Jersey Innovation Fund: establishment, funding and operation (P.124/2012) – amendment (cannot be debated before 1st May)

STATES OF JERSEY

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JERSEY INNOVATION FUND: ESTABLISHMENT, FUNDING AND OPERATION (P.124/2012) – AMENDMENT

Lodged au Greffe on 17th April 2013

by the Minister for Treasury and Resources

STATES GREFFE

2012   Price code: D  P.124 Amd.

JERSEY INNOVATION FUND: ESTABLISHMENT, FUNDING AND OPERATION (P.124/2012) – AMENDMENT

PAGE 2, PARAGRAPH (c) –

For the words "in accordance with the Operational Terms of Reference set out in the Appendix" substitute the words "in accordance with the Revised Operational Terms of Reference set out in the Appendix to the amendment of the Minister for Treasury and Resources dated 17th April 2013".

MINISTER FOR TREASURY AND RESOURCES

REPORT

1.  Introduction

Following the lodging of P.124/2012 on 20th November 2012, the Economic Affairs  Scrutiny  Panel  undertook  a  review  with  the  following  terms  of reference –

1. To undertake an examination of key elements of the proposals to create a Jersey Innovation Fund (JIF), including –

• eligibility  criteria  and  how  innovation'  is  defined  for  the purpose of the Fund
• the constitution and role of the Innovation Board', and the associated role of the Minister for Economic Development
• the  appropriateness  of  increased  risk  in  the  investment  of public funds, and how such risk will be managed
• the  processes  to  manage  the  Fund's  income  and  its operational costs.

2. To establish what work has been undertaken on plans to enable equity investment, and what work remains to be completed.
3. To examine  how  the Jersey  Innovation  Fund  compares to similar initiatives in relevant jurisdictions.

The  detailed  review,  which  included  meetings  with  Ministers  and  senior officers from the Economic Development, Treasury and Resources and Chief Minister's Departments and key external stakeholders, resulted in a report being published on 27th March 2013.

The Scrutiny Report's findings and recommendations have been welcomed by the Minister and, as a consequence, changes have been made to reflect fully or partially  the  recommendations  made.  The  changes  have  led  to  the "Operational Terms of Reference" included in P.124/2012 being revised.

As  a  result,  this  amendment  to  P.124/2012  has  been  brought  forward  to replace the previously lodged "Jersey Innovation Fund, Operational Terms of Reference,  September  2012"  with  the  'Revised  Operational  Terms  of Reference, Jersey Innovation Fund Grants and Loans – Phase 1, April 2013".

2. Summary of changes to the Operational Terms of Reference to reflect the Scrutiny Panel's recommendations

The areas of change in the Operational Terms of Reference to incorporate Scrutiny's recommendations are as follows.

Eligibility

1. The criteria  have  been  amended  to encourage  applications  from individuals,  sole  traders,  all  types  of  partnerships,  any  business registered in Jersey, or any organisation from the third sector.
2. Access to the JIF will not be limited to projects in high-value sectors. Eligibility criteria have been changed to encourage applications for projects from any sector with high-growth potential that will create jobs for locals.

Level of funding support

1. To be  consistent  with  the  Minister  for  Treasury  and  Resources' maximum  lending  limits  under  the  Public  Finances  (Jersey)  Law 2005, the maximum loan or grant available will remain at £500,000.
2. The proposed  minimum  level  of  £20,000  has  been  removed  to encourage applications from early stage or small projects.

Corporate Governance

1. To strengthen the Board, the number of private sector members has been increased to a minimum of 4 inclusive of the independent Chair.
2. Consideration will be given to commissioning organisations such as Jersey Business Ltd., Digital Jersey and the States Rural Economy Team to provide ongoing aftercare and monitoring functions.

Some of the Scrutiny recommendations refer to Phase 2 of the project which, subject to States approval, will allow the JIF to make equity investments and move  it  towards  a  Partnership  Model.  During  the  development  of  the Proposition and Report for Phase 2, all the Scrutiny Panel's recommendations will be carefully considered and, where appropriate, adopted.

3. Financial and manpower implications

There are no additional financial or manpower implications for the States arising from this amendment.

4. Conclusion

The recommendations made by the Economic Affairs Scrutiny Panel have been welcomed; and the changes made will, in Phase 1, improve access to the JIF and increase the amount of investment in all areas of innovation, which overall should drive growth and create new exciting job opportunities for locals.

The Operational Terms of Reference, Application Forms and all supporting documentation have been amended to reflect the changes in eligibility, level of funding and corporate governance recommendations.

Revised Operational Terms of Reference

Jersey Innovation Fund Grants and Loans – Phase 1

April 2013

Contents  Page

1. Strategic context .........................................................................................  8
2. Laws and Articles that allow for the Fund to be created ............................  8
3. The Jersey Innovation Fund's operating model ..........................................  8
4. Grants and Repayable Loans ......................................................................  10
5. Obligations to payment of royalties ............................................................  12
6. Eligibility ....................................................................................................  12
7. Due diligence ..............................................................................................  13
8. Assessment framework ...............................................................................  14
9. Recommendation and approval framework ................................................  17
10. Management and Governance of the JIF ....................................................  18
11. Risk .............................................................................................................  20
12. Scope of the Fund .......................................................................................  20
13. Financial and manpower implications ........................................................  20
14. Reporting and Audit ...................................................................................  21
15. Breaches and Remedies policies .................................................................  22
16. Liabilities ....................................................................................................  22
17. Governing Laws and Jurisdictions Policies ................................................  22

Appendix 1 – Extract from P.55/2012 .....................................................  23 Appendix 2 – Examples of Innovation Funds ........................................  26 Appendix 3 – H.M. Treasury Green Book best practice .......................  29 Appendix 4 – Nolan Principles ................................................................  31 Appendix 5 – Application Business Case Templates .............................  32 Appendix 6 – Process Map Summary .....................................................  43

On 17th July 2012, the States approved a new Economic Growth and Diversification Strategy  (P.55/2012).  The  key  objectives  of  the  Strategy  are  to  deliver  growth, improve competitiveness, diversify the local economy and create employment. This will be achieved by the States working in partnership with the private and third sector organisations to deliver 4 strategic aims –

1. Encourage innovation and improve Jersey's international competitiveness;
2. Grow and diversify the financial services sector capacity and profitability;
3. Create new businesses and employment in high value sectors;
4. Raise the  productivity  of  the  whole  economy  and  reduce the  reliance  on inward migration.

To support the delivery of these aims, the EGDS proposed the creation of the Jersey Innovation Fund (JIF) to increase innovation in the Jersey economy and, by doing so, increase the Island's productivity, economic diversity and competitive advantage. The relevant extract from the EGDS is included at Appendix 1.

The JIF will be capitalised with an initial £5 million allocation in the Medium Term Financial Plan (MTFP). Projects eligible for funding will range from direct business support for start-up, growth and inward investment through to strategic infrastructure in the private, public and third sector projects.

Success for the Jersey Innovation Fund will be to encourage investments into areas of innovation that will deliver a competitive advantage for Jersey, attract additional  private  sector  investment,  attract  high-value  inward  investment businesses and raise the productivity of local organisations, resulting in more job opportunities for locals.

2. Laws and Articles that allow for the Fund to be created

The  Fund  will  be  established  pursuant  to  Article 3(3)(a)  of  the  Public  Finances (Jersey) Law 2005.

3. The Jersey Innovation Fund's operating model

The principle of Governments encouraging, supporting and making investment into innovation is not a new concept; indeed Jersey is unusual in not having such support available to support economic development. The UK, Malta and Singapore are 3 good examples where government funds have, with significant success, been used to boost innovation. Whilst there are some common features, each jurisdiction has a unique operating model, eligibility and assessment criteria designed to support the specific priorities and objectives of the jurisdiction. That being said, analysis of Innovation Funds  from  across  a  number  of  jurisdictions  allows  operating  models  to  be characterised into 3 main types:

3.1  The Fund of Fund

A Government Fund managed by public sector fund managers who make strategic investments in a number of established private sector Venture Capital funds. The Government funding is directed towards Venture Capital funds that are of strategic importance; for example technologies or renewable energies. Coupled with private sector funding these privately managed funds invest  in  private  sector  businesses.  All  investments  are  equity  finance arrangements  where  a  share  in  the  company  is  taken  in  return  for  the investment. The returns on any Government investments are linked to the overall performance of the venture capital fund and not linked to any one specific organisation.

3.2.  The Partnership Fund

A Government managed fund that invites private sector venture capital fund  managers  to  submit  applications  for  co-funding  to  increase  the availability of risk capital for early-stage and high-growth companies. Government does not own any equity in the private enterprises; this is retained by the venture capital organisation. Returns on any investments are linked to either  the  overall  performance  of  the  venture  capital  fund  or  a  specific organisation.

3.3  The Government Fund

A fund that provides financial support in the form of repayable loans and/or non repayable grants direct into a private sector enterprise. The fund is normally managed by an independent Board with members from both the public and private sector. The returns made on loans are linked to combination of arrangement fees, interest rates and special clauses allowing it to benefit from any increases in value, sales growth, or the licensing of any intellectual property.

An example of each is provided at Appendix 2.

The Public Finances (Jersey) Law 2005 provides the legal framework to both establish the JIF and allow the Fund to provide support for projects in the form of loans or grants. Existing legislation would not allow the JIF to be used to make investments in private enterprise in exchange for equity in the business.

As a consequence, it is proposed that the JIF will launch and initially operate as a Government Fund (see 3.3 above) making available financial support in the form of repayable loans or non-repayable grants (Phase 1). The assumption is that the majority of support will be provided in the form of repayable loans with conditions that allow the JIF to realise enhanced returns if the business were to be successful and/or sold for significant gain. It is envisaged that non repayable grants will only be considered in exceptional circumstances.

Following  the  launch  of  the  JIF,  the  Treasury  and  Resources  and  Economic Development  Departments  will  develop,  in  consultation  with  stakeholders,  the necessary Report and Proposition for States approval, which will allow the JIF to make equity investment in privately-owned business (Phase 2). This will require an element of the JIF to be operated as a Partnership Fund, as described in 3.2 above. The aim is that the Minister for Treasury and Resources will bring forward the Proposition

and Report and to the States of Jersey for approval of this element of the JIF within 6 months of the launch of the Fund.

The aim of the JIF is that it should be self-replenishing. As a consequence, most grants and loans are expected to have conditions that allow the JIF to realise enhanced returns if the business were to be successful and/or sold for significant gain. In all cases any returns from clauses attached to any grants or loans will be returned back to the Fund. The income from interest on loans and royalties alone is not anticipated to cover annual operating and write-off costs. The development of the Fund to allow it to make equity investments (Phase 2) will support the aim of the Fund becoming self- replenishing.

4. Grants and Repayable Loans

Within the first 6 months of operation, the types of financial support available from the JIF will be restricted to repayable loans and non-repayable grants. In both cases the Minister for Economic Development will have the option to approve specific clauses or  conditions  to  safeguard  the  States  of Jersey  and  allow  it to  benefit from  any significant increase in the value of the enterprise, a move to another jurisdiction, a significant increase in revenues, or other commercial opportunities resulting from the original investment.

The option to provide either a repayable loan or grant provides the opportunity to support fully commercial projects in innovation or projects that would not proceed without assistance from the JIF. In all cases projects supported by JIF must clearly demonstrate that they have the potential to deliver economic and commercial returns. The assumption is the majority of support offered will be through repayable loans with grants only offered in exceptional circumstances.

Any financial support offered (loan or grant) will comply with all aspects of the Public Finances (Jersey) Law 2005 and States of Jersey Financial Directions. Any grant or repayable loan would be the subject of a detailed Funding Agreement. Each Funding Agreement will be unique to the project and include details of any specific clauses, the rights and obligations of both parties and contain the following as a minimum –

• Name of the investee
• Description of the financial support (loan/grant)
• Purpose of the loan or grant
• States strategic aims and objectives supported
• Amount of the support
• Payment terms and timing
• Repayment terms of the loans
• Interest rates of approved loans
• Royalty obligations
• Other Special conditions attached to the funding support
• Treatment of royalty or loan defaults
• Arrangements for repayment or early repayment
• Explanation of the corporate governance framework
• Explanation  of  disclosure  of  the  support  in  the  States  of  Jersey  Annual Accounts

• Clear explanations of what each party is expected to provide, including any reports and/or statements
• Any  conditions  attached  to  the  support  and  criteria  for  measurement  of whether investment conditions have been fulfilled
• Arrangements  for  repayment  of  the  loan  or  grant  in  the  event  of  non- performance or non-compliance
• Rights of access for Departmental officers and the Comptroller and Auditor General
• Arrangements for the purchase and disposal of any assets to be acquired using the grant
• Details of any security which may be required to secure the Loan.

4.1  Definitions of the types of financial support available Loans

Loans are defined as a sum of money advanced from the Fund to a party for a limited period of time and repaid with interest calculated on the balance outstanding. There is no minimum amount and, to be consistent with Minister for Treasury and Resources' lending limit under the Public Finances (Jersey) Law 2005, the maximum JIF loan is £500,000.

Loan Polices

There is no minimum Loan.

The maximum Loan is £500,00.

The maximum repayment period is 5 years.

The minimum repayment period is 12 months.

Initial draw-down of the Loan must be made within 6 months of the Loan Agreement  and  Royalty  agreements  being  signed  and  returned  to  the JIF Executive Officer.

Final  draw-down  must  be  within  12 months  of  the  Loan  and  Royalty Agreements being signed.

All Loans will be subject to an interest charge.

Interest rates will be fixed for the full term of the Loan.

Interest rates on all Loans will be recommended by the JIF Board.

Holiday Repayment Period on Loan Facilities must be for no longer than 12 months after the initial draw-down.

Interest rates will be calculated on the amount of capital outstanding at the end of each calendar month.

All  applicants  receiving  a  Loan  may  be  required  to  enter  into  a  Royalty Agreement.

Any available security should be used to secure the Loan.

Obligation to pay interest on all loans

The company receiving a loan from the Fund will be obliged to pay interest on the amount borrowed. The terms and interest rate will be determined through consultation between  the  Board,  the  Treasurer  of  the  States  and  the  Minister  for  Economic Development, and agreed on a case-by-case basis.

Termination of a Loan policy

Either party to an approved Loan may at any time by notice in writing, and without the need to provide any reason therefore, specify to the other party a Termination Date which shall be not less than 6 months from the date on which such notice is given. In all cases the Loan and any interest due will have to be repaid in full to the JIF.

An organisation in receipt of a Loan may request an early repayment or settlement figure. This settlement figure will be calculated by the Treasury Department.

Grants

Grants are defined as a transfer of money to an individual or entity in return for future compliance with certain conditions relating to the project. There is no minimum grant and, to be consistent with Minister for Treasury and Resources' lending limit under the Public Finances (Jersey) Law 2005, the maximum JIF grant is £500,000.

Grant Policies

There is no minimum Grant.

The maximum Grant is £500,000.

Draw-down  of  the  Grant  must  be  made  within  6 months  of  the  Grant Agreement  and  Royalty  agreements  being  signed  and  returned  to  the JIF Executive Officer.

All applicants receiving a Grant may be required to enter into a Royalty Agreement.

5. Obligation to payment of royalties

Based  on  the  recommendation  of  the  JIF  Board,  the  Minister  for  Economic Development  may  require  the  successful  applicant  to  pay  royalties  on  income revenues generated by the project. The scale and scope of royalty payments will be defined in the Funding Agreement.

6. Eligibility

1. Any individual, sole trader or any type of organisation or business can apply for JIF support. To apply, the applicant must –

complete and sign the JIF Application Form;

demonstrate: that without JIF support the project will not proceed, or will proceed at a significantly reduced scale or to slower timescales;

disclose all forms of potential security;

agree  to  supply  any  additional  information  requested  by  the  JIF Executive  or  Board  during  the  due  diligence  and  assessment processes;

have obtained the required business licence in accordance with the Regulation of Undertakings Law (for trading organisations only);

clearly demonstrate how the innovation investment will create new

jobs;

demonstrate the growth potential for the project;

disclose all other forms of security that could be used to secure the Loan.

2. The Application shall only be eligible for a Loan if –

the  aggregate  amount  of  the  requested  JIF  support  Loan   and/or capable of being advanced to such Applicant under any other States of Jersey scheme is an amount which does not exceed £500,000;

the  initial  draw-down  for  the  Project  will  be  made  no  later  than 6 months after the date of the Loan Agreement being signed;

the application is for a Loan Facility in sterling;

the project will be delivered within the Bailiwick of Jersey;

the applicant agrees, if requested, to sign a Royalty Agreement as

determined by the JIF Board.

3. The Application shall only be eligible for a Grant if –

the applicant can justify and demonstrate that the project will not generate sufficient income to repay a loan within the first 5 years of the Project starting;

the  aggregate  amount  of  the  requested  JIF  support  Grant  and/or capable of being advanced to such Applicant under any other States of Jersey scheme is an amount which does not exceed £500,000;

the  initial  draw-down  for  the  Project  will  be  made  no  later  than 6 months after the date of the Grant Agreement being signed;

the Project will result in significant economic spillovers in Jersey during the first 5 years of the project commencing;

the project will deliver an economic competitive advantage to the Island;

the project will be delivered in the Bailiwick of Jersey;

the project, within the first 5 years, will result in the creation of new jobs (direct or indirect employment).

7. Due diligence

1. Every Applicant must –

complete and sign the JIF Application Form;

provide copies of the current Regulation of Undertakings business licence (applies to established business only);

supply  a  copy  of  the  company's  Memorandum  and  Articles  of Association (applies to established business only);

for  all  collaborative  applications  supply  copies  of  all  partnership agreements;

provide details of all other sources of funding including copies of all agreements;

disclose any debentures or securities taken or charges placed;

disclose full details of any guarantees provided by the principle(s), directors to secure other funding for the project;

disclose details of all principal(s) and or shareholders including their residential address;

supply a copy of the latest audited accounts (established business only);

supply financial forecasts for a minimum of 3 years or the life of the project (if greater than 3 years).

2. All Applicants will be subject to background checks including but not limited to credit rating, tax/social security and financial.
3. Applications made by 2 or more organisations must be accompanied by copies of audited accounts for every partner.
4. Applications made by a subsidiary company must supply a copy of the parent company's accounts.

8. Assessment framework

To demonstrate the extent to which an application might meet the criteria of the Fund, the  independent  JIF  Board  will  have  a  consistent  and  objective  methodology  to compare projects which may exhibit quite different characteristics.

In particular, the JIF Board will have a robust approach to considering the impact a project might have on employment, competitiveness and innovation, plus an objective measure of whether a project can be considered to encourage high-value-added, high quality or high productivity activity. The Board will also consider the likely short- and long-term commercial viability of the project.

1. Assessment policies

Every application will be subject to a full economic assessment.

Economic assessments will be completed by the States of Jersey Economic Adviser's Unit.

The economic assessment will be presented as a written report to members of the JIF Board.

The JIF Board may, or if requested to do so by the Economic Adviser or the Minister for Economic Development, commission experts to provide specialist technology, financial or legal advice.

The  JIF  Board  is  responsible  for  assessing  the  applicant's  business  plan, including but not limited to: its commercial viability, the market opportunity and size, the competition if any, the capability and experience of the project team, and any identified or unidentified risks.

The JIF Board must review and consider all forms of security disclosed or available.

In  order  to  complete  a  thorough  assessment  of  all  potential  projects,  certain information will be required. A summary of the information required for every project is set out below.

2. The Applicant

Name of applicant

Economic sector

Country of residency/ownership

Recent Trading Results & projections

Three  years'  company  accounts,  including  the  most  recent  audited accounts.(not applicable for would-be-entrepreneurs or start-ups)

Business Plan with sales projections and commentary explaining any change in revenues, costs, margins, etc.

3. The Project (proportionate to the size and complexity of the proposed project)

Description of project

Details of any additional facilities/plant/buildings required

Rationale for the project/what alternative projects have been considered?

Will the project result in any new products or services?

Timescales

Amount and type of assistance sought

Other sources of finance and the need for further finance

Clear evidence that any other necessary funding has been secured

Evidence that all alternative funding has been exhausted (e.g. letters from bank)

Evidence that further funding is required (demonstrable finance gap)

Supply chain expenditure – any inputs purchased from local companies

Innovation –  existing  level  of  innovation  and  what  innovation  will  be undertaken  as  part  of  the  project.  Details  of  any  specific  expenditure  on innovation

Training/Skills  Development –  Details  of  any  training  that  will  be undertaken – general/specific, on the job/classroom, qualifications, etc.

Knowledge Transfers – Is there any collaboration with other businesses or knowledge bases?

Counterfactual – What will happen in the absence of assistance and what is the rationale/evidence for this?

Market analysis of current and anticipated market share, main competitors, etc.

Employment  Impacts – Number of Full-Time Equivalent staff – job titles, wages, skill levels, longevity, recruited from locally-qualified or non-local population.

4. The Assessment

• Commercial

Commercial/Market  Assessment –  How  realistic  are  the  trading forecasts?

Is there a market for the product?

Is the market growing?

Who are the main competitors?

What is the likely response of competitors?

Are there any risks to the market, e.g. exchange rate risks

Technical Assessment – how innovative is the project?

Viability/Sustainability

Will the project earn sufficient profits to be sustainable?

Are trading forecasts realistic based on the market prospects?

Assessment of the quality of the management team.

Are financing arrangements sustainable?

Environmental/Social Factors

Economic

Incremental Value Added

– Difference between the value added of the project and the counterfactual

– Will value added be scored high/medium/low compared to Jersey average?

Wider Costs/Benefits

Supply Chain – value added of any additional spend in the local supply chain

Opportunity Cost

– For locally qualified employees, the opportunity cost is  the  most  likely  alternative  employment  (or unemployment) to the project.

– For non-locally qualified employees, the opportunity cost is the potential to import labour for a different project/firm, potentially in a different sector.

Innovation Spillovers

– Scored  high/medium/low  potential  for  spillovers, based on the characteristics.

– Monetised  where  possible,  based  on  the  level  of expenditure.

Training Spillovers

– Scored  high/medium/low  potential  for  spillovers, based on the type of training.

Other Wider Impacts

–  Only  wider  impacts,  e.g.  displacement  from  other Jersey business, competition impacts, etc.

• Budgetary Impacts
  • Cost  of  Assistance,  including  all  costs  to  other  parts  of government
  • Direct Revenues – e.g. loan repayments, royalties, dividends
  • Tax  Impacts –  income  tax,  corporate  tax,  potential  GST impacts.
• Employment Impacts
  • Number and timing of creation of new FTE jobs
  • Sustainability of jobs
  • Quality of jobs

Skills (high, medium, low)

Productivity  at  end  of  project  (plus  assessment  of high, medium or low)

Average wages (high, medium, low)

• Additionality
  • Will the project go ahead without assistance?
  • What is the return on investment without support?
  • How risky is the project?
  • Is alternative finance available?
  • Is there another, more profitable location outside Jersey?

9. Recommendation and approval framework

The  JIF  Board,  after  completing  the  appropriate  levels  of  due  diligence  and assessment,  will  determine  if  the  project  should  be  rejected  or  proceed  with  a recommendation to the Minister for Economic Development to approve the project using  the  Business  Case  Template  attached  at  Appendix 3.  The  recommendation, signed by the Chair, will include all terms, conditions, interest rates, repayment term on loans, royalty obligations, security requirements and special clauses that are to be attached to offer of support.

9.1  JIF Board Recommendation Policies

The JIF Board must only make a recommendation to the Minister for Economic Development to approve an application if it is of the opinion that the –

Applicant has a viable business proposition.

Applicant will be able to meet its repayment obligations for the Loan.

Applicant is unlikely to secure funding from other sources.

Provision  of  debt  financing  to  the  Applicant  is  an  appropriate  means  of financing. For the avoidance of doubt, where the provision of debt financing is only one of a number of elements of an overall financing package, the JIF Board must be of the opinion that the provision of a Loan is an appropriate element of such financing package.

Individual or organisation receiving the Loan is able to meet its debts as they fall due and will not, as a consequence of entering into the proposed loan facility, cease to be able to meet its debts as they fall due.

Economic assessment undertaken is positive and confirms the project has the potential to positively contribute to the Jersey economy.

The JIF Board's recommendation, or not, to approve a Loan must be in writing to the Minister for Economic Development and accompanied by a business case signed by the JIF Board Chairman. The recommendation will include –

the amount of the Loan;

based  on  the  information  provided  by  the  Treasury  Department,  shall recommend the interest rate for the Loan;

details of how any available security should be secured;

any holiday period for both the Loan and interest repayments;

proposals for multiple draw-downs subject to the final draw-down being no later than 12 months from the Facility Letter;

confirmation that the Applicant has a viable business proposition with the potential to positively contribute to the Jersey economy;

details of the success criteria for the project (jobs and revenues) any wider economic benefits;

all information, clauses, terms and conditions that should be included in the Royalty Agreement.

The Minister for Economic Development, if he approves the Board recommendation, will record his decision by signing a Ministerial Decision. There is no right of appeal against either the Board's recommendation or the Ministerial Decision.

10. Management and Governance of the JIF

A new independent Innovation Board ("the JIF Board") will be established. The JIF Board  will  consist  of  a  minimum  of  4 private  sector  members  (including  an independent chair) plus, in an ex-officio capacity, one representative from Treasury and  Resources,  the  Economic  Advisory  Unit  and  the  Economic  Development Department's Chief Officer. The JIF Board will review every application and make recommendations to the Minister for Economic Development to approve or reject an application.  The  JIF  Board  will  not  have  authority  to  approve  any  funding.  The Minister for Economic Development will have sole responsibility for approving or rejecting all grants or loans from the Fund and recorded by signing a Ministerial Decision

The  Economic  Development  ex-officio  representative  on  the  Board  is  also  the Department's  Accounting  Officer.  To  protect  this  position,  avoid  any  possible conflicts of interest and to allow the Chief Officer to provide independent advice to the Minister for Economic Development, the Chief Officer will not have any voting rights in his capacity as a JIF Board member.

The  private  sector  representatives  will  play  a  critical  role  in  assessing  the  likely success of the project, so extensive commercial experience in a related role will be a pre-requisite.

The JIF Board will be supported by a JIF Executive, provided by the Economic Development Department. The JIF Executive will be responsible for administrative, secretariat functions and managing the due diligence processes. In addition, the JIF Executive  will  have  responsibility  for  managing  the  aftercare,  monitoring  and reporting to the JIF Board on all supported projects on a regular basis. This may include commissioning organisations such as Jersey Business Ltd., Digital Jersey or the States Rural Economy Team, to provide the ongoing aftercare.

The JIF Executive will also have lead responsibility for –

• Receiving and co-ordinating all applications
• Undertaking initial and appropriate levels of due diligence
• Preparing the Business Case on behalf of the JIF Board for the Minister's consideration
• Preparing  the  Funding  Agreement  in  association  with  the  Law  Officers' Department
• Managing  aftercare  and  ongoing  monitoring  of  approved  projects,  or  as appropriate arranging for aftercare to be managed by third-party organisations, such as Jersey Business Ltd. or Digital Jersey

• Establishing a risk register for all projects
• Managing  the  risk  register,  which  must  be  updated  every  6 months,  and notifying the JIF Board, Minister for Treasury and Resources, Treasurer of the States and Minister for Economic Development of any changes
• Drafting the Annual Report for the JIF Board to approve.

The JIF Board, as appropriate, will also draw on other expert opinions to provide comprehensive due diligence when considering and assessing applications. This will include, but not be limited to, technical expertise, market intelligence, financial due diligence, and company or patent searches.

In  every  case  and  during  the  assessment  process,  the  States  of Jersey  Economic Adviser's Unit will undertake an economic impact assessment and present a written report to the JIF Board, which they will use in considering and assessing the project from an economic prospective.

The JIF Board, after being fully satisfied with the due diligence checks, reviewing the expert and economic opinions and a detailed analysis of the proposal, will make a recommendation to the Minister for Economic Development to approve or reject the project. The recommendation will be presented using the Business Case template (Appendix 3) which is based on H.M. Treasury Green Book best practice.

The JIF Board, which will act in an advisory capacity, will be responsible to the Minister for Economic Development. The JIF Board will, at all times, ensure that the JIF operates within both the Public Finance Laws and any current or future Financial Directions. Board Members will also operate within an approved corporate framework and publish an Annual Report that will be presented to the States.

Private sector Board Members will be appointed through a process overseen by the Appointments Commission. Public sector Board Members will be appointed by the Minister for Economic Development. Board Members will not be remunerated.

Board members will be appointed for a period not exceeding 3 years. A member of the Board will cease to serve before the 3 year term if –

• they resign;
• they cease to be employed as a civil servant of the States Department they are representing;
• with respect to a private sector representative, they commence employment with the States of Jersey as a Civil Servant.

Board members will be expected to declare an interest and not consider an application where there is any risk of a conflict of interest. Conflict arises where an individual's obligation to further the purposes of the JIF Board is at odds with their own financial interests. For this reason, members will have to abide by the 7 principles of public life set out in the Nolan Report, attached at Appendix 4.

11. Risk

No form of financial support comes without a level of risk. It is acknowledged by the nature of the projects supported that some will fail. This may result in a loan not being repaid, the non-payment of royalties, or a grant supported project not delivering the desired outcomes.

Although the pre-investment due diligence, plus the post-investment monitoring and assessment process are designed to minimise risks, it is important to acknowledge that it is impossible to operate a fund of this type without accepting some level of risk.

During the due diligence and assessment process the JIF Board will consider all available  security  available  and  recommend  to  the  Minister  for  Economic Development if and how any available security should be used to reduce any risk to the JIF.

12. Scope of the Fund

The Fund will be used to support projects across all sectors, including the public and thirds sectors, but targeted and prioritised towards –

• Attracting new innovative businesses to the Island. This is an important part of the inward investment proposition and supports Government's commitment to enhancing its ability to attract and create new jobs.
• Assisting would-be-entrepreneurs and early stage start-up enterprises to invest in innovation.
• Established businesses with growth potential to invest in innovation.
• Research projects that may improve the Island's competiveness.
• Enabling investments in infrastructure.
• Establishing  better  links  with  universities  with  the  objective  of commercialising academic IP.

13. Financial and manpower implications Financial costs

There will be financial costs associated with the operation and management of the Fund, particularly relating to due diligence, assessment and approval of applications e.g. company searches, background checks, market research, credit checks, legal costs and specialist advice. It is intended that EDD will meet these costs in the first instance and  on  an  annual  basis  recharge  them  to  the  Fund.  The  Economic  Development Department estimates the cost for managing an estimated 10 applications a year will be no greater that £100,000 per annum.

Manpower implications

The  operation  of  the  Fund  will  place  manpower  demands  on  the  Economic Development,  Treasury  and  Resources  and  Law  Officers'  Departments  and  the Economic Adviser's Unit. It is estimated that the total man-hours will cost £50,000 per annum. This cost will not be recharged to the Fund and will be included within the relevant Department's year-end accounts.

14. Reporting and Audit

Copies of the signed minutes of all JIF Board meetings will be sent to the Minister for Economic Development. All reports published will comply with the normal States of Jersey reporting practices.

Reporting Policies

The JIF Board will provide the Minister for Economic Development and the Treasurer of the States with a written report no later than 31st January and 30th July for every year the JIF is in operation. Each report as a minimum must include –

a full financial statement on the income and expenditure of the JIF;

a list of all approved Loans including information on repayment schedules;

a report on all defaults, non-repayments, repayment delays, loan restructuring or write-offs;

a progress report on every Project supported by a Loan;

details on any other changes in circumstance.

Every organisation in receipt of a Grant or Loan must provide quarterly progress reports. As a minimum, each report must include –

1. Progress against the original Project plan noting all key milestones
2. A financial analysis of spend and income compared with the original forecast
3. A progress report on all new innovation
4. Details of any changes in Key Staff
5. Details on any change to the company's Board of Directors.

All organisations in receipt of a Loan or Grant must provide an annual Loan/Grant Assurance Statement to the JIF Executive Officer, confirming how the Loan/Grant has been spent and the outcomes achieved in comparison with the original plans. The Assurance Statement must be signed by the Directors of the organisation and received by the JIF Executive Officer by 31st March of the year following the signing of the Loan and Royalty Agreements.

Audit and provision of information polices

At such frequency and such times as the States of Jersey Audit Committee may from time to time determine, in its absolute discretion may conduct an audit of the JIF.

At such frequency and such times at the States of Jersey may from time to time determine, in its absolute discretion, conduct an audit or all or any approved Loans.

The Comptroller and Auditor General at his discretion can audit the JIF.

15. Breaches and Remedies policies

1. Any project breach, delay, significant change, as determined by the JIF Board, which is continuing unremedied and unwaived, the JIF Board will, at its discretion, determine what steps, if any, are to be taken to remedy the relevant breach  or  to  seek  to prevent,  or  minimise  the  risk  of,  any  possible  re- occurrence of such breach. This can include recommending to the Minister for Economic Development the termination of the Funding Agreement.
2. An  information  disclosure  breach  during  the  application  process,  as determined by the JIF Board, that is deemed to be inaccurate or misleading in any  way,  will  result  in  any  application  being  rejected.  An  information disclosure during the term of an approved Loan could result in the termination of a Loan agreement, resulting in a demand for immediate repayment for the outstanding amount.
3. A Funding or Royalty Agreement repayment breach will result in the Treasury following  its  standard  policies  on  debt  recovery.  Any  change  from  the standard Treasury policies will require a recommendation from the JIF Board and a Ministerial Decision from the Minister for Economic Development.

16. Liabilities

The Funding, Loan and Royalty Agreement must ensure the States of Jersey, the JIF and JIF Board Members shall have no liability to the organisation in receipt of a loan whether  in  contract,  tort  (including  negligence  or  breach  of  statutory  duty)  or otherwise.

17. Governing Laws and Jurisdictions Policies

The Laws governing all documentation, Loan or Royal Agreement shall be governed and construed in accordance with Jersey law.

APPENDIX 1

EXTRACT FROM P.55/2012

Strategic  Aim 1:  Encourage  innovation  and  improve  Jersey's  international competitiveness

The States has a role to play, in partnership with business, in encouraging innovation that will improve the Island's competitive advantage in an increasingly competitive international market place. Innovation encompasses a wide range of activities from research and development, to organisational change, training, testing, marketing and design. It contains products, services and other solutions that that can be new to the business or the international market. Businesses commonly under invest in innovation and, as a consequence fail to realise their potential. Government policy and financial intervention can remove barriers, bottlenecks or obstacles that impede the innovation process.

To achieve this strategic aim, a new Innovation Fund is proposed. The aim of the Fund is to support innovation and will be available to support a wide range of activity from direct business support to strategic infrastructure investments, in the private, public and third sectors. The one consistent factor of policies that merit support will be that they improve the rate of innovation in Jersey and lead to significant employment creation.

The priority is to:

1.1  Establish  a  new  Innovation  Fund  pursuant  to  Art. 3(3)(a)  of  the  Public Finances  (Jersey)  Law  2005 –  managed  by  EDD,  with  an  independent Board  including  EDD,  Treasury  and  Resources,  and  Chief  Ministers' Department representatives and non-Executive Directors drawn from the private  sector.  The  Board  will  have  responsibility  for  evaluating  all applications  for  support  and,  following  thorough  analysis,  making recommendations to the Economic Development Minister. The fund will make  investments  in  private  and  public  sector  projects  to  drive  greater innovation in Jersey and improve competitive advantage.

The Minister for Treasury and Resources will bring forward detailed proposals for the Innovation Fund to the States for approval in the fourth quarter of 2012 however the Fund will have the following structure:

• Investments  will  only  be  made  in  projects  that  clearly  demonstrate  a significant  leverage  in  terms  of  improving  Island  competitiveness, infrastructure  improvements,  developing  innovation  and  diversification towards high value activity that creates good jobs for local people. Projects will also have to demonstrate how the investment will deliver wider economic benefits to the Island.
• The fund will be used to support projects across all sectors, from enabling investment in ICT infrastructure, to additional support to attract innovative businesses to the Island

• The Innovation Fund will increase the availability of risk capital for high value growth companies, and is central to the Islands strategy for economic growth and diversification. The fund will support private, public and third sector projects that can clearly demonstrate the following:

1. Creation of employment for Jersey residents
2. Return on investment in terms of economic benefit for every £1 spent from the Fund
3. A  quantifiable  impact  on  competitiveness  and  innovation  in sectors which Jersey can demonstrate a comparative advantage (measured by increased market share)
4. Encouraging high value added, high quality, high productivity economic activity
5. A strong case for States support through alignment with States Strategic Plan priorities, in particular in areas where market failure is presenting a barrier to innovation.

• The Fund will be used to support projects across all sectors through:

1. Additional support to attract new innovative businesses to the Island.
2. Direct  support  to innovative  businesses  that  may  be  unable  to find finance.
3. Finance for research and development opportunities.
4. Enabling investment in ICT infrastructure.
5. Seed funding for new products/services/processes.
6. Funding for businesses to establish better links with university research

• Eligibility will not be sector-specific but all applications for support must demonstrate, as a minimum:

1. The impact  directly/indirectly  in terms  of  expected  profits/revenues/ employment in future years.
2. What efforts have been made to access private sector funding
3. Why private sector funding is not available
4. How the project will bring wider benefits to the Jersey economy
5. What funding is necessary and how the Island will benefit

• Applications will be assessed on a consistent and objective basis and only projects that meet the required criteria and score highly will be progressed. In particular:

1. Dedicated Officer support will check and make sure compliance in terms of information/key criteria (those that do not will not go forward to the Officer Board).
2. The Officer Board will consider applications and decide whether they merit more detailed consideration.
3. Projects that merit further consideration would be assessed on their net economic impact by the Economics Unit and in terms of financial code, etc. by Treasury and Resources (and other officers where appropriate).

Given the competitiveness of the inward investment market it is particularly important that the proposed Jersey Innovation Fund has access to significant resources, of a scale capable of standing comparison with competitor offerings.

Evidence from the UK, Singapore, Malta, Northern Ireland and elsewhere clearly demonstrates that an Investment Fund can make a real difference by supporting the wide range of policies intended and enhance the rate of innovation. The Funds being managed in the aforementioned jurisdictions vary in size and eligibility. Details of these Innovation Investment Funds and the benefit are detailed in Appendix 1.

Whilst the scale of the problems in Jersey do not match those in the UK Europe or elsewhere it is essential that sufficient resources are allocated to the Innovation Fund to deliver results and attract matching investment. In this respect it is proposed that the new Fund be created with an initial investment of £10 million from Treasury.

The performance of the Innovation Fund will be monitored by the Treasury and investments in the Fund will be subject to annual audit, the results of which will be presented to the States.

Success for this Strategic Aim will be to have established a fund, and assessment framework, that could be used for strategic investments into innovation and new technologies that would deliver a competitive advantage for Jersey, attract additional  private  sector  investment  and  create  new  high  value  businesses resulting in significant new job opportunities in a more diversified economy.

EXAMPLES OF INNOVATION FUNDS

Model 1: The Fund of Fund

An example: The UK Innovation Investment Fund (UKIIF)

The UK Innovation Investment Fund operates on a Fund of Funds structure which means it does not invest directly in companies, but rather invests in a small number of specialist, private sector technology funds that have the expertise and track record to invest directly in technology businesses. By increasing the supply of venture capital to these funds the UKIIF drives investment in high growth businesses, start-ups and spin- outs which are finding it difficult to raise finance in the current economic climate

The UKIIF had an initial investment of £150 million from H.M. Government, and has the ambition of increasing the value of the Fund to £1 billion. This money is invested in a small number of technology venture capital funds, operated by experienced and successful venture capital fund managers, with the expectation that the majority of the money would be invested in sectors such as life sciences, low carbon and clean technologies, ICT and digital and advanced manufacturing. The underlying funds are invested in companies that require equity finance at all stages of development, from seed and early-stage funding through to later stage financing.

Types of investments – Equity finance

Model 2: Partnership Fund Example Innovation Fund Ireland

Ireland has up to 250 million available and runs along 2 parallel tracks. The first one comprises a 125 million pool of funds provided by the Exchequer and managed by Enterprise  Ireland.  Managers  of  private  equity  funds/firms  are  invited  to  submit applications. Successful applicants who receive an investment from Enterprise Ireland will  have  to  commit  to  investing  an  equivalent  amount  in  Irish  companies  or companies with significant Irish operations over the lifetime of their fund.

The second one is for a similar amount and designed to allow Ireland's National Pension Reserve Fund to make a similar level of commercial investments.

Fund managers must meet, at a minimum, the following criteria to be considered for investment:

An  established  global  profile  and  network  with  a  reputation  for  market leadership in venture capital investment.

A proven track record of raising funds and generating superior returns for investors.

A capacity to access high potential international investment opportunities with an investment team capable of attracting world-class entrepreneurs.

An intention to establish a new and substantial presence in the venture capital market in Ireland and a willingness to invest a meaningful proportion of their

venture capital fund in Irish companies or companies with significant Irish operations

The Innovation Fund Ireland has been created to increase the availability of risk capital  for  early-stage  and  high-growth  companies,  and  is  central  to  the  Irish Government's strategy for economic recovery. Government does not own any equity in the private enterprises benefiting from the risk capital available from the fund.

Model 3: The Government Fund

An example from the Office of the Chief Scientist, Israel

The Office of the Chief Scientist (OCS) of the Ministry of Industry, Trade and Labour (MOITAL), empowered by the Law for the Encouragement of Industrial Research & Development 1984 (R&D Law), oversees all Government sponsored support of R&D in the Israeli industry. This broad spectrum support stimulates the development of innovative  state  of  the  art  technologies,  enhances  the  competitive  power  of  the industry in the high-tech global market, creates employment opportunities and assists in redressing Israel's balance of payments. In addition to its domestic activities, the OCS is involved in a myriad of bi- and multi-national industrial R&D agreements.

The OCS annually supports hundreds of projects from incipient concepts within a pre- seed framework followed by support of incubator and start-up companies through autonomous  industrial  R&D  enterprises.  The  support  is  directed  toward  the development of novel products based on new and innovative technologies throughout the entire industry, in well-established as well as new companies and in both the high- tech and traditional sectors. This support also extends to a broad range of co-operative ventures with foreign commercial entities. The support is structured and delivered via a wide range of separate schemes – (a few examples below).

1. Pre-Competitive R&D Support via:

Magnet  Consortium  Supports  the  formation  of  consortia  made  up  of  industrial companies  and  academic  institutions,  in  order  to  jointly  develop  generic,  pre competitive technologies. The duration of a Magnet Consortium is 3–5 years.

Grants are up to 66% of the approved budget for industry and up to 80% for the academic institution. No royalty payments.

Katamon Promote water technology projects by triple cooperation between industrial company,  academic  research  group  and  water  infrastructure  company.  Project's budget is up to US$1M, and its duration is up to 30 months. Grants are up to 50%. No royalty payments.

Research Institutes: Supports R&D programs carried out by Research Institutes Grants are up to 90% of approved budget.

2. Pre-Seed

Tnufa: Encourages and supports technological entrepreneurship and innovation at pre- seed stage. Assists individual inventors and start-up companies during early stages of projects. Includes evaluation of technological and financial feasibility preparation of patent proposal for submission to authorities, construction of prototype, preparation of business plan, establishing contact with the appropriate industry representatives as well as attracting investors. Grants of up to 85% of approved expenses for a maximum of $50,000 for each project. Royalty Payment conditions can apply

Europe's R&D Framework Agreement – ISERD

Grants to SMEs are 75% of the full cost with real overheads. Large industrial partners will receive 50% of the full cost with real overheads.

Eureka

Eureka is the largest European program for Industrial R&D, supported by nearly 40 member  states.  Israel  is  a  full  member  in  Eureka  since  2000.  Being  non- bureaucratic  and  SME  friendly,  over  40%  of  Eureka  project  participants  are small/medium enterprises (SME) – including start-up companies.

Israeli companies participating in the program receive R&D grants from the OCS. Bi-national Funds

The programs enable the participation in joint R&D projects with foreign counterparts. Grants are up to 50% of R&D expenses of each company from each state.

The CSO invests approximately 230–460 million each year through various support mechanisms projects in traditional industries, and innovation projects in the fields of nanotechnology,  biotechnology  and  clean-tech  sectors.  Each  scheme  has  its  own assessment evaluation and assessment criteria. Israeli firms applying for a grant can receive up to 50% of the project costs. In exchange, the firms are obliged to pay royalties if the project's outcomes become commercial. The royalty agreements are a condition of the grants or loan and act as the safeguard for longer term rewards.

All applications for funds are considered and approved by a Research Committee. Membership includes the head of administration of the fund, 2 representatives of the Ministry and Trade, 2 representatives of the Ministry of Finance, 2 representatives from the private sector, and a representative from the public with at least 10 years experience in business or industrial management. Appointment are to the Committee are for a 3 year period.

The UK Regional Growth Fund (RGF) represents a prime example of the type of Fund under consideration. This £2.4 billion fund operating across England from 2011 to 2015 supports projects to create economic growth and sustainable employment in local communities. The  first  2 rounds  of  RGF  have  been  very  successful –  conditional allocations were made to 176 bidders which will leverage over £7.5 billion of private sector investment and deliver around 330,000 jobs.

H.M. TREASURY GREEN BOOK BEST PRACTICE

The UK Treasury "Green Book" is widely acknowledged as best practice for public sector investment appraisal. There are 10 key steps for preparing a Business Case and these steps form part of the "Green Book's" Appraisal and Evaluation Cycle, which they  formalise  as  the  acronym  "ROAMEF".  ROAMEF  stands  for  (Rationale, Objectives, Appraisal, Monitoring, Evaluation and Feedback). This is shown within the "Green Book" as:

The 10 key steps are:

1. Strategic Context
2. The Need for Investment / Disinvestment or Policy Development
3. Objectives & Constraints
4. Identify Options
5. Identify & quantify option costs and benefits
6. Appraise Risks
7. Calculate NPV & assess uncertainties
8. Identify non-monetary costs & benefits
9. Presenting the results of the option appraisal
10. Action / Project Plan for implementation

1. Strategic Context

The opening section will clearly define the project and describe where it fits within the strategic context of EDD. The case must be consistent with our objectives and should clearly demonstrate and evidence this.

2. The need for Investment, Disinvestment

The Business Case should present the rationale for the proposal, clearly stating why we need to invest in this project. Remember – public funding should not displace private sector funding and you will need evidence of market failure to support your case.  The  case  should  also  consider  the  opportunity  cost  for  the  department  of investing or disinvesting in other projects and prioritising this project against other demands.

3. Objectives and Constraints

This section of the Business Case clearly states the project objectives, i.e. what the proposal intends to achieve. This should be stated in terms of outcomes, outputs and targets that must be measurable.

4. Identify Options

It is important to demonstrate that you have considered all the options including the "Do Nothing" option. There are always at least two options a "Do Nothing" and "Do Something".

5. Identify Options and Quantify their Costs and Benefits

Quantify the benefits and costs of each option for the duration of the project.

6. Appraise the Risks

Identify the key risks and assess their likelihood and impact should they occur. For complex and very large schemes, there are numerous techniques of appraising risk including undertaking a sensitivity analysis and an optimism bias.

7. Calculate NPV & Assess Uncertainties

Appraising  the  use  of  States  cash  and  apply  a  Discounted  Cash  Flow  Analysis, sometimes referred to as DCF. Again, your Finance team will help you with this.

8. Identify Non-monetary costs & benefits

For  each  option,  it  is  important  to  assess  the  non-financial  impacts,  such  as  the consequences for local employment and other social considerations including those environmental, economic, political and legislative.

9. Presenting the Results of the Option Appraisal

The  ultimate  outcome  of  the  Business  Case  is  to  decide  which  option  to  select (including the "Do Nothing" Option).

10. Action/Project Plan for Implementation

An action/project plan agreed with key milestones in order to ensure that the project is viable. Used to evaluate and monitor its progress during and after implementation.

NOLAN PRINCIPLES

Principles of Public Life:

Selflessness – Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.

Integrity – Holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might influence them in the performance of their official duties.

Objectivity –  In  carrying  out  public  business,  including  making  public appointments, awarding contracts, or recommending individuals for rewards and benefits, holders of public office should make choices on merit.

Accountability – Holders of public office are accountable for their decisions and actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.

Openness – Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.

Honesty – Holders of public office have a duty to declare any private interests relating to their public duties and to take steps to resolve any conflicts arising in a way that protects the public interest.

Leadership –  Holders  of  public  office  should  promote  and  support  these principles by leadership and example.

APPLICATION BUSINESS CASE TEMPLATES Economic Development Department Business Case

The other SOJ proprieties are listed below. Again, please describe how your project may contribute to these priorities?