Introducing financial instruments for the European Social Fund

Introducing financial instruments for the European Social Fund

Sec$on 1: What is a financial instrument?

Sec$on 2: Why use financial instruments in ESF programmes?

Sec$on 3: Who are the financial instruments for?

Sec$on 4: How to manage financial instruments?

Sec$on 5: Who implements the financial instruments?

Sec$on 6: What are the main financial products?

Structure of the Handbook

Key messages of the sec>on are:

• A defini>on of financial instrument with the revolving and leverage effects;

• The life cycle and main financial products;

• Financial instruments in rela>on to ESF: the key actors.

Sec2on 1 What is a financial instrument?

The specificity of ESF FIs


The investment ecosystem includes:


•  The public sector (na>onal, regional, and local governments), which develops and designs programmes and strategies to address social needs, while promo>ng an entrepreneurial environment and favouring links between other key local stakeholders. Financial instruments co-‐financed under the ESF can play an important role in suppor>ng public policies to combat social exclusion, covering gaps in public resource shortages and genera>ng savings. Public ins>tu>ons are therefore crucial in the design of ESF programmes and for the use of financial instruments, also accompanied by non-‐financial services, in addressing ESF investment priori>es. The public sector can also act as financial intermediary (for example, government agencies providing finance).



•  The private sector (entrepreneurs, banks, investors, small and medium-‐sized companies – SMEs), can also play a significant role in suppor>ng social policies and programmes. SMEs can be either direct final recipients, or a vehicle to address individual social needs, such as a social enterprise. Banks and investors may use social investments to acquire new customers and suppliers, as well as to explore innova>ve services and new products.



•  The non-‐profit sector (NGOs, universi>es, founda>ons) acts as pioneer and advisor in social investment. It can provide direct and financial support for programmes addressing social needs. It can have close contact with the target groups, as well as valuable hands-‐on experience and knowledge of social issues. Moreover, it can contribute with innova>ve pilot projects and schemes as well as by dissemina>ng best prac>ces.


Key messages of the sec>on are:

• providing an overview of the advantages of using financial instruments; • describing the main characteris>cs of social impact investment and how these can fit the ESF; • providing informa>on on how financial instruments can match ESF thema>c objec>ves.

Sec2on 2 Why use financial instruments in ESF programmes?

Social Impact Investment: “The provision of finance to organisa>ons addressing social needs with the explicit

expecta>on of a measurable social, as well as financial, return” OECD (2015), ‘Social impact investment – Building the evidence base’

Social Impact Investment

•  Social needs. The social impact investment primary objec>ve and star>ng point is to tackle social needs which range from ageing to disability, from health to children and families, affordable housing, unemployment, etc.

In the ESF, the needs of social impact investment are similar to those in the programme strategy, the priority axis and the thema?c and specific objec?ves.


•  Demand. Service delivery organisa>ons play a decisive role in addressing social needs. They include community organisa>ons, chari>es, non-‐profit organisa>ons, social enterprise, and social impact-‐driven businesses. Individuals, disadvantaged or not, can be seen as ‘poten>al’ beneficiaries.

In the ESF the demand is from target final recipients described in the programme ac?ons.


•  Supply. Social impact investors vary, in addi>on to government and public ins>tu>ons there are founda>ons, high net worth individuals, philanthropists, banks and other financial ins>tu>ons.

In the ESF, programme resources become part of the supply side.


•  Financial intermediaries. Commercial banks, investment banks, independent financial advisors, brokers and dealers play a pivotal role in developing social impact investment.

In the ESF, poten?al financial intermediaries can be dis?nguished into bank intermediaries (commercial banks, coopera?ve banks, and saving banks), and non-‐bank intermediaries such as NGOs, social equity funds, specialised microfinance intermediaries, and government bodies. Financial intermediaries can also provide technical support.


•  Enabling environment. This includes social systems, tax and regula>on.

In the ESF, the enabling condi?ons are the key elements in the ex-‐ante condi?onality. These include administra?ve capability, administra?ve burdens and sector planning.

Example on FIs and investment priori2es: how FIs can match ESF thema2c objec2ve 8

Note: ★★★=High; ★★=Medium; ★=Low

Example on FIs and investment priori2es: how FIs can match ESF thema2c objec2ve 8

These tables, one for each thema>c objec>ve, assess the poten>al relevance of financial instruments for individual investment priori>es in the 2014-‐2020 programming period. This mul>-‐criteria analysis considers: • past experience (2007-‐2013 programming period) in the EU, based on studies and reports from European ins>tu>ons including: EC (2012), ‘The Network for BeMer Future of Social Economy (NBFSE) – Strand financial instruments and mechanisms of funds’ alloca?on to social economy’; EC (2014), ‘Implementa?on of the European Progress Microfinance Facility – 2013’; EMN (2014), ‘Overview of the microcredit sector in the European Union’; EC (2015), ‘A map of social enterprises and their eco-‐systems in Europe – Country Reports’; COR (2015), ‘Financial instruments in support of territorial development’; EC (2015), ‘Social investment in Europe – A study of na?onal policies’; • past experience in non-‐EU OECD countries, based on studies and reports including: OECD (2013), ‘Innova?ve financing and delivery mechanisms for tackling long-‐term unemployment’; OECD (2013), ‘Job crea?on through the social economy and social entrepreneurship’; OECD (2014), ‘New investment approaches for addressing social and economic challenges’; OECD (2015), ‘Social impact investment – Building the evidence base’; • interviews with managing authori2es on their actual or poten>al use of financial instruments by investment priority.

Key messages of the sec>on are: • An overview of financial exclusion with the characteristics and needs of final recipients;

• Describing the main barriers that prevent ESF targeted groups from financial inclusion and how the ESF can mitigate them using financial instruments.

Sec2on 3 Who are the financial instruments for?

Types of exclusion

Transac2on banking Exclusion from receiving regular electronic payments such as wages, pensions or social assistance; conver>ng cheques or vouchers into cash; storing money safely; paying for goods and services other than with cash; paying bills electronically; making remigances.

Savings It is ohen a consequence of social problems and lack of money (low income and profit), lack of habit, or an unwillingness to deal with banks because of nega>ve past experience.


Types of exclusion



Credit Exclusion from access to goods or services requiring resources beyond the immediate budget

Types of exclusion



Credit Exclusion from access to goods or services requiring resources beyond the immediate budget.

Insurance It is some>mes mandatory for specific goods (motor vehicles) or economic ac>vi>es (self-‐employed trades or professions).

Types of exclusion

Barriers to social inclusion

FIs and ESF target groups

Key messages of the sec>on are: • The main ac>vi>es of each of four phases in the life cycle of financial instruments;

• Governance op>ons for implementa>on;

• The main characteris>cs of the third axis -‐ Microfinance and Social Entrepreneurship (MF/SE) – of the Employment and Social Innova>on (EaSI) Programme.

Sec2on 4 How to manage financial instruments?

The different governance op2ons

The EaSI programme The EaSI programme, set to run from 1st January 2014 to 31st December 2020, brings together three programmes managed separately in 2007-‐2013, which now form the three axes of EaSI. These are:

•  PROGRESS (Programme for Employment and Social Solidarity)

•  EURES (European Employment Services)

•  Microfinance and Social Entrepreneurship (MF/SE)

The MF/SE ini>a>ve includes new elements par>cularly appropriate for the ESF framework:

•  Increase access to microfinance •  Funding for capacity-‐building in microfinance ins>tu>ons •  Development of new financial instruments for social entrepreneurship (funded instruments, guarantees)

Key messages of the sec>on are: • Dis>nguishing between bank and non-‐bank intermediaries and between mul>-‐markets and local intermediaries;

• Assessing how they can contribute to the social impact investment;

• Advising on choosing the most appropriate financial intermediaries.

Sec2on 5 Who implements financial instruments?

Main features of the financial intermediaries

• Proximity to local market

• Focus on social mission

• Focus on investment sustainability

• Adaptability of financial products for social investments

• Understanding of social needs

• Addi>onal non-‐financial services

Main features of the financial intermediaries

Key messages of the sec>on are: • The advantages and disadvantages of each financial product;

• How they can contribute to each ESF thema>c objec>ve;

• Examples in the implementa>on of financial products to address ESF thema>c objec>ves.

Sec2on 6 The main financial products

Main features of the financial products

PROS CONS

•  Not par>cularly difficult to administer (so there are limited management costs/fees).

•  A defined repayment schedule makes budge>ng easier.

•  The lending mechanism is well understood, reducing the need for capacity building and the risk of misunderstanding.

•  Loans preserve the equity of the final recipient as there is no claim on the ownership of the enterprise.

•  Funded products such as loans require more ini>al resources than unfunded products such as guarantees.

•  It is some>mes difficult to establish the probability of default, especially with a lack of history of final recipients.

•  Financial intermediary counterparty risk needs to be carefully assessed as they might also go bankrupt.

•  The advantage for the final recipient is almost en>rely financial. There are limited addi>onal benefits as know-‐how is not transferred.



PROS CONS •  Guarantees can preserve the equity of final recipients as

there is normally no claim on the ownership of the enterprise.

•  Poten>al benefits for final recipients could include inter alia, lower or no guarantee fees, lower or no collateral requirements as well as lower risk premiums.

•  Since Programme contribu>ons cover only certain parts of loans (appropriate mul>plier ra>o), there is a high leverage effect.

•  The investment risk for third party lenders is reduced (because they only bear part of the risk of default).

•  Unfunded products such as guarantees require less ini>al support than funded products such as loans.

•  The guarantee represents a risk reserve for the lender and doesn’t provide liquidity. It can however, provide capital relief for the lender.

•  Es>ma>ng the appropriate cap, or maximum limit, can be challenging.

•  There is no transfer of business exper>se to final recipients.

Main features of the financial products PROS CONS

•  There are higher poten>al returns compared to pure debt instruments.

•  There is an ac>ve role in project management and access to shareholder informa>on for the investor.

•  The local private equity industry and local investor ac>vity in riskier areas can be encouraged.

•  The need for equity investment can prompt changes in regulatory framework to encourage a private equity market.

•  The company can benefit from investor’s management exper>se.

•  Public investors can influence the configura>on and mission of a company.

•  There is insolvency risk for all the invested capital. •  Time-‐consuming and cost intensive investment.

•  These investments are more difficult to administer than normal loans (high set-‐up and opera>onal costs), more >me-‐consuming and cost-‐intensive.

•  Short-‐term financing is not possible, since returns are feasible only in the long term.

•  Establishing the process for the investment can be challenging.

•  Compared to debt instruments, equity can be less agrac>ve to FRs due to the obliga>on to yield control.

Main features of the financial products PROS CONS

•  For co-‐investors, there are higher returns compared to pure debt instruments.

•  Addresses specific risk capacity constraints in a par>cular market segment.

•  S>mulates investment by local private equity industry, also in riskier areas not previously serviced.

•  Might prompt changes in the regulatory framework to encourage a private equity market.

•  These investments are more difficult to administer than normal loans (high set-‐up and opera>onal costs), more >me-‐consuming and cost more.

•  Short-‐term financing is not possible, since returns are feasible only in the long term.

•  Any ancillary services such as management exper>se would be an expense for the company.

•  There are typically a few investors and final recipients, while the investment amounts are high.

•  Compared to debt instruments, they may be less agrac>ve to final recipients as they may involve loss of control when bonds are converted into equity.

Thank you

Date post:	14-Apr-2017
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Introducing financial instruments for the European Social Fund

Economy & Finance