European Commission and EBRD joint programmes to support ......In addition to the DCFTA Programme,...

European Commission and EBRD joint programmes to support SMEs in Ukraine, Georgia and Moldova under the DCFTAEU SME PanelGeorgia, 23-24 October 2014

Contents

� Overview of EBRD’s Small Business Initiative – Five Pillar Approach

� Pillar 1: Indirect financing to SMEs through local financial institutions

� Pillar 2: Risk sharing with local banks on loans to SMEs

� Pillar 3: Direct financing to SMEs

� Pillar 4: Business advice for SMEs

� Pillar 5: Policy dialogue to strengthen SME business environment

� Pillars 1-3: Local currency financing for SMEs

6 November, 2014 © European Bank for Reconstruction and Development 2012 2

Overview of EBRD’s activities in support of SMEs


Country/regional policy dialogue

initiatives to improve ecosystem for private

sector investments

Lending to participating financial intermediaries for on-

lending to SMEs; investments in PE

funds

Lending to SMEs via funded/unfunded co-

financing mechanisms with banks

Direct "tailor-made" debt and equity

financing to SMEs with strong post investment value

creation

Strong pre-and post-investment advisory

engagement with MSMEs to improve

ESG standards

Pillar 1

Indirect Facilities

Pillar 2 Pillar 3 Pillar 4

A strategic and comprehensive approach to finance SMEs

Co-financing Direct Facilities SBS

Pillar 5Enhanced policy

dialogue

European Commission and EBRD prioritising finance and development of SMEs

� EBRD and EC have partnered since 2009 to support SMEs inEastern Partnership countries

� In 2014, agreement to provide even higher amount of supportto SMEs in Ukraine, Georgia and Moldova.

� Support centred on assisting SMEs to benefit from the termsof the Association Agreement and the Deep andComprehensive Free Trade Area

� DCFTA-related support in two phases:

� Phase 1 active: €60 million SME Direct Support Facility(Pillars 2-3)

� Phase 2 to be active in 1Q2015: new €1 billion+ DCFTAFacility across all five pillars


Overview of EC DCFTA Facility with EBRD

Phase 1: DCFTA Direct Finance Facility for SMEs:

� Approved in September 2014, focused on Pillar 2 and Pillar 3SME financing

� Designed to increase amounts of long-term financing toSMEs and number of projects

� Initial €60 million portfolio of risk sharing with local banksand direct financing to SMEs

� A joint financing program where EU and EBRD bear €9million and €51 million of risk respectively

� Financing includes senior loans, common equity andmezzanine capital


Overview of EC DCFTA Facility with EBRD

Phase 2: DCFTA Investment Grants and Risk SharingFacility

� In October 2014, EBRD submitted to the EuropeanCommission a proposal to partner with EBRD across all fivepillars to finance and develop SMEs.

� Approval expected in December 2014 and launch in 1Q2015

� In aggregate, it is expected the EC will combine an additional€55 million of grants over three years to generate over €1billion of financing support for SMEs

� These grants and financing are expected to support around€1.5 billion of SME projects over 2015-17


EC and EBRD support to SMEs under Pillar 1 (Indirect financing via financial intermediaries)

DCFTA Facility:

EBRD will provide medium and long-term loans to local FIs for on-lending to SMEs for capital investment

EBRD will provide trade facilitation to local FIs: Guarantee letters of credit and extend short-term loans for trade (capital investment and trade)

European Commission will:

� Provide investment grants to SMEs to reduce the cost of DCFTA capital investments

� Fund Technical Assistance for local FIs for SME lending and trade facilitation

In addition to DCFTA Facility:

EaP SME Finance Facility : FX mitigation for local currency loans in Ukraine

Women in Business Financing Program 6 November, 2014 © European Bank for Reconstruction and Development 2012 7

EC and EBRD support to SMEs under Pillar 2 (Risk sharing and co-financing with local financial intermediaries)

DCFTA Facility:

EBRD will risk share with local FIs on their loans to SMEs:

New: SME loan portfolio risk sharing loans < €1 million

Existing: Medium-Sized Co-Financing Facility loans > €1 million


� Provide first-loss guarantee to local FIs for SME loan portfolio risk sharing

� Risk share with EBRD and local FIs on MCFF loans

� Technical Assistance for local FIs for SME lending


EC and EBRD support to SMEs under Pillar 3 (Direct financing to SMEs)

DCFTA Facility:

EBRD will provide loans, mezzanine capital and equity to local SMEs

Purpose: DCFTA capital investment and working capital

Loans: Long-term loans in local currency and foreign currency

Mezzanine Capital: Quasi-equity with return linked to financial success

Equity: Up to 49% of capital


� Risk share with EBRD on loans, mezzanine capital and equity

� Technical Assistance for SMEs to design and implement DCFTA capital investment projects


EC and EBRD support to SMEs under Pillar 4 (Business advice for SMEs)

DCFTA Facility:

� EBRD will provide business advice in DCFTA-related areas for SMEs through local consultants and international experts

� EBRD will implement activities through dedicated local teams established in the EBRD Resident Offices according to established methodology and best practice


� Provide funding for advisory grants to enable SMEs to access know-how on a cost-sharing basis:

� ~100 SMEs will receive business advice from local consultants in 2015

� ~ 20 SMEs will receive industry expertise from international advisers in 2015

� Provide funding for market development activities in DCFTA-related areas such as export promotion and compliance with EU standards

� Support operational costs of the programme including the local dedicated team

NB Activities in 2015 only will be funded under the existing EaP SBS programme6 November, 2014 © European Bank for Reconstruction and Development 2012 10

EC and EBRD support to SMEs under Pillar 5 (Policy dialogue to support SMEs)

Under DCFTA EBRD and European Commission may:

� Review the legal, fiscal and regulatory environment in which SMEs operate with a view to removing impediments (e.g., Investment Councils, Legal Transition Programme)

� Reform legal environment to enable SMEs to access finance and under better terms (e.g. laws on collateral)

� Support local currency lending by banks, and developing local financial and capital markets

� Design mechanisms to encourage SMEs to participate in public procurement tenders

� Design specific procedures to encourage prompt and efficient restructuring of failing businesses and, if unavoidable, a value-preserving liquidation of the businesses.


Main areas of Pillar 5 activities: Top 3 challenges faced by SMEs in 2013, World Bank and EBRD BEEPs


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Armenia Azerbaijan Belarus Georgia Moldova Ukraine Russia

In addition to the DCFTA Programme, EC and EBRD developing local currency solutions

Large majority of SMEs sell goods and services in local currency (LCY) with no foreign currency revenues.

SMEs that do not export should borrow in same currency as revenues (LCY)

However, SMEs in Georgia, Moldova and Ukraine too often borrow in foreign currency (USD, EUR).

SMEs tend to look at absolute all-in interest rates - significantly higher for LCY

Many SMEs borrow in foreign currency - “herding” effect which results in high systemic FX risk for financial sector.

European Commission and EBRD will establish a new programme to deliver local currency lending to SMEs in Ukraine, Georgia and Moldova at viable interest rates.

Reduces SME FX risk and systemic risk in financial sector


Proportion of financial sector loans denominated in foreign currency, December 2012


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Around 70% of Georgian financial sector loans denominated in FX (USD). Percent higher for SME term loans to support capital investment.

Thanks to the European Union for the DCFTA Facility and other support

Initial estimates:

EBRD will be able to double its support for SMEs in Ukraine, Georgia and Moldova through the EC DCFTA Facility

EBRD will be able to provide improved and more local currency financing for SMEs in new EC Market-Enhancing Local Currency Programme


Contacts


Francis Malige, Managing Director, Eastern Europe & [email protected]

Bruno Balvanera, Director for Caucasus, Moldova & [email protected]

Sevki Acuner, Director, Ukraine [email protected]

Julia Otto, Head of Chisinau [email protected]

Chris Clubb, Director, ETC [email protected]

Henry Russell, Director, FI W.Balkans, Belarus, Moldova & [email protected]

Charlotte Ruhe, Director, SBS [email protected]

European Commission and EBRD joint programmes to support ......In addition to the DCFTA Programme,...

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