Analysis… SMEs and Horizon 2020
John Stringer, a leading expert on EU-funded projects, shares his thoughts on Horizon 2020 so far and outlines what could be done to better facilitate SME growth in the European Union.
In Europe alone, we have around 21 million SMEs representing over 99% of all businesses. They contribute tremendously to growth and jobs, and they provide 57% of the EU’s GDP and 67% of private sector jobs. In the last five years, 85% of new jobs in the EU were created by SMEs, leading to an average of 4.1 million new jobs every year … but it is not just about the numbers. It is about what they do and what they bring to our economies. They innovate. They find new solutions and use new business models. Above all, they are more ready to take risks,” said Elz˙bieta Bien´kowska, the first European Commissioner for Internal Market, Industry, Entrepreneurship and SMEs, speaking to the Atlantic Council, Washington DC, USA, on 14 September.
As the backbone of the EU economy, it is no wonder that the EU has focused much of its attention on SMEs, particularly within the new research and innovation framework programme – Horizon 2020. On top of the €2.3bn allocated to COSME, the EU programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises, SMEs are supported by €8.65bn under the combined budgets of the ‘Leadership in enabling and industrial technologies’ and ‘Societal Challenges’ objectives under Horizon 2020, including around one-third of the Access to Risk Finance budget (over €900m), €3bn to a dedicated SME Instrument, and up to €287m to the Eurostars programme, which supports international, innovative projects led by R&D-performing SMEs. All this with the aim of creating an innovation-friendly environment free from the red tape and overly complicated procedures of past framework programmes, boosting jobs and growth, and cementing Europe’s leading position in the global market.
Initial results have proved promising: there were 16,000 applicants for the first round of Horizon 2020 calls last year, of which 44% were from industry, an increase of 15% compared to the Seventh Framework Programme (FP7) – half of those came from SMEs. But Horizon 2020 risks becoming a victim of its own success. Oversubscription has led to a low success rate, and complaints remain about a burdensome application process.
To find out more, Portal spoke to John Stringer, owner and general manager of Berkley Associates sprl and an expert on the management and development of EU-funded projects. Stringer has almost 30 years’ experience in the areas of R&D, education and training, innovation policy, and the development of SMEs, and has previously worked on behalf of the European Commission in the implementation and monitoring of EU programmes.
Here, he shares his thoughts on Horizon 2020 so far, how it compares to its predecessor FP7, and what could be done to better facilitate SME growth in the European Union.
What are the main advantages of the new SME mechanisms under Horizon 2020, and how do they complement other mechanisms such as COSME and the Enterprise Europe Network?
Horizon 2020 is not only the world’s largest research programme, it also has a strong emphasis on SMEs, recognising them as the backbone of the European economy and one of the main drivers for growth and prosperity. This is reflected in the way Horizon 2020 is structured and its budget targeted.
The SME Instrument, which forms part of the Industrial Leadership and Societal Challenges pillars, is targeted at research-intensive SMEs with the aim of stimulating their level of innovation. Only SMEs can participate in the action, although other organisations can act as subcontractors. Access to the action is not limited to any specific field of science or technology, and it has adopted a bottom-up approach in order to better fit the needs of innovative SMEs.
Single participants or groups of SMEs may be eligible for funding under the instrument through three phases of project development from research to commercialisation of the product or process concerned. A first phase, which is funded on a lump sum basis (€50,000) covers the initial technical feasibility and assessment of the commercial potential of the project. A second phase provides funding (based upon a percentage of eligible costs) for innovation activities such as demonstration, testing, piloting, scaling-up and miniaturisation, as well as the drafting of a more developed business plan. A third phase, which is not funded directly by Horizon 2020, will provide support, training, and mentorship, as well as facilitating access to risk finance. This support will be provided by the Enterprise Europe Network under the COSME programme. The SME Instrument has proved to be very popular with SMEs across Europe which has led to considerable oversubscription.
In addition to the SME Instrument, Horizon 2020 has also put in place other measures to encourage SMEs to participate. For example, 20% of the budget in the Industrial Leadership and Societal Challenges pillars has to be devoted to SMEs (compared with a 15% target in the Co-operation programme in FP7). According to the Commission, this target is being achieved based on the results of the first 100 calls for proposals for Horizon 2020. The framework programme also facilitates access to finance for innovative SMEs via support to financial intermediaries such as banks and venture capital companies. This is carried out under the InnovFin programme (InnovFin SME Guarantee and InnovFin SME Venture Capital), which builds on the success of the former Risk-Sharing Finance Facility developed under FP7.
Horizon 2020 has a strong link with the COSME programme. Whereas Horizon 2020 is focused on innovation-driven growth, COSME concentrates on providing support to create a favourable business environment and competitiveness. One example of the close relationship between the two programmes is the support COSME gives to the Enterprise Europe Network, which assists SMEs in finding partners for Horizon 2020 research projects, provides help in formulating project ideas, and offers advice on proposal writing.
How do efforts under Horizon 2020 compare to those under FP7?
SMEs, like other beneficiaries, have benefitted from the Commission’s attempts to make Horizon 2020 more user-friendly and less bureaucratic, a process which also started with its predecessor FP7.
One of the major structural changes in Horizon 2020 has been to merge the research parts of FP7 with the innovations aspects of the CIP programme, thus making it possible, in combination with the SME Instrument, to cover the complete cycle of product development within one programme. Bringing the programme closer to market has made it far more attractive to industrial and commercial organisations, including SMEs. The inclusion of the EIT (the European Institute of Innovation and Technology) under the Horizon 2020 umbrella had a part to play in this process as well.
The adoption of user-friendly processes has also made the programme more attractive to applicants. Calls for proposals are generally now less prescriptive, more focused on solving problems and challenges, and thus favouring more creative, open approaches. Making Horizon 2020 a paperless programme, with all processes from application to project closing being handled electronically, has also been a key achievement of the Commission. One of the other major changes has been to simplify the funding mechanisms under Horizon 2020, instituting the principle of one project, one funding rate instead of rates varying depending on the activity and type of organisation, as under FP7. In addition, the single flat rate of 25% for overhead costs (although many organisations complained at the time) will no doubt remove a major cause of error in the financial statements of projects and reduce the risk of audit.
Another improvement has been the setting of a time to grant of eight months (i.e. the time from the close of applications to the signing of the grant agreement) and dispensing with the negotiation phase. The results of the first 100 calls under Horizon 2020 reveal that this target has been achieved in more than 95% of cases. This is a significant change from FP7 where the time to grant could be longer than 12 months and the signature of the grant agreement could be preceded by a long, drawn-out negotiation phase.
These changes, coupled with the economic climate in Europe and national research budgets being squeezed, have led to a rapid increase in the number of applications to Horizon 2020 and, inevitably, to oversubscription. The results of the first 100 calls show that the overall success rate has now dipped to 12-14% as compared with around 20% under FP7. It is hard to criticise the Commission for being successful, but the situation has led to many leading research organisations calling for more widespread use of two-stage calls. Although this will not change the overall success rate, it will mean that the winners will be sorted out from the losers faster, thus ensuring that time is not wasted on applications that will not be funded.
A stated goal of the Innovation Union is to create an innovation- and business-friendly environment. Is Horizon 2020 doing enough to effectively reduce the administrative and regulatory burdens on SMEs?
One of the major advantages for SMEs under the new programme has clearly been the creation of the SME Instrument with its SME-only approach, lump sum financing for the first phase, and the possibility for single applicants to apply. Other measures, such as improving access to finance, as well as the possibility for SME owners who didn’t pay themselves a salary to use the Marie Skłodowska-Curie flat rates, have also had their positive impact on reducing the administrative burden on SMEs.
Other measures intended for all beneficiaries under Horizon 2020 have also made life easier for SMEs. These include, amongst others, the simplified funding rates, the reduction in the number of audit certificates, which are now only required at the end of the project, and the intended reduction in the number of audits by the Commission services.
However, although all of these measures will no doubt make it easier for SMEs to use the programme, there are still a number of concerns with the actions that have been taken. Applying for funding and implementing EU projects is still a complicated process. For example, the financial guidelines for Horizon 2020 are contained in a document which runs to 634 pages. Although it is a comprehensive document, the rules are complex and it is difficult for inexperienced and even experienced applicants to follow and understand them fully, especially as the guidelines have already had to be updated more than 11 times.
The reduction in the number of audit certificates will mean that mistakes or errors will only be discovered at the end of the project, normally when it is too late to correct them. Although the Commission audit period has been reduced to two years after the payment of the balance, the number of audits that will eventually be carried out may have to be increased if the overall error rate for the programme is high. This is a fact that will not be overlooked by the Court of Auditors, which has a watching brief on how the Commission implements and manages programmes.
How is Horizon 2020 encouraging the global competitiveness of SMEs?
Participation in the world’s largest research programme offers some concrete advantages for SMEs, which certainly impacts on both their growth and competitiveness. First of all, there is the opportunity to network not only with other SMEs but also with academic and industrial partners. This may assist the SMEs in developing contacts for future research projects or for other business opportunities, including acting as a subcontractor. Horizon 2020 may also directly help the small companies to develop and market their products, as well as improving their access to finance via loans and venture capital under the InnovFin programme.
The fact that 20% of the budget for the Industrial Leadership and Societal Challenges pillars is dedicated to SMEs gives them a greater advantage. Another factor which also works in the favour of SMEs is that more emphasis is being put on applied research and product development in Horizon 2020. As has been remarked upon by Research Europe (edition of 10 September 2015), this particularly appears to be the case for Societal Challenges, where universities are becoming concerned that there are fewer opportunities for basic research. Universities have seen their share of funding decrease from 43% under FP7 to 35% in Horizon 2020 based on the first 100 calls.
However, it is not all plain sailing for the SMEs. The general oversubscription experienced in Horizon 2020 has made success difficult to predict. This is particularly the case for the SME Instrument where the overall success rate in both phase one and two is around 6-10%; although, as the Commission has pointed out, for projects that do meet the quality threshold, this rate can increase to 50%. This oversubscription means that SMEs need to seek funding from a variety of different sources and to actively maintain networks and contacts with other organisations, especially big industry and academia.
Would you say the Industrial Leadership pillar is actually helping SMEs or just major organisations?
The Leadership pillar covers the SME Instrument and Access to Finance, as well as actions in Leadership in Enabling and Industrial Technologies. We have already described the first two actions and the impact they are having on SMEs: for the third, no detailed statistics are available on the participation level of SMEs in this particular part of the pillar. However, the Commission has released the results of the first 100 calls in Horizon 2020 and these reveal that the target of 20% of funding for SMEs in the Industrial Leadership and Societal Challenges pillars is being achieved (based on the share of financial contribution to SMEs in signed grant agreements). As both pillars are aimed at applied research and product development with a strong emphasis on innovation, one might expect that there would not be a marked degree of difference in SME participation in both, but this has to be seen when more details are given by the Commission (probably at the midterm review of Horizon 2020 in 2017).
What barriers are holding back SME growth in Europe, and how might these be tackled?
Applying for and implementing EU-funded projects of whatever kind is always difficult, and particularly so for small companies that do not necessarily have the resources to handle the process. I would like to see the burden reduced further on SMEs by having funding based more on results rather than compliance with an increasingly complex and burdensome set of financial and administrative rules which tip the balance in favour of the more experienced promoter. There was talk of adopting this approach when Horizon 2020 was still on the drawing board, and hopefully this method can be adopted in the plans for the next framework programme.
Furthermore, in recognition of the fact that because of oversubscription, funding for projects will have to come from a variety of different sources; isn’t it time that the basic funding rules across EU programmes were more harmonised? For example, is there any reason why the eligibility of staff costs should not be the same no matter which EU programme you are dealing with? A more harmonised approach would make it easier for small organisations to handle EU funding and avoid them having to acquaint themselves with a different set of rules each time they deal with a new EU programme.
On a non-funding basis, one of the biggest barriers to growth is the high cost of employing staff in the different EU member states, but this is something for the national authorities to tackle. There are nonetheless other areas where the EU could help. In countries like the United States, business failure is not regarded as an obstacle to future entrepreneurial activities, but this is not the case in many EU countries, and perhaps a more harmonised and open approach might be more helpful. I also feel that there should be more support and encouragement by the Commission for helping small businesses link with both larger industrial groups and academia, whether in the context of EU funding or not. Private initiatives such as Vision 2020 in the United Kingdom are doing a great job at linking SMEs with academia for Horizon 2020 projects. Perhaps this type of approach could be encouraged more and applied to activities outside of the narrow remit of EU funding.
John Stringer
Owner/General Manager
This article first appeared in issue 8 of Horizon 2020 Projects: Portal, which is now available here.
