Lord Vallance of Balham and Hannah Boardman.

Q280 The Chair: Welcome to this morning’s Select Committee on Science and Technology. We are pleased to have as our witnesses the Minister for Science, Lord Vallance of Balham, and Hannah Boardman, director of technologies, growth and security at DSIT. As you know well, with the industrial strategy the Government are aiming that by 2035 the UK will be one of the top three places in the world to scale a business and that they will aim to secure the UK’s first $1 trillion technology business. We would be interested, Minister, if by way of introduction you could set out what the Government are doing to make that a reality. What concrete metrics will you track and publish over the next 12 to 36 months so that we are able to judge progress? Indeed, will DSIT publish those metrics? There are all kinds of issues, which you are familiar with, over the whole question of financing and scaling technology companies. We are interested to hear your views so perhaps you could start by addressing those points.

Lord Vallance of Balham: Thank you. I welcome this inquiry to come up with a report into what is a crucial area. Before I come to the specific answer, it is worth noting—several people have mentioned this to me—that the industrial strategy differs from previous industrial strategies in that science and technology is woven through every single part of it; it is not, as has often been the case previously, in an appendix somewhere. That is an important statement about intent.

The other thing that is important, and you will see this tomorrow when the life sciences sector plan is published, is that there are specific outcome metrics in those reports and they will be monitored. My desire would be to make as many of those things public as possible so that we can hold our own feet to the fire and make sure that we are delivering against them. As you will be aware, it would be easy if there were a single magic bullet that solved the problem that has been present in the UK for a long time, but there is not. It therefore requires everything covering regulation, procurement, finance for scale-up, skills and international collaboration, and indeed there are metrics against each of those things that will be looked at. This has to be viewed as an integrated approach to the scale-up issue.

As a general point, although there is clearly a problem and we need to tackle it, it is worth reflecting that we have the healthiest VC system in Europe. We have more money coming here than anywhere else. We have more unicorns than anywhere else, and 90% of those unicorns are still based in the UK. So there is a lot that is going right. Something that is particularly important is that, as the front end of the funnel, the start-ups get more and more. That means increasing pressure and urgency on the need to get the scale-up bit right, because every day that we do not get that right means that we have a big opportunity gap.

The Chair: Will DSIT publish those metrics that you referred to? Will there be tracking in such a way that you and indeed everyone will be able to see how all this is going?

Lord Vallance of Balham: That is absolutely what I want to see happen—that we have a way of publishing metrics, tracking them and seeing what progress we are making as a country.

Q281 Baroness Willis of Summertown: It is encouraging to hear all this. In fact, the whole report has been encouraging and illuminating. Last week we saw the new head of Innovate and UKRI, and they also gave a very upbeat image of the way forward. How will DSIT and the industrial strategy link together with the work that is going on with UKRI and Innovate?

Lord Vallance of Balham: I am pleased that we have two new leaders who really get this and are going to be focused on it. I have been clear that, as we think about public money, there are three buckets of spend that we need to think about. The first is the money that is on basic, curiosity-driven, investigative-led research that we must protect and grow, because that is the very thing that gives us opportunities in 10 to 30 years’ time.

The other two buckets are relevant to this discussion. One of those is the money that needs to go to meet government priorities—that is, the industrial strategy, the missions, societal needs, NHS needs and so on. That money needs to be targeted and measured in terms of outcome over reasonable time periods, and it needs to leverage private sector investment.

The third bucket is the one for money going into companies, both small scale-ups and large R&D-intensive companies. That is how the entire R&D spend is going to be looked at, and we as a nation will be able to work out what proportion we want in each of those buckets, which is an important question to address. At the moment we have what we have, but we will gradually adjust that as we need to. That will form the basis of how UKRI and Innovate work. I am encouraged that Tom, who is leading Innovate, is clear that he thinks the money is spread a bit too thin at the moment. I agree with him, and that is what we need to focus on.

Baroness Willis of Summertown: So the pure end of the science would be within UKRI. Do you see it as split that way?

Lord Vallance of Balham: That is definitely within UKRI, but I am not saying that the other bits are not. Obviously Innovate is part of UKRI, but that first bit is definitely in the research councils. We really need to be sure that we are doing truly excellent world-class research. That is what needs to happen; in a sense, the only thing that a Minister should ask is, “Can you guarantee that this is funding world-class work?” That is not a bucket of funding where Ministers need to be saying, “We need this within the next three years”. Some of it is the things that, if anyone talked to you about it today, you would think, “Well, that’s a bit mad”, but probably it is not—it is probably going to give us something really important.

Baroness Willis of Summertown: Coming back to metrics, we have heard from the British Business Bank. How will DSIT track funding from the British Business Bank on to Innovate outputs? Will that be a metric?

Lord Vallance of Balham: I do not know whether that will be a specific metric, but what is important is the UK Strategic Public Investment Forum that is being put together, which is the chair of Innovate, the BBB and the National Wealth Fund meeting on a regular basis. That is an important step. This has to be viewed as a pipeline. I am not saying for a minute that everything that is funded by Innovate should then get funding from the BBB and the National Wealth Fund, but there is diligence as part of that process. We know what is coming in at the front end. That should be taken by the BBB as a knowledge base to do whatever it needs to do, and the same goes for the National Wealth Fund. The coming together of those three leaders is an important initiative.

Baroness Willis of Summertown: My final question under the umbrella of DSIT and the industrial strategy is on what to do with AI. I know you have been a huge champion of AI across government, and rightly so, but Tom mentioned the difficulty that Innovate, like every grant-writing authority, is going to have with the use of ChatGPT and the like. He made the point that awarding grants will have to be rebuilt from the ground up because it is going to be difficult to tell who is actually writing the grant. Is that view shared within DSIT? What can we do about it?

Lord Vallance of Balham: I saw what Tom said about that, and it was interesting. He said that large language models can write grant proposals. Indeed, you will be aware that there is a whole area of AI for science looking at more than that—at the whole question of whether AI can formulate questions, design experiments and give the ability to get answers more quickly. That is interesting and needs to be pursued.

When it comes to the evaluation of grants, particularly to small companies, Tom said this means there will have to be some human interaction on top of this to make sure that we do the diligence properly. That is something that he and Ian Chapman will no doubt think about as they ponder the future of grant giving.

Baroness Willis of Summertown: I agree.

Q282 Viscount Stansgate: I want to ask about the Mansion House reforms. We have had a lot of evidence about this, and it is clearly important. The proportion of pension funds in Britain that goes into UK science and technology companies and so on has fallen hugely over the decades. What in your view do you think DSIT and the Government more generally can do? What part can you play to identify those science and technology opportunities and co-ordinate investment into them on the basis of the UK’s strategic priorities?

Lord Vallance of Balham: First, there is already a tangible change in the pension industry, which is thinking about things that it has not had to think about for a long time. It started, as you say, with Mansion House. I cannot remember which way around it was and whether it was the compact or the accord that came first. Initially 11 of the biggest companies all pledged to put money in, and the figure is now 17. I am encouraged that, of those first 11, 10 have already started working out skills development in their own companies, and a number of them—I think eight—have clear plans for how to think about investing in this way. So, even though the amounts of money are not yet big, there is clear movement here and we will be looking at that very carefully.

BBB is of course an important part of this. The extra £4 billion that it got at the spending review is in part to make sure that it can cornerstone some of this and give some sort of security to those less specialist investors as they come into this area. So we are on the cusp of the whole thing being about to move quite significantly as the first players get going on it. We will be looking at that carefully but of course the Treasury is looking at it too. You will see more on this in the financial services sector plan as well.

Viscount Stansgate: So you will be measuring some of the progress you hope to be able to see?

Lord Vallance of Balham: We will be looking carefully at the trends on that. I am not sure it is our job to measure the exact amounts going in through pension funds but I think it will be looked at as part of the overall industrial strategy.

Q283 Lord Drayson: It is encouraging to hear about the progress that is being made and the description you have given of the processes that the pension industry is going through. To dig a bit deeper on the points about metrics, there is clearly a massive shortage of liquidity for scale-up finance, and we have heard real concern from witnesses about when that will be fixed. Whose responsibility is it within government to measure that and to provide some clarity to industry as to what is a reasonable expectation for the lack of liquidity to be fixed, in time and amount?

Lord Vallance of Balham: Again, this is being led by the Treasury, and you will see more in the financial services sector plan. By 2030 we expect 10% of all of these funds, but I know that is not fast enough for some of it. I cannot predict exactly when this is going to go but I can say that, from my discussions with some of the people from industry, they expect there to be a slow trickle followed by a sudden acceleration. Obviously, what I am interested in is the question of when it suddenly accelerates. We will keep an eye on how that happens. You can hear not only the encouragement but the determination from the Government that we should see this liquidity because this is such an important part of the problem.

Setting a metric for this year is probably not the right thing to do. They need to get their confidence in their own internal capabilities, and they need to make sure that they have the right systems in place to do this. As you will recognise from previous iterations of people investing in this area, if you put the investment in and it goes wrong, that will cause a huge setback for the industry, which will probably clam up for a long time.

I am therefore okay with the fact that it is not going super fast at the moment. I am interested in learning when the pivot point will come and when this will really start to accelerate. The views that I am getting from inside industry suggest that it will happen and that it will work in this way. I suspect that there is FOMO that, when one gets going, others start coming in quickly—but we will look at it.

Lord Drayson: We were encouraged to hear evidence from Louis Taylor about what the British Business Bank is doing and the formation of the British Growth Partnership. He said that they have a mandate to lead and that the problem that has dogged the sector has been a lack of funds for teams that have the expertise and are prepared to lead. He gave us a sense that those first investments will be made around September, which was very encouraging to hear.

However, the amounts of money involved are small when you compare them to comparables such as the Ontario teachers’ fund. Therefore, there is momentum, but it is clearly not enough to make a meaningful impact on the UK economy within the timescale that I imagine the Government want. What other things are being considered to increase the level of impact, to move the dial on this issue and to give people confidence that the Government have gripped this and will do something effective about it?

Lord Vallance of Balham: This is the first time that this has been gripped in any way like this for a very long time. We have all lived through 30 years of this not happening. It is now clear that there is a plan in place to make this happen. There is some action. It is not as fast as those of us who are impatient want to see happen, but it is happening.

As I said, the impression I get from industry investors is that this will probably accelerate quite quickly at some point as people get beyond the initial concern. I do not think there is much more that needs to be done today to free up pension capital. We cannot and should not force people to do it; they have to get their own skill sets in place.

We need to tackle issues such as how we allocate money from those funds into the venture firms where the skills lie. As you will be aware, there is an issue with fee structure, which is holding people back; we are continuously looking at that to see what we can do. The British Business Bank, through the growth partnership, can cornerstone or de-risk some of the pension funds.

It is therefore all in place. Although we would all like it to happen tomorrow, that will not be the case—but it is happening. I think that it will happen faster than the current rate suggests.

Lord Drayson: I will push you a little further on this, Minister. You mentioned the VC funds, and you are absolutely right about the strength of the UK’s VC system compared to European comparables. However, we have heard evidence that the significant growth of US money in UK VC funds has led to a situation where the pressure then put on early-stage companies, when looking for scale-up finance to move to the United States, is a real issue. I am sure that you will have heard of the Delaware flip. What further reforms or actions could the Government take to address that problem that is clearly taking place in our scientific enterprises?

Lord Vallance of Balham: Let me make a few comments about that. First, I am okay with the fact that there is a lot of American capital coming into VC firms and that there are American VCs coming here and looking at things. We never will or should think that this is all domestic capital. The big problem is that there is a relative dearth of UK capital in that system—it is not an absolute thing—and that is what is being corrected.

Secondly, where companies choose to base their headquarters depends on a number of things: capital supply is definitely one of them; another is the approach of the public markets. There is a review of the LSE and the public markets, which need to be more accessible and supportive of these types of companies. As you know, the multiple share classes provide help in that direction. There are also things such as regulation, first customer, procurement pull from government. It is about all those things; it is not just about capital flow from America—although I do recognise that factor. I also recognise that, once a company then floats on NASDAQ, the pressure to have a US headquarters is pretty irresistible.

Lord Drayson: Just so we are absolutely clear, am I right in saying that there are no further reforms or schemes under consideration to encourage domestic UK capital to invest in domestic UK science companies?

Lord Vallance of Balham: A lot of things have been announced that are being done now, and those are the things that we need to make work. If you have any other great ideas, please send them in, because we are all totally focused on this.

Q284 Lord Lucas: Looking at the overall very low level of investment in the UK by UK pension funds, would it not be reasonable to say to them, “If we are going to give your members tax relief, that amount ought to be invested in the UK?” Do you think that the members of those funds have really consented to that low level of investment in their own country? Do you not think that the Government ought to do much more to encourage the people contributing to pension funds to get at the pension fund managers to support their own country more?

Lord Vallance of Balham: That is a very interesting question. The situation today is that there is support at the top of those companies; variable support in the middle of those companies; and an almost complete absence of knowledge among many of the pension holders themselves. You are hitting at something that I feel strongly about. If I were lucky enough to be in my 30s or 40s today, I would be banging on the door saying, “Why are not you putting more of my pension money into these high-growth assets? I understand that there’s a risk, so I would not want 100% of it in there, but I’d like some of it in there, please, because that is how I am going to get a better pension at the end of it”.

There is something about having a knowledge base and—if you like—having pressure from the ultimate customers saying, “We want to see more in UK assets and in the science and technology assets that have done so well elsewhere”. It is a bit trite to say this, but Canadian pensioners have done very well out of science and technology in the UK. Good for them, but we need to do the same here.

Q285 Baroness Young of Old Scone: I will go back to the other side of the equation: how we make sure that this additional funding goes into the right stuff. You talked about the BBB and the growth partnership. Is that the only mechanism for that happening, or will there be something more in the Mansion House agreement that helps encourage these institutional investors to put money into the stuff that the Government have identified as a priority through the industrial strategy?

Lord Vallance of Balham: That is another good point. UK equities are one thing, but UK science and technology high-risk equities are a subset of that. They are the ones that we are discussing here and that I am particularly concerned about. There is definitely an aspect of skills development that needs to be addressed here, which is why things such as the Science and Technology Venture Capital Fellowship, which we have launched, are important. That currently has 22 people on it, and it will grow. That is skilling up people in how they think about investment in science and tech, because, going back to my earlier comment, when it goes wrong, it goes horribly wrong. Generalist investors investing in this area often find it very difficult to do that, so we need to get the skills development right.

The BBB needs to get its own skill set right to make this investment in science and tech. That is the cornerstone work that will bring in some of the pension funds. However, we cannot mandate that the pension funds put it in here. This is similar to the answer I gave to Lord Drayson on what happens with American capital. Our job is to make the UK as attractive as possible, but we cannot do that with endless negative rules that say you cannot do this or you must do that. That is not going to work. We need to make it an attractive system. It has started to go in the right direction, but it needs to move faster because we are sitting on an extraordinary amount of talent and opportunity here.

Baroness Young of Old Scone: You do not think that the line of least resistance will be that they will go for infrastructure investment?

Lord Vallance of Balham: I think they will. That will absolutely be the reflex among many of them, which is why political pressure on this is also important. I am certainly going to have meetings over the coming year to ask people where they have got to with this, and I hope that will happen from the Chancellor as well. Again, you will see more on this topic in the financial sector strategy plan. It is great that that is in there, because I do not think the focus on this would have been in there a few years ago, but all those things need to come together. The answer is not to get lots of punitive measures in place that try to force people to do this.

Hannah Boardman: Louis said in his evidence that he did not think a mandated wave of money was the right answer but we needed to make UK S&T attractive as the highest-growth assets that are available. So you are right to suggest that there is potentially a bias towards infrastructure, but the Government, particularly DSIT, have a big opportunity now to be consistent in the messaging about what we want to see the industrial strategy translate into in the growth of S&T business. We keep that message going through what UKRI and then Innovate invest in, and into the deal flow that goes into the British Business Bank and then potentially into the NWF, so that we have a much more attractive and consistent group of high-growth assets that are easier to understand, to be educated about and to invest in.

Lord Vallance of Balham: That is happening because the US is interested in coming across here. Seeing that increased interest is quite an important signal that many of the things are moving in the right direction.

Baroness Willis of Summertown: To go back to the pension funds, we have heard from many people that we need to have the next generation saying, “We want our pension funds to invest in these newly created UK businesses”, but who should be communicating that? Where should that be? For the students that I deal with on a daily basis, pension funds do not come across their radar, and I suspect that is true for most 30 year-olds. Is that a role of the Government or DSIT? Where should it be happening to really get that moving?

Lord Vallance of Balham: I wish I knew the answer to that question. All I can say is that I would not have given it a second thought when I was in my 30s or 40s. It is a big cultural challenge to say, “It is not a given that this delivers good returns to you. There are choices to be made and you might be able to influence those choices”. How you get that going is a big societal question, and I do not have an easy answer to it.

Q286 Lord Stern of Brentford: Thank you for that positive all-government view on things; that is important and we will come back to it. On pension funds, though, I am a bit older than you but you had a defined-benefit pension, whereas the defined contribution has changed all this. That conversation should be opened in a much stronger way than would have been the case for those of us who were fortunate enough to live through defined benefit. There is a real opportunity for that kind of education, and I wondered what you thought about that.

Secondly, the new Lord Mayor of London, Alastair King, said yesterday that if we want pension funds to be more discerning and more analytical, as opposed to passive, index driven and bond driven, then we are going to have to charge higher fees because, as you said, there are new skills to be developed. Would you comment on that? Do you think we should be up front about saying that the strategy being described involves higher fees?

Lord Vallance of Balham: On the first point, I agree that this is mainly about DC schemes. That is where the big opportunity sits. It is an opportunity for younger people to pick up and say, “I want to know that you’re giving me good returns”. Given the number of people that I meet now, when I go around universities meeting postdocs and others who are all thinking about starting their own companies or being entrepreneurial, maybe there is a big surge of interest from that generation that will push this issue harder. Again, though, I do not have the answer to that.

Fees are a big issue. For a long time the industry has been low-fee, with modest returns and very stable. The focus on fees is not as important as the focus on returns, but that is the shift that needs to take place. The fees are higher because it is a more complex business, but the returns are also higher. Again, Canada has managed to do this with its change in pension funds and Australia has done it to some extent. That is going to be a big cultural change within an industry that has become very conservative for reasons that we all understand, stretching back to Robert Maxwell and all sorts of things that went wrong.

Baroness Walmsley: It is good that you are being so positive, but can we look at the negative for a moment? If at any point over the next five years the things that you say you want to happen and are beginning to happen do not happen, when and how would you intervene in some way?

Lord Vallance of Balham: Let me be clear: I am being positive about what I see as the base opportunity here and the fact that lots of things have been put in place that I think will make a difference, but I cannot guarantee that they will, and we will monitor that carefully. For the reason that I have given, which is the large increase in start-ups, if we do not see that turning into an increase in scaling companies in the next five years then we really need to think again about whether we have the right things in place. There are other aspects that people look at all the time. I do not want to get into a mode of focusing on what we might do next rather than on delivering what we are doing today. Delivering what we are doing today, being consistent about it and being clear that we are determined to make this happen is the right course of action for now.

Baroness Walmsley: But do you have stuff in your back pocket if necessary, even if you do not want to use it?

Lord Vallance of Balham: I do not have a magic solution about which I think, “Great, we’ll do that in three years’ time and that will solve everything”, and it would be incredibly naive of me to suggest that I did.

Q287 Baroness Neville-Jones: You talked earlier on about having ideas for things that the Government could do. This springs partly from personal experience: you should harangue the financial investor community, the advisers and the private investors. In my experience, they are not interested in the British scene, they do not know about it, they do not use their analyst to examine it and you cannot get them to talk about it. There is work to be done there in changing attitudes and realising that something big is going on, because in my experience they are not responding.

Lord Vallance of Balham: I agree that a massive cultural change is needed.

Baroness Neville-Jones: It seems to me they are a particular group.

Lord Vallance of Balham: And they are within other groups that suffer from the same problem that there have been perfectly adequate returns in a safe environment. That is difficult but important to disrupt. The political narrative becomes important here: messages from the Prime Minister and the Chancellor and a repeated focus on this are an important part of it.

Baroness Neville-Jones: Have them in.

Lord Vallance of Balham: Exactly. Those things have happened and are happening in order to say, “We need to change here”, but again that has to be done with them wanting to do it, rather than endlessly being told how naughty it is not to do it.

Baroness Neville-Jones: I entirely accept that. Now I want to ask about procurement. You have said, and so have many of our witnesses, that the thing that is most valuable, particularly to a company that is getting off the ground, is to get a government contract. Not only can that lead you into profitability but it is a validation of the product or whatever it is they are doing in the eyes of other customers, so it is doubly valuable.

My question is: how easy are you finding it to mobilise Whitehall? The Ministry of Defence has taken a lead. It said that it was going to put in a certain amount—I may be wrong but I think it is about 10%—into small companies, while DSIT sits at the middle, but lots of procurement takes place elsewhere. How are you getting on with the business of persuading people that they really have to take their science and technology role seriously? Part of the problem is the way in which a lot of government departments dump their budgets in UKRI. The Home Office is an example of greatly reducing its own departmental responsibility and putting it elsewhere. Interest in what you do with your budget has greatly declined in a lot of departments, so are you managing to get Whitehall to take this seriously?

Lord Vallance of Balham: Hannah will want to come in on this as well. Science and tech in departments was a big focus of what I pushed on when I was the Government Chief Scientific Adviser. We pushed budgets back out to departments to say, “No, you need to take this seriously, and the Treasury needs to make sure that you’re held to account to deliver on that”. The budget split shows that quite a lot of it went back out to departments to do that, and that is taken seriously.

The procurement question is a difficult one. I am very pleased about the 10% of defence equipment expenditure that is going to go on novel technologies, and about UK Defence Innovation, with £400 million set aside to do that. That is our biggest example to date of where procurement can really make a difference. If we get that right now, it will show the way in terms of the importance of the Government being an early customer for things. As many of your witnesses have said, one customer is worth many grants because that starts to bring in new investment.

There are some things in the life sciences sector plan that will drive that as well. Innovator passports, particularly for digital and other tech in the NHS, could be a way to get early customer pull-through. The idea of regional health innovation zones is that they could pilot some of the procurement to get things in, test them and then expand them across the marketplace of the NHS. Those are all areas that we need to look at carefully to see whether they do what they are supposed to.

A commercial innovation hub has been started in the Cabinet Office, with the remit to try to get innovation from SMEs embedded in the system. Then, at the front end, there are the Innovate schemes, which are really about the procurement of R&D by departments to answer specific problems, and the contract for innovation. Those are all good moves in the right direction.

The two other things that I mentioned are the AI opportunities action plan, which clearly talks about the Government as a procurer of AI to try to get pull-through, and £2 billion went into that at the SR so there is an opportunity there. That is being driven by DSIT, even though it is going to go into departments for them to pull things through.

The other thing is the R&D missions accelerator programme, which is designed as a programme with £500 million to tackle this directly. The missions board defines what it sees as the biggest problem, whether that is in opportunities for all, safer streets or clean energy. That then gets turned into an R&D question: “If that’s your problem, this is how we think you can address it”—private sector, public sector and others. At the end of that, there is a procurement. We have just said that this is one of the biggest problems we have as the Government in this area, so if you solve it then you have a customer. That is going to start stimulating a different way of thinking about R&D and procurement across government, and that is why I am pleased that we got £500 million to get started and get those programmes off the ground. They will not all be obvious things: it could be how you detect areas of high knife crime in a way that is non-invasive and allows you to understand what is going on. Others will be much more obvious tech solutions like how you get AI in the grid in order to get better use of the electricity that we have. Those are examples where we have tied together a question, R&D, industry and procurement.

Hannah Boardman: There is a lot going on, as you can see. I will highlight a couple of other things. First, for six years, since 2019, we have been running the National Security Strategic Investment Fund, NSSIF, which is a partnership between DSIT and the national security and defence communities. We make equity investments in very early-stage companies, and we do that with a customer in mind. We bring companies to NSSIF that have national security or defence customers, and those national security and defence customers do integrated work programmes with the company to develop a capability. We invest in the capability and take that company through to the sort of level where the British Business Bank takes over, and we end up with a capability that is developed and almost heading towards being pulled through into mission—in fact, we have already pulled about 40% of the investments that we have made into mission so far—and ideally we have ongoing equity investment afterwards, which ideally happens through the British Business Bank. That is a very real example of what we are doing to educate defence and security in terms of innovative technology.

The Minister has already talked about a number of examples of leading the way in showcasing technology. As well as defence, there is health. The health accelerator programme does a similar thing, thinking about where we can bring innovative tech into health problems.

What is starting to shift the dial is huge organisations with ginormous levels of public sector buying power being able to publish their integrated problem sets to the market—defence understanding what problems it needs to have addressed in security, and health doing the very same thing—and those being open to small companies and small innovators as well as to large primes. That is something where DSIT has a role in helping to educate the defence and health departments about what technology could possibly solve those problems and in bringing some of those small companies into that process.

Baroness Neville-Jones: Is all this helping to deal with the problem of risk aversion by changing the process, the psychology and the attitude? Risk aversion is still in the system, is it not?

Lord Vallance of Balham: It is absolutely in the system. There is a big question about how the National Audit Office, the Public Accounts Committee and so on can help with reducing that risk aversion, because clearly some of this will fail. You cannot do it without expecting failure in places. If that failure is immediately deemed an egregious waste of public money, then risk will not be tolerated. This is a big cultural change across government. In answer to your opening question about how easy it is to get the whole Whitehall machine to change, the answer is not easy, as I think you implied in your question. However, we should forget that side of the National Audit Office and the Public Accounts Committee; they are going to be important things that can either clamp down on risk or open up risk taking in an appropriate way.

The Chair: How do think it might change?

Baroness Neville-Jones: Public messaging is part of it, is it not?

Lord Vallance of Balham: Yes. I have had this discussion directly with the National Audit Office over several years. It lauded the Vaccine Taskforce as a wonderful example of innovation. I can guarantee, although the committee denies this, that had the taskforce not come up with a vaccine, which was by far the most likely outcome, then it would have been slammed as a waste of public money. In fairness, after I left as Government Chief Scientific Adviser, they invited me back to its board to talk about this, and in their new strategy they have been clear that they will accept the risk profile that is presented to them, rather than assuming that everything has to be a success. They have moved and been very public about that movement, and now we need to see that in action.

Baroness Neville-Jones: Part of it is recognising the risk that is involved, right at the outset.

Lord Vallance of Balham: Exactly. That is the discussion that I had with them. If you are making a new medicine, when you start you have something like a 2% success rate. You just need to accept that that is the success rate that you expect at the beginning. I am not suggesting that is what we need in public procurement, but there are times when you know it is going to be one in four at best. As long as we can define that up front then I think the National Audit Office will accept that as the risk we have chosen to take, eyes open.

Lord Stern of Brentford: The NAO needs to understand Bayesian probability, does it not? The fact that something happened ex post does not mean that the probability of it happening ex ante was very high. It is basic.

Q288 Lord Ranger of Northwood: I spent many years working in strategic supplies to government. One of the big risk challenges was post Carillion, when the Government had a real issue around risk in procurement, how it came through and understanding how we could manage things better. That filtered through the whole ecosystem of strategic supplies and overall supplies to government. One of the responses was the development of a series of playbooks over the years, working with industry to look at mitigating these kinds of risks that can be deeply embedded across procurement programmes. Is that part of the conversation on addressing risk aversion? I know that happened for a number of years and that work was done on that. That sat in the Cabinet Office at the time, and I worked on some of that. Is that still being taken forward in this area?

Lord Vallance of Balham: That is under the commercial function of government in the Cabinet Office. As I said, the commercial innovation hub has been formed to try to get more of a link with how we would procure from SMEs.

You are right that we need to get the processes in place. There is a question about how easy it is to have procurement organisations that do both types of procurement. Certainly, my experience from industry was that the routine procurement organisation does one thing; if you then try to make it do procurement of innovation at the same time, that becomes quite tricky. You therefore need different people—and, often, a different skill set—to do that.

Q289 Baroness Walmsley: I will ask you a question about the Contracts for Innovation scheme shortly. Before I do that, I will go back to something you just said. The basis of the system that you just described involves departments saying, “This is the problem we have”, and then moving forward. Is there a window for innovators to go to departments and say, “This is a problem that you do not have at the moment, but you are going to have it, and we have got the answer”?

Lord Vallance of Balham: That does happen; it is not an easy sell. That probably goes back to the earlier question about science and technology inside departments being alive to where those issues are and may come.

Baroness Walmsley: As you know, Contracts for Innovation is currently run by Innovate UK, and it is the nearest thing we have to the SBIR in the States. Last week, Tom Adeyoola told us that it is focused on the pre-commercialisation phase. Are there any plans to expand this scheme, especially given that, as the industrial strategy suggests, procuring authorities will set targets for how much they spend in relation to SMEs? How will the procurement for innovation agenda be co-ordinated across departments? If it is not done by Innovate UK, who will do that? Are there plans to expand it beyond pre-commercialisation?

Lord Vallance of Balham: The scheme at Innovate UK is a very specific scheme about procuring R&D to answer technical issues in departments for something they want to do to end up with a product. That is a very niche part of the procurement pool. When you look at the UK defence innovation programme and the 10% of MoD spend, that is a very different scale of procuring innovation that is already out there, or that is working at a late stage with companies to get the thing you want. That is not an Innovate UK thing; I believe that Innovate UK is right to stay where it currently is.

However, I hope that we will see more of the sorts of things that the MoD is doing, because that is how we end up with real pull and real ownership in departments. Inevitably, they then need to go out and make their contacts with all the innovative companies and SMEs to fulfil that mission. I really like what has happened there. We know from other countries that, where that has happened, you see a big effect.

Baroness Walmsley: One therefore has to assume that the MoD is an intelligent customer. Can we assume that all departments are intelligent customers? If not, what is being done by DSIT to make sure that they are?

Lord Vallance of Balham: Hannah may want to come in on this question, too. As I said, the same thing is happening in health, with the health innovation zones, and around AI, but I do not think that this is ubiquitous across departments. Some are doing it well; for example, DWP is doing some interesting work to bring in innovation. Everyone is doing a bit of it, but no one has it at the scale that we are talking about with the MoD.

A very interesting question—which I do not know the answer to—is about how we get more departments into the position where they are deliberately given innovation budgets to pull through innovation. That is important to consider. Things such as the commercial innovation hub in the Cabinet Office are looking to see how they can facilitate that.

There is an upskilling process, for the reasons that I have just set out, but I do not think that that is the standard procurement practice; it is very different. There is also a risk appetite question, because departments will definitely fail on some of that, and, at the moment, that is not an easy thing to accept in most departments.

Hannah Boardman: There is a role for DSIT in helping the MoD and others become both the most intelligent and the most open-minded customers. I am thinking back to some things that Tom said about the support that UKRI and Innovate UK gave to quantum companies. The National Quantum Technologies Programme has been running for 10 years already. Quantum companies worth about £1 billion have been created through that programme. It is a fantastic national asset for that technology.

There is a role for DSIT, which owns that national technology programme, to have—as we currently do—a very consistent and constant conversation with the MoD about the application of those technologies, companies and capabilities, and how all that feeds into what the MoD is trying to do. For things such as sensing, navigation and timing, DSIT may have a very clear idea about the solutions and what the application within defence, security, health or transport might look like. We definitely have a role to educate and keep the buyers as open minded as we can, which is why we work very closely with the science community as well as the innovators in those departments.

Lord Vallance of Balham: The other area that will be important is in thinking about different business models for procurement. Procuring something because it is there, and you want it, is one thing; however, giving a signal that you will procure something if it meets the following specifications, which is often what is needed for these innovative companies, is a different approach. That requires a certain upfront risk from the person saying, “I will procure as long as it meets these requirements”. It may also require co-working as you develop it. Again, it will be very interesting to start modelling the developments in defence for others to look at.

Q290 Baroness Young of Old Scone: There is a difference between some of the centralised departments—such as defence and transport, where most of the spend is lodged with the central department—and the health budget, where a lot of the spend is devolved.

My experience of working to try to get a change of heart in the Department of Health, which was around the sustainability agenda, is that there was spend and activity, but it was regarded as comparatively niche. It was picked up in the whole system only by consenting adults in private. The reality is that the rest of the machine marched on and said, “Oh, that is very nice, but it is for them to do it, not us”. How can we overcome that in the devolved, big-purchasing departments?

Lord Vallance of Balham: That is a fair point. The Secretary of State for Health has been very clear that he views innovation as the solution to NHS sustainability, not as an add-on or a nice-to-have. That is important.

The 10-year strategy is clear about what it wants to see for innovation, including analogue to digital, hospital to community, and treatment to prevention. Pulling those things through will be important. The health zones answer that to some extent, but the risk is that they do exactly what you just said: you have good uptake in one place but spreading that across the NHS is much more difficult. That is the challenge that is outlined in both the 10-year health plan and the life sciences sector plan. How do we get this to be a more ubiquitous uptake? It is more difficult, because it is not a centralised form of procurement in the same way.

Lord Stern of Brentford: I want to come back to a theme that has run through the discussion so far and was very strong in the work we were doing with the Council for Science and Technology: an all-of-government approach. That has come through in a number of your contributions, but I will focus on it directly now. It is sometimes spoken of as “cross-government co-ordination” or as a “horizontal role”, but that language is much too weak. We should be describing an all-of-government approach, which is what you were pushing—rather effectively, I thought—from your role as Chief Scientific Adviser. We tried to push through the science and technology. You and others have referred to the industrial strategy, which opens up powerfully with exciting possibilities; it lists the right things, such as life sciences, clean energy and AI—in, I think, the third sentence—and then goes on, importantly, to talk about strategic certainty and a more muscular approach. So that is the big picture: strategic certainty and a more muscular approach—that is, you have to get specific bits done and you have to go after it. That was signed by, in order, the Prime Minister, the Chancellor and the Secretary of State for Business and Trade.

So the idea is that the all-of-Government approach has been successfully and well embedded. You described how science and technology had run right through the industrial strategy, as opposed to being an add-on. So, from the point of view of articulated intent, we seem to be starting in a good place, but you can see the question coming: how is that actually going to happen? Will we have the right kind of leadership or organisational structures? Will we have the analytical skills? Will they be put together across government? I tried to do it with the economists working together when I was head of the Government Economic Service, and you tried to do exactly that to get the scientists and technologies working together. It is a question of drive from the top, the organisational structures, the analytical skills and the method of work. Given the intent, how can you see that starting to kick in strongly? Is there anything that we can do as a committee to underline the importance of this and that it should not just be words?

Lord Vallance of Balham: I feel the pain of the scars on your back.

Lord Stern of Brentford: You have them as well.

Lord Vallance of Balham: I have. This is not easy. I will answer with one specific, slightly tangential example, then come back to the main thing. I was asked earlier this year to take on the Oxford-Cambridge growth corridor. I agreed to do it but with certain terms, which are that we had to have an all-of-Government team. I have a team with people seconded from all the relevant departments who do not come with their departmental hat on; they come as a member of the team. Each member of the team can access the Permanent Secretary in their home department directly to free up things in that department. The team as a whole is then supported by a group of Ministers from each of those departments that I chair, and it comes together as a group focused on the Oxford-Cambridge growth corridor. We then put a submission in through the spending review to make sure that the departmental bids added up to something coherent for the growth corridor.

So we are trying a different way of running things, and central to that is data analytics and the ability to see all the bits, from transport to utilities to lab space to skills and so on. We are in the process of putting together a digital twin type tool to be able to look at the whole thing across all aspects of this. That is a small example in a way, although it is a big project in terms of its potential benefit to the UK, and it is obviously highly relevant to things like scale-up that we are talking about. It is only one bit of the picture, but it tells you that, if we are going to do some of these things, then we need to have the right hardwired structure in Whitehall to do them. It is good that the industrial strategy is allocated to departments for each of those areas. We have got digital and tech, and Hannah led much of the work on that, and we have the life sciences sector plan, together with health.

We are going to need teams that look like integrated teams to do this. Often the problem is that everyone agrees in principle but of course, while it is someone’s 15th priority, it is someone else’s second and someone else’s fifth, yet you need a coherent priority for the whole thing otherwise it does not work. So this integrated approach is important, and I believe that some of the digital planning tools and AI planning tools that we can use now will be an important part of it so you can see what would happen if this bit got delayed—how would that throw the whole thing out of shape? What would happen if we could accelerate that bit over there? We are not there yet, but if you were to encourage the need for that type of thing then it might be useful.

Lord Stern of Brentford: That is helpful. Just as your team members can go straight to the Perm Sec, I am assuming you can go straight to the Prime Minister.

Lord Vallance of Balham: Yes. While I was asked to do this by the Chancellor and I am working mainly with her on this, the Chancellor and the PM both totally support it. I should say that the Permanent Secretaries were pulled together by the Cabinet Secretary to say, “It is in all of your objectives to make this work”.

Lord Stern of Brentford: Very good. I note from what you just said, and from what you were saying about infrastructure and AI, that investing in infrastructure is not somehow a conspiracy against S&T. I thought that tone came through a bit in the earlier discussion, and I think that is wrong. You may want to comment on that.

Here is a follow-up question with a particular example. Some of us—certainly Baroness Willis and I—come from a university background and see the enormous opportunity that you also see in the talent now potentially coming to the UK, but there is a high up-front cost for visas, and there is a choice to make. Do you think the muscular approach to science and technology requires an intervention from the highest level to overcome some reluctance in the Home Office on these issues?

Lord Vallance of Balham: There is a clear need for immigration in the areas of science and technology. We as a country have never been self-sufficient in that and never will be. We have lots of great people, but we benefit enormously from people who come from overseas to join them. One only has to look at our Nobel Prize winners to see how many of them are first-generation or second-generation immigrants, and the same is true for start-up founders and people in companies. I do not have the statistics in front of me, but in many start-ups there is a high percentage of people who come from overseas as part of those start-ups. So this is an integral part of the system and we need to make sure it works, and everyone in government understands that.

The visa system is funded by the people who use it, a principle that is important. The global talent visa was singled out by the Chancellor in her speech in January, saying that we need to make the routes to it easier. The fees for that are included in UKRI and Horizon Europe grants for the visa system—not just the global talent visa but others. So I think it is recognised that that needs to be easier.

We have announced that we are linking the Global Talent Fund to a taskforce that can act as more of a concierge service to help some of this work at the senior level, but it is at all levels where we need to have immigration to support the innovation and science and technology. We are not talking about large numbers overall, but they are an important part of the system.

Lord Stern of Brentford: You mentioned that we will always want to welcome those people, so that will always be an issue. Would you say that that was actually an indication of strength? We are a place where people want to come and we would not want to be a place where people did not want to come, so actually it is not a failure of our supply side but a mark of quality.

Lord Vallance of Balham: Sorry, if I was not clear, that is exactly what I meant. We have lots of great people in the UK, but we also benefit enormously from the people who come in because they bring in different backgrounds, ideas and approaches, and that enriches the whole system. We have always been a magnet to attract those people, and we should continue to do so.

Q291 Baroness Northover: I will follow up on that in connection with the industrial strategy. I do not know if you read William Hague’s article in the Times this morning about the mixed messages from the Government in this regard. I was impressed by the industrial strategy, but I have questions about the specifics. Lord Stern has just mentioned the scheme to attract 10 to 15 researchers and so on. When we have the opportunity presented by those who want to come from the States and there are schemes in France and Germany—Germany is offering to have a Harvard campus—and things like that, that scheme does not seem on the right scale. Here is a case in point, where another part of Government is pulling in another direction. We are incredibly familiar with this; it has been a problem for many years. How are you tackling this in a way that will make a significant difference?

Lord Vallance of Balham: William Hague was not actually criticising the scale of this—or even talking about this; he was making other points. He has said how important this scheme is.

We have put £115 million together to attract people at all levels from around the world. Of that, £54 million is for the global talent fund, which is specifically about bringing in people and their teams to a set number of institutions in the UK that can bring them in. There is £30 million for the Royal Society to bring in fellows at a more junior level, and £20 million for the Royal Academy of Engineering to bring in fellows on green fellowships. There are Turing fellowships for AI, and we have also supplemented the work that ARIA is doing to bring people with AI skills from companies into the UK. Therefore, that is about £115 million in total.

Then there is the £500 million Choose Europe scheme, which we are part of. We count as “Europe” for that scheme, and we can enable people to come to the UK through it. We now have quite a good offer; it is comparable to what France and Germany have. A number of US and other global universities also have a base in the UK, and that will continue, too. We therefore have a reasonable scheme in place.

All these schemes have just got off the ground now; none of them is yet delivering what we need. We need to see the talent coming in from around the world and make sure that they can settle here and have proper access to the things they need to be successful.

The Government also have a global talent taskforce, based out of No. 10, which is looking at where it might offer a concierge service for people who are “top tech” and entrepreneurs, to bring them in. There are a number of things going on; we have enough to get on with at the moment. I do not think that we need to go much bigger today, but we will probably need to go bigger in the future.

Q292 Lord Berkeley: Good morning, Minister. To go back to the issues of co-ordinating between departments, you mentioned mission boards earlier. As we know, they are set up by different departments. They were created to set out R&D priorities for each mission, which was thought to help with innovation and procurement and with the applicants having an actual customer. Where have they got to? We do not hear much about them these days. Are priorities being set?

I was looking at comparing what the mission board priority might be with the Oxford-Cambridge arc, which was another co-ordination thing that you mentioned earlier. Is this actually another forum for resolving conflicts? I hate to suggest that there are too many forums, but how will it all work?

Lord Vallance of Balham: Let me deal first with the Oxford-Cambridge growth corridor team. That is not a co-ordination mechanism; it is a delivery mechanism. We are very clear that it is about making sure that delivery happens.

The mission boards are up and running. What I referred to earlier was the accelerator programme—an R&D programme linked to the mission boards—where we are drawing on the problems that the mission boards have identified. As you correctly pointed out, the mission boards are made up of Ministers from different departments, who are all focused on one problem. They remain a central part of how the Government are trying to tackle these big, long-term issues. We have added an R&D programme linked to that, which will then give answers to some of those problems and give the procurement pull that goes along with it.

Lord Berkeley: Is it working?

Lord Vallance of Balham: The R&D mission programme has just been launched. We have, I think, the first four problem statements and programme leads in place. I am sorry but I cannot remember when that will be made public; it will be very soon, because they are all signed off and ready to go. They are quite exciting; they concern R&D problems that companies will want to work on.

Q293 Lord Ranger of Northwood: You are covering a large area, to judge by the answers that you are giving today. I will turn to a specific point that you mentioned a couple of times: the concierge service, or the dedicated support service, which the life science sector plan highlights will help 10 to 20 specific firms. How can it help them remain headquartered in the UK as they develop? How will those companies be selected? What criteria will be used?

In addition, we have seen a whole array of different organisations—I have been listing them as we have been going along; I will not read them all out, but I have about 11 or 12 so far. One that has not been mentioned is the Digital Commercial Centre of Excellence, which A Blueprint for Modern Digital Government identified earlier this year as a way to professionalise and modernise the development of digital procurement across government.

It seems that that will be a fundamental part of helping this concierge service. Will they dovetail together? I ask this because I have worked on some of the things that you are trying to do. Getting these teams to work, and even to find each other, can be the biggest challenge.

Lord Vallance of Balham: The global talent taskforce is a No. 10 thing; it is focused on individuals who we want to bring in, and is led out of No. 10. The life sciences industrial strategy plan describes a unit that is within the Office for Life Sciences. It looks at 15 to 20 companies at any one time and asks, “What can we do to try to help them grow in the UK?” They will identify the companies through links with big companies, small companies and the British Business Bank. It is therefore not an application process; it is a targeted selection process to ask what is needed. The idea is that that team will then focus on helping them navigate what is inevitably a complex system.

The team put this to me in an interesting way. If you are a big company, such as AstraZeneca or GSK, you know how to navigate the system and you have a lot of people who know how to do it. However, if you are a growing company, it is very difficult and you do not have enough people to navigate all the regulatory, procurement and scale-up finance stuff.

Therefore, the idea is that this small team in the Office for Life Sciences will help people navigate the system and will give a bespoke service to those companies to help them get to the next stage. That will not be permanent; it will be to overcome certain things, and then they will withdraw. The team will then let them get on with it again.

Lord Ranger of Northwood: That is very interesting. Having spent time with the tech sector—I worked for a business called Atos—we would try to bring SMEs to government. As one of the big companies, we would try to get them access and visibility and help them navigate the hurdles, boundaries and procurement processes. Could this process operate outside of the life sciences and across government? That is the challenge: to make this work across all the government departments. Could we replicate the model?

Lord Vallance of Balham: Yes, you are right. A group is being set up by DBT, called the business growth service, which is designed to do the same thing across other businesses. To my knowledge, it has not started yet.

Hannah Boardman: It has not. We are also looking at the applicability of the concierge service to all the different parts of the industrial strategy now. We have a less formalised approach to things such as our top 20 quantum companies—although there are probably not necessarily “20” of them in the same way. We are definitely thinking about how we apply that right across the board.

Lord Vallance of Balham: Innovate UK has done some of this. It has UK Business Growth and UK Business Connect, both of which do a bit of this. There are several schemes. You are right that there are lots of fragmented schemes. We need to work out what provides the right support, particularly for the scale-up space, and the life sciences one is definitely focused on scale up.

Lord Ranger of Northwood: You had me with your previous answer, because I thought, “Great, we have a business growth service”—but then you mentioned that Innovate UK has two elements. That is the fundamental frustration. I am not going to say, “Let’s set up new groups and forums to do this”, because, as I said, I have listed out around 15 other groups. When you are in industry, the biggest challenge is seeing how many different places there are out there that you just do not know about. People now pay professional services to help them navigate through these things, which become further barriers to getting through the procurement process.

Lord Vallance of Balham: The business growth service in the DBT is supposed to be the front door for all of it. Its aim is to be the place that stops you having to navigate further because it will do the navigation for you and put you in the right place. That is the aim.

The Chair: Will it have powers? Is it more than an advisory service? Would it be able to seriously unblock problems like planning and visas?

Lord Vallance of Balham: I am sorry; I do not know the full remit of the business growth service at the DBT. You would have to ask them. I can say that that is exactly what the life sciences one—which is directly under me—is going to try to do. It will try to unblock things for companies.

Q294 Lord Lucas: John Flint of the National Wealth Fund suggested to us that there are too many public sector funding investment bodies, and that in the long run they should be consolidated, in a similar way to Bpifrance or KfW, so that it would house early-stage and later-stage investments under the same roof. Do you agree with that?

Lord Vallance of Balham: I do not agree. If by that we mean that what is now the National Wealth Fund, the BBB and Innovate should all be one thing, I do not agree—if that is what it means.

Lord Lucas: That was the question, yes.

Lord Vallance of Balham: Then I do not agree because they are very different. A venture firm is not doing the same thing as an institutional investment company—they have very different skill sets and objectives—and I think that is true for those three. I love the fact that they are coming together and working together, but it is better that they have their specialism.

Lord Lucas: Are we right in understanding that the Government have an ambition for a $1 trillion technology company to be established in the UK in the next decade? If so, should the Government have a view as to which company that is, or indeed in which sector it comes from? Have you a thought as to which sector it might be likely to come from?

Lord Vallance of Balham: The industrial strategy sets out the sectors that we think are the highest-growth sectors. The speed at which certain tech companies can reach huge valuations suggest that that is the most likely place for those companies to come from, with very rapid growth. They are there in the digital tech programme, and the life sciences sector plan and other areas of technology where it could happen. We can already see several companies that have huge potential in the UK.

Q295 The Chair: Minister, I have a question on the Regulatory Innovation Office. We had Lord Willetts as a witness and we heard a great deal about this interesting new initiative. Can you give us some insights into how you think it will work and assist the tasks that we are talking about today?

Lord Vallance of Balham: There are two different things going on in regulation. There is a government-wide approach to reducing the bureaucracy of regulation and dealing with the regulatory landscape overall. The Regulatory Innovation Office is set up specifically to be a sort of un-blocker of things, so it is unashamedly practical. In looking at the areas that it is currently exploring, it has gone to companies to find out what is stopping them from moving faster in the regulatory space. What are the one or two things that, if they were out of the way, would make a difference? It has started to unblock those, often working with more than one regulator because often these are issues that cross regulatory bodies. That is the aim of the Regulatory Innovation Office and I am clear that that is what it should do.

The tendency of bodies in government is sometimes that they want to revert to saying, “Let’s have a new bit of legislation” or “Let’s look across”. Someone needs to do that, but it is not what RIO is about. It is about picking up specific problems in particular areas and unblocking them. Out-of-line-of-sight drone flying and so on is one of the areas that it has looked at, and a regulatory sandbox for cultivated meats and so on is another—areas where, if we can do that, that opens up the possibility for several companies. That is how I think RIO should work over the coming period. At some point we may need to expand that and get into some broader areas as it picks them up, but I do not want this to start at the broad areas, writing reports on how things should be reviewed. I want it to practically unblock problems for companies.

The Chair: The perception is that there is a potential conflict between regulation and innovation. Presumably, the aim here is to have a pro-innovation regulatory environment. That is really the challenge for this new initiative. Is that right?

Lord Vallance of Balham: That is exactly what it is about. It built on a report that I wrote for Jeremy Hunt when he was Chancellor on pro-innovation regulation. We identified that in some cases companies are having to go to 12 different regulators in order to do that. That is impossible. You can do it if you are a very big company but it is impossible if you are starting up.

Q296 Lord Stern of Brentford: Generally, I use the language of “standards” rather than “regulation”. I mean, hands up everyone who wants low standards. That gets a bigger bite. This links to what you said about procurement: that we will procure if you can produce something that meets these standards, and then the standards become a mechanism for promoting innovation. If you recall, we wrote a letter to the Prime Minister saying that regulation should take into account not simply price, because most of them were set up during the privatisation of a monopoly and price regulation was at centre stage. We argued that regulation and standards around environment, biodiversity, climate and so on should be part of the regulation system. That is an approach to regulation which looks for standards and tries not simply to be one-dimensional. If done well, that could advance innovation. I wondered what you thought of that.

Lord Vallance of Balham: I agree. Actually, it is part of the Regulatory Innovation Office’s remit to look at standards as well. It is one of the places where the UK has been a good leader across the world. If you do that and get the standards right, you become quite attractive to companies because, although companies do not like rules that stop them, they like things that give them some certainty so they have a level playing field. So the standards part of this is important, and the standards bodies in the UK do a pretty good job of that.

Hannah Boardman: There are two things about the way that RIO interacts with the sorts of technologies that I am responsible for that are very cutting edge. Your point about “Standards first, then think about what to regulate”, is exactly what the technologies and the sectors are looking for when it comes to the UK’s approach to pro-innovation regulation. Last year the UK Government published—and became the first country to do so—their intended approach to quantum regulation. That is incredibly early, so it is difficult to say exactly what we are going to do, but it is based on the principle that we will go as far as we can through norms and international standards, and we will regulate at the point where we need to in a way that allows this technology to flourish. So that is an important way in which we are looking at how to regulate new technologies.

RIO is an interesting way of looking at some of the ways that our existing regulatory system just could not anticipate innovation. We have a brilliant UK company called Scarlet, which has found a way to create blood from scratch—synthesising blood. The regulations on the transportation of blood had some problems when it came to that company being able to show people its products. Blood that does not come from a human body is something you could never have imagined. and a regulation that does not anticipate that makes things incredibly complicated. One of the great things that RIO is doing is looking at these incredible companies and saying, “What are the 84 things that are in your way that we just never anticipated, and what can we do about them?” Some really great stuff is coming out of that too.

Q297 Baroness Northover: This is more about problems and possibilities. You push back hard, for example, on global talent and international researchers and students, and let us hope that that shifts. But one of the things that has been stressed to us—this is very familiar, is it not?—is the importance of networks and the groups, in Silicon Valley or Boston, of entrepreneurs, investors and researchers. I wondered what work was potentially being done to try to replicate that in the UK so that it is easier for people to connect.

Lord Vallance of Balham: That is an important point, and it is where clusters really matter. There are two quite different clusters in the US—well, there are lots more than two, but there are two really powerful ones. One is the cluster around Cambridge, Massachusetts, where pretty much everything is in walking distance, including the VCs, the universities, such as MIT, and the companies—you can walk from one to another. That has a very important characteristic when somebody goes into a company as a young researcher: if that company falls over, they do not really care that much, because they can walk to the one next door and join that one instead. It creates a very clear, walkable landscape. The other one is of course Silicon Valley, which is most definitely not walkable, but it has the same feature of having enough critical mass to make that happen.

We have mapped clusters across the UK, and that cluster map is beginning to show where we have specialisation clusters. The Oxford-Cambridge growth corridor is clearly meant to be a supercluster, which would allow connectivity between those two places, so that people can live anywhere along that corridor, knowing that they can access jobs right across it. The infrastructure is so important for getting that right. In contrast, if you live in the middle of that corridor now, it is quite difficult to get to either place, and it is certainly not easy to keep your family, education, health and living in one place and then work in another. Cluster development is therefore very important as part of this.

The bit that we do not have across most clusters yet is resident venture capital people in them. In the Cambridge, Massachusetts system, which is the one I know best in the States, VCs are local. Although they can invest internationally, they do not; they invest locally. They want to walk to the lab, look the scientists in the eyes, and check that they are doing what they think they are doing and that they are high quality. We need to attract the venture firms into the clusters. Over the next few years, we need to focus on what would make it attractive for a venture firm to be based in a cluster.

Q298 Baroness Young of Old Scone: I want to make an improper comment as well as a question. My improper comment is: as an environmentalist, I used to take heart from the fact that the Oxford-Cambridge arc was failing. Alas, Lord Vallance has turned up, and it makes it more likely that it will be a success. End of statement. I am putting you on your mettle to deliver an environmentally sound Ox-Cam arc.

My question is about another of my fixations. As you already know, I have an unnatural interest in ARIA. We have heard that ARIA’s stock-in-trade is the big thing—or, that it will eventually, by some process, hit a big thing. However, we were not convinced by its responses to us about how that would result in benefit to the UK, as opposed to it already having been bought and sold all over the place. How can we make sure that, when ARIA hits its moon shot, the benefit will come to the UK?

Lord Vallance of Balham: On your first point, I am indeed concerned about the environmental side of things, as you might imagine. Having been chair of the Natural History Museum, I want to make sure that we get that right.

Secondly, ARIA has a duty under the Act to support the UK—that is something that it must do. It has, quite correctly, taken the line that it will not take the IP into its own organisation. We know that when an organisation does that, it will kill innovation, because no one will invest in it. ARIA is therefore not acquisitive on the IP.

It has rights on the IP for certain things to do with the programme, so that people cannot take the IP, disappear completely and leave it high and dry on the programme. It also has rights so that, if the IP is licensed overseas, it gets some payment for that.

What ARIA is working on—this goes back to the very beginning of this session—is making it attractive for people to be in the UK. So far, eight start-ups have come out of ARIA, and seven US companies—venture firms and others—have decided to put a base in the UK because of that. It is an attraction model, rather than one that says, “We are going to hold on to everything and not allow it to have any international links”.

We do not know exactly how that will evolve. A wave of entrepreneurial scientists are being trained in ARIA. There is a huge amount of global interest in what ARIA is doing, and I think the UK will benefit from that, but I cannot map for you the precise route by which it protects everything—I do not think that ARIA can either.

Q299 The Chair: Minister, we are coming to the end of the session. You have been asked many questions. My final one is about the potential of our science and technology companies moving overseas or getting acquired by foreign buyers. We have heard quite a lot of evidence about that. Do you think that the Government have the right balance between being open to investment and retaining economic benefit to the UK? Are they being a bit too laissez-faire on investors acquiring companies from overseas? What are your views on that?

Lord Vallance of Balham: I do not think that we are being laissez-faire about it. Mechanisms can be used to stop an acquisition, if it is of national security importance. We have to be very careful not to be so protective about these things so that, in effect, all you do is stop investment in, and the growth of, those companies. We need to make it attractive enough for people to want to stay here.

You cannot force companies to stay; once you get into that, either you end up killing them, because they cannot get investment, or they will go anyway and accept that there will be a bit of pain when they leave. Everywhere that has been good at this has done that through making it attractive to move, rather than putting in lots of disincentives to do so. It is therefore right that we are trying to encourage a vibrant entrepreneurial system with inward investment. This goes back to an earlier point: would it not be nice if much more UK capital were going in?

The Chair: Presumably, even if a technology company ultimately moves its headquarters overseas, the perfect scenario would be if the R&D stayed in the UK. Do you think that is realistic?

Lord Vallance of Balham: We have just seen that: it is exactly what happened with the acquisition of Oxford Ionics. In that acquisition, all the R&D—indeed, more than just the R&D—is staying in the UK. The reason for the acquisition is because the company sees the huge potential of being in the UK.

Similarly, one could argue that that is what has happened with Arm and DeepMind. The latter is a great example of this: although it was acquired, it is now a massively important part of the Google organisation. As a result of DeepMind flourishing in King’s Cross, we have lots of other companies flourishing in the same area, and many of the people in those companies were trained by DeepMind.

We have to be careful not to worry about this in the wrong way; what we want is growing, flourishing, exciting companies in the UK. I will reinforce that last point: we have a very flourishing small company sector when we have big companies that can also help feed them with talent.

The Chair: Minister, that is a very positive message on which to end. Thank you very much for sparing the time to talk to us. It has been immensely valuable. Thank you, Hannah, as well.