MEPs decry ‘absurd’ changes to the European Innovation Council

19 Jul 2022 | News

In a heated debate, MEPs grilled a Commission official after learning decisions on equity financing for start-ups under the EIC Accelerator must now be rubber stamped by the College of Commissioners, the top of the bureaucratic tree in the EU executive

Anna Panagopoulou, director for European Research Area & Innovation at the European Commission, defended the rollout of the EIC in front of MEPs. Photo: Screen capture from the Parliament’s webstreaming service

The final decision on equity financing for start-ups and the grants complementing it under Horizon Europe’s European Innovation Council’s Accelerator programme has been delegated to the College of Commissioners, the highest level of bureaucracy at the Commission.

“This is hilarious,” said Christian Ehler, the MEP who is leading the push to break the deadlock within the Commission over how the equity fund is managed, during an ITRE committee debate last week. It is not clear that the commissioners have the time to decide on each individual application, and they are not well versed enough to make the decisions on who gets the funding, Ehler said.

This is the latest twist in a disagreement that has been going on for the past year and half about management of the EIC equity fund, which for the first time sees the EU taking stakes in start-ups. The row stopped money flowing to 102 companies selected for funding last year.

In June, the backlog started moving. The Commission signed off the first investment in a French company and another 30 companies that have experienced the longest delays are now in the pipeline to get their equity funding.

But without a permanent resolution to the question of how the equity investments are overseen, the College is now in charge of rubber stamping these decisions.

The Commission’s concerns about management of the fund centre on the risk attached to putting public money into start-ups, with the possibility that they fail.

But Ehler says handing decision-making to the highest level is the real problem. “If there is a reputational risk, it's commissioners deciding on something they haven't read, or they spent the rest of the day to read,” said Ehler. “This situation is ridiculous, unacceptable. It’s up to commissioners to resign, actually.”

Anna Panagopoulou, director of European Research Area and Innovation at the Commission’s directorate for research, assured the Parliament the measure is temporary.

“What we were discussing at the College is that once we have the long-term solution, there will be no need any more to have the singular word position at the level of the College. So that will go back to normality, but we have first to see [what] this long-term solution will be,” said Panagopoulou.

The College currently holds the final decision in the cases where the company has requested to have an equity component in their support. Grant-only Accelerator projects are signed off by the European Innovation Council and SMEs Executive Agency.

Political infighting 

In June the Parliament started working on a report on the rollout of EIC funds under Horizon Europe. During the first debate on that report, Ehler hailed the EIC Accelerator, the new EU instrument for investing in start-ups which had a successful three-year pilot phase before its official launch last year. But he also criticised the Commission’s recent, highly-contested changes to its management structures.

“The Commission is running it into ground due to political infight[ing]. Even worse, it's trying to kill the idea behind the EIC by making it a bureaucratic and static instrument run by the European Investment Bank,” said Ehler.

Fellow members of the ITRE committee support Ehler’s call on the Parliament to intervene. “We all agree that there is a problem, a problem we need to solve, and it is urgent,” said Lina Gálvez Muñoz, shadow rapporteur on the file. “Otherwise, it will be a real reputation problem and we cannot afford that because of internal problems.”

The EIC Accelerator troubles when the Commission’s directorate for budget decided it did not want the Commission to take the risk that comes with the Commission directly investing in start-ups. A wrong investment decision could undermine the market and overvalue or undervalue a company. To prevent such hiccups, the Commission decided to move the fund to indirect management under the European Investment Bank, a transition that has not run smoothly.

But the Parliament argues this risk aversion goes against what policymakers envisioned the fund should be. It was meant to fill the investment gap where private investors wouldn’t take on the risk of funding nascent technologies that could have a massive societal impact.

“The reputational risk is there but the catastrophe is that that instrument was meant as a flagship is now seen as exactly what is the perception of the [EU] in this market: slow, self-directed, self-centred and not delivering,” said Ehler.

Addressing the Parliament, Panagopoulou argued the restructuring is necessary and said the Commission is moving as fast as possible with the changes.

“This includes first the restructuring of the fund into an alternative investment fund managed by [an] external fund manager as soon as possible, and then second, moving to the fund fully under indirect management by the end of the year, as it is stipulated in the Horizon Europe legal basis,” Panagopoulou said.

The Commission is currently in negotiations with the European Investment Bank over the management of the fund that are expected to be finalised in the next few weeks (the Commission has previously said the talks would conclude by 30 June.)

“I would like to reassure you that the long-term implementation structure will be agile. Cost effective, attractive to applicants and investors and governable, while at the same time respecting the legal and auditing requirements of the financial regulation,” said Panagopoulou.

But the Parliament believes the Commission’s move to a safer option goes against the grain of the Horizon Europe legislation in which the EIC is set.

That prompted the Parliament to officially intervened by announcing it is working on a report detailing the situation. It is due for discussion by ITRE on 1 September, with a final vote in November.

As part of the report, the Parliament is threatening to withhold financing from the EIC Accelerator next year. That’s €811 million, or about 70% of the EIC’s total budget. The rest of the funding for its Pathfinder and Transition programmes is not in play.

Geographical and gender balance

The Parliament’s report will not be limited to the management of the fund and will aim to advise the Commission on how to improve the EIC on multiple fronts. Ehler’s colleagues in particular highlighted the issue of geographical and gender balance during the discussion in Parliament.

Ivars Ijabs MEP, said the application process for the EIC Accelerator is, “Very complicated and very bureaucratic,” with applicants often having to consult private consultancies to send off their applications

Ijabs noted that in some member states the application process is subsidised by the government. This is increasing inequalities between the countries, which are already run deep in the Horizon Europe research programme. In the latest EIC funding round, only 12% of start-ups selected for funding came from the ‘Widening’ countries in eastern and central Europe that tend to underperform in the EU’s research programmes.

“This was not the idea initially for the [EIC] Accelerator, which was intended to be much more flexible, much more swift in terms of application processes, because those innovations just can't wait,” said Ijabs.

Gálvez also stressed the need for the Commission to do more to ensure gender balance in the ranks of EIC grantees.

Here, the Commission already gives priority invites to pitch their ideas to women-led companies. This has increased the share of women-led start-up grantees from 8% to 29% between 2020 and 2021.

Panagopoulou told the MEPs the Commission has established advisory groups on widening and gender balance within the Commission to try to find ways to tackle the divides. But Horizon Europe is an excellence-led programme and there’s only so far the Commission can go in encouraging participation from different actors, she noted.

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