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Challenges and Achievements of JEREMIE Implementation in Hungary: Insights from a National Holding Fund

This case study examines the challenges, achievements, and perspectives of the JEREMIE implementation in Hungary, focusing on the role of the Venture Finance Hungary Plc. as the holding fund manager. The study provides an overview of financing programs, experiences, and future plans.

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Challenges and Achievements of JEREMIE Implementation in Hungary: Insights from a National Holding Fund

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  1. Views from a national holding fund on the JEREMIE implementationThe case of Hungary: challenges, achievements and perspectives József Vingelman, CEO Venture Finance Hungary Plc. 29/30 November 2010

  2. Information about Hungary • JEREMIE Programme in Hungary • Venture Finance Hungary Plc. (Holding Fund Manager) • Overview of Financing Programmes • Summary of experiences and future plans

  3. Hungary at a glance • Area: 93,030 km2 • Population: 10 million • Population density: 108/km2 • EU accession: 1 May 2004 • GDP/cap. (2009):63% of EU-27 average • No of SMEs: cca. 700 th. (over 99% of total companies) • SMEs produce 50% of GDP • 70% of workers employed by SMEs Firstamongthenewlyaccessedmemberstatestoinviteapplications

  4. Regions of Hungary Development basedonGDP/capita (% of EU average in 2006) 40.8% 41.4% 42.8% 43.7% 58.6% 64.9% 107% Least Most Northern Hungary Central Hungary Northern Great Plain CentralTransdanubia Western Transdanubia Southern Great Plain Southern Transdanubia Central Hungary and Budapest – CHOP Hungary excluding CHOP area - EDOP

  5. JEREMIE Programme in Hungary Strong LegalBackground – Local LegalSupport – Transparent System

  6. JEREMIE Programmein Hungary • Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis) • Tool: New financial programmes • Refinanced loan programmes (Micro Loan, Small Loan, SME Loan, SME Working Capital Loan) • Credit Guarantee • Venture Capital • Allocated Funds : cca. HUF 200billion (EUR 699 million) • Use of funds: • As standalone financing, or • own sources required for non-refundable subsidies • Funds are granted via financial intermediaries with joint risk-taking • Revolving funds, leverage effect DifferentProgrammesfordifferrentneeds

  7. Programmeoverview(1) EDOP (GOP): ~ HUF 178.4 bn (EUR 626 mn) CHOP (KMOP): ~ HUF 20.9 m (EUR 73.3 mn) Kezességvállalás JEREMIE„Holding Fund” Refinancing facilities Guaranties Capital financing • Microloans; • SME (investment) loans; • SME working capital financing • Portfolio guarantee • Venture capital MV Zrt. („Fund manager”)

  8. Programmeoverview(2) ManagingAuthorityLeadstheProcess

  9. Milestones • Key events: • Oct 2006: Approved GAP Analysis • Q1 2007: First product term-sheets • Aug 2007: Foundation of Venture Finance Hungary • Oct-Nov 2007: First call for tenders (Micro Loan, Portfolio Guarantee) • Dec 2007: First contract with financial intermediaries • Jan 2008: First Micro Loan granted • Oct 2008: Modification of Micro Loan conditions • Nov 2008: Launch of SME Loan Programme • Dec 2008: Notification of Venture Capital Programme • Jan 2009: Launch of SME Working Capital Loan Programme • Feb 2009: Call for tenders – Venture Capital Programme • Oct 2009: Close of Venture Capital tender • Apr 2010: Launch of Small Loan Programme • Q2 2010: Venture Capital funds start their investment activities • Sept 2010: Development of a new financial programmestarted (combination of Micro Loan and non-refundable subsidies)

  10. Venture Finance Hungary Plc. (Holding Fund Manager) Holding Fund Manager is intheFocalPoint

  11. Venture Finance Hungary Plc. • Established in May 2007 with the aim of developing and running financial programmes which will expand the financing options of Hungary’s micro-, small- and medium-sized enterprises (JEREMIE initiative) • Sole activity: fund Management of financial resources committed by European Union and Hungary • Designated as the Holding Fund Manager by Article 21 (4) of Hungarian Government Decree 255/2006 (XII. 8.) • Belongs to the Group of Hungarian Development Bank (MFB), 100% owned by MAG-Hungarian Economic Development Centre Plc (the Implementing Agency of EDOP). Share capital: HUF 2 billion (EUR 7 million) • Scope of activities and obligations are determined by the National Development Agency (NDA) • Equivalent financial service provider - compliant with BASEL II. criteria • Controlled and regulated by Hungarian Financial Supervisory Authority

  12. Prepare the Financial Programmes Description of the programme Relevant business terms Required funding Role of intermediaries Scope of beneficiaries 2) Implement the Programmes Evaluation and accreditation of intermediaries Concluding contracts with intermediaries Monitoring the use of resources and recommending reallocations Preparing policy for terminating risk takings, withdrawing from investments 3) Audit and control Tasks and responsibilities of the Holding Fund Manager Role of VentureFinance Hungary The Funding Agreement also defines the main tasks of the Resource Management Organisation: Contract 1. Level 2. Funding agreement Holding Fund Manager

  13. VFH’sOrganisation

  14. Overview of FinancingProgrammes DifferentProgrammesforDifferentNeeds

  15. JEREMIE Programmein Hungary Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis) Tool: New financial programmes: • Micro Loan • Portfolio guarantee • Venture capital Further specific programmes can be launched later on (counterguarantee, etc.) DifferentProgrammesforDifferentNeeds

  16. I. Micro Loan • Type of fund: refinancing fund for financial intermediaries • Financial intermediaries: financial enterprises, local microfinance institutions • Contribution by financial intermediaries: 10% • Main conditions of MicroLoan • Beneficiaries: micro enterprises • Loan size: • Investment loan: max. HUF 10 mn (EUR 35 th.) • Working capital loan: max. HUF 6 mn (EUR 21 th.) • Purpose of loan: capital expenditures and/or current assets • Interest rate: freely determined by financial intermediaries • Loan period: • Investment loan: max. 10 years • Working capital loan: max. 3 years • Loan guarantee is available for intermediaries as an option • Prohibited use of funds: credit redemption, VAT financing Supportforsmallcompaniesduringglobalcrisis

  17. II. SmallLoan • Type of fund: refinancing fund for financial intermediaries • Financial intermediaries: Credit institutions (banks, saving cooperatives), bank-owned financial enterprises • Contribution by financial intermediaries:25% • Main conditions of SmallLoan • Beneficiaries: micro- and small enterprises • Loan size:max. HUF 50 mn(EUR 175th.) • Purpose of loan: capital expenditures and/or current assets • Interest rate:Max. 0.3*3m BUBOR+6% (=currently max. ~7.6% p.a.) • Loan period: • Investment loan: max. 10 years • Working capital loan: max. 3 years • Loan guarantee is available for intermediaries as an option • Prohibited use of funds: credit redemption, VAT financing Supportforsmallcompaniesduringglobalcrisis

  18. III. SME Loan • Joint programmeof Venture Finance Hungary (MV) and Hungarian Development Bank (MFB) • Main conditons of SME Loan: • Beneficiaries: micro-, small- and medium enterprises • Loan size: HUF 10-100 million (EUR 35 th. – 350 th.) • Purpose: capex and directly related current assets (onlyoutside the Central-Hungarian region) • Loan period: max. 10 years • Interest rate: 3m EURIBOR*0.75 + 0.75% + max 5% (=currently max.~6.4% p.a.) • Prohibited use of funds: credit redemption, VAT financing Supportforsmallcompaniesduringglobalcrisis

  19. IV. Working Capital Loan • Joint programmeof Venture Finance Hungary (MV) and Hungarian Development Bank (MFB) • Main conditons of SME Working Capital Loan: • Beneficiaries: micro-, small- and medium enterprises • Loan size: HUF 1-200 million (EUR 3.5 th. – 700 th.) • Purpose: working capital financing serving for expansion of business activity • Loan period: 1 year + 1 day or 2 years • Interest rate:1M BUBOR * 0.5 + 1.25% + max 4%(=currently max ~7.9% p.a.) • Prohibited use of funds: credit redemption, VAT financing Supportforsmallcompaniesduringglobalcrisis

  20. V. Credit Guarantee • Facility: automatic portfolio guarantee behind new SME loans • Financial intermediaries: Credit institutions, financial enterprises • Extent of guarantee: max. 80% of the loans • Guaranteed SME loans: • Loans refinanced by Venture Finance Hungary or loans provided from the credit institution’s own funds • Size: max. HUF 200 million (EUR 700 thousand) • Maturity: max. 10 years • Purpose: capital expenditures and current assets Most promisingproduct, yetto be developed

  21. VI. Venture Capital • Aim: to improve the capital status of the Hungarian SMEs in the early (“seed”, startup) and growth stage. • Facility: financial resources for venture capital funds • 1 Co-investment Fund in the Central-Hungarian Region • 7 Joint Funds outside the Central-Hungarian Region • Financial intermediaries: Independent fund managers licensed by PSZÁF • Private contribution required: min. 30% • Investment policy: • Investment size: Max. EUR 1.5 million investment per 12 months per target company (max. in 3 consecutive years) • Target companies: Max. 5-year-old SMEs with less than HUF 1.5 bn (EUR 5 mn) turnover • Sectorial and other restrictions: shipbuilding, coal industry, steel industry, financial sector, enterprises in difficulty • Invested amount cannot be used for: credit redemption, development of real estate for sale, acquisitions Innovativeprogrammetoinvestintofuture

  22. Status of the programmes (30 September 2010) EUR/HUF =285

  23. Summary of experiences and future plans

  24. Micro- and Small Loan Experiences and future plans • Highest utilization (24%) of allocated funds among VFH’s financial programmes, but still under expectations • Best performing financial intermediaries: regional enterprise development foundations and some independent financial enterprises • Credit institutions (banks, saving co-operatives) show limited activity • Limited use of funds due to EU regulations (e.g. expansion of business activity) • There are other state-run microfinance programmesoverlapping loan products - competition between institutions  non-transparent system for potential beneficiaries • Strategic goals, planned reforms: • Introduction of a simple, easy-to-remember brand name • Further standardization of the loan’s terms & conditions • Simplified procedures • Restructuring of the support system on state-level to eliminate parallel loan products and parallel intermediary networks • Motivation of the best performing financial intermediaries, drawing in new intermediaries Supportforsmallcompaniesduringglobalcrisis

  25. SME Loan Experiences and futureplans • Low utilization (under 12%) of allocated funds • More complex procedures as the programmeis jointly run by VFH and MFB  longer lead-times • At a smaller loan size, competition with other JEREMIE products (Micro Loan, Small Loan) • There are other state-run working capital loan programmes overlapping loan products - competition between institutions  non-transparent system for potential beneficiaries • Not available in the Central-Hungarian Region • Strategic goals, planned reforms: • Reduction of allocated funds from HUF 50 billion (EUR 175 mn) to HUF 20 billion (EUR 70 mn) • Restructuring of the support system on state-level to eliminate parallel loan products and parallel intermediary networks • Simplification of procedures, reduction of MFB’s lead-times Supportforsmallcompaniesduringglobalcrisis

  26. Working Capital Loan Experiences and future plans • Very low utilization (under 5%) of allocated funds • Limited usability of funds due to EU regulations (e.g. expansion of business activity) • More complex procedures as the programmeis jointly run by VFH and MFB  longer lead-times • There are other SME loan programmesoverlapping loan products - competition between institutions  non-transparent system for potential beneficiaries • Strategic goals, planned reforms: • Reduction of allocated funds from HUF 100 billion (EUR 351 mn) to HUF 15billion (EUR 53 mn) (Programmeperiod ends in December 2010) • Further decrease of the loan period might improve the product’s competitiveness • Simplification of procedures, reduction of MFB’s lead-times • Performance of currently inactive saving co-operatives may boost as a result of VFH’s targeted communication Supportforsmallcompaniesduringglobalcrisis

  27. Credit Guarantee Experiences and future plans • Competitiveness of the guarantee product is limited: • To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments • No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules) • The guarantee fund is too small as compared to the banks’ SME portfolio • Credit institutions prefer to use other, traditional guarantee products on the market • Strategic goals, planned reforms: • Reduction of allocated funds from HUF 28 billion (EUR 98 mn) to HUF 15 billion (EUR 53 mn) • Expanding the circle of guaranteed SME loans (loan products of saving co-operatives etc.) • Elaboration of counter-guarantee schemes  Offering risk-free guarantee for traditional guarantee institutions (e.g. Garantiqa) with a large portfolio Most promisingproduct, yetto be developed

  28. Venture Capital Experiences and future plans • All the 8 venture capital funds were set up in the first half of 2010 • Funds started their activity some months ago – first investment decisions and investments has been made • HUF 9 billion (EUR 32 mn) has not been allocated to venture capital funds – the reserved amount may be reallocated within or outside the programme based on future experiences Innovativeprogrammetoinvestintofuture

  29. Problems on the level of financial intermediaries • Micro Loan, Small Loan: • Credit institutions (banks, saving co-operatives) show limited activity due to low loan size • Limited usability of funds due to EU regulations (e.g. expansion of business activity) • Credit Guarantee: • Competitiveness of the guarantee product is limited: • To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments • No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules) • The guarantee fund is too small as compared to the banks’ SME portfolio • Credit institutions prefer to use other, traditional guarantee products on the market

  30. Prospects • BUSINESS TASKS • Competition between programmes subsidied by State → simplifying list of products • Review of relationship of present intermediaries • Implementation of new products and modification of present products (e.g. redemption limit) based on market requirements • Renew communication campaign (tailor-made communication by intermediaries) • OPERATIONAL ISSUES • Simplifying data transfer • Implementing unique IT system in favour of intermediaries • Upgrade of service connection toward partners

  31. New financial programmes • Combination of Micro Loan and non-refundable subsidies in a „one stop shop” system for micro enterprises (under development) • Refinancing loans to factoring companies • New or revised guarantee schemes

  32. Thanks for your attention!

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