(1)

The Commission has received a request pursuant to Article 13(3) of the basic Regulation to investigate the possible circumvention of the anti-dumping measures imposed on imports of coumarin originating in the People's Republic of China.

(2)

The request was lodged on 13 February 2006 by the European Chemical Industry Council (CEFIC) on behalf of the sole producer representing 100 % of the Community production of coumarin.

(3)

The product concerned by the possible circumvention is coumarin originating in the People's Republic of China, normally declared under CN code ex 2932 21 00 (the product concerned). This code is given for information only.

(4)

The product under investigation is coumarin consigned from Indonesia and Malaysia (the product under investigation) normally declared under the same codes as the product concerned.

(5)

The measures currently in force and possibly being circumvented are anti-dumping measures imposed by Council Regulation (EC) No 769/2002 (2).

(6)

The request contains sufficient prima facie evidence that the anti-dumping measures on imports of coumarin originating in the People's Republic of China are being circumvented by means of the transhipment via Indonesia and Malaysia of coumarin.

(7)

The evidence submitted is as follows:

(8)

In the light of the above, the Commission has concluded that sufficient evidence exists to justify the initiation of an investigation pursuant to Article 13 of the basic Regulation and to make imports of coumarin consigned from Indonesia and Malaysia, whether declared as originating in Indonesia and Malaysia or not, subject to registration, in accordance with Article 14(5) of the basic Regulation.

(9)

In order to obtain the information it deems necessary for its investigation, the Commission will send questionnaires to the exporters/producers and to the associations of exporters/producers in Indonesia and Malaysia, to the exporters/producers and to the associations of exporters/producers in the People's Republic of China, to the importers and to the associations of importers in the Community which cooperated in the investigation that led to the existing measures or which are listed in the request and to the authorities of the People’s Republic of China, Indonesia and Malaysia. Information, as appropriate, may also be sought from the Community industry.

(10)

In any event, all interested parties should contact the Commission forthwith, but not later than the time-limit set in Article 3 of this Regulation in order to find out whether they are listed in the request and, if necessary, request a questionnaire within the time-limit set in Article 3(1) of this Regulation, given that the time-limit set in Article 3(2) of this Regulation applies to all interested parties.

(11)

The authorities of the People’s Republic of China, Indonesia and Malaysia will be notified of the initiation of the investigation.

(12)

All interested parties are hereby invited to make their views known in writing and to provide supporting evidence. Furthermore, the Commission may hear interested parties, provided that they make a request in writing and show that there are particular reasons why they should be heard.

(13)

In accordance with Article 13(4) of the basic Regulation, imports of the product under investigation may be exempted from registration or measures if such importation does not constitute circumvention.

(14)

Since the possible circumvention takes place outside the Community, exemptions may be granted, in accordance with Article 13(4) of the basic Regulation, to producers of the product concerned that can show that they are not related to any producer subject to the measures and that are found not to be engaged in circumvention practices as defined in Articles 13(1) and 13(2) of the basic Regulation. Producers wishing to obtain an exemption should submit a request duly supported by evidence within the time-limit indicated in Article 3(3) of this Regulation.

(15)

Pursuant to Article 14(5) of the basic Regulation, imports of the product under investigation should be made subject to registration in order to ensure that, should the investigation result in findings of circumvention, anti-dumping duties of an appropriate amount can be levied retroactively from the date of registration of such imports consigned from Indonesia and Malaysia.

(16)

In the interest of sound administration, time-limits should be stated within which:

(17)

Attention is drawn to the fact that the exercise of most procedural rights set out in the basic Regulation depends on the party's making itself known within the time-limits mentioned in Article 3 of this Regulation.

(18)

In cases in which any interested party refuses access to or does not provide the necessary information within the time-limits, or significantly impedes the investigation, provisional or final findings, affirmative or negative, may be made in accordance with Article 18 of the basic Regulation, on the basis of the facts available.

(19)

Where it is found that any interested party has supplied false or misleading information, the information shall be disregarded and use may be made of facts available. If an interested party does not cooperate or cooperates only partially and findings are therefore based on facts available in accordance with Article 18 of the basic Regulation, the result may be less favourable to that party than if it had cooperated,

(1)

By letter of 27 July 2001, registered as received on 1 August 2001, the Office of the Italian Permanent Representative to the European Union notified the Commission of aid for the purchase of equipment to ensure the provenance and quality of beef and veal.

(2)

By letters of 15 October 2001 (registered as received on 16 October 2001) and 26 February 2002 (registered as received on 27 February 2002), the Office of the Italian Permanent Representative to the European Union sent the Commission the additional information requested from the Italian authorities by letters of 12 September 2001 and 28 November 2001.

(3)

By letter of 24 April 2002, the Commission notified Italy of its decision to initiate in respect of that aid the procedure provided for in Article 88(2) of the EC Treaty.

(4)

The Commission decision to initiate the procedure was published in the Official Journal of the European Communities (1) on 18 June 2002. The Commission invited interested parties to submit their comments on the aid in question.

(5)

The Commission received no comments from interested parties.

(6)

By letter of 25 June 2002, registered as received on 27 June 2002, Italy sent the Commission further information on the planned measure.

(7)

Aid for the purchase of equipment to ensure the provenance and quality of beef and veal.

(8)

Funds budgeted for this measure amounted to €103 291,38 (ITL 200 million), to be provided by the Brescia Chamber of Commerce.

(9)

To the end of 2001.

(10)

Small and medium-sized firms employing no more than 20 people whose registered office and operations were located in the province of Brescia, which had no pending disputes with social security bodies, were up to date with their contributions to the Chamber of Commerce, were not in administration, had not compounded with their creditors and were not bankrupt.

(11)

The aid measure was to contribute to the purchase of scales linked to a computer system (hardware and software) which could certify the provenance of beef and veal and the inspection by the Brescia Centre for the qualitative improvement of milk and beef and veal.

(12)

In the original version of the measure, the beneficiaries of the aid were small and medium-sized firms in the services sector which sold meat and, to a much lesser extent, firms selling meat direct to consumers. However, the latter category is now excluded, as the Italian authorities stated in their letter of 25 June 2002. In the final version only small and medium-sized firms engaged in marketing (slaughterhouses) which sell certified beef and veal are eligible.

(13)

In the original version of the measure, the aid was modulated as follows:

(14)

The contribution granted to each firm may not exceed €1 291,15 (ITL 2,5 million).

(15)

This aid may not be cumulated with other aid granted by the State or other public bodies.

(16)

Applications made before the date of publication of call for expressions of interest are not eligible. The grant of the aid is in any case subject to its approval by the Commission.

(17)

The Commission initiated the procedure under Article 88(2) of the Treaty because it had doubts as to whether the scheme was compatible with the common market.

(18)

The first ground for its doubts arose from certain gaps in the information communicated by Italy.

(19)

First of all, the Italian authorities had provided no information on compliance with minimum environmental, hygiene and animal welfare standards. The Chamber of Commerce simply noted that compliance with these standards was not something for which it was responsible.

(20)

Secondly, the Chamber of Commerce made no comments on the existence of market outlets for the products in question.

(21)

Because of these omissions, the Commission had doubts about compliance with some of the conditions laid down at points 4.2 and 4.3 of the Community Guidelines on State aid in the agricultural sector.

(22)

A further problem which arose during the preliminary enquiry was the check on the non-cumulation of grants. In view of the organisation of the scheme, the Commission suggested establishing, in liaison with the Region of Lombardy, a system for checking on the non-cumulation of the aid. In the further information it sent to the Commission, the Chamber of Commerce expressed its willingness to check 10 % of the applications made. The Commission considered that figure inadequate because it could not exclude the possibility of beneficiaries receiving grants from a number of sources and so exceeding the eligible percentages.

(23)

In its letter of 25 June 2002, registered as received on 26 June 2002, Italy undertook to grant the aid only to slaughterhouses marketing beef and veal certified in accordance with the rules laid down by the Ministry of Agricultural and Forestry Policies. These holdings had been previously inspected for compliance with environmental, hygiene and animal welfare standards.

(24)

Italy also stated that the existence of market outlets was assured by the fact that beneficiaries were firms engaged in retail trade.

(25)

As regards compliance with the criterion of the non-cumulation of aid, the Italian authorities gave assurances that the rules on cumulation would be checked for all beneficiaries in liaison with the Region of Lombardy.

(26)

Under Article 87(1) of the EC Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is, in so far as it affects trade between Member States, incompatible with the common market. The measures covered by the decision in question correspond to this definition for the following reasons.

(27)

The finance provided by the Chambers of Commerce may be regarded as public finance within the meaning of Article 87(1) of the Treaty since firms are required to join these public law bodies and pay subscriptions to them. Furthermore, in the past, the Commission has regarded measures adopted by Italian Chambers of Commerce as State aids (2).

(28)

The measures favour certain small and medium-sized firms engaged in the marketing of agricultural products.

(29)

The measures may have an effect on trade in view of the importance of the marketing of processed products (which account for a substantial part of agricultural trade: e.g. in 1998 Italy imported agricultural products worth ECU 15,222 billion and exported products worth ECU 9,679 billion; during that year trade in agricultural products within the EU amounted to ECU 128,256 billion in imports and ECU 132,458 billion in exports).

(30)

However, in cases covered by Article 87(2) and (3) of the Treaty, some measures may enjoy derogations to be considered compatible with the common market.

(31)

The only possible derogation in this case is laid down in Article 87(3)(c), according to which aid may be considered compatible with the common market if it is found to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(32)

To benefit from the derogation referred to in Article 87(3)(c) of the Treaty, aid for investments in the sector of the processing and marketing of agricultural products must comply with the relevant provisions of Regulation (EC) No 1/2004 on the application of Articles 87 and 88 of the EC Treaty to State aid to small and medium-sized enterprises active in the production, processing and marketing of agricultural products (3). Where that Regulation does not apply, or if all the requirements laid down are not met, the aid must be appraised in the light of the relevant provisions of the Community guidelines for State aid in the agriculture sector (4) (hereinafter referred to as ‘the Community guidelines’.

(33)

Since the scheme in question is limited to small and medium-sized firms engaged in marketing, Regulation (EC) No 1/2004 applies. In particular, the appraisal of the compatibility of aid for investment in the processing and/or marketing of agricultural products must be based on Article 7 of that Regulation.

(34)

Under Article 7 of Regulation (EC) No 1/2004, aid for investment in the processing and/or marketing of agricultural products may be granted provided it satisfies the following conditions:

(35)

However, the description of the measure shows that, contrary to the requirement at f) above, this investment is restricted to the beef/veal sector. Accordingly, not all the criteria laid down in Regulation (EC) No 1/2004 are satisfied and so the aid should be appraised in the light of the Community guidelines.

(36)

In the information which it sent by the letter of 25 June 2002, the Italian authorities stated that the aid would be granted only to marketing firms (slaughterhouses) selling certified beef and veal. As a result of that change, the provisions which must be respected for the derogation under Article 87(3) (c) of the Treaty to apply are those at point 4.2 of the Community guidelines (“Aid for investment in the processing and marketing of agricultural products”).

(37)

Under point 4.2 of the Community guidelines, aid for investment in the processing and/or marketing sector may be authorised if the following conditions are satisfied:

(38)

As regards the criterion of economic viability, the conditions of eligibility for the aid, and specifically the exclusion of firms in administration, which have compounded with their creditors or are bankrupt, ensure compliance with the criterion at a).

(39)

As far as the minimum rules as regards the environment, hygiene and animal welfare are concerned, which was one of the reasons why the Commission initiated proceedings under Article 88(2) of the Treaty, the Italian authorities, in their letter of 25 June 2002, undertook to grant the aid only to slaughterhouses which marketed beef and veal which was certified in accordance with the rules authorised by the Ministry of Agricultural and Forestry Policies. These holdings had already been checked as regards their compliance with the rules on the environment, hygiene and animal welfare. Accordingly, the criterion at b) may be considered to have been met.

(40)

Since only marketing firms are eligible for the aid, the amount of the aid is fixed at 40% of the eligible expenditure with no possibility of modulation. That intensity complies with the criterion at c).

(41)

The aid is intended for the purchase of scales or equipment which fall within the definition of eligible expenditure at d).

(42)

As regards market outlets, in their letter of 25 June 2002 the Italian authorities provided information, the lack of which had led the Commission to doubt whether the aid was compatible with the common market. In particular, since the beneficiaries are economically viable marketing firms and the proposed investment does not increase productive capacity, the criterion at e) may be considered satisfied.

(43)

Another point which had led the Commission to initiate proceedings under Article 88(2) of the Treaty is the mechanism for checking on the cumulation of aid, which appeared inadequate. However, in their letter of 25 June 2002 the Italian authorities undertook to check all the applications for aid in liaison with the Region of Lombardy. This removed the doubts which the Commission had had.

(44)

In the light of the above, the Commission considers that the aid which the Brescia Chamber of Commerce intends to grant to firms marketing beef and veal for the purchase of scales is compatible with the common market, since it complies with point 4.2 of the Community guidelines for the agricultural sector. The aid measure may therefore benefit from the derogation under Article 87(3)(c) of the EC Treaty,

1.

By letter dated 25 November 2003, registered at the Commission on 26 November 2003, the UK authorities notified, pursuant to Article 88(3) of the EC Treaty, the above-mentioned measure to the Commission.

2.

By letter D/58191 dated 19 December 2003, the Commission requested further information concerning the notified measure.

3.

By letter dated 30 January 2004, registered at the Commission on 3 February 2004, and by letter dated 19 March 2004, registered at the Commission on 25 March 2004, the UK authorities submitted the information requested.

4.

By letter dated 7 May 2004, the Commission informed the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the measure.

5.

The Commission’s decision to initiate the procedure was published in the Official Journal of the European Union (2). The Commission called on interested parties to submit their comments.

6.

By letter dated 11 June 2004, registered at the Commission on 16 June 2004, the United Kingdom submitted a response to the Commission’s decision to initiate the procedure.

7.

The Commission received observations from 20 interested parties:

8.

By letter D/57629 dated 25 October 2004, the Commission forwarded these observations to the United Kingdom in order to give the United Kingdom the opportunity to react.

9.

The opinion from the United Kingdom in response to the comments of third parties was received by letter dated 23 November 2004, registered at the Commission on 24 November 2004.

10.

The measure intends to increase the amount of equity funding for small and medium-sized enterprises (SMEs) in the United Kingdom seeking to raise equity financing between GBP 250 000 (EUR 357 000) and GBP 2 million (EUR 2,9 million).

11.

The measure will provide leverage for licensed Enterprise Capital Funds (ECFs). The leverage, interest on the leverage and a profit share will be repaid by each ECF.

12.

ECFs will be required to invest capital in SMEs by means of equity or quasi-equity instruments.

13.

The legal basis of the scheme is Section 8 of the ‘Industrial Development Assistance Act 1982’.

14.

As the leverage provided to the Enterprise Capital Funds will have to be repaid, the measure is designed to be self-financing over the medium term.

15.

In terms of accounting for the scheme in its pathfinder phase, the United Kingdom has allocated GBP 44 million (EUR 63,8 million) to cover the cash-flow cost of the initial leverage.

16.

The United Kingdom seeks approval for a period of 10 years.

17.

The Department of Trade and Industry (DTI) will have statutory responsibility through its executive agency Small Business Service (SBS).

18.

The Small Business Service (SBS) will supervise the application for ECF status.

19.

The SBS will monitor ongoing investments undertaken by ECFs without having any direct control over ECFs’ individual investment decisions.

20.

The SBS will also ensure that each ECF complies with its business plan and adheres to the terms of its successful bid.

21.

The scheme is exclusively aimed at unquoted small and medium-sized enterprises (3) in the United Kingdom.

22.

Firms in difficulty as defined by the Community guidelines on State aid for rescuing and restructuring firms in difficulty (4) are excluded from investment.

23.

Enterprise Capital Funds (‘ECFs’) will not invest in sensitive sectors under State aid restrictions or in sectors to which the Commission Communication on State Aid and Risk Capital (5) does not apply. Low-risk sectors including property, land, finance and investment companies, or finance-type leasing companies will not be eligible for investment under the scheme.

24.

Enterprise Capital Funds will also be prevented from investing in other ECFs

25.

Enterprise Capital Funds will make investments in beneficiary SMEs in the GBP 250 000 (EUR 357 000) to GBP 2 million (EUR 2,9 million) range per single investment round.

26.

Additional investments in beneficiary SMEs beyond the GBP 2 million (EUR 2,9 million) limit will not be permitted in cases where the ECF is investing on less advantageous terms than other commercial investors.

27.

Follow-on investments will be permitted so long as the total equity funding raised by the beneficiary SME from ECFs and other equity investors does not exceed the GBP 2 million (EUR 2,9 million) limit.

28.

In exceptional cases, after a period of at least 6 months from the ECF’s initial investment in a beneficiary SME, follow-on investments in excess of the GBP 2 million (EUR 2,9 million) limit will also be permitted, where necessary, to prevent dilution. This will be subject to an upper limit of 10 percent of each ECF’s committed capital that may be invested in any single beneficiary SME.

29.

The Enterprise Capital Funds set up under the measure will combine private and public money for on-investment into SMEs.

30.

Following a licensing process conferring ECF status, ECFs will be entitled to receive public leverage at an interest rate at or close to the ten-year government bond rate.

31.

Public leverage to licensed Enterprise Capital Funds will be limited to no more than twice the private capital raised by the fund.

32.

The leverage, interest on the leverage and a profit-share for the public contribution must be repaid by the Enterprise Capital Funds. This will ensure that the programme will be self-financing over the medium term.

33.

The exact amounts of public leverage, profit share and repayment priorities will be determined by a competitive bidding process in order to ensure minimal public support.

34.

Open invitations for application through publication of the scheme in the Official Journal of the European Union and the relevant trade press will ensure that public support is the minimum necessary to achieve the intended objective.

35.

In applying for ECF status potential funds will need to specify the required amount of public leverage (up to the upper limit of two times private capital), the profit share between public and private investors, as well as the prioritisation of repayments on:

36.

Potential ECF operators will submit a robust business plan including:

37.

ECFs will be required to abide by British Venture Capital Association (BVCA) guidelines on accounting standards.

38.

Bids in which the public leverage is exposed to greater risk than the private capital will not be accepted.

39.

Private investors in Enterprise Capital Funds may be exposed to greater downside risk than the public, thereby removing the scope for moral hazard to influence decisions of ECF operators and ensuring commercial best practice in the operation and decision making of the ECFs.

40.

Once an ECF has secured commitments for the agreed level of private capital, it will be entitled to draw down public leverage.

41.

Each ECF will be free to draw down as little or as much leverage as it wishes, subject to the overall constraint imposed by the maximum leverage ratio agreed when ECF approval is granted.

42.

At any point in time, the maximum leverage entitlement will be determined by applying this ratio to the amount of private capital already drawn down into the fund.

43.

A maximum leverage ratio of 2:1 (public leverage will be capped at up to two times the private capital) will be applied for any ECF.

44.

The Commission Communication on State Aid and Risk Capital (6) (hereinafter referred to as ‘the Communication’) recognises a role for public funding of risk capital measures limited to addressing identifiable market failures.

45.

The Communication states that specific factors adversely affecting the access of SMEs to capital, such as imperfect or asymmetric information or high transaction costs, can cause a market failure that would justify state aid.

46.

The Communication further specifies that there is no general risk capital market failure in the Community, but rather market gaps for some types of investments at certain stages of enterprises’ lives as well as particular difficulties in regions qualifying for assistance under Articles 87(3)(a) and (c) of the EC Treaty (‘assisted areas’).

47.

The Communication goes on to explain that in general, the Commission will require provision of evidence of market failure before being prepared to authorise risk capital measures.

48.

The Commission may however be prepared to accept the existence of market failure without further provision of evidence in cases where each tranche of finance for an enterprise from risk capital measures which are wholly or partially financed through state aid will contain a maximum of EUR 500 000 in non-assisted areas, EUR 750 000 in Article 87(3)(c) areas, or EUR 1 million in Article 87(3)(a) areas.

49.

It follows that for those cases where the above-mentioned tranches are exceeded, the Commission will demand a demonstration of market failure justifying the proposed risk capital measure before assessing the compatibility of the measure in accordance with the positive and negative criteria listed under point VIII.3 of the Communication.

50.

The Enterprise Capital Funds scheme proposed by the United Kingdom foresees risk capital investments in the range of GBP 250 000 (EUR 357 000) to GBP 2 million (EUR 2,9 million) per investment tranche for SMEs in the United Kingdom.

51.

According to the ‘Regional Aid Map 2000 – 2006’ for the United Kingdom, the United Kingdom consists of regions currently classified as assisted areas pursuant to Article 87(3)(a) of the EC Treaty, as assisted areas pursuant to Article 87(3)(c) thereof, as well as of non-assisted areas (7).

52.

In line with point VI.5 of the Communication, the Commission would thus be prepared to accept the existence of market failure without further provision of evidence if risk capital funding for SMEs in the United Kingdom wholly or partially financed through state aid would be limited to the maximum amount of EUR 1 million for assisted areas pursuant to Article 87(3)(a) EC, EUR 750 000 for assisted areas pursuant to Article 87(3)(c) EC, and EUR 500 000 for non-assisted areas, respectively.

53.

According to the Communication, risk capital investments proposed under the Enterprise Capital Funds scheme exceeding the above-mentioned thresholds would necessitate the provision of evidence of market failure by the United Kingdom.

54.

In order to demonstrate the existence of market failure, the United Kingdom submitted two studies (8), concluding that there is a gap in the provision of venture capital for SMEs in the United Kingdom in the deal size range of GBP 250 000 (EUR 357 000) to GBP 2 million (EUR 2,9 million) for the following reasons:

55.

By letter dated 7 May 2004, the Commission informed the United Kingdom of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the Enterprise Capital Funds scheme.

56.

In its letter, the Commission stated that it had doubts whether the arguments presented by the United Kingdom in order to justify the existence of market failure could sufficiently justify the granting of risk capital investment tranches considerably exceeding the maximum amounts anticipated by the Communication.

57.

The Commission went on to explain that it considered a more thorough analysis of the issue to be necessary. Such an analysis would need to include any observations made by interested parties. Only after consideration of third party comments could the Commission decide whether the measure proposed by the United Kingdom affects trading conditions to an extent contrary to the common interest.

58.

In response to the publication in the Official Journal of the European Union of its decision to open the formal procedure, the Commission received observations by the following interested parties:

59.

All comments received were positive and underlined the importance of the measure as well as the appropriateness of the proposed maximum investment amounts.

60.

The arguments put forward by the above-mentioned interested parties can be classified and summarised as follows.

61.

In its comments on the opening of the formal investigation procedure, Germany highlighted the following facts:

62.

The Netherlands emphasised the following evidence in their comments on the opening of the formal investigation procedure:

63.

In its comments on the opening of the formal investigation procedure, Hungary highlighted the following facts:

64.

Lithuania accentuated the following experiences in its comments on the opening of the formal investigation procedure:

65.

The Confederation of British Industry (CBI) fully supports the UK proposal for establishing ECFs. CBI identified the market gap as stretching from GBP 250 000 (EUR 357 000) to GBP 3 million (EUR 4,3 million) and therefore believes that ECFs meet a clearly defined market gap in the funding of growth companies.

66.

The Nederlandse Vereniging van Participatiemaatschappijen (NVP) states that there is an evident equity gap at the bottom end of the market up to EUR 2,5 million. Whereas this gap may vary from Member State to Member State, the difference will not be significant.

67.

The Confederation of Netherlands Industry and Employers VNO-NCW supports the observations made by the CBI and the NVP, particularly with regard to the size of the equity gap.

68.

The Institute of Chartered Accountants in England and Wales believes that there is an equity gap that could be as high as GBP 5 million (EUR 7 million) for the following reasons:

The Institute believes that the proposed ECF scheme will provide a valuable source of finance for businesses seeking a relatively modest amount of equity capital and will stimulate other investors to participate in small investment amounts where they can follow a fund that is dedicated to this sector, as opposed to investing opportunistically from time to time.

69.

England’s Regional Development Agencies state that a recent study by the Advantage West Midlands RDA shows that the barriers to accessing growth finance are most acute for those firms seeking between GBP 250 000 (EUR 357 000) to GBP 2 million (EUR 2,9 million) as demonstrated by the following facts:

70.

The Northwest Regional Development Agency makes the following observations:

71.

The University of Warwick, after having conducted face-to-face discussions with technology transfer professionals from over 50 UK universities, comments on the early stage venture capital market and particularly on the issues facing university sector spin-off companies by highlighting the following aspects:

72.

Northern Enterprise Limited (Nelfunding) believes that there is market failure for risk capital investments below GBP 2 million (EUR 2,9 million) in the UK, and that this is adversely affecting SME development as a consequence.

73.

Stonesfield Capital Limited is actively investing in the equity gap between GBP 500 000 (EUR 700 000) and GBP 2 million (EUR 2,9 million) targeted by the Enterprise Capital Funds and submitted the following comments:

74.

The YFM Group submitted the following observations:

75.

Close Venture Management Limited highlighted the following facts:

76.

Enterprise Corporate Finance Limited has become increasingly frustrated in its endeavours to raise capital in the range between GBP 500 000 (EUR 700 000) and GBP 2 million (EUR 2,9 million) for their client companies:

77.

In its comment, 3i emphasises the following:

3i currently estimates that the equity gap has increased from GBP 500 000 (EUR 700 000) to GBP 1 million (EUR 1,4 million) to as much as GBP 2 million (EUR 2,9 million).

3i has significantly reduced its own investment in this segment of the market. Whereas it invested approximately EUR 1,1 billion in early-stage venture capital investments across Europe in 2001, investment in similar companies has declined significantly with 3i investing approximately EUR 150 million in this segment of the market in 2004.

78.

Cavendish Asset Management Limited supports the observations made by the Institute of Chartered Accountants in England and Wales described under point 68 above.

79.

The comments from the United Kingdom on the decision of the Commission to open the formal procedure pursuant to Article 88(2) of the EC Treaty as well as on the observations from third parties will be summarised in points (80) to (96).

80.

While access to debt finance has improved for the majority of businesses in the UK since the mid 1990s, an important minority of SMEs with high growth potential still have problems in attracting equity finance.

81.

Equity finance is suitable for businesses at an early stage of development that are not yet generating a sufficient stream of revenue to service debt interest repayments. It is also suitable for businesses developing new technologies, products or markets that offer the potential to achieve substantial rates of growth, but also hold a significant risk of failure.

82.

The public consultation on access to growth capital for small businesses, aggregated BVCA data and academic research all point to an equity gap in the United Kingdom affecting businesses seeking to raise between GBP 250 000 (EUR 357 000) and GBP 2 million (EUR 2,9 million) of equity finance.

83.

The equity gap has extended upwards in recent years, particularly since 1999, driven in part by the success of the private equity industry moving to larger size investments. Average deal sizes have risen substantially, as venture capital firms seek to benefit from increased economies of scale.

84.

The equity gap has been accentuated for early stage SMEs in recent years due to a marked shift in the types of investments made by venture capitalists. Evidence shows venture capital investments have drifted towards later-stage, management buy out (MBO) and management buy in (MBI) investments.

85.

The most recent BVCA data available for 2003 demonstrate that there is a continued emphasis on later-stage deals, and particularly on large buy-outs. Early stage investment accounted for just 6,5% of UK venture capital investment in 2003, or less than 0,02% of GDP. This contrasts with an average of 0,05% of GDP invested in early stage in the years 1998-2001.

86.

The expected use of newly-raised venture capital funds is becoming increasingly focused on larger deals in well-established companies. The most recent data from the BVCA indicate that only 4% of funds raised are expected to be allocated to early-stage investment, 3% to expansion deals, and 1% to MBOs of less than GBP 10 million. It was expected that only 3% of funds raised would be allocated to early stage and expansion technology investments, compared to 5% in 2002.

87.

Furthermore, data suggest that of those investments that take place within the equity gap of GBP 250 000 (EUR 357 000) and GBP 2 million (EUR 2,9 million), only 1 in 4 are initial, un-syndicated investments. Of approximately 1 000 investments in the sub GBP 2 million (EUR 2,9 million) range in 2000-2002, more than 70% were follow-on investments.

88.

As venture capitalists are migrating towards larger fund sizes, there is little evidence of a flow of new venture capital investment teams into the lower end of the market. The importance of reputation in the venture capital sector creates a significant entry hurdle for prospective new fund management teams seeking to compete in the venture market. This trend will result in a worsening shortage of talent and experience in the equity gap segment of the market that will become increasingly hard to replace as time progresses, with quality fund managers raising larger funds, and hence making larger deals. Given the skills needed for successful smaller-scale and early-stage investing, ensuring a good flow of quality new entrants is a precondition for a dynamic early stage market.

89.

The UK concludes that there appears to be full agreement among all respondents that there is a risk capital market failure that makes it difficult for SMEs with high growth potential to get funding. All third party comments have supported the UK’s view that the market has changed and that an equity gap now exists beyond the level set in the Communication.

90.

The United Kingdom has sought to demonstrate that a funding gap exists in investment sizes up to GBP 2 million (EUR 2,9 million). A number of respondents suggest this is a modest estimate and that the gap may now reach as high as GBP 5 million (EUR 7 million). The United Kingdom believes however that the evidence is strongest in support of GBP 2 million (EUR 2,9 million) as the appropriate figure.

91.

The United Kingdom highlights that responses from those businesses operating within the UK venture capital sector are in line with those of its own detailed consultation. Respondents universally acknowledged the existence of a risk capital funding gap at the GBP 2 million (EUR 2,9 million) level or above. These respondents have practical experience of this market and have researched it from a commercial point of view. Their experience supports the United Kingdom’s own research, which says that funds operating in this area are not able to attract private investors because of perceptions of risk and the economics of making smaller investments. The United Kingdom is therefore satisfied that the Enterprise Capital Funds scheme will not displace existing private provision in this market.

92.

The United Kingdom also welcomes the level of support for the practical design of the ECF model. The United Kingdom welcomes the understanding amongst respondents that the proposed fund structure means that a distortion of competition will not occur and that the incentive will be for sound commercial investment decisions. The key driver for this is that the proposed ECFs give no down-side protection to the private investors. This sharpens their incentive to select good fund managers who will invest their funds to best effect. If an ECF does not make a positive return the private investor will lose his or her money. The United Kingdom believes that this is a more powerful commercial incentive than an alternative model where there is a lower proportion of public investment but where public funds are at risk before the private investment and private investors can get their money back from loss making funds.

93.

By including key aspects of each fund’s structure within the competitive bidding process the United Kingdom will pay the minimum necessary in fund management charges and subordination. The bidding process will set out some minimum requirements, such as the pari passu loss position and a prioritised return to the public but it includes the flexibility for applicants to specify alternative terms where these are more generous to the public. This opens up the possibility that private investors may be exposed to greater downside risk than the public or that less than the anticipated leverage is required where a bidder could show that this would prove attractive to investors in its fund.

94.

The United Kingdom further notes that the responses from other Member States highlight a desire to update the current Communication. The risk capital market across the European Union has changed markedly since the publication of the Communication in 2001. In view of this the United Kingdom agrees that there will need to be some fundamental revisions in the Communication when it is revised in 2006. This will almost certainly need to go beyond looking at tranche sizes to look at other issues such as the balance of private sector risk as compensation for greater public funding and greater use of instruments such as block exemptions.

95.

The United Kingdom considers that the ECF scheme will make an important contribution to tackling what remains an important barrier to innovation and entrepreneurship and to meeting the goals set out at Lisbon and in the Entrepreneurship Action Plan. The ECF scheme will also help meet the recommendations of the Kok report which noted that finance for SMEs in Europe is currently too lending based and called for more use of risk capital.

96.

The United Kingdom concludes that the support shown both by the public and private sectors and by other Member States as well as those operating in the venture capital market positively reflects the need for an investment vehicle of the ECF type.

97.

The Commission has examined the scheme in light of Article 87 of the EC Treaty and in particular on the basis of the Commission Communication on State Aid and Risk Capital (9). The results of this assessment are summarised below.

98.

By notifying the scheme, the UK authorities have complied with their obligations under Article 88(3) EC.

99.

According to the provisions of the Communication, the assessment of the presence of State aid must consider the possibility that a measure may confer aid on at least three different levels:

100.

At the level of investors, the Commission considers that there is State aid within the meaning of Article 87(1) of the EC Treaty. The involvement of state resources is demonstrated by the fact that the UK authorities will provide public leverage to the Enterprise Capital Funds. Private investors in Enterprise Capital Funds, who may be undertakings within the meaning of the EC Treaty may be entitled to higher returns than the public and may thus receive an advantage. Even though no person or organisation is debarred from investing in the funds, the limited size of the funds will not guarantee that all potential investment will be accepted and the Commission therefore considers that there is selectivity. Finally, the scheme affects trade between Member States, as investment in capital is an activity that is the subject of considerable trade between Member States.

101.

At the level of the funds, the Commission in general tends to the view that a fund is a vehicle for the transfer of aid to investors and/or enterprises invested in, rather than being an aid beneficiary itself. However, in certain cases, notably measures involving transfers in favour of existing funds with numerous and diverse investors, the fund may have the character of an independent enterprise. Under the present scheme, the Enterprise Capital Funds will be newly created and will be prevented from diversifying into other activities than those intended by the scheme. The Commission therefore does not consider the Enterprise Capital Funds to be separate aid beneficiaries. This principle is in line with the Commission decisions on the ‘Viridian Growth Fund’ (10), the ‘Coalfields Enterprise Fund’ (11) and the ‘Community Development Venture Fund’ (12).

102.

At the level of the companies invested in, the Commission considers that there is State aid within the meaning of Article 87(1) of the EC Treaty. State resources are involved because the investments of the fund in beneficiary SMEs will contain public funding. The measure distorts competition by conferring an advantage on the beneficiary SMEs as they would otherwise not be able to obtain risk capital funding at the same conditions and/or volume. The measure is selective as it is targeted at specific SMEs in the United Kingdom. The measure has the potential to affect trade between Member States, as there is the possibility that the target SMEs are engaged or will be engaged in activities involving intra-Community trade.

103.

The Commission therefore concludes that State aid within the meaning of Article 87(1) EC is present at the level of the investors and at the level of the beneficiary SMEs.

104.

In line with the provisions of the Communication, the Commission may be prepared to accept the existence of market failure without further provision of evidence in cases where each tranche of finance for an enterprise from risk capital measures which are wholly or partially financed through state aid will contain a maximum of EUR 500 000 in non-assisted areas, EUR 750 000 in Article 87(3)(c) areas, or EUR 1 million in Article 87(3)(a) areas.

105.

The measure proposed by the United Kingdom foresees risk capital investments in the range of GBP 250 000 (EUR 357 000) to GBP 2 million (EUR 2,9 million) per investment tranche for SMEs in the United Kingdom.

106.

According to the ‘Regional Aid Map 2000 – 2006’ for the United Kingdom, the United Kingdom consists of regions currently classified as assisted areas pursuant to Article 87(3)(a) of the EC Treaty, as assisted areas pursuant to Article 87(3)(c) EC, as well as of non-assisted areas (13).

107.

In line with the provisions of the Communication, the Commission has informed the United Kingdom that in view of the fact that the proposed risk capital investments under the present scheme exceed the above-mentioned thresholds anticipated by the Communication, the United Kingdom would have to provide evidence of market failure.

108.

The arguments put forward by the United Kingdom as well as the observations made by third parties demonstrating the existence of a market gap in the investment range of GBP 250 000 (EUR 357 000) and GBP 2 million (EUR 2,9 million) will be summarised in the following.

109.

The most important single source of external finance for SMEs is bank debt, principally in the form of overdrafts and fixed-term loans, which together account for around half of all external finance. (14) Bank debt is most suitable where businesses are generating sufficient cash flow to service interest payments. The availability of debt finance has improved significantly over the past decade. There is no real evidence of firms having difficulties assessing bank finance. Nevertheless, lenders can still face considerable uncertainty when assessing the prospects of individual businesses. They often rely on collateral to support SME lending, especially where the borrower lacks an established track record in business. Not all business owners are able to offer suitable security.

110.

Market imperfections in the debt market arise from information asymmetries, whereby the lender is only partially informed about the prospects of a business. Information asymmetries mean that lenders are unable to quantify the level of risk involved in a particular SME. It is therefore difficult to assess the quality of investment propositions, and even harder to charge an interest rate that accurately reflects the level of risk involved. Banks typically make lending decisions on the basis of criteria such as credit history, past bank account management, the applicant’s track record in business and willingness to invest their own money in the business, and evidence of repayment capability based on a business plan. However, an individual may not have a previous track record and may have no personal capital to invest in the business. As a result, lenders also place significant emphasis on the entrepreneur’s willingness to provide collateral to underwrite the loan. While lenders’ reliance on collateral enables many businesses to secure debt finance, this approach to SME lending can create difficulties for entrepreneurs who lack suitable assets to offer as security.

111.

While debt and asset-based finance are sufficient to meet the needs of most firms, an important minority require equity finance. Equity investors inject capital in exchange for shares in the business, enabling them to receive a proportion of its future profits. This form of financing is most appropriate when the business is at an early stage of development, and is not yet generating a sufficient stream of revenue to service debt interest repayments and/or the business is developing new technologies, products or markets with the potential to achieve substantial rates of growth, but also with significant risk of failure.

112.

Equity finance accounts for only 8 per cent of all external finance for SMEs, but this statistic understates its importance in a modern, enterprising economy. Businesses that are most likely to need equity finance are often highly innovative, and have the potential to make an important contribution to productivity growth. In addition, the finance provided by venture capital is sometimes accompanied by management support, advice and other expertise.

113.

While equity finance is an important driver of growth of individual businesses, and more widely across the economy, there is a strong body of evidence that structural features of the private equity market give rise to a significant and growing ‘equity gap’ facing businesses seeking modest amounts of growth capital. These structural causes relate to both the supply and demand sides of the market.

114.

The information problems highlighted for the debt market are also applicable to the equity market. On the supply side, there are commonly three issues involved, namely information asymmetries, transaction costs, and the perception of risk and reward.

115.

‘Information asymmetries’ mean that equity investors can face significant costs in identifying suitable investment opportunities. These information problems are typically greatest for smaller, younger firms and especially innovative businesses seeking to develop unproven technologies, products and markets. Information difficulties present a significant impediment to smaller-scale equity investments, because the costs of investment do not vary proportionally with the size of investment. In comparison with large companies that are quoted on public stock markets, the flow of information about small, unquoted companies seeking investment is much more limited. Investors can therefore incur significant search costs when seeking out suitable opportunities. Furthermore, it is often difficult to assess the prospects of a business, especially where the management team, product or technology is unproven. Before equity investors can make informed investment choices, they must therefore undertake a process of due diligence. These information gathering costs do not vary proportionally with the size of the investment and, for smaller investments, can be prohibitively large relative to the potential financial rewards from making the investment. Finally, having invested in a business, equity investors need to monitor the ongoing performance of their investment. They will often do this by taking a seat on the board, and may contribute significant time and effort to providing management support, especially where a business’ management team is relatively inexperienced. This can make an important contribution to the performance of the investee business but, again, these costs do not vary proportionally with investment size.

116.

There are significant fixed costs involved in making equity investments, for example in negotiating the terms of investment and putting in place the necessary legal agreements (‘transaction costs’). As with other fixed costs, these transaction costs tend to militate against investing in smaller sums.

117.

Investment decisions will be driven by perceptions of risk and likely financial returns. If investors have incorrect expectations, this will result in a sub-optimal allocation of capital.

118.

Demand-side constraints are equally significant in limiting the flow of equity finance from investors to SMEs. Research has highlighted a number of issues that deter small businesses from seeking equity capital. Loss of control and restricted management freedom are the concerns most commonly cited by SMEs, but the costs of securing equity finance and a lack of knowledge of external sources of finance are also common obstacles. Many of those businesses that actively seek equity investment are also constrained by a lack of ‘investment readiness’. SMEs may be hampered by a limited awareness and understanding of the various forms of risk finance available and how to access it, and by insufficiently developed or poorly presented business plans. Inadequate business preparation and planning will deter potential investors, not least by increasing the information and due diligence costs involved.

119.

An equity gap arises where viable businesses are unable to attract investment from either informal investors or venture capitalists, which are the principal sources of equity finance for SMEs. Informal investors (business angels and other informal investors) have access to limited financial resources and therefore generally invest relatively small amounts of equity. By contrast, formal venture capital investors typically incur far greater costs in evaluating potential investments. For the structural reasons mentioned above, these costs are often prohibitive where a business is seeking only a modest amount of equity finance.

120.

An equity gap therefore affects businesses that are seeking a sum of money that is beyond the financial means of most informal investors, but below the level at which it is viable for venture capitalists to invest.

121.

According to recent BVCA data (15), large MBO funds showed good returns in 2003 and over the longer term, whereas average returns from early stage and technology funds continued to be depressed in 2003.

122.

As to the overall performance by investment stage, funds focusing on early stage investments made an average return of - 18,1% in 2003 compared to an average 3-years return of - 25,1% and an average 5-years return of - 12,5%.

123.

Funds specialising in development stage investments recorded an average return of - 3,4% in 2003 compared to an average 3-years return of - 8,2% and an average 5-years return of 2,7%.

124.

At the same time, funds concentrating on MBOs (management buy outs) performed significantly better. For mid-sized MBOs, the average return in 2003 was 12,2%, compared to an average 3-years return of 2,9% and an average 5-years return of 6,7%. The difference becomes even more evident when looking at large MBOs, with an average return of 15,3% in 2003, an average 3-years return of 9,1%, and a corresponding return figure of 13,6% for a 5-years period.

125.

The data presented above underlines the current pattern in the UK venture capital market. Venture capital providers migrate towards larger deal sizes as the associated returns are higher, thereby widening the equity gap between smaller-scale early stage and expansion investments and larger-scale investments in well-established companies.

126.

This trend towards ever larger investment sizes is further underlined by recent figures on investment activity in the United Kingdom (16). The average financing across all stages of investment increased to GBP 4,3 million (EUR 6 million) in 2003 from GBP 3,8 million (EUR 5,3 million) in 2002. This is explained by the fact that smaller-scale expansion stage investments fell by 57% to GBP 477 million (EUR 670 million) in 2003 from GBP 1,2 billion (EUR 1,7 billion) in 2002. The average amount received by an expanding company fell from GBP 2 million (EUR 2,9 million) in 2002 to GBP 800 000 (EUR 1,1 million) in 2003.

127.

Of the total funds raised in 2003, the vast majority of 92% (GBP 8,2 billion or EUR 11,5 billion) has been invested into MBOs and MBIs, up from an 87% allocation in 2002. The report anticipates that only 3% (GBP 290 million or EUR 406 million) will be invested into expansion stage companies, compared to 6% in 2002. For early stage investments 4% of total funds raised in 2003 (GBP 368 million or EUR 515 million) compare to 3% in 2002.

128.

Within the MBO/MBI category, 58% is expected to be allocated to the largest MBOs/MBIs (over GBP 100 million or EUR 140 million total deal value), compared to 45% in 2002. 20% will be allocated to MBOs/MBIs between GBP 50 million (EUR 70 million) and GBP 100 million (EUR 140 million), up from 17% in 2002, and 13% will be allocated to MBOs/MBIs of between GBP 10 million (EUR 14 million) and GBP 50 million (EUR 70 million), compared to 24% in 2002. Like in 2002, a mere 1% will be allocated to MBOs/MBIs of up to GBP 10 million (EUR 14 million).

129.

Both the decline in investment and performance presented above has led to early stage venture investors pulling out of the market. This is further highlighted by the fact that the average financing (across all stages of investment) is steadily moving upwards and has reached GBP 4.3 million (EUR 6 million) in 2003. Investors in the UK venture market are investing larger sums of money typically in an attempt to reduce risk, thereby contributing to a widening of the equity gap.

130.

The amount of funds raised to invest in early stage venture opportunities has fallen 73% from 2001 to 2003. In 2001, GBP 1,4 billion (EUR 2 billion) was raised to invest in early stage venture capital opportunities, compared to GBP 369 million (EUR 517 million) in 2003. Only 1 % of these GBP 369 million (EUR 517 million) raised in 2003 was targeted at deals less than GBP 10 million (EUR 14 million).

131.

In its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the proposed aid measure, the Commission stated that in view of the proposed maximum investment amounts proposed under the scheme, which considerably exceed the maximum investment amounts anticipated by the Communication, potential observations made by interested parties were necessary in order to decide whether the measure affects trading conditions to an extent contrary to the common interest.

132.

All comments received from interested third parties were positive and underlined the importance of the measure in general as well as the appropriateness of the proposed maximum investment amounts.

133.

Taking into account the information presented in the initial notification, the comments submitted by interested third parties as well as the additional information delivered by the United Kingdom following the Commission’s decision to open the procedure pursuant to Article 88(2) of the EC Treaty, the Commission concludes that the United Kingdom has provided sufficient evidence for the existence of an equity gap in the deal size range between GBP 250 000 (EUR 357 000) and GBP 2 million (EUR 2,9 million) in the venture capital market of the United Kingdom.

134.

ECFs will be restricted to investments in small and medium-sized enterprises within the Commission definition. This is to be considered positively.

135.

ECFs will be required to invest capital in SMEs by means of equity or quasi-equity instruments. Investments that are composed wholly of debt instruments with no equity features will not be permitted. The Commission considers this as a positive element.

136.

A link between investment performance and the remuneration of the commercial managers responsible for investment decisions is established. The public authorities will not be involved in the investment choices and decision making of ECFs apart from setting restrictions to ensure that investments are limited to SMEs. Investment decisions will be taken by commercial managers of the ECFs with an interest in ensuring a maximum return for the fund. The administrative body SBS will only approve ECFs where operators have a clear incentive to maximise returns. The terms on which the public authorities will invest in ECFs will give private investors very strong incentives to ensure that their funds are profit-driven and perform successfully. These incentives arise because private investors will have to pay interest on the public capital, and fully repay capital to both the public and private investors, before any profits can be distributed. As a result, private investors will bear at least a proportionate share of any losses made by ECFs. ECFs or their operators will be required to act in line with industry standards (British Venture Capital Association BVCA guidelines). All these elements have to be assessed positively.

137.

The UK authorities will ensure that the ECF scheme is publicised and that applications are invited from across the EEA with notices in the Official Journal of the European Union and the relevant trade press. There will be no restriction on location for any investor or operator. This is again considered as a positive element.

138.

Enterprise Capital Funds will not invest in sensitive sectors under State aid restrictions or in sectors to which the Communication does not apply. Low-risk sectors including property, land, finance and investment companies, or finance-type leasing companies will not be eligible for investment under the scheme. This has to be regarded positively.

139.

All investments undertaken by ECFs will be made on the basis of robust business plans. This is a further positive element.

140.

The UK authorities have committed themselves that the beneficiary SMEs’ eligibility for other publicly funded grants, loans or other forms of investment aid outside of this notification will be reduced by 30% of the aid intensity that would otherwise be permissible. The Commission considers this to be a positive element.

141.

The Commission therefore concludes that the aid granted under the Enterprise Capital Funds scheme fulfils the conditions of the Commission Communication on State Aid and Risk Capital. It has therefore found the measure to be compatible with the common market pursuant to Article 87(3)(c) of the EC Treaty.