EU-backed financial schemes largely unsuccessful, says accounting watchdog

EU-backed loans, guarantees and equity investments are expensive and have a poor record of triggering private investment, says a new report from the EU’s accounting watchdog.

The European Court of Auditors investigation covers over 1,000 financial schemes concocted between 2007 and 2013, most of which were administered by the European Commission’s regional department, DG Regio, and managed either by the European Investment Bank (EIB), the European Investment Fund (EIF) or banks in EU states, and backed by €21.5 billion from the EU budget.

Compared to grants, the traditional way of providing funding from the EU budget, financial instruments are supposed to trigger private investment and reduce the likelihood that recipients become dependent on public support.

But during the period looked at by the auditors, “The private sector remained reluctant to invest in financial instruments since [they] were considered to be too strictly regulated.”

Only 154 out of 1,025 financial schemes investigated by auditors attracted any private funding. This means that private money only made up 2 per cent of the total capital endowment raised by the EU.

The auditors express doubt that the EU will do any better before 2020. “At this stage it seems unlikely that a significant amount of private funds will be attracted for the 2014-2020 programme period,” they write.

One problem they identify is that a significant number of financial instruments were oversized.

“This indicates that market needs have not always been properly assessed by managing authorities before allocating funds,” the report says.

An example the auditors present is an EU agreement with a regional government in Italy to set up a guarantee fund with a capital endowment of €233 million, intended to guarantee loans of around €2.3 billion.

The auditors found “no analysis which justified such an allocation”. Moreover, there was no investment strategy and planning, and no exit policy in place when the funding agreement was signed.

By the end of 2014, the managing authority reported that only €45 million had been provided as guarantees to final recipients, a “disbursement rate” of 19 per cent.

In general, regions that traditionally find it hard to spend all their regional funding allocations from the EU also found it hard to use financial schemes.

But the auditors find that disbursements were also low in richer regions in Spain, Italy, the Netherlands and Austria. Schemes managed by the EIB and EIF performed worse than those managed by national fund managers.

The Commission argues the benefit of pushing public funds through financial schemes is that monies can be used multiple times. For instance, if a loan was repaid after three years, the cash could then be used to provide a new loan.

However, less than a third of all financial instruments had used their funds more than once by the end of 2014.

Hefty fees

The big fees charged by fund managers means that EU loans, guarantees and equity investments are also expensive to administer.

“A significant share of initial endowments of financial instruments was spent on management costs and fees,” the report says. “For some instruments, the management costs and fees even exceeded the actual amounts disbursed to final recipients.”

The auditors say that costs and fees reached up to three quarters the amount of the total financial support disbursed in the period they investigated.

The auditors also find costs and fees were significantly above the levels reported by the European Commission.

Reforms

Following the audit, carried out between October 2014 and March 2016, the Commission has made several reforms.

Endowments are now more likely to be appropriately sized, market analyses must be undertaken by public administrators, and there have been greater investments in training materials.

“In many cases the various bodies involved experienced a steep learning curve,” the auditors say. Public authorities were not much helped by the worldwide financial crisis either. Nonetheless, “more and earlier Commission guidance could have prevented these problems at least in part.”

The auditors recommend that the Commission makes further reforms, such as ensuring that EU states provide complete and reliable data on private investments made to capital endowments and strengthening the performance-related pay elements in fund managers’ contracts.