SCIENCE AND TECHNOLOGY SELECT COMMITTEE

The future of Innovate UK

Oral and written evidence

Contents AIRTO Ltd – Written evidence (IUK0003) ................................................................................... 2

Jean Aldous – Written evidence (IUK0008) ................................................................................ 4

Association of the British Pharmaceutical Industry (ABPI) and BP – Oral evidence (QQ 1-8) ... 6

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004) .................................................................................................................................... 7

BioIndustry Association – Written evidence (IUK0005) ........................................................... 14

BP and Association of the British Pharmaceutical Industry (ABPI) – Oral evidence (QQ 1-8) . 16

Confederation of British Industry (CBI), Professor Luke Georghiou, University of Manchester and United Kingdom Science Park Association – Oral evidence (QQ 9-16) ............................. 31

Professor Luke Georghiou, University of Manchester, United Kingdom Science Park Association and Confederation of British Industry (CBI) – Oral evidence (QQ 9-16) .............. 32

Government – Department for Business, Innovation and Skills (BIS) – Written evidence (IUK0001) .................................................................................................................................. 33

Government – Department for Business, Innovation and Skills (BIS) – Oral evidence (QQ 26-39) ............................................................................................................................................. 39

Professor Jackie Hunter CBE, ex Chief Executive of BBSRC, Nesta and Innovate UK – Oral evidence (QQ 17-25) ................................................................................................................ 54

Innovate UK, Professor Jackie Hunter CBE, ex Chief Executive of BBSRC and Nesta – Oral evidence (QQ 17-25) ................................................................................................................ 55

Nesta, Innovate UK and Professor Jackie Hunter CBE, ex Chief Executive of BBSRC – Oral evidence (QQ 17-25) ................................................................................................................ 56

Professor Ronald Stamper– Written evidence (IUK0006) ....................................................... 70

Technologia – Written evidence (IUK0002) ............................................................................. 72

United Kingdom Science Park Association, Confederation of British Industry (CBI) and Professor Luke Georghiou, University of Manchester – Oral evidence (QQ 9-16) .................. 75

University Alliance – Written evidence (IUK0007) ................................................................... 87

AIRTO Ltd – Written evidence (IUK0003)

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AIRTO Ltd – Written evidence (IUK0003) Letter from Professor Richard Brook OBE FREng, President, AIRTO c/o National Physical Laboratory The Future of Innovate UK AIRTO welcomes the announcement of The House of Lords Science and Technology Select Committee undertaking an investigation into the future of Innovate UK. This is a topic upon which AIRTO currently places high importance. There is currently much debate about how best the UK can organise its strategies for innovation with the inception of a National Innovation Plan. AIRTO’s response to the government’s recent call for ideas on this subject is enclosed for your interest. AIRTO also responded to the government recently specifically on the topic of the future of Innovate UK. Britain has a large and thriving Innovation, Research and Technology (IRT) Sector, which contributes significantly to our national capabilities, with the economic impact for UK plc now estimated to stand at over £32 billion pa, whilst consuming just 0.3% of Government spend. The IRT sector has more than 57,000 employees. AIRTO, which represents the sector, has set out its vision and ambition for tackling the challenge of driving innovation and growing productivity, pinpointing actions required in both the private and public sectors to bring this about: AIRTO's Action Agenda on Innovation. We urge the Committee, in evaluating the future of Innovate UK, to consider how the UK can benefit from fully embracing its entire network of innovation assets, which too frequently goes unrecognised in measures to stimulate economic growth. The IRT sector plays a pivotal role in driving economic growth and innovation, frequently acting as the aggregator of scientific and technological demand from businesses and markets. Our organisations typically work at the mid-level of the technology readiness scale (TRLs) and are well placed to understand company and sector based innovation strategies, where they are optimally positioned to facilitate interactions involving academic partners, SMEs and large organisations to approach challenge-led innovation projects. IRT organisations are well equipped to help companies seeking mid-TRL research capabilities, either on a self-sufficient basis or in conjunction with university partners. The recently launched Catapults are intended to provide a match to the research needs of business in specifically identified areas of technology and application. AIRTO welcomes the announcement of UKRI, and sees that there is value to be gained for UKplc by having a closer working framework to connect Innovate UK with the Research Councils. However AIRTO continues to see the need for a strong, distinctive identity for innovation in the way that UKRI is established, and there is a need to see a very heavy emphasis on the mission for innovation if the UK is to continue to compete well globally. Going forwards, AIRTO would like to see more prominence given to innovation and the investment in human and physical capital to underpin it, specifically:

AIRTO Ltd – Written evidence (IUK0003)

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to the processes for stimulating innovation and embedding its results in the economy as a key driver of productivity; accepting also that government has a role to play in direct support for innovation, including continuing support for Innovate UK, which can open up new opportunities, stimulate competition and initiate new supply chain relationships;

to the UK’s infrastructure for innovation, which is a national asset; it extends well beyond the Catapults but appears not to be well understood or very prominent in government thinking. The government stands to benefit from harnessing the expertise and thought leadership of the IRT sector to help shape national innovation policy;

to the fact that many new ideas and innovations originate outside of the university research base, but they too need to be supported across the ‘valley of death’; and whilst the academic research base yields new knowledge and discoveries and supplies capacity for scientific understanding and skills, driving knowledge transfer from the IRT sector is essential for driving productivity and growth;

place more emphasis on investment in human capital and enhancing skills, particularly the skills needed to manage the development and commercialisation of innovative products and processes;

improve access to patient finance to reduce the need for refinancing rounds and lessen the likelihood of innovative programmes losing control during phases of financial vulnerability (which almost all growing companies experience) to the detriment of growth ambitions, entrepreneurialism and dynamism in the economy;

improve capitalisation of non-profit research organisations and Public Sector Research Establishments (PSREs), as key contributors to the UK technological infrastructure supporting innovation;

place more emphasis on innovation and improved productivity in public services, over cuts, to drive costs down;

emphasise the value of procurement of innovative products and services, particularly from SME suppliers with export growth potential.

9 June 2016

Jean Aldous – Written evidence (IUK0008)

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Jean Aldous – Written evidence (IUK0008) I have worked with many engineers developing clean energy technologies who believe that it is wrong to pollute the atmosphere and risk damaging the environment for future generations. They have been developing electric vehicles, small scale wind energy collectors and fuel cells, but have been unable to compete with established energy suppliers. Government policies favour globalisation, which supports existing corporations. Market forces would only be effectual if the majority of consumers had a longer term vision and a greater understanding of scientific data. The situation is further confused by well funded PR companies, which often use psychological methods to encourage consumers to make emotional choices. The Engineers who have been working to ensure a better future for their country are not valued because they are not making money. The Government of course gets more immediate revenues from consumerism than it does from innovation. I published an article by Cambridge Econometrics in Electric Vehicle Developments decades ago which warned that the exploitation of North Sea resources was causing the exchange rate to rise and damaging British industry. According to data from the ONS published by the BBC, manufacturing is now only in the region of 10% of UK GDP. A recent report by R A Rosen entitled The Economics of Climate Change, which was published by Elsevier, pointed out that the databases used by governments did not include innovative energy developments. The Grantham Research Institute on Climate Change stated that there is an imbalance between support for deployment and R & D, with deployment outweighing R & D support by 150 to 1. This clearly favours existing energy suppliers rather than innovative SMEs. In the past the introduction of new technologies was spearheaded by individuals with small companies. Innovate UK specifies that applicants must be backed by an automotive or Tier 1 company, both large-scale organisations which are unlikely to want to help small competitors to enter their markets. Globalisation also affected the bankers who wanted to allocate funding for the longer term but were over-ridden as they became more centrally controlled. Barings was one of the last of the banks to have a fund for innovative energy technologies, but they were closed down. Engineers realise that the wealth of industrialised nations has been built upon two main factors, firstly a benign environment which provides food, water and much of our quality of life and secondly, the availability of cheap coal, oil and gas. Fossil fuels have enabled generations to have comfortable homes and instant mobility. At the same time people in poorer countries think that they should have similar luxuries. Fossil fuels have been utilised at such a fast rate that their costs are rising and they are polluting the atmosphere, the oceans and the soil. The scientists and engineers, who are aware of the seriousness of these problems are being blocked by the lobbies for global corporations backed by governments which want to continue enjoying the wealth generated by fossil fuels for as long as possible. The future of energy is likely to be more locally based, with distributed generation and renewable technologies. What is needed is assistance to

Jean Aldous – Written evidence (IUK0008)

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help potential users with the evaluation of advanced prototypes, followed by patenting and licensing. 21 June 2016 www.greenmotorsport.com www.fuelcellpower.org.uk www.futureenergies.com

Association of the British Pharmaceutical Industry (ABPI) and BP – Oral evidence (QQ 1-8)

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Association of the British Pharmaceutical Industry (ABPI) and BP – Oral evidence (QQ 1-8) Transcript to be found under BP

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004) 1. About the ABPI

1.1. The Association of the British Pharmaceutical Industry (ABPI) represents innovative research-based biopharmaceutical companies, large, medium and small, leading an exciting new era of biosciences in the UK. Our industry, a major contributor to the economy of the UK, brings life-saving and life-enhancing medicines to patients. Our members supply 90 per cent of all medicines used by the NHS, and are researching and developing over two-thirds of the current medicines pipeline, ensuring that the UK remains at the forefront of helping patients prevent and overcome diseases.

2. Introduction

2.1. The ABPI welcomes the opportunity to engage with the House of Lords Science and Technology Committee on this inquiry into the future of Innovate UK.

2.2. The pharmaceutical industry is the industrial sector making the largest investment in R&D in the UK with an investment of over £4 billion in 2013, representing 22% of all expenditure on R&D in UK businesses, more than twice the next biggest sector1.

2.3. To do so, the pharmaceutical sector relies on long-term investment and a stable science and research environment. Developing a new medicine takes on average 12 years from discovery to market authorisation. Creating this stability is important for science and research, attracting global inward investment, and facilitating long-term collaboration between the research base and industry.

2.4. The ABPI directly works with Innovate UK on the Cell and Gene Therapy Catapult, the High Value Manufacturing Catapult, the Precision Medicine Catapult and the Medicines Discovery Catapult.

2.5. The ABPI also directly works with Innovate UK to deliver the Medicines Manufacturing Industry Partnership (MMIP) and the Advanced Therapies Manufacturing Taskforce (ATMT) via the Innovate UK funded Knowledge Transfer Network (KTN).

2.6. The ABPI represents organisations that range from SMEs to large, global companies. Whilst our larger members are ineligible for Innovate UK funding, they form partnerships and work with many organisations who have received funding from Innovate UK – particularly on collaborative R&D projects - as well as benefiting from the wider life sciences ecosystem that Innovate UK supports.

2.7. As such, the future of Innovate UK as outlined in the Success as a Knowledge Economy white paper2, and the Higher Education and Research Bill3 will have a significant impact on the pharmaceutical industry in the UK.

1 ONS Business Enterprise R&D 2013 2 Success as a Knowledge Economy, Department for Business Innovation & Skills, 2016; https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/523396/bis-16-265-success-as-a-knowledge-economy.pdf 3 http://services.parliament.uk/bills/2016-17/highereducationandresearch.html

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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2.8. This submission specifically focuses on the impact of integrating Innovate UK under UK Research and Innovation (UKRI), and is supplementary to oral evidence given by the ABPI to the Committee on 7th June 20164.

3. Key messages

3.1. Innovate UK has an important role to play in the continued success of the UK’s life sciences sector and in supporting the world-leading ecosystem in which ABPI members operate.

3.2. Innovate UK has a distinctive role to identify and drive the commercialisation of science and technology innovations that will grow the UK economy, focusing on business innovation and SMEs. This attracts investment from industry, locally, nationally and internationally and should be maintained.

3.3. The ABPI supports the creation of UKRI, as part of the government’s commitment to fully implement the recommendations in the Nurse Review5, which can play an important role in promoting inter-disciplinary research.

3.4. We also support the commitment to protect dual funding and the Haldane Principle in the funding of the Research Councils, Innovate UK and Research England2.

3.5. However, the integration of Innovate UK into UKRI must not disrupt current funding arrangements, or upcoming calls and initiatives.

3.6. Innovate UK must retain its financial and administrative autonomy under UKRI. 4. Recommendations and areas for clarification

4.1. The ABPI recommends that Innovate UK, and the Research Councils, retain autonomy under UKRI. To do this, Innovate UK must:

4.1.1. Retain its own legal entity and separate mandate from that of UKRI and the Research Councils.

4.1.2. Retain a separate funding stream, with a continued focus on translating science and technology innovations into commercial opportunities.

4.1.3. Be administered separately from UKRI and the Research Councils, with the ability to form partnerships and employ the relevant qualified staff to deliver on its business plan.

4.2. For the Government to fulfil its commitment to maintain Innovate UK’s business facing focus, the Higher Education and Research Bill needs to include more overt protections of the funding allocated to Innovate UK.

4.3. The integration of Innovate UK into UKRI must not disrupt current funding arrangements and active grants, or upcoming calls and initiatives. Clear communication of changes to the research environment will also be key to ensuring the reforms are successful.

5. Importance of Innovate UK to UK life sciences sector

4 http://www.parliament.uk/business/committees/committees-a-z/lords-select/science-and-technology-committee/inquiries/parliament-2015/future-of-innovate-uk/ 5 Ensuring a successful UK research endeavour. A Review of the UK Research Council. Sir Paul Nurse, 2015; https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/478125/BIS-15-625-ensuring-a-successful-UK-research-endeavour.pdf

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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5.1. Innovate UK plays an important role in supporting the life sciences sector translate research into innovative medicines, devices and other therapeutics. It does this not only through funding, but by connecting business and the research community, through its Knowledge Transfer Network, and the national Network of the Catapults Centres.

5.2. Innovate UK’s distinctive role is not to fund academic research, but to fund science and technology businesses - specifically SMEs – that contribute to all aspects of the life sciences industry.

5.3. The ABPI welcomes Innovate UK’s 5 point Delivery Plan6, and support steps to improve performance. We specifically recognise Innovate UK’s attempts to simplify their offering including their funding streams across different topics, which is welcome.

5.4. We also welcome the commitment to continued support and funding for relevant life sciences sectors, including the commitment of £117 million (21%) of the 2016/17 budget to Health and Life Sciences as well as £137 million (24%) on Manufacturing and Materials6.

R&D funding 5.5. Innovate UK funding directly supports companies in the life sciences sector with

research and development funding at an early to mid-stage research development stage. This allows companies to reduce their risk burden when developing an innovative product and strengthen their business case to attract partnerships with industry or private investors.

5.6. An example of where this has been successful is Discuva7, a biotech company developing new antibiotics. Discuva received Innovate UK Biomedical Catalyst funding to accelerate drug development. They now have a partnership deal with Roche, with agreed payments for development milestones8.

5.7. A further example is Autifony Therapeutics9, an organisation which started as a spin out organisation from GlaxoSmithKline, led by scientists from GSK’s Neuroscience Centre of Excellence for Drug Discovery. Autifony Therapeutics received Biomedical Catalyst funding to accelerate development of their novel therapeutics for schizophrenia through proof of concept and are now ready to start clinical testing10.

Infrastructure funding 5.8. Innovate UK funding also has a crucial role in improving the infrastructure

necessary to accelerate research and development, and to develop technology to increase production capacity or establish operations abroad.

6 Innovate UK Delivery Plan Financial Year 2016/17 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/514838/CO300_Innovate_UK_Delivery_Plan_2016_2017_WEB.pdf 7 http://www.discuva.com/ 8 https://www.gov.uk/government/case-studies/discuva-leading-the-global-search-for-new-lifesaving-antibiotics 9 http://www.autifonytherapeutics.com/ 10 https://www.gov.uk/government/case-studies/schizophrenia-treatment-funding-enables-next-stage-trials

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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5.9. For example, Puridify11 is a company which develops nanofiber filtration methods to improve the manufacture of enzymes. This could significantly reduce manufacturing and production costs for the manufacturing of medicines. Puridify received Innovate UK grant funding which allowed them to recruit new staff, grow, and develop partnerships with industry. They have now received funding through SR One, the venture capital arm of GlaxoSmithKline11.

5.10. A further example is Ingenza12, a company formed in 2003 as a spin-out of Edinburgh University. Ingenza is now a leading developer and provider of innovative synthetic biology and industrial biotechnology services, helping translate innovation into more efficient manufacturing processes. With support from Innovate UK, Ingenza has grown from employing ten people in 2009 to employing 42 people, increasing its revenue tenfold to more than £4m a year. Ingenza received several grants since 2005 and has developed enabling technologies to more rapidly and predictably adapt and engineer biological systems for industrial-scale production13.

6. ABPI partnerships with Innovate UK

6.1. The ABPI directly works with Innovate UK to deliver the Medicines Manufacturing Industry Partnership (MMIP) and the Advanced Therapies Manufacturing Taskforce (ATMT) via the Innovate UK funded Knowledge Transfer Network (KTN).

6.2. The ABPI also continues to work with Innovate UK on the Catapult Centres – specifically the Cell and Gene Therapy Catapult, High Value Manufacturing Catapult, Precision Medicine Catapult and the Medicines Discovery Catapult.

MMIP 6.3. The Medicines Manufacturing Industry Partnership is a collaboration between the

medicines manufacturing sector and Government, and is supported by the ABPI. 6.4. It was established with the aim of ensuring the UK is recognised as an attractive,

thriving and innovation-rich environment for medicines manufacturing. 6.5. Working closely with key government organisations including the Medicines and

Healthcare products Regulatory Authority (MHRA), UK Trade and Investment (UKTI) and Innovate UK, MMIP is examining the UK's position in medicines manufacturing and identifying priorities for improvement.

6.6. The MMIP priority work streams are the technological, fiscal, regulatory and skills environments, as well as building the medicines manufacturing community.

6.7. Moreover, the Advanced Therapy Manufacturing Taskforce, launched by the Medicines Manufacturing Industry Partnership (MMIP) in 2016, will make a small number of targeted recommendations to build the advanced therapy manufacturing industry in the UK and ensure the UK is in a strong global position to discover, manufacture and deliver transformative, new therapies.

Cell and Gene Therapy Catapult and Precision Medicines Catapult

11 https://www.gov.uk/government/case-studies/success-story-puridify-heralds-new-generation-of-biotherapeutics 12 http://www.ingenza.com/ 13 E.g. https://www.gov.uk/government/news/cable-announces-20-million-for-uk-industrial-biotechnology

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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6.8. The co-location with two of the UK’s biggest pharmaceutical companies of both the Cell Therapy Catapult’s new £55 million Cell Therapy Manufacturing Centre at the Stevenage Bioscience Catalyst campus (GSK) and the Precision Medicines catapult at the Cambridge Biomedical Campus (AZ) recognises that stratified medicines and cell and gene therapy are important and growing fields of biomedical research for the pharmaceutical sector.

6.9. The Centres will bring together engineers and researchers from across the physical, life and biomedical sciences to develop advanced therapeutic medicinal products for late phase clinical trial and commercial supplies and accelerate the development of precision medicines, and will have a significant impact on the UK’s position in this field of research.

High Value Manufacturing Catapult: National Biologics Manufacturing Centre within the Centre for Process Innovation 6.10. Innovate UK and the KTN have supported the establishment of the National

Biologics Manufacturing Centre (NBMC), part of the Government’s 2011 Strategy for UK Life Sciences. As part of the High Value Manufacturing Catapult, the Centre for Process Innovation was selected to establish and manage the new £38m NBMC14, which will encourage innovative solutions in the UK health market. NBMC will be equipped with state-of-the-art technology and equipment to deliver a number of key themes, reflecting those identified in the KTN/Innovate UK Roadmap15.

6.11. The Centre for Process Innovation (CPI) has achieved significant outcomes, including the collaboration with Arecor16 to investigate ways to enhance the compatibility of biologic medicines with drug product containers. This would potentially improve stability and shelf life of medicines throughout transportation and storage.

6.12. The ability to stabilise therapeutic proteins using formulation as has been demonstrated during this project can provide great benefit for the global biologics manufacturing supply chain by cutting costs and reducing waste through increased shelf life and reduced product specification failures.

Medicines Discovery Catapult 6.13. The Medicines Discovery Catapult is the centre of national expertise for the

discovery of medicines. The Medicines Discovery Catapult (MDC) has been established as a private sector, industry focused, independent organisation to develop new approaches for the discovery and early development of new medicines helping to transform ideas into commercial products and services.

6.14. The MDC will develop and validate new ways of discovering new medicines and supporting the key UK strength in pharmaceutical, biotechnology and contract research organisations.

14 https://hvm.catapult.org.uk/news-events-gallery/news/national-biologics-manufacturing-centre-launched/ 15 http://www.ifm.eng.cam.ac.uk/uploads/Resources/The_future_of_High_Value_Manufacturing_in_the_UK_Pharmaceutical_Biopharmaceutical__Medical_Device_Sectors_-_2013.pdf 16 https://hvm.catapult.org.uk/impact/case-studies/investigating-the-compatibility-of-biologic-medicines-with-drug-product-containers/

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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6.15. Poorly predictive animal models are a cause of high attrition rates in pharmaceutical and non-pharmaceutical chemical development, representing a major financial burden for industry. The Medicines Discovery Catapult has the potential to harness recent technological advances and the latest knowledge in human safety, health and disease to generate new technologies with predictive capacity, or to extend existing technologies to new application areas.

BioMedical Catalyst 6.16. The BioMedical Catalyst (BMC) is a collaboration between the Medical Research

Council (MRC) and Innovate UK. 6.17. To date the BMC scheme has awarded over £250 million to accelerate medical

research. Over 180 business-led projects have been supported with funds worth over £130 million and with a total project value of over £240 million. This means that over £100m of additional private capital, in the form of matched funding, has been leveraged as a condition of the Biomedical Catalyst awards17.

6.18. Furthermore, beyond the Biomedical Catalyst awards, post-award funded companies and academics have realised in excess of a further billion pounds in the form of additional private finance, grant funding, via licencing or acquisition17.

6.19. Innovate UK’s business plan should commit to the continuation of the Biomedical Catalyst scheme, and should be widened to support larger pharmaceutical organisations.

7. Integration of Innovate UK into UK Research and Innovation

7.1. The ABPI has supported the call for the Research Councils to work more closely with Innovate UK to deliver appropriate funding streams targeted at maximising the commercial applications of the science and technological innovations that are developed from the UK’s world-leading science base.

7.2. As such, the integration of Innovate UK with UKRI should provide further opportunities to improve the necessary strategic coordination needed to maximise translation of these innovations.

7.3. The current colocation of the Research Councils and Innovate UK has already facilitated collaboration, for example on flagship initiatives such as the Catapult Centres and the Biomedical Catalyst joint funding scheme. The proposed integration can further improve this.

7.4. Integration also has the potential to increase visibility of flagship initiatives, such as coordinated activities on Precision Medicines, to global companies. The delivery of these ambitious initiatives within the UK relies on these numerous funding streams directed at different points in the development pathway.

7.5. However, we have identified a number of risks that the integration of Innovate UK under UKRI presents. Understanding the detail of how the integration will work in practice will be important to this. The risks we have identified are as follows:

7.5.1. It is important to be mindful of the potential risks of destabilising a globally recognised research and innovation ecosystem and caution must be taken not to risk the UK’s reputation in the eyes of global pharmaceutical companies.

17 The Biomedical Catalyst: making the case to continue, 2015 https://www.bioindustry.org/document-library/the-biomedical-catalyst-making-the-case-to-continue/bmc-round8-2015-final.pdf

Association of the British Pharmaceutical Industry (ABPI) – Supplementary written evidence (IUK0004)

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7.5.2. The ABPI highly values the fundamentally different remits of Innovate UK and the Research Councils. We would be concerned at any loss of individual autonomy of the Research Councils and Innovate UK, and their independence to enter into partnerships with other organisations, including pharmaceutical companies. Their individual legal identities and budgets must be retained, perhaps through primary legislation.

7.5.3. Integration should not lead to the reduction or dilution of Innovate UK’s dedicated budget or relations with the business community. The protection of the current funding models would specifically apply to funding committed to existing Catapults, including the Cell and Gene Therapy Catapult, and Precision Medicine Catapult, while existing funding streams such as the Biomedical Catalyst, should be maintained and built upon.

8. Methods of financing

8.1. Developing a new medicine takes on average 12 years from discovery to market authorisation, and contains significant risk.

8.2. Innovate UK has provided valuable funding for the gap between start-up funding and established biotech and pharmaceutical company investment. This allows projects to be developed to the stage where they can be considered for investment by industry.

8.3. A wholesale move from grants to loans has significant risks for the life sciences ecosystem, and is likely to adversely affect business innovators in the high-risk science and technology sectors.

8.4. As such, it should be carefully planned and piloted. However, we would need a clear sight of the proposed funding models to fully appreciate if they are appropriate for the biopharmaceutical sector and broader life sciences ecosystem.

9 June 2016

BioIndustry Association – Written evidence (IUK0005)

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BioIndustry Association – Written evidence (IUK0005) Ensuring the development of new finance products in support of innovation works for all parties The November 2015 Comprehensive Spending Review stated that, “the government will introduce new finance products to support companies to innovate following best practice in countries such as France, Finland and the Netherlands. These will replace some existing Innovate UK grants, and reach £165 million per year by 2019-20, so that total Innovate UK support is maintained in cash terms”.18 There has been a lack of detail provided by the government about both the parameters of this policy development and the methods by which stakeholders can engage. It has therefore been difficult for the BIA and others to develop specific input as stakeholders have not been provided with details of models that are or are not up for consideration. However, it is possible to set out some overarching principles that should be borne in mind during the development of the new finance products. Loans will not work for early-stage research in the life sciences sector, which is too risky to be financed by repayable debts. Successful matched-grant funding schemes, such as the Biomedical Catalyst, which successfully leverage private sector funds and kick-start innovation that would not happen without public support, should be continued as we have outlined in the preceding section. Converting later-stage research funding from grants to loans or other types of financial products may be workable but, as noted above, the life sciences sector faces specific challenges such as multiple financing rounds and long product development timelines. The new finance products will need to work within this dynamic. From this standpoint, there are various issues to consider as new models are developed:

We do not believe a loan in the form of equity will work as the government will find it difficult to value companies.

Any government loan needs to be a super-subordinated non-grant product in order to attract, not repel other forms of financing.

Payback of a loan should only kick in post-revenue generation from the investment or at company/asset exit.

Loans should be interest free, money repaid can then be recycled in real terms value.

At a fundamental level a loan can only work in a timescale of at least around 4-5 years, i.e. at a point where an exit strategy could be developed. A proxy in drug development scenarios could be when a product reaches the clinical stage, the parallel to a platform technology is not as easily distinguished (see points below).

18 HM government (2015), Spending Review and Autumn Statement 2015 Page 93 (Page 93) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/479749/52229_Blue_Book_PU1865_Web_Accessible.pdf

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Government and Innovate UK need to explore and understand how different types of companies and projects will be suited to different types of non-grant product, for example in the bioscience field some projects such as drug development may be well suited to an asset-centric loan, linked to IP. However, for platform technologies a corporate-level loan might work better. This requires in-depth exploration and consultation.

That said, it is important that overall funding schemes are easy to understand and use in order not to reverse company engagement with Innovate UK schemes.

Striking the balance between these last two points will be a challenge and requires serious and thorough consideration and industry consultation.

The BIA is ready to engage further on this issue and urges government to consult fully with all stakeholders to ensure this policy works for all parties. 9 June 2016

BP and Association of the British Pharmaceutical Industry (ABPI) – Oral evidence (QQ 1-8)

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BP and Association of the British Pharmaceutical Industry (ABPI) – Oral evidence (QQ 1-8)

Evidence Session No. 1 Heard in Public Questions 1 - 8

TUESDAY 7 JUNE 2016

Members present

Earl of Selborne (Chairman) Lord Borwick Lord Broers (co-opted) Lord Cameron of Dillington Lord Fox Lord Hennessy of Nympsfield Lord Hunt of Chesterton Lord Mair Lord Maxton Baroness Neville-Jones Lord Oxburgh Viscount Ridley Lord Vallance of Tummel Baroness Young of Old Scone

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Examination of Witnesses

David Eyton, Group Head of Technology, BP, and Dr Virginia Acha, Executive Director of Research, Medical & Innovation, Association of the British Pharmaceutical Industry (ABPI)

Q1 The Chairman: Welcome, David Eyton and Virginia Acha. I apologise for the fact that you can hardly see us. I can see you out there somewhere, and I am sure we will manage. The room is of a slightly longer configuration than we are used to. This is the first session in a very short inquiry that we propose to undertake on the future of Innovate UK. Would you first like to introduce yourselves for the record? If you would also like to make an introductory statement, please feel free to do so.

David Eyton: I am David Eyton. I am BP’s head of technology. It is probably also relevant that I am a director of the UK Energy Technologies Institute, which has a number of associations with this conversation.

If you will allow me, I will make a few remarks, which I have prepared and will read out. BP is domiciled in the UK, and the UK innovation ecosystem underpins our global success. More than 40% of our global research and development investment occurs in the UK, with three

BP and Association of the British Pharmaceutical Industry (ABPI) – Oral evidence (QQ 1-8)

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major research centres: one Pangbourne, one in Hull and one in Sunbury. We also have strategic relationships with four universities in particular—Cambridge, Oxford, Manchester and Imperial—and we made significant investments in the BP Institute for Multiphase Flow at Cambridge in 2001 and the International Centre for Advanced Materials into 2012, with its hub in Manchester. We also have a growing corporate venturing activity in the United Kingdom, and we have invested an amount totalling about £25 million in nine start-up companies. Therefore, we care deeply about innovation in the UK and about Innovate UK itself as a subset of that.

Large companies such as BP have well-developed global innovation ecosystems, of which universities and venturing are an integral part, alongside our own internal capabilities. Consequently, we have the capability to develop and deploy innovative products and services to support our own businesses.

However, small to medium-sized enterprises, on which BP also depends, do not have similar resources available to navigate the university and funding landscape. We see our UK role as primarily to support the success of innovative UK SMEs in developing and selling their products and services in global markets.

BP has not been a direct beneficiary of IUK’s support, but we have supported a number of SMEs in their bids for IUK funding, and we would ultimately be the first customer of their successful development. It is therefore primarily in this capacity that I make my comments here, as a venture capitalist.

The Chairman: Thank you very much. Dr Virginia Acha.

Dr Virginia Acha: First, I thank the Committee for giving me the chance to present evidence today. I represent the Association of the British Pharmaceutical Industry. We have more than 53 full members, who represent global biopharmaceutical companies from around the world. As a sector we remain the largest investor in R&D in the UK. That is no accident; it relates largely to the deep legacy of research and academic strength in the life sciences that the UK represents.

As David has described, the world is very much aware of the potential of the UK as a source of innovation, and in life sciences we represent the third largest cluster globally, behind only Boston and San Francisco. I would personally like to see us challenge for the top spot, but if we are to do that we need investments across the board that support the scaffolding around life sciences, not just the big companies and the academics, so that critically the translational work that happens through SMEs really comes to fruition in the UK.

Innovate UK has had a strong role in delivering that translation from science to innovation, which is why it remains so incredibly important to us. We are very supportive of the White Paper published on success in the knowledge economy. There are many aspects to UKRI that we support and would be happy to see continue: the Haldane principles, for example, and dual funding for science. However, how Innovate UK fits within that wider strategy is of keen interest to my membership for the same reasons that David described: we do not necessarily have direct funding coming to all our members, and although we have some small company members, for the most part it is about the life science ecosystem, which we are desperately keen to make sure continues to grow. Thank you for the chance to offer comments and evidence today.

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Q2 The Chairman: Thank you very much. Before I ask the first question, which is of a general nature, I must declare my interests, which are that I am a fellow of the Royal Society, I chair the Foundation for Science and Technology and I am an honorary fellow of the Institution of Engineering and Technology.

My question is very general and to both of you. In what way do your organisations interact with Innovate UK? Do you think these interactions are successful? How important do you think Innovate UK has been in contributing to supporting innovation in the United Kingdom?

Dr Virginia Acha: One of the key measures by which we have been engaging with Innovate UK is the catapults. We have a number of engagements with the catapult centres, which are a mechanism by which Innovate UK almost primes the market on how to interpret and translate that new technology. If you have the opportunity to see the future for life sciences in cell therapies, for example, the Cell and Gene Therapy Catapult is a way to bring together the earlier-stage science with the earlier stages of business to generate opportunities for change. As the ABPI, we engage directly with that catapult, and likewise with high-value manufacturing, because, again, manufacturing remains a growing technology for our sector. We also engage through the new Precision Medicine Catapult. You cannot pick up a newspaper today without more discussion about how precision and targeted therapies can work. The question is how the UK can play a role in that development. The catapults are there to try to bring those opportunities together to empower translation and impact to innovation.

We also have a lot of engagement with the knowledge transfer networks—the KTNs. They have been remarkably helpful in building community around technology and new areas of study. We have a knowledge transfer network on a number of issues relating to life sciences. I work with the KTN on all its work but specifically on medicines development. We have a medicines manufacturing innovation partnership, which includes members of the Government, the KTN, Innovate UK and a number of companies, to try to advance manufacturing once again for the UK. We have lost a lot of investment in manufacturing in recent years, and we are working with the KTN to see how to reverse that. As a first measure, the KTN put together a landscape that provides an online tool for people to identify where all the current manufacturing work is undertaken in the UK, so that people can find partners and build a community quickly. The KTN has been very effective.

Finally, there is the Biomedical Catalyst. Although we do not directly benefit, those grants have been absolutely material in developing the spin-outs and new start companies that have very much become a feature of the life sciences community in the UK. You may have heard about Discover, a company that is developing one of the few antibiotics in the pipeline. It is working on its MRSA project and other projects at the moment. It was an early beneficiary of Innovate UK investment, in particular through the biomedical catalyst. We have a list of companies that have directly benefited from the Biomedical Catalyst, without which our life-sciences cluster would be ever the poorer in the UK.

Through those three measures—the catapults, the KTM and the Biomedical Catalyst—the life sciences sector and my members in particular have received a lot of benefit from Innovate UK. They do that work well, but I will not kid you: it takes years to develop these opportunities to really have an impact. It is now all coming to fruition and, as always seems

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to be the case, we are starting to make changes to an organisation when it is finding its feet in the innovation environment. That is why we are worried.

David Eyton: In 2014, BP spent about £7.7 billion in the UK with 4,000 companies, from the very large to the quite small. I cannot tell you how many of those were beneficiaries of IUK’s work, but I have no doubt that Rolls-Royce down to the smallest companies—the whole supply chain on which we depend—were. Many of them have benefited from that.

In terms of our own more direct relationship, we have supported 18 successful bids to IUK, or its antecedents, over the last 10 years, and we currently have two live bids: one with Silicon Microgravity and one with Magma—the former for developing methods for making measurements underground and the other for making composite jumpers for subsea developments.

The other area is through the UK Energy Technologies Institute, of which BP was a founding member, as was the TSB, and a funder of its programmes. We created a programme called Smart Systems and Heat, which has now been transferred into the Energy Systems Catapult with our strong support.

The UK Energy Technologies Institute’s other function has been the strategic analysis of the UK energy landscape, and a reasonably strong signal is now being sent that the intention is to shift that function into the Energy Systems Catapult as well, as the ETI reaches the end of its 10-year period. The ETI is an important case in point here; it was set up to plug a gap in the UK’s innovation system to fund large demonstrations of energy technologies that are needed for the transition to a low-carbon economy. Now that the ETI is winding down after a 10-year period, that is the sort of thing that IUK needs to do in the future, and transferring some of the capability from the ETI into the Energy Systems Catapult is an important component of that.

Q3 Lord Vallance of Tummel: Could you say a bit more about the value-added of Innovate UK and the balance between financing, which is very clear, and the other services that it provides? If there was much less financing, would it stand on its own two feet because of the other services that it provides?

Dr Virginia Acha: That is an excellent question and one that Innovate UK colleagues have constantly challenged: without the funding, to what extent would they add anything new to what has already been delivered? From our side, ABPI members do not often benefit directly from that funding—we tend to benefit more from the other side: the building of networks and the building of communities—so without question Innovate UK is valuable, and we can see that value continuing regardless of the funding. However, I take very much on board the point that the companies that directly benefit from the funding—the Discovers and the spin-outs—are in a very different place and would find it very difficult to get some of the risk capital needed to take on some of the very challenging investments that they have to take on in pursuing technologies that a conventional loan or conventional VC might not be willing to pursue. That risk capital is a very important and value-added contribution that would not be easily replaced were Innovate UK not to pursue this. That is why we are also looking for more detail on how Innovate UK will be able to provide finance and whether that will be on a grant basis, a loan basis or whatever.

I will give you an excellent quote that makes the point. Ingenza was a spin-out from the University of Edinburgh. It works on bioprocessing engineering, an extremely useful part of

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our ecosystem, and is a really exciting company that helps to make biopharmaceuticals a reality in so many companies. It has grown quite a bit. It has partnerships with GSK and continues to go from strength to strength, but, as the managing director said, it is Innovate UK’s ability to connect business and the research community that makes it “the envy of western Europe”. It is about much more than the money; the community and the scaffolding into the life-sciences cluster is equally valuable. So I think it would find it difficult to separate the two. For larger companies we might find it useful to have that direct connection without the finance, but the way the pull-through works is what really makes a difference for Innovate UK conditions today.

David Eyton: I agree totally with Virginia. If you are a start-up company, you are generally six months away from bankruptcy, and financing is critical, so the grants that IUK has been putting into these companies are company-makers, and financing is likely to be the most critical thing at that stage. However, as you mature as a company, your products and services quite often become much more sophisticated—you do not have a single product but a combination of many products—and the knowledge networks that Virginia mentioned become increasingly critical. It is therefore a spectrum of things, depending on your scale and where you are in the life cycle of your product. I cannot comment on the balance. I do not know.

Lord Hennessy of Nympsfield: I declare four interests that may touch on the research councils: I am a fellow of the British Academy, of the Royal Historical Society and of the Academy of Social Sciences, and I am a professor of contemporary history at Queen Mary University of London. From the Department of Scientific and Industrial Research through to MINTEC, we have never felt at ease with our relationship between the state and the private sector in particular on all this. This has been a problem throughout my conscious lifetime. From your very deep experience in your different ways, could you both give a thumbnail sketch if you can, a little audit, of what the British state does well and does not do well on the innovation front?

Dr Virginia Acha: I think you know the history as well as I do on this. We always say that something is invented in the UK and exploited elsewhere. To some extent the life sciences have had this history; some of the most important inventions in our field have come from the UK. The question is: can we translate it into innovation and commercial outcomes here in the UK?

Since the Cooksey report some years ago, the biggest change that we have made in the life sciences in the last five to 10 years is to make translation a desirable outcome. That has been phenomenally important and I cannot underscore enough how much that has already changed and why today we are seeing a resurgence in life-science spin-outs and SMEs and in life sciences for biotech or bioprocessing, or whatever it might be, including new therapies, gene therapies. Without a doubt this is making translation desirable and achievable. It is critical, and it is why Innovate UK has played an important role in it: because you will not be able to translate if you do not know who you need to connect with. That building of community and providing the risk capital to ensure that you get to the early stages of being able to follow-on fund has been why we have seen an upsurge in life sciences. My colleagues at the BioIndustry Association have made that analysis with Ernst & Young in showing the remarkable improvement in the life-sciences SME cohort in the UK. That is entirely down to doing translation.

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On the question of what we do badly, we still keep a distance between academics and those working on innovation matters; they are still not easily brought together. There are some challenges in the way we establish evaluations for academic careers, which again is part and parcel of the same Bill. If we think about it we should do so holistically, and there is still more work to be done in that regard.

David Eyton: I must declare that I was on Professor Dame Ann Dowling’s review steering group, and I co-chaired the study by the Council for Industry and Higher Education as it was—it is now the National Centre for Universities & Businesses—into the relationship between business and universities, so I have been around this a fair bit. UK science is of an extraordinarily high quality. The evidence for that is the quality of the output for the money spent, which is second to none in the world. That is my belief and understanding based on the evidence that I have seen.

However, the shape of businesses and supply chains in the UK is really quite different from what you see in some of our major competitor countries, such as Germany and America. The vast majority of research and development done in the UK is either state-funded or done by very big companies. Our competitor countries have the equivalent of Germany’s Mittelstand—middle and smaller-sized companies; hence the shape of the supply chains in the UK, that feed the bigger companies here, looks quite different from what you see in some of our major competitor countries. I think that concern about whether or not you have a working supply chain, and hence jobs and wealth in the UK linked to the bigger businesses that are here, is a function of historic policy and industrial strategy, or the lack of it, in the UK. That is a “but”, if you like.

Another concern identified by the Dowling review was the complexity of the innovation landscape. If you are a company that does not have huge resources and want to figure out with whom to connect, how to connect or even how to get funded, it is a particularly complex landscape. IUK has stepped up to try to help and to be something of a one-stop shop in that space: you can come to them and they can make sure that you get connected to the right people. That is an important function. We somehow need to take all that complexity away, so that whether you are considering a spin-out from a university, a small company or a big company, you do not have to understand the system yourself to figure out where to plug in; you just need to connect with somebody who can point you in the right direction.

Lastly, I do not think that venture capital is as vibrant here as it is in America, for example. It is more difficult, I would assert—I cannot bring much evidence to bear—to get funded here. America has a different system whereby, because it is vibrant, the finance put in by arms of government in America can fit in with the large funding for science that already exists. Large venture capital and private equity are available, so a lot more of the money that the government puts in other than by grants is in the form of loans or convertible loans, because it fits the ecosystem as a whole.

Q4 Lord Fox: I declare an interest in that I have shares in Smiths Group, which is a technology company. I am employed by and have shares in GKN, which has relationships with catapults and at least one KTM, but I have no oversight or knowledge of those.

My question is about the effectiveness and the barriers to entry around Innovate UK. You will be talking as a third-party advocate for your various connected companies and

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relationship companies. Do you see any challenges or barriers to working with Innovate UK, and have those barriers and challenges improved over its relatively short life? I think you said that it was just getting good, so what has it done to improve that?

Looking forward to the delivery plan for next year, it contains the word “simplification” several times. Do you have any comments on that?

Dr Virginia Acha: Again, over the period since it was the Technology Strategy Board and then became Innovate UK, there has been a lot of work within its teams to understand the environment in which it is operating. The truth is that when we think about the life sciences sector, can we write down a list of everybody in the sector today? No, it is changing. Part of its challenge is how it keeps abreast of who needs to be part of the conversation and how it makes connections outward. I have seen that at ABPI and previously, when I worked for member companies Amgen and Pfizer. In both cases, it was becoming much more proactive and engaging to understand the needs of industry and to try to anticipate where the flow was going.

An example is its work on regenerative medicine and how you develop the new technologies of cell and gene therapies. That was born in a conversation that I sat in on six or seven years ago, where again by speaking to industry and being able to see the lay of the land it was able to coalesce work. It has become much more adept at that over time. Saying that, there are questions about the future and the five-point plan; the points about simplification are very well made. That goes to the point that David has already made: that we are never faced with an environment in which it is easy to identify where to go and how to pick things up. In fact, the larger companies may have an easier time doing that because they have staff who can invest the time and effort. That is a burden particularly for SMEs or new start companies. I very much welcome Innovate UK’s intention to make it as simple, easy and straightforward as possible for individuals to access its benefits. You can never stop that process; it is a continuous effort.

David Eyton: The delivery plan is clear and sensible. It gets to the big issue, which is complexity. We are still concerned that a lot of effort is put into the reporting and administration associated with grants to small companies. Our advice to any company that we work with is: do not bother asking for less than £250,000, because you will spend a fair amount of money putting in the bid and administering it on an ongoing basis. We need to watch out for the reporting burden, and giving people feedback on applications, whether they are successful or unsuccessful. Those are minor things in comparison with the important points that Virginia has made.

Lord Vallance of Tummel: I have a quick point that relates to my first question. I think what we are hearing is that, in part at least, Innovate UK is there to address a market failure in the venture capital market of the UK. Is that right?

Dr Virginia Acha: In the early-stage, high-risk area, yes.

David Eyton: There is a lack of risk capital in the UK for earlier-stage companies; I agree with that.

Dr Virginia Acha: That is why there is the Biomedical Catalyst.

David Eyton: It is a vehicle that can address that.

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Lord Broers: You have said that you think that the delivery plan is clear, and I certainly agree; I think it is excellent. However, would you comment on whether Innovate UK is trying to do too much? It covers an immense spectrum, from biomedicine all the way to space and energy. It is across the board and trying to do this with £500 million. Is that not too much and the money too little?

David Eyton: This activity is one that I think the UK is seeking to grow and build: to be more successful in generating jobs and wealth in the UK through translation in the UK associated with a world-class science base. That is the objective, as far as I can see, and it is the bit that needs the most effort. We have a well-established science machine that is running smoothly and is very mature—it dates back for ever. This activity is the one that we really need to grow, so my personal view, if I am allowed to express one, is that this needs significant effort in the UK and should be a significant component of the differential time spent by the governing body of UKRI—because the rest of it is running quite well and this is the hard bit, in my view.

The question whether this is the right amount of money to spend is quite difficult to answer, because companies are also spending huge amounts of money in this space. You are trying to ensure that where companies are not active or there is a failure in the market, state funding is put in; but vastly more than this is already spent by companies in this area and you are trying to multiply that activity. In my view, you could spend more money here wisely.

Q5 Lord Mair: I start by declaring an interest: I am a fellow of the Royal Academy of Engineering and a fellow of the Royal Society. At Cambridge, in our engineering department, I lead the Centre for Smart Infrastructure and Construction, which is an innovation and knowledge centre funded jointly by the EPSRC and Innovate UK. There have also been other grants from Innovate UK to my department.

My question relates to the Government’s plans, which we have heard about, to integrate Innovate UK into UKRI. I want to ask you specifically about the business-facing focus of Innovate UK. The Government have said in their White Paper that they envisage improved collaboration between the research base and the commercialisation of discoveries in the business community. What do you think about the integration of Innovate UK into UKRI? Will it achieve the benefits that the Government are looking for, or do you see problems with it?

Dr Virginia Acha: I certainly have questions that I would like answered in the next few months, because the uncertainty about exactly what is proposed is a challenge for both Innovate UK and companies working with it. At the moment, the White Paper’s detail on how that integration should take place is scant. We understand that Innovate UK will have some autonomy to make decisions, but what will that mean in practice? If they are to encourage integration, is that in decision-making, priorities or just back-room support? That is where we would like to see quite a lot more detail explained. I would be concerned if Innovate UK were brought under the same decision-making approach that a research council would be brought under, because they are making very different decisions. The problems are different and they need to be addressed as such.

Likewise, I would not want them, at the very moment when we are trying to encourage such integration for better translation, to have to fight among themselves as to who gets what

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part of the pot of money. There needs to be a lot more direction on how budgets for Innovate UK will continue, because it will be a challenging environment if you are trying to collaborate with the very research council that directly benefits from you having less in your budget.

David Eyton: The combination effectively works fine in a company. As the head of technology in BP, I have all our R&D and all our venturing activity. I do not see a conflict in that at all. They are two different ways of accessing innovation: doing it ourselves or investing in someone else who does. It works fine in the context of a company, but that is because we have a very clear strategy. I am very clear about what is needed of my function inside BP. The question one has to ask is: how clear is the strategic context for UKRI that would guide its decisions and choices? That is a critical issue for its governing body.

We were surprised that the Nurse review made this recommendation, because it was not self-evidently something that was consulted on in the first place. We provided input; we did not comment on that issue whatsoever. The challenge, as I have already said, will be one of emphasis. Effectively, IUK is the start-up in the context of that behemoth. It is 10% of it; the other 90% is very stable. It is comparatively new and needs to really motor. Will it get the management attention and focus, which requires the quite different skills for governing innovation ecosystems from governing science? That is also the question for that body: the balance of skills on the governing body.

The Chairman: Lord Broers, would you like to declare an interest?

Lord Broers: Yes, I am sorry. I am a fellow of the Royal Society and I was president and am a fellow of the Royal Academy of Engineering. I also chaired the steering board of the transport KTN that led to the transport catapult.

I do not want to put any words into any mouths, but do you not think that, across the board, trying to get results out of research into industry and products is not done well in universities: that it must have intermediate organisations, hence catapults or the BP institute? I declare that I was vice-chancellor when that institute was set up in Cambridge. I have never seen it work otherwise. Therefore, is it not a bad thing for the funding that enables those things to be joined up with the research funding? Does that not spoil both halves? Does it not spoil the environment that researchers need to discover and work in completely new areas and, on the other hand, the relentless drive that one needs to make new technology useful?

Dr Virginia Acha: That is why there needs to be very clear separation between that and the way in which the research councils undertake their decisions, strategic planning and budgeting. That must be separate and distinct from whatever Innovate UK will pursue. Again, to address David’s point, the fact that they are under UKRI means that it matters very much how the governing body treats those separate entities. We will look to see how that is elaborated, but I fully agree with your point and just make the additional one that Innovate UK also helps spin-outs from companies that do not come from the university sector. As you know, many of our companies, including some of my former companies, have changed how they are structured here in the UK. There have been a number of spin-outs from the very companies that have likewise benefited and been midwifed through their emergence into the cluster through Innovate UK support. That is another good reason why it has a wider focus than just the university sector.

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Q6 Viscount Ridley: I declare an interest as a fellow of the Academy of Medical Sciences and honorary president of the International Centre for Life in Newcastle, and it is wearing my Geordie hat that I want to ask you a question. We are well aware in the north-east of England, as in other regions of the UK, that you have to shout twice as loud to be noticed as you do in the golden triangle of London, Cambridge and Oxford—chip on shoulder over.

In a previous inquiry, the Committee heard from the Royal Academy of Engineering that Innovate UK’s support for business is very London-centric, tends to be just a website that people can go to, and really needs to spill out into the regions a bit more. Do you think that Innovate UK’s regional presence will be improved on integration into UKRI, or might it get worse?

Dr Virginia Acha: The integration itself will not necessarily change that one way or the other; the question is how the Innovate UK team perceives that opportunity. That is not so marked for the life sciences. With the Precision Medicine Catapult, for example, if anything people are now complaining because it is geographically distributed, so I guess they cannot win. The question is really what makes sense for what they are trying to achieve. I fully agree that we have a tendency to focus on very geographically-centred behaviour. I am sure the same is true for BP as it is for my members: they will look for that research and the translational opportunities that it provides wherever it is happening. Whatever happens with Innovate UK and whatever its context, it has to address the question that you raise. Will the new structure make it easier or worse for it? That depends on the extent to which its independence is protected and to what extent it will be expected to do things differently as opposed to today.

Viscount Ridley: I have a follow-up question that is really a footnote to Lord Broers’ last question. There is the philosophy that ideas start in academia and go in one direction into commerce, which has been called the linear model. We now know that that is wrong; things go in both directions. I wonder whether that might become a problem in the UKRI structure: UKRI owning Innovate UK, as it were.

Dr Virginia Acha: From my perspective, it might be an issue if it is focused on doing something different from what it might otherwise be doing. That might send a signal to the industry—and we will be careful to explore this—that there is a question as to whether they are still open to engaging directly with industry as a first measure. In the example that I gave about regenerative medicine, the prompts came equally from academia and industry, and the Innovate UK team brought them together. That must be sustained and it must have the independence to do that. You are quite right that it is not a linear model: we think of it and then you sort something out with it.

We almost need a mechanism to bring people together at the very early stages of the science. It will matter very much if they can do this in a way that tells industry that they are not just a technology transfer organisation for all of UK higher education but remain Innovate UK as a separate entity to develop the right cluster structures.

Lord Hunt of Chesterton: I declare an interest: I am also a fellow of the Royal Society, and I set up an SME that has had some dealings with Innovate UK. I have a question that follows up what Lord Ridley said. We had evidence from Rolls-Royce that the UK was in fact not doing as well as it should in working on European-wide industrial projects. The organisations that it had, the regional development agencies, were dismantled and followed by Local

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Enterprise Partnerships (LEPs) . What do you feel about regional support structures across Europe? In the 1980s, I helped to set up a European network in industrial fluid mechanics with lots of big companies, but it has been pushing water uphill all the time to get the Brits to participate. All the regions of Europe are working on these sorts of projects, but do you feel that the attitude and approach of Innovate UK could in some way enable Britain to benefit more from the regional networks all across Europe?

Dr Virginia Acha: I have seen that happen with KTNs, which will occasionally be part of the conversations that they have. Knowledge transfer networks are about how to engage with whatever is being pursued under Horizon 2020 or via other European-level approaches. In my own setting, life sciences, we have the innovative medicines initiative, which is the largest public-private partnership for R&D in the life sciences between the pharma industry, the EFPIA members and the European Commission. It is worth €5 billion and lasts until 2020. We will shortly release some material showing our analysis, and it is pretty plain that the UK actually does extremely well out of IMI. I suspect that the KTNs are encouraging that in the ways catapults used to, but that is something to be pursued. That is in my field. I am not sure if it is the same in David’s.

David Eyton: There are two big buckets in Brussels: one is Horizon 2020, the other is the structural funds. I was not a big fan of the Framework Programme. The evolution of Horizon 2020 is much more oriented towards excellence, you might say. It is less political, with everybody needing to get a piece of it. That seems to me to be a jolly good evolution of that system. However, there is the potential for the UK to be more effective in the way in which the structural funds, which by the way are supposed to be oriented towards innovation in the various regions into which they go, are used in order to support innovation in those regions, and the role that IUK could have in that respect.

The catapults have been somewhat geographically dispersed. It feels to me as though IUK has made quite an effort to ensure that it does not always put things in the so-called golden triangle. Certainly the Energy Systems Catapult, with which I am most familiar, has been set up and is going to be based in Birmingham, I believe, while the Offshore Renewable Energy Catapult is similarly not in the golden triangle. I am familiar with that one; it is testing out wind turbines. There seems to be a fair amount of geographical diversity in the location of the catapults.

The Chairman: So there are no chips on shoulders about catapults.

Lord Maxton: I will take Lord Ridley’s question and put it the other way around. I come from Scotland. Scotland has the Scottish Parliament, which has control over the universities, planning and a large amount of company investment. How does that affect Innovate UK and your companies that are involved? Does it affect you at all?

Dr Virginia Acha: It has not been a challenge with respect to the catapults that are in our space. In fact, I think that the lead of the Precision Medicine Catapult based in Glasgow has already been motoring quite a lot of work, so she is a formidable lead for that work. That has worked very well between Innovate UK and Scottish Enterprise. For us, it is a fairly seamless process.

Lord Maxton: So Scotland does better than the north-east of England.

Dr Virginia Acha: In the Precision Medicine Catapult, it did. It was very successful.

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David Eyton: I would just advocate that the National Centre for Universities & Business has just written a quite comprehensive report on growing value in Scotland and what needs to be done with the innovation system there to make it more even more effective. I am not going to try to paraphrase that report, but you might want to look at it if you want to look specifically at Scotland.

Lord Fox: You did not bite on Lord Hunt’s question about LEPs, so I will push the question again. Do you think they have a role? If they do, can you give me any example of an LEP that is actually playing that role?

David Eyton: The Dowling review commented on LEPs and obtained quite a lot of input. I have no experience of dealing with LEPs so I cannot really answer your question. It is certainly suggested that some are really quite successful. I vaguely recall one in the Cardiff area, which was pointed out as being really quite effective in creating connections between universities and businesses there. But it seems pretty hit and miss to me, and there are many of them.

Dr Virginia Acha: I would add only that any time you have multiples of anything, you make it harder for industry to engage. Ideally, when my members look at the UK, they are looking at it as a whole, and when they make decisions on partnerships they are looking specifically at individuals: particular strengths in a particular science, or companies that they are going to work with. The intervention of the LEP is probably less prominent in their expectations.

Q7 Lord Cameron of Dillington: I declare my interests: I am a Lawes trustee at Rothamsted Research, I chaired the strategic advisory board of the Government’s Global Food Security programme, which is a UKRI body, and I chair the advisory board of the Centre for Ecology & Hydrology.

My question is about the proposed change in the method of financing of Innovate UK, from grants to loans. I am not quite sure what form these loans will take or whether they are going to differentiate between SMEs and larger companies. What are your views on this, particularly with regard to SMEs?

David Eyton: I think the target is to spend £165 million a year on new kinds of financing that are not grants by 2020. My sense is that, as a consequence, IUK is now reducing its organisation. It was a grant-giving organisation, and we wait to see how it imagines it is going to put in money in some other way from 2020. If I were an SME, I would probably prefer a grant because there are no strings attached and it is the easiest way to have money coming in. I think IUK will struggle to pay the salaries and build a true venture capital group, if you want to call it that. If the money is to go in some other way, that probably means that it is likely to be in the form of loans or something like that.

The UK’s Energy Technologies Institute is quite a good case in point. If you are operating by yourself, a grant may be fine. If you are working in partnership with other companies, companies do not want to give money away; they want to do so on a basis that is at least somewhat more commercial. So in the context of the ETI, at least at that point in time, the EPSRC and the TSB, which were on its board, struggled somewhat with the fact that the other companies on the board of the company wished to put in money in the form of equity or loans, as well as funding development programmes. That is a more effective mixture of funding going into this activity; and, frankly, if it is successful, you get something back for it.

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If IUK is working with companies and within consortia and wants to invest on the same basis, it will have to consider doing that.

I will make one plug, if I may. One of the most effective forms of venture capital is actually corporate venture capital. We put money into companies, because if that technology or capability is successful, we want to use it. So we are an absolutely natural customer for that company and a very capable supporter of it. As far as I am aware, there is no incentive at all for companies to do that in the UK. In fact, there are some mild disincentives, because if you want to have more than 20% of the company, it gets treated as an affiliate and a whole bunch of new reporting requirements come in, imposed by the big company that is investing in it. That is a hell of a burden on small companies. So as well as, obviously, thinking about how IUK puts financing in, if it were going to put equity in I would say, “Do it alongside another company, because they know what they are doing and they are very naturally a customer”. Actually, the UK could do more to incentivise corporate venture capital as well, or at least make it easier in the UK. It is a very symbiotic and virtuous relationship.

Lord Borwick: I want to hear more about the loans that are being discussed. If the theme is making life simple, I cannot imagine anything that would make life more complicated than adding loans instead of grants. Is there any suggestion of the priority Innovate UK might want to have over other loans, what sort of interest rates it would charge, how on earth a small company would structure it against its other shareholders, and how on earth it would service such a loan?

Dr Virginia Acha: You are raising all the questions that people have been asking since the loan facilities were first described. It matters very much how all that will be resolved and whether they would be any advantage at all to the companies pursuing them. These are exactly the questions that we hope that this Committee will be able to push in connection with questions about the Bill. This needs to be thought through very carefully, because choosing a different way of doing it could lead to a loan facility that is never used, which we have seen before in other circumstances. To go to the point that David made earlier, it matters. They need a mix, and if they are to have a loan facility it needs to be geared to the risk and the potential for the sector at the time.

David Eyton: The case for it that I can think of is: why should the UK taxpayer not benefit from providing money to a company if it is successful? The company will not mind because it is then successful, so I would have thought that that was one of the cases for it. The key question is the level of risk that IUK is prepared to take. If it is set up like the Green Investment Bank, which invests on much the same basis as any other bank and takes very little risk, that is completely against the whole purpose of this thing here, which is trying to take some risk and to provide money to things that are not a guaranteed success. The question comes down to things like interest rates. The US Government has been prepared to take a $1 billion hit on a company that did not work out and the loan was just written off. If you are prepared to do that, fine; at least you are really taking risk. The issue becomes one of the right balance between grant-giving, equity and loans. There are not many ways of putting money into a company. Is it appropriate for IUK? That is the issue that you are pushing on, and I think it is a very valid issue to push on.

Lord Borwick: I should first have declared my interest as chairman of an advisory group on autonomous vehicles in Greenwich. The danger of this is even worse than has been

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suggested: it could stop other people investing, because the Government have priority over them. That danger could be very real, could it not?

Dr Virginia Acha: Exactly.

David Eyton: On the other hand, these companies are looking for financing. Obviously, the easiest thing for the company is a grant; we just give it away, obviously. Often a loan will be fine if the lender is prepared to take risk and the company is just trying to raise finance.

Dr Virginia Acha: Then it does not prejudice the next round of financing. That is key. That will only be the first stage, so it depends on the secondary approach. It is interesting, and may go to the point about risk that David mentioned, that your presentations today are from the two sectors with very high risk and very long timescales to fruition. We made it a priority to speak to the Committee, because we know that in our sectors this is the critical stage where such support is necessary for those small-stage, spin-out, SME companies to gain a foothold to continue. It may be less so in other sectors, but it is very true for ours.

David Eyton: To me, loans feel appropriate for later-stage activities, when you know what the proposition is. Fine, there is some risk, but at the very early stages loans seem less appropriate to me. You want more mature companies if you are going to start putting loans in.

Q8 Baroness Young of Old Scone: I declare an interest as chancellor of Cranfield University, which is involved in two catapults—and, we hope, three at some stage.

I turn to the international issue. David Eyton said that the structure of our business is quite different from that of other countries, so there may not be good international parallels and lessons that we could learn, but are there any examples from elsewhere where you think government innovation policy is particularly good, examples of good innovation agencies and what makes them particularly special?

Dr Virginia Acha: In the life sciences the environment has been a bit more patchy. We have structures in the UK that are not too dissimilar to what you might see in Boston; they are just fewer rather than categorically different. Saying that, as David said, venture capital is very different. Access to capital in the States is regularly recognised as a key reason why some of our best and brightest from the British cluster migrate and relocate in Boston, La Jolla or San Francisco.

In terms of interventions, a key feature in the global environment for life sciences has been a little less focused, other than via the direct funding that we have in the States through NIH and some of the strategic business investment projects. Direct public procurement and investment has been more of a feature, but it is quite different in life sciences than for energy or other fields. I do not know whether you have other international examples that are a better comparator.

David Eyton: I will answer a slightly different question first, which is: where would we choose to do technology demonstrations around the world in the energy sector? It is not necessarily because the Government are doing something; it is because of the ecosystem as a whole. If you want to do a demonstration project in the petrochemicals area, China is often a really good place because it can go incredibly fast and is extremely cheap. It is quite

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cost-effective to get something done quickly in China, but that is not because the Government are doing anything.

There are a lot of clever things in the design of the ARPA-E programme in America, because it looks at the whole value chain that would be needed to make an innovation successful and in effect tries to line the whole thing up and fund it as appropriate. When there has been some really classy science or invention, they try to figure out how the whole thing can work and try to line up customers and engage and involve potential purchasers of the capability up front. I am not saying that IUK does not do that, but looking at what it really takes to take something from the point at which you engage right the way through to a successful business that you hope will have a presence in the country that is funding that activity seems to me quite a smart way of going about things. I should probably declare an interest: it is now run by the former chief scientist at BP, Professor Ellen Williams, and I did not declare my interest as a fellow of the Royal Academy of Engineering, for which my apologies. Anyway, I think ARPA-E is quite a good model. It is based on DARPA, which as everyone knows, is a huge machine for creating valuable capabilities that progressively find their way from the defence sector into the commercial sector.

Dr Virginia Acha: I will make a quick point, which is that this is sounds very similar to proposals for the accelerated access review initiative that the Life Sciences Minister has been pursuing: a more holistic approach to evolving a life science technology through to use.

Baroness Young of Old Scone: I ask one last question. That is from your perspective as large multinational companies. Do you think that the examples you have given work for SMEs as well?

Dr Virginia Acha: The SBIR in the States works especially for SMEs: it is focused on helping early-stage companies. Again, the greater availability of existing market structures to support venture capital and small-scale industry in the US works very well in life sciences. The question is: to what extent do we have the same opportunities here in the UK and to what extent can Innovate UK deliver on that? Can they recreate NASDAQ? No, but they can encourage better communication between corporate venture capital, which David mentioned earlier, which is growing apace in life sciences in the UK, and the broader work that is being done in Innovate UK more generally to support technology development.

David Eyton: All I would say is that the companies that we have worked with are just focused on the next thing, which is getting funding to take them through the next stage of their product or service development. They do not have the capacity or ability to think about how you take that forward lots of steps beyond that; they are just focused on the next thing. ARPA-E, the programme I referenced, is quite a strategic programme, so there is a broader wraparound, and the companies that are being funded would sit in that somewhat larger programme, so things will be lined up by ARPA-E beyond the immediacy of that demonstration that could in turn be helpful, although it is not really the focus of those companies in the first instance.

The Chairman: We have run out of time on this session. We are most grateful to you both. This has helped us enormously to get this inquiry on innovation started. You will be sent a transcript, so please make any minor amendments of a factual nature. If there is anything further you want to add in the next week or so, please forward that to our clerk. Again, we are most grateful to you for your help this morning.

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Confederation of British Industry (CBI), Professor Luke Georghiou, University of Manchester and United Kingdom Science Park Association – Oral evidence (QQ 9-16) Transcript to be found under United Kingdom Science Park Association

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Professor Luke Georghiou, University of Manchester, United Kingdom Science Park Association and Confederation of British Industry (CBI) – Oral evidence (QQ 9-16) Transcript to be found under United Kingdom Science Park Association

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Government – Department for Business, Innovation and Skills (BIS) – Written evidence (IUK0001) Innovation in the UK 1. The Government is committed to making the UK the best place in Europe to patent new ideas, to innovate and to grow a business. We are resolutely focused on creating the best conditions for innovative businesses to flourish, recognising the central role innovation plays as a driver of economic growth and prosperity across the UK. 2. Investment in innovation is vital for economic growth. Evidence shows that innovative companies grow nearly twice as quickly in terms of both employment and turnover as non-innovators, create high quality jobs and are more likely to export. Innovation also generates large spill-over benefits to the wider economy – estimated on average at 2-3 times the level of private returns.

3. The Government understands that public investment is crucial to catalyse innovation and attract increased private funding and we provide significant support to enable businesses in the UK to innovate. Annual UK Government support for innovation includes £800m through the Department for Business, Innovation and Skills, predominantly through Innovate UK. R&D tax credits are also an important source of Government support. The number of companies claiming the R&D tax credits almost doubled from 2009/10 to 2013/14 (from 9,250 companies to 18,160) and the value of the claims also rose from £1bn to £1.75bn.

4. In 2014, UK Business Enterprise Research and Development expenditure reached its highest level on record (£19.9 Bn). This represents a 16.3% increase in constant terms since 2009. Over the same period, total business employment in R&D has increased from 151,000 to 192,000 (Full-time equivalents), an increase of 27.0%.

5. The Global Innovation Index 2015 placed the UK as the second most innovative nation in the world, behind only Switzerland. This is up from fourteenth in 2009.

6. But we recognise there are still challenges to address. We must continue to build partnerships between universities, the research base and the private sector, and support the translation of research. We must also prepare our economy to secure opportunities arising from emerging and disruptive technologies.

Innovate UK 7. Innovate UK is the Government's prime channel for supporting business-led technology innovation. Innovate UK’s vision is for the UK to be a global leader in innovation and a magnet for innovative businesses, where technology is applied rapidly, effectively and sustainably to generate economic growth and enhance quality of life. It has a strong track

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record of driving growth, by working with companies to de-risk, enable and support innovation. Innovate UK was created in 2007 (as the Technology Strategy Board).

8. Since 2007, Innovate UK has invested around £1.8bn of public funds in business-led innovation, which has been more than matched by the private sector. Innovate UK has supported innovation in over 7,600 organisations.

9. Innovate UK is working to simplify and improve the support it provides. The previous range of programmes and products, while individually relevant and meeting a specific need, had become complex for stakeholders to navigate and therefore obtain the right support. Innovate UK listened to stakeholders concerns and it has now simplified its offer and made its funding programmes clearer and easier to navigate. Its programmes are now focused around four broad sector groups and, including an Open programme, it will run 2 competitions each year in each sector group. It is also strengthening the way it connects businesses with partners and opportunities and is also increasing its regional presence to help join-up the innovation support network for businesses.

10. In April 2016 Innovate UK published its 2016/17 Delivery Plan. This plan set out how the organisation intends to use its £560m budget for the year. The Delivery Plan is underpinned by a new five-point plan that will ensure the organisation focuses on driving growth across the UK. It aims to:

Turn scientific excellence into economic impact and deliver results through innovation, in collaboration with the research community and government;

Accelerate UK economic growth by nurturing high-growth potential SMEs in key market sectors, helping them to become high-growth mid-sized companies with strong productivity and export success;

Build on innovation excellence throughout the UK, investing locally in areas of strength;

Develop Catapult centres within a national innovation network to provide access to cutting-edge technologies, encourage inward investment and enable technical advances in existing businesses;

Evolve funding models, ensuring businesses they work with get the right kind of funding at the right time and helping public money go further and work harder.

11. At the 2015 Spending Review, the Chancellor announced that Innovate UK’s budget would be maintained, in cash terms, for the duration of the current Parliament, including, by the end of the Parliament, £165m p.a. in new innovation finance products. This will ensure Innovate UK can provide the support to help innovative businesses expand and generate growth to the benefit of the whole of the UK.

12. Innovate UK has established a network of Catapult centres - physical centres where UK businesses, scientists and engineers work side by side on late-stage research and development, to transform high potential ideas into new products and services to generate economic growth. The Government is committed to the Catapult network, which it will seek to strengthen and grow over the term of this Parliament and we have prioritised core funding support for the Catapult network in the 2015 Spending Review. This will ensure

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Catapults continue to bridge the gap between business, academia, research and Government and to help turn great ideas into reality.

13. Eight Catapults are now operating from their established facilities: High Value Manufacturing; Cell and Gene Therapy; Offshore Renewable Energy; Satellite Applications; Digital; Future Cities; Transport Systems; and Precision Medicine. The Energy Systems Catapult- has started to operate as an independent organisation from a temporary location and is preparing an operational plan for their future expert capability and new facilities. The network will be expanded further with the establishment of a Medicines Discovery Catapult at Alderley Park in Cheshire and a new Compound Semi-Conductor Applications Catapult in Wales to build on Wales’ reputation in advanced electronics. UK Research and Innovation 14. The strengths of the current research and innovation system are clear and Government is committed to retaining them. But we believe the system has the potential to become even more effective. The challenges facing the world are complex, and increasingly require multi- or inter-disciplinary approaches. Our ambition is to ensure that our research and innovation system is sufficiently integrated, strategic and agile to meet these challenges, and to deliver national capability for the future that drives discovery and growth.

15. The Government confirmed in its White Paper “Success as a Knowledge Economy” its plan, subject to Parliament, to take forward Sir Paul Nurse’s recommendations to create a single non-departmental body operating at arm’s length from the Government. This new body, UK Research and Innovation (UKRI) will bring together the functions of the seven Research Councils, Innovate UK, and HEFCE’s research funding activities. The creation of UKRI offers an opportunity to strengthen the strategic approach to future challenges and maximise value from Government’s investment of over £6bn per annum in research and innovation. It also offers significant opportunities to strengthen the connections between the UK’s innovative businesses and its world leading research base, leading to an increase in the translation of research to commercialisation. Further details are set out in the White Paper. 16. Stakeholders provided views on integrating Innovate UK into this new body in response to the Higher Education Green Paper consultation and also in response to an online survey. The Government agreed with responses that said that Innovate UK must: retain its own funding; retain its clear voice as the business-facing element of government support for innovation; and continue to function as a flexible and responsive funder of innovation. Respondents also saw that business and academia working more closely together would help increase the understanding of both communities and would make collaborations easier and funding mechanisms clearer. 17. Bringing together research and innovation funding functions under a single organisation, led by a strategic board comprising representatives from the respective communities, will help drive up awareness among research leaders of the needs and interests of the business sector, as well as enabling the business community to identify opportunities arising from

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blue skies research. The new organisation will create a simplified, accessible and co-ordinated research and innovation landscape which can improve the UK's productivity, accelerate economic growth and act as a focal point for both public and private sector research and innovation activities. A further advantage arising from bringing together research and innovation funders into a single organisation is that the centralisation of administrative functions, including grant application systems, will simplify processes for funding recipients. 18. In integrating Innovate UK within UKRI, we are very mindful of the need to protect its distinctive focus and funding stream. Innovate UK will be a separate Council within UKRI, led by an Executive Chair, with a mandate to continue working closely with businesses in order to ensure that UKRI is helping deliver commercial impact and a competitive advantage for the UK economy. Its business facing focus is protected on the face of the HE and Research Bill. As now, the Secretary of State will allocate a hypothecated budget to Innovate UK, ensuring continued separation between research and innovation budgets.

19. We will also ensure the research and business communities are properly represented on the UKRI Board through an appropriate balance of skills and experience. The Secretary of State in making the appointments will consider the option of nominating a member of the UKRI Board who would lead in promoting and championing innovation and business interests and providing strategic support to the Innovate UK Executive Chair. The post holder would sit on the Council of Innovate UK. This would ensure a senior voice for innovation within UKRI and support Innovate UK and the UKRI Board in embedding innovation across the organisation, the sector and more widely. New Innovation Finance Products 20. At the 2015 Spending Review, the Government announced that BIS would work with Innovate UK and the British Business Bank to introduce new innovation finance products which broaden the range of finance options for businesses looking to innovate. The Government’s intention is to provide £165m of funding per annum through new innovation finance products by the end of this parliament. These new products, when implemented, will work alongside and complement grant funding. 21. Some of our competitor economies in Europe offer a variety of finance instruments to support businesses to innovate, and we have been working to understand these established approaches to support, drive and encourage innovation in the UK. We are currently conducting research to engage with innovative UK businesses of all sizes to fully understand their needs and their appetite for different features of new innovation products.

22. As part of the first phase of implementation, near the end of 2016, we will announce details of a pilot to test specific financial products and the accompanying evaluation framework.

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National Innovation Plan 23. The UK is already a world-leader for innovation. However, the nature of innovation is changing with the convergence of new digitally enabled technologies and the use of big data already transforming the global economy. To ensure that the UK continues to be a world leader, the UK’s innovation system needs to continue to evolve. We need to develop new capabilities, as well as build on existing areas of strength. The Government announced in January 2016 that it would develop a National Innovation Plan (NIP) which would establish an ambitious vision for innovation in the UK. 24. The NIP will be for all levels of business – from SMEs to our biggest businesses and in all parts of the UK. The Plan will set out a whole of Government framework of support that will drive innovation through:

Building and supporting an open business environment that encourages innovation;

Promoting collaboration and the sharing of ideas to drive innovation opportunities;

Providing businesses with the confidence to invest in R&D and supports them to adopt, adapt and scale up the best ideas, and;

Using the power of public procurement and customer demand to stimulate innovative products

25. We sought stakeholder views, via an online survey that closed at the end of May, and we are reviewing inputs from this and other contributions as we develop the NIP. Science and Innovation Audits 26. The Government is committed to improving the UK's competitiveness and raising productivity across the country. There is clear evidence of a link between R&D spending and national productivity. Studies show that public investment in the science base generates returns of at least 20% per annum in perpetuity in the private sector. 27. To make the most of the UK’s strengths, the Government announced in summer 2015 its intention to undertake Science and Innovation Audits (SIA). These would consist of high quality analysis of research and innovation administrative datasets, interpreted through dialogue with self-selecting consortia of local groups who would go on to act as champions of the SIA findings. The policy was set out in the Government’s Productivity Plan. It is intended that the SIAs will support the delivery of England’s Smart Specialisation strategy, and equivalent strategies within the Devolved Administrations. The data and analysis generated by the SIA (in essence, ‘deep dives’ in particular geographical areas) will also boost the work of the new Smart Specialisation Hub, which has been tasked with building the evidence base and developing a community of best practice around smart specialisation in England. 28. The UK’s science and innovation funding will continue to be allocated on a national basis to the strongest proposals on the basis of excellence. Audits are not intended as a route for

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separate consideration of proposals, but rather a way to help build evidence of potential global competitive advantage and begin to identify routes to realise that potential.

29. The Government invited consortia of universities, research and innovation organisations, Local Enterprise Partnerships (LEPs) and their equivalents in the Devolved Administrations, and businesses to work with the Government to map the science and innovation strengths of their areas. The first wave of successful consortia were announced on 16 March 2016. These were:

- Edinburgh and the Lothians City region - South West England and South East Wales - Sheffield City Region and Lancashire - Greater Manchester and East Cheshire - The Midlands Engine

30. BIS is currently working in partnership with Technopolis Group and these consortia to pilot the methodology that will shape two future waves of audits. The first wave SIAs are expected to complete over summer 2016 with waves two and three starting in summer and Autumn 2016 respectively. 6 June 2016

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Government – Department for Business, Innovation and Skills (BIS) – Oral evidence (QQ 26-39)

Evidence Session No. 4 Heard in Public Questions 26 - 39

TUESDAY 14 JUNE 2016

Members present

Earl of Selborne (Chairman) Lord Borwick Lord Broers (co-opted) Lord Cameron of Dillington Lord Fox Lord Hennessy of Nympsfield Lord Hunt of Chesterton Lord Mair Lord Maxton Baroness Morgan of Huyton Baroness Neville-Jones Lord Oxburgh Lord Vallance of Tummel Baroness Young of Old Scone

_____________________________

Examination of Witnesses

Jo Johnson MP, Minister of State for Universities and Science, Department for Business, Innovation and Skills, and Gareth Davies, Director General for Business and Science, BIS

Q26 The Chairman: Welcome, Minister, and Mr Davies. It is very good of you to come back to the Committee at short notice. We thought it would be helpful to launch a short inquiry into the future of Innovate UK, the national agency for driving forward UK innovation, which has been of enormous interest to the wider community, whether science, engineering or business. As usual we are being recorded on the web cameras. For the record, could I ask if you would like to introduce yourselves and, if you would like to make an opening statement, please feel free to do so?

Jo Johnson MP: Thank you very much. I am Jo Johnson, Minister for Universities and Science. I am with Gareth Davies, the Director General in the Department for Business, Innovation and Skills. I would like to make a brief opening statement.

I am very glad to be back before the Committee to talk about Innovate UK. It is an essential strand of this Government’s approach to addressing one of our major economic challenges,

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which is our productivity challenge as a country. It is an extremely important government agency and we are focused very closely on it. It is essential to our ability to fulfil a number of manifesto commitments as a Government, including that we want the UK to be the best place in Europe to innovate and grow a business.

We have ensured that we are going to be in a position to do that, first, by protecting funding for Innovate UK going back to the coalition. In this majority Conservative Government, we have increased Innovate UK’s funding considerably from 2009-10 levels of £315 million to £567 million per year, and we expect it to remain at roughly that level until the end of the Parliament.

We want to make the system within which Innovate UK operates still more effective. We are building on great strengths, but it has capacity for improvement. In the White Paper, which we published last month, and in the Higher Education and Research Bill, which was introduced last month in the House of Commons, we are proposing a number of steps that we believe will strengthen the research and innovation system as a whole. I look forward to going into that in due course. The overall vision is to have a more integrated, strategic and agile research and innovation system that will enable us to better meet the global challenges we face.

Following spending review commitments, in the White Paper we are proposing to introduce a broader range of products with which Innovate UK will support innovative businesses in this country. We are doing market research at present so that we can make available up to £165 million per year19 worth of financial support by the end of this Parliament.

We were extremely attentive to the responses of the business community and the research base to consultations that we launched in the Green Paper published last November and to a further consultation specifically into Innovate UK and its relationship with the rest of the research system. We have taken on board concerns that were raised about the need to preserve Innovate UK’s distinctive business-facing identity and the separate nature of its funding stream. We have done both of those. We have ensured that innovation is in the very name of the new organisation that is being set up. It will have a clear and distinct identity and I believe it will contribute strongly to our ability to rise to our productivity challenges in the years ahead.

Q27 The Chairman: Thank you very much, Minister. You said you would like to see the United Kingdom have the best record in Europe for promoting and implementing innovation. How are we doing at the moment?

Jo Johnson MP: It is a picture of considerable strength in many ways. You can pick and choose among the various indices that attempt to rank countries by how innovative they are. By some we are doing very well. We are second in the Global Innovation Index. There are others where we are seen more as an innovation follower than an innovation leader. We recognise it is a mixed picture. There are great strengths, but there is also considerable room for improvement—and we are not the first Government to make this diagnosis—in the scope for closer collaboration between business and academia: business and the research base. We want to build on and make more effective many of the ways in which we see collaboration work between those two groups.

19 Spending Review and Autumn Statement 2015

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The Chairman: As you say, there are a number of innovation indices. In the BIS evidence you quote the Global Innovation Index, where we come second, but even that index recognises that when it comes to knowledge diffusion we do not do very well, we are 23rd, and knowledge absorption, where we are 30th. Clearly there is an issue at that end that is quite different from the universities. You will see from the innovation indices that we do very well from the UK research base. We all recognise, and the White Paper states, that our universities are excellent. We are seeing a lot of research generated from business that is nothing to do with universities. It is not a linear process, so we have to make sure the area we are not doing very well in by comparison with the university sector has a governance that is fit for purpose. Our concern is that by following the Nurse recommendations, which very much link Innovate UK with the universities, we may be missing some of the weaknesses at the moment and businesses might feel that they have to dance to a tune that is more appropriate for research councils, which are reactive, than for Innovate UK, which clearly has to be proactive and orchestrating a very different scenario.

Jo Johnson MP: That is a very reasonable concern and one that came through in the responses to the consultation. We feel that we have addressed this head-on in the way we are organising the new body, UK Research and Innovation. There will be a very distinct role for Innovate UK within this organisation. Its objectives will be set down in legislation in the Bill and, subject to Parliament, enacted. As I said, innovation will be in the name of the organisation. There will be a strong business representation on the board of UK Research and Innovation. It will have its own funding stream and distinct role within the organisation. It must stay attentive to the core needs of the business community.

At the same time, we believe it is important that we do better as a society in exploiting and getting a return from the £6 billion or so that we are spending every year on research and innovation20. That is part of its job. By sitting horizontally alongside the seven research councils, Innovate UK will help them make businesses more aware of the brilliant research and great opportunities that are being generated in the research base, and at the same time it will help the business community, particularly SMEs, better understand what is going on in the research community. We see these as very important aspects of what it does.

At the moment about 10% of businesses that are innovative are so because of collaborations with universities and academia. We believe that figure has the potential to increase over time, and in developing relationships between business and academia we can see a greater level of innovation deriving from our academic base than at present.

Q28 Baroness Morgan of Ely: You have given us a fairly clear exposition, Minister, but I would like to dig a little further. To what extent did you look at alternative options to achieve the aims that you are talking about? To what extent do you think it would be possible to do it while maintaining a separate organisation? Can we be confident you have not done this for tidiness and “Let’s reduce the number of arm’s-length bodies and make things neater”? There is always a tendency to that within government.

Jo Johnson MP: Tidiness was not part of our thinking. The main drivers of our thinking in creating UK Research and Innovation were to follow the broad vision set out by Sir Paul Nurse in his review. He identified a strategic deficit in the way we do science and innovation as a country and saw that the system as a whole of the research councils and Innovate UK, 20 Case for the creation of UK Research and Innovation – June 2016

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while world class, adds up to less than the sum of the parts, which is how he put it. We do not have a body that is articulating a big strategic vision for the gaps in our system, where we need to prioritise resources and think about where the future challenges are coming from down the pipeline towards us. That was the main driver for doing what we are doing.

An equally important driver was the fact that the siloed nature of the research councils, and their clear remits to focus on their disciplines, meant that we were at risk of missing some exciting opportunities in interdisciplinary and multidisciplinary research. Developing countries around the world are focusing ruthlessly on these opportunities. If we stick with our existing structures, we are in danger of missing them. We could not afford to take that risk. If we want to remain world class, we have to adapt our systems and structures so that we have the capacity for cross-cutting research and innovation.

The third motivation, as I explained earlier, was to ensure that there is greater capacity for collaboration between academia and business. We think that mainstreaming innovation in this way in the organisation will help us do that. It is not the only answer, and in and of itself it is not going to crack our productivity challenges, but it is going to be a contribution towards a solution.

Q29 Lord Hennessy of Nympsfield: Minister, you referred to the broad vision of Paul Nurse, and I agree with that, having read the report, but in the key paragraph on page 31 on Innovate UK he points out that it was not part of his remit to go into this in any depth and that he has many anxieties about the merger that you are about to carry out. To put it bluntly, do you think you have done sufficient R&D on this new structure? We are talking about a very delicate mixed economy.

Jo Johnson MP: Yes, indeed. Sir Paul pointed to the potential benefits from the integration of Innovate UK with the research UK body that he was advocating in his review. He also flagged the risks, as did later responses to the consultation. We have addressed those risks. The risks he identified were the ones that came through very clearly in the consultation response, namely the business identity of the organisation and funding autonomy need to be preserved and the differing remits of the body need to be preserved. We are absolutely clear that that must continue, and I have made clear we want to ensure that innovation is in the name of the organisation, it has its own budget and it is funded separately from the rest of the organisation that is within the science ring-fence.

Lord Cameron of Dillington: A moment ago you were talking about missing opportunities. Bearing in mind that over 90% of research and development occurs outside the UK and should be available to Innovate UK, by tying Innovate UK to UKRI are you not limiting their possibilities?

Jo Johnson MP: We do not want this to be mutually exclusive. We want both to help the research base get better bang for their buck in commercialising the brilliant research that is going on, and ensure that Innovate UK continues to carry on doing the important work it does for the business community and other government departments.

Lord Cameron of Dillington: Does it not undermine the rationale by tying them? Are you sending out the wrong signals?

Jo Johnson MP: We do not think we are. We make it very clear that Innovate UK will continue to deliver on its strategy, which Dr Ruth McKernan discussed with you this

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morning, while working within UKRI to ensure we get a better return as a society on our £6 billion investment in research and innovation21.

Baroness Neville-Jones: Minister, I thoroughly agree with what you said about the need for more focus on interdisciplinary research activity. I wonder whether a wholesale structural change is necessary to achieve that, but the objective is certainly desirable. It seems to me there is still a missing piece in the argument as to why it logically follows from that that you have to change the status of Innovate UK, which seemed to me to thrive on its independence and the relationship that it could fashion with all-comers. If I might say so, I do not think the business of the translation from research through to innovation is linear, which your model suggests. How is Innovate UK, given its positioning in the system—and it seems to me it is a council under UKRI—going to maintain that valuable commodity of independence that it had, particularly when a lot of emphasis has been laid on the mitigation in the White Paper of the ring-fencing of its budget but there is going to be a single accounting officer? How does that add up to an organisation that can decide what its priorities are?

Jo Johnson MP: Each council within UKRI will be responsible for setting its own strategic delivery plan, and Innovate UK will do that and have it agreed by the UKRI board.

Baroness Neville-Jones: That does not make it independent any longer, does it?

Jo Johnson MP: It will be within a body that is responsible for setting an overall strategic vision for UK Research and Innovation. That is an important thing for this country to have. Innovate UK will agree its strategic delivery plan, it will have its own delegated budgetary authority and it will be responsive to the needs of the business community, which will make up a very significant proportion of its own council within UKRI. As I said earlier, there will be a significant business representation on the board of UKRI itself.

Baroness Neville-Jones: I think you describe a very top-down system, Minister.

Q30 Lord Fox: What you described earlier was your hope that Innovate UK would somehow infect the research councils with a more cross-disciplinary attitude. Yet when you come back to the governance, Innovate UK is in such a minority that how can you expect that to happen? Is it not more likely that the reverse will happen and that some of the things you are trying to breed out of the research councils, which I think is what I detected, will be the things you infect Innovate UK with?

Jo Johnson MP: All our reforms have this goal very clearly in mind. We have to make sure that it has two jobs. It has to serve the significant number of businesses that are innovating happily, well and successfully without needing the research base, but it has to do better at making more of the advantages that are within the research base. We do not want Innovate UK to become subsumed with academic concerns about citations and those types of issues; we can leave that to others. But we want it to do better at ensuring we get a clearer return from the £6 billion of investment in research and innovation22. That is why we believe this integration will be really important.

21 Case for the creation of UK Research and Innovation – June 2016 22 Case for the creation of UK Research and Innovation – June 2016

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Lord Vallance of Tummel: What are the reserve powers that UKRI will hold over Innovate UK that are not devolved to Innovate UK? The budget is going to be devolved because it is ring-fenced. Specifically, what are the reserve powers at the top level?

Jo Johnson MP: The Innovate UK budget does not form part of the science ring-fence. It is distinct from the budgets that will be held by the executive chairs of the other councils. The board of UKRI will be a strong body. It will have the responsibility of informing Ministers about strategic allocations, advising Ministers about allocations between the various constituent parts. It will have a duty to co-operate and share information and data with the new body coming up over the other side of the teaching fence, the office for students. It will be responsible for ensuring that the money we are allocating towards science and research is optimally spent. We think that the academic community will welcome this.

Lord Vallance of Tummel: You are not answering my question.

Jo Johnson MP: Let me have another go.

Lord Vallance of Tummel: My specific question is: what are the reserve powers—that is, what is not devolved to Innovate UK—that are going to be held at UKRI level?

Jo Johnson MP: The accounting officer is at UKRI level. The chief executive of UKRI is the single accounting officer for the body.

Lord Vallance of Tummel: But he is an accounting officer. I am asking about powers.

Gareth Davies: Essentially, we see Innovate UK having the freedoms and flexibilities that it currently has. It will set a strategy with its council.

Lord Vallance of Tummel: There are no reserve powers?

Gareth Davies: I was going to say how it works. It is important to compare how it operates now as a contrast, because we are moving from the position now to then. At the moment, Innovate UK proposes a delivery plan that is ultimately signed off by the Minister. That is a connection now, so there is a connection back into the department. Through the Bill we propose that, as now, Innovate UK will develop a delivery plan, but rather than going to Ministers that will be signed off by the UKRI board. The goal is consistency with the investment strategies of the nine bodies as part of UKRI. As the Minister said, we are investing £6 billion into UK science and innovation. We know our success as a country will come from our ability to exploit that science base, both globally and locally. It is about ensuring consistency between the two. At the moment, in effect, good people—you have already seen Dr Ruth McKernan and Professor Phil Nelson—make a very complex system work. This is ensuring that coherence and collaboration between the business side and research side is embedded from the start.

Q31 Lord Broers: A lot of questions have been dealt with. I have three specific questions and I want to set them in context. Does this reorganisation simply represent a merging of back office functions, or will it include strategy, priorities and decision-making? What is the estimated cost saving of forming UKRI? Who will have oversight of the wider innovation landscape to ensure coherence and prevent it becoming overly fragmented? In setting the context, we have talked about this a lot, but I would like to put some specifics. We are trying to compete internationally. You have chosen to take the Cornell global index, which was developed by a university. Its major measures of the quality of innovation are world

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university rankings and citation indices. The third is patents. We happen to sit equal first in the university rankings and in citations with the US, and tenth on patents. Patents are more relevant. If we look at a business-based one—our Chairman mentioned Bloomberg—we sit 22nd in R&D intensity, 44th in value-added and 30th in productivity. We have a serious problem. Are these changes going to address that situation when Innovate UK gets less than one-tenth of the overall budget? Perhaps it should get 30%? I am sorry, I have mixed some specifics with a general overview.

Jo Johnson MP: I will come in on the bigger question and ask Gareth to come in on some of the more technical points about cost savings, and so on. Of course, the proposals in the White Paper and the Bill are not the only part of the Government’s answer to our productivity challenges, but they are an important part in making sure that we have a more effective innovation and science base. There are many important reasons why we are not doing as well as we could be as an innovation power. We have an industrial base and business sector that is not as absorptive as it should be. Management in the UK is not as aware as it could be of the opportunities for innovation that are coming out of our system. Our skills base, which is a key driver of whether or not we are absorptive, is not what it should be. We are working hard as a Government to ensure that we are getting a better quality of skills base from our school system through our apprenticeship and university systems, but these are not issues we are going to be able to fix overnight. We believe the reforms will contribute towards a more joined-up system that has the capacity to create more linkages between science and business.

Gareth Davies: Coming back to your opening question, we have a shared view that as a country we are truly world class at invention and research, but we recognise that we have far more to do on innovation. This has been a long-standing problem with the British economy. You can go back 100 or 150 years to the productivity comparisons with Germany or the United States. As the Minister suggested, there are many issues. This reform will be part of but not the total solution.

Some of the benefits I see of the integration of Innovate UK into UKRI partly reflect the changing nature of technological change and adoption. If you look at emerging technology, particularly in the digital space, a lot of the new highly productive, fast growing companies are often very small. We are moving from an industrial model of the post-war period where we had large industrial manufacturers that drove our productivity frontier, and to a certain extent still do. You only need to go to Shoreditch and some of the small start-ups that rapidly scale. Large multinationals have the fixed costs and capacity to engage with a very diverse and diffuse research base in a way that small start-up companies cannot. One of the goals of this integration is to make the engagement of our world-class research base far simpler for some of those start-up companies. When I ask university researchers about their connections to businesses, often it is to our strengths in advanced manufacturing, be it people like Rolls-Royce or Jaguar Land Rover. I was at the University of York last Friday. They have a digital creativity lab deliberately designed to work with Innovate UK bringing in small businesses. We know that some of the growth in our economy will be in service-based sectors, design, communications and media. If there is a challenge facing UKRI, it is ensuring that the research base connects into those growth sectors of the economy as well as our existing strengths in advanced manufacturing.

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Lord Broers: If we look at the evolution of high technology industry, my estimate is that 75% of advances are evolutionary and 20% or 25% revolutionary. The 25% comes down from the science base. The 75% has to be generated in industries doing R&D, which is where I have observed us to be quite weak. Do you think this change helps? That is where Innovate UK has to work with industry and not the other way round. I am saying that 75% of their function should be working with industry and perhaps 25% should be trying to extract things from the research base. We may have our priorities wrong; at least, they do not agree with my observation of the situation.

Gareth Davies: I like your distinction between evolution and revolution. This is an important point, and goes back to our previous comments that this is not necessarily a linear process of an invention in a lab popping out at the other end as a product; that is one part in the creativity process. From my experience of working with Innovate UK and university researchers and businesses, it is the partnership which matters. The partnership with universities is sometimes about new products, new materials and new technologies, but it is also about our business schools and some of our work on the arts and humanities, for example, which are often seen far away from productivity. That can help give a framework for new business processes and ways of working. You could call it evolution or continual improvement in businesses. Some of those partnerships are incredibly important, and there is more to be made from that.

Jo Johnson MP: I do not think the proportions that Innovate UK presently spend in the academic community are very far out of line with your ideal. It is currently spending about 20% through the research base, so it is not a million miles away from your 25%. We see opportunities for the small business community in closer collaboration. Ten per cent of innovation that is taking place in our business sector is coming out of co-operation with universities or higher education institutions. That compares with countries such as Switzerland, which is seeing almost double the level that we are achieving. We think there is scope for more interaction between these two bodies.

Q32 Lord Oxburgh: In practical terms, within the new structure, how do you see things being possible that Innovate UK and the universities could not have done before?

Jo Johnson MP: Things on the interdisciplinary and multidisciplinary side. At the moment the research councils are limited in developing and exploiting the opportunities for interdisciplinary research. Similarly, the impact of this research is being felt by businesses taking advantage of it in multidisciplinary and interdisciplinary ways. There is a continuum from concept all the way through to commercialisation, and that applies to Innovate UK as much as the research councils.

Lord Oxburgh: I am talking about at the working level. This innovation is something that involves people hands-on in laboratories or businesses. At that level, what is new that could not have been done, or indeed was done already?

Jo Johnson MP: It will greatly simplify the ways in which Innovate UK collaborates with the research councils to do research through to commercialisation.

Lord Oxburgh: Collaboration does not occur at a research council level; it occurs at the individual level of the projects.

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Jo Johnson MP: It can do. The Urban Living Partnership, for example, is a project about designing the cities of the future that involved all seven research councils and Innovate UK. It took over a year to get eight different contributions into a shared pot. These are the kinds of rigidities that we have in our current system that we believe we cannot afford if we want to remain competitive, agile, flexible and able to respond rapidly to the challenges we see coming down the line. We do want a system whereby these bodies can work more closely and rapidly together.

Lord Oxburgh: How much shorter do you think that would be under your new system?

Jo Johnson MP: I cannot give an exact number of weeks or days, but it would be reasonable to expect it to be a considerably easier process.

The Chairman: Could I come back to Lord Broers’s concept of evolution and revolution? I do not know whether Lord Broers’ 75%:25% is right or wrong, but that does not matter. We recognise that the research-based universities, the cutting edge research, are probably less suited to promote this evolutionary research. When we had a stronger network than we do now, the public sector research establishments were good at it because they were relating to industry. When one looks at Germany you can see that the German research institutes work very closely with industry in a way that our structure makes harder. Collaboration is extremely desirable, but under the new governance arrangements we have to ensure the opportunity for this evolutionary input to be made recognising how much research is done. Of course, the majority of research is done not in academia but in commerce. The business sector must not feel that in future the agenda is going to be set by the research councils. This is why it is important to keep Innovate UK in touch with the people doing the research and they must feel that they are setting the agenda. Would you reflect whether you feel this continued desire to make sure that industries benefit from the universities’ output is not the tail wagging the dog?

Jo Johnson MP: Absolutely. We recognise that it is extremely important that Innovate UK continues to support businesses in their current innovative activities, but, where there are opportunities for them to benefit from ideas that are being generated in the research base as a society, we should want them to take advantage and be aware of them. We are in agreement with you and want to ensure that Innovate UK retains its distinct business-facing identity within the new organisation. We have stated that very clearly in the White Paper. We have put its objects in the Bill—innovation is in the name of the new organisation—and are committed to ensuring that it continues to serve its core constituency.

Q33 Lord Vallance of Tummel: At a previous session we were told that Innovate UK’s portfolio is extremely attractive and that for every £1 invested £7.30 is returned to the UK. We were also told that Innovate UK could invest at least twice as much with similar returns. Is that not where the blockage is? Instead of—how shall I put it—messing around with organisation charts, should we not be looking at how to get more finance into this? Is America so much better at it because its financing is better? If it is not going to be public finance it should be private, and it is not difficult to set up a vehicle that is combined public and private, that diversifies the returns and is a good prospect. It seems to me that you are getting the wrong end of the stick.

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Jo Johnson MP: We have protected Innovate UK’s financing. The direct support that we are giving through Innovate UK—which has gone up from £315 million in 2009-10 to £56723 million now—has been protected. There is significant indirect support for innovation in this country through the R&D tax credits. They have increased significantly in value to £1.75 billion in the last year for which we had data, which is 2013-14, from £1.1 billion in 2010-11. The overall amount of financial support that government is giving to innovation is on a strong upward trajectory. I do not think we are missing the point at all. We are very much focused on the need to provide support in the form that is required.

Lord Vallance of Tummel: I think you are completely missing the point. If there is a huge backlog, as we were told earlier this morning, that needs to be financed. If government cannot finance it you need to look at other ways. Under the existing system there are matching funds between the public and private sector at individual company level, which is where the risks are greatest. The portfolio return for Innovate UK is very high, so why not think about how you can get in private money at portfolio level and create a structure that allows that to be done. It is fairly simple, is it not?

Gareth Davies: We are looking at what we are calling new finance products for innovation. The Government set out £165 million in the spending review.

Lord Vallance of Tummel: With respect, that is out of the existing pot. I am talking about how you deal with a great backlog of highly productive potential projects in SMEs that are not properly financed. If it is not going to be government finance and the venture capital markets are prepared to do it, you can set up something between the two that is a vehicle, part publicly and privately owned, that will get in private money because the risk is diversified at the portfolio level.

Q34 Lord Oxburgh: We have touched on this. What do you see as the risks of the integration that you propose?

Jo Johnson MP: We have touched on it. They are the ones that came through the responses to the various consultations we have had. Lord Hennessy and the Chairman suggested that Innovate UK’s voice might be drowned out in the research councils. We have been extremely attentive to that in the way the governance of this body is being set up. We have ensured that Innovate UK’s funding will not be diverted into other activities. In the new world we have given the executive chair of Innovate UK responsibility and delegated responsibility for the budget. There is a risk that it might become overly focused on trying to commercialise research from the research councils and be insufficiently attentive to what businesses want—the concerns the Chairman echoed earlier—concerns that it might lose its ability to do cross-government work and ensure that other government departments are sufficiently focused on innovation. We are very clear that we want all its good work on behalf of other government departments, ensuring that regulators have an innovation focus that remains important to its future work. There is the risk that businesses might stop seeing Innovate UK as where they go for support for innovation because they would see it as a research-council-dominated organisation. We are alive to those risks, and in creating the new organisation and in all the mitigations and protections that we have put in place we feel we have addressed them.

23 As stated in the Minister’s opening statement (page 2)

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Lord Oxburgh: In what detail have you considered the make-up of the overarching board?

Jo Johnson MP: We have considered it in significant detail. We want to ensure that it reflects the strengths of the academic communities that will be served by the research councils within it, but also that it has a very distinct business-community representation. There will be very strong business figures on the UKRI board.

Lord Oxburgh: Could you put some numbers to that?

Jo Johnson MP: The overall board will be between nine and 12 people, in addition to24 I the chief executive, the chair and the finance director. That leaves up to twelve slots for others. We have not been specific about the number of slots we would want to go to the business community, but we have said very clearly that we want to make sure there is a strong business voice on the board.

Lord Oxburgh: Would that amount to three or four of those slots?

Jo Johnson MP: I could not guarantee that it would, but it might.

Lord Oxburgh: Having been involved in the original setting up of the Technology Strategy Board, one of the important elements with business was they did not want to be drowned out, or shouted down, by academic interests, which they felt were focused in a totally different direction. It seems that this is an important challenge that you have to recognise and face. Strong business representation on that board would go some way to alleviating that.

Jo Johnson MP: Agreed.

The Chairman: The research councils are invariably chaired by somebody from business. Could we assume that the main board of UKRI would be chaired by somebody from business?

Jo Johnson MP: It is certainly something that we are looking at. We have an interim chair in place now in the form of Sir John Kingman, currently of the Treasury. He is acting as interim chair until the creation of UKRI. In due course there will be a full public appointment process to find the chair with all the characteristics we want for this important position.

Q35 Lord Hunt of Chesterton: Minister, with your European scholarship you may know that on Friday the French department for education was discussing the importance of innovation and the fact that the ideas came from Sir Francis Bacon, a fellow of Trinity College, in 1605. They translated Bacon’s remarks into French. The class was then asked, “When do you think this was written?” and they said, “Probably last week in Le Monde”. This made the French laugh. My own career started with research council projects and then forming a small company. The assumption everywhere is that if you form a small company you want to grow and grow, but that is not always the case. A company can do valuable things. Lord Broers has implied that we are rather feeble in Britain and do not grow our companies enough, but there are two strands.

The other point you have made is small companies have benefited from the tax benefits that came under the previous Government and this Government. You have emphasised that the

24 White Paper – “Success as a Knowledge Economy: Teaching Excellence, Social Mobility and Student Choice” – May 2016

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Government should take more of a strategic view of high technology projects, and France is an example. These are multidisciplinary, and you have mentioned the Urban Living Partnership, but in what way will these strategic projects—power, infrastructure and new invention—happen? Innovate UK people take existing projects, and then you have the research councils. It seems a new range of people or bodies from what we have had in the past. Perhaps Gareth Davies can answer how, organisationally, you will have this new structure that sounds like Harold Wilson in 1964 with these new technological frontiers. How is this going to happen in your new organisation?

Jo Johnson MP: We feel that we are delivering on the vision Sir Paul Nurse set out, which is, as a country, how we best address the deficit in strategic thinking that we have on science and innovation. At the moment, we have a very effective research council system in which the individual councils are focused on their legally defined remits and impeded from collaborating effectively one with another. They are competing to a certain extent for the same pots of government money and undercutting each other’s messages. We want to have a system whereby there is an iteration between the councils within UKRI and the overarching UKRI board, so that as each council agrees its strategic delivery plan, that informs the work of UKRI in setting an overall strategy for science and innovation in the UK, which in turn will enable it to best advise Ministers on how we allocate funds that are then veered back to the individual councils. It is an iterative process whereby the communities talk directly to UKRI that synthesises the views and makes recommendations to Ministers, and we achieve an intelligent hierarchy of what our national priorities should be and where the gaps are, where we need to do more, and where we are wasting money. That is the vision that we have for it.

Lord Hunt of Chesterton: I understand that this week Inmarsart, a big company, is no longer in the top 100 companies, which is very important. This is a strategic issue. How will this be discussed? I have been on a research council. They talk about research projects, not how we should be dealing with energy or geology. We need a new format. It seems that you could do that, but you have not explained the institutional structure that will enable you to do that.

Gareth Davies: On coming into this role I observed that we are very clear and have a deep understanding of the strengths within individual disciplines. We are strong on biomedical research and we can look at places such as the Francis Crick Institute or the Laboratory of Molecular Biology. What is harder to assess as a country is where our comparative strengths and weaknesses are globally. This is not Oxford versus Cambridge or Liverpool versus Manchester; this is a global system. One of the earlier points was that this is a global open research community and that one of the strengths of the UK is its openness—just look at the number of international citations on joint research work. This is where I see the benefits of integrating Innovate UK with a business focus into the conversations where our comparative research strengths are and where we can capture the economic benefits as a country. The opportunities created by autonomous vehicles connect the revolutionary work, say the convergence of technologies on robotics and sensors, combined with big data and data programming with a lot of the behavioural and societal changes that you need in insurance and much more at the applied end. That work is happening, but at the moment it is spread across the EPSRC, partly in the ESRC, and in Innovate UK and its transport catapult. Having a more systematic integrated conversation will make these decisions more explicit and evidence-based so that we have a sense of strategy of where to invest public funds.

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Lord Hunt of Chesterton: The catapults will be a major integrated, strategic force.

Baroness Neville-Jones: I want to make a short comment on something that the Minister said. You gave me the impression that the research councils are going to do their thing and that the interdisciplinary matters will be thought about at the UKRI level. I am on the EPSRC and we spend a lot of time on engineering in medicine, in the biological sciences, in disciplines that are not traditionally thought of as engineering. I and other members of the council are extremely concerned that our capacity to do that will be cut back, not enhanced, by this new organisation, which has a hierarchy of the discipline and interdisciplinary. I hope that we do not end up with an organisation that lacks some of the flexibility that we have at the moment.

Jo Johnson MP: On the contrary, we think this will facilitate greater interdisciplinary and multidisciplinary work.

Baroness Neville-Jones: I hope it will.

Jo Johnson MP: That is the whole objective of what we are doing. If there was any evidence that such effects were appearing, we would be extremely concerned. We are doing this explicitly to rise to the challenges of these great opportunities.

Q36 Lord Fox: We have heard about indices and measurements, but I imagine you do your own benchmarking. As Minister you have had a chance to look over the fence at other administrations. Which Governments are delivering innovation more effectively? In this development what is it that emulates what they are doing?

Jo Johnson MP: We have taken into account our relative performance as an innovation system. We discussed at the start how we do in some of the innovation indices and where we are stronger and where we are weaker. We believe that we have room for improvement in the areas which these reforms seek to address: namely, long-standing recognition by Governments of all stripes that we need to do better at industry-academic collaboration. This is front and centre of these reforms. We have looked to countries that have developed new innovation products to meet gaps in our suite of offerings with which to support business. We have looked to countries including France, Finland and the Netherlands. We have taken stock of the fact that Switzerland does better than us in the proportion of innovation coming out of the research base. We have looked broadly across the systems of competitor countries.

Q37 Lord Cameron of Dillington: When I woke up this morning I was rather concerned about Innovate UK converting one-third of its grants into loans. I was worried about the question of loans amalgamating risks, as we heard from one of our speakers last week. We had a very good discussion with Dr McKernan about the philosophy behind the loans and the variety of products and encouraging the possibility of Innovate UK taking up equity in start-up companies, which then shares responsibility for the risks and the opportunities involved. I am encouraged by that, but it does beg another question, which Lord Vallance raised. We heard that seemingly Innovate UK could sensibly invest twice as much money as at present and get the same return. If loans and equity are going to be part of Innovate UK’s new armoury, how does that venture capitalist activity fit in with UKRI and its goals and modus operandi?

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Jo Johnson MP: We have looked at the countries I mentioned that have successfully developed non-grant forms of innovation finance, and they are meeting a need in their economies. We see similar scope to develop these products in the UK and are market-researching them at the moment. We have ambitions to make sure that we have the full suite of products from grants through to equity-linked products to loans, so we have a system in which there is a greater sharing of risks and rewards between innovators and taxpayers.

Lord Cameron of Dillington: How does that fit in with UKRI? If you are going into venture capital, which is a good idea, and I support everything you have said, it does not fit in with the research councils.

Jo Johnson MP: We see scope for the research councils to have an eye to the future commercialisation of some of their ideas, where appropriate. It will not be appropriate in many cases. We do not want them to lose their focus on discovery science and blue skies research, which is an important part of what they do. In many cases there are opportunities for commercialisation of research, and where there is a more venture capitalist-type spirit running through them we welcome it.

Lord Borwick: Mr Davies mentioned the spending review. I wonder whether the growth of the one-third of Innovate UK funding, which will be in the form of loans and potential equity, is part of the spending review discussions so that the same amount of cash goes into business but is accounted within the department as an asset rather than a grant expended. Beyond that, how will the cost of managing these extra loans and equity be handled? It is going to be much more expensive to hammer the salaries of the City into the Civil Service system without causing too much stress. I should declare my interest as chairman of an advisory board on autonomous vehicles, which is funded by Innovate UK.

Gareth Davies: Those are very good points. The main reason why we are not rushing to introduce these this year is because we are looking to do market testing, both qualitative and quantitative, to pilot in the next financial year and scale as we learn. In the past, when government has tried to move too quickly to some of these more innovative financial products, mistakes have been made. We want to make sure that we learn and build methodically. The costs will be part of Innovate UK’s delivery plan, and we will discuss with it how it wants to structure and the best way of delivering this, learning from Innovate UK’s back office systems but also the British Business Bank and other providers in the market.

Q38 Lord Vallance of Tummel: I have a question about ethos. Putting investment banking together with traditional banking ended up a mess because there was a completely different ethos and one tended to dominate over the other, and it seems to me there is a very different ethos between Innovate UK, which is becoming more interested in different types of finance, and so on, and the rest of the research councils. They look in different directions and have a different ethos. My worry would be that this results in the mess that we eventually saw in the banking system, that one dominates over the other or there is a mish-mash between the two, and that would be an argument for keeping them separate. Another argument for keeping them separate is that, if you ever thought of trying to get in private finance at the portfolio level, where the risks are mitigated and diversified, rather than the individual investment level, you would be better off taking it out separately rather than

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within the other. You are constraining yourself in potential financing for the future. Sorry, that is a statement, but do react.

Gareth Davies: How we design it will be important. Your point about looking at portfolio funding as well as individual project funding is entirely right. The key here is not that we are trying to create a new financial organisation; if we do that, we have failed. The goal is to make sure that we keep the focus on innovative companies. That is what Innovate UK does well now and needs to keep as its core competency. It will need to bring in the classic credit assessment, some of the skills that you talk about, and portfolio analysis. Whether that should be within Innovate UK or held on a more arm’s-length contractual basis are design questions. The point on culture is entirely right. The test will be making sure that we keep Innovate UK’s core competency and understand what helps innovative companies to grow and flourish.

Q39 Lord Hennessy of Nympsfield: As Gareth indicated a while ago, our discussion this morning touches a deep and long-standing national anxiety from at least 1896, when a bestseller, Made in Germany, hit the stalls and chilled everybody’s bones. We could have had a specific conversation like this since the 1918 Haldane report, which laid out the spectrum of research councils, which we finally got after many years. Whitehall is littered with the bleached bones of Ministers and officials who have hurled themselves at this problem. I have listened very carefully today and still cannot winnow out from your very helpful answers—and I admit they were very helpful answers—what is different about your approach. When PhD students in the 2050s come to look at this session and your stewardship, Mr Johnson, are they not going to add you to that pile of bones?

Jo Johnson MP: No, or Sir Paul Nurse’s in that case. We are implementing Sir Paul Nurse’s very compelling vision of how we can have a more effective science and innovation system. I will not reprise the overarching objectives. We are addressing the present strategic deficit, a glaring risk that we fall behind on interdisciplinary and multidisciplinary science, and tackle the fact we are not doing as well as we could at the knowledge-transfer side of the equation, making sure that we are getting bang for the buck from our brilliant research. For those reasons alone, it is worth doing this.

The Chairman: Minister, you referred to Sir Paul Nurse’s review, which is the begetter of this, and I remember that in the paragraphs in which he referred to Innovate UK he expressed some caution. He thought that it was important to quantify and qualify some of the issues to be addressed. I hope that when we come to write a short report or a letter on our two mornings of inquiry we will help to contribute to that review, which Sir Paul clearly felt was necessary. Indeed, from the evidence we have received we will be sharing with you some of the concerns that others have expressed, but recognising where there have been some very positive contributions. We recognise entirely what it is you are trying to achieve by bringing into being the new organisation of UKRI. I hope we will not be totally negative and will be able to contribute to a discussion which will help, as the Bill goes through Parliament, to meet all the real aspirations you and others have for the new organisation. Thank you, Minister, and Mr Davies, for a very helpful morning.

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Professor Jackie Hunter CBE, ex Chief Executive of BBSRC, Nesta and Innovate UK – Oral evidence (QQ 17-25) Transcript to be found under Nesta

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Innovate UK, Professor Jackie Hunter CBE, ex Chief Executive of BBSRC and Nesta – Oral evidence (QQ 17-25) Transcript to be found under Nesta

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Nesta, Innovate UK and Professor Jackie Hunter CBE, ex Chief Executive of BBSRC – Oral evidence (QQ 17-25)

Evidence Session No. 3 Heard in Public Questions 17 - 25

TUESDAY 14 JUNE 2016

Members present

Earl of Selborne (Chairman) Lord Borwick Lord Broers (co-opted) Lord Cameron of Dillington Lord Fox Lord Hennessy of Nympsfield Lord Hunt of Chesterton Lord Mair Lord Maxton Baroness Morgan of Huyton Baroness Neville-Jones Lord Oxburgh Lord Vallance of Tummel Baroness Young of Old Scone

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Examination of Witnesses

Stian Westlake, Executive Director for Policy and Research, Nesta, Dr Ruth McKernan, Chief Executive, Innovate UK, and Professor Jackie Hunter CBE, Chief Executive of Stratified Medical and ex Chief Executive of BBSRC

Q17 The Chairman: Welcome to this very short inquiry on the future of Innovate UK and particularly the proposed arrangements for integrating it within UK Research and Innovation. Would you introduce yourselves for the record? If you would like to make an opening statement, please feel free to do so.

Professor Jackie Hunter: My name is Jackie Hunter. I have interacted with Innovate UK wearing a number of different hats. My past role as chief executive of the BBSRC was possibly where I interacted most with Innovate UK, but in my previous role at GlaxoSmithKline I had some quite fruitful interactions. I now head a small biotech company and have previously run a spin-out company and an open innovation consultancy, so feel very able to comment on Innovate UK and its role in the innovation ecosystem, which is very important, and I am very grateful to be able to do so. I would also like to mention by way of

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conflict of interest that I am a member of the governing board of the University of Hertfordshire.

Dr Ruth McKernan: I am Ruth McKernan. I am the chief executive of Innovate UK. By way of an opening statement, I have been in the role for a year. I am thoroughly enjoying leading this very expert organisation, which I feel contributes a lot to productivity and economic growth in the UK.

Let me give you some statistics. We have worked with 7,600 businesses. For every £1 spent we have returned more than £7.30 to the UK economy in GVA. Since its inception—we are only eight years old—Innovate UK has spent £1.7 billion and returned £13.1 billion and created 55,000 jobs, which is seven jobs for every company that we have worked with. We are a business-facing organisation. We work with Research Councils at the moment. The way I see it, the research councils are the verticals, of which there are eight, and Innovate UK cuts across on the horizontal. A bit less than 20% of our funding goes to researchers in partnership with the 80% of our funding that goes to business. We run a lot of programmes that work across both research and innovation, but our focus is absolutely business facing and our programmes are led by business.

Stian Westlake: My name is Stian Westlake and I am executive director of policy and research at Nesta. Nesta was formerly an NDPB and is now a charity with the objective of promoting innovation for the public good in the UK. We have worked on a number of things that are relevant to Innovate UK’s performance and future. We recently put together a report comparing innovation agencies around the world, which I feel obliged to hold up. We have done research and written about repayable funding, which I have seen the Committee is interested in. We have also opined on the question of UKRI and Innovate UK’s status within it.

By way of disclaimer or statement of conflicts, the non-think tank bit of Nesta is a partner with Innovate UK in putting together the 300th anniversary Longitude Prize for antimicrobial resistance and we have worked closely together with them on that. I am also working with BIS on a prospective evaluation of repayable loans. Those are two conflicts or disclaimers.

Q18 The Chairman: As I say, our accent is very much on looking at Innovate UK’s role in the future. As a nation, how well do we do in the performance of rolling out innovation and, indeed, supporting innovation? What is Innovate UK’s role in that? It is clearly only one of many players.

Dr Ruth McKernan: The most robust data set comes from the Global Innovation Index, which is 79 indicators that look across lifestyle and environment in more than 100 countries. In that index, the UK comes out second only to Switzerland. It covers a huge space. It is a very rich set of data, and in some areas the UK does really well. As we know, in scientific research in universities, citations, patents and university performance we punch well above our weight. That is part of the Global Innovation Index. Those things are fantastic. I cannot claim that Innovate UK has any responsibility for those.

There are other elements, such as innovation ecosystems, research and industry collaborations, the development of clusters and knowledge transfer, where Innovate UK plays a part. There are some areas in this whole innovation index where, even though we are second, we do not do terribly well. They are mostly in the business elements: educating science and technology graduates for business, productivity and capital formation. We have

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a paradox here. We are extremely good at science. Within the broad definition of innovation, cutting across many different areas, we do very well, yet our business performance in productivity and economic growth is not what we would like it to be. The challenge for Innovate UK is to take the business perspective and see how we can encourage science to be better adopted and encourage businesses to invest more in research and development, because innovation accounts for more than 50% of productivity growth.

Professor Jackie Hunter: It is important that we see the UK innovation ecosystem in a global context. If we think about the amount of GDP we invest in research and innovation—1.7% compared with Germany at 4%—we are doing well to punch above our weight in that context. There are other components of the ecosystem such as venture capital. When I was trying to spin assets out of pharma companies, it was incredibly hard to get UK venture capital interest. Indeed, our VCs were from Europe and the US. That is another reason why the research councils and others became partners to set up the Rainbow Seed Fund. We need to find ways of incentivising and funding early start-up companies over this valley of death. Innovate has done a very good job of that.

It is also important to point out that Innovate’s role is not to look solely at the commercialisation or translation of research funded by the research councils and the universities. In fact, a large proportion—70%—of R&D in this country is funded privately through businesses or charities, and again Innovate plays a big role in stimulating that.

I will give an example as I have now moved partly into the artificial intelligence and machine-learning world. SwiftKey started up in 2008 with a £15,000 grant from Innovate UK. From talking to the founders, I learnt that was incredibly important. It grew to a company of 160 people, attracted over $17 million in a Series B investment and was then sold to Microsoft for £250 million in 2013. That is an example of the way in which Innovate is a really powerful lubricant in the innovation ecosystem. But it also acts to stimulate networking interactions between SME and big business. Innovate plays an important role, and perhaps the best example of that is in life sciences, where the biomedical catalyst, other funding and grant mechanisms, together with a clear life-science strategy for the UK, have really stimulated the growth of life science companies.

Stian Westlake: The Committee knows the figures and background, but it is worth highlighting the mental trap that we must not fall into when discussing the UK’s innovation system. It is very easy to point at our excellent universities and our relatively lower levels of business R&D and assume that there is a problem because we assume that technology must flow linearly from academics to businesses. However, as my fellow witnesses have said, that is a gross simplification of how innovation works. In fact the most significant driver of innovation and R&D in businesses is the kind of ecosystems that Innovate UK plays an important part in developing—the role of the supply chains and the role of customers. We must see those business-to-business elements as important.

The Chairman: Dr McKernan, I want to come back on one specific point. You quoted the Global Innovation Index. Indeed, this was given to us in evidence from BIS. It is impressive to go up from 14th in 2009 to second in 2014. However, there are other innovation indexes, and one gets the feeling that BIS has perhaps done a bit of cherry picking here, because the Bloomberg index gives a rather different story of 17th over the same period. One gets a feeling that it is what you put into these indexes that matters. From what you have all said, I think we can agree that our science base, our university sector, is absolutely excellent and, in

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so far as that is a contributor to innovation, that will give you a very high index reading. If you are looking at performance, knowledge diffusion and knowledge absorption, for which the GII itself gives quite different readings, this is clearly where we have some problems as a nation. I think you have all said that in so many words. We have to ensure that however Innovate UK is configured in future, it addresses this issue. There is no need to address the universities, which are apparently doing so well. If the issue is performance and application, we have to make sure that there is appropriate governance for Innovate UK and not governance that is convenient just for the universities and research councils.

Dr Ruth McKernan: I agree entirely with you on the innovation indices. If you drill down into the different reviews, the data that is illustrated in the content is exactly as you said: the universities are fantastic, on translation there is work to be done, businesses have a productivity challenge. Even though one says that we are second and one says that we are 14th, if you look at the content of what they are measuring, the data is entirely consistent.

Q19 Lord Vallance of Tummel: Dr McKernan, what is the principal measure of your success, of your value added? Is it the impressive return that you were talking about or something different? How much of that success comes from providing free money, which is a bit like being a substitute for the venture capital markets, and how much from the other services that you provide?

Dr Ruth McKernan: The data that we have been able to measure thus far since our inception is economic analysis, looking at the return in GVA, the number of jobs created and some very high-level measures. Let us remember that we give matched grants. For state-aid reasons, we require matched funding: that they put in an equal amount themselves, either from the business, if we are giving them money, or raised from the private sector somewhere. It is not like a grant that goes to a university. We measure that grant spend quarterly in arrears, and we check that the company is spending the money on what they said they were going to spend it on, so we have very tight control on how our matched funding is spent. I would love to be able to have more in-depth analysis of the benefit of our matched funding. Obviously we want that so that we can compare it with our financial products in the future. We are just implementing a new automated grants system that will allow us to have a richer database of what happens to the businesses we support. We have generated 40 questions that we will send annually and we will track the growth of those companies. We will have much more microevaluation as well as the very high-level econometric analysis that we have been able to do. We need a richer analysis of the quality of what businesses do with our money and how we make them more productive.

Lord Vallance of Tummel: Coming back to basics for a second, in a sense you seem to be saying that you are a substitute in part for a failure in the venture capital market, because it does not have the risk appetite or perhaps the knowledge and skills to invest in your area. That is part of your role.

Dr Ruth McKernan: No, I would not agree with that. We take the risk out so that companies become investable. When we give grants at very early stages, we are looking at feasibility studies; we are looking at going from an idea to a business that is investable or a product that is developable. That is very early-stage investment and it encourages growth in and improved productivity of businesses.

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The other really important element is collaborative research and development, which helps to cement the supply chain. I can give you a good example, Evoque-e and the low-carbon vehicle technologies, a project involving £16 million and 12 different companies, academics included, all working to solve some basic problems in low-carbon technology that will cement that supply chain in the UK. That is a very valuable way of using matched grant funding to help whole industries.

Lord Broers: As we are on this question, I want to ask Dr McKernan how far down in quality you have to go before you have spent your budget? Are there a lot of extremely high-quality applications you cannot fund?

Dr Ruth McKernan: You are asking whether we are oversubscribed. We are always heavily oversubscribed. In some of our programmes we are able to support only the top 10%, and usually only 50% or so of applications are worthy of funding.

Lord Broers: So there would be little loss in quality if you had twice as much money?

Dr Ruth McKernan: I think that is probably right.

Q20 Lord Broers: What is the rationale for the integration of Innovate UK into UKRC, UK Research and Innovation, now? Were you considered at the beginning of this proposal, and were other options considered?

Dr Ruth McKernan: There were three options in the business case which the Department for Business, Innovation and Skills published on 7 June: to do nothing and leave things as they are; to create a new body for interdisciplinary research, which is one of the core opportunities; and to integrate all the bodies into one entity, UK Research and Innovation. I have had multiple conversations about it. I have shared my thoughts about the opportunities—and I love to see opportunities in things. I have also shared my organisation’s view about the risks. I can say more about those now or I can leave that until later.

The Chairman: Professor Hunter, would you like to answer?

Professor Jackie Hunter: From my perspective—I have not seen the business case—when I was at the BBSRC I saw four main drivers for this: an increased alignment between investment in research by the research councils and that by Innovate UK; a need to align the investments in research with government priorities; a reduction in the number of NDPBs; and a reduction in the complexity of the environment for business, especially for SMEs.

The first driver does not need Innovate to be incorporated into UKRI. The representation of the chief executive of Innovate on the UKRI board, or RUK board, and vice versa, would be a logical and simple way to do this. In regard to the second, the alignment requires a clear strategy from government that should also be business focused, and not focused solely on investments via research councils or HEFCE QR, which is more focused on the universities. Indeed, there is a danger that if this is the case, the underpinning basic long-term science funded by the research councils and HEFCE QR would become too focused too early.

On the last two—the reduction of NDPBs and the complexity—clearly the Government need to save money and cut the number of bodies with which they interact, but I am not sure whether other, perhaps more radical, options were considered. Looking at it from the business case, UKTI interfaces with SMEs and business, and there could be real synergies for investigating the linkage between Innovate UK and that organisation. Other organisations

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such as NCUB add to the complexity of the landscape. I am not sure whether these other, perhaps more, radical alternatives were considered. Given that we have a £6 billion investment in R&D, I would have thought we need a very in-depth business analysis of the implications of what is going to be done. I am sure this has been carried out, but I have not seen it.

The Chairman: Have you any reason to believe that such an in-depth analysis was ever done?

Professor Jackie Hunter: No.

The Chairman: Mr Westlake, would you like to comment?

Stian Westlake: I agree with the other two witnesses. There are two reasons that I have heard reflected from within government, one of which is the hope that integrating Innovate UK and the research councils will allow more mission-oriented projects to be undertaken. That is difficult to do given Haldane and the fact that these organisations will still operate independently to some extent. The other reason is the hope that savings or administrative simplification would result. Given there is already a degree of shared services between the research councils, and that there will still be a lot of institutional integrity of the different research councils, it is not clear to me that those savings are there to be had.

Professor Jackie Hunter: Clearly there were savings to be had by centralising a lot of the functions of the research councils, but the way the research councils operate with their customers—the universities—is very different from Innovate UK. By trying to incorporate Innovate UK you will dilute the potential efficiencies gained by synergy with the research councils, especially if you have to incorporate loan mechanisms, or, by not doing that, you will impose a burden on trying to get Innovate UK to force fit into a streamlined RCUK system.

Lord Hunt of Chesterton: First, I should make a declaration of interest that I am on the advisory committee and a consultant to Tokamak Energy, which receives some money from the Rainbow Seed Fund and a lot of private sector money, so is a good example. I was thinking hard about what I could say that is good about this proposal, so I began to think of all the proposals I have had to make. I am involved with colleagues at the moment, and we have had to imagine who would find some important research on waves useful. You might put in your grant and somebody criticises you for not having contacted them. This is an area where it seems to me on the input side Innovate UK in its integrated form could do more at the proposal stage.

The second point is that when the research is done there is also a role for the digitalisation of research or the marketing of research or connecting to other countries, for example. That is not done at the moment. None of those things happens when you finish a research grant. If you had some integration between Innovate UK and the research councils, that might work, but I have not seen those remarks in the case made. Is that part of your justification?

Dr Ruth McKernan: That is very interesting. You expressed that by looking from the perspective of research and how that work moves to business. We start at completely the other end, at the business end. The first benefit that I can see is that it may give the researchers or academics a closer view of what business needs, so they might choose under the Haldane principle to do more applied research that will ultimately benefit the UK. Secondly, the common research and innovation fund may encourage more interdisciplinary

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research and more applied research between business and academia. Thirdly, by having a common grants system and common database of businesses and academic institutions in the future as we move into the new economy where data is rich and we can do a lot of things with it, we will be able to get more robust information about how companies benefit from interactions with business, how many grants they have, what they have done with that money, how quickly they have grown, and instead of having impact case studies we could have more robust quantitative measures of how businesses benefit from interactions with research. That would be a positive. For me it is about more visibility of research into business. From where I am looking at the business end back at research, it is about what we can pull from research, not what we can push from research into business.

Q21 Lord Hennessy of Nympsfield: I was very struck by the paragraph in Sir Paul Nurse’s report on page 31 on the integration of Innovate UK, because it is very caveat laden. He points out that he was not asked to look at it in depth and he has real anxieties about what might be lost in two areas. The first is the ring-fencing of the money and the second is the loss of the business interface. Do you think the Government in their perhaps excessive tidy-minded search for structure, which is what the Treasury goes in for and the way it operates, has not taken account of Paul Nurse’s caveats? Are you worried by that?

Dr Ruth McKernan: There are some very good things in there, which have been put into the White Paper and the Bill since Sir Paul Nurse’s report. The things that I see as very positive include the fact that the Innovate UK name has been retained. Businesses absolutely want to deal with one simplified organisation. I understand that the hypothecated budget and our allocation letter—the process by which Innovate UK gets its funding—will not change, although of course it is decided in the CSR and by the Secretary of State. There is the opportunity for the chief executive and the chair to influence what is done. That might be positive or it might not. There are some very good things in there. The last one, which I think is very important, is the recommendation that somebody sits on the board with a view to protecting particularly the interests of Innovate UK and making sure the business focus is not lost. That is a very useful addition.

The Chairman: Should that be the chairman?

Dr Ruth McKernan: It could be. I would not want to say who it should be, but I absolutely agree that there should be somebody.

Baroness Morgan of Huyton: Dr McKernan, listening to you speaking it felt to me—I do not know enough about this, so I may be wrong—that these are all mitigations that mean that it is not as bad as it might be, and it did not sound like a ringing endorsement that this was necessarily a good idea. Would you like to comment on that?

Dr Ruth McKernan: There are also risks that I have not gone into. There are some other areas of mitigation where I still have concerns. For example, Innovate UK does a lot of work with many government departments. We manage about £300 million of funds in partnership with other government departments, for example the Aerospace Technology Institute through BIS, and we do a lot of work with DECC and DCMS. It is really important to safeguard those relationships and not feel the need to create something else because we have created a fracture in putting Innovate UK within UKRI. We have already touched on whether we are a tech-transfer part of the universities. We need to find a way of making sure that the business-led programmes are still there. There are many different ways to get things to

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work. We are talking only about structure. We also have to consider behaviour incentives. There are other elements that are just as important as, if not more important than, the structure that you start with.

Professor Jackie Hunter: I agree. The Committee makes the very good point that there is a risk that Innovate will lose its business focus. In the Nesta report, one recommendation for an effective and successful innovation agency vehicle is independence and autonomy. What we are seeing here is a lack of clarity in the Bill and uncertainty around this issue, which I think other evidence-givers to this Committee have highlighted. Although Innovate’s budget process has been protected, its budget is outside the science ring-fence. Will there be two ring fences: an Innovate ring-fence and a science ring-fence? It is important that that budget is not eroded. Since 20% of R&D funding comes from outside the UK, unlike in the USA and Germany, getting clarity on some of these issues is important. The last thing you want is for businesses to disinvest because of the lack of clarity. It is very hard to get businesses to come back to a country once they have left. This is absolutely critical. One way is to ring-fence a certain amount of the budget for Innovate for business-led programmes to ensure that business focus remains.

Q22 Lord Oxburgh: We have covered many of the points that I was going to raise, but the topic focuses on the risks and opportunities of the plans to integrate Innovate UK with UKRI. More than a decade ago, I was involved in the discussions that led to the establishment of the TSB. One of the key issues we came across at that time was that business was not happy with the way in which academia was approaching these matters. I remember the comment, “A lot of universities think they know about how business works, but in fact they don’t”, and their orientation and priorities are different. Would you like to comment on that and on the extent to which you think the Higher Education and Research Bill going through Parliament does enough to protect these interests?

The Chairman: Lord Oxburgh, do you want to declare an interest, as this is your first meeting?

Lord Oxburgh: I am not sure that I have any direct interests to declare.

The Chairman: Fair enough. Sorry.

Dr Ruth McKernan: I have covered quite a lot of what I see as the risks and benefits. I always look for the opportunities. I come from the pharmaceutical sector where we have consolidated 57 companies down to fewer than 10, and I am very familiar with consolidation and putting multiple companies together. In my view, you have to put your energy into the new opportunities that are presented, because looking at reducing costs or making things simpler never really bears out as much as you would want. I see opportunities in being more ambitious in the programmes that we run that are business led and to which universities can contribute. There are some huge challenges that we can work on together. We launched our very first competition this year, which includes all the research councils and Innovate UK, and is based on cities and how to improve them for urban living. We can be much more ambitious if we are in one organisation.

Let us look at the things that Innovate UK does not do. We do not major on skills. We are a business-facing organisation. We have 11 catapult centres that are developing skills. We could look at new opportunities to educate and train within some of our institutes. There are 217 research and innovation centres that are managed by the research councils, and there

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are 11 catapult centres. We could look more globally at what should be a research institute or a growing information and knowledge centre that could be a catapult centre and business-facing, or at existing institutions that could be more catapult-like and business focused and help us pull that science through. We are just at the stage of beginning to think of the opportunities that can be created by forming UKRI. Instead of worrying about the mitigations, let us take a bit of time and look at the big opportunities and focus on those.

Lord Oxburgh: You commented a few minutes ago that the way people work together in an organisation is much more important than the organisation itself, and I would agree with that. On the other hand, if you get an organisation right it can also protect interests, and it is a question of whether that is there.

Lord Mair: I would like to return to the point that you raised, Dr McKernan, on risks to the all-important business focus that Innovate UK is all about. What is your view of the Royal Academy of Engineering’s response in the consultation, where they said that there is considerable doubt within the engineering community that this business-led focus will in fact be properly maintained under the new arrangements?

Dr Ruth McKernan: That was probably written before some of the mitigations that we have talked about had been introduced. There is still an opportunity to make sure that we safeguard business interests as we go through the construction of the board, the chair, the chief executive and the details of the Bill. I absolutely recognise what the Royal Academy of Engineering has said and I have spoken to it. I was at its event last night. I think it is really helpful, because it helps to shape this properly to get the best possible advantage and opportunity out of it.

Baroness Neville-Jones: I declare an interest as a member of the EPSRC. TSB and Innovate UK have been notably lively and independent organisations. They have not apparently needed “protection”. How do you see the relationship with Innovate, as now formed, as one of the councils under—and as far as I can see it is under—UKRI? Will that be beneficial? What is the point of that, and how could that be helpful?

Dr Ruth McKernan: It could be helpful in the way that I have just described. We could be more ambitious in some of the cross-cutting programmes that we run.

Baroness Neville-Jones: Do you not have your own views on how you do your job? Why do you need somebody else to help you?

Dr Ruth McKernan: If we get it right, our businesses would notice no difference. In fact, they might see that things are better. Innovate UK has its own culture, brand and relationship with businesses. That is not structural, that is a behavioural way of operating, and I see no reason why our relationship with businesses should change. We would not change the nature and style of our organisation. In fact, everything we are trying to put in place should be to avoid that happening.

Baroness Neville-Jones: It is very difficult to see the point of it.

Stian Westlake: Might I offer an historical perspective? Before Dr McKernan took over at Innovate UK, we saw some examples of a potential failure mode for an innovation agency. We have already identified that if an innovation agency is sucked too much into the academic world that is problematic for business reasons. The other challenge is being sucked into the world of government and becoming too subject to direct political control. One of

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the things we saw when we looked at successful innovation agencies, such as Israel’s, is that they had a fairly significant degree of independence from government and therefore the ability to pursue projects without direct interference.

If I think back to some of the challenges that Innovate UK faced in early 2010s, before Dr McKernan took over, it was challenging because occasionally it was asked by the Government to take on short-term, potentially glamorous projects that were rather difficult to form into a coherent strategy. One of the things that the Treasury has said about its new plans is that, at least within UKRI, Innovate UK would have some protection from government. I am not convinced that that outweighs the concerns about being too far from business that we have talked about, but that is part of the narrative.

Baroness Neville-Jones: One could argue the opposite is likely to be the effect.

Dr Ruth McKernan: I would add that I do not feel that I had any direction or instruction or indirect pressure on what we should fund. I want that to be clear.

Stian Westlake: I agree things have got much better recently.

Professor Jackie Hunter: The important point here is about financial autonomy. One of the important things that I felt personally about the research councils was that being an accounting officer gave you a certain degree of financial autonomy. In this new body there will be a single accounting officer, so how the delegated powers of authority and the ring-fencing of budgets is maintained will be critical, because otherwise—I agree with you—it will be worse than Innovate not being in UKRI. That is a personal point of view.

Q23 Lord Cameron of Dillington: I am concerned about the change of financing arrangements within Innovate UK and putting one-third of your money from grants into loans. How are these loans going to work? Are they there to save the Government money? Will Innovate UK be tempted to lend to later stages of innovation rather than to the true start-ups? Also, in the extremely risky environment of innovation and SMEs, will they discourage private equity investment in this way? Have they been tried elsewhere? There are a lot of questions there.

Dr Ruth McKernan: On the first question, absolutely they have been tried elsewhere. I am going to defer to Stian to answer that, because he has done a lot of work comparing different systems. Innovate UK has only given matched grant funding. Most other innovation agencies provide other sources of financial support, either loans or equity, and of various types—and that includes Scottish Enterprise and Enterprise Northern Ireland. This is in no way a new initiative.

When I took over as chief executive of Innovate UK, we looked holistically at what we do and we came out with our five-point plan. It is there on our website and I share it with people all the time. First, we work with research entities and government departments to help pull science into business. The second point is about scaling businesses, where I think loans have a part to play. Medium-sized businesses are the ones that pay tax and create the most jobs. We fund micro and small businesses, but we measure the growth to medium-sized business, because that is a very successful way of improving productivity and economic growth. The third point in the five-point plan is that we also take account of the regions and help to encourage the growth of businesses in regional clusters so that they are globally competitive. Having very active clusters takes the risk away from any one company and

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allows the cluster to grow and be strong. Point four is having our network of catapults work better across each other and with research entities so that they help develop the supply chain. Our fifth point is one that we created for ourselves, which is to evolve our funding models, recognising that other innovation agencies across the world use different tools. When we came up with evolving our funding models, we were enthusiastic about looking at things in a cautious and measured way. The allocation in the comprehensive spending review of £165 million of our funds to alternative finance products by 2020 is a very ambitious target for us. This is public money, so we need to know that we are developing the principles and the policy that allow us to do that properly.

That work is rightly being led by the Department for Business, Innovation and Skills. We are working closely with them. My financial experts are working closely with them, as is the British Business Bank, to try and ensure that the financial products that we develop are the sorts of things that businesses will use. That will be done in a very robust way. Anecdotally, the technologists who work in Innovate UK have relationships with many of the 7,600 companies I mentioned earlier, and I have been out and spoken to quite a few since I took over. Part of what I wanted to do was to understand what people thought about Innovate UK. We have asked them, “What sort of loans would work for you?” The type of feedback that we have had is that businesses that are growing want access to funds that they cannot easily get through a bank. If they could get bank money very easily, they would not come to us to grow their businesses. If you are a small company, you are growing very quickly and you need to borrow money for bespoke equipment, and you are young and have no collateral, a bank will not be inclined to lend you money for that. That is the sort of thing where Innovate UK could be very useful and could provide an equipment loan.

Some products, such as some of the new diagnostic products, take an awfully long time to make, particularly in health and life sciences. Even in biotech, new medicines might take more than 10 years to make. Other countries such as the United States have innovation loans that last for a decade, with an interest-free period at the beginning. To be able to provide that sort of patient capital would be a very good thing. We should look at whether we can provide equity to businesses that are really risky and thus encourage more risk to be taken. These are things that venture capitalists might not want to invest in. There are many areas where alternative financial products would be useful.

We absolutely must not lose sight of grants, because they are critical for very high-risk feasibility early-stage work and for encouraging collaborative research and development between businesses, big and medium-sized, SMEs and academics. There is always going to be a place for matched grants. We should look at what else we can do to help businesses grow and be successful.

Stian Westlake: The short answer is that some other countries do this. There are some successful innovation agencies such as Tekes in Finland and the OCS in Israel that have repayable loan programmes. There are some large caveats which Dr McKernan mentioned. First, these tend to be project-based loans rather than loans secured against the assets of the firm as a whole. If your technological project does not work out, the loan is typically forgiven, so these are very generous and rather soft loans.

Secondly, they work for specific funding of projects rather than some of these more systemic interventions, where you try to fund a cluster or a big collaboration between companies simply because there is no principal to lend to in those.

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Thirdly, we find that on the whole big businesses are not interested in this, partly because they are not capital constrained, but to the extent that they are it is typically said to be too much hassle to get it through their treasury departments, given that they already have sources of capital.

We also see that agencies that offer loans offer grants too, and typically they are much bigger relative to the size of the economy than the UK. If the Government are trying to do this as a way of saving a big chunk of money, it probably will not work. If this is a growth option and a way to do more, it might be a better option, but this is probably not going to save the taxpayer vast amounts of the money spent in Innovate UK.

Q24 Lord Borwick: First, I declare an interest as the chairman of the GATEway autonomous vehicle advisory board. One of the difficulties that I foresee with loans is the negotiation of the terms of the loans, because BIS surely already has the power under the Industrial Development Act to give loans to various companies, but its history is, at best, mixed. One of the difficulties is that when the company is a success and wants to refinance the loan, the new financier immediately takes the terms that have already been negotiated by BIS but that were negotiated when the company was very young and very much more vulnerable. Those aggressive terms become the standard for the future financing of that company. Do you foresee that as a reason why companies would not take these loans in the future, or, alternatively, why they would get themselves very bad financing terms in the distant future?

Dr Ruth McKernan: The terms and conditions under which the loans are offered are critical. We need to bear the purpose of the loan in mind. That is why it is going to take us quite a long time to get the appropriate vehicles. We are going to have to test out a few things and see what appetite there is from businesses. If we keep the purpose in mind and create the loan product that fits that purpose, we may avoid some of those pitfalls that you have identified. There are a lot of things to be considered in how we write those terms and conditions. It could be something very simple such as, “We give you a grant, but if your company is incredibly successful you pay it back”. We did not have a set of conditions in the grant that we gave to SwiftKey, for example, but if they had to pay back twice their grant when they sold for £250 million they probably would not have minded. There are some things that we could do that are very simple and there are some much more complicated products that would help companies to grow, but we need to bear in mind the specific purpose, and it is not all-comers just apply for a loan.

Lord Borwick: Will you be recruiting people with banking experience to make the decisions on whether or not to make a loan, or will this be people with grant-giving experience or people who are afraid of giving loans?

Dr Ruth McKernan: We are handling public money and we absolutely have to have the best experts who understand the credit and the terms and conditions of the loan. My organisation is very familiar and expert at the technical evaluation and the process, but we do not currently have that skillset, and we will have to share, borrow or build that skillset. It has to be done properly.

Lord Vallance of Tummel: I am delighted that you have said that you will also look to equity, because that means that you will have the full range of financial options, but it does make you much more like a financial services institution, a venture capitalist or otherwise, and that in turn means that your ethos is going to be even more different from the rest of the

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research councils, and I would say probably argues for you being separate, but you may not wish to comment on that.

You said earlier that you make a fantastic return and that every £1 invested gets a return of £7.30. That is tremendous. You have also said that there is a market failure somewhere, because you have a huge oversubscription and you could easily deal with twice as much money as you have now, which means that you ought to have access to twice as much money as you have now. That can come from one of two sources: the public source, which might be robbing Peter—the research councils—to pay Paul, or it might be private money. Would it not be sensible to think about private money as well?

Dr Ruth McKernan: There are many sources of private money. Interestingly, once we started talking about evolving our funding model from grants to loans, we had a lot of approaches from the private sector saying, “Could we come alongside you and look at a way in which we could share?” So far we have not engaged very far down that route, but I can see where that might work.

I would like to give you a specific example. We have now got to the point on the biomedical catalyst programme that Jackie spoke about earlier at which some of those companies have got to proof of concept and we are showcasing them to private investors and venture capitalists. I am sitting in that meeting saying, “We funded this project with public money and now it is successful and we are offering it for private sector investment. Why are we not getting a return back to the UK?” Could we think of a way of converting what has been a grant to a very small piece of equity in the company so that, as it grows and does well, some of that money is returned to public coffers to allow us to recirculate the money that we have spent? That is one way in which we could use equity very thoughtfully. We do not yet have a programme to do that, but it is in our minds.

Professor Jackie Hunter: One thing that I wanted to raise on the question of expertise is that at the moment, as I understand it, Innovate is not as constrained as the research councils are in being able to offer competitive salaries. That would need to be looked at if Innovate were incorporated into UKRI, because trying to attract business people of the required calibre would require perhaps a different mode of funding salaries.

Q25 Lord Fox: Coming back to this international comparison, Mr Westlake, you have mentioned examples, but who are the best and where is the best practice?

Stian Westlake: I would highlight the Office of the Chief Scientist in Israel, which is extremely good. It has spent 50 years building the Israeli high-tech sector. It is pretty independent from government. It uses a mixture of grants, loans and royalty-type agreements, where it has a potential share, up to the amount of money that it spent on the company. It has quite a broad mission to make the Israeli economy more high-tech oriented. Tekes in Finland is very good. It played a significant role in the development of the Finnish mobile phone industry. It provides grants and direct loans and is more transactional in some ways than the OCS. It is more into the process of making individual project loans than having a bigger vision for the industry, but it has been very successful. It is worth noting that both of those are between five and eight times the size of Innovate UK relative to the economies that they are in, so they are spending a lot more money on those things.

The first of the other two I would highlight, which are very different types of organisations from Innovate UK, is ITRI in Taiwan, which is much more of a sectoral-based organisation.

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ITRI is the government research organisation that built the Taiwanese semiconductor industry and spun off.

Lord Fox: So more like DARPA?

Stian Westlake: DARPA is the other organisation I would mention, which is the black projects research agency of the US defence establishment. I am often asked by government officials whether the UK should have a DARPA, and my typical answer is, “We can’t afford one”. DARPA works because it spends $3 billion a year and it has the pull-through of $600 billion of the US procurement budget, which has as its aspiration to be very high tech.

One of the lessons that we can learn, which comes back to Professor Hunter’s point, is that DARPA has very skilled project managers. Being a project manager at DARPA is one of the best jobs in American science. You get a seven-year job to fund all the most exciting projects that you can. You are paid reasonably well and you have a lot of resources behind you. That ability to get experts into place, make them independent and give them discretion is something that we could perhaps learn from.

The Chairman: Unless the other two witnesses have anything to add, I must now bring this very informative session to a close. You will gather from the inquiries that this Committee rates as enormously important the role Innovate UK has in the governance of innovation ecosystems. We have heard from you very clearly that very different skills and expertise are required to manage and champion such innovation from the governing of science. I am sure it is possible to put the two together in a way that is mutually advantageous, but equally, there are many pitfalls, and I hope that our report can help steer a way through all that. Thank you very much to our three witnesses for helping us so much today.

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Professor Ronald Stamper– Written evidence (IUK0006) Abstract: Based on my experience, I propose that, in addition to presenting industrial problems to the science community, InnovateUK should also present to business the results of UK-funded research with economic potential, to speed the adoption of new technologies.

Problem Experienced Research Results: The results of a multi-£m/€m research programme to study organisations as information systems, funded by UK and Dutch universities and Research Councils, and by IBM and Digital, has produced radically new analysis methods and specification tools that have been proven against practical business problems. Compared over a 10 year period with a very similar application built with the best orthodox techniques, we reduced by 80% the costs of development, support and maintenance, while also improving system quality in other dimensions. A Chance Result? No! Theory shows this can be replicated. Why? Current techniques evolved from Taylor's "Scientific Management". In the late 19th C. he modelled the movements of materials and assembly routines in manufacturing firms. Computer system design adopted the same ideas for processing documents and data. They ignore the human and social aspects of organisation - meanings, intentions and values - the foundation of the required organisational behaviour. We express these social norms in the form resembling legislation but expressed with exact formality and precision, from which to generate application software (even automatically). Opportunity for Businesses and Government: The UK spends ca.£80b a year on these systems (ca.£17b by government) half of which is susceptible to our savings. We can also reduce the appalling failure rate for ICT applications while increasing organisational adaptability. The savings are multiplied when the applications are designed to increase productivity. Obstacles: The EPSRC soon noted the potential of our work and demanded a written undertaking that the results would be applied in the UK. But now, when asked for help, the EPSRC explained that they only fund research, making no contribution to technology transfer, which, as the Principal Investigator and owner of the intellectual property, is left entirely up to me. Uniquely, I am able to write up the detailed scientific work; I cannot perform both tasks. My many attempts to get help from public and private sectors have failed. The DBIS, including Innovate UK, was disappointing. I tried other government departments, stressing the close match of our methods for systems based on legislation. (With great success we had worked with a Parliamentary Counsellor, Francis Bennion, on drafting norms and with the Dutch Ministry of Justice on the parallel design of legislation and the systems to implement it.) We need a business partner with whom to develop a demonstrator system to replace the original ones (mentioned above), which are in the Middle East and no longer accessible for political reasons. (A government department would be ideal, given that our methods relate closely to legislation.) Oxford University's Isis Innovation has offered to advise once

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we find a business partner, in other words, when we have already overcome our major obstacle. We also encounter the Max Plank obstacle (Science progresses one funeral at a time.) as when referred by InnovateUK to their subcontracted "expert", who dismissed our ideas as impractical on the grounds of his extensive experience (over fewer years than I can claim). Help to overcome them: Without a mechanism intended to facilitate the transfer of promising research results into the economy, I cannot see where to turn. May I suggest, therefore, that the DBIS and the Research Councils establish a joint system to identify promising scientific results to place before appropriate firms in the UK? That is what I expected to find. Indeed, our team would be willing to design such a system using our methods and tools, especially if that might result in a demonstrator system for introducing potential users to them. Biographical note: I worked on organisational problems in the NHS and in the Steel Industry where I developed courses in Information Systems Analysis and Design. These became a national BCS-NCC programme in ISAD in 1967. In 1968 I joined the LSE. I completed Information (Wiley 1973) and began to investigate of Organisations as Information Systems. From 1987, at U. Twente, as Prof. of Information Management and ever since, I have continued the research. On retiring in 1999, the EPSRC asked me to hand on the programme. Hindered by my undertaking to EPSRC, it continues, mainly at Reading in the UK but also in Brazil and China. Health in the family permitting, I work a full week completing the main theoretical scientific tasks. My ambition is to see the UK benefit from the tax and other funds invested. 13 June 2016

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Technologia – Written evidence (IUK0002) Letter from Mick McLean, Dr Jeremy Klein and Dr Giles Courtice, Technologia Ltd Investigation into the future of Innovate UK We write as the three directors of Technologia, a technology consultancy based in Cambridge. The three of us have worked over 30 years for consultancies and businesses concerned with developing and commercialising technology. We currently also undertake work as independent contractors for Innovate UK and for companies that are in receipt of Innovate UK support. Our principal interest is with the proposed (or impending) incorporation of Innovate UK into UK Research and Innovation. We note that the idea is frequently described as a recommendation from Sir Paul Nurse’s review. The relevant paragraph from the review25 is included below

In relation to Innovate UK, as stated earlier, the current delivery landscape is too complex, and there should be a smoother pathway to more applied research. Integrating Innovate UK into the Research UK structure alongside the Research Councils could help such issues to be addressed. However, Innovate UK has a different customer base as well as differences in delivery mechanisms, which Government needs to bear in mind in considering such an approach, and which this review, according to its remit, has not looked at in depth. As with HEFCE, I would also affix one strong proviso, which is that if Government were to consider this, any inclusion of Innovate UK must be done in a way which maintains the integrity of the ring-fence and does not reduce overall funding for research.

In our view this paragraph stops well short of constituting a ‘recommendation’. It merely states that some issues could be addressed by integrating Innovate UK with Research UK and outlines key differences between the customer base and delivery mechanisms of the two entities. Our reason for reminding the Committee of this paragraph is that ideas sometimes acquire momentum without having been properly scrutinised, and we urge the Committee to recommend a wider debate, including a commitment by BIS to publication of the consultation on this topic26 earlier this year, before decisions are made. Our company has worked with and for Innovate UK over several years. We have observed that Innovate UK has developed procedures for running thematic competitions, selecting winning projects and monitoring those projects during their lifecycle. Some projects are conducted with partners from UK universities and some competitions are co-funded with research councils.

25 https://www.gov.uk/government/collections/nurse-review-of-research-councils 26 https://bisgovuk.citizenspace.com/innovation/innovate-uk-and-research-uk

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The research councils have followed a different growth path from Innovate UK. It is not surprising therefore that the processes are substantially different between Innovate UK and the research councils. For example, almost all Innovate UK projects are subject to a rigorous quarterly monitoring process that goes a long way to ensuring that problems are ironed out before they become catastrophic. Research council projects are monitored with a lighter touch and usually less frequently, partly because the time scale of academic research tends to be longer. We would not claim that Innovate UK processes are perfect; there are always ways to improve and we and others have made suggestions for improvement which have often been adopted. However we do believe that Innovate UK has evolved delivery mechanisms that are well suited to its customer base and to the types of project it funds. If the integration of Innovate UK with the research councils were to change the delivery mechanisms radically we think the results would help neither set of customers. What follows from our analysis is that there should be a limit to the extent to which Innovate UK’s practices and procedures are ‘integrated’ with those of the research councils, which we believe was probably in Paul Nurse’s mind when he stopped short of making a recommendation in this area. Furthermore if the objective of this organisational change is to provide a “smoother pathway to more applied research” we believe that there are other more direct means of achieving this objective. A straightforward approach could be a regular open funding competition for projects aimed specifically at bringing technology embodied in academic IP closer to market. Some research councils27,28,29,30 operate follow-on funding schemes to carry out preliminary commercial activities. Regionally, the Proof of Concept programme run by Invest Northern Ireland offers funding to local universities and research organisations to help researchers take their ideas out of the lab and into the market. It would be worthwhile looking at the effectiveness of such schemes and, if there is evidence of success, further developing them as a joint research council/Innovate UK initiative. To do so does not depend on integrating the respective organisations. Innovate UK’s 5-point plan31 starts with the objective to “turn scientific excellence into economic impact”. We think that it is easy to overstate the role of previously generated university intellectual property here. In 2011 we undertook an analysis of UK patenting activity32 covering patents with priority years from 2007 to 2011. Of the 21,416 patents where the invention originated in the UK just 8% were from universities. In our consulting activities we see many collaborative projects where universities are active partners and crucial sources of knowledge, but relatively few where university IP is the starting point. Yes, we think that there should be support for those cases which do start with university IP, but

27 http://www.bbsrc.ac.uk/funding/filter/follow-on-pathfinder/ 28 http://www.stfc.ac.uk/funding/working-with-industry/commercialisation/follow-on-funding/ 29 http://www.ahrc.ac.uk/innovation/knowledgeexchange/follow-on-funding-scheme/ 30 http://www.nerc.ac.uk/funding/available/schemes/followon/ 31 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/451645/5-

point_plan_July_2015.pdf 32 http://www.technologia.co.uk/wp-content/uploads/uk_patents_short_version1.pdf

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these rare cases should not dominate the design of the entire institutional and funding system. Assuming the incorporation of Innovate UK into UK Research and Innovation goes ahead, it should be used as an opportunity to streamline the administration of projects that are jointly funded between research councils and Innovate UK. Currently there are two distinct funding models for these projects. In the first model, the research council’s financial contribution is administered by Innovate UK so that both the industrial and academic partners in a project are subject solely to Innovate UK’s procedures. In the second model, the research council retains control of its funds throughout, which results in the industrial partners in a project being subject to Innovate UK’s procedures and the academic partners being subject to the research council’s procedures. Over the lifetime of a project there will often be occasions where the participants wish to make a change to the finances, timescale or scope of their work. The procedures differ significantly between Innovate UK and the research councils regarding these ‘change requests’. Both the types of change that need to be escalated for authorisation and the mechanisms for achieving authorisation are different. In practice, having to simultaneously satisfy the detailed administrative procedures of two separate bodies can cause confusion for project participants. Admittedly this is a point of detail but we do recommend that the new body looks more generally at jointly funded projects as a priority. 8 June 2016

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United Kingdom Science Park Association, Confederation of British Industry (CBI) and Professor Luke Georghiou, University of Manchester – Oral evidence (QQ 9-16)

Evidence Session No. 2 Heard in Public Questions 9 - 16

TUESDAY 7 JUNE 2016

Members present

Earl of Selborne (Chairman) Lord Borwick Lord Broers (co-opted) Lord Cameron of Dillington Lord Fox Lord Hennessy of Nympsfield Lord Hunt of Chesterton Lord Mair Lord Maxton Baroness Neville-Jones Lord Oxburgh Viscount Ridley Lord Vallance of Tummel Baroness Young of Old Scone

___________________________

Examination of Witnesses

Dr David Hardman MBE, Chairman, United Kingdom Science Park Association, and Laura Smith, Head of Construction & Manufacturing, Confederation of British Industry (CBI) and Professor Luke Georghiou, Vice-President Research and Innovation, University of Manchester

Q9 The Chairman: Welcome to the second session. We are most grateful to you for joining us today for this short inquiry on innovation in the United Kingdom. Would you like first to introduce yourselves for the record? If you would also like to make an opening statement, please feel free to do so.

Dr David Hardman: I am David Hardman. I am chairman of the UK Science Park Association. I am also chief executive of Innovation Birmingham, which is one of the science parks in Birmingham. My interest is very much coloured by the early-stage technology businesses that you find on science parks across the UK and the role that science parks have to play in driving the translation of technology and ideas, from universities and elsewhere, into

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product and services in the marketplace, which I think is somewhat overlooked in this whole debate.

Laura Smith: I am Laura Smith. I am head of construction and manufacturing at the CBI, and a weird quirk of my portfolio is innovation policy as well as construction and manufacturing. It goes without saying that innovation is critical to our members both at a macroeconomic level in terms of what innovation can do to drive productivity and prosperity for the economy and, of course, at a micro level, a company level, in terms of gaining competitive advantage, increasing productivity, and increasing jobs and growth in the UK.

The Chairman: Thank you. Welcome back, Professor Luke Georghiou. You have helped us many times in the past. Would you like to introduce yourself once more?

Professor Luke Georghiou: Thank you very much. I am Luke Georghiou. I am vice-president for research and innovation at the University of Manchester, and, as an academic, a long-term analyst of research and innovation policy in the UK. While I will try to give the perspective of research intensive universities, I would like principally to give my personal views in this session.

Q10 The Chairman: Thank you. I will start again with a very general question. It would help us if you each told us the extent to which your organisation currently works with Innovate UK, what form these interactions take and whether they work. In your view, does Innovate UK have an important role in supporting innovation in the UK?

Dr David Hardman: The answer is, yes, it does have an important role, but it cannot by any means be seen as the only one. There is an issue of centralisation versus a local agenda. Everyone will recognise that innovation is cited as a contact sport and hence needs to be driven very much locally, where close connections readily take place. We have been in discussions over the past few years, during my tenure as chair of UKSPA, to point out the role that science parks could play in creating that local contact point. We have had good discussions, but I have to say that they have not really translated into activity. Of course, a few of the catapults are based on science parks, which creates one link. The local representatives who are now being put forward might provide a way in which we can engage, but I have to say that to date it has been a good idea but nothing has actually changed or happened.

Laura Smith: The CBI as an organisation has been supportive of Innovate UK since the days when it was the Technology Strategy Board. We have consistently believed from feedback from members that Innovate UK is underresourced for fulfilling its business-focused mission. Members have mostly positive experiences of working with Innovate UK, which is especially true once they are in the system; once they have done it for the first time, the second, third and multiple interactions after that become much easier once that understanding is there. We can talk about this when we come to the other questions, but there are some particular challenges for smaller businesses in navigating and understanding some of those routes to entry.

We think that Innovate UK has been very important and that it is not entirely coincidental that, during the very serious recession of the past few years, private spend on R&D has continued to increase by 5% or 6% every year. Innovate UK’s role within the broader ecosystem—as David said, it is not the only interactor with business innovation—is important.

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Innovate UK’s own data has some interesting details on return on investment. Every £1 invested creates £7.30 of GVA, which does pretty well. We should remember that the grant funding arrangements that currently exist are through a co-funding arrangement with the private sector, so this is business putting its money where its mouth is, as well as Innovate UK.

Professor Luke Georghiou: The University of Manchester interacts with Innovate UK at both strategic and project levels. At project level, our most frequent activity is probably through Knowledge Transfer Partnerships. We currently hold 26 of these. This is a scheme that is very successful in reaching SMEs in particular. In larger and strategic initiatives, we have taken part in the processes that have led to the establishment of the Medicines Discovery Catapult and part of the Precision Medicine Catapult in our region. We are embarking on a new kind of project, the £10 million CityVerve Internet of Things demonstrator, which is located in Manchester and led by business and the city.

On the question of the importance of Innovate UK, the collective evidence from many evaluations of specific schemes and from an overarching economic study performed in 2014, in which I had some involvement, is that firms that get government grants, mainly from Innovate UK, invest more in R&D, are more likely to collaborate and to employ graduates, particularly STEM graduates, and are more innovative companies. When those projects also include co-operation with universities or public sector research establishments, the impacts appear to be greater.

So the basic picture is good. None the less, there is room for improvement. The scale of activity has been limited by resources. The sectoral reach in the past has probably been too narrow. The recent rebalance towards life sciences and digital is welcome, given the direction of our economy. I would also have to say that, in the past, co-ordination with universities could have been better.

Lord Broers: I have a general question on that. Given its budget, is its spread appropriate, or is it spreading it too thin? Would it do better to concentrate on fewer, reduce the breadth a bit and increase the money, or is it about appropriate at the moment?

Professor Luke Georghiou: The new strategy focuses activities more, but by comparison with innovation agencies in other countries it is focused quite strongly on the grant product, so in that sense it is not as spread as it could be. There is no doubt that it is addressing clear deficits in SMEs in this country. We lack a sufficient number of SMEs engaged in R&D and innovation. They have deficits in both finance and capability, and my view is that this activity is underresourced.

Q11 Baroness Young of Old Scone: That leads very neatly on to my question, which is about the challenges and the barriers to working with Innovate UK, whether you think there are things that get in the way particularly of SMEs engaging, and whether the current changes, particularly in the delivery plan, will help with that.

Dr David Hardman: Continual change is never helpful. In the public sector, business support has undergone change in pretty well every activity almost continually, certainly since the RDAs disappeared. That change is not just in projects but in names. If you want people to follow it and keep following it when they are trying to run a business with five people or fewer, some form of consistency of offer is important. Again, short-term initiatives do not help, because they just about get going, just about get heard and are just about learnt by

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these people, and all of a sudden they have gone or their name has been changed. I am not suggesting that projects should stay in place for the sake of it, but one of the finest examples for me was the SMART awards, which were very successful and very successfully used by early-stage start-up businesses, often in diversifying their product lines. The name was changed and it became central, and both those things made it much less interesting and much more difficult for the SMEs to get hold of. The name then came back, but it was still centralised. I know that I keep going on about this, but in the past under the DTI the SMART awards were handled at a local level. Local businesses helped to promote the idea of SMART awards and drove a very successful set of projects. By pulling it all into one place and continually changing it, you do not make it as easy for the start-up and SME sector—and let us work on the principle that 90% plus of businesses employ fewer than 10 people.

The Chairman: Do either of the others want to contribute on this?

Laura Smith: No.

Professor Luke Georghiou: There is a real sense of change in the organisation, as represented by the delivery plan. We are seeing significant rationalisation into sector groups and the focus of the schemes on to just three areas. This messaging will be very welcome for the firms we work with. However, we would also like to see equal effort put into achieving a high turnaround speed for applications. It is in the nature of innovation that you must be as fast as possible, and de-bureaucratisation is very important.

Lord Hunt of Chesterton: You have talked about these small SMEs—I am involved in one myself—but you have not talked at all about the notion of picking winners: a grand strategy. One example is construction. This country now has big construction projects. Does that connect into new kinds of new technology perhaps—Lord Mair’s area? You have described it slightly as a responsive mode as opposed to a big strategic mode: “Here are some big areas, and we’re going to push for them. The Germans and the French are going to technology 4.0”. The answer is the same, and you quickly get an idea of some big areas that they are going for. It is very difficult to get that sort of feel from any discussions that we have where people comment on Innovate UK.

Laura Smith: For us and our members, it is exactly as you have described; a modern industrial strategy is what members really value and really got behind in the last Parliament. You can see how, by having a modern industrial strategy, you could look at this on a sectoral basis. In the manufacturing space, the fourth industrial revolution is all that my manufacturing members are really talking about, whereas in construction we are talking much more about off-site manufacturing, the use of BIM, the use of software through design and delivery. Quite different conversations are happening on a sectoral level. For us, an industrial strategy is one lens that you can use to help to drive it through the system.

Professor Luke Georghiou: Helping to build new innovation ecosystems in growing sectors is an important role for an innovation agency to have. To do that there clearly has to be more than responsive funding; you have to create banners around particular technologies, make sure that the infrastructure is there and, very importantly, also engage large firms such as the representatives we heard in the previous session. Small firms exist largely to sell into large firms, so if their innovation strategies are not built from the very beginning through working with those firms in procurement and other relationships they are not likely to succeed. There is therefore a bigger, co-ordinating and orchestrating role for the agency.

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Dr David Hardman: To come back to the procurement issue, there is huge opportunity there; you only have to look at all the discussions going on in Birmingham about HS2. The opportunity is definite. The issue is the start-ups’ ability to go in and tender their services against a particular tender. This goes back to the discussion in the previous session about the risks for early-stage businesses. There is no doubt that there are risks associated with working with a very small company when you are trying to do a big project like HS2, so the procurement processes tend to select against the start-up and the small company, where a lot of that innovation is to be had.

Q12 Baroness Neville-Jones: I declare an interest as a member of the Engineering and Physical Sciences Research Council. Could you comment on the Government’s plans, which were announced by BIS recently? They contain a number of important features, one of which is the idea that Innovate UK should become a council under UKRI. What do you feel about the risks and opportunities that are likely to arise from that situation? Do you see the whole tendency also to put a body above as helpful in guiding priorities, or as a potential limitation on Innovate UK’s independence?

Professor Luke Georghiou: Our view at the time of the consultation was negative on this change. This was based on the view that the needs of business are different: the allocation of resources does not follow the same model of project application and peer review as it does in the academic community. The most successful innovation agencies, such as Tekes in Finland, for example, are much more proactive and hands-on than is normal for a research council. Academic research communities are quite homogenous. They are very savvy: if somebody says they are going to fund an area of research, we will beat a path to their door. That is not the same for the target community of an innovation agency; it is a quite different relationship.

Another key risk is that of mission drift and convergence—in both directions. We heard earlier about the invalidity of the linear model narrative. None the less, this makes it easier to fall back on. It is a higher risk that we have to deal with. While there is great value to be extracted through good co-ordination and the Venn diagram space, if you like, between research councils and Innovate UK, there is also a risk that we concentrate only on that space, not on the distinctive missions that each of them has.

Baroness Neville-Jones: Since the plan was published—as you said, your attitude to what you had heard beforehand was negative—have you been reassured by the actual document?

Professor Luke Georghiou: We are where we are. The key aim now—I hope, with the advice of this Committee as well—is that the structures are designed to preserve that distinctiveness. We have heard that the name and legal standing of Innovate UK is protected to a higher degree than that of the research councils, but we have heard nothing else about it. It will need, for example, to have different employment conditions for its staff to get people with the business experience that it will need to do its job properly. It cannot work exactly on the same basis. There is always talk of back-office savings, but I suspect that they are largely mythical and did not materialise in the past.

Laura Smith: I would just echo most of Luke’s comments. When the consultation launched in both the HE White Paper and the BIS consultation on the possible integration, members felt that although they could see that some benefits could be driven from integration, overall the risks of doing so would outweigh any of them.

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You will be familiar with the benefits, but just to recap they are better linkages between the research and business innovation community and a more coherent pathway for the commercialisation of that research. One of the main risks that members talked to us about was losing some of the progress made over recent years. They feel that we have made a heck of a lot of progress, whether through Innovate UK or the catapult centres, in developing the right ecosystem in the UK. The move from grant funding to the new financial products also means that Innovate UK and the research councils will become even less similar to each other, because they will be using fundamentally different financial products to fund research and innovation. There is real concern about the huge disparity between the size of the budget between the existing research councils and Innovate UK, summed up by concern that Innovate UK’s influence would be dwarfed and its impact distorted. That was how members summed up the risks to us.

The Chairman: Dr Hardman, did you want to add anything?

Dr David Hardman: Just briefly. The danger is that it reinforces the idea of linearity between science and research and innovation coming through from the universities. I am not undermining what universities do—it is very important—but a lot of innovation closer to market comes the other way, from within industry.

Lord Mair: To follow up on Baroness Neville-Jones’s question and taking the answers that all three of you have given, are you really worried about this integration of Innovate UK into UKRI? Do you think it will change the relationship with businesses? Can it be as business focused as it should be?

Laura Smith: The draft Bill reassured us and members slightly that some of the safeguards seemed to be in place—whether the hypothecated budget for Innovate UK or the commitment for business representation on the main board—but I guess there is a heck of a long way to go while the Bill goes through the parliamentary process. We really need to make sure that those safeguards are not eroded as it goes through both Houses.

Professor Luke Georghiou: To add a different perspective, there also a worry the other way round: that research councils can be pulled excessively into the Innovate UK agenda. A great deal of extremely important basic research finds its way into the economy and society through channels other than Innovate UK.

Viscount Ridley: I just wanted to drill a little further into the linearity criticism. Is the danger that innovation comes to be seen as a daughter, a subset, of research by positioning it within the research councils? Is it that bad: that science always comes first and application second? As you have said, that is not always the case.

Dr David Hardman: You also have the science and innovation audits going on—again, very much driven from the university point of innovation. It reinforces a point. There are businesses that work very successfully with Innovate UK, and they will continue to do so. The question is whether this will provide a route to broaden that engagement. I saw some figures produced by the South-East Midlands Local Enterprise Partnership suggesting that only about 12% of businesses engage in R&D activities with universities in this country. I cannot claim to have checked the veracity of that number, but it is a small percentage and I think there is work to be done on engagement. Of those that do, the majority are businesses employing more than 100 people, so where is the innovation coming from? If it is, as we

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keep saying, from start-up, early-stage, growing businesses, anything that makes it more difficult for them to engage with this process will not be helpful.

Lord Broers: You all have broad experience, I guess across countries as well. Can you think of any country that considered joining their science funding with their innovation funding? I have been in the States a lot and I cannot recall there being discussion on whether to join NSF with ARPA. Can you think of any examples?

Professor Luke Georghiou: It tends to be done in the smallest countries where they simply cannot afford the overhead of two organisations, but we are not Iceland.

Lord Broers: Iceland has done it, has it?

Baroness Neville-Jones: With reference to funding, Dr Hardman said, and I can confirm, that there is anxiety in the academic community about bottom-up research being disadvantaged in the extremely centralised, top-down structure that is emerging. All things considered, would you have preferred Innovate UK to have been left alone as it was?

Dr David Hardman: Left independent, left standing on its own? Yes. I think that would have been better, although I am not saying that everything was perfect in its previous encarnation.

Baroness Neville-Jones: No, but with all its imperfections there was a balance of advantage. Does anyone else have a view?

Professor Luke Georghiou: I suspect that may not have been an option and that this change may have been a device to protect Innovate UK in an environment of very heavy cuts in the parent ministry, so perhaps wider things were in the balance, but I do not know the detail.

Baroness Neville-Jones: That may be a reason, but I am asking you a slightly different question.

Professor Luke Georghiou: In which case, I think a separate innovation agency, possibly with a wider focus on innovation than Innovate UK has had, would be beneficial for the country.

The Chairman: Something less radical.

Q13 Viscount Ridley: Chairman, I failed to declare another interest at the start, which I think I should. I am an early-stage investor in QuantuMDx, a Newcastle-based DNA start-up.

I want to put the same question to you that I put to the people who were here before—I think you saw that question—which is about the regions. We have already heard from Dr Hardman how the centralisation of the SMART awards was a mistake, but we heard in the previous session that the catapults are well distributed across the regions and the provinces. Is there a risk that we will lose that with the absorption of Innovate UK into UKRI?

Laura Smith: One of the things that I do not think came out in the last session—forgive me if I missed it—was that Innovate UK has very recently, within the last couple of months, put regional colleagues in place. I guess that the proof will be in the pudding and we will have to wait to see how that plays out, but Innovate UK is certainly putting resource into the regions to help to tackle the perception that it is merely in the golden triangle.

Viscount Ridley: Over and above the catapult point?

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Laura Smith: Yes. We can go back and have a look, but I gave a presentation a couple of weeks ago, and each of the main regions—say, the north-east, north-west and south-west—would have a designated person in that region.

Professor Luke Georghiou: There was a time when, with the exception of branches of the High Value Manufacturing Catapult, there were none outside the south of England, but that situation has changed in recent years. The north-east has done quite well if you look at the distribution of Innovate UK’s budget, at about 15%. The north-west has done badly.

I reinforce what my colleague said: the regional approach is new but very welcome. We now have Innovate UK personnel situated in greater Manchester but serving the wider region. A pilot is embedded in our original business growth hub. This will have the additional benefit of allowing co-ordination with other kinds of business support that are delivered regionally and locally. In the past, there has been a disconnect between these and innovation support.

Dr David Hardman: I have nothing to add to that.

Q14 Lord Cameron of Dillington: I was going to ask the same question that I asked in the last session, which was about the proposed new methods of financing from Innovate UK. I think you were all present at the last session and heard the discussion about risk and the issues of SMEs and whether grants and loans are better or whether venture capital is better still. I wonder what thoughts you might have on the matter.

Dr David Hardman: Loans and risk do not go well together, whichever way you look at it. It would very much depend on the terms under which those loans were being awarded. As was said in the last session, the last thing we want to do is saddle the businesses that we are trying to set up with problems when they come to get their next round of funding. Situations where businesses that get funded have to use some of their new funding to pay off the loan would very likely put off the investor, because they want to invest in the future, not the past.

Start-up businesses find it very difficult to go to a bank to get a loan because for the perceived risks. Unless the terms of the new loans are to be very different, the same problems will arise.

Professor Luke Georghiou: I certainly support those comments. This does not feel like a policy that was based on a rational analysis of where the greatest deficits of business existed. It was probably more an analysis of the problems of public finances. If we get past that and look at countries that give loans as well as grants, there is a clear separation in what they do. Grant-based products are focused on areas of risk and R&D, and loans are usually targeted at market launch. Even then, they are typically very soft loans at very low interest rates and quite typically what is called conditional, in the sense that if you fail you do not have to pay them back, so they revert to being a grant. This risks creating perverse incentives to underreport success, of course, and some countries have experienced issues with that.

My bigger worry is that it is carving a significant amount out of the grant budget but it is not a large amount for loans. You would need to create an infrastructure to administer those loans, you would put those firms under completely new kinds of scrutiny of their assets and liabilities rather than simply their performance on a product, and it could turn out to be a very top-heavy activity unless very well designed.

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Q15 Lord Hunt of Chesterton: I want to ask about international examples. We have recently heard about Siemens and what happens in Germany, where they have the Fraunhofer institutes, which are sort of governmental institutes. Laura Smith, you are involved in construction. One thing that people are very concerned about in the UK is the demise of the Building Research Establishment as a public sector lab. It is now a privatised lab; it has got rid of all its reports and a lot of its activity is now done in universities. You see this across the piece in the UK. International bodies comment that we do not have these big centres for data and expertise; the universities are now having to create them.

Do you feel that Innovate UK might participate in what is left of PSREs and their traditional role of support, data and so on, which is the beginnings of research? There is a big difference between the UK and Germany, in particular, where Germans from Siemens who visited here commented on the fact that the catapults were doing projects but were not a long-term knowledge centre with people with long years of experience to provide the kind of information needed for small companies to develop their technology. Do you feel that more pressure might be put on Innovate UK to have this Germanic role? Has that been discussed?

Laura Smith: It has not come up with my members.

Dr David Hardman: Obviously, the original model of the catapult was based on Fraunhofer activities. The model that has developed in the UK is somewhat different, although not necessarily unsuccessful. You talk about an example in the building environment. Big data is the future, so wherever those chunks of data are held, whether in universities, PSREs or cities, the key question is the degree of accessibility of that data to SMEs—indeed, for anyone—the health side of things being an obvious example.

Lord Hunt of Chesterton: Is it the role of Innovate UK to help to provide this data or ensure that there are networks where data is provided?

Dr David Hardman: The Digital Catapult would argue that one of its roles is providing that sort of route to data, but not specific data within a particular area. Given the scale of trying to address that, you would be taking cash away from other aspects of Innovate UK’s business to allow it to fulfil that role.

Professor Luke Georghiou: We have a long-term problem in innovation policy in the UK that goes back before Innovate UK or the Technology Strategy Board in that we are very good at designing policy measures—people come from around the world to look at them—but having designed them we run them at almost an order of magnitude smaller than we should. We are at fault on this issue in this area as well.

Lord Borwick: I go back to a question asked by Lord Cameron about the financial structures, particularly with reference to the R&D tax credit, which, when I was running a small SME, was paid gratifyingly fast: not as fast as the small company had to pay the taxman, but none the less the tax was paid back very quickly. In some of the papers, this R&D tax credit is described as an investment, as something that the Government should look after for the long term rather than a repayment of tax, which is the way SMEs looked at it. Am I overanalysing this, or do you see this as a trend whereby the Treasury or BIS would like to keep control of that R&D tax credit for the long term?

Professor Luke Georghiou: Without going into the details of the tax credit, I will make just one observation. There is something called the European innovation scoreboard, which

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classifies countries into leaders, followers and laggards. We are not in the leaders group, which is Denmark, Finland, Germany and Sweden. What they have in common is a highly effective innovation support mechanism that relies principally on grant funding and expert input from other countries, and they are the countries that are most averse to using tax credits as their principal instrument.

Dr David Hardman: I think that the tax incentives and incentives generally are aimed at promoting the successful growth of businesses. The return then is on the jobs, the tax that those people will pay and the tax that the company will pay when it starts to be profitable. To me, it is a longer-term return, but that is where the focus should be in any of these activities.

The Chairman: Lord Hunt, did you want to come back on the last question, or have we covered it?

Lord Hunt of Chesterton: The only other question I wanted to come back on was the way in which UK innovation policy and practice is internationally focused. In the United States, the Department of Commerce has a very strong team of people looking at innovation all around the world. In the UK, we produce 8% of the world’s science—92% is the rest—but as far as I understand it, there is no team or significant group within BIS that looks at scientific papers and technological developments to find out what has happened here. I use my simple story. I have written two papers, both of which were taken up by the Americans. Within two months, a company was formed. I had nothing to do with it, but they thought it was a good idea. Nothing like that happens here.

Innovate UK’s policy seems to be to apply UK research and science, but surely it should also be to apply science from all around the world in the UK. I do not get that message at all. In some sense, you could say that vice-chancellors are part of this conspiracy, as it were, to get the Government to fund research in UK universities all the time. Actually, one needs to do it globally. I wonder what you think.

Professor Luke Georghiou: I will certainly come back on the last point—not about vice-chancellors specifically, but about universities. We act as the large-scale radar to pick up the science and technology around the world and make it accessible to the firms in our regions. That is the best thing we can do for our smaller companies.

Lord Hunt of Chesterton: But do universities have an incentive to do that?

Professor Luke Georghiou: That is part of the reason why we wish to work with business. We are incentivised to work with business and do our best to do so.

Dr David Hardman: With a lot of these things we end up talking in silos. Innovation gets talked about, skills get talked about, inward/outward investment gets talked about, but they are all handled by different organisations. UKTI plays a major role in promoting inward and outward investment. How well is that connected to what goes on in Innovate UK and elsewhere? Everyone talks about an ecology for innovation. That by definition is not a linear process: if you change one thing it will impact on something else. We may need to look at how we are siloing some of the questions and delivery mechanisms in what in reality is a very fluid environment.

Q16 The Chairman: To come back to the central issue that we have referred to several times this morning, we have a proposal here in a Bill that is going through Parliament; it is

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not a draft Bill any more, it is a Bill. The proposal is for a single institution in which Innovate UK will quite frankly be the junior partner, whether we like it or not, and its job will be to co-ordinate all discovery and commercially-oriented research and development funding. We have heard repeatedly that a single institution is an unusual model, although for small economies such as Iceland it might be appropriate. Do you think that there is any rationale for this single institution? I think you have made it fairly clear that you have reservations. What would be your solution to reconciling these two competing needs?

Laura Smith: I think we have already put forward the rationale of the possible benefits: greater interaction and partnership between the research community and the business innovation community.

Your second point was about the mechanisms—we would call them safeguards—that would need to be put in place as we go through the Bill process to ensure that the influence of Innovate UK is not diminished. We can explore this in a bit more detail, but one safeguard is a hypothecated budget. There is a huge disparity between Innovate UK’s budget and the research budget, and therefore it should be protected. It needs to maintain its business-focused mission, purpose and values. There should be business representation on the main board of UKRI. Those are a handful of our early thoughts on how to ensure that the move towards a single institution is not detrimental to business innovation.

The Chairman: Would either the professor or Dr Hardman like to add anything?

Dr David Hardman: From my point of view, if it is going to happen—it sounds as though it is—Innovate UK will be inside a large structure. For it to be successful, it needs to be linked and reach out to other infrastructures that are driving the innovation agenda. Perhaps something might come out of the science and innovation audits. Perhaps something might come out of the Northern Powerhouse, the Midlands Engine and all such other structures, all of which are about driving innovation. If it is going to happen, let us allow it to connect at a regional, potentially local, level to ensure that it gets input from the grass roots, not just from the top.

Professor Luke Georghiou: I agree with all that has been said. We are where we are. There is no doubt that it will be integrated, so the key at this point is to mitigate the kind of risks that we have been talking about by ensuring that certainly, the distinctive missions, but also the means of operation are maintained for the three different kinds of body that will sit inside the new organisation. Then we can move on to focus on the opportunities that are opened up: potentially better co-ordination and vision-building not only across these organisations, as I said, but out to other bodies and into our regions.

The Chairman: Lord Broers, a last word?

Lord Broers: I have just a general question. We received written evidence today from the Government, from the Department for Business, Innovation and Skills. Under its bullet point 5, it states: “The Global Innovation Index 2015 placed the UK as the second most innovative nation in the world behind only Switzerland. This is up from 14th in 2009”. That conflicts with what some of you have said. Do you agree with it?

Professor Luke Georghiou: Each index is based on what they choose to have as the indicators.

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The Chairman: So there are lies, damn lies and statistics. Is that what you are saying? I, too, was slightly puzzled by that index. I was not sure where it came from. We have the opportunity to ask the Minister next week, so let us ask him that one.

Lord Broers: I think the level of funding is quite important. Would you agree that the most frequently cited number is 1.7% of our GDP on R&D, which is below all our major competitors?

Professor Luke Georghiou: Yes.

Dr David Hardman: I would agree with that.

The Chairman: I must bring this session to a close. You have helped us a lot. As I just said, we have the opportunity to talk to the Minister next week about this and we will then write a letter. I know that your contribution today will help us enormously in formulating our thoughts. Dr Hardman, Laura Smith and Prof Georghiou, thank you very much for your help this morning.

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University Alliance – Written evidence (IUK0007) University Alliance represents 19 higher education institutions with links to more than 20,000 UK businesses including 14,000 SMEs. This document forms our submission to the Innovate UK Inquiry of the Lords Committee on Science and Technology. Summary of key points • Universities support smart investment in innovation. As well as bringing research into the commercial sector, they act as hubs for entrepreneurs and investors and supply business with knowledge and talent. They also help local innovators obtain funding from various sources through a ‘one-stop-shop’ model.

• Plans to integrate the Research Councils and Innovate UK into UK Research and Innovation (UKRI) may help to increase mobility between universities and industry. However, the government needs to be clear about defining the ‘I’ in UKRI and preserving the Innovate UK brand.

• Retaining the organisation’s business-facing role is essential, as is understanding innovation as more than the commercialisation of research.

• Grants should continue to be offered for talent-related programmes and SMEs. A loans model would have an adverse effect on demand. 1) The importance of innovation and innovation funding 1. The nexus between innovation and economic performance is well known. Two-thirds of

the UK’s productivity growth between 2000 and 2007 was down to innovative businesses

– which grow at twice the speed of non-innovators. Innovation makes firms more

resilient during periods of economic fluctuation, more able to compete over time, and

less likely to fail.33

2. There is also a high rate of return from spending on innovation. Every pound invested in

R&D by government attracts an increase in private funding of between £1.13 and

£1.60.34 Where institutions succeed in obtaining public funds for innovation-linked

activity, the private sector promptly ‘crowds in’.

2) The role of universities

33 Nesta (2010), Rebalancing act; Department for Business Innovation and Skills (2012), Annual innovation report 2012: Innovation, research and growth; Nesta (2009), Business growth and innovation: The wider impact of rapidly-growing firms in UK city-regions; Department for Business Innovation and Skills (2014), Innovation, skills and performance in the downturn: An analysis of the UK innovation survey 2011; McKinsey (2013), Innovation matters: reviving the growth engine; and Enterprise Research Centre (2014), Innovation, innovation strategy and survival 34 Economic Insight (2015), What is the relationship between public and private investment in science, research and innovation? A report commissioned by the Department for Business, Innovation and Skills

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3. Universities occupy a unique position in UK innovation. As anchor institutions, they bring

leadership, continuity and connectivity to local ecosystems at a time when the focus of

public policy is increasingly regional.

4. When people look at universities’ contribution to the innovation landscape, they often

focus on research commercialised through spin-outs. However, this is just one aspect of

what universities do. Our Creating innovative regions report found that universities also:

a. act as physical hubs where entrepreneurs and investors meet;

b. provide knowledge and talent for business including SMEs;

c. help innovators navigate and access funding through a ‘one-stop-shop’ model.35

5. In many instances, universities are not the final destination of funds derived from

Innovate UK and other sources but instead act as channels for support to reach

businesses. Alliance universities are particularly adept at sharing expertise with local

firms and linking entrepreneurs to a wide network of public and private support. This is

crucial for smaller businesses which are often more reliant on revenue from the

surrounding region than their medium-sized counterparts.36

6. Innovate UK must consider universities as natural partners in the innovation ecosystem,

not just for the commercialisation of knowledge but through all of the wider

contributions they make (i.e. skills, space, leadership).

3) The value of Innovate UK 7. Innovate UK is an important institution with a distinctive role. Its business-facing identity

is well understood by its customers. It has the institutional expertise and memory to

respond to business need and ‘draw in’ applied and near-to- market research from the

demand side. This is very different to the ‘push out’ model operated by the UK Research

Councils.

4) Higher Education and Research Bill and UKRI

NB: The Higher Education and Research Bill sets in motion the unification of research and

innovation funding bodies. Innovate UK will be integrated into a single UK Research and

Innovation (UKRI) agency along with the seven Research Councils and knowledge

exchange funds currently provided by the Higher Education Funding Council for England

(HEFCE).

8. Instinctively, we believe that that the closer integration of research and innovation could

lead to some positive outcomes such as increased mobility between universities and

35 Faye Taylor (2016), Creating innovative regions: The role of universities in local growth and productivity, University Alliance 36 Nigel Culkin (2016), Entrepreneurial universities in the region: the force awakens? International Journal of Entrepreneurial Behavior & Research, 22(1), pp 4-16

University Alliance – Written evidence (IUK0007)

89

industry. A more joined-up, strategic focus will help to counter some of the disincentives

– for example, attitudes within Research Councils and expectations in the Research

Excellence Framework (REF) towards academic publication records can penalise

academics who have spent significant time outside academia in business.

9. However, the government needs to take account of the nature of ‘innovation’, as

compared with ‘research’, and the specific objective that Innovate UK was set up to

achieve. Retaining its business-facing role is essential, as is understanding innovation as

more than bringing research into the commercial sector.

10. In reshaping the research and innovation system, we urge the government to consider

the following principles:

a. Define the form and purpose of Innovate UK. If its only purpose in the future is to

exploit UK science and research then it will need to be re-conceptualised. At present,

20% of Innovate UK’s work is intended for this purpose with the remaining 80%

being business-facing. In practice, however, only around 8% of Innovate UK’s work

concerns commercialisation of research. While we support efforts to enhance this

activity, it must be viewed as a relatively minor part of Innovate UK’s role.

b. Branding. Businesses are familiar with the Innovate UK brand and it is important that

it is retained within UKRI.

c. Connectivity. Collaborations between universities and businesses often happen in

the broader innovation space e.g. product design and development or transfer of

people through Knowledge Transfer Partnerships (KTPs). Having a body with the

expertise to make connections from all sides is vital. Skills and absorptive capacity

are a significant part of UK innovation and must not be side-lined.

d. Governance. There needs to be a sense of common purpose as well as clear lines of

separation between Innovate UK and the Research Councils. We are pleased that the

government wants to see business representation on the UKRI board.

e. Innovation ecosystem. Successful foreign models for innovation funding use a

holistic model (often called an ‘innovation ladder’) to describe all parts of the

journey. An ‘innovation ecosystem’ concept for the UK could help bond the sense of

common purpose and roles for different organisations.

5) Future funding models 11. Following the 2015 Spending Review, Innovate UK will convert a significant portion of its

portfolio of grants into loans and other financial products. Against this backdrop, we will be satisfied if grant funding for talent-related programmes and SMEs is maintained. Moving to loans-based models for talent schemes would likely hit demand and uptake, particularly among SME recipients who are typically risk averse and time poor.

17 June 2016