15 September 2016

The challenges for regional city innovation in the face of Brexit

June 23 2016 will remain one of the most important, momentous and politically shocking votes in the United Kingdom in most of our lives. However you voted and whatever outcome you expected the results of the Brexit referendum will reverberate for generations in the UK and within Europe.

Much is unclear about how things will now progress. The UK population has expressed a slim majority to ‘leave’ the European Union (EU). However, what this means in practice is quite unclear and how and when this is achieved is also not defined and was not defined in the referendum campaign.

Britain can, it is assumed, expect to retain some of the rights, as well as responsibilities, of access to the remaining EU countries as a potential member of other economic and political associations, such as the European Free Trade Area, World Trade Association, as well as via direct negotiations with the EU.

How, when and what the access arrangements will be is yet to be defined. Britain’s resulting new trade and political relationship will need to be in some way ratified by the UK parliament – and people – as well as the rest of the EU, and our other international trade partners in order for it to finally come into permanent force. These issues will not be fully resolved for many years.

Nevertheless, today the UK remains part of the EU, has fully funded its contributions and thus has access to its funds and programmes. Over the last 10 years, via European pooled contributions the UK has received tens of billions of pounds. This includes structural funds as well as innovation funds. Programmes across the country, not only in economically challenged areas, have benefited from these funds. In the period 2007-2013, the UK received €47.5bn EU funds of which €8.8bn were dedicated to Research, Development and Innovation activities.

The EU allocates funds to each European nation to support sustainable economic development and reduce regional wealth disparities; it is the Union’s way of trying to boost the poorest parts of the continent (for example in the UK, Cornwall and Isles of Scilly as well as West Wales and the Valleys). A total of €10.9bn (£8.4bn) was awarded to Britain for the period 2014-20, and the government allocated the money based on an equality assessment.

While the UK government has also directly invested in regional development and innovation via a range of domestic programmes, it is not clear that these EU funding opportunities will be replaced like for like by the UK government in the long term. The UK government may simply have other funding priorities, as is often the case in the domestic comprehensive spending rounds. Also, countries outside of the EU have in some cases been involved in EU funding innovation funding rounds under certain circumstances. This is particularly, the case for Israel, Turkey, Norway and long-term EU applicant countries in the Balkans.

For many years cities across the UK have used the availability of EU innovation funds via competitions and bids as a means of advancing their local economies, capabilities and city infrastructure. This has included building the capabilities of local universities and small innovative businesses (SMEs), new transport concepts and schemes, broadening expertise of local staff, and building linkages to good practice in other locales across the Union. This has become the basis for much local innovation in the UK, particularly outside of London where due to funding availability and the size of the city, different approaches are usually considered.

These opportunities, it can only be assumed, will change once the UK is not within the political and funding processes for these programmes. Furthermore, the free movement of labour within the EU, upon which these programmes operate, will likely change in some way for the UK and the network of researchers that the UK has benefited from will do too.

Currently the opportunity to participate in EU-funded projects is limited to companies/organisations located in the EU plus some other eligible countries such as Norway, Iceland, Turkey and Israel, which have signed a special agreement with the EU and pay their annual ‘EU Membership fee’ based on a percentage of their GDP.

The Brexit procedure could start as early as late 2016 and could take 2 years for its completion within the structure of the existing treaties. Thus, the UK could officially leave the EU early in 2019. The structure of this unprecedented process is unclear. In a worst-case scenario, the UK could be unable to participate in EU projects and consequently lose access to the billions of Euros of pooled funds for Research and Innovation projects. This would seriously affect UK companies, universities, local authorities and SMEs.

At present, there are numerous EU funding opportunities, in particular, within the relatively new Horizon 2020 programme. Horizon 2020 is the EU’s largest ever funding framework with €80bn (£67bn) allocated between 2014 and 2020. The scheme is designed to fund Research & Innovation Actions (100% of eligible costs), Coordination & Support Actions (100% of eligible costs) and Innovation Actions (70% of eligible costs).

Themes eligible for funding range from Transport to Energy, from ICT to Environment, from Agriculture to Nanotechnologies, and more. Consortia of partners are needed with at least three partners from three EU countries. Both applicants from the private and public sectors are welcome as well as SMEs. The benefit of meeting other organisations from several EU countries is invaluable to learn from each other’s experiences, policies, best practices and to build larger more community wide businesses.

As a result of criticism from earlier schemes there is an SME specific scheme - the SME Instrument - where SMEs can participate alone (i.e. without consortia) to submit their innovation ideas and receive €50k to develop a business plan (SME Instrument. Phase 1) or a full implementation & commercialisation project – if the idea has already proved viable - and request funds that could range from €0.5m to €2.5m for up to 2 years of exploitation (SME Instrument. Phase 2).

There are other EU programmes such as:

InterReg Europe: Inter-Regional projects focused on finding solutions to cross-border problems that are part of the larger European Regional Development Funds (ERDF) scheme that help develop Innovation & Research, promote the Digital Agenda, support SMEs and encourage Low-Carbon Economy;

European Structural and Investment Funds (ESIF): to build capacity in the least economically developed EU regions;

European Fund for Strategic Investments (EFSI): to mobilise investment to stimulate Jobs and Growth.

As well as a wide range of other sector specific activities in areas such as space, environment, security, etc.

Enabling the development and deployment of the amorphous concept of a ‘smart city’ has been spurred by thinking, and funding, across the wide range of city based user cases and via EU co-funded projects.

So, what are some options, if not opportunities, for UK local authorities going forward to continue to make the most of innovation in an unsure, but no doubt evolving, post Brexit world over the coming years?

Firstly, the UK is still in the EU and eventually politics and negotiations will determine the shape of any change in our relationship with the Union and its members. For now, we are still able to fully participate in competitions. The consideration should be the length of the competition and how later stages may be impacted if and when our status changes. This leads to the suggested strategy of making consortia for bids widely based across the community and perhaps not UK led in the interim.

Funding applications should also be cognisant of the possibility of less funds being available from the EU in the later stages of winning bids. We have already heard that the semester of governing the EU Council scheduled for the UK in 2017 will be transferred to Estonia. This will indirectly reduce visibility and business opportunity for UK based business within the Union.

Authorities should consider forming longer-term partnerships with comparable cities/regions across the Union. This is a wise strategy even if we had not had the Brexit vote. Regardless of EU funding, working with like-minded and comparable cities in neighbouring EU states can and will be very useful in future to benchmark activities, grow your base of talent and suppliers and widen your strategic horizons. Start this now!

The UK government needs to be lobbied regarding considering how it will fund domestic innovation in the future. There are innumerable issues that need to be considered to make some form of Brexit viable as well as consequential funding pressures on the Treasury. Innovation funds may, or will, likely not be an initial priority and in particular as the Treasury will ultimately be the only source of such funds, pressure needs to be applied to ensure sufficient cash is available across a range of key UK priority industries and over the long term, as previous EU funds had been.

Devolution deals have become common across England over the last few years. While the future of these deals is uncertain as the constitutional playbook of the UK is rewritten, the local authority groups need to lobby government to ensure that these deals have sufficient local funding and routes to raise local funds in order to support local innovation. In addition, local authorities will need to now spend more time and resources finding and developing partnerships in Europe, but outside of the EU processes, and in addition more widely around the world.

Giles K Bailey works for Stratageeb Limited and Stefano Mainero works for EPN Consulting Limited.

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