A review of public measures for supporting company lending
– An international comparison of Denmark, Israel, Canada and Germany
The overall purpose of this study has been to review and analyze government lending activities in different countries. Above all, the focus has been on studying the ways in which Sweden’s government lending activities differ from other countries and whether these differences have any significance for how the measures function and their effects. We have specifically studied support measures in Denmark, Canada, Germany and Israel. These countries have been selected because they are examples of countries that have a great deal of experience in different ways of organizing government lending to small and medium sized companies.
Growth Analysis’ conclusion is that Sweden’s government lending activities differs in two ways:
- loan guarantees, which are common in other countries, are used to a very limited extent
- support administration is run almost exclusively through state-owned organizations and not with the aid of private stakeholders
However, there is insufficient material to allow us assess what significance these differences may be expected to have.
Globally, loan guarantees are the dominant form of support
The study shows that the main instrument for government support to company loans in the four countries investigated are various forms of guarantee systems. In Germany and Israel, loan guarantees are mainly used. In Denmark the loan guarantee volume amounts to just under 30 per cent of direct lending and in Canada the corresponding figure is just under 20 per cent. A new study from the OECD also shows that guarantees are currently the most widespread instrument for improving small and medium sized companies’ access to traditional bank financing.¹ Direct government loans are a more dominant element in Sweden than in other comparable countries.
Administration through private stakeholders more common abroad
Unlike in Sweden, the countries studied use private sector organizations to a greater extent in the organization of government support for loans to companies. In Germany and Israel, private banks handle most of the administration of public support initiatives. In Germany, in principle all government support is administered by the private banks, which means that the companies’ relationships with their local banks are key. Loan guarantees are also administered in a similar way in Canada. Denmark’s, and part of Canada’s, support system is similar to the Swedish, with a larger government organization in direct contact with the companies. The fully state-owned organizations – Business Development Bank of Canada and Vaekstfonden in Denmark – offer companies both direct loans and advice. In Canada and Germany especially, many of the measures to make small and medium sized companies’ loan financing easier are handled at provincial or (regional) state level.
What is most effective – direct government loans or loan guarantees? Administration through private banks or through state-owned organization?
The main question is whether Sweden would gain by moving more towards loan guarantees. Another important issue is whether Sweden would gain by making more use of private organizations in administering its government loan initiatives. Unfortunately, this international comparison does not give any clear answer to these two questions. The assessment from Growth Analysis is that no clear conclusions can be drawn about the effects of the different countries’ support systems based on the evaluations in each country. Few qualified evaluations have been done. It is unusual for the conducted evaluations to consider issues of additionality and the risk of displacing private capital, although there are exceptions. In general terms, most of the program evaluations that have been conducted seem to mainly focus on the effects on employment in the companies receiving support. What is missing are specific system analyses and evaluations on what works best in terms of loan guarantees and direct loans and in what way these two types of government initiatives should be combined or not combined so as to achieve the best results.
Out of the four countries, most qualified evaluations have been performed in Canada. Here, researchers have repeatedly evaluated the government loan guarantee program, while the loan program has received less attention. Some of these evaluations have used econometric methods using microdata² and in some cases they have also attempted to estimate cost-effectiveness.³ The evaluations of programs are mainly focused on the employment growth in the companies receiving support and relatively seldom on the effects of the support in terms of displacement and additionality. There are however interesting exceptions in Canada. Here, the additionality of the Canadian CSBF program was evaluated by Riding et al. (2007). The results show an additionality of 75 per cent, which means in other words that it was estimated that 25 per cent of the companies would have been able to obtain a loan in another way. However, the main purpose of the Riding study was not to evaluate the CSBF program’s loan guarantees but to develop a method for measuring the program’s additionality. However, Riding drew the conclusion that an additionality of 75 per cent is sufficiently good, considering the number of jobs (22 000 new jobs, 2.92 new jobs per loan) that the program created.
In Germany and Denmark, consultancy companies have been used to follow up regional development programs (the German ERP program) and loans and guarantees from Vaekstfonden in Denmark. The main conclusions from these evaluations are that the initiatives have a positive effect on job creation and growth. One criticism that was raised in the study of the German program was that many companies would have been able to obtain financing in another way, i.e. the additionality was limited. The only evaluation that has been identified where both the guarantee system and direct loans were analyzed is the analysis of Vaekstfonden in Denmark by the consultancy company Damvad. Unfortunately, no comparative analysis was done of the two products.
No qualified evaluations have been done of the Israeli programs. The Small and Medium Business Agency in Israel has repeatedly evaluated itself and has not used external evaluators. The self-evaluations have mainly consisted of compilations of key performance indicators, questionnaires and interviews, on the basis of which they have concluded that the activities are working well.
Why government loan support to small and medium sized companies?
It is important for growth that companies have good financing opportunities. There are a number of reasons for government loan initiatives aimed at companies. One reason is the lack of real security in many small and medium sized companies. Another is regional differences in structural conditions, access to and need for capital. A third reason could be promoting new businesses and growth in new and innovative areas. Taken all in all, government measures can be appropriate if private investors are unwilling and there is a social interest in the investment being made. The key aspect is that the government loan initiatives are a complement to the market and do not distort competition, while minimizing displacement effects. In practice, that is easier said than done. It is not always easy to discern where the boundary lies between non-commercial and commercial marketable investments. However, the EU rules on government support require that it is possible to distinguish initiatives to complement the market from those that are made on strictly commercial terms in a competitive market. The question is whether private or public organizations are most appropriate for making such market-complementing judgements.
This international study has not considered the effects of private organizations’ participation in government loan systems. We have however compared the countries’ reasons for government loan initiatives and these are relatively similar. Small and medium sized companies are judged to be disadvantaged in many ways that limit their access to the private capital markets. These may include for example a short track record and limited access to security.
The study shows a number of examples of how loan support is used to contribute to achieving targets in environmental, regional and labor market policy. Regional policy objectives can be noted in both Denmark and Germany. Other objectives noted include promoting innovation and green transformation by means of financing initiatives in these countries. The Israeli system also includes company loans aimed at specific vulnerable groups, such as the SAWA Direct Non-Bank Micro Loan Fund, which is a micro financing program to support Arabic women's companies.
¹ ”Guarantees appear to be the most widespread tool to strengthen SME access to traditional bank financing.” Koreen et al. 2018, s. 4.
² Riding et al, 2007; Chandler, 2012; Seens, 2015; Song, 2014
³ Seens, 2015