Government incentives
87. Between 1981 and 1998 total UK private sector
spend on RD&D fell from 1.5% to 1.2% of GDP, and a large proportion
of the total (37%) is undertaken by the pharmaceutical sector.
Total UK RD&D expenditure was 1.8% of GDP in 1998. This compares
with 2.5% in the US and 3% in Japan.[128]
The last two spending reviews have included substantial, real-terms
increases in public expenditure. In contrast, private sector RD&D
spend has changed little in recent years. The European Commission,
supported by the UK, has stated an aspiration that total RD&D
spend in the EU should reach 3% of GDP by 2010, with two thirds
from private sources.[129]
Outside the pharmaceutical sector, the oil and gas companies perform
well in the RD&D scoreboard but elsewhere in the energy sector
investment is not so high. We are pleased that the UK Government
supports an EU target of 3% of GDP invested in RD&D but given
the strong link between investment and productivity, we are disappointed
that it has not adopted this "aspiration" for the UK.
We recommend that the Government does so.
88. The lack of private RD&D investment is barely
recognised in the White Paper. The Government says it will "work
to create a policy environment that encourages the private sector
to bring the key technologies forward, and play a key role in
the delivery of major new infrastructure".[130]
It announces new money for capital grants to bring laboratory
research to the market, which is welcome, but nothing to provide
new incentives for industry to invest its own money in RD&D.
This is a regrettable. Tom Delay, Chief Executive of the Carbon
Trust, told us that to get anywhere near to 20% renewable generation
billions of pounds of private investment in innovation would be
required and that this is "very hard to envisage at the moment".[131]
Sir David King told us that, of the £100 million going into
the DTI's LINK programme, over half was from industry.[132]
He felt that the £28 million going into the Research Councils'
Sustainable Energy Programme would have the same effect in providing
leverage from the private sector. To get anywhere near to the
billions of pounds mentioned by Mr Delay a huge amount of leveraging
will required. Brian Wilson told us that a liberalised energy
market in Europe would force companies to invest in RD&D through
self-interest.[133]
Given the effect of liberalisation on the UK market it is clear
to us that this is unrealistic.
89. Government encouragement for companies to conduct
RD&D falls into two categories: direct incentives such as
the RD&D tax credit; and indirect incentives that create a
fiscal and technological environment in which RD&D investment
is more likely. The latter category, including Renewables Obligation
and the Climate Change Levy will be considered later.
90. An RD&D Tax Credit for SMEs was introduced
in April 2000. The Chancellor said it would underwrite almost
one third of research and development costs for small business.[134]
In the 2000 Budget the Chancellor announced that this would be
extended to larger companies, albeit with relief at 125% (as opposed
to 150% for SMEs). This came into force in April 2002.[135]
We asked our witnesses for their views on this initiative and
to what extent it had changed, or is likely to change their RD&D
investment strategy. Dr Bernard Bulkin, Chief Scientist at BP,
welcomed the tax credit, but stated that "It has not been
the force that drives us to where we do our RD&D".[136]
He commented that the cost of conducting RD&D in China is
a quarter of that in the UK or the US. Sir David King insisted
that it was too early to determine the effect of the tax credit
but that "there is now ... a much greater degree of willingness
to look into this issue.[137]
91. For other energy companies the tax credit is
purely hypothetical. As Powergen pointed out, if you have no taxable
profits then it will make little difference, and it would rather
the Government provided cash payments.[138]
Given that a feature of the energy market is difficulty for companies,
particularly the generators, to make any money, the tax credit
is particularly ill-suited as a stimulus for innovation in this
sector. The Government should recognise that even companies
not regularly making a profit need to think long term and invest
in RD&D and should consider introducing mechanisms that provide
that incentive.
92. Of equal concern to us is the complexity of the
rules. In giving evidence to us, neither Innogy nor Powergen seemed
particularly sure as to what qualified under the tax credit's
rules and what did not.[139]
Private companies are not usually reluctant to employ the tax
system to their benefit. Don Spearman from Vent-Axia also revealed
hesitancy over what would qualify for the tax credit. He had only
just heard of it when he came in to give evidence: "I took
it through to our accountant and he told me that our group company
had considered the sort of work that we were involved with and
felt that it was not appropriate and I told him to go back and
ask again".[140]
The existence and nature of R&D tax credits are not well
understood by companies—particularly the smaller ones—and
the rules of the R&D tax credit seem to be too complicated
or inadequately explained. The Government should remedy these
problems, since if energy RD&D is to be resuscitated in the
UK in the field of low carbon technologies, a clear and significant
tax incentive is much-needed.
93. A combination of EU rules on state aid and the
Government's unwillingness to interfere with the market has meant
that the Government has been unwilling to intervene to fund RD&D
in industry.[141] The
Japanese Government is more interventionist. The DTI's policy
of not supporting research that is close to market or should be
conducted by industry contrasts with Japanese companies being
subsidised heavily to conduct research on priority technologies.
We were struck that while Japanese industry has a impressive record
of conducting RD&D, it was clear from our discussions that
much of the research conducted by companies such as Sanyo in photovoltaics
and fuel cells would not be taken on in the absence of Japanese
Government funding and subsidies for installation. Given the more
benign energy market in Japan, it is not surprising that UK industries
are hesitant about investing in RD&D. The Government has
failed to encourage an environment that encourages technical innovation,
to provide sufficient direct investments and to make any significant
response to the scale of market failure.
95 
