Innovation Europe > News > Innovation EU Vol1-1 > Banking on good business

As the long-term financing arm of the European Union, the European Investment Bank (EIB) is committed to support innovative projects undertaken by the public and private sectors in Europe.

Since the European Council in Lisbon in 2000, the EIB has had a specific lending objective for innovation, or – as it was decided to call it in 2008 – the Knowledge Economy. This covers not only research and development but also investments in information, communication and technology (ICT) and support for higher-education institutions, all of which are important and interactive ingredients in helping improve European competitiveness.

Our aim is to support all areas of the “Knowledge Triangle”: innovation, research and education. All three components are important in improving the productivity of the EU. Research and innovation drive the knowledge frontier and create applications and enabling infrastructures, while education enhances the skills to innovate. Also, enabling certain types of education, such as full-day schools, where school meals are served, also increases labour productivity as parents can spend more time at work.

Between 2000 and 2008, out of total lending to support the Knowledge Economy of E69bn, R&D projects accounted for some E37bn, more or less evenly split between the business sector and public-sector research facilities, universities, and science and technology parks. Examples include the financing of the Large Hadron Collider at CERN in Geneva and the laser synchrotron in Trieste. The Bank follows closely projects identified by the European Strategy Forum on Research Infrastructures, such as the planned European Spallation Source in Lund.

Just over E15bn – or one fifth of total signatures over the nine-year period – were allocated to education and training, which mostly meant education infrastructure. Last year, for example, EIB lent E75m for new biomedical research and training facilities at Trinity College in Dublin.

E14bn went to projects in ICT, including advanced telecommunications networks and state-of-the-art ICT production facilities such as semiconductor production plants. Around two-thirds of this was to private-sector projects. One of the chief aims of this lending has been to facilitate a modern and interconnected ICT infrastructure so as to expand the environment necessary for developing further the knowledge-based economy in Europe including, for example, widespread availability of fixed and mobile broadband networks in order to improve ICT-based productivity.

Demand for EIB loans has been even higher this year as the financial crisis has made it harder for companies to obtain other sources of finance. The Bank has committed to increase its total lending by more than 30% to help respond and keep R&D spending going.

The EIB raises finance by issuing bonds on capital markets. Thanks to its owners – the EU’s 27 member states – and its own solid capital base it can raise this money on favourable terms. It aims to pass on this financial benefit to project promoters, its customers, either directly, in the case of larger loans, or indirectly via partner banks and financial intermediaries.

The Bank offers a wide range of financial instruments to accommodate everything from small start-up companies to large investment-grade companies and the public sector. One of EIB’s instruments that supports the Knowledge Economy is a special window for more risky RDI

CASE STUDY: VALEO

The EIB announced in July it would lend up to E300m to French car parts maker Valeo for research projects aiming to reduce the fuel consumption and CO2 emissions of cars and improve vehicle safety. The projects will include the development of systems for electric and hybrid vehicles, efficient transmission systems, and active safety technologies including assisted-viewing systems, crash-avoidance systems and advanced-lighting systems. It was an example of a loan made under the Risk Sharing Finance Facility, set up by the EIB and European Commission to support R&D in Europe.

loans created together with the European Commission, where E1bn from the 7th Research Framework Program of the EU together with E1bn from the EIB is the capital cushion for possible losses on these loans. The EIB and the Commission are sharing the risk of losses. Using this E1bn from the EU budget as a buffer, together with a E1bn buffer from EIB, will enable loans of several billons over the years for the benefit of RDI.

Since the start of operations in June 2007, cumulative signatures under this risk-sharing facility (named RSFF) amount to more than E2.3bn. This is expected to rise further by the end of the year, partly due to the extra effort the Bank is making to help offset the effects of the financial crisis on Europe’s economy, including supporting R&D into cleaner technologies by the automotive sector.

Part of the indirect lending of the EIB is directed at SMEs and Mid-Caps, acknowledging their importance as early adopters of more innovative processes as well as innovators. Total lending under this heading stood at E2.3bn for the 2005-2008 period.

In early start-up operations in the field of Innovation, the high risk profile of the companies may demand an equity-type of financing rather than a loan. The EIB can accommodate this through the European Investment Fund (EIF), whose shareholders are the EIB (with 62% of the capital), the European Commission (30%) and several European banks (8%). The EIF operates in support of SMEs, not through direct investments, but through equity investments in venture capital funds that support in particular early stage and technology-oriented SMEs.

The EIB’s support to the Knowledge Economy covers all areas in the Knowledge Triangle: Innovation, Research and Education

For venture capital investments, EIF uses its own resources, as well as others resources from the European Investment Bank and from the European Commission’s Competitiveness and Innovation Programme (CIP).

EIF’s total net equity investment commitments amounted to E3.6bn at end December 2008, invested in some 300 funds. EIF’s portfolio still remains focused on the early stage sector with over 40% of its portfolio in seed and start-up funds, even if some mid and laterstage funds are being included to balance the portfolio by offsetting the higher risks inherent in early stage investing. Within the early stage technology portfolio, information and communications technologies and life sciences figure strongly.

The EIB’s support to the Knowledge Economy covers all areas in the Knowledge Triangle: Innovation, Research and Education. Developments in these areas lead to subsequent productivity gains and market-related competitiveness, growth and jobs.

The EU has made progress in certain areas of the Knowledge Economy in the last years – the EU is world-leading in terms of clusters (automotive and telecommunications) – and the EIB aims to help the EU reinforce its leadership in this area. The Bank recognises that R&D and innovation are conducted in very different types of organisations and has adapted its financial instruments accordingly. Our aim is to offer continued support and attractive financing solutions for all parts of the Knowledge Economy enabling the narrowing of the current R&D gap that Europe has vis-à-vis the US and Japan.

For more information, visit: www.eib.org

Eva Srejber is EIB Vice President responsible for Knowledge Economy lending and a former Swedish central banker

EIB ANNUAL ECONOMICS CONFERENCE

The EIB’s annual economics conference this year will be devoted to the subject of R&D and the financing of innovation in Europe. The one-day event on 22 October will bring together academics and EU officials to consider such issues as how to measure intangible capital and policies to boost R&D spending.

For full details, visit: www.eib.org/about/events/conference-in-economics-finance-2009.htm