Successful Research, Development & Innovation (RD&I) is borne from collaboration, the sharing of ideas and an approach where collective intellect is greater than the sum of its parts. This approach is evident at every level of RD&I, from small research groups in universities, to large platforms of transglobal R&D teams in industry. One common trend that crosscuts all sectors is how to fund RD&I projects where the risk is great, the costs are high, and return on the investment may not crystallise for a long time, if ever. Eoin McCarthy and Ken Hardy of our R&D Incentives practice explain.
Within Europe, in addition to national mechanisms to support research, the European Commission (EC) presents a framework of significant resource and opportunity to de-risk RD&I activity by providing a large bedrock of funding across the science and technology disciplines, adding significant value to the EU’s innovation ecosystem and global competitiveness. The EC shapes it’s RD&I funding blocks into seven year framework programmes (FP), the first of which was initiated in 1984 with a budget of ~€3.8 billion. Since then, the budget has scaled significantly, outstripping inflation, and we now find ourselves approaching the end of FP8 (Horizon 2020), valued at ~€77 billion, and the beginning of FP9 – Horizon Europe.
So, what is Horizon Europe, how does it compare to previous programmes, and how can Ireland’s industrial landscape maximise its benefit from the programme?
Recently the Council of the EU published its proposal for regulation establishing Horizon Europe, its proposal to establish the specific programme for its implementation, and agreed the final budget with the European parliament. Indeed, the first work programmes have been published in quarter one of this year, with more to come in quarter two.
Effectively Horizon Europe is an ambitious RD&I programme running from 2021 - 2027 which aims to strengthen the EU and ERA’s scientific and technological bases, boosting innovation capacity, competitiveness, and enabling job creation. The budget, which was originally billed at ~€100 billion, has been eroded to ~€95.5 billion - an area of great debate and discontent. However, a €4 billion top-up has been added from next generation EU, ringfenced to support recovery and resilience brought on by the pandemic, and €5 billion from the EU’s COVID stimulus package.
The structure of Horizon Europe broadly trends with H2020, and features three, high level, pillars which covers a large spectrum of RD&I: from basic research in the low TRL’s, to enabling technologies clear the final hurdles in achieving commercialisation.
Opportunities to fund industrial RD&I is housed within the Global Challenges and European Industrial Competitiveness Pillar, budgeted at ~€54 billion, and Innovative Europe Pillar, with a ~€13 billion budget.
Extrapolating the funding awarded to industry within H2020 – which is 28.6 % of the total budget to date, we could reasonably forecast a ~€27 billion injection into industrial awardees in the next framework. This quantum of support is substantial and there are several barriers to entry that must be considered, overcome, or accepted prior to engaging in the process;
It must be noted that there are some exceptions, for example instruments within the EIC are open to individual applicants, or single beneficiaries, and is heavily geared towards supporting SMEs and start-ups. This type of support could be critical in bridging the dreaded ‘valley of death’ within the technology development cycle. Factories of the Future (FoF) calls also target SME’s in this space.
Given the drastic shift in RD&I activity over the past year as a result of the COVID-19 pandemic, there will more than likely be some fluidity in what areas of research will be prioritised, especially as the situation evolves in the medium-long term. Development in the digitisation and automation sectors will see increased activity – and increased competition as a result. R&D in the health sector – vaccine and medical device development in particular – will be prioritised more than ever. In addition, it is reasonable to predict expedited digitisation within the health industry, perhaps in remote diagnostics and treatment.
With the above in mind, how has Ireland performed in H2020 and can we extrapolate this into Horizon Europe?
Throughout the H2020 framework Ireland has continued to punch above its weight in attracting significant funding into our private sector. (For comparison, our non-SME industry sector has achieved a 42.5% success rate, compared with the 34% EU average. Our SME’s have achieved 12.6% success rates across, compared with a 9.9% EU average.) Our private sector has secured funding equating to ~ €367 million from H2020 alone so far, a significant injection into our innovation ecosystem. Irelands private sector have signed into 2.45% of the entire H2020 programme and drawn down 0.63% of its funding.
If we extrapolate our success rate to Horizon Europe, and account for an equivalent performance increase observed between FP7 and H2020, it is reasonable to predict a ~€1.2 billion funding injection into Irish industry from Horizon Europe. This is exclusive of pillar 1 type funding into HEI’s. Realising these returns requires robust organisation and increasing our coordination of grants, in addition to doubling down on national funding for our research infrastructures and technical expertise, a critical enabler to attracting EC funding. Our expertise in KPMG’s R&D Incentives Practice can advise you on how to position your approach to RD&I activity to maximise your chances of success and assist you in preparing a robust grant application.
Apart from the funding an awardee receives, it is also important to consider what percentage of the project is ineligible for support. The % of support is governed by the type of action framing the call. For example, an Innovation action is partially funded up to 70% of eligible costs. To date, ~54% of Irelands private sector involvement in H2020 has been within Innovation actions. By this measure at least €35 million in eligible costs are sourced outside of the grant agreement.
Considering our position as an over performer relative to our size, how can companies based in Ireland maximise the fiscal returns on European funded projects?
Within the EC framework the scope for individual funding calls within the Global Challenges and European Industrial Competitiveness - Pillar 2 (the largest funded pillar) is highly prescriptive. This has been counteracted to some extent, by developing many induvial calls tailored to almost every facet of industry. Indeed, funding calls are developed by engaging with industry and organisational stakeholders, such as the European Factories of the Future Research Association (EFFRA) and the League of European Research Universities (LERU), to identify what specific areas of science and technology should be targeted, which can be too granular in detail or too far ahead of the curve – which ultimately means a greater risk profile for applicants. As a result of these constraints, industry is often in a position where R&D work is progressing on a project along several fronts: before a grant application process is initiated, in parallel with a funded project, and after the funding has ended. This R&D activity outside of a grant may be captured within qualifying criteria for the R&D Tax Credit4, a generous incentive that should be considered and utilised.
Importantly, there are non-prescriptive opportunities within Innovative Europe - Pillar 3, that depend on the type of RD&I, aiming to fund innovative breakthroughs, which can benefit SME’s and start-ups for example.
There are other opportunities peripheral to funded projects. It may be beneficial to identify your company’s technical expertise and capabilities within the EC network for engagement as a third party contractor for example. This type of work may also constitute R&D activity when viewed in isolation and should be assessed in relation to the R&D Tax Credit. In KPMG’s R&D Incentives Practice we have significant experience in identifying the nuances, interdependencies and interactions between the varied funding mechanisms, and can add value to your RD&I approach in this respect.
The legal structure within multifaceted consortia brings great complexity and is a significant barrier to entry. It is critical to solidify a robust structure around IP planning from the outset. That said, for Irish entities, income generated from commercialising certain IP may qualify for the Knowledge Development Box (KDB). In KPMG’s R&D Incentives Practice we have respected experience in identifying opportunities around the KDB and have developed bespoke methodologies to expedite the preparation process.
In a time of great global uncertainty Ireland is well positioned to adsorb a shift in RD&I, be it short, medium or long term. Our pharma, biopharma, med tech and software industries are well positioned from an R&D and manufacturing perspective, both on an SME and multi-national basis. RD&I in our HEI sector is bolstered by multifaceted highly collaborative research centres, led by the SFI, which can leverage their broad set of expertise to move with the changing landscape. This holds us in a strong position to sustain our performance in attracting EC funding, and allows us the agility to pivot if circumstances change. There will certainly be an increased focus on RD&I in the health sector, especially around vaccines and digitisation, an area we prosper in.
As the transition period to Horizon Europe ramps ups it is important to acknowledge that H2020 is certainly not over. The final funding calls open in 2020, and these projects may run for up to 5 years. In addition, the audit period for H2020 funded projects is 2 years after the project has finished - so there is considerable overlap as you might expect. Indeed, the final calls within the H2020 programme will more than likely shape the initial calls for Horizon Europe, which typically happens between frameworks.
Horizon Europe is one facet of a wider EU RD&I agenda, albeit the largest player. Digital Europe, operating in the supercomputing, artificial intelligence and cybersecurity space, with a planned budget of €8.2 billion, will complement Horizon Europe with increased synergies between policies - a big target 2021 - 2027. This could be a great opportunity to leverage Irelands expertise in the area.
No matter how we approach it, funding RD&I projects remains high risk, but is critical for commercial development and success. It is more important than ever to consider the entire portfolio of potential R&D activity, especially areas that are not funded through a grant agreement. Moreover, the legal framework around IP generated from a project must be carefully considered. Companies based in Ireland must take the opportunity to maximise returns on RD&I activity through avenues such as the R&D Tax Credit, Knowledge Development Box (KDB) & RD&I Grants, and KPMG’s R&D Incentives practice are here to advise and assist our clients in this regard.