What is the role of SMEs and private capital in the Czech post-COVID recovery plan?
The Czech government is facing an extraordinary challenge - it needs to use the EU funding from Recovery and Resilience Facility to support economic growth in face of a downturn created by the COVID-19 outbreak. Just to illustrate the scale of the spending challenge, the government is planning reforms and investments for 182 bn CZK (6.7 bn EUR) in grants (for 2021-2027), an amount almost equal to all capital investments in the Czech 2021 annual state budget. If we were to include the 405 bn CZK (15.5 bn EUR) loan part of the EU offer (together forming around 587 bn CZK, 22.3 bn EUR), the amount is more than twice as big as the largest European Regional Development Fund (ERDF) allocation, 272.6 bn CZK (10.4 bn EUR, acc. to DotaceEU).
A few weeks ago, the government provided the latest version of the National Recovery Plan draft to key stakeholders. Civil society organisations, even those previously involved in public engagement roundtables, such as Hnuti Duha, were ignored, something the government has not been able to explain so far. During a last-minute webinar on March 10, government officials argued that disclosing the document would be counterproductive, as it would only lead to more critique. Fortunately, the document was shared with civil society after all, so we have the opportunity to offer you an assessment of the draft plan. In general, while significant parts of some of the plan’s components are still missing, an initial assessment of this version shows contradictions.
SMEs vs. big businesses
Apart from a couple of relevant new initiatives (incubators and innovation centres for 2.7 bn CZK, 103 mil EUR, and internationalisation of SMEs for 0.2 bn CZK, 7.6 mil EUR), the current draft plan seems rather imbalanced. It currently places importance on big, or the so-called “strategic”, businesses that, in effect, stand to benefit most from the EU’s recovery funding. There is a risk that, similar to other EU mechanisms (e.g., Just Transition Mechanism), the support to SMEs might remain only on paper.
Arguments in support of the role of big businesses in Czechia emphasise their strong economic potential - contribution to GDP, employment and investments. In this sense, the Czech governmental 2030 strategy frames big companies as “the spine of the economy”. Mr. Cizek, director of Industrial Policy at the Confederation of Industry, stated accordingly: “Big businesses form an essential basis of large-scale industrial transformation and – due to our economic structure - they also play an important role in facing new challenges, e.g., R&D, digitalisation or environmental protection.”.
However, research shows that diversity of actors in an economy implies stronger resilience and recovery potential in or after external shocks. Therefore, if Czechia wants to recover into a resilient economy, it needs to pay more attention to the role of SMEs. In addition, if the government were to support its decisions on rigorous evidence, statistics from 2018 show that companies with less than 250 employees (by definition, SMEs) are not just the cradle of innovation, but they are also employing 66% of workforce (twice as much as bigger entities), and are producing 56% of value added. Supported projects should not only contribute to the employment and GDP, but they should also fast-track a challenges-focused innovation, which adds the highest value. In this context, “big” does not always equal “strategic” or best for purpose.
Public investment vs. private capital
Another crucial issue is that the government plans to spend majority of recovery resources in public sector projects, some of which should be covered by the state budget (one of the most frequent critiques of the recovery plan). According to the assessment by the Confederation of Industry, only around 15-20 % of the funds are planned to support private sector. As the public resources will not be sufficient for the recovery and resilience-building, the government should mobilise as much private capital as possible. By contrast, using the funds for strapping up the public spending gaps crowds potential private investment out.
Although the current plan promises several ambitious initiatives, allocations are still quite marginal. For larger projects and "strategic” companies, the government plans to support investments through the Czech-Moravian Development Bank (CMZRB) and its public-private facility, the National Development Fund, in order to increase the local capabilities in public-private partnership (also in collaboration with the European Investment Fund and InvestEU). The amount is relatively small - 2.5 bn CZK (95.4 mil EUR, 1.4% of NRP). On the other hand, for SMEs, the government plans to promote decentralised debt financing through blockchain and cryptocurrencies (0.2 bn CZK, 7,6 mil EUR) and, for smaller and riskier projects, it plans to form a new de-risking seed investment scheme linked to technological universities (1.6 bn CZK, 61 mil EUR). Both amounts are marginal – 0.1% and 0.9% of NRP – and should be strengthened. Even more, the government should go beyond the established “grant mentality” based on concessional co-financing and offer financial solutions that would motivate stronger multiplier effect of private capital, such as impact bonds or pay-for-success instruments.
On the demand-side, the European Investment Bank’s (EIB) and the CMZRB’s findings suggest that projects that apply for the funding are often not financially viable. This might be the cornerstone of the discrepancy between big and small players. Moreover, results of the 2020 European Commission survey show that Czech SMEs lack experience to deal with private investors. In contrast to the EU average of 35%, around 60% of Czech SMEs have no experience with private investors. In similar vein, only 6% feel confident talking to private investors (EU average is 20%). Project owners need to be provided with tailored and accessible technical assistance.
Main take-aways
To sum up, although big companies are perceived as “strategic” for the economy, crude data shows that SMEs are not just innovative, they are in fact behind the majority of employment and value added in the Czech economy. The recovery plan should take this into account and its spending priorities should reflect the sector’s potential for positive economic impact. At the same time, the role of private investors is given marginal priority in the plan, even though substantial amounts of private capital will need to be mobilised for a successful and resilient long-term recovery. To achieve this, the current grant-heavy financing should be complemented by offering financial solutions with stronger potential for private capital multiplication (such as impact bonds or pay-for-success instruments). Equally, smaller players should be assisted to be able to access financial resources. If the government fails to ensure this, we will miss the opportunity to improve the resilience of our economy.
