Business, Energy and Industrial Strategy Committee
Oral evidence: Post-pandemic economic growth: Industrial Strategy, HC 674
Tuesday 26 January 2021
Ordered by the House of Commons to be published on 26 January 2021.
Members present: Darren Jones (Chair); Alan Brown; Richard Fuller; Paul Howell; Mark Pawsey; Alexander Stafford.
Questions 159 – 212
Witnesses
I: Dick Elsy CBE, Chief Executive Officer, High Value Manufacturing Catapult; Dr Jeremy Silver, Chief Executive Officer, Digital Catapult; Professor Chris Day, Vice-Chancellor, University of Newcastle; and David Connell, Senior Research Fellow, Centre for Business Research, University of Cambridge.
II. Amanda Solloway MP, Minister for Science, Research and Innovation; Jessica Skilbeck, Director of Industrial Strategy, Department for Business, Energy and Industrial Strategy; Dame Ottoline Leyser, Chief Executive Officer, UK Research and Innovation; and Mike Biddle, Programme Director, Industrial Strategy Challenge Fund, Innovate UK.
Witnesses: Dick Elsy, Dr Jeremy Silver, Professor Chris Day and David Connell.
Q159 Chair: Welcome to this morning’s session of the Business, Energy and Industrial Strategy Select Committee, and this is the fourth hearing of our industrial strategy inquiry. Today, we will be considering the research and innovation spending aspect of the industrial strategy, looking specifically at the Industrial Strategy Challenge Fund and the role of innovation and research in meeting the grand challenges that Ministers have set for the country.
As usual, we have two panels today. On our first panel, we have Dick Elsy, who is the CEO of the High Value Manufacturing Catapult; Dr Jeremy Silver, who is the CEO of the Digital Catapult; Professor Chris Day, who is the vice-chancellor at the University of Newcastle and a board member of the Universities UK network; and David Connell, who is a senior research fellow at the Centre for Business Research at the Cambridge Judge Business School. Welcome to all of you this morning.
My first question, to open the discussions today, is a reflection from the Industrial Strategy Council, which concluded that we need to increase the amount that we are spending through the Industrial Strategy Challenge Fund. Evidently, there is a lot of pressure on public finances at the moment, so we are keen to understand how effectively that could be spent, looking back at how the fund has worked in the past and how that might help us achieve our grand challenges. I am going to come to each of you in the order that I called you, just for a reflection on that, so Dick Elsy first. Do you agree that we just need to increase the amount that we are spending under the challenge fund in order to hit our grand challenges?
Dick Elsy: I do. If we reflect back on the success of the Industrial Strategy Challenge Fund programme so far, interestingly, I was involved in the first ever Industrial Strategy Challenge Fund, which was the Faraday Battery Challenge. That came out of an industry requirement in response to a request from the Automotive Council, of which I am a member. It set the task of what it would look like for 50% of cars to be all-electric by 2035. At the time, in 2017, that seemed like a huge challenge. Of course, we know that things are slightly different now in terms of the targets, but none the less, industry decided to get together—direct competitors—to understand what it would take to achieve that and we alighted very quickly on the need for battery technology. This was a shared endeavour among competitors in the UK, but to have a substantial battery industry in the UK was a critical success factor in that.
We got together and understood the route map to deliver that and the research challenges. That resulted, with our authorship within the High Value Manufacturing Catapult, in the Faraday Battery Challenge, which secured a match-funded £246 million. That has been hugely successful in driving applied research. Some £80 million of that has gone directly into our best universities to pull out research against specific industry targets. Another £80 million or so has gone into mid-stage innovation through the support of Innovate UK. A final £80 million-plus has gone into the development of a national battery scale-up facility.
We have this incredible system now, from primary research, which is directed by industry, through to mid-stage innovation and now an industrialisation capability, which, in turn, is acting as a major hook for inward investment for a gigafactory in the UK. It is a tremendous example of the collaborative impact that that has and of how directed research can bring the best work of our universities into commercial value-add and societal benefit.
On the basis of having been through that experience, it works particularly well. I see it as an excellent vehicle for the future, with one proviso: the Faraday challenge was successful in moving very swiftly to get its funding out and into the hands of researchers and innovators to move things forward. More latterly, the pace of implementation has slowed down markedly within the Industrial Strategy Challenge Fund. Made Smarter, for example, which is all about industrial digitalisation, has taken quite some time for the funding to flow and caused some frustration in industry.
Two things need to happen. It is a great instrument, so use it more, but we need to maintain pace if we are going to meet the big challenges like net zero.
Q160 Chair: One of the criticisms that we have heard is that we are very good at the research side but not so great at the innovation side. If we take your Faraday challenge example, there is some concern that UK-manufactured electric vehicles on the company side have not moved quickly enough and are having to catch up on the battery gigafactory challenge. There was a report this weekend that we are falling behind international competitors and we need to get a move on in being able to establish this capacity in the UK. Do you agree with those criticisms: that that handover from research and ideas into innovation and scale-up is a real weakness under the challenge fund?
Dick Elsy: It is a general weakness for the UK. It is a weakness for most developed nations, but, in particular, while the UK is so good at science and we have some of the best science in the world—we are number two in the world in terms of the quality of our output and number one when you assign a pound or dollar value to that—we have not been great at converting that great academic research into industrial value-add and societal benefit. The Catapult programme was formed some 10 years ago to bridge that gap and to bring research out, scale it up to industrial scale and bring it into value for UK industry. That is principally what we have been doing over the past 10 years and why we are involved in the Faraday Battery Challenge.
If we talk about whether UK industry and the UK car industry are ready for the, the primes—as in the major manufacturers—are definitely gearing up. The weakness that we have in the UK is in the supply chain, so batteries, electric motors and that sort of thing. We do not have the rich indigenous supply chains that, say, Germany enjoys, and the big task at the moment is to build those supply chains as we convert from petrol and diesel cars into electric. The hook for bringing in a gigafactory is not low energy costs or low labour costs; it is access to that best research and knowhow. That is the big lure, and our ability to translate it is a big attractant.
Q161 Chair: Dr Silver, from the Digital Catapult perspective, it is the same question for you. Do you agree that we need to increase the size of the challenge fund to help you reach the grand challenges that are relevant to your catapult?
Dr Silver: Yes, absolutely. It is a really interesting moment to be considering this, given the enormous difficulties that industry is currently experiencing in the midst of the pandemic. Our goal to increase the investment in R&D spending to 2.4% of GDP still stands and is more relevant than ever.
I would endorse everything Dick said. I would go a little further inasmuch as, in our view, in order to achieve that 2.4%, we really have to be looking in new places and at sectors that have not traditionally involved themselves in R&D and bring them in as well. If we continue simply to fund those areas that we have put money into in the past and do not open into broader horizons, we are going to struggle to reach that target, which still has a lot of validity.
For example, we worked throughout the development of the industrial strategy over the last three or four years with the creative industries, which have not particularly had a culture of formal R&D. They have not really engaged with the university system or with public funding mechanisms in order to help their own R&D. That is not to say that, within advertising, music, film or television, there is not R&D, but it does not happen in the formal way that we tend to recognise it within these sorts of conversations.
There is an enormous opportunity, but, of course, there are also challenges, because part of the reason why that work is not recognised is not least because that sector, along with many others across the UK economy, is largely made up of small companies and SMEs. The challenges of creating the right kinds of interventions and mechanisms that can really suit smaller businesses and address their needs are something that we still need to work on.
Dick mentioned the Made Smarter programme. We have just launched part of that, which is the Made Smarter Technology Accelerator programme. This is an interesting model because what it does is it provides the opportunity for traditional businesses to come and make a technology challenge available to people who can then compete for it. It provides about £20,000 per SME as a stimulus to them to engage in prototypes for addressing those challenges. In these times when, traditionally, businesses under a recession tend to retrench rather than innovate, it provides that level of stimulus, as well as, perhaps, a relatively low barrier to entry to traditional businesses to get involved in innovation and to move them along the way, and to bring those two parts of the economy together.
You will have heard this from colleagues in your previous sessions—from Irene Graham of the ScaleUp Institute, for example—but that ability to take the innovation in early-stage businesses, to scale that innovation and then to bring it into engagement with traditional businesses is really something that we can see the beginnings of how to do, but we still have a long way to go. There is a need to really align the strategies of universities and UKRI, and of a network of organisations like the Catapult Network. Aligning them better strategically is something that we still need to focus on and deliver more work on. Of course, the ISCF has provided a degree of alignment in that way, but we still have more to do in that regard.
Q162 Chair: You mentioned SMEs quite a lot there. The issue around digitalisation to improve productivity in SMEs across the country is widely discussed. Do SMEs have good engagement with you at the Digital Catapult? Do they know to come to you to try to improve their productivity, or do you need extra support to get out there and get in front of the SMEs in the other direction?
Dr Silver: We need a lot more help. Most of our focus is with innovative early-stage businesses and scale-ups, rather than with what we might call a legacy SME that needs to upskill. There are two completely different strands there, and it is important that we do not confuse them.
Just to reference Made Smarter again, the north-west pilot that it initiated was very much focused on SME adoption. It has proved there is a model there that can work, but the scale that is needed and the size of that task is really an enormous one. It is not one that I would separate from the goal of what the catapults do. In many ways, what a large number of SMEs across the UK need is a relatively small increment in digital adoption. We tend to focus on the leading-edge and more advanced technologies. We need work in both those areas, but with different mechanisms.
Q163 Chair: Professor Day, from a university perspective, it is well documented how well British universities perform on the research side of spending and output, but do you have any reflections on the innovation and industrial partnership aspect of the challenge fund?
Professor Day: Yes. What the Industrial Strategy Challenge Fund probably did was drive a real step change in that interaction between academia and industry. There were pockets and areas of the country and universities that did it particularly well, perhaps related to the businesses that might be surrounding them. The scale at which things like the Faraday Institute, the more recent Driving the Electric Revolution and the Advanced Manufacturing Challenge Fund got universities collaborating with each other and with the industry, and the outputs and increased emphasis on the translational aspect that that has produced over the last four years, has been remarkable.
As long as we continue to fund the other end of the research spectrum adequately—the discovery science—so that we continue to have good science to translate into innovation and development, increasing this fund would be broadly welcomed by the university community.
Q164 Chair: Lastly, David Connell, do you agree that increasing the amount of money in the challenge fund is the way to solve these problems?
David Connell: My background is in science and technology companies and in venture capital, before becoming a part-time academic, so it is that perspective that I tend to bring to bear. The challenge fund is doing some very good stuff. It is a lot better, bigger and better-structured than a lot of the previous BEIS and Innovate UK programmes, but you need to put it in context.
The amount of money that comes from the challenge fund and flows directly into businesses is something less than £600 million a year. That compares with R&D tax credits, which currently cost the Treasury £6.3 billion, and the Patent Box, which is about another £1.1 billion. All of that money has more or less the same objective, which is to increase the level of R&D that we do in our business sector and to increase the strength of British industry.
If you look at the challenge fund, a number of characteristics of the instruments that it uses are, essentially, inappropriate to the kind of start-up models and business models that have created our most successful new science and technology companies and which we need to take note of in terms of the policies that we have in the future.
There are two points that I would make overall. One is that it does not address the real policy problem that we face as the UK. Secondly, as a nation, in terms of industrial policy, we need to pull together all of those different strands of funding and make sure that we have carefully understood what they are trying to, how cost-effective they are and what the balance of funding should be between them.
Chair: We are going to come back to a number of those points in more detail with questions from colleagues.
Q165 Alan Brown: Should the grand challenges and objectives of the industrial strategy be the main determinants of innovation funding? Given time, we perhaps cannot ask all the panellists, but let us start with David. It may fall on what David was saying there.
David Connell: Let me tell you what the problem is. The main problem that we have in terms of the UK science and technology companies is the long-term failure to grow and retain enough large STEM-based companies to replace those in declining industries. Why is it that if the UK is as good at medical and other scientific research as we believe, we have only two of the 35 largest biotech and pharma companies, only one of the largest medical devices companies and only one of the top scientific instrument companies? In each case, those companies are quite a long way down the list.
My view is that the reason for this is, essentially, that we live in an increasingly global economy, with increasingly acquisitive multinationals, and the UK is probably the most attractive country in which to make acquisitions. It is an open economy, with good financial markets and a good legal system. We all speak English, of course, which is the international language of business.
This is particularly important for venture-capital-backed start-ups, on which we put a lot of emphasis in policy. What it means is that, because they are backed by and eventually controlled by venture capitalists, those that are successful are almost inevitably sold to large corporate acquirers, and those corporate acquirers are almost inevitably overseas. This means that further growth in the UK is truncated, and you can see this in all the main high-tech centres around the country.
In contrast, the STEM-based companies started in recent years that have grown to be the most economically significant—companies like ARM, Dyson and even Cambridge Antibody Technology, which is our most successful biotech—are not in areas that were in anyone’s hotlist of topics. In each case, they managed to avoid or defer venture capital, so that the founders had sufficient control to grow a substantial business. The reason for that is that they relied on customer R&D funding through contracts for a lot of their early funding.
What I would like to see in terms of total innovation funding is programmes that support this success model, alongside the very important funding for VC-based businesses and exploitation of university IP, which is important but, when it comes down to it, is probably more difficult to turn into substantial businesses.
Q166 Alan Brown: Are you saying that is a strategy that has to run alongside the grand challenges, or is the allocation of funding used in the grand challenges possibly crowding out other innovation that maybe does not fit specific challenges that have been identified by the Government?
David Connell: The grand challenges are good ones in important areas, but they are also areas and technologies that are well understood and where many countries and companies are working, so they are very competitive. I am not sure that it crowds out other areas. The use of contract development from customer to supplier within the areas that the challenges are tackling is very important, as one of the other witnesses said, in terms of building the supply chain. We really need to do that and the best way is to encourage companies at the top of chain to fund, as customers, potential suppliers and catapults through contracts, rather than collaborative grants that require co-funding from businesses, which many businesses cannot provide, because their contracts are much more likely to be focused on the customer’s needs and their ultimate willingness to buy product in volume.
Q167 Alan Brown: Dick, would you like to comment on whether the grand challenges and objectives should be the main determinants of funding for innovation, or is there a risk that it is affecting other innovation that might not line up specifically with them?
Dick Elsy: The grand challenges are pretty high-level collectors. You have AI and the data revolution; clean growth, which is all about sustainable manufacturing and an ability to keep consuming without destroying the planet; low-carbon mobility; and ageing society. They are high-level collectors and they do not warrant the challenge of asking, “Are we focusing on the right things?” They seem like pretty good things for me to focus on.
Picking up on how we use the funding within those and on what David Connell was saying, we see some real benefits of the mixed funding model of Government, with its stimulus funding, helping bear some of the early-stage risk with new technologies. It is often very tough for the regular investment community to take a punt on an early-stage technology that looks promising but whose risks are very high. That is one of the reasons why the UK has failed to bring a lot of early-stage technology through.
The catapult programme is a mixed funding model: about a third of our funding comes from Government to buy core capability; a third comes from collaborative research projects that we win with industry; and the final third comes from industry in terms of contract research using that equipment. It is a very powerful model of sharing the risk with difficult technologies, and we have found great benefits from that shared risk model of bringing new technology to market and securing new jobs, particularly in the regions.
For example, on the Sheffield-Rotherham border, the work of our Advanced Manufacturing Research Centre has brought in people like McLaren and Boeing to put up factories using new technology that has come from that shared-risk model for value-add in the region. It has acted as a huge stimulus in terms of turning an abandoned coke works at Orgreave into a vibrant advanced manufacturing park.
The money is being spent in the right place with the grand challenges. That does not really warrant a challenge, but it is about how we then do it. I am a real advocate of the shared risk model. I have been running it for eight and a half years. I am an industrialist, but I have never seen a programme of this level of advocacy through the catapult programme using Government stimulus in the hands of people who have great sector knowledge and understanding and who are well connected. It works really well and we should continue to support it. As we seek to become a science superpower, there is a danger that we spend all the money on pure science.
I know Professor Day said, “Let us make sure that we do not starve blue-sky research,” but there is a balance here between putting money into science and getting more of it to stick in the economy through this translation model. We need more balance there. As I said, we see great examples of targeted research on a shared-risk basis coming through the catapults.
Q168 Alan Brown: Do the industrial strategy sector deals align closely enough with this? Are they negotiated at the right time in the evolution process?
Dick Elsy: Yes. There is a slightly opportunistic nature to the sector deals. They favour those who get themselves well organised. For example, automotive and aerospace have a very strong collaborative community among the direct competitors in the UK through the Aerospace Growth Partnership and the Automotive Council. People are working very closely together for the benefit of the nation to do the right thing and to make sure that we preserve those powerful industries. Very interestingly, it has acted as a stimulus for other sectors to come forward.
Offshore renewables are a fine example where the Offshore Renewable Energy Catapult, which you will probably know from your part of the world, has managed to get big support for getting a sector deal and has led to a big growth partnership model, with about £100 million of funding for offshore renewables through collaboration.
The other really interesting one is the construction sector deal. The construction industry is not well known for its collaboration; there tend to be quite fierce competitors. In our observation, they said they were on a burning platform and needed help, so they look at aerospace and automotive in terms of how they collaborate. We helped them, through the High Value Manufacturing Catapult, and particularly our Manufacturing Technology Centre, to develop their sector deal and got them to pool the relatively small amounts of research funding they had for R&D—many of them single-figure millions—into a collective pot to tackle some of the big systemic innovation challenges that the construction industry has.
That led to them developing, with our help, the construction sector deal, with £170 million of match funding, which, in turn, has led to the development of the Construction Innovation Hub, where direct competitors in the construction industry are working together in a research centre at MTC, supported by Digital Built Britain and the Building Research Establishment.
It is a very clear model here of the high-level collectors of the grand challenges and the sector deals, albeit favouring those who came forward first, but it is beginning to have some spillover effect into other sectors. It is hugely powerful and there is a great sense of ownership, because these sectors have put their own money in and taken a risk together, in a shared endeavour with Government, and it is a model that works really well.
Professor Day: You could sit around with a group of people and come up with some different grand challenges, but we would probably all accept that climate change, ageing society and dealing with Covid are the three biggest challenges that we have at the moment, and they are well covered by these four headings. I would just point out that the challenge funds that came out of those headings are extremely diverse. The future of mobility has battery, extreme robotics and the national space test facility; healthy ageing has medicines manufacturing, data for early diagnosis and precision medicine. Using those broad headings in that very loose way to come up with the challenges that you currently think are important means that they have not been particularly restricting. The ones that we have do fine for me for the big challenges that we are currently up against.
Q169 Paul Howell: I would like to discuss the split of funding. The House of Commons Science and Technology Committee highlighted the imbalance between research and innovation. The UK generally has a ratio of about 10:1 between research and development and innovation, compared with about 1:1 in some of our competitors. I understand that the catapults do not think that 1:1 is necessary, but I would like to open up the discussion as to what is an appropriate balance between the two and how we can achieve that.
Dr Silver: The difficulties are all about the cost of innovation in relation to the cost of research. The robustness and rigour that is required to meet regulatory requirements and to meet the commercial environments that real innovation in industry requires have a higher price tag than pure research, in many instances. That is something that, when it comes to public investment, leads people to have concerns. The work being done in the Cell and Gene Therapy Catapult, for example, with the creation of a major new piece of infrastructure there for therapy manufacture, has led to the creation of an entirely new sector within the UK.
That combination of the creation of a facility that is based on proven research output but designed to enable a supply chain and an ecosystem of businesses to develop around it is at higher cost than the pure research itself, but with regard to the impact and value of that, in terms of both job creation and global competitiveness for the UK, we see some very good examples of how that really works and succeeds.
Part of the challenge is that, when we talk about innovation, it is a very broad term, and yet we have relatively small and narrow institutional capability in that area compared with how much emphasis we put on research. Within UKRI, we have eight research councils and Innovate UK, and there you see the position. This is not in any way to detract from the importance and value of blue-sky research. We all see the importance of that and would never want to undermine it, but there is a challenge in that, going back to what David Connell just said.
My background is as an entrepreneur. I have built and grown a number of businesses in the technology space over the last 25 years, and I built, grew and sold three of those companies to American technology businesses whose first letter began with A but whose non-disclosure agreements prevent me from saying any more about them. In many respects, it is a great outcome for individual investors and founders but not for the UK economy. That is where the innovation gap really needs to be filled. What we need to try to do is to make the connection between the investment side of things that we are putting in from the private sector investment and connecting that better, through innovation instruments, with traditional industry and really bringing those two things together.
The productivity challenge that we have in our large industrial sectors and the great creativity and inventiveness that we have in the start-up and scale-up communities need to be better connected. That is where we can do better and where the Catapult Network has a lot to contribute.
Q170 Paul Howell: Of the instruments that you talked about for innovation, which ones would you see as being the ones to pick up and utilise?
Dr Silver: We are starting to see real value in a variety of mechanisms that bring early-stage or innovative businesses into collaboration with traditional businesses. The difficulty is that that is a labour-intensive activity. The cultural gap and the difference in clock speed between a small business and a large business create challenges that make that integration very challenging. That is why a degree of public support can be so helpful in bridging that gap.
There is a degree of re-education that we need to achieve. One of my favourite moments over the last couple of years was when we were working with the British Oxygen Company and introducing it to a number of AI and machine-learning businesses. At one point during the programme, someone came to see me, who turned out to be from the procurement department of BOC, and said, “My boss has told me to unlearn everything that I have learned to date about procurement and to work out with you how best to work with these small, high-speed businesses.”
That led to an investment in a company called Predina, a machine-learning, predictive-analytics business, which has helped save its logistics operation a significant amount of money on its annual budget within the UK, and it is now rolling that out around the world. There are some very practical examples, but it is labour-intensive and we would value seeing more focus put on those kinds of programmes that we could scale around the UK.
Q171 Paul Howell: In terms of motivating public expenditure into this space, should things that have happened in terms of, for want of a better phrase, onshoring post-Brexit and post-Covid be motivating the desire to put more public support into getting more bang for our buck onshore?
Dr Silver: We have a huge amount to do in our new context. There is a need to bring together a more concerted and more strategically aligned innovation activity within the whole landscape that stretches from universities through to industry and brings in those smaller businesses. We have relied, over the years, on skills from around the world. We have drawn very heavily from highly skilled graduates from European universities as well as from the UK, and we need to make sure that we continue to do that and to find new ways of doing that, even within our changed circumstances.
Q172 Chair: David, on this point, your research and contributions to the Committee’s previous inquiries on R&D tax credits have already been considered by the Committee before the hearing today. I am keen to get your view on how R&D tax credits could be reformed to increase innovation-based growth.
David Connell: In terms of background, as many of you know, R&D tax credits were first launched in the UK in 2000 and have been steadily increased in terms of generosity and extension to large companies. They cost about £6.3 billion a year. Virtually every company with any kind of R&D gets them. There are many more recipients than the BEIS and Innovate UK grants, so they are enormously popular, but all the evidence shows that they are unbelievably ineffective.
If you look at the key measure of performance that they are trying to address, which is business R&D as a percentage of GDP, what the numbers show is that, in aggregate, the money that R&D tax credits have put into the system has merely resulted in a slightly larger decrease in the money that businesses have been prepared to spend out of their own generated funds. This is not a situation that is recognised by the Treasury or, indeed, by the CBI, which is the main advocate, but it is what the numbers show very clearly.
There are various ways of improving on that. One way would be to shift to the US approach to R&D tax credits, which is to relate them much more strongly to growth in R&D rather than the absolute value. There are some very strong arguments for cutting them back significantly and using the money for other forms of innovation. A solution that I have proposed, which you have seen, Chair, is that, for larger recipients of R&D tax credits, a portion should be in the form of a voucher that the company can then spend on contracts for R&D, either with companies—particularly small companies, and one might even have a regional premium outside the golden triangle—or with catapults.
As colleagues have said here, a key part of the catapult model is that a third of their income is in the form of contracts, which I know they found difficult to achieve, so it would help there. It would also support this success model that we have seen behind companies like ARM and many others, which is where customers who really know what they want in terms of innovation are the ones funding specialised companies to develop it for them.
I would add a point that I do not think has been picked up. I do not know if the Committee is aware of the structure of Innovate UK grants, which are what the Industrial Strategy Challenge Fund provides. Essentially, the majority of those are collaborative grants, which means that the money goes out separately to different participants—maybe a university and some companies. The companies get only 45% to 70% of the money, so they have to find the rest and, for many companies, unless they have a pot of money from venture capital in the bank, that simply does not work. The result is that many of the companies that we would like to support cannot be supported through that process. It has to be through 100% funded contracts.
The second point is that is not the way that businesses work for innovation. When a company wants to use an outside source of technology for innovation, it will do so through a contractual process and maybe with subcontracts. It is a contractual process rather than this loose collaborative process. By the way, that is also how DARPA works; it uses contracts.
I do not know if that answers your question. In terms of R&D tax credits, there are a number of possible solutions. One that could be very useful is to repurpose the money in a slightly different way that addresses the real problem.
Q173 Chair: We are familiar with the argument that R&D tax credits are an incentive for companies to be in the UK, but do any of the other witnesses on the panel want to challenge the point that the evidence shows a commensurate decrease in company spending on R&D in line with the tax credits they are getting?
Dr Silver: Broadly speaking, David and I are in agreement, but I would differ with regard to early-stage businesses, for which the R&D tax credit represents a very helpful lifeline at times, frankly, particularly when they are reaching the end of the runway provided by investors and still need to prove the point before they can raise the next round. We have to make a distinction—and it is feasible and something to think about—between the availability of R&D tax credits for early-stage businesses up to series A, perhaps, or potentially a little further, and for more established businesses where, if it is a replacement for their own investment, it is not achieving the position. I would just make that modification to his view.
David Connell: I absolutely agree with that. It is a great help to VC-backed businesses, and there is nothing wrong with VC-backed businesses. It is a really important model in most cases. For most other categories of businesses, it is either too small to do much or does not have much impact on the decision process, as far as one can see.
Q174 Mark Pawsey: I wanted to ask some questions about public procurement, but before I do, I will pick up the point on the success of R&D in the UK. In his answer to Alan Brown, David Connell said we have very few companies replaced in STEM businesses, and that one of the reasons for that is that the UK is attractive for acquisitions. Is that a case for making the UK less attractive for acquisitions? We heard from Dr Silver that he had founded three businesses and then sold them. I do not know whether those businesses benefited from R&D tax credits, but is there any recovery of the Government investment through R&D tax credits when a disposal of that nature is made? If not, should there be?
David Connell: The answer is no. There are, conceivably, ways that you could recover some grant and other money through options. By and large, the market economy works. We have to live with it and, if necessary, work around it, but I am not in favour of impeding it. We have to recognise the realities, and particularly the realities that we have in the UK. What that means is that, essentially, venture capital has a different economic impact in the UK than it has in the US, where most VC-backed businesses are acquired by US companies, and so the downstream growth stays in the US. That is not the case in the UK.
Q175 Mark Pawsey: Is it desirable for us to change that, and how could we change that?
David Connell: It needs very careful thought. One of the first things we need to do is to persuade the politicians and the senior decision-makers in the Treasury and in BEIS—and in the Cabinet Office, because defence and health are also important in this context—to get together and try to work out what the real problem is and how we solve it using the combination of their resources and funding in the most appropriate and cost-effective way. That simply does not happen.
Q176 Mark Pawsey: Dr Silver, do you have a view as to how we solve the problem of retaining the benefit of the investment that the Government may have made in UK businesses?
Dr Silver: The answer has to be that we need to encourage that same culture of acquisition among UK-based businesses. The fact is that we create that talent and capability here, and UK companies should have the same kind of appetite and recognition.
Q177 Mark Pawsey: Why do they not?
Dr Silver: That is a really great question. Part of the answer is that we do not have the level of technology awareness or an advanced level of technology activity in UK businesses compared particularly with the top five US technology companies, but there is more that could be done. We should be looking at the corporate-venturing side of things, for example, where traditional businesses get together and make investments in businesses, and look at how to incentivise them to look to the UK talent base. We need to do more to enable those companies that we are growing in the UK to get to a higher level of accomplishment that would make them more attractive not just in terms of the talent within them but also the technology that they are developing.
Q178 Mark Pawsey: Chris, do we use public procurement effectively enough to promote high-tech solutions, or is public procurement too cost-based?
Professor Day: I do not see it as a problem for the universities sector. Using a public procurement methodology has served us fine over the years. It is certainly not an inhibitor to us being able to do what we want on the universities side of R&D.
Q179 Mark Pawsey: Going back to David Connell again, you reviewed the Small Business Research Initiative and made some recommendations for change. Have they been acted on?
David Connell: No, they have not. I was asked by 10 Downing Street to carry out a review of SBRI, which is, essentially, a procurement-based innovation funding programme based on the US programme. The report was published in 2017. With the political turmoil, regular changes of Ministers and officials and, more recently, Covid, of course, other priorities have got in the way.
Essentially, my belief is that the problem we have is that spending Departments do not regard it as their job to fund innovation in companies. They prefer to buy technology products when they need them and simply choose the best available, and there is a lot of sense in that.
Mark Pawsey: It is public money, after all.
David Connell: What we need to do is find a way of funding spending Departments and agencies to do that job of funding the development of technologies that will meet their own requirements from a policy point of view and improve their cost-effectiveness as lead customers. We need to ensure that they have appropriate staff and mechanisms to do that in a strategic way, rather than just when there is a national crisis. We have seen procurement work wonderfully with Covid in terms of getting small businesses, through contract funding, and other innovative organisations to deliver solutions to the Covid problem in very rapid time. The same occurred in the second world war. We need to put that on a systematic basis, and my recommendations in the report are to achieve that, but they have not been followed through.
Q180 Alexander Stafford: My question is about local industrial strategies and is addressed to Chris. Universities UK has argued that universities are well placed to take forward local industrial strategies. Can you give a bit more of a context and a flavour of the role that universities play in providing a link between academic research and commercial innovation at local levels? It is all very well saying that there is this link, but how does it work in practice, and especially the commercial value of it?
Professor Day: The key thing with the local industrial strategies is to try to align where there is a meeting between the sectoral strengths of the particular region in which the university is based and its research. There is good evidence that, where there is a close link, you get this much greater spillover effect of university-based R&D on the local economy, whether that is due to graduates being produced in the relevant sectors and moving into those companies or whether it is the ability to access high-level and often world-leading R&D from the companies in those sectors.
In Newcastle, the very clear example is that the sectors that are strong around here are offshore energy, engineering, digital and life sciences, and they are the very ones that the university majors in, so we have found it very easy to fit in with our local industrial strategy development. I know that from other universities. Whether by accident or design over time, I suspect it is a cause-and-effect relationship.
There are universities that are particularly strong; Sheffield would be another great example, with the Advanced Manufacturing Centre there. Where you have those strengths in the university, the industries that benefit from those grow up around the area, and the local industrial strategy becomes fairly obvious. It is a matching of the university’s strengths with the strengths of the industry that is around there. We have seen those clusters in terms of Bristol and aerospace, or Oxford and life sciences. We see this great impact of university R&D because it aligns with those sectoral strengths.
Universities are pretty good honest-broker, anchor institutions for pulling the different sectors together, whether it be local government, the commercial sector or the voluntary sector, into these local industrial strategies. Where I have seen it work best across the UK is because of that alignment.
Q181 Alexander Stafford: How much bleeding across sectors have you seen? Do you see many people who start off on the academic side, are then poached by the commercial side, and then go off somewhere else? Vice versa, do you see people who come in from the commercial side and then go to the university? Do you see any of that mixing or moving around?
Professor Day: We would like to see more of it. We have examples of academics who have gone off and started successful companies and who may have ended up staying in it, but also some who come back and bring that expertise. More and more, universities are putting individuals in charge of their R&D strategy who can genuinely walk the walk and who have run businesses and been in the industry sector.
We see it a lot in the pharma industry, where people have started life as academics and moved into the pharma industry. A good example is AstraZeneca making the decision to move from Manchester to Cambridge. A lot of workers in AstraZeneca decided to go back to academia, and bringing them back into drug-discovery departments in universities with that knowledge has been enormously beneficial. You have seen UKRI talk about this, and the Academy of Medical Sciences has talked about this: whether we need more formal schemes that allow this porosity between the commercial and the universities sectors, so that it becomes a normal career move and not something that an odd guy in that department did, but a very well-recognised moving back and forward.
Dick Elsy: I just want to build on that. Certainly within the catapult, bearing in mind we are in this mid ground between academia and industry, probably about 20% of our staff turnover. People who work on the projects in our premises to help industry end up going into industry. Although it gives us a challenge in terms of refreshing the capability, we are seeing that flow of knowledge and academic knowhow going into industry.
The other thing that we do, with the support of the EPSRC, is that we run something called the Researchers in Residence programme, where we put academics into industry to solve very specific problems. It is a programme that I would advocate and that works particularly well. There is really good movement of people for the right reasons.
Q182 Alexander Stafford: Is there a danger, though, that, if people move across to the commercial side and are poached to go to the EU or somewhere else, we lose that talent? Are we seeing any of that—people coming out of the academic world, into commercial, and then realising, “There is a lot more money to be made. Goodbye”?
Dick Elsy: I am not seeing a net exodus overseas. Generally speaking, people are staying in the UK. If you can make the work interesting and stimulating, at the cutting edge, and if you are a British citizen, why would you want to go anywhere else if we have that environment?
Professor Day: I would agree with that. I would say that, if anything, because of the strength of the university sector, we are more likely to encourage entrepreneurs and scientists to come from outside. There are far more examples of people coming from Europe and beyond into the UK than of those who have been lost to the British system.
Q183 Alexander Stafford: Going back to the funding aspects, how influential have the objectives of the industrial strategy and the funding attached to it in the shape of the challenge fund been in determining the research priorities of universities? Has it really helped to focus minds?
Professor Day: I think not. You would not expect it to, would you? Researchers do the research that is interesting to them. That is what drives them and gets them out of bed in the morning. What it has done is provided a really strong mechanism for those researchers who have been looking for the application partners and the translational opportunities.
In Newcastle, we have had people who have spent their lives trying to design new, light, efficient motors and who now, because of Driving the Electric Revolution and £80 million being poured into the system, are working with literally over 100 companies on designing power drives and motors for the automotive industry. It has produced a magnet to pull academics who are in their core area. That is what they have done for the last 20 or 30 years, but it is much easier for them now to work with the commercial sector and see an obvious route to application of their work.
That is why the academic sector is so positive about the Industrial Strategy Challenge Fund but want it to keep going. We have had four years at this. We can give you examples of successes, and you heard some earlier from the Faraday Institute, but if you are going to go on to see this, it needs longer and more sustained funding. In the academic world, it has very much been seen as a route to getting some academics working closely with business and seeing applications that they would not otherwise have seen, because many of them who have not had that more applied end to their research until now would have stayed with their research council grants and been doing the pure science.
Q184 Chair: We heard, in another inquiry on levelling up, that there are very few local industrial strategies that have been signed off and turned on, including the one in Newcastle. Do the local industrial strategies provide any value to you, or has it just been the collaborative process of discussing them that has focused minds? What is going to be the difference when they are signed off by Whitehall?
Professor Day: The question there is who owns them. They have largely been driven by the LEPs. The position of the LEP in the local ecosystem varies from region to region. You have combined mayoral authorities and very strong city council partnerships. In somewhere like Manchester, the LEP has been brought into the combined authority and is very much the innovation arm of it, whereas in the north-east it sits slightly more on the outside—the combined mayoral authority is the one that does a lot of the driving initiatives here.
The difficulty is who owns it. We are part of it and we sit around the local industrial strategy planning system. We have come up with a plan here that we would be very comfortable with from the university sector—that includes me, Durham and others—but do we believe that the civic leaders in this region particularly think it is important, or are they pursuing their own city or regional agendas for different reasons? That is the problem. They have been hanging in the air for some years now. I seem to remember starting to work on this probably in 2019 and, as you say, what has happened because of that? I can show you a document that we are quite pleased with, but it does not really seem to be driving local or, indeed, national policy. That is the issue. I am not sure of the status of them.
Q185 Alan Brown: In terms of local industrial strategies and local investment, David, you have proposed changes to R&D tax credits. Is there any way that your suggested changes could be used to drive investment in regions that lag behind? Would it assist devolved Governments to drive investment in the other nations?
David Connell: Conceivably, there could. We could conceivably have a situation where a large company spends £1 million of one of its R&D tax credit vouchers with a company. If that company was within a region that we particularly wanted to support, maybe Innovate UK could provide a top-up of an extra £250,000 or something. There could conceivably be some mechanism worth exploring.
To be honest, I am not exactly sure where the UK stands in relation to the post-Brexit status of state aid agreements. That really constrained what we were able to do in the past. By the way, it is the reason why the collaborative R&D model is the dominant one in the UK. It is a relic of the 1980s and we should chuck it out. There are more things that we might be able to do, but it needs some creative thinking.
Q186 Mark Pawsey: I want to ask a quick question about catapults. We have two representatives from the Catapult Network and have heard a lot about that. I am, very proudly, the Member of Parliament for the area that includes the Manufacturing Technology Centre, which I have seen grow hugely and do some fantastic work. It would be great if we could get out of our Zoom meetings and go and see some of the work taking place in some of the catapults. Our inquiry is on the industrial strategy and I wanted to ask Dick Elsy and Jeremy Silver whether the approach of the catapults has changed in any way over the last two or three years since the introduction of the industrial strategy? Has it changed thinking about what we should be doing within our catapults?
Dick Elsy: It has acted as a tremendous stimulus. One of the challenges that we faced in the last two or three years is that the level of discretionary collaborative research-and-development funding that Innovate UK, our primary sponsor, has had has been dramatically reduced. It used to have something like £350 million a year where it could read the market, do the forecasting around where technology needed to be and place the necessary bets on what technologies to pursue. That funding has been dramatically reduced over the last three or four years. In its place, fortunately, has come the Industrial Strategy Challenge Fund. That is one of the reasons, rather selfishly, why the catapult programme has supported, pro bono, the development of a lot of the ISCF programmes and the sector deals: simply to create that stimulus to put the collaborative R&D money back on the landscape.
Q187 Mark Pawsey: Are you doing work now that you would not have been doing previously?
Dick Elsy: Yes, for sure. You know MTC well. We are working with the construction sector, which was not even on our radar four or five years ago. It is great because you are seeing the great innovation skills and new product introduction skills of aerospace and automotive, which are good in the UK, now translated into other areas like construction, which is just another method of manufacturing.
Dr Silver: It has given a huge focus to the convening role that the catapults have in our particular place in the landscape. For example, my colleagues at the Connected Places Catapult have worked really hard in defining and bringing together an industry consortium around the future of mobility challenge and were then able to take that through into delivering programmes associated with that, once those then became funding streams. We occupy a really interesting place in the landscape. The value of the grand challenges and the Industrial Strategy Challenge Fund specifically has really taken advantage of where the catapults are able to provide that technology/commercial-agnostic position to bring all those different players together.
The Energy Systems Catapult is another example where, in the Driving the Electric Revolution programme, the CEO is the chair of the Electric Vehicle Energy Taskforce. Because we have an overview of the landscape and an involvement on both the academic and the industrial side, with large and small players, and a sense of where Government are trying to go, our ability to bring the players together and add to the alignment has been very effective. The context of the challenge fund has been a really focusing one from that point of view.
Chair: We are conscious that the Government are reviewing catapults at the moment, and our friends on the Science and Technology Committee are doing some detailed work on that, so we will be looking at that detail when we make their recommendations, so no further questions on that today.
Q188 Richard Fuller: I would just like to draw attention to my registered interest as an adviser to a technology venture capital fund and associated board responsibilities. My question is for Professor Day and David Connell. We have spoken a lot in this session about sloshing around hard-pressed taxpayers’ money on various schemes that may or may not provide some long-term return. I would just like to focus on something that may not cost money, which is regulation. We have seen the Government move to look at reviewing regulations. We had very interesting comments by Lord Mandelson over the weekend about permissive regulation for future industries. I was wondering, from your own perspectives, what you feel is important to get right on regulation, if there is a clear need for change, and what those changes might be.
Professor Day: I have spent four years as vice-chancellor here and three years as chair of the N8 research-intensive universities in the north. This has never come up as a barrier to our doing R&D. There are rules and regulations that we have to follow. Sometimes we like them; sometimes we do not. There is nothing in the regulatory system for the university sector that is currently stopping us doing what we would like to. That is quite a short answer but it is probably the fairest. It has not come up on my radar, either as vice-chancellor or chair of N8 for the last three years, as an issue that we need to be tackling our local MPs or Government and lobbying about. Certainly on the UUK board, regulation is not stopping us doing the R&D that we want to do at the moment.
David Connell: I have pretty much the same answer. It is not something that I feel particularly qualified to talk about, and I guess that is because it has not come up.
Chair: Thank you to all our witnesses for your time this morning.
Witnesses: Amanda Solloway MP, Jessica Skilbeck, Dame Ottoline Leyser and Mike Biddle.
Q189 Chair: We are now going to move on to the second panel, where we are delighted to welcome Amanda Solloway, who is the Parliamentary Under-Secretary of State for Science, Research and Innovation in the BEIS Department; Jessica Skilbeck, who is the director of industrial strategy at BEIS; Dame Ottoline Leyser, who is the CEO of UK Research and Innovation; and Mike Biddle, who is the programme director for the Industrial Strategy Challenge Fund at Innovate UK. Welcome to all of you this morning, and apologies for keeping you as we ran over a little on that first panel.
Minister Solloway, the Prime Minister has set out how important science and technology is going to be to the Government’s vision for the post-Brexit, post-Covid economy here in the UK, so you have a big task in your red box to help deliver that. You will have heard from the first panel this morning about the role of the Industrial Strategy Challenge Fund in meeting those economic grand challenges in the industrial strategy. What assessment have you made as a Minister about what impact the Industrial Strategy Challenge Fund has had on helping businesses in the UK to innovate in line with the missions and challenges in the strategy?
Amanda Solloway: Thank you very much. It really is a delight to be here. When I received the budget allocation, I became everybody’s best friend; however, what I would say is that it is not without its challenges. Clearly, I will reflect on all four challenges, but if we think about where we find ourselves at the moment, we are in a really unique position in light of everything that we know has happened. Also, we have an opportunity in light of everything that has happened.
As an example, we have had leaving the EU. We also know there is a massive opportunity for levelling up throughout the whole country, and this is a particular focus. As well as that, we have had the Covid situation, which has really shown science at its best, and it has really led the way. When I go out and see people socially distanced, I hear them talk about how science is leading the way.
However, your question was specifically around the challenges. When we look back and reflect on what the four challenges were, they have led the way and laid the foundations for where we find ourselves at the moment. The most significant to me is when I think about clean growth as an example. This is now one of the major challenges, and it impacts on all of us. When we look at all the work that we are doing, it really gives an opportunity for innovation to shine and work at its best. I could mention the other challenges as well.
However, one of the things I care really passionately about—I had the great privilege of serving on the BEIS Select Committee in 2015-16—is these partnerships. It is about ensuring that innovation drives the future. We have this amazing opportunity to do that. I have set up the innovation expert group, and I am sure we can talk about that in a bit, but we have to make sure that we work with businesses. Together, we can seize the opportunities that we have at the moment that will lead us to the future. I will pause there, but I am happy to come back on any of that.
Q190 Chair: You will have heard previously the conversation around how Government funding and policies really connect with businesses in the “real world”. You talked about levelling up, so that includes smaller businesses in the regions and nations as well. Are you happy, as the Minister responsible for the challenge fund, that it is effectively making that connection, or do we need to make some reforms to improve that collaboration with businesses?
Amanda Solloway: One of the most important things that we need to remember—Dame Ottoline will add to this—is that there are lots of things that we do to support innovation. There is a whole raft of things, and you have already mentioned tax credits. We have looked at grants and we have loans, and there are many things that we are doing. However, we must make sure that we are focusing on these partnerships, and there are many good things. We need to be mindful, though, in terms of start-up as well as scale-up, and one of the things that you will find the challenge fund really does deliver and does well is around having these challenge directors. It is not just about giving money and funding; it is about giving support. Again, not wishing to divert too much but coming on to catapults as an example, the formula through which they work—the third/third/third—enables that sharing of data and information.
We are doing lots of things that will drive us forward. I am sure you will have heard the Prime Minister talk many times about unleashing innovation, and I genuinely believe we have the opportunity to do this, but it is about having that holistic approach. We must make sure we do that. It is about looking at all these blended types of funding, but also making sure that we are considering the support that we give to all of these businesses.
Q191 Chair: We know that the R&D Roadmap process is ongoing and, of course, the industrial strategy is being reconsidered by the Department.
Amanda Solloway: If I may quickly mention it, the roadmap lays the foundation, in my view, for all the things that we need to be doing. You do not need me to quote the themes to you, but when we talk about innovation and about the people and culture strategy, what is really at the heart of it is levelling up and places. Again, I am sure we will come back to that later.
Q192 Chair: I have one last question for you, Minister, before I go to the other panel witnesses. I noted in the brief that the data on companies that receive grants under the Industrial Strategy Challenge Fund is not published in terms of who gets what. Is there a reason that information is not public?
Amanda Solloway: Can I refer to Mike on that question? He has a more detailed answer.
Mike Biddle: The data is published. Everything that we fund we put up on the public transparency data, so I am happy to point the panel in that direction.
Q193 Chair: Thank you. There might have been an error in our brief. We will check that with you after the hearing today.
Dame Ottoline, welcome. This is your first appearance before the Committee since you took up the reins at UKRI, so we are delighted to have you today. I have a similar question for you as I just posed to Minister Solloway: how does UKRI measure success in terms of its delivery against the industrial strategy, and what is your view around performance at the moment?
Dame Ottoline Leyser: It is a pleasure to be in front of this Committee and to talk about this particularly important area of our activity. Success measures are an interesting question in the context of research and innovation because we are funding at the cutting edge and, therefore, high risk, so there is a very interesting question about what proportion of projects we would like to succeed. There is an argument that says that, if they all succeed, you are not funding enough high-risk projects, so that is one element.
Of course, another element is what success means, when one should measure that and when one should be able to measure that. We can and we do collect a very large number of what one might call proximal measures. One can count the number of patents that have come out of projects and one can look at the FTEs in the companies that we are supporting: are we creating jobs and driving up growth in those companies? Are we increasing their turnover? We measure all those kinds of things, and indeed the statistics from the challenge fund and how it is delivering on those look very positive.
The more important questions, though, are the much longer-term questions about whether we are really driving up productivity across the UK and whether we are creating these scale-up companies that really bring that virtuous circle of continued R&D investment both in the companies themselves but also in the supply chains that they support around them and so on. Those are much longer-term questions and are also more difficult to attribute directly to the funding that we put in.
There is quite an interesting conversation to be had right across Government on the effectiveness of the Green Book rules, which is what we are asking value for money to match against with the things that we are trying to do in a research and development and innovation context. It was interesting to see that greater outcomes focus in the rethink around the Green Book announced fairly recently.
For me, particularly in my job, I am really keen to make sure that we are spending every pound that we are given of taxpayers’ hard-earned money properly, well and effectively. Having those multiple targets against which to assess is really important to me, rather than some “I can measure this, I can count this” kneejerk reaction.
Q194 Chair: It is a dichotomy in our work because, of course, the industrial strategy is being reviewed. We have had evidence to say that, of course, it needs to be reviewed because we are now in a post-Brexit, post-Covid world and you need to think about that, but we have also had evidence to say that these initiatives need to be thought about in decades, not months or years, and that it might be too early to measure success.
We have also had evidence to say that you need intermediate measurements, so that you can learn on an iterative basis without completely shifting the fundamentals of the strategy. On the intermediate measurements, do we have those in place? Are there agreed touchpoints and measurements, or do we just keep funding and assessing research as we normally do and then, in 10 years’ time, we will have a reflection?
Dame Ottoline Leyser: One of the really excellent things that Mike and his team have done to build the challenge fund and the processes around it is to put in place a very well-thought-through and comprehensive set of measures as we go along. Those include operational things—whether the money is being spent effectively right now on the immediate things that we have allocated it towards and whether the projects are proceeding according to their milestones and so on—but also some of those measures that I mentioned, which we are collecting very actively. I am sure Mike will be able to give you chapter and verse on specific details.
In terms of the broader question about the review of the industrial strategy, one of the things that, in the context of the Industrial Strategy Challenge Fund, has been really exciting is that it was a different way of working, as we heard, for UKRI, but also, more generally in the UK, to have a really substantial investment in funding to target particular challenges. It is that pull-through that I find exciting about it, where you can stand above and say, “We want this kind of battery” or “We want this kind of semiconductor,” look across the extraordinary research and innovation landscape that we have in the UK—in the university sector, in PSREs and in business—and put in place people who understand that system and who can bring together, from across that system, all the talent and skills necessary to deliver on those challenges.
The mechanism is a really important thing to take forward, to learn from and to develop. Where one points it is an interesting question for Government policy, and it wraps much more broadly into the integrated review about where we are in the world: where do we have strategic advantage? Which technologies do we want to own, really drive forward and support in the UK? What are the societal and industrial challenges that we want to focus on as a nation? That is a really exciting question.
That, to me, should be the focus of how we are thinking next, how we take what we have learned from the current industrial strategy and make sure that we are pointing all that extraordinary talent, skills and expertise into the next era post Covid and post Brexit. Watching the system pivot to address the Covid challenges has been extraordinary and gives one an indication of what we can do, if we have that will and collective endeavour behind us.
Q195 Chair: I have one last question before I open it up to colleagues. I will direct it to you, Minister Solloway, and you can pass it out if you wish to do so. You will have heard in the first panel that there are two criticisms: one is around the delay between applications and funding being granted under the challenge fund, and we received some evidence of it growing to about two and a half years, which is clearly a very long time; the other issue that was raised is that, under the Innovate UK grants, businesses tend to receive around 40% to 70% of the cash and have to find the rest, which excludes many businesses that maybe do not have an R&D fund internally. Do you have any reflections on those two points?
Amanda Solloway: I do, and Mike will probably want to come in as well, with the Committee’s permission. First of all, one of the things that we are focusing on and which you will have seen in the roadmap is reducing bureaucracy. Clearly, we need to make sure that we do that, and it is absolutely a focus. Within that, what that will mean is that we can make decisions a lot more quickly. It is not around getting rid of that safety net. We really need to make sure that we are operating safely.
We have seen a great example with the vaccines. We have accelerated that to such a degree that we really have a viable solution, hopefully, to the Covid pandemic. That is one of the things that we very much need to do. We are really thinking about speed and haste and how we get those grants out faster.
However, coming on particularly to thinking about Innovate UK and businesses participating, as I mentioned in my opening comments, it is really important that we have a blend of different types of funding and a whole raft of different types of grants available. One of the questions that I heard on the previous panel was on whether we do enough around innovation. This is where businesses, linking in with this innovation and research side, are working together. It would be remiss not to have those partnerships, but that is not to say that other funding opportunities do not also exist.
Mike Biddle: It is absolutely fair to say that we would like to be doing things better, further and faster, and some of the starts to some of the waves of challenges did take longer than we had planned and intended. That said, there is a balance. We are good custodians of public money and, as part of that, what we are trying to do is choose the right areas where we can have the biggest bang for the buck—or for the pound, in this country. As we go through that process, it does take a little bit of time. That said, by taking the time to make the right choices—and it is about making choices, and the challenge directors are part of that model, as are Ministers, in terms of helping to determine the challenges themselves—it means that we have a better chance of success.
Picking up on the point made earlier about monitoring and evaluation, we have put a very robust plan in place, not just for in-flight monitoring to make sure that the money is spent well and that the projects are doing what they should do, but also that there is independent evaluation to show that we are giving a return back to the taxpayer. We are already seeing early signs of success from that, with increased net turnover of £1.1 billion in the projects that we have invested in at those early stages.
We are also seeing some of that in examples like a quantum company just yesterday, Riverlane, with a $20 million series A round, and some of that is because of the project it has been involved with through us and the supply chain that it is building. There are early signs of success and we could definitely do things bigger, better, further and faster, but we have the foundations that we can build from to do that.
Q196 Chair: There was a concern earlier that start-up companies in the UK are often bought by US companies. Is there any thinking from the Innovate UK perspective about how you bring together UK-based funds and potential owners to keep technology and innovative companies here in the UK?
Mike Biddle: Yes, absolutely. Part of the funding that we have provided through the challenge fund has been through a mechanism that we call investor partnerships to try to work together with those venture funds early on. We have them in the quantum space, the healthy ageing space, food and audience of the future—four of our challenges—and the logic there is about how you put the public money alongside the private money to enable some of these things to grow from the very beginning and, most importantly, provide a one-stop shop for those people applying. We talked about match funding earlier, which is one way for companies to see the public money alongside the private money, and it becomes something they can do as a one-stop shop.
Amanda Solloway: If I may reiterate that point, we know that we work in a global economy, but one of the things that we are really keen to do is to get that global economy coming to us. The funding model really helps with that. We know that we are fourth in the world in terms of innovation, but we have an ambition to really push that. The way that we work internationally and globally will really be significant in how we achieve that goal.
Q197 Paul Howell: Mike, would you describe how Innovate UK works with business to support the objectives of the industrial strategy sector deals? Are there any particular sectors where Innovate UK has focused its work or can point to specific achievements, and are there any sectors in which you still feel you need to get moving?
Mike Biddle: The way I would look at it is that innovation is a long game. We are trying to get companies to take risks that they would not normally feel comfortable taking to explore new sectors. I see that as us needing to inspire, to involve and to invest. We need to inspire for where the opportunities are, and the challenges create the framework to do that in terms of where the global markets will be and where the UK capability is. Then we need to involve, and we have talked quite a lot on this Committee today about the importance of collaboration and getting people working together. Ultimately, some of that comes down to investing alongside them in those areas.
In terms of where we have done some of that, in construction, for example, we think about how we build buildings that we want for the future but in a better, more efficient way. That has also connected very well with the local industrial strategy in the West Midlands. In the previous session, Dick Elsy referred to the Construction Innovation Hub, which was funded through the challenge. It has been working very hard with the Department for Education, looking at things like GenZero. If we are building new schools—we need new schools and that is going to happen anyway—we need to work with them to help them to be an intelligent customer and to define the type of building that they want and what sorts of technologies they need to be net zero in the future, which can pull the supply chain through that we are trying to build with the challenge. We have been trying to bring everything together. There is a lot of opportunity in terms of the future, in terms of the net-zero framing, clean growth as a grand challenge and how we all age and live better for longer. We have many different challenges that we could use this model to deliver, should we want to.
Q198 Alan Brown: This is for the Minister. In the first evidence session, we heard, in terms of the R&D tax credit system, that R&D expenditure has stayed constant, at approximately 1.1%, in the last 20 years or so, and that the tax credit system is only covering investment that would otherwise have been made anyway, so it is a subsidy for work that is already going on. How do you respond to that criticism?
Amanda Solloway: One of the first things I would mention is that, when it comes to tax credits, it really comes under Treasury. Undeniably, when we talk to R&D businesses they say that they are helpful and that they incentivise private R&D spend. In other words, if a business can see that a tax relief is going to be available at the end of it, they are more inclined to invest in R&D.
In fairness, the reliefs are becoming increasingly popular. In fact, the number of SME claims rose by about 19%, to about 54,000 claims. They have their place, but I reiterate that it is a part that they play; it is not the whole of it.
Mike Biddle: It is about how you build the overall system. If you are talking about changing how much businesses in the UK invest in research and development—currently it is about 1.7% of gross domestic product and we have the Government target of 2.4%—a lot of that is about giving long-term visibility of how we can work in partnership with the private sector to drive towards that.
If you look at most modern economies, about two thirds of their spend on research and development comes from the private sector and about one third from the public sector. What we need to do and what we have been trying to do with the challenge fund is to think about how we make sure that every public pound we are spending actually leverages that further private investment, to try to get it all to work together. Ultimately, that is the only way we can drive to a modern, R&D-driven economy.
Q199 Alan Brown: Is there any evidence about the effectiveness of the tax credit system for R&D, given that it has stayed static? Effectively you are saying, “We are doing the grand challenges because we need to increase investment in R&D.” Is that in itself an indication of the failure of a system that has been in place for so long?
Amanda Solloway: I am going to refer again to Mike on this, because the Treasury is responsible for the tax credits. From the research that we have available to us, it is clear, as I previously stated, that companies are inclined to invest in R&D for the very reason that they will get tax credits at the end of it. As you know, it is a credit that comes back. Mike, do you know of any other available data that we could share with the Committee at a later date.
Q200 Alan Brown: If that investment has not increased but has just stayed stagnant for nearly 20 years, how do you know it is working and bringing in this investment? You are saying it encourages people to invest. I know you are saying that taxation is a Treasury thing, but surely it is BEIS that needs to do the qualitative assessment; it is geared up to all the strategies that BEIS is trying to implement.
Amanda Solloway: One of the facts that we do know is that, for larger companies, every £1 foregone in tax revenue stimulates about £2.40 back, so we know this is a mutual benefit. In terms of the actual data, I am just thinking whether we could get something to you. Mike, I do not know whether you have something you could get. That would be helpful.
Mike Biddle: The R&D tax credits would be additional to the activity that we have been doing through the challenge fund. The challenge fund is additional money, which is predominantly grant funding but not only grant funding. What we have been trying to do there is recognise that the whole system needs to work together. There are the R&D tax credits, which, as the Minister has said, are very much a Treasury position. We have been trying to think about how you then inspire those companies for the opportunities to grow in the future, so that you actually help them to think about the long-term changes in the economy that they need to start to pivot towards, as well as the immediate development needs that they may have.
Jessica Skilbeck: Just to reinforce the point about it being a system, I would add about the role of regulation in signalling long-term direction of travel under Mike’s point about inspiring. The example I would give there particularly is the Future Homes Standard setting standards for new buildings. It is a parallel lever that Government have alongside the spending through ISCF or tax credits.
Q201 Alan Brown: Minister, you have already touched on the fact that the Treasury has a big involvement in the tax credits. Witnesses have expressed concern that there is not enough co-ordination between Treasury and BEIS in shaping activities to encourage innovation. How does a Department like BEIS ensure that all Government Departments are using their resources to increase the demand for innovation?
Amanda Solloway: That is a really good question. It is one that I am keen to approach and am certainly working on. One of the great examples is from a levelling-up point of view. If we put excellent R&D in, let us say, Halifax, Huddersfield or wherever in the country, it is not going to be successful unless we have the right infrastructure. It is not going to be successful unless we are working with education. It is not going to be working successfully unless we have that infrastructure, so I could not agree more.
One of the things I certainly do is have cross-Government conversations. This is one of the advantages at the moment, in terms of being able to have these meetings on a very regular basis. You raise a really important point.
Q202 Alan Brown: You acknowledge that is an important point, and you say you are trying to co-ordinate. Does somebody have overall responsibility in Government for pulling together all these strands?
Amanda Solloway: Yes, absolutely. Those conversations go on and we know that the Cabinet Office is really keen to do this. Mike and Ottoline, I know you wanted to come in as well.
Dame Ottoline Leyser: This is such an important question because so many of the challenges we are facing are completely cross-Government challenges, net zero being a really good example. One of the huge benefits of UKRI bringing together the whole research base in the way we do is it allows much easier access right across Government to BEIS. We work very closely with the chief scientific advisers network and with Patrick Vallance to think in a much more integrated way about the research and innovation system, as the Minister so eloquently described.
In that context, for example, it is worth pointing out that the Industrial Strategy Challenge Fund is only one element of the National Productivity Investment Fund. Another very successful component that we have been deploying is the so-called Strategic Priorities Fund, which takes the areas of research interest identified right across Government in other Departments and brings together consortia to tackle those challenges. That join-up, both in terms of the research and innovation system to address particular challenges but, more broadly, with infrastructure, skills and local priorities, is absolutely crucial in getting this right and delivering for the UK.
Mike Biddle: A lot of the reason for the challenge director model that we have to deliver the challenge fund is to work across the Government Departments. We have examples where we are working with the Department for Transport on a self-driving vehicle perspective, say, or the future of flight, in terms of what the airspace looks like, all the way through to some of the work we are doing on food, working with the Department for Environment, Food and Rural Affairs.
What we are trying to do with the challenge fund is have a way of bringing that together. One of the reasons that UK Research and Innovation exists is to bring that innovation ecosystem together. We are one of the flagship activities that has started that. We are seeing early signs of brigading that whole-of-Government approach and trying to use Government as an intelligent signal for where the future market opportunities are.
Amanda Solloway: To add an example, the R&D money that we receive is across Government Departments. It does not all come, unfortunately, to me in BEIS, so it is really important that we work collectively on this. I can see Dame Ottoline wishing that I did have it all.
We have very regular meetings as well. Dame Ottoline and I meet on a regular basis. I cannot emphasise enough that, if we are using innovation for the societal and economic recovery that we need, we have to work across Departments. It is a great question, Alan.
Q203 Alan Brown: It is highlighted and it is in Departments across the whole of Government. Who has sole responsibility for pulling together that cross-Government aspect and for evaluating the best cost-benefit ratio of that R&D across all the different Departments?
Amanda Solloway: In this particular instance I would refer to Dame Ottoline, because UKRI has that massive pot. I can see Mike has unmuted himself, so he can probably say how he monitors that.
Mike Biddle: In the context of the challenge fund, the challenge directors themselves are right at the centre of pulling it all together. They are not only helping make the selections of where we should be investing but are also making sure that we are delivering on the projects themselves and also looking at the evaluation from that. It is not for them to drive policy. Policy is for Government, but, in terms of the challenges themselves, the challenge directors are right at the heart of that, and the challenge teams are working across Government with all the relevant Departments.
Q204 Alan Brown: I have just one more question for you, Minister. I asked about sector deals in the first session, and it was suggested by Mr Elsy that one of the issues with the sector deals is they tend to go to sectors that are already the most organised in terms of collaboration. Is that something else the Government recognise, because clearly it would mean money continuing to go to those that are already successful, possibly crowding out innovation elsewhere?
Amanda Solloway: Yes, absolutely. One of the things we need to do is make sure that we encourage the sectors to come together to drive those sector deals. A great example, as we were talking about earlier, is around construction and the need for construction as part of that infrastructure process. If we are using the sector deals to have a real look at how innovation can move forward, we must make sure that we do that. We would be encouraging sectors to really get together to apply for those sector deals.
Q205 Paul Howell: Mike, I would like to explore which factors are most important when you are assessing applications for challenge fund grants, and how successful recipients have been in actually using that to leverage private funding. We touched on it a little earlier, but could you go into the success of the multiplication factor?
Mike Biddle: Any given intervention is slightly different, but if you take everything as a whole, it is roughly a 1:1 leverage, so £1 of public money generates £1 of private. Some parts of the portfolio are more one way or the other.
In terms of the assessment, we are looking for how they can address the challenge. Roughly speaking, we tend to fund about one in four of the ideas that come forward to us. We have about 1,600 projects in the portfolio at the moment, so you can multiply that by four for the number of proposals we have had.
A lot of that is driven by whether they are going to address the global market opportunity, whether they have the capability in the consortium that they are working with or the single company that might be putting forward the idea to deliver on that, whether now is the right time to do something to have the right sort of impact and what the added value is of the public sector funding. How does it go further to make sure that you are not just subsidising things that people were going to do anyway?
That goes through an independent assessment process, which then the challenge directors receive and use to take even further in terms of making the final selection decisions. That sort of approach is broadly across all of the challenges. It is slightly tailored in some cases, but, overall, it is independent and then informing the challenge directors.
Q206 Paul Howell: Can I probe that a little? There are different reasons that you are wanting to support people. If, for the sake of argument, one of those reasons is not getting enough applications and another one is getting lots and lots of applications, might the need to deliver on all of them mean that you have to wait given the strictness of the criteria across sectors, or do you remain at the same place all the time?
Mike Biddle: It is managed as a portfolio. There are specific business cases that fit with the Green Book, as Ottoline referred to earlier. Within those bounds, we are making sure that we deliver, but, if we put forward a competition or the proposals that come forward are not good enough, we would not fund them. These are the best of the best that we are looking for. We have selected the challenges, we have run the competition and we are trying to select the projects that we fund out from there. You would expect them to be better, but not everything can be, because we want to take risk. We have had to stop roughly 50 projects because we are trying to make sure that things can deliver. We will take those tough decisions if we need to.
It boils down to whether you genuinely think this is going to make the difference. Will it shift the needle? If it does not, you should not be using public funding. You are right: within the challenge or within the portfolio, how could you redirect that to have more impact?
Q207 Paul Howell: I have a follow-up question, aimed at the Minister first; she may well put it back to you, Mike. It is on what you have just said about the Green Book coming into the valuation. I know, Minister, you have already mentioned a couple of times the need for us to get into the levelling-up agenda and all that sort of thing. We know the Green Book is one of the problems that has been frustrating the levelling-up approach to where we are in the UK. Do you think that is likely to change? Do you think it is likely to change the bang for the buck in terms of the ability, for the sake of argument, to drive investment into my part of the world, up into Sedgefield? We want to see more innovation and more things, but you will not get the same bang for the buck in terms of local economic impact as you would if you were putting something in the south-east.
Amanda Solloway: Again, this is a really great question. We absolutely have a responsibility to hit this levelling-up agenda. You are right: wherever we are across the country, it is incumbent on us to deliver on that. There are many ways we can do it. One of the first things to mention is that we are not talking about lowering the standards anywhere. This is about making sure that we raise the standards across the country.
Almost coming back to Alan’s earlier question, it is about making sure we also have the cross-Department working on this. One of the things we must make sure we do is think about the infrastructure that is there, really enable every place to innovate and make sure that we have those skills available, because that is going to be one of the challenges. I am fairly sure you will be looking at that in the future, because if we do not get these skills, we are not going to be able to deliver on all the things we really want to do.
However, it would be remiss of me just to sit here and think, “This is what we need to do.” One of the things we have set up is a place advisory Group, which consults on what we need to do in industries and what we need to do to innovate, because, for us to deliver on all the things we want to do and to unleash innovation, we all have to make sure that we work collectively.
It is a really important question. We have an obligation to make sure that, where we can, we are delivering on all those challenges that we face.
Mike Biddle: If we take the example of the West Midlands, the design of the challenges, but also the way we deliver the challenges, has resulted in about 17.5% of the funding that we have delivered going into the West Midlands. That was not set out as a policy goal but we knew that, because we were doing things around automotive, the battery challenge, construction and advanced therapy treatment centres, that might be one of the places that the funding went to. You can design these schemes in a way that is Green Book compliant while building on local strengths, because it is all about how you grow local in order to be able to go global. We need to grow these companies across the country for them to win globally, ultimately.
Q208 Paul Howell: I would endorse that. In my patch, we have CPI and companies like Kromek that are doing fantastic things. It is just how we make sure we get more and more of them into the regions. We want them in the core places as well, but how we multiply that is so important.
Dame Ottoline Leyser: I just wanted to mention another successful NPIF programme that we are running. The Strength in Places Fund is asking exactly that question. What do places have that is excellent that, with a little bit of thought and local networking, could really build the strength in those places into something much more and much better?
I was listening to your previous panel discussing the important role of different types of institutions, be that universities, public sector research establishments or anchor businesses, in drawing in and agglomerating really powerful business clusters and activities in places. As the Minister said, that absolutely requires integrated consideration of infrastructure, skills and all those other things.
It is a very exciting opportunity now to think about how we align investment across Government to drive up the levelling-up agenda and also, more broadly, to think about national capabilities, rather than a very long-term ongoing narrative about competition being the only way to drive things up, but that competition being on a really narrow set of criteria, so then you actually drive homogenisation, which is exactly the opposite of what you want in a country like this. We want diversity of all kinds, working together to deliver for the country as a whole.
Q209 Richard Fuller: Amen to diversity and competition. It was so nice, after God knows how many hours, to have someone speaking up and championing the issue of competition and the vital role it plays. With that enthusiasm, I go back to an issue I raised with the last panel that had no takers, which is on regulation. I was inspired because Ms Skilbeck mentioned it, and I am hoping that she and, perhaps, the Minister might be persuaded to talk a little about what has been going around about regulatory change and how that can assist some of the objectives that you have in the industrial policy. I referenced both No. 10’s initiatives and also some comments by Lord Mandelson at the weekend.
Amanda Solloway: Thank you very much, Richard. It really is a great pleasure to be with you today. As you know, we served on the BEIS Select Committee before and it is fantastic to see you. I knew you would ask a really pertinent question, which it is.
It was interesting when I listened to the last panel that they basically said it was not a problem, but it poses a wider question, which Jessica will probably want to come in and talk about. You will also know that there was a White Paper, Regulation for the Fourth Industrial Revolution, published last year. There are a few things I will mention broadly and then come to Jessica. We must absolutely make sure that we are cutting the bureaucracy. It is really important that we are enabling this brilliant research and innovation to take place. Again, I referenced the vaccine earlier in relation to that.
This is one of the things the Innovation Expert Group is really mindful of. It is one of the questions that we are asking, because if we are to ensure that we unleash innovation, we have to think about this. Even if in the previous group they said it had not been a problem, there is an advantage to looking at this in more detail.
Jessica Skilbeck: Just to build on what you said, Minister, the point I would make, first of all, is that the UK is a leader in this field with such initiatives as the White Paper on the fourth industrial revolution. There is lots of work going on across Government looking at the regulation around specific delivery projects, so not so much in the innovation space but the delivery particularly of infrastructure and how those can be done more quickly.
The point I was making earlier was about the positive signal that Government can send with long-term regulatory signals. The example I gave was on the Future Homes Standard, but it would be naive to think that just setting that ambition marks the job as done. This is how the whole thing needs to operate as a system. Government have set that intention for the decarbonisation of new-build homes and then it is up to other parts of the system, not least the Industrial Strategy Challenge Fund, to come in behind to help build the market, working in collaboration with industry. It is just not to underestimate the power of non-spend levers, I suppose.
Q210 Richard Fuller: Having left the EU and its, not always but sometimes, lumbering approach to regulation, particularly when it comes to new sectors like fintech, gene editing and some of the points that Lord Mandelson was referring to in his newspaper article, there is the opportunity, is there not, Minister, for the UK to help shape the regulatory framework for some of these new sectors and potentially align with international partners—not just the EU, but Japan, the United States and other countries—so that we can create an overall environment that is UK-oriented but has that global Britain appeal? Is there any work going on in the Department, or with your colleagues in the Department for International Trade, to achieve that?
Amanda Solloway: As always, you raise a really good point. One of the examples is that I have a regular conversation with the Intellectual Property Office. One of the things it looks at is trademarks. Interestingly, over the Christmas period it had double the amount of British trademarks coming through. Very simply, one of the things we have managed to do is go from being an EU-based trademark and copyright organisation to now having a really robust UK-based regulation.
You will know all these conversations are going on in the wider scheme of things. It is definitely incumbent on us to have a look at this and view our place. Certainly, I believe we have a great opportunity on this.
Dame Ottoline Leyser: Regulation is a really important part of the system, and it is something we can do really well. One of the key lessons emerging in this space in particular is that regulating technologies themselves is seldom the way to go, because most technologies have multiple different applications. If you clamp down on the technology, you create a very uncertain environment where businesses are not sure whether they should pursue them in the context of their particular goals. Regulating particular uses is a much more sensible way to go. The work of the Better Regulation Executive and general thinking around that area is really very encouraging to create a kind of regulatory environment that supports innovation, while at the same time ensuring that any risks that should emerge are mitigated and that the benefits are appropriately shared.
Again, in the context of what I hope should come out of all these crises we are currently facing, which would be some kind of collective endeavour to push forward, that shared vision and shared understanding of what these technologies are for, which is national prosperity for everybody, should underpin people’s approach to regulation and also their engagement with the system as it goes forward. That is a bit of an ideological answer to a question about something so specific, but it is key to framing the regulatory debate, because otherwise it tends to turn into being about stopping evil companies doing something versus freedom to do anything you like, rather than a sensible system to support innovation to deliver for everybody, which is what it should be.
Q211 Chair: I have two very quick questions before we wrap up, just to pull in some additional points. Minister, we were told that the Small Business Research Initiative was having a declining force on the ability to use public sector procurement to deliver on some of the industrial strategy challenges. When we talk about levelling up, we know about the difficulty of placing a university research centre in a particular location, but actually engaging with lots of small businesses and getting them into the public procurement cycle may be an easier way of doing it. Are you reviewing the SBRI at the moment?
Amanda Solloway: One of the things that I am really conscious of doing is reviewing the whole system. One of the challenges that we face is that we need to make sure that we are supporting small businesses. We need to be making sure that we are supporting scale-ups as well. It would be remiss not to be thinking about all these issues, because the way forward has to be supporting a lot of these businesses. On the broader aspect, Covid has had a negative impact in some areas, but we also have a positive opportunity here where we can go forward, and a lot of small businesses will benefit from that.
Q212 Chair: Lastly, Alan Brown’s question earlier was trying to get to the issue of which Minister is responsible for cross-departmental co-ordination. Is it you, Minister, who has the responsibility? Are you able to walk down to the Department for Transport, get their officials around a table and say, “How are you delivering on the Industrial Strategy Challenge Fund?” or does somebody else have that power?
Amanda Solloway: I like to think we can work collaboratively to have those conversations. However, when it comes to the fund, I believe it is UKRI that ultimately would decide where that funding goes. I will bow to Mike on this.
Mike Biddle: That is correct, Minister, yes.
Chair: Thank you for that, and thank you to all of you for your time. Sorry for running late and then also running over. We are grateful to you for bearing with us. Thank you to the panellists from the first half of the session and to my colleagues on the Committee.