Simon Harris (Wicklow, Fine Gael) | Oireachtas source

I thank the Senators for raising this point on Second Stage. It is an important point and I asked officials in the Department to liaise further with them. They corresponded by e-mail with the Senators to explain the rationale behind this measure. It is not a case of the Government or Ireland deciding on a measure but of recognising the EU rules around it. It is not entirely clear from the wording proposed in the recommendation what the specifics are that the Senator wishes to be contained in the proposed report. We can engage on that matter and, I hope, provide him with whatever information he needs between now and Report Stage.

The EII scheme is targeted at job creation and retention and available to the majority of small and medium-sized trading companies. However, as it is a state aid scheme, the Irish authorities were required to make changes to the qualifying company criteria in order to comply with the new guidelines that came into effect recently.However, as the EII is a state aid scheme, the Irish authorities were required to make changes to the qualifying company criteria to comply with the new guidelines that came into effect recently. The alternative could have resulted in the scheme being in breach of state aid rules. In such a scenario, the Commission could have requested the suspension of the scheme in its entirety and launched a full investigation regarding its compatibility with the internal market rules.

In allowing for state aid for risk finance investments, the Commission has moved away from qualification criteria based on whether an enterprise is in seed, start-up or expansion phase and has now set new criteria on the type of companies that can qualify. These new European rules stipulate that a qualifying company must not have been operating in any market; have been operating in any market for less than seven years following their first commercial sale; or require an initial risk finance investment which, based on a business plan prepared in view of entering a new product or geographical market, is higher than 50 % of their average annual turnover in the preceding five years. That is how we arrived at that.

In addition, regarding follow-on investments, the following three criteria must all be met: the lifetime limit of €15 million is not exceeded; the possibility of follow-on investments was foreseen in the original business plan; and the company has not become linked with another company such that it would no longer be an SME. The revised guidelines from the Commission take account of the fact that SMEs may face difficulties in gaining access to finance, particularly in the early stages of their development. The Commission notes that business finance markets may fail to provide the necessary equity or debt finance to newly created and potentially high growth SMEs resulting in a persistent capital market failure, which negatively affects SMEs growth prospects.

The Commission, therefore, made the changes to the qualifying company criteria in recognition that newer SMEs find it more difficult to raise funding via traditional routes. Such companies typically create more employment than companies that have been operating for longer periods and this furthermore justifies the targeting of the relief. Regardless of whether I agree with the recommendation, the hands of the Government are tied in this regard. We need to make sure an investment scheme put in place to support start-ups and SMEs is compliant with EU rules. If it is not compliant, we risk jeopardising the scheme. The Commission had been monitoring this and its view is clear to the Department.

We published the detail of the changes in the financial resolution on budget day. I am sorry I cannot accept the recommendation but that is the rationale behind it.