House of Lords - The Multiannual Financial Framework 2014-20

The Multiannual Financial Framework 2014-20 - European Union Committee Contents

CHAPTER 5: INFRASTRUCTURE AND INNOVATION

118. This chapter considers the Commission's proposals for cross-border infrastructure, a Common Strategic Framework in research and innovation, and for providing support to SMEs, which aim to promote what the Commission has called "smart growth".

Connecting Europe

119. The Connecting Europe facility (CEF) draws together energy, transport and telecommunications infrastructure into a regime that is intended to be coherent and transparent, and more attractive to investors.

120. The CEF will see a significant increase in financial provision, resulting in a total budget of €50bn: €10bn from the cohesion budget, and €40bn specifically set aside in the CEF budget line.[122] Even excluding the €10bn earmarked for the CEF within cohesion funding, the Commission's proposals result in a budget four times that of the current equivalent programmes. The Commission further proposes to boost the impact of EU spending by attracting private-sector investment through the use of equity and risk-sharing instruments, and project bonds.

121. The Government supported the aim to simplify and rationalise the process surrounding infrastructure development, and have stated that the proposal can add EAV, but called the proposed budget "far too ambitious" at a time when they are calling for a real-terms freeze across the MFF.[123] Mark Hoban MP, the Financial Secretary to the Treasury, has stated: "We will work with our allies to cut this programme down to size, delivering fiscal restraint and value for money".[124]

122. In contrast, Director-General Jouanjean argued that the EU budget was "crucial in triggering investments needed for realising modern, cross-border networks at EU level".[125]

123. The CEPS suggested that, compared with the size of investment the CEF was expected to support, the budget line "seemed to fall short". The EESC supported the EU budget investing more in public goods, such as the CEF. BNE also advocated support for the programme, as EU-level financing would be most effective for cross-border infrastructure projects, due to national budget pressures.[126]

124. We appreciate the importance of EU-level action in these areas; however, the proposed budget will be difficult to accommodate within the MFF without radical reallocation of funds away from the CAP. We therefore call for a strategic review of the Connecting Europe facility, with European Added Value as the guiding principle, but noting that public investment should only be deployed where the market has failed to act.

125. We heard from the Department for Culture, Media and Sport that the current MFF contained no projects or proposals in relation to telecommunications, in contrast with transport and energy, and that there was "strong and ever greater emerging evidence that communications infrastructure underpinned growth and productivity". The Department for Transport also told us that the Government could "not see any real justification" for transport to be singled out to receive the greater proportion of the CEF.[127]

126. The balance between transport, energy and telecommunications spending should be a key question within a strategic review of the Connecting Europe facility. There are pressing needs across all sectors, and a focus on transport in the past does not necessarily demand the same today. We urge a greater focus on energy and telecommunications over the course of the next MFF, although there should always be a preference for direct private funding rather than subsidy from the EU budget.

127. The Commission's proposals for the Connecting Europe facility are intended to combine market-based instruments and EU direct support. The Commission hopes to see high leverage effects of innovative financial instruments being used as part of Connecting Europe,[128] which they argue will "contribute significantly" to mitigating risks and facilitating access to capital when coupled with the successful absorption of direct EU funding.[129]

128. We support the Commission's aim to increase private-sector involvement to leverage this investment. However, we would advocate a focus on substituting, rather than supplementing, EU funding where appropriate. As with all jointly funded projects, risks and rewards must also be properly apportioned between the public and private sectors.

129. Both the transport and energy guidelines of the CEF use the concept of "core corridors": coordinating mechanisms that seek to facilitate implementation by ensuring projects with the highest EU added value are given priority. The Commission's guidelines establish criteria against which to judge possible projects, and the Commission would thus have a central role in managing the Connecting Europe facility.

130. The Government conceded that this was necessary to ensure that European, rather than national, interests were at the forefront of developments. However, they were keen to ensure that Member States were fully involved in project choices and processes.[130] The COR emphasised that local and regional authorities needed "significant involvement" in supervising and managing infrastructure projects, which had not been accounted for in the proposed management arrangements.[131]

131. We accept the Commission's role regarding the oversight and coordination of infrastructure development. However, as the Connecting Europe proposal develops, it will be essential that national competences are fully respected.

Horizon 2020

132. Horizon 2020 is the financial instrument that aims to implement the Innovation Union, one of the seven Europe 2020 flagship initiatives.[132] Europe 2020 calls on Member States to spend the equivalent of 3 per cent of their annual GDP on research and development in order to keep pace with the United States and China. Across the EU, the private sector continues to provide the biggest proportion of spending in this area, and over the course of the next MFF, the Commission aims to foster the conditions that will encourage further private-sector investment in order to boost economic growth and the EU's competitiveness.

133. Horizon 2020 will supersede the Seventh Framework Programmes for Research and Technical Development (FP7)[133] while incorporating funding currently provided through the Competitiveness and Innovation Framework Programme (CIP) and the European Institute of Innovation and Technology (EIT). The proposed budget of €80bn over the next MFF represents a 46 per cent increase over comparable funding in the current MFF.[134]

134. We previously noted concerns regarding the structure of FP7, the bureaucracy surrounding grant arrangements, and the potential for fragmentation.[135] Horizon 2020 aims to establish a single set of rules, a single point of access for participants, and fewer controls and audits. By integrating elements of the CIP, the programme aims to ensure that action is directed at efforts throughout the innovation cycle, from early research through to the marketplace. It would also give a more prominent role to the European Research Council.

135. We are broadly supportive of the structure and aims of the Horizon 2020 proposal. If implemented correctly, Horizon 2020 could significantly reduce bureaucracy in the research field and help to foster innovation amongst SMEs. Furthermore, the enhanced role for the European Research Council will keep the focus on European Added Value and research-led excellence, which must be at the core of any EU research programme.

136. We previously recommended that funding in this area should be increased relative to FP7 and the MFF as a whole.[136] We have seen general support for increased funding in written evidence to this current inquiry, and in oral evidence to our Sub-Committee on Social Policies' inquiry into higher education.[137] Most witnesses to our previous inquiry also agreed that the budget for FP7's successor programme should be increased, and the Government told us that this was desirable provided that the overall envelope of the MFF did not increase.[138] However, in relation to the Commission's latest proposals, the Government have advocated greater focus within Horizon 2020, and in oral evidence HM Treasury officials suggested that outcomes could be improved even without an increased budget in this area.[139]

137. The Government noted that the UK had "done well out of FP7", but that a higher share of its funding went to higher education over industry, compared with other Member States. The Minister for Universities and Science, David Willetts MP, noted that one factor in this was that industry was discouraged from bidding for funds due to bureaucracy and the complexity of the procedure.[140] The EESC called for a more ambitious policy that linked entrepreneurship and the removal of barriers between national networks.[141]

138. We do not agree with the Government that the proposed level of spending is "unrealistic"; however, we agree that Horizon 2020 should receive a larger proportion of a smaller budget. Spending must be reprioritised to focus on growth-enhancing areas where EU funding can add most value, and spending on research clearly meets this description. We call strongly for increased budgetary provision on innovation and research to be supported at the expense of other areas, such as the CAP. We also urge the Government to do more to promote and facilitate industry's access to Horizon 2020 funds.

139. During our inquiry, we also considered whether there was a need for greater consolidation in the MFF, specifically in regard to the €60bn of cohesion funding that is earmarked for innovation. The COSLA called this a "clear and as yet unresolved demarcation issue".[142] The Government have noted that it would be possible for efforts to achieve greater consolidation and alignment to be over-extended; for example, they would not support greater consolidation between Horizon 2020 and structural funds.[143] While Horizon 2020 aims to fund excellence, cohesion funding aims to boost capacity that might eventually lead to excellence.

140. The interim review of the Seventh Framework Programmes for Research and Technical Development noted the relatively low success rates of some lower-income Member States when bidding for EU research funds, and highlighted the role of cohesion policy in raising research and innovation capacity. We therefore support efforts to achieve greater alignment between Horizon 2020 and cohesion policy instruments while retaining the important distinction between the two.

COSME

141. The Commission has proposed a new programme for supporting SMEs: Competitiveness of Enterprises and SMEs (COSME). The programme sits in Heading 1, with a proposed budget of €2.5bn for 2014-20.[144] It will replace the Entrepreneurship and Innovation strand of the current Competitiveness and Innovation Framework Programme (CIP), the rest of which will be merged into Horizon 2020 (see paragraph 133 above). The COSME programme will see a more than 60 per cent increase over the equivalent CIP components.[145] As with the CIP, COSME will not have Member-State-specific allocations; the Government estimated that, by the end of 2010, the UK had received around 10 per cent of the budget for the Entrepreneurship and Innovation strand of the CIP.[146]

142. SMEs face a number of challenges that limit their growth and competitiveness, including problems in accessing finance and exploiting new markets. EU initiatives such as the Small Business Act and the Europe 2020 strategy aim to support SMEs in overcoming these obstacles, and COSME will participate in this endeavour. It will target four key areas: improving framework conditions for the competitiveness and sustainability of EU enterprises; promoting entrepreneurship; improving access to finance for SMEs in the form of both equity and debt, including an EU-level loan facility; and improving access to markets both inside the EU and out. The Commission's proposal targets the tourism sector for "particular attention" because it makes a "significant contribution … to the Union's GDP" and has a high proportion of SMEs active in the sector.

143. The Government have expressed support for the proposal's attempt to improve framework conditions and to reduce fragmentation of the EU venture capital industry in order to improve SMEs' access to funding. However, they have argued that any additional funds for such action must be drawn from reprioritised existing EU funds.[147]

144. We support the COSME programme in principle. However, we are concerned at both the level of funding proposed, and the instrument's focus on tourism. In addition to the value offered by the tourism sector, it is important to recognise the many other sectors characterised by a high proportion of SMEs and a high level of growth potential.

145. Regarding the proposed EU-level loan facility, BNE advocated that additional funding should be provided for the SME Guarantee Facility and the High Growth and Innovative SME Facility, in order to improve SMEs' access to finance.[148] However, the Government expressed scepticism about the EU loan guarantee facilities, citing the European Court of Auditors' report of March 2011, which found that the EAV of such a facility was not conclusive, and the fact that UK banks have not made use of the loan guarantee facility, "mainly due to the perceived bureaucracy" and a more attractive national scheme (the Enterprise Finance Guarantee).[149]

146. Like the Government, we remain to be convinced that COSME's loan guarantee facility offers added value and does not simply replace national authorities' schemes.

122 Figures expressed in the Commission's proposals in current prices (COM(2011)676). Back

123 Explanatory Memorandum 16499/11, Q 33 Back

124 19 January 2012, HC Deb col. 914 Back

125 Supplementary written evidence Back

126 An EU Budget for Long Term Growth, MFF 1, MFF 4 Back

127 Q 5, Q 20, Q 7 Back

128 See Chapter 8 for more information on IFIs. Back

129 COM(2011)500/II Back

130 Explanatory Memorandum 16499/11, Q 17, Q 23 Back

131 Opinion of Committee of the Regions Back

132 See Box 1 above. Back

133 The Single Market Act in 1986 stipulated that multiannual framework programmes should be adopted to determine the main objectives and priorities for R&D. Back