EU funds for economic development - Five favourable amendments and five important things to do |
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Kinga Tihanyi
Deloitte in Hungary
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Budapest, 22 January 2009 — In line with international trends and especially due to the reduced availability of bank loans and a shortage of own funds, the importance of funds from the EU in financing has undoubtedly increased for Hungarian companies as well. However, the efficient use of EU funds for the purposes of economic development also depends a lot on how calls for tender are able to meet the challenges posed by the new economic environment. Deloitte draws attention to some of the most favourable elements of recently published tenders, but remembers to list the most critical problems as well.
Dr. Csaba Márkus, Director at Deloitte's EU consulting practice, commented: The upcoming days will see the closure of the public discussion initiated by the Hungarian National Development Agency in relation to the recently published calls for tender aimed at economic development and innovation. Discussion is vital since the importance of the systems of tendering and grants in the EU has become more profound than ever, owing to the changes in the economic environment caused by the global financial crisis.
Deloitte's expert continued: Reviews of the tendering scheme have shown that the changes have been favourable news in several areas - meaning that the calls for tender will now represent a solution for financing capital expenditures and other projects for a wider range of applicants. However, there are still a few problems waiting to be solved as some regulations unnecessarily exclude certain applicants or require unjustified effort from applicants in order to meet the relevant criteria.
Deloitte's expert added: In order for EU funds to be able to accomplish their objective of accelerating the economy and to attract as many promising projects as possible, not only is the close cooperation between the institutional system of tendering and grants and other administrative organisations a must, but also the appropriate reallocation of the funds. The best way to achieve this would be redistribution - between the private sector and other beneficiaries on the one hand, and large enterprises and SMEs on the other. A pre-requisite for a quick and meritable response by the government is the coordinated government treatment of companies of strategic importance for Hungary - or, irrespective of this condition, companies with a high number of employees - that are primarily engaged in manufacturing.But another thing Hungary cannot afford is for good projects meeting tender requirements to be eventually turned down due to a lack of funds - especially as the government found a solution to such cases during the year preceding the crisis as well, i.e. in 2007.
Dr. Csaba Márkus emphasised: According to the way in which the corporate sector - especially large companies - treats the implementation of their investment and development projects, three responses are typical today: The first is when companies consider that the difficult period will only affect them temporarily, meaning that the current situation will have no bearing on their projects that have a secure background but will only be launched in a few years' time or only return profit in the long run. Therefore, they believe that no projects will need to be terminated or changed. There are also examples of companies that consider the current environment to be fortunate for them since, in certain cases, their secure financing sources (or grants received) may allow them to outpace their competitors facing difficulties in financing. Another typical and often seen reaction by companies is to rearrange investment projects - companies are forced to do this when they realise that their former plans cannot realistically be implemented without changes. Finally, a third type of response is to postpone investment projects for indefinite periods of time when, after careful consideration of all aspects, companies come to a conclusion that - due to shrinking markets, for instance - it would not be worth launching or finishing their projects.
Five favourable amendments
Dr. Csaba Márkus commented: Out of the content elements of the calls for tender recently opened for public discussion, the first notable one is a fundamental change. Accordingly, the role of advances in the calls for tender has increased significantly in order to handle cash-flow difficulties. This means that for tenders aimed at economic development, the amount of advances that may be requested has been raised to 40 per cent, whereas for R&D projects the sum of advances and interim payments may reach as much as 90 per cent of the grant awarded.
Deloitte's expert added: The second considerable change is that from now on, for tenders open also to large enterprises, applicants will only be required to assume obligations in relation to either their revenues or the number of staff they employs, which provides many more opportunities than before.
Dr. Csaba Márkus explained: The third favourable change relates to the fact that, instead of undertaking a certain amount of revenue growth, even a decrease in revenues in percentage terms is acceptable, which may even amount to 10 per cent in the case of large companies, for instance. This amendment fundamentally attempts to meet the requirements set by the current economic environment, yet it is still questionable whether the available area for movement will be sufficient, due to the simple fact that drawing up realistic business plans is not easy in the current state of affairs.
Deloitte's expert emphasised: Another important simplification is that instead of the two closed business years required before, a single closed business year will be sufficient.
A fifth and clearly positive change concerns the fact that, according to plans, projects with eligible costs of at least HUF 2 billion would be institutionally transferred from the system of individual government grants (EKD) into the co-financed, so-called 'small EKD' tender (GOP-2009-2.1.3). We must quickly note, however, that even though this tender provides potentially larger amounts of grants for projects to be implemented, it is less flexible as compared to the EKD system - said dr. Csaba Márkus.
Five problems to be addressed
One of the first issues waiting to be resolved, as mentioned by dr. Csaba Márkus, is that it would be reasonable to allow grants awarded through co-financed tenders to be combined - by observing aid intensities - with other state grants in the future.
The unforeseen changes in macroeconomic circumstances may make it harder for numerous companies submitting their applications in this programming period and the programming period between 2004 and 2006 to meet their revenue-related commitments, which will lead to the amendment of an extensive number of grant contracts. A critical task for the institutional system is not only to be adequately prepared for this, but also to handle such situations with the appropriate flexibility - this is the second issue noted by Deloitte's expert.
As the third suggestion worth considering, Csaba Márkus pointed out that if certain tenders aimed at large companies only provide grants for disadvantaged and highly disadvantaged micro-regions, then it is not reasonable to limit the scope of applicants to export-oriented firms and suppliers. Such limitations mean that, should export markets shrink or even collapse, applicants would be deprived of the option to implement their development projects by concentrating on the internal market.
Deloitte's expert noted: it could spur on some favourable processes if, in the future, companies applying for grants could undertake commitments at the levels of divisions or business lines - the reason for this lies in how large companies work. A larger company is usually much more ready to undertake commitments in relation to its projects aimed at various market segments than at the entire company for a given project - he added.
Last, but not least, the expert mentioned unnecessary limitations as the fifth problematic issue, a hardly conceivable example of which is that the conditions for being free of lawsuit and claims still include the absence of 'permanent damage to the environment'. This means that even if a company remediates a real estate polluted by its predecessor, it will not be allowed to receive grants for projects implemented in that area. This limitation is not only legally unfounded, but is also inconsistent with the position of the Ministry of Environment and Water and the relevant rules of the EKD. Third, it unreasonably restricts the implementation of projects that are otherwise good - emphasised dr. Csaba Márkus.
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