Information Paper for
LegCo Panel on Trade & Industry

LegCo Panel on Trade and Industry

Existing Funding Schemes for
Manufacturing and Services Industries

INTRODUCTION

This paper outlines the operation of three funding schemes to support the development of the local manufacturing and service industries administered by the Industry Department -

(a) the Applied Research Fund;

(b) the Industrial Support Fund; and

(c) the Services Support Fund.

THE FUNDS

Applied Research Fund (ARF)

2. The ARF was set up in 1993.¹ It aims to foster technological entrepreneurship and encourage private enterprises to carry out technology ventures. All local companies are eligible to apply. Funding is given through loans or equity participation in investments. It is administered by the Applied Research Council (ARC), a private company fully owned by the Government and specifically formed to hold and manage the Fund. The ARC's Board of Directors comprises industrialists, professionals and academics.

3. Prior to November 1998, the day-to-day administration of the ARF and assessment of proposals were undertaken by the Industry Department with the assistance of external assessors from local universities and industry support bodies. The final investment decisions were made by the ARC's Board of Directors. In late 1997, the Administration completed a review of the ARF². The review reaffirmed the mission of the ARF, i.e., to promote technology ventures and to fill a gap in the local capital market where little investment was channelled to technology investments. The review however concluded that the major problem that had adversely affected the performance of the ARF was its institutional weakness -- the Industry Department's lack of experience and expertise in operating a venture capital fund of this nature. The review report was submitted to this Panel in January 1998.

4. The review therefore recommended the appointment of professional venture capital firms with the experience in technology investments to manage the ARF. This recommendation was approved by the Finance Committee of the Legislative Council in March 1998. Following a two-stage open selection exercise, the ARC in November 1998 appointed three private sector venture capital firms to be the Council's managers³ . Under the new arrangement, the three firms are responsible for identifying and evaluating investment proposals, as well as providing management, marketing and networking input to the investee companies. The ARC assumes a supervisory role and ensures that the public mission of the ARF is observed.

5. The ARF has so far supported 30 projects with a total investment of $172.5 million⁴ .

Industrial Support Fund (ISF)

6. The ISF was set up in 1994 to support initiatives that are beneficial to Hong Kong's industrial or technological development. Under this scheme, funding support is given to projects which may contribute to the competitiveness or technological development of the local manufacturing industry as a whole or a specific sector within it. All industry support bodies, trade and industry associations, higher education institutions, professional bodies, research institutes and local companies are eligible to apply. Funding support is normally given in the form of a grant. Project teams are required to make available the project results to companies within the relevant sector.

7. The Industry Department administers the ISF on the advice of the Industry and Technology Development Council⁵ . The amount available under the ISF is determined on a yearly basis in the context of the annual Estimates exercise. In 1998/99, $274 million was allocated to the ISF. Since 1994, the ISF has supported 373 projects, involving a total financial commitment of over $1.38 billion. These projects range from providing communal infrastructural facilities, developing new technologies/products and introducing new manufacturing techniques to improving production processes and carrying out promotional activities for individual sectors⁶.

8. The Administration carried out a review of the ISF in 1997. The review concluded that as the major source of public funding for the enhancement of our technological infrastructure and other industrial support measures, the ISF had enabled industry support bodies, trade organisations and universities to carry out projects and conduct R&D work which could enrich Hong Kong's industrial and technological environment. The review also recommended a number of measures to improve the operation of the ISF and to make it more relevant to the needs of industries. These measures include, inter alia, giving priority to projects with industrial participation or sponsorship and asking the Industry and Technology Development Council to identify specific topics or technology areas, etc. Details of the review were submitted to this Panel in January 1998. The recommendations have been implemented.

Services Support Fund (SSF)

9. The SSF was established in June 1996. Since its establishment, the Government has allocated a total $100 million to the Fund. Its modus operandus is similar to the ISF except that it focuses on the service industry. Like the ISF, all trade and industry organisations, higher education institutions, services support bodies, professional bodies, research institutes and local companies are eligible to apply, and priority is given to projects with private sector participation or sponsorship. Project teams are also required to make available the project results to the relevant sectors.

10. The Industry Department administers the SSF on the advice of an SSF Vetting Committee, which comprises professionals and experts from the service sectors as well as tertiary institutions. 40 projects have been supported, involving a financial commitment of $68 million. These projects seek to benefit the local service industry by developing the necessary facilities or infrastructure, or through the compilation of databases for the use/reference of particular sectors⁷.

11. Despite the short history of the SSF, the scheme has proved to be an important source of funding for initiatives to support the development of the service industry. For instance, the availability of resources under the SSF has encouraged trade and industry organisations from a number of sectors, such as import and export, estate management and film entertainment, to pursue new initiatives on a collective basis. SSF funding has also helped the organisation of a number of major cross-sectoral events like the Hong Kong Awards for Services and the Small and Medium Enterprises Week.

12. The Administration is now undertaking a comprehensive review of the SSF in the light of experience gathered in the past two and a half years. Members will be kept informed of developments.

Summary

13. It can therefore be seen that each of the three funding schemes has a specific mission -

1. the ARF encourages technology ventures;
   
   
2. the ISF supports projects to upgrade the competitiveness or technological development of Hong Kong's manufacturing industry; and
   
   
3. the SSF finances projects of benefit to the service sector.

THE NEW INNOVATION AND TECHNOLOGY FUND

14. In its First Report released in September 1998, the Chief Executive's Commission on Innovation and Technology recommends the setting up of an Innovation and Technology Fund (ITF) to finance ad hoc projects that contribute to innovation or technology upgrading.⁸ The Administration has accepted the recommendation and is working on its details. One of the issues being considered is the interface between the ITF and existing funding schemes. Our preliminary view is that both ISF and SSF should eventually be subsumed under the ITF. In other words, the ITF should be the funding source for programmes and projects, existing and new ones, that seek to strengthen Hong Kong's innovation and technological capability in both the manufacturing and services sectors.

15. The Administration is working out the framework of the ITF and the various programmes under it. We will consult this Panel in due course.

ADVICE SOUGHT

16. Members are invited to note this paper.

Trade and Industry Bureau
January 1999

1.The Applied Research Fund was originally called the Applied Research and Development Scheme. The initial injection was $200 million. In June 1995, the Finance Committee of the Legislative Council approved another $50 million for the setting up of the Cooperative Applied Research and Development Scheme. This scheme differed from the original scheme in that it required the investee companies to collaborate with Mainland universities or research institutes. In March 1998, the Finance Committee of the Legislative Council agreed that the two schemes should be merged into one scheme known as the Applied Research Fund. A further injection of $500 million was approved. Thus altogether, the Government has injected a total of $750 million into the Applied Research Fund.

2.The review had taken into account the public mission of the ARF, the operating experience so far, the observations and recommendations of the Director of Audit's Report No.29 on the Government's funding schemes for promoting technology development in industry, and the vision for an economy of high-value added activites depicted in the Chief Executive's inaugural Policy Address.

3.They are the Walden International Investment Group, the HSBC Private Equity Management Ltd. and the AsiaTech Ventures Ltd.

4.27 of these investments were made before the contracting out of the ARF in November 1998. These investments involve $113 million. Another three investments have been made by the venture capital firms. They involve $62.5 million.

5.The Industry and Technology Development Council is the Government's standing advisory body on industry- and technology-related matters. Under the main Council are seven committees -- six focus on specific industrial sectors and one deals with cross-sectoral or other general technology issues. The seven committees play an important role in the assessment of funding applications and monitoring of approved projects.

6.Examples include the development of a new process for large scale production of recombinant Human Epidermal Growth Factor which has been licensed to a local company for use in the production of cosmetic products; the development of modernised fermentation process and advanced flavour analysis techniques for the food industry; the development of electroforming technologies for the jewellery industry; the enhancement of the internet infrastructure with the latest Asynchronous Transfer Mode technology which has enabled the local internet backbone to increase its capacity by 50 times; the production of a multilingual CD-ROM to promote the local electronics industry. In addition, a Patent Application Grant, initiated by the Industry and Technology Development Council, with an initial injection of $6 million, has been operating since April 1998.

7.Examples include the publication of a directory for small and medium enterprises; the development of a manual for food trading and retailing; and the promotion of supply chain management for the retail and distribution industry.

8.The recommendations of the Commission's First Report were discussed at the Panel meeting held on 10 October 1998.