Bridging the valley of death: improving the commercialisation of research: Government Response to the Committee's Eighth Report of Session 2012-13 - Science and Technology Committee Contents


Appendix 1: Government response


Introduction

The Government is grateful to the Committee for its report 'Bridging the valley of death: improving the commercialisation of research'.

The Government is pleased that the report recognises the crucial role of both research and innovation to the UK economy. It also warmly endorses the Committee's view that future measures to improve the support of the UK innovation and commercialisation landscape should not be made at the expense of funding for the UK research base.

The Government agrees with those witnesses who argued that the innovation process is poorly represented by the linear model and with the University of Manchester's observation that "successful innovation is an interactive process in which commercialisation plans have to be effective in all stages and sometimes simultaneously".

The Government's Innovation and Research Strategy for Growth (December 2011)[1] with its accompanying Economics Paper[2] set out its analysis of the strengths and weaknesses of the UK's innovation ecosystem and announced measures to improve its effectiveness with further measures being announced in subsequent Budgets and Autumn Statements. An innovation ecosystem is a dynamic environment which needs continual monitoring. For all the improvements made, the Government remains conscious of areas needing further strengthening and the progress that other countries are making to enhance their innovation systems. It reports on the UK's innovation performance in an Annual Innovation Report[3].

The Committee's report recognises that the Government remains strongly committed to encouraging research that has real "impact" for business, public policy and public services, for the economy, environment, health, society and culture, and to supporting universities, researchers and business to work more closely together. This includes an assessment of the impact from excellent research within the new Research Excellence Framework, Research Council processes which encourage researchers to consider the potential "pathways to impact" of their research from the outset, and sustained support for universities to engage with business and others through enhanced investment in Higher Education Innovation Funding.

The Committee's report goes beyond the Government's Innovation and Research Strategy in considering not just successful commercialisation but also the environment in which successful small innovative companies can grow into medium sized enterprises producing substantial jobs and wealth in the UK. The Innovation and Research Strategy sits alongside the Government's Industrial Strategy which has been rolling out over the past few months. One element of the Industrial Strategy is the improvement of the financial environment for business, including the establishment of a Business Bank.

More broadly, the Industrial Strategy focuses on strengthening the UK's performance in eleven key sectors; the successful use and commercialisation of research is central to many of these. The Industrial Strategy also sets out the Eight Great Technologies: areas where Britain has global strengths and a real opportunity to create growth through backing the effective commercialisation of research and new technology.

The Government is pleased that the Committee supports its approach to innovation policy and to the development of the Technology Strategy Board (TSB) as the UK's innovation agency.

The Government's prime channel for supporting business-led technology innovation is the TSB. It will, through the TSB, invest over £1 billion in business led R&D over the Spending Review period. By matching these public sector investments with UK business, the TSB will have generated a £2 billion programme of investment in UK innovation in the period 2011-2015.

The TSB is investing over £200 million to establish a network of Catapult Centres, announced in October 2011, to commercialise emerging technologies in areas with global market opportunities. In addition the TSB and the Medical Research Council jointly provided £180m for the Biomedical Catalyst in 2012/13 explicitly to support the commercialisation of research. This has proven a promising success. A further £75 million package has directly has been directly funding research-intensive and innovative SMEs since October 2012. It includes Smart grants to develop new products and technologies, Innovation Vouchers to give companies access to £5,000 worth of advice and expertise, and the extension of the TSB's Launchpad scheme for SMEs.

In the 2012 Budget the Government committed a further £60m for the UK Centre for Aerodynamics to support the development of innovative new aerospace components and in the 2013 Budget it committed £1bn, to be matched by business, to create the UK Aerospace Technology Institute. This sectoral R&D programme will draw on the capabilities in our universities and the facilities of the Catapult Centres.

The Government recognises the importance of effective Government procurement in fostering innovative SMEs. The Government announced in Budget 2013 that it will substantially expand the Small Business Research Initiative (SBRI) programme among key departments so that the value of contracts allotted through this route increases from £40 million in 2012-13 to over £100 million in 2013-14, representing 0.25 per cent of procurement budgets, and rising to over £200 million in 2014-15, representing 0.5 per cent of procurement budgets.

Future economic growth depends on businesses being able to develop and adopt new technologies and invest in many other forms of innovation. Government recognises that businesses have a diverse range of finance needs, and so have in place a wide range of measures to support their access to finance, including a number of schemes that support venture capital investment, including the Enterprise Capital Fund programme and UK Innovation Investment Fund.

Research and development (R&D) incentives form a key part of the Government's support to help encourage business investment in new ideas and technology. The Government has introduced a new 'above the line' (ATL) credit for large company R&D investment from April 2013. The ATL credit is designed to make R&D relief more visible to those making investment decisions and provide greater cash flow support to companies with no corporation tax liability. The introduction of the ATL credit follows an increase in the rate of the SME R&D tax credit from 175 per cent to 225 per cent at Budget 2011, which continues to provide targeted support for early stage companies and start-ups investing in R&D in the UK. Also from April 2013, the Patent Box will give a reduced 10 per cent rate of corporation tax on profits from patents, driving growth and investment in UK innovation.

Ensuring the flow of credit to viable SMEs is essential for supporting growth and is a core priority for the Government. The new Business Bank will play a major role in this by:

  • supporting the development of diverse finance markets for business
  • tackling market failures in the provision of finance to SMEs that cannot access the capital markets
  • ensuring that businesses are aware of, and can access, the support provided by Government.

It is intended that the interventions put in place by the Business Bank will have a lasting presence and make a real difference to business lending over the longer term.

These developments, and the further implementation of the programmes and policies put forward in the Innovation and Research Strategy for Growth and through the various elements of the Industrial Strategy, will act to improve the commercialisation of research in the UK.

It is recognised that there is still further work that can be done in this area and we now turn to the specific recommendations in the report.

Specific recommendations and statements

INVESTMENT IN TECHNOLOGY COMPANIES

1.  We are concerned that our small companies are too often bought up by larger overseas companies before they can develop into the medium sized enterprises that would produce substantial jobs and wealth in the UK. We are convinced that while equity investments have a place, too many companies are forced into over-reliance on this route because other types of funding are unavailable. We recommend that the proposed bank for business, possibly in partnership with the Business Growth Fund, be used to promote a bond market for medium sized businesses, thus providing growing small businesses with an additional source of funding. (Paragraph 39)

The Government has set an ambition to make the UK one of the best places to start, finance and growth a business. The business bank is integral to this ambition. It will support the development of diverse debt and equity finance markets for businesses, promoting competition and increased supply through new finance providers. It will also increase the provision of finance to viable but under-served businesses, in particular improving the provision of long term finance. We recognise that new investment is crucial for business growth but that securing long term, patient capital is a particular challenge for certain sectors and certain types of company.

For those businesses for which equity investment is the appropriate form of finance, particularly early stage technology companies, the business bank will build on existing business finance schemes. This includes Enterprise Capital Funds which provide venture capital and the Business Angel Co-Investment Fund that support angel investments in early stage companies. Enterprise Capital Funds have invested more than £180 million of venture capital in over 150 companies to date, with a total investor commitment of nearly £400 million.

At Budget 2013, we announced a further £75 million funding for venture capital investment in early stage companies. £50 million of this commitment will expand the Business Angel Co-Investment Fund to a £100 million fund, and £25 million will extend the Enterprise Capital Fund programme to include a VC Catalyst Fund which will support funds that specialise in early stage venture capital and are near to launching, enabling them to commence investment in small businesses.

The Government will hold a round table in early Autumn to bring together key organisations in the UK's finance and innovation infrastructure, including the business bank, the Green Investment Bank and the independent Business Growth Fund. The roundtable will seek to make strategic links and identify potential opportunities to maximise the benefits for companies seeking support to commercialise their innovation.

On the Committee's specific proposal for a bond market, the Government agrees that it is desirable for capital markets to better serve the needs of medium-sized and smaller businesses and welcomes the growth in retail bond markets in the UK, particularly since the establishment of the Order Book for Retail Bonds ("ORB") on London Stock Exchange. Since its inception in February 2010, there has been circa £3bn of bond issuance and its development has increased the financing options available for medium sized businesses that traditionally do not have the scale to access the institutional bond markets. The ORB is growing in recognition and the Government does not intend to promote an alternative bond market.

2.  We have concerns that regulation to de-risk pension and insurance funds has had the effect of starving technology companies of a source of long term patient capital. There is a need to deploy these funds more usefully. We recommend that the Government investigate the potential to require funds to have a proportion of European SME equities. (Paragraph 40)

The Government has already taken strong steps to improve SME access to public equity markets. These have included:

  • consulting on allowing shares from the Alternative Investment Market and other growth company exchanges to be included in ISAs; and
  • the announcement at Budget 2013 of the intention to remove stamp duty from shares traded on growth markets such as the Alternative Investment Market.

However, directing investors where to invest their capital, for example by requiring funds to have a proportion of European SME equities, would have unintended consequences for investors. As a result, the Government does not intend to mandate funds to hold a proportion of SME equities.

The creation of the business bank should create platforms to allow institutional investors to fund UK SMEs. Wholesale solutions are designed to enhance capital or funding conditions associated with SME lending. These would be deployed in line with the business bank's objectives either to support the development of new sources or types of finance or to increase lending to under-served SMEs.

3.  Lloyds Banking Group run a scheme where senior staff attend a Warwick based engineering course designed to help them make better decisions on financial risk by giving them a better understanding of some emerging technologies. We recommend that the bank for business adopts such an approach for its staff from the outset. (Paragraph 41)

The Government welcomes schemes such as Lloyds' which develop senior staff and relationship managers' understanding of different technologies and sectors so that accurate assessment of credit risk can be made and appropriate types and source of finance identified.

The business bank will facilitate the provision of finance, including long-term capital, to UK firms through banks and other financial institutions and, as such, it will not be an institution with its own branches on the high street. It will, however, be professionally run and commercially focused and its staff will be suitably experienced and qualified to deliver the best value from schemes it runs on behalf of the taxpayer.

4.  The bank for business announced by the Government may provide a useful go between for institutional investors and technology businesses. We urge the Government proactively to seek to develop not only the market in technology equities but to ensure that the market has ready access to information that may change the perception of these equities and their relative risk and create mechanisms, such as the Lloyds scheme, to help fund managers understand evolving technologies. However, reporting requirements and other costly regulatory burdens on UK-based listed companies, especially in the AIM market, should be kept to a 'fit for purpose' minimum. (Paragraph 42)

The Government agrees with the importance of businesses of all sizes being able to access the right forms of finance. This includes businesses being able to access the public equity markets to raise new equity capital.

To make it easier for companies to access the public markets, the Government has recently worked closely with the London Stock Exchange to develop a new segment on its market designed for high growth companies. This will appeal specifically to companies with high growth potential, including technology companies. In this way the Government and the London Stock Exchange are providing new ways for companies to access the public equity markets and providing ways for investors to invest in some of the UK's emerging high growth companies.

As outlined, the Government has also taken a number of steps to increase investment in smaller companies. These include (1) consulting on allowing shares from the Alternative Investment Market and other growth company exchanges to be included in ISAs, and (2) the announcement at Budget 2013 of the intention to remove stamp duty from shares traded on growth markets. The Government will continue to look at further ways to improve smaller companies' access to the public equity markets.

On the Lloyds scheme specifically, the Intellectual Property Office is currently looking into the role and perception of intellectual property in finance. The research is currently gathering evidence and will help develop understanding about the perception of IP-rich businesses by finance providers.

On regulation of the AIM market, the current setup aims to balance reporting requirements for companies with investor protection.

5.  We recommend that the Government re-examine their portfolio of interventions to determine where gaps may lie and to ensure there is a consistent spread of funding across the spectrum of business need. It is important that government funding fits the needs of growing companies rather than company growth having to adapt to gain government funding. It is also important to ensure that the incentives from Government tend towards greater growth and retention of jobs and wealth creation in the UK. (Paragraph 45)

The Government recognises that businesses have a diverse range of finance needs and has in place a range of measures to support those needs, including the Seed Enterprise Investment Scheme, Enterprise Investment Scheme and Venture Capital Trust tax reliefs for equity investment in smaller companies, the Enterprise Capital Funds programme for high growth potential SMEs seeking venture capital, through to support for debt finance such as the Enterprise Finance Guarantee.

The Government is bringing together activities that support the needs of small businesses; the business bank, announced last year, is being created precisely to meet this challenge and provide a balanced range of support to meet businesses' needs.

The Government also recognises the need to support sustainable job creation, and the Regional Growth Fund also supports private sector investment and employment in key growth sectors, such as life sciences.

6.  We consider that the R&D Scoreboard was a useful and widely respected source of information for technology businesses and we recommend that the Government should reinstate it. We also recommend that the Bank of England should resume their monitoring activity on the availability of finance to SMEs. (Paragraph 87)

While the R&D Scoreboard was a useful and respected tool that helped track progress on investment, both domestically and overseas, today's companies better understand the importance of R&D to their long-term success. At the same time unprecedented financial pressures have made it necessary to reduce public spending and BIS is no longer able to sponsor the Scoreboard.

ONS now publish R&D data on the amount spent and employment by the top 100 companies spending on R&D expenditure.

THE NEED FOR PHYSICAL INFRASTRUCTURE

7.  We share the concerns of our witnesses that the UK small business sector lacks access to large scale test and experimental production facilities. We recommend the Government to find a way to ensure that those facilities that do exist can be more readily accessed by business, that gaps in requirements are identified and a fund established to subsidise those facilities that cannot afford to remain at the leading edge in a purely commercial environment. (Paragraph 51)

The network of Catapult centres, being established by the Technology Strategy Board (TSB), will allow businesses of all sizes to access state of the art facilities to help in the development of ideas into new products and services. Each of the Catapults will have programmes targeted specifically at small businesses.

Catapult centres will help businesses adopt, develop and exploit innovative products and technologies. They offer concentrated expertise in areas such as manufacturing processes, test facilities, type approval and accreditation or supply chain development. Catapults provide access to advanced equipment, specialist facilities and skills to develop and test ideas in reality.

Catapults allow business to work with scientists, engineers and organisations to unlock opportunity, reduce the risks of innovation and speed new products and services to commercial reality. Core funding from the TSB represents 1/3 of Catapults overall funding with a further 1/3 from the private sector and the final 1/3 provided through successful bids to funding competitions from a variety of sources.

In addition to the Catapult centres, the TSB also supports a number of large scale demonstrators such as in the areas of low carbon vehicles, assisted living and future cities, providing opportunities for businesses to test out their developments in real world environments. The TSB and Research Councils also support university based Innovation and Knowledge Centres which are centres of excellence to accelerate and promote business exploitation of an emerging research and technology field.

The TSB is also looking more widely at how best to help businesses access other facilities that may exist in places such as in Universities. Innovation Vouchers provided by the TSB can be used to access the knowledge, skills and equipment that reside in organisations such as Universities, Research and Technology Organisations and Catapult centres.

8.  We urge the Government, when looking at the issue of production facilities, to ensure that the Technology Strategy Board and other commercialisation activities address whether projects are properly supported in issues of manufacturing capability. (Paragraph 52)

Commercialisation of technologies that require a manufacturing step, often require the development and assembly of novel equipment (or at least the use of established equipment in new processes). That equipment is often expensive, and requires special skills to operate. This is exactly what the High Value Manufacturing (HVM) Catapult is set up to address, and it already offers equipment in a number of areas of "competency" to help business with such challenges.

For instance, the HVM Catapult is able to help biotechnology companies develop and demonstrate a new process up to 10,000 litre scale-large enough to be confident that a commercial facility could then be built, incorporating the learning from the demonstration and reducing the risk of technical failure. The HVM Catapult can also develop and demonstrate, at commercial scale, novel machining technologies that can then be transferred to the shop floor to produce commercial components meeting rigorous industry standards.

The key is that the equipment for such demonstrations is expensive, and needs to be kept at the cutting edge which is possible when supported through a national centre.

The TSB's HVM strategy was refreshed in 2012 and is built around 22 key competencies which the TSB has identified as offering pivotal opportunities for businesses. This strategy is driving TSB's investment decisions including at the HVM Catapult. In addition to investment the HVM Catapult is also looking at complementary skills requirements and is developing proposals for inclusion of apprenticeships and training facilities in the Catapult. Some of these proposals are already under consideration through the Employer Ownership Pilot and round 4 of the Regional Growth Fund.

SMALL COMPANIES

9.  The Government indicated that it would not follow the James Dyson report recommendations that the tax credit should be refocused on high technology sectors or on small and start-up companies. The R&D tax credit has been successful in increasing spend by business on research and development but this has, mostly, been within larger companies. We recommend that the Government identify the reasons why R&D spend still appears to be drifting away from the UK despite the benefits enjoyed by larger companies. We also believe that there needs to be a mechanism to support SME's who do disproportionately badly from the current scheme. (Paragraph 59)

Recognising the challenges of securing R&D investment by globally integrated large companies, the Government have taken steps to improve the way that R&D relief is provided to large companies with the aim of making it more effective at encouraging R&D activity in the UK economy. It should be noted that in the last year of data, UK BERD substantially increased despite the strained economic conditions.

In April 2013, large companies will be able to claim a 10 percent 'above the line' (ATL) credit for their R&D investment. Unlike the current system, the credit will be accounted for in a company's profit and loss account where it will be more visible to those making investment decisions and more beneficial to foreign-parented multinationals investing in R&D in the UK. The credit will also be payable to loss making companies, providing greater financial and cash flow support to companies that are cyclical, capital intensive, or characterised by long product development cycles. This will also increase the certainty of R&D relief to a company, allowing it to have more of an influence on up-front investment decisions.

Along with the introduction of the Patent Box, designed to encourage companies to retain profits arising from patents and intellectual property in the UK, the ATL credit will support domestic innovation and the development of new skills, processes and technologies in the UK economy.

The Government will continue to assess the wider tax and non-tax factors that influence company decisions on where to locate R&D activity, and how the UK can improve its competitiveness in these areas.  The Government is also committed to multilateral action through the G20 and OECD to tackle the issue of base erosion and profit shifting by multinational enterprises and the negative impact this could have on the cost-effectiveness of incentives for innovation.

On the recommendation that there should be a mechanism to support SMEs, who do disproportionately badly from the current system:

Moreover, the Government believes that the relief it provides for R&D investment needs to be competitive with other international regimes, to ensure that the UK remain an attractive location for large company innovation and to ensure that sufficient business activity exists for smaller companies in the supply chain.

The Government recognises that SMEs are likely to face more significant barriers to investment in R&D and that their investment is more likely to generate spill-over benefits to the wider economy. This is why, following consultation on the proposals of the Dyson Review, the rate of the SME R&D tax credit was increased from 175 percent to 225 percent at Budget 2011, providing companies with a cash benefit worth around 28 percent of their qualifying R&D expenditure (compared to a cash benefit of around 8 percent available to large companies). The Government also made changes to simplify the scheme, remove barriers to companies claiming the credit, and provide greater certainty on the costs of qualifying for relief.

10.  We conclude that the Government needs to distinguish in its innovation policy between small and medium enterprises: a single SME category is too broad. (Paragraph 61)

The Government recognises the importance of both small and medium sized firms within the UK economy. SMEs are more widely grouped together because large businesses behave noticeably differently.

The Government is seeking to better understand how best to develop and deliver innovation policies that address differing needs. Data is currently collected in the innovation survey on small, medium and large enterprises and splitting Medium enterprises into two categories of 50 to 99 and 100 to 249 employees in the sampling methodology. The data is presented in three different categories, S, M, and L in analyses. The definition of a SME for the purposes of R&D tax relief—less than 500 employees, turnover of less than 100m or a balance sheet of less than €86m—is double the EU recognised definition.

TAXATION AND REGULATION

11.  We recommend that the Government address the issue of VAT and how it might ensure that VAT rules allow academic teaching and research to sit alongside commercial and incubation activities within public or charitably funded laboratories and research centres without creating a financial burden for the institute. (Paragraph 63)

The Government keeps all taxes, including VAT, continually under review, with the aim of balancing the requirements to raise revenue and encouraging innovation that leads to economic growth. Non business research undertaken by charities continues to be supported by the government through the zero rate VAT relief for construction of new buildings intended to be used at least 95% for non business purposes.

In December 2012 the Government issued a consultation on the withdrawal of the VAT exemption for business research supplied by one eligible body to another. It has taken this step following infraction proceedings commenced by the EU Commission that this VAT exemption is ultra vires to the EU VAT Directive. The UK accepts that the exemption is ultra vires and so this needs to be withdrawn. Subject to the outcome of the consultation, the Government intends to introduce secondary legislation withdrawing the exemption, with effect from 1 August 2013. Otherwise, there has been no change in policy in this area.

12.  Poor regulation adds to the risk burden of entrepreneurs. We welcome the proactive response of the Minister on the issue raised in evidence to us and recommend the TSB to undertake a review of regulatory burdens on technological innovation in the UK. This review should be consistent with the advice to Government by Professor Ragnar Lofstedt on Health & Safety matters but should not include just a list of regulatory burdens in need of reform but a roadmap of how that reform might be used to drive innovation and which institutions should take the lead. (Paragraph 70)

The Government endorses the Committee's contention that poor regulation can add to the burden on entrepreneurs, and in doing so can potentially inhibit business growth and business-led innovation. Although it considers that there is a role for the TSB to identify and advise Government on the barriers to innovation, it is not the most suitable body to take responsibility for this recommendation and another section of Government will be identified to lead on taking this forward. The Red Tape Challenge is working to reduce and amend poor regulation; offering all the opportunity to highlight areas of regulation that they feel are unnecessary and counterproductive. As an example of the real impact that the Red Tape Challenge is having, in April 2013 the Aviation Red Tape Challenge announced the repeal or amendment of 58% of aviation regulations.

INTELLECTUAL PROPERTY AND TECHNOLOGY TRANSFER

13.  We judge that the IPO mediation service could be more heavily used to arbitrate in matters of intellectual property. We recommend that the Government require the use of mediation before any legal action can be taken in a UK court, both speeding up the resolution of disputes and reducing the costs of protecting intellectual property. We also recommend that refusal to engage in mediation be taken into account in awarding costs. (Paragraph 76)

The IPO service was only used infrequently but following a recent call for evidence the IPO has recently (March 2013) launched a modernised mediation service which is designed to better meet the needs of SMEs. The changes include: offering a variety of mediation options (including short telephone sessions); training a wider range of experts as mediators; and an amended fee structure. The IPO will improve awareness of the service and mediation generally and will continue to maintain its list of other providers who have indicated they will mediate IP disputes.

14.  We recommend that the Government assess the benefits of the Easy Access IP experiment and whether it improves the flow of IP not just between universities but into wealth creation activities within the UK. (Paragraph 81)

The Government recognises that it is important that Higher Education Institutes (HEIs) continue to work to support the effective application and commercialisation of knowledge that is generated in institutions across the UK. It supports and encourages HEIs to work effectively with business and other users of knowledge. Easy Access IP represents one approach to facilitating this. HEIs are autonomous institutions and responsible for implanting a strategic approach to IP and IP management which is suited to their individual activities and mission. BIS has asked the National Centre for Universities and Business (NCUB), with the support of their funders and partners, to assess the contribution of Easy Access IP and other innovative IP management approaches to speeding the application and commercialisation of IP from HEIs.

15.  We understand the intent behind changes to HEIF that further reward institutions that have already benefitted from successfully commercialising their IP. We have concerns that IP transfer from universities that have been less successful in commercialising their IP may decrease further. We recommend that the Government review the situation after three years and publish a report on how the changes have contributed to increased IP transfer, job creation and related social benefits. (Paragraph 82)

Most studies have strongly correlated the emergence of highly marketable IP with levels of investment in research. There is no evidence that significant marketable IP opportunities would be lost from institutions which now secure lower Higher Education Innovation Funding (HEIF) allocations. However, HEIF provided by HEFCE rewards institutions for a range of interactions with business and other users, not solely for the commercialisation of IP. It provides reward for collaborative research, contract research, the provision of access to infrastructure and equipment and for career and professional development training (with double reward for engagement with SMEs), as well as the commercialisation of IP generated within the institution. The dynamics and evolution of this broad range of interactions are monitored through the annual Higher Education - Business & Community Interaction Survey (HEBCI) and through the HEFCE Annual Monitoring Survey (AMS). Through these arrangements, HEFCE will continue to monitor the performance of individual institutions and the overall sector.

Institutions, including those which have not secured a HEIF allocation since the reforms introduced in 2011, are also able to apply for project funding from HEFCE (for example through the Catalyst Fund) or through TSB schemes to support the commercialisation of IP.

16.  We recommend the Technology Strategy Board examine the current provision of proof of concept funding to universities and small companies and report to Government a coherent view of the amounts of funding available along with a recommendation on whether there exists a shortfall of provision of these funds and whether a consolidation of provision into a single programme would be helpful. (Paragraph 96)

The Government agrees with the recommendation and the TSB will review the current provision of proof of concept funding to universities and small businesses.

The TSB is ideally placed to undertake this review given its responsibility to delivering support such as Smart, Innovation Vouchers and Knowledge Transfer Partnerships. In considering whether a shortfall exists it will be important to consider how the other schemes fit with proof of concept funding.

THE UK INNOVATION ECOSYSTEM

17.  There is an evident need for an innovation agency in the UK and it makes greater sense to ensure the TSB and its schemes evolve to meet this need than create a new organisation. It also makes sense to concentrate the innovation function within a single agency to ensure there is coherence and consistency within the system. We support the current Government's approach to its innovation policy. (Paragraph 100)

The TSB was established as the primary UK innovation agency, both to act as the main channel through which the Government incentivises business-led technology innovation and to adopt a wider leadership role in stimulating technology development and innovation. It has a leadership role to stimulate technology development and innovation for the benefit of UK business in the areas which offer the greatest potential for boosting UK growth.

Understanding that the innovation ecosystem is fragmented and difficult for business to navigate, the TSB provides a cohesive range of support for R&D and innovation, to help UK business bring new ideas and technologies more rapidly to market and to generate sustainable economic growth.

The TSB is working to connect the innovation support landscape, developing mutually beneficial relationships with other UK innovation and business support organisations, as well as the investment sector to help SMEs in particular to access other forms of finance. The TSB plays an important role, taking a national view of innovation support and looking for the opportunities to join up the support available to businesses, creating a more effective innovation environment.

In addition, the TSB helps and encourages companies to gain access to European funding and partnership opportunities, as well as building joint programmes with the key emerging economies of India and China to help companies internationalise their activities.

18.  We consider it vital that the Catapults are made to work. We ask the Government to confirm to us that they will not seek to push the Catapults to generate revenue but instead allow them to grow slowly and organically with a focus on developing the necessary capabilities to support innovation. (Paragraph 103)

The Catapult centres will provide businesses with access to the expertise, equipment, and specialist facilities they need to develop and exploit innovative products and technologies.

The Government is making a long term commitment to the core funding of the Catapult centres. The TSB is initially establishing five year funding agreements with an expectation of further funding, subject to ongoing need and satisfactory performance. There are currently no plans for the Catapult centres to become self-financing.

Revenue is important as part of a balanced approach to funding the Catapult centres. From evidence in the Hauser Review and a separate review of International best practice by the TSB, it is clear that the ability of technology and innovation centres to earn revenue is a key demonstrator of their relevance to industry and ensures their activities remain focussed on challenges facing businesses large and small. This is part of the 1/3-1/3-1/3 balanced approach adopted for the Catapults. Over time it is expected that the Catapult centres will generate around one third of their income from industrial revenue; one third from competitively won R&D funding and one third from core funding from the TSB. The typical expectation is that centres take between five and eight years to reach this steady-state because it is recognised that the growth in capabilities and revenue must come in a controlled and sustainable manner.

19.  We have concerns about the ability of the TSB to provide real local information unless they have the funding and resources to develop regional points of contact that can talk knowledgeably to local businesses. We recommend that the Government consider how they can resource the TSB to provide local level advice to technology businesses. (Paragraph 109)

When the TSB was set up in July 2007, a decision was taken to work with existing partner organisations in the regions and Devolved Administrations rather than establish a regional or sub-national network of offices or locally-based TSB staff. This approach has worked well and has reduced potential cost, duplication and overlap.

However, given the recent changes in sub-national structures in England and the overall scope and scale of the TSB's portfolio of programmes and activities across the whole of the UK, the TSB is now actively reviewing the way it operates to ensure greater linkage between the national approach to innovation and support and intelligence gathering at a local level. The TSB is working with and consulting the Department of Business, Innovation and Skills on this which takes into account work on the Heseltine Review and City Deals.

COMBINED RESPONSE FOR CONCLUSIONS 20-23 FOLLOWS

20.  UK universities collectively constitute a world class research base which is, consequently, attractive to foreign businesses. Even if they are not focussed on commercial considerations, they will inevitably generate ideas and discoveries that are of commercial value. (Paragraph 117)

21.  They are an important facet of the UK innovation ecosystem but a resource to be drawn on rather than a primary driver of commercialisation. (Paragraph 118)

THE ROLE OF UNIVERSITIES

22.  We are sympathetic to the demand that universities become more accommodating to non-traditional backgrounds among their academic staff. We regard it as axiomatic that the extended presence of people with an industrial background within university faculties would facilitate a greater understanding of commercial imperatives and the most effective ways to engage university resources within businesses. (Paragraph 123)

23.  We are concerned that driving an innovation agenda too aggressively through universities may have diminishing returns with regard to commercialisation and risk damaging the academic research that is working well. We recommend that the Government's objective should be to create a commercial demand for university engagement to which they are already primed to respond. This echoes and reinforces the point made almost 10 years ago in the Lambert Review. (Paragraph 127)

The Government fully recognises the internationally competitive research excellence of UK research base, of which universities are a critical component, and their role in attracting and anchoring internationally mobile investment in research and development within the UK, as well as their role in contributing to the UK innovation ecosystem. This contribution derives not only from the generation of knowledge for direct commercialisation but also the broader benefits of engaging with world leading academic researchers.

Assessment of HE institutions' knowledge exchange performance indicates that HE institutions have over recent years secured increasingly more people from the private sector—and indeed these recruits account for more than three times the number of academics making the transition from academia into the private sector. In addition, some analysis, such as Salter on the academy of entrepreneurialism, has suggested that some academics are more entrepreneurial than the general population[4].

The Government recognises that UK universities provide very broad ranging environment encouraging and valuing both intense academic contemplation as well as supporting entrepreneurialism and innovation.

For the majority of businesses the engagement of universities should be driven by the business need. For those companies that are not aware of what services or help a university can provide then the use of an Innovation Voucher is an ideal way to create that first engagement, breaking down any barriers that may exist.

24.  It is crucial that the Government has a coherent plan on how to engage the research base (people, facilities and intellectual property) with the innovation agenda. However, the current situation is fragmented and confusing and, as such, extremely difficult for small businesses to engage with. (Paragraph 136)

The Innovation and Research Strategy for Growth and the developing Industrial Strategy incorporate a wide range of measures to ensure that the excellent resources of the UK research base are fully utilised to support the innovation ecosystem. This has been incorporated in the development of the Industrial Strategy since its inception. The Research Councils are specifically focusing on how to improve the quality and clarity of their communications in order to reduce any potential confusion, and make approaches from businesses of any size a less complex process. The Gateway to Research tool is a key element of this provision that allows users to access research data sourced from a variety of Research Councils and outcome providers[5]

25.  We ask the Government to provide, in their response to this report, its perspective on the adequacy of the national infrastructure for innovation, benchmarked against nations with which we compete and how it intends to remedy structural shortcomings, possibly along the lines recently recommended by the Council for Science and Technology. We recommend that Public Sector Research Establishments play a key role in this infrastructure and we plan, in future, to examine their role within the research and innovation ecosystem in more detail. (Paragraph 137)

With the creation of the Catapult Centres, in response to the recommendations in the Hauser and Dyson report, Government has made a significant investment in developing the UK's national innovation infrastructure. The report compared the UK innovation system to those of twelve international competitors including Germany, US and China and these Centres will create a critical mass for business and research innovation in specific technologies where there is a potentially large global market and a significant UK capability. The Catapults will be an important part of the UK's innovation system, making a major long-term contribution to UK economic growth. Centres have already been established to build on UK expertise in High Value Manufacturing, Cell Therapies, Offshore Renewable Energy, Future Cities and Satellite Applications. Development of further centres to focus on Connected Digital Economy and Transport Systems is also in train.

Public Sector Research Establishments are a key element of the UK's infrastructure and Government is currently developing a set of guiding principles to make sure that any future reviews of these laboratories take full account of their value to the UK and the scientific and technical expertise they embody. The National Physical Laboratory is one such PSRE where the present contract for its operation ends in March 2014. A new operating model is expected to replace the present one. This model is being developed to take account of the NPL's important role in the UK research and innovation ecosystem.

The UK also has a broad range of other research and technology institutions which taken together form a valuable element of the overall innovation landscape. These have engaged in collaborations with universities and other institutions to help draw through the knowledge created in the research base—for example TWI, formerly The Welding Institute, has worked with Brunel University in the establishment of the Brunel Innovation Centre which undertakes joint research programmes with funding from external sponsors. This has helped them to build a mutual understanding of future research challenges and opportunities, develop new emerging technologies and help develop the next generation of engineers and technologists.

GOVERNMENT PROCUREMENT

26.  PraxisUnico provides training programmes and networking events to improve technology transfer skills across the whole of the university sector. It is a good example of a government sponsored programme that delivered necessary skills across a disparate sector. We recommend that the Government should consider it as a model for the delivery of a coherent set of skills across the whole of Government procurement. (Paragraph 142)

The Government has recognised the need to improve and make better use of commercial skills within the Civil Service. Obtaining better value requires all civil servants to have and demonstrate sound financial and commercial understanding. This is much more than simply improving our procurement skills. All civil servants must better understand what they need to buy, how to plan and engage with the market to obtain most choice and innovation, how to procure and contract intelligently; and how to manage the delivery of goods or services so that our expectations are met.

As part of the Civil Service Capabilities Plan the Government will develop in partnership with Civil Service Learning, a programme to improve commercial skills, aimed at all civil servants who may influence what goods or services they buy, how they buy them, who they buy them from and how they manage their delivery. This includes:

  • A programme to improve commercial skills targeted at the Senior Civil Service.
  • Making better connections with the Fast Stream through actively seeking to assign placements within the Cabinet Office commercial team and by identifying secondment opportunities within the private sector specifically to develop commercial skills.
  • Short commercial master classes, providing introductions to key topics including commercial awareness and successful contract negotiation.

27.  We were concerned that the SBRI scheme fails to assist companies to gain Government commercial contracts. We recommend that the Government ensure that its procurement officers, and those of other public sector agencies, are properly trained to take into consideration the wider public benefits of procuring services from small technology companies that have been developed through the SBRI. (Paragraph 150)

The current SBRI programme was launched in April 2009 and so to date very few of the projects supported have yet been completed. However, the point made by the Committee is recognised and accepted, as getting new innovations developed by small technology companies accepted by Government is not straight forward.

Government agrees that more could be done to raise awareness of the benefits of SBRI and to ensure wider deployment of the programme across central Government. Two recent developments will help BIS and the TSB increase capability in Government to use and exploit SBRI:

  • In Budget 2013 the Government announced that the SBRI programme will be expanded among key departments with the value of contracts increasing from £40 million in 2012-13 to over £100 million in 2013-14, representing 0.25 per cent of procurement budgets, and rising to over £200 million in 2014-15, representing 0.5 per cent of procurement budgets.
  • All Departmental SME Agenda Action Plans have identified how departments will make use of SBRI.

28.  We recommend the Government examine the critical role of research hospitals in addressing the most challenging of conditions and explore ways of ensuring that funding encourages the development of innovative solutions. (Paragraph 159)

The Department of Health, through the National Institute for Health Research (NIHR), provides a range of direct project, programme, and infrastructure NIHR research funding which support research hospitals. As part of this, the NIHR designates and funds a number of Biomedical Research Centres and Units which are based in the most outstanding NHS/University research partnerships in the country, and which are leaders in scientific translation and early adopters of new insights in technologies, techniques and treatments for improving health. In addition, NIHR Research Capability Funding is allocated to research-active NHS organisations to assist research-active NHS organisations to act flexibly and strategically to maintain research capacity and capability.

Responsibility for tariff design and price setting has transferred from the Department to Monitor and NHS England. As part of the development of a vision for the future of the payment system, they are reviewing existing arrangements for the reimbursement of specialised services and complex patients.

29.  We consider it critical for the future of the bioscience sector in the UK that the Government ensures that a significant proportion of the NHS procurement budget is accessible by small innovative companies. The Government should incentivise NHS Trusts to engage with SME companies for innovative technology solutions. A similar approach should also be adopted across other agencies including local government, police etc. (Paragraph 160)

Following the Chancellor's announcement in the Budget, the Department of Health and the Treasury are considering proposals under which 0.25% of the NHS's procurement budget could be spent on SBRI-type ventures in 2013/14 and 0.5% in 2014/15. Proposals have been submitted and are being considered by HMT.

30.  Both the Crick institute and the Stevenage Open Innovation campus demonstrate that the Government is working actively with the industry to ensure that bioscience retains a strong presence in UK research and development. Government support for life sciences has been excellent and there is real innovation taking place in how that sector might be supported. (Paragraph 166)

The Government welcomes this endorsement of the key role that these developments can play. To elaborate on the specific example of the Crick Institute through enabling interactions between physical, biomedical and clinical scientists, the Crick will play a key role in ensuring that advances in biomedical sciences are translated swiftly and effectively into benefits for patients in the NHS. By fostering collaboration with other centres of excellence, the Crick will harness the full capacity of this country's brightest and best researchers for the benefit of patients and the economy.

31.  We have not been persuaded that the Department for Business, Innovation and Skills has a strong enough voice across Government policy to effect the necessary radical change in procurement practices. Procurement by Government departments needs to focus on issues other than simply cost. We recommend a Minister in HM Treasury be given responsibility for the delivery of procurement-driven benefits identified by the Department for Business, Innovation and Skills. (Paragraph 172)

Government has put in place the measures to encourage and set the conditions to enable procurers to harness innovation in a manner consistent with ensuring long term value for money for the taxpayer. BIS are working closely with the Cabinet Office to embed innovative procurement into departmental priorities and, where appropriate, integrate it automatically into public procurement and the way that procurement is undertaken. These procurement reforms have already resulted in changes including increasing Government spend with SMEs and increased budgets for SBRI.

Government does not therefore believe there is a need for a Minister in HM Treasury to be given responsibility for the delivery of procurement-driven benefits identified by the Department for Business, Innovation and Skills.

Government procurement policy is to award contracts on the basis of value for money and not simply according to the lowest price. This is set out in the Treasury Green Book, which makes clear that value for money is about the optimum combination of cost and quality of the lifetime of the project. It means wider factors can be taken into account when awarding public contracts where such factors are directly relevant to the individual procurement and where doing so achieves the best value for money

32.  We recommend that the Government, in two years, publish a breakdown of companies successful in tendering for Government contracts and compare whether greater openness in procurement has resulted in increased contracts among small and developing British technology companies. (Paragraph 174)

Transparency is at the heart of Government's operations. This includes publishing information about the way public money is spent:

  • all central government contracts over the value of £10,000 are published on Contracts Finder
  • the Government has published information on its spend with SMEs.[6]
  • the TSB has created a searchable database which has been available since mid November 2012.[7] This contains details of all SBRI contract recipients, where the TSB is the contracting authority.

The Government does not, however, believe it is possible to publish information as the Committee recommends given the number of contracts awarded and the difficulties of identifying small and developing British technology companies.

33.  During our inquiry we have become aware of the multitude of issues and problems that are faced by businesses in a variety of innovation sectors. Each of these companies find issues in funding that innovation but their concerns and needs vary from sector to sector and are often predicated on the size of the business. We conclude there is no single valley of death that all businesses, or even all small businesses, must cross. (Paragraph 175)

The Government welcomes the Committees recognition of the complexity of the issues facing varying businesses across a diverse range of fields. It entirely agrees with this assessment and is seeking to tailor its support for the commercialisation of research accordingly.

FINAL CONCLUSIONS

34.  What is consistent across business is the need for a clear vision from the Government to provide confidence into the future. Without a definite commitment from Government, business is more reticent about making its own financial commitment to the levels of risk that innovation requires. (Paragraph 176)

The Industrial Strategy will provide a unified Government and Business commitment to key sectors across the medium-long term. The role of the commercialisation of research through the full utilisation of the UK research base is a central consideration in the development of the Industrial Strategy.

Specifically focusing on commitments to innovation and research the Innovation and Research Strategy for Growth provides a blueprint for the Government focus in these areas and the support that will be available.

Government has already shown a clear vision in several keys areas. This is well demonstrated in the consistent support that the Government has shown for the UK space sector. It has increased UK funding to the European Space Agency to an average of £240m per year for the next five years, and followed that through with additional funding directly to the UK space sector.

35.  The evidence that we have seen shows that there is no coherent innovation policy. The Government has begun to consolidate its innovation policy by bringing more schemes and responsibilities within the Technology Strategy Board. We judge that this consolidation needs to go further and that the TSB should be given more funds including monies designed to better finance existing programmes such as SMART and SBRI but not at the expense of the Research Councils. (Paragraph 177)

Having a single national UK innovation organisation under which most schemes are consolidated is clearly desirable to help UK business access the right support. Since its inception in 2007 the Government has, despite a very difficult economic situation, continued to grow the TSB. It is however the case that many of its programmes remain heavily oversubscribed with many good proposals being rejected because of the amount of funding available.

36.  We have seen a desperate need for government procurement to do heavier lifting than in providing encouragement to the growth of small technology companies. There is possibly a greater and more sustainable benefits to be gained by growing and developing small companies into successful medium sized ones than in attracting large companies. (Paragraph 178)

The Government is taking a strategic approach to public procurement through seeking to ensure the huge purchasing power of government supports the task of boosting growth, and enables us to actively shape the UK market for the long term.

The Government has an aspiration that 25% of spend (directly or in supply chains) should be with SMEs by the end of the Parliament and has introduced a number of reforms to improve access to procurement opportunities for SMEs. We have already made real progress:

  • The latest figures show that in 2011-12 10% of direct spend went to SMEs—an increase from 6.5% in 2009-10. In addition, a survey of Government's top suppliers showed that 6% went to SMEs in supply chains.
  • To date, 15,000 central Government contracts over £10,000 have been published on Contracts Finder and 4,830 have been flagged by departments as awarded to an SME.
  • Government has published pipelines of upcoming procurement opportunities worth £84bn and placed an emphasis on pre-market engagement so that business can be involved in shaping specifications.
  • Government has eliminated bureaucratic Pre-Qualification Questionnaires for central Government procurements below £100,000 in 15 out of 17 departments.
  • Government has given SMEs a voice at the top table by appointing a Crown Representative for SMEs, and putting in place an SME Panel attended by Cabinet Office Ministers which provides an additional degree of challenge to our SME Programme.
  • The Mystery Shopper Service enables suppliers and other interested parties to report instances of poor procurements, including overly bureaucratic processes and the late payment of invoices for Cabinet Office to Investigate. Out of the 319 cases closed to date, over 80% of investigations resulted in a positive outcome.
  • All departmental SME Agenda action plans have identified how they will make better use of SBRI, and Government has announced its intention in the 2013 Budget to expand the use of SBRI among key departments five-fold. The value of contracts made available through this route will increase from £40 million in 2012-13 to over £100 million in 2013-14, and over £200 million in 2014-15.

37.  There needs to be a coherent strategy across the whole of UK industry to provide UK business with confidence in where they might expect Government support for the medium and long term—whether through procurement, R&D focus or fiscal policies. (Paragraph 179)

The Industrial Strategy is designed specifically to address this issue and provide a clear vision for the future of key UK sectors. This will be a partnership between Government and Industry that addresses the broad range of issues impacting upon the UK business environment.

38.  Finally we would urge the Government to seriously consider the financial markets and the inadvertent negative impacts that changes to policy there might have on innovation policy, for example how the regulation of pension funds has effectively starved technology firms of growth capital. Where it is not possible to foresee such impacts Government should be alert to the need to detect and to rectify them in a speedy fashion. (Paragraph 180)

The Government has already taken strong steps to improve SME access to public equity markets. These have included:

  • consulting on allowing shares from the Alternative Investment Market and other growth company exchanges to be included in ISAs; and
  • the announcement at Budget 2013 of the intention to remove stamp duty from shares traded on growth markets such as the Alternative Investment Market.

As the report notes, there have been changes over time in the way that pension and insurance funds invest their funds. One cause has been a shift internationally from defined-benefit pension plans to defined-contribution pension plans, with defined-contribution schemes investing more in instruments with lower risk and return (e.g. bonds). Another cause is demographic changes, with ageing populations shifting their portfolios towards lower risk assets. However, going beyond the strong steps already taken by the Government to improve SME access to the public equity markets by directing investors where to invest their capital, for example by requiring funds to have a proportion of European SME equities, would have unintended consequences for investors. As a result, the Government does not intend to mandate funds to hold a proportion of SME equities.

The creation of the business bank should create platforms to allow institutional investors to fund UK SMEs. Wholesale solutions are designed to enhance capital or funding conditions associated with SME lending. These would be deployed in line with the business bank's objectives either to support the development of new sources or types of finance or to increase lending to under-served SMEs.


1   https://www.gov.uk/government/publications/government-innovation-and-research-strategy Back

2   https://www.gov.uk/government/publications/innovation-and-research-strategy-for-growth Back

3   https://www.gov.uk/government/publications/annual-innovation-report-2012-innovation-research-and-growth Back

4   Bart Clarysse, Valentina Tartari, Ammon Salter, The impact of entrepreneurial capacity, experience and organizational support on academic entrepreneurship, Research Policy, Issue 8, October 2011 Back

5   http://gtr.rcuk.ac.uk/ Back

6   https://www.gov.uk/government/news/departmental-sme-spend-for-2011-12-reveals-steady-increase Back

7   https://connect.innovateuk.org/publicdata/ Back


 
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Prepared 11 July 2013