Financial instruments that you support from the European Structural
and Investment Funds can be a sustainable and efficient way to invest in growth
and development in your region or country.
They may complement grants and stimulate additional private or public investments.
In this way, they help to achieve the policy objectives
of your region or country.
If you're thinking about using financial instruments,
the best way to get started is to map out which actions to take
and to structure them step by step.
Conceptualising and planning the steps in advance
will make the set up and management process
of your financial instrument easier.
We call this an action plan.
In this video we will show you which elements it includes.
So, what are the most important elements that you should consider?
We've divided the overall lifecycle of financial instruments into four phases:
design, set up, implementation and winding-up.
In this video we will guide you through these four phases.
A well-executed design phase will help you choose the right financial instrument
and the best management structure to go with it.
A first step in this design process
is to understand that financial instruments can support
certain investment priorities within your programme.
They can be used where the activities are financially viable,
for instance generate income or revenue or savings on future expenditure,
so that final recipients are able to reimburse the loan.
The second step is an ex-ante assessment,
which analyses the market and proposes the scope of the financial instrument
and how it should be delivered.
A detailed guide and separate video, on how to do this
is available on our fi-compass website.
Some of the concrete actions to be taken next
will depend on the results of the ex-ante assessment and your choices.
For instance, you may entrust the implementation of the financial instrument
to financial intermediaries, such as a bank or an equity fund manager.
These financial intermediaries
can be useful to help managing authorities deliver support to final recipients.
You may also decide to set up a fund of funds,
as an umbrella instrument that uses several specific funds.
For instance, a fund of funds for small and medium-sized enterprises
with specific funds for loans, guarantees and equity investments.
An important step here will be to select the financial intermediaries,
or the manager of the fund of funds,
as this also includes the potential to provide or attract additional investment.
Please note that if your financial instrument
is implemented by a fund of funds
its manager will select the financial intermediaries.
Bear in mind that these implementation options are not exhaustive
and that the selection must be carried out in line with applicable laws,
in particular the law on public procurement.
In the next step funding agreements will need to be drafted.
They can be concluded. One - between the managing authority
and the body implementing the fund of funds
and subsequently, between the body implementing the fund of funds
and the financial intermediaries. Or two - between the managing authority
and the financial intermediaries, if there is no fund of funds involved.
The funding agreements must include all elements provided in Annex IV
to the Common Provisions Regulation.
For example, an investment strategy, which details
how the financial instruments should be implemented,
the financial products offered,
the target groups and possible combination with grants.
A business plan which also explains the expected leverage effect.
The target results to be achieved by the financial instrument.
Provisions concerning monitoring, reporting,
calculating and paying management costs and fees
or winding up of the financial instrument.
In addition, further legal provisions may be helpful or even necessary
such as the specification of the applicable law or mechanisms
to deal with possible disputes.
The next phase is the set up of the financial instruments.
In this phase the bodies implementing the financial instrument
will make sure that a system is put in place
to deliver the financial instrument as requested
by the managing authority and set out in the funding agreement.
This concerns the governance structure
which could for example involve a steering committee,
made up of members from the managing authority, the fund manager
and other relevant parties in the implementation of the financial instrument.
The next step will be to open a separate account for the financial instrument
to ensure proper accounting and an audit trail from the very beginning.
Once the account is in place
the first payment can be made to the financial instrument.
For example, 25% of the total programme contribution
committed to this financial instrument in the funding agreement.
Following this, the first application for interim payments,
including expenditure for the financial instrument
of a maximum of 25% of the committed program contribution
can be submitted to the European Commission.
The Commission reimburses it according to the co-financing rate
at priority access level.
Or the co-financing rate for the relevant measure in a rural development programme.
The bodies implementing the financial instruments
must also make sure that the documentation,
management and monitoring systems are operational.
This will, among other things, involve putting systems and processes in place
to provide all the data necessary for reporting
in accordance with Article 46 of the Common Provisions Regulation
and as set out in the funding agreement.
Last but not least,
the fund managers may need to further reinforce existing capabilities
to implement the financial instrument.
For instance, this may involve targeted training of staff
or the development of promotional measures towards final recipients.
Now, the implementation on the ground can start.
The financial intermediary will first select investments by final recipients
who will benefit from support delivered through concrete financial products,
such as a loan, guarantee or an equity investment.
Here it will be important to assess the eligibility of the investments
and contribution to the programmme objectives
as well as their financial viability.
Once the selection is made,
a contract will be signed between the financial intermediary
and the final recipient.
And the agreed support to the final recipient will be paid.
Please bear in mind
that the second and subsequent applications for reimbursement
can be submitted only once a predefined share of the first payment
has reached the final recipients,
such as small and medium-sized enterprises or project sponsors.
The financial intermediary will report back regularly to the managing authority
and measure the outputs and the results achieved.
The monitoring and reporting processes take place at different levels;
between the financial intermediary and the final recipients,
between the fund of funds and the financial intermediary,
between the managing authority and the financial intermediary
or the fund of funds,
between the monitoring committee and the managing authority,
and the European Commission and the managing authority.
The managing authority carries out management verifications
during the set up and implementation phases.
In addition, the audit authority could carry out an audit
on the managing authority, the fund of funds
or the financial intermediary.
Once the resources used for investments are paid back
they may be reused for further investments.
The resources that are paid back
include capital repayments with gains or other earnings,
such as interests, guarantee fees, dividends
or any other income generated by investments in final recipients.
This may be the case either within the eligibility period or beyond.
The end of the life cycle of the European Structural
and Investment Fund - financial instrument
will be reached when the managing authority exits all resources including gains.
This does not mean that the concerned fund is liquidated
as it may continue investing in national or private resources.
For further information on how to implement financial instruments
under European Structural and Investment Funds,
please refer to the documents and videos available
on the fi compass website. www.fi-compass.eu
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