UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 348-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Science and Technology Committee

Bridging the "Valley of Death": Improving the Commercialisation of Research

MONDAY 2 July 2012

(SHEFFIELD)

Rees Ward CB, Professor Keith Hayward, Henner Wapenhans, Dr Ruth Mallors and Sir John Chisholm

Evidence heard in Public Questions 175 - 212

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Oral Evidence

Taken before the Science and Technology Committee

on Monday 2 July 2012

Members present:

Andrew Miller (Chair)

Stephen Metcalfe

Pamela Nash

Hywel Williams

________________

Examination of Witnesses

Witnesses: Rees Ward CB, Chief Executive Officer, ADS, Professor Keith Hayward, Head of Research, Royal Aeronautical Society, Henner Wapenhans, Head of Technology Strategy, Rolls-Royce, Dr Ruth Mallors, Director, Aerospace, Aviation and Defence KTN, and Sir John Chisholm, Engineering the Future, gave evidence.

Q175 Chair: First, may I thank you for coming to see us today and thank those responsible for inviting us to your superb facilities here? It would be helpful if, for the record, the five witnesses would introduce themselves. We have quite a few questions that will overlap, and we are trying to get opinions from all of you. It is going to be quite difficult to do it in the allocated time, so if you get squeezed out and have got something to say, it would be really helpful if you could pass us a note afterwards-send us a note of your thoughts. If anyone violently disagrees with something somebody else says, please indicate to me that you want to speak.

Sir John Chisholm: I am John Chisholm, and I am representing Engineering the Future today. I have been asked by my colleagues to do a little bit of coordinating in case we run out of time.

Dr Mallors: Good morning. My name is Ruth Mallors and I am the Director of the Aerospace, Aviation and Defence Knowledge Transfer Network, which is a programme of the Technology Strategy Board.

Henner Wapenhans: Good morning, my name is Henner Wapenhans. I am the Head of Technology Strategy for Rolls-Royce.

Professor Hayward: I am Keith Hayward, Head of Research for the Royal Aeronautical Society, which is the learned society representing aerospace and aviation professionals.

Rees Ward: I am Rees Ward; I am the Chief Executive of ADS, a trade organisation representing aerospace, defence, security and space.

Q176 Chair: This goes for all of us around the room: if your mobile is on, it would be helpful if you switched it off, as it interferes with the system.

We have been provided with examples of why big firms are important-that is fairly obvious-and small firms. A recent letter in The Times pleaded the case for people in the middle, and I was privileged last weekend to be at a brainstorming session on precisely this subject in Ditchley Park, where there was quite a wide-ranging discussion about the people in the middle. What is the truth, in your sectors, and where is the UK failing to create wealth and jobs?

Sir John Chisholm: Perhaps I can start with that, Chairman. Obviously all parts-big, small and middle-are important, but in different industries they play different roles. You had the pharmaceutical industry here quite recently. In the pharmaceutical sector, science is hugely important and SMEs play a key role. The pharmaceutical companies then buy them up. In engineering, on the other hand, systems are enormously important. Having the big systems integrators-who can pull through what comes out initially in science, often through SMEs, into bigger companies and into the systems integrator-is enormously important. If we had more companies like Rolls-Royce, you would see that happening more often in the economy. Perhaps I can ask Henner to say a word.

Henner Wapenhans: Quite simply, innovation is the process of taking a new bright idea to the market. The bright idea might come from anywhere, but it is important to have a structured approach so its chance of success is maximised. That structured approach has three elements to it: basic research, technology demonstration and advanced manufacturing. In particular, the latter two require a large amount of investment. This is where we see that large companies have the ability through the complex systems to drive the innovation, to bring SMEs and their innovation on to the vehicle-on to the systems we create-so that they can come to market through our products and services.

Q177 Chair: So you would see it as your responsibility to pull through medium-sized companies in the area?

Henner Wapenhans: We see that on technology demonstrations or in advanced manufacturing, as on this site here, that is the prime place to bring suppliers in to pull them through, yes.

Professor Hayward: It is a very valid point Sir John has made about the notion that aerospace is, par excellence, a system of systems. I could also describe it as a system of supply chains, where you have a whole nexus of companies which contribute, often at a very high level, to the scientific and technological component of a system or a subsystem. One of the particular places where-I would call it-the big/small or the small/large companies can be found is the avionics industry, where you have considerable amounts of research and development devoted to creating a significant part of a subsystem. For example, some of the engine control systems that, if you like, help drive the Rolls-Royce engine require a huge technology input. It also requires a company of sufficient size and research intensity to support independent research to provide that product.

Dr Mallors: The only point I would add to that is that aerospace and space are very highly regulated environments. The barrier to getting into that is quite high. One of the key aspects the KTN assists with is the brokering of an engineer-to-engineertype conversation at the right part of the development chain. The reason a small company like CPI Technologies is now engaged in three business interactions and three potential business interactions is because, through the KTN, they were introduced to the head of engineering design or the head of technology in the primes and tier ones at the right part of the development cycle, not at the end when they are just trying to procure a product and capability.

Q178 Chair: Is there any policy gap that you would like to see filled to help the task of pulling through those bright ideas from the small and medium-sized companies?

Sir John Chisholm: The first thing to do is have a clear strategy.

Q179 Chair: Is that a broad plea for an industrial strategy, full stop?

Sir John Chisholm: Yes, but particularly in particular sectors-to have a clear strategy in that sector, and getting coherence in-country so that people investing understand what the game plan is and have the connections with the big, medium and small companies, so that the technology can flow through and you do not end up with a great pile of technology that goes nowhere.

Rees Ward: Certainly on the aerospace side, the dialogue that is going on between Government and industry at the moment is very good. It is developing extremely well through the Aerospace Growth Partnership. Those are discussions that are in part developing those supply chains, which are so important to ultimately delivering the full product. In defence, the issue is one of understanding where the Government and the Ministry of Defence want to go in 10 and 15 years’ time. As Sir John says, it is clarity in where that direction is going. Once you have that clarity and that position, you can work your way back to the kinds of technologies that are required. That is when you can start bringing SMEs in as well as the whole supply chain. Different sectors require slightly different approaches here, but the broad picture is that we need to understand, in highly regulated and Government-dominated sectors, where the Government wants to go in the long term.

Q180 Chair: If we take, for example, the biosciences sector, there are several interesting partnerships, but let us take the one that is being built at St Pancras, the Francis Crick Institute: publicly funded science and money from Wellcome Trust and others are coming together to create a centre of excellence that will, I think, have a significant impact on our success in that sector. Is there any parallel that ought to be looked at in terms of the aerospace sector and, indeed, defence?

Sir John Chisholm: Perhaps I can make a point on that. I go back to what I said earlier about the difference with the biotechnology sector. In that sector, the science is hugely important. The problem is having an efficacious molecule that does the job, and the understanding of that and making that work is enormously important. The pharma companies tried to industrialise that process and it did not work. That is why everyone is going back to investing in the fundamental science and working up from that to individual product kind of work.

In the engineering sphere, although the science is important, it is only a contributor to the overall system. It is bringing that together in the total system that makes the difference. That ecosystem-which has science and SMEs in it, and medium-scale integrators and the total system integrator working together-makes the difference in the engineering sector.

Professor Hayward: There is also a fundamentally different approach to the whole notion of the innovation cycle. It is true to say that bioscience-particularly pharmaceuticals-tends to be a linear process, where you can put a lot of time and effort into understanding the basic science of a molecule that, after a long period of testing and proving, eventually might be turned into a drug that can be taken safely by a human being. In aerospace, as a high value engineering sector, the process is much more iterative. It is a generational exchange of ideas and concepts that are subject to a period of evolution-even, perhaps, passing out of aerospace into another sector for development, and then coming back into the aerospace sector some years later. The history of carbon fibre composites in the UK is a classic example: having been kicked off by research at the old Royal Aircraft Establishment, it went into Rolls-Royce, had perhaps something of a blind alley for a while, went out into autosport, and has eventually come back into complex aerospace structures. That, in a nutshell, is the way innovation works in aerospace and other related engineering sectors.

Henner Wapenhans: We, of course, have long-range investments we have to make. In order to compete effectively, we have to work with partnerships: with suppliers, academia and the Government. An effective model we see in that is the advance manufacturing research centres, the AxRCs, that have now been formed together into the High Value Manufacturing Catapult. We see this as a very encouraging opportunity to scale and increase the pace of drawing technology as innovation through to the product. We are very encouraged by the Catapult and would like to see increased investment and the long-range stability and understanding that one has access to funding over a consistent period of time through this type of catapult.

Dr Mallors: I would add that, for the space community, what you are now starting to see is not necessarily a bespoke centre but a clustering of capabilities in centres around Harwell. You have Diamond Light Source; ISIC; ESA has committed to an agency in Harwell; it is attracting the primes like Astrium to set up offices there; it is clustering SMEs together. Again, it is the fruits of a long-term strategy committed to by the industry and the Government, with its Space Innovation and Growth Strategy. That is now spawning a clustering and an evolution of capabilities for engineering system-of-systems-type sectors, which is space, aerospace and very much defence.

Q181 Chair: In this fantastic facility, the role of the big prime contractors is fairly obvious; I see several famous logos around us. How do you engage, in terms of the organisation of an institute like this, with the smaller players? How do they get brought in to the decisionmaking process?

Henner Wapenhans: This is a very good question. If we look at the evolution of the AMRC, the first one took quite a long time to get off the ground. The second one after that was three years from that. What that has shown is large companies like Rolls-Royce need to take a leadership role and be there in the early part of creating these large centres. When they become more effective and larger, that is when the smaller companies are prepared to invest themselves, because they can see the certainty that, if they come into a centre here and have cofunding as well, they can get a return on their investment. It is a question of their risk profile; the risk profile goes down when one has a larger system integrator involved with it. We are seeing that we can attract more and more suppliers at this time. We obviously bring them together into proposals for research work; it can be done either individually by the SMEs or through larger programmes. We are quite pleased that recently we had the approval of the SAMULET continuation programme, which does include SMEs and also universities that are partnering. Jointly we came up with a proposal for that funding.

Q182 Hywel Williams: Can I ask a couple of broad questions? Firstly, it is a truism that we live in hard times. What I would like to ask you is, is the balance between curiosity-driven research and commercialisation activity right?

Sir John Chisholm: Can I start with that? Of course, both are crucially important, but you need to have a balance. You need to have processes to draw the results from the curiosity-driven research into the real world. An element of curiosity-driven research is crucially important. I will put on my hat as Chairman of the MRC for the moment: all our evidence is you get the best value output from research by giving the responsibility to researchers themselves to find the researchable problems and apply their minds to them.

Having said that, you can direct the funding into areas that are most fruitful in output terms; that is possible, provided you allow the researchers their head to apply what they know to research problems. That is crucially important. Having said that, you then need to make sure you do not just pile up a load of IP that goes nowhere. You need to have avenues to draw that out into the real world. I guess what would be common amongst the people in front of you today would be the thought that that is something we should do more of in the United Kingdom.

Rees Ward: If I could just take that one on, the balance is between the Research Councils’ budget, in terms of the £3.5 billion, and the TSB’s budget, which is variously £300 million plus £200 million for Catapult. A recent £24 million call from the TSB on manufacturing was 20 times oversubscribed. That seems to indicate that there are a lot of companies out there eager to get in this pull-through mechanism. The TSB, on that particular data point, would appear to be somewhat underfunded in the broad balance. If I judged your question to be where the balance is between all of this, I would suggest-certainly from this kind of evidence-we need more pull through. If it is a zero-sum game, that has to come from the other portion.

Henner Wapenhans: I would endorse that view for the low-level technology readiness-the kind of work that happens with the early scientific investigation. There is a warranted balance there between curiosity-driven and impact-driven research, but as soon as one gets closer to demonstration in advanced manufacturing, it must be more heavily focused on actual commercialisation. This is where we believe the TSB is not properly funded. It is making the right decisions, it is effective in how it is going about making the decisions, but it needs to be more focused on the higher level technology readiness to pull through those innovations.

Dr Mallors: I would concur. I have to be careful because, being funded by the Government, I am not allowed to lobby the Government, but on the flip of it being a scientist and being very logical-

Chair: You can be very logical in front of us.

Dr Mallors: Very, very logical.

Hywel Williams: We are not the Government.

Dr Mallors: -there is another slug there in terms of the imbalance. You have the research base, over £3 billion, over £300 million around the TSB, and then round about £1 billion in the regional growth fund, which is about the growth agenda. It is another aspect of the innovation landscape and pulling it through. It just does not feel right that there is this funding dip at a time when it should be lifted up.

A couple of other points I would say are that the mechanisms are phenomenal, they are really good, but KTP, SBRI, collaborative R and D, Smart, RGF, FP7 and Horizon 2020 are really confusing. The metrics between those mechanisms do not join up. In terms of a CASE award from academia, a measure of its success should be becoming a knowledge transfer partnership. That should be deemed successful by becoming collaborative R and D. It is not that innovation there is not linear, but the mechanisms could be seen to be a bit more linear. My final thing about this is there is a lot of corporate knowledge within the Technology Strategy Board. That creates an opportunity for other sectors, not necessarily aerospace, defence and space but those sectors that have much shorter term timescales, to attract venture capitalists: creative industries, some of the CENSA capabilities, the IT communities. That corporate knowledge is not necessarily being leveraged from within the TSB out, which would take some pressure off the TSB to invest in longer term industries, such as aerospace and space.

Q183 Chair: Is it not a bit optimistic at the present time to expect any real response from the venture capitalists?

Dr Mallors: I do not know whether it is optimistic; I just do not think they are being given an opportunity to see the opportunity of pull through at the moment. It is a very interesting market, and it depends on whom you talk to as to whether it is up or down, but the reality is that I might suggest that venture capitalists are a bit like headhunters-possibly a bit lazy. If they were given the insight as to where something may well be available for them to invest in, they would look at it. There are companies out there that do corral that kind of content and then present it as pitch material: companies like Omni do that. The TSB house a phenomenal amount of knowledge and insight, and yet it is not made available.

Sir John Chisholm: As someone responsible for a venture capital kick fund, I would not say they are terribly lazy; they work incredibly hard at looking at investment opportunities. There are things that, from a policy point of view, one can do to encourage more investment into this Valley of Death arena. One of the key things that the Government can do is create good markets, which you can do through regulation, but of course the Government is a huge procurer in the market. One thing that all startup businesses know is a customer’s pound is worth 10 times an investor’s pound. It is crucially important to have a market that startup companies can sell into. It is the big advantage you get in the United States, and it is something Government can really help through its procurement.

Q184 Chair: Would, for example, the Israeli model incentivise the VC industry to be a bit more proactive, where you have the confidence of at least some matched funding coming from some sort of Government source?

Sir John Chisholm: There are such sources already in the UK. The Government has put money into various venture arms-the Innovation Investment Fund and things like that-which are enormously helpful. The Israelis have shown that is a very fruitful way of developing and fasttracking new companies into the market. The Israeli companies have done extremely well by having markets-particularly in the United States-that they can sell their product into. I make the point again: the markets are even more important than capital.

Q185 Hywel Williams: Can I just ask you another broad one? At what point should public funding stop being about excellence and move on to what might be commercially successful?

Sir John Chisholm: Do you want to take that up?

Professor Hayward: To some extent, there has been a long, wellestablished track record in the aerospace sector of repayable launch investment, which is a classic instance of Government assuming a shareholder role in the development of a new programme, primarily an airframe or an aeroengine programme in the United Kingdom. This has taken great ideas, such as an airbus wing or the technologies that Rolls has developed through the triple spool engine, into producing families of aircraft and families of engines. That has been a classic example. However, there are certain issues related to that form of direct investment. It is now potentially outlawed by the WTO, and thus the importance of supporting generic research that can apply to a sector or to a raft of companies, as opposed to one or two individual companies or projects, is becoming even more essential. In principle, that sort of partnership-and it has lasted now nearly 30 to 40 years in its current form-has been an extraordinary success in rebuilding and creating a world-class UKbased civil aerospace industry.

Rees Ward: If I may, the new manifestation in terms of the Aerospace Growth Partnership, which has been worked on jointly between Government and industry over the last year or so, is going down a very good path in terms of sustaining a civil aviation industry that has captured some 17% of the global market. That market is increasing at something like 5% to 6% per annum, and for value to the UK economy, that joint partnership is focused absolutely on the right kinds of things.

Henner Wapenhans: If I may add, there is also a very big importance in terms of infrastructure for tests, largescale test rigs and things like that, which are not project specific but very important. If we were doing international comparison with other countries that are very largely aerospace driven, we have competitors that have access directly to Government facilities. That is something that is not the case here in the UK.

Q186 Chair: I was asking your colleague Paul Stein about this sort of thing at the weekend; he was at the same event I was at. He was specifically asked how the testing facility just outside Berlin was funded.

Henner Wapenhans: That was with German government funding support.

Q187 Chair: Directly or through the Länder?

Henner Wapenhans: I would have to go back and check that. I do not have the accurate data.

Chair: I would be interested to know.

Q188 Hywel Williams: Just one specific question, if I may, Chair: what does the Energy Technologies Institute do that the TSB and the catapults cannot?

Sir John Chisholm: Well, they all occupy the same space.

Henner Wapenhans: Could I take that one, please? We see a big advantage to having a construct like the Energy Technologies Institute, in the sense that there is a large commitment-10 years-to have a programme to develop technologies in renewables, where there is a commitment from industry to pledge a certain amount, £5 million per annum, which is matched by the Government, and gives within that horizon flexibility to operate and also predictability in terms of projects to fund. To an earlier point I made, it is very important to our long-range technology development to have those kinds of constructs. We are very supportive of these joint technology initiatives, JTIs, or publicprivate partnerships. The Catapult can act in that same way. We are hopeful that it will do so through a combination of Government support and industry support.

Sir John Chisholm: It is an odd example of coordinating on the strategy and bringing together the various elements in the whole value chain so that they can work together. There are different funding sources that come together to achieve something that could not have been done separately.

Q189 Stephen Metcalfe: I particularly want to pick up on the role of the customer in all this. We have had some evidence that says customers are more important than funding. First of all, do you agree with that statement? Secondly, there is also the role of lead customer. As I see it, there are lead customers throughout the supply chain, starting with the very smallest company and feeding up to the next layer. Could you just tell us a little bit about your experience around those, and whom you see as your lead customer?

Sir John Chisholm: Can I just start by repeating what I said before? I absolutely agree that customers are hugely important. Going back to my experience in the venture industry, a company coming forward asking for money that has customers lined up is far more likely to attract a good slice of funding than somebody who is just coming forward with a great idea. Having customers is hugely important. Of course, if you are a small company, you are not actually addressing the end customer. There is a supply chain you are part of. Getting that chain working and having a lead customer-particularly in the United Sates, the Government plays a hugely important role as the lead customer for advanced technologies-then pulls through at various levels in the supply chain, and enables the funding of that to be drawn in from the private sector.

Q190 Stephen Metcalfe: So in the American model, it is pulling the technology through. If the American Government will identify a need and then look for someone to provide that need, that is driving innovation, is it?

Sir John Chisholm: Exactly so, exactly so.

Professor Hayward: Rees and I also armwrestle for this one. In that sense, it is clear at least half the business of the United Kingdom aerospace industry is, in some respects, directly related to a Government procurement exercise. Although a significant proportion of that these days is somebody else’s government doing the buying-either directly or indirectly-nonetheless the UK MOD is still one of the paramount customers for a large element of the UK aerospace sector. We certainly have some concerns about the default position of the MOD to compete globally and to treat value for money in a particularly narrow way that certainly excludes any real, meaningful inclusion of externalities for national welfare or technological benefit. That is explicitly an element that American procurement policy, where there is a clear determination: A) to buy national; B) only to buy foreign if there is absolutely no alternative; and certainly C) to encourage a whole raft of research and development activity through a whole plethora of dedicated research establishments. The simple answer is Government is important to this industry.

Q191 Chair: Can I just tie together the point that Stephen has made and Hywel’s earlier point? What then is the difference between launch aid and the US Government operating as a lead customer?

Professor Hayward: A huge philosophical difference on which the whole of the WTO dispute over the last 15 years has hung is-

Q192 Chair: In terms of the impact on the industry; I am not being legalistic.

Professor Hayward: As an observer and historian of the launch investment process, I would say the repayable launch investment system is a much more efficient and effective way of drawing technology into commercial use. The United States has historically used high levels of defence budget and defence spending indirectly to support civil aeronautical activity, either by encouraging people just by putting money into a Boeing or a General Electric through a large domestic defence budget, or of course enabling some specific research, either through NASA or through the DOD.

Q193 Stephen Metcalfe: I think I understand from what you have said that the Government as a lead customer in its own right has a slightly narrow view. If you were able to write one of our recommendations that would come off the back of this inquiry-I do not want to put words in your mouth-what recommendation would you like to make to Government in how it may change its view and its role as lead customer?

Professor Hayward: This is one for the trade association. Writing a recommendation for a Committee: life does not get any better than this, does it?

Rees Ward: In the way that the MOD views its procurement policy and its recent, if you will, focus on buying off the shelf, it really does play to a very narrow value-for-money proposition, i.e. for the department itself in terms of performance, cost and time. But from a trade association’s point of view, because this is Government money, taxpayers’ money, that is too narrowly defined. I would suggest that the definition should be much broader on a national basis, taking into account jobs, high-value employment, taxes that are being paid, Jobseeker’s Allowances that are not being claimed, and, and, and. There is a much broader view here for UK plc that should be taken into account.

Q194 Stephen Metcalfe: Thank you. Is defence looked after as an industry rather than as a product for support? Is the balance between MOD and BIS interest correct, or do you think you need more BIS input to view you as a business that can help support UK plc, and then hopefully support some of those small and medium-sized companies to come up through the supply chain?

Rees Ward: Yes, I would agree with that. The MOD is voted money from Parliament to equip and train Her Majesty’s armed forces. Those forces then do the bidding of the Government of the day. In terms of defence, the industry has felt itself kept at arm’s length, because that is the way the MOD wishes to have that relationship. As I said to a previous question, I do believe that the industry must have some view of the long-term nature of where the MOD and indeed the Government want to go. The investments that are made in defence matériel are long-term investments; it is very difficult for an industry to make those investments if they have no idea where they are going.

Having said that, the MOD has taken up that notion of the long-term view very recently. You have seen their commitment to publish the 10-year programme, and what detail comes out is anybody’s guess; we all look forward to the NAO report sometime in the autumn. There is also an agreement to work jointly with industry to review what capabilities Her Majesty’s armed forces require in the 10- to 15-year period and work our way back down roadmaps to identify the kinds of technologies and, therefore, the kinds of investments that are required. At that point, when we have more clarity and visibility, then industry and Government can have a much more informed debate about who does what and where.

Sir John Chisholm: Can I make a general point about this, about the innovation process, which is hugely important to this? I do not think that anybody will dispute that, for the UK to survive in the 21st century, we have to be innovators. We have to be lead innovators, because that is one of the things that will keep us competitive in the world. Innovation is clearly good for the UK as a whole.

The problem with individual innovators is the question of who gets the benefit of it. The benefit of the innovation will be captured somewhere in the economy; it is not at all obvious that the financing of an individual innovation will itself pay off, if you see what I mean, because the benefit spreads out through the economy. This partly relates to Government-funded projects. There was a Government-funded project that I remember well because I was around at the time, in the 1980s, called Inmos, which was going to revolutionise the microprocessor industry. It did not and it failed. Therefore, it is a failed project, is it not? However, if you look around Bristol now, which is where it was, you find a plethora-a whole architecture-of companies that spun out of it. The project itself might not have achieved its end, but the innovation that was created there spread out into the economy.

Therefore, going to the issue of major projects: a major project may well be castigated by the NAO for not doing exactly what it was supposed to do. However, that happens in major technology projects. If it is going to be a genuine step forward, you are going to launch it not knowing all the things you are going to discover. You may, therefore, look in retrospect and say, "We thought it was going to cost £2 billion; in fact it cost £4 billion." But in doing that you will have created value that will have spun out elsewhere in the economy.

Q195 Stephen Metcalfe: Well, you hope it will have created value; that is what you have to be able to measure, isn’t it?

Sir John Chisholm: You can measure in retrospect; you can go round and look at the infrastructure that has spun out of it. If you are going to do anything serious in technology, you are going to discover things you did not know to start off with. You could call that a failure, but typically it is not a failure; it is a discovery. It is skills that go out into the economy that enable you to solve other problems further down the line. Taking too narrow a view of the outcome of technology projects can lead you into too risk adverse a strategy.

Q196 Stephen Metcalfe: Do you think where the Government as lead customer is located at the moment is taking that too risk-averse view?

Sir John Chisholm: I defer to my trade association there.

Q197 Stephen Metcalfe: Finally I suggested BIS as perhaps a better location for the Government as lead customer; someone suggested the Cabinet Office. Does anyone have a view perhaps where as a buyer the Government should sit?

Professor Hayward: In fairness to the Government and the MOD, it seems probable-if not inconceivable-to put the responsibility of the customer for the UK armed services anywhere other than the MOD. What Rees and I have in common is a belief that the MOD’s view of how it selects programmes and brings forward UKbased technology needs to have a broader understanding of the impact this has on national welfare.

Dr Mallors: The only thing I was going to say was the role of the Department of Business, Innovation and Skills-to repeat the message yet again-is of long-term strategy that enables a whole stack of Government departments to be intelligent and lead customers, whether it is the Department of Health, the Department for Education, the Department for Transport or the MOD. We are seeing some of this confusion going on at the moment with the announcement made in March around UK aerodynamics. It has been a product of the successful Aerospace Growth Partnership, the early success strategy of that, and it has a sort of civil aviation focus, and the MOD is going, "Well, what about us? Where are we on that? What about our requirements and how are we trying to filter those in?" It pops up as, "We have not been asked." BIS being able to be a strong leader on those long-term strategies on behalf of multiple Government Departments would be valuable.

Henner Wapenhans: I would echo the comments on the MOD, but also we operate in many sectors. We do not see the Government as being a lead buyer for the civil sector. The Government does not buy civil aircraft, power generation or nuclear power plants. For those large technology-driven areas, the Government can assist by providing the frameworks to enable the technology to be pulled through into the product.

Q198 Chair: In the small business sector in the US, for example, the Department of Defense still have to engage through the SBRI schemes.

Professor Hayward: I think you are right; it has been a while since I have looked at the specific detail, but I think both NASA and the DOD are enjoined to let a certain proportion of contract to what they define as the small-business sector. My brain is scratching around for citation, but I also think the United States-parallel to the size of American dinners-tends to have a larger view of what a small and medium-sized enterprise should be. To some extent they have a more liberal interpretation of what constitutes a small company.

Dr Mallors: The SBRI project is alive and well through the TSB here. It is in economies of scale, and it is also about the certainty. In a lot of the US programmes-and again, I have seen it a lot in Canada recently-there is certainty. It is just a given that year on year that programme will be in place, so businesses can plan and shape around it.

Q199 Chair: The evidence here suggests that neither the Ministry of Defence nor the Department of Health have exactly switched on to the scheme here.

Dr Mallors: Not in scale.

Henner Wapenhans: We also see the difficulty here in the UK of the Small Business Research Initiative being applied to larger projects. If you look at the US, they encourage sponsorship to be sought with a large company, which has two benefits: it creates strong relationships, and it creates the route to market. We think there is definitely something that can be learnt from the US system.

Q200 Pamela Nash: In the written evidence that several of you have provided, we have examples of technology that is not being manufactured in the UK due to an inhospitable environment here. I wonder if any of you can expand a bit on the issues that companies are facing. Two of the problems raised were prohibitive taxation and inability to scale up. I would appreciate a bit more detail on those problems. Also, to what extent do you think new Government policy is going to be able to look at these problems and fix the issues that we are seeing here?

Sir John Chisholm: I think each of us covered some of this in our evidence. I know you did Henner. You mentioned the taxation issue. That was to do with Raspberry Pi, which in turn was in our evidence from Engineering the Future. That was simply an issue where Raspberry Pi had to pay tax on the import of components, which put them at a disadvantage in manufacturing in the UK as opposed to manufacturing elsewhere. Henner, you made some comments from Rolls-Royce’s point of view in terms of where you put your plants.

Henner Wapenhans: One of the examples we gave we touched on earlier, which was the test facility that has been established in Brandenburg in Germany, which is one of those examples of infrastructure where the company that operates globally has to see where it can compete globally. When other governments provide frameworks that are attractive, then it is something that we cannot not do. Another example that we have is about our fuel cells business, which is still in the pre-production phase, where we managed to attract Department of Energy funding in the US, which led us to transfer the activities into the US for that business. These are all examples of creating a level playing field between what other industrialised nations are doing to attract R and D and what the UK is doing to attract R and D.

The strength here in the UK is if we can build on the starting coherency of making sure that all those three elements that I mentioned, going through technology demonstration to advanced manufacturing, are all looked at as one whole. That then creates the delivery mechanism for the technology. Again, I would raise the subject of infrastructure. Another subject that has been brought up by the Government is e-infrastructure and giving companies and academia access to computer power, which is a very important enabler for technology development.

Professor Hayward: It is important to always appreciate in this that the UK does not have a national aerospace industry. We have the UK cluster of a global aerospace industry, and the point that Henner has made about having a supportive government for national industry is really about ensuring that the UK elements of this global industry are no worse off than other parts of that global industry. I have particularly in mind here, in a sense, that the destiny and future of Airbus UK is decided by investment policies made in Toulouse and elsewhere. Thus, when a multi-national board is looking at where they are going to place the next manufacturing infrastructure, they will look around all of the options available and say, "That is a much more favourable place for us there," say North Germany, "than the South West of the United Kingdom." It is essential for any Government to appreciate the global context of this national industry and to review and consistently analyse our standing, our regulatory position, our financially supportive position, not in absolute terms but vis-à-vis our major competitors and what they are offering our share of the globally operating companies located within the United Kingdom.

Q201 Pamela Nash: How would you rate the current Government’s capability to respond to that?

Professor Hayward: It has as good a record as past Governments. It has not yet been tested by a large repayable launch investment request, although it has supported Westland’s attempt to civilianise some of its military helicopters, a very important part of ensuring the survival of rotary craft development in the United Kingdom. The support for technology partnerships reflects several decades of support for generic technology in aerospace and aerospace-related industries. It falls, as past governments have fallen, on the defence side. It fails to recognise that it does have an active responsibility to support UK-based defence industrial enterprise. In a sense, you could say there has been a whole series of curate’s eggs of governments over the last 20 or 30 years. What is nice about this is the recognition that the industry does have a value, but one more push and Government would become a sophisticated 21st century partner.

Q202 Pamela Nash: Throughout the evidence we have taken so far, it has not been a great surprise to anybody that we are constantly told that the Government has to put more money into R and D, but there is also an issue in the UK with private investment and research and development. Do you think there is anything more the Government should be doing to encourage companies to invest in their own R and D?

Sir John Chisholm: If I can start that again, it comes back to having good markets. Companies are not reluctant to invest because they want to give the money back to shareholders. They will invest if the circumstances are right. It is true to say that in the last four or five years there has been a retreat in innovation investment in the UK. Putting my NESTA hat on, it looks to us like there has been something like a 20% retreat in innovation investment since 2008, which is a lot. It looks like it is probably worse here than it is elsewhere, but these are very preliminary figures. There is something to address here. On the other hand the Government has begun to do things, like the Innovation Investment Fund, where it is putting money up on the basis of matched funding coming from elsewhere, which will encourage more investment. If you get the right markets, which is what we have been saying here, that is the most important thing that you can do.

On the general subject of money, there are other potential sources that you might like to look at in your committee, particularly the 4G auction monies, which are coming along. Our view would be that innovation in the UK would be an extraordinarily useful recipient for those monies and would pay off handsomely for the nation.

Henner Wapenhans: It is not just the amount of money that is being invested by the Government; we could see an improvement by speeding up the decision process for making capital investment available. We do see that there are other countries around the world where that can happen very rapidly. We invest quite a bit. Last year we invested £900 million of R and D, and it has been consistently that high. The TSB has been very effective in being timely, but further improvement is possible by making quick decisions possible when opportunities come up.

Rees Ward: To finally cap that, the aerospace and defence industry figures indicate that they put back about 8% of their turnover, which is high when you look at the industry sectors here in the United Kingdom. That is at the top end, probably in the top two or three. I would like to re-emphasise the point that an awful lot of the industries in the United Kingdom are global, i.e. they have footprints in a large number of markets and a large number of countries. Therefore, their boards will be looking at where to invest to get the best return. If the Government is not providing the right conditions here in the United Kingdom then, inevitably, that investment will go elsewhere. To your original question about industries’ private investment in the United Kingdom, part of that decision-making process is how attractive it is to do business in the United Kingdom. Of course the Government’s reduction in corporation tax is excellent. The R and D pilot scheme, which is going in the right direction, is also excellent, but the broader piece about making the UK open and attractive for business is absolutely essential if we are going to attract inward investment.

Q203 Hywel Williams: Going on from this-you have answered my question to some extent-looking at the national innovation system, we have been told that the UK wants commercialisation of research work to be on the basis of fairy dust and good intentions, putting it very succinctly. What gaps do you see in the national innovation system, and does the engineering base sector of the economy suffer specifically from a lack of coherent funding, as well as facilities and also with respect to regulation?

Sir John Chisholm: I think the point has been made before that it is a bit bitty at the moment. There are lots of virtuous elements of it, but it lacks a coherent strategy that everyone can relate to. That is our principal point here. There is a lot of argument in the press about the national economy, about Plan A or Plan B. We are quite keen on a Plan I, which is instead an investment programme in relation to innovation as the key driver for the economy of the future.

Dr Mallors: I would agree there is a fragmentation issue. Some work carried out by City University a couple of years ago looked at the academic aeronautical-related facilities and showed their quite substantial degradation. The really worrying thing about some of those facilities is that a decision is made at the local level-the university level-and not against the national agenda. There are lots of facilities in there, but there is not an overarching understanding of which bits we need nationally to create a national capability. Adding to that is that there is the need to be able to take that academic research in a very small wind tunnel and put it in a really big industrial-type facility and see how it works, and then to be able to take that kind of data into those high-level TRL stages with academia to test it. That overarching strategy and facility approach is not there, particularly for industries where physical and virtual testing is so important because of safety and the regulatory environments. It is becoming an increasingly big issue for those sectors.

Q204 Hywel Williams: Can I ask you a broad question about defence innovation? Is it more restricted by a lack of cash or a lack of strategic direction?

Rees Ward: I think that we have to understand the position the Ministry of Defence has been in up to this point. It is heavily over programmed. The armed forces need a lot of equipment and systems, and there is a very constrained cash profile. When you are in that sort of constraint, then I suspect-I cannot speak for the Ministry of Defence, but one observes from outside-a rational set of choices would be, "I will not do any research and development. I will buy it off the shelf, put it in the hands of the Armed Forces straight away and I will have achieved my remit, which is equipping and training Her Majesty’s Armed Forces to do the Government’s bidding." I would suggest, and I would say this as a trade organisation, that is a very short-sighted view. The whole business of research and development is continuity and sustained investment. A lot of it is contained in people’s heads and it is investment in people and skills. If you start turning the tap off, those people will go and you will never get them back. That will be a complete waste of the investment. Well, it will not be a complete waste, but it will go somewhere else in another sector.

The Ministry of Defence is getting itself out of that particular trap of too much in terms of programme and not enough in terms of cash, but I still detect a downward trend. For example, in R and D the numbers have come down over the last decade, or just under that, from about £2 billion down to £1 billion. In S&T, which is much more clearly defined, it has come down over the last 10 years from £800 million to £400 million. You will not see the effects of those reductions over the last few years. You will probably see the effects of those reductions as we go forward. The fact that the MOD has put a floor in at 1.2% of the defence programme for S&T is very welcome, but is that sufficient to sustain the kinds of technologies that the Ministry of Defence will require in future? That question is still open.

Professor Hayward: I would agree with everything that Rees has said and make the basic observation that, whilst there has been, over the years, a shift away from the classic spin-off from advanced defence technology into the commercial sector, there is now much more evidence of spin-in-the way that streams of commercial technology are now incorporated into complex weapons systems and other military equipment. But there are still areas of specific defence research that do have, or could have, significant commercial value to the aerospace sector. I am not talking here about stealth airliners as a solution to getting into Heathrow early, but it would certainly apply to certain aspects of gallium arsenide display technology, which will, conceivably, create much thinner, much lighter civil avionic equipment. There are also the integrated power systems, which I suspect is Henner’s area of expertise, that are being developed for unmanned systems-because you need a lot of power in a small space to fly the aeroplane but also to power the sensors and all the rest of the equipment-which will have significant value in generating power for commercial airliners.

Dr Mallors: To supplement what Keith was saying, a lot of the documentation out of the White Paper will talk about the MOD reaching into non-defence supply chains and pulling that capability back in. There are two issues there; one is that they do not know where to go, because they are used to working with a defence industry or supply chain. The second thing is they talk in a very strange and unusual language that is fundamentally difficult to understand for the non-defence supply chain. The KTN is leading what we believe to be quite a unique programme, which is co-funded by Dstl and the Technology Strategy Board, which is aiming to start that process of facilitating introductions of Dstl-type capability requirements and where their research programmes are going, and articulating that into the Knowledge Transfer Network networks. I run one of 15 KTNs, but plugging them into people like energy generation and supply KTN, because they were not plugged in and they were not plugged in to those supply chains. It is that connectivity. They just do not know how to do it, because they have not had to do it before.

Q205 Chair: Sir John, going back to your Plan I, was that a subtle way of calling for the re-invention of the original purpose of 3i?

Sir John Chisholm: Well, no.

Chair: Not as it is structured now.

Sir John Chisholm: It was specifically a venture capital operation and, by the way, a very successful one originally. However, my notion of Plan I is that it is possible to construct, I believe, a comprehensive plan from the UK perspective, which would have immense advantage to industry in general, and particularly to the engineering industry.

Q206 Chair: So this is a sector-specific industrial strategy?

Sir John Chisholm: I would say it is a strategy for the economy, which would help this sector enormously.

Q207 Chair: The second part of that is that, increasingly, there are massive crossovers between disciplines that used to be wildly disparate-the overlap between work going on on this campus and, for example, in medicine. There are massive overlaps these days. How do you ensure that in that great encompassing strategy, you make those things continue to work together so that the spill over to other disciplines can work effectively? You are in charge of Plan I now, Sir John.

Sir John Chisholm: Plan I would inevitably have maybe 15 components to it, things like the innovative procurement we discussed before. It would indeed have exactly those sorts of spin-offs in it, because it would encompass a lot more than the Ministry of Defence. It would encompass the NHS, the Department of Energy and others. Within that, it would encourage sector strategies to emerge. Through various stimulant measures, it would encourage a greater flow of private capital into the innovation space. All of these things are important stimulants for exactly that sort of broadly based, technological response.

You are exactly right that a lot of the most important breakthroughs in technology come at the intersection between sciences. If you look at the way that academia now organises itself, it goes out of its way to try to encourage that. The kind of thing that you see here, of bringing together parties, is exactly in the same space. All of that should be part of a comprehensive Plan I, which is not just one component but brings together a number of initiatives into a coherent picture.

Dr Mallors: I would concur. One of those elements would be this translation issue, so we know what is appropriate for aerospace and how to translate that, whether it is into Formula 1 or into the automotive sector or outside. Bizarrely, you do not know where that translation is going to come from. You may well recall the BBC’s How To Build… A Nuclear Submarine or How To Build… A Satellite. Astrium is now having conversations with GSK; even though they are in buildings next door to each other, they did not have an understanding of the clean-tech facilities that were bring deployed in Astrium to use their satellites. The key aspect of the KTN is translating those competitions and the funding that is available or where the sectoral opportunities are, in and out of the sectors.

Q208 Chair: That was also a weakness not just between industries but within the Government machinery. How do you ensure, using the networks that we have through the research councils and through TSB, that there is some feedback upstream, so that bits of the Government machinery understand the potential of exploiting technologies that come from another sector?

Sir John Chisholm: It is a good point. We are making progress, exactly as Ruth suggested, through programmes such as the Catalyst Programme, which the MRC and the TSB have together, which draws in the biotech industry, in order to bring together funding streams that were previously entirely separate. That is definitely a direction of travel. As we have all suggested, it can be better integrated, and I certainly hope that would form one of your recommendations.

Q209 Chair: Now, the final question: the last time I was on this site was a rather long time ago, when a rather significant political event was occurring just over there in the early 1980s. Things have transformed out of all recognition here. There must have been some catalyst that brought together this fantastic cluster of world-class industry, small and medium-sized companies and academia. What was the big driver?

Sir John Chisholm: Do you know that-do you have the history, Henner?

Henner Wapenhans: I can have a go at the history. The big driver was a realisation that we had to do more in manufacturing. We have always been a technology company, and scaling in terms of size-and we have grown quite significantly over the last 10-20 years-made us realise that a lot of attention needs to be given to manufacturing. We are quite proud of being one of the early partners in creating this new model. It has been a good model to show how, between industry, government and academia, it has managed to work. It has created a critical mass so that we now see a lot of international interest in what is going on here and people are looking to the UK and this advanced manufacturing park to see how they might emulate it. It is a fantastic example.

Q210 Chair: At the time, what role did the Regional Development Agency play?

Henner Wapenhans: I do not know that specifically, but I think that they played quite a considerable role. If I look at the kind of funding that has come through and the kinds of activities we have had over the last few years, the RDA has been a source of funding. A big concern of ours is how that source can be replaced and by what mechanism. Will it be through the TSB or by which mechanism?

Q211 Chair: I want to push you on that, because we are a relatively small country geographically-the size of some individual states of the United States.

Henner Wapenhans: Texas.

Q212 Chair: Do we really need a regional policy to make this work or can the centre do all of this?

Professor Hayward: I detect a certain political undertone here. I will comment having seen, when I was working for the trade association, the emergence of the RDA process and also, as an academic, observing the development and evolution of aerospace clusters in Europe and elsewhere, there was indeed a significant input of the appropriate regional-level funding. The Midi-Pyrénées, for example, is a mixture of the prefecture and the region. The City of Toulouse also contributes investment and various forms of infrastructure. All of this has helped to create a very impressive, generalised, aerospace/high-technology cluster in the Toulouse, Midi-Pyrénées region. You will probably find the same input in the Länder in Germany, who will contribute. Historically, Bremen owned part of their local aerospace company. That has now become a contribution to infrastructure and local research and development activity, whether it be funded through the local universities or some other intermediary body. There is still a role and a function for a regional organisation or agency of some description.

Sir John Chisholm: It is clear from all of the academic work that clusters are hugely important as a stimulant for innovation. If you have been to Aberdeen, there is a magnificent example of a cluster that has sprung out of nothing, because the people in Aberdeen clustered around the university have looked at the problems that they were facing and created entirely new industries. It can be done. Clusters are highly important, and therefore there is a local element that is very important in terms of encouraging innovation.

Dr Mallors: The stuff that we could see with the RDA model, and the point that you made, was that it was creating an internal competition across the regions on some of these things. The supply chains may well be clustering, but they are global. It is about the mechanism and how the mechanism is deployed to foster national growth and international growth, rather than creating an internal debate about which region is better than the other region and who is winning on funding and who is doing all those things. It is about what is best for UK Plc and driving that. The shaping and clustering is really important. We are seeing it in Aberdeen, partly with oil and gas, and then recognising that we are on a bit of a dead duck here if we are not careful. There is space stuff going on in Harwell, the South West and North West. Aerospace and defence clustering is very important.

Chair: It has been an extremely interesting session. Dr Mallors, gentlemen, thank you very much indeed for appearing before us this morning.

Prepared 6th July 2012