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Corporate longevity and business innovative projects:

the economic efficiency approach

Tatyana Novikova

Novosibirsk State University, Department of EconomicsInstitute of Economics and Industrial Engineering,

Siberian Branch of the Russian Academy of Science, Novosibirsk, 630090Russia

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Novosibirsk State University, Department of Economics

Institute of Economics, Siberian Branch of Russian Academy of Science,

Russia

* Novosibirsk

* Moscow

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Content

1. Statement of the problem2. Model of investment project3. The complex of models4. Conclusions

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Methods of project analysis:traditional approach

Public sector

Privatesector

GovernmentPrivate

participants

Projectevaluation

Costbenefit

analysis

Commercial efficiency analysis

Financialanalysis

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Methods of project analysis: modern approach

Public sector

Privatesector

GovernmentPrivate

participants

Projectevaluation

Costbenefit

analysis

Commercial efficiency analysis

Private and public

participation

Public efficiency analysis

Financialanalysis

Economic analysis

The modern approach assumes interaction of private and public sectors and essentially expands the analysis of investment projects in a corporation due to one more direction – the economic efficiency analysis.

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Financial (commercial) efficiency considers project’s benefits and costs from the point of view of private participants. Economic (public) efficiency considers project’s benefits and costs from the point of view of society as a whole.

Efficiency of the project

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The main problem

for Cost Benefit (Economic Efficiency) Analysis:

revealing of the valid

costs and benefits

in conditions of

market failures.

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Difference of financial and economic efficiency as the informational problem

Projects of the third, intermediate group are characterized by a combination of low financial and high economic efficiency, but they are carried out in a private sector. The majority of innovative projects of the Siberian Branch of the Russian Academy of Science correspond to the latter group.

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Economic efficiency: specifics of costs and benefits

Directions Factors

Revealing

Redistribution (tax) effectsExternal (ecological) effects Indirect effects

Measurement Shadow prices

Discounting Social rate of discounting

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Support of innovative projects

by government or institutes of development

Without support projects with a low level of the financial efficiency are unable to stimulate private investors, however their level of economic efficiency is so high that it forms the basis for the support. Due to support in the form of budget financing of the most risky researches financial efficiency increases up to a level that is attractive to private participants. Thus the government or the institute of developmentplays a role of the specific participant which can influence the financial efficiency and bring it into accord with economic efficiency of projects.

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Model of investment project

T

t tΔr)r(

F

f)tΔCt(Δ)tCt(B

NPV

ff

0 1Benefits Bt and costs Ct in the context of a financial efficiency for each moment of time t and the rate of discounting r ;

f– factors of difference of financial and economic efficiency,f=1, …, F .

(1)

Δ

As a tool of evaluation of the efficiency the multi-period model of investment project is used. It consists of financial and economic models which are based on appropriate financial and economic analysis.

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Efficiency

Efficiency of the project

Efficiency of participation

in the project

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means comparison of benefits and costs,

arising at realization of the project

for every participant.

Efficiency of participation in the project

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Mechanisms of project realization

(2)where

CFt – cash flow of the project, equal to

within the framework of the analysis of a financial efficiency and within the framework

of the analysis of economic efficiency, – cash flows of s -th participant of the project.

s

stt CFCF

)tCtB (

F

f)tΔCtB()tCtB ff(

stCF

For project realization the problem of financing and corresponding redistribution of results is very important, as well as the problem of the efficiency of participation in the project. Mechanisms of project realization are based on the interrelation of cash flows.

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Mechanisms of project realization and incentives for participants

NPV – net present value of the project (within the framework

of financial or economic efficiency analysis),

– net present value of s -th participant of the project (within the

frameworks of financial or economic efficiency analysis).

s

sNPVNPV

sNPV

The net present value of the project is divided between participants by means of its financing and providing corresponding net present value for various participants. The positive net present value that arises after realization of the efficient project can be considered as original "pie" which is divided in different ways between participants of the project by means of its financing. It provides corresponding efficiency of participation in the project. A significant size of the net present value for every participant of the project would show that this scheme of financing is interesting for participants and leads to successful realization of the project.

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Applications

• These methods were applied to 3 megaprojects and 19 innovative projects used for the evaluation of innovative potential of the Siberian Branch of the Russian Academy of Science.

• The analysis was based on the models of investment projects with detailed presentation of economic efficiency.

• The wide public resonance was received by the so-called megaprojects that use significant volumes of budgetary financing and provide high level of efficiency. The list of "standard" projects includes 3 megaprojects.

• The first Siberian megaproject was the innovative project of production of new catalysts that received significant support in the form of budgetary financing of 350 million rbl. and then 500 million rbl.

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Innovative project: Innovative project:

production of new production of new

creking and riforming

catalysts catalysts for oil refining Initial project - 2003

Modified project - 2006

Innovative project: Innovative project:

production of new production of new

creking and riforming

catalysts catalysts for oil refining Initial project - 2003

Modified project - 2006

Efficiency of the project project of new of new creking and riforming catalystscatalysts ::

ssystem of indicators

Financial efficiency

Economicefficiency

NPV , million roubles

R= 10% 137,3 2768,3

IRR, % 30,7 95,0

Payback period , years 3,63 3,2

BCR, times 1,369 3,300

Revenues/budget investment rate, times

R= 10% 2,141 11,664

R= 0% 2,503 13,993

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The project project of new of new creking and riforming catalystscatalysts:

NPV dynamics (th. rbl.)

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Difference of financial and economic efficiency

r = 0% r = 10%

Th. rbl. Th. rbl. %

1.Financial efficiency: NPV 274 393 137 328 5,0

2. Tax effects 2 076 079 1 539 560 55,6

3. Effects in the oil refinig 2 193 270 1 429 243 51,6

Difference of import and internal prices 217 618 167 928 6,1

sales of gasoline 2 337 695 1 747 537 63,1

Effect of economy of materials 16 199 12 231 0,4

Capital investment in oil refining -378 243 -498 454 -18,0

4. Investments into research and development -375 000 -337 807 -12,2

5. Economic efficiency: NPV 4 168 742 2 768 323 100,0

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Government support and efficiency (mln. rbl., r=0%)

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Efficiency of the complex of 19 «standard» innovative projects of the Siberian Branch of the Russian Academy

of Sciences, 2006-2010 years, , r=10%

NPV million roubles %

Financial efficiency 2 305,4 3,8

Tax effects 25716,6 42,6

Indirect effects 32099,0 53,2

Economic efficiency 60326,2 100,0

The most significant effects (53,2 %) arise in the sphere of application of new products and technologies and are connected with indirect effects. The influence of tax effects also is essential (42,6 %). The tax effects are connected with the profit tax. Its part in the total amount of tax effects from the production of innovations is 62,7 %. From the use of innovative production the main part comes from the VAT and excises (71,0 %).

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NPV dinamics for 18 «standard» innovative projects of the

Siberian Branch of the Russian Academy of Sciences, million roubles, r=10%

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NPV 2006 2007 2008 2009 2010

Financial efficiency -1,9 -2,8 -0,6 6,6 15,8

Tax effects 0,7 18,3 49,9 98,6 146,7

Indirect effects 5,0 94,3 138,5 190,2 183,1

Ecological effects 0,1 0,5 2,7 6,5 11,4

Economic efficiency 3,9 110,3 190,4 301,8 357,0

Efficiency of the summary projects of the Siberian Branch of the Russian Academy of Sciences,

million roubles, r=10%

On the basis of standard projects the multipliers were calculated. The parameters of the evaluation of innovative potential were found out by their implication to 13 megaprojects of the Siberian Branch of RAS. The analysis of projects efficiency reveals higher level of economic efficiency in comparison with rather low level of a financial efficiency.

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Economic efficiency:NPV, IRR, PBP

Financial efficiency:NPV, IRR, PBP

Efficiency of participationin the project

Efficiency of the project

Multi-period simulation model

of the investment project(MSMIP):

financial and economic

Two-period inter-industrial inter-regional

optimization model(TIIOM):

initial andmodified

Variation ofmacroeconomic, regional and industrial indicators

Direct and indirect, internal and external effects (measured in basic prices and optimum dual variables)

RegionsNational economy

Export and importInter-regional trade

The complex of models

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• Influence of the project implementation on macroeconomic, regional and sectoral parameters is estimated on the basis of comparison of calculations on modified and initial TOIIM. At the same time the evaluation of the project on a microeconomic level is conducted from the point of view of various private participants within the financial MSMIP and taking into account specific public factors within the economic MSMIP.

• The modification of initial TOIIM is done by addition of the fixed technological vector that represents the result of summation on a line of parameters of the block of the investment project for the appropriating period of time. Besides technological coefficients of the interfaced industries (first of all, coefficients of material and labor inputs) changed due to positive spillovers project results.

• Transition to economic MSMIP is carried out by updating cash flows for each year, received from financial model, taking into account four groups of effects: prices, tax, indirect and external. The information on tax effects acts from financial MSMIP. The total sum of indirect and direct spillovers is defined as a result of calculations on TOIIM for two appropriating periods. The evaluation of these effects is based on the use of the increase of final consumption. Distribution of indirect and spillovers on years (according to time intervals of simulation model) is carried out proportionally to volumes of annual sales on the basis of solution in financial MSMIP.

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Results of experimentsCalculations on aggregated modified TOIIM have

been conducted for a small-size model. The economy in this model is presented by three regions, seven industries and two periods – five and ten years.

Two model investment projects (fuel and complex) have been constructed for calculations. The fuel project is devoted to the development of fuel minerals fields in the Central region. In the complex project it is supposed that creation of infrastructure in the same region leads to simultaneous development of related industries on the territory where the project is realized.

To carry out experimental calculations on multiple-period simulation model we separated two core variants from 18 possible ones. They are: the variant of a complex project that is realized in the conditions of balanced development, and a variant of a fuel project that is realized in the conditions of transport deficit.

The results of an estimation of economic efficiency show much higher indicators. The NPV which was calculated at 15 % discount rate within the frame of economic efficiency reaches level of 19847,4 million rbl in the fuel project and 13186,3 in the complex project. Thereby the economic efficiency indicators exceed indicators corresponding to the financial efficiency by 22,2 times in the fuel project and 8,2 times in the complex project.

Fuel project

complex project

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The transparency of support

The need for the approved financing of projects support requires adequate development of democratic transformations and corresponding transparency of the intervention by government or institutes of development into investment process.

The budget transparency and corresponding investment policy is connected with the clear and convincing ground for the necessity and essential forms of government participation in every innovative project, may be in the form of budget financing.

The transparency includes openness, availability, detailed presentation, trustworthiness and revealing of the principal problems.

There are incentives on the part of individuals for information not to be revealed or for a lack of transparency. As a criterion of substantiation and control of support it is necessary to use economic efficiency analysis.

From the point of view of realization in the private sector the adequate criterion is the financial efficiency analysis. The transparency of private and public participation in investment projects requires simultaneous analysis of the financial and economic efficiency.

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Conclusions1. The modern approach to the estimation of investment projects

on a microeconomic level extends the framework of financial (commercial) analysis in order to better fit the interdisciplinary and multilevel project results through the analysis of economic (public) efficiency.

2. As a tool of an evaluation of efficiency the multi-period model of innovative project is used. It consists of financial and economic components. For the profound quantitative estimation of economic efficiency this model is interconnected with the modified two-period input-output inter-regional model with investment project.

3. Socially significant projects revealed as a result of such estimation require the support by government or institutes of development , otherwise they would not be realized by a private sector. The support of innovative projects is based on the difference between relatively high economic and relatively low financial efficiency in comparison with other projects

4. An integrated evaluation of financial and economic efficiency of the investment projects is important for success in business and corporate longevity.

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Thank you for your attention!

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References

• [1] Boardman A., Greenberg D., Vining A., Weimer D. Cost-benefit analysis : concepts and practice, 3th ed. – Upper Saddle River, NJ: Prentice Hall, 2006.

• [2] Granberg A.G., Suslov V.I. Suspitsin S.A. Multiregional systems: economic and mathematical research. Novosibirsk, Siberian Scientific Press, 2007.

• [3] A Guide to Cost-Benefit Analysis of Investment Projects. DG Regional Policy, European Commission, 2000.

• [4] Innovative potential of a scientific centre: methodological and methodical problems of analysis and evaluation. Ed. Suslov V.I. Novosibirsk, IEOPP, 2007.

• [5] Jenkins G.P., Harberger A.C. Cost-benefit Analysis of Investment Decisions. Manuel. – Queen’s University, Canada, 2001.

• [6] Methodical recommendations to the evaluation of investment projects efficiency (the second edition). The official publication. M.: Economy, 2000.

• [7] Novikova T.S. Experience of the evaluation of innovative projects efficiency in the Siberian branch of the Russian Academy of Science: the interaction of the state and business. Innovation, 2009, N9.

• [8] Novikova T.S. Economic efficiency analysis of investment projects. Novosibirsk, IEOPP, 2005.

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has identical structure and includes following components: 1. Basic calculations: sales, volumes of production and liquidation value,

investments, amortization and a fixed capital, current costs, working capital, taxation, financing;

2. The forecast of cash flows, including cash flow of the project (a cash flow from operational and investment activity), cash flow for financial planning (a

cash flow from operational, investment and financial activity), cash flow for the governments, cash flow for investors;

3. Financial forecasts of the income statement and the balance sheet; 4. Indicators of efficiency of the project and efficiency of participation in the

project on the basis of appropriating cash flows. The result is a working model of the business that accurately reflects interrelationships between variables,

assumptions and business drivers in the process of project realization.

Financial model of investment project

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Approved Investment projects

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Approved Investment projects

№ ProjectsTotal Cost

of the project, ($

bln.)

Public investments (Investment Fund)

($ bln.)

1Motorway Odintsovo in Moscow oblast 0,64 0,37

2Transport Infrastructure for mineral resource

development in Chita region5,2 1,5

3Orlovsky Tunnel in St.Petersburg

0,97 0,3

4 Western High Speed Diameter in St.Petersburg 3,1 1,0

5Nizhnikamsk Complex of Oil-refinery and Chemical works 4,8 0,6

6 Nizhnee Priangarye Complex Development 7,9 1,2

7Moscow - St.Petersburg Highway (km 15 - km 58) 2,0 0,95

Total 24,61 5,92

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№ Название проекта C

1. Изодекс 106018

2. Катализаторы крекинга и риформинга 1 301 219

3. Молекулярная эпидемиология 37 049

4. Ионизатор 86 053

5. Титан-магниевый катализатор 414 465

6. Теплоутилизаторы 127 918

7. Кремний на Изоляторе 433 593

8. Оптоволоконные мультисенсорные системы 19 423

9. Центр коллективного пользования оборудованием 36 536

10. Ультрафиолетовая лампа 60 827

11. Динамическое зондирование грунта 14 854

12. Трамбовка 7 580

13. Эндоскоп 14 594

14. Риноскоп 213 388

15. Экодом 8 016

16. Система поддержки и принятия решений 17 591

Итого 2 899 124

Эталонные проекты: оценка затрат на реализацию проектов по выпуску высокотехнологической продукции, млн. руб

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Сводные проекты: оценка затрат на реализацию проектов по выпуску высокотехнологической продукции на основе разработок СО РАН

в период до 2010 г., млрд. руб

Инновационное направлениеЗатраты

Всего В том числе

Бюджетные средства Внебюджетные средства

1. Информационные и телекоммуникационные технологии

2.6 1.09 1.51

2. Новые технологии в минерально-сырьевом комплексе Сибири

0.98 0.42 0.56

3. Повышение нефте и газоотдачи 0.22 0.08 0.14

4. Сибирская нефтехимия 1.8 0.85 0.95

5. Сибирская газохимия 2.00 1.00 1.00

6. Сибирская углехимия 0.75 0.30 0.45

7. Сибирская лесохимия 0.60 0.25 0.35

8. Силовая электроника Сибири 6.13 2.53 3.60

9. Биотехнологии, пищевые продукты и лекарственные препараты с использованием электронно-лучевых технологий

1.45 0.54 0.91

10. Современные строительные технологии 0.56 0.20 0.36

11. Энергосберегающие технологии 1.78 0.66 1.12

12. Утилизация техногенных отходов и нерудного сырья

2.14 0.94 1.21

13. Интеллектуальные высокоточные системы вооружения и средства борьбы с терроризмом

0.47 0.47 0.00

Итого: 21.48 9.32 12.16

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Efficiency of the complex of 18 «standard» innovative projects of the Siberian Branch of the

Russian Academy of Sciences, million roubles, r=10%

NPV 2006 2007 2008 2009 2010

Financial efficiency -328,7 -493,5 -111,2 1 149,7 2 776,6

Tax effects 120,0 3 210,7 8 746,2 17 283,5 25 716,6

Indirect effects 879,2 16 527,3 24

274,8 33 339,6 32 099,0

Economic efficiency 670,5 19244,5 32909,8 51772,7 60592,1