2007 Operating Framework
Each year, the CRI shareholding Ministers lay out
their expectations on the CRIs for the coming year in the form of the
Operating Framework. This is the Operating Framework version for 2007.
Foreword
This is the seventh Operating Framework issued to CRIs. It is the
cornerstone document through which shareholding Ministers communicate
their expectations to CRI boards. It is a public document and I
encourage CRI boards to circulate it to staff and other stakeholders.
During 2006, I have been pleased to see the CRIs making significant
progress against most of the expectations outlined in the 2006 Operating
Framework. This common understanding of expectations is reflected in
the fact that this year’s Operating Framework is essentially unchanged,
other than a few minor updates. I am also pleased that during 2006 the
CRIs have had valuable input into discussions around the development and
implementation of a more stable funding system, and I welcome continued
dialogue in this area.
CRI engagement with stakeholders has also developed further. This
engagement includes not only the CRIs’ various client bases but also the
community in general. This latter engagement has varied from
contributing to urban and regional economic development initiatives to
communicating the value of science and science careers to young people.
These activities are very much in line with shareholder expectations
that the CRIs will play a broad transformative role in New Zealand’s
economy, society and environment and contribute to the government’s
economic transformation goals. Shareholding Ministers are keen to see
this engagement continue in 2007 and, in particular, to respond to the
many constructive points raised at the Capitalising on Research
summit held in October 2006.
Finally, the 2007 Operating Framework continues the incorporation of an addendum specific
to each CRI introduced in 2005. The CRIs are becoming more diverse over time
and the addenda enable shareholding Ministers to provide clearer
guidance on where their expectations for a particular company sit within
the wider parameters of the generic Operating Framework.
Role
of a CRI
CRIs are owned by
the government and their role is to:
-
undertake excellent research, science and technology (RS&T) that aligns with
the government’s current social, economic and environmental
priorities, in a manner that reflects best practice management and
governance
-
engage with relevant industrial, environmental and social stakeholders to
address current RS&T needs and agree longer-term research
priorities, while regularly communicating to the public the set of
stakeholders they are targeting
-
serve as a key
repository of New Zealand’s strategic scientific knowledge and RS&T
skills of national importance
-
collaborate with
other science organisations, to provide for New Zealand’s current
and future strategic science needs
-
ensure the
development of knowledge, and its transfer to and uptake by
end-users within the resources available to the CRI, in a way that
maximises the overall benefit to New Zealand
-
promote awareness of
the value of RS&T amongst all New Zealanders
-
continually develop
the human capital of their organisation in ways that support and are
aligned with the long-term interests of New Zealand’s science and
innovation system.
The role of a CRI does not include:
-
necessarily being the
sole provider of RS&T within New Zealand
-
acting as a principal
education provider
-
maximising profit
-
focusing on financial
return at the expense of delivering on its other objectives and
statutory purpose
-
competing with or
crowding out the private sector by holding a majority ownership
interest in commercialisation ventures beyond the point where the
CRI is the party that can add most value
-
acting with complete
academic freedom, without regard to the needs of stakeholders
-
determining its own
research priorities without regard to existing government research
priorities and/or the needs of sector stakeholders
-
deciding RS&T policy,
although the CRIs are expected to have input to policy formation.
Owner’s
expectations of CRIs
A
CRI’s research and development capabilities, which are ultimately geared
to ensure benefit to New Zealand, should always be underpinned by a
successful business so that those capabilities can continue to be
delivered over the long term.
A successful CRI will be able to demonstrate that it
meets the following expectations.
A. CRIs fulfil their
role by:
1.
undertaking excellent research
2.
engaging with relevant industrial, environmental & societal
stakeholders
3.
serving as a key repository of strategic scientific knowledge and
skills
4.
collaborating with other science organisations
5.
ensuring the transfer of knowledge and its uptake by end-users
6.
communicating the value of RS&T to all New Zealanders
7.
developing the human capital of their organisation
B. CRIs demonstrate
best practice management and governance by:
8.
ensuring long-term financial viability
9.
measuring and reporting financial and non-financial performance
10.
exhibiting best practice governance
11.
maintaining excellent and transparent practices
12.
being socially, ethically and environmentally responsible
13.
taking considered risks
14.
setting and managing to a target capital structure
1. Undertaking excellent research
Excellence in research is central to all CRI
activities; undertaking excellent research ensures CRIs can deliver a
quality of service that allows them to meet stakeholders’ needs and
collaborate with other high-quality science organisations, both
domestically and abroad. CRIs should be undertaking excellent research
that contributes toward improving New Zealand’s economic, environmental
and social development through transforming/creating industries or
delivering improvements in well-being.
Undertaking excellent research will play a key
role in CRIs’ attracting, developing and retaining quality staff.
We expect that CRIs will continue to monitor
themselves against the generally accepted measures of research
excellence, including publication and patents, but also work with
government agencies, including the Ministry of RS&T (MoRST) and the
Foundation for RS&T (FRST), to improve the application of processes such
as technical review.
2. Engaging with relevant economic,
environmental and societal stakeholders.
CRIs should engage with stakeholders to help
facilitate the government’s economic, environmental and social
development objectives.
The government has the objective of transforming
industry to create a high- productivity, high-wage and high-skill
economy. It wants to see science and innovation raise productivity in,
and add value to, both traditional and non-traditional industries. The
government also seeks to improve the well-being of New Zealanders and
improve the sustainability of New Zealand's environment. To contribute
to this transformation and improvement, CRIs will need to build on
existing knowledge, develop new knowledge, and use the full range of
transfer mechanisms to ensure the knowledge is applied to the benefit of
New Zealand.
As well as providing tactical RS&T solutions, CRIs
are well placed to look over the horizon to identify new technology
needs of their stakeholders through their direct engagement with RS&T
end-users and their activity in research that will underpin future
technology. Through ongoing and meaningful engagement with their
stakeholders, CRIs should be much better able to identify areas of
opportunity relevant to their stakeholders and to help stakeholders
themselves identify areas of opportunity. It is only through
identifying and taking advantage of new opportunities that stakeholders
will build, maintain and enhance their competitive advantages.
MoRST is developing a suite of ‘Science Roadmaps’
that will help provide an overview of areas of scientific importance to
the government and outline the desired directions for that area into the
future. Roadmaps will also inform the government’s broader RS&T policy
objectives over time. CRIs will have an important role to play in
contributing to the development of these roadmaps, including providing a
researcher’s and end-user’s perspective to this process.
3. Serving as a key repository of New
Zealand’s strategic scientific knowledge and skills
The government owns CRIs to ensure that New
Zealand maintains a critical mass and capability in strategic areas of
science that are of long-term importance to New Zealand. This role is
not duplicated in other publicly funded research organisations, such as
tertiary education institutions. Maintaining this critical mass and
capability is important to New Zealand’s capacity to create the
knowledge, products and processes that are core to achieving the aims of
the government’s economic transformation agenda and the government’s
social and environmental objectives.
CRIs’ decision-making on the capabilities that
they choose to develop and maintain should be aligned with the existing
and future needs of their stakeholders, including both the public and
private sector. CRIs should give regard to their capability development
and maintenance strategies, including the production of a three year
capability profile in their Statement of Corporate Intent (SCI), as part
of their obligations associated with receiving monies from the CRI
Capability Fund.
An important part of CRIs’ repository role
involves the curation of databases. The government is committed to
increasing the availability of data for the generation of national
benefit. CRIs have an important role in actively managing,
disseminating significant science databases and curating data to
appropriate standards, including standards for metadata that facilitate
data sharing, for the benefit of New Zealand.
Shareholding Ministers expect that CRIs will have
regard to the following principles in managing and disseminating data:
-
data
should be managed and disseminated in a way that will maximise
benefit to New Zealand in the long run
-
charges
for access to data should normally reflect the costs of provision,
including the cost of capital invested by the CRI
-
on
entering into contracts that involve the generation of new data,
whether publicly or privately funded, the subsequent availability
and application for national benefit should be actively considered
and formally agreed
-
data
should be managed in a way that retains the quality and integrity of
the data over time
-
data
should be publicised and made available except where:
-
prevented by contractual arrangements
-
release prejudices the objectives of a research programme
-
it
can be demonstrated that greater national benefit is likely to
accrue from alternative arrangements, or
-
it
is not practicable to make data available.
To manage these expectations, shareholding
Ministers expect that CRIs will develop and publish transparent data
management policies that are regularly reviewed.
4. Collaborating with other science
organisations
(i) Onshore
The small size of most research areas in New
Zealand and the fragmented nature of individual sectors mean that
collaboration between organisations is of greater importance in New
Zealand than in many other countries.
CRIs are the only organisations tasked with
maintaining a strategic view of their stakeholders’ RS&T needs. It is
expected that, as part of considering the knowledge, expertise and
capability needs of their stakeholders, CRIs will identify and, where
required, facilitate collaboration between themselves, other research
organisations and end-users.
(ii) Offshore
Science and technology, both research and the
application of that research, continue to internationalise. Whilst
strong international collaboration at the investigator level is the
norm, institutional and governmental collaboration are less advanced.
CRIs need to ensure that they are well linked into RS&T developments
offshore so that they are able to facilitate the identification and
capture of relevant offshore expertise, knowledge and innovation for the
benefit of their New Zealand stakeholders.
The government has a growing number of bilateral
science agreements with other countries. Free trade agreements are also
deepening New Zealand’s linkages with international markets. CRIs
should seek to ensure that they take full advantage of the opportunities
that these arrangements offer so that the full potential benefit of any
offshore engagement can deliver to their stakeholders. MoRST can assist
CRIs in identifying these opportunities.
5. Ensuring the transfer of knowledge and
its uptake by end-users
The government is committed to increasing the rate
at which CRI research is applied to the benefit of New Zealand. The
application of research is a broad concept that encompasses a variety of
approaches that CRIs can use to translate knowledge into value for New
Zealand. These approaches include direct dissemination, mobility of
researchers, and CRI-industry collaborations, as well as
‘commercialisation’ activities such as the sale or licensing of IP and
spinning out commercial subsidiaries.
Researcher mobility
between collaborating organisations and staff exchanges or secondments
with client firms are also a form of tacit knowledge flow. CRIs are
encouraged to promote this activity.
CRIs are expected to bring an increased focus on
New Zealand benefit to their commercialisation activities through
developing commercialisation models that reward CRIs for their
risk-taking, while ensuring that significant ongoing economic,
environmental and societal benefit is delivered to New Zealand. The
following criteria should guide all CRI technology transfer activities.
CRIs should:
-
partner
effectively with industry as early as possible
-
maximise
wider benefits to New Zealand
-
aim to
ensure ongoing earnings to New Zealand
-
aim to
anchor within New Zealand any technology transferred
-
consider
wholly owned subsidiaries where industry partners are not
immediately available, with a view to seeking such partnerships
downstream as the business consolidates.
Where CRIs have developed a subsidiary to
commercialise technology, shareholding Ministers expect that CRIs may
well divest some, or all, of their ownership stake in cases where the
research and scientific risks associated with the subsidiary decline and
the business risks and capital requirements increase beyond the capacity
of the CRI to deal effectively with them.
When considering the sale of equity in a
commercialisation subsidiary, CRI boards would be expected to make an
assessment of whether any recommended sale or partial sale of a
commercialisation subsidiary is consistent with the criteria and
divestment expectations above. Shareholding Ministers will separately
circulate guidance to boards on information requirements for sale
processes that require shareholder consent.
Shareholding Ministers appreciate that
commercialisation brings with it many risks and understand that
individual ventures may sometimes fail. It is considered important,
however, that CRIs find ways to manage the risks associated with
commercialisation so that core science capabilities are not jeopardised.
For the avoidance of doubt, shareholding Ministers
are comfortable with CRIs’ allowing an individual or a team to benefit
materially from the financial success of a venture to which they have
made an intellectual contribution.
6. Communicating the value of RS&T to all
New Zealanders
Ministers have identified the need for New
Zealanders to understand the value of RS&T to themselves and to the
country. CRIs are expected to play a key role in the communications
needed to achieve this goal, with MoRST coordinating this work across
the sector. CRIs will be expected to work with other government
agencies and science organisations to maximise the impact of this
communication.
CRI communication activities should target
audiences such as communities, schools and industry groups and may
include engaging with the public on areas of science that may cause
concern.
7. Developing the human capital of their
organisation
Staff members and
their representatives are important stakeholders.
Shareholding Ministers expect that CRIs will enter into productive
employment relationships and engage collaboratively with their staff
members and the Public Service Association (PSA) in respect of their
staff members represented by the PSA.
The government and
the PSA have entered into a partnership agreement built on the
recognition of a common interest to develop a modern and innovative
workplace. Shareholding Ministers expect that the CRIs will reflect the
aims of this agreement through their principles of engagement, good
faith, and respect for staff.
CRIs are expected
to meet or exceed their statutory requirement to be a good employer, as
defined by section 118 of the Crown Entities Act 2004. In addition, to
deliver their role in the New Zealand science system, they are expected
to have appropriate policies and procedures in place that create the
environment required to attract, develop and retain the capabilities
they need to undertake world-class R&D, and to reward their staff based
on their performance. Consequently, shareholding
Ministers encourage CRI boards to review their IP reward policies
periodically to ensure they remain appropriate to their organisation.
Shareholding
Ministers also see that CRIs have a role in continually developing their
human capital in ways that support and are aligned with the long-term
interests of New Zealand’s wider science and innovation system.
Shareholding Ministers expect CRIs to engage with their staff
collectively to address issues relevant to human capital development
affecting all CRI staff. This will include working in partnership to
create a culture and to develop processes and policies that:
-
ensure
that science careers are attractive, stable and rewarding as
evidenced by low staff turnover, good staff morale, and a high level
of positive responses to staff satisfaction measures
-
support the recruitment and
retention of high-quality staff including the provision of salaries
and working conditions that are competitive with other organisations
and policies that reflect good employer practices and provide equal
employment opportunities
- promote and
support science excellence
A successful CRI
should be actively engaged with New Zealand and overseas science and
education communities to ensure that it will be able to meet its
staffing needs over the long term. There are currently several examples
of CRIs closely engaged with universities to improve the flow and
quality of graduate and post-graduate students from universities to CRIs,
which Ministers support.
As major employers of scientists, CRIs also have a
role in encouraging school students to consider careers in science.
Such activities could include information for students and promotional
activities highlighting career opportunities.
B. CRIs demonstrate best practice governance and
management by:
8. Ensuring long-term financial viability
The board of a CRI exercises stewardship on behalf
of the shareholder to ensure the company’s ongoing health and financial
viability. CRIs sustain capabilities in fields of strategic importance
to New Zealand and are expected to do so for the long term.
Shareholding Ministers’ expectations regarding governance and financial
performance are informed by this focus on long-term financial viability.
(i) Growth
A successful CRI will adopt strategies that will
ensure long-term viability and maintain the ability to meet its debts as
they fall due. To achieve this, CRIs need to generate sufficient
operating surpluses that they can apply to enable investment in capital
expenditure, to develop new products and services for future revenue,
and to attract and retain suitable staff members, all of which, in turn,
will contribute to future revenue generation and long-term viability.
A successful CRI is expected to maintain or grow
its revenue in real terms so that, at the least, it can keep pace with
the cost of undertaking R&D and with inflation generally. Growing
revenue also allows CRIs to increase their R&D capability and capacity
and/or increase rewards to staff in line with performance.
While revenue growth is essential to the long-term
viability of CRIs, it should not be the overriding focus of a CRI. A
successful CRI will grow sufficiently to ensure its long-term viability
and extend its R&D capabilities over time while ensuring ongoing
transfer of scientific knowledge and technology to the sectors with
which it is aligned. Shareholding Ministers are comfortable with
commercial revenue growth that reflects an extension of a CRI’s ability
to serve its constituents, but uncomfortable if revenues are derived
from competing with or crowding out the private sector.
(ii) Reinvesting with a capital mentality
In recent years, some CRIs have continually
reinvested significant portions of their operating surpluses into
research and/or development activities without any evidence to date of
recovering those investments. This has contributed to a steady decline
in the average return on equity for CRIs. Unless CRIs balance
reinvestment against returns, they are living beyond their means and
diluting their value, which could ultimately threaten their ongoing
viability.
There is no inherent conflict in the expectation
on CRIs to, amongst other things, be both financially viable and
undertake research for the benefit of New Zealand. A CRI can deliver
both on an aggregate basis. It is frequently the case that the greatest
proportion of ‘benefit’ from CRI knowledge transfer is realised in the
wider economy, and not as a financial return to the CRI. The CRIs are
not restrained from reinvesting into activities with low financial
returns to them, provided that other reinvestment initiatives provide a
compensating return that allows them to continue to meet company return
targets on average and over time.
Several CRIs continue to support otherwise
unfunded capabilities through reinvestment. The CRI Capability Fund,
rather than reinvestment, is intended to be used to maintain or enhance
capabilities, in the short to medium term, where alternative funding is
limited or unavailable.
(iii) Generating returns at the cost of equity
capital
A successful CRI is expected to generate net
profit after tax (NPAT) before dividends sufficient to reflect the cost
of its equity capital on average over time. Shareholding Ministers
consider that an appropriate cost of equity target for CRIs is 9.0%.
Ministers are comfortable that additional profits can be reinvested by
CRIs if done so with a capital mentality.
CRIs are expected to manage to their SCI NPAT
targets, which may include scaling back reinvestment in operating items
in the course of a year if the CRI forecasts that it will not meet its
NPAT target.
9. Measuring and reporting financial and
non-financial performance
There are tried and tested accounting and
financial analysis practices for measuring financial performance, but
the methodology for measuring the delivery of national benefit through
RS&T is less well established. Shareholding Ministers consider it vital
that CRIs improve their ability to demonstrate the value they add to New
Zealand, both within formal performance monitoring frameworks and by
CRIs’ own efforts. An example of the latter is Crop & Food Research’s
and HortResearch’s involvement in the Growing Futures project.
The new research
application indicators introduced in 2006 will provide a comprehensive
overview of the CRIs' performance to shareholding Ministers and will
highlight to the public the valuable contribution that the CRIs make to
New Zealand's economy, society and environment. Shareholding Ministers
look forward to the CRIs’ reporting on these indicators.
There are two other areas where progress in
developing measures is desired in the near future:
Science excellence - ownership monitoring of
science excellence is seen as increasingly important as the funding
system is further evolved. CCMAU has been asked to work with FRST,
MoRST and CRIs during 2006/07 to ensure that measurement is aligned with
sector best practice.
Knowledge creation – both CCMAU and MoRST share
the Association of CRIs’ interest in the developing field of
intellectual capital (IC) measurement. If IC tools develop in a way
that is seen to be relevant to CRI performance measurement, CCMAU will
be asked to lead efforts to implement them in the CRI sector.
While CCMAU has been asked to play a lead role in
developing new measures, the direct involvement of CRIs is vital to
ensure that measures are aligned with CRIs’ organisational and strategic
interests.
10. Exhibiting best practice governance
Ministers expect CRI boards to implement
governance standards that reflect accepted best practice in terms of
ethical behaviour, strategy development, delegation, compliance and risk
management, and the specific governance structures and protocols that
are put in place. In setting strategy for the company, boards are
expected to have high regard for the expectations of shareholding
Ministers. Operating Frameworks, correspondence and the new Owner’s
Expectations Manual for CRIs, expected to be released during 2006, will
support and clarify expectations.
All boards are expected to have in place an annual
process for evaluating board, chair and individual director
performance. The outcomes of this process should be aligned with
suitable professional development programmes for directors.
In calculating and paying directors’ fees and
reimbursing directors’ expenses, boards are expected to pay particular
attention to the Crown Company Directors’ Fees and Reimbursement
Guidelines issued in February 2004.
11. Maintaining excellent and transparent
practices
CRIs need to develop and maintain excellent,
transparent processes around budgeting, forecasting, capital allocation
and risk management. This is particularly so in the case of revenue and
profit forecasting as shareholding Ministers’ support for the various
initiatives outlined in each CRI’s SCI relies on the company’s ability
to generate sufficient revenues and profit.
CRIs are also expected to maintain open and
regular lines of communication with shareholding Ministers and their
officials. This expectation includes the appropriate timeliness of
response to shareholder requests for information and, in line with the
'no surprises' policy, proactive communication in advance of issues that
are considered controversial or likely to be of wider public interest.
12. Being socially, ethically and
environmentally responsible
CRIs are expected to be cognisant of the context
in which they operate, particularly given public expectations that
Crown-owned organisations will exhibit ethical and socially responsible
behaviour. Consequently, CRIs are expected to consider the impact on
their staff members, local communities and other stakeholders when
undertaking major initiatives such as relocations or the divestment of
business units. Appropriate consultation should be undertaken when
deemed necessary.
In the course of their business, CRIs should be a
model of ethical behaviour. For example, aggressive strategies to
minimise tax obligations would not be acceptable. Similarly, when
operating overseas, CRIs may be looked upon as representatives of the
government and should behave in a manner in which they are seen to be
beyond reproach.
CRIs are expected to consider the impact of their
physical infrastructure and business activities on the environment and
to adopt sustainability practices that seek, for example, to minimise
waste, CO2 emissions and energy use.
13. Taking considered risks
Boards are expected to take reasonable risks to
meet their objectives and to take advantage of opportunities that
arise. CRI boards should be fully aware that shareholding Ministers
accept risk-taking as a natural part of a CRI’s activities and that
risk-taking may occasionally fail to produce returns.
Again, this highlights the need for CRIs to
balance their risk-taking against adequate returns so that they can
weather a percentage of failed research and/or development-related
investments. Boards should also make sound capital rationing decisions
and exit science and/or development projects if it becomes clear that
they have little chance of success.
14. Setting and managing to a target
capital structure
Most CRIs have
either agreed with shareholding Ministers a capital structure
appropriate to their risk / return profile or are on course to do so.
Boards are expected to re-evaluate their optimal capital structure
whenever circumstances suggest it is necessary, such as following any
major change to the CRI’s risk profile. Shareholding Ministers would
expect that any capital structure review will have undergone external
review to ensure that it conforms to current best practice. In the
absence of an agreed capital structure, 30% net gearing with a
three-times interest cover requirement will continue to operate as a
default target. Therefore, the onus is on boards to demonstrate why any
different capital structure target is appropriate.
CRIs should not just set the target but actively
manage to it within an acceptable margin. Any CRI that consistently
falls below or above its target would be expected to take action to
re-align. Appropriate action would include planned expenditure to
reduce the cash balance or the payment of a dividend where no
commercially sound investment opportunities can be identified.
While the Crown’s primary purpose in owning CRIs
is not dividend flows, CRIs should have excellent capital allocation
processes that are transparent to the shareholder. Where dividends are
made, they will be retained within the wider innovation system.
Company-specific addenda
AgResearch
Our primary expectation
for 2007 is that the Board will focus on developing a strategy to ensure
AgResearch’s long-term viability, bearing in mind future revenues
(including the upcoming rebidding for FRST funding), operating costs,
and the level of capital expenditure on building projects.
The company has
signalled its intention to engage in a number of building projects, some
of which are likely to incur considerable cost. We expect that the
Board will develop robust business cases for each project, including the
effect of increased operating expenditure on the company as a whole.
This expectation is framed within the context of the company’s revenue
forecasts and current high cost base. We expect the Board to consider
carefully the company’s cost structure and, in particular, its support
for areas where there is little or no prospect of securing sustainable
external income.
Shareholding Ministers
continue to support AgResearch’s strategy of engaging with the pastoral
sector. We commend the company on the significant advances that it has
made in raising its profile and, in general, in communicating the value
of the pastoral sector, agricultural issues and related science to a
broad array of stakeholders. While we acknowledge that
relationship-building takes time, we are keen to see the company’s
efforts translate into R&D contracts with the sectors that it serves.
We note that the recent
acquisition of Canesis Network Ltd (Canesis) represents a considerable
change to the size and scope of AgResearch. We encourage the Board to
consider carefully the timing of similar significant transactions as it
concentrates on the integration of former Canesis activities and staff
members and AgResearch’s campus redevelopment programme.
We reiterate our
expectation that the company will consider the nature of its
communication to stakeholders while significant transactions, including
building projects, are still under consideration by shareholding
Ministers. Similarly, we encourage the company to continue to advise
shareholding Ministers in advance of all key initiatives and public
announcements.
We expect that, in
developing its 2007/10 Strategic Plan, the Board will review its net
gearing target in light of the change to the company’s risk profile as a
result of a number of events including the AgVax disposal, Canesis
acquisition and future plans for AgResearch’s farm properties.
IRL
Shareholding Ministers
expect that IRL’s main priority for 2007 will be to focus its efforts on
maintaining long-term science and financial viability. Key elements of
this challenge in the near term include:
· efforts to improve engagement with industry and to derive
commercial revenue
· the
relevance of IRL’s technologies bearing in mind the areas that can be expected to generate wider benefits for New Zealand.
· consideration of IRL’s cost structure
· management of risks associated with rebidding for funding
in upcoming FRST rounds.
Once IRL has taken
appropriate steps to achieve sustainable viability, we encourage the
Board to review the company’s capital expenditure needs to ensure that
researchers have access to the appropriate tools with which to carry out
their research and to meet contractual obligations.
We applaud the company
on the number of technological opportunities emerging through its
pipeline and other activities such as the GlycoSyn facility that are at
a more advanced stage. We encourage the company to develop these
technologies further provided that the company takes considered and
appropriate risks. Engagement with external partners or the securing of
external investment early in the process is expected to reduce such
risks for IRL.
We note that many of the
company’s technologies are novel or emerging and that these technologies
and the supporting capabilities are not widely found within other New
Zealand research organisations. Nevertheless, where there are
complementarities, we encourage IRL to develop collaborative
relationships with other research organisations, including universities
and other CRIs, and private firms that engage in research.
We encourage the Board
to review the role that the company is expected to play, where its
financial performance allows, in promoting its technologies and the
value of RS&T not only to potential clients but also to the wider
community, including educational institutes, communities and industry
groups.
Now that the company has
signalled its intention to close its Biopharm facility, we expect that
the company will review its capital structure target and manage to that
target.
Landcare Research
Shareholding Ministers acknowledge the company’s
efforts to diversify its income sources, including through greater
engagement with the private sector, investment in commercialisation
opportunities and the development of environmental management tools for
firms. We commend the company for its efforts to encourage greater
environmental awareness and sustainable practices, particularly within
the private sector where it can help make a significant difference.
We note the significant ongoing expenditure that
the company requires to commercialise its technologies, relative to the
size of the company. We encourage Landcare Research to ensure that an
appropriate system is in place to review continued investment in
specific opportunities should it appear that anticipated returns are
unlikely to be generated.
Similarly, we encourage the Board to set in place
procedures to manage the risk that revenue, particularly from new or
emerging commercial activities, falls short of targets.
We commend the company on its efforts to report on
its activities and the various areas of science in which it operates.
Examples include Landcare Research’s award-winning annual report,
website and numerous publications. We consider that Landcare Research
has played an important role in raising public awareness of science
issues such as climate change and encourage the company to continue to
play this important role, where practical.
During 2006, Landcare Research submitted a tailored
capital structure proposal to shareholding Ministers. We encourage the
company to continue to review its target net gearing ratio in light of
its risk profile and degree of certainty around future cash flows.
NIWA
Shareholding Ministers commend NIWA on its
continued engagement with its industry sectors and its commitment to
diversifying through both developing sectors outside of its core
business and through the formation of operating subsidiaries.
During 2005/06, we note that NIWA invested its own
capital into maintaining and upgrading nationally significant databases
and collections. We are pleased to see the company make a significant
commitment to ensuring the longevity of key strategic scientific data.
We commend the company on working closely with other government
organisations to ensure that NIWA’s databases complement others in
similar areas.
We are pleased to note that NIWA has again achieved
a good rate of return on its equity capital for 2005/06 and welcome the
company’s commitment to returning excess funds to the shareholder. We
understand that the company is considering a number of significant
investments which will enable it to grow. We support these investments
on the understanding that the company will continue to consider the need
to maintain long-term financial viability. As usual, we expect the
company to keep us fully informed of its plans in this regard.
We appreciate the Board and management team’s
co-operation with officials during the recent MetService/NIWA review.
We expect the company to continue liaising with officials as the
mediation process develops.
As noted previously, we understand that NIWA has reviewed its capital
expenditure projects and is currently undertaking a capital structure
review. We expect NIWA to obtain shareholder support for this review,
supporting its case with sufficient information.
Scion
Shareholding Ministers
are pleased to see increasing signs of the Scion Group engaging well
with industry stakeholders. We understand that Te Papa Tipu Properties
is also engaging well with the wider forestry industry and now has a
number of forestry-related tenants. We also note that the Scion Group
is engaged with eight incorporated or unincorporated ventures that
entail significant partnerships with other organisations.
We commend the Scion
Group on the progress that it has made in its wider biomaterials
strategy and support the company’s continued efforts to expand its
business and presence in the new and emerging biomaterials market. The
recent formation of a research partnership to assess the
feasibility of a transportation biofuel industry in New Zealand is an
example of the significant contribution that
the Scion Group can make to the creation of new bio-based industries.
We would like to
acknowledge the important role that Ensis is playing in maintaining New
Zealand’s strategic science skills and capabilities. Although there are
clear science benefits already accruing from Ensis, Ministers have been
concerned by the entity’s financial performance during 2005/06 and the
consequent impact this has had on the Scion Group’s financial
performance. We are particularly keen to see improvement in the
predictability of Ensis’s performance against business plan targets. In
this context, Ministers are encouraged by the refinement of Ensis’s
governance and management arrangements during the first quarter of
2006/07. In Ensis’s third year of operation, we consider it very
important that it demonstrate its scientific and industry value through
achieving a stable financial state.
As stated in previous
Operating Framework addenda, shareholding Ministers wish to reiterate
our expectation that the governance structures and strategies of Ensis
allow Scion to retain sufficient control over its core science assets,
and key New Zealand scientific capability, as the joint venture
develops. In addition, although Ensis is Australasian-focused, we
consider that it is important to ensure that clear benefits from the
joint venture continue to be delivered to New Zealand.
GNS Science
Shareholding Ministers wish to commend GNS Science
on its engagement with industry end users and commitment to developing
stronger linkages with universities. We are pleased with the company’s
continued strong financial performance and commend the Board on pursuing
a strategy that balances returning excess funds to the shareholder and
reinvestment. We welcome GNS Science’s commitment to maintaining its
financial viability and to paying dividends where there are no clearly
identified commercially sound investments.
We continue to support GNS Science’s bold
challenges but urge the company to set targets in its 2007 Strategic
Plan to allow shareholding Ministers and officials to gain a better
understanding of the company’s progress towards these goals. We note
that the success of many of these bold challenges depends on the company
developing strong partnerships with end users and see this as one of the
company’s strengths, particularly its relationship with universities.
We acknowledge that GNS Science has identified few
opportunities to commercialise its research and, therefore, has not
developed formal commercialisation processes. We understand, however,
that the Board will consider any such opportunities based on robust
business cases. We encourage the Board to bear in mind the
commercialisation criteria in the Operating Framework for CRIs, which
are designed to maximise the benefits that will accrue to New Zealand
from these activities.
We understand that the company has commissioned an
external review with the aim of setting an appropriate net gearing ratio
target. We await further adequate information to allow shareholding
Ministers to support that target.
ESR
Shareholding Ministers are pleased to note that ESR again achieved an
adequate rate of return on its equity capital in 2005/06. We consider
this supports the long-term financial viability of the company, and are
pleased with the company’s continued focus on achieving adequate returns
from its key clients.
ESR received a significant amount of Capability Fund monies in 2005/06
and we are pleased to see the company achieving the top two awards in
the MacDiarmid Young Scientist of the Year Awards 2006. We consider
this is a significant achievement. We support the company’s plans to
continue to undertake excellent research and to build capability to
achieve benefits for New Zealand.
We note that ESR carried out an independently
assessed capital structure review in 2005/06. We expect ESR to work
actively towards achieving its target gearing level identified in that
review within the next two years.
Shareholding Ministers commend the company on its
ongoing efforts to establish the NCBID. We consider this is a key
development to enable the company to expand its client base. We
encourage the company to continue to be fiscally prudent and to ensure
that the project is completed within budget.
We expect that, as a Crown-owned company, ESR will
maintain excellent and transparent practices. We were concerned,
therefore, by the comments expressed by the Office of the Ombudsmen in
its 2005/06 Annual Report regarding ESR’s conduct during an Official
Information Act 1982 investigation. We are pleased that ESR has already
taken steps to improve its internal processes.
Crop & Food Research
We are pleased to see the company’s continuing
engagement with relevant stakeholders and its continued leadership in
areas of food and seafood research.
Shareholding Ministers
are encouraged by Crop & Food Research’s continued strong revenue
growth. We are, however, eager to see the company return to
profitability given expectations that have been created during the
investment cycle seen over recent years.
Ministers would like to
see a greater level of commitment by the company to achieving its SCI
targets over the coming three years. We would expect this to
include appropriate measures to re-align where actual performance falls
below forecast.
Shareholding Ministers
see Crop & Food Research’s commercialisation portfolio as one of the
more challenging amongst the CRIs and are encouraged by the efforts of
the company in developing a market for, and seeking external investment,
into Gracelinc Ltd. We are grateful for the company’s efforts to keep
us fully up-to-date on any developments concerning Gracelinc Ltd and ask
that this continue.
HortResearch
We consider the HortResearch Board and management
team should be commended on surpassing its Strategic Plan targets in
2005/06. We understand the company had a difficult start to the year.
We consider the company worked hard and put in place appropriate
measures to ensure a good end-of-year result and we would like to
congratulate the company on this approach. We consider that this
supports the long-term financial viability of the company. We encourage
the company to continue to focus on achieving an adequate return on
equity and, as indicated previously, we expect the company to inform us,
as part of the 2007/08 planning round, of its timetable for producing
returns equivalent to its cost of equity.
With the development of detailed plans for each
science programme, we note that the company is undertaking
capability-mapping as part of the process of reducing its science
platforms. We expect the company to continue to consider medium- to
long-term benefits to New Zealand in line with Ministers’ expectations.
As indicated, we expect to be kept fully informed of any significant
developments.
The company has had an outstanding year in
developing its people and we are pleased to see the company continue its
leadership development programme and extend it throughout the
organisation.
We are pleased with the way the company has engaged
with officials during the last year and expect it to continue to do so
whilst discussing its capital structure review.
