ESIF Financial Instruments in 14-20 Programme Period Jane Worthington, DCLG Legal Advisers, Regeneration and Commercial Team, a division of TSOL Date:

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 Instruments14-20 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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• 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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• 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 InstrumentsExperience 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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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 InstrumentsExperience 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 re-utilisation 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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• Experience from 2007-13 – Co-finance/Co-invest 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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• 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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• 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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• 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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• 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 InstrumentsExperience 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 Instruments14-20 Programme – The New Regime

• Found at http://ec.europa.eu/regional_policy/information/legislation

• 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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http://ec.europa.eu/regional_policy/information/legislation





• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• 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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• Thanks for listening

• Any questions?

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Documents

ESIF Financial Instruments in 14-20 Programme Period Jane Worthington, DCLG Legal Advisers, Regeneration and Commercial Team, a division of TSOL Date: