European Commission, B-1049 Brussels - Belgium. Telephone: (32-2) 299 11 11. Office: SPA-3 8/17. Telephone: direct line (32-2) 2985687. Fax: (32-2) 2961242.

Research, Development and Innovation State aid Framework

Consultation paper

The purpose of the present consultation is to invite both Member States and stakeholders to provide comments on the application of the Community framework for state aid for research and development and innovation and on Research, Development and Innovation policy at large.

The Commission invites Member States and stakeholders to submit their comments to DG Competition by 24 February 2012.

1. Introduction

Promoting Research, Development and Innovation (hereinafter R&D&I) is an important objective of common interest. Article 179 (1) of the TFEU states: "The Union shall have the objective of strengthening its scientific and technological bases by achieving a European research area in which researchers, scientific knowledge and technology circulate freely, and encouraging it to become more competitive, including in its industry, while promoting all the research activities deemed necessary by virtue of other Chapters of the Treaties (…)". In its Europe 2020 Communication1, the Commission identifies R&D&I policy as an essential component of its strategy for growth and jobs. In its "Innovation Union Communication"2, one of the seven Flagship Initiatives set out in the Europe 2020 Strategy, the Commission stresses the importance of improving the framework conditions and access to finance for research and innovation so as to ensure that innovative ideas can be turned into products and services that create growth and jobs. Alongside EU policies, national public policy can do a lot to promote R&D&I with the above framework conditions. Well targeted financial support can also help to leverage private investments in R&D&I. In some circumstances financial support qualifies as State aid and is subject to the Treaty rules to ensure a level playing field across firms and Member States in the internal market. According to Article 107 (3) of the TFEU, certain categories of aid granted by Member States may be found compatible with the internal market, in particular when aid pursues the objective "to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest" (Article 107 (3) lit. c). Article 108 specifies procedural aspects of the EU State aid rules. 1 Communication from the Commission Europe 2020 A strategy for smart, sustainable and inclusive growth,

COM(2010) 2020 final, 3.3.2010. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:2020:FIN:EN:PDF

2 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Europe 2020 Flagship Initiative Innovation Union, COM(2010) 546 final, 6.10.2010.

http://ec.europa.eu/research/innovation-union/pdf/innovation-union-communication_en.pdf#view=fit&pagemode=none

-- 2

The Europe 2020 Communication makes an explicit reference to the role of State aid: "State aid policy can also actively and positively contribute to the Europe 2020 objectives by prompting and supporting initiatives for innovative, efficient and greener technologies, while facilitating access to public support for investment, risk capital and funding for research and development". The Commission has laid down the criteria it uses in assessing the compatibility of State aid for R&D&I in its Community framework for state aid for research and development and innovation3 (hereinafter: R&D&I-Framework). Since 29.8.2008, a large number of categories of R&D&I have been exempted from prior notification where they meet the conditions set in the General Block Exemption Regulation (GBER)4. In line with the balancing test formulated in the 2005 State Aid Action Plan5, State aid for R&D&I can be declared compatible with the internal market where the aid addresses a market failure in R&D&I and is necessary to increase R&D&I, provided that the ensuing distortion of competition and effect on trade is not contrary to the common interest. The aim of the R&D&I-Framework is to ensure this objective and to make it easier for Member States to better target the aid to the relevant market failures. The R&D&I-Framework recognises that without public support R&D&I might be lower than what is socially desirable. At the same time, it highlights the possible risks of distortions in competition between firms and in the location of investments across the Union. R&D&I-State aid that is not well targeted could crowd out competitors, thus reducing the market's overall innovation output (by reducing the incentives of other players in the market to continue to do R&D), maintaining an inefficient market structure (by artificially supporting the market presence of the firm in the market) and/or increasing or maintaining the aid beneficiary's market power. In view of the expiry of the R&D&I-Framework and the GBER in December 2013 and as a first preparatory step for the new rules, on 10 August 2011 the Commission published a Mid-term review on the application of the R&D&I-Framework6, thereby delivering on commitment 13 of the Innovation Union Communication. As a second step, it now seeks further feedback from Member States and stakeholders on the application of the R&D&I rules and substantive input for its revision.

3 OJEU C 323/1 of 30.12.2006;

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006XC1230(01):EN:NOT

4 OJEU L 214/3 of 9.8.2008; http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32008R0800:EN:NOT

The GBER allows Member States to grant aid in favour of SMEs, research and development, innovation, regional development, training, employment, risk capital, and environmental protection, as well as aid measures promoting entrepreneurship, such as aid for young innovative businesses, newly created small businesses in assisted regions, and female entrepreneurs.

5 State Aid Action Plan, less and better targeted State aid: a roadmap for State aid reform 2005 to 2009. See also the balancing test as set out in the Community guidelines on state aid for environmental protection, Official Journal C 82 of 01.04.2008, page 1.

6 http://ec.europa.eu/competition/state_aid/legislation/rdi_mid_term_review_en.pdf

-- 3

2. How to contribute to the consultation

Member States and other interested parties are invited to respond to the questionnaire hereunder. Replies can be submitted in all official EU languages7.

While some of the questions are specifically aimed at public authorities, others are aiming at both public authorities and other interested parties (stakeholders). For your convenience, the questions are sorted by their principal target audience. If you do not feel concerned by a particular question please reply "not applicable".

Questions referring to "your Member State" or "your authorities" and the like may be read by international entities with no particular Member State affiliation as referring to "Member States" and "Member State authorities".

The deadline for the replies is 24 February 2012. Replies should be sent to the European Commission, DG COMP, State aid registry, 1049 Brussels, reference "HT 618", preferably via e-mail to Stateaidgreffe@ec.europa.eu.

The Commission services plan to make the replies to this questionnaire accessible on its website http://ec.europa.eu/competition/consultations/open.html. Therefore, if respondents do not wish their identity or parts of their responses to be divulged, this should be clearly indicated and a non-confidential version should be submitted at the same time. In the absence of any indication of confidential elements, DG COMP will assume that the response contains none and that it can be published in its entirety.

7 Given the possible delays in translating replies in certain languages, an English working translation would be

welcome.

-- 4

QUESTIONNAIRE

ABOUT YOU

For the rules on personal data protection on the EUROPA website, please see: http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata

Specific privacy statement: Received contributions, together with the identity of the contributor, will be published on the Internet, unless the contributor objects to publication of the personal data on the grounds that such publication would harm his or her legitimate interests. In this case the contribution may be published in anonymous form. Otherwise the contribution will not be published nor will, in principle, its content be taken into account.

Please provide your contact details below.

Name Nick Rousseau Organisation represented Department for Business, Innovation and Skills

answering for the UK Government. Location (country) UK E-mail address: nick.rousseau@bis.gsi.gov.uk

Please describe the main activities of your company/organization/association.

The UK Government’s Department for Business, Innovation and Skills (BIS) is responsible for supporting sustained growth and higher skills across the UK economy and leads and coordinates the UK position on State Aid including the R&D&I rules.

Power to decide R&D&I and business support policy and their implementation are devolved to the devolved administrations and as such there are some variations in the use of the rules. As such we have also provided the responses of each of the devolved administrations to sections A&B of the questionnaire in order to provide the Commission with a full picture of the way R&D&I rules are used in the UK.

SECTION A: GENERAL QUESTIONS ON R&D&I POLICY AT LARGE A.1. R&D&I policy - Fact finding

Questions aiming at public authorities:

1. Please describe how your authorities support R&D&I. Please provide a short historical overview of overall R&D&I policy and the legal instruments on which the public interventions are based. To what extent is such a policy run at the national, regional or local level?

-- 5

The UK Government reiterated its continuing support for Research and Development and Innovation in the document “The Innovation and Research Strategy for Growth”8 published in December 2011.

The UK’s R&D&I policies are run at a national level. Responsibility for R&D&I policy lies in the Department for Business, Innovation and Skills which sponsors the seven UK Research Councils that fund science, the Higher Education Funding Council for England (HEFCE) and the Technology Strategy Board, which is responsible for funding innovation and technology development within business and is the national innovation agency for the UK.

The Devolved Administrations are responsible for certain elements of funding in this area, specifically unhypothecated funding for higher education research and enterprise agencies that deliver skills and business support. Annexes to this main questionnaire contain details of the DAs’ policies and programmes but a single UK response to the questions about whether the State Aid Framework should change is provided in this main document.

The Coalition Government, elected in May 2010, decided that all programmes for and funding linked to research and innovation would be delivered by national organisations. The Regional Development Agencies (RDAs), which previously had a role in innovation funding are in the process of being dissolved. The new Local Enterprise Partnerships being introduced at sub-national level will not have dedicated budgets for research and innovation, or a role in delivering innovation support programmes.

Funding for research in the UK is provided through a dual support system. The first element of this is competitive project-based funding delivered through the Research Councils, for which researchers in UK universities or public sector research can apply. The Research Councils allocate resources within their fields between institutes, facilities, international subscriptions, research studentships and projects. The Research Budget Allocations9 are made for the duration of each Comprehensive Spending Review period (3-4 years – the current period runs from 2011-1025), to allow funding bodies to plan strategically. The second strand of this funding is delivered through HEFCE in England, and its counterparts in Scotland, Wales and Northern Ireland. HEFCE distributes funding to English HEIs, including funding for research, knowledge transfer and infrastructure, with the aim of providing support which builds institutional capability and which also aims to reward consistent excellence.

The Technology Strategy Board is the UK’s prime channel for supporting business-led technology innovation. The Technology Strategy Board was originally established in 2004 as an advisory board to guide the Government's Technology Strategy, following recommendations in the 2003 Innovation Report. Its purpose was to advise the Secretary of State for Trade and Industry on business research,

8 www.bis.gov.uk/innovatingforgrowth

9 http://www.bis.gov.uk/assets/biscore/science/docs/a/10-1356-allocation-of-science-and-research-funding-2011-2015.pdf

-- 6

technology and innovation priorities for the UK, the allocation of funding across priorities and the most appropriate ways to support them.

In 2006, plans were announced for the Technology Strategy Board to be given a wider role and to operate as an Executive Non-Departmental Public Body (NDPB), with responsibility for managing support for innovation and technology development in business in the UK, and with a greater degree of independence from Ministerial control. The new Technology Strategy Board was established on 1 July 2007, sponsored by the then Department for Trade & Industry (DTI). The Department for Business Innovation and Skills is now the Technology Strategy Board's sponsor.

The Technology Strategy Board is responsible for a range of innovation programmes including Knowledge Transfer Partnerships, Knowledge Transfer Networks, Collaborative Research and Development, Smart (formerly Grant for Research and Development) and the new network of Catapult Centres. It also champions the Small Business Research Initiative (SBRI). Its strategy for 2011-15 is called Concept to Commercialisation.10 R&D Tax Credits are the biggest single funding mechanism provided by Government for incentivising investment in business R&D. There are two schemes, for large and small companies, with more generous terms available for small companies, reflecting the higher level of risk taken on by these companies when undertaking R&D projects. The credit is made available in one of two ways: either as a tax deduction from Corporation Tax (a tax on company profits) based on R&D spending or it may be possible for certain loss making small or medium sized companies (SMEs) to surrender their losses in return for a cash payment from Her Majesty’s Revenue and Customs. A comprehensive list of historic documents showing how R&D tax credits have developed can be found on the HM Revenue & Customs website. 11 The SME scheme provided businesses with £250m in 2007/8 rising to £320m in 2009/20. Statistics for both the SME scheme and also the Large Company scheme since the introduction of R&D tax credits are also available12. Additionally, funding for the development of new civil aircraft programmes has been made available by successive UK Governments whose policies have been to provide repayable advances to address market failure. The provision of repayable advances is entirely discretionary, there is no scheme, programme, application form or budget and projects are subject to due diligence which can only be supported if funding is available. Four projects have been notified under the R&D&I framework (or its predecessor) in the previous 15 years, those projects received approval to provide about £620m to large companies.

Legal Instruments

10 http://www.innovateuk.org/ourstrategy.ashx

11 http://www.hmrc.gov.uk/ct/forms-rates/claims/randd.htm

12 http://www.hmrc.gov.uk/stats/corporate_tax/rd-accrualsbasis.pdf

-- 7

The Science and Technology Act of 1965 is the legal basis for most R&D&I funding in the UK, including six of the seven UK Research Councils and the Technology Strategy Board. The Arts and Humanities Research Council was established via the Higher Education Act 2004.

The Higher Education Act of 1992 (and subsequent Acts) provides the legal basis for research funding to higher education institutions via the Higher Education Funding Councils.

R&D Tax Credits were legally established in the Finance Act 2000 (Small Company scheme), with the Large Company scheme following in the Finance Act 2002. Consolidating legislation was passed in the Corporation Tax Act of 2009.

The Civil Aviation Act 1982 is the legal basis for providing repayable advances to the aerospace industry. 2. Please describe the structure of the overall financial budget that has been committed to

develop overall R&D&I policy over the last 5 years in your Member State. Please provide a break-down by:

a) Types of support:

– No State aid measures:

– General R&D&I initiatives not targeted to firms (e.g. education),

– Financial support to firms below the de minimis threshold13,

– General measures (e.g. fiscal breaks for firms' investments in R&D&I).

– State aid: schemes, ad-hoc aids (outside schemes).

b) R&D&I objectives at national level (also regional and local where relevant). Objectives such as e.g. funding for research organisations, for R&D projects, research infrastructures, promotion of clusters, promotion of knowledge transfer;

c) Types of measures, where possible as provided for by the R&D&I-Framework (aid for R&D projects; aid for technical feasibility studies; aid for industrial property rights costs for SMEs; aid for young innovative enterprises; aid for process and organisational innovation in services; aid for innovation advisory services and for innovation support services; aid for the loan of highly qualified personnel; aid for innovation clusters);

d) Sectors (for the purposes of the sectoral breakdown, you can use the NACE codes or the headings proposed by the 'select' function of the State-aid case search tool under http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

e) Size of the beneficiaries (small, medium and large enterprises14) and nature (enterprise, research organisation including higher-education, non-profit entity, other);

13 The de minimis threshold amounts to 200.000 € per undertaking over three years. See Commission Regulation

(EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid

14 In case it was available and relevant, subcategories can be identified.

-- 8

f) Types of aid instruments (e.g. direct grants, reimbursable advances, loans, soft loans, fiscal incentives, provision of capital, guarantees, compensation above market prices for goods or services, consultancy, training, provision of infrastructures, public procurement policy, reduction of social-security contributions, debt write-off);

We have a broad range of policies that contribute to stimulating research, development and innovation, as shown in the above strategy documents. The UK Government does not support sector-specific policies or programmes in the area of innovation, preferring to use generic support mechanisms that aim to deliver specific functions, or target companies of particular size (e.g. SMEs). The main programmes operating in the UK, which are managed by the Technology Strategy Board are listed below. All of these mechanisms operate under the provisions of the R&D&I State Aids Framework, and have been approved by the Commission through the General Block Exemption Regulation.

• Collaborative R&D: provides funding to enable business and research communities to work together on R&D projects from which successful new products, processes and services can emerge. Over £150 million will be invested in 2011-12 to enable research. This mechanism is primarily used by large companies or consortia of companies, although these frequently include SMEs.

• Knowledge Transfer Networks (KTNs): providing over £15 million in 2011-12 for 15 KTNs, helping industry access knowledge and information to support growth

• Knowledge Transfer Partnerships (KTPs): over £30 million in 2011-12 to stimulate innovation by facilitating the transfer of knowledge and the spread of technical and business skills through 1000 live projects per annum undertaken by high calibre, recently qualified graduates, mostly in SMEs.

• Small Business Research Initiative: investing over £5 million in 2011-12 to enable innovative companies to solve challenges for Government departments.

• Smart (previously Grant for Research and Development): approximately £20 million of funding in 2011-12 (rising to £35m in FY12-13), to address the finance market failure for high-risk and potentially high reward technologically innovative projects carried out by SMEs. The funding supports Proof of Concept and Proof of Market analyses, and the development of prototype products.

The devolved administrations of Scotland, Wales and Northern Ireland have their own ‘devolved’ budgets and independently set their policy priorities and budget allocations for R&D – Annexes to this main questionnaire contain details of the DAs’ policies and programmes.

Up until last year, England’s Regional Development Authorities (RDAs) invested on average between £23m and £27m per year in supporting R&D in business over the last 4 years. 3. Implementation and take-up of R&D&I State-aid schemes

a) Please provide a list of the current R&D&I-support schemes in your Member State.

-- 9

b) Please specify for each scheme if it has an R&D objective, an innovation objective15, or mixed objectives (R&D&I).

c) What is the proportion of each scheme's initial overall budget commitment that has in effect been absorbed (i.e. disbursed)?

d) What proportion of the budget of each scheme has been absorbed by SME's, large enterprises and other beneficiaries?

Links to the most recent evaluations of the main business support programmes are included below:

KTP review http://www.innovateuk.org/_assets/pdf/corporate-publications/ktp%20strategic%20review%20feb%202010.pdf

Grant for R&D (This has now been rebranded as Smart) www.bis.gov.uk/files/file52026.pdf

Collaborative R&D http://www.innovateuk.org/content/news/evaluation-of-collaborative-rd-published.ashx

R&D Tax Credits evaluation http://www.hmrc.gov.uk/research/report107.pdf

4. Please describe the importance of EU programmes and funding for your Member State's R&D&I strategy. Could you, if possible, indicate the relative importance of the following EU programmes and funding:

– EU Framework Programmes (the current 7th Framework Programme16);

– the Competitiveness and Innovation Framework Programme17;

– the European Institute of Innovation and Technology18;

– cohesion policy, in particular through Structural Fund financing for R&D and innovation, entrepreneurship, ICT and human capital development 19;

15 We understand by scheme with an innovation objective the following innovation aid measures foreseen in the

R&D&I Framework (aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory services and innovation support services, aid for the loan of highly qualified personnel, aid for innovation clusters).

16 http://ec.europa.eu/research/fp7/index_en.cfm

17 http://ec.europa.eu/cip/

18 http://eit.europa.eu/

19 http://ec.europa.eu/regional_policy/activity/research/index_en.cfm#

-- 10

– European Investment bank (EIB), in particular under the Risk-Sharing Finance Facility (RSFF).20

European Programmes such as the Framework programmes are a significant source of support for research and innovation in the UK. Funding won from the Framework Programmes accounts for around 9% of the income generated by the Higher Education sector. The UK has received € 3,271m from the Seventh Framework Programme, equivalent to 14.8% of the total FP7 funding to date (31 October 2011). UK Academia accounts for 69.0% (or € 2,255m) of this funding and UK Business 17.4% (or € 570m). In addition, the Structural Funds, principally the European Regional and Development Fund (ERDF) have been utilised as a significant source of support for both innovation programmes (those which are run geographically, such as the Knowledge Transfer Partnerships programme), and capital assets linked to innovation, including a number of Research and Training Organisations (RTOs). The UK has also used ERDF funding to invest in technology and innovation centres, for example the Plastic Electronics Technology Centre and the Centre for Process Industries, where they have been used to fund both specialist equipment and to support innovation-related projects involving business. Universities in the UK have also played a key role in accessing ERDF funding, and as channels for this into programmes that support business innovation such as KTPs.

EU programmes and funding that support various forms of EU-level projects are complementary to national initiatives and must demonstrate EU added-value. Those that operate on a collaborative model offer both a wider-range of potential R&D&I partners and the potential for UK players to broaden their supplier and customer networks.

We believe that EU R&D&I funding should work alongside other EU funding sources including Structural and Cohesion funds and the Common Agricultural Policy. We are also of the view that there are benefits in aligning and coordinating EU R&D&I support with Member States’ national programmes on a voluntary basis. This approach can lead to economies of scale, enhanced networks, reduced fragmentation and, importantly, reduced timescales.

On the matter of the relative importance of each source of funding for the UK:

1. EU Research Framework Programme (FP7);

2. Structural and Cohesion Funds;

3. Competitiveness and Innovation Programme;

4. Risk Sharing Finance Facility; and

5. European Institute of Innovation and Technology.

20 RSFF is co-funded by the EU (via the FP7) and the EIB and is aimed at fostering primarily private sector investment across Europe in research, technological development, demonstration and innovation. http://www.eib.org/products/loans/special/rsff/?lang=en and http://ec.europa.eu/invest-in-research/funding/funding02_en.htm

-- 11

We believe that EIT and its Knowledge and Innovation Communities (KICs) have potential value in terms of supporting the UK’s innovation capacity, but to date, there has been a low level of engagement between UK institutions and companies and the EIT. To date Imperial College is the sole UK organisation participating as a core partner in the KICs and we believe that this is partly because of the requirement for KIC partners to become a new legal entity and also due to the relatively modest amount of funding available, compared to Framework Programme Projects. There is no earmarked national funding for UK participants in KICs, but KIC partners can bid competitively for national funding sources which align with the KIC activity.

UK organisations will probably find it easier to be successful in future KIC topics such as Health or Added-value manufacturing which are in areas of national expertise / investment and where we have active Innovation Platforms (eg assisted living) or other similar activities. As stated in the recent Innovation & Research Strategy, BIS with our partner organisations (principally TSB and Research Councils) will take a more active role in assisting potential UK participants in KICs. Questions aiming at both public authorities and other interested parties

5. How important is the level of private funding for the development of R&D&I policy in your Member State? Can you indicate the relative importance of the various sources of private funding such as loan financing from banks, own capital resources, existing shareholders, venture capital (investment in unquoted companies by investment funds) and risk-capital investment (equity and quasi-equity financing to companies during their early-stages)?

The aim of most innovation support programmes in the UK is to incentivise business investment in R&D and innovation, as this is an area where public sector investment has the greatest spillover benefits; OECD research21 suggests that an increase of 1% in business R&D investment increases multi-factor productivity by 0.13%, whilst a 1% increase in public sector R&D achieves a multi-factor productivity increase of 0.17%. Public sector investment also helps overcome well-evidenced market failures in this area (e.g. difficulties in accessing finance, information failures). However, within the UK economy, other forms of investment in innovation are more important than R&D. Overall, R&D investment accounts for nearly 43% of all investment in innovation, but this is heavily concentrated in sectors such as life sciences, aerospace, automotive and communications technologies. Across services sectors, including business services, many digital technologies sectors and the creative industries, other innovation inputs are more important, and companies invest significantly more in acquiring external knowledge and skills, design, branding and marketing. UK businesses are significant investors in these activities. NESTA research has shown that in 2007, UK businesses invested £133 billion in intangible assets, equating to 14% of GVA created, which is higher than most comparable economies.

Within the UK, most business investment in R&D is financed through retained earnings. Whilst company profits have been reduced during the recession, overall, investment in R&D has held up well. In 2009-10, £15.6bn was spent on total R&D performed in UK businesses (BERD). In real terms this is a 4.1% decrease on 21 OECD, 2004, a study of 16 countries, including the UK, between 1980 and 1998.

-- 12

revised 2008 figures (a 2.5% decrease in cash terms). BERD as a proportion of GDP was 1.1% in 2009, unchanged from 2008 and 2007. Some sectors recorded large increases in spending, including: pharmaceuticals, and miscellaneous business activities; technical testing and analysis, R&D Services; and electricity gas and water supply. Others, such as the automotive and electronics sectors registered falls in investment. However, overall, it is clear that in contrast to previous recessions, UK businesses have sought to maintain their investment in R&D and high-value business activities, recognising the importance of this to their future competitiveness. 6. To what extent has the current economic and financial crisis had any impact on:

– overall public R&D&I-policy;

– the granting of State aid for R&D&I in your Member State;

– the level of private R&D&I spending? If so, can you describe such impact and indicate if, and how, your authorities have adapted their overall R&D&I policy and in particular State aid granting in response? How do your authorities intend to ensure funding for R&D&I of SMEs, which have been particularly hit by the impact of the financial crisis on bank lending?

The recently published Innovation and Research Strategy for Growth22 has been developed to reflect the Coalition Government’s response to the global economic situation, through returning the UK economy to a path of sustainable investment-led economic growth and reducing the fiscal deficit. It sets a strategy for placing investment in research and innovation at the centre of the UK’s approach to returning to a path of sustainable economic growth driven by business investment, and for encouraging greater levels of innovation in all sectors of the economy, supported by a better-integrated and more cohesive innovation system. The Strategy made a number of specific announcements of additional investment in R&D&I, including:

a. additional capital investments in research infrastructure of £495m, including high performance computing and e-infrastructure, satellites, and specific research facilities;

b. the investment of £50m to create a Graphene Global Research and Technology Hub in the UK, and £6m to create an Open Data Institute to exploit the potential of semantic web technologies;

c. a £25m investment to develop a large scale demonstrator in the area of future cities; and

d. £75m of investment over three years to support technology-based SMEs, which will be spent through a range of existing programmes

22 http://www.bis.gov.uk/assets/biscore/innovation/docs/i/11-1387-innovation-and-research-strategy-for-growth.pdf

-- 13

approved under the GBER, with an additional £180m invested in a Biomedical Catalyst to accelerate the development of innovative technologies in the life sciences sector.

A.2. Rationale of R&D&I policy

Questions aiming at public authorities:

7. What were the main policy objectives of your Member State's R&D&I policy (e.g. increase of R&D&I investments, better allocation of resources, development of a particular sector or activity or region, employment, environment)? In case you do not consider that the relevant measures were geared towards any specific objective, can you indicate why?

Our R&D&I policies are focused on increasing UK capability to innovate and commercialise new technologies, and using this to drive economic growth and employment creation. The main metric used to evaluate the impact of R&D funding programmes is Gross Value Added (GVA), although data is also gathered on company growth, income generated from an innovative product or project and employment creation. Links to recent evaluations conducted are included in our response to question 10. 8. Do you consider that your Member State pursues different R&D&I objectives when

implementing non-aid R&D&I measures and State aid R&D&I measures? If so, can you identify such differences?

No, the most appropriate instrument for the objective in question is used. 9. How does your Member State see the balance in its R&D&I policies between interventions

involving State aid and other policies that seek to nurture R&D&I. Where do you see the main contribution from State aid measures going beyond general horizontal measures?

As set out in the Innovation and Research Strategy for Growth (December 2011), the UK recognises that innovation is a systemic process and needs to be supported through a coherent and integrated system that enables innovators to access funding, expert knowledge and other resources at different stages of the innovation cycle. Consequently, the UK Government funds a range of non-State Aid R&D&I measures that are linked to innovation, including support for research and investment in university research and teaching, as well as research infrastructure. The UK also supports activities such as metrology (the National Measurement System), as well as some activities in relation to the development of standards and accreditation, where there is no market incentive for the provision of these. The value of providing support to business that constitutes State Aid is that these subsidies incentivise businesses to undertake a higher level of R&D activity; projects that have a higher level of inherent risk, but which have the potential to generate greater benefits. This helps to maximise the benefits of wider investments in the innovation system (e.g. into research and HE) by encouraging companies to make use of the knowledge generated and to develop commercial applications for this. Therefore, the UK believes that it is important to achieve a balance between support for different elements of the innovation system, and this includes support for business through State Aid measures.

-- 14

10. How do you evaluate the effectiveness of your R&D&I policy? Do you carry out evaluation

analysis of either individual measures or programmes?

The UK conducts regular evaluations of its programmes for supporting R&D. Most evaluations are undertaken by independent external consultants, and these studies are published. Links to the most recent evaluations of the main business support programmes are included below:

KTP review http://www.innovateuk.org/_assets/pdf/corporate-publications/ktp%20strategic%20review%20feb%202010.pdf

Grant for R&D (This has now been rebranded as Smart) www.bis.gov.uk/files/file52026.pdf

Collaborative R&D http://www.innovateuk.org/content/news/evaluation-of-collaborative-rd-published.ashx

R&D Tax Credits evaluation http://www.hmrc.gov.uk/research/report107.pdf

Questions aiming at both public authorities and other interested parties:

11. How do you see your R&D&I policy evolving in view of the Europe 2020 strategy referred above and its implementation?

We welcome the Europe 2020 Strategy and its overall aims and objectives, and accept the target of the EU spending 3% of GDP on R&D. However, we have not set a national target for R&D investment in the UK, as this has not proved effective in the past, although the level of investment in R&D in the UK is monitored on an annual basis. We also welcome the Innovation Union policy document, which sets a clear direction for future EU policies in the area of research and innovation.

Many of our R&D policies and programmes already reflect the overall thrust of Innovation Union ie increased focus on socioeconomic challenges; a partnership approach bringing supply, demand and frameworks together; non-technological forms of innovation such as design; increased use of public procurement of innovation; and improved VC provision.

We have welcomed the proposals for Horizon 2020 that the European Commission has published and will engage constructively in the development of this programme. Overall, we see this as well balanced and expected to make a real contribution to Member States’ ability to build a good environment for R&D&I. Chapter 5 of the Innovation and Research Strategy for Growth refers to the key areas of European policy and programmes on which we will focus.

The UK also welcomes the proposal of the European Commission to concentrate ERDF on three thematic objectives, including research and innovation. A.3. The R&D&I-Framework's impact on R&D&I policy

-- 15

Questions aiming at public authorities:

12. Has the design of your overall R&D&I policy been influenced by the provisions contained in the R&D&I-Framework (for example the eligible categories of aid, assessment of incentive effect)? Are there examples of support measures whose design was modified from the one planned to align it to the requirements of the R&D&I-Framework? If so, can you explain why?

All our R&D&I policies take account of the State Aid framework and generally are well able to be delivered within its constraints. Questions aiming at both public authorities and other interested parties:

13. Do you consider that the current R&D&I-Framework has given guidance for Member States to design large individual R&D aids that are better targeted at market failures than under previous R&D State aid rules?

No comment.

SECTION B: GENERAL QUESTIONS ON R&D&I STATE AID

B.1. Effectiveness of R&D&I State aid

Questions aiming at public authorities:

14. If your Member State has achieved R&D&I objectives through measures that may not involve State aid under certain conditions, please indicate if these measures fall under any of the following headings and how is it ensured that they do not involve State aid:

- de minimis aid23

- R&D&I infrastructure

- Industrial property rights (IPR) policy

- Education and training

- Mobility of qualified personnel

- Knowledge and technology transfer

- General fiscal incentives

- Public procurement policy

23 Small aid (“de minimis aid”) to an enterprise that is below € 200,000 over a period of three fiscal years and

respects certain conditions, does not constitute State aid in the sense of Article 107(1) of the Treaty, since it is deemed not to affect trade or distort competition. Conditions for de minimis aid are laid down in Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid”, OJ L 379, 28.12.2006, p. 5.

-- 16

- Information campaigns

- Other general measures

The UK delivers R&D&I through a broad variety of aid and non-aid measures. In particular, the UK has established a highly effective IPR service delivered by the Intellectual Property Office (IPO). Innovation is promoted by providing a clear, accessible and widely understood IP system, which enables the economy and society to benefit from knowledge and ideas. As well as providing operational delivery of Intellectual Property Rights (IPRs) the IPO has also set itself a goal of delivering ‘Global and national IP policy that promotes UK competitiveness and growth, and meets the needs of consumers and society.’ We have put considerable emphasis on using public procurement as a means of stimulating innovation capacity in the UK through our Forward Commitment Procurement programme, which helps public sector organisations to engage with supply chains to develop products and services for which there is demand, but that do not currently exist, and the Small Business Research Initiative (SBRI), which enables public bodies to procure R&D&I to meet policy objectives. These competitions are run in accordance with the rules set out in the Procurement Directives, as well as the 2007 guidance provided by the European Commission on the Pre-Commercial Procurement of R&D services by public bodies.

Research and Development (R&D) Tax Credits provide companies with an incentive to carry on additional R&D, addressing a market failure which causes companies to do less R&D than is optimal for society. There are two schemes:

- the SME scheme, introduced in 2000, gives companies an additional deduction of 100% (increased from 75%% from April 2011 , and increasing to 125% from April 2012) and the possibility of a payable credit worth around 25% of the qualifying R&D expenditure. The SME scheme is an approved State Aid; and

- the general (or large company) scheme, introduced in 2002 which gives an additional deduction of 30%, but no payable credit. This scheme is open to all companies in the UK undertaking qualifying activities, and as such is not considered to be a State Aid.

The UK Government is introducing a Patent Box from 1 April 2013, which will apply a reduced 10% rate of corporation tax to profits from patents and other similar types of intellectual property (supplementary protection certificates, regulatory data protection and plant variety rights). The aim of the Patent Box is to provide an incentive for companies in the UK to retain existing patents and to develop new innovative patented technologies; and to encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK. The Patent Box will not involve state aid as it is available to all businesses operating in the UK. 15. What has been the R&D&I-Framework's impact on the overall effectiveness of your R&D&I

policy?

-- 17

Largely supportive. We have broadly been able to deliver the necessary interventions under cover of the existing rules. Questions aiming at both public authorities and other interested parties:

16. Please make available any relevant studies or reports that describe the effectiveness of R&D&I-State aid in your country.

Links to the evaluations of the effectiveness of the business support programmes that operate within the R&D&I State Aids framework are included in our response to Question 10.. 17. According to your experience, which are the most appropriate types of State aid instruments

to promote effectively R&D&I? (e.g. direct grants, reimbursable advances, loans, soft loans, fiscal incentives, provision of capital, guarantees, compensation above market prices for goods or services, consultancy, training, provision of infrastructures, public procurement policy, reduction of social-security contributions, debt write-off)). Please substantiate your answer.

It is hard to generalise, as different industry sectors and types of company benefit most from different forms of support. The position of the UK Government is that a broad range of measures are needed to address different market failures, or to target specific problems or opportunities that require innovation. For example, tax credits are a stable and predictable mechanism of support for companies, that incentivises investment in building R&D capability and conducting R&D activities, and helps to address the identified market failure in innovation finance. Grant funding programmes enable public bodies to target specific areas and encourage innovation activity in these, which helps to create new innovation collaborations between companies and the knowledge base; this helps to address the information failures linked to innovation. However, we believe there is strong evidence of the positive impact and additionality of both fiscal incentives for R&D and grant funding programmes that support these activities.

The UK Government has also made use of other mechanisms, including equity investments (primarily through the Enterprise Capital Funds programme, which provides funding of between £250,000-£2m to companies with high growth potential, through investing in private-sector managed funds. This is an initiative which targets an identified equity gap for SMEs, and is a notified State Aid. To date, this has invested over £124m. The UK Government has also established the UK Innovation Investment Fund (UKIIF), which operates under the Market Economy Investor Principle (MEIP), and is not a State Aid. It invests exclusively in technology-based businesses through venture capital funds. The UK Government also provides loan guarantees through the Enterprise Finance Guarantee (EFG) programme, which benefits technology-based and other businesses. In the past, the UK Government has provided funding for companies in exchange for an agreement to pay royalties on the revenues generated from an innovative product, although this initiative was stopped and has not been replicated. 18. According to your experience, which instruments do you regard as being particularly

effective in supporting innovative start-ups and SMEs?

-- 18

SMEs benefit from a number of targeted programmes in the UK, including Smart and Knowledge Transfer Partnerships (KTPs), as well as a more generous rate under the Small Firms R&D Tax Credit. They are also able to access the Collaborative R&D funding mechanism as part of consortia. The SBRI programme has also been designed to provide SMEs with opportunities to compete for contracts, although companies of all sizes are also able to tender, as this is a requirement of the Procurement Directives under the terms of which the scheme operates. Broadly, we believe that programmes which are flexible, responsive and accessible to single businesses rather than consortia, are most beneficial to SMEs. Alternatively, SMEs and investors (e.g. venture capitalists) have voiced strong support for the stability and predictability of the support delivered via the R&D Tax Credit. B.2. Positive effects of R&D&I State aid

Questions aiming at public authorities:

19. When granting State aid to R&D&I, how do the authorities in your country verify the existence of the incentive effect? Do you typically make enquiries into the counterfactual (i.e. what the firm concerned would do in the absence of aid). Please provide examples. Do you measure effect of additional public spending in leveraging private expenditure on R&D&I? If so, what are the results?

Verification of the incentive effect is undertaken as part of the evaluation of individual project proposals, through applicants being asked to assess the viability of the project with and without aid, and demonstrate the incentive effect of the aid as defined in Article 8 of the GBER. For example, under the Regional Growth Fund applicants are asked to provide internal documentation provide a credible assessment of the viability of the aided project or activity with aid and without aid. This is undertaken as part of a wider assessment of the project against criteria relating to the additionality of state support, quality of the technology development being undertaken, the capability of the organisation to do this, and the likely economic impact.

This process is undertaken as part of a wider evaluation of the project against criteria relating to the quality of the technology development being undertaken (the aim is to encourage companies to undertake larger or more ambitious projects than would otherwise be supported), the capability of the organisation or consortium to do this, and the likely economic impact.

The incentive effect of State Aid R&D&I is also investigated as part of the evaluations of the impact of business support for innovation in the UK. These evaluations have shown that in the case of Collaborative R&D, 86% of projects would either not have gone ahead or probably not have gone ahead without the support provided through public sector funding. The 2009 evaluation of Smart found that 70% of projects were wholly additional and would not have happened without public funding, and a further 26% were partly additional.

With regards to the provision of repayable advances to the aerospace industry, the UK undergoes a detailed assessment of the incentive effect, not just for the R&D&I notification process but also for its own approval requirements. It assesses the economic benefits to the UK, reviews the technology being developed and the risks, financial due diligence, particularly assessing whether

-- 19

the company could fund the project themselves or through the market, and whether there is a market for the product being developed. The counterfactual analysis is also undertaken and is also necessary for the UK’s own approvals. However, the counterfactual is not always easy to demonstrate and can become a fluid part of negotiating the advance.

Questions aiming at both public authorities and other interested parties:

20. Under which circumstances would you consider that State aid for R&D&I is necessary? Please identify positive effects of R&D&I State aids and in particular any market failures that should be overcome by R&D&I State aid or other reasons.

There are a number of established market failures in relation to innovation, relating to the ability to access funding, identifying potential collaborators and in the provision of information. These have an impact on the level of investment companies are prepared to make in R&D, or other forms of funding such as venture capital, that supports technology commercialisation. The market failures arise from the inherent risks that technologies will not work, or work less well than anticipated, and the financial risks associated with long term and complicated technology development projects. This is a particular problem in the UK, where Business Expenditure on R&D (BERD) is 1.1% of GDP. This is well below the Organisation for Economic Co-operation and Development (OECD) average of 1.63%. Early stage technology enterprises are particularly seen as vulnerable to capital scarcity, and find it difficult to raise equity debt or other forms of finance.

There is also the difficulty that innovators have in appropriating the economic return from their research and innovation, due to the spillover benefits that occur through, for example, the movement of workers or the use of technologies in new areas of application. Economic research into this area indicates that whilst the private return on investment in R&D is likely to be 20–30%, the social rate of return is likely to be 50–100%. Whilst this creates a strong incentive for public investment into science and R&D, it acts as a disincentive to private sector investment, particularly at the earlier stages of technology development, sometimes identified as Technology Readiness Levels 1-4.

Other market failures that have been identified in the area of innovation include difficulties in accessing specialist skills and knowledge required in connection with innovation, which individual companies do not possess internally, or access to specialist technical facilities or services, the costs of which are too high for most individual businesses to bear. There is also an established market failure in the area of information provision, and the ability of innovators to identify sources of knowledge across the public and private sectors that can support innovative projects.

Most of the market failures that exist in research and innovation are generic, and these affect companies in all technology-based sectors. The difficulties in accessing finance and other resources, and market failures relating to the provision of information, tend to be related to company size rather than sector. Most of the available economic research has identified that SMEs face particular problems. However a report produced by Oxera identified that the sector in which a company is active is a crucial variable in innovation market failures. The report found that companies in technology-based sectors that depended on innovation

-- 20

needed to invest a higher proportion of their resources in innovation and, because of this, any market failure in the area of innovation would be magnified in these sectors.

Whilst these market failures affect all technology-based sectors, there is some evidence to suggest that sectors are affected to a different extent. Sectors which are capital intensive and have long horizons for product development, such as the life sciences (particularly those SMEs developing new medicines), aerospace and low carbon energy where many R&D activities are further from market, are particularly affected by market failures. These relate to access to finance, particularly early stage finance, and difficulties in appropriating the value of their investments. This reduces their attractiveness to potential investors. A report by HM Treasury, Bridging the Finance Gap, suggested that the difficulty in raising equity finance varied by region, sector, round of funding and stage of development. Other evidence suggests that for technically complex investments, such as clean energy or life sciences, the equity gap identified by Bridging the Finance Gap of £250,000– £2 million could be higher, at £10– £15 million.

21. Under which circumstances do you consider that State aid measures have an incentive effect, i.e. stimulate additional R&D&I efforts by the recipient of aid? In your opinion, is State aid mainly needed to address financing constraints (e.g. inability of firms to attract external funds for R&D&I) or to address low profitability of R&D&I (e.g. inability for firms to reap the profits of innovation)?

Public funding is primarily required to address financing constraints, and to provide an incentive for companies to undertake ambitious R&D projects, which have a high degree of inherent risk. This is where public funding for innovation adds most value, as it leads to projects being undertaken which are larger, or more ambitious than those companies would be willing to undertake utilising only their own resources. Specific examples of such projects that would not have occurred in the UK without public sector funding include the development of high value manufacturing technologies, involving the development of equipment and manufacturing techniques for use with high performance materials, the development of low carbon vehicles and marine and tidal energy technologies.

The available economic evidence suggests that whilst innovators cannot appropriate all the returns on an investment in R&D, they are able to derive sufficient returns on their investment for profitability not to be a concern. In general, the market failures in the area of innovation relate to the difficulty in accessing resources of capital or knowledge for innovation, as set out in response to Question 20; these are the key obstacles which public support seeks to overcome. An additional justification for public investment are the high social rates of return on innovation. Because innovators cannot appropriate all the benefits of their investment, these spillover into other companies and sectors, and so have a wider positive impact.

Our experience has shown that State aid measures do incentivise the recipient to do more R&D&I. As previously mentioned, the State aid addresses the market failure, but it also helps companies to build on their previous development experience and proceed on to the next development.

-- 21

B.3. Negative effects of R&D&I State aid

Questions aiming at both public authorities and other interested parties:

22. What do you think are the main potential negative effects of R&D&I State aid, i.e. distortions of competition and effects on trade? Which circumstances could in your view lead to a high risk of distortion of competition/effect on trade, as a result of an R&D&I aid? For the purposes of your reply, please consider in particular the following circumstances: market proximity of the supported R&D&I activity; amount of aid; size of the beneficiary; market power of the beneficiary; level of positive externalities; structure of the market concerned.

In our view, as the framework stands, the rules and thresholds broadly strike the right balance between enabling aid for key R&D projects and minimising market-distorting effect with the detailed assessment applying to the largest and most potentially distortive projects. 23. Under which circumstances would you consider even aid below the thresholds beyond which,

pursuant to the R&D&I-Framework, a detailed assessment of the aid is mandatory to hold a high risk of distortion of competition? Do the current rules sufficiently capture the potential combined effect ("cumulative effect", positive or negative) of various aid measures granted under schemes?

No comment. 24. Which safeguards should be in place in order to avoid that harmful distortive effects of the

State aid intervention outweigh the positive effects? Should the rules emphasize the use of less distortive means where available?

The UK Government believes the current systems of thresholds and the GBER approval process provides adequate safeguards against market distortion, given the limited risk of distortion as a result of R&D&I activity. 25. Do you consider territorial restrictions as to the beneficiary and/or the eligible R&D&I

activity (e.g. the requirement that eligible activities are carried out in a certain Member State or region) as necessary to attain the objective of R&D&I State aid measures? If yes, please explain why and indicate what is the degree of limitation that you apply or would consider necessary? Or do you consider that such territorial restrictions have negative consequences, for example on the incentives of potential beneficiaries to locate R&D&I activities in the EU?

No comment.

SECTION C: R&D&I- FRAMEWORK

C.1. General questions on the R&D&I-Framework

Questions aiming at both public authorities and other interested parties:

-- 22

26. What is your general assessment of the current R&D&I-Framework: what has worked well, and what has worked not so well? Please substantiate your answer.

We are broadly happy with the Framework as it stands – see comments below for key areas where some improvement would help. 27. Do you consider appropriate the overall balance in the architecture of the rules, between

block exempted measures, assessment of aid schemes and individual measures subject to the in-depth assessment? Is there any potential to improve the current structure? If yes, please specify any desirable improvement.

The UK believes the overall balance within the State Aids framework is broadly right. However, we believe there is a need for the Commission to review the position regarding allowable aid for industrial research and experimental development , given falling levels of commercialisation in the EU relative to key third countries and the increasing cost of vital technology development projects, particularly demonstration and prototyping projects within capital intensive, mature industries. The UK would requests that the European Commission investigate the funding and state aid requirements for such high cost and risk projects and consider whether there is a case for changes to the state aid framework to ensure that important projects are able to proceed. Please see more detailed explanation at paragraph 42.

C.2. Notion of aid in the context of the R&D&I-Framework

Generally any funding meeting the criteria of Article 107(1) of the TFEU will be considered to be State aid. In the field of R&D&I, some specific questions arise concerning the notion of State aid. Research organisations qualify as an undertaking within the meaning of Article 107(1) of the TFEU if they carry out an economic activity. If the public funding of the economic activities is done on normal market conditions it would not entail State aid. Indirect aid could be granted to undertakings through publicly funded research organisations.

Questions aiming at public authorities:

28. Considering financial instruments, do you find necessary to further clarify the notion of transparent aid and to provide further guidance for the quantification of the aid element in such instruments? If yes, what do you consider to be the necessary elements in this regard?

Not aware of any problems. 29. Please indicate if you have encountered any difficulty in the evaluation of the possible

existence of State aid elements in public procurements that promote R&D&I, including both public procurements of R&D (such as pre-commercial procurement24) and public procurements of innovative products and services. If so, please describe such difficulty. How do you/would you address it? Do you find necessary to further clarify these issues in the R&D&I-Framework? Do you have mechanisms in place at national/regional level to avoid

24 For more information about pre-commercial procurement, see http://cordis.europa.eu/fp7/ict/pcp/home_en.html

-- 23

overlaps and/or incompatibilities in financing of R&D&I that are provided by R&D&I aid measures versus public procurements?

The UK is not aware of any difficulties in evaluating whether public procurements of R&D&I create State Aids. The Commission guidance on Pre-Commercial Procurement (published 2007) has been useful in this respect. However, changes may be required as a result of any changes that might be made to the Procurement Directives following the current review. 30. Have you encountered any difficulty as regards the application of State aid rules to public

funding of R&D&I infrastructures, including infrastructures designed for dual use (economic and non economic)? If so, please describe such difficulty. How have you addressed it? Do you find necessary to further clarify these issues in the R&D&I-Framework? If yes, what do you consider to be the necessary elements in this regard?

The UK has made wide use of, and supports the Commission guidance in section 3 of the current R&D&I framework, as regards research infrastructure. The guidance provides helpful clarity and insight into how principles of aid should be applied in this context, providing us with greater confidence to make such interventions in a way which is compliant with the rules. The approach adopted by the Commission, of allowing investments which create infrastructure which is accessible to external parties on a non-discriminatory basis, should be continued. Questions aiming at both public authorities and other interested parties:

31. Do you consider appropriate the current guidance and criteria applicable to collaboration between research organisations and undertakings, as regards the aspects relating to:

– indirect aid to undertakings through collaboration with publicly funded research organisations;

– the provisions applying to contract research by public research organisations on behalf of undertakings.

– the terms on which research organisations and undertakings collaborate, for example in respect of the terms for transferring intellectual property? If not, what would be in your view the most appropriate elements to take into consideration in this regard? Do you consider that there are other areas where the current guidance and criteria that are applicable to collaboration between research organisations and undertakings should be improved?

The UK believes that the existing framework is adequate, and provides sufficiently clear direction on these issues. 32. What is in your view the most effective method to establish the market price of services or

intellectual-property rights that are performed/generated by publicly funded research organisations? Which method does your Member State/your organisation apply?

The UK Government believes that in principle, the market should determine the price of services or intellectual property rights, and that this should be achieved through negotiation between organisations. The UK Government allows publicly funded research organisations considerable discretion to develop their own IP

-- 24

policies and determine charges for their services. In order to ensure that there are sufficient incentives for institutions to negotiate on a commercial basis, the UK Government has a policy of encouraging ownership of IP by the organisation best-placed to exploit this, which in practice means allowing universities and other publicly-funded research organisations to retain the ownership of the IP that they generate; in general, funding organisations do not retain ownership this in whole or in part. The same principle is also extended to IP generated during R&D projects supported by public funding, where the UK Government does not seek to retain any share of the ownership.

Universities are encouraged to maximise their external income through incentives such as Higher Education Innovation Fund (HEIF) support, which provides funding for universities based on the level of external income they generate. This funding mechanism is formula-based, so as universities increase the level of external income they generate, they receive a higher level of funding through HEIF

33. Are there any other aspects referring to the notion of aid that are in need of further

clarification? If yes, please indicate them and justify your answer.

We are broadly content with the current framework

C.3. Definitions provided by the R&D&I-Framework

Questions aiming at both public authorities and other interested parties:

34. Based on your experience with the application of the R&D&I-Framework, are there any definitions (e.g. research organisations, process and organisational innovation, innovation clusters) in need of further clarifications or change? If so, what should be the main elements to be considered?

35. Do you consider, in particular, that the current definitions of 'industrial research' and 'experimental development' (Points 2.2.(f )and (g) of the R&D&I-Framework) are sufficiently clear with regard to those activities, which fall under the scope of the R&D&I-Framework?

36. Do you consider the scope of the definition of 'research organisation' (Point 2.2.(d) of the R&D&I-Framework) as sufficient to cover entities engaged in non-economic R&D&I and/or in innovation-intermediary activities?

The UK supports the ongoing use by the Commission of the definitions of activities that constitute R&D as set out in the Frascati Manual. Whilst these are imperfect, in that they draw distinctions between what are in practice interconnected activities within a single process, there is merit in continuing to use the established and internationally agreed definitions, which EU Member States (and WTO members) are familiar with, and on the basis of which R&D funding programmes, fiscal incentives and other measures in a large number of countries are based.

C.4. Scope of the R&D&I-Framework

Questions aiming at both public authorities and other interested parties:

-- 25

37. In your view, are there any fundamental differences between R&D&I activities undertaken in different sectors and/or areas of knowledge, which would require a differentiated treatment under State aid rules? If so, please substantiate your answer.

See the answer to Question 20. 38. To the extent that current rules already cover more than just technological R&D&I and thus

allow to support also new and emerging forms of R&D&I activities, do you consider that there are still market failures that prevent social innovation (e.g. regarding the ageing society, mobility, integration of minorities) or innovation in the production and distribution of cultural content in a digitalised world that would deserve public support and that are not sufficiently considered under the current rules? If so, please indicate them and justify your answer.

39. R&D&I activities do not necessarily follow a linear approach from R&D towards market application (innovation), and other forms of innovation can materialise in this process (collaboration across organisational boundaries through innovation networks/platforms, clusters, co-creation, crowd-sourcing, open innovation, innovation management, multidisciplinary cooperation for innovation, etc). Based on your experience, is there any need for specific public intervention to support these forms of innovation processes beyond the current provisions of the R&D&I-Framework? Do the current definitions in the R&D&I-Framework sufficiently cover these forms of innovation processes?

The UK Government does support a number of initiatives for innovators e.g. the Knowledge Transfer Networks and the _connect online platform hosted by the Technology Strategy Board. These are intended to address the market failure related to information provision. However, these are relatively low cost and are provided by the UK Government free of charge to all users, and do not require support through measures that count as State Aid. Therefore, the UK Government would not propose changing the current definitions to allow more generous support to be provided, as there are other mechanisms for this. 40. Does the R&D&I-Framework need to become more specific about activities such as user-

focused innovation and design? Should it include some types of marketing activities?

In the view of the UK Government, these elements are already adequately covered in the R&D&I Framework. A number of higher-level design activities fall within the scope of the Frascati definition and can be supported, and where they do not, there is likely to be insufficient evidence of market failure to justify a significant level of public support.

C.5. Specific State aid objectives covered by the R&D&I-Framework

C.5.1. Innovation aid measures

Questions aiming at both public authorities and other interested parties:

41. Based on your experience (e.g. evaluation of aid measures, reports by beneficiaries and industry), do you consider innovation aid (aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory services and innovation support services, aid for the loan of highly qualified personnel, aid for innovation clusters) as effective? If you cannot evaluate its effectiveness, what are the reasons for that?

-- 26

Northern Ireland has tried to use section 5.8 of the R&D&I guidelines (aid for innovation clusters) and have found that these are not workable.

Having considered how Invest NI’s clustering projects actually work and are set up, it would probably be more helpful if the conditions in section 5.6 (Aid for innovation advisory services and for innovation support services) and Article 36 in the General Block Exemption Regulation were relaxed to allow:

(a) the beneficiaries to be all sizes of companies (i.e. not just SMEs); and

(b) a widening of the eligible costs for ‘innovation advisory services’ to include ‘innovation cluster facilitators’ and a widening of the eligible costs for ‘innovation support services’ to include ‘innovation cluster facilitation’.

These proposed changes would allow State aid to be provided to larger clusters via a lead cluster member. All the State aid would be channelled through the lead member (i.e. it would pay the cluster facilitator and cluster facilitation costs) but with the benefit of the State aid would accrue to all cluster members.

In relation to the widening of scope to cover large companies, it should be noted that these are usually recruited into clusters because of the knowledge and spillover benefits that they can provide to the cluster. In many cases it could actually be argued that they are not a beneficiary of the State aid (i.e. they just contribute to the cluster and do not receive knowledge back). However, it cannot be excluded that they may benefit commercially from their participation in the cluster (e.g. by expanding their supplier base or diversifying their products into new markets etc), so it would be logical to widen the scope of section 5.6 and Article 36 to cover large companies as well as SMEs.

The Commission suggested in January 2010 that the UK should look at the possibilities offered by GBER Articles 26 (consultancy in favour of SMEs) and 36 (innovation advisory services and innovation support services). Having looked at both, the UK considers that para 5.6 in the R&D&I Guidelines and GBER Article 36 are the best fit for providing support to 'innovation clusters'.

42. Is there any specific need to revise State aid rules to make innovation aid more effective? In which areas? Please substantiate you answer.

The UK Government believes there is a strong case for the Commission to review the types and levels of aid which are permissable for more large scale, capital intensive and risky projects, particularly large demonstration projects and prototypes. In particular, the UK believes that this review should consider whether the existing rules of the state aid framework on support for the experimental development phase of R&D, currently provide adequate support for the commercialisation of technology-based products and services where there are significant costs linked to proving that these technologies operate safely and effectively and are ready for market.

-- 27

Companies face significant financial burdens during the demonstration phase of R&D projects, particularly in capital-intensive sectors such as renewable energy, or sectors where large scale and complex manufacturing processes need to be developed and tested (e.g. Micro and Nano Electronics, or advanced materials). The importance of support for commercialisation activities in these sectors and the need for the EU to invest more if it is to remain an internationally competitive location for innovation was highlighted in the report of the High Level Group on Key Enabling Technologies, particularly in the sectoral reports on Micro and Nano Electronics and Industrial Biotechnology (http://iri.jrc.ec.europa.eu/concord-2011/papers/wydra_sven.pdf).

It is the experience of the UK that the need to support the prototyping and demonstration of new technologies at scale is increasingly important if they are to be successfully commercialised. This is primarily due to the need to develop new and enhanced infrastructure and systems for the delivery of utilities and other public services (e.g. intelligent transport systems, sensor enabled autonomous systems to manage water and energy infrastructure, assisted living systems), or to develop large-scale innovations that will respond to societal challenges such as climate change. Governments, regulators, companies and consumers will not accept the risk of using technologies that have not been proven to function effectively when deployed at scale in real operating environments, rather than in laboratory or controlled test conditions, because the risks are too great. Unless these technologies are adequately demonstrated they will not be adopted by the market, and the benefits of the investment made in R&D will not be realised, as these primarily flow from the adoption of new technologies. Under the present rules the support available within the state aid rules falls at this stage of development because this is closest to the market. However for certain technology development projects costs are increasing and the level of risk is high at this crucial phase in the commercialisation process when innovators are seeking to prove that a new product or service can operate effectively. As a result it is possible that important projects will not proceed. As noted in the 2011 Innovation Scoreboard (http://www.pro-inno-europe.eu/inno-metrics/page/innovation-union-scoreboard-2011), there has been a decline in business investment commercialisation activities in the EU, despite an increase in the level of investment in R&D within the EU as a whole. The Scoreboard identified that this has had a particular negative impact on SMEs; a decrease of 0.7% in the number of SMEs introducing product or process innovations and a drop of 1.2% in the level of sales of new-to-market products and firm innovations. The EU continues to perform worse than key competitor countries in its ability to translate research into innovative products and services and we wish the Commission to consider whether available levels of state aid may be a contributing factor. The commercialisation of certain technologies where higher levels of risk and cost might be involved is not only important for growth and competitiveness of EU companies. The societal challenges faced by the EU will require large scale changes to existing infrastructure and systems, for example the need to move to smart grids which are better able to respond flexibly to demands for energy, and transport and healthcare systems, as well as sustainable buildings, vehicles and other infrastructure. Given the essential services provided by these systems, and the potential impact of the failure of new technologies to operate effectively, it is essential that these are demonstrated and tested at scale in operating

-- 28

environments. This can be costly an expensive, particularly in sectors such as renewable energy. It is estimated that it will cost c£40m to develop and demonstrate a marine energy turbine in order to get it to the point at which it is ready for market, with a significant proportion of these costs falling into the experimental development phase of activity, involving anchoring a turbine on the sea bed, and monitoring its performance over a period of time, then making necessary additional adjustments to the design and operation of this to optimise performance. The UK has taken a lead in seeking to demonstrate these technologies, for example through supporting the world’s largest low carbon vehicles demonstrator, and we are in the process of implementing three large-scale assisted living demonstrators. however, the UK has had to support these, and smaller scale demonstration activities such as sustainable construction technologies, through the use of public procurement mechanisms within the Pre-Commercial Procurement (PCP) Framework, because companies were unwilling to take the financial, technological and reputational risk of demonstrating these systems without a higher level of public support than can be provided for under the current State Aids Framework (25%). Whilst the use of PCP offers an alternative approach to supporting demonstrators, it increases the costs to the public sector of supporting these projects at a time when there is increasing pressure on public sector finances which might mean less projects would go ahead than would be optimal were more funding available.

C.5.2. Aid to innovation clusters

Questions aiming at both public authorities and other interested parties:

43. The current R&D&I-Framework allows for the promotion of innovation clusters. Based on your experience, do you consider the conditions for promoting innovation clusters appropriate? If not, please explain why.

44. What is your experience and recommendations with the investment aid to the legal entity that operates an innovation cluster for setting-up, expanding, and animating the cluster activities (often referred as “cluster organisation”)?

45. What is your experience and recommendations with the operating aid to cluster organisations, and particularly to the funding scheme of phasing out support, limited to 5 years?

C.5.3. Aid for technical feasibility studies

Question aiming at both public authorities and other interested parties:

46. According to your experience, do you consider the current limitation of the aid to 'technical' studies appropriate? Please explain.

UK public authorities have made use of this provision and we would support its retention. We have no specific concerns with this. C.5.4. Industrial property rights

-- 29

Question aiming at both public authorities and other interested parties:

47. According to your experience, do you consider the current rules on aid for industrial property rights appropriate? Please explain.

No comment. C.5.5. Aid to prototypes/pilot projects

Questions aiming at both public authorities and other interested parties:

48. According to your experience, is there any need for specific public intervention to support the development of prototypes which are ‘first-of-a-kind’? If so, please justify your answer.

49. Are ‘first-of-a-kind’ prototypes typical only for specific sectors and/or areas of knowledge and if yes, which ones? Are there specific sectors (besides the shipbuilding sector) where ‘first-of-a-kind’ prototypes are necessarily the final commercial product? How do you/would you assess the ‘first-of-a-kind’ character of a prototype?

50. What is/would be the impact on competition of the funding of such 'first-of-a-kind' prototypes and pilot projects, and how would it be possible to foster this type of breakthrough innovations or technologies while ensuring a level playing field between companies and across Member States?

We see that there may be a case for the provision of exceptional levels of support for significant “first of a kind” projects, for example in the energy or manufacturing sectors, multi-modal intelligent transport systems or intelligent energy transmission and distribution systems (smart grids), where large scale demonstration is essential to proving these technologies work in real operating environments and costs and risks. Other possible projects could involve providing support for technology development in sectors of economic importance for the EU, but which are facing the need to rapidly develop complex new technologies to maintain their competitiveness and respond to societal challenges. A possible example would be support for next-generation passenger aircraft, similar to the support previously provided for Airbus under the rules allowing for support for projects of common European interest.

The justification for providing exceptional levels of support for these major projects would have to be their cost, the extent to which there were common European interests in the project and the involvement of a number of Member States, the requirement for demonstration at scale, and the significant collective benefits to society that would be created through their adoption, in terms of greater sustainability, reduced carbon emissions or future economic competitiveness. As well as limiting the circumstances in which such aid would be provided, there would also need to be a clear framework of rules on the disclosure of information about the innovation, and/or the involvement of partners, to ensure that an individual company or consortia was not able to secure an unfair advantage through this support. . C.5.6. Important projects of common European interest

Questions aiming at public authorities:

-- 30

51. Have you ever considered the possibility of measures that target support in R&D&I, to try and address an identified common EU interest, in line with the provisions of Article 107(3)(b)?

52. What experience do you have with the application of compatibility rules for aid under Article 107(3)(b) of the TFEU (part 4 of R&D&I-Framework)?

The UK had considered using these provisions to support the UK CCS demonstration project (notification subsequently withdrawn). Questions aiming at both public authorities and other interested parties:

53. For which type of projects would you consider that it is justified to design an approach based on common EU interest?

54. According to your experience, is there any specific need to revise the current rules? Please substantiate you answer.

See question 50.

C.6. Compatibility criteria of the R&D&I-Framework

State aid to R&D&I shall address a particular market failure and must lead to the recipient of aid changing its behaviour so that it increases its level of R&D&I projects or activities. Aid can only be declared compatible with the internal market if the distortion of competition is not considered to be contrary to the common interest

C.6.1. Standard assessment (Chapter 5 and 6 of the R&D&I-Framework)

For all the questions in this part on standard assessment, please, take also into account the distinction between schemes and ad hoc aids.

Questions aiming at both public authorities and other interested parties:

C.6.1.a) Aid intensities, aid amounts, bonuses

55. What is your experience with the aid intensities, aid amounts and bonuses that are permitted under the current R&D&I-Framework? To what extent are these:

– either too excessive, i.e. the market failure is, as a rule, overcome with less than the maximum permitted aid intensity/amount,

– or too restricted, i.e. the maximum permitted aid intensity/amount is not sufficient to overcome the market failure?

See question 42 - the UK Government believes there is a strong case for reviewing the aid allowable for supporting the experimental development phase of R&D in some circumstances. Significant financial burdens arise during the demonstration phase of R&D projects, particularly in capital-intensive sectors such as renewable energy, or sectors where large scale and complex manufacturing processes need to be developed and tested (e.g. Micro and Nano Electronics, or advanced materials).

-- 31

56. To what extent would there be any specific need for simplifying the current conditions regarding aid intensities, aid amounts and bonuses (e.g. harmonising aid intensities for feasibility studies preparatory to industrial research and experimental development)? Please substantiate your answer.

Further simplification of the State Aids Framework would be desirable. While we can see that there is a case for differentiating between large companies and SMEs, it is not clear if the relatively small difference in the level of support that can be provided for technical feasibility studies to small and large companies or if this is just adding to the complexity of the Framework. 57. Regional bonus: Do you consider that a regional bonus (as currently foreseen for aid to

young innovative enterprises and aid for innovation clusters) is justified or not, and why?

This may become more important if the ability to award aid in assisted areas is restricted.

58. Matching clause: The current R&D&I-Framework takes account of the international

dimension of competition: Its "matching clause" allows, under certain conditions, to exceed the permissible aid ceilings where a Member State can demonstrate that a competitor has received or is going to receive higher aid intensity outside the EU for a comparable project. However, the matching clause has never been invoked.

a) Do you still consider necessary/relevant the matching clause in its current form? If so, please justify your answer.

b) Do you consider that there is a need for a different mechanism to better take account of the international dimension of R&D&I competition? If so, please substantiate your answer.

The non-use of the existing matching clause suggests that these mechanisms may be ineffective in ensuring that EU Member States are not disadvantaged by third country offers of higher levels of support, especially at the later stages of the innovation process.

We would request that the Commission review this provision and investigate whether there is scope for improvement. As suggested during the work of the High Level Group on Key Enabling Technologies, it can be very difficult to identify the levels of support provided by third countries to companies, as these are often the subject of commercially confidential negotiations, and can be made up of many different elements (e.g. direct funding, taxation, support for skills development and training, provision of land or facilities).

C.6.1.b) Eligible costs and other compatibility criteria

59. Based on your experience, what are your views on the other compatibility criteria (e.g. eligible costs, age of young innovative enterprises, and definition of highly qualified personnel) established by the R&D&I-Framework for the different aid objectives as appropriate? Please substantiate your answer.

-- 32

60. Eligible costs: In your view, should the concept of eligible costs relate to the total costs of the project or rather the incremental cost (extra costs compared to the counterfactual project)?

C.6.1.c) Incentive effect

61. According to your experience, do you consider the conditions for demonstrating the incentive effect of the aid (Chapter 6 of the R&D&I-Framework) as sufficiently clear and appropriate? Please differentiate in your reply between

– the formal aspect of the incentive effect (R&D&I activity must not have commenced prior to the aid application by the beneficiary to the national authorities)

– the material aspects of the incentive effect, in particular the analysis of the counterfactual (profitability (Net Present Value, NPV) of R&D&I project without aid; risk assessment; analysis of financing constraints).

C.6.2. Detailed assessment (Chapter 7 of the R&D&I-Framework)

62. Please provide your views, based on your experience, on the detailed assessment of individual aid measures, in particular the appropriateness of :

– the aid thresholds beyond which the detailed assessment is mandatory,

– the methodology: analysis of market failure, incentive effect, distortions of competition and trade,

– possible impact on national policy initiatives

63. Do you consider that when there are strong indications of the absence of a market failure (e.g. the market already undertakes R&D&I projects that are identical or very similar to the project notified), the distortion of competition and trade may be particularly high, and the aid should be prohibited?

64. Do you consider the criteria developed in the R&D&I-Framework as sufficiently precise to analyse and balance the positive and the negative effects of State aid? Please substantiate your answer, both for assessments under Chapter 5 (standard assessment) and Chapter 7 (detailed assessment) of the R&D&I-Framework.

C.7. Reporting and monitoring obligations under the R&D&I-Framework

Questions aiming at public authorities:

65. What is your experience in monitoring/complying with the R&D&I-Framework's provisions on the cumulation of R&D&I State aid with other aid (Chapter 8 of the R&D&I-Framework)?

66. What is your experience in reporting and monitoring (Section 10.1 of the R&D&I-Framework)?

No comment.

-- 33

SECTION D: GENERAL BLOCK EXEMPTION REGULATION (GBER): R&D&I MEASURES

A large part of the R&D&I-Framework was included into the GBER, thereby allowing Member States to support most of R&D&I investments without prior notification to the Commission. However the total amount of R&D&I aid granted through block exempted measures is still relatively low (9% of the total R&D&I aid was block exempted in 2009).

Questions aiming at public authorities:

67. To what extent has your Member State made use of the possibilities provided by the GBER? What proportion of aid for R&D&I was granted under the GBER in comparison to the R&D&I-Framework (please indicate the number of GBER aid measures and GBER aid amount as percentage of total R&D&I aid)? Which categories of R&D&I aid did your Member State use under the GBER (please quantify the number of measures and aid amounts)?

UK business support programmes for innovation managed by the Technology Strategy Board are approved under the GBER. The UK Government welcomes the GBER and believes the GBER process increases the speed and flexibility with which innovation support can be delivered, and that it is important that this framework is maintained or extended. Most direct funding support in the UK is delivered via programmes approved under the GBER; only exceptional projects, usually large ones, are supported outside this. 68. Do particular factors prevent your authorities from granting a larger proportion of R&D&I

aid through block exempted measures? If so, please specify.

No.

Questions aiming at both public authorities and other interested parties:

69. Do you consider the level of notification thresholds for R&D&I measures as appropriate?

70. Do you consider the scope of the R&D&I measures covered by the GBER as appropriate? If not, could you explain which modifications would be appropriate, and why?

71. Based on your experience, do you consider that the compatibility criteria (e.g. aid intensities, aid amounts, eligible costs) established by the GBER should correspond exactly to those established by the R&D&I-Framework for all different aid categories? If not, please substantiate you answer.

Greater alignment across the framework and regulation should result in greater clarity for granting authorities.

SECTION E: MISCELLANEA

Questions aiming at both public authorities and other interested parties:

-- 34

72. Do you have any other comments on the application of the R&D&I-Framework, including on issues other than the ones covered in the previous questions?

73. Please provide copies of any documents or studies which may be relevant for assessing the application of the current R&D&I-Framework and contributing to the reflection on its future revision.

Please indicate whether the Commission services may contact you for further details on the information submitted, if required. Y yes no

THANK YOU FOR RESPONDING TO THIS QUESTIONNAIRE.

-- 35

Annex I: Research, Development and Innovation State aid Framework

Consultation – Scottish Response

ABOUT YOU

For the rules on personal data protection on the EUROPA website, please see: http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata

Specific privacy statement: Received contributions, together with the identity of the contributor, will be published on the Internet, unless the contributor objects to publication of the personal data on the grounds that such publication would harm his or her legitimate interests. In this case the contribution may be published in anonymous form. Otherwise the contribution will not be published nor will, in principle, its content be taken into account.

Please provide your contact details below.

Name Alan Coleman Organisation represented Scottish Government / Scottish Enterprise /

Highlands & Islands Enterprise Location (country) Scotland (as devolved administration within UK) E-mail address: Alan.coleman@scotland.gsi.gov.uk

Please describe the main activities of your company/organization/association.

The UK Government’s Department for Business, Innovation and Skills (BIS) is responsible for supporting sustained growth and higher skills across the UK economy and leads and coordinates the UK position on State Aid including the R&D&I rules.

Power to decide R&D&I and business support policy and their implementation are devolved to the devolved administrations and as such there are some variations in the use of the rules. As such we have also provided the responses of each of the devolved administrations to sections A&B of the questionaire in order to provide the Commission with a full picture of the way R&D&I rules are used in the UK.

The Scottish Government is a devolved administration within the United Kingdom. Scottish Government recognises the importance of R&D&I in the delivery of economic growth. Through our key economic development agencies, Scottish Enterprise and Highlands & Islands Enterprise, we work in partnership with companies of all sizes, universities, colleges, local authorities and other public sector bodies to maximise our contribution to the Government Economic Strategy. We work closely with all industry sectors, including Life Sciences, Energy, Food & Drink and Healthcare, offering tailored support to businesses of all sizes. Support includes products, services, funding and investment opportunities.

SECTION A: GENERAL QUESTIONS ON R&D&I POLICY AT LARGE

-- 36

A.1. R&D&I policy - Fact finding

Questions aiming at public authorities:

1. Please describe how your authorities support R&D&I. Please provide a short historical overview of overall R&D&I policy and the legal instruments on which the public interventions are based. To what extent is such a policy run at the national, regional or local level?

• Winning Through Innovation is a programme of events that bring inspirational

thinking into everyday business, and opens doors to a whole series of specialised advice and assistance

• SMART: SCOTLAND helps experienced innovators raise their research and development effort

• Innovation Support Service helps ambitious companies fulfill their goal • The R&D Grant is funding for companies who have growth in mind, and seek

assistance with specific project

Scottish Government (SG), Scottish Enterprise (SE) and Highland 7 Islands Enterprise (HIE) have also supported specific sectoral initiatives, particularly support for research, development and demonstration of innovative approaches in ocean (wave and tidal) energy generation and attach high importance to supporting innovation in low carbon technologies / sectors in support of renewable energy and climate change targets. 2. Please describe the structure of the overall financial budget that has been committed to

develop overall R&D&I policy over the last 5 years in your Member State. Please provide a break-down by:

g) Types of support:

– No State aid measures:

– General R&D&I initiatives not targeted to firms (e.g. education),

– Financial support to firms below the de minimis threshold25,

Innovation Support is provided to companies as de minimis aid, as the specific requirements of the R&D&I Framework / GBER make it difficult to provide support for the wider definition of business innovation which SE and HIE applies.

– General measures (e.g. fiscal breaks for firms' investments in R&D&I).

– State aid: schemes, ad-hoc aids (outside schemes).

SE and HIE operates a number of company support measures through the Scottish Research, Development and Innovation Scheme, under the R&D&I Framework.

25 The de minimis threshold amounts to 200.000 € per undertaking over three years. See Commission Regulation

(EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid

-- 37

We also have a specific scheme to support the capital costs of demonstration projects in the ocean energy sector, notified under Article 23 of the GBER (Environmental Protection).

h) R&D&I objectives at national level (also regional and local where relevant). Objectives such as e.g. funding for research organisations, for R&D projects, research infrastructures, promotion of clusters, promotion of knowledge transfer;

Given the low level of Business Expenditure in R&D (BERD) within the Scotland, the R&D&I has been primarily used to stimulate BERD and also to accelerate knowledge transfer from academia into business or to create opportunities for spin-outs from academia.

i) Types of measures, where possible as provided for by the R&D&I-Framework (aid for R&D projects; aid for technical feasibility studies; aid for industrial property rights costs for SMEs; aid for young innovative enterprises; aid for process and organisational innovation in services; aid for innovation advisory services and for innovation support services; aid for the loan of highly qualified personnel; aid for innovation clusters);

The following have been provided under the R&D&I framework: aid for R&D projects; aid for technical feasibility studies; aid for industrial property rights costs for SMEs; aid for young innovative enterprises.

j) Sectors (for the purposes of the sectoral breakdown, you can use the NACE codes or the headings proposed by the 'select' function of the State-aid case search tool under http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

Scotland does not collect its data in line with the above sectoral headings. SE has taken a broader industrial/cluster perspective in its classification of the key sectors in Scotland.

k) Size of the beneficiaries (small, medium and large enterprises26) and nature (enterprise, research organisation including higher-education, non-profit entity, other);

SE has used its annual £18m R&D funds to finance only businesses. Of the £18m some £8m pa goes to SMEs - the remainder (£10m pa) goes to large enterprises.

l) Types of aid instruments (e.g. direct grants, reimbursable advances, loans, soft loans, fiscal incentives, provision of capital, guarantees, compensation above market prices for goods or services, consultancy, training, provision of infrastructures, public procurement policy, reduction of social-security contributions, debt write-off);

The annual budget of £18m has been disbursed solely in the form of grant aid

3. Implementation and take-up of R&D&I State-aid schemes

e) Please provide a list of the current R&D&I-support schemes in your Member State.

SE’s R&D&I support takes place mainly through two schemes: the SE R&D scheme which is available to companies of all sizes and has a budget of circa £12m pa and the

26 In case it was available and relevant, subcategories can be identified.

-- 38

SMART:SCOTLAND scheme which is available only to SMEs and which has a budget of £6m pa.

f) Please specify for each scheme if it has an R&D objective, an innovation objective27, or mixed objectives (R&D&I).

Both schemes have the object of increasing BERD. This is an area in which Scotland lags significantly behind the UK and EU averages. However both schemes form part of SG and SE’s larger and more widely encompassing innovation strategy aimed at boosting the amount of innovation in Scottish firms.

g) What is the proportion of each scheme's initial overall budget commitment that has in effect been absorbed (i.e. disbursed)?

The budget’s for both schemes are fully disbursed each year.

h) What proportion of the budget of each scheme has been absorbed by SME's, large enterprises and other beneficiaries?

As noted above some £8m of the budget goes to SMEs each year.

4. Please describe the importance of EU programmes and funding for your Member State's R&D&I strategy. Could you, if possible, indicate the relative importance of the following EU programmes and funding:

From the Scottish Position paper on FP8:

We recognise the benefits of continuing to be engaged in European R&D activity – it provides access to European networks, increases scientific and business reputation, improves ability to attract and retain world class researchers, and provides access to new markets and funding. Scotland as a region has a wealth of expertise and we want to share our learning and experience with the European Commission and other European partners in order to help shape the future of European R&D policy. This approach is very much in line with the ambition set out in the Scottish Government’s EU Action Plan and our goal of enhancing links with the EU to promote opportunities for Scotland in science and research as outlined in Science for Scotland: A Strategic Framework for Science in Scotland. A key priority for Scotland is to improve participation in European R&D activity and increase business R&D spending. This will help to ensure a long term positive impact on Scotland’s sustainable economic growth.

– EU Framework Programmes (the current 7th Framework Programme28);

FP7 is very important to Scottish research institutes and companies. Scotland’s Universities have an excellent track record in FP7, leading or partnering in a number of 27 We understand by scheme with an innovation objective the following innovation aid measures foreseen in the

R&D&I Framework (aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory services and innovation support services, aid for the loan of highly qualified personnel, aid for innovation clusters).

28 http://ec.europa.eu/research/fp7/index_en.cfm

-- 39

significant projects. Scottish Enterprise attached high importance in supporting Scottish companies, particularly SMEs to participate in FP7, through the Enterprise Europe Network (SE houses Enterprise Europe – Scotland) and more tailored advice and support through Scotland Europa and the Scottish European Green Energy Centre. Access to FP7 funding and EU collaboration activities is an element of SE and Scotland’s approach to developing and delivering our R&D&I strategies e.g. we actively engaged in seeking strategic opportunities for collaboration, including applications under the FP7 Capacities programme e.g. Regions of Knowledge.

– the Competitiveness and Innovation Framework Programme29;

Scottish partners have been active participants in the Intelligent Energy - Europe programme, which is useful tool in tackling non-technical barriers to innovation and market penetration of low carbon technologies. Scotland Europa has been supportive of a UK NCP post for Eco-Innovation and SE, Scotland Europa and Enterprise Europe-Scotland are keen to engage more Scottish companies in Eco-Innovation.

– the European Institute of Innovation and Technology30;

Scotland has a strong interest in engaging with the current KICs and is actively looking at opportunities to participate in future KICs. This would complement national initiatives, such as Technology and Innovation Centres.

– cohesion policy, in particular through Structural Fund financing for R&D and innovation, entrepreneurship, ICT and human capital development 31;

R&D&I are a priority of the Scottish ERDF Programmes. The Lowlands and Uplands Programme identified Scottish Enterprise as a Strategic Delivery Body to deliver a programme of research and innovation support for SMEs, part funded by ERDF. The total programme cost is around £50m, with £20m coming from ERDF. This funding has been used to support SE’s Innovation Support Service, R&D grants and Proof of Concept programme, together with initiatives focusing on innovation systems in specific sectors and rural areas. The Lowlands and Uplands ERDF programme has also funded research facilities and knowledge exchange programmes, and targeted funding through a specific call for low carbon innovation projects. The application of State aid rules in the context of ERDF funding for innovation support services is an area which has required careful consideration and new State aid notifications, and further clarity and simplification in this respect, including where ERDF funded services are provided via private sector or not-for profit organisations, would be useful.

– European Investment bank (EIB), in particular under the Risk-Sharing Finance Facility (RSFF).32

29 http://ec.europa.eu/cip/

30 http://eit.europa.eu/

31 http://ec.europa.eu/regional_policy/activity/research/index_en.cfm#

32 RSFF is co-funded by the EU (via the FP7) and the EIB and is aimed at fostering primarily private sector investment across Europe in research, technological development, demonstration and innovation.

-- 40

Not aware of this being used in Scotland.

Questions aiming at both public authorities and other interested parties

5. How important is the level of private funding for the development of R&D&I policy in your Member State? Can you indicate the relative importance of the various sources of private funding such as loan financing from banks, own capital resources, existing shareholders, venture capital (investment in unquoted companies by investment funds) and risk-capital investment (equity and quasi-equity financing to companies during their early-stages)?

6. To what extent has the current economic and financial crisis had any impact on:

– overall public R&D&I-policy;

– the granting of State aid for R&D&I in your Member State;

The availability of match funding to private companies, particularly SMEs, is proving difficult in the current climate and affecting their ability to make use of the R&D&I support available from SE and HIE. The maximum aid intensities mean that companies have to secure potentially large amounts of funding to carry out projects, while there is still a considerable risk involved in the development of new products.

– the level of private R&D&I spending? If so, can you describe such impact and indicate if, and how, your authorities have adapted their overall R&D&I policy and in particular State aid granting in response? How do your authorities intend to ensure funding for R&D&I of SMEs, which have been particularly hit by the impact of the financial crisis on bank lending?

SE has attempted to deal with its situation by increasing maximum grant rates, while keeping within the State aid limits. And as a result of the current economic and financial climate resulting in changes in demand from Scottish companies, they have increased the intervention rates in the two aid schemes noted above but for SMEs only (the previous intervention rates were below the maxima allowed and still are). We have also increased the maximum amount of grant support in certain cases and also increased a self-imposed cap on salaries.

A.2. Rationale of R&D&I policy

Questions aiming at public authorities:

7. What were the main policy objectives of your Member State's R&D&I policy (e.g. increase of R&D&I investments, better allocation of resources, development of a particular sector or activity or region, employment, environment)? In case you do not consider that the relevant measures were geared towards any specific objective, can you indicate why?

As previously noted, the two aid schemes are designed to increase the total amount of BERD taking place in Scotland. This is in the context that BERD in certain industrial sectors has a direct correlation to long-term competitiveness.

http://www.eib.org/products/loans/special/rsff/?lang=en and http://ec.europa.eu/invest-in-research/funding/funding02_en.htm

-- 41

8. Do you consider that your Member State pursues different R&D&I objectives when implementing non-aid R&D&I measures and State aid R&D&I measures? If so, can you identify such differences?

9. How does your Member State see the balance in its R&D&I policies between interventions involving State aid and other policies that seek to nurture R&D&I. Where do you see the main contribution from State aid measures going beyond general horizontal measures?

SE and HIE have other funding mechanisms to support other forms of innovation e.g. design innovation, open innovation etc and other activities integral to successful innovation e.g. marketing, partnering etc.

10. How do you evaluate the effectiveness of your R&D&I policy? Do you carry out evaluation analysis of either individual measures or programmes?

There are two forms of analysis carried out by SE and HIE. Each project is firstly subject to an appraisal to not only confirm the project’s eligibility for support under the state aid- guidelines but also to appraise the economic returns benefits to Scotland of the project. Thereafter each project is monitored for technical and economic progress. Secondly, each of the two aid schemes is evaluated at the programme level every 3 years to ensure that the aid schemes are meeting their original objectives and continue to offer good value for money. (For links to the evaluations of the schemes please see response to Q16).

Questions aiming at both public authorities and other interested parties:

11. How do you see your R&D&I policy evolving in view of the Europe 2020 strategy referred above and its implementation?

We would hope that the framework is expanded to include more support for broader innovation areas such as creativity and design and also that it has a wider consideration of business model innovation and intangible asset based innovation.

A.3. The R&D&I-Framework's impact on R&D&I policy

Questions aiming at public authorities:

12. Has the design of your overall R&D&I policy been influenced by the provisions contained in the R&D&I-Framework (for example the eligible categories of aid, assessment of incentive effect)? Are there examples of support measures whose design was modified from the one planned to align it to the requirements of the R&D&I-Framework? If so, can you explain why?

In developing mechanisms to support the growth of business via R&D&I consideration is always taken of the State aid parameters within which we must work; these in turn must be taken account of in policy direction to ensure that, as an organisation, we do not pursue areas which we are ultimately unable to support if required. Support products have generally been designed in line with the provisions of the R&D&I Framework. The introduction of new provisions, such as Support for Young, Innovative Enterprises has encouraged us to look at new, innovative ways of delivering R&D&I support.

There are areas in which we would have like to have been able to provide support but no suitable State aid scope exists. Typically around funding for prototype development or

-- 42

implementation of new ways of working where there is limited research, significant capital costs, and overall could result in a significant innovation for the customer.

Questions aiming at both public authorities and other interested parties:

13. Do you consider that the current R&D&I-Framework has given guidance for Member States to design large individual R&D aids that are better targeted at market failures than under previous R&D State aid rules?

SECTION B: GENERAL QUESTIONS ON R&D&I STATE AID B.1. Effectiveness of R&D&I State aid

Questions aiming at public authorities:

14. If your Member State has achieved R&D&I objectives through measures that may not involve State aid under certain conditions, please indicate if these measures fall under any of the following headings and how is it ensured that they do not involve State aid:

- de minimis aid33

Innovation Support is generally provided to companies as de minimis aid, as the specific requirements of the R&D&I Framework / GBER make it difficult to provide support for the wider definition of business innovation which SE and HIE apply.

- R&D&I infrastructure

Support has been provided for the development of R&D&I infrastructure. These projects tend to be treated on a case by case basis to examine the potential State aid issues and find an acceptable solution.

Industrial property rights (IPR) policy

- Education and training

- Mobility of qualified personnel

- Knowledge and technology transfer

- General fiscal incentives

33 Small aid (“de minimis aid”) to an enterprise that is below € 200,000 over a period of three fiscal years and

respects certain conditions, does not constitute State aid in the sense of Article 107(1) of the Treaty, since it is deemed not to affect trade or distort competition. Conditions for de minimis aid are laid down in Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid”, OJ L 379, 28.12.2006, p. 5.

-- 43

- Public procurement policy

- Information campaigns

- Other general measures

15. What has been the R&D&I-Framework's impact on the overall effectiveness of your R&D&I policy?

It is difficult to accurately attribute the impact of the R&D&I framework on our R&D&I policy as SE and HIE would have undertaken many of the activities it currently undertakes in the absence of the R&D&I framework; however the framework provided a structure to create a number of interventions which we currently deploy.

Questions aiming at both public authorities and other interested parties:

16. Please make available any relevant studies or reports that describe the effectiveness of R&D&I-State aid in your country.

Please see evaluations of the grant schemes mentioned above that support our R&D&I policy (Note: there are 3 evaluations as one of the grant schemes issues grant slightly differently depending on whether the amount sought is greater or less than £100k):

The SMART:SCOTLAND grant evaluation: http://www.scotland.gov.uk/Publications/2009/09/28103010/0 The Scottish Enterprise R&D scheme evaluation of grants less than £100,000 http://www.evaluationsonline.org.uk/evaluations/Browse.do?ui=browse&action=show&id=451&taxonomy=ENT The Scottish Enterprise R&D Scheme evaluation of grants greater than £100,000 http://www.evaluationsonline.org.uk/evaluations/Browse.do?ui=browse&action=show&id=348&taxonomy=ENT

-- 44

Annex II: Research, Development and Innovation State aid Framework

Consultation – Welsh Response

ABOUT YOU

For the rules on personal data protection on the EUROPA website, please see: http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata

Specific privacy statement: Received contributions, together with the identity of the contributor, will be published on the Internet, unless the contributor objects to publication of the personal data on the grounds that such publication would harm his or her legitimate interests. In this case the contribution may be published in anonymous form. Otherwise the contribution will not be published nor will, in principle, its content be taken into account.

Please provide your contact details below.

Name Jon Merrey Sian Brown

Organisation represented Welsh Government Location (country) Wales E-mail address: Jon.Merrey@wales.gsi.gov.uk

Sian.Brown2@wales.gsi.gov.uk

Please describe the main activities of your company/organization/association.

The UK Government’s Department for Business, Innovation and Skills (BIS) is responsible for supporting sustained growth and higher skills across the UK economy and leads and coordinates the UK position on State Aid including the R&D&I rules.

Power to decide R&D&I and business support policy and their implementation are devolved to the devolved administrations and as such there are some variations in the use of the rules. As such we have also provided the responses of each of the devolved administrations to sections A&B of the questionaire in order to provide the Commission with a full picture of the way R&D&I rules are used in the UK.

The Welsh Government develops and implements regional R&D&I policy for Wales and provides financial support to companies and other organisations including higher education institutions.

SECTION A: GENERAL QUESTIONS ON R&D&I POLICY AT LARGE A.1. R&D&I policy - Fact finding

Questions aiming at public authorities:

-- 45

1. Please describe how your authorities support R&D&I. Please provide a short historical overview of overall R&D&I policy and the legal instruments on which the public interventions are based. To what extent is such a policy run at the national, regional or local level?

The Welsh Government develops and implements regional R&D&I policy for Wales and provides financial support to companies and other organisations including higher education institutions.

2. Please describe the structure of the overall financial budget that has been committed to develop overall R&D&I policy over the last 5 years in your Member State. Please provide a break-down by:

m) Types of support:

– No State aid measures:

– General R&D&I initiatives not targeted to firms (e.g. education),

– Financial support to firms below the de minimis threshold34,

– General measures (e.g. fiscal breaks for firms' investments in R&D&I).

– State aid: schemes, ad-hoc aids (outside schemes).

Welsh RD&I Schemes

Scheme

2006 (£ millions)

2007 (£ millions)

2008 (£ millions)

2009 (£ millions)

2010 (£ millions)

SMARTCymru / SIF RD&I / RD&I

4.2 6.9 18.8 9.5 5.6

n) R&D&I objectives at national level (also regional and local where relevant). Objectives such as e.g. funding for research organisations, for R&D projects, research infrastructures, promotion of clusters, promotion of knowledge transfer;

Strategic Objectives

This Fund will provide financial support to Small and Medium Enterprises (SMEs) to help them increase expenditure on Research and Development and create new products, processes and technologies.

34 The de minimis threshold amounts to 200.000 € per undertaking over three years. See Commission Regulation

(EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid

-- 46

Objectives include:

• creation of high quality R&D related jobs • increasing businesses expenditure on R&D through the provision of financial

support to undertake innovative research and technological development with commercial potential, leading to new products, processes and technologies

• encouraging and supporting industry collaborations with other partners with research-based organisations in carrying out industrial research and experimental development activities

• measuring the return on investment of supported R&D projects and providing continuous improvement of the project management of R&D in companies supported

• enabling business links to other business support to optimise commercialisation.

o) Types of measures, where possible as provided for by the R&D&I-Framework (aid for R&D projects; aid for technical feasibility studies; aid for industrial property rights costs for SMEs; aid for young innovative enterprises; aid for process and organisational innovation in services; aid for innovation advisory services and for innovation support services; aid for the loan of highly qualified personnel; aid for innovation clusters);

Aid for R&D projects; aid for technical feasibility studies; aid for innovation advisory services and for innovation support services.

p) Sectors (for the purposes of the sectoral breakdown, you can use the NACE codes or the headings proposed by the 'select' function of the State-aid case search tool under http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

Current priority sectors supported by the Welsh Government: Information and Communication Technologies (ICT) Financial and professional services Creative industries Energy and environment Advanced materials and manufacturing Life sciences Food and farming Construction Tourism

q) Size of the beneficiaries (small, medium and large enterprises35) and nature (enterprise, research organisation including higher-education, non-profit entity, other);

Currently, at least 80% of enterprises supported by RD&I schemes are SMEs.

r) Types of aid instruments (e.g. direct grants, reimbursable advances, loans, soft loans, fiscal incentives, provision of capital, guarantees, compensation above market prices for goods or services, consultancy, training, provision of infrastructures, public procurement policy, reduction of social-security contributions, debt write-off);

35 In case it was available and relevant, subcategories can be identified.

-- 47

Direct grants, repayable grants.

3. Implementation and take-up of R&D&I State-aid schemes

i) Please provide a list of the current R&D&I-support schemes in your Member State.

Welsh schemes Objective RD&I Financial Support for Business (ERDF) R&D&I

Business Innovation Support (ERDF) R&D&I

Academic Expertise for Business (ERDF) R&D&I

j) Please specify for each scheme if it has an R&D objective, an innovation objective36, or

mixed objectives (R&D&I).

See table above.

k) What is the proportion of each scheme's initial overall budget commitment that has in effect been absorbed (i.e. disbursed)?

-----

l) What proportion of the budget of each scheme has been absorbed by SME's, large enterprises and other beneficiaries?

-----

4. Please describe the importance of EU programmes and funding for your Member State's R&D&I strategy. Could you, if possible, indicate the relative importance of the following EU programmes and funding:

– EU Framework Programmes (the current 7th Framework Programme37);

– the Competitiveness and Innovation Framework Programme38;

– the European Institute of Innovation and Technology39;

36 We understand by scheme with an innovation objective the following innovation aid measures foreseen in the

R&D&I Framework (aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory services and innovation support services, aid for the loan of highly qualified personnel, aid for innovation clusters).

37 http://ec.europa.eu/research/fp7/index_en.cfm

38 http://ec.europa.eu/cip/

39 http://eit.europa.eu/

-- 48

– cohesion policy, in particular through Structural Fund financing for R&D and innovation, entrepreneurship, ICT and human capital development 40;

Much of the R&D&I funding provided in Wales is match funded using the Convergence and Competitiveness Structural Funds. Structural Funds will continue to be a major source of funding for R&D&I activity within Wales.

– European Investment bank (EIB), in particular under the Risk-Sharing Finance Facility (RSFF).41

Questions aiming at both public authorities and other interested parties

5. How important is the level of private funding for the development of R&D&I policy in your Member State? Can you indicate the relative importance of the various sources of private funding such as loan financing from banks, own capital resources, existing shareholders, venture capital (investment in unquoted companies by investment funds) and risk-capital investment (equity and quasi-equity financing to companies during their early-stages)?

-----

6. To what extent has the current economic and financial crisis had any impact on:

– overall public R&D&I-policy;

-----

– the granting of State aid for R&D&I in your Member State;

-----

– the level of private R&D&I spending?

-----

If so, can you describe such impact and indicate if, and how, your authorities have adapted their overall R&D&I policy and in particular State aid granting in response? How do your authorities intend to ensure funding for R&D&I of SMEs, which have been particularly hit by the impact of the financial crisis on bank lending?

-----

A.2. Rationale of R&D&I policy

40 http://ec.europa.eu/regional_policy/activity/research/index_en.cfm#

41 RSFF is co-funded by the EU (via the FP7) and the EIB and is aimed at fostering primarily private sector investment across Europe in research, technological development, demonstration and innovation. http://www.eib.org/products/loans/special/rsff/?lang=en and http://ec.europa.eu/invest-in-research/funding/funding02_en.htm

-- 49

Questions aiming at public authorities:

7. What were the main policy objectives of your Member State's R&D&I policy (e.g. increase of R&D&I investments, better allocation of resources, development of a particular sector or activity or region, employment, environment)? In case you do not consider that the relevant measures were geared towards any specific objective, can you indicate why?

------

8. Do you consider that your Member State pursues different R&D&I objectives when implementing non-aid R&D&I measures and State aid R&D&I measures? If so, can you identify such differences?

-----

9. How does your Member State see the balance in its R&D&I policies between interventions involving State aid and other policies that seek to nurture R&D&I. Where do you see the main contribution from State aid measures going beyond general horizontal measures?

-----

10. How do you evaluate the effectiveness of your R&D&I policy? Do you carry out evaluation analysis of either individual measures or programmes?

----- Questions aiming at both public authorities and other interested parties: 11. How do you see your R&D&I policy evolving in view of the Europe 2020 strategy referred

above and its implementation?

-----

A.3. The R&D&I-Framework's impact on R&D&I policy

Questions aiming at public authorities:

12. Has the design of your overall R&D&I policy been influenced by the provisions contained in the R&D&I-Framework (for example the eligible categories of aid, assessment of incentive effect)? Are there examples of support measures whose design was modified from the one planned to align it to the requirements of the R&D&I-Framework? If so, can you explain why?

-----

Questions aiming at both public authorities and other interested parties:

-- 50

13. Do you consider that the current R&D&I-Framework has given guidance for Member States to design large individual R&D aids that are better targeted at market failures than under previous R&D State aid rules?

SECTION B: GENERAL QUESTIONS ON R&D&I STATE AID

B.1. Effectiveness of R&D&I State aid

Questions aiming at public authorities:

14. If your Member State has achieved R&D&I objectives through measures that may not involve State aid under certain conditions, please indicate if these measures fall under any of the following headings and how is it ensured that they do not involve State aid:

- de minimis aid42

- R&D&I infrastructure

- Industrial property rights (IPR) policy

- Education and training

- Mobility of qualified personnel

- Knowledge and technology transfer

- General fiscal incentives

- Public procurement policy

- Information campaigns

- Other general measures

15. What has been the R&D&I-Framework's impact on the overall effectiveness of your R&D&I policy?

Welsh Government Innovation Policy is currently under review.

42 Small aid (“de minimis aid”) to an enterprise that is below € 200,000 over a period of three fiscal years and

respects certain conditions, does not constitute State aid in the sense of Article 107(1) of the Treaty, since it is deemed not to affect trade or distort competition. Conditions for de minimis aid are laid down in Commission Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid”, OJ L 379, 28.12.2006, p. 5.

-- 51

Annex III: Research, Development and Innovation State aid Framework

Consultation – Northern Ireland Response

ABOUT YOU

For the rules on personal data protection on the EUROPA website, please see: http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata

Specific privacy statement: Received contributions, together with the identity of the contributor, will be published on the Internet, unless the contributor objects to publication of the personal data on the grounds that such publication would harm his or her legitimate interests. In this case the contribution may be published in anonymous form. Otherwise the contribution will not be published nor will, in principle, its content be taken into account.

Please provide your contact details below.

Name Stephen Moore Organisation represented Department of Trade and Enterprise for Northern Ireland Location (country) Northern Ireland E-mail address: stephen.moore@detini.gov.uk

Please describe the main activities of your company/organization/association.

The UK Government’s Department for Business, Innovation and Skills (BIS) is responsible for supporting sustained growth and higher skills across the UK economy and leads and coordinates the UK position on State Aid including the R&D&I rules.

Power to decide R&D&I and business support policy and their implementation are devolved to the devolved administrations and as such there are some variations in the use of the rules. As such we have also provided the responses of each of the devolved administrations to sections A&B of the questionaire in order to provide the Commission with a full picture of the way R&D&I rules are used in the UK.

The Department of Enterprise Trade and Investment for Northern Ireland (DETI) and its economic development agencies Invest Northern Ireland and Inter Trade Ireland, develop R&D&I policy for Northern Ireland and provide financial support primarily to companies and other organisations, including higher education institutions. This support is aimed at raising awareness of R&D&I and stimulating higher levels of R&D&I by enterprises in Northern Ireland.

SECTION A: GENERAL QUESTIONS ON R&D&I POLICY AT LARGE A.1. R&D&I policy - Fact finding

Questions aiming at public authorities:

-- 52

1. Please describe how your authorities support R&D&I. Please provide a short historical overview of overall R&D&I policy and the legal instruments on which the public interventions are based. To what extent is such a policy run at the national, regional or local level?

The Department of Enterprise Trade and Investment for Northern Ireland (DETI) and its economic development agencies Invest Northern Ireland and Inter Trade Ireland, develop R&D&I policy for Northern Ireland and provide financial support primarily to companies and other organisations, including higher education institutions. This support is aimed at raising awareness of R&D&I and stimulating higher levels of R&D&I by enterprises in Northern Ireland.

2. Please describe the structure of the overall financial budget that has been committed to develop overall R&D&I policy over the last 5 years in your Member State. Please provide a break-down by:

s) Types of support:

– No State aid measures:

– General R&D&I initiatives not targeted to firms (e.g. education),

– Financial support to firms below the de minimis threshold43,

– General measures (e.g. fiscal breaks for firms' investments in R&D&I).

– State aid: schemes, ad-hoc aids (outside schemes).

Northern Ireland R&D&I State Aid schemes

Scheme 2006 (£ millions)

2007 (£ millions)

2008 (£ millions)

2009 (£ millions)

2010 (£ millions)

Invest NI grant for R&D&I

N/A N/A 0.035 12.8 25.1

Invest NI START programme

1.71 3.68 6.969 N/A N/A

Invest NI Product and Process Development Programme

0.45 0.89 1.495 N/A N/A

Invest NI Compete programme

2.07 2.85 7.95 N/A N/A

Invest NI SMART programme44

0.49 0.68 N/A N/A N/A

InterTrade 0.051 0.095 0.471

43 The de minimis threshold amounts to 200.000 € per undertaking over three years. See Commission Regulation

(EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid

44 The SMART programme was operated on a de minimis basis from 2008 onwards

-- 53

Ireland - Innova

t) R&D&I objectives at national level (also regional and local where relevant). Objectives such as e.g. funding for research organisations, for R&D projects, research infrastructures, promotion of clusters, promotion of knowledge transfer;

Greater levels of R&D&I is a key priority in Northern Ireland’s programme for government and DETI’s economic strategy. The key 2014/15 targets for R&D&I in the economic strategy are as follows:

• Support £300m investment by businesses in R&D, with at least 20% coming from SMEs

• Support 500 businesses to undertake R&D for the first time and secure 120 Collaborative Projects in R&D

• Support 200 projects through the Creative Industries Innovation Fund by 2015 • Support our Universities to establish 8 spin-out companies by 2013 • Support our Universities and Further Education colleges to undertake 155

knowledge transfer projects on behalf of local businesses by 2014

u) Types of measures, where possible as provided for by the R&D&I-Framework (aid for R&D projects; aid for technical feasibility studies; aid for industrial property rights costs for SMEs; aid for young innovative enterprises; aid for process and organisational innovation in services; aid for innovation advisory services and for innovation support services; aid for the loan of highly qualified personnel; aid for innovation clusters);

Most of Northern Ireland’s measures would be categorised as ‘aid for R&D projects’.

v) Sectors (for the purposes of the sectoral breakdown, you can use the NACE codes or the headings proposed by the 'select' function of the State-aid case search tool under http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

As detailed in the supplementary reports for R&D&I, Northern Ireland’s support for R&D&I covers a very wide range of sectors, namely: C – Manufacturing D - Electricity, Gas, Steam and Air Conditioning Supply F – Construction G - Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles J - Information and Communication M - Professional, Scientific and Technical Activities

w) Size of the beneficiaries (small, medium and large enterprises45) and nature (enterprise, research organisation including higher-education, non-profit entity, other);

45 In case it was available and relevant, subcategories can be identified.

-- 54

As detailed in the supplementary reports for R&D&I, approximately 20% of the enterprises supported by Northern Ireland’s R&D&I schemes are ‘large’ enterprises and 80% are SMEs.

x) Types of aid instruments (e.g. direct grants, reimbursable advances, loans, soft loans, fiscal incentives, provision of capital, guarantees, compensation above market prices for goods or services, consultancy, training, provision of infrastructures, public procurement policy, reduction of social-security contributions, debt write-off);

Most aid is provided in the form of a direct grant against actual ‘vouched and approved’ expenditure.

-- 55

3. Implementation and take-up of R&D&I State-aid schemes

m) Please provide a list of the current R&D&I-support schemes in your Member State.

Northern Ireland schemes Objective Invest NI grant for R&D&I R&D Collaborative Network Programme

Innovation

InterTrade Ireland – Innova R&D

n) Please specify for each scheme if it has an R&D objective, an innovation objective46, or mixed objectives (R&D&I).

See table above.

o) What is the proportion of each scheme's initial overall budget commitment that has in effect been absorbed (i.e. disbursed)?

This question cannot be answered as it changes on a daily basis. The budgets for these schemes come from the Northern Ireland Block grant and can be increased or decreased according to demand.

p) What proportion of the budget of each scheme has been absorbed by SME's, large enterprises and other beneficiaries?

This cannot be easily determined, but based on the supplementary reports for R&D&I, approximately 60% of annual State aid for R&D&I goes to ‘large’ companies.

4. Please describe the importance of EU programmes and funding for your Member State's R&D&I strategy. Could you, if possible, indicate the relative importance of the following EU programmes and funding:

– EU Framework Programmes (the current 7th Framework Programme47);

Invest NI actively encourages and assists companies to apply to the EU Framework and other programmes and has 3 members of staff dedicated to this task.

– the Competitiveness and Innovation Framework Programme48;

46 We understand by scheme with an innovation objective the following innovation aid measures foreseen in the

R&D&I Framework (aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory services and innovation support services, aid for the loan of highly qualified personnel, aid for innovation clusters).

47 http://ec.europa.eu/research/fp7/index_en.cfm

48 http://ec.europa.eu/cip/

-- 56

Most of Northern Ireland’s R&D&I is co-financed by the Competitiveness programme. It is and will continue to be of the highest importance to Northern Ireland.

– the European Institute of Innovation and Technology49;

I am not aware of any Northern Ireland involvement with the European Institute of Innovation and Technology.

– cohesion policy, in particular through Structural Fund financing for R&D and innovation, entrepreneurship, ICT and human capital development 50;

As noted above most of Northern Ireland’s R&D&I is co-financed by the Competitiveness programme, so structural funds are and will continue to be of the highest importance to Northern Ireland.

– European Investment bank (EIB), in particular under the Risk-Sharing Finance Facility (RSFF).51

I am not aware of any Northern Ireland involvement with the European Investment Bank.

Questions aiming at both public authorities and other interested parties

5. How important is the level of private funding for the development of R&D&I policy in your Member State? Can you indicate the relative importance of the various sources of private funding such as loan financing from banks, own capital resources, existing shareholders, venture capital (investment in unquoted companies by investment funds) and risk-capital investment (equity and quasi-equity financing to companies during their early-stages)?

The Vision statement in Northern Ireland’s economic development strategy details that we are trying to develop an economy in Northern Ireland that is characterised by a sustainable and growing private sector, where a greater number of firms compete in global markets and there is growing employment and prosperity. In practice this means we need to increase the level of private funding in many areas, particularly R&D&I. The economic strategy does not assign any particular importance to the various sources of private funding, however, in the context of the current economic downturn, a particular issue of concern is the lack of availability of bank and venture capital finance.

6. To what extent has the current economic and financial crisis had any impact on:

49 http://eit.europa.eu/

50 http://ec.europa.eu/regional_policy/activity/research/index_en.cfm#

51 RSFF is co-funded by the EU (via the FP7) and the EIB and is aimed at fostering primarily private sector investment across Europe in research, technological development, demonstration and innovation. http://www.eib.org/products/loans/special/rsff/?lang=en and http://ec.europa.eu/invest-in-research/funding/funding02_en.htm

-- 57

– overall public R&D&I-policy;

There has not been any impact on overall public R&D&I policy.

– the granting of State aid for R&D&I in your Member State;

It is too early to identify whether the current economic and financial crisis had any impact the granting of State aid for R&D&I in Northern Ireland. Anecdotally there are some reports that grant rates had to increase because companies are finding it extremely difficult to find the balance of funding for R&D&I projects.

– the level of private R&D&I spending?

As noted above it is too early to identify whether the current economic and financial crisis had any impact on the level of private R&D&I spending in Northern Ireland. If so, can you describe such impact and indicate if, and how, your authorities have adapted their overall R&D&I policy and in particular State aid granting in response? How do your authorities intend to ensure funding for R&D&I of SMEs, which have been particularly hit by the impact of the financial crisis on bank lending?

As noted above, whilst policy has not changed (i.e. all R&D&I projects are still subjected to a full economic and technical assessment), anecdotally there are some reports that grant rates had to increase because companies are finding it extremely difficult to find the balance of funding for R&D&I projects.

A.2. Rationale of R&D&I policy

Questions aiming at public authorities:

7. What were the main policy objectives of your Member State's R&D&I policy (e.g. increase of R&D&I investments, better allocation of resources, development of a particular sector or activity or region, employment, environment)? In case you do not consider that the relevant measures were geared towards any specific objective, can you indicate why?

Northern Ireland’s main policy objectives in relation to R&D&I policy are as follows: a. Increase amount of investment by the private sector, with at least 20% from SMEs; b. Support more new businesses to undertake R&D for the first time and, in particular,

encourage more businesses to engage in Collaborative Projects in R&D; c. Encourage more companies to participate in innovation clusters; d. Encourage Universities and Further Education colleges to collaborate more with

businesses on innovation and R&D; e. Encourage universities to establish more spin out companies; f. Encourage Universities and FE colleges to undertake in projects and initiatives that

result in knowledge transfer to local businesses; g. Support businesses and academia to apply for national, transnational and EU

funding programmes. h. Encourage new R&D and innovation activity in the Creative Industries; i. Increase levels of cross-border innovation with the Republic of Ireland; j. Increase levels of agri-food research and knowledge exchange;

-- 58

8. Do you consider that your Member State pursues different R&D&I objectives when implementing non-aid R&D&I measures and State aid R&D&I measures? If so, can you identify such differences?

No.

9. How does your Member State see the balance in its R&D&I policies between interventions involving State aid and other policies that seek to nurture R&D&I. Where do you see the main contribution from State aid measures going beyond general horizontal measures?

Whilst general measures can be effective in raising the level of R&D&I as a whole in a Member State, they would not be as effective in addressing regional disparities as State aid measures that are ‘regionally selective’.

10. How do you evaluate the effectiveness of your R&D&I policy? Do you carry out evaluation analysis of either individual measures or programmes?

Yes.

The Independent Review of Economic Policy (IREP) was commissioned by the Minister of Enterprise, Trade and Investment, Arlene Foster MLA, in December 2008. The Review reflects the Minister’s desire to achieve the Executive’s priorities for the economy and the Review Panel were asked to advise on the need to realign existing policies, or to devise new policies, in order to meet the Executive’s goal of halving the private sector productivity gap between Northern Ireland (NI) and the UK excluding the Greater South East of England by 2015. Given NI’s favourable record in job creation, the widening productivity gap had been identified by DETI as NI’s main economic challenge. It was recognised that up to 2008 existing policies did not appear to be leading to convergence in productivity. On the contrary, the gap had been widening for a number of years. The aim of the Review has thus been to consider the extent to which DETI / Invest NI policy should change in order to stimulate convergence in productivity and ultimately living standards between NI and the rest of the UK. In relation to R&D&I the key IREP proposals are as follows: • In light of the reducing regional aid ceilings, grants for business expansion – which

tend to have low levels of additionality – should be phased out towards 2013. The resources should be redirected to provide greater levels of support to Innovation and R&D in indigenous and foreign owned companies, and also to attract companies new to NI; &

• A new institution for commercially-orientated research should be explored in NI, along

the lines of an open innovation centre or something similar. The full IREP report can be accessed at: http://infonet.intranet.nigov.net/independent_review_of_economic_policy.pdf

Questions aiming at both public authorities and other interested parties:

-- 59

11. How do you see your R&D&I policy evolving in view of the Europe 2020 strategy referred

above and its implementation?

Increasingly our R&D&I policy will play an increasingly important role in addressing the economic disparities that exist between Northern Ireland, the United Kingdom and the European Union.

A.3. The R&D&I-Framework's impact on R&D&I policy

Questions aiming at public authorities:

12. Has the design of your overall R&D&I policy been influenced by the provisions contained in the R&D&I-Framework (for example the eligible categories of aid, assessment of incentive effect)? Are there examples of support measures whose design was modified from the one planned to align it to the requirements of the R&D&I-Framework? If so, can you explain why?

No. R&D&I policy has been evolving for a number of years and has not been significantly influenced by the R&D&I Framework, which is generally seen as a constraint and not as guide to best practice.

Questions aiming at both public authorities and other interested parties:

13. Do you consider that the current R&D&I-Framework has given guidance for Member States to design large individual R&D aids that are better targeted at market failures than under previous R&D State aid rules?

This question cannot be answered as personnel currently involved in R&D&I policy have negligible experience of the previous R&D rules.

SECTION B: GENERAL QUESTIONS ON R&D&I STATE AID

B.1. Effectiveness of R&D&I State aid

Questions aiming at public authorities:

14. If your Member State has achieved R&D&I objectives through measures that may not involve State aid under certain conditions, please indicate if these measures fall under any of the following headings and how is it ensured that they do not involve State aid:

- de minimis aid52

52 Small aid (“de minimis aid”) to an enterprise that is below € 200,000 over a period of three fiscal years and

respects certain conditions, does not constitute State aid in the sense of Article 107(1) of the Treaty, since it is deemed not to affect trade or distort competition. Conditions for de minimis aid are laid down in Commission

-- 60

- R&D&I infrastructure

- Industrial property rights (IPR) policy

- Education and training

- Mobility of qualified personnel

- Knowledge and technology transfer

- General fiscal incentives

- Public procurement policy

- Information campaigns

- Other general measures

15. What has been the R&D&I-Framework's impact on the overall effectiveness of your R&D&I policy?

The R&D&I Framework has had a marginally positive impact on R&D policy and negative impact on Innovation policy. As noted previously, the Framework is seen more as a constraint that restricts how R&D&I policy can develop.

Questions aiming at both public authorities and other interested parties:

16. Please make available any relevant studies or reports that describe the effectiveness of R&D&I-State aid in your country.

The following research studies published on DETI’s website may be useful: Productivity, Innovation and Competitiveness in Small Open Economies: Insights for Northern Ireland (http://www.detini.gov.uk/deti-stats-index/deti-stats-index-3/productivity_innovation_competitiveness.htm)

The Changing face of Innovation Policy: Complementing R&D Initiatives in Northern Ireland (http://www.detini.gov.uk/deti-stats-index/deti-stats-index-3/changing_face_of_innovation_policy.htm) Innovation in Northern Ireland Tradeable Services (http://www.detini.gov.uk/deti-stats-index/deti-stats-index-3/stats-innovation.htm) Annual Northern Ireland Research and Development (R&D) Surveys 2007 - 2010 (http://www.detini.gov.uk/deti-stats-index/stats-surveys/stats-research-development.htm)

Regulation (EC) No 1998/2006 of 15 December 2006 on the application of Articles 87 and 88 of the Treaty to de minimis aid”, OJ L 379, 28.12.2006, p. 5.