private cofinancing through bank loans as a limit of … · 2018-07-24 · e-mail:...

Annals of the „Constantin Brâncuşi” University of Târgu Jiu, Economy Series, Issue 3/2018

„ACADEMICA BRÂNCUŞI” PUBLISHER, ISSN 2248-0889, ISSN-L 2248-0889

PRIVATE COFINANCING THROUGH BANK LOANS AS A LIMIT OF

IMPLEMENTING EUROPEAN PROGRAMMES IN ROMANIA

IOANA TONEA,

DOCTORAL SCHOOL, FACULTY OF SCIENCES, 1 DECEMBRIE 1918 UNIVERSITY, ALBA

IULIA, ROMANIA

e-mail: [email protected]

IOANA BELEIU,

DEPARTMENT OF MANAGEMENT, FACULTY OF ECONOMICS AND BUSINESS

ADMINISTRATION, BABES-BOLYAI UNIVERSITY, CLUJ-NAPOCA, ROMANIA

e-mail: [email protected]

Abstract Sustainable agriculture, in a context of continuous population growth and considering limited natural

resources, is not only a major concern, but also a challenge for the countries in the European Union and worldwide.

Therefore, agriculture has a major role in creating a sustainable future as it has multiple implications over jobs,

climate change, water, soil and biodiversity. Agriculture in Romania still needs support for growing, but this has to be

made in a sustainable way and the National Programmes for Rural Development have strategic objectives among

which there is also the sustainable management of natural resources and combating climate changes. In agriculture,

low productivity and poor use of modern technology determine the need for farmers’ access to financial market and

bank loans. Facile access to finance through the National Programmes of Rural Development is essential, but farmers

need a private contribution for cofinancig approved projects and this contribution has its source in bank loans. Data

from reports of the national programmes showed that one of the reasons for poor implementation of agricultural

projects, that are responsible for sustainable development, was the difficult access to bank loans. The objective of the

research is finding out to which extent is cofinancing a limit of implementing sustainable development projects and

what is the solutions for overcoming it.

Keywords: sustainable development; agriculture; European funding programmes; cofinancing; bank loans. Classification JEL: Q01;Q14

1. INTRODUCTION

The concept of sustainable development is continuously evolving and receiving an increased

level of attention both in theory and in practice since the Brundtland Report in 1987, considered to

be a milestone by researchers approaching the topic. Sustainable development is more than a topic

of interest. It is a challenge in the current economic environment, being applicable at the level of

society, regions, companies, programs and projects (Gareis, et al., 2013). An important contribution

is made by Gareis et al. (2013) when defining sustainable development by referring to its principles:

economic, ecologic and social orientation; short, medium and long-term orientation; local, regional

and global orientation; as well as value orientation. Another study conducted by Silvius and Schip

(2014), based on a comprehensive literature review, identifies nine dimensions that describe the

impact of sustainability on project management, adding to the principles mentioned above the focus

on transparency and accountability, on stakeholder participation, on risk reduction, on eliminating

waste and on consuming income not capital. Focusing on sustainability aspects when dealing with

projects, improves not just the process of project management, but also the outcomes and the impact

of the projects. Considering the complexity of the topic, further research in the field can enhance the

existing literature by providing different perspectives.

On the other hand sustainability in agriculture resents in the need of developing technologies

and practices that do not have adverse effects on environmental goods and services, are accessible

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mailto:[email protected]

mailto:[email protected]



to and effective for farmers, and lead to improvements in food productivity (Pretty, 2017). Pretty

(2017) underlines the need for making productive use of people’s collective capacities to work

together to solve common agricultural and natural resource problems, such as for pest, watershed,

irrigation, forest and credit management as a key principle that helps build important capital assets

for agricultural systems: natural, social, human, physical and financial capital.

In practice, a special attention is given to sustainable development when dealing with

projects financed by the European Union. The European Commission considers sustainable

development a fundamental objective, which is integrated with the European policies (EC, 2009).

The European Union’s sustainable development strategy approaches economic, social and

environmental issues, under the objective of continuously improving the quality of life and well-

being for present and future generations (EC, 2009). The focus of the article is on projects financed

by the European Union through the National Rural Development Programme of Romania that aims

to use about 9.5 billion Euro in a timeframe of seven years for reaching the main priorities areas:

promoting competitiveness and restructuring the agricultural sector, protecting the environment and

stimulating economic development, job creation and a better quality of life (EC, 2015).

Although progress has been made through the guarantee scheme introduced in 2010, access

to credit was listed as a one of the limits of National Programme for Rural Development (NPRD)

2007-2013. Two years before the end of the programme, NPRD 2014-2020 aimes to introduce

specific financial instruments to facilitate the cofinancing. Considering that farmers’ access to

credits was a limit for implementing European funds for agriculture development, the main

objective of the paper is to find out, based on literature review and document review, if this is still a

current issue. The NPRD 2014-2020 evaluated the need of easy access to adequate financial

instruments for farmers and entrepreneurs in the rural area as a way of supporting competitive input

acquisition, production diversification, sustainable development, farm modernisation and shortening

supply chains. The role of the financial instruments that support agricultural investments is still of

high importance. This is determined by the need of cofinancing projects financed by NPRD and by

the difficulties in obtaining the needed bank loan.

2. FINANCING ROMANIAN AGRICULTURE

Sustainable and large scale production in agriculture has bank loans as a very important

source for financing. Bank loans are not single sources for agriculture’s development, but in strong

relation with European funds granted as subsidies or for investment projects. European funds for

financing investment projects are obtained at the end of a complex process that requires compliance

of specific methodology. The beneficiary has to support cofinancing of the investment and this is

composed of ineligible expenditure and personal contribution to eligible expenditure.

The role of banks is very important in the financial system, as they lend directly to

companies, they provide funding and investment through securisation and covered bond issuance

and participate in derivates markets which affect the cost of capital. Therefore a dysfunctional

banking system reverberates through all of these channels either through deleveraging or through

high risk premiums. Small and medium sized businesses financing is affected by any of the

mentioned approaches that eventually affect the lending. Where interbank lending freezes up,

securities market activities (including underwriting and derivatives transactions) become more

difficult, and uncertainty and the cost of capital rise. This affects projects that need longer-term

financing, such as infrastructure. The business models of banks, as the recent crisis has shown, are

at the very heart of these issues (OECD, 2013).

The managing authority’s analysis in 2008 found that banks were reluctant to provide

lending to farmers or rural SMEs although resources were available. Banks perceived NPRD

recipients to be risky since most of them could not prove a solid financial record, did not possess

sufficient material guarantees, lacked expertise and qualified personnel, or had lower profitability

than other sectors. In addition, the administrative costs for offering these loans were too high.

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Frequently, NPRD recipients could not secure the private co-financing required by the programme

and were often forced to abandon their projects (European Investment Bank, 2015). Farmers need

specific financing products based on their needs and also understanding of their activity coming

from loan officers and risk comittes responsible for credit approval.

Halfway the NPRD 2007-2013, in 2010, agriculture received less than 3% of the total

private loans. Although big farms managed to increase their financial liquidity and profitability and

as a consequence their access to traditional financial mechanisms, for small and medium farms and

processors, the main way to access bank loans (used mainly for working capital), was by using their

APIA certificates for direct payments. Due to the slow process of their strengthening and raising

competitiveness, the Strategy for Development of Agriculture and Food Sector of the Ministry of

Agriculture and Rural Development (MADR), expects that the main source of credit to remain the

direct payments used as a guarantee instrument, untill 2020 (MADR, 2015). In 2010 a guarantee scheme of 190 million euro was introduced as a way of stimulating

loans for the beneficiaries of 121 NPRD measure: Modernization of farms and 123 PNDR measure:

Increasing added value of agricultural and forestry products. This scheme was meant to support part

of the risk at 80% of the guarantee needed through FGCR (Rural credit guarantee fund). This was

financed also from NPRD sources. Besides increasing the accessibility rate of farmers to bank

credit, the guarantee schemes were also meant to raise interest and trust of financial institutions in

rural economy and to intensify the development of rural development through private sources of

financing. It should not be ignored that 2010 was still under the precautionary principal given by the

recent economic crisis. Nevertheless, results appeared as banks have found the scheme a good

opportunity and adapted their offer to the agricultura sector.

The Strategy for Development of Agriculture and Food Sector of MADR also points that it

should be given special attention to secondary problems that stand in the way of credit market

development. These would be a functional land market and real value of agricultural land that

would gain banks’ trust on long term to credit investments using land as a collaterals. Another issue

is the improvement of fiscal policies for making informal economy formal and giving the possibility

of real evaluation of the agricultural production, as well as the using of financial instruments during

2014-2020 NPRD (MADR, 2015).

3. RURAL DEVELOPMENT PROGRAMMES

The most importat programme accesed by Romania before its adheration to the European

Union was the Special Accesssion Programme for Agriculture and Rural Development (SAPARD)

in the years 2000-2006 and it was meant to reorganize and modernize Romanian agriculture before

joinig the EU. It helped growing competitiveness and increase technologization, but the private

cofinancing for projects was between 50% and 60% of the project and difficulty of accesing. This

was the major problem of poor implementation, so in 2005 the government proposed another

programme that aimed to grow acces to loans and assure the collaterals necessary for the bank loans

focused on cofinancing SAPARD projects. Still, the problem of acces to loans continued in the

future programmes, as periodical reports show. The objective of facilitating acces to bank loans has

been a constant preoccupation to improve these programmes.

SAPARD was followed by the National Programme for Rural Development 2007-2013.

Rural development programmes, as a way of spending the budget of common agricultural policy,

provide co-funding for projects with economic, environmental or social objectives, primarily

targeting farms and SMEs in rural areas. The budget is spent via tailor-made plans designed

nationally or regionally to face local challenges and opportunities. Spending is linked to a

performance framework with target indicators and monitoring, which effectively requires member

states and regions to deliver clearly defined results in order to receive the full budget allocation. On

top of the additional public funding from national and regional administrations, rural development

programmes also raise significant amounts of private capital, in particular for investments related to

business development (EC, 2015). The rural development programmes are financed from the EU

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budget on the basis of commitments made in annual instalments. Member states should be able to

draw on the EU funds, soon as they begin the programmes. A suitably restricted prefinancing

system is therefore needed, to ensure a steady flow of funds so that payments to beneficiaries under

the programmes are made at the appropriate time (European Commission, 2013). In Romania, rural

development funds represent more than half of the total CAP exependiture for 2016, higher than in

any other EU countries.

Fig.no 1 Distribution of CAP expenditure 2016

Source: European Commission, 2017

Fourteen measures of rural development will be financed through NPRD. The programme is

financed by European Fund for Rural Development and it supports the strategic development of

rural space by strategic use of the following objectives:

Restructuring and raised viability of farms;

Sustainable management of natural resources and fighting climate changes;

Diversification of economic activities, creating new jobs, improvement of

infrastructure and services for the improvement of life quality in the rural area

(MADR, 2017).

Most recent data of European Comission show the situation of national and regional

programmes progress (table no. 1):

Tabel no.1 Progress of national and regional programmes, reported financial data

Year Planned (Total

budget)

Decided

(Financial

resources

allocated to

selected projects)

Spent

(Expenditure

reported by the

selected

programmes) 2015 8.558.990.050 8.558.990.050 9.630.606.613

2016 819.096.791 2.369.702.246 4.022.750.880

2017 0 864.966.280 2.646.437.482

Source: European Commission, 2018

4. FINANCIAL INSTRUMENTS: GUARANTEE SCHEMES

SAPARD experience pointed to difficulties regarding the financing of rural investment

projects due to lack of private capital necessary, banks’ low interest of investing in this sector and

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also because of their conditions regarding the collaterals. As a result, an instrument necessary for

facilitating access of NPRD beneficiaries to credit and this financial instrument appeared. It consists

in guarantee schemes for credits, introduced in 2010. There are two of these schemes out of which

one is for agriculture, offering collaterals for beneficiaries of 121 and 123 measures of NPRD 2007-

2013 (MADR, 2015). The proper use of these schemes depends on every bank’s lending policy

regarding agriculture financing and it should be taken into consideration that most of the

benefiaciaries of the NPRD investment projects are young farmers, small and medium companies,

most of them start-ups which scored highly in the projects’ selection phase, but don’t represent

banks priorities for investment loans.

The document of the programme (MADR, 2015) includes Swot Analyses of the area. One of

the points in the Swot Analyses refers to SME’s access to financing which continues to be a

problem. It identifies low access to financial resources for small entrepreneurs in rural areas and

high costs of crediting products as weaknesses. According to ex-ante evaluation of financial

instruments of NPRD 2014-2020, farmers in Romania accessed four times smaller credits than the

average European Union. It means 281 euro/ha in Romania compared to 1203 euro/ha in EU. In

spite of the guarantee scheme that was available for NPRD 2007-2013, some of the beneficiaries

did not succeed in accessing a credit. The main reason for this situation was the lack of a special

product for agriculture. Banks’ requirements are similar to the ones for any other SME and are hard

to be accomplished. The guarantee scheme was not used at its best and the rate of canceled projects

was high.

The main ex-ante results of the financial instruments evaluation were: there is a funding gap

of 2.1 billion for agriculture and 0.2 billion for non-agricultural investments in the rural area. It was

recommended the implementation of two financial instruments: the guarantee scheme with

individual guarantees and the financial instrument with shared risk. The priority was the guarantee

scheme because the main fault of market failure was lack of collaterals necessary for obtaining co-

financing credit. The necessary budget for the financial instruments is 92.5 million euro, which

covers 40% of the necessary credits. The financial instruments provide private co-financing for

NPRD beneficiaries (MADR, 2016).

5. CONCLUSIONS

Agriculture financing made considerable progress since the pre-adhesion to the European

Union. The financial instruments are still of high importance because they support European funds

absorption. One limit that generated poor implementation of the European funding programmes for

agriculture was the difficult access to credit market. The solutions are financial instruments that

were first consisted in the guarantee schemes. NPRD 2014-2020 takes into consideration the

success as well as the risks that appeared during SAPARD programme and NPRD 2007-2013 for an

improved use of the guarantee scheme and adds a new financial instrument. A percentage of 10% of

the finalized projects during NPRD 2007-2013 were supported by guarantees through financial

instrument (MADR, 2015). The guarantee scheme was a success as data shows, since the projects

supported had higher percentage of finalization than other projects.

For the NPRD 2014-2020 relevant public information is not available to show the impact of

the guarantee scheme. The second instrument, the shared risk credit, has not been implemented until

now. This should respond to the financing need of farmers by providing necessary funds for the

financial intermediaries, including the nonfinancial institutions that are specialized in

microfinancing of agriculture and financing the rural area. Private cofinancing of European projects,

improve the quality of their use, bringing more responsibility in using the financial capital, which

undoubtedly leads to the sustainable development of agriculture, therefore supporting it is

important.

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