Callaghan Innovation, the government backed innovation hub, faced questions this week from opposition MPs about why it had funded companies that subsequently failed and gave grants to unprofitable subsidiaries of wealthy overseas firms, or local firms that moved offshore.
Chair Sue Suckling, chief executive Mary Quin and chief financial officer Richard Perry were appearing before the parliament's education and science select committee for Callaghan's 2013/14 financial review, covering its first full year in existence.
They were questioned most extensively by Labour's David Cunliffe about criteria for making grants including the $332,966 paid over to Trends Publishing International before the grant was halted in December, following an audit of the magazine publisher's funding claims that led to a referral to the Serious Fraud Office. And he questioned the $287,500 in grants to eHome NZ, the offsite home builder that went into receivership owing $17.5 million.
The former Labour leader also asked why Chatham Rock Phosphate got funding for technology to mine rock phosphate before the would-be seabed mining company has been granted a consent, which was subsequently declined. He also asked what was the status of grants to biotech start-up BioDiscovery since its decision to relocate its global research & development centre to California, and why a grant was made to the unprofitable local unit of Bayer, the Germany conglomerate "making huge profits".
"I support the concept of Callaghan and I want it to work," Cunliffe said after the committee meeting. "But the quality of some of its grant making, lack of clarity on some of its criteria and policy failure that grants are automatic if applications meet the criteria have led to some bizarre results."
He said Callaghan "is only new and is yet to hit its straps" but he believes it can "be a central agency that has a role for the innovation eco-system." Cunliffe also has questions awaiting written answers in the House from Economic Development Minister Steven Joyce.
Callaghan's Suckling told the committee that the organisation has "a very formal grants approval process" and that applications "are carefully scrutinised."
"There will be failures," she told BusinessDesk after the meeting. "The critical thing is that we have robust processes in place to ensure (a recipient) is as ready as possible to optimise its chances of success."
Chief financial officer Perry said of those grants singled out for criticism, not all the funds had been paid out. Clawback provisions gave Callaghan scope to recover grants. In the case of BioDiscovery, the start-up had elected not to seek their funding. Chatham Rock had been approved for a grant under transitional arrangements and no money had been paid out.
The grants being scrutinised are only a small portion of the funding Callaghan has made since its inception in February 2013. In its 2014 annual report it cites grants of almost $270 million made last year to 541 businesses.
Callaghan's 2014 financial statements show it had total income of $203 million in the 12 months ended June 30, 2014, of which $186 million was revenue from the government including grants. It also generated $14.5 million of commercial revenue. Wages and operating costs were its biggest costs at a combined $64 million, contributing to total expenses of about $195 million and resulting in an operating surplus for the year of $8.4 million.
National committee member Maurice Williamson gave an anecdote at the meeting of visiting an incubator organisation in Finland in the 1990s to be told the chief executive "had been fired for having too few failures", with the explanation that in backing innovation "you have to take risks, not just back winners."
Chief executive Mary Quin said after the meeting that after two years it was too soon to say whether Callaghan 'had enough failures'.
"What we're looking at is the collective success of the New Zealand economy and businesses," she said. "That will always mean some percentage of companies that grow and become global, some that grow and plateau and some fail. With entrepreneurs, you can have people who've had one, two, three or four failures. Looking at failure as a negative can be a mistake."
(Disclosure: BusinessDesk receives funding from Callaghan to assist in the coverage of the commercialisation of innovation)