Member Blog: What will Brexit mean for European funding of the games industry?
by Osborne Clarke
Simon Neill (Competition, Partner), Ashley Morgan (Litigation, TKL) and Rebecca Malone (Competition, Associate).
More than six weeks on from the UK's EU referendum, uncertainty is still a defining feature of the economic and political climate. For the games industry, one of the major uncertainties is the status of European-based funding.
The potential impact of Brexit will vary between the different sources of European funding. Some programmes will require the UK to become an associate member and, in some cases, to put its own funding in to invest in projects. Nevertheless, so long as decision-making bias can be kept in check, the UK government should (if it so chooses) be able to ensure that businesses continue to benefit from comparable levels of EU funding.
On 13 August, the UK government announced its commitment to guarantee funding for certain projects signed before the Autumn Statement. Whilst a welcome move, the assurance is a short-term solution which fails to quell the uncertainty that still enshrouds projects concluded after this deadline and those not covered by the guarantee.
Horizon 2020 is the European Commission's primary funding programme for research and innovation, and the largest, with a budget of €79 billion. It allocates funding through two-year work programmes administered by the Commission, which include calls for tenders for interactive entertainment projects such as games.
Businesses located in EU Member States have an automatic right to respond to calls for tenders. Non-Member states are also actively encouraged to participate in H2020 as "associated members". There are currently 14 associated members. For associated members which do not pay into the EU budget, the funding allocated to a business based in that state must be paid by the associated member state itself.
As there is no change to the UK's legal status within the EU until Article 50 of the TFEU has been invoked and the UK's withdrawal completed, UK businesses will be able to respond to tenders and should be treated as any other EU business until that time.
Post-Brexit, the UK could become and an associated member of H2020, which would preserve the right for UK businesses to apply for H2020 funding irrespective of whether the funding came from the EU or the UK. This would fit with assurances given pre-referendum by the Leave campaign that the UK government would guarantee H2020 funding. It would also fit with the post-referendum assertion by Jo Johnson, Minister of State for Universities and Science, that the government "is determined to ensure that the UK continues to play a leading role in European and international research and innovation".
Whilst the UK government's guarantee lends some much needed support for H2020 applications set for completion ahead of the Autumn Statement, its long-term intentions have yet to be confirmed. The uncertainty surrounding the future of H2020 is threatening interactive entertainment businesses operating in the UK, which might find that European partners would prefer to choose non-UK business to collaborate with. It has been widely reported that UK partners, particularly universities seeking H2020 funding, are already being dropped from prospective projects amidst Brexit uncertainty.
There are also concerns, which are difficult to judge so far, that the assessors (European, rather that UK, institutions) may themselves be influenced by Brexit-related bias when assessing tenders submitted by UK businesses.
European Regional Development Fund
The ERDF allocates funds to EU Member States to distribute over a defined period. The UK has been allocated funds under the 2014-2020 Regional Development Fund, which are potentially available to the games industry.
A consequence of this is that, as the funds are allocated at a national level, the concerns around allocation bias that have been raised for H2020 will not apply to the EDRF.
If the UK were to leave before 2020, it is unclear whether any unallocated EU funds may need to be returned to the EU, but for funds that have already been granted, the standard form grant agreements do not appear to allow the UK government to claw back or withhold payments to grant recipients. Therefore, in the event that the Commission demanded monies back from the UK government in relation to these allocated pots, it is likely that the buck will stop with the UK government, which will, presumably meet the bill from monies saved in contributions to the EU budget. This is the position that was alluded to by the Leave campaign, pre-referendum.
If the UK has not left the EU by the time the next round of EDRF funding is agreed, it should not be disadvantaged when it comes to the allocation of funding, as this follows a mathematical formula. It would, however, be for the UK government to agree with the EU what should happen to those funds if the UK Brexits part-way through the funding programme, and to set out whether it (the Government) would make up any shortfall to ensure the same level of funding was available to industry.
As with H2020, ERDF grant agreements concluded before the Autumn Statement will be covered by the UK government guarantee but beyond this, the precise position remains uncertain.
Creative Europe is administered by the European Commission with a budget of €1.46 billion, of which €3.4 million has been set aside for the development of new video games with high circulation potential. In 2015 the UK was the largest beneficiary of the fund. Example beneficiaries include Broken Sword developer, Revolution Software.
Despite worries around selection-bias (the funds are dispensed by a European, rather than UK administration), Creative Europe has sought to reassure UK applicants that there will be “no immediate material changes… Our services to the UK’s creative professionals continue as usual and prospective applicants to Creative Europe are encouraged to get in touch"
Creative Europe's programmes may continue to be open to UK applicants following Brexit, depending on the terms agreed between the UK and the EU. As with H2020, non-EU countries can apply to join Creative Europe. EEA members such as Norway, for example, as well as Switzerland, participate in the programme, and businesses in those countries can apply for funding.
Unlike H2020 and ERDF, reports suggest that the UK government's guarantee will not extend to Creative Europe funding.
The status of existing agreements
Where funding has already been agreed or even provided, the expectation is that those funds are secure, although the precise wording of agreements should be checked to ensure that there are no unexpected conditions or difficulties that may be triggered by Brexit. This will be important particularly where the funding situation is more complex, for example with matched funding provided by several sources, or where the project is involves collaboration between two or more parties. Termination or material adverse change clauses, as well as simple things like references in agreements to EU regulations, have the potential to cause difficulty. Now is the time to clarify these points and resolve any potential difficulties.
The political reality
As with many of the issues presented by Brexit, the legal basis of sources of European funding tells us only so much. If the political will is there on the part of the UK government and the EU, the mechanisms are in place to allow the UK games industry to continue to benefit from the same level and sources of funding. Whilst the status of these funds will be up for discussion alongside the vast array of other issues to be agreed between the UK and the EU, industry can play an important part in keeping this high on the political agenda.