House of Commons - European Scrutiny

Select Committee on European Scrutiny Thirtieth Report

11 Competitiveness and Innovation Framework Programme (2007-2013)

(26495)

8081/05

+ ADD 1

COM(05)121

Draft Decision establishing a Competitiveness and Innovation Framework Programme (2007-2013) plus Commission staff working document

Legal base Articles 156, 157(3) and 175(1) EC; co-decision; QMV

Department Trade and Industry

Basis of consideration Minister's letter of 22 May 2006

Previous Committee Report HC 34-xx (2005-06), para 9 (1 March 2006) and HC 34-i (2005-06), para 20 (4 July 2005); also see HC 38-v (2004-05), para 10 (26 January 2005)

To be discussed in Council 29 May 2006 Competitiveness Council

Committee's assessment Politically important

Committee's decision Cleared

Background

11.1 In its Communication of February 2005 on a renewed Lisbon strategy,[30] the Commission proposes to focus efforts on "delivering stronger and lasting growth and creating more and better jobs". It calls for actions to deliver growth and competitiveness and to make Europe a more attractive place to invest and work. It emphasizes the need to stimulate entrepreneurial initiative, attract sufficient risk capital to start up businesses, and sustain a strong European industrial base whilst facilitating innovation and notably eco-innovation, more and better investment in education and training, the uptake of ICT and the sustainable use of resources.

The Competitiveness and Innovation Programme (CIP)

11.2 According to the Commission, the Competitiveness and Innovation Framework Programme (2007-13) "will bring together into a common framework specific Community support programmes and relevant parts of other Community programmes in fields critical to boosting European productivity, innovation capacity and sustainable growth, whilst simultaneously addressing complementary environmental concerns".[31] The CIP is designed to replace the 2001-06 Multi-Annual Programme for Enterprise and Entrepreneurship (MAP) and aims, in the context of the Lisbon Agenda, to improve the overall business environment in particular for small and medium-sized enterprises (SMEs).

11.3 The CIP would have three sub-programmes — the MAP and those existing Community programmes that currently contain actions in the areas of innovation and eco-innovation in an Entrepreneurship and Innovation Programme (EIP); an ICT Policy Support Programme to promote greater Information and Communication Technologies uptake; and better use and innovative development of energy resources in an expanded Intelligent Energy-Europe Programme. Overall, there would be a greatly expanded budget of €4.2 billion (€2.6 billion for the EIP and €802 million for ICT support and €780 million for "Intelligent Energy", compared with €450 million for MAP). Three funding instruments would be managed by the European Investment Fund: a High Growth and Innovation SME Facility, to make venture capital available to SMEs at the start-up and expansion phases and for those that demonstrate high growth potential in innovation; an SME Guarantee Facility which will provide guarantees to financial institutions making loan facilities available to SMEs; and a Capacity Building Scheme, to improve the expertise of financial institutions investing in SMEs. The Commission argues that such a CIP achieves greater coherence and maximises the potential for exploiting synergies.

11.4 The proposal says that the CIP will provide "a significant and coherent legal basis for Community actions which share the overarching objectives of enhancing competitiveness and innovation" and will be more visible and comprehensible for the public. The specific sub-programmes are required because the CIP objectives and target groups are diverse and of "the need to maintain the visibility of its individual components".

11.5 The proposal discusses at length the CIP's complementarity with the Structural Funds and Rural Development Policy. The Commission will propose "Community Strategic Guidelines on cohesion, which will set out how EU-level priorities — including competitiveness and innovation — should be taken into account by the national and regional authorities responsible for managing structural funds" and will "strongly encourage managing authorities to pursue investments that are complementary to EU competitiveness and innovation policy … Similar considerations hold for many interventions of the new Rural Development Policy."[32]

11.6 The CIP will also complement the 7th Framework Programme for Research, Technological Development and Demonstration (FP7-RTD) and the Integrated Action Programme in the field of Lifelong Learning, as well as facilitating interconnection with the Trans-European Networks for Transport, Energy and Telecommunications.[33]

11.7 A fuller summary of the proposal and our assessment is contained in the Report of our 4 July 2005 meeting.[34] There, we noted that no real attempt had been made to explore alternatives or to demonstrate how this approach was likely to be any more successful than the MAP, where progress was described as "at best patchy". Instead, the essence of a variety of assertions was that the Commission alone was capable of addressing various "market failures" and, by virtue of expanding its involvement, would facilitate outcomes that had not arisen hitherto, e.g. significantly enhanced ICT take-up. This was validated by a consultation exercise whose outcome was essentially predetermined, since it involved "stakeholders" who, as the main beneficiaries, were unlikely to contest the programme's impeccable objectives (closing the SME innovation and ICT takeup gap) or the proposed solution. Although regarding the programme as "a positive step in the right direction", the then Minister had a number of reservations about the financial instruments, the shape of the programme and its potential for overlap with other instruments. As with other proposals dependent on the new Financial Perspective, the Committee kept the document under scrutiny until the final shape of the Financial Perspective was clearer.

11.8 In a lengthy letter and the UK Presidency's Progress report to the November 2005 Competitiveness Council, the then Minister sought to address, where possible, the Committee's points. He acknowledged that MAP was its own worst enemy because of poor evaluation and that the CIP was poorly drafted and confusing. But he noted a strong pan-European political will for CIP, including in the European Parliament, and argued that the CIP had the right mix of ingredients and actions to support SMEs and the potential to be more than merely a re-branding exercise of the merged programmes, provided certain amendments were driven through in negotiation. He had therefore concentrated on introducing greater clarity and ensuring: clear differentiation between the CIP, the Structural Funds and the 7^th RTD Framework Programme; that the management arrangements would eschew the Commission's original "silo" thinking and instead be comprehensive and promote synergies; and that, by containing proper evaluation mechanisms, the CIP would inform any successor in ways in which MAP could not. He also argued persuasively, along with the networking arrangements that will facilitate information- and best practice-sharing and intra-SME collaboration, for the role of public funding in promoting SME development, especially in the risky, innovative areas that the Lisbon Agenda was seeking to encourage; and dealt fully with our earlier observations regarding the use of Commission funds to back financial investments in SMEs and the role of tax incentives. Though there would be advantages in pulling together the existing ICT programmes within CIP's ICT Policy Support Programme, he agreed that such activity should not need a budget of €800m.

11.9 Finally, on the immediate timetable, the Minister said, given the outstanding budget issues, the Austrian Presidency was focussing on textual amendments (and had successfully taken forward all of the recommended amendments called for in the UK Presidency's progress report); were to table a revised text for the whole programme for Partial General Approach at the 13 March Competitiveness Council; and would then concentrate on agreeing budget priorities and making any further related textual amendments with the aim of reaching Political Agreement at either the May or June Competitiveness Council.

11.10 Notwithstanding this exhaustive, thorough and persuasive Report, from which it was clear that the UK Presidency had been used to good effect in giving effect to the sort of CIP that we, and clearly he, had in mind when first confronted by the Commission proposal, we noted that, even so, it was still not entirely clear, despite the examples given in the Presidency paper, how complementarity would be achieved, and overlap avoided, between the Structural Funds, the 7^th RTD Framework Programme and the CIP. Against this background, we did not object to the Minister participating in the Partial General Approach, on the condition that the budgetary provisions remained under scrutiny and were excluded from the General Approach, and that he provided further progress reports on the various outstanding issues which remained under negotiation or were still subject to further clarification regarding the final size and shape of the programme and measures to ensure complementarity and avoid overlap with other instruments.[35]

The Minister's letter

11.11 A further exhaustive response is contained in a letter of 22 May 2006 from the Minister of State for Industry and the Regions (Margaret Hodge), as follows:

"I am now writing to provide you with details of the final budget figures and the timetable for 1^st reading agreement. I will also try to answer those few remaining questions your Committee has, notably with respect to the complimentarity between CIP and the incoming 7^th Framework Programme for Research and Technological Development and Structural Funds.

"Following the provisional Inter-Institutional agreement on the 2007-13 Financial Perspectives (FP) in early April this year, the Commission released an initial headline budget figure for CIP on the 12^th of April. This was for €3.3bn, a cut of €930m, which Alun Michael referred to in his letter to you on the 18^th of April. At that point the Commission had still not released a detailed breakdown of the allocation of funds across the constituent parts of the programme. A full budget package was published on the 24^th of April. However, this showed the final figure for CIP to be €3.6bn. In COREPER[36] on the 26^th of April the Commission was criticised by a number of delegations, led by the UK, for not presenting the correct figure of €3.6bn on the 12^th of April. This was due to the first figure being expressed in 2004 terms, as was the whole 2007-13 FP agreement (see Annex B to this letter),[37] and the final figure was expressed properly in 2006 terms. I apologise that in turn the Government was not able to give you the correct figure in Alun's April letter to you.

BUDGET

"I set out the Government's position on the main elements of the budget in Annex A to this letter.[38] In summary I am pleased to say that following interdepartmental dialogue and consensus, the Government is content with the overall CIP budget figure of €3.6bn. With respect to the allocation of funds across the constituent parts of the programme officials in DTI, DEFRA and HMT agreed that the balance was pretty much what the Government would have realistically aimed for. This is also within the context of an overall European budget increased only marginally from that proposed by the UK Presidency for the December 2005 European Council.

"On the whole the UK's main negotiation priorities for changes to the proposal have been met and although there are few areas where we would have preferred a slight shift in the provision of funds between different CIP instruments, I am satisfied that this is a reasonable compromise package that the Government accepts.

TIMETABLE

"The timetable for signing off CIP at 1^st Reading Agreement, has proven to be very tight indeed, as I will explain. Although the Council agreed a figure for the Financial Perspectives in December from which it was possible predict the possible level of cut to the CIP proposal, the Austrian Presidency took a hard line and did not allow discussions on the budget to begin until both the Council and the EP had agreed the FP and until a confirmed figure for CIP was known. Austria feared that if they opened negotiations on the CIP budget based on expected cuts, it would make it very difficult to successfully manage negotiations and progress discussions on the necessary textual amendments in a tight timescale. As a result they focussed on textual amendments, taking forward those recommended by the UK Presidency, and very successfully won agreement from all delegations on these instead at the March Competitiveness Council.

"As I have said, the Commission did not release its final figure for CIP and the budget breakdown until 24^th April. The Austrians came under immediate pressure from the European Parliament to conclude Council negotiations as early as possible before the end of their Presidency. The EP is largely content with both the text of CIP agreed at the March Council meeting, and with the budget. Given the backlog of proposals for clearing as a result of the delayed agreement on the FP, the EP want to have those proposals that are generally regarded as uncontroversial cleared away very swiftly.

"In order for the Presidency to meet this ambitious timetable they had to ensure that the Council had given its approval for both the text (with minor revisions by the EP post Competitiveness Council) and budget at senior official level in COREPER on the 26^th of April, two days after the details of the CIP budget was made available. This would then enable to the Presidency to pass the proposal over to the Parliament to begin its final stages of sign off at the EP's Committee meeting on the 3^rd of May.

"Urgent telephone calls were made by the Presidency (and for us by UKREP) between the 24^th and 26^th of April to gauge delegations initial reactions to the budget figures and whether delegations would be content to progress so swiftly to COREPER. All Member States were willing to do so, though most expressed frustration with the Commission for the timing of the release of the budget as this has given no opportunity for detailed discussion on the figures.

"The text of the proposal is not significantly changed from the version that received partial general approach in March and the Government, like all delegations, is content. Consequently, at COREPER all delegations lifted their scrutiny reserves with the exception of the UK. At your Committee's request we have maintained the reserve on the budget. As the Commission and, following their Committee meeting on the 3^rd of May, the EP are content with the CIP package, the Presidency fully expects CIP to endorsed at the 1^st June Plenary of the EP. It is intended that CIP will be tabled as an 'A' point for agreement without further discussion at a Council meeting in June, exact details have not been finalised by the Presidency.

UK NEGOTIATIONS ON TEXTUAL AMENDMENTS

"In your Committee's report dated 1^st March 2006, I note that the Committee was satisfied that the Government had — during the UK Presidency's handling of this dossier, and latterly in negotiations under the Austrians — ensured that CIP would operate in line with UK thinking. If I may I would like to underline that the UK's key negotiating objectives have been met.

The Government accepts the budget which is within the context of an overall European budget increased only marginally from that proposed by the UK Presidency for the December 2005 European Council.
Risk capital support is the dominant financial instrument with clear political backing supporting its ongoing development.
The evaluation processes and methodologies that will be carried out for CIP are now considerably stronger than originally proposed as a direct result of UK interventions.
Similarly, as a consequence of the UK prioritising the management structure during our Presidency, my officials have been able to secure in the legal text, that the Management Committee for the Entrepreneurship and Innovation sub-programme (which has lead responsibility in CIP for promoting entrepreneurship, SMEs, and innovation and the financial instruments), will have an overarching strategic management role. This should help ensure appropriate coordination, focus and complimentary actions across all parts of CIP.
Ensured that the legal text sets out clear objectives for eco-innovation actions. The Commission's proposal unhelpfully merged these with wider entrepreneurship and innovation actions.
Clarified that all of CIP's instruments can be used to fulfil any objective as determined by the Management Committees (on which all Member States will represented).
Clarified that CIP will complement the new 7^th Framework Programme for Research and Technological Development (FP7) and Structural Funds.

"On this last point, I note that your Committee requested further explanation of how complimentarity would be achieved between CIP and FP7 and Structural Funds (namely the European Regional Development Fund).

"With respect to complimentarity between CIP and FP7, the text of CIP now states that CIP will: 'exclude research and technological development activities carried out in accordance with Article 166 of the Treaty. It should be complementary to' FP7 'by dealing with innovation, which includes non-technological as well as technological innovation, that has moved beyond the final demonstration phase and is ready for market replication'. This requires CIP's instruments to be orientated differently to FP7 to effectively pick up where FP7 finishes. Similarly, my officials have ensured that similar text is included in the FP7 legal text. This reads: 'During the implementation of the Community RTD Framework Programme, complimentarity and synergy will be ensured with the actions of the Competitiveness and Innovation Framework Programme'. Additionally, as I note in paragraph 13 of my report to you, the new network of information and support to businesses will be specifically funded to promote and signpost FP7 opportunities for SMEs.

"Turning to structural funds, we have confirmed that the Structural Fund Regulations prohibit the 'double-funding' of a project — this will remain the case for the proposed regulations that are currently subject to negotiations — and the text of CIP makes this explicit. In practice, this means that Member States cannot use structural fund money and funds from other Community instruments such as CIP to co-finance the same stage of a project. They can, however, use both funds for different stages of the same project: i.e., structural funds for infrastructure set up and CIP for ongoing project support and development. Examples to illustrate this point are provided in the Presidency Paper.

"Although we have confirmed that double funding is not permitted, it is possible that some Member States will opt to utilize structural fund cash in preference to CIP, or use structural funds and CIP funds for different projects. This could mean that in some Member States CIP will face competition from an alternative EU source. However, the Commission point out that because it is for Member States to decide how they use structural funds, support for entrepreneurs could be patchy across Europe unless alternative consistent provision is available. Accordingly, the only way to guarantee that support is provided equally to all EU entrepreneurs/high growth SMEs (to bridge the gap between research and the market place and drive up competitiveness and innovation) is through a Community instrument like CIP.

"Whilst we accept this argument, we remain keen to ensure that structural fund access to finance instruments are managed effectively alongside those administered by CIP, possibly by the European Investment Fund. My officials are in ongoing discussions on this matter.

NEXT STEPS

"I appreciate that your Committee may find this timetable frustrating. Interdepartmental officials have used the period since the end of April to consider the budget fully so that I can present you with a reasonably detailed appraisal of this final package. I hope that this is helpful.

"The next Competitiveness Council will be held on the 29^th of May. The Presidency has decided to give a presentation on the state of play for CIP then. As you know, the UK has been instrumental in successfully leading this dossier through its textual negotiations both during our Presidency and latterly by working closely with the Austrians. Given that we have been instrumental in ensuring that CIP is now a considerably stronger initiative than when the Commission presented its proposal, I would very much like us to be able to signal to the Presidency, for the 29^th, that our reserve is lifted."

Conclusion

11.12 As noted above, we were satisfied from the Minister's predecessor's earlier letter that a good case had been made for a CIP and that the UK Presidency had been successful in negotiating much-improved management arrangements.

11.13 We are grateful to the Minister, and to her predecessor and their officials, for this further very detailed and comprehensive analysis of the negotiations since last February. Not everything has been achieved that we, and they, would have liked to have seen achieved, particularly with regard to the overall size of the programme and especially of the ICT Policy Support component. But that is in the nature of negotiation, especially in an area involving qualified majority voting and co-decision. Moreover, we agree with her that the bulk of our shared objections to the Commission's initial proposal have been overcome, and that the final programme holds out the prospect of a much better managed and evaluated programme than its predecessor. We can but hope that we or our successors will see clear evidence, when the first evaluation is produced, both as to the achievement of the Lisbon goals in this area and of the CIP's contribution to their achievement.

11.14 We now finally clear the document from scrutiny.

Annex I

GOVERNMENT POSITION ON THE CIP BUDGET, (APPENDED TO MINISTER'S LETTER)

1. The table below shows the allocation of the CIP budget pre and post agreement of the Financial Perspectives. In the following sections I set out the Government's view on the final allocation across each of the three CIP sub-programmes. This also includes some additional information to illustrate why much of this final budget has been orientated towards addressing energy and environmental concerns.

Initial CIP
Proposal
Final CIP
Budget

Enterprise and Innovation Sub-Programme (EIP) 2,631,000,000 2,172,000,000

Financial Instruments 1,036,000,000 1,133,000,000

* Risk Capital Instruments including for eco-innovation 508,000,000 554,000,000

* Loan Guarantee Instruments 468,000,000 506,000,000

* Capacity Building Scheme, including for eco-innovation 60,000,000 73,000,000

Promote creation of an environment favourable to SME co-operation 570,000,000 408,000,000

Promoting and supporting business innovation (including eco-innovation) — including market replication 733,000,000 365,000,000

Promote entrepreneurship and innovation culture, a business environment favourable to innovation, enterprise development and growth and related economic and administrative reform 292,000,000 266,000,000

Intelligent Energy-Europe Sub-Programme 780,000,000 721,000,000

ICT Support Sub-Programme 801,600,000 729,200,000

Total: €4,212,600,000 €3,622,200,000

ENTREPRENEURSHIP AND INNOVATION PROGRAMME - €2,172BN

2. The Entrepreneurship and Innovation Programme can be broken down into four main areas of support that are principally focussed on SMEs (in particular high growth innovative SMEs) and stimulating innovation. In the Commission's original proposal funding for these areas collectively amounted to €2,631m or 60% of the overall CIP budget. This proportion of the budget has remained the same, now set at €2,172m.

FINANCIAL INSTRUMENTS (€1,133M)

3. During negotiations on the text of the proposal the UK strongly argued the case for risk capital instruments and listened to other Member States' views, though no decisions on the budget were taken at that time. Nevertheless, although we have not had the opportunity to negotiate on the budget, our initial input, together with our wider efforts during the UK Presidency such as the Risk Capital Conference, have paid off. The allocation of funds across the financial instruments as a whole is now in fact largely in line with what we would have expected given other delegation positions.

4. As a consequence of this and wider political backing, overall the financial instruments have been further increased in funding from the Commission's original proposal figure of €1,036m to €1,133m an increase of 9%. Of this total €554m goes to risk capital (which includes €165m allocated to eco-innovation support), €506m goes to loans guarantees, and €73m for the Capacity Building Scheme (which includes €63m allocated to eco-innovation). This reflects both the political commitment made by Commissioner Verheugen to ensure that these financial instruments, in their entirety, were safeguarded, and wider political support for stimulating new 'green' technologies.

RISK CAPITAL (€554M)

5. I am pleased that risk capital has the highest level of funding in CIP (€554m) and that it received a bigger percentage increase than Loans Guarantees following the change in budget. This is an acceptable result. Both the UK Presidency's 2005 Risk Capital Summit and the 2005 Hampton Court Heads of State Informal pointed to the need to improve the supply of risk capital across Europe as a way of increasing levels of innovation, enterprise and entrepreneurship and thereby European productivity. Furthermore, as Alun Michael pointed out in his February letter to your Committee, the priority need for risk capital was also underlined in the 'Aho Report'.

6. Given that background, the Government would have preferred even more for risk capital and less for loans guarantees: as Alun's letter illustrated, the British Venture Capital Association's (BVCA's) data reflects a need for a high level of public funding and less for loans guarantees. Indeed more recent data from the BVCA's Report on Investment Activity 2005 highlights the fact that even though, for BVCA members, worldwide investment by private equity (including venture capital) increased by 21% from 2004 to 2005, only 2% of total investment went to companies being financed at the start-up stage. The BVCA reports the biggest increase in funding going to expansion stage investment, management buy-outs and management buy-ins. Clearly there is a continued need for a strong public sector engagement at the early stages of financing both to ensure the availability of the necessary risk capital finance for our fledgling SMEs and to demonstrate the returns that can be achieved in order to encourage the private sector back into this area and thereby develop sustainable capital markets. DG ECFIN's March 2006 report on 'Profitability of venture capital investment in Europe and the United States' pointed to the volume of funds raised for future European venture capital investment having declined since 2000 yet evidence clearly also points to the priority need for risk capital.

LOAN GUARANTEES (€504M)

7. Although from a UK perspective the arguments for risk capital is strong, in other Member States the provision of debt finance in the form of guarantees will, at the moment, constitute the bulk of demand from their SMEs. Indeed, we must acknowledge that for a great many other Member States their risk capital markets are not as well developed as ours and for newer countries to the EU the debt finance route may be, in the short to medium term, the most pragmatic way of increasing access to finance. For example, other than the traditionally manufacturing orientated older Member States like France, Spain and Italy who have long backed loan guarantees, it is difficult to see the Poles, Baltic States, Czech and Slovak Republics signing up to anything that does not ensure suitable provision in this area, and they have said so.

8. Accordingly, in the Government's view, the figure of €506m for loans guarantees is high but understandable. What is key is that the loan guarantees figure of €506m is some €48m lower than the risk capital instruments and I hope that this sets the scene for the future. Of the total amount for loan guarantees €46m is for securitization. While the Government is opposed to bank securitization, we do acknowledge that the UK has one of the most mature and secure banking sectors in the EU. The situation in other Member States is different both in terms of maturity and security so I accept there is some need for this measure.

9. I am aware that your Committee was concerned that under the Multi Annual Programme (MAP) the UK did not make use of the loan guarantees mechanism. This is primarily because we did not consider it appropriate for our national Small Firms Loan Guarantee (SFLG) programme, which operates through the small business lending activities of the banks and other financial institutions, to be burdened by the bureaucracy of additional reporting requirements at the level of each individual loan imposed by the Commission. In order to ensure that the UK does better under CIP I have asked my officials to continue their discussions with the EIF to ensure that the procedures implemented for the operation of future guarantee assistance are compatible with the UK's SFLG programme. I will keep you informed.

CAPACITY BUILDING SCHEME (€73M)

10. The Capacity Building Scheme (CBS) covers both actions to support institutions developing their risk capital expertise and the provision of small seed capital grants. Generally the Government thinks the risk capital industry will do its own capacity building as part of a rational decision-making process when seeking good returns for investors and, as a consequence, the UK is not on the whole an advocate for support in this area. I am thus pleased that the CBS still forms only a small percentage of the overall financial allocation despite its increase on the Commission's original figure. The Government accepts that the reason for this is to mainly concentrate support for eco-innovation and to fulfil the wider political backing for action in this area. Of the €73m for CBS, €53m will be allocated specifically for partnership actions to help develop eco-innovation fund management expertise, and €10m for eco-innovation seed capital grants. The Government accepts that it will be important to support improved expertise in this area particularly for other parts of the EU where there are less sophisticated markets. The remaining €10m of the CBS is for other seed capital grants. Seed capital grants carries on from a similar scheme operating under the previous MAP regime. We expressed concern that the previous intervention did not have robust enough evaluation to justify its continuance in MAP. However, given the very restricted amount of resource now allocated to it (€20m in total) and the support it has with other Member States, we can accept it.

SUMMARY

11. Overall, it is the Government's view that the financial instruments supported by CIP, in particular the emphasis on risk capital, should help those Member States (who lack the range of banks and sophisticated players to provide risk capital other than via the European Investment Bank) to shift their focus in the course of the next seven years and be more in line with our own approach. Furthermore, given that under the MAP risk capital received less than loans guarantees, I think we have to acknowledge that our arguments for increasing the proportion for risk capital have effectively been met. They also explicitly include the need to increase investment volumes of risk capital funds and investment vehicles provided by business angels.

INFORMATION AND ADVICE SERVICES — A PAN-EUROPEAN NETWORK OF ADVICE CENTRES — AND SUPPLEMENTARY ACTIONS (€408M)

12. Under CIP a new more integrated European network will be created to provide information and advice to businesses. The network will bring together the existing Euro Info Centres from the Multi Annual Programme and the Innovation Relay Centres currently funded by the 6^th Framework Programme for Research and Technical Development. In doing so the Commission will create a more integrated network that can provide information on business, innovation and technology transfer opportunities in Europe. This should provide significant advantages for SMEs over the present system.

13. Firstly it should improve ease of access to EU business and innovation information support by a broader network offices for entrepreneurs to turn to. Furthermore, no office will be a 'wrong door': each will be able provide an answer or easily refer the customer to the correct destination. Additionally, the network will provide better promotion and signposting for SMEs of opportunities in the 7^th Framework Programme for Research and Technological Development. It will also provide centres of expertise that will provide help to businesses wanting to develop a researched idea into a marketable product.

14. In the Commission's original proposal, network services were principally to be funded by €570m. Following the budget cut this figure has been reduced by nearly 28% to €408m though this includes a very small amount €14m for supplementary actions. The Government can accept this reduced figure. It is still significant enough to be a direct reflection of the political importance placed on the provision of advice to business, especially SMEs, by Commissioner Verheugen and Member States: I understand that in working group debates some delegations became quite passionate in their support for this service. The overall Council will is to see this network supported and resourced to be more properly effective than is currently the case. Additionally, it is expected that it will act as a conduit for SMEs to give feedback to the Commission on its future proposals and in doing so help improve EU better regulation processes.

15. The Government accepts these arguments. However, I think it is important that the new network fits neatly with domestic advice providers. To that end my officials have already held meetings with current representatives of the UK EICs and IRCs, Business Link and UK Trade and Investment to explore how services have meshed up to now and what needs to done to prepare for the new network. The aim is to ensure seamless support and that UK businesses are provided with an excellent overall service. This work is ongoing.

PROMOTING AND SUPPORTING BUSINESS INNOVATION — INCLUDING MARKET REPLICATION (€365M)

16. In the Commission's original proposal €733m was set aside for both the bulk of the actions coming into CIP from the 6^th Framework Programme for Research and Technological Development and for 'market replication' actions from LIFE Environment (market replication is the provision of funds to businesses that want to test innovative technologies, or the new application of existing technologies, in the market place). Collectively it is intended that support will be geared towards promoting and stimulating business innovation.

17. Following the budget cut, this figure has been reduced by approximately 50% to €365m. Of that, €195m remains for market replication. This is an important component of CIP for helping to bridge the gap between research and the market place for innovations. The Commission have said that most of the €195m will be used for testing eco-innovations and the Government supports this, but part of this figure will be available for innovative technologies other than eco-innovation. Additionally, the Commission have said that they expect to recommend to the Management Committees that up to 40% of the budget for Intelligent Energy-Europe (IEE) is used to support funding for both energy and eco-innovation projects. Consequently, in practice, the amount of money for market replication could be higher for both the testing of 'green' innovative technologies and leave more money available for general innovations. I have asked my officials to pursue this once the Management Committees have been established. (I set out more details for IEE and eco-innovation below.)

18. I am pleased to report that the bulk of the cut to this innovation support part of CIP has been to those actions that were not aimed directly towards to business. These included a new initiative involving twinning actions between authorities responsible for innovation policies. During negotiations on the text my officials argued that these actions should have significantly reduced funding as they were not of direct benefit to business, in particular SMEs. The remaining figure of €170m will be allocated to initiatives such as the Intellectual Property Rights Helpdesk designed to support organisations, especially SMEs, protect new innovations, and a range of other measures to help promote and stimulate innovation, such as support for eco-innovation clusters.

19. Overall, whilst the Government would have preferred a clearer picture on the spend for market replication, I am content that the real areas where we had misgivings have been significantly reduced. As the result largely increases the focus on support to business, the Government can accept this budget change.

PROJECTS SUPPORTING BEST PRACTICE SHARING AND ECONOMIC AND ADMINISTRATIVE REFORM (€266M)

20. Within both the existing Multi Annual Programme and 6^th Framework Programme for Research and Technological Development a wide range of projects have been undertaken to examine Member State initiatives and policies for promoting entrepreneurship, SMEs and innovation with the aim of stimulating and rolling out best practice across the EU.

21. The UK has played an active role participating in almost all project initiatives - responding to requests for data/information, contributing to studies, benchmarking and participating in expert groups to assess good practice and policy development. This approach can help identify alternative successful measures reducing the need for regulation. In many areas of study the UK is ahead of the game over the rest of Europe. This presents us with the opportunity to lead on and influence the outcome of studies. For example, in the area of Better Regulation the UK played a significant role in a MAP project looking at 'Consultation with Stakeholders in the shaping of National and Regional Policies Affecting Small Business'. The concluding project report recommended our model on stakeholder consultation.

22. In CIP more of these actions will be undertaken. The focus of work across this area will be on identifying ways to develop European entrepreneurial and innovation mindsets, skills and culture, encouraging a business environment favourable to innovation, enterprise development and growth, supporting policy development, and complimentary measures for collecting data inputting to wider competitiveness strategies and mutual learning across Member States. In the Commission's original proposal this area of work was allocated €292m. Following the change in the budget, this figure has been slightly reduced to €266m. The Government can support this figure.

FUNDING FOR SUSTAINABLE ENVIRONMENTAL INITIATIVES (IEE AND ECO-INNOVATION ACTIONS)

23. In the last two Spring Council Conclusions, Heads of Governments have underlined the importance they place on developing Europe's environmental technology capacity. In 2005 they reiterated 'the important contribution of environment policy and growth and employment, and also the quality of life, in particular through the development of eco-innovation and eco-technology as well as the sustainable management of natural resources, which lead to the creation of new outlets and new jobs.' In this year's Conclusions, they repeat this line endorsing the 'strong promotion and diffusion of eco-innovations and environmental technologies'.

24. As you know, in the UK, the Energy White Paper places a strong emphasis on the importance of energy efficiency and renewable energy. DEFRA has highlighted energy efficiency as a key priority for helping to tackle climate change. This has been cemented by the Government's championing of energy efficiency during our G8 and EU Presidencies and its role in taking forward an EU wide debate on how energy efficiency improvements can be achieved.

25. Eco-innovation — the development of new innovations aiming at significant and demonstrable progress towards the goal of sustainable development, through reducing impacts on the environment or achieving a more efficient and responsible use of natural resources — has significant potential to contribute to sustainable development boosting jobs and competitiveness in the wider economy at the same time as benefiting the environment. The environmental goods and services sector is worth €515bn globally (a comparable size to the aerospace and pharmaceutical industries) and predicted to be worth €688bn in 2010. The UK industry is a dynamic and growing sector and in 2002 accounted for over 400,000 jobs and was worth €25bn. The sector has significant growth potential for the UK and EU, if we can compete effectively with the US and Japan. The EU Environmental Technology Action Plan (ETAP), which the UK strongly supports, articulates the need for coordinated action across the EU at national and regional level to help stimulate private and public investment in eco-innovation beyond what could be achieved by a Member State acting alone.

26. These EU and national commitments will be supported through two components of CIP: the Intelligent Energy-Europe Programme, and support for businesses, in particular SMEs, developing new eco-innovation technologies (part of the Entrepreneurship and Innovation Programme).

INTELLIGENT ENERGY EUROPE (€721M)

27. The Intelligent Energy Europe (IEE) programme was set up to help remove barriers to the market receptiveness and uptake of energy efficient technologies. Funding is provided to community partners to help achieve this goal through promotion and dissemination projects.

28. Projects funded by IEE must be able to be copied across the EU. The UK can benefit from those projects that do not themselves have UK participants. However, historically the UK has fared well in this programme. Under the last call for IEE project proposals over 56% of projects had UK participants who received over 12% of the total funding under the current budget. Furthermore, the current IEE programme is oversubscribed, with €112m funding requests against a budget for the year of €50m, indicating that significant activity is taking place in the programme areas that should be encouraged.

29. The funding for IEE actions has now been set in CIP at €721m over 7 years; this is a reduction on the Commission's originally proposed budget figure which was €780m but an increase over existing spending of approximately 50% per annum. This extra funding will not only continue support for the existing IEE actions increasing these to meet demand, but will additionally cover 'market replication' actions: funding for businesses who want to test new innovative technologies, or the new application of existing technologies, in the market place. Money for market replication from the IEE budget will work in tandem with market replication funding for eco-innovation as set out in the objectives of the Entrepreneurship and Innovation Programme.

30. Given the wider EU political context and the increasingly intense public focus on environmental concerns, the fit with UK policies, the level of overall demand for support and the UK's successful participation in the current programme, the Government considers the increase on current spending to be acceptable. However, I would have favoured greater clarity in the split of funding between IEE and eco-innovation activities. In turn this would have given a better steer for how much money is to be allocated for the market replication of 'green' innovative technologies, and how much is for all other innovations.

31. Nevertheless, overall the Government can accept this revised budget figure for IEE actions and the ongoing support for existing IEE actions, recognising that there is, arguably, a 'cart and horse' effect here. Namely that initiatives designed to help remove barriers to market receptiveness and uptake of new environmental technologies is a necessary first step to help stimulate further business interest in developing new innovations

ECO-INNOVATION — PART OF THE ENTREPRENEURSHIP AND INNOVATION PROGRAMME (€433M EAR-MARKED)

32. Eco-innovation actions are set out within the context of the Entrepreneurship and Innovation subprogramme. In CIP eco-innovation actions have been transferred from the current LIFE-Environment programme which is part of the LIFE III Regulation (Council Regulation 1655/2000) — on which DEFRA lead. Between 2000 and 2006, up to €445m was available to co-finance a range of innovative environmental approaches. In the past two years these included an additional emphasis on taking forward ETAP through funding for companies to test new innovative environmental technologies, developed through R&D or from adapting existing approaches. The co-financing also funded the adaptation of technologies to market conditions by testing their operational effectiveness in different conditions, which equates to the CIP instrument of market replication. Decisions to finance projects bidding for LIFE-Environment support were made on a competitive basis and the balance of projects receiving support could change from year to year. LIFE funded a number of other activities stemming from the 6^th Environmental Action Plan in addition to eco-innovation. Market replication is the only element coming over from LIFE, the other actions being new. The remaining non eco-innovation activities will continue to be supported through a replacement for LIFE-Environment, the LIFE+ Programme.

33. In the Commission's original proposal for CIP, €520m (12% of the budget) was ear-marked to eco-innovation. This included funding for market replication, partnerships and clusters and, importantly, risk capital investment. Following the reduction in the overall CIP budget, total funding level ear-marked for eco-innovation was reduced to €433m (12% of the revised budget). Although this is less than the current amount spent on LIFE-Environment, as noted, not all of the existing programme's actions come over to CIP.

34. The allocation of funding for eco-innovation within the final budget for CIP, provides for approximately €165m for risk capital support and €63m for eco-innovation from the Capacity Building Scheme (of which €53m is for partnership actions to help develop the eco-innovation venture capital fund management expertise in newer Member States in particular, and €10m is for seed capital grants). CBS had been an area of CIP that we were less enthusiastic about, but as this is now almost entirely dedicated to eco-innovation where the Government accepts there may be a need, we can accept it.

35. The inclusion of these access to finance measures for eco-innovation is welcome and support for this kind of activity was one of the key recommendations from the ETAP. Funding for risk capital investment is critical as, historically, fund managers have tended to shy away from eco-innovations because these technologies are often very new concepts to the market place and consequently can represent a higher risk. Helping to build experience and investment by fund managers in this area is important and will enable more businesses, especially innovative, high growth SMEs, to flourish in this sector. Access to finance for eco-innovation is an issue of interest to the Government and DEFRA is hosting a workshop for financiers and SMEs on this topic jointly with DTI, the City of London, and Forum for the Future, on 31 May.

36. €195m has been ear-marked for market replication projects; although some will be used for non-eco-innovation projects, most will be for eco-innovation. As I noted earlier, the Government would have preferred a clearer picture on the amount allocated for market replication in particular how much is for eco-innovation, rather than the Commission's ear-marking of most of the €195m for eco-innovation. However, I welcome the overall commitment in the CIP to support eco-innovation. Under LIFE-Environment funding for eco-innovation market replication projects has supported some promising technologies such as a company based in Great Yarmouth that has developed a new technology to deal with the increase in waste tyres by converting them into their component materials. A remaining €10m has been allocated to fund activities that will foster eco-innovation networks and clusters.

FUNDING FOR ICT INITIATIVES (€729M)

37. I am aware that your Committee had quite an extensive exchange of views with Alun Michael on the ICT component of CIP. In his February letter Alun agreed, in part, with the Committee's view that the Commission had not successfully justified the ICT Policy Support Programme in CIP. However, he pointed out that the merger of the existing three ICT programmes: MODINIS, eContentplus and eTEN into a single strand of CIP will help deliver the i2010 Strategy and that action in this area had been called for by Heads of State. Nevertheless, Alun noted that the Government did not think the ICT Policy Support Programme needed a budget of €800m.

38. Separately, the Minister wrote to you in April with respect to your correspondence on the eTEN programme. Here Alun underlined that he was in agreement with your Committee that further expenditure in this area should be resisted where it resembles or repeats the existing eTEN programme but pointed out that under CIP eTEN actions, like all the existing programmes to be merged into CIP, can be taken forward differently drawing on a much wider range of tools than has been previously available, and that how these are progressed will be directed by the new ICT Management Committee on which the UK will be an active participant. Alun also underlined that UK officials, in working group negotiations, had intervened and said the UK does not think that those actions which closely resemble eTEN should be funded generously. However, we were the only Member State to say so. Nevertheless, he noted that the UK would continue to resist any extension of eTEN activities subject to the timetable constraints of ongoing negotiations and the considerable wider political will from all sides to see CIP agreed at First Reading and to be reached swiftly. Following that exchange your Committee lifted its scrutiny reserve on the eTEN programme, and I am grateful for your help in moving that particular issue to a practical conclusion.

39. The budget for the ICT Policy Support Programme has been reduced from the original proposal of just over €800m by 9% to €729m. As Alun indicated, and as I have set out here, the timetable constraints since the budget details were announced have been very tight and it has not been possible to negotiate further changes to this ICT budget. Nevertheless, in the circumstances and taking into account the broader picture, the Government can accept the proposed ICT budget.

40. Recent economic analysis confirms the key role played by ICTs in boosting innovation, creativity and competitiveness in all sectors. Nearly half of the productivity gains in our economies are explained by ICT. However, international comparison shows that the uptake and use of ICT is less intensive in Europe which still lags behind its main competitors. Additionally, the level of individual Member State support for ICT is inconsistent. This and cultural, linguistic and in particular technical differences between Member States results in ICT solutions that are not always interoperable across the EU damaging EU competitiveness. Accordingly, there is a strong case for coordinated actions and resources spent at EU level to reduce uncertainties and risks of duplication and, for example, to stimulate services across the internal market and stimulate the technological environment necessary to promote innovation: a key objective for CIP.

41. CIP's ICT objectives are focused on supporting the development of the Single European information space to strengthen the internal market for both ICT and ICT based products and services and thereby improving market receptiveness, developing an inclusive information society and better services in public areas (which in the UK represents approximately 45% of our GDP), and they are focussed on stimulating innovation through the wider adoption and investment in ICT. Not only are these actions critical for the success of the i2010 Strategy on which the UK is a strong advocate, but importantly, I think these objectives also illustrate that CIP will help address concerns recently raised by the Aho Group that Europe's markets are not sufficiently innovation-friendly; a point Heads of State, at this year's Spring Council, articulated they wanted the Commission to address.

42. In summary, whilst in an ideal situation we would have wanted to see a greater reduction in the budget to reflect our concerns about funding for eTEN type activities, given that these activities can be taken forward in a number of ways that are more appropriate in CIP, and that the objective of the ICT actions will be to support the i2010 Strategy, the Government can accept this revised budget figure.

Annex II

FINANCIAL BREAKDOWN OF PROGRAMME SPENDING 2007-13 AGREED BY THE INTER-INSTITUTIONAL AGREEMENT (ALL IN 2004 PRICES).