€350M cut to EIT budget will be hard gap to fill

The European Institute of Innovation & Technology (EIT) will find it hard to deal with a proposed budget cut of €350 million, but will use it as an incentive to become financially sustainable, says chairman Peter Olesen. “It’s hard to compensate for this but we can [choose] to see it as an opportunity,” he said. 

The cuts start with €25 million reduction in EU financing this year, with a further €325 million to be axed over the next five years. The money is to be used instead as seed capital for Commission President Jean-Claude Juncker’s new bumper investment fund, which is currently making its way through the legislative mill in Brussels.

“It’s a major challenge… but [we] need to become self-sustainable anyway,” said Olesen, speaking at the EIT’s ‘InnovEit’ conference in its home city of Budapest this week.

Compounding the budget headache, Olesen is also facing concerns over EIT’s accounting practices. Last week members of the European Parliament budgetary control committee refused to sign off on the EIT’s accounts for 2013, something that is usually routine for semi-autonomous agencies and partnerships.

Added roadblocks

EIT co-funds and presides over clusters, or Knowledge and Innovation Communities (KICs), which are large consortia bringing together industry and academics, both to translate research through to market and train a cadre of entrepreneurs.

There are currently five KICs, specialising in information technologies, energy, climate change, raw materials and life science. The addition of life science and raw materials was approved in 2014 and two further KICS, in sustainable food production and high-value manufacturing industry are scheduled for launch next year.

With the prospect of a tighter budget, the mood music at the top of the EIT has shifted slightly. Management will now press upon KICs the need to find more external funding and become fully self-financing earlier.

Bertrand Van Ee, chief executive of the Climate KIC, said the Commission’s decision to cut EIT funding has obvious consequences for a project that includes many companies. "The real issue is predictability [on the investment timeline]," he said. "When one partner changes the rules, it has an impact."

As things stands, EIT is due to put up a quarter of the total KIC funding for the first 10 years. After year 10, investments will fall by 20 per cent per year over five years. There is a clause in KIC founding agreements that says the EIT will still supply a “pre-defined minimum level” of financing after 15 years. What this amount is, no one can say: the oldest KICs have only been around five years, so no one has had to worry about this much.  

“If after year 10 a KIC didn’t need any more funding, this would be a great success,” said Vasco de Oliviera Janeiro, a strategy officer with EIT.

Before being accepted as a KIC, consortia have to prove they have long-term, self-supporting financing options, which means a substantial contribution from businesses.

There are several options for KICs when it comes to securing future financing, said Oliviera Janeiro. “Some KICs are looking into equity shares in their start-ups; this would be a significant addition to their budgets,” he said. To date, KICs have formed 141 start-ups and many have been successful in securing additional sources of finance.

There is also potential revenue from the education side, with KICs having the option to charge for masters and PhD programmes, Oliviera Janeiro added.

The EIT is also planning to talk the European Investment Fund (EIF) and the European Investment Bank, both potential sources of debt and equity financing. The discussion will be around creating a long-term fund to fund KICs. To further this, the EIT recently recruited Richard Pelly, a consultant who until last year was the executive director of the EIF.  

Cuts notwithstanding, Oliviera Janeiro is upbeat. “If we succeed, we become a role model for other EU [public-private partnerships],” he said. “It will put pressure on other EU projects to do better.”

Reporting obligations

Instead of signing off on the EIT's 2013 accounts last week, the European Parliament used its power of sanction to demand improvements. The EIT has until the autumn to demonstrate, in the form of several reporting obligations, that it has improved its policies on payments and public procurement processes.

For the EIT, the Parliament’s audit has re-animated ghosts from the past. In 2011 an independent evaluation of the institute identified "inefficiencies in the implementation" and staff who were "ill-suited to the operational role that [the EIT] was trying to forge".

“We feel sure this remains in the past,” said Olesen, who combines his EIT duties with chairing the Danish Council for Strategic Research. “We have procedures now that say this is behind us and I’ve very sure by September we can convince the Parliament this is [the case].”

The Parliament takes stock of EU programme accounts annually. Parliamentarians begin looking at numbers in November and make their positions known by springtime the following year. The audit tries to get to the bottom of whether EU money was spent in accordance with the rules, and puts a flag on anything deemed in need of further investigation.