Consultation of the European Commission s Green Paper for EU Research and Innovation funding

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1 Consultation of the European Commission s Green Paper for EU Research and Innovation funding Statement of the Network of European Financial Institutions for Small and Medium Sized Enterprises (NEFI) NEFI welcomes the opportunity to take part in the public consultation on a Common Strategic Framework for EU research and innovation funding. We propose that a significant part of the budget allocated to the Framework be devoted to the innovation and SME domain, thereby bringing together all instruments and financial products able to cover the complete R&D and innovation cycle, including: - a range of risk sharing financial products, and an improved RSFF mechanism for SMEs implemented by national financial institutions, including loans, guarantees and equity capital, - an innovation-sme programme with significant joint funding from the EU and the member states, notably including the sector-specific components of the CIP and the SME component of the former FP7 Capacity programme The Commission is asked to develop a toolbox of simple financial products that promote the main subjects of the EU 2020 Strategy, most notably innovation, with long term challenges for the EU and the member states, ideally optimising the leverage between European, national and regional funds transforming costly grants, into financial leverage instruments; this means the reallocation of part of the structural funds pre-allocated to the states for these arrangements. The proposed mechanism should be in accordance with the European principles of additionality, synergy, simplicity and subsidiarity and be easily accessible to SMEs in order to accompany them in their efforts to drive innovation and internationalization. The most relevant actors to implement this approach are the national promotional institutions that are close to the market and the local players. Apart from the design of the research and innovation funding, we would like to stress the importance of reviewing the community guidelines on state aid for RDI in order to better consider the importance devoted to innovation, notably non-technological innovation that is currently strongly limited. Question 3 and 8: EC value added and relationship with national funding At a time of constrained public budgets EU funding should be channelled in a way to achieve the highest possible effect by combining EU budgets with national resources. The national and regional promotional institutions in Europe already make an important contribution to diminish the financing gap and facilitate access to finance for innovative SMEs through loans, guarantees, mezzanine financing or equity. The intensity of support varies from member state to member state and from region to region but the funds they provide for this purpose are not to be seen as a substitute for EU funds but rather as a possibility to top up existing financing, resulting in a substantial leverage, which was the case with the CIP guarantees and should also be the objective for future instruments.

2 Cooperation with and implementation through national promotional institutions in the EU should be strengthened as a working principle for EU support, as it will allow to - draw on their substantial knowledge of and position in national markets, thus maximizing outreach of EU support, - make use of their in-depth expertise in targeted innovation finance and measurement, thus optimizing impact of EU support, - avoid duplication of public support through a coordinated approach combining forces, thus raising efficiency of EU support, - buy in substantial national co-financing, thus increasing leverage of EU support. As pointed out in the green paper, future programmes should be streamlined in order to clarify their objectives and avoid duplication and fragmentation. While there was an important SME participation in the CIP, the RSFF failed to reach SMEs as a target group. In our opinion guarantees are a valuable instrument for a broad range of instruments, i.e. for equity, including VC, mezzanine and loans. They are in their nature complementary to private or other public funding. A successor programme should employ the existing expertise and base future schemes on the user feedback to make sure that new programmes benefit from the practical know-how gained through operating the instrument and thereby also show a certain consistency and reliability. In some countries structural funds will play an important role. It seems reasonable to strengthen their limited capacity. A combination of guarantees with structural funds should be possible, but not mandatory. If risk sharing instruments are considered, they should offer a broad scale of possible applications and not be overburdened with administrative requirements, which often act as a deterrent for prospective applicants. A significant and upgraded risk sharing finance facility covering SME financing, eco-innovation and venture capital to support national promotional institutions would combine national and EU funds without unduly restricting the range of promotion for the national financing institutions. Risk sharing should be offered both funded and unfunded to best respond to local needs and make most efficient use of EC funds. For any envisaged programmes the Commission is asked to carefully review the requirement of a European added value. The term is ill-defined and counters the efforts to simplify participation. If reduced to the criterion of cross-border co-operation of either SMEs or financial institutions it seems unrealistic and far-fetched. SMEs are certainly trying to penetrate foreign markets, for which additional support would be welcome, but a cross-border aspect of any funding should not be requested for its own sake. Instead, it should be recognized that the value added lies also in significantly enhancing national programmes and gearing them towards the strategic EU objectives of the Innovation Union. 2

3 Question 14: Broad definition of innovation We support the broad definition of the term innovation in the green paper in order to enhance programme relevance to business priorities, including non technological innovation, which is important for many very small companies, as well as eco-innovation and social innovation. Innovation should also not be restricted to mean a totally new product in the market, but rather include new products or services for the individual enterprise. This would ensure that financial assistance is not limited to high-tech innovation, which, while being crucial for Europe s competitiveness, can not be expected to generate a strong boost of innovation in the EU by itself. Considering that European countries are faced with the transformation from a product oriented economy to a more knowledge-based society, it seems reasonable to structure future innovation policy accordingly and include innovative services. We do not recommend to focus on specific sectors, however, given the environmental challenges worldwide, eco-innovation deserves a special emphasis. Question 16: Measures to support innovative SME s SMEs in general face difficulties in accessing adequate financing, which calls for action regarding small as well as medium sized enterprises. But especially small enterprises report that their loan applications are rejected and their ratings downgraded more often than those of larger enterprises. For banks, lending in this business segment is often considered uneconomical, due to the adverse cost/earnings ratio. With small loan amounts, credit risk assessment and approval processing, documentation and closure incur high fixed costs combined with low profits. Consequently, commercial banks are reluctant to serve this client group, leaving the existing demand unsatisfied. Start-ups and young enterprises face even more difficulties obtaining credit because, in addition to small loan amounts, they often lack collateral and a business history to judge their creditworthiness. However, young SMEs have a considerable potential to contribute to research and innovation as well as growth and jobs in the EU. They typically carry out their own research and are a key component of the innovation system, facilitating the emergence of new products and markets. Financing difficulties are the most important obstacles for innovation development by SMEs. Especially companies developing a genuinely new product for the whole market and companies with continuous research and development complain of lack of external financing. 3

4 As a consequence, financing constraints especially affect the most innovative companies which could make the biggest contribution to the necessary structural changes and the competitiveness of the economy. In order to combat the market failure in this area we recommend the following instruments to strengthen the innovative power in Europe: - As a principle, cooperating with national and regional promotional institutions will allow to effectively reach a great number of innovative enterprises. Innovation financing on a broad scale is needed to efficiently develop the potential of a large number of young and innovative enterprises. This can best be achieved by channelling funds through promotional institutions already known as major market players for clients in their respective countries. - Guaranteeing of loans or joint venture capital funds of national financial intermediaries would help to offer tailor-made financing for the specific demand and the technological development state in different countries. - Channelling the Research, Development and Innovation aid policy towards the market through a single, simple, easily and SMEs friendly programme, that would cover all steps of the RDI process, from first ideas to the commercialisation phases. This mechanism should include a co-guarantee between the EIF and the Member States, on a range of specific financial products that overcome a shortfall in the market as a result of a significant risk not covered by the usual financial operators (bankers and investors) like loans without any kind of collateral ( guarantee) and a grace period of one or two years. - Optimising the leverage effect by linking up the European and national initiatives; in this context, the proposal is to implement a homogeneous and efficient management and assessment approach for RDI projects based on a technology rating * type; that would allow: a) linkage with the new European financial instruments b) management through subsidiary delegation to the national agencies for decision and/or granting financing; c) a reduction of management costs through effective rationalisation of the decision/financing process; d) financial engineering and the valorisation of projects in order to better respond to the financing needs of companies. - EU funds to support network building of national promotional institutions in the field of innovation financing could be used to facilitate an exchange on best practice to pool experiences and to conduct workshops. - Furthermore, EU funds could be used to help young and innovative companies who own patents, which are normally not accepted as collateral by commercial banks. Due to the banks lack of technological know-how they cannot properly assess the value of patents. 4

5 Consequently, a specific promotion of the external assessment of patents by experts would hopefully lead to the development of best practice across Europe and a more precise valuation of patents, resulting in easier access to finance for the patent owner. If EU budgets could be used for consulting in this field, e.g. for grants to innovation financers, the value of patents for SMEs could improve markedly. For remaining uncertainties regarding the value of patents as collateral an added risk sharing between national institutions and the EU in risk-prone innovation financing would be desirable. In addition, legal security of the EU patent market for enterprises could be enhanced by the introduction of a single European patent. - Moreover, to strengthen innovation without straining EU budgets improvements in the framework for state aid might be considered. Until now, the Community Framework in the field of research, development and innovation focused on technology-oriented innovation. If non technological innovations were included in the framework this would help to offer financing to a number of SMEs which have been neglected to far. In addition, an increase of the de minimis threshold of EUR to EUR would be desirable. Even innovations of a non technological kind often require a considerable investment, so that raising the de minimis amounts would be an effective and simple way for the EC to foster innovation. - For young and innovative enterprises the community guidelines on state aid to promote risk capital investments for SMEs contain a number of restrictions that often work to prevent SMEs from developing their full innovation potential. In particular, the requirement of a minimum private investor share of 50% for any risk capital investment hampers the companies efforts to secure financing. Due to the high risk that innovations generally present, private investors are often unwilling to invest at that stage. Therefore, in many cases the financing a promotional institution might be willing to provide fails because of the 50% private investor rule. We recommend a general lowering of the private share to 30% (in assisted areas to 20%), as allowed for in the Temporary Framework during the financial crisis, which would considerably improve innovation financing. 5