Staff Working Papers

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1 JASPERS Knowledge Economy and Energy Division Staff Working Papers Project Preparation and CBA of RDI Infrastructure Projects Clarke, Steven; Mawhinney, Mark; Swerdlow, Robert; Teichmann, Dorothee (*) April 2013 JASPERS Staff Working Papers are prepared by JASPERS experts with the aim of facilitating the discussions with counterparts in the context of their different assignments, mostly in terms of project scoping and applicable criteria and methodology. These papers normally originate as part of the assessment of a specific project, in which case the version published here is edited to be made non-project and non-country specific and therefore easily applicable to other projects in the sector. This particular paper provides methodological guidance for the development of the feasibility study and CBA for RDI infrastructure projects, with a particular focus on research infrastructure, higher education infrastructure and Science Park projects. (*) This document benefited also from the comments and support of other members of the knowledge economy team in JASPERS. Disclaimer and Copyright This report is provided in good faith, to be used at the risk of the reader. JASPERS does not warrant the accuracy or completeness of the information contained in this report nor does it assume any legal liability or responsibility, direct or indirect, for any damages or loss caused or alleged to be caused by or in connection with the use of or reliance on materials contained in this report. This report has not been formally discussed or approved by the European Commission. The comments expressed in this report do not necessarily state or reflect the views of the JASPERS partners (European Commission, EIB, EBRD and KfW). In particular, the views expressed herein cannot be taken to reflect the official opinion of the European Union. EIB retains copyright to this report on behalf of JASPERS. Permission to reproduce and distribute this report in whole or in part for non-commercial purposes and without fee is hereby granted provided that JASPERS is acknowledged. 1

2 Table of Contents 1 Introduction Context of the paper Purpose of the paper Scope of the paper Structure of the paper Best practice in RDI infrastructure project preparation The Feasibility Study What is a project? Definition of the project s objectives Demand analysis Option Analysis State aid issues Preparation of the financial analysis and economic cost-benefit analysis Purpose of the financial analysis and economic CBA General principles of the cost-benefit analysis Incremental method Choice of reference period Choice of discount rates in the financial analysis and economic CBA Financial analysis Principles for data collection Identification of cash-flow items of RDI projects Cash outflows Cash inflows Objectives and methodology of different financial analyses Analysis of investment financial profitability Determination of the EU grant amount Evaluation of financial sustainability Analysis of financial profitability of national capital Cash in- and out-flows to be considered in different financial analyses Economic cost-benefit analysis Conversion of financial costs into economic costs Identification and quantification of additional economic benefits The identification of direct outputs and benefits

3 Quantification of economic benefits Calculation of the economic rate of return Risk Assessment Sensitivity analysis Risk analysis Annex 1: Project Development and Economic CBA of Higher Education Projects Description of typical projects EU Policy Framework and Objectives of Higher Education Projects Demand analysis Option analysis Financial Analysis and Economic CBA of Higher Education Projects Identification of financial in-flows and out-flows of RI projects Identification of Economic Costs and Benefits Explanation and quantification of the suggested economic benefits Societal benefits through improvement of individuals through education Employment benefits Building-related benefits Risk analysis Case Study Project description Project objectives Demand analysis Options analysis Project cost estimates Financial CBA Economic CBA Risk Assessment Annex 2: Project Development and Economic CBA of Research Infrastructure Projects Description of typical projects EU Policy Framework and Objectives of Research Infrastructure Projects Demand analysis Option analysis Financial analysis and Economic CBA of Research Infrastructure Projects Identification of financial in-flows and out-flows of RI projects Identification of Economic Costs and Benefits Explanation and quantification of the suggested economic benefits

4 5.3.1 Employment benefits Building related benefits Societal benefits through improvement of individuals through education Societal benefits from research Risk analysis Case Study Project description Project objectives Demand analysis Options analysis Project cost estimates Financial CBA Economic CBA Risk Assessment Annex 3: Project Development and CBA for Science Park Projects Description of typical projects The EU Policy Framework and Objectives of Science Park projects Demand analysis Options Analysis Financial analysis and Economic CBA of Science Park Projects Identification of financial in-flows and out-flows of RI projects Identification of Economic Costs and Benefits Explanation and quantification of the suggested economic benefits Building related benefits Employment benefits Research related benefits Business related outputs Risk analysis Case Study Project description Project objectives Demand analysis Options analysis Financial Analysis Project cost estimates Operational and maintenance costs Estimated revenues

5 7.5.4 Calculation of the funding gap and EU Grant Financial performance indicators Economic CBA Risk Assessment Sensitivity analysis Risk analysis Annex 4: Economic Outputs and Benefits of RDI projects Bibliography

6 1. Introduction 1.1 Context of the paper In the EU financing perspective , the classification of infrastructure eligible for funding through the European Regional Development Fund (ERDF) was expanded to cover major projects in the area of Research, Development and Innovation (RDI). These projects were previously funded through alternative European Union programmes such as the Research Framework Programmes (FPs). Council regulation (EC) No 1083/20061 lays down general provisions on the ERDF, the European Social Fund, and the Cohesion Fund. The regulation states that Member States or managing authorities are required to provide the Commission with a cost-benefit analysis and a feasibility study of the proposed project. To assist beneficiaries with the completion of these documents, and specifically those matters relating to the CBA, the following guidance documents were made available: EC (2008), Guide to Cost-Benefit Analysis of Investment Projects, July 2008 EC (2006), The New Programming Period , Guidance on the methodology for carrying out cost-benefit analysis The COCOF note on revenue-generating projects (Article 55 of council regulation (EC) No 1083/2006)2. Though complete in terms of their guidance for those sectors traditionally funded by the ERDF, they provide little specific instruction for RDI project proposers. To help address this situation, in 2009 JASPERS supported the Czech Government to develop a working document for the preparation of projects in the area of RDI, entitled Background Methodology for Preparing Feasibility and Cost- Benefit Analysis of R&D Infrastructure Projects in Czech Republic. The document provided practical guidance on the preparation of RDI projects and put forward a suggested methodology for the generation of economic indicators for the CBA. Box 1: JASPERS and the ERDF JASPERS (Joint Assistance to Support Projects in European Regions) assists the 12 Central and Eastern EU Member States in the preparation of major projects to be submitted for grant financing under the Structural and Cohesion Funds. The ERDF, a major source of grant funding for major projects, was designed to strengthen economic and social cohesion in the European Union by correcting imbalances between regions. The fund promotes or funds projects which are likely to become economic development catalysts. The guidance was used successfully for an early batch of five RDI projects which were subsequently approved by the Commission. 1 This regulation has been amended by Regulation (EU) No 539/2010 of the European Parliament and of the Council of 16 June Revised COCOF Guidance Note on Article 55 on ERDF and CF of Council Regulation No 1083/2006: Revenue-generating projects, published on 30/11/2010 6

7 1.2 Purpose of the paper The purpose of this current document is to present a revised and extended guidance note for the preparation of RDI projects for the next ERDF programming period ( ). The paper builds on the project experience JASPERS developed during the financing perspective, and has been extended to provide guidance on three types of RDI projects, higher education institutions (HEI), research infrastructure (RI) and science parks. The document is intended to provide the reader with an overview and an understanding of the primary elements required for the preparation of a feasibility study and the CBA. More specifically, the document puts forward a practical methodology for the identification of project objectives, the breaking down of objectives into performance indicators, and the subsequent identification and valuation of the relevant economic benefits of projects. The reader should be aware that the document is presented as a working paper that may be subject to change. It is expected that as JASPERS experience of RDI projects grows during the next programming period and, following feedback from users of this document, the paper will be revised and improved. The reader should also note that at the time of writing, the European Investment Bank (EIB) and JASPERS are in the early stages of undertaking a three year academic research programme to develop a unified methodology for forecasting cost/benefits in RDI projects for use within the Bank and by others (ideally project proposers). Once complete, it is expected that this will replace this current document. 1.3 Scope of the paper RDI activities generally exist along a spectrum spanning from education to research to commercial application. For the purpose of this current document, these activities have categorised by the following infrastructure types: higher education institutions, research infrastructure, and science parks. Though to a large extent this split mirrors the types of RDI projects JASPERS worked on during the programming period, it should be noted that in practice, projects will often contain components of each activity. It is, for example, not unusual for a research facility to undertake educational activities in addition to conducting research. Likewise, as many science parks have close links with universities; educational benefits may also be attributed to science park projects. For the purpose of this document, however, the boundaries of the projects have been narrowly defined. The higher education annex, for example, focuses on benefits related to education rather than those attributed to research commercialisation. This has been done in order to avoid excessive repetition and to ensure that each annex remains focused. For the reader, it may therefore be necessary to refer to some combination of annexes 1 to 3 in order to fully cover all of the relevant components of their project. Table 1 below, provides an overview of the characteristics of these three project types. 1.4 Structure of the paper Section Two of the paper provides information on the preparation of the following sections of the feasibility study: the project objectives, the demand analysis, and the option analysis. A suggested structure for the completion of each section is provided along with a description of the type of information that is typically required. A brief clarification of state aid issues related to RDI projects is also provided. Section Three, covers the preparation of the financial analysis and the economic analysis, including a suggested model for the completion of the CBA. In Section Four, the sensitivity and risk analysis are addressed. 7

8 Table 1: RDI project type Higher Education Research Infrastructure Science Parks Main characteristics of project type Facility or expansion of a pre-existing facility used for educational purposes, affiliated to a university, college of technology or any other institution of tertiary education (OECD, 2002) A single sited or distributed facility(ies), related services or sources that can be used by scientists to engage in research in their fields (OECD, 2002). Professionally managed collection of centralised buildings and services dedicated to facilitating scientific research and business activities. Principal activity undertaken in project type Teaching Research Business incubation, technology transfer, knowledge transfer. Examples Construction of university buildings, and other higher education institution s premises. Construction and furnishing of research facilities, including specialised equipped laboratories. Construction, organisation and furnishing of the premises of science parks, tech parks, incubators etc. Annexes 1 to 3 present a set of standalone recommendations for higher education, research infrastructure, and science park projects, including calculation methodologies for economic costs and benefits related to these project types. Further, more specific, project preparation advice is also provided along with individual case studies. Annex 4 provides a full list of economic outputs for RDI projects, together with reference market values for project promoters own calculations. It should be noted that, while this document endeavours to cover the main topics addressed in the EC s guidance material, there are further practical considerations that should be included in a feasibility study that have not been addressed in this document - such as procurement, management, and legal arrangements, as discussed in Section 2.1 below. 2 Best practice in RDI infrastructure project preparation 2.1 The Feasibility Study A feasibility analysis is carried out to identify potential constraints and related solutions with respect to the technical, economic, regulatory and managerial aspects of a project. A project is feasible when it meets the technical, legal, financial and other constraints that are relevant to the nation, region or specific site (EC, 2008). A project feasibility study should be a self-contained document that covers all the different relevant aspects of the project, including the: (a) project background and justification; (b) planning framework; (c) situation/location analysis (d) existing situation and expected demand; (e) option analysis; (f) detailed technical description of the preferred option; (g) detailed cost estimates; (h) institutional 8

9 analysis, including the necessary arrangements for the operation of the project facilities; (i) costbenefit analysis; (j) environmental impact assessment; (k) procurement strategy for the implementation phase; and (l) risk analysis.. The project s position in relation to state aid issues should also be clarified. It is recommended that, in order to ensure internal consistency, the project feasibility study is prepared by a single beneficiary team, or where a consultant is employed, a single contractor (as opposed to different contractors preparing different parts of the study). It further recommended that the project team/consultant is responsible for the coordination and management of the numerous stakeholders involved in the development of the project itself. In Sections , suggested methodologies for the completion of the project objectives, the demand analysis, the option analysis and State aid issues in the context of RDI projects are presented. The financial analysis and economic Cost-Benefit Analysis are treated separately in Section What is a project? Before the different analyses mentioned above are carried out, the scope of the project needs to be carefully defined. In order to do so, it needs to be clear to the project promoter how to identify an individual project that can be acceptable for ERDF funding. The EC (2008) CBA guide defines a project as follows: A project can be defined as an operation comprising a series of works, activities or services intended to accomplish an indivisible task of a precise economic or technical nature; one which has well defined goals. The appraisal needs to focus on the whole project as a selfsufficient unit of analysis and not on fragments or sections of it. Partitions of projects for purely administrative reasons are not appropriate objects of appraisal (p. 30) The EC guide further states that a project may consist of several inter-related but relatively selfstanding components and notes that the promoter should justify the project identification choice (p.30). The latter can, for example, be done by showing the synergies that are created by having several self-standing project components. RDI projects will typically cover a range of activities and, in some instances, a number of seemingly disconnected components. A project may consist simply of investment in education infrastructure (e.g. the construction of a building to host a business school), or, more typically, may combine investment in education infrastructure with pure research and/or applied research facilities (e.g. construction of a university library and laboratory infrastructure).regardless of the components in question, a common beneficiary must be provided, and the link and need for the components must be justified. 2.3 Definition of the project s objectives The definition of the project s objectives form a crucial part of the feasibility study. The more specific the objectives, the more focused the analysis will be in each of the subsequent sections of the study. A project feasibility study will typically identify two forms of objectives: 1) The specific objectives of the infrastructure; and 2) Their link to strategic goals and objectives set at the EU/national/regional level. 9

10 More specifically, in the case of ERDF funded projects; the Feasibility Study not only describes specific objectives of the infrastructure, but also details how the project will help to fulfil the broader EU and national goals and objectives that are usually described in the priority axes of the relevant Sector Operational Programme (SOP) - an example is given in the box below. Box 2: Example of definition of the project s general objective General Objective: To enhance economic and business development and increase the competitiveness of the region by improving the physical and intellectual infrastructure for research and education services and in line with EU innovation policies and in the context of the Priority Axis [ ] of the SOP [ ]. It is suggested that when considering the objectives of the project, that the promoter takes care not to include project inputs - such as the construction of a research facility - as an objective. Where possible, the objectives of the project should be output based, and focused on the impact that the project will have. Table 2 provides an example of number of output based objectives and their link to the general objective according to the corresponding Priority Axis. There will, in general, be a clear link between the predicted outputs that will be generated by the cost benefit analysis and the definition of the project objectives. To increase the specificity of the objectives and the accountability of the CBA predictions, the project promoter is encouraged to assign figures from the CBA to the outputs detailed in the objectives, e.g. that the project will produce 20 research jobs per year. An example is provided in the case study in Annex 3. Table 2: Definition of the EU/National and project objectives EU/National Objective 1. Increase of research and education capacity 2. Increased access of enterprises to research output, increased knowledge spill-over Project Objective Increased number of research jobs, papers published, graduates per year expressed in concrete numbers Increased number of contractual research projects between research infrastructure and private enterprises 3. Enhanced economic transformation and technological diversification Increased number of patents, licenses and spin-offs 4. Increased attractiveness of regions for international investors Increase of FDI in the region 2.4 Demand analysis The demand analysis provides quantitative and qualitative evidence to assure the reader that the proposed infrastructure will satisfy its objectives, be consistently utilized, and that its outputs will be 10

11 used, and be of value to society. To this end, the analysis of RDI infrastructure projects will generally consider demand at two levels: The demand for the infrastructure itself i.e. showing that, once constructed it will be used, and; The future demand for the output of the infrastructure, i.e. that the output will be of value and will utilised. In the case of a research facility for example, the project developer would need to provide evidence that the research facility is, and will continue to be, in demand and therefore used by the target group of users (i.e. researchers). The analysis will further need to show that the results of the research that will be undertaken at the facility will, and will continue to be, relevant and utilised by the wider economy. Typically, in order to undertake this analysis the following elements are considered: Macro-economic analysis of project region and sector Identification of the target group Identification of current demand of the target group Identification of future demand for the projects output Identification and quantification of financial revenues. The Macro-economic analysis provides evidence to show that the macro and socio economic conditions of the country and the region will provide a conducive environment for the successful operation, and long term sustainability of the RDI investment. The analysis should include data such as macroeconomic projections (GDP etc., share of research expenditures as % of GDP, inflation), household income projections, demographic projections, and growth trends etc. The identified target group will differ depending on the project type, but is likely to consist of some mix of students, researchers, non-commercial and commercial research institutions and industry. The analysis should include information on the size of the respective target groups at the local, national, and, where appropriate, the EU level, showing that a critical mass of users exists. Particularly in the case of research infrastructure, the analysis should further show that the identified users have sufficient expertise to meet the projects objectives. If, for example, an objective is to produce a state of the art research facility which will generate world class research results, the feasibility study will need to provide evidence to show that, either the required expertise in terms of users and research staff is available at the local/national level, or that the facility will be able to attract world leading staff and users from overseas. For the identified target group of users the demand for the infrastructure will then need to be assessed. The evidence provided in the feasibility study will differ from project to project depending on what information is available and what is appropriate. From JASPERS experience, the kinds of evidence provided for RDI infrastructure projects include information such as: Facility/infrastructure gap analysis are there comparable facilities available at the local, national and EU level? If similar facilities exist, what are the utilisation rates? Are the facilities oversubscribed? Are they regarded as competition, or are there synergies between the facilities? 11

12 If the infrastructure focuses on a particular scientific discipline, what evidence is there that this area of research is interest to the academic community? What evidence is there to show that the users have been consulted? Can partnership agreements, letters of intent, MoUs, be provided? Once the demand for the infrastructure has been ascertained, the feasibility study should then detail the projected future demand for the project s outputs induced by the existence of the new project. Similarly with the identification of the user groups, the analysis of the demand for the project s outputs should identify who the users of the outputs will be and show that a critical mass exists, again at the local, national and EU level. The analysis should further show potential uses for the outputs and again, ideally if possible, evidence of actual interaction with the users should be provided with letters of intent, for example. Annexes 1-3 provide more specific forms of evidence of demand for each of the three infrastructure types. It should be noted that, as previously mentioned, there is not set requirement for the evidence provided, it is down to the project promoter to judge the most appropriate forms of evidence. Finally, in the last step, the revenues that can be expected from the sale of outputs (e.g. revenues from tuition fees, licensing, rental space etc.) are quantified. In this context, the elasticity of demand to relevant prices and income as well as demographic evolutions in the region (in particular as far as education services are concerned) are also assessed. Please note the particular definition of the term revenues according to the EU regulation in this context, which is further explained in Section of this paper. Different estimation techniques can be used for current and forecasted demand as well as the estimation of future revenue streams, such as expert interviews or trend extrapolation. A further potential technique is to compare the project with a benchmark project in order to derive an estimation of the demand, future demand and revenues. This benchmark project should be similar in structure and size and preferably in a region where income levels, population densities etc. are comparable. Whatever estimation technique is chosen, transparency in the main assumptions and in the parameters and values, as well as the trends and coefficients used in the forecasting exercise, are to be assured (EC, 2008). 2.5 Option Analysis Once the project objectives have been set and the demand for the project has been justified, the best project has to be chosen among a range of possible options. EU Regulations require the project proposer to base the selection of the project to be financed on the results of an option analysis as an obligatory element of the feasibility study. The main objective of such analysis is to identify the most promising project set-up that can achieve the set project objectives by considering a list of relevant criteria. In principle, all the options are originally defined to achieve the same specific project objectives, which in most cases have to do with achieving performance indicators defined by the project and the relevant EU policy and operational programmes. In practice for RDI projects, the feasibility study will typically present a number of what can be best described as option sets. These are groups of options related to particular aspects of the project, such as its location, the building configuration or the technical specification of the equipment. Each set will include a number of alternatives, including (where appropriate) the do-nothing or the dominimum alternative that allows complying with existing regulation at the lowest capital investment. Option sets that are frequently presented include: 12

13 Strategic Options: A set of alternatives (e.g. A,B,C,D) which may concern the structure of the overall project. For example, alternative A may involve the regrouping of different research centres, while B proposes the construction of a new research facility. Technological Options: A set of alternatives (e.g. A,B,C,D) which may concern different technologies to be purchased by the project. Several (more or less sophisticated and costintensive) technological set ups may be available on the market that allow to carry out the proposed research, Location options: A set of alternatives (e.g. A,B,C,D) which may concern the location or the geographical set up of the project. For example, a higher education infrastructure project may be located in one of several locations, or split between a number of different locations. Architectural options: A set of alternatives (e.g. A,B,C,D) that concern the architectural design of the building where a project is located. For example a research centre may be located in a newly built building (option A) or in an old refurbished building (option B). Different energy efficiency measures can also be compared here. Depending on the particular project scope and objectives, one, or several of these option sets are chosen3 and are, in turn, screened against a set of qualitative criteria4 in order to determine the optimal alternative. For a Technological Options set for example, the project promoter might present four alternatives (A,B,C,D) and assess them against the following quantitative and qualitative criteria: Implementation time and timing risks Investment cost Operation and maintenance cost Economic costs and benefits5 Novelty of technology On the basis of this quantitative and qualitative assessment, the project promoter may then determine that Technological Option C is preferred. Ideally, the preferred option should be the one that achieves the project objectives in the most efficient way. Assuming that all options are defined to have similar impact, then the most efficient is the one with the lower financial net present value6. However, in some cases, several options may have similar net present values. In those cases, the preferred option may be other than the one with the lower net present value provided that there are there are qualitative aspects specific to this option that support the decision. If multiple options sets are considered, the promoter will then repeat this assessment for each of the option sets until the optimal alternatives from each set have been chosen. The preferred project 3 It should be noted that the EC guidance does not define the number of options that need to be considered in the feasibility study. It is the responsibility of the project proposer therefore to consider whether the number of options they have chosen to assess, present sufficient detail to allow the reader to properly assess the feasibility of the project. From JASPERS experience, project proposers tend to assess between 1-3 sets of options. 4 Each option set will be subject to a different set of criteria. 5 This implies usually a simplified economic CBA. Once the option is chosen a detailed CBA will be carried out. It should be noted that the EC (2008) guidelines suggest defining and identifying a small number out of a large list of possible project options. A simplified CBA with rough data estimates can then be carried out for the short-listed options in order to rank them and generate the preferred project option. 6 Which should be calculated taking into account the project investment cost and also the expected revenues and operating costs during the operational phase of the project. 13

14 option that will be later subject to the CBA is created from this set of optimal alternatives, for example Technological C, Location B, Architectural B, and Strategic Option D (See annexes 1-3 for case study examples). If the minimum requirements of these analysis cannot be met (e.g., financial sustainability, affordability, adequate profitability), then the analysis of alternatives may have to be revisited. 2.6 State aid issues In most RDI infrastructure projects, commercial activities and collaboration with industries is imbedded in order to bridge between knowledge development and its use for society in terms of new products and/or employment. This inclusion of commercial activities requires an analysis on the issue of State Aid in the context of co-funding from EU Structural Funds. Not all public funding, however, will constitute State aid. Even if a particular measure meets the conditions to be considered as State aid, being thus in principle incompatible with the common market, some derogation has been established (regarding RDI infrastructure projects the most relevant ones figure in Art of the Treaty on the Functioning of the European Union). From such derogations it follows that Member States may grant aid for investments in disadvantaged regions, aid to projects of common European interest or aid targeted at fostering fundamental research, industrial research or experimental development activities. There are two official documents that have been published by the European Commission and provide guidance on the design of RDI projects by taking into account potential state aid issues: The Community Framework for State Aid for Research and Development and Innovation (Official Journal C323 of )7 Commission Regulation (EC) No. 800/1008 of 6 August 2008 (general block exemption regulation). The Community Framework for State Aid for Research and Development and Innovation)8 provides clear guidelines on the design of RDI projects. The framework contains a definition of a research organization which means an entity, irrespective of its legal status or way of financing, which meets at the same time three conditions: The primary goal is to conduct research and to disseminate the results, All profits are reinvested in research, dissemination activities or teaching, and No undertakings that can exert influence upon that entity (e.g. as shareholders or members) enjoy preferential access to the research entity or to the research results. The following research activities, which constitute the primary activities of Research Organisations, are normally of a non-economic character, and thus, its financing will not be considered as State aid and its notification to the Commission will not be mandatory: Education for more and better skilled human resources

15 The conduct of independent RDI for more knowledge and better understanding, including collaborative RDI The dissemination of research results Technology transfer activities9 of an internal nature10 if all income from these activities is reinvested the primary activities of the ROs (which by definition will be non-economic). However, most beneficiary research institutions conduct economic activities which are in principle subject to free movement within the common market (e.g. contract research, licensing, renting out of facilities, consulting services, organization of conferences, seminars, paid graduate trainings, etc.). If the public funding is aimed to promote only the non-economic activities of the research organization (RO), legal and financial separation of the costs of both types of activities will be necessary in order to prove that no cross-subsidization of the economic activity takes place.11 There is a legal presumption of spill-over of public funding into economic activities if the two types of activities cannot be properly separated. In this case, the entire RO and its funding are subject to State aid rules.12 In case the public funding promotes economic research activities or if non-economic activities are not properly separated, the aid will have to be notified to the Commission, but might still be approved if it complies with the compatibility test described in detail in the Framework. The level of the Commission s assessment in this case will be proportional to the risk of distortion of competition. State aid for activities that, due to their scope or object, are far away from the market will be therefore less likely to give rise to a very extensive scrutiny. In light of the positive and negative effects of the measure, the Commission will determine whether the resulting distortions adversely affect trading conditions to an extent contrary to common interest. The Commission s final decision, based on this balancing test, may refuse the notified aid proposal, approve the aid or issue a conditional approval, imposing restrictions on the measure in order to reduce the resulting distortions. These might imply a reduction of the aid intensity, the diffusion of results, or other behavioural commitments. Moreover, if doubts arise as to the risk of crosssubsidization between the beneficiary s economic and non-economic activities, or between the 9 The R&D&I Framework mentions licensing, spin-off creation or other forms of management of knowledge created by the RO as examples of technology transfer activities. 10 By internal nature, the Commission means a situation where the management of the knowledge of the RO is conducted either by a department or a subsidiary of the RO or jointly with other ROs. Contracting the provision of specific services to third parties by way of open tenders does not jeopardise the internal nature of such activities (taken from Community Framework for State Aid for Research and Development and Innovation OJ C 323 of , p. 1 Footnote 25). 11 If the same entity carries out activities of both economic and non-economic nature, in order to avoid crosssubsidisation of the economic activity, the public funding of the non-economic activities will not fall under Article 87 (1) of the EC Treaty, if the two kinds of activities and their costs and funding can be clearly separated. Evidence that the costs have been allocated correctly can consist of annual financial statements of the universities and research organisations. Community Framework for State aid for Research and Development and Innovation OJ C 323 of , p. 1, point For different examples of the Decision practice of the Commission on the proper separation of economic and non-economic activities in the case of ROs, cf. VON WENDLAND, B. State aid and public funding for Universities and other Research Organisations, Competition Policy Newsletter, Number , pp , in pp

16 economic activities which are directly benefited by the aid and other activities performed in another market, measures might be imposed in view of establishing a strict separation of accounts. The Commission Regulation (EC) No. 800/1008 of 6 August 2008 (general block exemption regulation), sets out in detail the conditions under which aid for Research and Development falling under certain thresholds and complying with some other secondary conditions is exempted from the notification requirement. Art. 6 (e) gives individual notification thresholds for RDI projects per undertaking: 20 MEUR of aid (in gross grant equivalent) for fundamental research, 10 MEUR for industrial research and 7.5 MEUR for all other projects. Art. 31 stipulate that the aid intensity shall in principle not exceed 100 % for fundamental research, 50 % for industrial research and 25% of the eligible costs for experimental development. It can therefore be concluded that major projects (> 50 MEUR) exceed the given thresholds and would normally need to be notified individually, with the exemption of public financing of non-economic RDI activities. For more detailed information on state aid issues in RDI projects, please refer to a separate JASPERS working paper by Cruz Yabar (2012)13. 3 Preparation of the financial analysis and economic cost-benefit analysis 3.1 Purpose of the financial analysis and economic CBA Cost-benefit analysis (CBA) is a tool for decision making in project development. It helps to compare different options and to distinguish good and bad projects. This is done not only from the project developers point of view but also from the society s point of view. Risk and uncertainty are also explicitly assessed as part of the exercise. Cost-benefit analysis therefore consists of financial analysis, economic analysis and risk assessment. The financial analysis is carried out from the point of view of the project investor. The purpose of the financial analysis is to help determine whether the project will be financially sustainable in the longterm. More specifically, the analysis looks to ascertain the following: (i) (ii) (iii) (iv) estimation of the project revenues and costs, and their implications in terms of cashflow; definition of the project financing structure as well as its financial profitability; verification of the sufficiency of the projected cash flow to ensure the adequate operation of the systems and meet all investment and debt service obligations. calculation of the funding gap of the selected option and subsequently calculation of the eligible expenditure in revenue-generating projects according to Art. 55(2) of regulation 1083/2006. While the financial analysis assesses whether a project needs co-financing, the economic analysis assess whether a project is worth co-financing. For a project that is mainly focused on fundamental research it is most likely that financial analysis will not be a good proxy for economic analysis, i.e. economic benefits of increased knowledge cannot be appropriated only or mainly by the project promoter. Therefore socio-economic analysis will have to include other flows as well

17 The economic CBA is in essence a means to demonstrate to investors (especially those providing public money to the project) whether the venture is of benefit for the public good and hence, whether the money invested is in the public s best interest. The economic impacts are assessed against predetermined objectives and the analysis is usually made from the point of view of society as whole, intended as the sum of all individuals concerned. Usually, a CBA analysis limits itself to within national boundaries so that the societal benefit refers to the benefit to the sum of individuals in a nation state, however, for RDI projects, this may not always be appropriate. The objective of the CBA is to, where possible, identify and monetise all possible impacts of the action or project under scrutiny, in order to determine the related costs and benefits. Traditionally, costs and benefits are evaluated by considering the difference between a scenario with the project and an alternative scenario without the project. The output of the economic analysis is the economic rate of return of the project (ERR) as well the economic net present value (ENPV), and the economic cost/benefit ratio. 3.2 General principles of the cost-benefit analysis Incremental method Cost-benefit analysis evaluates the incremental financial and economic costs and benefits of a project, i.e. the project cost and benefits that would occur in a no-project-scenario are compared to those costs that occur in a project-scenario. As defined in the EU CBA Guide, the business as usual scenario (BAU) is the scenario which is most likely to occur if the project is not implemented. In a nutshell, BAU is a no-investment forecast of what will happen in future in the context under consideration. This scenario is not necessarily non-costly, because for already existing infrastructures, it comprises incurring operational and maintenance costs (as well as cashing the revenues generated, if any). If the BAU of the project is a situation where no infrastructure exists, the actual financial project cash flows are the incremental cash flows as no reference scenario exists. For the economic CBA, however, a reference scenario would need to be defined and compared to the project scenario Choice of reference period The choice of time horizon has an important effect on the results of the financial and economic CBA. Reference periods, or periods of projection, differ widely between the different sectors. Typically, the reference period corresponds to the period during which the project facilities will remain operational and in condition to deliver the expected objectives. For RDI projects, a reference period of years is suggested. In order for the project to be able to demonstrate a positive economic return, a long reference period is required. It should be noted that as research equipment tends to become obsolete over time, substantial investment in new equipment, upgrades or extraordinary maintenance to maintain the useful like of research equipment may be required, the costs of which will need to be accounted for in the financial analysis Choice of discount rates in the financial analysis and economic CBA The discount rate used in the financial analysis should reflect the opportunity cost of capital to the investor. The Commission recommends that a 5% financial discount rate in real terms is used as an indicative benchmark for public investment projects co-financed by the Funds (Working Document 4). Member states may choose a discount rate different to the 5% benchmark if: 17

18 it seems necessary because of the Member State s specific macroeconomic conditions; the nature of the investor is deemed to be non-standard. For instance, the discount rate can be higher for PPP projects, where the inclusion of private funds may increase the opportunity cost of capital. The nature of the sector concerned (e.g., transport, environment, energy, etc.) requires an alternative discount rate. Should an alternative discount rate be applied, the choice must be properly justified in the feasibility study. Member States should provide their own benchmark for the discount rate in their guidance documents. This reference must then be applied consistently. If the discount rate is expressed in real terms, the analysis should be carried out at constant prices. If current prices are used, a nominal discount rate must be employed. In the economic analysis, a social discount rate should be used which is estimated based on longterm economic growth and time-preference rates. In its Working Document 4, the Commission proposes a social discount rate of 5.5% for the Cohesion countries and 3.5% for the others. As with the financial discount rate, Member States can define their own social discount rate however, again the choice needs to be justified by specific socio-economic conditions and applied accordingly throughout all projects. 3.3 Financial analysis The financial analysis as required by the EU regulation consists of the following components: (i) (ii) (iii) (iv) Calculation of the financial internal rate of return (FRR) on the total investment (FRR(C)) and Financial Net Present Value of the investment (FNPV(C)); Determination of the EU grant amount, Calculation of the financial internal rate of return on national capital (FRR(K)) and the corresponding financial net present value of the capital (FNPV(K)). Evaluation of the sustainability of the investment; The funding gap analysis and the two profitability analyses require the use of the discounted cash flow (DCF) method. DCF requires that only cash flows are considered, i.e. the actual amount of cash being paid out or received by the project, and that cash flows predicted for the future have to be discounted back to the present year of analysis by using a financial discount factor. Non-cash accounting items like depreciation and contingency reserves must not be included in the DCF analysis. The general principles for data collection are described below. Subsequently the financial cash inflows and outflows are discussed, paying specific attention to the identification of financial in-flows (revenues in the sense of Art. 55 and other financing resources) that are relevant for RDI projects. The methodology to undertake the required analyses is explained in detail in the proceeding sections Principles for data collection The financial projections for the project should be prepared on the basis of a financial model for which the collected data should be consolidated, justified and consistent. The financial arrangements should 18

19 be certain and all assumptions should be conservative. Furthermore, only future financial in- and outflows should be considered. Consolidation: Projections for the whole project should be used, as opposed to a number of sets reflecting different components or geographical areas of the project (e.g. a university composed of different campuses in different cities). Justification: All relevant input data should be justified (in the CBA or with reference to other parts of the project feasibility studies). Consistency: The data should be consistent with the conclusions of the feasibility studies, the project description and the rest of the data in the financial projections. In particular, this refers to the following: (i) beneficiaries; (ii) demand; (iii) investment costs; (iv) revenues; (v) operating costs; and (v) expected changes of those variables during the projection period. Certainty: There should also be sufficient certainty regarding the financial arrangements for the financing of the project. Specifically, in the case of direct contributions from national authorities and loans from local lenders or international financial institutions, the beneficiary should demonstrate that it has assurances from the relevant parties that the funding is secured or ring-fenced. Conservative assumptions: The financial and macro-economic assumptions used should be conservative. Future financial data: Costs incurred in the past (sunk costs) and savings or efficiencies already achieved (realized benefits) should not be considered in the financial analysis Identification of cash-flow items of RDI projects Before any financial analysis is carried out, the relevant financial cash in- and outflow items need to be identified. This identification must be in line with the relevant EU regulation and CBA guidance Cash outflows Financial cash outflows consist of investment costs and operating costs. According to Working Document 4 (EC, 2006), investment costs are made up of fixed investments, start-up costs, costs related to intangible assets and changes in working capital over the entire time horizon. Fixed investments may include investments in land, buildings, plant & equipment purchase, upgrading of existing technology, unusual maintenance and repair, Start-up costs are directly attributable to the capital investment such as cost of site preparation; initial delivery and handling costs of materials for the capital works project; installation and assembly costs; costs of testing that the asset is functioning properly; and professional fees such as engineering expertise and technical assistance, Intangible assets can cover for example franchise licenses, trademarks, special trainings, certification to show compliance with standards etc. Changes in working capital are determined as the difference between the net working capital of the current year and the net working capital of the previous year. It should be noted that the VAT, if it is recoverable, is non-eligible for EU grant financing. 19

20 Operating costs comprise all the data on the disbursements foreseen for the purchase of goods and services, which are not of an investment nature since they are consumed within each accounting period (EC, 2008). The main categories of operating costs are: Production costs (materials and services, personnel, regular maintenance, general production costs, annual costs of certification etc.). Sales and distribution expenditures. Administrative expenditures. Items that do not give rise to a cash outflow must be excluded, specifically: depreciation and amortization, as they are not effective cash payments, any reserves for future replacement costs, because they do not correspond to a real consumption of goods or services, any contingency reserves, because the uncertainty of future flows is taken into consideration in the risk analysis and not through estimated costs in the financial analysis Cash inflows Cash inflows to the project are revenues, other in-flows and the residual value of the investment in the last year of the reference period. According to the COCOF note on Article 55, the overall cash in-flows to a project can be divided into: Revenues, that is, cash in-flows directly paid by users for the goods and/or services provided by the project, Other cash in-flows, that is, private and public financial contributions that do not stem from the sale of goods or services but are rather related to the financing of the project (such as loans, grants and other financing sources). This implies that not all inflows can be considered as revenues in the sense of Art. 55. Revenues received directly from users of the project are due to sales of goods and services by the project. In the case of RDI projects these may include revenues from renting out office space (in the case of science park projects) and revenues from contracted research carried out for the private sector. Other revenues, which typically account for a relatively small part of the revenues, are revenues from the sales of material, products, services and equipment (as may be the case in medical or biological research laboratories); and the commercialisation of intellectual property (such as royalties received from the licensing of patents) Even though contingencies are not included in the financial analysis and the funding gap calculation (see next section) they may be included in the total eligible costs used to calculate the planned contribution of the funds. However, they should not exceed 10% of total investment cost net of contingencies. 15 Please note that only those revenues generated by the project itself are considered and not those that are generated by third parties (such as tenants of science parks or spin-off companies). 20

21 The estimation of future operational revenues has to be linked to a detailed demand analysis for all markets concerned. The demand analysis will be the basis for estimating the quantities of goods and services to be sold and the tariff to be achieved. The concept of revenues does not include donations, research grants, subsidies etc. and other similar financing sources frequently used in RDI sector, which are considered as other cash in-flows. The distinction between revenues and cash-inflows is an important one to make as the other cash inflows, such as research grants and donations, usually make up for the largest shares of in-flows to RDI projects. In fact, RDI projects are usually considered non-net revenue-generating in the sense of Article 55 of the relevant EU regulation as the operating costs are typically higher than the revenues and hence the funding gap does not need to be calculated but would be set to 100% in this case. Another in-flow is the residual value of investment, i.e. the value that can be obtained from the sale of fixed assets at the end of the reference period. The residual value is positive only if the length of the reference period of the financial analysis of the investment is less than the technical and economic life of the project s assets. It is recommended to use the book value of the residual value, calculated as the investment + reinvestment depreciation (at market values) Objectives and methodology of different financial analyses In the following sections the methodological principles of the different financial analyses to be carried out according to the EU regulation are described in more detail. In the subsequent section, the cash in- and outflows are to be considered in the different analyses are discussed Analysis of investment financial profitability The analysis of investment financial profitability includes the calculation of two indicators: the net present value of the investment before community contribution (FNPV (C)) as well as the financial rate of return on investment before community contribution (FRR (C)). In order to calculate these two indicators, the discounted inflows from sales (revenues) and residual value are compared with the discounted outflows from operating costs and investments. If the financial net present value of the investment without the contribution of the Funds (FNPV/C) is negative then the project needs cofinancing by the EU (as long as it does not fall under state aid rules) as it would be a loss-making undertaking for the project investor to go ahead with the project. If the FRR(C) is lower than the applied discount rate (or the FNPV(C) is negative), then the revenues generated will not cover the costs and the project needs EU assistance Determination of the EU grant amount Article 55 of the EU regulation provides guidance on calculating the EU grant amount by applying the so-called funding gap methodology16. The funding gap rate of the project is the share of the discounted cost of the initial investment not covered by the discounted net revenue of the project Please note that article 55(6) states that the provisions of are not applicable to revenue-generating projects subject to State aid rules (for more information on state aid, see section 2.5). 17 Revised COCOF Guidance Note on Article 55 on ERDF and CF of Council Regulation No 1083/2006: Revenue-generating projects, published on 30/11/

22 The aim of the funding gap method is to ensure firstly, that the project has enough resources to be implemented, and secondly, that it is not over financed. The calculation also ensures a minimum level of project profitability to borrow money. The funding gap also corresponds to the maximum discounted eligible expenditure that can be cofinanced by EU funds. It is equal to the part of the discounted investment costs of a project that cannot be financed by the project itself through the revenues it generates, which means that it is the difference between current investment costs and current net revenues, i.e. current revenues minus current operating costs, as expressed by the following formula: FG = (DIC - DNR) / DIC With FG = funding gap rate; DIC = discounted investment cost; DNR = discounted net revenue (which is calculated as discounted revenues discounted operating costs + discounted residual value); The EU grant is then calculated as: EU grant = FG * EC * MaxCRpa With EC = eligible costs; MaxCRpa = maximum co-funding rate fixed for the priority axis in the Commission s decision adopting the operational programme (Art. 53.6). In the rare case that a particular project is predicted not to generate any revenues (e.g.: RDI centre financed on donations and grants only)18, the project is regarded as non-revenue-generating and no funding gap rate is calculated. Whenever revenues are expected in the project, the project is considered as a revenue generating one (art 55.1), and operational costs (discounted) and revenues (discounted) have to be estimated in order to calculate the DNR. If revenues are lower than the operational costs the project is a non-net-revenue generating project (DNR is negative) and the funding gap rate is 100% and does not need to be calculated. If the DNR is positive and the project is considered as net-revenue generating, the funding gap rate needs to be calculated as described in the above formula. It is important to note here that the calculation is based on a comparison of with- and without project scenarios and that net revenues are therefore incremental net revenues This should be justified by some particular reasons. RDI projects should always exploit possible commercial activities the will lead to a revenue stream for the project. 19 See EC (2006), Guidance on the methodology for carrying out cost-benefit analysis, Working Document No. 4 for more details on the calculation of the EU grant. 22

23 Evaluation of financial sustainability According to the EC 2008 guidelines, a project is financially sustainable when it does not incur the risk of running out of cash in the future. In RDI projects the rate of return, FRR(C), may show that the investment will never be profitable in the long term. It should therefore be clearly specified which resources the project will draw on when the EU contribution is no longer available. To do so, project promoters should show how over the project time horizon, sources of financing (including revenues and any kind of cash transfers) will consistently match disbursements year-byyear. Sustainability occurs if the net flow of cumulated generated cash flow is positive for all the years considered. The sources of funding for projects may consist of: Private equity Public sector contribution consisting of: local funding, regional funding, central funding EU grant Loans from international financial institutions (such as EIB)/Commercial loans Other financial resources such as bonds The sources of funding should be shown in a table, providing details of when they are disbursed. The verification of the project financial sustainability implies a cumulative positive cash flow for each year of the projection. Temporary shortfalls can be covered by a revolving credit provided that the assumptions behind this revolving credit are reasonable with regards to the local financial markets. Generally speaking, except in some cases in which project revenues and costs can be ring-fenced, the assessment of the financial sustainability of the project will require the preparation of financial projections for the overall system (for example the combination of education and research facilities). This is typical for projects in the RDI sector where the costs of the different components of the system have to be covered with the same source of revenues (e.g. tuition fees, patent fees, fees from contractual research). RDI projects, such as research infrastructure and higher education projects are often not financially sustainable even after community contribution due to limited financial inflow. A strong support from local or national government is therefore crucial. In such cases, however usually two issues should be considered: 1. Financial capacity of local or national government (to what extent is the financial commitment provided at the project development stage likely to be maintained in bad financial times?) and 2. State aid issues (discussed in Section 2.6) Analysis of financial profitability of national capital The final part of the financial analysis is the calculation of the financial return on national capital, which is expressed notably by two indicators: FNPV(K) and FRR (K). The financial net present value of the capital FNPV(K) is the sum of the net discounted cash flows accruing to the project promoter 23

24 due to the implementation of the investment project. The FRR (K) is the financial rate of return on capital. The objective of these indicators is to assess the project performance from the point of view of the assisted national public and/or private entities (project promoters) in order to understand in how far they benefit from an increased project net return because of received EU funds and hence a decrease in their capital needs. When computing the FNPV(K) and FRR(K) the national sources of funding are accounted for, but not the EU contribution. The national resources are considered as outflows (but inflows in the sustainability calculation), while investment costs are not considered. FRR/K after Community assistance should not be higher than the required return on equity for companies in the sector since that would show an excessive return to the project promoters at the expense of the EU tax-payer. The EC standard financial discount rate is 5% real, and the return for the beneficiary should, in principle, be aligned with this benchmark In fact, a substantial positive FRR(K) would lead to the suspicion that the EU grant would bring supra-normal profits to the national beneficiaries (be they public or private). In RDI projects the FRR (K) happens often to be negative. The financial sustainability analysis should therefore clearly prove the financial sustainability of the project in the long run Cash in- and out-flows to be considered in different financial analyses In the investment financial profitability analysis (/C indicators) and the funding gap calculation only revenues directly paid by users are considered but not the financing sources(such as loans, subsidies, grants, donations), while in the financial profitability analysis of national capital and the sustainability analysis also the financing sources are considered. The investment financial profitability analysis and the funding gap aim at determining the amount of the investment costs that cannot be financed by the project s own revenues but needs co-financing by the EU (in case of the funding gap calculation). The analysis of financial profitability of national capital (/K indicators) considers the financing structure of the project. Its objective is to determine the profitability of the investment from the point of view of the project owner after community assistance. The financial sustainability analysis also considers all revenues from sales as well as all financial resources and compares them with the overall out-flows (investment and operating costs) over the whole project period. Its aim is to avoid that the project runs out of cash in the future. Please note that there is a significant difference between the analysis of financial profitability of national capital and the financial sustainability analysis. The latter considers public and private contributions (such as grants from national ministries or private donations) and the EU funding as inflows, while the analysis of financial profitability of national capital does not consider the EU contribution and public and private national financial resources are included as in-flows to the project and not as outflows. 24

25 Table 2: Financial cash-inflows for RDI projects considered in different elements of financial analysis Analysis investment financial profitability of Funding gap analysis Financial profitability of national capital Financial sustainability Indicator FRR (C), FNPV (C) - FRR (K), FNPV (K) - Objective Assess the ability of the project to generate financial returns without considering the cash flows due financial resources Determine the contribution from ERDF to revenuegenerating projects Determine the profitability of the investment project from the point of view of the project owner after community assistance Assess the risk of running out of cash in the future Consideration of financial in- and out-flows Revenues National Financing Sources National public contribution (e.g. grants from national ministry of research) National private contribution (e.g. donations from private foundations) Loans Other resources (operating subsidies for universities) EU Contribution From ERDF operational programs Other EU research grants Residual value (only if it corresponds to real inflow for investor) Note that the - and + signs indicate the nature of the cash-flows. For instance, national public contributions are considered inflows when checking the project sustainability and as outflows when estimating the return on national capital (K). O indicates that the cash-flow is not considered. Source: authors based on EC guide (2008), p

26 The residual value is an inflow. It is always considered for calculations of financial rate of return on investment, FRR(C), and financial rate of return of capital, FRR(K) as well as in the funding gap calculation to determine the value of DNR. It is however not relevant to decide whether a project is revenue-generating or not. It should be considered in the sustainability analysis only if it corresponds to a real inflow for the investor. The following table provides an overview of financial cash-inflows for RDI projects considered in different elements of financial analysis. 3.4 Economic cost-benefit analysis While the financial analysis aims at quantifying the project s financial costs and revenues for the project owner, the purpose of the economic analysis is to assess whether the project is likely to have a positive net contribution to society. Typically, the economic benefits of RDI project cannot be captured solely by financial revenues20. This is because the market for RDI products is imperfect, i.e. externalities exist, which means that the benefits created by the project that occur in the long run, and for a wider range of stakeholders (i.e. others than the direct users of the infrastructure), are not captured in the financial analysis. One of the objectives of the economic CBA is to identify and quantify those externalities (economic benefits). Usually RDI projects have a positive economic return after the economic externalities have been added, even though difficulties in demonstrating a financial return exist. The positive economic return makes the project worth co-financing by EU or other public funds. A positive economic return implies that the present value of the project economic benefits exceeds the present value of the project economic costs. In practical terms, this is expressed as a positive ENPV, as a Benefit/Cost (B/C) ratio higher than 1, or when the project ERR exceeds the discount rate used for the calculation of the ENPV. To help address encountered difficulties in performing the economic CBA, a simplified CBA framework for RDI infrastructure projects is presented below. The framework is based on JASPERS experience in the RDI sector. In the following sub-sections, the framework is discussed, paying attention to: Conversion of financial costs into economic costs Identification and quantification of economic benefits Calculation of the economic rate of return Conversion of financial costs into economic costs The economic analysis takes into account the costs that occur for the project owner and for society. The calculation of the project economic costs involves the conversion of project investment and operating costs from market to economic prices. Due to market distortions (e.g. taxes, monopolies, barriers to trade, minimum wages, etc.), market prices that are used in the financial analysis may fail to reflect opportunity costs or willingness-to-pay by consumers. In order to take possible distortions 20 These revenues are the direct financial revenues that the project owner receives. In theory on perfect market (i.e. a situation without externalities) the prices for goods and services reflect exactly the economic value of the goods and services produced. 26

27 Table 3: Explanation of conversion factors Cost item Explanation Conversion factor Traded goods Nontraded goods Skilled labour Nonskilled labour This category comprises all goods and services included in the project cost that can be valued on the basis of world prices. In a context of an open economy with international tender for the procurement of the equipment, materials and services, this category will normally cover most of the project costs. No specific conversion is required since market prices are assumed to reflect economic prices. This category comprises all goods and services that have to be procured domestically, like for example domestic transport and construction, some raw materials and water and energy consumption. The conversion is usually done through the Standard Conversion Factor (SCF). The SCF is usually computed based on the average differences between domestic and international prices (i.e. FOB and CIF border prices) due to trade tariffs and barriers. However, given that costs within this category are normally low with regards to the total project costs and that a high percentage of the Member State trade is internal to the EU and therefore by definition not subject to trade tariffs, the SCF should be very close to 1. In any case and since the SCF is common to all projects in the same country, its value should be provided by the Managing Authority. This category comprises the labour component of the project cost that is considered scarce and therefore adequately priced in terms of opportunity cost. No specific conversion is required since market prices are assumed to reflect economic prices. This category comprises the labour component of the project cost that is considered in surplus (i.e. in a context of unemployment) and therefore not adequately priced from the economic point of view. The correction to reflect the opportunity cost of labour is made by multiplying the financial cost of un-skilled workers by the so-called Shadow Wage Rate Factor (SWRF), which can be calculated as (1-u)*(1-t), where u is the regional unemployment rate and t is the rate of social security payments and relevant taxes included in the labour costs. In practice, the SWRF is accounting for the positive impact of the project in a region with high unemployment, since SWRF (always lower than 1) decreases as unemployment increases, resulting in a lower economic costs and therefore a higher economic return. The SWRF is projectspecific and therefore should be calculated for each project. 1 Close to 1, to be provided by the Managing Authority. 1 SWRF Calculated as (1-u) x (1-t) 27

28 Land acquisition This category comprises the land implicitly used in the project, even when no financial cost is included as part of the project cost (for example if the land for the landfill was provided free of cost by the project beneficiary). Correction of land costs intends to adjust for the net output that would have been produced on the land if it had not been used by the project. Rather than applying a conversion factor to the financial cost like in the case of non-traded items or non-skilled labour, the economic cost of the land, which is also project-specific, has to be calculated separately. However, in those cases in which the land has been acquired at market value, it can be assumed that the financial cost is a good proxy of the economic cost since the market value should reflect the present value of the future output. Case by case calculation instead of conversion factor into account, border prices or marginal costs, shadow wages, etc. may be used. The shortcut to computing shadow prices is to apply conversion factors to the financial prices, which implies the breakdown of the project cost into the different categories, i.e. traded items, non-traded items, skilled labour, non-skilled labour and land acquisition. Table 3 summarises the required treatment specified for each case and summarizes the corrections from market prices to economic prices as indicated. The financial costs are converted into the economic costs by multiplying by the corresponding conversion factor - note that the relevant costs to be considered for the economic analysis are the project incremental costs. See Table 3 for summarised information on conversion factors and refer to the EC guide (2008) for more detailed information. Indirect taxes (e.g. VAT), subsidies and pure transfer payments (e.g. social security payments) must be deducted from financial costs. However, prices should be gross of direct taxes, and if specific indirect taxes/subsidies are intended to correct for externalities, then these should be included. As explained above, due to the existence of externalities, financial revenues capture only a fraction of the economic benefit of the project. The externalities (economic benefits) created by the project therefore need to be identified and quantified21. For example, if successful, RDI outputs can potentially have far reaching benefits for the wider economy, e.g. health impacts, which are however both difficult to predict and to quantify Identification and quantification of additional economic benefits The identification and quantification of CBA for RDI projects is often made difficult due to a number of issues related to the estimation of economic benefits that, although applicable to most types of infrastructure, are often particularly pronounced with RDI projects. More specifically, the difficulties in performing the CBA are due to: 21 It depends on the particular project whether the financial revenues are included as economic benefits or not. However, double-counting of benefits should be avoided. 28

29 Intangible benefits The benefits of RDI projects are normally attributed to the dissemination of knowledge, and are therefore often intangible and difficult to convert into monetizable units. Uncertainty - The achievement of RDI benefits is often subject to a high degree of uncertainty and risk. The size of the benefit may exceed or fail to meet expectations, or may not materialise at all. In general, fundamental research has a low probability of being successfully commercialised. Wider benefits If successful, RDI outputs can potentially have far reaching benefits for the wider economy, e.g. health impacts, which are both difficult to predict and to quantify. The suggested approach for the economic analysis of RDI is presented below. This approach is based on the following pillars in order to address the issues (highlighted above) and to reduce the complexity of the analysis. Focus on direct project outputs To address the issue of the intangible nature of the benefits, the framework focuses exclusively on quantifiable project outputs (e.g. graduates, licenses, publications) and their direct short and medium term benefits. The use of market values as proxies Where possible the framework relies on market values as a proxy for the economic value to society of an output. The economic value of a license, for example, is valued using the predicted financial revenue that the facility will receive for that license. This reduces the complexity of the analysis and provides a transparent and justifiable means for quantifying the economic benefit. It is apparent, however, that in certain instances, this method of valuation is likely to underestimate the full economic benefit of the output. It is suggested that given the uncertainty surrounding the majority of RDI related benefits, that this low probability will, to some extent, balance out the potentially underestimated benefit to the economy. Exclusion of wider benefits that occur outside the project reference period - In principle; a CBA should include the full effect of each benefit as it spreads from output to outcome to eventually impacting the wider economy. In practice, however, it is assumed that long-term impacts, such as population wide health benefits, occur after around 25 years, and are therefore, beyond the typical 25 year reference period of most RDI projects and beyond the scope of the CBA. It should be noted that the primary purpose of the framework is to provide project promoters with a transparent and justifiable framework that produces economically viable projects. The framework is provided as a temporary solution in the absence of proper guidance. The assumptions applied to the CBA have reduced the complexity of the analysis but also reduced its scope, meaning that, even accounting for uncertainty, the true economic impact of the infrastructure may, in some instances, be underestimated. As previously noted, The EIB University Research Sponsorship Programme (EIBURS) is in the process of undertaking a three-year academic study into the CBA of RDI projects The identification of direct outputs and benefits On the basis of JASPERS experience during the Programming Period , JASPERS have created a set of direct outputs and benefits that can normally be attributed to RDI projects. The outputs have been chosen based on their relevance to the project type and the ease with which reference market values can be found or generated. 29

30 In Annexes 1-3, each project type is presented with a set of outputs that are appropriate to the individual project type. As discussed, the boundaries of the projects have been narrowly defined; and for this reason, it may be necessary for the project promoter to refer to multiple annexes, or to Annex 4 where a full set of outputs for RDI projects is provided. Table 4: Examples of RDI outputs and benefits Outputs Building Related Outputs Savings in energy use due to renovation of building. Residual value of infrastructure Job Related Outputs No. of jobs created for individuals over 35 Education Related Outputs No. of Masters graduates. Research Related Outputs No. of research contracts No. of article in impacted journals Commercialisation Related Outputs No. of spinouts No. patent granted No. of Licence deals Short-term & Medium term benefit Environmental and economic benefits linked to energy efficiency Benefit to society of residual value of investment Benefit to society of Creation of new jobs Benefit to society of educated labour force Benefit to society of new knowledge creation and dissemination Benefit to society of new knowledge creation and dissemination Benefits related to growth of company and knowledge transfer to the economy Benefit attributed to national registration of patent not captured by licensing, e.g. assignment of rights, competitive edge, improved market position Societal benefit attributed to commercial application of IP The table above provides an overview of some of the outputs commonly attributed to RDI projects along with the proposed benefits. The outputs described are presented as an example, and the list is not exhaustive. The outputs have been loosely categorised by output type, specifically: building benefits, job benefits, education benefits, research benefits and commercialisation benefits. It is suggested that the project promoter creates their own list of outputs and benefits relevant to their project, based on the menu of outputs provided in this document. The promoter is free to add their own outputs to the lists provided. Where this is done, the promoter should take care to avoid double counting with existing benefits and should provide justification for the inclusion of the outputs. Box 3: The identification of wider, long-term benefits As noted in Section 3.4.2, the model proposed assumes that the wider, long-term benefits occur beyond the reference period and for this reason are not considered in the CBA. This is an assumption that has been made to avoid the need to quantify these benefits, and it has been shown that most projects are economically viable without the inclusion of such benefits. The project promoters, is however, free to include them if they wish. If done, JASPERS will normally adopt a reactive approach and check the assumptions and the justification made by beneficiaries if they come forward with proposals in this area. 30

31 Quantification of economic benefits Various methodological approaches exist to quantify and value economic benefits. Techniques frequently used include: The use of market prices as a proxy to calculate the benefits of the project to society, e.g. the increased salaries paid to students that graduate from a particular course. The revealed preference methods, which infers values from observed behaviour (e.g. hedonic price, travel cost method) The stated preference methods, where individuals are directly asked to state their willingness-to-pay in surveys (e.g. contingent valuation methodology). The choice of methodology to employ will depend to a large extent on the particular benefit being measured, and for this reason, it is generally unusual for a CBA to rely on a single methodology. As discussed, the structure of the CBA that is proposed in this paper primarily relies on the use of market values as a proxy, as shown in table 3 below. JASPERS also encourages the use of the revealed preference methods and stated preference methods as this may allow in certain cases to generate project-specific data. The table overleaf is a continuation of Table 4 above. In addition to the output and the benefits, the proposed quantification methods and value calculations suggested to quantify and monetise the benefits of RDI projects are also included. Market values will need to be derived on a project-by-project basis as they will usually be specific to the country or field within which the project is operating. In certain instances it may be possible to transfer/adapt values from existing national guidelines. Some national authorities authorise a standardised approach to economic CBA in the RDI sector and have created their own set of values directly linked to the national circumstances. Other potential sources include the OECD which has developed monetary values for a range of outputs and indicators relevant to RDI projects. All of the academic outputs included are accepted measures of academic output and most countries in Europe have recognised national systems which convert these into points and then from this decide how much public funding to allocate per point. By implication, therefore, there is a monetary value and a perceived benefit to society. In Annex 1-3, the calculation methods are explained in more detail and specific versions of this table are provided for higher education, R&D facility, and science park projects. In Annex 4 an indicative table is provided with a list of indicators of economic benefits developed based on past JASPERS project experience. 31

32 Table 5: Example of RDI project outputs and benefits, quantification methods and valuation calculations Outputs Short-term & Medium term benefit Quantification method Value Calculation Building Related Outputs Savings in energy use due to renovation of building. Residual value of infrastructure Job Related Outputs Environmental and economic benefits linked to energy efficiency Benefit to society of residual value of investment Market value as a proxy Market value as a proxy [GHG savings in MtCO2e] x [Value for each MtCO2e according to national energy efficiency guidelines] 20-40% of initial investment costs No. of jobs created for individuals over 35 Benefit to society of Creation of new jobs Market value as a proxy [Av salary for person over 35] X [no. of jobs for over 35s created] Education Related Outputs No. of Masters graduates Benefit to society of educated labour force Market value as proxy Research Related Outputs No. of research contracts No. of Article in impacted journal Commercialisation Related Outputs Benefit to society of new knowledge creation and dissemination Benefit to society of new knowledge creation and dissemination Market value as proxy Values attributed from research peers ([Average national salary of masters] [Average national salary] ) X [number of jobs] (Average volume of contract research from private funding) x number of research contracts ([Number of points attributed for funding nationally per published paper] X [value of each point according to national funding schemes]) X [number of papers published] No. of academic consultancy contracts Benefit to society of company growth and new knowledge creation Market value as a proxy [Av value of consultancy contract] X [No. of consultancy contracts] No. of Spinouts Benefits related to growth of company and knowledge transfer to the economy Market value as a proxy ([Average national salary] X 5 X 10 X 50%) No of national patents granted Benefit attributed to national patent filing not captured by licensing, e.g. assignment of rights, improved market position Market value as proxy [Average value of patent] X [number of patent granted] No. of Licence deals Societal benefit attributed to application of IP Market value as proxy [Average value of licenses] X [number of licenses] 32

33 3.4.3 Calculation of the economic rate of return The final step in the project economic analysis is the calculation of the project s ENPV (present value of economic benefits present value of economic costs), the B/C ratio and the ERR. The social discount rate for the calculation of the ENPV and B/C is 5.5% in real terms. Examples of each calculation are provided in Annexes Risk Assessment Risk (in terms of CBA) refers to the assessment of the capacity of the project to achieve the desired objectives. The desired objectives are measured in terms of the impact in terms of economic return, as well as the associated financial profitability indicators that make the project financially viable. The relevant profitability indicators are FRR/K and corresponding FNPV/K (calculated after Community assistance), and the ERR and corresponding ENPV. The risk assessment is comprised of two parts, a sensitivity analysis (quantitative) and a risk analysis (quantitative and qualitative). The sensitivity analysis aims at identifying the critical variables and their potential impact in terms of changes in the profitability indicators, while the risk analysis aims at estimating the probability of these changes actually taking place, with the results expressed as an estimated mean and standard deviation for those indicators. Another important aspect of the risk analysis is the (qualitative) identification of risk mitigation measures. In the following, the main elements of the sensitivity analysis and the risk assessment are presented. More detailed methodological guidance can be found in the EC guide (2008). This section includes an overview of the some of the risks commonly associated with RDI projects, and the corresponding mitigation measures Sensitivity analysis The first step of the sensitivity analysis is the identification of critical variables. These are those variables whose variations have the greatest impact on a project s financial and economic performance indicators. The EC CBA guide (2008) recommends considering those variables as critical for which a variation of 1% results in a variation of more than 1 percentage point of the financial and economic profitability indicators. This basically implies the calculation of the values of the profitability indicators after variations of +/- 1% in the following variables: (i) project investment costs; (ii) revenues; (iii) operation and maintenance costs; (iv) economic benefits; (v) economic costs (investment); and (vi) economic costs (operation and maintenance). The following table provides an overview of typical critical variables grouped into the categories mentioned above: investment costs, operating costs, revenues and economic costs and benefits that typically apply to RDI projects. The list is indicative and should be adapted to cover specific project risks. When identifying the critical variables of an RDI project, the risks that can materialise during both the investment and operational phase should be considered. From experience in past project assignments, JASPERS normally recommends to pay particular attention to operational risks of RDI projects as they may have significant impacts on the project success in the medium and long run and tend to be neglected by project developers. Typical risks that RDI projects face during the investment phase concern the procurement schedule. For example during the construction of a research centre high-tech equipment can lead to procurement bottlenecks as there may only be a limited number of suppliers. Risks for cost overruns should also not be underestimated. When state-of-the art technology is installed, it is often difficult to predict the costs as recurrent testing and calibration may lead to delays and higher costs. 33

34 Table 6: Examples of potential critical variables Categories Examples of potential critical variables Investment costs - Duration of the construction site (delays in realisation), hourly labour costs, hourly productivity, useful life of the equipment and manufactured goods, cost of concrete aggregate etc. Operating costs - Price dynamics: rate of inflation, growth rates of real salaries, energy prices etc. - Number of staff employed, efficiency of employed staff Revenues - Demand data: demographic evolutions, development of industry (demand for research results) and demand for contracted research, evolutions on labour market (demand for university graduates and impact on demand for education services in the area) Economic costs and benefits Source: authors, based on EC (2008) - Shadow prices of goods and services, valorisation of externalities (ex. availability of research grants and contracted research etc., evolution of salaries) Once the critical variables are identified, as a next step the EC guide (2008) suggests to assign a probability distribution to each of the critical variables. In particular, a precise range of values around the best estimate should be defined. This range of values may be derived from different sources, such as experimental data, distributions found in the literature for benchmark cases, benchmarking cases available in the country from the current financing period or consultation of experts. For all identified critical variables the calculation of the so-called switching values is also recommended, which is the maximum variation (in percentage) in the critical variable that is permitted before the FNPV or ENPV (whichever is relevant for that specific critical variable) turns negative Risk analysis The risk analysis has a quantitative and a qualitative part. The quantitative risk analysis aims at the quantification of the level of certainty of the calculated values for the profitability indicators. There are generally two options to do this: a) If there is reasonable information to define a probability distribution for the critical variables as detailed above, then the Monte Carlo method can be applied. This method consists of assigning random values to all the critical variables simultaneously (assuming a normal distribution between a maximum and minimum possible value) for a number or repetitions sufficiently high in order to come up with a probability distribution for each one of the profitability indicators. Then each profitability indicator will be expressed as the mean and standard deviation of the values obtained after all the repetitions. b) If there is no reasonable information to define a probability distribution for the critical variables, then the risk assessment will be carried out by defining an optimistic and a pessimistic scenario that includes all the critical variables, and then calculating the two extreme values for the profitability indicators based on those two scenarios. The qualitative risk analysis focuses on the relevant factors that may affect the values of the critical variables as well as the mitigating measures already included in the project in order to limit the impact of those factors. It is crucial to define mitigation measures already at the project planning stage. In particular, in the planning stage optimism bias should be avoided. Optimism bias may have technological causes (e.g. imperfect information on unproven technology), psychological causes 34

35 (tendency of project developers to be over-optimistic) and political-institutional causes (actors are incentivised to be more optimistic to promote their own project). In the following table some examples of risks during investment phase and the operational phase with an expected high impact on the project success are presented along with the respective possible mitigation measures. As regards the investment phase, for example, project investment cost could be a critical variable. In particular in research infrastructure projects that include the installation of an innovative technology poor testing results led to a high amount of change requests by the researchers, which resulted in delays and cost overruns. The preparation of detailed designs and tender documents with realistic cost estimates and contingencies as part of the feasibility studies could be a mitigating measure to control this risk. An example for risks encountered during the operational phase could be the lack of academic and departmental buy-in, which leads to a failure to achieve the expected business results. A mitigation measure can be a close monitoring of achieved deliverables. 35

36 Table 7 Examples of risks and risk mitigation measures for RDI projects Project phase Investment phase Operational phase Risk Changes requested during testing phase of technology used in research infrastructure, which lead to delays in construction Objectives are not met as the right staff needed to carry out the research have not been attracted Lack of Academic and Departmental buy-in Poor capture of full user requirements. Inadequate training too little too late Poor business processes Costs could rise significantly during the course of the project Impact on project Delays. Failure to achieve the research results and the associated economic benefits Failure to achieve business benefits. Ineffective work practices. More fragmented processes. Poor Communication. Failure to meet minimum requirements. Failure to achieve business benefits. Need to rework solution after rollout. Failed delivery. Users unable to use system properly. A system based on overcomplicated, badly engineered business processes will itself be overcomplicated and badly engineered. University may be unable to financially support the project. Risk Reduction Actions Agree specification. Agree priorities. Reasonable consultation on format. Identify upfront whether there is sufficient local expertise, ability to attract world class talent Remuneration (Competition, local environment) Ensure User Requirements are properly assessed. Communications and planning focus. Appoint Communication Manager. Focus on User Requirements capture at start of project. + Best people with appropriate knowledge and authority to decide and time to be involved. Accountable process owners. + Executive leadership and on-going involvement. Ensure training staff are involved from start of project. Revised business processes before constructing user spec. Ensure tight control of costs. Have a pot of money available in case risk occurs If it happens: Triggers & Actions Triggers Swamped with changes. Delay in signing off items. Actions Managerial decision on importance, technically feasibility and observance of time constraints. Triggers Surveys Actions Put in place the right institutional set-up, analysis and early start of negotiations with relevant researchers Triggers Staff Survey, Benefits realisation monitoring Actions Review deliverables Triggers Project Sponsor/Feedback from User Reps Actions System accountability built into project and documentation standards. Monitor through workshops, feedback from pilots. Triggers Feedback from training sessions/training manager Actions Review training procedures, enhance. Triggers Business Process Analysis Reports/Critical User. Actions If system development is getting bogged down in complex processes, review project. It may be necessary to go back to business processes and start again. Triggers Project Budget/Project Manager Actions Use contingency funds. 36

37 Annex 1: Project Development and Economic CBA of Higher Education Projects 1 Description of typical projects Higher education institution projects usually consist of the development of a facility, or expansion of a pre-existing one, for educational purposes, which is affiliated to a university, college of technology or any other institution of tertiary education. In most cases higher education institutions do not only host education activities but also research activities given the synergies between research and education. For example, whilst university lecturers would be expected to devote a proportion of their time to teaching, they would be attracted to an academic tenure if they were able to conduct research. It is also becoming increasingly commonplace for universities to engage in commercialisation and knowledge transfer activities such as academic consulting, contract research, licensing and spinout formation. It may, therefore, be appropriate to attribute commercialisation or business related outputs and benefits to higher education projects. JASPERS has been involved in a limited number of major HEI projects, i.e. projects whose main objective is the improvement of education22, in the EU financing perspective One example is the following. A case study of a typical HEI project is presented in Sub-Section 7. Construction and equipment of 2 Faculties at University of Ljubljana, Slovenia in order to provide new opportunity for educational and research activities and to enable technology transfer into the economy ( M EUR of total investment costs). 2 EU Policy Framework and Objectives of Higher Education Projects As discussed in Section 2.3, a project is built to attain both project specific objects and to help fulfil national and EU policy objectives. As a reference for project promoters, the broader objectives that may potentially be relevant for higher education projects are briefly identified herein. The case study in Section 7 of this annex provides an example of project specific objectives, including performance indicators. Higher education is important to national economies, both as a significant industry in its own right and as a source of trained and educated personnel for the rest of the economy. Higher education institutions also play an important role in the performance of R&D. The EU's growth strategy for the coming decade highlights higher education as a key policy area where collaboration between the EU and Member States can deliver positive results for jobs and economic development. In this context, Member States agreed in the modernisation agenda for higher education of a target of 40% of young people (aged 30-34) to have a higher education qualification or equivalent by According to the European Commission, the Bologna Process24 launched the European Higher Education Area in 2010, in which students can choose from a wide and transparent range of high quality courses and 22 HEI projects are distinguished here from research infrastructure and science park projects. Both project types may be part of a university and/or promoted by a university or associated to a group of universities, but the objective of the projects themselves will be to build a research facility or science park (though it may of course be used to educate). For more detailed discussions of research infrastructure and science park projects refer to annex 1 and 3 respectively

38 benefit from smooth recognition procedures. The Bologna Declaration of June 1999 put in motion a series of reforms needed to make European Higher Education more compatible and comparable, more competitive and more attractive for Europeans and for students and scholars from other continents. Reform was needed then and reform is still needed today if Europe is to match the performance of the best performing systems in the world, notably the USA and Japan. The three overarching objectives of the Bologna process have been from the start: introduction of the three cycle system (bachelor/master/doctorate), quality assurance and recognition of qualifications and periods of study. In the Bucharest Communiqué25, April 2012, the Ministers identified three key priorities - mobility, employability and quality, and emphasised the importance of higher education for Europe's capacity to deal with the economic crisis and to contribute to growth and jobs. Ministers also committed to making automatic recognition of comparable academic degrees a long-term goal of the European Higher Education Area. The Bucharest Communiqué builds on the Leuven Communiqué of 2009, which established priorities for : Ensuring a quality higher education system Adopting a two- or three-cycle system of study (BA, MA, PhD) Promoting the mobility of students and academic and administrative staff Introducing a credit system (ECTS) for the assessment of study performance The Recognition of levels: adopting a system of easily identifiable and comparable levels The Active involvement of higher education institutions, teachers and students in the Bologna Process and student participation in the management of higher education Promoting a European dimension in higher education Promoting the attractiveness of the European higher education area Lifelong learning A European higher education area and a European research area two pillars of a society based on knowledge The development of individual HEI projects would aim to increase regional and national higher education capacity, meet future demand for graduates of industries of interest in the future, to enhance economic transformation, seek to increase the qualifications of the average individual and to increase attractiveness of regions for international investors. It is important that these project objectives correspond to national policy as set by the Operational Programmes and EU policy as mentioned above. Thus, project proposals for Research Infrastructures which seek funding from ERDF are to be developed in the context described above and the priorities that arise

39 3 Demand analysis The demand analysis provides quantitative and qualitative evidence to assure the reader that the proposed infrastructure will satisfy its objectives, be consistently utilized, and that its outputs will be used, and be of value to society. In the case of a higher education infrastructure project, the project developer would primarily need to provide evidence that the infrastructure is, and will continue to be, in demand and therefore used by the target group of users (i.e. students and researchers). Alternatively stated, the feasibility study will need to provide evidence to show that a sufficient number of students of researchers exist to ensure that the infrastructure will be consistently utilised. The analysis will further need to show that the outputs that will be generated by the facility will continue to be, relevant and utilised by the wider economy. The importance of this second stage of the analysis will depend to large extent on the nature of the project and its outputs. If it is a pure education project and the primary output is educated individuals, it can be assumed that educated individuals are usually in demand, however, the data and information on the local and national labour market conditions would be useful, particularly if the educational activities focus on a specific niche disciplines. If the project has a research or commercialisation component to it, the second stage of the analysis becomes critical as evidence will be needed to show that the research outputs are relevant and of interest to the wider economy. Typically, in order to undertake this analysis the following elements are considered: Macro-economic analysis of project region and sector Identification of target group Identification of current demand of the target group Identification of future demand for the projects output Identification and quantification of financial revenues. The data and qualitative information presented in the table can be useful to show present and future demand and to estimate revenues of the future project. Depending on the data that is available for a particular project, different techniques may be used to estimate the demand. Expert interviews based on the collected data can be carried out for higher education infrastructure projects. Alternatively, a benchmark project may be chosen for comparison with the existing one. The idea is to derive demand estimates from this real-life benchmark. 39

40 Table 8: Demand Analysis for HEI projects Element of demand analysis Contents Necessary data and qualitative information Macro-economic analysis Identification of target group Identification of demand of the target group Identification of demand for projects outputs Identification and quantification of financial revenues Description of the key features of the country: Description of the key features of the project area: Description of the public research sector and demographic information : Demand for high education infrastructure Demand for project outputs - Population/Demographics - GDP growth rates - GDP per head - Main sectors of the economy - Population/Demographics - GDP per head - Main sectors of economy - Site geography - Transport - Regional infrastructure - Healthcare, leisure and culture (if appropriate) - Amount and % of annual state budget - Number of local educational institutions - Number of students - Demographics - Analysis of comparable infrastructure available at the local, national and EU level - Utilisation rates of existing infrastructure - Volume (number of researchers, PHD students, etc.) in specific research area (if appropriate) - Labour market conditions and demand from national and international Industry. - Job opportunities for researchers with master degree or PHD in the field. - Evidence of demand by employers, researchers, academia for graduates in the field of academia of the project - Expert opinions on financial revenues to be created through tuition fees or comparison with benchmark project. 40

41 4 Option analysis The option analysis is carried out in order to identify the most promising project set-up that can achieve the set project objectives. No specific guidance is provided for the completion of the options analysis for higher education projects. As such, the reader is referred to the Section 2.5 of this paper for a description of the approach that is suggested for RDI projects in general, and also to the analysis example provided in the proceeding case study. 5 Financial Analysis and Economic CBA of Higher Education Projects 5.1 Identification of financial in-flows and out-flows of RI projects The financial analysis considers project costs (investment costs and operational costs) as well as financial revenues (for more details see Section 3.3 of the main part of these guidelines). The identification of the project revenues according to Art 55 of the EU regulation is of particular importance and should be in line with a detailed demand analysis. Revenue items have to be carefully distinguished from other cash-inflows, i.e. the financing sources (see Section 3.3 for more details). The following table provides examples of the main revenue and cash-inflow (other than revenues) items that are relevant for Higher Education Infrastructure Projects. Table 9: Revenues and other cash-inflows of Higher Education Projects Inflow item Source Revenue items Tuition fees paid by students Other cash-inflows National education subsidies EU subsidies, other than ERDF (e.g. national education allowances and grants) The residual value can be expected to be moderately high if the building can be used for other activities after the end of is reference period. Otherwise the residual value may be rather low. Investment costs mainly consist of construction costs of fixed assets, but also design costs and preparatory studies etc. Operating costs are generally made up of staff costs, administrative costs and costs of energy and water consumption (see Section 3.3 for more details). From experience higher education infrastructure projects tend to be non-net-revenue-generating projects and in most cases have a negative return on investment. The economic analysis is, hence, of great importance to justify the investment and the EU contribution. 5.2 Identification of Economic Costs and Benefits Economic costs The economic costs of higher education projects are directly transferred from the financial analysis. Conversion factors are applied to investment costs and operating costs in order to correct for market distortions (e.g. taxes, monopolies, barriers to trade, minimum wages, etc.), (please see the EC 41

42 (2008) guide for more details on conversion factors). These conversion factors depend on the country. Often, however, they can be assumed to be close to 1. Economic benefits Table 11 provides an overview of a selection outputs that can be commonly attributed to higher education Infrastructure projects along with the proposed benefits, quantification methods and the value calculations suggested by JASPERS to quantify and monetise the benefits of these projects. An explanation of the benefits is provided in the section below, along with example market values where available. It is suggested that the project promoter creates their own list of outputs and benefits relevant to their project, based on the menu of outputs provided in this document. The promoter is free to add their own outputs to the lists provided. Where this is done, the promoter should take care to avoid double counting with existing benefits and should provide justification for the inclusion of the outputs. Table 10: Economic benefits and indicators identified by JASPERS for HEI projects Outputs Short-term & Medium term benefit Quantification method Value Calculation Building related Outputs Savings in energy use due to renovation of building. Environmental and economic benefits linked to energy efficiency Market value as a proxy [GHG savings in MtCO2e] x [Value for each MtCO2e according to national energy efficiency guidelines] Residual value of infrastructure Benefit to society of residual value of investment Market value as a proxy 20-40% of initial investment costs Job Creation Outputs No. of jobs created for individuals over 35 Benefit to society of Creation of new jobs Market value as a proxy [Av salary for person over 35] X [no. of jobs for over 35s created] No. of jobs created for individuals under 35 Benefit to society of Creation of new jobs Market value as a proxy [Av salary for person under 35] X [no. of jobs for under 35s created] Education benefits No. of Masters graduates Benefit to society of educated labour force Market value as proxy ([Average national salary of masters] [Average national salary] ) X [number of jobs] No. of Graduates, PhD Societal benefits through improvement of individuals through Market value as a proxy ([Average national salary of PhD graduate] [Average national salary] ) X [number of jobs] 42

43 5.3 Explanation and quantification of the suggested economic benefits Societal benefits through improvement of individuals through education This measure is based on the incremental improvement on salary over the average salary per year and is a standard economic benefit measure across Western Europe. That said, it is possible for more value to be placed on a masters or doctoral graduate if for example one of the project objectives is to increase the number of national young graduates and a future willingness-to-pay on the labour market to pay more for the particular group of graduates in the course of the operational lifetime of the project is expected. Table 11: Market values for improved education of individuals (EUR/year) Indicator Unit Market Values (EUR/year/graduate) Source Number of Graduates, MA per graduate 2,400 OECD Statistics Number of Graduates, PhD per graduate 3,300 OECD Statistics Market values for the increase in salaries of MA and PhD graduates can be taken from OECD (2012) statistics26. The increase in salary for MA would be around 2,400 EUR per year. As far as the increase in salary for PhD graduates is concerned, statistics show a value of around 3,300 EUR per year. Some national guidelines may attribute a different value to that of the market for a master or PhD graduate according to an estimated WTP Employment benefits Direct employment effects of technical staff (education and research) staff and non-technical staff can be measured by the number of gross new jobs of persons over 35 years of age, the number of gross new jobs of persons under 35 years of age along with the number of gross new non-research jobs. The monetary benefit of a non-research job is valued at the average salary in the country according to said country s national statistics. Research and/or education jobs for persons over and under the age of 35 instead are valued according to the average salary of researchers in the same country. In certain justified cases the benefits due to the creation of jobs for researchers/lecturers under 35 years of age may be higher than the observed market values. For example, some national guidelines places a higher value to the replacement of aging education/research staff as it is one of the key objectives of investment in education/research projects. The monetised value was then based on the average costs of a new working place in national programmes supporting young researchers/lecturers

44 Table 12: Market values for creation of technical and non-technical jobs Indicator Unit Market Values (EUR) Source No. gross new technical (education/research)jobs No. gross new technical (education/research)jobs (U35s) No. gross new non-technical jobs per job 12,500 OECD Statistics per job 12,500 OECD Statistics per job 10,300 OECD Statistics The values per job created are suggested values based on the average annual salary statistics provided by the OECD (2012)27 when possible for EU-12 member states. These values can differ between member state and it is up to the discretion of the promoter to provide representative values but, as a reference, job creation may account for around 10% of the total benefit in the CBA. Please note, only direct jobs created or lost are sought for in the application form for major infrastructure investment. Do not include indirect jobs for the purpose of the ERDF application, but list such employment effects as other regional benefits (no quantification of benefits required) Building-related benefits Economic benefits can be derived from energy savings through energy efficiency tools and building design of the RDI project, be it the construction of new buildings/facilities or the development of older less energy efficient one. The economic cost of heat or electricity supply in the building is calculated on the basis of the baseline energy and CO 2 scenario and the energy savings generated by the project over its life time. Each member state will have their own Energy Efficiency Action Plan through which the reduction of CO 2 and other greenhouse gasses can be quantified and monetised for inclusion in the CBA. The residual value can also be used to measure the benefit related to the improved building. It is an accounting proxy but valid, although it should be noted that equipment may need reinvestment for refurbishment as an added cost (to avoid being obsolete). If the residual value is considered in the economic CBA the reinvestment costs should be included as well. Table 13: Values for building-related benefits Indicator Unit Market Values (EUR) Source Energy savings efficiency EUR/m 2 Varies between countries and projects n.a

45 In some of JASPERS supported projects that were approved by EC during the financing perspective, the benefit from residual value at the end of the project life-time was estimated between 20 and 40% of the construction cost. The benefit from energy efficiency savings can vary depending on the savings in GHG emissions which will depend on the energy efficiency of the building and other factors such as the energy mix of the member state. As such, it is up to the project promoter to produce a value corresponding to the member state s Energy Efficiency Action Plan and evaluate the energy efficiency of the building. 6 Risk analysis Risk analysis (in terms of CBA) refers to the qualitative assessment of the capacity of the project to achieve the desired objectives. In general, quantitative risks to be taken into account refer to variables in the calculation model, such as investment costs, operating costs, and further investment costs for technological development, decommissioning costs, revenues and grants and benefit generation. The quantitative risk analysis should be complemented by a qualitative one. Risk mitigation measures should be identified for the most important risks. Please refer to Section 4 of the main part of these guidelines for a description of the methodology to be used and a discussion of the major risks encountered in RDI project. Investment risks (delays, cost overruns etc.) are important in the case of higher education infrastructure projects and should be analysed. Risk mitigation measures should be presented. the risks during the operational phase should also be taken into account. In higher education research infrastructure these risks refer to the supply and the demand side issues. On the supply side, factors that can affect the performance of the teacher body (i.e. payment of salaries, creation of the right environment to attract high class staff) should be considered, along with the risk of low enrolment rates. On the demand side, the risks that can impact the market demand for educational services should be carefully analysed by taking into account demographic projections of the project region. The institutional set-up should also be considered as it is important to make the project viable in the long term. If the project is non-net-revenue generating and even generates negative /k indicators (see the section on financial analysis for more details), it is of crucial importance to also consider the financial set-up of the project and to show that the risk that the project runs out of money and/or that the operational loss is not covered is mitigated. Evidence should be provided at the point of project development that the national or local body subsidising the operation of the project has seriously committed to providing the financing over the whole project period (for example by proving that a budget has been set aside). 7 Case Study 7.1 Project description The project consists of the relocation and establishment of two faculties (Chemistry and ICT) of the State University (hereafter refer to as UNI) that are currently facing a lack of space and poor organisational, working and safety conditions.. The project requires the construction and outfitting of three buildings as well as parking space below the buildings. 7.2 Project objectives The project is expected to enhance the working environment, the teaching environment and the research environment in order to contribute to achieve a critical mass of researchers and graduates 45

46 that will improve international competitiveness. In particular, the new facilities are expected to provide new opportunity for educational and research activities on the national and international level by building on strengths and needs identified within the economy. Besides the upgrading of existing teaching and research capacities (i.e. the part of the project from which ERDF funding is requested), the project will also undertake some technology transfer activities. In a wider perspective, outputs to the benefit of the country s and European society are expected in the form of: Positive Effects on the education level of the individuals Higher level of inclusion in the European Research Area Direct increase in employment Contribution to the progression and development of scientific knowledge Contribution to the competitiveness of the economy The project is therefore in line with the priorities of The Bucharest Communiqué, the Bologna Process, and the Operational Programme for Strengthening Regional Development Potentials, The specific objectives of the project are to contribute to the economy through the following outputs (average per year of operation): 20 articles 100 citations 18 new researchers 75 research contracts 23 international researchers attracted 16 graduates 2 PhDs The project is also expected to generate 4 spinout companies and 2 patents. 7.3 Demand analysis This analysis was carried out against the macro-economic background of the country and region as well as an analysis of other existing education and research programmes in the area of chemistry and chemical technology as well as computer and information science. The demand for education and research activities was analysed and figures on the expected revenues outputs of the project were generated. Demand for education The demand analysis carried out for the education component of the project analysed the market demand for education in chemistry and information science, which is two-fold: 1) the demand for the education itself (by future students) 46

47 2) the demand for the projects output (graduates) by the industry in the region The first part of the analysis consisted in particular of extensive demographic estimations, it was found that population numbers in the cohort (ie. the 19 year old age groups) eligible for higher education are predicted to drop in the near future before levelling off. However, the university believes that this is being balanced by a rise in the numbers of mature (or adult) students and growth in lifelong learning, particularly in the two study areas. Thus student enrolment numbers are predicted to increase slightly over the period , although the nature of the student body will change. The second part of the analysis was based on a labour market analysis, which assessed the local and national unemployment rates amongst students, and the needs for graduates from local industry on the basis of previous experience, desktop research and a questionnaire. The analysis also considered the international mobility of students. The analysis suggests that the two faculties produce graduates that are in demand, which ties in with the economic assessment of the two sectors and their related sectors being important to the country s economy. However, the questionnaire revealed gaps in the skills and competences provided, and noted the desire of business for greater co-operation. Thus, tailoring of the faculties offer may be required. Based on the above analyses, the forecasts for research student numbers has been produced for the project period to These numbers served as the basis for the estimation of revenues from student fees (the amount of the fees is fixed based on those of other universities in the country). Demand for research The comparison of present capacities and future needs has shown that strong external demand for more research to be performed at the faculties is hampered by inadequate infrastructure, space and has led to highly fluctuating research revenues and an inability to grow some areas of excellence. The estimation of financial revenues was based on the performance of a benchmark institution in the same country but in a different sector. Revenues are expected in particular from contract research. The expected number of articles to be produced was based on the past performance of the beneficiary i.e. the average value of past published articles. 7.4 Options analysis The option analysis assessed the following three sets of options: 1) Choice of location: Should the existing location be retained or should the UNI move to a new location? 2) Number of faculties: Should the two faculties be combined in one project or in two separate ones? 3) Spatial and architectural options: What is the best out of three options for the building and outfitting of the UNI building? Cost efficiency is the main criteria for all three analyses carried out. This means that if the project objectives can be achieved by all or at least two of the options, the most cost efficient is to be chosen. Choice of location Two main options have been considered: (1) retain existing locations; and (2) move to new locations. However, within these two options there have been a number of variations considered. 47

48 Within the option move to new location, the advantages and weaknesses of nine specific locations were studied as were their possibilities and restrictions, which showed that some are more and some less suitable or not meeting the requirements at all. The examination was carried out by a consultant based on an evaluation scheme, which is presented in a simplified table below. All nine locations and the existing locations were also described in detail and the judgments made were justified in detail. Table 14: Location set option analysis Option Current location New location 1 New location 2 New location 3 New location 4 New location 5 New location 6 New location 7 New location 8 New location 9 Option Chosen Criteria Suitable - Suitable Suitable - Suitable Suitable Suitable Suitable Suitable Suitable Suitable Suitable - Suitable Suitable Suitable - Suitable Suitable Suitable Suitable Suitable Suitable - - Suitable - Suitable Suitable - - Suitable Suitable Suitable Suitable Suitable Suitable - Suitable Suitable Suitable - Suitable Suitable Suitable Suitable Suitable - Suitable - Suitable Suitable Suitable - Suitable Suitable Suitable Suitable - Suitable - Suitable Suitable Suitable - Suitable Suitable Suitable Suitable Suitable Suitable Suitable Suitable Suitable Suitable Suitable - Suitable Suitable - Suitable - Suitable Suitable Option 8 The criteria are the following: 1) The intended purpose of land according to a long-term municipal plan (for institutes, education, health care, which is in line with the programme) 2) Size of the land (enabling comprehensive solution to the problem) 3) Traffic accessibility (accessible by basic road network or city passenger transport lines). 4) Current land use 5) Procedures necessary for obtaining urban planning documentation 6) Other restrictions and advantages in space (areas of natural and cultural heritage, water resources protection area, etc.) 7) Utility infrastructure 8) Land ownership 9) Investment estimate (previously stated criteria influence the final investment value) This resulted in the decision to invest and development of the proposal. 48

49 Number of faculties A further study investigated the costs and benefits of combining the chemistry and IT faculty in one new building. The synergies of combining the two were shown to be significant and a 15% lower investment cost for a joint development of the two faculties at the same time. Spatial and architectural options 5 Spatial and architectural options for the proposed campus location for the two faculties to be combined in one project were then assessed by a mixed panel of internal and external members. The panel members were asked in particular to evaluate whether the different options were suitable to achieve the project objectives in terms of student up-take, necessary number of class rooms as well as offices for the expected number of research and education staff. 3 options were identified that can achieve the objectives, out of which the most cost-efficient option was chosen. 7.5 Project cost estimates Project investment cost evaluation has been divided into preparatory works, constructions works, the equipment purchase and other costs. There has been an assessment of eligible and non-eligible costs. For example, approximately 50% or planning fees and land purchase are classified as ineligible as is some of the VAT. Some of the costs have been taken from contractor preliminary estimates. In the following table constant and current prices are presented. For the CBA calculations the current prices are used. Table 15: Project cost estimates (in constant and current prices) Costs (Euro) Constant prices Current prices Planning/design fees 3,482, ,539, Land purchase 6,480, ,480, Building and construction 53,609, ,251, Plant and machinery 25,506, ,041, Technical assistance 2,949, ,073, Publicity 858, , Supervision during implementation 770, , Sub - TOTAL 93,657, ,094, VAT - eligible cost 16,540, ,409, VAT - non-eligible cost 927, , TOTAL 111,125, ,449, The project will be implemented in a period of three years, after which the new faculties will be fully 49

50 operational. With regards to operation and maintenance costs, a detailed breakdown by type of expense, facility and year was prepared as part of the project feasibility study. The result of this analysis is that the proposed project implies additional operational expenditure for the university of about 2.5 m EUR in the first year of operation, with a gradual increase to reach 3.0 m EUR after 5 years and constant 3.0 m EUR per year after that. 7.6 Financial CBA The financial analysis of the project is based on the incremental approach. The following assumptions are used: all amounts stated in constant EUR discount rate of 5% real reference period of 15 years The residual value was estimated to stand at 40.2 meur. This is based on the book value that was calculated as initial (investment costs + reinvestment costs depreciations). The analysis was carried out with the same investment and operating costs described in the previous section. The project is expected to generate revenues from student fees, use of facilities, expert consultations and others. These incremental revenues have been estimated at about 0.5 meur in the first year of operation, with a gradual increase to reach 0.8 meur after 5 years and constant 0.8 meur per year after that. However, the overall revenues are lower than the operating costs throughout the whole reference period. The project was considered non net-revenue generating project in the sense of Art. 55 of EU regulation 1083/2006 as the residual value is not taken into account when it is determined whether a projects is net revenue-generating and whether the funding gap methodology needs to be applied. The funding gap rate is therefore 100% and the decision amount equals the non-discounted eligible costs (99.4 meur) according to the above referred Art. 55. The community contribution was estimated to be 84.5 meur with the co-financing rate of the priority axis being 85%. The remaining 32.3 meur in the project total investment cost will be funded by State budget sources. In the following table the detailed calculation for the determination for the EU grant amount is presented. 50

51 Table 16: Determination of EU grant amount FUNDING GAP Calculation of Discounted Investment Cost (DIC) NPV 5% Total investment (w/o contingencies) meur DISCOUNTED INVESTMENT COST (DIC) meur Calculation of Discounted Net Revenues (DNR) NPV 5% Revenues - student fees meur Revenues - use of facilities meur Revenues - expert consultations and patent fees meur O&M costs - labour costs meur O&M costs - maintenance meur O&M costs - other meur Residual value of investments meur DISCOUNTED NET REVENUES (DNR) meur ELIGIBLE COST 99.4 ELIGIBLE EXPENDITURE (EE = DIC-DNR): 91.7 FUNDING GAP RATE (R = EE / DIC): 100.0% DECISION AMOUNT (DA = R x EC): 99.0 MAX CO-FINANCING RATE IN PRIORITY AXIS: 85.0% EU GRANT ( = DA x Max Co-Financing Rate): 84.2 The financial profitability indicators of the project are as follows: Without Community assistance: FRR/C = % FNPV/C = meur FRR/K = -10.3% FNPV/K = meur With Community assistance: FRR/C = -2.5% FNPV/C = meur FRR/K = -2.5% FNPV/K = meur Note that as the project will be financed only with the contribution from EU funds and the State budget (e.g. without the use of loan resources), there is not difference between FRR/C and FRR/K, and the same applies for FNPV/C and FNPV/K. The negative FRR and FNPV even after Community assistance show that the project will not take place without grant support (in this case the EU funds). This is typical in higher education projects. With regards to the long-term financial sustainability of the project, the expected revenues will not be sufficient to cover the operating costs, so a strong national commitment to provide the necessary support to the project is required and will materialise in the annual allocations of State budget to the university. This situation, which may not be acceptable for other type of projects in other sectors, is quite typical in cases like this one. 51

52 The detailed calculations carried out for the financial analysis are shown in the table overleaf. Table 17: Calculation of FRR/C and FRR/K FRR/C FRR/C before Community assistance NPV 5% Total investment (w/o contingencies) meur Revenues meur O&M costs meur Residual value of investments meur Project cash-flow before Community assistance meur FRR/C before Community assistance -10.3% FRR/C after Community assistance NPV 5% Project cash-flow before Community assistance meur Community assistance meur Project cash-flow after Community assistance meur FRR/C after Community assistance -1.4% FRR/K Loan Balance Beginning balance meur Loan disbursements meur Interest payments meur Principal repayments meur Ending balance meur FRR/K before Community assistance NPV 5% Project cash-flow before Community assistance meur Loan disbursements meur Interest payments meur Principal repayments meur Promoter cash-flow before Community assistance meur FRR/K before Community assistance -10.3% FRR/K after Community assistance NPV 5% Promoter cash-flow before Community assistance meur Community assistance meur Promoter cash-flow after Community assistance meur FRR/K after Community assistance -1.4% 7.7 Economic CBA As the financial CBA, the economic CBA is based on the incremental method. The calculation of eligibility is based on the 7 % discount rate, as stipulated by the national methodology. A 15-yearreferenceperiod is used. The assessment of the project is calculated according to constant prices in December There are four categories of assessed socio-economic benefits for the project that are directly derived from the overall project objectives: value added to individual students etc., higher level of inclusion in R&D, direct increase in employment, contributions to the economy. 52

53 The methodology used to identify and quantify economic benefits consists of two steps: 1) Identification and quantification of key performance outputs linked to the overall project objectives and benefits, 2) Identification and quantification of economic benefits based on these outputs. As regards point 1, outputs are defined based on those proposed and approved by the Operational programme for Strengthening Regional Development Potentials for the period. Furthermore, in co-operation with the faculties, indicators on the faculty level were defined. These indicators are supposed to measure the success of the activities and services that are performed by the faculties: creation of new knowledge (R&D), teaching (education) and knowledge transfer (technology transfer). All indicators are presented in Table 19 below. No. Indicator Table 18: Physical and financial indicators of the project per year Without Investment After investment (2014) 5 yrs after completed investment (2019) After reference period (2028) 1 Number of articles (+53) 312 (+124) 474 (+286) 2 Number of citations (+98) (+498) (+1508) 3 Number of patents (+1) 2 (+2) 4 Number of Spin-Offs (+4) 4 (+4) 5 Number of young researchers for (+1) 37 (+3) 45 (+11) employment in business 6 Number of researchers (+3) 238 (+33) 273 (+68) 7 Number of teachers (+8) 223 (+22) 8 Number of technical staff (-3) 39 (-7) 9 Number of national researchers (in FTE) (+1) 47 (+6) 10 Research direct contractual 11,69 12,94 16,17 22,96 cooperation with business (in FTE) (+1,25) (+4,48) (+11,27) 11 Number of international researchers (in FTE) 8,19 8,86 (+0,67) 9,80 (+1,61) 11,70 (+3,51) 12 Number of first cycle graduates (+34) 455 (+79) 535 (+159) 13 Number of second cycle graduates (+40) 285 (+104) 14 Number of doctors of science (+10) 56 (+16) 68 (+28) 15 Number of students with special (+3) 31 (+11) 46 (+26) needs 16 Number of students older than 29 yrs (+8) 50 (+13) 65 (+28) 17 Number of first and second cycle foreign students (+8) 81 (+39) 120 (+78) 28 Patents are counted in the area of chemistry and chemical technology. 29 In the»without«investment conditions. 53

54 Most of the indicators are directly measured (e.g. in numbers) and monetary assessed but at the same time they present added value to the society which cannot be directly measured (e.g. regional impact, time consumption, transport during study, improvement of the effectiveness and quality of study and research work). In a second step, all indicators are used in the economic cost-benefit analyses in order to quantify the additional benefits to the labour market; business and society (see Error! Reference source not found.). There are the following 4 types of economic benefits: direct benefits on individual level, benefits due to higher degree of inclusion in R&D, benefits due to the direct increase in the number of employments and benefits due to the contribution of the project to society. Table 19: Calculation of economic benefits Indica tor Indicator Unit Assessment Value in EUR per year per unit Average benefit per year in EUR Total benefits in EUR Direct benefits on individual level benefit No. of first cycle graduates No. of second cycle graduates No. of doctors of science 1 graduate Assessment of the value added to the average wage based on the difference between the expected individual wages of a graduate and of a person without diploma , ,32 1 graduate 6.310, ,66 1 doctor of science 8.038, ,68 15 Students with special needs 1 student with special needs 5.501, , , No. of students above 29 yrs of age 1 students above 29 yrs of age 5.500, ,8 17 No. of foreign students 1 foreign student Tuition fees 4.584,96 (first cycle), 6.310,08 (second cycle) ,8 Higher degree of inclusion in R&D (in FTE) benefit 2 9 National research 1 FTE Value of FTE defined for national natural science research projects , , Research with business 1 FTE Value of FTE defined for national natural science ,00 54

55 research projects 11 International research 1 FTE Value of FTE defined for national natural science research projects ,50 1 No of articles SCI 1 publication 0,5 FTE value ,75 2 No of citations SCI 1 citation 0,335 FTE value ,5 0 Direct increase in the number of employments benefit 3 5 Young researchers for employment in business Number of additional employees Value of FTE , ,05 6 Researchers Number of additional employees Value of FTE , , ,0 2 7 Teachers Number of additional employees Value of FTE , ,91 8 Technical staff Number of additional employees Value of FTE , ,51 Contributions to economy benefit 4 (4) 3 No. of national applications for patents Patent 1 FTE + costs ,00 3 No. of international applications for patents Patent 1 FTE + costs , ,00 4 No. of spinoffs/start-ups Firm 1*3 employed* EUR ,00 The direct benefits are the direct annual benefits to students, which are assessed as the difference between the expected individual wages of a graduate and of a person without diploma. The benefits related to the higher level of inclusion in R&D are calculated on the basis of expected volume of the national research, research with business and international research. The significantly improved conditions for research will contribute to greater internationalization and increased excellence of research and innovation. This impact is measured according to the number of published 55

56 articles and citations (SCI). One article represents 0.5 FTE (Full Time Equivalent), one citation FTE (1 FTE represents EUR net). In order to quantify the direct increase in the number of employments the number of additional employees is presented. The added value is quantified based on the expected individual wages. The impact of the project on the overall economy is calculated on the basis of the national and international applications for patent, spin-offs, as the difference between with and without investment. One national patent application is assessed as 1 FTE + costs for application, One international patent application is assessed as 1 FTE + costs and one spin-off or start-up firm as costs for 3 employed researchers per firm. The project indicates high economic level of return, despite assessment of only 5 benefits. The ERR stand at 12.9% and the cost-benefit ratio at The following table presents the detailed calculations carried out. Table 20: Calculation of ERR and economic cost-benefit ratio ERR TOTAL Project investment cost (w/o contingencies) meur of which: Traded goods and skilled labour Non-traded goods Unskilled labour Land purchase Taxes Conversion Factors Traded Goods and Skilled Labout Coef. 1.0 Non-traded goods Coef. 1.0 Unskilled Labour Coef. 0.8 Taxes Coef. 0.0 Economic value of land meur ERR NPV 5.5% Economic benefits - value added to individual students meur Economic benefits - higher level of inclusion in R&D meur Economic benefits - direct increase in employment meur Economic benefits - contributions to economy meur [ ] meur [ ] meur [ ] meur Total investment (w/o economic prices meur O&M costs meur Residual value of investments meur ERR meur ERR 12.9% B/C RATIO Risk Assessment Sensitivity analysis The sensitivity analysis carried out on the main project variables points at the project investment cost as the most critical variable, which calls for a careful preparation of tender documents and monitoring of the project during the construction period to avoid costs overruns. The maximum increase allowed in the project investment cost before the ERR of the project turns below 5.5% is 23%. 56

57 A Montecarlo simulation showed that there is a 95% probability that FNPV/K is between meur and -10,931,590, with a 0.0% probability of FNPV/K >0. Also, for the economic profitability of the project, there is a 95% probability that ENPV is between 27.2 meur and 53.5 meur with a 100.0% probability of ENPV >0. Figure 1: Monte Carlo Simulation Risk analysis The project risk analysis was carried out taking into account the following dimensions: risks in project development risks in implementation risks in facility operation general risks The development and implementation of the project warrant mainly the timely provision of sufficient funds as well as a qualified expert team for project implementation. In the implementation phase, the timely implementation may be jeopardised by unforeseen weather conditions, which neither the contractor nor the client can influence. The implementation may also be jeopardised if an unsuitable contractor is selected, who performs works poorly or fails to perform it. In order to reduce the said risk, it is essential to prepare suitable tender material according to the applicable legislation, with clearly defined conditions that the contractor must fulfill, especially as regards references and human resources, and to determine suitable criteria for selecting the most favourable bidder, including the submission of suitable bonds in all the phases of procedures. In the operation phase, the investment may be subject to a higher risk level especially if the personnel in charge of facility management primarily for operating machines are not properly qualified and fail to comply with the instructions given for the operation and maintenance of the facility, prepared by the contractor. In order to prevent this risk, it is necessary to provide suitable schooling and training for the technical personnel. It is believed that the general risks political, economic, social and cultural are minimal and will not jeopardise project implementation. 57