Jersey Innovation Fund - Ministerial Response - 30 April 2013

Findings

Comments

1

The official definition of innovation for the purpose of the JIF is understandably wide ranging in scope.

However,  with  no  clear  case  studies identified  and  more  restrictive eligibility  criteria,  a  degree  of uncertainty has been introduced about the  type  of  projects  the  JIF  aims  to support.

The definition for innovation is defined in  the  Report  and  Proposition  and referenced in the EA Scrutiny Report as products, services and other solutions that can be new to the business or the international market'.

Appropriate  case  studies  will  be developed  based  on  experience elsewhere to be brought forward prior to the debate.

2

It is proposed that the JIF will launch and initially operate in the model of a Government  Fund,  making  financial support  available  in  the  form  of repayable  loans  or  non-repayable grants.

In Phase 1 of the project the JIF will operate as a Government Fund and in accordance  with  the  Public  Finances (Jersey)  Law  2005  offer  loans  and grants.

3

Although the JIF is proposed to launch as  a  Government  Fund,  matched

The Public Finances (Jersey) Law 2005 limits the JIF to offer only loans and

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funding  with  private  venture  capital (i.e. a Partnership Fund) was identified as the preferred model by stakeholder organisations,  and  recognised  as  a leverage opportunity by the Minister for Economic Development.

grants  –  Phase  1  The  Government Fund.

Within  6  months  of  launch  Treasury and Resources will lodge a new R&P that will allow the JIF to make equity investments  in  privately  owned businesses  and  move  towards  a Partnership Fund. This will require ED and  T&R  working  closely  with stakeholders to develop the R&P.

4

It is proposed that the JIF is to be a fund of last resort and, in order to qualify for a loan, evidence must be produced by an applicant to show that all alternative funding has been exhausted.

There  is  general  consensus  that  last resort' terminology is unhelpful.

To  clarify.  Public  funds  will  only  be invested where there is clear evidence that  the  project  will  not  go  ahead without support from the JIF – where a market failure' exists.

Following  the  publication  of  the Scrutiny  Review,  greater care  will  be taken  to  explain  the  rationale  of  the Fund  and  avoid  external  perceptions that it has the status as a Fund of last resort'.

5

Stakeholder  organisations  agreed  that basing  the  JIF  on  the  principle  of lender  of  last  resort'  was  unsuitable, given its implied negativity about the quality of potential applications.

To  clarify.  Public  funds  will  only  be invested where there is clear evidence that  the  project  will  not  go  ahead without support from the JIF – where a market failure' exists.

Following the findings of the Scrutiny Review, greater care will be taken to explain the rationale of the Fund and avoid negative external perceptions.

6

It is accepted that due to the nature of the new and innovative businesses that might be supported by the JIF, not all investments will be successful.

Consequent  failures  could  result  in loans not being repaid and/or objectives not  being  met.  A  level  of  failure' would  need  to  be  accepted  by  the States,  balanced  against  the  positive benefits  that  the  JIF  is  seeking  to achieve.

A  review  of  a  similar  scheme  in  the UK- the Small Firms Loan Guarantee Scheme-reported a write-off rate equal to 10% per annum of the value of the loans  outstanding.  The  review  also reported that a number of projects failed to reach their original growth forecasts.

It  is  estimated  that  about  20%  of projects supported by the JIF will fail to reach their original forecasts of growth (jobs and revenues) – of which 10% ,in outstanding  loan  value,  will  fail completely. The actual write off cost' to the JIF will depend on what can be recovered from the failed project and or any security taken.

7

The  Minister  for  Economic

The 70% quoted was not the percentage

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Development  raised  the  potential  for high  percentage  levels  of  failure' amongst  those  projects  given  funding through the JIF, initially suggesting this could be as high as 70%.

There is consensus, including from the Minister, that in terms of JIF recipients going out of business, such high rates would be unacceptable.

of loans written-off.

The  70%  cited  by  the  Minister  for Economic  Development  is  the percentage of projects, supported by a similar fund in Israel, which did not exit on high value multiples of the original investment.

8

There is a lack of clarity about what defines failure' both in relation to the JIF overall and the individual projects receiving funding.

Overall failure for the JIF would be if high quality innovative projects could not  proceed  because  of  lack  of appropriate funding.

Failure for a project would be that it failed to achieve its original anticipated potential. This would be measured, for example,  in  revenues,  jobs  created, market share, or economic spillovers.

Accepting the point made by the Panel in  its  review,  more  careful  use  of terminology suggesting failure' will be used  so  as  to  minimise  negative external perceptions.

9

More  clarity  and  detail  is  required regarding  the  monitoring  mechanisms that  would  enable,  amongst  other things, the possible identification of the need to discontinue the JIF before it is depleted,  should  it  not  be  performing successfully.

The Panel's views are accepted and a series  of  revised  reporting/monitoring mechanisms  are  recorded  in  the Revised  Operational  Terms  of Reference  Framework  Section  14  (as summarised below) –

• JIF Board to provide Minister for Economic  Development  and  SoJ Treasurer  with  a  written  report every  6 months.  To  include:  A financial  statement  on  all  income and  expenditure  of  the  Fund;  full details  on  every  approved  loan; report on all defaults, non or late repayments; loan restructuring and write-offs;  progress  reports  on every  project  and  details  of  any other changes to the project.

• Every  organisation  must  provide quarterly  reports  to  include: progress report against the original plan;  financial  analysis  of  spend and income; progress report on all innovation development; changes in

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key staff; changes in Directors.

• Provide  an  annual  Grant/Loan Assurance Statement.

• At such frequency and such time as the  States  of  Jersey  Audit Committee may from time to time determine may conduct an audit of the JIF.

• The  SoJ  at  its  absolute  discretion may  conduct  an  audit  of  all approved grants/loans.

• The  Comptroller  and  Auditor General  may,  at  his  absolute discretion, audit the fund.

10

There is a lack of clarity about what defines success' in relation to the JIF and  the  individual  projects  receiving funding.

As  defined  in  the  Report  and Proposition;  Success  for  the  Jersey Innovation Fund will, by encouraging investment  into  areas  of  innovation, 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.'

Given the comments of the Panel in the Review  this  definition  will  be  given increased  profile  in  the  final  Revised version  of  the  R&P  going  to  States Members.

11

The  Economic  Development Department only estimates between 5- 10  full  applications  would  be  fully progressed  each  year,  of  which  it  is estimated  4-5  applicants  would  be successful in gaining funding.

It is anticipated that 4-5 investment will be  made  per  annum. This  estimate is based  on  previous  experiences  of promoting  and  managing  a  range  of funding  schemes  such  as  the  Jersey Innovation  Initiate,  Jersey  Export Development  Initiative,  The  Small Firms  Loans  Guarantee  Scheme,  The Rural  Initiative  Scheme  and  the Tourism  Development  Fund.  Plus  the market  intelligence  obtained  from  the Jersey Enterprise operation.

Organisations that do not meet the JIF criteria or fail to secure funding will be signposted  to  the  other  support schemes, for example but not limited to, The  Rural  Initiative  Scheme,  the

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Tourism  Development  Fund,  or  the Jersey Business Angels Network.

12

With regard to the overall Fund, there were  common  success  criteria identified,  such  as  the  creation  of locally qualified jobs, financial return to the  JIF  and  general  taxation contributions.

However,  these  were  prioritised differently  amongst  the  stakeholders, including  the  2  Ministers  responsible for the JIF.

As defined in the Revised Report and Proposition;  Success  for  the  Jersey Innovation  Fund  will,  by  encouraging investment  into  areas  of  innovation, 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.

Given the comments of the Panel in its Review,  the  Department  has  already begun more in-depth engagement with various  organisations  viewed  by Scrutiny as key stakeholders and will continue to work with them to ensure that  views  of  success  can  be  more closely aligned.

13

To avoid becoming a sinking fund, the JIF  must  have  a  clear  financial objective,  and  key  performance indicators  (KPI's)  should  be  defined from the outset.

The  aim  is  for  the  JIF  is  to  be  self- replenishing.  In  Phase  1  it  is  not anticipated  that  the  income  from royalties  and  loan  interest  payments will  be  sufficient  to  fully  replenish during  its  early  years  of  operation owing to the nature of loan repayments and the early stage of product lifecycles of the companies involved.

As  loans  mature  and  royalty  income from sales build, there is an increased likelihood  that  returns  to  the  Fund would  replace  or  exceed  the  amounts borrowed at the outset and reduce the early stage deficit effects.

Phase 2 (equity investments) allows for greater and earlier potential returns to the JIF (through dividends and potential sale  of  shares  at  multiples  of  the original  investment  value),  that  will greatly  improve  the  JIF's  ability  to become  self-replenishing  at  a  much earlier  stage  and  possibly  compensate from the more staged returns of Phase 1 investments.

The Department will continue to work with  Stakeholders  and  Treasury  to

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agree  a  mutually  acceptable  list  of measures  and  performance  indicators that accurately reflect the performance of the Fund, keeping Scrutiny updated on progress made.

14

Although  intended  to  constitute  a £10 million fund, it is proposed that the JIF will launch initially with £5 million, with  an  additional  £5 million  to  be allocated at a later, undefined stage.

The source of the additional £5 million has yet to be confirmed by the Minister for Treasury and Resources.

In accordance with paragraph f. of the MTFP Proposition, the States agreed –

"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  Economic  Development Department  to  provide  funding  for the proposed Innovation Fund."

This was reiterated in Appendix Ten of the MTFP –

1380.  "the  establishment  of  a  new Separately Constituted Special Fund to be  known  as  "The  Innovation  Fund", under Article 3 of the Public Finances (Jersey) Law 2005."

1381.  "Further,  to  approve  the allocation of £5 million in 2012 to this fund.  This  will  be  managed  by  the Economic  Development  Department and an independent board."

The  Minister  for  Economic Development  confirmed  this  when signing  MD-E-2012-0137  Jersey Innovation Fund: Operational Terms of Reference'. Likewise, the Minister for Treasury and Resources confirmed this funding  with  MD-TR-2012-0094 Jersey  Innovation  Fund: Establishment, Funding and Operation', both of which were signed in November 2012.

This  funding  was  consistently communicated  throughout  the  MTFP process  when a  target  of  £10  million was set for the JIF but the States could only  provide  £5  million  within  the

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resources available in the period of the MTFP.

The inability to identify the source of the additional funds at the outset should not materially affect the ability of the JIF  to  serve  its  purpose,  given  the predicted  number  of  loans  and  the current limit on loan size (£500,000 as a result  of  the  Public  Finance  (Jersey) Law 2005) – see 18 below.

15

It is widely agreed that, although a fund of  £10 million  is  small  compared  to many  other  such  schemes,  it nevertheless represents a suitable scale for Jersey and was seen by stakeholders as a positive step.

The States has agreed to capitalise the JIF with £5 million in the MTFP.

The potential to further develop JIF at Phase 2 into a Partnership Fund may well  attract  further  private  sector investment  extending  the  scope  and value of the Fund, with no impact on States revenues.

16

The potential level of demand for the JIF  has  not  been  assessed  through formal  research  by  the  Economic Development  Department,  and  is effectively unknown.

However, stakeholder organisations and the sponsoring Ministers are hopeful of introducing  or  attracting  sufficient levels of applicants with good ideas to the Fund.

EDD,  through  both  current  and previous  support  programmes,  has  a good  understanding  of  the  likely number of applications. The experience gained from the work done by Jersey Enterprise  2007-2011,  and  grants schemes such as the Jersey Innovation Initiative,  Jersey  Export  Development Initiative, The Rural Initiative Scheme and the Tourism Development Fund has been  used  to  anticipate  the  level  of demand for the JIF.

17

Although the lodged Proposition report clearly sets out that the JIF would be available  to  support  a  wide  range  of activity, it is not clear to the Panel how the third or public sector would be able to  access  the  fund  based  on  the demanding  criteria  of  the  JIF  Policy Framework  and  the  Eligibility Guidelines  found  on  the  application form.

The concerns raised by the Panel about accessibility for third and public sector organisations  have  been  addressed  in the  Revised  Operational  Terms  of Reference and Application Form which have  been  amended  to  ensure  that organisations  from  any  sector,  at  any stage of development, value or size can make applications to the Fund.

18

Although the lodged Proposition, report and  Operational  Terms  of  Reference contain no indication of a minimum or maximum funding level per applicant, this is contradicted by the inclusion of minimum  £20,000  and  maximum £500,000 funding amounts on the draft

The  recommended  maximum  funding level (£500,000) is consistent with the Minister  for  Treasury  and  Resources' maximum  lending  limit  under  the Public Finances (Jersey) Law 2005.

This  upper  limit  will  be  reviewed during the work required to allow for

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application form and policy framework documents.

private  equity  investments  (Phase  2) where  the  Department  will  obtain  a clearer indication of the types and scale of  investment  sought  coming  forward from the Jersey market via the initial Phase 1 applications.

Following the publication of the Panel's Review, the minimum level of £20,000 has  been  removed  from  the  Revised Operational  Terms  of  Reference  and Application  Form  appended  to  the R&P. This will be monitored over the initial operational period and reviewed, along  will  other  policies  along  with input from the JIF Board on a regular basis.

19

Stakeholders,  and  initially  both sponsoring Ministers, agreed that there was  little  or  no  merit  in  setting minimum or maximum funding levels.

However,  the  Minister  for  Economic Development  later  suggested  that  a minimum level may even be set higher than £20,000.

See 18 above

The  Minister  and  Department  have accepted  the  views  of  the  Panel  and amended  the  Revised  Operational Terms  of  Reference  and  Application Form appended to the R&P to reflect this.

20

The  JIF  Policy  Framework  and  the Eligibility Guidelines on the application form establish the need for an applicant to be a Business incorporated under the Companies (Jersey) Law 1991.

This appears to be inconsistent with the Operational Terms of Reference, which don't indicate such a narrow scope or criteria. It raises concerns that a number of potential applicants to the JIF might be  inadvertently  excluded,  in  that Partnerships,  LLP's  and  sole  traders might be ineligible to apply.

The concerns raised by the Panel about eligibility  guidelines  have  been considered  and  as  a  consequence  in order  to  maximise  the  scope  and benefits of the JIF, Revised Operational Terms  of  Reference  and  Application Form  have  been  developed  that  will allow  applications  from  individuals, thirds sector organisations and any type of trading entity, such as sole traders, Limited  Liability  Companies, partnerships, LLPs etc.

Applications  from  individuals  or  sole traders  successful  in  securing  a  loan may be asked, by the JIF Board, to put in place a specific corporate governance structure  which  could  result  in establishing  a  company  registered  in Jersey.

21

The requirement for an application to demonstrate  £65,000  GVA  per employee effectively rules out potential applications from the third and public sectors, and many non-finance industry

The  Minister  and  Department  have accepted  the  views  of  the  Panel  and amended  the  Revised  Operational Terms  of  Reference  and  Application Form appended to the R&P to reflect

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related projects.

this.

To maximise the scope of the scheme the  required  £65,000  GVA  per employee has been removed from the eligibility criteria.

Applications will now be welcomed for any  project  that  can  demonstrate  that the  investment  in  innovation  will deliver productivity gains/growth (jobs and revenues).

22

The GVA levels per employee and high growth  requirements  could  effectively rule  out  many  potential  applications, particularly  in  the  third  and  public sectors, and traditional industries such as tourism and agriculture.

See 21 above.

23

The  high  growth'  requirement  states that an applicant must demonstrate the potential  to  double  revenues  or employment  within  4  years  and  to employ at least 10 full-time equivalent staff by the end of the 4 year period. This appears highly restrictive.

The  recommendation  by  the  Panel  to remove the reference to high growth in the eligibility criteria has been agreed and  all  policy  documents  and  the application form updated.

The aim of the EGDS, for which the JIF is  an  enabler,  is  to  deliver  growth- resulting  in  new  jobs  and  increased revenues for organisations.

24

There  is  clear  inconsistency  between the  stated  aim  of  the  Fund  being available to all sectors of the economy on  the  one  hand,  and  the  emphasis placed  on  targeting  high  value,  high growth opportunities on the other.

Following the publication of the Panel's Review,  the  Department  has  accepted the  Panel's  comments  and  as  a consequence the JIF will be accessible to any company from all sectors which can  demonstrate  an  investment  in innovation has the potential to deliver growth  resulting  in  new  job opportunities.

25

The  application  process  places considerable demands on an applicant, beginning  with  the  initial  15  point request  for  a  written  report  and supporting documentation contained on the application form.

As the application process progresses, there  are  additional  demands  for information through the due diligence process,  Funding  Agreement development and post loan monitoring and reporting.

The  JIF  must  have  the  appropriate levels  of  due  diligence  and  risk assessment for a fund capitalised with public money. It is also important that the JIF applies the appropriate levels of post approval aftercare.

The  information  requested  is  both appropriate  and  necessary  for  a Government Fund, although it will be reviewed  again  –  based  upon  actual experience – as part of the R&P for the Phase  2  of  JIF,  which  may  move towards  the  Partnership  model  and

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provide  access  to  non-States  funding, where  such  criteria  may  be  seen  as more onerous.

26

A  balance  is  required  between  the required quality due diligence, and the need to make the application process as free of red tape' as possible, in order to ensure  that  it  is  timely  and  not  off- putting to potential applicants.

The  JIF  will  be  capitalised  with  tax payer's money so it is important that the JIF applies the appropriate levels of pre-approval  due  diligence  and  post approval aftercare.

This will be balanced with the overall aims of the JIF.

27

Stakeholder  organisations  were  united in  their  expectation  of  a  timely  and efficient,  yet  robust,  due  diligence process.

The  Panel  has  concerns  about  the ability of the due diligence process as currently proposed to meet those sound expectations.

The  Minister  and  Department  have accepted  the  views  of  the  Panel, recognising  the  need  to  apply appropriate levels of due diligence at all stages,  leading  to  the  delivery  of  a timely,  effective  and  commercial process.

The  target  is  applications  should  be considered,  assessed  and approved/rejected  within  6  weeks  – some may take longer and some may be quicker.  The  6  week  target  gives  the applicant an indication of the timescales and  a  performance  measure  for  the application process.

The due diligence process will regularly be reviewed with amendments made at the recommendation of the Board, if it proves to be unrealistic.

28

It is clearly proposed that grants will only  be  made  in  exceptional circumstances.

The Minister and Department agree the views of the Panel and this is consistent with the Revised Operational Terms of Reference and Application Form.

29

Any grant or repayable loan would be the  subject  of  a  detailed  Funding Agreement.

Each  Funding  Agreement  would  be unique  and  include  details  of  any specific  clauses,  including  repayment terms  and  timing  arrangements  for repayment.

The Minister and Department agree the views of the Panel and this is consistent with the Revised Operational Terms of Reference and Application Form.

30

Although the JIF Operational Terms of Reference broadly propose consultation between the Board, the Treasurer of the States and the Minister for Economic Development,  the  process  by  which

Each application will be unique.

During  the  application,  due  diligence and  the  JIF  Boards  assessment  each project will be assessed for its ability to repay the loan, over what period and at

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loan repayment terms and interest rates are to be established is not clear, with no  formal  details  or  guidelines available.

what interest rates.

It is anticipated that the Treasury and Resources  Department  will  provide regular  advice  on  current  commercial rates  of  interest,  against  which  any recommendations of the JIF Board to set different rates of interest on loans can  be  judged  by  the  Minister  for Economic Development.

31

The Panel is concerned by the number of  outstanding  questions  relating  to Royalty  Agreements,  and  the  limited progress  that  has  been  made  by  the Economic Development Department at this  stage in progressing the template document,  which  is  currently  only  in early draft form.

The  Department  recognises  the concerns expressed by the Panel in its Review  and  will  produce  draft Templates for the Panel's review prior to the States Debate.

Draft  Template  Agreements  will  be provided  that  will  allow  the  Panel  to assess the likely contents and reach a view on their progress.

Whilst Templates are being developed it is worth emphasising that given the varied nature of applications, products and  terms,  each  successful  Fund applicant  will  require  an  Agreement with a high degree of bespoke content, therefore the Templates will effectively only be illustrative in nature.

32

Should  the  States  approve  the  first phase of the JIF, there are proposals for a second stage to be introduced within 6 months to enable the States to make equity investments in funded projects.

This  is  a  significant  step  and  a departure from common States practice regarding loans, and requires additional expertise and also new legislation.

The Minister and Department agree the views  of  the  Panel  and  the  Revised Report  and  Proposition  confirms  the commitment for EDD and T&R to work together and develop proposals that will allow  the  JIF  to  make  equity investments.

A  new  R&P  will  be  lodged  within 6 months of the launch of the JIF.

33

Although the proposed JIF is intended to  be  self  replenishing,  with stakeholders  agreeing  that  this  was  a sensible aspiration, it is difficult within the context of high suggested failure' rates, grants, costs, lender of last resort principle,  differing  success'  priorities and in particular the initial absence of the equity element amongst others, to envisage that the JIF will meet this aim.

There  is  therefore  the  distinct possibility  of  the  JIF  becoming  a

Whilst every effort will be made for the JIF  to  become  self-replenishing  some projects  will  fail  to  achieve  their original anticipated growth and revenue forecasts,  others  may  even  fail completely resulting in a loan write-off.

Making  the  Fund  self-replenishing  in the  early  years  of  Phase  1  will  be represent a significant challenge for the reasons  highlighted  by  Scrutiny, however as both companies and loans mature,  any  diminution  in  this

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sinking Fund.

aspiration should be minimised.

Phase 2 (equity investments) allows for greater and earlier potential returns to the JIF (through dividends and potential sale  of  shares  at  multiples  of  the original  investment  value),  that  will greatly  improve  the  JIF's  ability  to become  self-replenishing  at  a  much earlier  stage  and  possibly  compensate from the more staged returns of Phase 1 investments.

The  Department  believes  that  the Revised  Operational  Terms  of Reference  reflect  the  concerns expressed by the Panel and encompass sufficient  monitoring  and  governance safeguards  that  will  prevent  the  JIF from becoming a sinking fund.

34

The  emphasis  on  the  requirement  for the JIF Executive to have considerable and  specific  business  expertise,  as outlined  in  the  Operational  Terms  of Reference  and  identified  as  being crucial  by  stakeholders,  has  been reduced by the Economic Development Department  to  that  of  a  basic administrative role.

The role of the JIF Executive Officer is to  provide  support  to  the  Board  and manage  the  various  stages  of  due diligence. This will require some basic administrative function but also require good  knowledge  of  local  business regulatory requirements.

The JIF Executive Officer will also be responsible  for  managing/coordinating reports and after care arrangements for all  approved  loans.  This  may  include outsourcing  the  aftercare/monitoring requirements  to  support  organisations such  as  Jersey  Business  Ltd,  Digital Jersey, Genuine Jersey, Rural Economy Advisory Team.

The Department recognises the Panel's concerns  and  will  work  with Stakeholders  to  ensure  that  sufficient resource  of  the  appropriate  calibre  is put  in  place  to  deliver  both  the administrative and functions of the role.

35

Some  Innovation  Funds  in  other jurisdictions  are  managed  by  external agencies  who  undertake  all  due diligence  in  reference  to  the management  of  the  fund  with  no apparent conflict.

In  view  of  this  and  stakeholder consensus on the need for expertise and

The proposed operating model in Phase 1 (loans and grants) is a Government Fund, where the Fund remains within Government and complies with Public Finance Laws, Codes of Directions etc.

It  would  not  be  very  effective  or efficient  in  Phase  1  for  the  JIF Executive  Officer  function  to  be

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efficiency in the support provided to the JIF Board, it is conceivable that Jersey Business is well positioned to undertake the role and responsibilities of the JIF Executive.

provided  by  an  arms-length organisation.

There are also concerns about potential conflicts if a support agency bringing forward applications was also managing the  due  diligence  processes.  There  is however  a  role  for  Jersey  Business, Digital  Jersey,  and  others,  to  provide aftercare on projects.

Jersey  Business,  Digital  Jersey  and others will be fully consulted at Board level regarding any proposed role that they  may  take  in  bringing  forward applications as part of the development of the Phase 2 ( private equity) R&P.

36

There  is  a  discrepancy  between  the limited  role  Treasury  and  Resources expects to undertake in the JIF, and the level  of  involvement  that  Economic Development  has  envisaged  for Treasury and Resources.

The  role  for  Treasury  and  Resources includes; being represented on the JIF Board, and managing the collection of loan  repayments  and  the  associated accounting/reporting processes.

37

In  addition  to  the  Economic Development  and  Treasury  and Resources  Departments,  the  JIF proposals establish the requirement for formal  roles  to  be  undertaken  by  the Economic Advisor's Unit and the Law Officers' Department.

The demands and nature of these roles will be bespoke to each application.

The Department will work with other States and private sector stakeholders to ensure  that  there  is  a  clear understanding of the role of each in the overall process.

38

The Panel is disappointed by the level of  consultation  undertaken  by  the Economic  Development  Department with other relevant Departments, most notably the Law Officers.

This has led to a situation where there is lack of detail and progress on key areas, such as the Royalty Agreement, despite the  close  proximity  to  the  proposed debate.

ED  and  Treasury  officers  have  had three meetings with the Law Officers to discuss  the  development  of  the  Loan and  Licence  agreements.  Progress  is being made but can't be completed until the  R&P  and  Revised  Operational Terms of Reference, Policy Framework and  Application  Forms  have  been agreed.

Draft  Template  Agreements  will  be provided to Scrutiny prior to the States debate  that  will  allow  the  Panel  to assess the likely contents and reach a view  on  their  progress.  Whilst Templates  are  being  developed  it  is however worth emphasising that given the  varied  nature  of  applications, products  and  terms,  each  successful Fund  applicant  will  require  an Agreement  with  a  high  degree  of

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bespoke  content,  therefore  the Templates  will  effectively  only  be illustrative in nature.

39

The JIF Board would be responsible for the management of the Fund, assessing all  applications  and  making recommendations  to  the  Minister  for Economic  Development.  It  would  be comprised of a minimum of 2 members and a Chair from the private sector, plus ex-officio,  non-voting  representatives from  the  Economic  Development, Treasury  and  Resources  and  Chief Minister's  (Economic  Advisor's  Unit) Departments. This could set the Board structure  as  three  private  sector members  and  three  public  sector members.

The number of private sector JIF Board Members has been increased to 4 Board Members  including  an  independent Chair.  The  public  sector  will  be represented by representatives from The Economics  Advisory  Unit,  Treasury and  Resources  plus  The  Chief Executive  from  Economic Development.

The  Chief  Officer  from  Economic Development  will  be  there  in  a  non- voting capacity, to avoid any possible conflicts  of  interest  and  to  allow  the Chief  Officer  to  provide  independent advice  to  the  Minister  for  Economic Development. The representatives from Treasury  and  Resources  and  Chief Minister's Department will have voting rights.

40

The  Panel  recognises  the  need  and value of the public sector members of the JIF Board, but it is ultimately the private sector expertise recruited to the JIF Board that would be crucial to the potential success of the Fund.

 The Minister and Department agree the views of the Panel and the number of private sector Board Members will be increased  to  4,  consistent  with  the Revised  Operational  Terms  of Reference.

41

Although  the  Economic  Development Department  has  outlined  significant roles and input for both Digital Jersey and  Jersey  Business  in  the  JIF, disappointingly  it  has  not  undertaken formal  consultation  with  either organisation despite the imminent date of the States debate on the Proposition.

The Departments Chief Executive is on the Digital Jersey Board and the Deputy Chief Officer is on the Jersey Business Ltd  Board.  These  appointments  allow for  on-going  and  regular communication about their current and future respective roles in the JIF.

Recognising the Panel's concerns, more detailed discussions have now begun at Board level with both organisations and these  will  be  extended  as  the development  work  for  Phase  2  gets underway in earnest.

42

The  financial  and  manpower implications  statement  in  the Proposition  estimates  the  operational and management costs' of the JIF to be £100,000.

However, it was soon apparent that the

ED's  normal  accounting  treatment  of cost is not to include internal manpower or other expenses on similar projects- there  are  reported  as  corporate  costs. (for example the Tourism Development Fund and Rural Initiative Scheme)

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£100,000  did  not  apply  to  anything other  than  the  external  expert  advice that  would  be  required,  and  took  no account  of  internal  costs  such  as  the resourcing of the JIF Executive by the Economic Development Department.

As  a  consequence  of  the  Panel's concerns,  the  Department  has  revised its  estimation  of  the  likely  levels  of costs incurred.

The estimated total annual cost of the JIF in Phase 1 is now believed to be £150,000. (£100,000 for external costs- due  diligence, specialist advice,  legal, credit  and  other  background  checks, plus a best estimate' for internal costs

–  man  hours  for  the  JIF  Executive, EDD Chief Officer, Law Officers, T&R and  the  Economic  Advisors  Unit  of £50,000  based  upon  800  man  hours input per annum).

This  is  a  best  estimate  and  will  vary depending  on  the  complexity  of  the applications  which  are  currently unknown,  however  the  experience gained during Phase 1 will be utilised to more  clearly  scope  the  overall  cost implications for Phase 2 and beyond.

43

It is quite possible that total estimated charges  to  the  Fund  could  equate  to within a range of £250,000 to £400,000 per year, undermining the ability of the JIF to be self replenishing.

The  Minister  recognises  the  Panel's concerns,  however  cannot  share  this estimate of costings.

In  Phase  1  (grants  and  loans)  10 applications are anticipated resulting in approximately  5  grants/loans  being approved. The annual cost of £100,000 or  £20–£25,000  per  supported  project should be sufficient to meet even the most complicated projects.

44

It is proposed that the operational and administration  functions  of  the  JIF would  be  covered  by  existing Departmental  resources,  which  the Panel was told would therefore be of no cost to the Fund. This approach does not  transparently  account  for  the internal  invisible'  costs  of  the  Fund and the man hours it requires.

The  Minister  recognises  the  Panel's concerns  and  internal  costs  to  the Department will be closely monitored during  Phase  1  to  allow  such transparency,  with  any  subsequent amendments  being  reflected  in  cost structure  coming  forward  for  the Phase 2 R&P.

45

No full and transparent assessment of the  invisible'  costs  that  will  be incurred by States Departments to fulfil the  administration  and  monitoring functions of the fund has been made. Without defining the cost of the internal resource requirements, it is difficult to

See 44 above.

The  Department  will  make  a commitment  to  closely  monitor  the costs of internal resource requirements in managing the Fund throughout Phase 1 and will use this early experience as a means of evaluating how best to operate

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determine how the Fund is performing and  to  measure  its  overall  success relative to cost.

and manage the Fund in Phase 2 R&P proposals.

46

Whilst in principle the JIF is very much welcomed  by  the  Panel,  there  is  an unacceptable  level  of  inconsistency within the proposals,  which  also  lack clarity  and  key  details  that  should reasonably be in place and available to Members and stakeholders at this stage of  the  process.  Until  these  issues  are resolved, the Panel cannot support the establishment of the JIF.

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1

It  is  recommended  that  a Partnership Fund would be a  more  suitable  model  to move to, in order to harness the considerable benefits of leverage,  shared  risk  and private  sector  expertise. This  should  be  given serious consideration at the earliest opportunity.

ED

Reject for Phase 1 (loans and grants)

Agreed for Phase 2 (equity investments)

The Public Finances (Jersey) Law 2005 allows the JIF to provide grants or loans (Phase 1). The Government Fund model is the most appropriate structure for this initial phase.

Within 6 months of launch a new R&P will bring forward recommendations that will allow the JIF to make equity investments.

Subject to States approval the R&P will move the model towards a Partnership Fund in order to harness the benefits of leverage, shared risk private sector expertise and make investments in return for equity in the business

6  months from launch

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2

Greater  clarity  is  required on  defining  both  failure' and success' as they relate to  the  JIF,  both  in  an overall sense and as applied to  individual,  funded projects.  This  should include:

• a precise framework for the  monitoring  of  the performance  of individual projects and the  financial performance  of  the overall Fund;

• a formal mechanism to establish  the circumstances  under which  the  possible temporary  or permanent  closure  of the  JIF  might  be considered.

ED

Agreed

Overall success is clearly defined in the Revised Report and Proposition –

Success for the Jersey Innovation Fund will, by encouraging investment into areas of innovation, 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'.

Overall failure would be less innovation resulting in fewer job opportunities for locals

The Revised Operating Terms Of Reference clarifies the minimum reporting requirements for all supported projects. These reports will allow for all projects to be performance monitored on a regular basis.

The JIF Executive will also manage a Risk Register which will record and escalate a project that is not meeting the agreed project objectives

The Reports prepared by the Board on a regular basis, along with the Minister being represented at Board

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Meetings, will provide the level of input and monitoring required for the Minister to be assured of overall satisfactory performance.

Future Terms of Reference for the Board are likely to include the type of KPI's and other measures that Scrutiny are seeking in terms of the Minister being in a position to independently evaluate the longer term progress of the Fund

3

To provide clarity about the very  purpose  of  the  JIF, there  must  be  a  common position established by the Ministers  for  Economic Development and Treasury and  Resources  regarding the  prioritisation  of  the various success criteria.

ED

Agreed

The purpose is to encourage investment into areas of innovation.

Success measures are to –

1. deliver a competitive advantage for Jersey;

2. attract additional private sector investment;

3. attract high value inward investment businesses;

4. raise the productivity of local organisations.

The outputs from the above should lead to more job opportunities for locals

1-4 above are in no order of priority, and a project does not have to deliver against them all. The priority outcome is

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job creation which is consistent with the SoJ Strategic Priorities

4

The  source  of  the  second £5 million due to the Fund should be clearly identified by the Minster for Treasury and Resources.

ED

Accept

The Minister shares the Panel's concerns regarding the source and timing of the second stage £5 million States investment (see above).

The inability to identify the source of the additional £5 million at the outset should not materially affect the ability of the JIF to serve its purpose however, given the predicted number of loans and the current upper limit on loan size (£500,000 as a result of the Public Finance (Jersey) Law 2005).

See above.

6  months from launch

5

The  JIF  should  not  adopt the  principle  of  minimum or maximum funding levels per applicant.

ED

Accept

The Minister and Department have accepted the views of the Panel and amended the Revised Operational Terms of Reference and Application Form appended to the R&P to reflect this

The £500,000 maximum amount is consistent with the Treasury Ministries lending limit under the Public Finances (Jersey) Law 2005.

This may change in the R&P for Phase 2

The proposed £20,000 minimum grant or loan

Immediate

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limit has been removed and the Revised Operational Terms of Reference and the Application Form have been updated.

6

Partnerships,  LLP's  and sole  traders  must  not  be excluded from applying for funding.  Therefore,  there should  be  clarification  of the  consequences  of  the requirement  for  an applicant  to  be  a  business incorporated  under  the Companies  (Jersey)  Law 1991.

ED

Accept

The concerns raised by the Panel about eligibility guidelines have been considered and as a consequence, in order to maximise the scope and benefits of the JIF, Revised Operational Terms of Reference and Application Form have been developed that will allow applications from individuals, thirds sector organisations and any type of trading entity, such as sole traders, Limited Liability Companies, partnerships, LLPs etc.

Applications from individuals or sole traders successful in securing a loan may be asked, by the JIF Board, to put in place a specific corporate governance structure which could result in establishing a company registered in Jersey.

Immediate

7

If the JIF is realistically to be  made  available  to  the third  and  private  sectors, and non-finance industries, the  proposed  eligibility criteria relating to GVA per employee and high growth business  should  be amended  to  a  less demanding level.

ED

Accept

The Minister and Department have accepted the views of the Panel and amended the Revised Operational Terms of Reference and Application Form appended to the R&P to reflect this

Immediate

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To

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Target date of action/ completion

To maximise the scope of the scheme the required £65,000 GVA per employee has been removed from the eligibility criteria.

Applications will now be welcomed for any project that can demonstrate that the investment in innovation will deliver productivity gains/growth (jobs and revenues)

8

Whilst  ensuring  effective and  robust  processes  are established where required, such  as  due  diligence, continued  attention  should be paid to ensuring that the JIF is not overburdened by red tape

ED

Accept

The management of the JIF will not be overburdened with red tape. But it will have the appropriate levels of due diligence and risk assessment for a fund capitalised with public money.

Immediate

9

Outstanding issues relating to the work required of the Law  Officers  Department must be resolved, not least the  development  of  the Royalty  Agreement template, prior to the States debate.

ED

Accept

The Department recognises the concerns expressed by the Panel in its Review and will produce draft Templates for the Panel's review prior to the States Debate

Draft Template Agreements will be provided that will allow the Panel to assess the likely contents and reach a view on their progress.

Whilst Templates are being developed it is worth emphasising that given the varied nature of applications, products and terms, each successful Fund applicant will require

April 2013

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To

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an Agreement with a high degree of bespoke content, therefore the Templates will effectively only be illustrative in nature.

10

• The JIF should retain the objective of being self-replenishing. It is vital  therefore  to ensure that in addition to  implementation  of the Panel's monitoring and  cost  related recommendations:  a clear  financial objective  and  Key Performance Indicators  are established;

• formal  guidelines  are established  between the  relevant Departments regarding interest  rate  levels, and  the  process  for establishing  loan repayment  terms  is clearly set out;

• the  equity  element  is developed,  as proposed,  within 6 months;

grants are awarded only in extremis'

ED

Accept

The aim is for the JIF is to be self-replenishing although it is worth stressing that this is unlikely in the early stages owing to the nature of staged repayments and the product development lifecycles of the companies involved.

In Phase 1 it is unlikely

- owing to the nature of interest payments on loans and scale of early stage income from royalties – that income will be sufficient to replenish the fund within the early years. As loans mature and royalty income from sales build, there is an increased likelihood that returns to the Fund would replace or exceed the amounts borrowed at the outset and reduce the early stage deficit effects.

Phase 2 (equity investments) allows for greater and earlier potential returns to the JIF (through dividends and potential sale of shares at multiples of the original investment value), that will greatly improve the JIF's ability to become self- replenishing at a much

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earlier stage and possibly compensate from the more staged returns of Phase 1 investments.

Interest rates, loan repayment periods, repayment holidays, multiple draw downs, royalty percentages will be considered on a case by case basis. The Board, which includes a Treasury representative, will make recommendations on the all the above details to the Minister for Economic Development.

Within 6 months of launch a new R&P will bring forward recommendations that will allow the JIF to make equity investments.

Subject to States approval the R&P will move the model towards a Partnership Fund in order to harness the benefits of leverage, shared risk private sector expertise and make investments in return for equity in the business

The Department shares the Panels views that Grants will only be given in extremis from the Fund, given that such States support may be available under different support programmes

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11

The Minister for Economic Development  should formally  engage  with Jersey  Business,  with  a view  to  that  organisation undertaking  the  functions of the JIF Executive.

ED

Accept

The R&P proposes a Government Fund allowing for grants and loans to be offered in Phase 1. The Fund will operate within the Public Finances (Jersey) Law 2005 and Financial Codes of Direction which it would be difficult for an outside body to administer on the Minister's behalf.

During the work to prepare the R&P for Phase 2 (equity investments and move towards a Partnership Fund) the Department will engage in in-depth discussions with Jersey Business to evaluate whether there is a more intensive role that it could play in working without outside third parties, in delivering the Partnership Fund model.

May 2013

12

All  States  Departments involved  in  the  JIF  must have  their  roles  and responsibilities  more clearly  defined,  most notably  the  Law  Officers and  Treasury  and Resources. This will require formal  discussions  and should  result  in  clear guidelines  outlining  their particular responsibilities

ED

Accept

The roles of the various Departments are recorded in the Revised Operating Terms of Reference drawn up as a response to the Panel's Report.

Immediate

13

It is recommended that the number of Board members recruited  from  the  private sector,  through  a  full  and formal recruitment process,

ED

Accept

The Minister and Department agree the views of the Panel and the number of private sector Board Members

Immediate

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should be set at a minimum of  four  (inclusive  of  the Chairman).

will be increased to a minimum of four, consistent with the Revised Operational Terms of Reference.

14

The Minister for Economic Development  must  engage in formal discussions at the earliest  opportunity  with Digital  Jersey  and  Jersey Business,  regarding  their roles in the JIF.

ED

Accept

The ED Chief Executive is on the Board of Digital Jersey and the Deputy Chief Executive is on the Board of Jersey Business Limited. This allows for on-going constructive discussions about their current and future roles in supporting the JIF.

Jersey Business, Digital Jersey and others will be fully consulted at Board level regarding any proposed role that they may take in bringing forward applications as part of the development of the Phase 2 ( private equity) R&P.

Both the above, and other bodies, will be fully engaged in the development of Phase 2 which will be lodged as a R&P within 6 months of launch of the JIF.

May 2013

15

A  best  estimate  of  annual operating  costs  for  the management  of  the  JIF, including  all  overhead support  (external  and internal  costs),  should  be provided.  Additionally,  an assessment  should  be undertaken  of  this estimated  annual  cost  of operating the Fund against a  measure  of

ED

Accept

The estimated total annual cost of the JIF in Phase 1 is now believed to be £150,000. (£100,000 for external costs- due diligence, specialist advice, legal, credit and other background checks, plus a best estimate' for internal costs – man hours for the JIF

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deliverables/outcomes arising from the utilisation of the Fund. Transparency on  this  exercise  will effectively  provide  an indication of the true utility of the JIF

Executive, EDD Chief Executive, Law Officers, T&R and the Economic Advisors Unit of £50,000 based upon 800 man hours input per annum)

This is a best estimate and will vary depending on the complexity of the applications which are currently unknown, however the experience gained during the Phase 1 will be utilised to more clearly scope the overall cost implications for Phase 2 and beyond

16

Due  to  the  level  of inconsistency  in  the proposals,  and  the  lack  of key  details  that  could reasonably  be  available  to Members  and  stakeholders at  this  stage,  the  Minister for Economic Development should  consider  the findings  and recommendations contained within  this  report,  and address the issues it raises, before  the  Proposition  is debated by the States.

ED

Accept

The debate has been delayed until 30th April