New development funds to help the regions of Poland

The current financial framework is the last European Union budget that is generous to Poland. The funds can be used until 2022, but after that the principles of cohesion policy will change.

The European Union intends to provide more funds for joint, cross-border investments, new technologies and innovation, and perhaps also for social goals resulting from the problems associated with migration. It is also possible, that the Eurozone countries will form a separate budget, as a result of which there will be less money for the implementation of the cohesion policy, i.e. aligning the level of development of the EU’s various regions.

The Polish regions, managed by the voivodeships’ authorities, should be prepared to conduct a regional development policy without the support of EU funds or with much less support than previously. So they are creating Regional Development Funds.

Recycling of EU funds

The financial framework 2007-2013 introduced repayable financial instruments in the form of loans and guarantees. Companies and local governments were able to use the JESSICA Initiative (Joint European Support for Sustainable Investment in City Areas) and the JEREMIE Initiative (Joint European Resources for Micro-to-Medium Enterprises). In accordance with the value of the signed contracts, EUR260.3m was allocated for the implementation of the JESSICA Initiative in Poland, and EUR399m was allocated for the implementation of the JEREMIE Initiative. The resources from JESSICA and JEREMIE come from the European Regional Development Fund, the European Investment Bank, and, in the case of JESSICA, also from the Council of Europe Development Bank. Their purposes are specified by the Regional Operational Programs, which are created in each voivodeship in accordance with the regulation of the European Parliament and of the European Council from 2013.

In accordance with the Act of 11 July 2014 on the principles of implementation of the cohesion policy programs financed under the 2014-2020 financial framework (the so-called “Implementation Act”) and the regulation of the Council of the European Union, repayable resources (the so-called financial engineering instruments, i.e. loans, guarantees) repaid by the recipients of EU assistance are then reused, and managed by the voivodeships’ authorities. These resources are collected on the accounts of the State Development Bank of Poland (BGK) and mobilized by BGK only at the request of the voivodeships.

While obtaining and spending EU funds – both refundable and non-refundable – is subject to very restrictive regulations and requires the approval of the European Commission, resources which came back to the voivodeships from entities that made use of loans and guarantees are not subject to such restrictions. They can be used again on development objectives defined within the voivodeships. So we are dealing with something like a recycling of EU funds – the voivodeships do not have to provide explanations concerning the money recovered from the financial instruments.

They’ve already started

The act of 2014 did not specify the legal forms of the institutions dealing with development policy in the voivodeships with the use of financial instruments. Voivodeship authorities formed loan funds and/or guarantee funds, which had an undefined legal form. The Supreme Chamber of Control questioned the functioning of such institutions, stating that the management of repayable funds, also after their “recycling” within the regions, could only be done by the voivodeships’ authorities, and not by a separate entity entrusted with this task. The ability to establish separate funds will, however, be included in the amended “Implementation Act”. The voivodeships have already received the “green light” from the government and have begun establishing regional (voivodeship) development funds, without waiting for the adoption of the amendment.

For the time being, six funds have been established: in the Greater Poland, Pomeranian, Kuyavian-Pomeranian, Lower Silesian, Podkarpackie and Opole voivodeships. The goal of the regional development funds is to support the industries and business projects that were determined as a priority for the region by the voivodeship’s authorities. The funds are not and will not be the main provider of capital for these projects. They do not have the sufficient financial strength for that. They can, however, play a supporting role – of institutions filling the liquidity gap. This applies, among others, to loans for companies that have a too short history to be able to receive loans, or whose projects seem too risky for commercial banks to support them. There are also cases where the banks could provide loans, but on unfavorable terms – they include a high risk margin in their interest rate.

The Regional Development Funds do not provide loans themselves, but instead use financial intermediaries – usually co-operative banks or small companies specializing in financial services. For the large commercial banks such activity would be unprofitable because its scale is too small and it would be necessary to create a special computer program for such a service.

Between market and aid

On the other hand, the Regional Development Funds should not take the place of commercial banks in the financing projects which are doing fine on the market. Offering preferential loans to such companies would distort competition. These are more general issues concerning assistance from EU funds. Some of the companies, which obtained non-refundable or refundable financing, probably had access to bank loans on market terms. The EU support gave them an additional advantage, but at the expense of other companies that did not receive it.

“The problem that will be faced by the Regional Development Funds is the ‘cannibalization’ of the funds. The point is that they shouldn’t support activities that can be supported by EU cohesion funds,” says Patrycja Wolińska-Bartkiewicz, Managing Director of the European Funds Division at BGK.

The first months of activity of the Regional Development Funds also showed that their legal form has to be adapted to the Polish and local realities. As joint-stock companies, they are subject to the provisions of the Code of Commercial Companies, but the goal of regional development funds is development policy, which consists in granting loans and guarantees at rates lower than market rates. This means that they will operate on a non-profit principle.

Another legal problem that the Regional Development Funds will have to deal with is corporate income tax. As companies, they are subject to the same taxation rules as other legal entities. What’s more, in their pursuit of maximization of tax revenues, tax offices may raise objections to the operations carried out by the funds, determining that they are intentionally lowering their profits. This, of course, will be in contradiction with the statutory purpose of the funds, allowing non-market operations, i.e. ones that are non-profit or have a lowered profit as a matter of principle. The easiest and the most appropriate solution would be to adopt a law on regional development funds, and to provide them with a special legal form, allowing them to operate with the greatest possible flexibility, while exempting the funds from corporate income tax.

A more difficult matter will be excluding them from the restrictions of the public procurement law, which some voivodeships’ authorities are hoping to do. The provisions on public procurement have to be compatible with EU law, and there is no doubt that Regional Development Funds are and will be operating as public entities.

Another problem that may occur in a few years could be significant capital differences. The amount of resources that the Regional Development Funds have and will have available in the coming years depends on the extent to which the given voivodeships preferred repayable assistance (financial engineering instruments) in their development policy. Some feared that the repayable assistance would not return to them after “recycling”, and that the state government would find a way to take over these resources in contradiction to the legislation. That is why they preferred to support development with grants from EU funds and not with loans. This lack of trust may prove to be harmful for them, because the established Regional Development Funds will have fewer resources available.

One important thing is that the resources of the Regional Development Funds are not included in balance sheets of public finance statistics. In other words, they do not affect the level of the public finance deficit. Therefore, there is no danger that they will be taken over by the state government in the event of a difficult situation of the central budget.

How does it work in practice

The Pomeranian Voivodeship Development Fund began its operations more than a year ago – on April 1st, 2016. BGK assigned to the Fund the management of 57 operating agreements with a value of EUR124m, concluded with 15 financial intermediaries. The Pomeranian Voivodeship Development Fund currently manages 70 operating agreements with a total value of EUR142m. The company cooperates with 15 financial intermediaries, who were previously involved in the distribution of repayable assistance for small and medium-sized enterprises (SME) in the framework of the JEREMIE Initiative. These include loan funds, guarantee funds, domestic banks and cooperative banks, and other financial entities.

The company does not provide support directly, as it is provided by the intermediaries with whom the Pomeranian Voivodeship Development Fund concluded operating agreements. The Fund is working on an update of the Investment Strategy for the years 2017-2018, which will determine the areas that will have access to loans and guarantees. So far, thanks to the activities of the Fund, SMEs have been supported with over EUR10.6m. The Fund granted 420 loans and guarantees.

The Kuyavian-Pomeranian Voivodeship Regional Fund was created on January 26th, 2017. It was established through the division and separation of the assets of the Kuyavian-Pomeranian Voivodeship Loan Fund in Toruń. It took over 15 agreements after the former Loan Fund. It will ultimately take over EUR42.2m from the old budget perspective, and will have EUR103.5m available from the new perspective. Loans and guarantees will be provided to more than 4,000 enterprises. Their interest rate is lower than the market interest rate – companies pay an interest rate of 2.75–3 per cent per year. The Fund may also grant preferential loans with an interest rate of 0.5 per cent.

Theoretically, the first Development Fund was the Lower Silesian Voivodeship Fund, which was registered as a limited liability company in 2012, but for the first several years its task was the distribution of funds under the JEREMIE Initiative. The resources were provided to almost 6,000 enterprises and are successively repaid by them. In 2016 the company was entrusted with the task of supporting SMEs from the Dolnośląskie voivodeship, using repayable financial instruments from the post-JEREMIE resources. In the Q3’ 2016 the fund launched the first loans – for a total of EUR16.4m. It will have EUR94m to be allocated from the old financial framework and a bit more from the new framework. These funds will benefit several thousand enterprises. The Fund cooperates with seven financial intermediaries. The loans are granted at an interest rate of 2.83 per cent.

In January 2017 the decision was made to establish the Opole Voivodeship Regional Development Fund. The establishment of the Fund was supported by 16 councilors of the voivodeship’s assembly while 6 voted against. The Opole Voivodeship Regional Development Fund is supposed to be initially financed with the resources that in the financial framework 2007-2013 were allocated for loans granted by the Voivodeship Fund for Environmental Protection and Water Management in Opole. This amounts to several million EUR. The regional authorities want to add EUR1.2m from the budget. In the future the company is also supposed to receive “recycled” money from the new budget perspective – EUR64m. The company was registered in March. Its share capital is EUR703,623 – the sole owner, as in the case of all the other regional funds, is the voivodeship (in this case the Opole Voivodeship).

The Fund cooperates with other institutions involved in supporting the region’s economy, among others, the Opole Voivodeship Centre for the Development of the Economy. One of the ideas for the functioning of the Fund is offering consulting services to enterprises. The authorities of the Fund may in the future support small and medium-sized enterprises through the establishment of joint partnerships.

The youngest funds are the Podkarpackie Voivodeship Development Fund and the Opole Voivodeship Regional Development Fund.

The resources made available to the financial intermediaries should be allocated solely for the financing of the investment and development needs of micro and small entrepreneurs. Intermediaries cannot grant assistance for objectives that are not related to economic activity, for consumer loans, or the repayment of other liabilities, etc.

The Funds have announced the creation of investment strategies which will determine the preferred sectors and types of activity. For now, however, such policies are, at best, in the stage of preparations.

According to Patrycja Wolińska-Bartkiewicz, the Regional Development Funds will have to learn how to effectively support the development of the region. They should focus on priority sectors and specific types of activity. They may assist in professional activation and support exports (within the limits permitted in the WTO and the OECD) and key companies in the region. Their principles should be flexible, as each region has its own specificities. They will be able to access additional funds, e.g. enter partnerships with private investors, use loans from the European Development Bank. They could become important financial vehicles on the regional scale once the money from the EU runs out.

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