Parliament and Commission lock horns over European Innovation Council delays

01 Sep 2022 | News

MEPs have finally lost patience over the 18 month delay in getting the new EU equity fund up and running. But as the gloves came off today, the Commission claimed the solution is in sight

Christian Elher, MEP. Photo: Science|Business

This morning the Parliament’s industry, research and energy committee ITRE locked horns with Signe Ratso, the Commission’s new acting director general for research on her first day in the job, accusing the Commission of not accepting it is to blame for the delays in getting equity funding flowing to high tech start-ups.

“Instead of taking the damage it caused seriously and admitting that it has an internal problem, the Commission turns to the blame game and political framing,” said the Parliament’s rapporteur for the EIC debate, Christian Ehler, who was responsible for negotiating the legal basis for the EIC as part of the Horizon Europe research programme.

Ehler has gone as far as proposing to withhold €811 million in financing from the Accelerator programme for start-ups next year, unless the Commission sorts out the management issues plaguing the equity fund. The delay in setting up the fund has meant EU start-ups promised millions in funding have been waiting for months.

“We should stop lying that we have billions available and allocate money to other sources,” Ehler told his fellow MEPs in a debate in this morning. “It‘s nothing less than a scandal. In the real world, this is causing real harm.”

Ratso promised the Commission is doing its utmost to restructure the management of the EIC Accelerator’s equity fund as soon as possible. The changes include, “the restructuring of the fund into an alternative investment fund, managed by an external fund manager” in a transitional phase, which will then be replaced by a fund fully run under indirect management by the end of the year.

“Let me reassure you that the essential features of the EIC Fund in providing timely support to start-ups and high-risk SMEs will be fully preserved, in both the transition and the long-term solution,” said Ratso.

The Commission’s rationale

The Accelerator was intended as a marked shift in support for start-ups, from providing grant funding only, to taking stakes in companies set up to commercialise outputs of publicly-funded research, closing the funding gap and promoting Europe’s technology sovereignty.

The EIC’s pilot phase launched in 2018 and ran smoothly for three years, but the European Commission quickly realised it did not have the internal resources or expertise to carry out the necessary due diligence and supervision of companies applying for equity funding.

In addition, some officials worried that making direct investments in companies directly threatens the Commission’s reputation if/when companies fail. To reduce the risk and make the programme sustainable long-term, it decided to move the management of the fund to the European Investment Bank (EIB).

However, that the transition has been halting and the delay has meant equity financing promised to companies that won competitions in the past eighteen months, cannot be given out. Most of the 65 companies that were selected for funding following a cut-off date in June 2021 have received grant funding, which complements equity financing, while those selected later in the year continue to wait.

Only one company from the 2021 batch has received equity financing, which represents the biggest chunk of the funding available. For months, the Commission has been promising a swift resolution of the problem but is yet to deliver a working solution.

In June, Ehler stepped in and announced he would get Parliament to push for a resolution to the equity fund management problem. A report he instigated is almost ready – with amendments to be made in the coming week and the committee vote on the report planned for 29 November.

In Parliament’s view, Commission infighting is to blame for the delay. The Parliament’s draft report on the situation “emphasises that the delays were completely and only the result of conflicts between different directorates general of the Commission about the management of the EIC Fund.”

But, as the Parliament is poised to push through its resolution, the Commission claims the transition solution for the fund is almost ready. According to insiders, the Commission has chosen an external manager for the fund, and a Commission spokesman confirmed to Science|Business an appointment is expected this month.

The Parliament’s solution

A solution may be in sight, but Parliament is not happy with the Commission transferring responsibility to third party management. It wants the current Investment Committee and the EIC Fund Board to retain their roles, while EIB and external fund managers carry out the day-to-day oversight of portfolio companies. And it is willing to throw a spanner in the works by withholding funding.

Meanwhile, start-ups that have been waiting for financing are stressed. Ehler recounted the story of one company that upon learning it had won EIC financing hired additional staff and invested in infrastructure in anticipation of the money coming it, but due to the delays is running out of cash. It asked a bank for an advance, backed up by a letter from the Commission saying it was due to receive EU funding, but the letter could not guarantee the money would be received before the end of the year. As a result, the bank refused to make an advance. “While the Commission is having its internal struggles, dozens of European innovators suffer,” said Ehler.

The Commission says setting up a first of its kind venture capital fund backed by EU money is a complicated process. Ehler argues the legal details under which the EIC must function have been clear since 2018, giving the Commission plenty of time to figure out how to manage the equity fund.

Now, instead of indirect management, the Parliament recommends establishing an independent union agency by 2025 to oversee the implementation of the Accelerator. Whether the Commission will consider the option remains to be seen.

“We welcome the discussion in the ITRE committee as a constructive input to the EIC. The Commission remains committed to put in place a solution for the EIC Accelerator as soon as possible,” a Commission spokesman said in response to today’s debate.

Other MEPs are on board with Ehler’s proposal. Most are in favour of setting up an independent EU agency, others even support the idea of pulling funding if the deadlock persists. “I support our rapporteur‘s idea that we should cut the funding of the EIC if no substantial changes are made,” said Ivars Ijabs from the Renew group.

On the left group in Parliament, Marisa Matias MEP also shared concerns about the future of the EIC. “It’s ironic that an instrument that is meant to be most disruptive is actually being affected by bureaucracy, and so we do worry about situations where start-ups and SMEs that were considered eligible have not had access to funds,” she said.

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