Global economic trends: Why it’s time to invest in innovation

1. European Investment Bank
EIB Financing of European Research, Development and Innovation (RDI)
Thomas C. Barrett
Brussels, 24 November 2010
Innovation Union and Industrial Policy
Briefing for Journalists

2. European Investment Bank 2
‘‘ A Europe of Zero Risk would be a Europe of Zero Innovation‘‘
Commissioner Máire Geoghegan-Quinn, Strasbourg 2010
Role of Innovative Finance
What is the role of Equity /Risk Capital?
What is the role of Debt ?
What is the role of the Public Sector?

3. European Investment Bank 3
Why invest in innovation?
Increasing average R&D investment in innovation across EU27 to 3% of GDP by
2020 would:
increase GDP by 3%
reduce unemployment by 1.5%
Although in the long-run innovation and employment creation go hand in hand:
there will be frictional and structural employment issues
the labour market needs to be flexible and well-functioning
education is critical
The Europe 2020 Agenda calls for smart, sustainable and inclusive growth,
requiring:
the right innovation environment
appropriate risk-sharing arrangements to better leverage limited public funds

4. European Investment Bank 4
The innovation problem
The European Innovation Scoreboard for 2009 indicates a considerable “Innovation
Gap”:
22% between the EU27 and the US
30% between the EU27 and Japan
New competitors (e.g. Brazil, Russia, India and China) increase the pressure on the
EU to remain globally competitive in terms of the quality of its:
research of innovative goods and services
ability to attract researchers and innovators

5. European Investment Bank 5
Why doesn’t Europe innovate enough ?
The UK Community Innovation Survey (2005) identifies the most important barriers
to innovation:
cost-related
market-related
regulation-related
knowledge-related
• European firms are likely to invest less in RDI than their US or Japanese
counterparts because RDI returns are consistently lower in Europe
• Public policy must aim at increasing returns to investments in innovation in Europe

6. European Investment Bank 6
How can public policy increase the returns to innovation ?
• Public RDI policy of the past generation focused on the supposed superiority of the
public sector to pick technological winners
Current RDI approaches seek to place the private-sector in the strategic driving seat:
European Technology Platform (ETP) initiative
– 36 industry-led ETP initiatives designed to define R&D priorities
– A number of ETPs involving dedicated PPPs already exist
• The role of the public sector is to establish an environment in which innovation can
thrive

7. European Investment Bank 7
How can public policy promote an environment for
innovation ?
Spill-over effects are critical.
Human capital investment a key driver of spill-over benefits.
Two implications for public policy:
importance of clusters
importance of education

8. European Investment Bank 8
Maximising spill-over benefits
The importance of clusters:
Local proximities to research and education institutions:
50% of R&D in the OECD area performed by 10% of its regions
85% of clustered European firms claim their competitiveness has increased
Europe lags behind the US in average cluster strength
The nurturing of clusters is a focus of public sector regional/urban policies
The importance of education:
Tertiary education is key for a skilled workforce necessary for innovative firms
Role of tertiary education in basic/fundamental research

9. European Investment Bank 9
How should the public sector fund RDI ?
Insufficient access to appropriate finance partly explains Europe’s investment gap
Commission Member States have established a number of support instruments:
High Growth and Innovative SME Facility (GIF)
Risk Sharing Finance Facility (RSFF) complemented in some countries by the
JEREMIE scheme
• Efficiency and effectiveness of these instruments already demonstrated

10. European Investment Bank 10
Grant funding for innovation
Grants play an important role in achieving policy objectives when:
the valuation of an investment to a promoter and its social value differ
socially valuable investments need to be made affordable to an investor
• Risks of grant funding:
– incentive to maximise the grant component of an investment
– danger of over-investing
• Where possible grants should be:
– related to the achievement of outputs of investment programmes
– risks to promoters should be allocated to private partners when efficient.

11. European Investment Bank 11
The role of PPPs in RDI
PPPs can enhance R&D impact by:
improving the leverage of public support to business R&D through cost and risk
sharing
mobilising human and financial resources of the private sector
opening new avenues for commercial spill-overs from public-research
upgrading knowledge infrastructures
promoting the creation of regional clusters
• EPEC has launched an important project with Partnerschaften Deutschland
exploring further how PPPs can be used to support RDI activity

12. European Investment Bank 12
Conclusion
Europe’s priorities of smarter, sustainable and inclusive growth demand new thinking
about options for investing in innovation.
Public policy should concentrate on:
enhancing the innovation environment
strategic partners defining the innovation agenda
funding based on more effective risk sharing within public sector and between
public and private sectors

13. European Investment Bank 13
European Investment Bank - Profile
EIB was created by the Treaty of Rome in 1958
EIB is a not-for-profit, policy driven institution
EIB is 100% owned by the 27 EU member states
EIB has subscribed capital of EUR 232.4 bn as of 2009
EIB is AAA/Aaa rated by Moody’s, S&P and Fitch with stable outlook
EIB funds itself on the capital markets: EUR 79.4 bn in 2009
EIB signed loans amounting to EUR 79.1bn in 2009 (c.93% in EU)
EIB is the largest multilateral financing institution
EIB is the majority shareholder in the European Investment Fund
The European Investment Bank is the European Union‘s long-term financing institution. The
Bank acts as an autonomous body set up to finance capital investments furthering European
integration by promoting EU policies.

14. European Investment Bank 14
EIB GROUP : EIB/EIF product range
Risk Capital CIP Resources (SME) RSFF (SME / MidCap)
Entrepreneur, friends, family
Business Angels
Seed/Early Stage VC Funds
VC Funds
Bank Loans and Guarantees
Seed / Start-Up Phase Emerging Growth Phase Development Phase
Facility: High Growth
Innovative SME Scheme
(GIF), Ecotech
Purpose: IP financing,
technology transfer,
seed financing,
investment readiness
Target Group: VC
Funds, Business Angels
EIF Product: Fund-of-
Funds
Competitiveness and
Innovation Program
(CIP) Guarantee
schemes
Growth financing for
SMEs
VC Funds, CLOs
SME guarantees (loans,
microcredit,
equity/mezzanine,
securitisation)
RSFF
Innovation financing
SMEs/MidCaps, Banks,
PE Investors (sub-
investment grade)
Loans (incl. Mezzanine),
Funded Risk Sharing
Facilities with Banks
(Investors)
Special Operations
RSFF / Investment Loans
RSFF
Investment Loans
RDI financing
MidCaps/Large
Corporates/Public
Sector Entities
(investment grade)
Guarantees
Special Operations
Later Stage
Counterparts
EIF EIB

15. European Investment Bank 15
As of FYE 2009:
 Since 2000, EIB financed some 590 individual RDI projects/programmes
 Approvals and signatures amounted to EUR 104bn and 86bn, respectively
 Transaction sizes ranged from EUR 8m to EUR 600m
 Approximately 50% of the transactions were private sector investments
European Investment Bank
Financing of research, development
and innovation (RDI)
i2i Approvals
00
00
00
00
00
00
00
2000 2001 2002 2003 2004 2005 2006 2007
R
Total
EUR 104bn
ICT:
EUR 17bn
Industrial RDI:
EUR 53bn
2008
Geographical split of RDI approvals in
2009
000
000
2009
DE
23%
IT
13%
ES
13%FR
11%
SE
8%
GB
8%
Others
10%
CZ 2%
BE 2%
PT 2%
TR 2%
FI 3%
PL 3%

16. European Investment Bank 16
EIB
EIFEIF
 High volume possible
 Risk profile commensurate with a debt instrument and
relatively simple structures
 Customized to end recipient needs
 EIB focusing on demonstrable transfer of benefit to final
beneficiary
 Risk-sharing is being developed
 Small volumes
 High risk profile and bespoke structures
 Customized to intermediary needs
 EIF impact focused on additional capacity in market
Loans
&
Guarantees
Portfolio
guarantees,
equity
&
quasi- equity
EIB Group’s Tools to Support SMEs
Two complementary sets of instruments
(EUR bn) 2004 2005 2006 2007 2008 2009
(Forecast)
Signed Loans (EIB) 4.6 3.9 6.2 5.2 8.1 12.7
Portfolio guarantees (EIF) 1.5 1.7 2.0 1.4 2.1 2.3
Equity funds (EIF) 0.35 0.47 0.69 0.52 0.41 0.7

17. European Investment Bank 17
Role of Risk Capital /Equity in Financing Innovation
…VC is an integral part of an innovation policy
A thriving VC industry is a precondition for exploiting Europe‘s rich potential for innovation and
entrepreneurship- this is primarily the role of the private sector, but public sector can facilitate by
creating incentives to invest and improve regulation
However, the European VC market is still highly fragmented and the funding gap compared to
the US remains high
VC in Europe accounts for just €5-6 billion a year on average; hence large institutional investors (pension
funds, asset managers, banks, insurers) generally consider VC too small to justify allocating investment
expertise or resources to this asset class
Europe does not yet have a community of institutional investors that fit the profile of long term partners for
VC, unlike in the US where there is a dedicated VC investor base in particular managing university
endowments
Underperformance of the VC asset class worldwide has not helped to attract new investors to the asset
class
EU needs a robust and self-sustainable VC industry able to support bright ideas to come to
market
In the EIB Group, the EIF acts as a fund of fund and has invested so far over €4bn in over 300
early stage to late stage funds. EIF manages the Risk Capital Mandate and Mezzanine Fund
Facility on behalf of the EIB and the CIP on behalf of the European Commission.
EIF’s objective is to be catalytic and facilitate the fund raising process by coming in as a
cornerstone investor into new funds

18. European Investment Bank 18
Banks
 EIB RSFF funds complement other sources of
debt capital available for low/sub investment grade
RDI intensive corporates
 EIB RSFF funds are highly attractive for potential
beneficiaries because of:
1. Highly attractive terms & conditions (AAA
rating and non-for-profit pricing)
2. Long maturities of up to 10 years or more
3. Direct EIB participation of up to EUR 300m
per transaction (depending on rating)
4. Strong technology/industry expertise
5. EIB does not sell assets on the secondary
market (buy and hold strategy)
6. No cross selling (just long-term lender)
7. Signalling Effect: EIB as a quality stamp
8. Debt and Mezzanine Debt Product
Investors
Final Beneficiaries
Low/Sub Investment Grade
EIB (RSFF)
2007 - 2013
EUR 1bnEUR 1bn
Approx. EUR 10bn
Debt Financing
Own Resources
Role of Debt in Financing Innovation
Case Study: The Risk Sharing Finance Facility (RSFF)

19. European Investment Bank 19
Role of the Public Sector in the making Europe more innovation-friendly
Improve the regulatory framework
Creating a single innovation market by streamlining and simplifying the patent registration process, creating
a single EU Patent
Remove the remaining barriers to VC funds operating cross borders
Simplify the listing processes of innovative companies in European stock exchanges
Dynamic standardisation system to spur innovation in ICT
Look at public procurement as an opportunity to spur innovation, connect public procurement to
policy objectives; use pre-commercial procurement
Public procurement accounts for 17% of the EU’s GDP
US spends at least USD49 billion a year on pre-commercial procurement
Intelligent use of Public Private Partnerships for RDI projects
Public support to create self sustainable VC market in Europe; use of public funds to mobilise
private funding into seed and start-up funds
Fill the current market gaps : During the technology and start-up phase, new companies face the ‘valley of
death’ where public research grants stop with no access to private finance;
Use of public funding to mobilise higher risk lending to knowledge-based companies lacking
collateral (see RSFF)
Smart use of public funds to maximise leverage, diversify away from pure grant-based funding to innovative
blending of grants and other public and private funding sources (e.g. RSFF) to mobilise private sector
funding
To date, contributions for the RSFF of €430m from the EU budget and €800m from the EIB, as risk sharing
partners, have supported over €18billion investments, or 15 times the combined contribution to the
RSFF and 42 times the EU budget contribution)

20. European Investment Bank 20
1
2
Engineering/Automotive
Energy
3
4
ICT
Life Science
Scope of Sector
EU Policy Dimension
Key RDI Trends
Strong EIB Track Record in the industry
RSFF Implementation Strategy
Rationale for Selection
Product Development Sector Know-How Long Term Financing
5 RDI Infrastructures
Risk Sharing Finance Facility - Key Sectors

21. European Investment Bank 21
Risk Sharing Finance Facility
Results 2007 – To Date
RSFF Loan amount (in EURm) and number of RSFF Operations Approved/Signed/Disbursed
2010 RSFF Signature Target: EUR 2,145m (37% achieved to date)
Target
2,145
8,146
5,328
323
1,497
845
2,833
4,264
1,502
887
1,494
459
1,024
2,984
861
169
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2007 2008 2009 2010 TOTAL
EURm
APPROVALS
SIGNATURES
DISBURSEMENTS
7914 14 12 7 36 1525 12812 335276

22. European Investment Bank 22
RSFF – RESULTS TO DATE
Over EUR 5.3bn RSFF loans signed to date in 20
countries.
Main sectors – Engineering/Industry & Life
Science/Speciality chemicals
Signed Loans by Country
Signed Loans by Sector
SI
0.2%
Other
14%
TR
3%
UK
9%
RO
0.2%
PL
1.4%
SE
11%
LU
0.8%
LT
0.1%
BG
0.6%
BE
1.4%
AT
0.6%
NL
7%
DE
20%
DK
0.8%ES
17%
FI
6%
FR
9%
IL
1.7%
HU
3%
IT
6%

23. European Investment Bank 23
ALPHASAT
Project Cost: EUR 598m
RSFF Financing : EUR 225m
Alphasat is the first flight (proto-flight) mission for Alphabus,
the new European platform for next generation, high power
communication satellites. The program is jointly supported by
ESA (European Space Agency) and CNES (Centre National
d’Etudes Spatiales). The promoter will utilise the operational
payload to launch an augmented version of its Broadband
Global Area Network, while ESA is also including four
Technology Demonstration Payloads in the launch
ANDASOL SOLAR THERMAL POWER 1 & 2
Project Cost: 2 x EUR260m
RSFF Financing: 2 x EUR 60m
Technology: “Solar-only” Parabolic Trought Power Plant
Installed Capacity: 2x 49.9 MWel
Storage: Two-tank molten salt storage for 7.7 full load
hours
Project Site: Plateau of Guadix, Province Granada
Net electricity production: 2x 179.1 GWh/a
MEDINVEST
Project Cost: EUR229m
RSFF Financing : EUR 30m
Financing of RDI activities in the field of medical
devices/technologies
The proceeds of the EIB loan will be downstreamed to
finance the RDI activities of the portfolio companies.
Each portfolio company is liable and responsible for
repaying the loan made to it.
Distributions to the founders will be used to first repay the
remaining outstanding loan to Medinvest.
The most likely source of distributions are proceeds from
disposal/exit.
EUROPEAN MEDTECH (OPEN INNOVATION)
Project Cost: EUR 413m
RSFF Financing: EUR 200m
Long term strategic finance in the form of a subordinated
loan to fund the open innovation R&D activities in and
around the High Tech Campus in Eindhoven
The RSFF Loan will be used to fund Philips’ early stage,
higher risk healthcare R&D projects in the field of image-
guided intervention and therapy, home healthcare and
clinical decision support systems.
Philips’ R&D will take place in collaboration with SMEs,
research institutes and universities across Europe.
RSFF – CASE STUDIES

24. European Investment Bank 24
RSFF Mid-Term Review
Main Conclusions and Recommendations of the Independent Expert Group (IEG)
The RSFF is considered a uniquely innovative, demand-driven instrument;
It has been successfully introduced as a new scheme into the European Union’s research
funding under FP7 and therefore helped drastically to expand the financing for RDI;
The RSFF had a positive dual leverage effect: Allowing EU funding for loans to finance R&D
and helping private investors/ companies to finance riskier RDI activities, even in times of
economic crisis (2008/2009);
The implementation of the RSFF, at a particularly difficult time, appears to have been carried
out in a highly efficient and effective manner;
The IEG is therefore highly positive about the first roll-out phase of the RSFF.
The IEG made 10 recommendations for the future of the RSFF.
Period 2011-2013:
Additional EU contribution of up to € 500 million to RSFF
coming from EC FP7.
Improvement to some already supported innovation target groups (SMEs, Research
Infrastructures) through introduction of specific approaches and change of risk-sharing.
Period 2013-2020:
Continuation and expansion of the scale and the scope of the RSFF – as a visible part of ‘FP8’ –
to address future RDI financing needs with a revolving dedicated EU budget of no less than EUR
5 billion for R&D and Innovation (EU support also for Innovation).
Rationalisation of existing/future financial schemes should be targeted.

25. European Investment Bank 25
Contacts
Thomas C. Barrett
barrett@eib.org
Tel: +352 43 79 87006
Jukka Luukkanen Marc D’hooge Nicholas Jennett
luukkane@eib.org dhooge@eib.org jennett@eib.org
Tel. + 352 43 79 86412 Tel. + 352 43 79 87211 Tel. + 352 43 79 87320
http://www.eib.org