Jersey Innovation Fund: establishment, funding and operation.

STATES OF JERSEY

JERSEY INNOVATION FUND: ESTABLISHMENT, FUNDING AND OPERATION

Lodged au Greffe on 20th November 2012 by the Minister for Treasury and Resources

STATES GREFFE

2012   Price code: D  P.124

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to  refer  to  their  Act  dated  17th  July  2012  in  which  they  approved  the Economic Growth and Diversification Strategy which, inter alia, proposed the establishment of an Innovation Fund, and –

1. to approve, in accordance with the provisions of Article 3(3)(a) of the Public Finances (Jersey) Law 2005, the establishment of a special Fund to be known as the "Jersey Innovation Fund";
2. to agree,  in accordance  with  the  provisions  of  Article 2(4)  of  the Public Finances (Transitional Arrangements) (Jersey) Order 2011 to increase the expenditure approval for 2013 approved by the States on 6th  November  2012  in  respect  of  the  Economic  Development Department  head  of  expenditure  to permit  the  withdrawal  of  an additional  £5,000,000  from  the  Consolidated  Fund  to finance  the creation of this new special fund;
3. to agree that the Jersey Innovation Fund should be operated and used in accordance with the Operational Terms of Reference set out in the Appendix, under the supervision of an independent Innovation Board to be established by the Minister for Economic Development through a process overseen by the Appointments Commission and following the Commission's code on appointments to public bodies;
4. to agree that any loans or grants made from the Jersey Innovation Fund will be authorised by the Minister for Economic Development.

MINISTER FOR TREASURY AND RESOURCES

REPORT

1. Introduction

The key objective of the Economic Growth and Diversification Strategy, as approved by the States in P.55/2012, is to deliver growth, improve competitiveness, diversify the local economy and create employment. To achieve this, a key strategic aim is to encourage innovation and improve Jersey's international competitiveness.

In order to achieve this strategic aim, an identified priority is to establish the Jersey Innovation Fund. The aim of the Fund is to support innovation, and it 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  proposals that will  merit  support  will  be  that  they  improve  the  rate  of innovation  in  Jersey  and  lead  to  significant  employment  creation.  Economic Development has now developed proposals for how the Innovation Fund will be managed and operated. These are set out in the attached document: "Jersey Innovation Fund, Operational Terms of Reference – September 2012" (see attached Appendix).

In order to provide initial funding for the Jersey Innovation Fund, proposals were contained  within  the  Medium  Term  Financial  Plan  2013 – 2015  (MTFP).  It  was proposed  and  approved that the  Fund  be  established  with  an initial  allocation  of £5 million, funded from part of the proposed redemption of JT Group Limited's 9% cumulative preference shares.

The purpose of this Proposition is to formally seek the States' approval to these proposals and to approve the basis on which the Jersey Innovation Fund will operate.

2. Establishment of the Innovation Fund

Under Article 3(3)(a) of the Public Finances (Jersey) Law 2005, the States may, on a proposition lodged by the Minister for Treasury and Resources, establish a special fund for specific purposes. Such approval is sought for the establishment of the Jersey Innovation Fund.

3. Initial funding of the Innovation Fund

In approving the MTFP 2013 – 2015, the States approved the following part of the proposition –

"(f)  to  approve,  in  accordance  with  Article 32(5)(a)  of  the

Telecommunications  (Jersey)  Law  2002,  the  disposal  by  way  of redemption of the States' 9% Preference Shares in the JT Group Ltd. with the redemption value of £20 million being applied, £15 million to  the  Capital  Programme  for  2013  to  2015  and  the  balance  of £5 million  for  the  Economic  Development  Department  to  provide funding for the proposed Innovation Fund;".

This Proposition seeks approval to transfer the £5 million into the Jersey Innovation Fund.

4. Purpose and operation of the Jersey Innovation Fund

The purpose of the Jersey Innovation Fund is set out in P.55/2012 – Economic Growth and Diversification Strategy – as approved by the States on 17th July 2012.

The  Economic  Development  Department  document,  "Jersey  Innovation  Fund, Operational  Terms  of  Reference –  September  2012",  which  is  attached  as  the Appendix to this Report, sets out how the scheme is intended to operate and be managed. Key features are –

• A new independent "Innovation Board" will be established, with a minimum of  2 members  and  a  Chair  from  the  private  sector.  There  will  also  be representatives of Economic Development, Treasury and the Chief Minister's Departments on the Board.
• The Board will be responsible for the management of the Fund, assessing all applications  and  making  recommendations  to  the  Minister  for  Economic Development. The Board will be supported by a Fund Executive from the Economic Development Department (from within existing establishment).
• The  Board  will  assess  each  application  on  a  number  of  economic  and commercial criteria, which will require the provision of detailed information from  applicants.  As  a  minimum,  this  will  include  an  economic  impact assessment undertaken by the Economic Adviser's Unit.
• The  Board  will  make  recommendations  to  the  Minister  for  Economic Development in regard to each application.
• Support to businesses will be by repayable loans and grants. The aim is that support will mainly be by repayable loans, as EDD's medium-term aim is for the Fund to be self-replenishing.
• Any loans or grants to be made from the Fund will be authorised by the Minister for Economic Development.
• All loans and grants will be made in accordance with the Public Finances (Jersey) Law 2005 and comply with relevant Financial Directions.
• Each loan or grant will have a formal Funding Agreement signed before funds are released. This will include any specific clauses and set out the rights and obligations of both parties.
• Each  agreement  will  be  regularly  reviewed  by  EDD  for compliance  with agreed terms, and the operation of the Fund will be subject to audit review.

5. Specific matters arising Approval of loans

The Jersey Innovation Fund is a new development, and in order to ensure its efficient operation, the ability to approve loans on a timely basis is essential. Additionally, the terms and conditions to be applied to each loan will potentially differ, based on the individual circumstances of each case, and will be recommended by the Board.

In order to address the different factors relating to the Jersey Innovation Fund and provide the necessary flexibility, the attached proposition seeks approval of the States to allow the Minister for Economic Development to authorise the grant of loans from the Fund, in accordance with EDD's document "Jersey Innovation Fund, Operational Terms  of  Reference –  September  2012",  and  subject  to  sufficient  monies  being available in the Fund.

The arrangements for administering the repayment of loans will be agreed between States Treasury and the Economic Development Department.

Nature of the loans and grants made

Economic  Development  have  identified  that  due  to  the  nature  of  the  new  and innovative businesses being supported, not all "investments" will be successful, and there will be failures which may result in loans not being repaid or objectives not being met. This will be a reality and runs counter to the normal inherent "risk averse" nature of public finance accountability. Therefore a level of "failure" will need to be accepted by the States and be balanced against the positive benefits that the Jersey Innovation Fund is seeking to achieve. To minimise the risk of failure, it is essential that the framework for assessing applications to the Fund, as set out by EDD, must be rigorously  applied  and  adhered  to,  along  with  robust  ongoing  monitoring  of performance and risk.

Funds to be paid into the Innovation Fund

In addition to any sums the States may vote, the Fund will receive income by way of interest earned on the Fund balance. Further, any sums received by way of loan repayments,  and  any  income  received  relating  to  clauses  in  individual  Funding Agreements, will also be credited to the Fund. This is in accordance with Economic Development's aim of making the Fund self-replenishing.

In accordance with the Public Finances (Jersey) Law 2005, an investment strategy for the balances held in the Jersey Innovation Fund will be proposed. It is anticipated that this will be based on the same strategy that is in place for the Tourism Development Fund – where in order to meet the Fund's purpose the investment strategy set is to maintain the monetary value of the Fund, to provide a high level of security and a good level of liquidity to finance projects as required.

Accounting Officer

The Accounting Officer for the Jersey Innovation Fund will be the Chief Officer, Economic Development Department.

Future Developments

Following the launch of the Jersey Innovation Fund, the Treasury and Economic Development will develop the necessary proposals, for States approval, that will allow the Fund to make equity investment in privately-owned businesses. The aim is that the Minister for Treasury and Resources will bring forward a further Proposition to the States for approval of this element, within 6 months of the launch of the Fund.

6. Financial and manpower implications Operational costs

There  will  be  costs  associated  with  the  operation  and  management  of  the  Fund, particularly  relating  to  assessment  and  approval  of  applications,  e.g.  company searches, due diligence work, legal costs and specialist advice. These costs will be met from the Fund.

It is intended that EDD will meet these costs in the first instance, and on an annual basis recharge them to the Fund. Agreed processes will need to be put in place to manage and control this.

The  Economic  Development  Department  estimates  that  the  operational  and management costs at this stage are £100,000.

Manpower implications

The Economic Development Department will allocate an individual to be the Fund Executive to support the Innovation Board and assist the management and ongoing operation of the Fund. This post will be from within its existing establishment and budget.

7. Conclusion

This report along with EDD's document, "Jersey Innovation Fund, Operational Terms of Reference – September 2012" (see attached Appendix) outlines how the Jersey Innovation Fund, as approved in the Economic Growth and Diversification Strategy (P.55/2012), will be created, initially funded, managed and operated.

It is recommended that the Propositions to implement these measures are approved.

APPENDIX

Jersey Innovation Fund

Operational Terms of Reference

September 2012

CONTENTS  Page

1. Strategic context ...........................................................................................  9
2. Laws and Articles that allow for the Fund to be created ..............................  9
3. The Jersey Innovation Fund's operating model ...........................................  9
4. Definition of grants and repayable loans ......................................................  11
5. Management and Governance of the JIF ......................................................  12
6. Risk ...............................................................................................................  14
7. Scope of the Jersey Innovation Fund............................................................  14
8. Financial and manpower implications ..........................................................  15
9. Reporting ......................................................................................................  15
10. Audit .............................................................................................................  15
11. Assessment framework .................................................................................  15
12. Recommendation and approval framework ..................................................  18

Appendix 1 –  Extract from P.55/2012 ............................................................  19 Appendix 2 –  Examples of Innovation Funds ................................................  22 Appendix 3 –  H.M. Treasury Green Book best practice ..............................  25 Appendix 4 –  Nolan Principles ........................................................................  27 Appendix 5 –  Application Business Case Templates ....................................  28 Appendix 6 –  Process Map ..............................................................................  39

1.  Strategic context

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 sector 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 sectors projects.

All projects considered for support will, as one of their core outputs, improve the rate of innovation in Jersey and lead to job creation for Jersey residents.

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,  both  to establish the JIF and to 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.  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  Economic  Development  will develop the necessary draft legislation, for States approval, that will allow the Fund to make equity investment in privately-owned business. 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 a further Proposition to the States 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 and NOT a sinking fund. As a consequence, all grants and loans offered will 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.

4. Definition of 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, but not be limited to, 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 grant assistance from the JIF. In all cases, projects supported by JIF must clearly  demonstrate  that,  in  the  success  case,  they  have  the  potential  to  deliver economic and commercial returns. The assumption is that 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 the 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.

1. Definitions of the types of financial support available

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.

Grants are defined as:

a transfer of money to an individual or entity in return for future compliance with certain conditions relating to the activities of the individual/entity.

2. 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.

3. Obligation for payment of royalties

At the discretion of the Minister for Economic Development, any project receiving support from the JIF may be required to pay royalties. The scale and scope of royalty payments will be defined in the Funding Agreement. For instance, if the Minister for Economic  Development  approves  a  grant  or  repayable  loan  for  research  and development support which may lead to the commercial development of products or services,  the  Minister  shall,  based  on  professional  advice,  decide  income  from products or services which may be subject to royalty payments and how the amount of royalties should be calculated as a percentage of income. The products/technology on which royalties are to be paid shall be specified in the Funding Agreement.

Royalty-liable revenues would be recorded separately by the company and paid in accordance with terms and conditions defined in the Funding Agreement. The sale price requiring payment of royalties would be the full price recorded by the company in its accounts and audited statements. The only expenses that would be deducted from the sale price are those due to purchase taxes.

To remove any doubt, the Funding Agreement will document the exact details of all  loan  and  royalty  payments.  The  Funding  Agreement  will  be  a  binding agreement between the parties and must be signed by the Minister for Economic Development before any funding is released.

5. Management and Governance of the JIF

A new independent Innovation Board ("the Board") will be established. The Board will consist of an independent chair, a minimum of 2 private sector members plus, in an ex officio capacity, one representative from the Economics Unit of the Treasury, and the Economic Development Department's Chief Officer. The Board will review every  application  and  make  recommendations  to  the  Minister  for  Economic Development to approve or reject an application. The 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.

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 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  Board  will  be  supported  by  a  JIF  Executive,  provided  by  the  Economic Development Department. The JIF Executive will be responsible for administrative and secretariat functions. In addition, the JIF Executive will have responsibility for ongoing  management,  aftercare  and  monitoring  of  all  investments  made,  and  for reporting to the Board on these matters on a regular basis.

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  Board  for  the  Ministers' consideration;
• Preparing  the  Funding  Agreement  in  association  with  the  Law  Officers'

Department;

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

The  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 Board, which they will use in considering and assessing the project from an economic prospective.

The 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 which is based on H.M. Treasury Green Book best practice (see Appendix 3).

The Board, which will act in an advisory capacity, will be responsible to the Minister for Economic Development. The 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; or
• 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 Board is at odds with their own financial interests. For this reason, members will be required to abide by the 7 principles of public life set out in the Nolan Report, attached at Appendix 4.

6. 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.

7. Scope of the Jersey Innovation Fund

The Fund will be used to fund projects across all 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 high-value jobs.
• Assisting early-stage high-value start-up enterprises with access to working capital to enable the Fund to invest in innovation.
• Supporting  established  business  with  high-growth  potential  to  invest  in innovation.
• Financing research projects that may improve the Island's competiveness.

• Funding enabling investments in infrastructure.
• Seed-funding for businesses developing new products/services/processes.
• Funding for businesses to establish better links with universities, with the objective of commercialising academic IP.

8. Financial and manpower implications Operational costs

There  will  be  costs  associated  with  the  operation  and  management  of  the  Fund, particularly  relating  to  assessment  and  approval  of  applications,  e.g.  company searches, due diligence work, legal costs and specialist advice. These costs will be met from the Fund. It is intended that EDD will meet these costs in the first instance and on an annual basis recharge them to the Fund. Agreed processes will need to be put in place to manage and control this. The Economic Development Department estimates that the operational and management costs at this stage are £100,000.

Manpower implications

The Economic Development Department will allocate an individual to be the Fund Executive to support the Innovation Board and assist the management and ongoing operation of the Fund. This post will be from within its existing establishment and budget.

9. Reporting

Copies of the signed minutes of all Panel meetings will be sent to the Minister for Economic Development. An annual report on the management, operation and details of  all  the investments  made  will  be  prepared  and sent to  the  States.  All  reports published will comply with the States of Jersey Principles of Reporting.

10. Audit

The management of the Fund will be subject to appropriate audit review as determined by the Audit Committee.

11. Assessment framework

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

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

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 –

11.1 The applicant

Name of applicant.

Company sector and project sector.

Country of residency/ownership.

Recent Trading Results and Trading Projections.

Three years' company accounts, including the most recent audited accounts.

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

11.2 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?

Timescales.

Amount and type of assistance sought.

Other sources of finance and 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; 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?

Counter-factual: 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.

11.3 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 counter- factual.

- Will 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 Spill-overs:

- Scored  high/medium/low  potential  for  spill-overs,  based  on  the characteristics.

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

Training Spill-overs:

- Scored high/medium/low potential for spill-overs, 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 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).

• Other Assessments

In  addition  to  the  assessment  to  be  carried  out  by  economists,  the  Economic Development  Department  will  ensure  that  a  number  of  other  assessments  are completed. Again, these will be carried out to a level proportionate with the size and complexity of the proposed project. The information from the below assessments will both feed into and sit alongside other assessments being considered by the Board.

Additionally – 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?

12. Recommendation and approval framework

The Board, after completing the appropriate levels of 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 draft Business Case Template attached at Appendix 5. The recommendation, signed by the Chair, will include all terms and conditions, interest rates, repayment terms on loans, royalty obligations and special clauses that are to be attached to offer of support.

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.

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

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 is 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

Example: 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 and 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 co-operation between industrial company, academic research group and water infrastructure company. The Project's budget is up to US$1 million, 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. Appointments 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

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 & 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  2 options:  a  "Do Nothing"  and "Do Something".

5. Identify Options and Quantify their Costs & 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