Budget begins shift of Ontario’s innovation engine towards commercialization

Modest measures seen as holding pattern

Ontario's new Liberal administration is sending positive signals that innovation remains a top provincial priority, with the announcement of two new programs geared towards commercialization. The initiatives — moderately funded at $63 million over four years — were contained in the government’s May 18 Budget and are part of a refocussing effort of the province’s existing innovation program portfolio.

The new programs are being greeted as a good initial first step but the S&T community is holding off any celebrations until the spending estimates for current programs are made public in the near future. There is confidence that support for programs such as the Ontario Centres of Excellence and Ontario Innovation Trust will be maintained. But others may see their structures altered and funding reduced, raising concern that new gaps in the innovation process could open up just as others are being plugged.

RE$EARCH MONEY has learned that substantial changes are in the works for the Ontario R&D Challenge Fund and that Premier’s Platinum Medal for Research Excellence has been cancelled (see page 3).

The majority of attention has been on the Budget’s introduction of a health premium and increased health care expenditures, as well as the Liberal’s attempts to reduce the deficit left by the previous Conservative regime.

“The Budget represents a holding pattern for science and technology. Health, education and energy clearly took priority,” says one senior official.

The new commercialization programs target the early stages of the investment cycle for promising intellectual property emerging from the provincial institutions. The Ontario Research Commercialization Fund (ORCF) commits $27 million over four years to adding value to research emanating from public research institutions. The Fund targets proof-of-principle projects and may also be used for bulking up university technology transfer offices.

Staff at the Ministry of Economic Development and Trade (MEDT) will design the ORCF in consultation with provincial research institutes, with a launch date sometime in the fall. It will be done in conjunction with the development of an overall science and innovation strategy, with a review launched partly in response to stinging criticism delivered late last year by the provincial auditor (R$, December 11/03).

“We’ll be discussing the program with the research institutes to get the program design so it works for the both the research community and the investor,” says Dr Tim McTiernan, MEDT’s assistant DM. “It’s aimed at proof-of-principle, between the bench and the investible product and process.”

The second new initiative — the Ontario Commercialization Investment Funds (OCIF) program — is more advanced and is positioned to succeed the sunsetting Community Small Business Investment Funds (CSBIF) program. It also has strong similarities to the recently proposed Next Step Commercialization Program developed by the Toronto Region Research Network, albeit on a far most modest scale (R$, May 10/04). A bill creating the program will be introduced in the fall.

“It seems to capture a lot of the representation by the commercialization research community,” says McTiernan.

The OCIF — informally dubbed ‘son of CSBIF’ — will provide 30% dollars for funds raised from the private sector. That translates into $9 million annually over four years, attracting $30 million in private capital each year for a combined total of $156 million. The concept is to encourage the creation of private early-stage funds, to which the Ontario government will contribute 30% of the amount in the form of a grant once an investment in a seed-stage business is made. Each fund must be sponsored by a research institute and the minimum purchase by each investor is $25,000. Labour-sponsored venture capital corporations will not be able to participate.

COORDINATE WITH FEDS

Provincial officials plan to speak with their federal counterparts to see whether any synergy can be created with Ottawa’s recently announced commercialization programs, namely the $250-million investment in the Business Development Bank and the two pilot funds targeting university and federal research (R$, April 6/04).

Reaction to the new programs from the university community has been positive if muted, mainly due to the size of the financing pools and some restrictive criteria.

“It’s not a lot of money and the OCIF doesn’t appear to appeal to too many groups but it will help us leverage the private sector,” says John Molloy, president/CEO of PARTEQ Innovations, Queen’s Univ’s technology transfer arm. “As for the proof-of-principle program (OCRF), any money directed to allowing the universities to add value is good although it doesn’t address the skills question. It recognizes the role for universities to play to a certain point, then we pass it on. It’s a good sign and a good start but more needs to be done.”

Dr George Adams, president/CEO of the University of Toronto Innovations Foundation (UTIF) is also generally pleased with the government’s introduction of targetted initiatives aimed at specific funding bottlenecks in the commercialization continuum. He says the funding level of the ORCP is adequate and welcomes the OCIF as an appropriate successor to the CSBIF program. But he questions the latter’s limitation to a single fund per institution.

“That’s a bit challenging. We have 10 CSBIFs at the U of T and each has a unique investor. Now everyone has to get into the same fund — angels, institutions, corporations and investors. I don’t see that,” he says. “Everyone likes to pull their own trigger so structurally I’m not sure how people will react.”

Logistics aside, Adam says the two programs will have a significant impact on capital formation around promising intellectual property if they are properly structured and don’t contain overly restrictive conditions.

“The OCIF in particular will help accelerate things to get to the point where other investors come in,” he says. “That will help collapse time, and time is what kills the return-on-investment calculation for the investment community.”

OCE WELCOMES PROGRAMS

The new initiatives are also of considerable interest to the OCE program, which has recently completed a corporate restructuring and has increased its emphasis on commercialization.

“Both could be of advantage to the OCE program. They fund the kinds of things our projects are ideally suited for,” says Don Hathaway, OCE’s interim managing director and CEO. “We should have a stream of projects coming out that would qualify for that money ... We want to learn more about how you qualify for the program and that can then become part of our selection process.”

MULTIPLE CHANGES TO LSIF LEGISLATION

The Budget’s other major S&T initiative is a review of the province’s 13-year-old Labour Sponsored Investment Funds (LSIF) program and a moratorium on new funds effective May 18/04. Budget documents assert that several recently established funds have “failed to raise sufficient capital to be viable”.

Proposed amendments to the program include:

• introduction of rules allowing amalgamation of LSIFs through asset purchases;
• allow LSIFs to offset 70% of realized losses deducted from investment requirements with a maximum of 70% of realized gains;
• ease restrictions to allow LSIFs to invest up to 25% of their investments in publicly listed firms;
• allow LSIFs to control investee companies;
• allow research-oriented investment funds more flexibility to establish the annual date when investment requirements are determined;
• provide investors with greater certainty of tax credit by conforming to federal practice;
• prohibit LSIFs from counting investments in holding companies against their investment requirements; and,
• clarify the investment write-off provision.

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