In December 2014, the EU Commission R&D scoreboard reported that investment in research and development by EU based companies grew by 2.6 per cent in 2013. This growth is below the 2013 world average of 4.9 per cent. It also lags behind companies based in the US (five per cent) and Japan (5.5 per cent).
These R&D trends come as no surprise, as they have been persistent year on year. It is against this backdrop that the EU Commission launched the Horizon 2020 programme in December 2013.
Under this R&D funding programme the Commission allocated €80 billion over the years 2014 to 2020 to co-finance R&D investments championed by European companies. Figures show that EU-based companies invested €162 billion in 2013. Thus the question becomes inevitable: how far will €80 billion over seven years take us?
Taking into consideration these funding limitations, the Commission together with the European Investment Bank developed the InnovFin financial instrument to finance EU-based R&D companies through local banks and equity providers. InnovFin seeks to place Horizon 2020 funds in the form of guarantees to leverage private funds from debt and equity providers. InnovFin is expected to make over €24 billion of debt and equity financing available to innovative companies to support €48 billion of research and innovation investments across Europe.
The eligibility criteria for SMEs… restrict the total number of potential Maltese applicants for such a financial instrument
Analysing R&D projects from the perspective of a financial services provider, such investments are not particularly appealing due to their high risk profile. Banks shy away from financing such projects with the result that potentially good ideas never make it to the market, or fail due to the lack of a proper funding structure.
Cognisant of this mismatch, Bank of Valletta through its EU Representative office, analysed the possibility of implementing an InnovFin financial instrument in Malta. The provision of an InnovFin guarantee would enable the bank to consider higher risk profile SMEs with R&D investment projects. However, the eligibility criteria for SMEs to benefit under the InnovFin financial instrument restrict the total number of potential Maltese applicants for such a financial instrument. The small number of eligible applicants does not provide the required critical mass to develop a standalone InnovFin financial instrument in Malta.
However, the SME Initiative financial instrument was identified by the relevant stakeholders as a possible solution for the Maltese market to entice Maltese banks to consider financing the small number of eligible SME R&D projects. The SME Initiative is the first EU financial instrument which makes use of the new principle under the 2014-2020 Structure Funds regulations (i.e. article 39(2) of EU Regulation 1303/2013) which permits the pooling of different financial contributions into a single financial instrument set up at a European Union level.
The SME Initiative blends European Regional Development Funds with Horizon 2020 funds and funds from the European Investment Bank. These funds will be used to provide a single guarantee to Maltese financial institutions to finance SMEs as well as a handful of R&D SMEs.
Using the option of pooling Horizon 2020 funds into the SME Initiative is enabling Malta to benefit from a portion of Horizon 2020 InnovFin funding even though Malta does not have the critical mass to create a standalone InnovFin portfolio.
The option of pooling different EU funds into a single financial instrument under the new programming period proves to be an attractive proposition for small member states like Malta.
Mark Scicluna Bartoli is the head of EU and institutional affairs at Bank of Valletta and is also responsible for its EU Representative Office in Brussels.