Select Committee on European Scrutiny Thirty-Seventh Report


46 Financing SME growth

(27673)

11216/06

COM(06) 349

+ ADDs 1-3

Commission Communication: Implementing the Community Lisbon Programme: Financing SME Growth — Adding European Value

Legal base
Document originated29 June 2006
Deposited in Parliament10 July 2006
DepartmentTrade and Industry
Basis of considerationEM of 24 July 2006
Previous Committee ReportNone; but see HC 34-xvii (2005-06), para 10 (1 February 2006)
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decisionCleared; relevant to any debate on support for SMEs

Background

46.1 The mid-term review of the Lisbon Strategy in March 2005 proposed to focus efforts on "delivering stronger and lasting growth and creating more and better jobs". The review emphasised that entrepreneurial initiatives must be stimulated.

46.2 Small and Medium Enterprises (SMEs) represent 99% of all enterprises in Europe — some 25 million small businesses employing 55% of the private sector workforce. The Lisbon Strategy's success depends on Europe's SMEs achieving their potential.

46.3 The Spring 2006 European Council emphasised that a fully integrated financial market and sufficient access to finance are crucial for the growth of Europe's SMEs. This Communication includes a set of proposed Commission actions relating to access to finance for SMEs within the framework of the Lisbon agenda, through reforms at national and EU levels.

The Commission Communication

46.4 The Communication argues that one of the main challenges is to spread good practices across the EU, given that the features of a world class environment for SME finance can already be found in some Member States. The diversity of European SMEs, in entailing different financing, also creates potential for Member States to improve their policies by learning good practices from each other, so making access to both risk capital and debt finance easier. Europe also needs to work on the availability of risk capital to SMEs with high growth potential: since the bursting of the technology bubble, European venture capital investment in early stage firms has stagnated at around €2 billion. European stock markets appear to fall short of providing a passage to the next stage for a significant number of successful companies. On the demand side, many entrepreneurs need guidance on the advantages and disadvantages of alternative forms of finance and on how best to present their investment projects to potential financiers: investment readiness programmes, too, need to build on best European practice. "Overall, Europe needs to develop a mindset in which entrepreneurs and financiers alike are more willing to take and to share risk."[113]

46.5 There is a serious and persistent lack of business angels and seed investors in Europe — estimated to be less than 10% of those in the US — with low rates of return — a 6.3% 10-year return in Europe compared with 26% in the US. A lack of private investors also hampers the establishment of compensatory public/private partnerships. In Europe, venture capital seems to fund projects with much smaller amounts than those in the US. Only Sweden, Denmark and the UK compare with the US 0.04% of GDP dedicated to early-stage venture capital investment: €6 billion, or a tripling of the current level, would be necessary for the rest of the EU to catch up.

46.6 Further problems are caused by the fragmentation of the market. As a result, many funds cannot become sufficiently specialised and their management teams cannot develop the special sectoral expertise required for successful investments. The result is a venture capital market that is far less efficient than in the US. The lack of liquid exit markets for venture capital, with a critical mass of advisory services around them, create further difficulties for venture capital funds. "The Commission, the Member States and the exchanges should therefore work together to ease the cross-border operations of financial exchanges, to remove obstacles to the use of competing clearing and settlement systems and to apply common rules to trading."[114]

46.7 Against this background, to achieve the Lisbon goals, the Commission says it and Member States have to work with other stakeholders "to transform the face of risk capital investment in Europe". The "Risk Capital Summit 2005" in London during the UK Presidency identified the following key areas for action:

—  Business angel investment needs to be encouraged;

—  Venture capital funds need to become larger and more professional and need to co-operate closely with innovation sources;

—  Europe needs to overcome the fragmentation of the venture capital market;

—  Europe needs liquid growth-oriented stock markets;

—  Entrepreneurs need to become more growth-seeking and investment-ready; and

—  Governments need to reward success with their policies.

The EU needs to create an environment that achieves sustained growth in the level of venture capital investment, which in turn needs a favourable regulatory environment for the whole financing chain, from pre-seed through to investor exits. Public intervention needs to be targeted on building the commercial market. Public investment to compensate for market failure should as far as possible be at arm's length, so that investment decisions are solely driven by market discipline, and in partnership with the private sector. The Commission and the Member States need to work in partnership to achieve this aim.

46.8 The Communication acknowledges the continuing importance of debt finance for SME growth and supports the spread of good practice in the provision of microfinance (loans of less than €25,000), loan guarantees and mezzanine finance (hybrids of debt and equity). The Competitiveness and Innovation Framework Programme (CIP) and the Joint European Resources for Micro to Medium Enterprises (JEREMIE) of the structural funds and the Seventh Research Framework Programme (for certain research-related financing needs) will be the main EU vehicles for helping SMEs. The CIP will provide some €1 billion through its financial instruments, which are expected to leverage around €30 billion of new finance for SMEs; in all, 350-400,000 SMEs are expected to benefit from these facilities between 2007 and 2013. The JEREMIE initiative will combine grants from the European Regional Development Fund with loan capital and other sources of finance to support the creation and expansion of innovative micro, small and medium-sized enterprises as part of EU regional policy, technology transfer and links between business, universities and research centres, and the availability of micro-credits targeted at those who may not have access to commercial credit. The Seventh Research Framework Programme (2007-13) will support key areas of research increasing Europe's potential for innovation and competitiveness. The Commission will closely co-operate with the European Investment Bank (EIB) and the European Investment Fund (EIF). The Commission will also promote co-operation between Commission-financed activities like Europe INNOVA and PRO-INNO Europe and networks such as the European Business Angels Network (EBAN).

46.9 The first addendum to the Communication, "List of Actions", lists the Commission's proposed actions, which the Commission envisages undertaking from now until December 2013. They are generally based around the convening of expert groups, workshops, the commissioning of studies and the development of indicators. There are undertakings to modernise state aid rules and to implement the risk capital instruments within CIP, FP7 and JEREMIE. The Commission invites Member States to consider a number of possibilities for providing a more stable financial and regulatory environment.

46.10 The second addendum to the Communication, "Impact Assessment", outlines three options for moving forward — making no changes from present approaches, a legislative approach or an approach based on the spread of best practice and strengthened partnerships between various public and private sector stakeholders. The conclusion is that an approach based on strengthening partnerships will best address the goals of the Lisbon agenda and respect the requirements of subsidiarity.

46.11 The third addendum, "Access to Finance: The Way Forward" deals in more detail with the issues identified in the main document, reiterating the key position of access to finance for SMEs in achieving Lisbon goals, of the need to address both supply side and demand side issues and the use of the financial instruments integral to CIP, FP7 and JEREMIE. Global statistics, including a comparison with the US venture capital market, point to the gap in performance which must be addressed.

46.12 Summing up the Commission says it will:

—  Work towards a single market for venture capital funds that allows investments across borders without red tape;

—  Enhance investor co-operation in seed investment, paying particular attention to business angels, by identifying and spreading good practices;

—  Favour the emergence of more professional venture capital funds making larger investments when implementing Community instruments (CIP instruments, JEREMIE);

—  Organise a Round Table between banks and SMEs to review the current situation and to suggest ways to improve the scope for long-term banking relationships;

—  Use Community instruments to leverage lending programmes targeting innovative SMEs;

—  Invite experts to evaluate the advantages of tax relief systems for young innovative companies;

—  Invite stakeholders to implement good practices when using public funds for venture capital investment;

—  Develop tools and indicators to evaluate the effects of policies on SME financing across Europe; and

—  Identify and spread good practices in investment readiness programmes.

For their parts, "the Community institutions and the Member States should create the conditions that allow the sustainable tripling of investment by venture capital funds in seed and start-up companies by 2013".[115]

The Government's view

46.13 In her 24 July 2006 Explanatory Memorandum, the Minister of State for Industry and the Regions (Margaret Hodge) notes that, as well as recognizing the importance of access to finance for SMEs, the Communication accepts the differences that currently exist between finance markets across Europe and therefore accepts a differing focus for policy interventions within particular Member States in response to their current position with regard to access to finance provision and maturity of markets for that provision. She says that "this approach should enable the UK to build on its current domestic provision e.g. through the Small Firms Loan Guarantee and Enterprise Capital Funds and give flexibility for other EU Member States to adopt measures in accordance with their current market needs".

46.14 She also says that the Communication reflects many of the issues raised with the Commission during the 2005 "Risk Capital Summit" held in London as part of the UK Presidency and in subsequent meetings and exchanges of views prior to its publication, and comments as follows:

"It is important that the Commission has accepted the need for public interventions to be based on the need to work with existing markets in order to grow them without distorting them or crowding out private investment. The acceptance that interventions should be timebound with the eventual goal of creating a sustainable private investment market is important.

"The implementation of the proposals in the Communication must now be a key area on which officials should concentrate. The various financial instruments in programmes such as FP7 and CIP must be implemented in such a way as to assist innovative SMEs' growth through their business life cycle rather than duplicate interventions.

"The new guidelines on state aid for risk capital have now been agreed and these should assist in giving greater flexibility in making risk capital finance available for SMEs.

"The Communication also includes some references to taxation issues. The Government remains clear that such matters remain a national preserve."

46.15 Looking ahead, the Minister says that the Commission will monitor progress on SME finance and provide a first progress report in 2009.

Conclusion

46.16 Earlier this year we considered a previous, complementary Commission Communication: "Implementing the Community Lisbon Programme — Modern SME Policy for Growth and Employment".[116] In considering that earlier Communication, we noted that the Commission President had recently said that "a properly functioning services market, together with SME reforms, are the most important drivers for creating jobs in Europe" and that the Communication stressed that the responsibility for the latter lies primarily in the hands of Member States. We are accordingly gratified to note the continuing emphasis on Member State responsibility, good practice promotion and the primacy of the market.

We now clear the document, which — as with the earlier Communication — we consider relevant to any debate on support for SMEs.


113   COM (06) 349, page 3. Back

114   Ibid, page 5. Back

115   Ibid, page 11 Back

116   See headnote. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 26 October 2006