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Sir Giles Shaw (Pudsey): I welcome the fact that the Chancellor of the Duchy of Lancaster is here. I know very well that he has many matters pressing on his attention. I also welcome my hon. Friend the Member for Harrow, West (Mr. Hughes). I suspect that he will undertake his baptism of fire towards the close of the debate. I welcome him to his office of Parliamentary Secretary and trust that he will have a fruitful partnership with the Committee in developing the policies to which the Government have set their hand. I am sure that my right hon. Friend the Chancellor of the Duchy will not mind if I add my warm respect for the work that was done by his immediate predecessor, my right hon. Friend the Member for Bristol, West (Mr. Waldegrave), who is now Minister of Agriculture, Fisheries and Food. It was, after all, the Government's initiative that created the Office of Science and Technology and thus brought the Committee into being. For that reason, my colleagues and I have double thanks to offer.

We should place on record the fact that my right hon. Friend the Member for Bristol, West was able, in a relatively short period of office, to preside over substantial changes in the way in which science was treated at Government level. During his time in office we witnessed the enlargement of the role of the chief scientific adviser, the development of the director general of the research councils, the alteration of the research councils and their remit, and the first publication, in the "Forward Look", of a White Paper that clearly outlined the developments for science and technology and the role to which the Government were determined to set their hand for the future of British science and innovation. That is a thoroughly worthwhile achievement.

I trust that my right hon. Friend the Chancellor of the Duchy will recognise that we wish to build on those substantial initiatives, and on the developments that are consonant with an increasing commitment showing that the OST is here for keeps. It is the development that best co- ordinates public sector science with private sector requirements. I hope that it will eventually produce, through its policies, a substantial increase in the nation's commitment towards scientific endeavour, innovation, investment in research and a consequential improvement in economic performance.

Hon. Members are grateful to the Leader of the House for allowing us the time to debate the Committee's report this evening. The report is a substantial effort by a Committee that has dedicated itself to investigating, in a relatively short time, significant issues affecting scientific and technological development.

Committee members were aware at the outset that the Select Committee in another place had already dealt with innovation in industry and published a significant report in 1991. We took that not as a disincentive but as an encouragement to build on that initiative to broaden science and technology, and innovation in particular. We felt that they were hugely important to the country.

How grateful I am that Committee members acted as one in that endeavour. We were grateful to the team of advisers who guided us to the report-- Professor Ivan Yates, Gerard Fairclough and Professor Michael Gibbons

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and his excellent team at the Sussex science policy research unit. All colleagues and advisers helped to achieve drive and unanimity on the subject. It is accepted by hon. Members on both sides of the House and by people throughout the country that the science base in the United Kingdom is exceptionally fertile and well regarded, that it has developed effectively both within and without the Government service and that it has been regarded world wide as being of great distinction.

However, in our first report, into the workings of the Office of Science and Technology, we realised that the problems went wider than the science base. The evidence to the Committee at that time showed that, for a wide variety of reasons, there was a need to develop innovation and technology that matched the excellence of British science. That is probably the key reason why we felt it correct to dig deeper than perhaps our noble colleagues had done into the reasons why innovative developments in the UK, despite a fertile industry and a very fertile science base, had been so disappointing when compared with competitive developments in other countries. The fact that the science White Paper "Realising our Potential" had stressed so obviously the importance of science and technology to industry, and the fact that it had announced new arrangements to make research councils and universities more responsive to industry's needs, encouraged Committee members to feel that the time was right to match that up with research into industry's problems and the scale of development and innovation that the country had achieved. Although the White Paper was encouraging and although the Government were right to entitle it "Realising our Potential", the Committee's subsequent inquiry into the routes through which the science base is translated into innovative and competitive technology showed that, even though improvements could be made, the science base was already relatively responsive to industry. Industry was able, as many companies were, to get the scientific input that they needed, at the time that they needed it, and of the quality that they needed. The real problems, however, were much wider and deeper. In many cases, UK industry appeared unprepared to make use of the resources of the science and technology base. Perhaps it was from ignorance; perhaps it was from industry's own short-sightedness, but, worryingly, there were many reasons why the UK's innovation record was internationally uncompetitive. The Committee believed, therefore, that a policy to encourage innovation could not be narrowly focused purely on the science base.

We might reflect at this point that the position of British industry--let me call it British manufacturing industry for the purposes of the debate-- has been perceptibly, and some people would say substantially, in decline in recent years. It is not surprising, therefore, that the pressures of having to survive in a pretty ferocious economic environment have made it difficult for countries to set aside the commitment, both in cash and in people, to investigate and to develop innovatory technology for the markets in which they competed.

During those times, one had to consider inflation rates and the fact that it was relatively difficult to obtain capital to make profitable investments. There is no doubt, however, that, against that background, there has been a substantial diminution in what we should call with some pride manufacturing culture. The consequence of that has been a diminution of interest in, let us say, engineers

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becoming engineers and graduates seeking to earn their money in the industrial climate, and a general resistance to the smokestack image of manufacturing processes, an image that has, happily, been largely eliminated and that has done no great service to industry. The Committee was convinced, therefore, that policies to alter attitudes and activities in relation to innovation and technology would be effective only if they were shaped by knowledge of the innovation process and if all the factors promoting or hindering them were recognised. Accordingly, the inquiry was intended to be a major review of the subject. I suspect that that is why it lasted 18 months. In addition to holding 14 sessions of oral evidence and considering more than 160 memoranda submitted by interested parties, the Committee conducted its own research. It commissioned research into six industrial sectors--pharmaceuticals, aerospace, automotive products, food and drink, machine tools and office electronics. The Committee chose the science policy research unit at the university of Sussex to conduct the research. Professor Gibbons and his team were able to design a substantial questionnaire that produced a great deal of response on the use by industries of the science base, their investment in innovation, their skilled personnel requirements and their ability to raise the money needed for further investment. In addition, the Committee visited both Germany and Japan to see at close and at far hand the way in which those two highly effective economic giants performed in relation to innovation and technology.

Although the particular sectors that we researched varied widely in their needs and in their relative successes, the overall picture that we gained was pretty gloomy. In the past three or four decades, the UK has fallen behind comparable-sized countries in the amount spent on research and development both as a percentage of gross domestic product and as a percentage of patents on the international market. The Committee was forced to agree with one of its witnesses that "the UK has tended to under-invest in R and D".

There is no doubt that that has been the case.

The Committee said in its report:

"In the course of our inquiry we have come to believe that unless reforms are urgently undertaken the United Kingdom will remain less able to exploit science and technology than many of its competitors. There is no one reason for this; rather it is the result of a set of interactions between the education and training system, the organisation of industry and the operation of the financial system, all of which are strongly affected by government policies and the state of the economy."

That will come as no surprise to hon. Members on either side of the House.

In part, the problems identified involved a culture that failed to reward adequately those people engaged in industry and, in particular, science and engineering. There was no question but that the rewards for those going into the sciences or engineering in Germany or Japan were substantial. I might add that their social stature was considerably enhanced by their so doing.

Colleagues will recall that in Germany, the status of a doctor of engineering commanded a great deal of acceptance at any level and was certainly equivalent to that of a physician or banker in this country. In Japan, in what I think was an aside, a member of the Toyota

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company said, "We call all our workmen engineers' here, at whatever level they operate." Therefore, we are up against cultures which have been established on ground which should still be fertile here but which now is not bearing sufficient fruit.

Industry has indeed recruited engineers but the result has usually been that scientists or engineers tend to remain within their specialities. Few join upper management or reach the general management of their companies and therefore they do not have the ability to gain the high salaries available in industry to those who manage enterprises.

The Government's response to our report stated that there was "no firm evidence of a current shortage of science and engineering graduates to fill specialist posts."

I agree, but the response misses the point entirely. We are concerned to get the scientist and the engineer into mainstream management, into finance and the City so that they can perhaps bring more orthodox attitudes to bear on industry's need for cash for research and on the way in which high risk should be something to which City advisers should respond. We need scientists and engineers in general management. We need them to lead our companies and to bring the disciplines that they have acquired in their specialities to the running of those companies.

Moreover, the lack of scientists and engineers in management sits ill with the fact that, even during the recession from which we are now--thankfully- -emerging, nearly half of the companies that responded to our questionnaire had experienced skill shortages, and the majority expected similar problems to arise in the future. We were forced to conclude that the financial system in the United Kingdom produces a culture that appears to be risk averse and inclined to rely too heavily on short-term measures. I am sure that short-termism will be one of the themes taken up by colleagues in the subsequent debate. One of the problems is that it is quite rational for those who work in the financial world to take the views that I have outlined but to do so can have a very destabilising effect on industry. We welcome the industrial finance initiative study that started when my right hon. Friend the Member for Loughborough (Mr. Dorrell) was at the Treasury. We also welcome Budget initiatives such as the enterprise investment scheme to encourage small and long-term investors in this process.

I sincerely hope that such schemes will be maintained and developed, but we were of the opinion that attitudes tend to vary substantially within the banking system. Some within the financial system claimed that there was plenty of risk capital available but there was clearly no fertile route through which it could flow to those who really needed it. In many cases-- certainly in the clearing banks--it rested on the good will of local management to determine such things rather than on head office deciding that it was a policy worth pursuing. The financial system and the restriction of technological expertise combine to make industry disinclined to invest in innovation. In Japan in 1991, industry-financed research and development amounted to 2.12 per cent. of GDP as opposed to 0.94 per cent. in the United Kingdom. If Japan is thought to be exceptional--which in many ways it is--let me add that German investment was 1.5 per cent. of GDP and that of France

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1.01 per cent. There are considerable differences between our measurable performance in investment in innovation and that of those with whom we still seek to compete.

The Committee was presented with recent research which appeared to prove that tax incentives for R and D might not only produce greater R and D expenditure than the revenue forgone but, through stimulating such R and D, might significantly increase the rate of economic growth. We thought that that was an important point to record in our report and the Committee thus recommended that, in the light of this evidence, there should be a major re -examination of the case for fiscal incentives for investment in R and D. It was disappointing that the Government in three lines--I suspect that that was their shortest comment on any item in our report--decided that such a reappraisal was not to be undertaken.

However, we did not want a commitment; we simply thought that it was reasonable for us to make a suggestion and leave it up to the Treasury to take the rash decision to do a little bit of research to see whether the results might lead to better innovation and better economic growth. If that is the way in which the Treasury is to lead our scientific and technical development, I suspect that the policy of mortmain cannot be far behind.

The Committee accepted that many of the problems involved in providing a fertile route for science to bring a competitive innovation into industry were beyond the power of the Government to solve. However, it was clear that the Government intend to take the lead in tackling many of those problems. The White Papers on "Realising our Potential" and on competitiveness show a welcome appreciation of the value of industry. The Government's response to our report is welcome in many respects. We note that many of the Government's recommendations coincide with ours or, to put it another way, that the Government are prepared to agree with many of our recommendations. However, some of the Government's responses cause us concern.

The first of the Government's responses on which I shall comment is in paragraph 11, which deals with the Department of Trade and Industry. I noted with some apprehension the way in which the new departmental restructuring has taken place. We commented on the failure to replace the chief adviser on science and technology, but we were informed that the post is being discontinued for the reason stated. The Government state:

"A recent Departmental restructuring has brigaded his Division with the Sector Divisions under one Deputy Secretary Industry Command."

I was beginning to think that perhaps the President of the Board of Trade had gone back to his flak jacket and was seeking to instal a military system in the DTI. No doubt he will shortly be leaving his office and cascading through the country rather like Sennacherib: "The Assyrian came down like a wolf on the fold,

His horses, his chariots, his teeth filled with gold". We wish him well if the result is greater innovation, but we can hardly accept the language used.

Paragraph 12 of the Government's response deals with another important issue. In paragraph 332 of the Committee's report we dealt with the form of identifying and maintaining the wider knowledge base that industry requires. The Government's response was:

"In the Government's view, it is for industry to identify and maintain the expertise it requires."

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The reason for our demanding--or seeking to provide--that the Government have a role in maintaining the science base was to ensure that the distribution of scientific endeavour leading to innovative technology can reach the places which the larger initiatives do not reach and, in particular, to protect its use for smaller and medium- sized enterprises which the Government, through the DTI initiatives and the business link scheme, recognise as essential for the collective development of better industrial activity in this country.

Therefore, I found the Government's response unsatisfactory. It also appears to conflict with the response contained in paragraph 25 of the Government's report, which agrees with many of our comments in support of collaborative research. It states that the DTI recognises the importance of technology generation but that its efforts would be best directed at

"encouraging companies, particularly small and medium-sized enterprises . . . to improve best practice and use new technology more effectively."

That seems to be an inconsistency in the report. Perhaps my hon. Friend the Minister will comment on that when he winds up. We also noted--I have dealt with the matter of general tax incentives--the Government's response at paragraph 21:

"On the Committee's point . . . about the lending decisions of the banks, the Government has been informed by the banks that they are seeking to base their lending decisions primarily on the basis of the quality of the proposals being considered, and are making efforts to adopt a more systematic approach to risk assessment."

The Committee will certainly welcome that. There is, however, much evidence that small businesses are far too often locked into mortgage-related arrangements with banks, which have brought real distress for the families and have created the impossibility of getting out from under their problems in a humane and generous manner. The developments hinted at in paragraph 21 should be acted on pretty urgently.

My next point on the Government's response relates to paragraph 57. We were talking here about Government laboratories. The Government said:

"It is not evident to the Government that the value of Government Research Laboratories depends on their ownership, and indeed, their effectiveness and the efficiency with which they use their resources in response to industrial needs may well be greater if they operate under the commercial disciplines of the market."

Our concern is that the Government should be responsible for the preservation of the base of scientific knowledge and at least ensure that, at the current level of expenditure, it is preserved or enhanced. On the whole, the Government have been disinclined to make provision for that. I should like my hon. Friend the Minister to express a view on that issue.

I concede that, all in all, the Government's response to the Committee's report is generous in that many of our proposals have been accepted. I also welcome the fact that the direction in which our report is set is one that the Government strategically find convincing. Our debate now, however, will range over many issues that are far from satisfactory. There is great dissatisfaction because we know that many industries are in need of assistance for innovative technology, yet are unable to manage it, to find the finance for it or to develop the techniques that they really need.

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We have recognised that the productive qualities of British industry are just as great as they ever were. Indeed, in recent years, British industry has improved enormously in international competitiveness. The sector is ripe, therefore, for a new and substantial step forward not only in efficiency but in technology, and not only in technology but in innovation. It is now that the Government must ensure that the initiatives that they have set in train and the Committee's initiative in comparing how innovation takes place here with how it takes place in other competitive countries lead to an increase in effort and not to a diminution in Government expenditure or Government commitment.

It has always been the case that the Government have a huge role to play in the nation's research and development. Public sector investment is substantial and nowhere more so than in the Ministry of Defence. It is equally true that the Ministry of Defence has, over many years, provided a significant spin-off for civil use in a wide range of industrial applications, but we all know that the role of the Ministry of Defence has been reduced. We all know, therefore, that the requirement of the Ministry of Defence will be reduced and we all know, therefore, that the amount of development through research and innovation in Ministry of Defence activities will also be reduced. If we have that reduction, we must compensate for it by a wider generation of innovative technology springing from our existing science base through industrial application. That is the challenge to which, I trust, the Government will respond.

7.33 pm

Dr. Lewis Moonie (Kirkcaldy): I unreservedly welcome the report. It will be an invaluable contribution to the debate that we are about to have on innovation and the regeneration of our industry. I also welcome the Minister to the Front Bench and I hope that he lasts a wee bit longer in the job than his predecessor did. I am sure that he will find his new job very interesting and quite a change from some of the things that he has done in the past. Perhaps he will show the same interest in developing his scientific knowledge as the former Chancellor of the Duchy of Lancaster did with his much reported investigation of the Higgs boson and various other arcana of the scientific world. I shall await his comments with interest. The report, valuable as it is, must be set against the background of a country coming out of an extremely painful recession, which has, once again, seen a contraction of our manufacturing base. It should be obvious that the more the base contracts, the more difficult it becomes to regenerate growth thereafter. The report is, therefore, all the more important and timely as it comes against that background.

Equally, we have the background of Government action over the same period-- or should I say Government inaction? Over 15 years, the Department of Trade and Industry has cut its budget of support for industry every year. The Government are fond of saying that they will do something; sadly, they rarely get round to doing it.

The report covers one of the key areas of economic and industrial development--the interface between our science base and industry. British science is the best in the world. All of us here would give ourselves a pat on

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the back and agree to that. However, that in itself is not sufficient, because if we really want to build a prosperous future and if we really want to provide the money that we shall need to improve the things that we all want to improve--health care, education, our infrastructure, pensions and benefits--we shall have to improve industry's ability to utilise and to benefit from the ideas that we generate in our research departments.

The gap between inventiveness and application is nothing new; it was first recognised in the mid-19th century and has been commented on repeatedly since then. The Labour Governments of the 1960s attempted to redress the balance with the Ministry of Technology and the Department of Economic Affairs. That neither was an unqualified success is a matter of historical fact. Perhaps the tragedy was that both were ideas ahead of their time.

We should compare that record with the record of the DTI. On the very day that the science White Paper "Realising our Potential" was published, the Department announced the abandonment of its advanced technology programme. Every year, we have seen supposedly new advances in support for technology and support for industry being developed with a great flourish--fancy papers and advertisements on television. Each time, there has been a repackaging of less and less cash.

I have said that I welcome the report. I shall single out one or two of its most important features for comment. The Select Committee recognised the need for the Government to play their part in assisting industry to identify and carry the innovation it needs through to production. Were that statement alone to be accepted and acted on by the Government, it would be a significant change in their attitude towards industry.

The complexity of the innovation process is properly identified and due tribute is paid to the pioneering work of those in the Economic and Social Research Council who have carried much of the work forward. As the Chairman of the Committee, the hon. Member for Pudsey (Sir G. Shaw), has just said, the case for Government support for research and development through enhanced tax credits is made. Frankly, I cannot see how the Government can still refuse to recognise the value of such a system in the light of the work of Bronwyn Hall in the United States. How much evidence do they need? As the Chairman said, the Committee is not even asking for the Government to implement the scheme. It is only asking them to look at it again in the light of the present evidence. Surely that is not too much to ask. I sincerely hope that tonight the Minister will withdraw the comments made in the Government's response to the report and will say that they will go ahead and at least examine the case for looking at research and development credits.

Much emphasis is placed on the importance of creating effective technological databases, both local and national, and the provision of technological consultancy services for small and medium-sized enterprises-- something which I have long been in favour of. I feel that appropriate reference in the conclusions and recommendations to the crucial role of our telecommunications network might have been appropriate and might have enhanced what is otherwise an excellent report.

Action is needed to create information super-highways in this country. They are needed to implement the proper use of the databases that the Select Committee is talking

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about. Our present approach to telecommunications is a guarantee that other countries will bypass us in the race to develop proper broad-band communications. [Interruption.] I welcome the hon. Member for Boothferry (Mr. Davis), the former Parliamentary Secretary, Office of Public Service and Science, to his place on the Front Bench. I am amazed that, with his onerous duties in Europe, he has time to idle here for a few hours to listen to our debate, but he is welcome none the less.

The report underlines the importance of independent research and technology organisations, and points to the significance in Germany of the Max Planck and Fraunhofer institutes for basic and applied research respectively. Again, I feel that we need to re-examine the possibility of developing a similar system in the United Kingdom. How else are we to take full advantage from, for example, the technology foresight programme? That is surely one of the key reasons for our chronic failure to innovate in this country. Applied and near-market research cannot be left to the vagaries of our short-termist industrial and financial sectors.

Apropos short-termism, I am glad to see that the need for effective sources of long-term funding for small and medium-sized enterprises was also given prominence in the report. We must remember that our crucial deficit in the industrial sector is in the middle-sized companies--which we hope that small companies would grow into. That is the crucial lack in Britain's industrial manufacturing sector. One of the key reasons why we do not produce more medium-sized companies in this country is the critical shortage of long-term, secure finance to fund expansion and development. Chronic financial constraints on growth, as well as a lack of technological know-how, undoubtedly inhibit the organic growth of companies. I hope that, at last, the Government will consider doing something about it and not merely confine their response to accepting what was said in the White Paper.

That brings me neatly to my last point: the response of Government to the report. There is a fair old collection of platitudes in the Government's response, which is only to be expected. The Government will, of course, tell us that, in advance of the Budget, they cannot possibly make any concrete proposals that might cost any money. But I do think that they might have tried a little harder than they seem to have done in their response to the report. It is one thing to accept and say, "Oh yes, you are right," and, "Oh yes, we agree with that." It is quite another to say, "And we are going to do something about it."

Sadly, there is a wee hole in the Government's response, which clearly indicates that they have no intention of doing anything about the report. They hope that, like so many Select Committee reports, it will be quietly buried after it has had its stock debate for three hours on the Floor of the House on an otherwise fairly empty Monday evening. That should not be their response.

There are so many things that I could mention, but perhaps the most obvious point has already been mentioned by the Chairman of the Select Committee: the three-line rejection of the consideration for the case for general tax incentives. I was also disappointed with the

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Government's response on their own research institutions, particularly in view of the editorial in the New Scientist this week, which said:

"According to government figures, by next year departments will be spending a staggering total of £620 million a year less on research than they did 10 years ago . . .

Next year the Technology Foresight Programme should bring this problem into sharper focus when it identifies commercially valuable areas of research for the country to invest in. But invest what?" Where is the money to come from? Government spending on research is being cut year after year--not just the budget for the Department of Trade and Industry, but other areas of research as well. It is the seed corn for future industrial development in this country. We cannot afford to cut investment in that area, which, it seems, the Government wish to do. So the self-congratulatory note of the response to the report leaves me a little cold.

I found paragraph 39 of the report particularly galling. It says: "The UK Government has played a leading role in negotiation of the Fourth Framework Programme for EC Research and Technological Development."

They certainly did. They spent about two years trying to cut the total sum that was to be spent on research, and congratulated themselves on having done so. Having cut spending on research in this country, they congratulated themselves on having managed to cut it in the European Community as a whole as well. That is scarcely something which I would want to boast about. It is a monumental piece of cheek to claim that they have played a leading role in the negotiations when the role was entirely negative.

The report is an important contribution to the debate on the future of Britain as a successful manufacturing nation. I trust that, in his response tonight, the Minister will show that our Government intend to do more than just take note of the proposals. I fear, however, that they will not and that it will be left to the next Labour Government to begin the process.

7.45 pm

Mr. Robert Jackson (Wantage): I join other hon. Members and in welcoming my right hon. Friend the Chancellor of the Duchy of Lancaster and my hon. Friend the Parliamentary Secretary to their new positions at the Office of Public Service and Science. They have inherited a curiously assorted collection of responsibilities. Of those, their responsibility for science is probably the most esoteric, but it is also probably the most important and, I believe, the most vulnerable. I hope that they will ensure that it gets a full share of their attention. I wonder whether in time they will come to feel, as I think may prove to be the case, that it was a fundamental mistake to shift the responsibility for the research councils away from the Department for Education. Meanwhile, as they attend to science, they can be reassured by the encouragement and support of the Science and Technology Select Committee. It has indeed produced, for its first report, a weighty document which is full of both detail and good sense.

We are at the beginning of a new era at the OPSS, at both ministerial level and the highest official level. I take this opportunity to congratulate Richard Mottram, the superb founding permanent secretary of the OPSS, on his new appointment to the weighty office of permanent secretary at the Ministry of Defence.

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As the OPSS is at the beginning of a new era, I hope that my hon. Friends and the House will forgive me if I pitch my speech at a level that is more of philosophy than of detail. In that, I will follow the excellent speech of my hon. Friend the Member for Pudsey (Sir G. Shaw). What I have to say runs counter to much of the current orthodoxy in this area, but I know that Ministers have a taste for the battle of ideas, and I hope that my remarks may be lodged with them as a valid counterbalance to much of the thinking that will surround them in their offices.

Let me express my thoughts in a serious of propositions. First, basic science is necessary for the health of an advanced economy such as that of Britain. By "basic science", I mean science that aims at a theoretical pay- off, rather than at any clearly perceived utility. Fundamental science-- what the jargon calls the "science base"--is vital to an economy such as ours because it trains the most highly educated manpower, on which advanced economies depend; because it equips those people to tap into the flow of ideas from the science base both at home and abroad; and because it is the seed bed of innovative technology.

It is important to restate that fundamental proposition, because although lip service is often paid to it, except from time to time by the Treasury, its full implications are not always fully and properly understood, as I hope that I will be able to explain. Historically, as has been said several times in the debate, Britain is strong in basic science. It is one of the jewels in our national crown, but it is not one which we keep highly polished. In its statistical analysis, the Select Committee report does not enter that well-trodden field. However, I believe that it is now well established that our spending on basic science in Britain is relatively low compared with that in the other leading basic science countries--the United States, Germany and France.

My second proposition is that basic science has two intrinsic characteristics which severely limit the extent to which profit-oriented industry can be expected to invest in it. One of the features of basic science is that it has no evident utility at the time it is being undertaken. It develops most effectively under conditions of openness within the global community of scientists, and that makes it difficult for economic operators to appropriate and exploit the intellectual property that it may represent.

From the point of view of science-based companies, basic science is what might be called a necessary externality. In that respect, it resembles many other kinds of infrastructure which must be provided as public goods. That is where we must locate the most important responsibility of Government in science.

Advanced economies around the world have found that the only way to secure a flourishing science base is for the Government to pay for it. In this country, the OPSS has a substantial role in relation to that half of our investment in basic science which flows from the research councils. I suggest to my hon. Friends that that is the responsibility which they must keep closest to their hearts. With regard to science that aims at commercial and other applications, which is the subject of the report from the Science and Technology Select Committee, I want to state a third proposition. The delicate chain of innovation,

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of which science is only a part, can be managed successfully only by the organisations and companies that have a direct stake in it. They must have a sense of ownership of the process if they are to manage it successfully and, in particular, they must feel wholly committed in the management of that most difficult transition of all --from the laboratory bench to initial market and production concepts.

Innovative companies must obviously have strategies for gaining access to the science base, especially in universities at home and abroad. There is bound to be an extensive interface between the Government-funded area of basic science and the industry-funded area of applications. As in the science White Paper published earlier this year and the Select Committee's report, thought must be given to the way in which that interface is managed. However, the temptation and the danger are that the Government will become more involved than they should, so that the proper boundaries are blurred and industry's sense of responsibility and ownership in the management of innovation is diminished.

It is still too early to say whether that is happening as a result of the changes constituted by the creation of the OPSS. However, hon. Members should watch that point closely, as should my right hon. Friend the Chancellor of the Duchy of Lancaster. We should bear in mind, as an object lesson, the story of the British Government's engagement with science and industry in the 1950s and 1960s. In those days, under Governments of both parties, the Government were a heavy investor in what is now called near- market research. The Select Committee report has much to say about the applications gap. It refers to the weakness in innovation in British industry. The report does not offer an extensive explanation of the problem, but I believe that much of our present weakness derives from that period and from the impression it fostered that science is more a matter for Government than for companies.

While there has to be a partnership in that area between the Government, industry and scientists, it is critical that there should be a clear sense of the boundaries between the responsibilities of those different parties. That is why I believe that we were on the right lines in the late 1980s, under the leadership of Baroness Thatcher who had a close personal interest in such matters, when the Government sought to concentrate on their responsibility for the science base and to point industry clearly to its responsibility for profitable applications.

I want now to refer to a point of detail which appears in the Select Committee report in paragraphs 181 to 186. If my analysis is right, one of the implications must surely be that it is better and healthier for Government support for scientific innovation in industry to take the form of tax credits rather than being cast in the form of grants and subsidies.

Of course, public money is involved either way and the Treasury insists, probably rightly, that the public expenditure costs of a grants regime are bound to be cheaper than those of a tax credits system. However, that misses the psychological point that it is better for companies to be encouraged to spend what they see as their own money on R and D than for them to become habituated to the idea that their R and D is basically the Government's business.

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I strongly support the Select Committee's recommendation at paragraph 186

"for a major re-examination of the fiscal incentives for investment in research and development."

As has been pointed out, the Government reject that advice in their note at paragraph 19. I continue to find it odd, although not untypical of the Treasury, that the Government should be so certain on that point when so many other countries, with Governments of the right and of the left, believe that tax credits of the kind called for by the Select Committee have an important role to play. On another point of detail, the Select Committee report is absolutely right to insist at paragraph 164 that the Government should proceed with care in handling applied science for Government purposes in the Government research establishments. I support the concept of the so-called internal market for Government science and, where appropriate, for privatisation of the GREs. However, the report is absolutely right to highlight the risks that that involves. In that respect, I have particularly in mind the future of AEA Technology, the great British applied science asset whose headquarters are at Harwell in my constituency and which faces the risk of fragmentation on privatisation. That must not happen and the uncertainty which has for too long surrounded the matter should be ended as soon as possible. I hope that the Chancellor of the Duchy and my hon. Friend the Minister will take a close interest in what the Department of Trade and Industry is doing in that respect. More fundamentally with regard to the GREs, we must remember that there are two sides to the customer-contractor relationship and the Government must be careful to keep them in balance. They should not rush ahead to create contractors before they have adequately developed their capacity to act as a set of intelligent contractees--a problem which the Select Committee report refers to as the "intelligent customer". There may be a danger that the new research contracting organisations will contract in the negative sense as well as simply being contractors.

Returning to the main thread of my argument, I want now to draw a conclusion from what I have said about basic science and applied science and state it in the form of a fourth proposition. As I said earlier, basic science is vulnerable to a host of takeover bids which I see it as the duty of my right hon. Friends to resist. On the part of industry, there will always be a taste for subsidy, although perhaps not from the best companies. On the part of Government, there is always a measure of impatience for quick results. It must be said that, in the current climate, there is also a desire among academic scientists to legitimate themselves through promoting their claims to relevance.

I saw something of the ambitions of other Departments in relation to the science budget of the OPSS--the research councils' budget--when I was a junior Minister in the Department. On that point, I simply want to repeat what I said in any earlier debate about these matters. I pointed out that any significant shift of Government R and D funding to support what are taken to be business objectives will never be enough to make much difference to business and could have potentially catastrophic effects on the availability of resources for basic science.

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Let me cite some figures to illustrate what I mean. Twenty per cent. of the annual research councils' budget amounts to about £240 million. That sum is no more than 4 per cent. of the estimated annual spend by British industry on R and D. Yet that £240 million covers just about the whole of the cost of the Medical Research Council, on which we spent £257 million last year, or it equates to the cost of supporting all the work done in astronomy and particle physics, at a cost of £190 million, together with the whole of the sum devoted to the Economic and Social Research Council, £53 million.

"Partnership" is an attractive word and an attractive concept, and I used it earlier--I see that the Select Committee has endorsed it several times-- but I want to draw the attention of my right hon. Friends to its risks, and in particular to the risk that the direction of fundamental research may be shifted, through the development of the apparatus of partnership, into directions that serve the interests of the industries of today rather than the industries of the future.

In particular, I must tell my right hon. Friends that, although the Select Committee supports them at paragraphs 346 to 348, I think that the jury must still be out concerning the arrangements for technology foresight, upon which the OPSS has now embarked. That will turn out to be either a set of talking shops, which will be costly in terms of high-grade manpower, but without practical effects or, much worse, it will become a mechanism for distorting the organic development of the science base under academic leadership. I hope that the Government will produce a full report on that exercise in due course so that the House can draw its own conclusions.

That same line of reasoning leads me to dissent from the Select Committee's report when it refers, at paragraph 129, to the universities. The Government's response on that point is at paragraph 52 of its note, and, to the extent to which it follows the line taken by the Select Committee, I believe it to be mistaken. The Committee says that it would

"support the initiatives to widen the criteria used in assessing research performance and to increase the status of industrial research"

in universities. That conclusion flows from what I see as the current orthodoxy and it reflects the blurring of the philosophical distinctions which I am attempting to assert.

Contrary to what the Select Committee says, and indeed what the Government think, the Government's policy with regard to the science base in the universities should be to build fundamental science in those universities where that work is best done and to make it clear both to industry and to the universities that it is industry's business to develop and fund appropriate networks with the universities in support of applied research. The danger otherwise is that the Government will end up paying for research which is neither first class as fundamental science nor of any real practical relevance to industry, while first-class, basic research opportunities are neglected and industry is encouraged to go on underestimating its practical interest in building its own links with the universities.

I said earlier that Britain's history of strength in basic science is one of the jewels in our national crown. That position was achieved with much effort over several centuries and it can be sustained only with much effort over a long haul. However, great damage can be done in only a short period of neglect and mistaken priorities. That

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is why my right hon. Friend and my hon. Friend the Ministers have assumed a heavy burden of responsibility in taking on the S part of the OPSS. We all wish them well in carrying it forward.

8.2 pm

Dr. Jeremy Bray (Motherwell, South): The hon. Member for Pudsey (Sir G. Shaw) has added to the signal services that he has given the Select Committee by his wide-ranging speech, which clearly presented the scope and depth of the report and reflected many of the views which the whole Committee would take of the Government's response and the Committee's disappointment with some aspects of it.

The Chairman of the Committee rightly referred to the services given to the Committee by its advisers, Professor Ivan Yates, Mr. Gerard Fairtlough and Professor Michael Gibbons. They are distinguished men of great achievement in the scientific world. Ivan Yates is a former chief engineer and deputy chief executive of British Aerospace. Gerard Fairtlough is the founding managing director of Celltech Ltd. Michael Gibbons is the director of the science policy research unit, which is the leading and

longest-running science policy unit in the country. Professor Gibbons was assisted by Professor Roy Rothwell, whose books on industry and science have been of great value for many years.

With that breadth of advice and the wide range of evidence taken, the Committee sought to come up with an analysis which was to be of value both to people in the science community and to its neighbours in education and in other parts of government. That objective was achieved. The report is beginning to be quoted in conferences and forums which look for objective analyses of the overall situation. I am sure that the Committee's report will stand the test of time. My hon. Friend the Member for Kirkcaldy (Dr. Moonie) rightly spelt out our criticisms of the Government's science policy. In his capable hands, that criticism will be extended into further practical developments of our own policy over the next two years.

I welcome the speech of the hon. Member for Wantage (Mr. Jackson), whose fulfilment of the duties of Minister with responsibility for science was enjoyable and always stimulating. I agree with much of what he says. It is a great advantage to the House if a Minister or an hon. Member speaks with long experience of and commitment to a subject, and the hon. Member for Wantage has certainly done so over the years.

There has been a change of personnel and Ministers. I echo what the Chairman of the Committee, the hon. Member for Pudsey, said about the departure of the former Chancellor of the Duchy of Lancaster to other duties. He undoubtedly won acceptance by the science community to an extent that totally exceeded the resources in financial terms which he added to it. I am not saying that his acceptability was undeserved; he took an intelligent interest in science and certainly launched some important developments in the restructuring of the research councils which are still being worked out and implemented. Thanks to the right hon. Gentleman's experience of the machinery of government, he was able to carry through changes to the extent that he did, although he lost some important battles in setting up the

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