ADDITIONALITY, EFFICIENCY AND QUALITY OF PUBLIC FUNDING

Public funding should change the way companies invest and direct their R&D and innovation activities. This is what is commonly understood by the concept of additionality. This change should result in a better outcome of these activities from both the companies and the society's point of view. Furthermore, the resources of the Agency should be used effectively to achieve the additionality (productivity requirement for the Agency). The quality of public funding procedures and complementary advisory services should be assessed, watching for a suitable balance between promptness and easiness to participate and control and good use of public money.

From the Agency's point of view the main hypothesis attached to public funding are:

• Selective funding by expert assessment is the most effective way to implement public incentives for R&D and innovation activities in companies.

• The Agency is the best way to combine market mechanism to social objectives.

• Additional value of the Agency is based mostly on the behavioural change in companies R&D and innovation activities.

The additionality concept summarises the very heart of policy rationale: does public support achieve its objectives? In other words: does public support make any difference in what actually happens in relation to what would have happened without policy action? The chart illustrates this idea.

The concept of additionality contains a difficult measurement problem. There is only one reality which includes the public support instrument and the option without public subsidy is always an estimate. From the TAFTIE point of view additionality is assessed prior to the funding decision by the agency. What is understood as additionality in most ex-post evaluations is what the company receiving the subsidy estimates as being the impact of the public funding. One can argue that in both cases there is a bias. Perhaps the most objective estimate of additionality could be obtained as a combination of these conceptions.

Additionality, however, is an even more comprehensive issue as it is related to all other criteria. Therefore, one possible option in trying to measure additionality is to duplicate at least the most important assessments regarding financial rate of return, competitive position and externalities. This approach would at least give a better picture of a complicated issue. The source of information is still a problem. Perhaps the best option is to combine the views of the agency with the views of the customer in jointly agreed estimates.

The estimated outcome with and without public funding requires a reference group without public funding. This can either be a real group of companies or an estimation of what would have happened without public funding. The use of a real control group of companies is usually difficult except for isolated cases, since typically the companies receiving public funding already differ clearly from the other companies thus making the comparison originally biased.

To describe the way additionality can be analysed, some authors propose three different faces of additionality:

• Input additionality: the extent to which public support stimulates new R&D activity, as opposed to subsidising what would have taken place anyway. Therefore, it is the increase of research efforts measured in terms of inputs (R&D investment, man-hours) originating from public support.

• Output additionality: it is the additional effects obtained (outcome, impact) thanks to public support.

• Behavioural additionality can be defined as the influence of public support on business strategy and R&D activities.

Let us define additionality in a more general way: how public support influences business behaviour. We will then split this concept in a taxonomy of additionalities depending on the spheres of business behaviour that are relevant for our analysis:

• Influence on investment decisions: how public support affects the level of total R&D expenditure of the firm, the timing of this investment and the project selection (which projects are given the "go ahead" among the potential project portfolio). In other words, what we call "influence on investment decisions" is the classical "input additionality".

• Influence on the organisation of R&D: how public support affects the structuring of the R&D function inside the firm, decisions on "make or buy" (R&D outsourcing), learning effects in R&D management (working on a project basis -clear objectives, individualised budgets, scheduled milestones-), etc.

• Influence on technology strategy: effect of public action on key choices of the firm in the field of technology strategy. For example: choice of technological trajectories, core and collateral technologies, technology partners and networking (Did public bodies intervene in putting together partnerships? Did public action reinforce formal co-operation? How new members entered into existing networks Networking with the public administration -financing bodies, regulators, access to public procurement-).

• Influence on international activities: did public support facilitate access to new markets, international alliances, etc.?

• Influence on marketing and company image: does public label increase the company prestige? Does public support contribute to improving exploitation capabilities of the firm?

Additionality must enter from the very beginning into the funding decision of the agency. For that purpose, a formal statement of additionality should be carried out in every single project at the moment of ex-ante appraisal and funding decision. At that moment, the type and extent of additionality must be formally described and detailed by the officer in charge of project selection.

It is clear that the additionalities described above differ according to the characteristics of the firm. For instance, the influence on investment decisions will apparently be much higher in the case of small firms. It would be sensible to confront a taxonomy of additionalities with a typology of firms (by size, ownership -multinational vs. national, state-owned vs. private-, location, etc.) in order to ease the work of the project officer who is responsible for the additionality statement.

Afterwards, project monitoring and ex-post evaluation should check whether the additionality envisaged has actually occurred. This approach would help to overcome the shortcomings of traditional ex-post evaluations in which additionality is measured in a very simplistic way through "candid" questions such as "would you have done the project without public support anyway?". Questionnaires and interview guidelines ought to be prepared according to the initial taxonomy of additionalities and firms. Meanwhile specific "tricks" and checking devices must be produced to ensure adequate and credible results.

While additionality addresses the efficiency of public funding, cost-efficiency should be considered as a measure of TAFTIEs capability to implement policies. Efficiency is easier to measure and information is usually readily available in the agency's operational database. This combined with benchmarking studies with e.g. other TAFTIE agencies should provide adequate measures of efficiency.

Costs of public actions are composed of two items: first, the cost to government of the financing method; second, the costs of programme management.

The financing method used is not neutral even for the additionality issue. If additionality is understood, in the first instance, as the capacity of public financing to spark off an R&D investment decision by the company or to substantially modify it, it seems clear that the characteristics of public support in terms of aid intensity, total amount and the terms upon which it is given, received and, as the case may be, refunded, can have a decisive influence on the behaviour of the company. The company's behaviour may also differ considerably according to whether a credit, subsidy or equity finance is in question.

It is obvious that loan schemes represent a lighter burden for public budgets that classical non-refundable subsidies. However, financial tools and intensity of public aid are issues usually dealt with at policy level and therefore are fixed and given conditions at project level. That being the case, the cost to the tax-payer of the funding scheme and management costs should be tackled as a topic at the programme/policy level of evaluation.

Agency productivity is simply the relation between main outcome indicators and Agency costs. It is very important to realise that Agency productivity is not related to Agency outcome indicators such as number of applications handled or the number of companies. Instead it is related to the indicators described in this document, representing the real impact of Agency activities.

Finally, in order to have a complete picture of the effects of public policies, a chapter ought to be dedicated to evaluating the quality of the service provided to the company. The quality of funding procedures and complementary advisory services should be assessed, watching for a suitable balance between promptness and easiness of participation and control and good use of public money.

Quality of public support measures is a measure of customer satisfaction. Customer satisfaction as a measure of quality presents a measurement problem to the agency. Timing, recent funding decisions and expected future support will bias any surveys or other forms of data collection implemented by the agency itself. Therefore, these should be executed totally independently from the agency. TAFTIEs, however, can and should organise feedback within their normal assessment, monitoring and evaluation practices in order to observe any major problems and changes in quality and to be able to initiate external studies or corrective actions when necessary.

Customer and owner satisfaction means that the Agency is respected by the companies and the policy makers. From the companies' point of view this means that the Agency is reliable, easy to work with and reacts quickly and in the right way. From the owners' point of view the Agency must also be reliable and be able to fulfil the expectations set for it. The quality issue consists of current customer satisfaction and its trend, the errors rate in Agency operation and its trend and the development process in the Agency facilitating improvements to the current situation.