Commission revises state aid guidelines to promote risk capital investment in SMEs
The European Commission has revised its guidelines on state aid rules to improve access to risk capital investment by small and medium sized enterprises (SMEs). Stakeholders have welcomed the new rules, which they say will significantly help boost innovation. Risk capital is financing in the form of equity to companies in their early start growth stages. Public funding of risk capital measures is deemed necessary because of the 'equity gap' experienced by many companies, particularly SMEs that fail to access financing for the expansion of their business. However, due to the potential commercial benefits it could bring, any publicly supported risk capital has to be monitored to ensure that it is not distorting the market, nor creating a lack of incentive or discouraging other potential investors from providing capital. Published on 19 July, the 'Guidelines on state aid to promote risk capital investments' provide the conditions that state supported risk capital measures for SMEs must meet in order to be authorised by the Commission. The guidelines, which replace a 2001 communication, bring into play the so called 'safe harbour' approach or 'light assessment', which allows SMEs to receive up to €1.5 million in joint state and private funding within a year. This is a 50 per cent increase on the previous threshold and is deemed to reflect adequately the current level of the equity gap in the EU. Other conditions which have to be met under this 'light' assessment include a 70 per cent quota for equity instruments rather than debt instruments and a 50 per cent minimum contribution by private investors. Should a state-supported risk capital measure go above the aforementioned threshold, it will be required to undergo a more detailed economic assessment where proof of market failure will be requested. The decision to develop a two tier economic assessment procedure is the overall refined economic approach taken by the Commission's State Aid Action Plan. The European Association of Craft, Small and Medium Sized Enterprises (UEAPME) has come out in favour of the new rules, calling them 'a significant improvement over the 2001 Communication on the same issue and an important element to compensate regulatory and market failures in the innovation area'. The Commission's approach of requesting that at least 50 per cent of capital comes from private sources was particularly welcomed. '[It] will make sure that investment decisions are profit-driven and that risk capital funds will be managed on a commercial basis,' said Gerhard Hümer, UEAPME Director for Economic and Fiscal Policy. 'The guidelines will also allow the use of public money to increase profitability or decrease risks for private investors.' However, the guidelines could be further streamlined and simplified, according to UEAPME, by providing a block exemption for all 'safe harbour' measures up to a certain threshold, for instance €1 million. This would reduce the bureaucratic burden and ensure a faster handling for risk capital-related state aid. The other shortcoming of the revised guidelines, says UEAPME, lies in the fact that they focus only on risk capital measures for innovative and fast-growing SMEs. While it is true that these businesses suffer from an evident 'equity gap', most SMEs are actually confronted with a general 'finance gap' and need better access to debt financing measures, which are unfortunately excluded from the scope of the revised guidelines. 'We hope that Member States will now make full use of the new guidelines to encourage risk capital investments and close the equity gap currently affecting Europe's most innovative SMEs. We also expect that the European Commission will come up with a new set of guidelines on State Aid for debt and quasi-debt instruments, which would complement the new rules on risk capital and improve access to finance for all small and medium businesses,' concluded Mr Hümer In other related news, the Commission has approved two state aid schemes for innovation. The first is an innovation-mobilising scheme developed by the French national agency for industrial innovation (AII). Established in 2005 with an annual budget of €1 billion, the AII will select, finance and assess major strategic programmes which, under the impetus of a lead company, bring together large industrial companies, SMEs and research laboratories. The aim is to create a new high-tech product or service within five to ten years. Although viewed to be in line with the Community framework for state aid for research and development (R&D), the Commission says that it will continue to monitor the agency's programmes. '[G]iven their potential impact on competition, the programmes will have to be notified individually to the Commission before they are embarked on. The Commission will check in particular that aid provided by the Agency is not detrimental to the interests of other European competitors,' said Competition Commissioner Neelie Kroes. The second approved scheme is €4.6 million of state aid that the Dutch Province of Gelderland plans to allocate to initiatives which explore new ways for protecting the environment and making public transport more efficient and user-friendly. The Commission agreed with the Dutch province's view that current license holders of public transport services were under-investing in environmental protection and innovation transport, and therefore state aid intervention was deemed necessary to address the 'market failure'.