Source: EURLEX
Language: en
Format: md

**EUROPEAN COURT OF AUDITORS**
**12, rue Alcide De Gasperi**
**1615 Luxembourg**
**LUXEMBOURG**

**Tel. +352 4398-1**

**E-mail: eca-info@eca.europa.eu**
**Internet: http://eca.europa.eu**

**Twitter: @EUAuditorsECA**
**YouTube: EUAuditorsECA**

**More information on the European Union is available on the Internet (http://europa.eu).**

**Luxembourg: Publications Office of the European Union, 2014**

**ISBN 978-92-872-0120-1**

**doi:10.2865/32195**

**© European Union, 2014**
**Reproduction is authorised provided the source is acknowledged.**

_Printed in Luxembourg_

### **EN 2014**

# **NO 07**

##### **Special Report Has the ERDF successfully** **supported the** **development of business** **incubators?**

(pursuant to Article 287(4), second subparagraph, TFEU)

## **Contents 02**

**Paragraph**

**Glossary**

**I – VII**
**Executive summary**

**1 – 9** **Introduction**

**10 – 17** **Audit scope and objectives**

**18 – 78** **Observations**

**19 – 28** **The quality of infrastructure was generally good, but incubators’ performance lagged behind**

**20 – 23** **In most cases, incubation facilities were well adapted and had been constructed and equipped as planned**

**24 – 28** **Audited business incubators were comparatively less effective**

**29 – 58** **Audited ERDF incubators had not made sufficient use of good practices**

**31 – 34** **When business incubators were being established, too little attention had been paid to the effectiveness of**
**their business support functions**

**35 – 48** **Incubation services were only loosely linked to clients’ needs**

**49 – 51** **Monitoring systems within the incubators did not provide adequate management information**

**52 – 58** **Incubators’ financial sustainability was conflicting with the objective of providing adequate incubation**
**services to relevant businesses**

**59 – 72** **ERDF management systems did not focus on efficiency of the services provided by business**
**incubators**

**60 – 68** **The procedure for selecting incubators did not give due consideration to certain crucial elements for**
**incubation activity**

**69 – 72** **ERDF co-funded incubators were not required to continue incubation activities for a sufficiently long period**
**of time**

## **Contents 03**

**73 – 78** **Limitations in the dissemination of knowledge by the European Commission hampered the**
**promotion of good practices**

**79 – 85** **Conclusions and recommendations**

**Annex** **—** **List of audited incubators**

**Reply of the Commission**

## **Glossary 04**

**Client** : An entrepreneur or a company receiving assistance on the basis of a cooperation agreement with a business
incubator. This assistance may take the form of facility rental and/or participation in business support activities.

**EBN** : European Business and Innovation Centre Network.

**EC‑BIC incubator** : An incubator which is a certified member of the European Business and Innovation Centre
Network.

**ERDF** : European Regional Development Fund.

**High‑growth potential company** : A company performing better, or expected to perform better, than its industry
or the market as a whole.

**Incubation programme** : An individually tailored document describing planned events and actions for each
individual start‑up hosted in the incubator. The objective of the incubation programme is to establish business
objectives for a client company and to define a range of targeted resources and services which would support its
development. The implementation of the programme and the achievement of business goals are monitored using
indicators.

**Networking** : A business activity which involves businesspeople and entrepreneurs establishing personal contacts
and arranging business opportunities.

**Regional innovation strategy (RIS)** : A document defining regional priorities in a systematic and target‑oriented
manner, and addressing them using actions aimed at developing local innovation by academic and business
organisations.

**Scouting activity** : Actively searching for clients and exploring potential markets.

**SMEs** : Small and medium‑sized enterprises. This category comprises enterprises which employ fewer than 250
people and which have an annual turnover of less than 50 million euro, and/or an annual balance sheet total not
exceeding 43 million euro.

**Spin‑off** : An independent company created when a division or a part of an existing company or organisation splits
off and becomes a separate entity.

**Start‑up** : A newly created company or a partnership which is carrying out the initial development of its product or
service and conducting market research.

**Virtual incubation** : A scheme which allows a company to benefit from an incubator’s support without actually
being located on the incubator’s premises.

## **Executive
 05**

#### **summary**

###### **I**

Small and medium‑sized enterprises (SMEs) play an
important role in the creation of growth and jobs. As
a result, the provision of support to SMEs has become
an increasingly important political priority over the
years. The amount of aid from the Structural Funds
earmarked for the support of SMEs during the two
last programming periods amounted to 23 billion and
15 billion euro respectively. Business incubators aim
to support the successful establishment and further
development of start‑up enterprises.

###### **II**

The main objective of the audit was to assess whether
business incubation facilities co‑financed by the
European Regional Development Fund (ERDF) had
successfully supported high‑potential start‑up com­
panies. The audit team carried out an on‑the‑spot
audit of a sample of incubators in four Member States.
It also visited managing authorities in these Member
States, and carried out a benchmarking exercise on an
extended sample including incubators in two addi­
tional Member States.

###### **III**

The Court concludes that the ERDF has made a signifi­
cant financial contribution to the creation of business
incubator infrastructure, particularly in Member States
in which this type of business support was relatively
rare. However, the performance of audited incubators
was modest.

###### **IV**

The disappointing results delivered by the audited
incubators can be explained by the fact that estab­
lished good practices had only been applied to
a limited extent. More specifically, too little attention
had been paid to the effectiveness of incubators’ busi­
ness support functions when incubators were being
established. Secondly, incubation services were only
loosely linked to clients’ business objectives. Thirdly,
monitoring systems within the incubators did not
provide adequate management information. Finally,
concerns about financial sustainability had hampered
incubation activity.

###### **V**

At the level of the managing authority, management
systems were too focused on output and did not
pay sufficient attention to the operational activity of
business incubators. In particular, the procedure for
selecting incubators for co‑funding had not given due
consideration to several elements which are crucial
for incubation activity such as staff qualifications, the
scope and relevance of incubation services and finan­
cial sustainability. In most cases, the expected benefits
for the regional economy had not been evaluated.

###### **VI**

Although the Commission has made some effort to
obtain knowledge about the activities and character­
istics of business incubators in Europe, the support
which it has offered cannot be considered to be ade­
quate. The Commission’s activities to promote incuba­
tors and good practices were too limited to mitigate
the risk of failure for inexperienced and immature
co‑financed incubators.

## **06**

**Executive summary**

###### **VII**

The Court makes the following recommendations.

Firstly, the Commission should require Member States
to make authorisation for the establishment of new
incubators using EU co‑funding dependent on the fol­
lowing considerations:

(a) Business incubators should be established on

the basis of detailed and realistic business plans,
paying particular attention to the sustainability of
their non‑profit incubation activity.

(b) From the outset, incubation activity should be car­

ried out by suitably skilled staff who can provide
relevant individual support to clients and potential
future entrepreneurs.

(c) Incubators should proactively seek and acquire

new clients irrespective of their geographical
origin, focusing on those with innovative busi­
ness ideas with high growth potential in order
to maximise the efficiency of public funding and
therefore the value added by EU funds.

(d) The incubation process for each client company

should start with the preparation of a detailed,
tailor‑made incubation programme. The imple­
mentation of this programme should be followed
up, and the degree to which the business’s objec­
tives have been achieved should be assessed.

(e) Incubators should offer their services to non‑­

resident companies, thereby allowing incubation
support to have a larger impact on the local busi­
ness community and improving possibilities for
networking.

(f) Incubators should set up a monitoring system

based not only on the data obtained from their
own activity, but also on business data produced
by supported clients.

Secondly, the Commission should require Member
State authorities to incorporate the following ele­
ments into the design of the procedures for selecting
and supervising ERDF co‑financed incubator projects:

(g) In the project selection criteria, greater emphasis

should be placed on the expected results of the
projects rather than on the delivery of physical
outputs.

(h) During the project assessment process and when

contractual obligations are being defined, more
use should be made of expert knowledge of busi­
ness incubation activities.

(i) The level of public support should be based on the

defined results forecast for the incubator project.
The value of ERDF payments should be linked to
the results achieved by the incubator.

(j) The sustainability period should be adjusted to

correspond to the actual life cycle of the business
incubator assets co‑financed by the ERDF.

Thirdly, the Commission should:

(k) update its knowledge concerning the effective­

ness and efficiency of business incubation, and
should apply this knowledge with a view to ensur­
ing that ERDF support is well adapted to the needs
of the business incubation sector;

(l) resume its efforts to support the community of

business incubators, and in particular those in
receipt of EU support, for instance by organising
knowledge and experience exchange with re­
sponsible bodies in Member States. The initiative
should target all business incubators, which could
present their success stories, exchange knowledge
and access peer support at European level.

## **Introduction 07**

1 Ecorys, _EU SMEs in 2012: at_
_the crossroads_, European
Commission, September 2012
(http://ec.europa.eu/
enterprise/policies/sme/
facts‑figures‑analysis/
performance‑review/files/
supporting‑documents/2012/
annual‑report_en.pdf).

2 Gross value added is the value
of products and services
produced minus the cost of all
inputs and raw materials that
are directly attributable to that
production.

3 Eurostat: http://epp.
eurostat.ec.europa.eu/
statistics_explained/index.
php/Business_demography_
statistics

4 The European Business and
Innovation Centre Network
(EBN) stated that the survival
rate of companies during the
incubation period was 92 %;
the survival rate in the 3 years
following graduation was
90 %. ‘BIC Observatory 2012©’
report (http://www.ebn.
be/assets/assets/pdf/2012/
bic_obs_2012.pdf).
UK Business Incubation
Ltd reported a survival
rate of 98 % during the
incubation period, and of
87 % after 5 years (http://
www.ukbi.co.uk/resources/
business‑incubation.aspx).
The US National Business
Incubation Association
reported that the 5‑year
survival rate was 87 %,
(2012 State of the Business
Incubation Industry).

**Why are business**
**incu­bators important?**

###### **01**

Small and medium-sized enterprises
(SMEs) play an important role in the
creation of growth and jobs. It is
estimated that, as a whole, Europe’s
20,7 million SMEs account for 67 % of
total employment and 58 % [1] of gross
value added [2] . As a result, the provision
of support to SMEs has become an
increasingly important European polit­
ical priority over the years. The Lisbon
strategy paid particular importance to
the SME sector. Later, the Europe 2020
strategy attached great weight to the
importance of SMEs and innovation for
the European Union economy and the
key role they play in achieving smart,
sustainable and inclusive growth.

###### **02**

Business incubators aim to provide
broad and intensive support to young
businesses. This support is most need­
ed at the beginning of a company’s life
cycle, when it is most at risk of failure.
The Court’s definition of a business
incubator is provided in _**Box 1**_ .

###### **03**

Published research suggests that SMEs
which have received incubation sup­
port are significantly less likely to fail
during the first few years after their
establishment. The general 3‑year sur­
vival rate of new companies is around
56 % [3], whereas the rate for companies
which have been assisted by business
incubators is around 90 % [4] .

###### **04**

The incubation process is most effec­
tive if it is individually tailored to the
specific needs of the entrepreneur. The
scope, variety and intensity of support
depends on various factors. In gen­
eral, though, it varies according to the
stage of the assisted company in its life
cycle (e.g. establishment, expansion),
the market sector it operates in (e.g.
information and communication tech­
nology, biotechnology) and the type
of business which it is (e.g. start‑up,
spin‑off). [5]

5 See paragraph 14.

**Definition of a business incubator**

A business incubator is an organisation designed to support the successful establishment and further devel­
opment of enterprises. It often offers access to physical business infrastructure, individually tailored business
support services and networking opportunities.

Incubators vary in many ways, in particular in the scope of the incubation programmes they offer, in their
internal organisation, in the economic sector they specialise in and in the types of clients they serve.

## **Introduction 08**

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###### **05**

Three typical phases of incubation
activity are identified in the European
Commission’s Smart Guide to Innov [­]
ation‑Based Incubators (IBI) [6] . Examples
of activities performed at each stage
are described in _**Chart 1**_ .

(a) Pre‑incubation. This stage com­

prises activities aimed at support­
ing potential entrepreneurs in
developing business ideas, busi­
ness models and business plans.
The objective is to increase the
chance that the entrepreneurs will
be able to create a business effec­
tively, and proceed successfully to
the start‑up phase. Typical services
provided at this stage include
a first assessment of the business
idea and individual guidance on
all aspects of preparing a business
plan.

(b) Incubation. This stage begins

when the SME starts up, and ends
at the moment when it becomes
self‑sustainable and prepared to
operate independently on the
free market. This stage lasts for
around 3 years. During this time,

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the incubator offers access to
finance, training and coaching
for entrepreneurs, as well as to
networks of potential business and
technology partners, office space
and, in some cases, access to fully
equipped laboratories, workshops
and prototyping facilities. Physical
incubation (when companies are
actually present in the incubator)
is important in certain economic
sectors (e.g. biotechnology and ad­
vanced materials). In some sectors,
though, (e.g. software develop­
ment), virtual incubation can also
be an effective solution.

(c) Post‑incubation. This stage com­

prises activities carried out when
a company has reached operation­
al and financial independence and
is capable of continuing operations
without external support. Various
services may still be needed by
the SME — for example, measures
aimed at increasing its levels of
sales, improving its productive
processes using methods such as
internationalisation, or introducing
innovation.

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6 European Commission,
February 2010 (http://
ec.europa.eu/regional_policy/
sources/docoffic/2007/
working/innovation_
incubator.pdf).

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**Schematic representation of the three stages of the incubation process**

**Pre-incubation** **Incubation** **Post-incubation**

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οο Innovation assessment ο ο
οο Business plan preparation ο ο
οο Training ο ο

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ο

ο

ο οο Access to finance ο
ο οο Coaching, mentoring and training ο
ο οο Physical hosting, labs and workshops ο

οο Commercialisation ο
οο Advanced business planning
οο Association of business partners

ο ο οο Business development
ο ο οο Internationalisation
ο ο οο Clustering

ο οο Networking

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_Source:_ European Court of Auditors based on the ‘Smart guide’ published by the Commission.

## **Introduction 09**

**How does the European**
**Regional Development**
**Fund (ERDF) support**
**business incubators?**

###### **06**

Together with regional convergence
and European territorial cooperation,
increasing regional competitiveness
and employment are the main objec­
tives of the EU’s cohesion policy. In
practice, the Structural Funds and in
particular the European Regional De­
velopment Fund (ERDF) are the main
sources of EU funding for programmes
supporting SMEs.

###### **07**

The Structural Funds are programmed
and budgeted for a 7‑year period. The
total Structural Funds budget for the
2000–06 programming period was
around 225 billion euro; for the 2007–
13 period, the total budget was around
345 billion euro. The funds earmarked
for the support of SMEs amounted to
23 billion and 15 billion euro respec­
tively. There are no available figures
on the amounts specifically dedi­
cated to the development of business
incubators.

###### **08**

The Structural Funds are subject to
shared management. The Commission
bears overall responsibility for manag­
ing the Structural Funds. It does so by
assessing the operation of national
management systems and approving
operational programmes. Measures
defined in operational programmes,
notably the selection of projects, are
implemented by bodies at Member
State level.

###### **09**

For the purposes of this report, busi­
ness incubator projects co‑financed by
the ERDF can be split into two distinct
phases:

**Phase I: Establishment**
This phase begins when the grant
agreement is signed. The project
manager then begins to make plans
for the construction (or refurbishment)
of the facility and the purchase of the
necessary equipment. It ends when
the incubator is equipped, staffed, and
physically ready for operation, and
when the investment has been settled
from a legal and a financial point of
view. The incubator is then ready to
admit its first tenants. This phase typi­
cally lasts for up to 2 years.

**Phase II: Operation**
This phase begins when the incuba­
tor’s first clients are admitted and the
incubation process starts; it lasts until
the end of the sustainability period
(in other words, until the moment
from which the grant conditions no
longer oblige the owner of the project
to maintain project results or to keep
assets for the purposes of incubation
activity). In the case of the audited
projects, this phase ended 5 years after
the signature of the grant agreement,
and normally lasted for around 3 years
after the end of phase I.

## **Audit scope
 10**
#### **and objectives**

###### **10**

The main objective of the audit was
to assess whether business incubator
facilities co‑financed by the ERDF had
successfully supported start‑ups with
a high potential for growth. The Court
asked the following three audit ques­
tions, each relating to a different level
of management:

(a) Had beneficiaries applied good

practices in establishing and oper­
ating incubators?

(b) Had the bodies responsible for

managing the ERDF [7] put in place
effective mechanisms for selecting
appropriate incubators to receive
support and ensuring their suc­
cessful operation?

(c) Had the Commission taken ap­

propriate action to maximise
the impact of ERDF support on
co‑financed incubators?

###### **11**

The audit was carried out at the
premises of the European Commission,
and in the four Member States which
had allocated the largest amounts of
ERDF funding to the establishment
of business incubators (the Czech
Republic, Spain, Poland and the United
Kingdom). On the basis of an analysis
of lists of projects (which was carried
out due to the lack of official figures
described in paragraph 7), the Court
estimates that 1,2 billion euro in fund­
ing was allocated to actions contribut­
ing to the establishment of incubators
in the four visited Member States in
the 2000–13 period.

###### **12**

The Court performed an on‑the‑spot
audit of a sample of 27 incubators
(see _**Annex**_ ) which had received ERDF
support in the 2000–06 program­
ming period, and which had been in
continuous operation for at least 3
years. The Court examined all aspects
of the incubators’ operations, from
the planning decisions upon which
their construction had been based to
the practices and procedures which
they had in place. The average total
cost of a single project was 6,1 mil­
lion euro. Contributions from public
funds covered an average of 82 % of
this amount: 42 % of the average total
cost was covered by the ERDF (a total
of 70 million euro); the other 40 % was
covered by the Member States.

###### **13**

The Court also assessed the man­
agement systems which had been
implemented by the six managing
authorities responsible for these
27 incubators. The assessment focused
on the project selection process, on
the grant agreement conditions and
on how these conditions were sub­
sequently monitored to ensure that
contractual objectives were met.

###### **14**

The standards used as audit criteria
are based on good practices described
in the ‘Smart guide’ published by the
European Commission, and in other
literature which has been published on
this topic [8] .

7 e.g. managing authorities and
intermediary bodies.

8 National Business Incubation
Association, _Best practices_
_in action — Guidelines for_
_Implementing First‑Class_
_Business Incubation Programs_,
2nd Edition 2010.
European Commission,
_Benchmarking of Business_
_Incubators_, February 2002

## **11**

**Audit scope and objectives**

###### **15**

An integral part of the audit was
a benchmarking exercise which col­
lected key figures and indicators in
order to assess the performance and
efficiency of the operations of selected
incubators which had received ERDF
support. In total, 49 incubators [9] (see
_**Annex**_ ) in the four visited Member
States as well as in Italy and Germany,
two Member States which had also
allocated significant amounts of EU
co‑funding to the operation of busi­
ness incubators, submitted detailed
information about their operational
activity and financial situation.

###### **16**

The 49 ERDF co‑funded incubators
in the sample were compared with
a benchmark based on the results
achieved by the 65 EC‑BIC certified
incubators [10] which were members of
the European Business and Innovation
Centre Network (EBN) [11], and therefore
applying best practice recognised by
the Commission, in the six selected
Member States. These 65 incubators
are referred to in this report as the
‘benchmarked incubators’.

###### **17**

Audit evidence was collected from

interviews with Commission and
Member State officials, as well as
with project managers. Documents
obtained from EU and national author­

ities and business incubators were also

reviewed.

9 Incubators audited on the
spot (21) as well as certain
other ERDF co‑funded
incubators (28).

10 In order to be awarded with

the EC‑BIC trademark, an
incubator must go through an
accreditation process which
ensures compliance with the
EC‑BIC label criteria.

11 The EBN is a European

non‑governmental association
of around 200 incubators.
It is the only organisation
allowed to certify incubators
with the EC‑BIC label, which is
recognised by the European
Commission.

## **Observations 12**

###### **18**

This section begins with an assessment
of the performance of the audited
incubators. It goes on to describe the
observations arising from each one of
the Court’s three audit questions.

**The quality of infrastruc­**
**ture was generally good,**
**but incubators’ perfor­**
**mance lagged behind**

###### **19**

The Court assessed the performance of
the audited ERDF co‑funded incuba­
tors in terms of the process of con­
structing and equipping or refurbish­
ing them (their output) and in terms of
the results which they achieved. These
two dimensions correspond approxi­
mately to the two phases of the im­
plementation of an incubator project
described in paragraph 9.

**In most cases, incubation**
**facilities were well adapted**
**and had been constructed**
**and equipped as planned**

###### **20**

The Court considers that physical
incubator space is especially important
for certain high‑growth sectors (e.g.
biotechnology, advanced materials)
which depend on otherwise unaf­
fordable equipment being available
in the incubator. Incubators should
be designed to provide a comfortable
working and meeting space equipped
with gen­eral‑purpose office and com­
munication equipment. It is also im­
portant to create shared leisure spaces
to encourage tenants to integrate and
to maximise the potential for collabo­
ration and the free exchange of ideas.

**ERDF co‑financed ‘Delta’ building in the Wrocław Technology Park**

**In most cases, audited ERDF incubator projects offered well‑adapted working conditions.**

_Source:_ European Court of Auditors. Architect: Anna Kościuk.

## **Observations 13**

###### **21**

The vast majority of the visited incuba­
tors were successfully offering attrac­
tive working spaces for their clients.
The profile of audited facilities ranged
from simple office buildings to fully
equipped laboratories. In all, 23 out
of 27 of them were offering working
conditions which were adapted to
the individual needs of hosted SMEs
and encouraged collaboration. In the
arrangement of their physical space,
incubators had taken into account
the importance of networking: they
provided a leisure area for the use of
hosted companies where spontaneous
networking could occur.

###### **22**

The Court’s assessment of this phase
also covered the process of plan­
ning and constructing the audited
facilities. All incubators had been built
in accordance with their planning
documentation, which in 23 out of 27
cases contained detailed information

about the intended characteristics
of the facility, and which established
fixed construction schedules. Most
of the incubators (23 out of 27) had
been delivered in line with these plans;
however, only 15 out of 27 of them had
been completed in compliance with
the deadlines set out in the project
application.

###### **23**

The Court did not detect any major
cost overruns, and 20 out of 27 pro­
jects had been completed within their
planned budget. Cost overruns had
been covered by applicants’ own re­
sources and had had no effect on the
EU budget.

**Audited business incuba­**
**tors were comparatively less**
**effective**

###### **24**

The Court assessed the effectiveness
and efficiency of incubator projects in
phase II by measuring their operational
activity and evaluating their outcomes
in terms of their main objectives:

(a) the number of business plans cre­

ated with incubator support;

(b) the number of start‑ups incubated;

(c) the number of jobs created.

###### **25**

During the reference period, the aver­
age audited incubator helped to draw
up 20 new business plans. This led to
the creation of 15 start‑ups and 27 new
jobs. On average, 164 people were
employed in each audited incubator
over the reference period; however,
start‑ups accounted for only a small
proportion of these.

## **Observations 14**

###### **26**

The effectiveness of the benchmarked
EC‑BIC certified incubators, which
were of a comparable size to the
ones audited by the Court, was much
higher. The average benchmarked
incubator had helped to draw up
101 new business plans and assisted in
the establishment of 65 new start‑ups
over the reference period; this had led
to the creation of 147 new jobs. Sup­
port offered to businesses beyond the
scope of physical incubation (i.e. the
provision of pre‑incubation and virtual
incubation services to entrepreneurs)
had contributed to this high start‑up

creation rate. The value of virtual incu­
bation is demonstrated by the fact that
the number of start‑ups created by the
audited incubators greatly exceeds the
number of tenants in the incubators.

Detailed data on the effectiveness of
both groups of incubators is given in
the _**Table**_ .

**Average outcomes achieved by business incubators**

**Audited ERDF incubators were comparatively less effective.**

**Pre-incubation activity**

Enquiries about support 92 738

Business plans prepared 20 101

Enterprise creation projects 19 91

|Incubation activity|Col2|Col3|
|---|---|---|
|Start-ups created (incl. non tenants)<br>Jobs created in start-ups<br>Jobs created per start-up|15<br>27<br>1,8|65<br>147<br>2,3|
|All tenants in incubator<br>People employed by all tenants<br>Employees per tenant|26<br>164<br>6,4|35<br>166<br>4,7|

**Post-incubation activity**

Existing SMEs supported 54 168

Jobs created in SMEs in post-incubation 20 49

Jobs created per SME in post-incubation 0,4 0,3

_Source:_ ECA benchmarking data for 2011.

## **Observations 15**

###### **27**

To assess efficiency, these results were
then examined in the light of the level
of resources which had been deployed
(operations costs and staff employed).
The outcome of this measurement was
compared with the results achieved by
the benchmarked EC‑BIC incubators.
Details are given in _**Chart 2**_ below.
As an example, the audited incuba­
tors generated an average of 5,3 jobs
for each 100 000 euro of operational
cost compared to 9,6 for benchmark
incubators, which gives a cost of
around 18 000 euro per job, compared
to 10 400 euro in the benchmarked

incubators.

There is a difference of a similar magni­
tude between the incubators audited
by the Court and the EC‑BIC incubators
used as a benchmark in terms of the
cost per business plan created and the
cost per new business created. Simi­
lar conclusions can be drawn when
the number of staff employed by the
incubator is taken as a basis for the

calculation.

**Efficiency of incubators’ operations — results for 2011**

**Audited business incubators were comparatively less efficient.**

12,00

8,00

6,00

4,00

2,00

Audited incubators

Benchmarked incubators

0,00

Business Start-ups Jobs Business Start-ups Jobs
plans plans

created per 100 000 euros of operational costs created by staff employed by the incubators

_Source:_ ECA benchmarking data for 2011.

## **Observations 16**

###### **28**

Most of the audited ERDF incubators
had commenced operations relatively
recently, and this lack of experience
undoubtedly hampered their effi­
ciency. However, the magnitude of the
difference between the two groups
of incubators demonstrates the rela­
tive underperformance of the ERDF
co‑financed incubators audited by the
Court. A discussion of the various pos­
sible reasons for this appears below,
following the structure of the three
audit questions asked in paragraph 10.

**Audited ERDF incubators**
**had not made sufficient**
**use of good practices**

###### **29**

A business incubator is a complex
system whose success depends on
external factors such as the macro­
economic situation, the legal system in
which the incubator operates and the
entrepreneurial culture in the coun­
try in which the incubator is located.
However, internal practices also affect
an incubator’s success.

###### **30**

Recognising this, the Court examined
the quality and relevance of the prac­
tices and procedures of the audited
incubators in four areas:

(a) their internal business planning;

(b) the relevance of the services pro­

vided to their clients;

(c) the systems they used for monitor­

ing clients;

(d) and their business models.

**When business incubators**
**were being established, too**
**little attention had been paid**
**to the effectiveness of their**
**business support functions**

###### **31**

The Court considers that a business
incubator’s mission and objectives
should be clearly defined from the
very beginning. Its future operations
should be precisely outlined in a busi­
ness plan. This plan should include
information about the incubator’s key
business support activities, as well
as details of the human and material

resources needed for the incubator
to successfully achieve its incubation
goals. It should also include details of
networking arrangements.

###### **32**

Although 22 out of 27 audited incuba­
tors had prepared a business plan in
line with the formal obligations aris­
ing from legislation governing ERDF
support [12], only half of them included
details of their activity and result‑­
oriented goals.

12 In the five other cases there

was no legal obligation to
develop a business plan.

## **Observations 17**

###### **33**

An analysis of incubators’ business
planning documents revealed weak­
nesses affecting factors which are
essential for the sound operation of
a business incubator. Most commonly,
descriptions of incubation pro­
grammes were missing; the resources
to be assigned to incubation processes
(e.g. qualified staff) had not been
specified; or items of information on
the cost of incubation activities were
incomplete or missing. Without this
essential information, it is not possible
to make a reliable assessment of the
future economic sustainability of any
incubator.

###### **34**

Most of the numerous objectives
included in the planning documents
concerned the facilities of incuba­
tors themselves, rather than focusing
on the activities which the incubator
would actually carry out. Insufficient
attention was thus paid to the impor­
tance and the results of incubation
processes. This bias towards phys­
ical objectives (e.g. construction and
equipment) gave undue prominence
to the objectives of the construction
phase (phase I) instead of concentrat­
ing on achieving the fundamental
objectives of incubation activity
(phase II).

**Incubation services were**
**only loosely linked to clients’**
**needs**

###### **35**

The Court considers that the core ac­
tivity of any business incubator is the
provision of business support services
to its clients. A wide range of services [13]
can be offered to entrepreneurs;
these include the rental of physical
space; mentoring; training; consulting
in various areas; networking; access
to financing; and many other things.
However, if results are to be delivered
effectively, incubation support cannot
be offered in the form of a simple list
of available services. The most effec­
tive incubators apply an individual
approach, providing a tailor‑made
incubation programme in combination
with other entrepreneurial support
initiatives (such as lectures given by
invited speakers) aimed at preparing
newly created SMEs to operate on the
free market.

**Services offered**

###### **36**

In the audited incubators, the support
provided to hosted companies gener­
ally [14] took the form of subsidised office
space (offered by 94 % of incubators).
In addition to this, ‘soft services’ were
also provided free of charge, or for
a low fee. The most common were
coaching, training courses and support
in the areas of law, marketing, account­
ing and intellectual property rights.

13 The ‘State of the business

incubation industry’ report
produced by the United States
National Business Incubation
Association in 2006 identifies
33 distinct services which can
be offered to client companies
by business incubators.

14 Discounted rental costs were

not usually offered in the
United Kingdom.

## **Observations 18**

###### **37**

_**Chart 3**_ shows the range of services
being offered by ERDF incubators
audited by the Court in comparison
with the range of relevant services
offered by incubators in the bench­
marked EC‑BIC population. In par­
ticular, only 53 % of incubators were
able to provide advice about financial
planning and financing. This is a cause
for concern: insufficient access to
finance is recognised as a key barrier
to the development of SMEs [15], and the
lack of financial advice provided by
incubators did not help to reduce this
problem. This hampered clients’ and
potential clients’ overall perception
of how useful the support offered by
incubators to hosted companies was.

15 ‘The SME financing gap,

Volume I: Theory And
Evidence’, Organisation
For Economic Cooperation
and Development (http://
ec.europa.eu/enterprise/
newsroom/cf/_getdocument.
cfm?doc_id=624).

**Type and frequency of principal services offered by audited ERDF incubators**

**Audited ERDF incubators offer a more limited range of services.**

Start-up services

Assessment of training needs

Rental of incubation space

**94 %**

Fundraising support

Risk analysis support

Entrepreneurial skills

assessment support

Audited incubators

Benchmarked incubators

Financial planning support

_Source:_ ECA benchmarking data for 2011.

Business planning support

Business modelling support

## **Observations 19**

**Incubation programmes**

###### **38**

During the audit, the Court observed
that the relatively limited range of
services offered by the audited incuba­
tors was a direct consequence of the
approach they took to incubation. In
general, ERDF co‑financed incubators
were not directly involved in the busi­
ness development of their clients and
were not actively working with hosted
companies to identify and set business
objectives for them. The incubators
did not require hosted companies to
collaborate closely with them in this
way; for their own part, hosted com­
panies often saw no benefit in shar­
ing sensitive business data, and were
therefore reluctant to do so.

###### **39**

Structured comprehensive incuba­
tion programmes involving intensive
cooperation between incubators and
their clients were scarce. Only 4 out of
27 audited incubators systematically
drew up a comprehensive incubation
programme together with each indi­
vidual client, establishing specific per­
formance and development objectives.
Only 6 out of 27 audited incubators
were subject to quality audits which
aimed to improve the overall quality of
incubation services.

###### **40**

This limited level of cooperation led to
a sense of ‘isolation’ from the incuba­
tor, and also had a negative effect
on the sense of community between
tenants. This did not facilitate synergy
between tenants.

**Staff skills**

###### **41**

The absence of a culture of intensive
cooperation between incubators and
clients meant that there was no incen­
tive for incubator staff to possess or
to acquire specific skills and expertise
which would allow them to assist
hosted companies more effectively.
The resulting lack of skills meant that
incubator staff were unable to take
steps to engage more effectively with
hosted companies, creating a vicious
circle. The range of skills and expertise
possessed by incubator staff was less
extensive in the audited incubators
compared to the benchmarked incuba­
tors, as _**Chart 4**_ shows.

###### **42**

In particular, relatively few members
of staff who were engaged directly in
business incubation activities pos­
sessed skills which allowed them to
offer more specialised assistance to
companies in areas such as specific
sector‑related expertise (39 %) or ac­
cessing financing possibilities (43 %).

## **Observations 20**

**Comparison of main available staff skills and expertise**

**The range of skills and expertise possessed by incubator staff was less extensive in the audited incubators.**

High-tech SME
creation & support

Specific sector-related
expertise

Promotion of assisted SMEs

Legal advice

Access to finance

Audited incubators

Benchmarked incubators

Advanced use of ICT for Human resource development
SME development

_Source:_ ECA benchmarking data for 2011.

###### **43**

A further effect of this lack of coop­
eration was that incubators had only
limited structured knowledge about
the individual needs and achievements
of the companies they hosted.

**Pre‑incubation and virtual**
**incubation**

###### **44**

Weaknesses in programmes and
low levels of engagement were also
detected in two other important areas
of incubator activity: pre‑incubation
support (see paragraph 5a) and virtual
incubation (see paragraph 46). Both
services are provided to prospective
clients and to clients who are not
necessarily physically located on the
incubator’s premises.

## **Observations 21**

###### **45**

Providing intensive pre‑incubation
support to potential entrepreneurs
is important. Firstly, it allows an
incubator to develop a pool of pro­
spective clients irrespective of their
geographical origin. It also enhances
the incubator’s engagement with its
local community. However, it requires
a significant commitment of time by
incubator staff. In all, 14 out of 27 au­
dited incubators failed to offer it. The

absence of this service was one of the

reasons behind the low number of
enquiries received by incubators, as
the _**Table**_ shows.

###### **46**

Virtual incubation refers to the provi­
sion of incubation programmes to
clients who are not based on the incu­
bator’s premises. It is a service which
increases the effectiveness of incuba­
tors (see paragraph 26). Interest in
receiving this type of business support
largely depends on the quality and ef­
fectiveness of incubation programmes.
Weak incubation programmes (see
paragraphs 38 and 39) and limitations
in the range of services offered were
two main reasons for the fact that only
11 out of 27 audited incubators pro­
vided virtual incubation to externally
located clients.

**Networking and embedded**
**incubators**

###### **47**

The audited incubators had a good
understanding of the need for net­
working and of the benefits which it
brought. In all, 19 out of 27 of them
had attempted to build up a network
of connected stakeholders. Further­
more, almost all audited incubators
had links with a recognised local part­
ner, or were embedded within one.
These partners included universities,
business support organisations and
public authorities. However, few in­
cubators had successfully established
a network which engaged all types of
relevant stakeholders (e.g. universities,
industry leaders and their own former
client companies in the post‑incuba­
tion stage).

###### **48**

Incubators should play an important
role in each region’s business support
infrastructure. However, only 14 out of
27 incubators had been consulted at
any point in the past during the prep­
aration of regional innovation strat­
egies. This low figure demonstrates
indirectly that the value of incubators
as important business support centres
often fails to be recognised.

## **Observations 22**

**Monitoring systems within**
**the incubators did not**
**provide adequate manage­**
**ment information**

###### **49**

The Court considers that a monitor­
ing system should be established in
each business incubator. This system
should collect and record statistics and

other relevant information about the
activity of the incubator and its clients.
The goal of gathering this information
is to assess whether resources were
invested effectively and efficiently,
and whether they contributed towards
achieving strategic objectives. These
objectives can only be achieved when
business data is obtained from the
incubator’s management system as
well as from incubated companies in
the form of standardised financial and
activity indicators.

###### **50**

Only 15 out of 27 incubators had put
in place a system whereby incubation
activities were regularly observed and
recorded. The collection of data in
the remaining incubators was limited
to the mandatory statistics required
by accounting rules and tax regula­
tions. Incubators were often unable
to provide detailed financial data on
the value of the aid granted to each
of their clients. This makes it more dif­
ficult to properly assess their incuba­
tion activity. The practice of integrat­
ing data concerning clients’ business
activity with the incubator’s monitor­
ing data was even more infrequent.
Some incubators did not collect basic
performance data because they had
only a limited amount of oversight
over their clients’ development. Only 5
out of 27 incubators used their clients’
performance data to improve the man­
agement of their facility. An example
of an incubator which did so is given
in _**Box 2**_ .

**Good practice — Integrated monitoring system**

One of the most successful audited incubators in the Czech Republic regularly monitored the performance
of hosted companies and the relevance and quality of the support offered to them. To do so, the incubator
had developed a system of key performance indicators integrating exhaustive information about the activ­
ity of the incubator (e.g. number of training sessions organised, number of lectures given) and the perfor­
mance of hosted companies (e.g. turnover, number of patents applied for, number of full‑time equivalent jobs
created). The resulting information was used by the management to assess the effectiveness of incubation

programmes.

## **Observations 23**

###### **51**

All of the monitoring systems used
by the incubators which did carry
out measurements of their activity
involved performance indicators.
However, only in 10 out of 27 cases
were these defined with reference to
standards set out by recognised na­
tional or international organisations [16] .
This lack of standardisation made it
more difficult to compare individual
incubators’ performance with available
benchmarking data or to assess their
impact on the local economy.

**Incubators’ financial sustain­**
**ability was conflicting with**
**the objective of providing**
**adequate incubation services**
**to relevant businesses**

###### **52**

The Court considers that a relevant

business model should allow an incu­
bator to achieve its strategic objec­
tives, taking into account economic
constraints. This should mean that the
incubator is selective in providing sup­
port and services to a targeted group
of tenants. Only those entrepreneurs
who are able to put forward feasible,
innovative and competitive busi­
ness ideas should be supported. That
means that appropriate entry criteria
should be in place, and that scouting
activity should take place to ensure
that a sufficient number of quality
candidates are available.

###### **53**

Incubation activity is not usually
a profitable endeavour: support and
services are provided free of charge
or at a rate which is not sufficient to

cover the incubator’s costs. In the
audited population of 27 incubators,
only 7 had made sure that the finan­
cial support provided by stakeholders
would be continuously available. An
example of such an arrangement is
described in _**Box 3**_ . The other 20 incu­
bators were intended to be financially
self‑sustaining; this forced them to
focus excessively on the financial side
of their activity.

###### **54**

As a result, audited incubators de­
pended heavily on income generated
internally from incubation activities
(mainly office space rental), which ac­
counted for 72 % of their total revenue.
In the benchmarked population of
EC‑BIC incubators, this activity gener­
ated only 34 % of revenue and the
rest was covered by public and private
funding.

###### **55**

In order to minimise their structural
deficit, audited incubators whose con­
tinued financing was not guaranteed
were forced to reduce their costs and

maximise their income. Cost reduc­
tions inevitably led to reductions in
the level of support offered, and to
simplified incubation programmes. It
also meant that fewer resources were
available for carrying out scouting
activities. As office rental was the main
source of income, incubators had at­
tempted to maximise this.

16 There are various

organisations publishing this
type of information. They
include the European Business
and Innovation Network,
the US National Business
Incubation Association and
the European Commission.

## **Observations 24**

**Good practice — Financial support from the parent organisation**

In Spain, in order to ensure stable operations and financial sustainability, the chambers of commerce, the
organisations by which the incubators were managed, had formally committed themselves to making up any
yearly deficit. This formal commitment is tangible evidence of the willingness of the incubators’ stakeholders
to take part in the business creation policy, which is perceived as a public mission coherent with the activity of
the parent organisation.

###### **56**

The number of applicants rarely ex­
ceeded a few per month, even in the
busiest audited facilities. Incubators
therefore had little incentive to oper­
ate a formal entry procedure in which
potential clients were selected on the
basis of an examination of the level of
innovation and potential for growth
of the business ideas which they were
proposing. Only 12 out of the 27 au­
dited incubators had such a procedure
in place.

###### **57**

This allowed businesses with a lower
potential for growth to move into the
incubator, reducing the efficiency with
which incubators’ resources were used.

###### **58**

Due to insufficient financing and a lack
of external funding (e.g. from a share­
holder), 8 out of 27 audited incubators
had to limit the scope of the incuba­
tion support which they offered after
their ERDF grant agreement expired. In
four cases, they had completely aban­
doned incubation activity, turning
themselves into normal commercial
office suites with no business support
function.

Weak selection criteria and a lack of
development goals for hosted com­
panies had a negative impact on the
effectiveness of the incubators audit­
ed, and adversely affected the overall
efficiency of their incubation activities.

**ERDF management sys­**
**tems did not focus on the**
**efficiency of the services**
**provided by business**
**incubators**

###### **59**

These audit results, including the sup­
porting benchmarking data, clearly
indicate that audited incubators did
not provide their services efficiently
enough. This means that it is par­
ticularly important to examine ERDF
management systems established by
managing authorities covering the ex­
penditure of public funds. The Court’s
assessment focused on two important
issues: how projects to be co‑funded
were selected, and how the sustain­
ability of their operations was ensured.

## **Observations 25**

**The procedure for select­**
**ing incubators did not give**
**due consideration to certain**
**­crucial elements for incuba­**
**tion activity**

###### **60**

The Court considers that public au­
thorities should generally design aid
measures in a way which takes into
account the needs identified by their
enterprise policy and which ensures
sustainability and an adequate return
from invested public funds in the form
of new SMEs and jobs. To achieve this,
projects should only be selected for
co‑financing if their future sustainabil­
ity is ensured.

###### **61**

The two project implementation
phases described in the introduction
in connection with business incubators
(see paragraph 9) are reflected in the
ERDF management procedures applied
by managing authorities. The ERDF is
principally used to co‑finance invest­
ments in physical infrastructure in EU
regions. The management process
applied by managing authorities fo­
cuses mainly on ensuring the effective
delivery of physical outputs.

**Project assessment and selection**

###### **62**

In the case of business incubators, this
outputs‑oriented approach can first
be detected at the project selection
stage. In particular, the project assess­
ment and selection process did not
pay enough attention to some key ele­
ments of incubation activity, which is
part of the operational phase (phase II)
of a project.

(a) Staff qualifications. The selection

procedure failed to adequately as­
sess the suitability of staff mem­
bers responsible for providing
business incubation services. The
Court noted in particular that, in
one third of cases, co‑funding was
granted for projects where it could
not be demonstrated that any
member of staff had the necessary
knowledge of, or any experience
in, the subject matter. In some
cases, this lack of specific expertise
was supposed to be addressed
by additional ERDF co‑funded
projects.

(b) Incubation services. The scope

and relevance of the incubation
services which would be offered,
and in particular of incubation pro­
grammes, was not assessed during
the process for approving grants
for business incubators.

(c) Financial sustainability. Applicants

were not required to provide
detailed information about the
scope of business support and its
expected costs or results. Nor were
they required to provide informa­
tion about their strategies for
covering any shortfall in operating
expenditure and guaranteeing the
continued provision of incubation
services.

(d) Expected project impact. The

assessment procedure did not
evaluate expected benefits for
the regional economy. The lack of
standardised assessment criteria
also made it impossible to assess
the efficiency of planned projects
in terms of the cost per job created
or per new SME.

## **Observations 26**

**Project objectives and indicators**

###### **63**

Some of the project objectives defined
in the application were quantified
using indicators, with defined targets
to be achieved. Output indicators had
been applied appropriately: examples
included the number of square metres
of office space built, or the number of
printers installed.

###### **64**

However, none of the visited manag­
ing authorities had used a system of
indicators based on good practice
guidelines issued by an experienced
national or international grouping of
business incubators.

###### **65**

It is particularly important to define
indicators precisely in setting objec­
tives for incubation operations (phase
II). In general, indicators were largely
defined by applicants themselves.

###### **66**

The lack of structure in the use of
indicators to establish specific project
objectives and to monitor the op­
erational activity also had an impact
on the overall efficiency of public
spending. Specifically, when signing
grant agreements, managing authori­
ties were unable to ensure that the
value of the ERDF grant or the level
of co‑financing was proportionate to
the results which the applicant ex­
pected to achieve, or to the impact on
local entrepreneurship. The benefits
of providing public funding were not
quantified and assessed at the project
selection stage.

**Project monitoring and follow‑up**

###### **67**

The physical establishment of incuba­
tors had generally been monitored
properly. Member State authorities
had carried out on‑the‑spot visits and
reviews of financial documentation.

###### **68**

However, Member State authorities
had not been able to appropriately
measure incubators’ effectiveness in
achieving results. One main reason for
this was that they had not taken steps
to ensure that management systems at
incubator level would fulfil their basic
performance monitoring role. The lack
of adequate results monitoring meant
that they had been unable to proper­
ly follow up the achievement of the
anticipated outcomes.

**ERDF co‑funded incubators**
**were not required to con­**
**tinue incubation activities**
**for a sufficiently long period**
**of time**

###### **69**

The Court considers that particular
attention needs to be paid to the
financial and operational sustainability
of co‑financed projects, to the quality
of incubation services offered and to
the overall expected positive impact
on the local, and possibly the wider,

economy.

## **Observations 27**

###### **70**

In this respect, the minimum length of
the sustainability period [17] (5 years) was
not adapted to the characteristics of
the business incubation process; nor
did it accurately reflect the life cycle
of the assets built and purchased with
ERDF support (20–30 years) [18] . This
meant that managing authorities had
relinquished their control over the
assets immediately after the minimum
sustainability period stipulated in the
Structural Funds regulation [19] expired.
An example of how a Member State
successfully addressed this problem is
given in _**Box 4**_ .

###### **72**

In situations like this, the actual ben­
efit from public funding was trans­
ferred to facility owners (e.g. private
companies, local authorities, chambers
of commerce and universities) instead
of to local entrepreneurs and start‑ups.
The Court estimates that the total
value of funding affected in this way
may amount to around two fifths of
total ERDF investment in the audited
business incubation projects, i.e.
30 million euro.

17 The period during which

the beneficiary is obliged to
respect the commitments
provided for in the grant
agreement.

18 The life cycle of the assets in

question (mainly buildings)
was determined on the basis
of depreciation rates applied
in the respective Member
States.

19 Council Regulation (EC)

No 1260/1999 of 21 June 1999
laying down general
provisions on the Structural
Funds (OJ L 161, 26.6.1999, p. 1).

###### **71**

After the sustainability period had
expired, the entity responsible for
project delivery was released from its
contractual obligations and was able
to dispose freely of the assets which it
had obtained. In the audited projects,
8 out of 27 incubators had partially
or entirely stopped their incubation
activity after the 5‑year sustainability
period expired.

**Good practice — Sustainability period**

In Poland, the problem of a short sustainability period had been resolved in the 2007–13 programming period
in one of the measures included in the horizontal operational programme. The sustainability period laid down
in the grant agreement had been extended to 20 years, and project operators were obliged to transfer all
public financing received for the construction of the facility to the hosted SMEs over this period in the form of
business support.

## **Observations 28**

**Limitations in the dissem­**
**ination of knowledge by**
**the European Commission**
**hampered the promotion**
**of good practices**

###### **73**

The Court’s assessment of the Commis­

sion’s contribution focused on those
activities which, in principle, should
contribute to the development and im­
plementation of incubator projects. In
particular, the Court assessed whether
a body of expertise concerning incuba­
tion activity had been accumulated by
the Commission, and whether good
practice guidelines based on this
expertise had been made available at
European level.

**Commission initiatives**

###### **74**

In the course of this audit the Court

screened a number of the Commis­

sion’s initiatives. It concentrated on ini­
tiatives which had been in place since
the beginning of 2000, and whose
main focus was on incubators. These
initiatives had the potential to make
a contribution to the accumulation of
relevant knowledge within the Com­
mission, and also to the dissemination
of this knowledge and relevant good
practices among interested stakehold­
ers or responsible authorities.

###### **75**

Two important initiatives should be
mentioned in connection with the
management of knowledge:

(a) In 2002, the Commission published

a benchmarking study provid­
ing valuable information about
the state of European incubators.
The study recommended that the
benchmarking exercise should be
repeated; however, this was never
done.

(b) In parallel to the benchmarking ex­

ercise, the Commission set up a da­
tabase of incubators [20] . The data
was updated on a yearly basis until
2006, when the system ceased to
be developed and updated.

**Knowledge dissemination**

###### **76**

Concerning the dissemination of
incubator‑related expertise, apart
from the benchmarking report men­
tioned above, a ‘Smart guide to
innovation‑based incubators’ was
published by the Commission in 2010.
The document, which was produced
on the basis of the experience of EBN
members, describes the main factors
and processes which exert the greatest
influence on the success of business
incubation, and how this can best be
measured. However, the guide did
not provide any performance data
or information about the effective­
ness of this kind of business support.
The guide was published too late to
allow the audited incubators to take it

into consideration at the time of their
establishment. Only a few incubators
were even aware of its existence.

20 http://cordis.europa.eu/

incubators/about.htm

## **Observations 29**

###### **77**

The initiatives described above dem­

onstrate that in the last decade the

Commission did indeed make some
effort to gather data about business
incubation. However, the experience
and knowledge gathered was lost
due to the lack of continuity in the
Commission’s initiatives. The Commis­
sion had not carried out any further
systematic studies about business
incubators, and therefore did not have
adequate up‑to‑date knowledge to
share. Such knowledge would have
been particularly useful to Member
States which were intensively develop­
ing their business incubation network
(i.e. Member States which joined the
EU in and after 2004).

###### **78**

The Commission does not have an
adequate knowledge base which could
allow it to assess the effectiveness
of business incubators, or to provide
advanced support to any business
incubator — in particular, to those
co‑funded by the ERDF. The fact that
the number of incubators is grow­
ing makes it especially important for
the Commission to provide support
to incubator operators, managing
authorities and Member States alike,
in particular by providing examples of
good practice, successful incubation
programmes or benchmarking data
which managing authorities can use
during the assessment of proposals for
the establishment of future incubators.

## **Conclusions and 30**

#### **recommendations**

**­**

###### **79**

The ERDF has made a significant
fi **­** nancial contribution towards the

creation of business incubator infra­
structure, particularly in Member
States in which this type of business
support was relatively rare. However,
the Court considers that the provision
of incubation services — and, con­
sequently, the ­wider impact on local
businesses — was rather limited, due
to financial constraints and the low

level of incubation activities. This was
mainly explained by a lack of exper­
tise concerning incubation practices,
and by shortcomings in management
systems.

**In general, audited ERDF**
**co‑financed incubator**
**facilities had been estab­**
**lished properly, but the**
**business support offered**
**to clients was only moder­**
**ately successful**

###### **80**

The performance of the audited
incubators was lower than that of the
benchmarked incubators. Although
the ERDF had been effective in deliv­
ering incubator infrastructure, it had
been less successful in ensuring that
they provided effective and efficient
support to their clients. ERDF‑support­
ed incubators were operating in mod­
ern and properly adapted co‑financed
facilities, they were more costly to run
and required more staff to produce
a new start‑up than the benchmarked
incubators.

**Audited ERDF incubators had**
**not made sufficient use of**

**­** **good practices**

###### **81**

There are several possible reasons
why the audited incubators were less
effective and efficient. Most of the
incubators had commenced oper­
ations relatively recently, and this lack
of experience undoubtedly hampered
their efficiency. The clearest signs of
this were weaknesses and gaps in in­
cubation programmes and inadequate
business models, in particular with
regard to financial sustainability. This
constraint focused the attention of the
incubators’ management teams on
generating income rather than provid­
ing quality services for high‑growth
potential start‑ups. This income‑­
oriented approach led incubator man­
agers to relax the eligibility criteria for
newcomers. As a result, costly incuba­
tor support was offered to low‑growth
ventures. This further increased inef­
ficiency in the use of public resources
invested in business incubators.

###### **82**

Incubators were unable to offer
comprehensive, individually tailored
assistance to their clients. The range
of services offered was limited. Most
audited incubators did not offer sup­
port to prospective entrepreneurs at
the pre‑incubation stage, or to non‑­
resident clients. The incubation pro­
grammes were of a basic nature and
did not take into account the specific
individual needs or business develop­
ment objectives of their clients. As
there was no close cooperation with
them, the incubators lacked detailed
knowledge of their level of develop­
ment. This had an additional adverse
effect on the quality of business sup­
port offered.

## **Conclusions and recommendations 31**

**Recommendation 1**

The Commission should require Mem­
ber States to make authorisation for

the establishment of new incubators
using EU co‑funding dependent on the
following considerations:

(a) Business incubators should be es­

tablished on the basis of detailed
and realistic business plans, paying
particular attention to the sustain­
ability of their non‑profit incuba­
tion activity.

(b) From the outset, incubation

activity should be carried out
by suitably skilled staff who can
provide relevant individual sup­
port to clients and potential future
entrepreneurs.

(c) Incubators should proactively seek

and acquire new clients irrespec­
tive of their geographical origin,
focusing on those with innovative
business ideas with high growth
potential in order to maximise the
efficiency of public funding and
therefore the value added by EU
funds.

(d) The incubation process for each

client company should start with
the preparation of a detailed,
­tailor‑made incubation pro­
gramme. The implementation of
this programme should be fol­
lowed up, and the degree to which
the business’s objectives have
been achieved should be assessed.

(e) Incubators should offer their

services to non‑resident compan­
ies, thereby allowing incubation
support to have a larger impact
on the local business community
and improving possibilities for
networking.

(f) Incubators should set up a moni­

toring system based not only on
the data obtained from their own
activity, but also on business data
produced by supported clients.

**Management systems had**
**been effective in ensuring**
**that infrastructure was deliv­**
**ered, but not in ensuring the**
**provision of efficient busi­**
**ness incubation support**

###### **83**

In most cases, management systems
had been effective in ensuring that
physical outputs (e.g. buildings) were
delivered on time and according to
plan. However, they did not ensure
the effective and efficient delivery of
incubation services (e.g. coaching and
training). Greater emphasis should
have been placed on the management
of incubation services in the long term.

###### **84**

The Member State authorities which
selected projects for co‑funding paid
insufficient attention to the expected
outcomes of incubation activity and
to the feasibility of the incubators’
business models. This had serious
consequences: it affected the objec­
tives which were established for indi­
vidual incubators, and had subsequent
implications for the sustainability of
incubation activities. This latter issue
is particularly concerning, because
the length of the sustainability period
does not correctly reflect the nature of
ERDF co‑financed incubator projects.
One important risk resulting from
this is that the systems in place allow
a significant part of the value of public
funding to pass to incubator own­
ers after the end of the sustainability
period.

## **Conclusions and recommendations 32**

**Recommendation 2**

The Commission should require Mem­
ber State authorities to incorporate
the following elements into the design
of the procedures for selecting and
supervising ERDF co‑financed incuba­
tor projects:

(a) In the project selection criteria,

greater emphasis should be placed
on the expected results of the pro­
jects rather than on the delivery of
physical outputs.

(b) During the project assessment

process and when contractual ob­
ligations are being defined, more
use should be made of expert
knowledge of business incubation
activities.

(c) The level of public support should

be based on the defined results
forecast for the incubator pro­
ject. The value of ERDF payments
should be linked to the results
achieved by the incubator.

(d) The sustainability period should

be adjusted to correspond to the
actual life cycle of the business
incubator assets co‑financed by
the ERDF.

**The Commission did not take**
**sufficient steps to facilitate**
**the exchange of knowledge**
**and good practices**

###### **85**

Although the Commission has made
some effort to obtain knowledge
about the activities and characteris­
tics of a large population of business
incubators in Europe, the support
which it offers does not capitalise on
this. The recently published ‘Smart
guide’ provides a valuable overview
of the principles of incubation, but it
is not sufficiently detailed and it omits
important data concerning the incuba­
tion process, e.g. benchmarking data
for key indicators. The Commission’s
activities in disseminating relevant
knowledge and promoting good prac­
tices were too limited to mitigate the
risk of failure for recently established
co‑financed incubators.

**Recommendation 3**

The Commission should:

(a) update its knowledge concerning

the effectiveness and efficiency of
business incubation, and should
apply this knowledge with a view
to ensuring that ERDF support is
well‑adapted to the needs of the
business incubation sector;

(b) resume its efforts to support the

community of business incubators,
and in particular those in receipt of
EU support, for instance by organ­
ising knowledge and experience
exchange with responsible bodies
in Member States. The initiative
should target all business incuba­
tors, which could present their
success stories, exchange knowl­
edge and access peer support at
European level.

## **Conclusions and recommendations 33**

This Report was adopted by Chamber II, headed by Mr Henri GRETHEN, Member
of the Court of Auditors, in Luxembourg at its meeting of 9 April 2014.

_For the Court of Auditors_

Vítor Manuel da SILVA CALDEIRA

_President_

## **Annex 34**

**List of audited incubators**

|Name of the incubator|Visited|Surveyed|
|---|---|---|
|**Czech Republic**<br>Agentura pro ekonomický rozvoj Vsetínska, o.p.s. Podnikatelský inkubátor Vsetín<br>BIC Ostrava spol.s r.o.<br>Podnikatelský inkubátor Nymburk příspěvková organizace<br>South Moravian Innovation centre<br>STEEL IT Třinec Institut EuroSchola, o.s.<br>TechnoPark Pardubice, k.s.<br>Vědeckotechnický park Plzeň, a.s.<br>Vědeckotechnický park Roztoky Trigema a.s.<br>VŠB–TU Ostrava<br>VÚSH, a.s. Podnikatelský inkubátor Brno-Jih<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Germany**<br>BGI Biotechpark Gatersleben Infrastrukturgesellschaft mbH<br>Merseburger Innovations- und Technologiezentrum GmbH<br>Mitteldeutsches Multimediazentrum Halle GmbH<br>TechnologieZentrum Dresden GmbH<br>TGZ Halle Technologie- und Gründerzentrum Halle GmbH<br>X<br>X<br>X<br>X<br>X<br>**Italy**<br>2i3T Società per la gestione dell’Incubatore di Imprese e per il Trasferimento Tecnologico dell’Università’<br>degli Studi di Torino<br>BIC Pieve di Bono<br>Bioindustry park Silvano Fumero Spa<br>Incubatore Comune di Ultimo<br>Incubatore universitá degli studi di Firenze (strutture di Via Nizza e Strada del Drosso)<br>Pépinière d’Entreprises Espace Aosta<br>Polo Scientifco e Tecnologico di Navacchio<br>Sistema di incubazione policentrico metropolitano Comune di Firenze<br>Tecnogranda Spa<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Poland**<br>Agencja Rozwoju Regionalnego S.A. Beskidzki Inkubator Technologiczny w Bielsku-Białej<br>Akademicki Inkubator Przedsiębiorczości Sp. z o.o.<br>Bełchatowsko – Kleszczowski Park Przemysłowo – Technologiczny<br>Fundacja Uniwersytetu im. A.Mickiewicza w Poznaniu<br>Inkubator Tecnologiczny ARTERION/Fundacja Wspierania Przedsiębiorczości i Nauki<br>Łódzki Regionalny Park Naukowo-Technologiczny Sp. z o.o.<br>Śląski Park Przemysłowo — Technologiczny Sp. z o.o.<br>Stowarzyszenie Inicjatyw Społeczno — Gospodarczych Inkubator Technologiczny w Białogardzie<br>Wrocławski Park Technologiczny S.A.<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|**Czech Republic**<br>Agentura pro ekonomický rozvoj Vsetínska, o.p.s. Podnikatelský inkubátor Vsetín<br>BIC Ostrava spol.s r.o.<br>Podnikatelský inkubátor Nymburk příspěvková organizace<br>South Moravian Innovation centre<br>STEEL IT Třinec Institut EuroSchola, o.s.<br>TechnoPark Pardubice, k.s.<br>Vědeckotechnický park Plzeň, a.s.<br>Vědeckotechnický park Roztoky Trigema a.s.<br>VŠB–TU Ostrava<br>VÚSH, a.s. Podnikatelský inkubátor Brno-Jih<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Germany**<br>BGI Biotechpark Gatersleben Infrastrukturgesellschaft mbH<br>Merseburger Innovations- und Technologiezentrum GmbH<br>Mitteldeutsches Multimediazentrum Halle GmbH<br>TechnologieZentrum Dresden GmbH<br>TGZ Halle Technologie- und Gründerzentrum Halle GmbH<br>X<br>X<br>X<br>X<br>X<br>**Italy**<br>2i3T Società per la gestione dell’Incubatore di Imprese e per il Trasferimento Tecnologico dell’Università’<br>degli Studi di Torino<br>BIC Pieve di Bono<br>Bioindustry park Silvano Fumero Spa<br>Incubatore Comune di Ultimo<br>Incubatore universitá degli studi di Firenze (strutture di Via Nizza e Strada del Drosso)<br>Pépinière d’Entreprises Espace Aosta<br>Polo Scientifco e Tecnologico di Navacchio<br>Sistema di incubazione policentrico metropolitano Comune di Firenze<br>Tecnogranda Spa<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Poland**<br>Agencja Rozwoju Regionalnego S.A. Beskidzki Inkubator Technologiczny w Bielsku-Białej<br>Akademicki Inkubator Przedsiębiorczości Sp. z o.o.<br>Bełchatowsko – Kleszczowski Park Przemysłowo – Technologiczny<br>Fundacja Uniwersytetu im. A.Mickiewicza w Poznaniu<br>Inkubator Tecnologiczny ARTERION/Fundacja Wspierania Przedsiębiorczości i Nauki<br>Łódzki Regionalny Park Naukowo-Technologiczny Sp. z o.o.<br>Śląski Park Przemysłowo — Technologiczny Sp. z o.o.<br>Stowarzyszenie Inicjatyw Społeczno — Gospodarczych Inkubator Technologiczny w Białogardzie<br>Wrocławski Park Technologiczny S.A.<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|**Czech Republic**<br>Agentura pro ekonomický rozvoj Vsetínska, o.p.s. Podnikatelský inkubátor Vsetín<br>BIC Ostrava spol.s r.o.<br>Podnikatelský inkubátor Nymburk příspěvková organizace<br>South Moravian Innovation centre<br>STEEL IT Třinec Institut EuroSchola, o.s.<br>TechnoPark Pardubice, k.s.<br>Vědeckotechnický park Plzeň, a.s.<br>Vědeckotechnický park Roztoky Trigema a.s.<br>VŠB–TU Ostrava<br>VÚSH, a.s. Podnikatelský inkubátor Brno-Jih<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Germany**<br>BGI Biotechpark Gatersleben Infrastrukturgesellschaft mbH<br>Merseburger Innovations- und Technologiezentrum GmbH<br>Mitteldeutsches Multimediazentrum Halle GmbH<br>TechnologieZentrum Dresden GmbH<br>TGZ Halle Technologie- und Gründerzentrum Halle GmbH<br>X<br>X<br>X<br>X<br>X<br>**Italy**<br>2i3T Società per la gestione dell’Incubatore di Imprese e per il Trasferimento Tecnologico dell’Università’<br>degli Studi di Torino<br>BIC Pieve di Bono<br>Bioindustry park Silvano Fumero Spa<br>Incubatore Comune di Ultimo<br>Incubatore universitá degli studi di Firenze (strutture di Via Nizza e Strada del Drosso)<br>Pépinière d’Entreprises Espace Aosta<br>Polo Scientifco e Tecnologico di Navacchio<br>Sistema di incubazione policentrico metropolitano Comune di Firenze<br>Tecnogranda Spa<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**Poland**<br>Agencja Rozwoju Regionalnego S.A. Beskidzki Inkubator Technologiczny w Bielsku-Białej<br>Akademicki Inkubator Przedsiębiorczości Sp. z o.o.<br>Bełchatowsko – Kleszczowski Park Przemysłowo – Technologiczny<br>Fundacja Uniwersytetu im. A.Mickiewicza w Poznaniu<br>Inkubator Tecnologiczny ARTERION/Fundacja Wspierania Przedsiębiorczości i Nauki<br>Łódzki Regionalny Park Naukowo-Technologiczny Sp. z o.o.<br>Śląski Park Przemysłowo — Technologiczny Sp. z o.o.<br>Stowarzyszenie Inicjatyw Społeczno — Gospodarczych Inkubator Technologiczny w Białogardzie<br>Wrocławski Park Technologiczny S.A.<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|

## **Annex 35**

|Name of the incubator|Visited|Surveyed|
|---|---|---|
|**Spain**<br>BIC Granada<br>Parque Tecnológico de Andalucía<br>Vivero de empresas de Badajoz<br>Vivero Castilleja de la Cuesta<br>Vivero de Azuaga<br>Vivero de Plasencia<br>Vivero de Puertollano<br>Vivero de Vigo<br>Vivero Nuevo Torneo Sevilla<br>Vivero de Alcala de Guadaira<br>Vivero Salamanca<br>Vivero Talavera de la Reina<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**United Kingdom**<br>Chester Innovation Economy Centre<br>Core Technology Facility<br>Daresbury Incubator<br>InfoLab21<br>Power Technologies Innovation Centre<br>Technium Springboard<br>The Media Factory<br>Swansea Technium II<br>Aberystwyth Technium<br>PONTIO — Bangor University<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|**Spain**<br>BIC Granada<br>Parque Tecnológico de Andalucía<br>Vivero de empresas de Badajoz<br>Vivero Castilleja de la Cuesta<br>Vivero de Azuaga<br>Vivero de Plasencia<br>Vivero de Puertollano<br>Vivero de Vigo<br>Vivero Nuevo Torneo Sevilla<br>Vivero de Alcala de Guadaira<br>Vivero Salamanca<br>Vivero Talavera de la Reina<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**United Kingdom**<br>Chester Innovation Economy Centre<br>Core Technology Facility<br>Daresbury Incubator<br>InfoLab21<br>Power Technologies Innovation Centre<br>Technium Springboard<br>The Media Factory<br>Swansea Technium II<br>Aberystwyth Technium<br>PONTIO — Bangor University<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|**Spain**<br>BIC Granada<br>Parque Tecnológico de Andalucía<br>Vivero de empresas de Badajoz<br>Vivero Castilleja de la Cuesta<br>Vivero de Azuaga<br>Vivero de Plasencia<br>Vivero de Puertollano<br>Vivero de Vigo<br>Vivero Nuevo Torneo Sevilla<br>Vivero de Alcala de Guadaira<br>Vivero Salamanca<br>Vivero Talavera de la Reina<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>**United Kingdom**<br>Chester Innovation Economy Centre<br>Core Technology Facility<br>Daresbury Incubator<br>InfoLab21<br>Power Technologies Innovation Centre<br>Technium Springboard<br>The Media Factory<br>Swansea Technium II<br>Aberystwyth Technium<br>PONTIO — Bangor University<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X<br>X|

#### **Reply of the** **Commission**

**Executive summary**

**I**
Improving SME competitiveness requires a combin­
ation of financial and non-financial support and an
SME-friendly legal and administrative framework. It
is reflected in the regulatory framework for the new
2014–20 programming period accordingly. Support
for SME competitiveness is a top priority for the
European Structural and Investment Funds (ESIF).
The new generation of programmes harbours the
opportunity to revise and better target SME sup­
port and to develop a comprehensive and coherent
policy mix that makes full use of the range of instru­
ments available, including financial instruments,
SME support services and public procurement
possibilities.

**Common reply to III and IV**
The Commission welcomes the Court’s conclusion
concerning the ERDF financial contribution to the
creation of business infrastructure.

The Commission notes that the classification of the
performance of the audited incubators as mod­
est is based upon the comparison of the results of
these more recently established incubators with the
benchmarks set by well-established, more mature
incubators.

In particular, in the Member States that joined the
EU in and after 2004, this kind of business infra­
structure was missing in the past and is only being
built now, also with Structural Funds support. Not
much experience, therefore, has been gained and
further efforts should be made to better learn how
to effectively use these infrastructures to support
adequately new business ideas/new start-ups.

**IV**
The benchmarks presented in the reports of the
European Commission Business and Innovation
Centre and International Association of Science
Parks and Areas of Innovation would help in com­
plementing the assessment with additional data.

## **36**

**V**
The reform of cohesion policy for 2014–20 will pro­
vide the committee monitoring the respective oper­
ational programmes with the necessary incentives
to approve selection criteria ensuring maximum
impact for this type of investment. Countries and
regions will have to decide up front what objectives
they intend to achieve with the available resources
and identify precisely how they will measure pro­
gress towards those goals for each priority axis. This
will allow regular monitoring and debate on how
financial resources are used.

**VI**
The European Commission created the European
Commission Business and Innovation Centre (ECBIC) in 1984. Since then, it has provided continu­
ous support through the EC-BIC quality insurance
system.

To increase the knowledge of managing author­
ities in the field, the European Commission drafted
‘A guide to regional innovation strategies (RIS).’ In
addition, the Commission provided guidance based
on the experience of the different generations of
regional innovation strategies. Furthermore, guid­
ance was issued by supported projects/networks.
The Commission has developed many initiatives to
encourage this, including ‘Regions for economic
change’ (started in 2006). This is a learning platform
for EU regions that includes the annual ‘Regions
for economic change’ conference and RegioStars
awards, a policy learning database and inter­
regional fast track networks, funded by the Interreg
IVC and urbact II programmes.

The Commission adopted in June 2008 the Small
Business Act (SBA), a comprehensive SME policy
framework for the EU and its Member States.
The SBA includes entrepreneurship as a priority
area and has put in place a more comprehensive
approach for tackling the full range of barriers to
entrepreneurship at EU and national levels. This
work has been re-enforced by the ‘Entrepreneur­
ship 2020’ action plan adopted in early 2013. Within
this overall framework, the Commission has contin­
ued to support the BIC quality mark scheme.

## **37**

**Reply of the Commission**

**VII**
Within the framework for cohesion, the Commission
is not involved in the selection of projects, except
for the approval of major projects.

The new regulatory framework for 2014–20 never­
theless ensures from the start that, through the
content of the adopted programmes and the
intervention logic including results indicators for
objectivesand outputs encapsulated in priority
axes, the selection of projects will be done by Mem­
ber States as far as possible according to the Court’s
recommendation.

Also, based on the performance framework estab­
lished for each operational programme, the Com­
mission will be in a position to encourage and
review the performance of programmes through
milestones and indicators. Where there is evidence
resulting from a performance review that a prior­
ity has failed to achieve the milestones set out and
that the Member State has not taken the neces­
sary steps to rectify the problem, the Commission
may suspend all or part of an interim payment or
apply ultimately financial corrections. The per­
formance reserve should not be allocated to such

programmes.

Under the 2014–20 legal framework, the Commis­
sion is also strengthening the _ex ante_ condition­
alities for the funds to ensure that the necessary
conditions for their effective implementation are
in place. As regards SMEs, the _ex ante_ conditional­
ity refers to the specific actions carried out by the
Member States to underpin the promotion of entre­
preneurship taking into account the Small Business
Act.

In addition, the Commission, through its active
and continuous work with the Member States, will
advise managing authorities to include recom­
mendations of the European Court of Auditors in
the selection process and the selection criteria for
business incubators. A contribution to the expected
results of the priority axis is now required to be
included in the selection criteria.

**VII (a)**
The Commission fully supports the need to estab­
lish business incubators on the basis of detailed and
realistic business plans. They should be integrated
in the overall regional development strategy and
Member States are strongly encouraged to enforce
smart specialisation strategies

**VII (b)**
Skills, in particular in Member States which joined
in and after 2004, to incubate business activities
are currently being built and the main driver is the
need to ensure the financial sustainability of the
incubation infrastructure which has just been built.
These skills did not exist before and newly built
incubation infrastructure is triggering the process
of building the skills.

**VII (c)**
The Commission agrees. The 2014–20 programming
period makes incubator activities conditional on the
existence of an appropriate development strat­
egy. Incubators are erected primarily to foster the
indigenous economic development of a region and
to respond to the needs and potential identified by
the economic (or innovation) strategy.

**VII (d)**
The Commission agrees. The Commission will advise
Member States to include the recommendation of
the Court as a requirement to be taken into consid­
eration when selecting operations and preparing
support contracts between intermediate bodies
and the management of incubation facilities.

## **38**

**Reply of the Commission**

**VII (e)**
The Commission agrees in principle, but, in line with
the subsidiarity principle, this recommendation is
more for the Member States to consider, depending
on the objectives pursued to foster endogenous
economic growth. The Commission will recom­
mend that Member States encourage incubators
to open their services to non-resident companies
with a well-defined strategy to ensure benefits for
the local business community. The Commission will
also recommend that the Member States estab­
lish networking and links with other incubators
to foster knowledge exchange and to encourage
co-incubation, notably across borders within the EU
and beyond.

**VII (f)**
The Commission agrees. The Commission will rec­
ommend that Member States encourage incubators
to set up such a monitoring system without increas­
ing the administrative burden on supported clients.
Given that some business entities treat business
information as confidential, this can be done only
on a voluntary basis.

Under shared management of Structural Funds,
there is no legal basis for the Commission to expli­
citly require the incorporation of these elements
into the design of procedures.

The Commission, in its supervisory role, will encour­
age Member States to follow the cited recom­
mendation. However, under shared management
Member States are responsible for selecting, imple­
menting and monitoring projects.

The Commission considers that the Court’s recom­
mendations under (g) and (j) should be addressed
to the Member States.

**VII (g)**
The Commission agrees. This is in line with the
results orientation of the reformed cohesion policy
and the European Commission will advise that this
recommendation be included in the relevant selec­

tion criteria.

**VII (h)**
The Commission agrees. Expert knowledge in
business incubation, particularly in Member
States which joined in and after 2004, has been
built mainly through learning by doing. It is now
more probable that experts can be found in these
countries who have some experience in incubation
and can disseminate their knowledge to train other
actors involved in incubation, like, for example,
labour offices. The Commission will advise Member

States to follow this recommendation.

**VII (i)**
The Commission agrees in principle. The ERDF con­
tribution to the project is based on a cost–benefit
analysis derived from the business plan. The results
of a business incubator can, however, be influenced
by external factors that cannot always be known in
advance and by the level of public sector support
per job created. Linking ERDF payments with results
would be challenging for this reason.

**VII (j)**
The Commission disagrees. The Commission con­
siders that the sustainability period as defined
by the Court should correspond to the durability
period of the operations as defined in Article 71 of
the common provisions regulation (CPR — Regula­
tion (EU) No 1303/2013). There is no legal basis for
the Commission to impose an adjustment of the
durability period to the actual life of the business
incubator assets beyond the 5 years.

In that context, the Commission takes note of the
good practices identified by the Court in some
Member States.

**VII (k)**
The Commission recognises the need to continue
updating the knowledge. In 2014, the Commission
will publish a report on ‘Setting up, managing and
evaluating EU science and technology parks’ which
will provide advice and guidance and will be dis­
seminated to managing authorities.

## **39**

**Reply of the Commission**

**VII (l)**
The Commission agrees and underlines that the
new orientation of the Enterprise Europe Network
(EEN) (2015–21) already takes account of these
recommendations. The EEN will play a role in con­
necting regional SME support services (including
incubators) to good practice at European level.

Enterprise Europe Network partners in the current
network are also required to cooperate with other
European networks and to put in place actions such
as joint promotion and signposting.

**Introduction**

**01**
The Commission reflected the important role which
the SMEs play in the economy in the regulatory
framework for the new 2014–20 programming
period: the SMEs should be primarily supported
from the European Structural and Investment
Funds.

**Audit scope and objectives**

**16**
The Commission welcomes the Court’s recognition
that the EBN’s certification scheme, supported by
the Commission, fosters best practice. ERDF cofunded incubators in the Court’s sample are com­
pared with EC-BIC incubators which are certified on
the basis of a wide range of criteria.

**Observations**

**Common reply for paragraphs 21 to 23**
The Commission welcomes the Court’s assessment.

**26**
The size of the incubators is one of many factors
ensuring comparability between the effectiveness
of the ERDF audited incubators in relation to the
benchmarked population. The Commission would
like to highlight that other external factors are also
important, such as a regional economy, a profile of
incubators and the type of businesses accommo­
dated, and the principles of market failures.

The primary role of the ERDF incubators is to foster
the development of start-ups. Support offered to
businesses beyond the scope of physical incubation
can be achieved by other means. As an example,
business support in the UK is often provided by
service companies which offer a wide variety of
business advice.

**27**
As regards the example given by the Court, the
Commission notes that the cost per job created
to assess the incubator’s efficiency can vary from
country to country as the start-up costs, deprecia­
tion and accounting policies as well as salary level in
different Member States impact upon this indicator.

**28**
The relative underperformance of ERDF-supported
incubators in the Court’s sample can also be
ascribed to the fact that BIC incubators are subject
to the quality check of EC-BIC’s certification scheme.
See also the reply to paragraph 16.

**29**
Internal performance depends on management
skills, organisation and the motivational and local
innovation systems. The Commission will recom­
mend that Member States implement accreditation
or quality systems in ERDF-inanced incubators.

## **40**

**Reply of the Commission**

**32**

The Commission welcomes the Court’s assessment
that 22 out of 27 projects audited had prepared
a business plan in line with the obligations arising
from the legislation governing ERDF support.

The Commission acknowledges that in some cases
business plans, although in line with the formal
selection criterion, lacked quantifiable objectives
and appropriate results indicators. However, under
shared management, the selection of projects is
the responsibility of the Member States. This means
that when selecting the business incubators, it
should have been primarily the Member State (the
managing authority) verifying the quality of project
application and supporting documents (e.g. quality
of business plans).

**33**
As recalled in the reply to paragraph 32, the selec­
tion of projects under shared management is the
responsibility of the Member States. It is neither the
role of the Commission nor within its capacity to
verify all these details for each project application.

**34**
In some Member States, especially Member States
that joined the EU in and after 2004, a predominant
focus was given to the construction of the physical
infrastructure because of a lack of previous experi­
ence in the implementation of business incubators.
In order to have a fully operational business incu­
bator, time and well-performing local innovation
ecosystems are required. This is the process which is
going to be enforced with the new result-orientation
approach of cohesion policy.

**36**
As explained in paragraph 34, the business infrastruc­
ture (e.g. business incubators) is underdeveloped in
the majority of Member States that joined the EU in
and after 2004. The ERDF supported the construction
of business incubators and provision of basic ‘soft
services’ for the newly in the 2007–13 period. Soon it
became evident that the support of ‘soft services’ was
underestimated and improvements are planned for
the 2014–20 programming period.

**37**
Incubators go through different stages of the life
cycle and their provisions depend on their maturity
and the ecosystem they are operating in. Although
the Commission shares the view that a broad
range of services should be offered to enable
smooth incubation, the services to be offered are
developing over time in line with the life cycle of
incubators.

**38**
The ERDF supported the construction of business
incubators but there was a lack of focus on the coop­
eration among businesses and business incubators.
In Member States that joined EU in 2004 and after,
it is caused by lack of business knowledge (business
planning, management skills etc.) on both sides, on
the side of business incubators (new infrastructure
and no skilled labour to manage it) and on the side
of enterprises. The same is valid for EU-15 Member
States where the investments aimed to complement
the mission innovation system infrastructure.

Furthermore, hosted companies are not compelled
to collaborate with the incubator’s staff as they
might resort to external services in order to estab­
lish their development plan. Sharing sensitive data
might have negative consequences for the hosted
companies unless a confidentiality agreement is
signed.

Business services can be commissioned from out­
side service providers instead of entrusting them to
the incubator staff.

**39**
The Commission refers to its reply to paragraph 38.

**40**
As pointed out by the Court, clients are attracted
by subsidised office space rather than by services
provided. Tenants should be carefully selected
and reflect a profile set out in the incubation
programme. As the selection of projects and the
definition of selection criteria fall within national
competences, the Commission will recommend that
Member States consider these aspects.

## **41**

**Reply of the Commission**

**41**
Specialist services can be offered by outsiders as inhouse services are of a more general nature. Build­
ing the expertise of incubator staff can be costly
and the incubator might never reap the desired
benefits.

**43**
The Commission considers that the lack of cooper­
ation between incubators and clients may be
a direct consequence of the client’s reluctance to
share sensitive data.

**44**

The Commission considers that disbursed EU funds
have a positive impact on the development of
en­tities which are not physically located in the incu­
bator’s premises but use their services and cooper­
ate with tenants.

**45**
The business incubators have been only set
up in Member States which joined in and after
2004 in this programming period and time was
then needed to develop further the cooperation
between the incubator and its clients and also with
prospective clients. Another factor which limited
the cooperation was the quality of the staff manag­
ing the business incubators that often possessed
insufficient business skills. Lastly, some incubators
lacked the organisational capacity to provide preincubation support while providing such support
usually requires additional own resources.

The same is valid for EU-15 Member States where
the investments aimed to complement the creation
of an innovation system infrastructure.

**47**
Weak cooperation between the business sector,
universities and R & D institutions is well known in
the Member States which joined the EU in 2004 and
after and the Commission has been attempting to
solve this issue in the current programming period
by establishing proper coordination mechanisms
where possible. This issue then has an impact on the
activities of business incubators and their attempts
to network with R & D and university partners.

**48**
The role played by incubators in a region’s business
infrastructure differs, depending on Member States
and each specific national context.

In the new programming period, the elabora­
tion of a smart specialisation strategy, including
a wide consultation of innovation players, is a pre-­
condition for accessing ERDF support.

**49**
As a contribution to the expected results of the
priority axis is now required to be included in the
selection criteria, the Commission will advise the
managing authorities to include the recommenda­
tion of the European Court of Auditors concerning
the establishment of a monitoring system in each
business incubator in the selection process and
selection criteria.

**53**
Incubation activity should be sustainable after the
ERDF co-financing comes to an end. The sustain­
ability criterion is embedded in the project selec­
tion criteria. In line with the principle of sound
financial management, the continuity of the oper­
ation should be ensured without full reliance on
public financing.

**56**
An incubator provides primarily rental space for
hosted companies, especially at an early stage
of its business life cycle. In order to ensure finan­
cial viability, potential applicants are welcome to
occupy the available space.

The Commission also considers that one of the pri­
mary objectives of ERDF-supported incubators was
to create jobs and not only high-tech SMEs.

## **42**

**Reply of the Commission**

**58**
The incubator’s provisions can be viewed from two
perspectives: services provided and premises. As far
as premises are concerned, the ERDF has achieved
the objective of providing suitable office space. The
service function can be delivered by outside service
providers.

Lack of external funding is a frequent issue when
supporting SMEs or R & D activities. The business
incubators were built in regions and after the
sustainability period as defined in the ERDF regula­
tion they were allowed to switch to other activities.
This was primarily caused by improper definition
of selection criteria; therefore, in the new program­
ming period, and in line with the subsidiarity prin­
ciple, the Commission will recommend that manag­
ing authorities pay more attention to this aspect in
particular, by establishing more demanding selec­
tion criteria in the operation selection process.

**59**
Under the shared management, the Commission is
not involved in the selection of projects, except for
the approval of the major projects.

Indeed, as laid down in Article 125 of the CPR,
establishing selection criteria falls under the
responsibility of the managing authority, with the
approval of the monitoring committee.

According to Article 48(3) of the CPR, the Commis­
sion shall participate in the work of the monitoring
committee but only in an advisory capacity.

The European Commission will therefore advise the
managing authorities to include recommendations
of the European Court of Auditors in the selection
process and selection criteria of business incuba­
tors. Also, a contribution to the expected results of
the priority axis is now required to be included in
the selection criteria.

**60**
For the 2014–20 programming period, the Commis­
sion is requesting Member States to fulfil _ex ante_
conditionality to put in place a smart specialisa­
tion strategy which shall be developed through
an entrepreneurial discovery process with a very
closed involvement of enterprises to meet research
strengths with business needs.

**Common reply to paragraphs 62**
**to 62(c)**
Under the 2007–13 legal framework, the project
assessment and selection process falls under the
responsibility of national authorities, the manag­
ing authority and the monitoring committee, with
the Commission having only an advisory role in the
latter.

Under the 2014–20 legal framework, the contribu­
tion of an operation to the expected results of
a priority axis is now required to be included in the
selection criteria.

**62(d)**
Investments in business incubators are more of an
enabler than a driver of growth. Business incubators
cannot generate economic growth by themselves;
they need to be combined with other external
factors. In addition, the interventions may have
significant externalities, having both negative and
positive influences on the development of a region.
Therefore, establishing a direct link between the
investment in a business incubator and regional
benefits requires in-depth evaluation.

The Commission assesses the stated objectives of
the priority axes of operational programmes. This
may not only be jobs created but also, for example,
new products developed or exports generated.

**64**
As regards Member States which joined in and after
2004, they are still (continuously) learning how
to properly define indicators and evaluate their
implementation. This also has implications for the
monitoring of business incubators, which are newly
built business infrastructures.

## **43**

**Reply of the Commission**

**66**
The Commission notes that although the system of
project selection, which falls under the responsibil­
ity of the Member States, was correct, it did not
assure that the level of co-financing was propor­
tionate to the impact on local entrepreneurship.
A set of indicators was established by managing
authorities to monitor the operational programme
performance in its implementation and not in
operations. The Commission will recommend that
Member States put more emphasis on the monitor­
ing of operations.

**68**
The Commission refers to its reply given under
paragraph 66.

**70**
The recommendation made by the Court goes
beyond the regulatory obligation of the ERDF regu­
lation, which sets 5 years as the durability period.

**71**
There is no legal basis for the Commission to
impose additional obligations to beneficiaries as
regards incubation activities beyond the 5-year
sustainability period.

It is the responsibility of national authorities to
decide, in the selection criteria and in conditions for
providing the grant to the project, on the extension
of the sustainability period beyond the duration
laid down in the relevant regulation.

**75(a)**
The former benchmarking exercise was contin­
ued via a more targeted action to benchmark and
stimulate best practice in European incubators
applying for accreditation under the EC-BIC trade­
mark scheme and those wishing to continue their
membership. In its capacity as owner of the EC-BIC
trademark and member of the BIC Quality Mark
Committee (BQMC) [1], the Commission contributes
to the work to encourage business and innovation
centres (BICs) throughout Europe and beyond to
enhance their quality and practices, with a view to
obtaining the EC-BIC trademark.

## **44**

**Reply of the Commission**

**77**
The Commission is systematically preparing guid­
ance so that it can be used in the 2014–20 program­
ming period. Member States are also obliged to
submit an annual implementation report for each
operational programme every year, which gives
an overview of performance of implementation of
Structural Funds.

**78**
The Commission recognises the need to continue
updating the knowledge. In 2014, it will publish
a report on ‘Setting up, managing and evaluat­
ing EU science and technology parks’, which will
provide advice and guidance, and which will be
disseminated widely to managing authorities in the
coming months.

**Conclusions and recommendations**

**80**

The Commission notes that the classification of the
performance of the audited incubators as mod­
est is based upon the comparison of the results of
these more recently established incubators with the
benchmarks set by well-established, more mature
incubators.

In general, incubators in the Court’s sample were
relatively less well staffed than those in the bench­
mark in all key functions, including entrepreneur
guidance and support.

**81**
The Commission shares the Court’s opinion con­
cerning the lack of experience of some incubators.
In the Member States that joined the EU in and
after 2004, this kind of business infrastructure was
missing in the past and is only being built now, also
with Structural Funds support. Therefore not much
experience has been gained and further efforts
should be made to better learn how to effectively
use these infrastructures to support new business
ideas/new start-ups adequately.

**82**
Incubators have different stages of life cycle and
their offer depends on their maturity and ecosys­
tem they are operating in. Although the Commis­
sion shares the view that a broad range of services
should be offered to enable smooth incubation, the
services to be offered are developing over time in
line with the life cycle of the incubators.

**Recommendation 1**
Under the framework for cohesion, the Commission
is not involved in the selection of projects, except
for the approval of major projects.

The new regulatory framework for 2014–20 never­
theless ensures from the start that, through the
content of the adopted programmes and the
intervention logic including results indicators for
objectives and the outputs encapsulated in priority
axes, the selection of projects will be done by Mem­
ber States as far as possible according to the Court’s
recommendation.

Also, based on the performance framework estab­
lished for each operational programme, the Com­
mission will be in a position to encourage and
review the performance of programmes through
milestones and indicators. Where there is evidence
resulting from a performance review that a prior­
ity has failed to achieve the milestones set out and
that the Member State has not taken the neces­
sary steps to rectify the problem, the Commission
may suspend all or part of an interim payment or
apply ultimately financial corrections. The per­
formance reserve should not be allocated to such

programmes.

Under the 2014–20 legal framework, the Commis­
sion is also strengthening the _ex ante_ conditional­
ities for the funds so as to ensure that the necessary
conditions for their effective implementation are
in place. As regards SMEs, the _ex ante_ conditional­
ity refers to the specific actions carried out by the
Member States to underpin the promotion of entre­
preneurship taking into account the Small Business
Act.

## **45**

**Reply of the Commission**

In addition, the Commission, through its active
and continuous work with the Member States, will
advise managing authorities to include recom­
mendations of the European Court of Auditors in
the selection process and the selection criteria for
business incubators. A contribution to the expected
results of the priority axis is now required to be
included in the selection criteria.

**Recommendation 1(a)**
The European Commission fully supports the need
to establish business incubators on the basis of
detailed and realistic business plans. They should
be integrated in the overall regional development
strategy and Member States are strongly encour­
aged to enforce smart specialisation strategies
which are developed.

**Recommendation 1(b)**
Skills, in particular in Member States which joined
in and after 2004, to incubate business activities are
currently being built and the main driver is the need
to ensure the financial sustainability of the incuba­
tion infrastructure which has just been built. These
skills did not exist before and newly built incuba­
tion infrastructure triggers the process of building
the skills.

**Recommendation 1(c)**
The Commission agrees. The 2014–20 program­
ming period makes incubator activities conditional
on the existence of an appropriate development
strategy. Incubators are erected primarily to foster
the endogen­ous economic development of a region
and to respond to the needs and potential ident­
ified by the economic (or innovation) strategy.

**Recommendation 1(d)**
The Commission agrees. The Commission will advise
Member States to include the recommendation of
the Court as a requirement to be taken into consid­
eration while selecting operations and preparing
support contracts between intermediate bodies
and the management of incubation facilities.

**Recommendation 1(e)**
The Commission agrees in principle, but, in line with
the subsidiarity principle, this recommendation is
more for the Member States to consider, depending
on the objectives pursued to foster endogenous
economic growth. The Commission will recom­
mend that Member States encourage incubators to
open their services to non-resident companies with
a well-defined strategy to ensure benefits for the
local business community. The Commission will also
recommend that Member States establish network­
ing and links to other incubators to foster knowl­
edge exchange and to encourage co-incubation,
notably across borders within the EU and beyond.

**Recommendation 1(f)**
The Commission agrees. The Commission will rec­
ommend that Member States encourage incubators
to set up such a monitoring system without increas­
ing the administrative burden on supported clients.
Given that some business entities treat business
information as confidential, this can be done only
on a voluntary basis.

**83**
The ERDF supported the construction of business
incubators and the provision of basic ‘soft services’
newly in the 2007–13 period. It soon became evi­
dent that the support of ‘soft services’ was under­
estimated and improvements are planned for the
2014–20 programming period.

The Commission will recommend that the manag­
ing authorities pay more attention to this aspect in
particular, by establishing more demanding selec­
tion criteria in operation selection process for the
2014–20 programming period.

## **46**

**Reply of the Commission**

**84**

The Commission considers that the ECA statement is

addressed to entities outside the remit of the Com­
mission, namely the Member States.

There is no legal basis for the Commission to impose
additional obligations on beneficiaries as regards
incubation activities beyond the 5-year durability
period.

It is the responsibility of national authorities to
decide, in the selection criteria and in the conditions
for providing the grant to the project, on the exten­
sion of the durability period beyond the duration laid
down in the relevant regulation.

**Recommendation 2**
Under shared management of Structural Funds there
is no legal basis for the Commission to explicitly
require the incorporation of these elements into the
design of procedures.

The Commission, in its supervisory role, will encour­
age Member States to follow the cited recommenda­
tion. However, under shared management Member
States are responsible for selecting, implementing
and monitoring projects.

The Commission considers that the Court’s recom­
mendations under (a) and (d) should be addressed to
the Member States.

**Recommendation 2(a)**
The Commission agrees. This is in line with the results
orientation of the reformed cohesion policy and the
Commission will advise that this recommendation be

included in the relevant selection criteria.

**Recommendation 2(b)**
The Commission agrees. Expert knowledge in busi­
ness incubation, particularly in new Member States,
has been built mainly through learning by doing. It
is now more probable that experts can be found in
these countries who have some experience in incu­
bation and can disseminate their knowledge to train
other actors involved in incubation like, for example,
labour offices. The Commission will advise Member
States to follow this recommendation.

**Recommendation 2(c)**
The Commission agrees in principle. The ERDF con­
tribution to the project is based on a cost–benefit
analysis derived from the business plan. The results
of a business incubator can, however, be influenced
by external factors that cannot always be known in
advance and by the level of public sector support
per job created. Linking ERDF payments with results
would be challenging for this reason.

**Recommendation 2(d)**
The Commission disagrees. The Commission consid­
ers that the sustainability period as defined by the
Court should correspond to the durability period of
the operations as defined in Article 71 of the CPR.
There is no legal basis for the Commission to impose
an adjustment of the durability period to the actual
life of the business incubator assets beyond the 5

years.

In that context, the Commission takes note of the
good practices identified by the Court in some Mem­
ber States.

**85**
The European Commission created the European
Commission Business and Innovation Centre (EC-BIC)
in 1984. Since then, it has provided continuous sup­
port through the EC-BIC quality insurance system.

To increase the knowledge of managing author­
ities in the field, the European Commission drafted
‘A guide to regional innovation strategies (RIS).’ In
addition, the Commission provided guidance based
on the experience of the different generations of
regional innovation strategies. Furthermore, guid­
ance was issued by supported projects/networks.
The Commission has developed many initiatives to
encourage this, including the ‘Regions for economic
change’ (started in 2006). It is a learning platform
for EU regions that includes the annual ‘Regions
for economic change’ conference and RegioStars
awards, a policy learning database and interregional
fast track networks, funded by the Interreg IVC and
Urbact II programmes.

## **47**

**Reply of the Commission**

The Commission adopted in June 2008 the Small
Business Act (SBA), a comprehensive SME policy
framework for the EU and its Member States.
The SBA includes entrepreneurship as a priority
area and has put in place a more comprehensive
approach for tackling the full range of barriers to
entrepreneurship at EU and national levels. This
work has been re-enforced by the ‘Entrepreneur­
ship 2020’ action plan adopted in early 2013. Within
this overall framework, the Commission has contin­
ued to support the BIC quality mark scheme.

**Recommendation 3(a)**
The Commission recognises the need to continue
updating the knowledge. In 2014, it will publish
a report on ‘Setting up, managing and evaluating
EU science and technology parks’ which will pro­
vide advice and guidance and will be disseminated
to managing authorities.

**Recommendation 3(b)**
The Commission agrees and underlines that the
new orientation of the Enterprise Europe Network
(ENN) (2015–21) already takes account of these
recommendations. The EEN will play a role in con­
necting regional SME support services (including
incubators) to good practice at the European level.

Enterprise Europe Network partners in the current
network are also required to cooperate with other
European networks and to put in place actions such
as joint promotion and signposting.

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