Jersey Innovation Fund - Report - 27 March 2013

Economic Affairs Scrutiny Panel

Jersey Innovation Fund

Presented to the States on 27th March 2013

S.R.4/2013

Contents

1. PANEL MEMBERSHIP AND TERMS OF REFERENCE.......................................... 1
2. GLOSSARY OF TERMS........................................................................................... 2
3. CHAIRMAN'S INTRODUCTION ............................................................................... 3
4. EXECUTIVE SUMMARY .......................................................................................... 5
5. FINDINGS ................................................................................................................. 8
6. RECOMMENDATIONS ........................................................................................... 14
7. INTRODUCTION: BACKGROUND TO THE REVIEW ........................................... 17
8. SCOPE, ELIGIBILITY AND ACCESS: KEY ELEMENTS EXAMINED................... 20

1. Purpose and Objectives of the JIF ........................................................................ 20
2. What is Innovation? .............................................................................................. 21
3. The Type of Fund ................................................................................................. 24
4. Fund of Last Resort .............................................................................................. 29
5. Hopes of Success, Expectations of Failure'?........................................................ 33
6. Establishing Demand – is £10million enough? ...................................................... 40
7. Scope of the JIF and Eligibility Criteria: Inconsistencies ........................................ 44
8. High Value Sector and High Growth Business ...................................................... 50
9. Application Process – Red Tape? ......................................................................... 52
10. Due Diligence ....................................................................................................... 55
11. Funding Arrangements – Loans or Grants ............................................................ 57
12. Self Replenishing Fund? ....................................................................................... 60

9. RESOURCES AND COSTS ................................................................................... 68

1. Economic Development and the Role of the JIF Executive ................................... 68
2. Additional Departmental Resources/Responsibilities ............................................ 75
3. The Board ............................................................................................................. 79
4. Stakeholder/Industry Involvement in the JIF.......................................................... 82
5. Costs – Visible and Invisible ................................................................................. 86

APPENDIX 1: EVIDENCE CONSIDERED...................................................................... 94 APPENDIX 2: CIPFA REPORT ...................................................................................... 95 APPENDIX 3: DRAFT JIF APPLICATION FORM ........................................................ 147 APPENDIX 4: DRAFT INNOVATION FUND POLICY FRAMEWORK ......................... 155

1.  PANEL MEMBERSHIP AND TERMS OF REFERENCE

1. The Economic Affairs Scrutiny Panel is comprised of the following members: Deputy S.G. Luce , Chairman

Connétable S.W. Pallett, Vice-Chairman

Connétable M.J. Paddock

2. The following Terms of Reference were established for the Review:

1. To undertake an examination of key elements of the proposals to create a Jersey Innovation Fund, including:

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

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

2. GLOSSARY OF TERMS

• Application Form - Application Form in draft
• Chamber of Commerce - Jersey Chamber of Commerce
• Chief Officer, ED - Chief Officer of Economic Development
• CMD - Chief Minister's Department
• Connétable of St Brelade – Vice Chairman of the Panel
• Deputy of St Martin – Chairman of the Panel
• EDD - Economic Development Department
• EAU – Economic Advisor's Unit
• ERDF – European Regional Development Funding
• Expert Advisor – External Advisor from CIPFA
• Policy Framework – Innovation Fund Policy Framework in draft
• JIF - Jersey Innovation Fund
• Operational Terms of Reference – Jersey Innovation Fund, Operational Terms of Reference – September 2012
• Royalty Agreement – Royalty Agreement in draft
• T&R – Treasury & Resources Department
• The Minister for ED - The Minister for Economic Development
• The Minister for T&R - The Minister for Treasury & Resources
• The Panel – Economic Affairs Scrutiny Panel
• The Proposition - P.124/2012 Jersey Innovation Fund: Establishment, Funding & Operation
• TDF – Tourism Development Fund

3. CHAIRMAN'S INTRODUCTION

1. The concept of operating Innovation Funds is not new, indeed various funds have been in place not only in the United Kingdom and Europe, but also around the globe, for many years now. This doesn't mean, however, that it isn't still a concept that needs supporting, and the Economic Affairs Scrutiny Panel would certainly wish it to succeed. The fact that it is not a brand new concept means that there are a number of very successful examples for us to study, learn from, and follow. The Panel would therefore, at the outset, wish to endorse this initiative from the Economic Development Department, one that is another important part of the new Growth and Diversification Strategy.
2. Notwithstanding the above, it became apparent from the outset of this review that there were, if not contradictions, then certainly contrasting and contrary views as to how the proposed fund was going to operate. The Economic Development Minister, in the first hearing we held with him, stated that "the devil was in the detail", but it soon became clear to the Panel that "the detail" was not consistent with the Report and Proposition that have been tabled for debate by the Assembly. After six public hearings, and other meetings with civil servants held by our advisor, it is still apparent to the Panel that there are a considerable number of questions that have not been sufficiently well answered.
3. Taxpayers' money is hard earned, and it is the duty of Government to make sure it is well used. Investment in innovation can be risky, and if we are to invest in "risk" then we need to be assured that that risk is at least minimised as much as possible. This can only be done with the use of strict and consistent rules and guidelines. At present those rules and guidelines are not in place..or at least are inconsistent across the various elements of "red tape" that the Panel were presented with. There was also a clear difference between the opinion of those people we heard evidence from, and the detailed paperwork that the Panel received during the review.
4. The Panel wish this initiative to move forward, and we wish the Fund to be a success, but both these things will only happen when there is a consistency across the whole of the Report, Proposition and the underpinning detail. The Panel look forward to reviewing

some additional amended material in the very near future, after which they are hopeful of being able to offer their full support to this new, and important, schemea scheme that could prove to be hugely beneficial in these difficult economic times.

Deputy S.G. Luce

Chairman

Economic Affairs Scrutiny Panel

4. EXECUTIVE SUMMARY

1. Whilst in principle the Jersey Innovation Fund (JIF) is welcomed by the Panel, there is currently an unacceptable level of inconsistency within the proposals. The proposals also lack clarity and key details that might reasonably be in place, and available to Members and stakeholders, given the close proximity of the proposed States debate that would establish the fund. Until these issues are given consideration, reluctantly, the Panel finds itself in a position where it cannot support the establishment of the JIF. The Panel has recommended that, in this context, the Minister for Economic Development must consider and address the issues, as outlined in this report, before the JIF Proposition is debated by the States. Indeed, the Panel intends to review the Minster's response and any revised proposals in advance of their debate.
2. Although intended as a fund of £10million, it is proposed that the JIF will launch initially with £5million, with an additional £5million to be allocated at a later, undefined stage. This second tranche of funding is crucial to the prospects of the Fund. The source of the additional £5million has yet to be confirmed by the Minister for Treasury and Resources, and the Panel is clear that, for the avoidance of any doubt, the source of this second £5million should be clearly identified before the States debate.
3. The JIF is proposed to launch as a Government Fund, however, matched funding with private venture capital (i.e. a Partnership Fund) was commonly identified as a preferred model. It is suggested that serious consideration should be given by the Minister for Economic Development to adopting a Partnership Fund model, in order to harness the considerable benefits of leverage, shared risk and private sector expertise. Stakeholder organisations also 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.
4. It is accepted by the Panel that due to the nature of the new and innovative businesses that could be supported by the JIF, not all investments would be successful, and the 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. The Minister for Economic Development raised the potential for high percentage levels of failure', initially suggesting this could be as high as 70%. There is a general consensus, however, that in terms of fund recipients going out of business, such a high rate of failure would be unacceptable.

5. Looking at success', it was apparent there were commonly identified success criteria, such as creation of locally qualified jobs, financial return to the JIF and general taxation contributions. However, these were prioritised differently amongst the stakeholders, including the two Ministers responsible for the JIF. To address this and 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 success criteria.
6. Indeed, greater clarity is required more generally on defining both failure' and success' as they relate to the JIF, both in an overall sense and as applied to individual, funded projects. It is recommended that this should include development of a precise framework for the monitoring of the performance of individual projects and the financial performance of the overall Fund, including a formal mechanism to establish the circumstances under which the possible temporary or permanent closure of the JIF might be considered.
7. Further clarity is also required to better define the roles and responsibilities of key external organisations and States Departments whose resources and input are required by the JIF. There should be formal discussions held at the earliest opportunity with Digital Jersey and Jersey Business regarding their roles, which in the case of Jersey Business includes a recommendation from the Panel that consideration should be given to that organisation undertaking the functions of the JIF Executive. There is concern that the roles and responsibility of other States Departments must be more clearly defined, most notably those of the Law Officers and Treasury and Resources. In addition, a number of issues relating to the work of the Law Officers Department that remain outstanding (through no fault of their own) must be resolved prior to the States debate, not least the development of the Royalty Agreement template.
8. 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 heavy emphasis placed on targeting high value, high growth opportunities on the other. In fact, there are a number of seemingly over-restrictive eligibility criteria including the need to demonstrate the ability to achieve a level of at least £65,000 GVA per employee, to demonstrate the potential for high growth', and the requirements relating to an applicant being a Business incorporated under the Companies (Jersey) Law 1991. These could all effectively rule out many potential applications, particularly in the third and public sectors, and traditional industries such as tourism and agriculture. 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. Additionally, it is a conclusion of the Panel that the JIF should not adopt the principle of minimum or maximum funding levels per applicant.

9. 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 sinking Fund. It is imperative that the JIF should retain the objective of being self-replenishing. It is vital therefore to ensure that, amongst other elements, a clear financial objective and Key Performance Indicators are established, grants are only awarded absolutely in extremis' and that the equity element is developed, as proposed, within 6 months.
10. Costs are also a major concern of the Panel. It became apparent early in the Review that the £100,000 estimated for the operational and management costs of the JIF did not apply to anything other than the external expert advice that would be required. No full and transparent assessment of the invisible' costs that would 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 determine how the fund is performing and to measure its overall success relative to cost. This is taxpayers' money, and value for money must be achieved. The Panel's adviser has indicated that 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.
11. The Panel has recommended that 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, it recommends an assessment of this estimated annual cost of operating the Fund against a measure of 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.

5. FINDINGS

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. (8.2.9)
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. (8.3.5)
3. Although the JIF is proposed to launch as a Government Fund, matched 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. (8.3.16)
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. (8.4.15)
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. (8.4.15)
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. (8.5.5)
7. The Minister for Economic 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. (8.5.5)
8. There is a lack of clarity about what defines failure' both in relation to the JIF overall and the individual projects receiving funding. (8.5.5)

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. (8.5.11)
10. There is a lack of clarity about what defines success' in relation to the JIF and the individual projects receiving funding. (8.5.21)
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. (8.5.21)
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 two Ministers responsible for the JIF. (8.5.21)
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. (8.5.21)
14. Although intended to constitute a £10million fund, it is proposed that the JIF will launch initially with £5million, with an additional £5million to be allocated at a later, undefined stage. The source of the additional £5million has yet to be confirmed by the Minister for Treasury and Resources. (8.6.10)
15. It is widely agreed that, although a fund of £10million 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. (8.6.10)
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. (8.6.10)
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. (8.7.7)

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 application form and policy framework documents. (8.7.19)
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. (8.7.19)
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. (8.7.24)
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 related projects. (8.8.7)
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. (8.8.11)
23. The high growth' requirement states that an applicant must demonstrate the potential to double revenues or employment within four years and to employ at least ten full time equivalent staff by the end of the four year period. This appears highly restrictive. (8.8.11)
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. (8.8.11)
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. (8.9.8)

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. (8.9.8)
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. (8.10.6)
28. It is clearly proposed that grants will only be made in exceptional circumstances. (8.11.9)
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. (8.12.13)
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 loan repayment terms and interest rates are to be established is not clear, with no formal details or guidelines available. (8.12.13)
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. (8.12.18)
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. (8.12.28)
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 sinking Fund. (8.12.28)

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. (9.1.18)
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 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. (9.1.18)
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. (9.2.10)
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. (9.2.15)
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. (9.2.15)
39. The JIF Board would be responsible for the management of the Fund, assessing all applications and making recommendations to the Minister for ED. It would be comprised of a minimum of two 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. (9.3.10)
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. (9.3.10)

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. (9.4.13)
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 £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. (9.5.12)
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. (9.5.12)
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. (9.5.22)
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 determine how the Fund is performing and to measure its overall success relative to cost. (9.5.22)
46. Concluding Finding:

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.

6. RECOMMENDATIONS

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. (8.3.16)
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. (8.5.21)

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. (8.5.21)
4. The source of the second £5 million due to the Fund should be clearly identified by the Minster for Treasury and Resources. (8.6.10)
5. The JIF should not adopt the principle of minimum or maximum funding levels per applicant. (8.7.19)
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. (8.7.24)
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. (8.8.11)
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. (8.9.8)

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. (8.12.13)
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'. (8.12.28)

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. (9.1.18)
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. (9.2.10)
13. It is recommended that the number of Board members recruited from the private sector, through a full and formal recruitment process, should be set at a minimum of four (inclusive of the Chairman). (9.3.10)
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. (9.4.13)
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 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. (9.5.22)

16. Concluding Recommendation:

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.

7. INTRODUCTION: BACKGROUND TO THE REVIEW

1. The principle of setting up a Jersey Innovation Fund' (JIF) was established as part of the Economic Growth and Diversification Strategy, adopted by the States in July 2012. Such funds in various forms have been established and operate in a number of countries, including the UK, Ireland, Malta and Israel, which in particular has been used as a reference point by the Economic Development Department (EDD) during the development of the JIF. The key objective of the Economic Growth and Diversification Strategy 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. During the course of the debate last July, the Chairman outlined the Panel's intention to undertake a Review of the JIF at an appropriate time, as more detailed proposals emerged.
2. The Proposition to establish the JIF, P.124/2012 Jersey Innovation Fund: Establishment, Funding and Operation, (The Proposition) was lodged au Greffe on 20th November 2012 in the name of the Minister for Treasury and Resources (Minister for T&R). Although primarily an initiative of the Minister for Economic Development (Minister for ED), the Proposition has been lodged by the Minister for T&R to fulfil the requirements of Article 3(3)(a) of the Public Finances (Jersey) Law 2005, whereby the States may, on a proposition lodged by that Minister, establish a special fund for specific purposes.
3. The JIF itself seeks to support innovation through financial investment by the States in a wide range of activity, from direct business support to strategic infrastructure investments across the private, public and third sectors. Under the proposals, the £10million fund would be established with an initial allocation of £5 million coming from part of the redemption of JT Group Limited's 9% cumulative preference shares. At the time of launching the Panel's Review the source of the remaining £5 million had yet to be confirmed, and this remains the case as we present our report.
4. The Panel first received drafts of the Proposition, accompanying report and Jersey Innovation Fund, Operational Terms of Reference (Operational Terms of Reference) for the Fund on 21st September 2012, and updated versions on 16th October, along with an indication of an intention to lodge au Greffe within a week. At that stage the documents were in draft form and, therefore, understandably subject to confidentiality.

5. The Panel agreed that if the Proposition was lodged as intended, it would not have adequate time to undertake the work expected of it if the minimum six week lodging period was applied, as it needed to fully and publically explore the significant proposals with the relevant stakeholders, something that could only be achieved with publishable versions of the documents referred to above. The Panel wrote to the two relevant Ministers (see 7.2) to request that they consider agreeing that the debate should not take place before the States meeting on Tuesday 29th January 2013 (a date that has been subsequently pushed back further by the complications presented by the unplanned lodging of  P.113/2012 Tourism Shadow Board: Establishment by the Minister for ED and the increasing concern of the Panel, as laid out in this report, that the JIF Proposition required further work before the Panel would be in a position to fully review it). Throughout the process the Panel and Ministers have maintained a constructive dialogue, and the Panel welcomes the approach of both Ministers who have been understanding of the requirements and obligations of Scrutiny, and have taken on board and agreed to the Panel's suggestions regarding the scheduling of the debate.
6. Having assessed the documentation available at the time, the Panel agreed and published the Review's Terms of Reference in December 2012 and launched a public call for evidence inviting contributions from all interested individuals and stakeholders. Targeted requests for evidence were also made to the two Ministers and to key stakeholder groups, notably Jersey Business, Digital Jersey and Jersey Chamber of Commerce who all attended Public Hearings. The Panel also secured independent expert advice from CIPFA Business Ltd, who have provided considerable assistance to the Panel, particularly on the technical aspects of the JIF. CIPFA's report on the JIF is attached to the Panel's as Appendix 2.
7. Although positive about the concept of an Innovation Fund, it soon became clear to the Panel as evidence gathering began that there seemed to be a lack of detailed planning behind the proposals, despite the imminent States debate, for instance regarding the costs associated with administering the Fund and the extent of formal consultation undertaken with key stakeholders. It also emerged that were some worrying contradictions between the visions of the JIF held by various stakeholders, including the Ministers themselves - perhaps a symptom of the concerns regarding the level of formal consultation. Indeed, the Panel has also witnessed the evolving' positions of certain individuals on various elements of the JIF as the Review progressed, which has been the cause of some considerable confusion. There were a number of key areas in which these differences were apparent, including amongst many others the scope of the JIF, defining an innovative' project, the purpose of the Fund, what success looked like and how risk would be managed.

8. The Panel's concerns were only intensified when it was presented with additional draft documentation as the Review progressed, notably the Innovation Fund Policy Framework (Policy Framework) and Jersey Innovation Application Form (Application form). There was further concern about the limited information provided to the Panel during correspondence with EDD requesting updates about the development of a template Royalty Agreement.
9. Although they were in draft form, once received it was reasonably expected that there would be little change to these documents given the proximity of the scheduled debate on the JIF, and because, with the exception of the Royalty Agreement, these were documents that were clearly in an advanced, apparently complete format. The Panel are concerned that further changes to the draft documents would clearly change the nature of the fund.
10. There were notable further inconsistencies and contradictions between this additional information and the lodged package' of the Proposition, report and Operational Terms of Reference, not least regarding minimum/maximum levels for the loans (or possibly grants) and crucially the eligibility criteria. It also raised further questions about the level of detail planning that had been undertaken, or indeed remained to be done.
11. This report presents the findings (Section 5) and recommendations (Section 6) of the Panel on the proposed Jersey Innovation Fund based on the evidence received. In Section 8 Scope, Eligibility and Access: Key Elements Examined' there is a full exploration of who can access the fund and how (i.e. the envisaged application process), followed in Section 9 by an examination of the resource implications and costs associated with the fund.

8. SCOPE, ELIGIBILITY AND ACCESS: KEY ELEMENTS EXAMINED

1. Purpose and Objectives of the JIF

1. In order to achieve the key strategic aim of the Economic Growth and Diversification Strategy to encourage innovation and improve Jersey's international competitiveness, an identified priority is to establish the JIF. 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.
2. The scheme is intended to be operated and managed following the Operational Terms of Reference which are attached to the Proposition. The 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 EDD, Treasury and Resources (T&R) and the Chief Minister's Departments (CMD) on the Board.
• The Board will be responsible for the management of the Fund, assessing all applications and making recommendations to the Minister for ED. The Board will be supported by a Fund Executive from EDD (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 (EAU).
• The Board will make recommendations to the Minister for ED 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 ED

• 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

2. What is Innovation?

1. In its broad sense, the concept of innovation can be defined as follows:

• not just a new idea but can be an advancement or improvement on something that is existing
• A new method, idea or product
• The action or process of innovating[1]

2. The Operational terms of Reference contains a definition of innovation for the purpose of this Fund, which reads:

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.[2]

3. The Panel asked the key witnesses at public hearings to define what they believed innovation to be, to try to get a clear idea of the expected targeting and demand of the JIF. There were, as can be seen below, a range of responses:

Minister for ED

"I would define innovation as a new idea, a new method or a new product, the idea being able to create high value, and importantly to create job opportunities. It is about new ideas, new methods and new products, in summary, and the execution thereof"

3

Minister for T&R

"...Innovation means securing new businesses and jobs in economic areas that are outside financial services and that are new..." [3]

President, Jersey Chamber of Commerce "...I would be looking for natural progression..."[4]

Chairman, Jersey Business

"... it is difficult to predict. There are a number of companies here that we have come across who have ideas ranging from the mundane to what I would call the innovative to the highly innovative, and there are degrees of risk associated with all of them..."[5]

Chairman, Digital Jersey

"...it could be a completely new idea that is taken to market. It could be an extension of an existing business...the innovation fund is not just about technology and we completely understand that"[6]

4. Aware that there appeared to be wide parameters to the definition of Innovation for the Fund, which could potentially cause confusion from those trying to access and those trying to run the JIF, the Panel asked the Ministers to provide a case study example of the sort of successful' application they might envisage.
5. A number were provided and many can be seen in the transcripts of our Hearings with the Ministers, but they have not provided the Panel with the clarity that might be expected at this stage. Instead, it appeared that many of the examples given would simply not qualify for funding based on inconsistency and incompatibility with one of more of the many eligibility criteria (see 8.7), including a sweet shop example that it was widely agreed was not innovative, and for which it is anyway difficult to envisage as being high value and high growth. Where innovation could be potentially seen, for instance in the example of a highly successful entrepreneur who, before his success, required £500 of start up funding – if he had applied to the JIF he would have been turned away for being under the £20,000 minimum (see 8.7.8) loan requirement.
6. The Panel also became aware of a reference that had been made by the Chief Minister at a Jersey Hospitality Association lunch in March 2013, linking the upcoming Innovation Fund and the successful Jersey Heritage Forts and Towers' project, as an example of the type of project that may receive funding. However, during a hearing with the Minister for ED, this example was provided by the Chief Officer, ED, but it appeared to have been contradictory to the eligibility criteria.

7. The Chief Officer, ED, explained the benefits and additional revenue this particular project had produced. The Panel explored further the eligibility criteria and asked the Chief Officer if this project would be able to show it had met the criteria of an additional 10 staff after 4 years. The Chief Officer, ED said:

Chief Officer, ED (hearing with Minister for ED on 22nd February 2013)

"...I do not know whether that particular entity has done that, but what I do know is that the level of employment associated with the forts and fortifications is certainly not zero and it is certainly quite significantly higher than ... well, it is not zero, because they were not there before"[7].

8. During the same hearing, the Panel Chairman asked:

Deputy of St. Martin :

"...We mentioned the development of the castles and forts around and turning them into tourist attractions, but the application form also says that the applicant has to be a high-growth business. Surely that would not qualify, because a high-growth business by definition has to double its revenue and its employment within 4 years and employ at least 10 fulltime equivalent staff by the end of the fourth year..."

Chief Officer (hearing with Minister for ED on 22nd February 2013):

"...I am not necessarily saying that the forts and fortifications fits that criteria..."[8]

9. The Panel was therefore surprised that the forts and towers scheme was still being used to illustrate the type of application that may receive innovation funding, and was concerned that inconsistency appeared to remain between the anticipated targeting of the fund and the defined eligibility criteria.

3. The Type of Fund

1. The principle of governments encouraging, supporting and making investment into innovation is not a new concept. Jersey is unusual in not having such support available to support economic development. The UK, Malta and Singapore are 3 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. Although Innovation Funds are operated in other jurisdictions successfully, these schemes are invariably designed to attract significant inward investment primarily focused on global markets. The Funds that are in operation in the UK, Ireland and Malta attract some regional economic support funded in part through the EU by way of European Regional Development Funding (ERDF) and channelled through the central/local government infrastructure of these respective countries.
2. Government funds operating in other jurisdictions follow their own operating model which is used to support the specific priorities and objectives of that jurisdiction. Within the Operational Terms of Reference, an analysis of Innovation Funds from across a number of jurisdictions allows operating models to be characterised into 3 main types:-

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.

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.

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 a 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.[9]

3. It is proposed that the JIF will launch and initially operate as a Government Fund, 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.[10]
4. Following the launch of the JIF, the Minister for T&R 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. (See Section 8.12.20).  
5. The Operational Terms of Reference makes reference to a Government Fund which is currently operating in Israel. This fund is extremely successful and references and comparisons to this fund are used throughout this report. However, the Panel's advisor has advised that whilst there is much that can be learned from the operation of Innovation Funds across the world it is important that the objectives and operating context aligned to each Fund is fully appreciated. Aspects of the funds operated in the UK and Israel have some similar attributes to the JIF although the key differences on the extent of venture capital fund matching remain. Indeed, differences in operating environment, primary objectives and underpinning funding make true comparisons difficult.[11]

6. Matched Funding
7. As outlined above, it is intended that the fund will launch initially as a Government Fund, followed in time by an equity element. It is important to note that in order for the JIF to be eligible for matched funding, it would have to move from being a Government Fund as proposed, to a Partnership Fund model. Ireland and Israel (amongst others) are two jurisdictions that operate successful Innovation Funds on this basis. It is not proposed within the JIF proposition to pursue matched funding. However, matched funding was raised by the industry stakeholders as a sensible principle with which to underpin the JIF, and the Panel has therefore explored this concept further.
8. Jersey Business suggested gaining leverage for the fund would help minimise risk and double the size of the fund. The Chairman believed it could be an opportunity to improve the fund:

Chairman, Jersey Business

"...Government could initiate it but is it the best executer of investment and investment policy? Traditionally not. Traditionally it is a very poor investor. Can it improve that through the proposed structure in the Innovation Fund proposition? Yes, it can. Can it improve that through drawing on expertise as is anticipated outside of that panel? Yes, it can. Can it do that by co-venturing with other investors? Yes, it can. I mean there is a wide open opportunity here..."[12]

9. Digital Jersey were also in favour of matched funding with the Chairman stating:

Chairman, Digital Jersey

"...I think for the future there will be ways to have a multiplier effect with the funding that comes from the States, matched funding with other Venture Capital. It is a very common model. A jurisdiction puts in X, a venture capital company or investment company comes in and matches it, and then you leverage the size altogether. So I think there are a number of models that could be considered in the near future as to how to get a greater fund to be invested in the industry..."[13]

10. The Panel raised matched funding with the Minister for Economic Development at the concluding public hearing. During the hearing, it became apparent that, despite its absence from the lodged proposals, the Minister and his Officers were amenable to the concept. The Chief Officer, ED, (Chief Officer of Economic Development) spoke of the model that is currently used in Ireland:

Chief Officer (Hearing with Minister for EDD on 22nd February 2013)

"...The Irish model is quite interesting - I think we do cite this - where they have taken, I think, 125 million, which is a little bit more than we have, and have said to the venture capital community or private equity community: "If you match that with 125 million you could administer the 250 million fund, but it has to be administered with the criteria that we define." So, yes, that is what they do. That is an alternative model..."[14]

11. He added:

"...if we want this thing to be generally self-sustaining the percentage of equity investments would be very high, but if that were the case that probably leads you towards having the type of model the Irish have deployed where they do match those funds with external funds and it is managed externally, because that is where the genuine investment expertise is and this is not just in the area of pre-award evaluation..."[15]

12. The Minister for ED (hearing on 22nd February 2013) went on to say:

"...That is quite an interesting model when you consider the amount that we do have available. As the Chief Executive (Chief Officer of Economic Development) has said we have a fund of £5 millionbut the opportunity to leverage that amount by the exact model described is a very interesting opportunity in my view...But, again, even £10 million is, although a large sum of money in the context of Jersey in some respects, in the greater scheme of things, when looking at funds of this nature, is quite small. So we do need to look at opportunities for leveraging it"[16]

13. However, on the Policy Framework document, it is stated that:

For the avoidance of any doubt the Fund will not compete or replace private sector funding, only to be used after all other sources of funding and security have been fully utilised, and be used to invest in innovative projects.

14. The Panel raised this issue at the final public hearing, and asked whether or not this rules out matched funding for the JIF. The Chief Officer, ED, stated that the wording did not rule out match funding and stated:

Chief Officer. ED (hearing with the Minister for ED on 22nd February)

"...it is being misinterpreted and I can understand why it sounds far too draconian in this context..."[17]

15. The Panel's expert advisor has stated within his report that true comparisons with other jurisdictions is difficult:

Whilst there is much that can be learned from the operation of Innovation Funds across the world it is important that the objectives and operating context aligned to each Fund is fully appreciated. Aspects of the funds operated in the UK and Israel have some similar attributes to the JIF although the key differences on the extent of venture capital fund matching remain. Indeed, differences in operating environment, primary objectives and underpinning funding make true comparisons difficult.[18]

16. The expert advisor continued:

We would agree that the closest Fund type to the proposed JIF, in its initial stages, is a Government Fund as outlined within the Report on the Establishment, Funding and Operation of the JIF. However, the example given of Israel should be taken with some caution  given  the  differentials  in  state  expansionary  objectives  and  operating environment. At the Panel Meeting with the Minister for Economic Development on 22 February 2012 it was clear that aspirations on match funding and equity will invariably move the positioning on fund type towards a Partnership Fund type rather than a Government Fund Type.[19]

4. Fund of Last Resort

1. The Proposition states that in order to qualify for a loan, evidence must be produced to show that all alternative funding has been exhausted (letters from bank, etc). During the public hearings with each of the Ministers, the term "fund of last resort" emerged and was used as terminology for the fund throughout the public hearing process. The Minister for ED explained the idea behind the fund of last resort:

Minister for ED (hearing 14th January 2013)

"...Clearly there is a hope and expectation that this will provide businesses with funding, funding as the last resort, as has been pointed out already, to stimulate innovative new ideas, develop businesses and, as such, give them the confidence and the requirement to employ local people..."[20]

2. The Minister for Treasury & Resources also informed the Panel that the JIF was explicitly intended to be a lender of last resort:

Minister for T&R

"...It is one of the criteria defined in the report, because what we want to be is a fund of last resort..."[21]

3. The use of the term posed some issues. Jersey naturally has a significant number of bank lenders and has a well developed network of private lending. If they wouldn't lend, what did this say about the quality of the idea of applicants who would be trying to access the JIF?
4. There was consensus amongst the industry stakeholders that we received evidence from, that establishing a fund based on the principle of lender of last resort was not a suitable option, with the implications it carries. The President of the Chamber of Commerce raised the concern that it implied nobody else was willing to fund the idea, and therefore it may not be worthy of funding in the first place. Consequently, if the poor ideas were the ones appearing at the door of the Fund, finding the next big thing and seeing the financial rewards of that will be almost impossible. He said:

President, Jersey Chamber of Commerce

"...If the private sector, and I mean this in the banks or any other form, Angel funds or anything, do not think it is great idea obviously this fund would become a fund of last resort almost. It is the last one you come to after everybody else has either told you your scheme is rubbish or it does not go and so the chances of finding a diamond in it all is quite limited. So again we have to be wary of that..."[22]

5. He continued:

"...Finding that diamond is going to be a tough one to make because that diamond theoretically should have been found by a lot of other people way before the Innovation Fund got to see it..."[23]

6. Digital Jersey were asked their view on the "fund of last resort", and echoed the concerns raised by Chamber of Commerce:

Chairman, Digital Jersey

"...I have only just seen that comment and I could not disagree with it more. I do not see the innovation fund as being the fund of last resort at all. I would suggest that if it is viewed that way and if we ask: "Have you been to this bank? Have you been to this person?" what we will be left with is a whole bunch of dross that we are not going to invest in..."[24]

7. He continued:

"...From what I have seen of the innovation fund it could be a really aspirational thing.

What we are looking at in Digital Jersey is creating diversification in the sector, bringing in catalysts from overseas if you like. We need something that will appeal to the talent already on the Island to give them confidence that they will be able to create a new business perhaps with help from overseas..."[25]

8. There was acknowledgement that the nature of bank lending at present was a hinderance to even good ideas accessing funding, with a more cautious attitude prevalent. Jersey Business for instance made the following point:

Chief Executive, Jersey Business

"...In days gone past the banks might lend on collateral or they might lend against earnings, today, make absolutely no mistake, yes, you need those earnings and a business plan that says this is a viable business, but on top of that you need the collateral. For a lot of particularly younger business or young entrepreneurs and new ventures that collateral is not here. You have to get past it..." [26]

9. The Chairman, Jersey Business also stated that:

"At the moment the banks, in part because of the economy, and in a large part because of the capitalisation requirements that are being imposed on them, are simply withdrawing from the supply of credit. They are not doing that because they are not getting good propositions through the door. They are doing it because they have to reduce their own balance sheets. In that economy or in that economic situation can a fund like this assist? Can it accelerate? Can it meet the objectives that we talked about to begin with and are clearly stated in the fund? Yes, it can..."[27]

10. At our final hearing with the Minister for ED, the Minister and the Chief Officer, ED, explained their reservations about the terminology, but not the principle, explaining:

Minister for ED (hearing on 22nd February 2013): "...I do not like the phrase[28]

Chief Officer, ED (hearing with Minister for ED on 22nd February 2013)

"...It is still a fund of last resort, is it not? The phrase is not a great phrase; I will give you that, which is what I think people are railing against. Think of the other end of the spectrum. If a company comes to us and they have a very robust balance sheet, very good cash reserves, and they come along to the Innovation Fund and say: "We have this great idea; can we have some money?" The obvious question has got to be: "Well, why?" Almost, if you go to the other end of the spectrum, the people who will come to us is probably because (a) they have not been able to raise the amount of money either privately, or (b) if they have gone into the banking system, they do not have the collateral so to do. So maybe fund of last resort, which is sort of common parlance for the way the public sector does fund, makes it sound a bit more draconian than it is'[29]

11. The Chief Officer, ED, elaborated on his disagreement with the implication that last resort implied poor quality of application:

Chief Officer (hearing with Minister for ED on 22nd February 2013)

"...The point I am trying to make, I suppose, is that it is about the quality of the proposal. There is nothing wrong with being the funder of last resort and it does not mean that what you are looking at I think the word that has been used is "dross". Well, that is not the case. There are a lot of people with a lot of very, very bright ideas who for reasons, some of which are through no fault of their own, do not have the ability to raise funds. There is effectively a market failure..."[30]

12. The Panel followed up the issue of Jersey being in a privileged position regarding having a considerable amount of private wealth on the Island, noting that this raised further questions about the sustainability of the JIF and the potential that only the poorer' ideas would make it to the Fund once banks and private investors had been exhausted. It was acknowledged by the Chief Officer, ED, that there were a significant amount of investors in Jersey who may be willing to look at such projects, but with an important caveat that would mean this source of funding would render certain projects unviable:

Chief Officer (hearing with Minister for ED on 22nd February 2013) "...There is, absolutely, at "healthy interest rates..."[31]

13. The Panel explored the intended last resort status of the JIF in the context of matched funding (see Section 8.3.6) with the Minister for ED and his Officers at the closing Hearing on 22nd February. The Chairman of the Panel explained that that all stakeholders had been positive about the JIF incorporating principles of matched funding, seeing that as the most appropriate way forward. He continued:

Deputy of St Martin

"...It doubles our money. It gets us involved with third parties who will also have an involvement and people thought it would be very attractive for third parties to get involved with Government in schemes, but we keep coming back to this fund of last resort which seems, above all, to say, "Well, no, we cannot do that because it is not the last resort..."[32]

14. Responding, the Chief Officer, ED, said

Chief Officer (hearing with the Minister for ED 22nd February 2013)

"If I am a private individual and I want to invest in a business and I can get Government to stump up half the money, I have halved my risk. But is that what we are seeking to do? Are we seeking to compete with the private sector and advantage them in that way or are we seeking to fund the things that may be very, very good quality opportunities but have not been able to secure that funding?..."[33]

15. The Panel's expert advisor has noted in his report that further clarification is needed on the fund being the lender of last resort as it could add risk if there are no other sources of funding. It was noted that the phrase "fund of last resort" was extremely unpopular with the executive and the stakeholders and could be seen as a poorly chosen one.

5. Hopes of Success, Expectations of Failure'?

1. All funds must have an expectation of success and failure to monitor their performance in order to achieve their objectives. The Proposition states that EDD 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 JIF is seeking to achieve.
2. 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. The Minister for ED made reference to an Innovation Fund in Israel, highlighting the fine balance between success and failure (i.e. the rate of failure of businesses that received funding), outlining clearly that high failure rates could well apply to the JIF:

Minister for ED (hearing on 14th January 2013)

"...There could well be, in terms of numbers or in percentage terms, really high percentages of failures. Now this does not mean it does not succeed of course." ".If you look, for example, at Israel, some of the funds created there had a very high failure rate. I think it was running at - something like 70 per cent of the projects supported failed. The key thing is that the 30 per cent that succeeded, succeeded very strongly and met the aims and the fund has been self-replenishing and indeed growing since the time that it was initially pump-primed by government"[34]

3. Responding to the potential failure rates that the Minister had originally highlighted, the Chief Executive of Jersey Business summed up the general theme of the comments on this issue expressed by stakeholders, saying:

Chief Executive, Jersey Business

"if a venture capital fund had a 70 per cent failure rate it would not be around very long. It seems exceptionally high. I think that is a pessimistic figure"[35]

4. There was some confusion however about the level of failure' being allowed or prepared for. At the final hearing with the Minister for ED, he clarified that he was not in fact referring to 70% of businesses provided with funding failing, but making the point that 30% were high value exits (from the fund) and that 70% were still investments with the fund itself:

Minister for ED (hearing on 22nd February 2013)

"I think the 70% failure rate was referring specifically to the Jerusalem Fund and that was referring in particular to the exits, 30% of which were high value exits. The balance, the 70% is in fact still investments that the fund itself held. They are not referring to businesses that have gone out of business in that sense but they just simply had not exited to the value that the 30% hadI would say that we would not dream of seeing 70% of businesses failing; using the definition "going out of business" that is"[36]

5. Speaking at the Public hearing with Minister for T&R on 10th January 2013, the Chief Officer, ED advised that:

"it is only in extremis that things will fail" "if there are things starting to go wrong I would hope that we will be in a position to intervene and to correct thatin the event of failure it may be necessary to write those monies off because we are investing in innovation"[37]

6. When to say "enough is enough"?
7. Given the potential failure rates identified and the issues around self replenishing and defining success, the Panel sought to establish what mechanisms were in place to potentially stop effectively throwing good money after bad'. It is not stated within the Proposition, or any of the documentation behind it, when to undertake the decision to discontinue the fund through lack of performance – should this be required.
8. The Panel asked the Minister for T&R if, after 18 months there is only £3 million left in the fund and nothing to show for it, do we stop or do we carry on? He told the Panel:

Minister for T&R

"No, I think if that is the result then we put another shot of caffeine into the machine and we work up and say: "What has gone wrong? What can we do? What lessons can we learn?" Failure is not an option here. There is no plan B of failure. We have got to make this stuff work and we are going to make it work"[38]

9. The Panel asked the stakeholders what their view was on the potential discontinuation of the fund should it not be performing successfully. The President of Jersey Chamber of Commerce commented:

President, Jersey Chamber of Commerce

"if you lose your first £5 million I think the enthusiasm for putting another £5 million in it would obviously weigh dramatically. Whether he would like to do that or not I think politically it would be very difficult to do" [39]

Deputy of St Martin

"If we get halfway through this £5 million and we have nothing to show for it at all we need to just say: "Stop and let us look at other ways of using the money we have left"?..."

President, Jersey Chamber of Commerce: "I think that is a sensible approach, yes"[40]

10. When the point was raised with the Chairman, Digital Jersey, he commented:

Chairman, Digital Jersey

"I would never say you do something and that is it, you are going to do it for ever. I think initiatives like this really have to be judged on their success and if it is not working then you do not carry on doing it"[41]

11. The Panel's advisor has indicated that ongoing monitoring is key to enable the fund to meet its objectives yet there are no clear areas as to what this ongoing monitoring will encompass.

12. Defining Success
13. The JIF is linked to the overall Economic Growth and Diversification Strategy and the Proposition states that 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.
14. The Minister for T&R outlined to the Panel how he saw success in reaction to the JIF. He said:

 "I think we have got to be really realistic. I think there are serious economic challenges facing Jersey, and I want the Chief Officer to spend the £5 million on getting business start-ups up and running and employing people, so I want them to do it because I suspect that the scale of challenge that we have, which if we respond properly,  assertively  and  boldly  enough  we  can  deal  with,  we  can  reduce  our unemployment numbers and we can start some business start-ups that are going to be the wealth creators of the future"[42]

15. The Panel also asked the Minister for ED what success would look like for the JIF. Responding to whether this would perhaps be seen as being in terms of financial return to the fund, the number of jobs created, regardless of the financial return to the fund or even a combination of that and other things, the Minister said:

Minister for ED

"It will be the latter. Clearly there is a hope and expectation that this will provide businesses with funding, funding as the last resort, as has been pointed out already, to stimulate innovative new ideas, develop businesses and, as such, give them the confidence and the requirement to employ local people. So job creation is a key outcome that I see from this" [43]

16. The Panel asked the Chief Officer, ED, what he would define as success. He explained that success would be seen in terms of the employment creation as well as the pure commercial success of the business, adding that this in turn results in higher levels of returns through general taxation as much as it does to the loan being repaid to the fund. [44]
17. The President of the Jersey Chamber of Commerce believed that small successes should be measured as equally as the larger projects as they would help build confidence in the economy. He also stated that unless the funding is given sensibly and risks are taken without recklessness:

President, Jersey Chamber of Commerce

"There is a real danger that you turn around and go to the first guy who comes in and says: "Well, I could not get any funding anywhere else and I need £1 million and it is a great idea" and then someone sort of : "We have lent £1 million to something and such and it is a fantastic idea", there is a real danger that you have tried to force the issue to say: "We have lent the money" without maybe going to: "Well did we lend the money in the right area? Was that a sensible thing to do?""[45]

18. The Chairman of Jersey Business summed the Innovation Fund up as "venture capital with a social conscience"[46] The Chief Executive added:

Chief Executive, Jersey Business

"I do not think you should measure success by the financial return on the fund because if that is what you want to do go and be a venture capitalist in the big wide world, in the full market. If that is the purpose of the fund then I do not understand it. But I think there should be an evaluation of the economic benefit to the Island. That would come through from directly out of the accounts that says they paid X amount of tax. The amount of payroll that it stimulated" [47]

19. Jersey Business also stressed the importance of the fund having an investment objective, and stated that unless it has a return over a set period of time it will quickly run out of funding:

Chairman, Jersey Business

"This fund should have an objective and it should have a return on it. Investment objective, whether that is 20 per cent or 10 per cent or 5 per cent, whether it is a return over 5 years or 10 years, is something to be determined but it must have a return on investment criteria otherwise it will have no money very shortly"[48]

20. It is perhaps important to note that any discussion of success' should be seen in the context of the number of applicants that it is anticipated will be provided funding from the JIF per annum. The Chief Officer, ED, has given a figure of 5-10 applicants per year as a guideline. The Director of Business Creation and Growth gave indication of 4-5 applicants per year as the number envisaged as being successful in gaining funding.[49]
21. The Panel's expert advisor has noted that there appears to be no clear positions/views on  what  successful  ventures  would  look  like  and  no  measurements  as  to  the quantification of success. He also stated that investment aimed at driving enterprise and innovation will inevitably invite an element of risk and the balancing of providing an optimal level of stimulus without the impediments of "red tape" together with the minimisation of risk to the fund is usually a difficult one to achieve. There are no indications as to the amount of monies that would be acceptable to write off each year.

6. Establishing Demand – is £10million enough?

1. It is proposed that the JIF will be given £10 million in its entirety, which will be provided in 2 stages of £5 million. The first £5 million will come from the redemption of the JT preference shares, but it remains unclear precisely where the second £5 million will come from. The Minister for T&R has stated that:

Minister for T&R

"What I have said to EDD is if they get this fund up and running, if they give some good decisions, if they attract good businesses and they spend their £5 million, I will be right behind them and I will find the other £5 million. I cannot tell you where, but I have a number of options available"[50]

2. The Minister for ED was hopeful that the fund would be a success and would receive the second tranche of £5 million:

Minister for ED (hearing on 22nd February 2013)

"Bear in mind this is the first £5 million in what is intended, longer term, to be a £10 million fund. So we will have tohope that the Minister for T&R remains as enthusiastic about his shot of additional funding, if required, as we move forward"[51]

3. Speaking to the Minister for ED at a Public Hearing, the Panel asked about the number of applications that might be seen in the first 12, 18 or 24 months, which had presumably been used to establish the resource requirements. He explained that it was not as simple as just looking at the overall number of applications, as other factors needed to be considered - such as there being one particularly complicated application requiring specific, extensive analysis. All such factors needed to be borne in mind, but his Department was working to an arbitrary figure that it felt was reasonable.[52]
4. The Chief Officer, ED, added at the hearing with the Minister for ED on 14th January 2013:

"I think we will get a significant number of applications when we launch the fund. Not all of those applications, however, will proceed to the point where we undertake due diligence on them, because effectively they would have to pass through the initial filtering which would be undertaken by members of the board, based on economic and commercial analysis undertaken by the department within our own resources"[53]

(See also Sections 9.1 and 9.3)

5. The Chief Officer, ED, expanded further and touched on the number of applicants per annum, and what the budget would be in terms of each application:

"I think something that we had put together was that somewhere between 5 and 10 per annum would advance to that level and that would allow us a budget of between £10,000 and £20,000 per application to undertake that. That is not inconsistent with the type of figure that we used that we would apply to analysis of the bids for the submissions that we have from consultants"[54]

Deputy of St. Martin :

We are hoping there might be 10 to 20 applications initially?

Chief Officer (hearing with the Minister for ED on 14th January 2013) "We are hoping there will a larger number of applications than that"'[55]

6. Stakeholders broadly concurred that until the launch of the fund it would be difficult to know the precise levels of demand. However, they were confident that there was or would be significant demand, which indeed they hoped to play their part in introducing to/accessing the Fund. The Chairman, Jersey Business highlighted his confidence in the demand, telling us:

Chairman, Jersey Business

"I could find within a week an allocation of all £5 million"[56]

7. The Panel asked if the Chairman would be in a position to suggest over how many different applications that would be:

Chairman, Jersey Business:

"We could go out and find a very good applicant who could make a business case for a £5 million investment. Absolutely. Is that the best way to invest the fund? Undoubtedly not. Would there be 50 people applying for £20,000 or £50,000 or £250,000? You do not know until you open the door and establish the fact that the funding is there and establish the criteria under which the applications will be assessed and evaluatedWe do know from our direct experience that there are a considerable number of people with good ideas who are having difficulty raising finance..."[57]

8. In addition, and specific to his sector, the Chairman, Digital Jersey explained his take on the expected demand and his organisations approach to harnessing the opportunities it may provide:

Chairman, Digital Jersey

"I think that there is a latent demand here in the Island for business support and business start-up, but I would see it, the use of the innovation fund being to support businesses that are already here that want to extend..."[58]

9. He continued:

"There is demand and, in fact, I have been involved already as Chairman of Digital Jersey with a couple of local entrepreneurs, or hope to be entrepreneurs, who have ideas in the digital sector that they would like to see fundedI also see us using the innovation fund to help attract and support inward investment as well. I do not think we should underestimate that there are people with good ideas in the digital sector and outside that will come forward to try and access the innovation fund. I think there will be a queue for that..."[59]

10. Digital Jersey also made specific reference to their area of expertise and how they would  be  aiming  their  focus  on  targeting  particular  clusters  of  the  market.  The Chairman, Digital Jersey, explained that his organisation's view was that they will be seeking out and targeting particular clusters, particular areas to stimulate. He added:

we really believe that we will need to focus quite tightly within those and that is part of where the research comes in as to which clusters we will be focusing on and then taking the innovation fund, rather than setting up the innovation fund and waiting for people to come to it for application, targeting where we think some of the best uses of those funds could be in different areas"[60]

7. Scope of the JIF and Eligibility Criteria: Inconsistencies

1. The Proposition report states that, if established, the JIF will be available to support a wide range of activity, from direct business support to strategic infrastructure in the private, public and third sectors. The accompanying Operational Terms of Reference state that the Fund will be used to fund projects across all sectors but targeted and prioritised towards:

• Attracting new innovative businesses to the Island
• 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 competitiveness
• 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 [61]

2. In addition to the Operational Terms of Reference, EDD has provided an application form (in draft) and a draft Policy Framework' all of which outline the scope and eligibility criteria of the JIF to a greater or lesser extent. These documents effectively establish the criteria that must be met before any applications stand the chance of being successful in receiving funding.
3. The Panel has, however, significant concerns about apparent inconsistencies between these documents and/or the evidence that we took when speaking to the Ministers and stakeholders, concerns which were particularly highlighted upon receipt of the draft application  form.  It  should  be  noted  that  the  draft  application  form  was  received following  the  initial  hearings  with  the  Ministers  and  stakeholders  and,  as  a consequence, it was unable to be question stakeholders on this area. The Panel did however have the opportunity to raise the issues with the Minister for ED at the final Public Hearing, as seen in the following sub-sections.

4. Third and Public Sector
5. It was unclear to the Panel how the eligibility criteria and such targeting would include realistic opportunities for the third and public sectors to successfully access the Fund. Indeed, the eligibility criteria of the Application Form states that firms must be able to demonstrate the project has potential to improve the overall level of productivity of the economy with value added per employee significantly in excess of £65,000 in order to qualify for funding. In addition, they must be a high growth business with the potential to double revenues or employment within four years and to employ at least 10 full time employees at the end of the fourth year.
6. It  was  therefore  an  area  that  the  Panel  explored  with  the  Minister  for  ED.  He acknowledged the point, but explained:

Minister for ED (hearing on 22nd February 2013)

"It is probably unlikely that many would qualify and it is right that the bar is relatively high when you look at the underlying core objectives of the Innovation Fund, but it is also equally right that they should be included, because it is not impossible"[62]

7. The Minister elaborated on the Department's objective to open the fund to all sectors, telling us in reference to the public sector that:

Minister for ED (hearing on 22nd February 2013)

"I think it would be wrong to exclude the public sector. I would not imagine there would be very many at all potential applications from the public sector, but I do not think  we  should  discount  the  fact  that  the  public  sector  can  also  come  up  with innovative ideas. It is always possible "[63]

8. The Minimum and Maximum Amount of Loan per Applicant
9. There is no area within the lodged Proposition or Operational Terms of Reference to indicate whether the fund will operate on the basis of a minimum and maximum amount available to applicants. At the initial hearings, both Ministers spoke to the Panel about levels of potential funding, with no suggestion of restricting the amounts through defined minimum and maximum amounts given. The Minister for T&R told us:

Minister for T&R

"They may come to us and need £3,000, just to free up their time and get some basic equipment to get themselves going. So it is about the nature of the proposal they bring to us rather than the monetary contribution. That should not be a filter..."[64]

10. The Minister for ED was very clear, commenting that there were:

Minister for ED (hearing on 14th January 2013) "...no pre-set figures in that which is granted"[65]

11. Other stakeholders were also of the opinion that there should be no limits on the funding available. The President for the Jersey Chamber of Commerce made the point that the scheme should be for anybody and a judgement call should be made by those running the fund suggesting each opportunity presented is judged on its merits. Jersey Business also stated that they did not believe the fund should have any limitations on funding available.
12. However, significant confusion was introduced upon receipt of the draft application form. The application form states that the amount requested should not exceed £500,000 and must be greater than £20,000. This development was unexpected.
13. At the final hearing with the Minister for ED, the Panel was able to address the inconsistency on the matter of the £20,000 minimum and £500,000 maximum amounts and asked the Minister if he could clarify the issue. He suggested that the application form was still in draft format, and therefore there were details yet to be set. However, he did not dismiss the fact that £20,000 could be a minimum amount, despite this significant concept not appearing in the lodged documentation. He stated that:

Minister for ED (hearing on 22nd February 2013)

"we see this as operating in a niche which broadly covers the range that you referred to"[66]

14. The Panel made reference to what both Ministers had said at their previous hearings, essentially that there would be no pre set figures and figures as low as £3,000 would meet the criteria. Speaking to the Minister for ED, he told the Panel:

Minister for ED (hearing on 22nd February 2013)

"I do not envisage applications of that level, because clearly if somebody is making an application for £1,000, £3,000 or £5,000 it is likely to be for some items of equipment as opposed to a business proposition that is going to seek to deliver on the objectives of a fund of this nature. So there is, by nature, going to be a certain minimum that is going to be considered, I would imagine, by the board as being appropriate to deliver on the objectives"[67]

Deputy of St. Martin :

"But do you see that minimum being £20,000, as is in the application form and the policy document?..."

15. In fact, somewhat surprisingly to the Panel, the Minister for ED went on to suggest that the likelihood was that the minimum funding would be set even higher than £20,000. He told the Panel:

Minister for ED (hearing on 22nd February 2013)

"I would think it is unlikely to be as low as that, but not necessarily..."[68]

16. Following on from that comment, the Panel asked the Minister what would happen if a good, innovative idea came forward and needed funding of less than £20,000. The Minister responded:

  Minister for ED (hearing on 22nd February 2013)

"I am not saying I am ruling it out totally, I just said it was less likely I would have thought but it depends on the proposition that comes forward[69]

17. Pressing further, the Panel asked the Minister for a yes or no answer to "are we ruling out everything under £20,000?" The Minister told the Panel that each applicant should be considered on its merit and should not have a particular financial sum attached to it stating that:

Minister for ED (hearing on 22nd February 2013)

"it would depend on the merits of the application, so if you want a yes or no, then it falls under yes"[70]

18. To illustrate the potential limitation of applying minimum/maximum amounts, the Panel reflected on the reference made by the Chief Officer, ED, to an example he gave as the sort of applicant the JIF might attract, in which the central figure required £500 finance to get started:

Chief Officer (hearing with the Minister for ED on 22nd February 2013)

"he was in his thirties when he started business [and needed] £500 because he did not have the wherewithal to go and get that from anywhere else. He had a brilliant idea, which has turned into a brilliant idea. I think he eventually sold it to Yahoo for £30 million or £40 million or something like that. He had a brilliant idea but he did not have ability to raise the capital, regardless of where he went"[71]

19. However, given what the minimum and maximum levels of lending are as defined on the application form, this idea would not have received funding from the JIF as it would not have fulfilled the criteria.

20. Business incorporated under the Companies (Jersey) Law 1991
21. The Panel has noted the appearance on the draft application form eligibility guidelines of the need for an applicant to be a Business incorporated under the Companies (Jersey) Law 1991. It raised concern that this could perhaps unnecessarily eliminate a number of potential applicants in that Partnerships, LLP's and sole traders would be unable to apply. The Innovation Policy Framework document, section 2.1 in Due Diligence, states that Memorandum and Articles of Association must be supplied. If so, this raises a key issue, as this can seemingly only relate to incorporated companies and cannot apply to Limited Liability Partnerships, Partnerships or Sole Traders.

22. The Panel raised the issue of LLP's potentially being unable to meet the criteria with the Minister for ED and his Chief Officer, who informed the Panel:

Chief Officer (hearing with the Minister for ED on 22nd February 2013)

"A Jersey company can be a limited liability partnership. In fact, many of the law firms are, certainly, and more and more will be so now we have changed the LLP legislation to remove the requirement for a £5 million bond"[72]

23. The Minister for ED added:

Minister for ED (hearing on 22nd February 2013)

"Either structure or other appropriate structures would potentially qualify, so that covers that point"[73]

24. The advice we have been given from our advisor raises a question mark about this position, suggesting that LLP's cannot produce the documents required to meet the criteria. CIPFA's report comments:

we would respectfully suggest that this is incorrect as a matter of Law in its strictest sense although there are some similarities within the Company law framework. [74]

8. High Value Sector and High Growth Business

1. High Value
2. There  is  considerable  emphasis  placed  on  targeting  the  Fund  at  high  value opportunities. Within  the  Innovation  Fund  Policy  Framework,  high  value  sector  is defined as a sector with a value added per employee above £65,000. This figure is based on the average per capita G.V.A. (Gross Value Added) across the whole of the Jersey economy.
3. On review of the statistics posted on  www.gov.je  the Panel's expert advisor has provided further detail in this area. Taking four of the key areas into consideration (Hotels, Agriculture, Construction and Finance), the advisor suggests that £65,000 GVA per employee would show finance being the only industry that met the criteria:

4. The Panel's expert advisor has stated that whilst these figures are broad averages and there may be extreme positions within each sector values, it does suggest that the prospectivity of applicants meeting these parameters outside the financial sector is likely to be low.
5. The Panel had the opportunity to question the Minister for ED on these figures and GVA overall at their final hearing raising the concern that if only a small section of the economy can target the fund, is it not in danger of becoming "elitist".
6. The Chief Officer, ED, made the point that the low productivity sectors are supported by EDD through grants and subsidies and stated that "elitist" was the wrong word. He went on to say:

Chief Officer (hearing with Minister for ED on 22nd February 2013)

"we  would  not  want  to  support  businesses  that  did  not  have  the  potential  of performing at levels of average productivity that were lower than the average. This is not a fund to support low-productivity business." ".the low productivity sectors are supported by what is the majority of the EDD budget through grants and subsidies and other direct marketing support for instance. That is not the intention of this fund"[75]

7. He continued:

"there is no reason why a business in the rural economy, tourism, any other sectors, cannot develop in such a way that it has that level of productivity. Our objective is to support the broadest range of sectors possible"[76]

8. High Growth
9. In addition to high value, EDD has stated this fund is targeted at areas that can deliver high value, high productivity business. The Chief Officer, ED, told the Panel:

"The words that I would like to use is that this fund is targeted at high-productivity, high-value  sectorthis  is  not  about  targeting  the  financial  services  sector. It  is unlikely, in my opinion, that we would be supporting businesses that are in the financial services sector..."[77]

10. The Policy Framework defines a high growth business as a business with the potential to double revenues or employment within four years and to employ at least ten full time equivalent staff by the end of the four year period.
11. When raising concerns about the limitations this may place on non-finance sectors accessing the Fund, it was stressed to the Panel by the Chief Officer, ED, that there are other funds available to assist various other sectors within the economy e.g. the Tourism Development Fund for tourism initiatives, the Rural Initiatives Scheme for the

rural economy sector and others which are funded on a recurring basis from the Department. [78]

9. Application Process – Red Tape?

1. It  was  clear  speaking  to  stakeholders  –  industry  representatives  who  will  be encouraging various business sectors to use the Fund where appropriate – that a balance had to be struck between the necessary requirement for quality due diligence, with a need to make the Fund operate as free of red tape' as possible to ensure a timely process and to simply not put off potential applicants through an overwhelming process.
2. The application process does appear to place considerable demands on an applicant, as can be seen from the initial 15 point request for a written report and supporting documentation  contained  on  the  application  form.  As  the  application  process progresses, there are then potential additional demands for information through the

due diligence process, Funding Agreement development and post loan monitoring and reporting.

3. Commenting on the need for a sensible balance to avoid excessive demands and the consequential creep of red tape', the President, Jersey Chamber of Commerce explained that there has to be a clear set of procedures set out which establish very clearly how the JIF will ensure a timely process. He elaborated:

President, Jersey Chamber of Commerce

 "if it is something that is novel to the market, you know there will be 100 people behind this person who given another week or fortnight for that decision to be made may well catch up with the person who may be leading the market out there. There is a huge necessity for a fast turnaround"[79]

4. The Chairman, Digital Jersey concurred, clearly explaining the requirements for a sensible balance:

Chairman, Digital Jersey

"I think we should be very sensitive to that. It is always a balance between the appropriate level of due diligence and understanding and making sure that the entrepreneurs have thought through the business plan but not tying them down in red tape. If it is going to take us 6 months of due diligence and everything else to get it going, then I think that is self-defeating"[80]

5. The Chairman, Digital Jersey went on to discuss a successful model that was currently in operation in Israel:

Chairman, Digital Jersey

"I refer the Panel to some very successful models. I am thinking of incubators and I had the chance to experience one in Israel where companies come in ... not companies at that point, people with ideas, and this is rather in the seed start-up, so quite heavy risk. They are provided with infrastructure, a room, connectivity, accounting support, legal support, and some upfront cash to get going, in this case £20,000, £25,000, and there was an expectation that in 6 months they will have made it. So there are models out there and if you are doing that and if the expected return

time is 6 months - by the way, this is in Israel where they have been going over this for a while - you cannot take 4 months of that signing the agreement"[81].

6. Once the applications have been submitted, they follow a process to undergo due diligence and economic assessment before being reviewed by the Board until finally approved/rejected. This timeline is shown on the process map within the Operational Terms of Reference. The process map states the time of the process for successful applicants as 6 weeks from submission. Applicants which are unsuccessful will be notified within 3 weeks of submission so that they can withdraw if necessary. This is shown in the process map within the Operational Terms of Reference and also on the draft application form.
7. The process map indicates that the first 3 weeks will be taken up with due diligence, know your client (KYC) checks and economic assessment with the following 3 weeks being used for Board review, Minister review and application approval. The Panel's expert advisor has indicated that the 3 week timeframe for the process of due diligence could be viewed as optimistic bearing in mind the amount of information that may be required  and  consequently,  the  3  week  period  for  Board  review  and  Ministerial approval may seem generous.
8. When the Panel raised the timeframe with the Minister for ED, the Chief Officer, ED, advised that the timeframe was not set in stone but was purely an indication of their target turnaround from the point of application to the point of decision.

10. Due Diligence

1. The Operational Terms of Reference imply that the elements of the due diligence function will be undertaken by EDD with assistance from the EAU who will undertake an economic impact assessment and present a written report to the Board. It is outlined in the Proposition report that the Board, as appropriate, will also draw on other expert  opinions  to  provide  comprehensive  due  diligence  when  considering  and assessing applications. The costs of this will be borne from the £100,000 currently allocated for Operational and Management costs.
2. The Chief Officer, ED, at the Public Hearing with the Minister for ED on 22nd February 2013, told the Panel that there will be two forms of due diligence or two forms of analysis undertaken. The first would be an economic impact analysis, undertaken by the EAU looking at broader impacts rather than purely commercial returns. The second level of analysis and due diligence would be on the commercial proposition put forward by the applicant, and be related in great part to the nature of the business plan presented and the bona fides' of the individuals presenting that. It was envisaged that this would be undertaken independently. Both of those two things would then brought together and will inform the Board's deliberations and the final decision to be made by the Minister. [82]
3. The Minister for ED has stated that the principle of due diligence applies to whatever the amount that is being requested, and indicated that the level of due diligence is likely to change based on the size of the project and the degree of work involved.[83]

8.10.4Stakeholders were united in their expectation of there being a requirement for timely

and  efficient,  yet  robust,  due  diligence.  Jersey  Business  set  a  very  precise  due diligence process consisting of 4 elements that it would expect to see apply to any investment:

Chairman, Jersey Business

"In terms of the due diligence, you have to believe that this is a business that is likely, that the likelihood of success is there. If it is not nobody should be investing in itdue diligence consists of 4 elements in any investment. One is an investment manager or a group of people evaluating whether it is a good business proposition. The second is outside expertise, which may be required if it, for instance, is a highly scientific projectThe third element of it islegal. In other words someone has to structure the loan and the documentation that is involved. The last element is the accountantIn other words, to do checks and balances. The last 2 are a give-up, in the sense that you are going to run that expense in any investment, whether you make it or not, but you do not make that investment until you get the final stage, having done the first 2 analyses. The expert you only hire if you think there is a good business case. The good business case should be the judgment that is made by the investment panel or managers who are evaluating a sound business plan" [84]

5. The Chairman, Digital Jersey, also commented on the importance of getting due diligence right at an early stage of application, saying that for any investment there are lots of models out there and the JIF certainly should not be recreating well created wheels. He commented:

Chairman, Digital Jersey

" I think it is a very straightforward stage gate process. One of the keys around this is a very early yes or no to determine whether you are going to spend ... because the longer you spend with due diligence the greater the cost is and then right at the end before you make the investment there will be some legal due diligence and other searches. That is where those upfront costs really build"[85]

6. The Panel's advisor explained the importance of robust due diligence within his report stating:

Before receipt of the Policy Framework we had reservations about the absence of detailed procedure relative to due diligence. Significant importance was placed on the regulatory application of the Undertaking business licence and the requirement for the applicant to be an incorporated body under the Companies (Jersey) Law 1991, as amended. The establishment of the full identity of applicants, acquiring a history of credit and the requirement to minimise the risk of criminality is assumed to be fundamental. Whilst the Innovation Policy Framework effectively narrowed the range of eligible applicants to incorporated bodies only (presumably the "legal personage" of the  incorporated  body  and  Directors)  which  are  subject  to  regulatory  business licensing with Jersey, our thinking was that such constraints should make it easier to carry our due diligence within the application process. However, as the Minister for ED has now confirmed that there are no restrictions placed on legal entity formats that can apply, the effectiveness of Due Diligence processes are key particularly in the context of  all  legal  business  formats. In  this  respect, following  the  Panel  Meeting  on  22 February 2013 we now understand that Due Diligence will be externalised and fed to the JIF Board as required.[86]