The new EU guarantee instrument is technically quite complex and requires negotiations between the European Commission, the government, KredEx, and the cohesion fund implementing body. Technical complexity, however, should not serve as a pretext for opting out.
A document is circulating in public consultation that will, over the next seven years, frame how EU funds are used in Estonia. The document is voluminous and its title lengthy: the Partnership Agreement for the implementation of the Cohesion Policy Funds and the European Maritime, Fisheries and Aquaculture Fund, and the draft Operational Programme for the Cohesion Policy Funds for the period 2021–2027. Within this substantial package are two sentences that should — and indeed must — attract the attention of entrepreneurs and, why not, even prompt them to speak up.
In the Partnership Agreement, the government plans to confirm that “Estonia will not make a transfer to InvestEU” and that “Estonia will not make an additional transfer from ESF+ or ERDF to the JTF.” In plain terms, this means that Estonia does not wish to provide a voluntary budgetary guarantee — which in turn means that Estonian enterprises will in the future have no possibility of accessing the EU guarantee. In the short term, we gain a few percentage points from cohesion funds that can be deployed immediately in visible projects. In the long term, however, we forfeit the competitiveness of our enterprises relative to those in member states that do provide the guarantee.
The cohesion policy that frames EU internal market economic policy is evolving away from grant-based support towards the provision of financial instruments. In the new funding period (2021–2027), this means above all supporting green and digital transition investments through new financial instruments. One must bear in mind, however, that every ministry, politician, and civil servant continues to view the funds earmarked for cohesion policy implementation as a pot of money from which they must extract as large a sum as possible. Once secured, the politician can report positive news to constituents and the ministry can pursue its own initiatives.
In the straightforward and universally comprehensible domestic funding logic, a complex and technical document such as the Partnership Agreement — and with it the plan under discussion to opt out of the EU guarantee arrangement — goes unnoticed. This is precisely what those two sentences mean: companies will not be able to use the advantages of the EU guarantee’s high credit rating for investments necessary for the green and digital transitions. In other words, access to cheap money. Before this option is locked away, I urge the interest groups involved in the Partnership Agreement consultations to seriously consider whether the enterprises they represent truly wish to continue relying on expensive KredEx products. Or whether it is time to engage more deeply with the cohesion policy intervention logic and the InvestEU programme — and genuinely safeguard the international competitiveness of Estonian businesses.
In the new funding period, all existing EU market-based financial instruments will be consolidated into a new one: the InvestEU Fund. Backed by the EU budgetary guarantee, this creates an opportunity to cover part of investment risks and thereby extend the reach of investments. InvestEU strategy falls under the remit of the Ministry of Finance and is not perceived as part of business policy — presumably due to the technical complexity of the subject. The InvestEU programme has four major policy windows: sustainable infrastructure; research, innovation and digitisation; small and medium-sized enterprises; and social investment and skills. The programme therefore has a very broad scope. And crucially — since the focus in all policy windows is on companies with up to 500 employees, InvestEU practically covers the entire Estonian economy. I would suggest that such a programme deserves public interest.
All InvestEU policy windows have two sections: an EU section and a member state section. Guarantees provided under the EU section focus on EU priorities. Guarantees under the member state section, however, allow member states to use the EU guarantee’s high credit rating to make investments needed in their own economies. To participate, a member state must provide a voluntary budgetary guarantee — essentially agreeing on how and under what conditions a portion of its cohesion policy funds may be used as an EU guarantee.
The EU guarantee offered under the InvestEU programme is a new instrument replacing the SME Initiative of the previous funding period. Estonian enterprises have hitherto been quite successful users of the financial instruments under the SME Initiative (InnovFin, COSME, etc.). In the new funding period, these financial instruments will no longer be offered; only the EU budgetary guarantee is available. For member states to participate, they must allocate an agreed percentage of their cohesion funds to the member state section — if they so choose. Estonia chooses not to.
Under the previous funding period’s SME Initiative, the member state made a contribution to the cohesion funds and received in return financial instruments on considerably more favourable terms than any individual member state could offer independently. Under the new EU guarantee, member states likewise do not have to spend resources or time creating and managing their own financial instruments. The Partnership Agreement should, however, signal that Estonia is considering providing the voluntary budgetary guarantee needed to participate in the member state section — and then analyse the costs and benefits. Instead, Estonia is planning to declare upfront that it intends not to participate, that Estonian enterprises are not interested in using the EU guarantee.
The principal partner of InvestEU is the European Investment Bank. Through the member state section, however, investment projects may also be submitted — and the EU budgetary guarantee thereby utilised — by other organisations: in Estonia’s case, for example, KredEx, the EBRD, and the NIB. The sole prerequisite is that a so-called pillar assessment has been conducted — an audit performed by an independent auditor — to ensure that the organisation can be trusted when using EU funds. No such assessment is planned in Estonia.
The new instrument raises many further considerations. Nor is it yet clear how it will be received in other member states. On the other hand, if Estonia’s national promotional bank — KredEx — does not undergo a pillar assessment, and if Estonia unequivocally confirms in the Partnership Agreement that it does not intend to participate in the member state section, then Estonia is unequivocally also removing the possibility for its enterprises to access the EU budgetary guarantee. Before this is enshrined in the Partnership Agreement, it would be worth analysing the matter and discussing it with business representative organisations.
Let me also offer concrete examples of potential consequences. In the spring, Internal Market Commissioner Thierry Breton visited Estonia and, at a meeting with Estonian companies, invited them to make use of the opportunities offered by the European Health Emergency Preparedness and Response Authority (HERA). These funds, however, will be made available to enterprises through the European Investment Bank and InvestEU. If Estonia does not participate in the InvestEU member state section, these funds will not be accessible to our enterprises — at least not on the same favourable terms as for competitors.
Or another example. Much has been said about the hundreds of millions to be made available in Ida-Viru County through the Just Transition Fund. What has not been discussed is that the fund is only a small part of the Just Transition Mechanism. In investment terms, the significantly larger component is the InvestEU Just Transition Scheme, designed to attract private sector investment. If Estonia does not participate in the InvestEU member state section, these funds will not be available for investments in the decarbonisation of our economy — again, at least not on the same favourable terms as for competitors.
In summary: the new EU guarantee instrument is technically quite complex and requires negotiations between the European Commission, the government, KredEx, and the cohesion fund implementing body. Technical complexity, however, should not serve as a pretext for opting out. And even if opting out is the right decision, it should be based on an impact assessment.
This opinion piece was published on www.err.ee on 18 October 2021.