Select Committee on European Scrutiny Twenty-Sixth Report


INTEREST RATE SUBSIDIES FOR SMEs


(21320)

9824/00

COM(00) 376


Fifth Report from the Commission on the implementation of the Decision on the provision of Community interest rate subsidies on loans for small and medium-sized enterprises extended by the European Investment Bank under its temporary lending facility (the SME facility).
Legal base:
Document originated: 22 June 2000
Forwarded to the Council: 22 June 2000
Deposited in Parliament: 11 July 2000
Department: HM Treasury
Basis of consideration: EM of 19 July 2000
Previous Committee Report: None; but see paragraph 5.2 below
To be discussed in Council: No date known
Committee's assessment: Politically important
Committee's decision: Not cleared; awaiting further information

Background

  5.1  In 1993, the Copenhagen European Council invited the European Investment Bank (EIB) to lend 1 billion euro to strengthen the competitiveness of small and medium-sized enterprises (SMEs). Loans would be accompanied by interest rate subsidies at the rate of 2% per year for five years, with the cost being met from the Community Budget.

  5.2  In response to a request from the European Parliament, the Court of Auditors reported on the management and effectiveness of the facility for subsidised interest. On 14 June 2000, we reported[12] on the Court of Auditors' report (Special Report No. 6/2000). The Court found a number of administrative deficiencies. More importantly, it also called into question whether the subsidy rate was sufficient to have affected investment decisions, most of which it believed would have happened anyway; and it found no good evidence that the subsidies generated additional employment.

  5.3  We noted that, following an earlier report of the Court of Auditors (Special Report No. 3/99)[13], on the management and control of interest rate subsidies in a range of Community schemes, ECOFIN had asked the Commission to conduct a full review of the rationale for interest rate subsidies. We left Special Report No. 6/2000 uncleared so that we could consider it again when we had a report of the review requested by ECOFIN.

The document

  5.4  The document on which we now report is the fifth report by the Commission on the scheme for subsidised loans for SMEs — the subject of the Court of Auditors Report No. 6/2000. The wider review of interest rate subsidy schemes requested by ECOFIN is not yet finished. The rules of the scheme are complex but essentially provided a subsidy of up to 3000 euro per new job. The subsidies paid under the scheme stopped by the end of 1997. The report states that by then 53,789 jobs had been created and subsidies of 92.3 million euro paid. 15,985 jobs were in the UK. The average subsidy per job was 1716 euro, and the number of jobs created exceeded by nearly 12% the planned total, as indicated by the applicants for loans. The Commission says this higher figure suggests that "overall improving economic conditions played an important rôle in the increased investment and job creation", but the results were significantly different across Member States (for example, in Spain only 76% of planned jobs materialised). In the UK the subsidy per job was 1241 euro and in Germany 2487 euro, indicating more labour-intensive investments in the UK. The report shows that the average total subsidy received by beneficiary firms was 21,300 euro, or 2.4% of the capital cost of the average investment made. It concludes that the subsidy alone could not have been enough to justify the creation of additional permanent jobs, rather it should be seen as one amongst other factors. It notes that, although when the scheme was proposed, economic growth was historically poor and unemployment high, by the time the scheme was being implemented — from 1994 onwards — European economies were growing again. It points to some administrative lessons learnt that could inform the design of any similar scheme in future — for example, to prevent self-certification of job creation exaggerating the number of jobs created and to prevent abuses leading to excessive subsidies in some cases. However, overall, the Commission regards the scheme as a success, notwithstanding the Court of Auditors' criticisms (to which this report does not refer in detail).

The Government's view

  5.5  In her Explanatory Memorandum of 19 July 2000, the Economic Secretary to the Treasury (Miss Melanie Johnson) argues that the Commission's report, read in conjunction with the Court of Auditors' Report, strengthens the need for the wider review requested by ECOFIN on the rationale for interest rate subsidies.

Conclusion

  5.6  The Commission's report seems to us to present a very favourable view of this scheme, whilst accepting some of the detailed administrative weaknesses identified by the Court. So we are surprised that the Minister argues that it strengthens the need for the wider review requested by ECOFIN. It does not deal directly and substantively with the Court of Auditors' concerns that most of the investments and job creations might have happened anyway. We are not in a position to reach a view about that, at least without the benefit of knowing what the forthcoming report for ECOFIN may say. With that in mind, we leave this document uncleared, so that we can return to it, along with the Court of Auditors' Report No. 6/2000, when we scrutinise the report for ECOFIN in the autumn.


12  (21250) 8309/00; see HC 23-xxi (1999-2000), paragraph 2. Back

13  (20368) 10121/99; see HC 34-xxix (1998-99), paragraph 15 (27 October 1999). Back


 
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