Select Committee on European Union Minutes of Evidence


Examination of Witness (Questions 240-247)

MONDAY 2 JUNE 2003

MR HEINZ ZOUREK

  240. That is fine; we are happy to look at that. It would just have been useful today to get a sense, choosing a country other than the UK, we are anxious to learn, just a scheme which the Commission regards as an example of best practice, to give us an idea of the role and the form of the Commission's activities. May I turn to one other item? You said that the north and the south in Europe differ in the extent to which enterprise and entrepreneurial activity is actually encouraged and developed. Which has the greater, the north or south?

  A. The south. You can say Greece has double the propensity to become entrepreneurs of Finland. What I must say is that we do not know whether this is intentional entrepreneurship or whether it is forced. The weaker the social security systems, the more people will be forced to become entrepreneurs because there are no safety nets they can rely on. It is not always clear that becoming an entrepreneur is a deliberate choice, because you have a plan in your head, which you want to put into practice. It might be because you have no alternative. You also have to make a distinction between becoming an entrepreneur because you have a new idea, a novelty, or because you are copying another newspaper stand somewhere else. The London Business School has produced an inventory for us of entrepreneurship and the propensity to become an entrepreneur and they really made an in-depth study into this. They were not just looking at statistics, they were undertaking interviews with people who are considered to be entrepreneurs and the definition of an entrepreneur is somebody who has been paying somebody else's salary out of their own revenue. It is not just to file an application to open a business, but it is something which is really serious. We rely on this. I am trying to find amongst the papers I have received a list of activities that we considered to be of quality or of originality.

  241. By all means send it on to us; that would be fine. You said the southern European countries tend to have more entrepreneurial activity for whatever reason. Is there any evidence that has any effect on relative GDP growth?

  A. Not that I am aware. I would have to check whether this link or correlation has been established and whether it is a causal link or not. I am not aware of such a link.

Lord Fearn

  242. It is the reverse of what the Chairman was asking. He was talking about schemes across the Member States of the EU. I am asking which schemes operating at the EU level at the moment you could identify as best practice. Are they going to be in that book you are going to send us or can you give us an example of that? Earlier on you talked about biotechnology. Would that be enhancing the commercialisation of science and technology through entrepreneurship?

  A. We do have an evaluation under way on all the financial support activities which have ever been undertaken by the Commission for small- and medium-sized enterprises. The result of that should be ready by the end of this year. We call it a strategic evaluation which covers all the activities which have been undertaken or are still in place. We do also have certain evaluations which are more focused on particular activities. I should like to mention, as a good example, the financial instruments, in particular the guarantee facility. The guarantee facility is when Community funds are put at the disposal of guarantee institutions in Member States to facilitate access to finance for small- and medium-sized enterprises which lack collateral or any other security vis-a"-vis the bank or other creditors. We have a remarkable leverage effect via this. One euro community fund invested in this creates quite a remarkable amount of access to finance for small- and medium-sized enterprises. I would consider this to be a good example. I would also consider another example to be a very helpful instrument, in particular for micro credit. We have to acknowledge that credit institutions are extremely reluctant to give out micro loans—we define them as loans up to

25,000—because of the fact that the management costs of such a loan equal those for a

250,000 loan but they cannot generate the revenue. If they were to charge the same interest or fees, it would render the credit more or less unaffordable. What we try to do is support the handling of micro credit applications so that really small enterprises, in particular when they start up, receive access to finance. This is something which I would consider to be good practice. We have learned the lesson of one programme which was designed some years ago, which looked very promising but which is not delivering at all. It is called the Joint European Venture. The idea was that two small- and medium-sized enterprises from two different current Member States would have a joint venture in one of the candidate countries. British and French small- and medium-sized enterprises go to Hungary. This was not a success because there was no a real demand. Usually there is one enterprise which wants to get a hook into the candidate country. They are not really interested in joining in a venture with somebody else, they are perhaps interested in a venture with an enterprise which is already there, or taking over, or taking a stake in an existing enterprise. I must admit also that the reporting requirements and all the additional requirements and formalities were so cumbersome for both the Commission and the enterprises who would have been eligible, that there was almost no demand for it. We have suggested such projects should not be continued because they simply do not deliver. It was a nice idea, it was a convincing idea, but the reality looks different. We use this type of evaluation as an indication for us of whether something is delivering what it is supposed to deliver and whether it is delivering at a reasonable cost and whether the whole process is effective enough for us to continue or discontinue or whether we should design new approaches. To come back to your question on what I consider to be an example of a good or bad experience, these are the two which we have evaluated most recently. However, I would ask you to watch out for the strategic evaluation reports which we are now producing for the end of the year, where we move into all the financial support mechanisms which have ever been put in place by the Commission and where we also look at something which we cannot do when we evaluate one particular programme: is there a synergy between them? It is sometimes very difficult because one service is in charge of one particular project and evaluates most of the efficiency and the cost effectiveness of it but they do not take into account the overall picture of whether something which was done five years ago is still delivering or not. On the other hand, I must admit that when we are evaluating some other projects it is extremely difficult to find the appropriate benchmark against which to measure. Sometimes we are active in areas where a multitude of factors is contributing and it is difficult to say what effect the Community action has had and whether it has been diminished by some other areas. In the biotechnology area to which you made reference, there we try to be as supportive as we can by creating the appropriate legal framework and other frameworks for enterprises who would be interested in becoming active in this area.

  243. Do you involve yourselves with banks? How do the banks liaise with you? Do you liaise with them?

  A. We liaise with banks via the European Investment Fund. We do not enter into contractual relations directly with banks; we do it via the European Investment Fund because they have the necessary expertise and they can do so. At present we are trying to establish a programme on how to continue financing biotechnology. Usually the start-up definition that we apply is up to five years after the foundation of an enterprise. If you look into the biotechnology business, you will see that the time it takes to create revenue is approximately ten years and you have an increasing demand for financing. The more advanced your biotechnological invention is, the more expensive the pre-clinical tests and all the rest. Now they would fall out of our schemes because they are no long eligible because we have this five-year rule. What we are trying to develop now is how to support biotechnology or other hi-tech businesses—biotechnology is just the most urgent one—to give them continued access to finance when they need it. At the moment venture capital firms are behaving in a rather unfortunate manner in that they have all withdrawn from financing biotechnology. There is a real scarcity of supply of finance for this industry. This is one of the market failures we would register and try to counteract. We are aware that we cannot replace financing by venture capital firms with the banks but we can at least facilitate those who are still active in this area to do so and to have an incentive.

Lord Shutt of Greetland

  244. My colleagues have been talking about strengths and I want to ask about weaknesses. You refer to the weakness in the case of the two nations plus the candidate nation. Are there any other weaker aspects which have come out of the evaluation which you want to mention to us in terms of the EU policies on entrepreneurship?

  A. As a general finding, I would say that the weakness is that the less focused a programme is, the less efficient it is, because you do not really target at a particular group of recipients. Secondly, we should avoid direct activities from the centre. You cannot possibly execute something like this centrally from Brussels and even less so when we reach 25 Member States next May. This is something where we have found that looking at all those projects which are going on, in particular financial support, in too small a detail is a drawback. I would not name particular projects now because this is best done in this evaluation report I mentioned and I would not like to commit myself. I mention some of them only because I know them and others are even worse than the ones I know about.

  245. Are there any important lessons which you want to draw to our attention which emerge from past EU evaluations which would help to design future EU policy, judge which types of policy have been least successful in the past and identify policy failures to avoid them in the future? Do you want to draw any other important lessons to our attention or do you think these are covered and will follow in the paper?

  A. They cannot possibly be covered in the paper yet because the Green Paper is always the starting point of a discussion, where we put questions rather than giving responses. What we ask is whether you share our view that this is performing better, or not? We put open questions and we have to wait until the end of this month to see what reaction we get. We will make these reactions available. The two most important conclusions that I would draw are that it is not only money which counts. Of course you cannot do without money, but it is not always the money that makes the difference, it is focusing and defining in advance what you really want to achieve. I have to admit that we are sometimes also under considerable pressure from parliamentarians in the European Parliament, who want to create another directorate because they want to sell the idea in their election campaign that they have secured another

50 million or whatever it is for the small- and medium-sized enterprises. Then it puts an enormous strain on us in working out how to administer that. The efficiency of such activities is rather questionable. It is not money in the first place, though of course we need some money. We do not ask for much more and we think we could continue with what we have; perhaps do one thing more. The second point is that what we think is that from this open network of co-ordination and a determined effort by Member States we have now learned to listen to others. This is not done to name and shame, but rather to be open that others are doing things in different ways and that some of the main ideas behind them are perhaps of value for others. You cannot copy one scheme in another Member State, but some of the basic ideas which are behind them are of great help. Our experience is that this act of mutual learning has brought about some considerable change and it even developed some kind of peer pressure because if you are the one Member State which takes the longest to establish a business and after one year everyone else round the table can report that they have reduced the time by one third and you say you have extended it, this is something which Ministers do not like to do in the Council. So we have produced this in a rather sketchy manner so that Ministers could exchange views on this. I consider that it is this mindset of Member States, that although it is not a Community competence, they could not learn from others, which is the most important ingredient for a successful enterprise policy.

Chairman

  246. In evidence to a committee in the other place in this palace, the minister responsible in the Department of Trade and Industry for small enterprises, Nigel Griffiths, told members of the House of Commons that he was concerned that the Commission was being very difficult about the Small Business Service business incubation fund. This is a scheme to help small businesses get going. He expressed concern that large amounts of state aid to declining industries seemed to get through the Commission okay, but when we tried to help small businesses in a particular way, the Commission had been raising some problems. You may not have this information at your fingertips but it would be helpful if you could send us a note on how the Small Business Service business incubation fund problem is progressing. Is it a problem which is being overcome? I will just leave that with you. You have emphasised a number of times that the Commission feels really that it does not want to get involved directly in more and more schemes. It sees its role principally as one of identifying best practice, of gaps, helping people, helping countries to learn from each other and so on, always with the impetus of helping the European Union Member States to become more competitive compared with the United States. I have to say I share that view and I welcome those remarks. I am always puzzled why the European Investment Fund then gets involved in small business loan guarantee schemes. What on earth is that to do with the European Union? Each Member State is perfectly able or not, if it observes good practice, to have a small business loan guarantee scheme. I am always puzzled why the Commission does not tell the European Investment Fund that this is not really a job for a European institution and they should let the Member States get on with it, or not, and the Commission will tell them about best practice. Why is it? Is that historical? If it did not exist today, the spirit of your remarks to us is that you certainly would not be setting it up now. I just wonder how you feel about that.

  A. I am afraid I cannot respond to the first question because it seems to be a question in relation to state aid, approval of a scheme, which I must admit is a different service and is a question of the legal assessment of the compatibility of a particular scheme with the state aid rules. In principle the Commission supports incubators and incubator systems because one of our best projects was exactly devoted to incubators and there we see the added value at European level because we have established a database which is regularly kept up to date on incubators active in Europe. Those incubators which are active in one particular sector of the economy could find allies in other Member States and also support institutions in Member States could have easy access through the available incubators. They are only listed in this database when they meet certain requirements and pass tests. This is not just a list of internet connections, this is something which has some kind of quality standards. On the reason why the European Investment Fund is active in the guarantee, first of all you take it for granted that such a scheme is available everywhere, but it has not been. With the help of the European Investment Fund, entities in Member States where no state scheme was available could then afford to become active. It has also been supported by Member States, because to design the guarantee facility is not something which the Commission can decide on its own. It is this co-ordination we were speaking about at the beginning of this meeting that Member States tell us into what area to go and where not to go and how to do this. This has been a kind of request from Member States to develop a guarantee scheme, to facilitate access by small businesses to financing. The European Investment Fund had the advantage of bundling the knowledge and the competence, because the Investment Fund has a remarkably small staff, some 60 or 70 people only, but they are in possession of good know-how on which scheme in which Member State would be fit to help small- and medium-sized enterprises. We do not want to continue with such activities for all eternity. The sooner we get the ball rolling and it is supported by Member States the better, but I would not like to punish small- and medium-sized enterprises which do not have access to guarantees just because of this consideration that it is not up to us. We found that this is one very efficient instrument to help quite a considerable number of small- and medium-sized enterprises in Europe.

  247. That is a very positive note on which to finish. Is there anything you would like to add?

  A. No. Thank you for devoting so much time to this issue, which I consider to be extremely important and I am really honoured that I can present a part of our activities to you. I look forward to the contributions we will receive to our Green Paper and I can only say that we will take on board as much as we can from the comments and from those we receive from you.

  Chairman: The pleasure is ours. We were delighted when you issued your Green Paper. We wish you well in helping promote enterprise and entrepreneurship across Europe and we look forward in due course to your own consideration of the responses you get. Thank you for coming today.





 
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