Under section 103 of the Crown Entities Act 2004, I direct Callaghan Innovation to give effect to Government policy as specified in this direction.
INTRODUCTION
In this direction, I set co-funding guidelines for Callaghan Innovation to apply when determining how to charge for its services.
PURPOSE
Callaghan Innovation's mission is to accelerate commercialisation of innovation by firms in New Zealand. Callaghan Innovation does this through:
- services that foster a stronger culture of innovation;
- services that build firms' capability and connection to resources across the innovation system;
- providing demand-driven in-house research and technical services in niche areas of need; and
- commercial services for the direct benefit of firms.
These co-funding guidelines will ensure transparency and competitive neutrality for New Zealand domestic recipients of Callaghan Innovation's services. The guidelines set a floor (rather than a ceiling) for the prices that Callaghan Innovation sets, but they also provide some initial flexibility to support Callaghan Innovation to grow commercial revenue while delivering wider benefits for New Zealand through its public good activities. The co-funding rates are intended to apply to domestic revenue, with any overseas revenue expected to be priced to achieve a full return on capital and at the maximum level the market will bear.
The co-funding guidelines are comprised of three parts:
1. Principles agreed by Cabinet in 2012 when Callaghan Innovation was established;
2. practical considerations that have been developed to ensure that prices are sensible and reasonable; and
3. indicative co-funding rates for each main category of service.
POLICY PRINCIPLES
The following policy principles apply to the charging of services:
- With respect to Callaghan Innovation's commercial activities, the funding model should create incentives for the institute to grow commercial revenue and reduce its overall reliance on government funding over time.
- The funding model for contestable services should be broadly consistent with the principle of competitive neutrality to avoid crowding out other (public and private) providers.
- Funding sources for Callaghan Innovation functions,
and their associated services or activities, should recognise the different blend of public/club/private good characteristics associated with those functions.
- The funding model should be consistent with the
on-going financial viability of the institute, including with respect to building and maintaining capability to deliver services into the future.
PRACTICAL CONSIDERATIONS
There are a number of practical considerations that need to be taken into account when deciding on the co-funding rates to apply:
- Significance: Where the amount of expenditure on the service is likely to be small, the development of a formal co-funding regime is not warranted. There may, however, be merit in making a charge to avoid
frivolous use of the service or to recover some of
the administration costs for events and information dissemination.
- Alignment with NZTE: In November 2012, Cabinet also considered the alignment and coordination of service delivery by Callaghan Innovation and New Zealand Trade and Enterprise (NZTE). While they have distinct functions, both will be involved in the delivery of business development services. Some alignment with NZTE's co-funding rates should be sought where there are overlaps or similarities with the services Callaghan Innovation is providing. For example, both organisations should adopt a "no-wrong-door" approach when engaging with firms and there should be consistency across common programmes such as the "Better By..." series and information provision.
- Firm engagement process: NZTE has adopted an approach where it introduces charges for services
once engagement with firms has proceeded and it has offered specific services. In the initial phase of engagement, firms are not charged while the parties determine what services are appropriate. There is
merit in Callaghan Innovation adopting this practice, especially where the initial phase is not particularly
long or costly. Co-funding rates would increase to the expected co-funding rate once Callaghan Innovation begins to supply a significant level of services. This practice is likely to be beneficial to smaller firms that need to find out what suitable services are available.
- Callaghan Innovation's establishment phase: A case
can be made for Callaghan Innovation charging lower co-funding rates for some services while it gets established in the markets for its services, and builds
up its customer base and capabilities. The establishment phase could be around three to four years. The time frame for lower co-funding rates shall be clearly signalled to stakeholders, and adhered to, so that an enduring advantage is not created. This practical consideration will only apply for a small number of services, such as open labs and the Foodbowl.
- Treatment of developmental / infrastructure costs: Callaghan Innovation will have already invested in developmental and infrastructure costs for some of
the products and services it provides. Where on-going public funding has been set aside for infrastructure
costs (such as the National Measurement Standards appropriation - $5.8 million per annum), there is less concern about competitive neutrality because the equipment is specialised. In these cases, the concept of direct costs is used, where businesses would be charged the additional costs (eg the cost of labour, materials and the use of any specialised equipment) involved in making those products and services available.
INDICATIVE CO-FUNDING RATES
The policy principles set out above have been used to formulate indicative co-funding rates. These rates may be varied by Callaghan Innovation, in line with the practical considerations above, or as approved by the Minister of Science and Innovation. Note that any significant variation from the co-funding guidelines shall be clearly signalled and be for a limited time only (eg up to two years).
Category Indicative co-funding rate for service delivery*
Predominantly public good services Free of charge or
non-material costs only
Building firms' capability and access to resources - mixed public and private good services Part charges 25-100% of direct costs
In-house research and technical services -mixed public and private good services 100% of direct and indirect costs
In-house research and technical services - private good services 100% of direct and indirect costs
- Direct cost refers to the cost of labour, materials, and the use of any specialised equipment (including depreciation).
- Indirect cost refers to overhead including a margin for the cost of capital.
*Note that some capability in Callaghan Innovation is directly funded through Crown revenue to support national capability. Callaghan Innovation will not seek to recover costs related to national capability funding.
Dated at Wellington this 7th day of December 2013.
HON STEVEN JOYCE, Minister of Science and Innovation.