate accounting system and agreement to be audited
Entitlement to act under Union and national law
• Transparent and objective selection criteria – avoiding
conflicts of interest
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Selection and Implementation cont.
Improvement on old Art.43 of the 2007-13 Implementing
Regulation- more defined requirements for bodies
implementing FIs (Art.38 CPR):
• Must open fiduciary accounts/separate block of finance,
following prudential accounting rules and having
“appropriate liquidity”
• Must ensure Financial Intermediaries are selected on basis
of open, transparent, proportionate and non-discriminatory
selection criteria – avoiding conflicts of interest
• Standard terms and conditions for funding agreements –
Annex IV
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Type of Fund – Co-finance or co-investment.
Greater flexibility :
• Cofinance (match funding) contributions can be provided
at the level of the financial instrument or at the level of the
final recipient (the coinvest model) and may include in-kind
contributions where relevant.
• Cofinance does not have to be paid to the financial
instrument upfront –can be provided at later stage (but
has to be provided before the end of the eligibility period).
• Article 41 CPR allows for full reimbursement of ESIF
contributions even when match provided at a later stage.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Type of Fund – Co-finance or co-investment.
But tighter controls :
• Article 41 – phased applications for payment to prevent
over-capitalisation and ‘parking’ of ESIF.
• Applications for payment can only be made up to specified
percentages. After first tranche, can only be made once
specified amount has actually been invested in SME etc.
• Delegated Act to specify rules on withdrawal of payments
and amendment to applications.
• Implementing Act to specify models for submission of
information alongside application for payment.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Costs/Fees.
Much greater emphasis on performance:
• Article 42 CPR permits management costs and fees,
including arrangement fees (provided not double funding).
• However, detail to be set out in Delegated Act which is
shortly to be published.
• The Delegated Act concentrates on results – performance
fee to be based on finance actually being invested.
• DA also includes aggregate caps (but competitively
tendered funds may exceed).
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Delegated Act is being finalised, but covers:
For an Equity Fund- Base fee for first two years of 2.5% which then drops
to .05%) payable until end of eligibility period
-Performance Based fee based upon actual
investment (2.5% per annum of the programme
contributions paid)
For fund of funds –
-Base fee for first year of 3% which then drops to
1% for second year and 0.5% thereafter
- fee for investing downstream 0.5% per annum of the
programme contributions paid
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Costs/Fees continued.
• The Performance Element is to be based on:
– Disbursement of ESIF
– Resources returned
– Quality of measures accompanying investment to maximise
impact
– Contribution to programme outputs and objectives
• PMC must be informed of the provisions related to
calculating performance based fees, and must receive
reports.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Costs/Fees continued.
• The Aggregate caps are:
– Fund of funds – 7% of the total amount of programme
contributions paid
– For Equity fund – 20% of the total amount of programme
contributions paid
• Exceptions?
– Where the Fund includes majority of co-finance on MEIP basis,
the management costs and fees must conform to market basis
and not exceed.
– Procured funds
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Interest and Returns.
• Article 43 (interest):
– ESIF to be placed on idle funds in accordance with sound financial
management principle
– To be used for same purposes (investment/costs) within the same
FI or, following winding up, in another FI or in other forms of
support in accordance with objectives of the specific priority until
the end of the eligibility period.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Interest and Returns.
• For Returns, the legislation now differentiates what has to
happen during programme period and post:
• Article 44 CPR (During):
–
–
–
–
Further investment through same or another FI
If applicable, preferential remuneration of cofinance
Reimbursement of costs/fees
Contribution to programme outputs and objectives
• Article 45 (Post)
– Further investment through same or another FI
– Recycle for at least 8 years in line with original aims or the aims of
programme provided still demonstrable market need.
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ESIF Financial Instruments
14-20 Programme – The New Regime
• Thanks for listening
• Any questions?
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