1 Kristina Gogić, mag.iur./LLMBENEFIT COST ANALYSIS OF RESEARCH, DEVELOPMENT AND INNOVATION (RDI) INFRASTRUCTURES Strategy for Europe 2020 Kristina Gogić, mag.iur./LLM

2 RDI INFRASTRUCTURES Benefit Cos Analysis (BCA) of the research, development and innovation (RDI) infrastructures is a new field; 1) The research, development and innovation (RDI) infrastructure is the generic name for investment projects that are designed and operated according to very different specifications and cannot be analyzed with the same degree of standardisation of methods as, - for example, in railways or water; 2) The project proposer should be aware that, at the same time, it requires a solid understanding of the principles of BCA, professional experience in project evaluation in different areas and a very flexible practical approach tailored to the specific project under appraisal; for which there are several decades of evaluation experience and a large library of appraisal documents

3 RDI INFRASTRUCTURES While the target groups of other infrastructures are relatively well identified: - e.g. passangers for high-speed rail or residents in a urban area for solid waste management, the multifaced nature of RDI is such that many types of direct and indirect taget groups are involved: - from business to the general public; Each of them has standing in the BCA, and this makes the evaluation of infrastructures a particulary complex task.

4 RDI INFRASTRUCTURES It is expected that over the planning period ( ) a portofolio of BCA of RDI infrastructures will be gradually built within the European Union (EU) Member States (MS), following the high priority given to research and innovation for the EU growth strategy;1) Many research and innovation R&I projects face difficulties in securing finance despite being fundamentally good projects; 1) In this field different acronyms are often used in policy and regulatory documents, such as R&I (research and innovation), R&D (research and development), RTDI (research, technological development and innovation)

5 INNOVFIN ADVISORY InnovFin Advisory (IFA) was set up as a joint European Investment Bank – European Commission initiative under Horizon 2020 IFA assists eligible public and private counterparts to improve the bankability and investment readiness of large, complex, innovative projects that need substantial long term investments

6 RDI IN THE EU POLICY AGENDARDI are at the core of the policy agenda as key drivers of sustainable long-term economic development Strategy for Europe 2020 puts RDI at the top of the EU agenda for smart, sustainable and inclusive growth The European Commission lauched the „innovation Union” flagship initiative, aimed to ensure that innovation ideas can be turned into products and services that create economic growth and jobs.

7 Standard BCA of RDI Infrastructures Definition of RDI infrastructuresResearch and development infrastructures are science related physical realisations (laboratories, facilities, etc.) developed with the main purpose of acquiring new knowledge in a given scientific and technological field; 1) Innovation infrastructures are infrastructures aimed at combining knowledge and technology for the development of new or improved products, services and business processes that could be sold on the marketplace 2), 3) R&D infrastructures in tum, can be discriminated between: - infrastructures for fundamental research, i.e. infrastructures that are meanth to undertake theoretical or experimental work primarily to aquire new knowledge on the underlying foundations of phenomena and observable facts, without any direct practical application or use in view, and – infrastructures for applied research and experimental development i.e. Infrastructures directed to a more practical purpose, when research and investigation are aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services, which are not yet directly intended for commercial use; In many cases it is not possible to sharply distinguish between research and development infrastructures and innovation infrastructures. RDI infrastructures project in reality are likely to encompass multiple activities, ranging throughout the whole innovation process spectrum (more about that in description of the context) According to the new European strategic orientations, defined in the Europe 2020 strategy, and in line with thematic objective „Strenghtening research, technological develoment infrastructures and innovation” of the EU Regulation No 1303/2013 which is legal basis for major projects appraisal (Article 9) during the programming period the EC is focusing on reinforsing links between education, business, research and innovation.

8 Standard BCA of RDI Infrastructures Description/Presentation of the contextSocio-economic trend; 1) Policy and legislative framework; 2) Geographical conditions and availability of resources; 3) Current level of research and innovation; 4) Conditions of the existing research facilities and infrastructural needs 5) – national and regional GDP growth; - magnitude and characteristics of industry in the catchment area of the infrastructure; - demographic statistics (population size and growth); - education statistics; - percentage of population employed in the education sectors; - gross domestic expenditure in research and development; - education background; etc. Reference to; - EU sector policy documents and other horizontal policies; - the priority axis and the interventions areas of the OP; - the Regional and innovation Strategy for Smart Specialisation; - national and regional strategic documents and development plans; - to State legislation etc. Geographical proximity: - to universities, industries and other research laboratories to favor networking and collaboration; - to the research object; Accessability; Number and specialisation of scientists and students in the infrastructure’s reference area and field etc. Percentage of employees in the research and development sector; Knowledge intensity of business in the region; Number of patent applications and patent per capita in different economic sectors; Venture capital investment as a percentage of GDP; SMEs innovating in-house as a percentage of SMEs, etc. Current: - state of the existing infrastructures and facilities in the same scientific/technological field; - number of research centres in the same field in the infrastructure’s reference area and in other regions/countries; Benchmarking with other RDI infrastructures operating in the same field in other regions/countries; Past and present scientific activity carried out by the project promoter; Cooperation agreements with existing entities or other relevant research programmes

9 Standard BCA of RDI Infrastructures Definition of objectivesRDI projects can be associated with a multitude of long- term objectives; i.e.: 1) - strenghten the cooperation between research, innovation, education and business to create more jobs and increase economic competitiveness; - enhance the attractiveness of a cluster or science park for investors and companies; 2) - promote the mobility of researchs and associated exchange of ideas The list is illustrative; drawing from several policy and project appraisal documents - Develop and strengthen the European Research Area by making national research systems more effective, ensuring optimal transnational cooperation and competition among researchers, and guaranteeing access and transfer of knowledge; - help address societal challanges in a number of fields, including, for example: energy security, sustainable transport, climate change and resource efficiency, health and ageing; environmentally; production methods and land management etc

10 Standard BCA of RDI Infrastructures Project identificationThe proposed project must be described in details as a self-sufficient unit of analysis; - when RDI investments consist of single-site facilities, the project identification becomes relatively straightforward 1) - geographically distributed RDI facilities, consisting of a network of infrastructures and equipment located in different places (or countries) can also be identified as a self-sufficient project if there is a strong functional relationship among all of its parts 2) i.e. a single or a set of infrastructure and equipement located in a single physical location; as an example: single-site RDI infrastructures include telescopes, medical research facilities, laboratories for technological experimentation and others Meaning that the distributed facilities cannot operate and/or produce RDI results without contributions from any of the facilities. i.e research centres in the field of climate change, biosciences, geology etc.

11 Project identificationRDI investments aimed at fostering cooperation between a number of research facilities and knowledge transfer/innovation facilities; - located in the same area (city or region); - are not incorporated within one single- site infrastructure; - could still be considered as a single project and a self-sufficient unit of analysis for the purpose of the BCA as long as they create strong synergies, critical mass and achieve cost savings for each facility involved

12 Standard BCA of RDI Infrastructures Demand analysisThe demand of RDI infrastructures is actually driven by the social and economic needs expressed by a multiplicity of target groups; i.e. stakeholders who/which will ultimately benefit from the intervention; 1) The macro categories of target groups, which drive the demand for the RDI project at regional and/or national level, can be identified: - business; 2) - researchers, young professional and students; 3) - target population and the general public 4) 5) 0) The demand analysis implies identifying the need for an investment, which is expressed by the current and future demand. Qualifications of the demand in the scenarios with and without the project are both essencial for formulating the project demand projections in incremental terms. The demand analysis should be carried out before the option, financial and economic analysis, since it provides inputs that are necessary for the subsequental appraisal steps. 1) these may include both projects users and non-users, whose welfare will be affected by the construction, operation and services provided by the infrastructure 2) including SMEs and large enterprises, high-tech businesses, spin-offs and start-ups, 3) who would use the RDI facility to carry out their own research to increase scientific and technological knowledge in a given field, or for a training programme 4) who are attracted by the project outreach activities or who are direct or indirect target of research 5) The list may be broken down to a more detailed level of analysis

13 Demand analysis Target group BusinessExamples of factors driving the demand Possible methods for data gathering and estimation Examples of output from the demand analysis Business Average growth of the industrial base in the RDI project field in the last years Knowledge intensity of businesses in sectors related to the RDI project Statistical analysis of historical data Benchmarks with similar RDI projects Relevant literature and existing studies Interviews, surveys, consultations Annual number of spin-offs/start-ups expected to be generated - supported by the project Expected number of business using the infrastructure to develop new/improved products and processes Researchers, young professionals and students Number of scientists operating in the RDI project field and in the geographical area targeted by the infrastructure Demographic projections Annual number of researchers who will directly use the RDI infrastructure Revenues from student fees Target population and general public Existance of knowledge transfer agreements to the RDI infrastructures Provisions of outreach activities by the project promoter Annual number of people potentially targeted by the project Annual number of patients treated by innovative medical technologies 0) Data, methods and outputs of the demand analysis

14 Standard BCA of RDI Infrastructures Option analysisThe option analysis aims at identifying the most promising project option that can achieve the expected objective given a certain demand The baseline for the option analysis is the description of a scenario without-the-project for which alternative options can be conjectured RDI project options: strategic, technological, location and architectual; could differ one from another from multiple perspective 1) 1) Each option should be assessed against a number of criteria, such as: - its expected costs; - expected revenues; - expected economic benefits, including positive and negative externalities; - possible wider regional effects; - implementation time; - degree of uncertainty and the risk involved

15 Standard BCA of RDI Infrastructures Financial analysis Investment, operation and maintenance costsInvestment costs O&M costs - Planing and design costs - Land acquisition - Construction costs, possibly disaggregated by civil works and installations, materials, labour etc. - Energy, waste disposal and other utilities consumed during the construction period - Road access - RDI equipment, including information technologies (particulary for data storage or elaboration) - Intellectual property purchase costs - Testing - Start-up costs - Materials and equipment - Consulting services - Costs of scientific personnel - Cost of administrative and technical staff - Cost of obtaining and maintaining patents - Energy, waste disposal and other utilities - Promotional campaigns and other outreach expenditure to the general public - Training courses connected to the infrastructure’s operation and management

16 Standard BCA of RDI Infrastructures Financial analysis Revenues and financing sourcesExamples of operating revenues Examples of financing sources - Licenece revenues gained from patents’ commercialisation; - Sale of consultancy services - Revenues from industrial research contracts and pre- commercial procurements contracts - Entry fees to the laboratory and for the use of research equipment charged to researchers and business - Student/master/PhD fees - Spin-off equity realisations - Research grants involving a transfer of ownership of a specific research output - Sale or rent of new buildings used for the project’s objective - Revenues from the target population using the research outputs (e.g. patients receiving an innovative treatment) - National/regional public contributions - National/regional private - EU contribution - Other national/regional funding schemes for RDI activities - Public grants to research, e.g. the Horizon 2020 framework - Ordinary public transfers

17 Standard BCA of RDI Infrastructures Economic analysisThe main difficulty is the estimation of the social benefits from a range of diverse projects: - from research centres on climate change to scientific and technological parks; or - from high-energy physics research infrastructures to bio-molecular research facilities Typical benefits (who is going to be targeted?): - for business;1) for researchers, young professionals and students;2) for the target population and general public 3) - New businesses; i.e. technological start-ups and spin-offs established via the project implementation and/or those enjoying the service provided by the incubators and similar infrastructures; benefits: decreased business mortality, avoided cost due to the services provided by the RDI facilities; - Existing businesses: - large businesses involved in applied research infrastructures, or competence centres with universities…etc.; - SMEs benefiting from activities and services offered by technological parks and other collective infrastructures supporting R&D etc.; - any other business, either SME or larger, either high-tech or not, which is able to avoid some costs or increase sales because of the impact of new knowledge; i.e. high-tech business in the supply chain of the RDI infrastructure, contributing to the development of innovative equipment, materials and software, and benefitting from learning-by-doing effects Typical benefits for academics, for example, are publications and citations in scolary journals; Population in areas of environmental risk could benefit from the costs avoided and lives saved in relations to major risks; such as the effects of climate change, earthquakes, floods, pollution etc.; - Population at health risk: avoided mortality and increased quality of life; - General public interested in science and technology arising from onsite visits to the infrastructure, virtual visits to the project’s websites and social networks, availability of educational publication information in the media as part of the outreach activities of the team managing the RDI infrastructures. The related use-benfit is in terms of cultural effects, valuated through the marginal willingness-to-pay for that form of cultural activity

18 Standard BCA of RDI Infrastructures Economic analysis Valuation of benefitsTo business: the general rule is that any change beneficial to a business should be valued by incremental shadow profits 1) To researches and students: one of the main benefit is the opportunity to access new experimental data, to contribute to the creation of new knowledge and to publish scientific papers in scolary journals 2) - the main benefit for junior researchers and students involved in the project is a „premium” for their future salary, resulting from the aquisition of human capital 3) For example: if targeted businesses are located in areas characterised by high unemployment, the shadow profit will be higher than the gross financial profit because the shadow wage will be lower than the market wage The unit benefits is the marginal social value of the scientific publication; the marginal value of the publication can be estimated by its marginal production costs That would haven’t been accumulated without their participation in the project

19 To target population and the general public: Standard BCA of RDI Infrastructures Economic analysis Valuation of benefits To target population and the general public: - reduction of environmental risks; the most encompassing risk for the human kind is climate shange 1) - reduction of the health risks; the discovery and testing of new drugs, new advanced forms of surgery assisted by robotics, radiotherapy with non-conventional beams, genetics, etc. 2) - cultural effects for visitors; 3) The Paris Agreement; december 2015.; 195 countries adopted first-ever universal, legally binding global climate deal: it is a bridge between today’s policies and climate neutrality before the end of the century; result of the many years of the research Research on the safety of the food chain or the safety of transport modes is also important to the perspective of human health Some RDI infrastructures attract the interest of the general public and their management may have an outreach strategy to this end. Examples of outreach activities could include the organisation of guided tours for visitors , for example, by the science park, or agreements between a research competence centre and schools and universities, aimed at arranging onsite educational programmes. There are many examples in Europe and USA of research infrastructures with large number of visitors per year, and project promoters may consider whether they want to develop such outreach programmes as part of their strategy. The ultimate beneficiaries of these activities are the visitors to the infarstructure.

20 Standard BCA of Infrastructures Risk assessment; Typical risks in RDI projectsStage Risk Demand analysis - Evolutions in the labour market; Insufficient qualified human resources for research activity; Interest of general public different than predicted Design - Inadequate site selection; Inadequate design cost estimates; Delays in completing the project design; Lack of well-established technical engineering expertise Administrative and procurement - Delays in obtaining building permits; Unresolved property ownership rights; Procedural delays to select the supplier and sign the procurement contract; Supply bottlenecks Construction - Project cost overruns; Delays in complementary works outside the project promoter’s control; Accidents Operation - Unexpected complications connected with the installation of specialised equipment; Insufficient production of research results; Lack of academic staff/researchers Financial - Inadequate estimate of financial revenues and system for protection and exploatation of intellectual property; Loss of existing clients/users due to competition from other RDI centres 0) In the case of RDI infrastructures the overall uncertainty of BCA results can be even larger. A fully-fledged quantitative risk assessment is required. This could comprise a sensitivity analysis, a qualitative risk analysis, a probabilistic risk analysis and the definition of a risk prevention and mitigation strategy

21 THANK YOU ON YOUR ATTENTION! Questions?