Earlier this week (7 march 2018) I lectured at the Executive Masters in Management of Research Infrastructures (University of Milano-Bicocca) about legal and governance considerations in the financing of inter-governmental research infrastructures by way of a loan (e.g, a cash facility from the European Investment Bank or similar).
Here is a summary of the key points discussed:
Inter-governmental research infrastructures (“RI”) will usually be funded by their members (mostly national governments) with or without the combination of grants, user fees, and in some cases, revenues from commercial activities.
During a period of construction or in cases of capital investment (e.g., new or upgrade of existing machines) it is possible that for a certain period of time the expected cash flow i.e. contributions by members and other sources of income, compared against the expected expenditures for construction/upgrade, will create a negative cash-flow.
The RI may then need to consider alternative ways to securing funding, for example by securing a cash facility, to be paid back in periods when expected cash flow is positive again. Such a cash facility, or bridge funding, can be achieved by contracting a loan from a funding bank (e.g., EIB, ESIF, EFSI, etc)
If the amounts are significant, it is likely that the management of the RI may find itself at that point of time at a challenging position:
The lending bank would be concerned with ‘bankability’, that is: taking into account financial, economic, legal and political considerations, the bank would like to be assured that the RI must have the means and the duty to repay the loan. The bank will look at the RI's business plan and examine in particular issues such as: cash flow, future revenues (if any), commercial activity, assets (including IPR), possible guarantees and the organisation’s liability regime. The bank would require sufficient comfort from the borrower for proper servicing of the loan (capital, interest and other potential charges).
The stakeholders of the RI, i.e., the member countries represented at the Council/Assembly, would be concerned about their authority to permit the RI to contract a loan of a significant amount and about their government’s (as well as their personal) liability in relation to servicing such a loan.
The bank would seek maximum security, hence increased liability or specific guarantees while the members will look at minimising their liability and potential exposure. The RI governing documents, such as the Convention, Statutes, Financial Rules, will be looked at by both the lending bank and Council members, seeking support or comfort to their interests. It is likely that the RI itself will be requested by the bank and by the Council to provide additional guidance on the interpretation of governing documents as well.
When the amount of the loan is large, the stake will be high and so does the challenge to the RI’s management team. Finding the path forward will require strong leadership skills combined with a degree of creativity and a good team of advisors.