The Performance of European Funded Projects Finance Essay

The anfractuous integration of Romania in the European Union implies a complex process of modernization and structural reorganization. One of the most important aspects of this process is the economical efficiency. In the perennial context of the economic crises, enterprises, more than ever, have to follow a complex process of reorganization in order to respect the community rules and standards. In order to fulfill this objective, the Romanian enterprises are encouraged by the possibility of receiving non-refundable funds from the European Union (80%) and Romanian Government (20%). The lack of any advertising and public relation campaigns about the process of receiving these kinds of funds has often put the final beneficiary in a predicament. Most of the Romanian investors have no idea what their obligations imply, they are focused on the idea that the money they receive needn't be refundable. The present article means to analyze the way the European funded projects are implemented, focusing mainly on the costs and obligations that the investors enter. The non-refundable European funds are an excellent opportunity for the business environment as long as the beneficiaries are aware from the beginning of the "social and institutional cost" of this process. KEYWORDS: cash-flow, grant, IRR JEL CLASSIFICATION: F35, F36

INTORDUCTION

Since the 1st of January 2007 Romania has been a full right member of the European Union. Having this position, our country receives non-refundable funds, available through projects, for the development and reducing the socio-economic gaps/disparity in comparison with the other members. Romania presently has several financing programs with different levels of aid intensities (depending on the kind of eligible beneficiaries and the type of investment funded), the most relevant of them are: National program for rural development 2007-2013 The operational program Increase of economic competitiveness The operational program for Human resources development The operational program for environment The operational program for transport The operational program administrative capacity development. The magnitude and complexity of the non-refundable funds do not admit an exhaustive analysis of the problem, only in case of studies involving teams formed by specialists in this issue. For this present analysis we chose a line of funding from the National Program for Rural Development 2007-2013, the third axis - "Improving the quality of life in rural areas and diversification of the rural economy", 313 Measure - "Encouragement of tourism".

This line sets the overall objective of financing the development of tourism activities in rural areas in order to help increase employment and alternative income, as well as increasing the attractiveness of rural areas (EC, 2009; EC, 2005; MARD, 2009). Given this ample general objective, within the 313 Measure we have four kinds of investments, namely: a) Investment in tourism accommodation infrastructure (this component is broken down in turn into agro-tourism and rural tourism), b) Investments in recreational activities, c) Investment in small-scale infrastructure such as information centers, tourism signs, etc.. and d) development and / or marketing of tourism services relating to rural tourism (PARDF, 2012). Another effect of the extensive overall objective is the diverse range of eligible applicants. Eligible within the 313 Measure are: micro-enterprises, freelancers, local authorities and NGOs.

MATERIALS AND METHODS OF RESEARCH

In the present material we performed an analysis of a hypothetical project implemented by a micro-enterprise, within the component "Investment in tourism accommodation infrastructure" (rural tourism). In this example, the non-refundable financial aid is 50% of the eligible value of the project (but no more than 200.000). The total value of the project is 496.000 Euros, of which the eligible amount is 400.000 Euros (this value was chosen since it covers the costs of a bed and breakfast of four daisies (the equivalent of four stars) with ten double rooms and a restaurant) and ineligible value - 96.000 Euros (which is VAT, which is not funded by the European Union as it is recovered from the National Tax Administration Agency). The implementation period of this hypothetical project is one year. Given the value of the non-refundable financial aid and of the eligible value of the project, the investor would receive 200.000 Euros from structural funds. The problem that is overseen by many potential investors is that the European funding is granted on the principle of reimbursement of expenses made by the beneficiary. Many investors do not take into account the additional costs associated with this principle (short-term financing).

Another omission made by potential beneficiaries is related to the monitoring period. A beneficiary who has implemented a project with non-refundable funds within the 313 Measure should keep the bed and breakfast into service and do not to alienate/sell it at least five years after completion. During this monitoring period the beneficiary must maintain all of the jobs foreseen in the project. In this example, (considering the value of 200.000 Euros of the non-refundable financial aid) the appropriate number of jobs created by the project must be eight (given the selection criterion no. 3 non-refundable financial amount / number of jobs created ” 25.000 Euros (PARDF, 2012). These two omissions generate additional financial efforts for potential beneficiaries that can be considered a cost of the non-refundable financial aid. This article tray's to determine the level of these costs and the actual percentage of co-financing of such an investment. To see the differences that arise between the various scenarios with and without the influence of personal costs and the costs of short-term financing, we must take into account two indicators: a) IRR F/(C) - financial internal rate of return calculated on the investment, quantified by the formula:

• where: I0 - is the initial investment (the eligible value + ineligible value of project); CFi - is the value of the cash flows generated by the project in operation (flows from investing activities, financial and operational); VR - residual value, estimated at the end of the time horizon taken into consideration. b) IRR F/(K) - financial internal rate of return calculated on the value of its own contribution. In this case we use the formula: (2)
• where: K - is the private co-financing (financing the eligible amount (50%)) + other ineligible costs incurred during the implementation; CFi - is the value of the cash flows generated by the project in operation (flows from investing activities, financial and operational); VR - residual value, estimated at the end of the time horizon taken into consideration. (EC, 2008; Hazen, 2003) Ignoring the costs of short-term funding (generated by the principle of reimbursement of expenditure already made) and costs related to the number of jobs to be created and maintained during monitoring period, the investment has a IRR F / (C) -1.95% , which reveals that the project is not attractive for financing from a bank or investor. Also there is an IRR F / (K) of 10.12%, showing that through a 50% non-refundable financial assistance, the project would become viable (two indicators detailed in the Table 1 - Variables initial investor).

Source: Own calculations based on the scenarios previously presented If we consider the additional cost generated by a higher loan necessary for covering the gap between the investment and the reimbursement of expenses, the grant aid intensity (expressed as percentage) decreases from 50% to 33.28%. This new value can be called the actual grant aid. A counter argument could be that the investor has sufficient financial resources and a credit is not needed. However, in this case he blocks a certain amount of money for a determined period of time, during which he can't use it. Although this cost is difficult to place in a cash flow, as an opportunity cost, it exists, and interferes on a long-term perspective, the investor renouncing the use of those amounts, which could generate income.

Conclusions

Grants are an opportunity for all businesses and a diverse pallet of investors. The decision to start such a project must be analyzed very well, because all sources of capital even "grants" have a specific cost, sometimes hard to quantify explicitly. In the case of grants, the cost derives mainly from the social side and the process of reimbursement. However, through a detailed economic and financial analysis of the project that takes into account of all the elements, both obvious and most discreet, the success of the investment can be ensured and thus fulfill all the objectives and commitments of the grant recipient.

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