It was in the dizzying wake of the Brexit referendum that the Cornish council issued a plea for protection from Westminster.
The rural county had substantially benefitted from EU subsidies but had now, like many areas of the country voted overwhelmingly to Leave. Facing a funding black hole of €600m, Cornwall hoped the gap would be filled by the British government’s beneficence.
The story is indicative of the funding conundrum that the UK at large has entered into. Through decades of European integration, The UK had become enmeshed in the EU’s array of funding programmes - many of which are specifically aimed at SMEs. Logic would dictate leaving the union would change this rather dramatically.
The Leave campaign’s argument around EU funding was perhaps best captured by their bright red ‘Battle Bus’. The decal on its side boldly proclaimed - The National Statistics Authority would say falsely - that the UK would recoup the £350m a week it sends to The EU.
The story is indicative of the funding conundrum that the UK at large has entered into.
The money, Leave said, would be spent on British endeavours by British people. That claim has gone quiet after the referendum, raising even more questions than answers. Leave’s logic would say that the money we sent to Brussels, is now coming home.
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That logic is problematic, though. There’s an inherent flaw with saying that taking money away from something you don't think is worthwhile will be neatly redirected to other endeavours.
Sophistry aside, even if we did now, as Nigel Farage claimed, have a “£34 million a day feather bed”, how much of that will go to support Britain’s vibrant startup culture? What will happen to schemes like Horizon 2020, which funnelled over a billion into making the country’s businesses competitive?
The phrase ‘EU funding’ is frequently deployed but to many it remains poorly understood. The EU operates a parade of programmes and loan facilities, many aimed at developing businesses. So, from a British business perspective, what are the important ones?
There are three that are the most important in the British context: The European Regional Development Fund (ERDF), the Programme for the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) and the framework programme for Research and Innovation (known as Horizon 2020).
The ERDF concentrates on “correcting imbalances between the different regions of the EU”. So this money went to regions that would be considered previously disadvantaged (rural areas like Cornwall). COSME offers substantial loan guarantee facilities, allowing local lenders to extend credit to SMEs. And from Horizon 2020, the UK raked in £1.2 billion in 2015 alone - more than any other nation in the Union for research innovation.
If the UK ends up leaving the Union, it doesn’t require a statistician to see that it’s a big hole to fill.
Horizon 2020 funding
Let’s take a closer look at Horizon 2020. The programme is a broadchurch, so it doesn’t all strictly go to startups. But there’s a big tranche that does, which is administered by EASME (the EU’s executive agency for SMEs). Under EASME’s scheme, an SME can receive up to €2.5m and specialised coaching.
The EU defines SMEs as any business below 250 staff and €50m turnover. Since the programme was implemented, 230 British SMEs have received backing from the European Commission. Horizon 2020’s support is apportioned according to four categories (referred to as ‘thematic concentrations’): SME support, environment, maritime and energy.
Horizon 2020 has supported everything from innovative cage fishing projects in Aberdeen, to a bleeding edge Bristol tech startup called Ultrahaptics that develops ultrasound technologies to provide haptic (or touch) feedback in free space (things like turning something off by pressing a virtual on-off button).
Horizon 2020’s geographic dispersal
In October 2015, Ultrahaptics was awarded €1.496 million for a specific engineering project.
“Horizon 2020 helped the business at a crucial time,” explains Ultrahaptics CEO Steve Cliffe. “We had just launched our evaluation program, which saw our technology in the hands of customers, allowing them to experiment with touchless haptics for the first time.
Horizon 2020 helped the business at a crucial time.
“The program was oversubscribed within two weeks. We knew it would be popular, but the demand from multiple market was just phenomenal.” Confronted with unprecedented demand, Ultrahaptics realised it needed to develop a solution to support “not just tens, but hundreds of customers”. “And we needed to do it quickly,” said Cliffe.
“We looked at our roadmap and realised that Horizon 2020 funding would strip months off it, dramatically reducing our time to revenue. Having funding, some of which was upfront, allowed us to hire, buy equipment and dedicate time to developing a product that could support the ever increasing customer demand.”
A silver lining?
The dust from the referendum had barely settled when the investment fund Coast to Capital sent out an email warning of a funding freeze. The organisation allocates some EU funding to companies on South-East coast of England.
It does seem now, however, that The Treasury has gone out of its way to placate organisations like Coast to Capital. Samantha Philpott from Coast to Capital told BusinessZone that The Treasury has promised to honour “all European Structural and Investment Funds (ESIF) projects with signed contracts or funding agreement in place prior to the Autumn Statement will be fully funded, even if these projects continue beyond the UK’s departure from the EU”.
The treasury is also assessing whether “to guarantee funding for specific ESIF projects that might be signed after the Autumn Statement but whilst the UK remains a member of the EU”.
The fate of funding post-Brexit remains unclear, however.
The fate of funding post-Brexit remains unclear, however. When asked about local investment projects in Post-Brexit Britain, Coast to Capital were unwilling to comment until after the Autumn Statement.
But all this supposes that Brexit will definitely happen. As Morgan Stanley’s chief UK economist Jacob Nell noted: chances are it’s just too damn difficult for Britain to leave the EU.
Namely, Nell points out, the EU “will not give the UK a deal in which Britain gets access to the single market but opts out of the freedom of movement”. The British government bureaucracy has been gearing up for negotiations, with new departments being set up within Whitehall to handle negotiations.
But early indications aren’t looking good. With the EU set to play hard ball, a Whitehall insider recently admitted to The Sunday Times: “They say they don’t even know the right questions to ask when they finally begin bargaining with Europe.”
The Autumn Statement promises the most clarity, with the government expected to make moves to shore up business confidence.
One sector expected to benefit is R&D tax relief.
One sector expected to benefit is R&D tax relief. “I do believe they will increase R&D tax relief in the Autumn Statement,” predicts Brian Williamson, managing director of R&D tax advisory Jumpstart. “At worst it’s a way for them to siphon into companies that generate the most value to the economy and the R&D tax relief programme is a great way to do it.”
According to Williamson, these uncertain times offer a funding opportunity for SMEs. “Horizon 2020 for instance, is still open to everyone and goes on for a number of years and if you’re thinking of doing it, I’d encourage you to,” says Williamson. “If you combine these funds with an increase in R&D tax relief, it could be lucrative.”
Who will replace the EU?
The key question is this: what will change once Theresa May’s government takes sole control of the EU funding mantle after the nation leaves the union? The obvious candidate is the newly minted department for Business, Energy and Industrial Strategy (BEIS).
Keen to place her stamp on government, the new prime minister merged the department for Business Innovation & Skills (BIS) - already roiled by budget cuts and retrenchments - with the Department of Energy & Climate Change. The new department falls under the custodianship of Greg Clark, replacing Sajid Javid.
Like the rest of Theresa May’s government, BEIS has struck a sanguine tone post-referendum. A BEIS spokesperson told BusinessZone that the department wants businesses to benefit from “the opportunities presented by leaving the EU”. The department’s spokesperson, understandably, was unable to confirm that EU funding would be exactly replaced.
When pressed, the spokesperson noted that: “The impacts on leaving will depend on a number of factors including the timing of the UK’s exit and the details of our future relationship with the EU, but we are clear that no immediate change is necessary. While we remain a member, the UK continues to pay into the EU and continues to receive funds.”
But it doesn’t take much analysis to realise that startups dealing with May, an MP that has generally sided with the concerns of big business on climate change measures, will be playing a different game compared to any potential benefactors from Brussels. The EU’s thematic concentrations (SME support, environment, maritime and energy) are startup led.
“The phasing out of European funding,” Williamson notes as we end our conversation, “ will only be dramatic if perceptions are dramatic. Although, sometimes perceptions drive a market rather than reality”.
Sometimes perceptions drive a market rather than reality.
It seems rather appropriate that perception would have such cachet in post-referendum Britain. Both the Leave and Remain campaigns deployed tactics that aimed to destabilize voters’ perception; either their perception of the EU, the economy or one another.
The fact remains, though, that there are some entrepreneurs who have been stung by the referendum result. As Lorne Blyth, founder of Flavours Holidays, recently told BusinessZone: “There’s a lot of debate about the EU strangling small businesses, but that’s just not been my experience. We’ve had nothing but help and support”.
The only thing that seems clear in all of this is that Theresa May and BEIS have a lot of work on their hands.
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