Comptroller and Auditor General (C&AG) Karen McConnell’s review into the Jersey Innovation Fund (JIF) has spelled out significant deficiencies in the fund, which was set up in 2013 to help bring new products or services to the market.
Since 2013, when the States Assembly agreed to transfer £5 million into the JIF, seven loans totalling over £2 million have been made to six borrowers.
At the end of December 2016, only 26 per cent of payments due had been received and one borrower was the subject of a winding up order. The provision for doubtful debts was £692,000 at 31 December 2015, increasing to £1,383,000 at 31 December 2016.
Lack for clarity
The C&AG’s review has concluded that arrangements were inadequate from the outset:
• There was a confusion about and poor articulation of roles and accountabilities.
• Objectives were not translated into measurable outputs with associated targets – such as local jobs created per pound spent.
• Key policy matters were either confused (risk appetite of the fund) or not addressed (parameters to inform the setting of interest rates).
• Internal resource requirements were underestimated.
• The potential financial performance of the fund was not adequately considered.
• Despite risk management arrangements for individual loans, there was insufficient focus on managing risk for the fund as a whole.
• Success criteria were not clearly articulated.
• Mechanisms for securing upside gains from successful loans were not developed.
• Arrangements for aftercare were underdeveloped.
Operational issues
McConnell highlighted several deficiencies in the operation of the JIF:
• There was poor compliance with many of the provisions of the operational terms of reference.
• External expertise was not drawn upon, as envisaged in the operational terms of reference.
• Documentation was not always sufficient to support the recommendations and decisions made about advancing loans and, in instances, it is difficult to understand the basis for recommendations made to the Minister responsible.
• Monitoring of performance of loans granted was inadequate.
• Reporting of performance of loans granted was late, incomplete and inaccurate.
The report concludes that the JIF Accounting Officer could and should have done more to ensure that public money was protected. It also expresses concern about the role of the Advisory Board and action taken by the Treasury and Resources Department.
C&AG statement
McConnell said: "The Jersey Innovation Fund was a new scheme that required an entrepreneurial approach. Such an approach requires an excellent understanding of good governance, consistently applied in practice. That has not been demonstrated.
"Weaknesses in governance and internal control create an environment in which any conduct of loan applicants and recipients that falls below expected standards is less likely to be detected. I have identified concerns about the conduct of third parties that I am considering reporting to the Attorney General.
"As I believe the current arrangements are not fit for purpose, I strongly recommend no further loans are made unless and until the very significant failings identified in my report are addressed."
The report will be available on the Jersey Audit Office’s website from 0930 on 12 January at www.jerseyauditoffice.je
PAC response
Jersey’s Public Accounts Committee has said it will "review all aspects of the Jersey Innovation Fund from its inception".
The C&AG’s report has revealed considerable deficiencies in the way the fund has been administered, it said, with significantly more risk of loan defaults than was originally agreed by the States.
The PAC will want to thoroughly investigate and review the departments involved, in particular their Accounting Officers, how many jobs were created for local people and how much economic growth has been achieved, as envisioned by the States when agreeing to set up the fund.
Deputy Andrew Lewis, PAC Chairman, said: "I was dismayed to note the level of non-compliance with agreed policy and procedures. My committee will be reviewing all aspects of the JIF from its inception.
"The PAC will be particularly interested to understand how such poor governance of the fund was allowed to continue for a sustained period without being brought to the attention of Ministers or the Assembly."