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The World Bank

Sandro Zanus-MichieiSt. Petersburg – March 2003

The role of Development Agencies

in promoting and fostering SMEs

The role of Development Agencies

in promoting and fostering SMEs

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What are the basic conditions for developingSMEs ?

1. efficient administrative and legal system

2. supportive and transparent fiscal system

3. adequate infrastructure

4. developed financial and banking system

What are the basic conditions for developingSMEs ?

1. efficient administrative and legal system

2. supportive and transparent fiscal system

3. adequate infrastructure

4. developed financial and banking system

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The financial constraints for SMEs:

obtaining capital

cost of capital

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- Regional Development Agencies –

The Italian experience

A public-private partnership to promote

and foster enterprises, on a regional

basis

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- Over 30 years of experience -

Regional Investment Agencies

Regional Leasing Agencies for Development

Regional Guarantee Agencies

- Over 30 years of experience -

Regional Investment Agencies

Regional Leasing Agencies for Development

Regional Guarantee Agencies

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Regional Investment AgenciesRegional Investment Agencies

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What is and how does it work a Regional Investment Agency ?

- legal entity established with the private sector and partially funded by (local) government to invest in SMEs- the Agency provides a variety of “products” (financial and non) to SMEs at (marginally) subsidized terms

What is and how does it work a Regional Investment Agency ?

- legal entity established with the private sector and partially funded by (local) government to invest in SMEs- the Agency provides a variety of “products” (financial and non) to SMEs at (marginally) subsidized terms

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- Roles -

1 – Investment Company sets out to create and to develop businesses with shareholdings in risk capital, loans, consultancy and expert assistance 2 – Development Agency implements policies for the promotion and economic growth of the Region

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- The products offered -

Financial:- Private Equity- Loans- Venture Capital- “Promotion investments” to SMEs and micro-enterprises- Joint-venture financing Non-Financial:- Advisory services

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Regional Investment

Agency

Regional Investment Agency

SMEs

Advisory

EquityLoans

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Equity investments:

- although a “silent investor”, a Board seat is required for one of its investment staff for the duration of the investments- limited amount of investments, max 35% of subscribed capital- risk based investment (no collateral)- average duration 5 years (SME call option)- average investment decision (45 days)- required audited financial statements

Equity investments:

- although a “silent investor”, a Board seat is required for one of its investment staff for the duration of the investments- limited amount of investments, max 35% of subscribed capital- risk based investment (no collateral)- average duration 5 years (SME call option)- average investment decision (45 days)- required audited financial statements

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Loans:

- collateralization of the amount of the investment- average duration 3-5 years - interest rate slightly subsidized- Loan/Equity mix

Loans:

- collateralization of the amount of the investment- average duration 3-5 years - interest rate slightly subsidized- Loan/Equity mix

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Why does the system work ?

- the Agency builds an unique knowledge of the local business environment: staff gains a wide and comprehensive expertise that enables them to provide highly specialized assistance and professional advice, tailor-made to meet entrepreneurs’ needs.- “pull factor” for co-financing from commercial banks - networking business opportunities

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Regional Leasing Agencies

for Development

Regional Leasing Agencies

for Development

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What is and how does it work a Regional Leasing Agency ?

- leasing company established with the private sector and partially funded by (local) government - provides leasing to small entrepreneurs at (marginally) subsidized terms

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Regional Leasing

Agency

Regional Leasing Agency

SMESupplier/

ManufacturerGoods

Ownership

Lease

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- The products offered -

(i) real-estate leasing

(ii) equipment leasing

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- does not require any collateral (!)

- fiscally advantageous (!?)

- it is easier and faster to obtain than a Loan

- it is a “pull factor” for technology devel.

(i.e. induces SMEs to replace obsolete

machinery and equipment faster)

- the cost (interest) is competitive with working capital Loans

Advantages

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Regional Guarantee AgenciesRegional Guarantee Agencies

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What is and how does it work a Regional Guarantee Agency ?

- legal entity established by SMEs- SMEs subscribe a Guarantee Fund that will be used to guarantee Loans, granted only to member SMEs, by the banks- Guarantee Fund is (often) subsidized by (regional) public funding- majority of Guarantee Committee is formed by small and medium entrepreneurs- limited staff

What is and how does it work a Regional Guarantee Agency ?

- legal entity established by SMEs- SMEs subscribe a Guarantee Fund that will be used to guarantee Loans, granted only to member SMEs, by the banks- Guarantee Fund is (often) subsidized by (regional) public funding- majority of Guarantee Committee is formed by small and medium entrepreneurs- limited staff

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Regional Guarantee Agency

Shareholders:

- SMEs

Subsidized by:

- public (local) funds

Bank

50% Guarantees

Loans

MemberSMEs

Banks

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Scope of the Guarantee Agencies:

facilitate granting of Loans to SMEs

reduce cost of Loans (by reducing the Bank’s lending risk)

Scope of the Guarantee Agencies:

facilitate granting of Loans to SMEs

reduce cost of Loans (by reducing the Bank’s lending risk)

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Why does the system work ?

- is co-financed by the entrepreneurs- entrepreneurs are involved in the mgmt (Guarantee Committee)- more efficient use of public funds- reduced risk for the banking system therefore there is a higher incentive for the Banks to grant loans to SMEs- by guaranteeing 50% of the Bank’s Loan, the Agency negotiates a ‘base’ int. rate for all its member SMEs with each Bank