European Institute of Innovation and Technology needs significant reform, says EU auditor

The European Institute of Innovation and Technology (EIT) cannot become an effective tool for breeding innovation in the EU without “significant legislative and operational adjustments,” according to a critical report published today by the European Court of Auditors (ECA).

The Court finds several weaknesses in EIT’s structure and says its legal basis should be amended, and change its approach to delivering impact. The audit, carried out between December 2014 and June 2015, covers EIT activities from 2010 to 2014.

Before the ECA raised a red flag in 2015, the Institute did not thoroughly evaluate the performance of the Knowledge and Innovation Communities (KICs) and has “rarely rejected costs based on the lack of performance,” the report says. KICs are large consortia of researchers, educators and businesses formed to create new products, services and spin-outs across Europe, and train young entrepreneurs. The EIT, headquartered in Budapest, was formed in 2008 to jump-start innovation in Europe through KICs in various sectors.

The EIT had a budget of over €300 million for the 2008-2013 period, and the Commission has allocated €2.38 billion for 2014-2020 to further the EIT’s mission of strengthening the innovation capacity of the EU member states and contributing to economic growth and competitiveness.

But, the ECA says “EIT is not the impact-driven institute envisaged.”

Many of the criticisms laid out in the report are being addressed, according to EIT interim director Martin Kern. “It’s important to keep in mind the audit was completed a year and a half ago and that we have made significant progress since,” he said.

The European Commission has set up a review panel to make recommendations for reform by the end of 2016. These will “support the EIT Board, its management and the Commission services as they seek to set the EIT's future strategic direction,” said Nathalie Vandystadt, Commission spokeswoman for education.

The EIT says a better monitoring system will be put in place that is geared towards results and impacts. In 2015, it launched a tender procedure to design impact-based performance indicators and has created a working group to address this particular issue.

Lack of leverage

The EIT’s funding model allows KICs to organise “complementary activities” which were supposed to generate a leverage effect. But this was based on the assumption that all KIC complementary activities initiated by KIC partners are triggered by the EIT’s intervention.

The KIC complementary activities were “poorly defined,” which made it difficult for KIC partners to understand what could be reported as a complementary activity and how to report them.  As a result, KIC partners were undertaking activities which would have been done without the EIT’s intervention, but reporting the costs as complementary activities.

For example, academic partners of the KICs have reported costs for the participation of non–EIT students in courses in which EIT students also participate, as complementary activity. These costs are not additional, as the courses are part of the standard educational programme of the university.

Little evidence of tangible results

The ECA argues that while the KICs have stimulated an innovation network and entrepreneurial culture, there is “little evidence of tangible results or impact to date” and says the future financial sustainability of the KICs is in doubt because it is unlikely that EIT funding will be replaced by KIC incomes.

From 2010-2014, the EIT injected €460 million into the KICs. In that time, only one KIC reported an income, of €400,000, while the rest have not reported any. Up to 2015, the EIT continued to fund close to 90 per cent of the KIC costs.

The Court is concerned that the annual grant agreement does not match the time horizon of KIC innovation activities, because the KICs must select projects and devise business plans without knowing if funding will still be available after the first year. For the same reason, universities are reluctant to sign multiannual partnership agreements with EIT students. “The principle of annuality [is] a major handicap to foster innovation in the long run,” the report says.

Also, 12 per cent of the EIT’s budget, originally earmarked for €2.7 billion, has been cut by the Commission and re-allocated to the European Fund for Strategic Investments. The cuts will lead to “fewer EIT-funded innovation activities,” the ECA says.

Geographical concentration

The EIT funding is concentrated within a few countries and a limited number of KIC partners, with 73 per cent of EIT money going to five countries. Only two of the newer member states have received any EIT financial support. “A two-speed Europe risks being further engrained,” the Court warns.

Most of the money is flowing to a very few KIC partners, with the top 10 partners receiving between 49 and 65 per cent of the EIT financial support to each KIC, according to the report. The majority of partners have received less than €500,000.

Under-resourced and poorly managed

The EIT headquarters in Budapest is understaffed, with fewer project officers than most EU research programmes. There is one project officer per KIC to manage a budget of up to €400 million. In contrast, for ICT, energy and environment projects under EU’s seventh framework programme, each Commission staff member was managing budgets of €12.5 million to €20.4 million.

No significant increase in the number of staff is foreseen despite a large budget increase, from €309 million between 2008 and 2013 to €2.38 billion between 2014 and 2020.

The concentration of funding raises concerns over possible conflicts of interest and “unfair allocation of public funding.” Notably, the ECA identified instances when a KIC partner is a member of the committee that reviews proposals and selects the projects.

Although only seven partners were interviewed in person, the ECA surveyed 113 KIC partners and found “almost half […] do not believe that the selection of the activities to be funded by EIT within the KIC is fair and transparent.”

Similar EU bodies, such as the Joint Technology Initiatives, became fully autonomous in less than three years. But the EIT has not been able to become autonomous due to “limited leadership and managerial abilities of the EIT management,” according to a previous report written by the Directorate-General for Education and Culture, which is cited in the report.  

Companies make up 56 per cent of the KIC partners, but they have received only 24 per cent of the EIT’s money. Between 2010 and 2014, only two of the top 40 beneficiaries of EIT funds were businesses, because the agendas of the KICs were “mainly driven by the needs of higher education,” says the report.

The payment cycle is a problem, because SMEs cannot afford to wait up to one and a half years to be reimbursed for costs exceeding pre-financing agreements. Also, SMEs do not have access to effective EIT support, as only large companies can navigate the “heavy bureaucracy and inefficient communications.”

The EIT’s activity and impact has been poorly monitored due to unclear key performance indicators (KPIs).  The “core KPIs are not clearly defined and have not been consistent over time,” the report says.

In addition, EIT’s model of competitive funding discourages cooperation between KICs because any benefits would be shared with a funding rival.

All costs reported by KIC partners are thoroughly checked by the EIT. Several KIC partners interviewed or surveyed by the Court complained that they sometimes need to provide the same information more than once.