New deliverable: Financing mechanisms for the bio-based industry
D4.3: Recommendations for the use of European Agricultural Fund for Rural Development (EAFRD) and other funding instruments in early stage finance
Within the POWER4BIO project, the confidential report about the outcomes of POWER4BIO task 4.3, “identification of private and public funding instruments for innovative bio-based solutions”, was delivered to the European Commission. The aim of this report is to build a repository of selected financing mechanisms for the bio-based industry with recommendations and guidelines on how to develop synergies with the European Structural and Investment Funds (ESIF), Horizon 2020, private equity and quasi-equity funds.
The overall outcome of the analysis is a catalogue of financial instruments with the state of the art on financing issues for bio-based solutions. The analysis provides, for each identified financing mechanism, information on the sector/topic targeted, type of investments it is addressed to and the beneficiary groups targeted. The analysis has been carried out in collaboration with the Regional Bioeconomy Hubs (RBHs) and particular attention was devoted to new opportunities deriving from the full exploitation of the potential of European Agricultural Fund for Rural Development (EAFRD) for risk capital.
Firstly, the report presents what financial instruments are and the different types of financial instruments available. Financial instruments are public policy instruments such as subsidised loans, credit, guarantees and equity finance schemes designed to overcome market failures experienced by small and medium-sized enterprises to promote productive investments in a way that would not result through market interactions alone.
Secondly, this document goes into more detail and analyses funding instruments for innovative bio-based solutions, focusing on the European framework which most of the national and regional funding mechanisms derive from. A specific focus has been given to the European Structural and Investment Funds (ESIF), due to their importance for the definition and implementation of the economic strategies in the European regions. Besides, the European Agricultural Fund for Rural Development (EAFRD), which is one out of 5 different funds that make ESIF, represents one of the main common financial instruments available to the regions to implement their bioeconomy strategies.
Thirdly, the report focuses on the area of access to finance for SMEs, where there is a market imperfection/failure, which is present as a fundamental structural issue: the reasons for this market failure is related to insufficient supply of capital (debt or equity) and inadequacies on the demand side. This market failure is mainly based on asymmetric information, combined with uncertainty and/or risk perception, which causes agency problems that affect debt and equity providers´ behaviour.
In an economic sector such as bioeconomy, start-ups are one of the driving forces; high-growth firms are powerful to foster for regional economic development and the availability of funding for those companies depends heavily on their stage of development. Equity is one of the forms of finance that are more appropriate for the early development stages of innovative enterprises.
Equity financial instruments co-financed with public resources can be a powerful catalyst for the creation and development of venture capital ecosystems in Europe. But when it comes to setting up a new ESIF Equity instrument, it is essential to match program goals with the economic and innovation main regional characteristics. The consistency with the characteristics of the region is crucial for the success of the financial instrument. This report also analyses the main steps to be undertaken to set the scene for a proper use of EISF in order to create tailored financial instruments to finance high growth enterprises.
Finally, financial instruments have formed part of the EAFRD legislation for more than 15 years, but under the current programming period new ways of using EAFRD resources have been implemented to stimulate investments in agriculture, food processing, rural businesses and forestry. In the last part, this document provides regions with recommendations and tips for the creation and implementation of financial instruments using EARDF.