Govt eyes research groups for seed cash

By SIMON COLLINS

Crown research institutes are divided over a Government plan to ask them for a special dividend of tens of millions of dollars for venture capital.

The nine institutes have not had to pay dividends since they were carved away from the Department of Scientific and Industrial Research in 1991.

Science Minister Pete Hodgson said that several of the institutes were "cash rich" and could afford to pay a dividend to the Government.

He plans to ask all of them, except the Institute of Environmental Science and Research (ESR), for a special dividend payment "over the course of the next year or so, and probably more than once."

He said the Government would use the money to invest in "several new venture capital funds that would focus on the seed capital part of the spectrum" - early-stage finance for ventures considered too risky to be able to raise capital in the mainstream financial markets.

The proposal had yet to be approved by cabinet, but Mr Hodgson said he had the support of Finance Minister Michael Cullen.

He planned to ask private sector investors to become partners with the Government in the funds that private investors would then manage.

The proposal is similar to the Israeli Government's investment of $US100 million ($226 million) in the venture capital fund Yozma, in 1991. Private investors also invested in the Yozma scheme, and later bought out the state shareholding.

Yozma stimulated the growth of Israel's venture capital market, which has now nurtured more than 100 high-tech companies to the stage of listing on New York's Nasdaq stock exchange.

Keith Steel, chief executive of New Zealand's biggest crown research institute, AgResearch, said staff were concerned about the proposals. His staff were paid bonuses when their profit exceeded targets.

"This is a complete reversal of the previous policy of not requiring CRIs to pay a dividend," he said.

"That was to allow them to re-invest their profit in growth and in new science capabilities."

Mr Hodgson said the institutes could afford to pay the special dividend to the Government and then fund their growth by borrowing.

"If CRIs are geared to the tune of say 30 per cent, or 20 per cent [of their assets], then they are in a really good position to increase their debt ratio if they want to expand beyond that."

But Mr Steel, who chairs the Association of Crown Research Institutes, questioned whether this would be the best way for the institutes to commercialise their research ideas.

"If you look at how high-tech, high-risk business ventures operate, they actually operate through raising cash through equity and not through debt," he said.

"So my perception is that it [the special dividend] would cause a fundamental change in the way CRIs operate, and it is something we would need to look at very carefully."

The outgoing chief executive of the Institute of Geological and Nuclear Sciences, Dr Andrew West, questioned the rationale for using profits from the environmental, non-commercial institutes such as his to fund business ventures.

But the chief executive of Industrial Research, Dr Geoff Page, said the Government, as the institutes' owner, was "absolutely entitled to take money out of any organisation that [it] funds."

"I don't think for us it would constrain growth, because I think we have enough revenue to do that," he said.

The principal adviser on CRIs for the Crown Company Monitoring and Advisory Unit, Murray Wright, said the amount of the special dividend would have to be negotiated with each institute's board.

Mr Hodgson said he had met, in mid-January, the chair and chief executive of each board.

The National Party spokesman on CRIs, Dr Paul Hutchison, said the Government should be very cautious about investing in venture capital funds.

"The priority should be to see if the private sector can do it best."

He said the big issue for the institutes was "how basic research can best be carried out in this country in combination with the universities, and what parts of the CRIs' activities are better done by the private sector."