USAGE OF ACB-MININD SOFTWARE IN THE CBA ANALYSIS FOR FINANCING INVESTMENT PROJECTS THROUGH EUROPEAN FUNDING IN CORRELATION WITH THE FINANCING FROM THE BANKING SYSTEM

Abstract

The extension of the European Union with the first "wave" of new members in 2004 and later with the second "wave" of members in 2007 brought new opportunities for the countries in Eastern Europe, being obvious that "effective utilisation of EU support can foster the success of their economic performance". Financing investment projects proposed by the SMEs can be realized through several financial sources internal and external, from which two of the most common external sources constitute from subsidies-grants and through banking system. One of the most important financing programme present in Romania, available for SMEs is SOP IEC, which awards grants for investments proposed by production companies. This financing program encourages its beneficiaries to combine the European grant with private funds mostly provided through the banking system. The paper analyzed the methodology used in Cost Benefit Analysis and also The ACB-MININD software which is compulsory to be used for the CBA analysis of these investment projects links for the first time elements of analysis used by the European Commission with elements of analysis used by the banking system. In this context the present article tries to analyze how the ACB-MININD software links the main elements of Cost-Benefit analysis such as NPV or IRR with elements of the bankability software which are mainly used by the banking system such as: cash-flow analysis, loan/interest payment and financial sustainability. Also are presented the links between the banking sector and the external financing sector in the field on investment projects. As final conclusions of this paper we will demonstrate the theoretical and practical role of cost-benefit analysis-financial component to select the best applications that will be proposed for funding under the European grant programs and to link them to the banking system in order to ensure a proper co-financing for these investment projects. JEL Codes: G17, G21, F35, O16, H43, C63, C61

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USAGE OF ACB-MININD SOFTWARE IN THE CBA ANALYSIS FOR
FINANCING INVESTMENT PROJECTS THROUGH EUROPEAN FUNDING IN
CORRELATION WITH THE FINANCING FROM THE BANKING SYSTEM
Droj LaurenĠiu
University of Oradea
Faculty of Economics
Droj Gabriela
University of Oradea
Faculty of Construction and Architecture
The extension of the European Union with the first “wave” of new members in 2004 and later with the
second “wave” of members in 2007 brought new opportunities for the countries in Eastern Europe, being
obvious that “effective utilisation of EU support can foster the success of their economic performance”.
Financing investment projects proposed by the SMEs can be realized through several financial sources
internal and external, from which two of the most common external sources constitute from subsidies-
grants and through banking system. One of the most important financing programme present in Romania,
available for SMEs is SOP IEC, which awards grants for investments proposed by production companies.
This financing program encourages its beneficiaries to combine the European grant with private funds
mostly provided through the banking system. The paper analyzed the methodology used in Cost Benefit
Analysis and also The ACB-MININD software which is compulsory to be used for the CBA analysis of
these investment projects links for the first time elements of analysis used by the European Commission
with elements of analysis used by the banking system. In this context the present article tries to analyze
how the ACB-MININD software links the main elements of Cost-Benefit analysis such as NPV or IRR with
elements of the bankability software which are mainly used by the banking system such as: cash-flow
analysis, loan/interest payment and financial sustainability. Also are presented the links between the
banking sector and the external financing sector in the field on investment projects. As final conclusions of
this paper we will demonstrate the theoretical and practical role of cost-benefit analysis - financial
component to select the best applications that will be proposed for funding under the European grant
programs and to link them to the banking system in order to ensure a proper co-financing for these
investment projects.
JEL Codes: G17, G21, F35, O16, H43, C63, C61
Key words: Banking, Loans, Grants, Cost Benefit Analysis, NPV, IRR
1. Introduction
A notion which is under debate in the recent years, from economical, social and political point of
views: the non-reimbursable funding/grants is quite ignored by the scientific economics
community. The grant concept, which is called also external financial assistance, developed
initially from free transfer of specialized goods and services to fund transfers (Moger, 1999 and
Kanbur, 2003). In the same time Stiglitz (2003) observes that for a long period of time and even
now the World Monetary Fund and the World Bank link their strategic grants to reimbursable
funding: loans provided by the banking system. Other studies especially Lerick and
Meltzer(2002) in Quarterly International Economics Report, Carnegie Mellon - Gailliot Center
for Public Poverty, draw attention that in case of loans contracted through World Bank or other
institutional banking lenders some of the loans were transformed into grants since some of the
beneficiary countries were not able to pay them back, so their debts were finally erased.
The extension of the European Union with the first “wave” of new members in 2004 and later
with the second “wave” of members in 2007 brought new opportunities for the countries in
Eastern Europe, being obvious that “effective utilisation of EU support can foster the success of
their economic performance” as it is considered in a KPMG(2011) report from 2011. Moreover
the integration of Romania into European Union brought new opportunities for the Romanian

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private enterprises both concerning the accession of their products and services to the single
market and also accession of additional co-financing for funding their business infrastructure
investments (Droj, 2010).
Under these circumstances most of the specialists consider that access to European funding and
its efficient absorption constitute a key issue in these years both at the level of state level decision
makers, at the level of financing institutions and at the level of the decision makers within the
companies. Financing investment projects proposed by the SMEs can be realized through several
financial sources internal and external, from which two of the most common external sources
constitute from subsidies-grants and through banking system. In the recent years a very close
relations seemed to be established between the banking sector and the financial aid sector.
In the same time the banking sector evolved and created specialized services which are dedicated
to the above mentioned beneficiaries with the goal of supporting development, carrying out or
co-financing projects implemented under the European Structural Funds. Lack of experience in
this field shown by both at the level of the applicants for Structural Funds, at the level of the
management authorities and, finally, at the level of the banking system which is requested to
ensure additional funding creates serious obstacles to achieving a higher absorption capacity of
EU structural funds in Romania. (Funda

ia

oros Romania, 2009

i Departamentul pentru Afaceri
Europene, 2009)
Also can be noticed the lack of a methodology for implementation of funding programs adapted
to the Romanian realities. Another major problem is that most financial programs lack correlation
of economic and financial indicators of the European Commission to those requested by the
banking sector, so that the beneficiaries of European structural funding are finding themselves in
the situation where they are unable to access bank credit which is needed to secure co-financing
or fund its cash-flows required to implement the proposed investments.
In this context the current paper is dealing with analysing the linkages between the cost benefit
analysis requested by the EU management authorities and the credit analysis, performed by the
banks. This constitutes a topic of major interest for both potential beneficiaries and the
management bodies, and the banks so they can prepare specific to banking products. From the
vast field of study concerning structural funds we proposed to approach as the main themes in
this research paper the following: identification of a European funding programme operating in
Romania, realization of a correlation between the performance indicators within the benefit-cost
analysis requested by European and those requested by the banking sector.
2. Considerations over the Cost Benefit Analysis and its linkage with the banking sector–
Literature Review and Research methodology
One of the main goals of these European Funding programmes are to implement the European
Union Cohesion policies. As its main instruments and for improvement of the competiveness of
the “weaker” regions were established the European Regional Development Fund (ERDF) and
the European Social Fund (ESF), otherwise known as the Structural Funds, as well as the
Cohesion Fund. Through these instruments European Commission invests in thousands of
projects across all of Europe’s regions to achieve its primary task: to promote economic and
social cohesion by reducing these disparities between Member States and regions (European
Commission, 2009).
In this context, the private companies benefit of increased opportunities for accessing European
Funding which gives them a better chance for increasing their competitiveness and for extending
distribution of their products and services on the entire European market and beyond. The most
important production infrastructure financing programme for the Small and Medium
Enterprises(SME) operating in Romania is considered to be the Sectorial Operational Programme
“Increase of Economic Competitiveness” (further referred to as SOP IEC) which offers financial

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support for the consolidation and modernization of productive sector through
investments(Guvernul României, 2009).
Even in 2008 edition of the “
Guide to COST-BENEFIT ANALYSIS of investment projects -
Structural Funds, Cohesion Fund and Instrument for Pre-Accession”
edited by the European
Commission(2008) is highlighted that cost-benefit analysis can help public decision makers to
identify projects that will maximize net social benefits and thus determine the order of priority
infrastructure works will be made and how public policy decision making.
As it is mentioned in the above referred document the investment decisions are at the core of any
development strategy, all other elements such as: economic growth and welfare depends on
productive capital, infrastructure, human capital, knowledge, total factor productivity and the
quality of institutions (European Commission, 2008).All these elements involve – in a certain
measure – decision making regarding investing financial sources at present time in the hope of
obtaining future uncertain benefits.
In order to take the decisions, the decision makers need appropriate tools for comparing costs and
benefits of various types: economic, social or ecological investment projects that are ongoing
over several years. Cost-benefit analysis is not an exact science, is seen as having many
limitations which are generally based on approximations, working hypotheses and estimates due
to missing data or due to inability providing all possible situations. The financial analysis is
considered the key element of the Cost Benefit Analysis both by the financing organization and
the banks (Trenca 2006, Trenca 2008 and Stancu 2006) or by other financial institutions which
will ensure the co-financing of the investment. The goal of the financial analysis is to use the
predictions such as cash-flows to calculate relevant indicators especially the Financial Net
Present Value (FNPV) and the Financial Internal Rate of Return (FRR), respectively in terms of
return on the investment cost, FNPV(K) and FRR(K).
While Cost-benefit analysis goes well beyond financial ratios considering the project, most
project data on costs and benefits is provided by financial analysis. This analysis provides
decision makers information on inputs and outputs, their prices and the structure of income and
expenditure over the analyzed period (European Commission, 2008).
The methodology used for the determination of the financial return is the Discounted Cash Flow
(DCF) approach. This implies some assumptions as are mentioned in the methodology:
- Only cash inflows and outflows are considered;
- The project cash flows it should be based on the incremental approach;
- After the aggregation of cash flows occurring during different years it is adopted an applied
an appropriate financial discount rate in order to calculate the present value of the future cash
flows.
According to the methodology (European Commission, 2008) the Net Present Value of a project
is the sum of the discounted net flows of a project. The NPV is a very concise performance
indicator of an investment project: it represents the present amount of the net benefits flow
generated by the investment expressed in one single value with the same unit of measurement
used in the accounting tables.
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D

5
6(W7
5
f
D@5

4
6(W7
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The Internal Rate of Return (FRR) is defined as the discount rate that zeroes out the net present
value of flows of costs and benefits of an investment, that is to say the discount rate of the
equation below(European Commission, 2008:212):
676^7 >&
D
6( 
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Since the goal of this study is to use the ACB-MININD software in CBA analysis for financing
investment projects through European funding in correlation with the financing from the banking

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system in the following chapter we will set a case study using a project proposed by a Romanian
production company which tries to access SOP IEC funding in 2011.
3. Case study –
Usage of ACB-MININD Software in the CBA analysis for financing
investment projects through European funding in correlation with the financing
from the banking system
As mentioned above we selected a test company, which intended to access European funding to
co-finance its infrastructure investments. The company is a market leader in its field of activity:
plastic manufacturing and intends to increase its production capacity and to improve its
competitive advantages on the Romanian market. In order to realize this an ambitious investment
programme was started to build a new production facility and to increase the quality of their
products. The project was proposed to be financed under SOP IEC and was based on the data
provided by a detailed the technical project and by the price offers. The company performed a
financial analysis using the official software provided by the management authorities within the
programme:
ACB-MININD Software which is available online at:
http://acb.minind.ro/ACB/index.php (Guvernul României, 2012)
. These results were later
compared with the bankability analysis, in order to ensure future bankability of the project. The
particularities of this software is that it requests and processes information which is delivered by
the banking institutions regarding proposed co-financing or implementation loans.
In order to secure financing of its investment the selected company has to fulfil several financial
criteria established by the SOP IEC Programme. According to the Guide of SOP IEC
Programme, in order to obtain financing for an investment project FNPV(K) is requested to be
higher than 0 and FRR(K) to be between 0 and 9. For the mentioned project the mandatory
discount rate was established to 5%. The analysis was realized both on the implementation period
of the project (2 years) and on the operation period of the investment realized within the project(7
years). A challenge was made to obtain both the financial sustainability of the project and also to
ensure its bankability.
Figure 1 Presentation of the Financing sources (Currency: Thousands RON)
Source: Made by the author
The first step was to analyse its bankability and to establish the maximum eligible loan and to
analyze the loan payment using the bankability software provided by the bank. Once these
information were established were introduced in the ACB-MININD Online application. The first
step was to analyse its bankability and to establish the maximum eligible loan and to analyze the
loan payment using the bankability software provided by the bank. These can be seen in the
above figure. Once these information were established were introduced in the ACB-MININD
Online application. In this circumstance all the financial sources and the equivalent financial
costs are introduced in the financial analysis including the loan payment, the interest payment,
royalties, income tax.
Figure 2 Financial Performance Indicators (Currency: Thousands RON)

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Source: Made by the author
As can be seen the second step was to analyse the financial performance indicators and to
determine if FNPV(K) is higher than 0 and FRR(K) is between 0 and 9. Also the ratio
benefits/costs its analyzed as well. The conclusion is that the project can be submitted for
European financing.
Figure 3 Financial sustainability of the project (Currency: Thousands RON)
Source: Made by the author
In figure 3 the Financial Sustainability of the project is analyzed by using also the
information provided by the credit analysis from the banking system. As observed all elements of
financial sustainability were considered: since in the beginning only operational expenses were
presented in this stage were included also other payments and was analyzed the real capacity of
the company to ensure financing resources for loans payments, interest payments, income tax or
royalties. Afterwards the project is declared sustainable both by the management authorities of
the programme and by the banking system.
4. Conclusions
Since, in the past, the financial analysis performed according to CBA methodology had several
inconsistencies with the bankability analysis, an important step seems to be taken by using
practical bankability financial information within the ACB analysis. As can be seen from the

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presented test case the authors consider that, in this context the ACB Minind application can only
be the beginning of reforming the ACB methodology and in the future this approach should be
further extended and common solutions accepted by all stakeholders: structural funds
management authorities, banking sector and private/public beneficiaries to create common
indicators or analysis methodology in order to ensure both the financial sustainability, according
to EU regulations and fulfilment of bankability criteria which is requested by the banking sector
in order to ensure co-financing of the projects. This research should be further continued by
development of a set of common indicators based on both methodologies.
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