«ITEM FOR FINANCE COMMITTEE INNOVATION AND TECHNOLOGY FUND HEAD 111 – INNOVATION AND TECHNOLOGY Subhead 101 Innovation and Technology (block vote) ...»
For discussion FCR(2014-15)57
on 27 February 2015
ITEM FOR FINANCE COMMITTEE
INNOVATION AND TECHNOLOGY FUND
HEAD 111 – INNOVATION AND TECHNOLOGY
Subhead 101 Innovation and Technology (block vote)
HEAD 184 – TRANSFERS TO FUNDS
New Subhead “Payment to the Innovation and Technology Fund”
Members are invited to approve a further injection of
$5 billion into the Innovation and Technology Fund.
PROBLEMThe uncommitted balance of the Innovation and Technology Fund (ITF) is expected to be fully committed by mid-2015. The Commissioner for Innovation and Technology (CIT) has no authority to commit funding for new ITF projects beyond that.
PROPOSAL2. CIT, with the support of the Secretary for Commerce and Economic Development, proposes to inject an additional $5 billion into ITF to provide sustained and comprehensive support for the development of innovation and technology (I&T) in Hong Kong. Subject to Members’ approval, CIT will be authorized to enter into new commitments.
FCR(2014-15)57 Page 2 establishment in 1999 to 2006, the focus of ITF was more on supporting projects conducted by universities, the Hong Kong Applied Science and Technology Research Institute and the Hong Kong Productivity Council. Following a large-scale consultation exercise, the Government set up five Research and Development (R&D) Centres 1 in 2006 to drive and co-ordinate applied R&D in selected areas which had potentials for further development in Hong Kong. After the financial tsunami in 2008, the Government further upheld the importance of I&T by designating it as one of the six new industries that enjoyed clear advantages.
Since then, much efforts have been made to drive realisation and commercialisation of R&D outcomes. For instance, we introduced a new assessment framework in 2011, which aims to identify projects with better prospects of realisation/commercialisation apart from scientific/technology contents, and launched the Public Sector Trial Scheme (PSTS) to promote the application of R&D outcomes in the public sector.
4. With the financial support provided by the Government through the University Grants Committee/Research Grants Council and ITF as well as private sector investment, etc., we are gradually building up an eco-system on I&T. For example, Hong Kong’s Gross Domestic Expenditure on R&D (GERD) has risen from $7.1 billion in 2001 to $15.6 billion in 2013, representing an average annual growth ofaround 7%. The number of R&D personnel has also more than doubled during the same period, from around 11 000 to 26 000. While the increase in R&D personnel and GERD is not entirely attributable to ITF, ITF is certainly a key player in fostering the I&T ecology.
Comprehensive Review of ITF 5. In order to evaluate the operation of ITF after some 15 years of operation and identify areas of improvement, the Government conducted a comprehensive review on ITF (ITF Review) in mid-2013 and consulted the Legislative Council (LegCo) Panel on Commerce and Industry (C&I Panel) on the recommendations in 2014. We submitted the Final Report of the ITF Review to the C&I Panel in late 2014. With the support of the C&I Panel, the Innovation and Technology Commission (ITC) will continue to operate ITF along the way forward as proposed by the ITF Review, including – /(a) …..
1 The Government set up five R&D Centres in June 2006, namely –
2 SERAP was first launched in 1999. Its objective is to provide financial support for small technology-based enterprises to carry out in-house R&D activities on a dollar-for-dollar matching basis.
We have also completed a comprehensive review of SERAP. To address the limitations of SERAP and to encourage more private sector investment in I&T, we will replace SERAP with a new ESS with effect from around March 2015. Details of the new ESS have been discussed and supported by the C&I Panel.
FCR(2014-15)57 Page 4 Construction Industry Council and the Tung Wah Group of Hospitals. With the various improvement measures to support larger-scale trial projects in Government bureaux/departments and statutory bodies and more efforts to facilitate cross-institutional collaboration, we expect to bring a greater impact on the community through application of R&D outcomes to a wider section of the community such as the elderly;
(d) Creation of an I&T Ecological Environment and Fostering Collaboration Over the years, through the financial support of ITF as well as our active liaison and collaboration with key stakeholders, we have gradually built up an eco-system on both software and hardware fronts, widened the network/exposure of our researchers, and created synergy amongst them. This is conducive to the development of I&T in Hong Kong. For instance, at the local level, we have been supporting technology transfer and technoprenuerial activities of universities through funding their Technology Transfer Offices and setting up a new Technology Start-up Support Scheme for Universities. At the Mainland level, we have been supporting the establishment of Partner State Key Laboratories and Hong Kong Branch of Chinese National Engineering Research Centres in Hong Kong. At the international level, we have been supporting collaboration in R&D with renowned overseas institutions. We will continue to foster the development of an I&T ecological environment in Hong Kong; and (e) Other Improvement Measures We are implementing a number of improvement measures, including relaxing the sponsorship requirements for the Innovation and Technology Support Programme (ITSP); increasing the time frame for the University-Industry Collaboration Programme (UICP) projects from two to three years; increasing the funding ceiling of the Patent Application Grant (PAG) from $150,000 to $250,000 (and correspondingly the patent application budget in all ITF-funded projects), etc., in stages starting from December 2014.
Subsuming the Research and Development Cash Rebate Scheme (CRS) under ITF 6. Apart from the funding programmes under ITF, the ITF Review has also covered the CRS. The CRS was set up in 2010 with an approved non-recurrent
commitment of $200 million under the Expenditure Head 155 of the ITC. The objective is to provide further financial incentives to encourage enterprises to participate in R&D. The ITF-funded projects is one of the two categories of R&D projects under the CRS. It has since been operating smoothly and the industry’s response has been increasingly positive, especially after the increase of the cash rebate level to 30% in 2012. The amount of cash rebate approved increased from $11.4 million in 2011-12 to $30.0 million in 2013-14, representing a cumulative growth of over 160%. As at end-November 2014, the CRS approved a total of 990 applications involving cash rebate of $104.4 million. The CRS will be fully committed by the second half of 2015. There is an increasing number of companies making use of, and seeking support under the Scheme. We anticipate that with our increasing efforts to promote R&D investment in the private sector, such as the launching of the ESS, this trend will likely continue in the future.
7. Having regard to the complementary objectives of both the CRS and ITF in supporting R&D, as well as the need to sustain the operation of the CRS, we consider it appropriate and timely to subsume the CRS into subhead 101 Innovation and Technology (block vote) under the ITF. This should provide a more stable and longer-term financial support to sustain the promotion of private sector investment in R&D. This consolidation arrangement is also conducive to achieving synergy, enhancing co-ordination and simplifying the administration of funding programmes for promoting R&D in Hong Kong.
Need for Additional Funding
8. As at end-November 2014, ITF has supported over 4 250 projects, involving a total funding of about $8.9 billion. The total revenue earned was about $4.1 billion, which comprised mainly the investment income from the Exchange Fund as well as project incomes ploughed back to ITF over the years.
9. As at end-November 2014, the uncommitted balance of ITF was $0.2 billion and the cash balance was about $1.3 billion. According to our latest cash flow forecast, the uncommitted balance of ITF would be fully committed in mid-2015 and the cash balance will be exhausted in early 2016. There is an imminent need for a further funding injection into ITF.
10. The Chief Executive has announced in the 2015 Policy Address the proposal to inject $5 billion into ITF and subsume CRS under ITF to provide sustained and comprehensive support for I&T development.
EXPECTED BENEFITS11. We expect that with the proposed funding injection, we will be able to continue supporting the development of I&T mainly in the following aspects –
CONTROL AND REVIEW MECHANISM12. Given that ITF is the flagship tool of the Government in promoting I&T, it is imperative to put in place a good control and review mechanism to ensure that the funds are being utilised in an efficient and effective manner.
13. For non-R&D Centre projects, applications are vetted according to the respective assessment frameworks of the relevant funding programmes by an assessment panel/committee before submitting to the CIT for approval 3. The membership lists and terms of reference of the assessment panels/committees of the
ITSP, SERAP and General Support Programme (GSP) are set out at Enclosure 4.
For projects undertaken by R&D Centres, applications are vetted by the respective R&D Centres before submission to the CIT for approval. Key information of the approved projects, such as the fund recipients, project period and funding amount, is published on the ITC website for the public’s perusal.
14. ITC also promulgates funding guidelines for various funding programmes which set out, among other things, the control and review mechanism of ITF. Over the years, ITC has, from time to time, made changes to these guidelines to reflect the latest policies and enhance the control, monitoring and evaluation of ITF projects. For example, the prevailing version of the “ITSP Funding and Administrative Guidelines for Successful Applicants”, promulgated in January 2015, has set out some relevant control mechanism for the R&D projects supported under the ITSP, including –
There are similar control mechanisms for other funding programmes under ITF.
15. To ensure compliance with the funding guidelines, the ITC will also conduct progress meetings/site inspections with the project teams where appropriate to verify the project progress and usage of funds as reported in the progress/final reports or audited accounts. Disbursement of funds will be made in accordance with a prescribed cash flow schedule only if the project is able to meet approved milestones. In case of non-compliance with the funding guidelines or where project progress is unsatisfactory, disbursement of funds may be withheld or the project may be terminated where appropriate.
16. The Director of Audit conducted in 2013 a value-for-money audit on ITF and made recommendations, among others, to improve the project management and evaluation mechanism of ITF, principles and policies for commercialisation, and timely submission of project progress reports and audited accounts, etc.. ITC agreed with the recommendations and has taken them into account in conducting the ITF Review. For instance, we promulgated a new guideline which gives greater flexibility for negotiations on intellectual property arrangements, and introduced a more comprehensive/systematic post-project evaluation framework to better assess and monitor the outcome and commercialisation of projects.
17. In the future, ITC will continue to enforce the prevailing control mechanism for ITF projects, conduct periodic reviews and make necessary adjustments/enhancements as appropriate.
FINANCIAL IMPLICATIONS18. If the proposed injection of $5 billion is approved (and the CRS is subsumed under ITF), based on past expenditure pattern, the indicative financial implications with breakdown by financial year is as follows –
19. As shown above, with the proposed injection of $5 billion, we expect that ITF can continue to operate for around five to six years until 2020-21.
However, the actual cash flow may vary depending on the number and amount of funding applications approved under different funding programmes as well as refinements in policy.
FCR(2014-15)57 Page 9 20. Upon subsuming the CRS under ITF, any uncommitted balance remaining in the non-recurrent commitment under the Expenditure Head 155 which was around $30 million as at end-November 2014 will be returned to the General Revenue Account. ITC will continue to provide recurrent resources to support the operation of ITF.
21. Subject to the approval of the above proposed funding injection of $5 billion for ITF, we will create a new subhead under Head 184 Transfers to Funds for a supplementary provision of $5 billion from the General Revenue Account to ITF in around early 2016, when the cash balance of ITF is expected to be exhausted.