Innovation 2010 Initiative

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F i n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e F i n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e F i n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e


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n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e F i n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e F i n a n c i n g I n n o v a t i o n 2 0 1 0 I n i t i a t i v e

Financing Innovation 2010 Initiative 1

The EIBs objective is to lend EUR 50 billion to fosterinnovation over the current decade. In the rst ve years

since the Bank set up i2i, it advanced loans worthEUR 24.5 billion and provided EUR 2.3 billion

in venture capital through the EIF.

Innovation 2010 Initiative

At the Lisbon European Council of March 2000, the European Union set itself

the strategic goal of establishing a competitive, knowledge-based economy

capable of sustainable economic growth with more and better jobs and greater

social cohesion by 2010.

The European Investment Bank, togetherwith its subsidiary the European Invest-ment Fund, is a major player in imple-menting the Lisbon agenda on theground. In so doing, the EIB Groupcooperates with the European Commis-

sion, acting as a complement to the grantinstruments operating via the EuropeanUnion budget.

Soon after the Lisbon European Council,the EIB set up a special facility: the Inno-vation 2010 Initiative (i2i).

The Bank focuses its lending under i2i on four strategic areas

1Research, development and innovation the EIB finances private and pub-lic sector investment in research, the development of centres of excellenceand academic research centres.

2

Human capital formation support for university training by improving accessto training as well as life-long learning, integration of research into tertiaryeducation projects, helping to finance upgrading of IT infrastructure, digitalliteracy and e-learning.

3

The diffusion of technologies and development of information and commu-nication technology the EIB assists the creation of communication networksin a number of sectors (such as health and transport), the development of electronic commerce platforms and the roll-out of fixed and mobile broad -band networks and access technologies.

4Support for entrepreneurship by financing innovative SMEs and, throughthe European Investment Fund, investing in venture capital funds providinginnovative SMEs with equity resources.


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Financing Innovation 2010 Initiative2

Integrated approach

The Innovation 2010 Initiative is basedon an integrated approach focusing onthe links between knowledge creationand the market. It covers all phases of theprocess, from education to RDI and thetransformation of innovation into invest-ment, generating productivity gains andenhancing the competitiveness of theEuropean economy. Such an approachis key to effective support for innova-tion as a driver of economic growth and job creation.

In view of the wide variety of investmentin innovation, a substantial part of i2ilending is directed towards intangibleassets such as training and research pro-grammes, patents alongside the EIBstraditional financing of tangible assets,

such as infrastructure, buildings, andscientific and technological equipment.

Moreover, the EIB Group gives prior-ity to projects furthering or resultingfrom synergies between the public and

private sectors, since mobilising theircombined efforts is crucial for attain-ing the ambitious RDI investment tar-get of 3% of Europes GNP by 2010, setby the Barcelona European Council inMarch 2002. A pan-European dimension

Many of the EIB loans supporting thecreation of a competitive, knowledge-based European economy also contributeto greater economic and social cohesion. The establishment of centres of excel-lence in the less-favoured regions of theEuropean Union is a key factor in ensuringEuropean citizens equal access to tech-nologies in a changing world. It helps tooffset the tendency for investment to beconcentrated in the wealthiest parts of the EU. Accordingly, some two thirds of

the Banks i2i lending went to projects inthe least developed regions of the Union,a testimony to the high value added of theBanks involvement and its commitmentto the transfer of knowledge to areas of the EU that are lagging behind.

Since its creation in the year 2000, thegeographical scope of i2i has been broad-

ened by linking it to the establishmentof a European Research Area, an objec-tive agreed at the Barcelona EuropeanCouncil in March 2002. Consequently,i2i investment is eligible for EIB financewhen located in:

The EU Member States (EU-25), withspecial emphasis on projects located inassisted areas and Cohesion Countries;

Acceding and Accession Countries (Bul-garia, Romania and Turkey);

The Western Balkan countries, where,as the Banks support for reconstruction


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EIB lending under i2i2000-2004

ICT

Education/Training

R&D


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and development begins to bear fruit,major needs in the form of educationalfacilities and technological networks willhave to be addressed.

Cooperation with theEuropean Commission

To support investment in innovation,the EIB cooperates closely with the Euro-pean Commission. Most prominently, thiscooperation is visible in:

Coordination and co-financing of key ini-tiatives backed by the current EuropeanUnion Research & Technological Devel-opment Framework Programme;

Implementation of agreements withDG Info on a European approach tofinancing technology networks and

schemes involving ICT content andapplications;

Creation of synergies with DG Culturefor the support and financing of Euro-pean audio-visual projects;

Optimising synergies between the twoinstitutions in the fields of regionaldevelopment and the integration of thenew Member States, especially with a

view to maximising the effectiveness of the European Structural Funds.

Still more investmentneeded

However, despite the combined effortsof the Bank and the Commission, themid-term review of the implementa-tion of the Lisbon Strategy, which wason the agenda of the Spring 2005 Euro-pean Council in Brussels, concludedthat further public and private effortsare essential, failing which Europe willcertainly fall short of reaching its inno-vation objectives.

The EIB wants to give full support to theurgently needed accelerated investmentup to 2010. To this end, the Bank has devel-oped a toolbox of financial engineeringinstruments tailored to investors needsand expectations. The combination of Commission grants and EIB loans playsan important role in this respect. TheBank has also set up a special window formid-caps, corporates of intermediatesize, which are frequently major innova -tors. This window is aimed at financinginvestments with a total cost of up toEUR 50 million, particularly in i2i sectors.

In order to increase its value added fur-ther, the EIB is also accepting higher lend-ing risks for i2i projects by extending itsStructured Finance Facility (SFF). Cre-ated in 2001, the SFF is used to supportpriority projects that are below invest-

ment grade, through provisioning forthe associated higher lending risks bysetting aside part of the Banks reserves.SFF operations have been intensified andfocused on RDI investment, in particularby the private sector and public-privatepartnerships (PPPs).

The future of i2i

Beyond the immediate future, the EIB and

the European Commission are lookingat new ways of improving the leverageof EU grant resources when combinedwith Bank loans, as requested by theSpring 2005 Brussels European Coun-cil. Under the next Research Framework Programme, which will cover the period2007-2013, a Risk-Sharing Finance Facil-ity (RSFF) is to be set up for this purpose.Under the RSFF, the EIB will use Com-munity grant resources, together withits own funds, to cover part of the risksassociated with loans that have a higherrisk profile. The EU grant is estimated toallow the EIB to make available in loans forEuropean RDI an additional amount of six

times the value of the grant. Pending theagreement of the European Parliamentand Council, the Risk-Sharing FinanceFacility should start operating in 2007.EIB loans supported by the Facility will beopen to all partners in large RDI projectswith a strong European dimension.

The European Investment Fund is alsostepping up its efforts on behalf of the Lis-bon Strategy. Under the proposed Com-petitiveness and Innovation Programme(CIP), covering the period 2007-2013, theEIF will manage the implementation of the Entrepreneurship and InnovationProgramme, an important componentof which is the High Growth and Inno-vation Facility. This Facility will leverageprivate capital for SMEs seeking betweenEUR 200 000 and EUR 2.5 million. Thisis new and innovative in its non grant-

based approach; nevertheless it will fol-low the successful model of the existingmarket-based EU financial instrumentsin its delivery via the EIF and professionalventure capital funds, including fundsset up by business angels and technol-ogy transfer.


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The European Investment Bank

The role of the European Investment Bank (EIB), an autono-mous EU institution, is to finance investment projectscontributing to the balanced development of the Union.Set up in 1958 under the Treaty of Rome establishing theEuropean Community, the EIB operates as a bank andraises on the capital markets the bulk of the resourcesthat it deploys to finance projects meeting the Unionsbroad objectives.

The EIBs shareholders are the Member States of the Euro-pean Union, which have all subscribed its capital. As a

major international borrower continually awarded a first-class credit rating (AAA) by the main rating agencies, theBank mobilises large volumes of capital on highly favour-able terms, subsequently providing loans at interest ratesthat reflect its borrowing costs. The EIB is financiallyautonomous and does not come under the EU budget.

The constantly growing volume of EIB operations currentlymakes the Bank one of the largest multilateral financinginstitutions in the world.

EIB lending mainly targets the EU Member States. Out-side the Union, the Bank contributes to the implementa-tion of EU development aid and cooperation policies bygranting loans in some 150 countries, notably the Acced-ing and Accession Countries and non-candidate Balkanstates, the Mediterranean region, Asia and Latin America,the African, Caribbean and Pacific States (ACP and OCT),and the Republic of South Africa.


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EIB finance for i2i

The European Investment Bank offers various loan formats in support of i2i investment, depending on project size and

category.

Individual or framework loans : aimed at projects or programmes with investment costs of at least EUR 25 million, under-taken by both (semi-) public and private sector borrowers. The maximum loan amount is in general up to 50% of totalproject cost. The appropriate loan/security structure is defined on a case-by-case basis.

Global loans : aimed at investments of up to EUR 25 million, global loans are lines of credit arranged with other banks orfinancial institutions to support at their own credit risk smaller projects, typically undertaken by SMEs with fewer than250 employees or local authorities. In the case of i2i, promoters of any size and ownership may qualify for allocations underglobal loans. The maximum amount for allocations is generally up to 50% of the investment cost, i.e. EUR 12.5 million.

Mid-cap loans : aimed at investments of up to EUR 50 million. Mid-cap loans are lines of credit in support of projectsundertaken by intermediate-sized companies with fewer than 3 000 employees (mid-caps). The maximum amount for

sub-loans under mid-cap loans is generally up to 50% of the investment cost, i.e. EUR 25 million. Finally, to meet the requirements of projects or promoters with a high-risk profile, the EIB has established a Structured

Finance Facility (SFF). Its aim is to offer a mix of financial products, such as senior or subordinated loans and guarantees,mezzanine finance, including high-yield debt for industrial companies in transition from SME scale or in the course of restructuring, and project-related derivatives.

The EIB offers loans with a fixed, variable or revisable interest rate. The loans can be denominated in euro, the curren-cies of the EU Member States not in the euro zone, or other currencies such as the US dollar, yen, Swiss franc or a Centralor Eastern European currency. An advantage of EIB f inance is the extended maturities of the loans in the industrial sec-tor up to 12 years and for infrastructure up to 20 years and longer. Borrowers may further benefit from grace periods thataccommodate the generally longer time span between the start-up, market launch and payback stages of research-basedprojects. The EIB adopts a flexible approach and tailors its financing instruments to the specific i2i financing needs of theborrower, always in line with sound banking practice and procedures.


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EIF support for i2i

To support investment in innovation, the European Investment Fund manages two main types of financial instrument:venture capital , where it acts as a fund of funds; and SME guarantees , covering counterparties SME portfolios.

The EIFs venture capital activity typically consists of equity investments in venture capital funds that support innovativeSMEs, particularly those that are technology-oriented. EIF investment covers not only the seed and start-up phases of anenterprise, but also the subsequent development stages. At the end of 2004, the EIFs venture capital port folio totalledsome EUR 2.8 billion, invested in 199 funds across the EU-25 and the Acceding Countries, indirectly supporting more than1 800 high-tech enterprises in key sectors such as biotechnology, nanotechnology and new materials.

The purpose of EIF guarantee products is to provide effective support for SMEs through the leverage effect of the prod-uct on the volume of loans which banks can make available. The EIF offers two main product lines, based on a portfolioapproach: credit enhancement (where the Fund provides guarantees to enhance the credit quality of a SME financingportfolio, or of securities backed by such portfolios in a securitisation transac tion); credit insurance or reinsurance (wherethe Fund can provide guarantee cover in relation to a portfolio of loans or leases, taking up to 50% of the risk of every indi-

vidual loan or lease in the portfolio). Eligible intermediaries for EIF guarantees are commercial banks, guarantee schemes,public bodies (e.g. mutual guarantee schemes) or other vehicles (special purpose vehicles).

To these principal financial instruments, the EIF has added:

Technical assistance , aimed in particular at governments, regional development agencies, universities and researchcentres that want to create an enabling environment for SME financing in the areas of venture capital and guaranteesthrough financial engineering. This involves strategic and technical advice on the design, implementation and evalu-ation of SME financing instruments, includingmarket studies, assessing potential investors,preliminary structure design, and long-term

investment strategies.

In the same context, the EIF carries out a con-sulting assignment on behalf of the EuropeanCommissions Directorate General for Research. The Technology Transfer Accelerator initiativeseeks to set up pilot projects, bringing togethera number of research institutions and seeking toaddress their seed-stage financing needs. Thefocus is on bridging the financing gap betweenthe research phase and early-stage investment.


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The Innovation 2010Initiative is based on an

integrated approachfocusing on the linksbetween knowledge

creation and themarket. It covers all

phases of the process,from education

to RDI and thetransformation of

innovation intoinvestment, generating

productivity gainsand enhancing the

competitiveness of theEuropean economy.


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Documents

Innovation 2010 Initiative