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

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

SCIENCE AND TECHNOLOGY Committee

BRIDGING THE "VALLEY OF DEATH": IMPROVING THE

COMMERCIALISATION OF RESEARCH

Wednesday 5 SEPTEMBER 2012

TIM CROCKER and DR TIM BRADSHAW

FERGUS HARRADENCE, IAIN GRAY and SIR JOHN SAVILL

Evidence heard in Public Questions 213 - 279

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

Oral Evidence

Taken before the Science and Technology Committee

on Wednesday 5 September 2012

Members present:

Andrew Miller (Chair)

Caroline Dinenage

Stephen Metcalfe

Stephen Mosley

Pamela Nash

Sarah Newton

Hywel Williams

Roger Williams

________________

Examination of Witnesses

Witnesses: Tim Crocker, SME Innovation Alliance, and Dr Tim Bradshaw, Head of Enterprise and Innovation, Confederation of British Industry, gave evidence.

Q213 Chair: Welcome to you, gentlemen. You are familiar with the terms of reference of this inquiry. We are going to be asking you a few questions in a moment. It would be helpful if for the record you would introduce yourselves.

Dr Bradshaw: I am Tim Bradshaw and I am here representing the CBI.

Tim Crocker: I am Tim Crocker. I am here representing the SME Innovation Alliance. Maybe I ought to add that I am a committee member, but we don’t have any salaried people, so in my day job I am an R and D engineer.

Q214 Chair: Thank you very much. You will probably be aware that later on this morning we are hearing from some of the folk who spend Government money. I notice that one or two are in the room. Do you think they have got the balance about right so far as big and small S and T-based businesses are concerned?

Dr Bradshaw: Yes, by and large. We have to remember that the majority of the R and D activity that happens in the business community happens with large companies. They are the anchors for R and D activity, not just within their own companies but within the value and supply chains that support them. There is probably a two-thirds/one-third split, in terms of where the money from Government goes, particularly if you look at things like the R and D tax credit, so supporting those large companies is absolutely essential. It anchors R and D here and then allows that to filter down through the supply chains to other smaller companies. On top of that, we have got very good support for SMEs through R and D tax credits with some of the things like SBRI that the Government support through the TSB. Roughly the balance is probably okay, but whether the quantum is right is perhaps another debate.

I know the inquiry is about the valley of death. I suppose it is a difficult question, because there will always be a valley of death no matter what you do. There will be more R and D ideas than you could possibly ever commercialise, and it is a case of trying to flatten out, perhaps, that valley of death so that most of the really promising ones get their chance of getting further through to commercialisation, be it with small or larger companies.

Tim Crocker: We could always say that we need more money, but we are aware that that is not the game on the table. I would take issue with some of the points that have been made. Where the money goes in and where it is spent are slightly different things because of the way the supply chain works. Quite a lot of small companies are doing work on behalf of bigger companies and the numbers will turn up in statistically different places. The main problem that the SME community has, which is different from that of the large companies, is that traditionally most of the funding support from Government has been on a matched funding basis: a 60% grant with 40% being found elsewhere. The assumption has been that the 40% comes from venture capitalists and private investors-that is where the problem lies. It does not. The investors who are available have very short-term aims and want to sell the companies out faster than the design cycle practically allows.

Q215 Chair: Does that apply to particular technologies, or are you talking generally?

Tim Crocker: There are sectoral differences. We are aware that the biotech and pharma sector works far more like the Government model or, rather, the Government model seems to apply to biotech and pharma very well, but in what I would call the hard industries-computing, mechanical engineering and electromechanics-it is entirely different. There is a quantum difference between SBRI funding, which is basically 110% funding, and 60% funding. If we could move all the TSB funding to SBRI, it would be transformational; it would be a night-and-day job because of the way the investment community behaves.

Dr Bradshaw: We like SBRI. We have said a number of times in the past that it is not as large as it should be. If you compared it with the US equivalent and scaled our economies, the UK one would still be six times smaller than the US one. Yes, we would agree that SBRI is a very good vehicle. It is underfunded and could be expanded. We would take issue with moving all of the TSB’s funding into SBRI, though, because it does an awful lot of very good work in other areas, but, if Government money was available, increasing the overall budget for the TSB so that things like SBRI could be increased would be good.

Q216 Chair: So that I have got this right, the two of you are basically agreeing that there aren’t any major gaps in the Government intervention mechanisms, but there is a slight difference between you in how it is managed and targeted. Is that right?

Tim Crocker: I would say the fact that 60% to 75% funding, depending on the scheme, has persisted for 20 years shows that there is a gap. I have spoken to senior officials in DTI and BIS about this; it is recognised. The other matched funding is not available. The major reason why SME projects that have merit crash is that you do the technical work and maybe spend a few hundred thousand pounds, and the follow-on funding that would match the Government funding simply is not available. To us, the mechanism of funding is one whereby SBRI procurement funding pays the whole bill. You do the job and your company is no worse off at the end of that, and you can move on to the next phase. That is probably a difference that won’t appear in the large company sector, where they largely have ongoing product income and revenues from other sources that can bridge those gaps.

Dr Bradshaw: That is one of the reasons why we have been very supportive of things like the Enterprise Investment Scheme being expanded, in terms of the rates and limits, as well as venture capital trusts and the ECF, which was given another £200 million in the last spending review. There are other mechanisms for getting money into that space.

Q217 Stephen Mosley: Technology businesses tend to be very mobile and are able to move technology around the globe. What makes one decide to invest in a new technology in a particular location? I guess it will be different as between big companies and small ones, but why would someone start investing in a certain technology in one particular place?

Dr Bradshaw: Most companies would say that the most important factor would be the knowledge-the people-and that can often override some of the other costs involved. If you have an established community of academics, other researchers or businesses making a cluster where you can build and develop that idea and take it further, that is probably the primary reason, and then you look at other things. Have you got the building space where you can set up a lab? Have you got the other support infrastructure you might need to be able to take things further? Have you got business partners who can come in and help you?

Tim Crocker: One of the important things about our membership is that they are largely people who have come out of R and D in a big organisation, a university, and set up in the private sector previously. Where those people who have particular expertise end up tends to be driven partly by family circumstances but also by a lot of previous schemes where you could get rent-free space in the peripheries of a country. A lot of businesses were attracted to the west country because they would be given a factory. The Welsh Development agency ran a lot of things like that. The policy of the 1990s and the early part of this century probably dispersed the small companies around the country.

On the question about investment, probably most of our member companies start with a technology idea, but they are in the commercial world so they are not starting this in vacuo. They are thinking, "This is an idea that can take off but it is bigger than our scale of business. Therefore, if we can get some Government support, we will take it forward." Then the matched funding element drops in. You then have to find the investors, so the proposition to the investors is, "You guys are investors. There are angel networks and so forth around with a lot of family and friends. This looks like a good idea. I can get £100,000 from the Government. Will you find us the other £60,000?" It is very organic in that sense and driven by the match of a new idea with a potential market.

Q218 Stephen Mosley: Assume that someone has set up and come up with a good idea. They are becoming successful and beginning to prove that the idea will work. How do we make sure that that new idea stays in the UK and doesn’t get taken elsewhere?

Dr Bradshaw: That is why it is nice to have things like the proof of concept funding and the return of Smart awards within the TSB. That is something that can help anchor the next bit of research and development to keep it in the UK. Beyond that, there are all sorts of other good things we can do. We can link them up with the universities, maybe to get more people that they require and the skills to develop things further, or access other R and D that might be needed to add to what they have got to make a commercially viable product. Then you scale it up at the other end where you might have initiatives to support corporate venturing. Some of the larger companies are looking at these innovative new technologies and might want to be able to help them advance further. In the past, we have had schemes that would support corporate venturing activity. I think that shut down in 2010 or 2011-I forget exactly when it was-and maybe it is time to have a look at some of those things again.

Tim Crocker: This is where divergence really opens up. Most companies manage to get to the proof of concept stage. If they are successful in getting large-scale venture capital backing, there is really only one business model in town. In the last year I have been to a number of investment events and have seen this. The standard business model is to get a few million pounds in Government grant, out of the TSB mainly, and a few million pounds out of the venture capital community. Then, because of the needs of the venture capital community-the angels behave almost exactly like venture capitalists now, the organised networks-the company is sold on. The business model is: three from the TSB; three from investors; sell for 20. You can sit in an investment network and see that business model churn, and the numbers change a little bit. The effect of it is that these companies, at the point where proof of concept has been passed, go into the hands of large corporations. The IPO in the public market is almost discredited now. I can’t find anybody who has done it recently, and I can’t find a single business adviser who will tell you it is a good idea. There are companies languishing in the junior markets that can’t get funds, so a sell-out for 20 million quid is the business school model, and most of those buyers will not be UK buyers. That is where the rub is.

Dr Bradshaw: I take issue with the emphasis put on "sell-out". Business life is like that. There will always be times when companies will want to develop that next stage further. They can’t afford to do it themselves, and maybe the best way of doing it is with a larger company helping them take things forward. There will be those who do grow themselves and do it organically; there will be others where the best route for them may well be to have different management brought in, to have funding from another source, or maybe to be taken over by a large company. That is just the way business works. They are commercial organisations. If you have a technology which is really good but to make a difference you have to get a market scale, which means global penetration pretty much straight away, it is very difficult if you are a small company to do that just on your own. Quite often, the best solution may well be to do that with a large company back-up.

Q219 Stephen Mosley: But the key thing for us here in the UK is to make sure that the skills, jobs and technology stay in the UK, even if the company is sold on elsewhere. How would you try to ensure that happens?

Tim Crocker: I disagree fundamentally with what you said. I just have to register that that is completely not the way we see it. I can promise you that there is only one business model in town for small companies: to get to £20 million and sell out. There has been a lot of research on building what has now become recognised as the equivalent of the German Mittelstand and how we grow medium-size companies from a sell-out value of £20 million to something with a revenue of maybe £100 million, which we are really short of in this country. To do that, you have to have longer-term finance that will buy out the VCs and keep the companies in this country. It may be in partnership with a UK company, but the statistics show that most of these companies are sold overseas because the Americans, Indians and Chinese all have their chequebooks open. We have pretty much stopped visiting members of the CBI to sell things out, because the first thing is that we haven’t got any money and we don’t do that.

Dr Bradshaw: Last year we produced our "Future Champions" report about mid-size businesses. One thing we looked at in there was the lack of a bond market in the UK for smaller bonds.

Tim Crocker: I absolutely agree with that.

Dr Bradshaw: Excellent. Finally, we agree.

Tim Crocker: If we had a bond market and other financial instruments, this disagreement between ourselves would disappear, but it is the absence of that medium and long-term money in the UK market that controls all this.

I have to add one other thing that is relevant here. In this "only one business model in town" there is also weakness in the patent system. When a small company in the UK files a patent you can get very good quality patent work done, if you can afford it, and the TSB is supportive, but you cannot exercise the rights of those patents unless maybe you have got a fighting fund of half a million quid; and that would be a minimum sort of fighting fund, as lawyers would advise you. Therefore, when you sell out a company to a large corporation and you have good patents, those patents have value. If you try to hang on to them, you cannot exercise the commercial rights of those patents if you are a £20 million-worth company. You can’t continually fight half-a-million quid battles to enforce your commercial rights.

Q220 Hywel Williams: This is a matter of curiosity on my part. For as long as I can remember, there has been concern about the brain drain. A moment ago Stephen Mosley made a point about companies migrating overseas. I wince at the term, but is there a brain pump? Do we attract in good and interesting small companies, or take advantage of those sorts of ideas from abroad? Are we as good as other countries in doing that?

Dr Bradshaw: That is a good question. I am sure we do attract them; just look at the "brain drain" bit as well. Don’t forget that we have a lot of good UK companies that are winning market share in places like the US. Okay, they are bigger companies, but the likes of QinetiQ and BAE Systems are doing very well overseas at the moment. Do we attract other good companies to the UK? I think so, and, yes, we have smaller companies that are managing to win big business with large overseas corporates. A good example recently would be ECO Plastics, which is working with Coca-Cola. They got private equity funding to develop a system for turning post-consumer plastic waste into food-grade plastic bottles again for Coca-Cola. That is now going to be rolled out much more widely than just in the UK. There are some really good success stories of what you can do. We would like to have more of them.

Tim Crocker: I cannot answer your question directly-I don’t know the answer-but there are some asymmetries built in, which we are not very happy about, on the same lines. For instance, UKTI has a budget to get overseas companies to invest here and set up their own company, but it can’t help you get investment into a UK company, which seems to be an own goal. It could be 100% Indian, but it can’t be 50%. On the other side, an awful lot of people look at the greener grass on the other side-Germany and America-and weigh the fact that they have family and lifestyle issues here. There are lots of pluses for the UK, so they stay out of a fairly solid allegiance. They would simply like some structural change made so that it is easier to do what Government want us to do. These are structural changes that I do not think have Exchequer cost. We can simply change some rules and do better.

Q221 Hywel Williams: I should say that I have a Siemens plant in my constituency of Arfon. One of the reasons the previous company moved there from the United States was lifestyle issues, because, as Mr Crocker said, it is a very nice place to set up, and it is free.

Tim Crocker: Yes. We view the world for medium and large companies in the UK as being quite benign, so a lot of the points made here by Tim I would not disagree with at all. That community is good. It is just the funding issue for SMEs which causes the difficulty.

Q222 Hywel Williams: I would like to get on to that point. It is said that the UK is very poor at growing small companies to medium-size companies, and medium-size companies to large companies. Tim Crocker has already referred to the finance provision. Is it just a matter of finance, or is it a matter of providing customers, and perhaps the Government as customer as well? Is it an either/or, or is it both?

Tim Crocker: In my view it is definitely both. SBRI, as we have it, is not quite the same as the American SBIR. The American instrument is probably quite crude, but it is the one that works best. That is what most of the survey information says. The reason we have matched funding is that Government wanted the investment community to make the business judgment and then come in alongside it with Government money. The fact that the investment community don’t want to engage and be in that early means that that judgment is not being made. If you then move to 100% or 105% funding, which is what would drive it on, you generate a very difficult decision, which is: who gets the money? Panels of what we call the great and the good, for perfectly natural reasons of human nature, always put the money in the safe and well presented, and not in the ones that retrospectively would have been the successes.

What they say in the States is that they get round that because they are not afraid to fail. If you have blanket SBIR funding, the exciting projects, which may have been hidden, will still come out. If we moved to 100% funding, it is better that it is procurement funding, because then it is at least decision making around Departments of Government, each of which has some expertise in the subject, is statistically more likely to put the money in the right places and, more importantly, is less likely to get stuck in a big institutional handout system that always winds up on itself and ends up looking expensive. I think the Regional Development Agency story tells you what can go wrong if you go down that path.

Dr Bradshaw: There is a two-sided story to this: the push side, where Government are helping to do things through the Technology Strategy Board or skills and things, and the pull side from the Government procurement line. Looking at the push side and what is available in terms of Government grants and aid that makes a difference, we go back to a piece of work that the Centre for Business Research at Cambridge university did probably five or six years ago, but it is still valid. They did a matched sample of high-tech small companies in the UK and the US, so they were very comparable, and looked at whether they got Government funding, what money they got and whether it made a difference. The UK came out quite well in terms of whether they got Government funding; it was about two to one in favour of the UK. But those companies that got funding in the US got five times as much as the UK ones. The story was that the money they got was transformational. It wasn’t just a little bit of money for skills and a little bit of money for a project on R and D; it was money that could make a difference in building up their innovation skills and perhaps leadership and management skills, and helping them to access finance and do some R and D activities. It was everything they needed in one place. That is the difference, often, with the picture in the US versus the UK. We do a lot of little things all over the place, but we don’t bring it together to make a real, critical difference.

Q223 Hywel Williams: How do they pick the winners, then?

Dr Bradshaw: I don’t know. We will have to go back to the story and look in a bit more detail at which ones got that money. They are setting the bar a bit higher, perhaps, in terms of what their market and technology potential is to get that money to start off with. In straitened financial times maybe you do have to set the bar a little higher, but, if you do that, make sure you give a critical mass of support that will make a difference.

If you look at it from the pull side-the Government procurement side-yes, absolutely, that is what can really make a difference. Despite what I have just said about grants, aid and things, most companies would bite your arm off for a contract rather than a grant. The more the Government can do to encourage innovation through their procurement lines the better, be it through SBRI or maybe making sure that all the public procurement space is also looking at innovation so that we transform it. We look at things like outcome-based procurement and whole-life value; we encourage those involved in procurement to look for innovative new ideas that might save the money long term, rather than short-term upfront costs. When you have some really good things in the public estate, showcase them. If you have got them in, show them off to the rest of the world and show what can be done. Make sure you are demonstrating to overseas buyers that we have done this in the UK: "They’ve got a fantastic contract with the UK Government, and now they can go and supply Australia, Canada or whoever else might need it."

Q224 Hywel Williams: It is said that Germany is better than us. We have compared ourselves with the US already. I do not know whether you are familiar with the model in Germany, but, if they are better, what are they doing better than we are? How do they do it more successfully?

Dr Bradshaw: The KfW bank is one of the things we have looked at, and we think that is very good, in terms of being an industry support structure. There is perhaps a little difference in culture, in terms of growing companies more organically for a longer period of time. It would be worth looking at that in more detail to see what the cultural difference is.

Tim Crocker: I would agree with that. The thing that I noticed in doing business in Germany is that the universities and businesses are integrated in a two-way flow system. Implicit in Government policy now-you see it in all sorts of policy documents-is that the game is to get the technology out of the universities and into the commercial companies. In the bio and pharma sector I think that is the way it works, but in other sectors it doesn’t. To me, it is bizarre that I have closer bilateral relations with German universities than I can have in the UK.

The signal of that is that in the UK we have the KTP finance system-knowledge transfer-which assumes transfer of knowledge from the university outwards. If you are on a peer-to-peer basis-in lots of cases our companies are more advanced than universities-there is no funding mechanism at all by which we can engage with the universities and our time and theirs can be paid for. All we can ever do is use TSB money to subcontract to them, and that is a very unsatisfactory relationship. There is very little walk-back of Government scientists, or research scientists, from the big corporations back into the universities after an industrial career. If I speak to people in Germany, these guys are in and out of the universities-five years here and five years there. Visiting professors spend half a day a week teaching, and the integration between universities and industry is entirely on a peer-to-peer basis.

Dr Bradshaw: We recognise that. This is a hands-on, people-based activity. A two-way flow of information back from industry into the universities and vice versa is essential. The more we can do to support that, the better, definitely. The KTPs do work quite well. One of the issues is the speed at which these things can be set up, and that is a particular issue for SMEs. It is a relatively bureaucratic process. Later, Iain Gray will probably tell you that it is not bureaucratic and it is all lovely, but we know there are smaller companies in particular who would like a shorter KTP activity to be able to set things up straight away. I think there would be mechanisms to be able to give money to the universities that we know have a good record on KTP, and say, "Look, we’ll trust you to set things up quickly", and then do the bureaucracy after they have been set up, rather than the current system, which means you have to go through all that process before you can do anything. The speed of delivery of some of these mechanisms would make a difference.

Tim Crocker: I would agree with that wholeheartedly. My point is not that KTP is bad, but that it is intrinsically one-way. If KTP were a bilateral deal and faster, it would solve an awful lot of problems inside the same funding.

Q225 Chair: Mr Crocker, earlier on you used a phrase I did not fully understand. You said that if we looked at the RDA story we would understand that. I think that was the phrase you used. What story do you tell?

Tim Crocker: I am based in the south-west. I do not think there is any favourable press for the south-west RDA, so I have probably the most jaundiced view. I know that the one in the north-east did fantastic work, but what we observed, which I think is the median story of the RDAs, is that they spent an awful lot of Government money on what I would call current account spending. It built up an infrastructure that was supposed to support the whole of industry, particularly the SME community, but it spent it on its own activities. I have been to a lot of events that are completely useless.

Q226 Chair: In the south of England.

Tim Crocker: Yes, except that I have met some useful people. What we would advocate in all this is to take one lesson from the past, which is that, whenever you set up a big bureaucracy, it tends to consume a lot of current account money; it is just spent that year, and no benefit is coming to our members. That is what everybody says.

Q227 Chair: This is the curious thing I find. Dr Bradshaw, when making a comparison with the Germans, used the phrase, "It’s cultural." I personally don’t accept that it’s cultural. There is actually a bureaucracy there, but it is a bureaucracy that works.

Tim Crocker: Yes. We have not managed to make our support bureaucracies work, and that is because we do different things.

Q228 Chair: Your criticism was not of the principle, but the mechanics.

Tim Crocker: I am holding up a red flag: be very wary about setting up another institution that on the current account spends a lot of public money supposedly supporting businesses. I would give you this germ of an idea. One thing that frustrates a lot of people in the small sector is the way that we have set up some of the technical standards. We are more private-this is done by private companies according to pro forma standards-whereas these things are done in Germany by the federal states at local government level. I would be greatly in support of spending public money to bring back into the public sector some of these regulatory activities at a detailed level, which then implicitly give support, because there is somebody to talk to who knows the answer to a particular technical problem.

What the RDAs did was to put in a vast senior management of people who were good at putting on events, shows and so forth, but if you asked them, "How do I pass regulation such-and-such?, the answer would be, "I will find you a consultant." We suffered deeply from that, whereas in Germany it would be, "You will go to TÜV and talk to Dr So-and-So, and he will tell you the answer." The state would charge you a fee for that, but it will be the definitive answer.

Q229 Caroline Dinenage: As I understand it, in Germany it is compulsory for a business to be a member of its local chamber of commerce. I have been a business owner since I was 19 years old and have never engaged much with a chamber of commerce because it was too large to feel that it was very good for me to grow my business. Is there any mileage in businesses getting support from others, particularly at the intellectual level?

Tim Crocker: I do think there is, but the approach of the last 30 years, during which we have progressively privatised this, is backfiring in an unintentional way. What you want are definitive answers to questions, so that you can say, "This person told me that", and that answer stands for the purposes of law, rather like the relationship we have with the Inland Revenue where, if you get a tax inspector to say, "That is how it is; I agree it", it is done and dusted. I cannot get that for technical regulations, which for us are real barriers to entry for products. If chambers of commerce became more and more semi-official, with true partnerships between businesses and local government, as they are in Germany, I would think it a very good idea. If they were the local government kissing off that form of responsibility so that it was only an opinion, it would work entirely the other way.

Dr Bradshaw: I very much support businesses learning from other businesses, and there are lots of ways of doing that. I don’t necessarily support compulsory membership of chambers; that is probably not the way to do it, but there are lots of mechanisms out there. The CBI does a couple of things. For example, we set up some clubs for medium size businesses around the country so that they can share ideas and learn from experts on innovation, access to finance, exporting and things like that. We have run a business-university collaboration group at the CBI for well over 20 years, in which we bring predominantly large but quite a few small high-tech companies into the room to discuss and share ideas and best practice about working with universities, and the best way of tapping into knowledge and expertise in the UK and overseas. That sort of thing is probably better; it is more of a technical thing that companies might need and that might make a difference, rather than some of the very general things you might get from just the chambers perhaps.

Q230 Caroline Dinenage: That is interesting. You have talked a lot about the lack of long-term risk-taking by equity investors. Do you see that as something the Government can influence? Do you think the banks could have more involvement? Do you see that the banks understand the needs of growing small and medium-sized technological businesses?

Dr Bradshaw: There is always a knowledge gap. The companies themselves are the ones that probably know best where their technology is going. Do the banks have all the expertise? Maybe not. There may well be a need for better expertise in certain areas. That is why it is very useful to have things like the Green Investment Bank, where there is a focus on a particular sort of technology or technology area. Should the Government be doing more to support equity investment? We have lobbied for a long time for the cost of raising equity to be normalised with the cost of raising debt. At the moment there is a difference between those two. We would far rather that businesses were taking investment decisions based on what they need to grow their companies, rather than on their tax position and their profit and loss account.

Tim Crocker: There are lots of elements to that question. The question sometimes gets simplified to: should the banks be involved in financing R and D? I don’t think there is any way you can use debt finance to finance R and D. There is an implicit risk there; if the R and D activity fails, who repays the bank? Therefore, you need some of the funding to do R and D.

One thing that is fundamental and unavoidable is that the UK is in the equivalent of an arms race on R and D funding. All the competitor nations that we aspire to be as good as are spending lots of public money on R and D. There is an EU study by Professor Mazzucato, who is now at Sussex university, which spells this out in total detail. It is the most recent study I am aware of, and it fits with all the facts that I have ever observed about this. If we pose the question of whether, to get more R and D done in the UK and make it stick longer, we should do something to raise more equity or put in more Government funding, the only rational answer is to say that you have to put in more Government funding, because nobody has ever done it any other way. Our competitors are doing it by Government funding in the here and now, so we would be taking an enormous risk, even if we could do it.

If you are going to move to putting in Government funding, the question becomes: how do the taxpayers get back their funds? If you look at the way the VC community works in the United States, it pays an awful lot of corporation tax back to the Government. When the US Government do their accounting on SBIR, as it is there, they find that it is a virtuous circle. They can afford to spend this money because the finance community is paying back the taxes, the profits are appearing on the stock markets and so forth. I am very doubtful that technically you can do anything about equity funding more than the initiatives that are going on with organisations like Crowdcube and so forth, which are pushing it along. I think Government have to bite the bullet and say that getting R and D through to commercialisation is, in our competitor nations, basically a state-funded activity, and then set up the tax system to make sure that it comes back in.

Dr Bradshaw: Don’t forget the pull side of that equation. I go back to that again. That is the thing that makes a real difference-getting a contract. If you are using the public procurement system, not just through SBIR but more widely, to try to bring through innovation, and you have a better market where there is an open dialogue between potential suppliers and Government procurers about what is possible for the future, looking at new capabilities and new technologies coming on line, you will get a better environment for those technologies and ideas to be developed further, because there is then a potential route to a customer.

Q231 Caroline Dinenage: If I may ask you about the business community, is there sufficient support and encouragement among the larger businesses for smaller businesses within their supply chain? Is there anything that the Government can do to encourage that?

Tim Crocker: Our supply chain is very discontinuous. Many of our members will have contracts with big companies, and that is their best way forward, but it is very binary. You might or might not, but it is very hard to get the first one.

To add something on the issue of banking, I think the Committee, BIS and the Treasury need to look at the conditionality of banking in the high street, rather than the rates that they see. One of the things that comes up time and again is, "We applied for this Government grant and then we are asked for personal guarantees", with people being wheeled in to sign off on £100,000 worth of Government support-soft funding-for clean tech or one of these things, and then the directors are asked for personal guarantees. The problem with personal guarantees is that they limit the scale of ambition of the company to the financial resources of the directors, if they are brave enough, and turn it off if they are not.

I know we had an answer from the DTI 10 or 15 years ago that, with the Government-backed guarantee schemes, 75% of the loan was guaranteed by the Government and the bank had to pick up the other 25%. The banks made the borrowers pick up the other 25%. Nobody from the Government side is looking at that conditionality. If you walk into the boardrooms of the banks, they know nothing. Mystery shopping and inspecting deals is the only way it is going to happen. When I started my business, I was paying 2.5% over base; on very small short-term loans, I am now paying 9.5%, and I know some people who are paying 20% over base. There is no point in the Bank of England setting the rate at 0.5% if the banks are still lending as they were in the mid-1990s. This is just running on and on.

Q232 Roger Williams: We have had written evidence that the UK needs a clear national innovation system, but what do businesses need most of all? Is it the right people, access to equipment or access to cash?

Dr Bradshaw: I don’t want to sound like a broken record, but it is a push-and-pull thing. It is the innovation system, industrial policy, which you can wrap up into the same package, and public procurement. I think the No.1 ask from business is long-term strategic focus from Government. If you are looking at an R and D investment and the time it takes to bring that through to commercialisation, obviously it is different for different sectors, but for the aerospace industry it could take 20 to 40 years to realise a return on your investment. So having confidence that the Government will still be interested in the aerospace industry and will support the activities you are doing over that time frame with the R and D that is required to bring that through to market is essential-making sure that the overall environment is good, in terms of universities, R and D tax credit and things. These things take a long time to pay off. That is what companies are, No. 1, looking for: is it going to be stable in the UK? Do we have a good environment for the long-term future that will get those people through, get the money and get a potential market?

There are all sorts of other things beyond that. On the people side, yes, definitely, we know there are particular shortages in engineers. The Institution of Mechanical Engineers, or one of the other organisations, looked at that and said that we needed to treble the output of university graduates that are coming out at the moment with engineering degrees to be able to meet the demand we know we will have. That is an issue.

In terms of equipment and facilities, the universities themselves have a lot of that on offer. There are more schemes that we can use to encourage companies to have a look at that and see what is available. The innovation vouchers are being brought back in again to encourage the first contact between SMEs and universities to see what facilities are available to them. I think the catapult centres, as they are now called, fill that same slot. Last time I called them the "Andrew Miller centres", didn’t I? We were debating the name then.

Chair: We preferred "Alan Turing".

Dr Bradshaw: That is right. There are lots of mechanisms out there now that have facilities, expertise and equipment. Can we make sure that the community is aware of those, and that you can best match up what the companies need and what is available in the UK? That is something we still need to work on. It is an ongoing problem. We are getting there, but we are not there yet. More emphasis needs to be put on that.

Q233 Roger Williams: Mr Crocker, you did say right at the beginning that more cash would be a good thing but it is not an option at the moment. A senior member of the Government said that he was going to give 110% to growth. I don’t know whether you can understand that, but what I understood by what he was saying was that, if there was some Government spending that isn’t delivering growth, it could be taken to another sector where growth could be better achieved. The case has been made that investment in science and technology is a real element of growth in the national economy. Is it that politicians are not making the case for more investment in science and technology, or is it business or the universities, or is it just the Government who are resistant to that argument?

Tim Crocker: I think our membership has been invisible to Government for a long time. The universities sometimes do come across as if they are the only source of innovation. That is simply not the case; the statistics say otherwise. When I said we understand that cash is short, I absolutely agree that the factor 6 figure is the ballpark of the per capita increase in Government funding that we need if we are to compete with the United States. I take it that it is a decision for politicians where you are going to get that factor 6 from. My plea is not to spend it on salaries of advisers, because this becomes wishy-washy money. That is not a plea for not spending it in the public sector. I would like to see EMC inspectors, or whatever the equivalent is in biomedicine, so I can get decent, instantaneous answers to questions.

Is it money or any of the other things? It is all the things that have been said, but for our sector, it is the length of the money that is the absolute big thing. Four or five-year horizon money does not allow you to do anything other than sell the company. People say there are no medium-sizes companies because they have all been sold to big companies, and it is just an inalienable truth.

The point made earlier about us needing to package the money in bigger slices is absolutely true. If you receive £200,000 of R and D money it seems a lot, but the lawyers who do the deal will want £100,000 of that. So we need bigger packages; we need to think bigger. One idea arose earlier that we have been looking at. The bond market is the only route forward where, as far as I can see, the Government have to stand by some sort of growth bond. That growth bond has to go predominantly into some sort of procurement funding.

Q234 Roger Williams: Often, the universities have provision for high-technology machinery and equipment. Is that always available to the companies that really need it and would make best use of it?

Tim Crocker: No. There is no lack of willingness; these things are done with good intention. The mechanisms at the detailed level are not there.

Dr Bradshaw: The facilities are there, but often it is the matching of the need with the facility, and finding routes to do that is difficult.

Q235 Roger Williams: Can you give us a view on the catapult system and whether it is going to be a good one for smaller to medium size companies?

Dr Bradshaw: I think it is still too early to say. These things are only just being set up properly now. A few of them-the advanced manufacturing ones-have been going a little longer. We need to see how they evolve with time. If you pull the roots up now to try to examine them, you will do them no favours. We would like to see them settle down a little, and let’s ask that question again in a year or two and see what success they can show. We always said, when they were set up to try to emulate the Fraunhofers, that the Fraunhofers had been there for many years and had built up that brand equity by having a long-term relationship and being able to demonstrate success over time. Let’s give them a little bit of time to settle down and show they can do something useful before we start to try to pull them up.

Q236 Chair: When you undertake your review of the catapults and how they are performing, I would recommend that you look at the Fraunhofers. One of the reasons I picked you up on the word "cultural" is that, when I asked a senior German civil servant whether it was the triangulation involving the Fraunhofers that created the longer money that Tim Crocker is looking for, his response was, "Mr Miller, I used to be a banker. The answer is yes." I think the argument that it is cultural needs challenging, and organisations like the CBI need to ask themselves whether it is structural. If the answer is yes, I think you would agree there is a case for going further with the catapults. Is that fair?

Dr Bradshaw: Do you mean expanding the catapults and doing more sectors and giving them more money?

Chair: Despite their name.

Dr Bradshaw: Despite their name. I don’t think they have been there long enough to be able to see whether they are the right mechanism. There is a lot of good value in them, but they need to establish themselves. Let’s not forget that they are also competing with some very good university centres and research and technology organisations, but they are fitting themselves into the innovation ecosystem in the UK and they have to find their space. If we find that they are just duplicating effort elsewhere, then yes, we will be vocal about that, but if we find they are doing a really good thing in bringing bits together and making a difference that is good, but it is a bit too early to say at the moment.

Q237 Sarah Newton: I am very fortunate to have the last question. This is your last opportunity to say anything you have not said before. You have given us an immense amount of useful information and food for thought. It has ranged across the medium and longer term and some short term. We have got complete focus now, with the reshuffle, on growth, so if you had the Ministers responsible here today, what would you want the Government to do right now or within the next 12 months to address the issues that you have shared with us today?

Tim Crocker: I think the need for long-term strategy is the absolute core of this, and the long-term strategy will then pick up the points we have been making in detail about money, patents and so forth. When you make the distinction between "cultural" and "structural", a culture develops from the structure that is there; it is an institutional process. I would say that at the moment we have the wrong culture and institutions that are probably not performing as well as they should. It is possible to fine-tune the institutions, but the trend that seems to have been continuous since the last war is that we do not find the means of doing technocratic governance very well. Other countries that we admire for their technology have state-run railways that run perfectly well.

I do not want to get into the politics of this, but our solution is different. My absolute gut instinct-I am a commercial person through and through-is that it is the interface between private industry and the state where the boundary has gone wrong. The state has shed a lot of low-level activities that are absolutely necessary and thrown them into the private sector, and that forces the divide between us and the large companies, because the large companies benefit from this; they can soak it up. They have accounts departments that can cope with 30-odd different national insurance rates and so on and so forth. The little companies are systematically disadvantaged by this. It is not just tax rates; it is every little rule and regulation. If I want goods signed off for sale in this country, I end up signing the certificate of compliance. If I go to a German test house, the test engineer, who is an employee of the German state, signs it off. That is a massive liability difference.

I know Mr Harradence is here later. I think it needs to be absolutely inside BIS. Government have to view BIS not as a spending Department but an earning Department, and they have to have the absolute lean and mean crack team that is going to work with industry, not on its own, to get this structure sorted, and then everything else will fall out. I would hope that out of that we will see a means of getting longer-term money, and moving grant support from Government away from matched funding, which is the real and immediate bugbear. Also-I have not said this sufficiently strongly-the patent system needs fixing for the small companies. The big companies love it the way it is; we don’t. It is a Mandy Rice-Davies thing: they would say that, wouldn’t they, because it’s good for them, but it’s really bad for us.

Q238 Sarah Newton: Could you expand on how it could be improved for small and medium-sized businesses?

Tim Crocker: At present, if my car is stolen I call the police, who try to get it back; if my patents are stolen, I have to go to a civil court, front up a few hundred thousand pounds and have a fight with a multinational. That means that my investors have absolutely no security over the patents we hold. In more than half of EU countries, patent infringement is now part of criminal law to fix this. In the United States they have triple punitive damages. In this country we have absolutely nothing. In the hands of a big company, those patents are perfectly powerful. As a bargaining tool for small companies, they are worthless; they have no value. We can only exercise that value by sale to a big company. That is the other pillar by which we do not have medium-scale technology companies. Dyson broke the mould, but his success should not be seen as the normal path. He did brilliantly well to break that mould.

Dr Bradshaw: I will limit myself to three things, although some of them are quite big. The No.1 would be to have a new approach to industrial strategy that is focused on our competitive advantage sectors and helps to make sure that they are being encouraged and supported to export and develop for the future. A lot of that could well be around developing their value chains in the UK. For example, there is a supply chain initiative at the moment that BIS runs. It is only for one year and it is for about £125 million, but what about the next 10 years? Could we repeat that again and again each year for the next 10 years to build the facilities, skills, and innovation investments required for the supply chains in the future? The first is an industrial strategy.

The second would be the changes I mentioned around public procurement. That is the big pull factor. I suppose there are three big areas around that. One is creating a better market environment, which is an open dialogue between suppliers and buyers about what is potentially possible. It is about capability reviews, like the tunnelling capability review produced recently for procurement pipelines. Those are all very good because they help to give companies confidence about what is needed for the future, but those need to look a little further out, because at the moment they are more about capacity than developing new capabilities for the long term. If we looked ahead up to 10 years rather than just five years, which is what the current plans look for, that would really help. Then there are wider changes within the outcome-based procurement, looking for whole-life value and being able to transfer money between revenue and capital budgets in procurement to help bring through some of those changes. Those would be very good.

The third and final thing would be around the funding for the Technology Strategy Board. We have always argued that it should have funding on a par with something like the EPSRC. That will effectively double its budget at the moment, but it has to work with business and focus on the things business wants. At the moment it does an awful lot of good things, but its money is spread very thinly. If we could bring a little more focus to and effort around some of the core competitive advantage sectors, we could make more of a difference, and that requires more finding.

Q239 Sarah Newton: If that budget was doubled, would you keep the ratio of expenditure about the same, or do you think it should be changed?

Dr Bradshaw: Within the TSB?

Sarah Newton: Yes.

Dr Bradshaw: Whether the budget is doubled is the biggest question. If we achieved that, we would be delighted, and then let’s have a look at how we spend it.

Chair: Gentlemen, thank you very much indeed.

Examination of Witnesses

Witnesses: Fergus Harradence, Deputy Director, Innovation Policy, Department for Business, Innovation and Skills, Iain Gray, Chief Executive, Technology Strategy Board, and Sir John Savill, Research Councils UK, gave evidence.

Q240 Chair: Gentlemen, welcome to this morning’s session. You are all familiar with the terms of reference of this inquiry. I notice that you also listened in to a significant part of the previous session. For the record, would the three of you kindly introduce yourselves?

Sir John Savill: I am John Savill, currently serving as chief executive of the Medical Research Council, but today I represent Research Councils UK, which is the collaborative organisation of the seven research councils.

Iain Gray: I am Iain Gray. I am the chief executive of the Technology Strategy Board.

Fergus Harradence: I am Fergus Harradence, and I am the deputy director for innovation policy in the Department for Business, Innovation and Skills.

Q241 Chair: Welcome to the three of you. The Government have told us that science is core to the growth of the UK economy. In your opinion, have the Government got the balance right between the funding of basic science and stimulating and supporting commercialisation?

Iain Gray: I think the answer is no. If you look at the responses we heard earlier, there were some clues to that as a direction of travel. The balance is wrong. The key question is how we address that balance, and too often the wrong ideas come forward as to how to redress that balance. To look at things in a total cross-governmental way is one of the ways forward to address the balance, but, fundamentally, I think the balance is wrong.

Sir John Savill: Can I qualify that view from the perspective of the research councils, though I would not disagree with it? The first thing to remember is that without fundamental research and discovery there is no translation. If changing the balance results in reducing the funding to fundamental research, there will be less to translate for the nation and that has to be borne in mind.

The second point-I won’t bore you with the detail but will happily go into it if you are interested-is that the research councils commit an awful lot of resource to the translational pathway. In my own area of biomedicine, where the valley of death is a very real phenomenon, we have changed our way of working over the last four or five years.

Thirdly, I would agree with Iain that the balance might appear to be wrong. It is interesting to compare the devolved nations of the UK. I live and work in Scotland some of the time. The balance there between Government funding through Scottish Enterprise to the research council funds that reach Scotland through competition is different.

Finally, all research councils enthusiastically engage with TSB. For example, in developing the cell therapy catapult, EPSRC, MRC and BBSRC have invested £25 million in a regenerative medicine platform to speed the transfer of fundamental research to the catapult.

Personally, I have been involved in thinking developed at the Office for Strategic Co-ordination of Health Research, chaired by John Bell, where we recognised a real shortage of funding available to TSB. We were able to press the case with Government for additional funding for TSB to partner MRC in the biomedical catalyst. I would agree that the balance might appear to be wrong. I think the most obvious imbalance is in the budget of the TSB to the research councils.

Q242 Chair: "Is wrong"; "appears wrong". Mr Harradence, I guess we are going to hear a slightly different version from you.

Fergus Harradence: I would try to agree with both points of view. I agree with Iain that, if you compare the budget of the Technology Strategy Board relative to the budget of the research councils, you would draw the conclusion that there is a need for more funding to go to the Technology Strategy Board to support innovation, technology development in business and the commercialisation of research, but I don’t think the solution to that problem would be to say that we should crudely aggregate those budgets and decide to take some money away from funding basic research, which performs a tremendously valuable role, and not only in building intellectual capital in the country and supporting the early stage research that leads to translational research and technology development in business; it also trains the cadre of skilled people that we desperately need in the economy, who will become the innovators of the future.

Part of the solution is to seek additional funding from outside for the Technology Strategy Board to try and get a better balance. I also agree with Iain’s point that there is a big need for us to become more joined-up across Government. A lot of additional funding for science, technology and innovation is held by various Departments and other public bodies, and that is not part of the simple TSB research councils’ calculation when you look at the total budget for science and innovation. There is more that we could do to link up with Departments like Transport, Defence and Health to achieve a better and more coordinated approach to support for innovation that will draw on the investments we make in the research base.

Sir John Savill: I agree with the last point. I have lived in a space where over the last six years we have tried to coordinate the public sector research budgets involved in health research. They are not held just by the Medical Research Council but also by four national health service research and development systems. OSCHR is a model that has worked to coordinate spend across Government Departments quite effectively; indeed, as such it has attracted international visibility. In my travels within the European health research community I am often asked about OSCHR. It is an example of how you can achieve what Fergus has highlighted in other domains.

Q243 Chair: This could take us down the lines of an entirely different inquiry if we start focusing too much on the structure of Governments, but there is some common ground between you. Are there other budgets that could be refocused that would help release resources for commercialisation purposes?

Iain Gray: To give my perspective, first I reinforce what John said. The working relationships among the Technology Strategy Board, the research councils, universities and science bases are very good. While I gave a very blunt and straightforward answer, I would reinforce that it is not about redressing the balance by reducing investment in science and technology.

If you look at the overall investment in R and D across the big spending Departments of Government, we heard earlier this morning about SBRI. The procurement of research across different Government Departments needs to be drawn into this debate. If you look at the overall public sector expenditure across Government Departments, it is an order of magnitude sum of money greater than that invested through BIS in the Technology Strategy Board. I believe it is how we can tap the large R and D expenditures and public sector expenditures, particularly in pre-commercial procurement, to help assist in the innovation agenda, bridging the valley of death that we are talking about this morning. To my mind, that is where there is some untapped resource.

Q244 Chair: Is it your view that some other countries do that better? The obvious part of your answer is to look at the procurement side. For example, you would not see too many nonFrench police cars on the French roads, whereas in the north-west of England we have police forces buying Kias.

Iain Gray: There are examples. Probably, the most visible public sector example in the US is related to defence, SBIR and the DARPA type of scheme. Equally, you could look at other big spending Departments. You could look at health and how we do things in energy, but, from a US perspective, I would cite the way that the defence budget is used to stimulate innovation and growth through SBIR and DARPA as a prime example.

Q245 Chair: Mr Harradence, are there any projects under way that we ought to be made aware of where some of these issues would be addressed?

Fergus Harradence: Yes. I think we have made quite a lot of progress over the last five years in becoming a more intelligent lead customer in Government and putting in place some procurement mechanisms and processes that can help us use the power of public procurement to pull through products and services. One of the great successes of the Technology Strategy Board has been the implementation of the Small Business Research Initiative in the UK. We had two previous goes at this in the early part of the last decade. Both times the programme failed because it lacked focus, resource and active management.

Since 2009, when we relaunched the programme, we have been able to build it to a level of about £20 million a year of expenditure, which compares favourably with a lot of our other business support programmes that are focused on technology-based SMEs. So far under the programme we have awarded over 900 contracts worth £78 million, of which 55% have gone to either small or micro-businesses employing fewer than 50 people in total, which typically is the cadre of companies that the Government and the public sector more widely find it most difficult to contract with. There have been some successes, but the scale of the programme is still too small. In an ideal world, I would like to see it more than double, and we should be aiming to grow this to a level of about £50 million a year, which I think is feasible and achievable in a relatively short space of time.

I would highlight a couple of other initiatives. We have been doing some work on better supply chain management and how Government can engage more effectively to support the development of new products and services over the longer term through our forward commitment procurement programme. We have used that to procure zero-waste mattresses for the Prison Service, which are more environmentally friendly and cost less, and to develop a new type of ward environment, this time for the national health service. We have got to the point where it has been demonstrated. It is in the Building Research Establishment in Watford. Most recently, in May of this year we launched our public/private procurement compacts. This is genuinely new and innovative. I am not aware of anyone else in the world that has done it. For the first time, the public and private sectors in the UK are coming together in areas where they have a shared interest in stimulating demand for new products and services. We are running them in low-carbon vehicles, biogas and zero-carbon catering.

Q246 Pamela Nash: Is that a UK-wide initiative or just in England?

Fergus Harradence: All the initiatives we run are UK-wide, but we work with specific local partners. In the case of the forward commitment procurement programme, we are working with hospitals in England, but there is certainly no reason why hospitals anywhere else in the UK cannot participate.

Q247 Pamela Nash: Has there been an approach to NHS Scotland and Wales?

Fergus Harradence: They are aware of what we do, and the Technology Strategy Board works very closely with the NHS and Health Department in Scotland. They co-fund a number of TSB programmes, so, overall, Scotland is one of our bigger partners on the innovation side.

Sir John Savill: Perhaps I may reiterate that the OSCHR structure involves Iain and me, but the R and D systems are from all the four nations. Andrew Morris, the chief health scientist in Scotland, is a member of OSCHR, so in the health area there is very good communication. We have had many discussions, as Iain knows, about the importance of innovative procurement. We think we have seen movement in England in the Nicholson report. I was a non-executive director of Lothian Health Board for eight years, and I know this is an issue on the agenda in various health systems. The MRC recently made a visit to Wales; indeed, we are going to Northern Ireland in October. Again, I encountered interest in this innovative procurement agenda in Wales and hope to do so in Northern Ireland.

Q248 Pamela Nash: I appreciate that. From the evidence that we have received from the Shelford Group, which I appreciate is concentrated in England, I was pretty shocked by one of the quotes we have been given: "Currently the NHS invests more than £1 billion each year into primary research, but as an organisation it lacks an agreed structure to capture the value of that investment in intellectual property." Is there any evidence at all that this expenditure is benefiting life science companies and medical technology companies within the United Kingdom?

Sir John Savill: I am sorry. Any evidence of?

Pamela Nash: Is there any evidence that the money the NHS spends in England on R and D is being translated into business success within the UK?

Sir John Savill: It is important to explain that a lot of the research and development done in the NHS is late stage and does not involve the development of new intellectual property. I can refer to my Scottish experience with Scottish Health Innovations Ltd-SHIL-where there is a real effort by the Government to mine intellectual property that derives from NHS innovation. A good example of that is Touch Bionics, a company that makes artificial limbs, which came out of a Scottish NHS innovator.

I would like to move on and recount some anecdotal evidence. I went to an event that Iain organised for innovators. In this case they were from the English NHS. They had developed really interesting new approaches to improving health care. They had formed companies to try to develop that, but had found it impossible to penetrate the NHS in the shape of a lead customer. This is an issue in the English report. If the NHS were to be required to spend a very small part of its procurement budget exclusively in small innovative companies, that would help these innovators to penetrate the market and demonstrate worldwide that they can sell into health care.

Q249 Pamela Nash: Would you be able to share with us what the particular difficulties were in penetrating that market?

Sir John Savill: The particular difficulty is that the procurement system exists to drive down price, and therefore it favours the high-volume trader. The small company does not trade at high volume but gets enormous benefit from selling 20 bits of kit to a small part of the NHS. Iain will probably want to expand on that.

Iain Gray: To give you an example, the bottom line is that there is a huge opportunity. Some of the restructuring, with the commissioning board looking at things in a more central way around innovation, presents big opportunities.

Coming back to SBRI, Tim Bradshaw in the previous evidence stressed push and pull. It is the NHS providing that pull that is the key ingredient in this. If you take SBRI, I will quote just one company: Eykona, which is a company which essentially has been developed. It uses a 3D imaging type scheme to assess wounds remotely in the home and avoids regular trips to hospitals and things like that. It is a terrific piece of technology. It came out of defence and 3D imaging technology; it is a great spin-out from other sectors.

Coming back to previous evidence from Tim, Eykona won an SBRI contract. It has taken it to the next stage. The managing director of Eykona would say, "We would not exist as a company were it not for SBRI", but he has now reached the critical point John describes, which is: how does he move that on now into a procurement-type contract in the NHS? Ironically, the market he is now chasing to procure the technology that has been developed under an SBRI contract is overseas. He is chasing overseas contracts because, when it comes to the critical point of the next stage in the procurement contract, there is a risk-averse approach in the UK.

We have got great science and technology; we have got the SBRI in place, which is helping small businesses get their technology to the point where they can take it to market; and we need that pull at the next stage to act from a procurement point of view to move the technology into the NHS. I believe that has to be looked at in a much more holistic way.

Fergus Harradence: One of the problems across the Department of Health and the NHS is the lack of an obvious front door for small innovative companies that would be parallel to, say, the Centre for Defence Enterprise of the Ministry of Defence. As a small company you are dependent, in most cases, on finding an individual hospital that is willing to procure your innovative product or service. While there are certainly some hospitals in the NHS that have done that and been helpful in bringing products to market, you still lack that piece of central infrastructure that is able to brigade demand, prioritise, signal and market where the big strategic needs are in terms of health procurement. That is probably something that is lacking at the moment.

Q250 Pamela Nash: You mentioned the MOD. Is there evidence that the MOD is much better at this? Can I ask you to compare that with other Departments in Whitehall? Are they better at spending the money?

Iain Gray: We have just signed a charter with Dstl, which is part of the MOD. The chief executive, Jonathan Lyle, and I have signed a charter to work closer together particularly focused on SBRI, and the MOD is committing money to that. It is the same analogy. That is a small part of MOD expenditure. It is looking at how you connect that development side of things to the bigger operations side of MOD. How do you create the pull and demand from the big MOD spending budget? For me, that is where the connection needs to be made, but we are making good connections at departmental level on the R and D side. It is the pull that is the key to making this successful now.

Q251 Pamela Nash: Obviously, my experience is based on my constituency in Scotland. Visiting businesses over the recess, the main problems I found were for medium size businesses to go into any sort of public sector contract. They were going up against companies from the rest of the EU when it got to contracts that they might be going for, which is often unfair because those companies may have additional Government support in their own countries and lower wage bills and poorer conditions for their workers. For smaller companies, there still seems to be a lot of red tape in trying to get Government contracts. One company, without giving too much away, has a product that could help prevent hospital-acquired infections in Scotland, yet they have been told that it would be difficult for them to sell to the NHS because there is no one else in the UK with this product; therefore, there is no competition. I would like to know more about what the Government and their agencies are doing to try to cut through this and help British companies get these contracts.

Fergus Harradence: The Cabinet Office through the Efficiency and Reform Group has been leading a programme of work to try to tackle two of our big problems. The first is to simplify and streamline the procurement process and free up more time within procurement functions to enable them to go out and engage with the marketplace and businesses in a strategic way, combined with better signalling of Government demand in particular areas. The work that has been done on future capability needs in areas like tunnelling would be an example of that. We published quite a lot of information earlier this year about future Government needs.

Secondly, there is a big challenge in upgrading the skills and knowledge of people in the procurement profession. The difficulty in doing that is that procurement is not in most public sector organisations a centralised function; it is often devolved to a number of agencies or individual public sector organisations like local authorities and individual hospital trusts. Fundamentally, it is their job to pay and manage their staff and decide what they want to do. When you try to encourage people to go out and engage in the marketplace, it is very difficult to have the kind of strategic approach adopted in the US where procurement is much more centralised within major departments like the Department of Defense, and it is a fundamental part of their operations. The culture, structures and the way procurement is managed in the UK are fundamentally different, and that makes it hard for us to procure in the same strategic way that you see the US doing. I would not say that these problems are insuperable; they could all be tackled over time, but, being realistic about it, it will be a process of long-term improvement and cultural change.

Iain Gray: To give a short answer to Pamela, I would be very interested in talking to you about that specific example. We were talking about hospital infections with the First Minister in Scotland and how SBRI could be a tool to help small businesses like that. It is a generic issue.

In a broader sense, I tend not to talk about procurement but the role of Government as a lead customer. Procurement is, "I want something and I want something now", and inevitably you have a value system that tends to focus on very specific criteria when you are going to procure something. You do that as an individual; Government Departments would do that. The role of a Government as a lead customer is to help to try to identify the needs much earlier on so you can help work with businesses to see what the potential solutions are.

We heard about standards and regulations and how they can help, not hinder, UK businesses win contracts. It is a matter of getting in much earlier to identify the challenges and problems that hospitals and public sector bodies face and using that need to engage with business and understand what the potential solutions and challenges are, and then have the mechanisms by which the R and D they develop to support those challenges can move into procurement contracts. It is not just about a one-stop procurement decision; it is about the role of Government as a lead customer early on in the process that I think is important.

Q252 Chair: Mr Harradence, I think that just before you came into the room Tim Crocker said that UKTI helps companies from abroad set up in the UK but doesn’t help UK companies. Given your background, is there more UKTI could do to help in this space?

Fergus Harradence: You have to look at the role of UKTI. Its role is really twofold. First, it supports UK companies to do business overseas, including the public sector overseas. For example, when you have something like the Olympic Games in Rio and the Commonwealth Games in Delhi, UKTI will make an awful lot of effort to help ensure that British companies have access to those contracting opportunities. Secondly, it has a role in inward investment and bringing companies into the UK. One of the things companies look for when deciding whether to come to the UK as opposed to another location is their access to a customer base, whether that is in the public or private sector. It is not really the role of UKTI to provide support to UK businesses seeking to do business with the public sector in the UK. That is something that the Department for Business, Innovation and Skills would do working with the Cabinet Office, because we have a responsibility for procurement and innovation procurement respectively.

Q253 Chair: There is this concept of joined-up government that we were trying to encourage you to think about at BIS. Is there not a case for creating a parallel mechanism to make sure that indigenous companies are not disadvantaged in that process?

Fergus Harradence: I am not sure there is any evidence to show that British companies are disadvantaged in public procurement decisions. I agree there is some anecdotal evidence, but ERG has had a look at the award of contracts to businesses. Broadly, the level of awards of public sector contracts in the UK to British businesses compares with the situation that you would see in France, Germany and other countries.

Chair: I will leave Mr Crocker to bend your ear after the hearing.

Q254 Stephen Mosley: A couple of questions ago the Chairman was asking about the balance of funding between research councils and wider industrial incentives. Looking specifically at research council funding, what is the balance between the funding of blue sky research through to the proof of concept side of it? How do you decide where that balance of funding lies?

Sir John Savill: First, it is a difficult question to answer, but there is a feeling in the community that, very roughly, two thirds of the research is what you might call blue skies and one third right across the seven research councils is more directed research. Each research community has different opportunities to translate and different challenges. In informatics research might move very quickly into the market. The Committee will know that in biomedicine it is a very long haul, over at least a couple of decades. So the approach you take as a research community depends on the particular problem you face.

All the research councils have identified translation as a priority. I guess you could identify that at least 10%, or towards 20%, of the research funding is directed specifically at translation. If there is time, I would happily run you through a list of things that the research councils broadly share in the way they try to promote translation. We are definitely not ivory towers that just do discovery blue skies research. We want to see that research improve society and benefit the nation’s wealth, and there are various strategies to do that. I will happily go through them if you would like me to.

Q255 Chair: It would be helpful if you could provide a note covering that. I would also be interested to know where that process overlaps and engages with the TSB.

Sir John Savill: I will happily do that and also cover in the note to you the relationship with the TSB.

Iain Gray: In the relationship between the Technology Strategy Board and research councils, both in a collective sense and on an individual research council basis, in our delivery plan we have agreed objectives and where we do work together. As John has said, different councils have different objectives. It is not just about science in a blue skies commercialisation sense. There is a very strong emphasis on the role of social sciences and things like design and the behavioural side of things, which engage very closely with the commercialisation side of the agenda as well. For each of the research councils there is, as part of our joint delivery plans, a statement of those areas, projects and activities where we will work together. At the very beginning, we heard John talk about the good work we have been doing with MRC, particularly around the biomedical catalyst and the cell therapy catapult area.

Sir John Savill: One of the strongest arguments for seven research councils rather than one is that each looks to a pretty different but fairly well defined set of industries where the translational pathway has different barriers and requirements. It is definitely not one size fits all, but, as you will see, there are some approaches-collaborative PhD studentships and joint research centres-that really work for campuses and a number of research councils. So I will happily write in about that.

Q256 Stephen Mosley: That would be helpful. Have there been any changes in the balance of that funding in recent years, and what are the drivers for that? Are they economic or political, or is there something else?

Sir John Savill: There definitely have been. In the Medical Research Council’s domain, a key stimulus was the report of Sir David Cooksey, who has given evidence to you. That highlighted that we needed to behave differently if we were to promote the translation of biomedical research. There have also been some very interesting differences from industry. If you look back 20 years, industries like Rolls-Royce had a monolithic discovery and development model, not unlike pharma. Rolls-Royce realised that it couldn’t lead the world if it had a monolithic R and D model, and discussed with EPSRC the idea of joint technology centres in universities. So a push has come from industry to get into universities with collaborative funding of research councils. EPSRC has over 20 large companies involved in joint technology centres. We are beginning to see that in my domain in biomedicine as well.

You might say that some of the push is political-David Cooksey’s report; some of it comes from industry; and some of it just comes from the stage which research brings you to. An example of that is graphene, which is a brilliant breakthrough. That is a new material that might revolutionise lots of industries. It is a great opportunity. It has been recognised, and the approach has been a collaborative one with public sector funding through research councils, universities and industry.

Q257 Stephen Mosley: I was interested that you mentioned the EPSRC. As a committee we have been lobbied quite hard on their shaping capabilities programme. Has there been much reaction? A lot of the research community out there tends to believe that funding should purely follow research excellence. Has there been some sort of push back, saying that perhaps you should not be changing the way funding takes place?

Sir John Savill: Different communities behave differently. What I have seen in biomedicine is that there is a grass-roots response to things like the Cooksey report, where the applicants themselves realise that they want to see the translation of their research, so it is different strokes for different folks.

EPSRC has chosen to undertake the experiment of shaping from above. In the case of the Medical Research Council, much of it has been shaping from below-from the grass roots. Every community behaves differently. I don’t think there is one particular method that works best across the piece, which is another argument for seven research councils, and any change always brings criticism. As we all know, there has been criticism of EPSRC’s push to do this. There was very strong criticism three or four years ago of the Medical Research Council supposedly abandoning basic research. That is not the case. Any change brings criticism.

Q258 Stephen Mosley: On a different issue, last year we did a report into peer review. How many scientists do you have with an industrial background and experience working for the research councils doing peer review? Is it focused purely on academic subjects?

Sir John Savill: No. It is a very important part of the peer review process, but scientists in industry have a day job and it can be difficult to find scientists whose companies are prepared to release them to give time to public sector peer review. Again, I can speak about my own back yard. Every one of our standing boards has industry involvement and folk who are based in industry. We try to have as many of those as possible and find it very useful, but for small companies in particular it is difficult for scientists to give up the time to do peer review.

Q259 Stephen Metcalfe: The TSB seems to be given ever-increasing numbers of programmes and initiatives to deal with. I have a simple question. Do you have the resources, financial and human, to be able to deliver on those?

Iain Gray: The simple answer is that as an organisation we are growing and expanding to meet the needs. We talked earlier about a confused innovation landscape. The Technology Strategy Board does help to draw together these different initiatives. There are some things people are talking about that, frankly, are scaling up what we do already; there are some things that people talk about that are new initiatives and mechanisms that require additional finance and resource to do them. So the bandwidth of the organisation has to adapt to the needs that are placed on us in slightly differing ways. One issue is not so much the resources and bandwidth to do what we are asked to do but the bandwidth and resources to do what the community out there expects us to do. For example, post the world of RDAs, there was a lot of anecdotal stories about the Technology Strategy Board doing this or picking up that. What we do not have the resources and finance to do is to meet all the expectations that some of the outside world would place on us.

Q260 Stephen Metcalfe: How are you managing those expectations and communicating back to the outside world that these things are not your responsibility?

Iain Gray: We are in close engagement with the business community. One of the things we have tried to work at quite hard is how we build the links with local communities. In the north of England, for example, with the N8 universities we have established what is called the N8 Innovation Forum, which is a mechanism that allows us to talk with the universities and business clusters around those universities in a constructive way about how we can engage for the things that we do and things that we don’t do. We can’t engage with every single business, LEP or regional office of different professional or trade associations. We have to try to find the right mechanisms to talk to local communities and the devolved Administrations, to come back to an earlier point, making sure that we are regularly talking in Northern Ireland, Wales and Scotland as well.

Q261 Stephen Metcalfe: Is it right you said you were not talking to each individual LEP?

Iain Gray: I said we cannot talk to each individual LEP on a structured basis. How many LEPs are there?

Fergus Harradence: There are 38 or 39.

Q262 Stephen Metcalfe: That doesn’t seem to be that big a number to be communicating with-at least to have a communication.

Iain Gray: If you add to that the 140 universities, 100,000 businesses, the trade associations and professional bodies that all want to talk to us, you could spend your entire life talking to people. What we have to try to do is find a structured way of engaging with business-large businesses, SME communities and small businesses. We have some good one-to-one relationships with large businesses; we have the leadership councils that have been established, which are business and Government working together. That helps us engage with the supply chain development. If you look at the SME community, quite often we have to find more local geographic cluster-based ways of talking to communities. We are trying to find the appropriate way to talk to communities. To have a structured relationship which says that on a detailed management basis you are going to build relationships with every one of those bodies is just not a practical thing to do.

Q263 Stephen Metcalfe: You don’t think that the work you are doing at the moment is stretching you too thin? You have the resource to do that?

Iain Gray: I think we have the appropriate resource to do the work we have been asked to do. The scale of the Technology Strategy Board to meet the needs of innovation is at the very heart of the economic agenda. We have talked a lot about budget. We do not have the resources to meet what I think the country needs in terms of economic development, and there is quite considerable scope to increase the influence and mechanisms that have been put in place for overall UK benefit, but to match the budget and initiatives we have got there is an appropriate level of resource.

Q264 Stephen Metcalfe: Bearing in mind that budgets are under pressure at the moment-they will not be heading north any time soon in large numbers-you have to use the resource you have in the best possible way. There has been some criticism that perhaps the TSB has been a bit timid in the way it is using its resources. How would you react to that? Do you have a strategy to be able to be bold and innovative in trying to find areas to invest in, and how is that arrived at?

Iain Gray: I have not heard the use of the word "timid".

Q265 Stephen Metcalfe: I use the word "timid". I think Sir Peter Williams tentatively said that you could be a touch bolder.

Iain Gray: Maybe that is a separate conversation I need to have with Peter. What I do recognise and hear is that, in reality, with the resource available to us, a lot more businesses are unsuccessful in their grant applications to the Technology Strategy Board than are successful. With the budget we have got, we have to find better ways of making sure that businesses that are unsuccessful feel they have got something positive out of the engagement and that it is not just about money. We have talked a lot this morning about some of the other levers of Government: regulation and standards. There was a question in the earlier session about Germany and what Germany does. Germany uses standards at the very heart of its innovation agenda. There are a lot of non-financial ways in which we can help business so that the businesses that have been unsuccessful in applying for money can still be very successful in the kinds of things we can do in a nonfinancial sense.

I don’t recognise "timid". I do recognise that there are some tough choices to be made. We have made choices. The reality is that everybody says they are happy that you make choices, but when you make them, sometimes those on the wrong side of that decision are less happy.

Fergus Harradence: If you are to make a reasonable assessment of whether or not you think the TSB is timid, you have to compare it with the situation prior to the TSB’s existence, when support for R and D and innovation was run out of what was then the DTI. If you compare what the TSB is doing now with what the DTI was doing five or six years ago, you will see that the TSB has moved to make substantial commitments in new sectors or market areas of activity in innovation and technology that the DTI simply was not engaged in at all. It had a much narrower focus in its programmes. The TSB has developed new mechanisms specifically focused on small businesses, which are intrinsically higher risk than those focused on large companies or consortia. We have more of those programmes, and a higher proportion of the TSB’s budget is allocated to SME-facing activities. We are doing work on emerging technologies. Again, this is intrinsically high risk.

Q266 Chair: Does putting those roles at arm’s length from the civil service machine mean that the "Yes, Minister" syndrome and risk-averse nature of the traditional civil service mechanism is removed to the advantage of business?

Fergus Harradence: Officially, I couldn’t possibly comment.

Chair: Exactly.

Fergus Harradence: The answer is almost certainly yes.

Chair: Thank you very much for being honest.

Q267 Stephen Metcalfe: You would refute that; you are taking risks in some areas, so some of the companies that are successful are exploring new areas.

Iain Gray: I am not sure what Peter was referring to if he used the word "timid". One thing we have deliberately not gone out of our way to do in the first five years of our existence is actively to promote the Technology Strategy Board having done this or that, because for us, what is much more important is what is achieved in business. Five years on, the story of what the Technology Strategy Board has done to support business needs to be told louder and more strongly, and, as we move into what I described as chapter two of the TSB, that is something we will do, but I don’t believe we have been timid in the sense of making some difficult decisions.

Q268 Stephen Metcalfe: "Timid" was my word, not Sir Peter’s, but it does mean that because of limited resources you have to prioritise; you have to make decisions and choices. As a final point, would making those decisions and choices be easier if there was an industrial strategy for the UK?

Iain Gray: I think the industrial strategy would help provide a framework. What you heard this morning in the first session were two quite contrary views representing different membership organisations. The industrial strategy would very much support the CBI and the large corporates, picking the races that we are in from a UK point of view. I think we have been doing that, working very successfully with the leadership councils of various communities, Government and business working together, but it will help in that framework. How we support smaller businesses is a different dimension from what we are about, particularly in a responsive mode sense. We have to find good ways of supporting the type of community that was talked about this morning, but you heard that we support that in a slightly different way. The answer is, yes, the industrial strategy will provide a clear framework to help us in some of our decision making. It might not help in other ways. We have to use it sensibly.

Q269 Caroline Dinenage: The feedback we have gathered on this Committee seems to show that a big problem is the low level of business expenditure on research and development in the UK. Is there any evidence you have collected that current policies have begun to address this?

Fergus Harradence: The existence of that problem is unarguable; the evidence is very clear. If you look at patterns of business expenditure on R and D in the UK, businesses in this country invest 1.1% of GDP in R and D and the OECD average is 1.6%. Even when you add in public sector investment into R and D activities, it pushes the total investment in R and D in the UK only up to 1.8% of GDP. If you add comparable public sector investment in other countries, it tends to push it up to about 2%. So, yes, there is a relatively low level of investment in R and D in this country, which is explicable through a range of factors, including our industrial structure but also a culture of risk aversion when it comes to investment in innovation and technology development.

As to what we have done to try to address that, over the last 10 and 15 years a wide range of different incentives has been put in place to encourage higher business investment in R and D, as well as increased expenditure in science, research, innovation, HE and skills. We have also introduced things like the research and development tax credit. There is some evidence that that has influenced decisions within businesses and made them more willing to invest in this area and to build their capability to conduct R and D, or their willingness to engage with universities or other research-based institutions that can conduct R and D for them. The fact remains that we have been increasing levels of business investment in R and D slowly and steadily, but only by degrees. What you have seen is that in competitor countries the same pattern has occurred, so the gap has not significantly narrowed despite 10 to 15 years of sustained investment in this area.

Sir John Savill: From my area, perhaps I may support that with some evidence that Government are taking measures to try to address this issue that are bringing benefit. In the publicity around the decision by GlaxoSmithKline to invest £700 million in Cumbria and two sites in Scotland in biopharmaceutical manufacture, specific reference was made to the Patent Box that the Government have brought in as one of the reasons that the GSK board decided to invest in Britain rather than Singapore, India or the USA. In my area that is one good piece of evidence that benefit is ensuing.

Q270 Chair: To press you on that, is that partly because business sees those developments as transcending political change in Government?

Sir John Savill: I think it sees them as advantageous to the UK.

Q271 Chair: Because they have a life that extends beyond the lifetime of Governments.

Sir John Savill: Indeed, the coalition Government have continued and developed policies that the previous Government put in, so it is really about the UK rather than each particular Government.

Iain Gray: Just picking the example of low-carbon vehicles and the automotive sector, five years ago it was generally believed that we had hollowed out the supply chain in the UK. We were doing a lot of assembly but not very much research. With the advent of some of the new opportunities arising out of low-carbon vehicles, companies from overseas are now looking to invest their R and D capability in the UK and not just manufacturing or assembly; it is the total chain. I think that gives the stickiness that we are looking for in five, 10 or 15 years out. For me, there is evidence. It is a long-term game, and you have to get the right leading indicators to know whether or not you are being successful in that game, but I would cite that as a good example of where I see a quantum change.

Q272 Caroline Dinenage: To go back to the subject of the R and D tax credits, the Committee has had varied feedback on the stimulus provoked by these. One school of thought is that potentially the bigger companies just use that money to invest in the whole of their business expenditure, which is anything from dividends to marketing. Is there any evidence to suggest that if those tax credits were more focused on SMEs it would have greater benefit?

Fergus Harradence: The eligibility criteria mean that large companies cannot claim the R and D tax credit against anything other than the eligible elements of their expenditure. There is certainly a higher level of dead weight in the large company scheme-that is, expenditure on R and D that would have taken place anyway, regardless of the public subsidy. However, you have to take into account the fact that, now, almost every country that the UK is competing with economically has some form of tax relief on R and D. It might not be an exact parallel to our own. For example, in France they provide relief on employment taxes relating to people with PhDs, but there is some form of tax relief that relates to expenditure on R and D and aims to reduce that for companies. If we scrap this programme, it would have an impact on our competitive position and ability to attract high-value inward investment and retain high value-added business activities in this country. Given that 20%-or, to be specific, 21%-of all R and D in the UK is funded from overseas, we have to be very sensitive to anything that would worsen the UK’s competitive position.

Q273 Caroline Dinenage: Some members of the Committee went to Warwick university, and they raised the issue that, while businesses can shop around for academic expertise, there is not really a facility for academic establishments to shop around for interesting industrial problems to solve. Is there any mechanism by which the TSB can communicate industrial research interests to the academic community?

Iain Gray: That is an interesting observation. In some regard I would link it back to the earlier remark about knowledge transfer partnerships and one-way communication. How do we get good two-way communication? I am seeing good evidence of that. I talked earlier about the N8 Innovation Forum, which is about universities and businesses coming together, with businesses defining the challenges that they are looking to resolve and the universities being able to participate in the potential solutions that exist. We do not have a one-size-fits-all-type mechanism, but there are pockets of very good practice being developed. It is something we need to continue to work at, but I wouldn’t say it’s not happening; it’s something we need to build on.

Q274 Roger Williams: We have heard quite a bit this morning about the Small Business Research Initiative. Do you think it is the right model for the UK, and does it enable small businesses to become sustainable and grow?

Iain Gray: From my perspective, in the last two years we have demonstrated that it is a mechanism that can work and provide demonstrable benefit. It needs to scale up. We heard a couple of times today about the importance of a contract versus a grant. SBRI is a contract and therefore from a business perspective is worth something very significant.

Two things need to happen: one is a scale-up of SBRI itself across Government Departments; the second, going back to the earlier discussion, is about providing a market. SBRI is only the precommercial procurement element of procurement. There has to be the next stage. We have to get that right as well for SBRI to be really successful. My answer is, yes, we have a mechanism and it works. Let’s now use it and make it work and find a way of scaling it up, but let’s also find a way of providing that link into the end procurement market.

Q275 Roger Williams: Does it work best when it involves Government buying directly from small companies or putting a requirement on larger companies to use smaller companies in contracts with Government Departments?

Fergus Harradence: They are really different procurement issues. The aim of the Small Business Research Initiative was always to increase the level of direct contracting done between public sector organisations and technology-based SMEs, and to give those companies the opportunity to win a contract that would help them develop a product or service and take it to a point at which it was ready for market. With a programme like that it is very important that you have that direct customer/supplier relationship. I do not think SBRI would function effectively if you put in an intermediary layer, a large prime contractor, and got it to manage the programme.

Interestingly, the evidence from the US with their SBIR programme shows that, where they have tried to use large prime contractors as part of the process and SMEs as a means of developing small parts of much larger projects for which primes are responsible, in general it has not worked very well. You find that these companies are not always attuned to the needs of the prime contractor; they don’t see the bigger picture in terms of the scale of the project. I would not want to experiment with SBRI in that way.

However, more generally there is a question to be asked in procurement about whether or not we are effective in managing our relationships with large prime contractors and whether or not we do enough to encourage them to source innovative products and services from UK SMEs that are developing interesting new technologies. That is something we need to look at through our contracting frameworks and policies.

Q276 Roger Williams: SBRI has not been used in terms of a large main contractor or subcontractor.

Fergus Harradence: No.

Iain Gray: From my perspective, there is real merit in looking at how we build supply chains through large contractors, but it is a different mechanism. Some of the things we are doing are already addressing that, but I would take Fergus’s point. SBRI is specifically trying to address the challenges of Government on the one hand but providing the opportunities for direct contractual relationships with smaller businesses that have good innovative ideas but currently do not have a route to market to do it.

The other thing about SBRI is that 900 companies won SBRI contracts. That should be the first port of call for venture capitalists looking at the kind of businesses they should be investing in. That is what happens with SBIR in the States. We need to talk positively about it and about the companies that have been successful in it. We need to scale it up and provide the end market opportunities.

Q277 Chair: If I may give you an example of an event that occurred, can you tell me that because of SBRI it would not happen today? A company developed a GPS-based safety device for health workers working alone in the field. It was a relatively small company, and it was an innovation for them. When the final bit was flagged up on television by the then Secretary of State, Frank Dobson, it was a brilliant little device. When it came to the contracting process, Richmond House knocked back this company as a bidder and insisted that it go to bed with one of the large telecom companies because it did not believe that the company had sufficient financial security to manage. Are you saying that is now something in the past or will those events still occur?

Iain Gray: I said we have a mechanism and that SBRI really works, but we need to find the next stage-those routes to market. Even in SBRI terms, one is moving companies from what was a phase one SBRI contract into what we call a larger phase two SBRI contract and then into a commercial contract with a large spending department. Very few companies have gone that complete route. For me, we need a recognition that SBRI in phase one is all very well. Companies would stand up and say-I quoted Eykona-they would not exist today were it not for SBRI. The number we have taken right the way through that process is still very small, and we need to keep working on that. The outcome is the endgame.

Q278 Sarah Newton: We have been talking a lot about small and medium size businesses. There is a huge amount of effort to try to support them, and there are matters to do with regulation and all sorts of things. To what extent do you think Government is capable of distinguishing between the needs of small technology-based businesses and small businesses generally?

Fergus Harradence: Technology-based businesses have specific needs that they share with other small businesses. Obviously, you want efficient systems for things like managing tax, ensuring you comply with regulations and the provision of basic business information about the legal requirements of running a company and so on. But technology-based SMEs have specific needs related to their ability to access the support available through the innovation system, whether it is specialist advice on issues like design or measurement, intellectual property, or the ability to access funding streams through the Technology Strategy Board, research councils, devolved Administrations or whatever.

We have a pretty good grasp of the needs of technology-based businesses. There are active trade associations; they are engaged in things like the TSB’s knowledge transfer networks. We have a fair amount of direct contact with businesses and their representative organisations. There are lots of service delivery organisations. It is not just the Technology Strategy Board but Capital for Enterprise, which supports venture capital investments, the Intellectual Property Office, which deals with IP registration, and bodies like the National Physical Laboratory. All of these have SME-facing outreach programmes of one sort or another.

Iain Gray: Sometimes we try to generalise things by referring to small companies and large companies. Life is more complicated than that. If we are talking about life sciences, cell therapy or aerospace, it is a 10, 15 or maybe even a 40-year game, whereas, when you talk about developing an app for a tourist application, if you have not resolved it in three months and got it to market you are dead, and yet small businesses are involved in both of those extreme sectors. To try to distinguish it by referring to "large" and "small" is to oversimplify the problem. Government has good links in with trade associations and leadership councils on various big picture items, but it is important that we don’t try to generalise it as just large and small companies. There are different time clocks for different sectors. Even in the technology area there are different time clocks. We need to be responsive in different ways to those different needs.

Q279 Sarah Newton: From the work that you do, is there a perception in Government that the special needs you have talked about of technology companies, which undoubtedly are there, are properly recognised and valued? Is there a perception that the companies are worth giving this much support because they have a special place in the economy, or do they just have to compete alongside all the other types of companies?

Fergus Harradence: We have a lot of forms of support that are accessible only to technology-based SMEs. All of the grant support programmes of the TSB are not a generic tool for giving money to small companies. Only a relatively small proportion of the small company base-the ones engaged in R and D activities-can access them. Similarly, a lot of the investment funds that Capital for Enterprise puts money into are focused on supporting technology-based businesses. For university spin-outs, you have the research council funds, the activities funds and the higher education innovation fund. These are all targeted on technology-based businesses. We are expecting new initiatives like the growth accelerator, which is a mechanism BIS has put in place to deliver support to companies with high growth potential. One of the target groups for that will be technology-based SMEs as well as SMEs in other sectors that have growth potential. Yes, we do recognise and value the fact that these companies are an important part of the UK economy.

Chair: Gentlemen, thank you very much for your contribution this morning. That has been extremely helpful.

Prepared 17th September 2012