For discussion
on 9 July 1999


New Capital Account Subhead "Payment to the Innovation and Technology Fund"


    Members are invited to -

  1. approve a new non-recurrent commitment of $5 billion in a new subhead "Payment to the Innovation and Technology Fund" under Head 184 Transfers to Funds;

  2. approve supplementary provision of $5 billion for this subhead in 1999-2000;

  3. approve the creation of a new block vote subhead under the new Head for Innovation and Technology Fund projects each costing at or less than the prevailing funding ceiling for Category D projects in the Public Works Programme, currently at $15 million, with an estimated provision of $244 million in 1999-2000;

  4. note that Innovation and Technology Fund projects each costing more than the prevailing funding ceiling for Category D projects in the Public Works Programme will be submitted to the Finance Committee for approval as individual subheads under the new Head; and

  5. note that the outstanding commitments in respect of projects approved under Head 73 Industry Department Subhead 840 Industrial support (block vote) and Subhead 700 Item 542 Services Support Fund will be transferred to the new block vote or new subhead as appropriate under the new Head.


We need to set up an Innovation and Technology Fund (ITF) to promote innovation and technology in Hong Kong.


2. The Secretary for Trade and Industry proposes to inject $5 billion from the General Revenue Account into the ITF.


The Need for the ITF

3. Innovation and technology are important drivers of long-term economic development. They are essential to adding value, increasing productivity and enhancing Hong Kong's overall effectiveness. The Government is therefore committed to providing the best support to enhance the capability of our industries to innovate, as well as to stimulate technology development, commercialization and use of technology in Hong Kong.

4. The establishment of the ITF will underline the Government's commitment to its policy and strategy for promoting innovation and technology, and provide a secure source of funding for their implementation. Projects financed by the ITF will help promote innovation and technology upgrading in our manufacturing and service industries. These efforts will contribute to increased productivity and enhanced competitiveness, and hence will be conducive to the long-term economic development of Hong Kong.

The Proposed Framework for the ITF

Mission and Broad Principles

5. We propose to adopt the following mission statement for the ITF -

    "As part of the Government's innovation and technology support programme, the ITF seeks to finance projects that contribute to innovation or technology upgrading in industry, as well as those that contribute to the upgrading and development of industry, to be undertaken by government or non-government entities."

6. We propose to adopt the following broad principles in operating the ITF -

  1. the projects to be supported should be relevant to the needs of the economy;

  2. the ITF should not distinguish between manufacturing and service industries as the line between the two is increasingly difficult to draw in a modern globalised economy;

  3. the projects to be supported should be focused on areas where Hong Kong can do well, so as to optimise the impact of public investments;

  4. the administration of the ITF should be publicly accountable, and a credible mechanism for both project assessment and overall evaluation of its effectiveness should be put in place;

  5. without compromising the principle of proper public accountability, the ITF should be administered efficiently without cumbersome procedures; and

  6. the ITF should as far as possible seek to cultivate and foster technological entrepreneurship.

Relationship with Existing Funding Schemes

7. At present, the Industry Department operates three funding schemes for supporting manufacturing and service sectors. They are the Industrial Support Fund (ISF), the Services Support Fund (SSF) and the Applied Research Fund (ARF).1 The ISF and, to a lesser extent, the SSF already finance some projects contributing to innovation and technology upgrading. The Chief Executive's Commission on Innovation and Technology (CIT) has recommended that the ITF replace the ISF and SSF as the funding source of these projects.

8. Some projects currently funded by the ISF and SSF may not be directly related to innovation and technology upgrading, but are nonetheless beneficial to upgrading and future development of our industries. We propose that the scope of the ITF be widened to cover these projects as well.

9. As regards the ARF, it has a distinct objective of encouraging technology ventures by providing equity capital to them, filling a gap in the private capital market which is rather averse to investing in technology businesses. The operational management of the ARF has been contracted out to three private sector venture capital firms. Given the different nature and modus operandi of the ARF, we consider that it should continue to have a separate identity for the time being. In future, however, the ITF may be a funding source for the ARF.

Categories of Projects to be Funded

10. We propose that the ITF should fund the following four broad categories of activities -

  1. Innovation and Technology Support Activities : This category will cover mid-stream/downstream research and development projects undertaken by universities, industry support organizations, trade associations, private enterprises and the Applied Science and Technology Research Institute (ASTRI)2.

  2. University-Industry Collaboration Activities : This category of projects aims to stimulate private sector interest in research and development through leveraging the knowledge and resources of universities. Following the recommendations of the CIT, initially we intend to introduce three schemes under this category :

      - Teaching Company Scheme
      - Matching Grant for Joint Research
      - Industrial Research Chair Scheme

      Details of the above schemes are at Enclosure 1. Projects under this category may be proprietary in nature and for this reason, funding will be provided on a matching basis. Other schemes that may also foster university-industry collaboration may be introduced at a later stage.

  3. General Support Activities : This category will cater for projects that contribute to fostering an innovation and technology culture in Hong Kong, such as conferences, exhibitions, seminars, etc. This category will also include projects which are not directly related to innovation and technology upgrading, but will nonetheless contribute to the upgrading and future development of our manufacturing and service industries.

  4. Technology Entrepreneurship Promotion Activities : This category will cover projects that aim to encourage people with both technology know-how and business ideas to develop technology businesses. As a start, we are considering a scheme to provide financial support for small technology-based enterprises to carry out pre-venture-capital stage research and development activities on a commercial basis. For companies that qualify and whose projects are assessed to have merits, funding of up to, say, $2 million will be provided on a matching basis. The grant will be recouped gradually if the project is commercially successful. An additional loan may be considered in special cases where the applicants are unable to come up with the matching fund. Other schemes that may help promote technology entrepreneurship may be introduced at a later stage.

Control Mechanism

11. The ITF will be set up as a statutory fund under the Public Finance Ordinance (PFO). The Resolution establishing the ITF was passed by the Legislative Council on 30 June 1999. A copy of the Resolution is at Enclosure 2. As with all other PFO funds, the Financial Secretary will be designated as the administrator of the Fund. He may, however, delegate his power of administration to other public officers. We intend that the Director-General of Industry (DG of I) be delegated with the power to administer the Fund and authorize expenditure under the Fund. In addition, in line with existing ISF practice, this Committee's approval will be sought for individual ITF projects costing more than the funding ceiling for Category D projects in the Public Works Programme, which is currently $15 million.

12. Upon establishment of the ITF, both the ISF and SSF will be subsumed under the ITF. We will therefore suspend further payments from the following items under Head 73 Industry Department -

  1. Subhead 840 Industrial support (block vote); and

  2. Subhead 700 General other non-current Item 542 Services Support Fund.

We will charge the outstanding liabilities of about $481 million of existing ISF and SSF projects to the ITF. A proposed layout of the Estimates of the ITF with an estimate of the expenditure and income in 1999-2000 is at Enclosure 3.

13. Disbursement from the Fund will be made upon the advice of an advisory structure responsible for project assessment and monitoring. This will comprise businessmen, academics and Government officials to provide the necessary commercial, technical and policy input in the assessment and monitoring process. In developing the eventual advisory structure, we will take into account the CIT's deliberations regarding institutional arrangements for our technological infrastructure. These discussions point to the continued need for sector-specific committees to assess and monitor ITF projects.

14. We propose that the assessment criteria should have regard to a number of factors related to the potential contribution of the project to innovation and technology upgrading of the economy, commercialization potential, project team capability and the like. A list of the criteria is at Enclosure 4.

15. To facilitate project assessment, we will ask applicants to set out, where possible, quantifiable objectives that the proposed project is expected to achieve. This may include, for example, the number of firms that are likely to adopt a certain technology; the expected number of participants at a funded event, etc. These objectives will also form the basis for the evaluation of the results of the projects. To ensure that project proposals are relevant to the needs of industry, we will require, where appropriate, private sector participation in the projects. To increase the possibility of the project results being adopted by private enterprises, we will need the participating companies to contribute in cash or in kind to the project. In addition, especially with technology development projects touching on specific technical issues and new technology areas, the proposals may be vetted by independent experts in the field.

16. We will adopt the following measures to monitor the progress of the projects -

  1. Periodic reviews : We will require project teams to submit progress reports on a regular basis, say, half-yearly. Visits to and presentations by the project teams will be arranged where necessary.

  2. Disbursement of fund according to deliverables : To complement the monitoring efforts in (a) above, we will disburse funds only if a project is able to meet the prescribed milestones of the projects.

  3. Mid-term evaluation : For projects that are related to technology development, particularly those that seek to develop technology in new areas, there should be a mid-term evaluation during which the likelihood of success and the latest global developments in the same area should be re-examined in detail.

  4. Retention money : For some projects, a sum of "retention money" of, say, 5% of the project costs will be held until all the milestones have been completed satisfactorily and all the requirements set down have been accomplished.

Post-Completion Evaluation

17. Projects will be evaluated against relevant performance yardsticks, taking into account their original objectives and targets as well as feedback from the project teams, their sponsors, and other relevant parties. Given the diverse nature of projects, it will not be feasible or desirable to devise a single set of evaluation criteria for all projects. Some of the yardsticks that will be considered for the purpose of post-completion evaluation are at Enclosure 5.

Constant Review of the ITF

18. We propose to review the ITF periodically, say, once every three years. This will help develop a management tool to make the ITF better meet its mission and operate more efficiently. It will enable the ITF to adjust to the changing needs of the community. It will also help meet the many external requirements and requests for programme results.

19. In addition, "impact studies" may be conducted for selected projects to examine the projects' accomplishment in the longer term. We will look at both the economic benefits generated by the project results (such as the number of jobs created, the amount of investment/turnover generated) as well as indirect and intangible returns (such as the project's contribution to broadening the knowledge base of Hong Kong). The measurement of non-financial benefits is particularly important for mid-stream research that entails higher risks. Even if these projects fail at the commercialization end, for example, they may still broaden our technological horizon or strengthen our technological capability, thereby contributing to innovation and technology upgrading and leading to spillovers in the long run.

20. In considering the effectiveness of the ITF, we need to accept the fact that not all projects would be able to accomplish all the goals (innovation and technology upgrading, knowledge creation, timely commercialization of products and services, etc.) The impact studies and overall reviews should therefore provide a clearer picture on the usefulness of the ITF as a whole over a longer period of time.


21. The Financial Secretary may authorize the investment of the unexpended balance held in the Fund at any time. Any interest or dividends earned on investment will be credited to the Fund. Assuming an annual return of 5%, we estimate that the investment income generated from the unutilized balance of the Fund in 1999-2000 would be approximately $178 million (see Enclosure 3).


22. The operation of the ITF will be subject to the control mechanisms normally applicable to statutory funds established under section 29 of the PFO. For example, we will prepare annual Estimates for the ITF for the Legislative Council's consideration in the context of the annual Estimate of Expenditure. The Director of Accounting Services will prepare and submit the accounts of the ITF to the Director of Audit in accordance with provisions in the Audit Ordinance. The audited accounts will be submitted to the President of the Legislative Council and laid before the Legislative Council.


23. An appropriation of $5 billion from the General Revenue Account is now required to establish the ITF. The Fund is expected to be sufficient for approximately five to seven years. This has taken into account the investment income earned from the $5 billion grant and all proceeds received from any disbursement from the Fund. We will closely monitor the financial position of the Fund and consider the future funding for the ITF as appropriate.

24. While existing staff responsible for administering the ISF and SSF will be redeployed to administer the ITF, an additional post of Trade Officer will be created to cope with the additional workload as a result of the establishment of the ITF. The additional annual staff cost will amount to $1,133,292, which will be met by DG of I through redeployment of existing resources.


25. The Chief Executive set out his vision of developing Hong Kong into a centre for innovation and technology in the region in his 1997 Policy Address. He subsequently appointed the CIT in March 1998 to advise him on the necessary steps to realize the vision. The First Report of the CIT recommended, inter alia, the establishment of an ITF. The Chief Executive in his 1998 Policy Address accepted the CIT's recommendations and pledged an injection of $5 billion into the ITF.


Trade and Industry Bureau
June 1999

Enclosure 1 to FCR(1999-2000)36

Proposed Schemes under the Category of University-Industry Collaboration

Teaching Company Scheme

Under this scheme, we will encourage companies to take on graduate research students for specific research and development (R&D) projects with a finite duration. The university will provide teaching guidance for the students in handling the projects. The participating companies and the Innovation and Technology Fund will each bear half of the costs for hiring the students.

Matching Grant for Joint Research

2. As the name suggests, the aim of this scheme is to foster private enterprises to collaborate with universities in proprietary R&D projects. We will require the participating company to bear half of the costs of the project. The ownership of and access to the intellectual property rights of the project results will be agreed between the company and the university before the project commences.

Industrial Research Chair Scheme

3. The objective of this scheme is to assist universities and industry to develop research efforts in technology fields that are not yet developed in Hong Kong but for which there is good development potential in the longer term. The project should be in the natural science and engineering field. We will provide funding on a matching basis which could also cover the salary of the chairholder for a finite duration. This chairholder will mainly conduct research and will accept a light teaching load.

4. For these three schemes, we consider that competitive assessment might not be needed as the proposals would require the agreement of the university and the company involved. The university will need to play an active role in the selection of students and projects, and also the deployment of its teaching and research resources. At the same time, the participating company will also be involved in project formulation and monitoring, because of its substantial contribution and direct interest in the project. Moreover, because of the proprietary issues involved, companies may not wish the details of their projects to be made known to other parties. We therefore consider that a funding ceiling can be set each year, and universities will submit collaboration proposals to the Director-General of Industry. We will entertain the proposals on a first-come-first-served basis, as long as they meet the objectives of the concerned scheme. Universities will be required to provide regular reports on the projects.

Enclosure 3 to FCR(1999-2000)36

Innovation and Technology Fund
Proposed Layout of Estimates for 1999-2000



Approved projects Approved
to 31.3.98

________ ________ ________ ________

$'000 $'000 $'000 $'000

Head XXX-Innovation and Technology
xxx Project block vote............................................. - - - 224,010

________ ________ ________ ________

    Head XXX: total.....................................
- - - 224,010

________ ________ ________ ________

Total (Payments)............................................ - - - 224,010

________ ________ ________ ________




Investment income............................................................. 178,125

Transfer from General Revenue....................................... 5,000,000

    Total (Receipts)............................



Movement of the Account



Expenditure 244
Revenue 178
Surplus/(Deficit) before Transfer from GRA (66)
Transfer from GRA 5,000
Surplus/(Deficit) after Transfer from GRA 4,934

Expenditure Analysis



Payments 244
Total Expenditure 244

Revenue Analysis



Investment income 178
Total Revenue 178

Enclosure 4 to FCR(1999-2000)36

Factors to be Taken into Account in the Assessment Criteria of the
Innovation and Technology Fund

  1. The potential of the project to contribute to innovation and technology upgrading of the economy;

  2. the potential of the project to broaden the scientific and technical knowledge base of the economy;

  3. the potential of the project to facilitate general upgrading and future development of one or more sectors in industry;

  4. for product/service development projects, the potential for commercialization and the likely pathways to the market;

  5. the commitment of the company, whether as an applicant, private sector sponsor or partner, to follow through with future development of products, services and processes if the technical barriers can be overcome;

  6. whether similar products, technologies or services are already available in the market;

  7. the planning and organisational structure of the project, including the schedule of implementation, the milestones, etc.;

  8. the technical and project management capability of the project team i.e. the applicant's experience, qualifications, track record, and the resources available for the project;

  9. whether the proposed budget is reasonable and realistic;

  10. whether the project should be funded by other sources, such as the Research Grants Council or the Applied Research Fund;

  11. whether the project is duplicating or likely to duplicate the work carried out by other institutions; and

  12. whether there would be any recurrent cost implications.

Enclosure 5 to FCR(1999-2000)36

Proposed Yardsticks for Post-completion Evaluation
  1. Innovation and technology support activities : We would look at the number of companies that have adopted the technology / product / service / process, and where possible, the amount of investment spawned by the project. It must however be pointed out that the latter point may not be easy to establish because of the commercial sensitivity involved and the fact that investments may be made in tranches over a long period of time.

  2. University-industry collaboration activities : We would look at the number of participating companies, the research and development expenditure induced from these companies on the project concerned, the involvement of faculty and students, as well as the level of technology upgrading on both parties through the project.

  3. General support activities : We would look at, say, the number of participants at an event, the number of copies of a publication distributed to the industry and so on.

  4. Technology entrepreneurship promotion activities : We would look at the percentage of beneficiary companies that could in due course obtain venture capital or other sources of investment, or could survive in the market after a period of time.

Taking all the above factors into account, each completed project would be given a rating, and companies / project teams with the lowest rating could be "blacklisted".

1. The ISF was set up in 1994 to support projects that contribute to the industrial and technological development of Hong Kong. The SSF was set up in 1996 to support projects that contribute to the overall development and the competitiveness of Hong Kong's service sectors. The ARF was set up in 1998 by merging the Applied Research and Development Scheme and the Co-operative Applied Research and Development Scheme. The Fund serves as a venture capital fund to encourage private technology ventures.

2. The establishment of the ASTRI is another recommendation made by the CIT. The ASTRI aims to support and stimulate mid-stream research and development in generic technologies that have the potential of ultimate commercialization by industries.