Banco de Fomento will have to be profitable

Portugal’s new State-owned investment bank aimed at helping startups and SMEs which essentially are profitable but lack capital investment to grow, must run at a profit.

The European Commission says that the public investment bank will be able to help struggling companies, but it will insist that this help is given under the same strict conditions of profitability that a regular high street or merchant bank would require.
According to the European Commission’s decision on the new institution, the bank, in addition to acting as an “impact investor” — which means that when it invests it will have to take into account the “ample social returns, possibly at the cost of financial returns” — will also have to operate under market conditions, in other words getting a financial return on its lending investments.
This pre-condition aims to ensure that the development bank does not cause market distortions despite being able to grant credit and make investments with repayment deadlines that are longer than those practised by the market, as well as taking on higher risk and offering lower interest rates.
Furthermore, the bank’s activities operating under market conditions may only assist in business and economic activity areas where market failures have previously been detected.
“The Portuguese authorities have not submitted new studies on market failures, but to date the decision is based exclusively on already identified market failures in the Commission Guidelines for State Support”.
This condition is nothing new in Portugal. It was used when Caixa Geral de Depósitos increased its capital by €3.9Bn and had to submit a business plan that showed a minimum market profitability of 9%.
This business plan aimed to ensure a restructuring of the bank so that it could “return to a position of being profitable in 2018, ensuring the Portugal would see a return on its investment under market conditions and in line with what would be acceptable to a private investor” wrote the commission in March 2017.
It seems that Portugal’s new development bank Banco de Fomento will also have to provide the Portuguese taxpayer with some return on State investment to help SMEs and startups going forward.