Social economy

The Slovak Investment Holding company (SIH), the manager of National Development Fund II company, is looking for financial institutions to act as financial intermediaries for financial instruments for the support of social economy. SIH will launch three different selection processes in sequence: for a Guarantee Instrument, a Loan Instrument and an Equity Instrument. The first selection to be launched will be the one for the Guarantee Instrument, to which this set of questions and answers is primarily devoted. For more information, interested parties should contact .

This document attempts to provide a user-friendly summary of the company’s current thinking, and it is based on the relevant rules, laws and regulations. While SIH has done everything in order to ensure that the information here contained is complete, correct and precise, this summary, which is intended to serve as a basis for discussion during the preparatory market consultations, should nevertheless be regarded as purely advisory and non-binding. The only binding conditions will be provided in the procurement documentation, and the responsibility for compliance with the relevant legislation remains with the tenderer themselves. Therefore, potential candidates are advised to familiarise themselves with the texts of the relevant legislation, listed at the end of this document.

How will the Guarantee Instrument work?

The support of social economy through the Guarantee Instrument will take the form of loans to eligible small and medium-sized enterprises (SMEs). The role of the financial intermediaries will be to seek clients from among the eligible companies and subsequently create a portfolio of new loans for which the first loss risk will be covered by the Guarantee Instrument. The term ‘new loan’ implies that refinancing of existing loans is excluded from the operation of the guarantee.

The guarantee provided by National Development Fund II company, funded by the European Structural and Investment Funds and the state budget, will provide the financial intermediary with credit risk coverage of an individual loan up to guarantee limit rate (up to 80% of the loan) and, at the same time, up to the portfolio limit rate (up to 25% of the portfolio). The candidates’ proposed guarantee limit rate and the portfolio limit rate will be assessed during the selection process. Preference under this particular criterion will be given to candidates applying for the lowest rates.

The financial advantage of the guarantee must be passed on to the final recipients, either in the form of a reduction in the interest rate on the loans or in the form of reduction of the collateral requirements. This transfer of the advantage must be guaranteed by the tenderer’s pricing methodology, which will be scored in the selection process and which shall be constant and binding for the financial intermediary.

What is the sum being tendered?

The preliminary parameters being considered by SIH are as follows:

The total potential allocation to the Guarantee Instrument is EUR 10 million, which under the maximum limit guarantee and portfolio rates corresponds to a total loan volume of 50 million.

However, in the first instance, the amount available in the tender will be EUR 1.5 million, corresponding to a loan portfolio of 7.5 million. Provided that a financial intermediary has placed loans corresponding to at least 30% of their existing Guarantee Instrument allocation, they will be able to apply to increase this allocation up to the EUR 2.5 million.

What kinds of enterprises are eligible?

The eligible enterprises are the ‘enterprises in the Greater Social Economy’ as defined by Slovak legislation, which includes both ‘Social Enterprises’ and ‘Social Impact Enterprises’.

Simply put, a Social Enterprise is an entity which fulfils all the following conditions: it is involved in economic activity, but whose primary objective is to achieve some type of benefit for the society, rather than profit; if the enterprise does make a profit, most of it has to be reinvested to support this primary objective; and the enterprise involves stakeholders, such as workers, consumers, local inhabitants etc. in its activities. The enterprise does not necessarily have to be a company within the meaning of the Commercial Code – as long as they carry out economic activities, other legal forms (see below) are considered to be enterprises in this context.

A Social Impact Enterprise, as a less demanding category, also has a primary objective to achieve some social benefit, but without necessarily fulfilling all the other conditions.

What is the precise definition of these enterprises?

Definitions of the enterprises in the Greater Social Economy, based on the new Slovak Social Economy and Social Enterprises Act [1], read as follows:

‘Social Enterprise’ is a commercial company, a cooperative, a civic association, a foundation, a non-profit organization, a special purpose church facility, or a natural person-entrepreneur who is an employer,

  1. which on a continuous basis, on its own behalf and in its own name, conducts an economic activity,
  2. whose primary objective is to achieve measurable positive social impact, as defined below,
  3. for which the positive social impact is achieved either by the goods and/or services which it produces, supplies, provides or distributes, or by the method of production of these goods and/or services,
  4. which,
    1. if it earns a profit from its activity, uses more than 50% of the post-tax profit for achieving the main objective under (b);
    2. if it distributes some of the profit according to the Commercial Code, uses procedures and rules that ensure such distribution does not undermine its primary objective according to letter (b)
  5. which involves stakeholders in the running of its economic activity.

‘Social Impact Enterprise’ is a commercial company, a cooperative, a civic association, a foundation, a non-profit organization, a church-purpose facility, or a natural person-entrepreneur,

  1. which on a continuous basis, on its own behalf and in its own name, conducts an economic activity,
  2. whose primary objective is to achieve measurable positive social impact, as defined below,

and which fulfils two of the conditions c) to e) above.

What does "measurable positive social impact" mean?

"Positive social impacts" means the fulfilment of one or more of these so-called ‘services of social benefit’ [1]:

  1. provision of healthcare,
  2. provision of social assistance and humanitarian assistance,
  3. creation, development, protection, restoration and presentation of spiritual and cultural values,
  4. protection of human rights and fundamental freedoms,
  5. education, cultivation of youth and the development of physical cult
  6. research, development, scientific, technological and information services,
  7. creation and protection of the environment and protection of the health of the population,
  8. services to support regional development and employment,
  9. provision of housing and the administration, maintenance and renovation of the housing stock.

"Measurable positive social impact" means that an enterprise demonstrates the fulfilment of a social benefit service in a measurable manner – for example, by measuring the number or percentage of the disadvantaged persons it employs, the number of kilowatt-hours of electricity produced from renewable sources, the number of apartments leased to the persons eligible for social benefit rental housing, etc.

Can you provide some examples?

The most well-known types of such businesses are the so-called Work Integration Social Enterprises (WISE). These are companies where at least 30% of employees belong to the disadvantaged or vulnerable groups. In Slovakia, several successful municipal companies are close to this definition, such as the ones in Spišský Hrhov or in Raslavice –  while the support offered in the new Social Economy Act caused a further wave of interest among the Mayors in setting up such businesses. Similarly, Social Enterprises are also included in the Action Plans being prepared under the Least Developed Districts Act. Aside from the municipal companies, the WASCO industrial laundry in Valaska Dubova, the Svatobor ecofarm, or until recently the Dobre & Dobré Café in the Old Market Building in Bratislava have also been involved in work integration.

For Slovakia, apart from work integration the most significant area is probably going to be the development of social benefit rental housing. It was precisely for these two areas that special categories have been created in the Social Economy Act. The reasons are clear: in Slovakia, there is, in comparison with other European countries, a physical shortage of flats, and out of this insufficient number of dwellings, rental housing represents only a fraction. For young people especially, from the point of view of labour mobility, as well as increasingly strict regulation on the provision of individual mortgages, the question of affordable rental housing is likely to become more and more urgent. The Social Economy Act therefore creates space for the support of social benefit rental housing, or in a sense a restart of cooperative housing, with soft and affordable loans for cooperative construction playing an important role. The Guarantee Instrument for the social economy allows such loans to be guaranteed for up to 30 years, and the Loan Instrument will offer funding for loans with the same maximum maturity.

However, the social economy is far from being limited to these two types of business. The conditions for a Social Enterprise can be met, for example, by theatres or publishing companies, social service centres, environmental businesses such as plant root waste water treatment plants or small renewable energy source power plants, etc. Interesting examples of innovative social entrepreneurship can be found e. g. on the webpage of the Impact Hub Bratislava.

Who is responsible for making the decision on an enterprise’s eligibility?

Social Enterprises have the option of requesting registration by the Ministry of Labour. A registered Social Enterprise is then entitled to a range of benefits, from grant and subsidy assistance through tax concessions to improved standing in the public procurement process. In terms of financial instrument support, Registered Social Enterprises automatically qualify as potential clients [1]. This means that once the loan applicant proves their Registered Social Enterprise status, the financial intermediary has no further obligation to verify the fulfilment of the conditions in the social enterprise definition.

However, non-registered Social Enterprises and Social Impact Enterprises are also eligible as clients for financial instruments [1]. Such enterprises are required to demonstrate the compliance with the conditions of a Social Enterprise/Social Impact Enterprise by, at the very least, providing a statutory declaration to his effect (note that knowingly providing a false declaration is a criminal offence in Slovakia). The financial intermediary may, at their own discretion, also require additional documents to prove compliance.

What is the sum being tendered?

The preliminary parameters being considered by SIH are as follows:

The total potential allocation to the Guarantee Instrument is EUR 10 million, which under the maximum limit guarantee and portfolio rates corresponds to a total loan volume of 50 million.

However, in the first instance, the amount available in the tender will be EUR 1.5 million, corresponding to a loan portfolio of 7.5 million. Provided that a financial intermediary has placed loans corresponding to at least 30% of their existing Guarantee Instrument allocation, they will be able to apply to increase this allocation up to the EUR 2.5 million.

Are there any State Aid implications involved in the loan provision?

Indeed – since the guarantee is funded by the European Structural and Investment Funds, i. e. public resources, the State Aid rules must be respected in its operation. For this purpose, SIH developed a State Aid Scheme which was subsequently approved by the Anti-Monopoly Office. Financial intermediaries are required to follow this scheme, including the obligation to record and report the amount of the aid they have provided to the client.

In practice, this means that loans may be provided to small and medium-sized enterprises which are at most seven years old, or to enterprises which need finance for significant initial investment to introduce a new product or to enter a new geographic market.

The total amount of loans covered by the Guarantee Instrument provided to a single enterprise may not exceed EUR 15 million.

In the near future, SIH plans to also submit a De Minimis Aid Scheme for approval to the Antimonopoly Office [14]. Based on such a scheme, it will be possible to extend the range of clients to other businesses – i. e., those that do not meet the conditions in the State Aid Scheme.

In case of such other businesses, the total amount of loans covered by the Guarantee Instrument may be EUR 1.5 million for five years or EUR 0.75 million for ten years (provided that the client has received no other de minimis aid). In the case of companies active in the road freight transport sector, the limits above will be halved [14].

Is there a difference between a ‘financial instrument’ and a ‘product’?

The financial instrument is being provided by SIH to the financial intermediaries. On the basis of this financial instrument, the financial intermediary then offers a financial product t the final recipients, i. e. the applicants for the loan. Based on the Guarantee Instrument, several different types of products can be offered to clients. This includes, for example, an investment loan to finance the launch business activities or a new type of production; an overdraft credit line; a loan specifically designed to support social benefit rental housing; or a loan specifically for self-employed persons who fulfil the criteria of the Social Impact Enterprise.

Is there any recognition that working with this type of client is more demanding than usual?

Given that enterprises in the Greater Social Economy often are not investment ready, SIH has the option of offering clients a technical support grant when preparing for an investment. The ceiling for this subsidy is 5% of the volume allocated to the financial instrument. [5] The subsidy will not be paid to the client; rather, it will be managed by the selected financial intermediary. Technical support does not apply to the usual investment activities of the financial intermediary – that is, activities covered by management costs and fees (see section 11. above). Expenses covered by technical support are only intended for the technical preparation of a future investment for the benefit of the client to be supported by this operation. [4] They must therefore not be part of the actual investment to be financed by the loan under the relevant financial instrument. [5]

Are there any systematic support measures planned in order to prevent losses in the support of these enterprises?

Experience from abroad shows that purely financial support to the social economy is often ineffective. Due to the atypical nature of Social Enterprises, mentoring and other supporting activities are at least as important. As can also be seen from foreign experience, such support significantly increases the likelihood that repayable financial assistance will actually be repaid.

For this reason, the Ministry of Labour made a contractual commitment to create an infrastructure for the logistical support of the enterprises in the Greater Social Economy by creating a network of Social Enterprises incubators providing advisory, legal and other support services to facilitate the operation of these enterprises [1]. This network of regional support centres is currently being prepared under the guise of the National Project ‘The Institute for Social Economy’. After launching, a support centre should be created to support social businesses in each of the eight self-governing regions of Slovakia. In practice, these centres should be operational by the end of 2018.

Is there a possibility to provide a client with a combination of a financial instrument and a grant?

Enterprises in the Greater Social Economy are often undercapitalised and, as a result, their ability to accept loan investment is limited. Combining financial instrument support with a grant is a solution to this problem – so that grant support acts in synergy rather than in competition with the financial instrument [2], [8]. The Ministry of Labour has committed itself in the Financing Agreement with SIH to make every effort to supplement financial instrument support with grants, in the case of start-ups with insufficient equity or in case there is other demonstrable needs. This additional grant support should be launched in the course of 2018. According to the SIH information, the total allocation for this grant support is EUR 30 million.

What are the conditions of participation in the selection?

The candidates must meet the conditions of participation relating to their personal standing, their financial and economic standing and their technical or professional capacity [11].

As far as personal standing is concerned, the tenderer must be innocent of any past financial crimes, breaches of professional standards, or obligations under environmental, social or labour law. The tenderer shall not have any arrears of taxes or social insurance contributions and shall not be in process of bankruptcy, restructuring or liquidation. In accordance with the relevant legislation, they must be entitled to perform tasks related to the functioning of the financial instrument. Finally, the tenderer must not have been prohibited from participation in public procurement.

From a financial and economic point of view, the tenderer must have adequate economic and financial viability as evidenced by their total assets.

In terms of professional and technical ability, the tenderer must have an adequate capacity to implement the financial instrument (including organisational structure and governance framework), an effective and efficient internal control system, and use an accounting system that provides accurate, complete and reliable information in a timely manner. [4]

On what criteria will the candidates be evaluated?

The award criteria will take into account the nature of the financial instrument, the tenderer's experience with the implementation of similar financial instruments, the expertise and experience of the proposed members, and the operational and financial capacity of the institution. The criteria used will be based on the following foundations [4]:

  1. robustness and credibility of the methodology for identifying and appraising clients,
  2. the level of management costs and fees and the methodology proposed for their calculation,
  3. terms and conditions applied in relation to support provided to clients, including pricing;
  4. the ability to supplement NDF II funding by other resources (in the case of a Guarantee Instrument, this will be assessed by the guarantee limit rate and the portfolio limit rate)
  5. the ability to demonstrate that the provision of funds will be an additional activity compared to present activity of the candidate – in the case of the Guarantee Instrument, by providing coverage to a portfolio of new loans, to the exclusion of refinancing old ones
  6. proposed measures to align interests and mitigate possible conflicts of interest.
Will not the problem be a problem for candidates who want to enter a new field of activity?

Given that most financial institutions in Slovakia do not have extensive experience in social economy, it is recommended that such potential candidates consider applying as a group of economic operators, set up jointly with one or more non-governmental organisations or other actors active in the social economy in addition to the financial institution. The criterion of the expertise and experience of the proposed team members with the social economy can then be demonstrated through the experience of the member of the group who actually possesses it [11], [12]. However, it is important to ensure that the member is also involved in the activity of seeking out and working with the clients, which must be proved by contractual relations between the members of the group.

Where do the funds for financial instruments to support the social economy come from?

The financial instruments are funded by the European Structural and Investment Funds [2], [4], [6]. Specifically, in the case of the Social Economy instruments, the source is the European Social Fund [3] via the Human Resources Operational Program [9], [10] with the Ministry of Labour, Social Affairs and Family of the Slovak Republic in charge as the Managing Authority. By a decree of the Slovak Government, the implementation of financial instruments was entrusted to SIH as a wholly owned subsidiary of the Slovak Guarantee and Development Bank, the national promotional bank of Slovakia.

Where can legally binding information be obtained?

Social economy

[1] Act no. 112/2018 on Social Economy and Social Enterprises


European Structural and Investment Funds

[2] Regulation No. 1303/2013 (Common Provisions Regulation)

[3] Regulation No. 1304/2013 on the European Social Fund

[4] Commission Delegated Regulation No. 480/2014

[5] Commission Implementing Regulation No. 964/2014 (consolidated version) on the standard (‘off the shelf’) financial instruments

[6] Act no. 323/2015 Coll. on financial instruments

[7] European Commission Guidance for Member States on Article 42 (1) (d) CPR - Eligible management costs and fees

[8] European Commission Guidance for Member States on CPR_37_7_8_9 Combination of support from a financial instrument with other forms of support

[10] Annexes to the Human Resources Operational Program (in Slovak)


Public Procurement

[11] Act no. 343/2015 Coll. on public procurement

[12] European Commission Guidance for Member States on the selection of bodies implementing financial instruments


State aid

[13] Regulation No. 651/2014 (General Block Exemption Regulation – consolidated version)

[14] Regulation No. 1407/2013 on de minimis aid

[15] Act no. 358/2015 Z. z. on state aid