Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 20-39)

DEPARTMENT OF TRADE AND INDUSTRY & SCIENCE AND TECHNOLOGY FACILITIES COUNCIL

WEDNESDAY 9 MAY 2007

  Q20  Mr Dunne: As far as the operating costs are concerned?

  Professor Sir Keith O'Nions: We are content that the settlement that we have had from the Treasury, which is 2.5%, 2.7% real, so 5.4% cash year on year, will provide enough flexibility to fund the commitments that we have and we envisage at a level that many of our international competitors would enthuse over.

  Q21  Mr Dunne: If I may turn to the specifics for a moment of the build costs, a lot of the focus of this Report has been on delivering on budget and on time. The projects, by their very nature, are very individual and very specific and the Chairman touched on one issue highlighted by the NAO in finding a procurement officer, which was clearly very challenging. A couple of reports here indicate that the performance against time and budget has varied, perhaps not surprisingly but quite significantly. What can you do at the department to try to learn from the experience of those projects which have completed to provide some consistency in approach?

  Sir Brian Bender: One of the benefits of setting up this new Research Council would be to bring together more of the expertise on the larger projects. We will be working as a Department with that Research Council and with some work the NAO themselves are doing on a handbook to provide greater guidance on some of these difficult issues to try to get better at these things over the future and make sure, for example, that best practice is spread across the piece, that best practice on procurement is used each time, and so on.

  Professor Sir Keith O'Nions: Formally we expect Professor Mason's Research Council to take a leadership role in procurement issues and project management issues, given the very large number of projects they are responsible for. We have already established a working group with Research Councils UK and we are minded to embed within STFC (Public Accounts Facilities Council) a project management office that will draw together best practice and actually be accountable for ensuring that that is captured and spread across the research councils working with the procurement office that already exists.

  Professor Mason: If you look at the history of the projects that we are currently engaged in, none of these cost increases has been "uncontrolled". They have been for specific reasons which are well understood, where key decisions were made, for example about the scope of the project and what it should deliver. Diamond is a case in point and the ISIS Second Target Station are cases in point where we essentially expanded the capabilities of the machine on the basis of consultations early in the lifetime of the project. One of the difficult areas that we need to come to grips with in these large projects is the fact that costings cost money to produce reliably and there is inevitably some sort of toing and froing at the beginning of the project where you are both defining the cost and the scope at the same time. It is that process that we need to bring under control, but it is not a trivial thing to do. We intend to put the best expertise that we have to this and I am sure we will make a better fist of it in the future.

  Q22  Mr Dunne: The NAO, on page 19 table 7, identified some cost overruns being as a result of the addition of contingency, which suggests that unless contingency is being used to cover expansion of scope, which I would rather doubt, not enough proper thought was put into the original budgeting exercise. Contingency is a problem we have noticed in other departments through this Committee: it tends to get cut and added in after the project has started when some people realise they are going to run out of money.

  Sir Brian Bender: I would agree that it is wrong, for example, for Diamond not to have had a contingency when it was first set up. That was an error which was then corrected. If you are saying projects should have a sensible and prudent amount of contingency in them, then I very much agree with that and it will be one of the lessons we will make sure is learned.

  Professor Mason: That is one of the skills that we can bring to bear, which is to assess risk and assign a contingency accordingly to various segments of a project.

  Q23  Mr Dunne: My final question goes back to operating costs. Page 21 table 8 shows the increases and paragraph 2.16 refers to five of the six most mature projects having to revise their approved business case estimates of annual operating costs. We were told this morning that there seems to be a much more rigorous review of build cost, capital cost and a much laxer approach to analysing what the operating costs of these facilities are going to be. Do you think that is a fair comment?

  Professor Mason: Assessing operating costs is not something that is straightforward and it is not something you can really do before you know the scope of the project. The way it is usually done is by a parametric estimation, in other words you find a facility that has an analogous function and you compare it against that facility. With the experience that we now have with these large facilities, we will be in a much better position in the future to have more accurate analogues and therefore to be able to estimate the running costs more precisely at an earlier stage in the project.

  Professor Sir Keith O'Nions: There is not much wriggle room for us here. We can offer an explanation of each of these, but one has to say this is an under-performance that concerns us and there is experience, certainly in Government, and there are very clear things in the Treasury Green Book that we really must put into place. In defence, cost-of-ownership calculations are done with a higher level of sophistication than we have used. We are determined to adopt best practice, abide by the Green Book and do exactly the things that Keith is talking about.

  Q24  Mr Dunne: If an overrun occurs in your estimation, does it fall back to your budget or does it come out of other research councils for which you are not responsible?

  Professor Sir Keith O'Nions: The way we have tended to handle that sort of risk in capital costs and operating costs is that a certain allocation is made centrally from the Office of Science Innovation for a three-year period; there is a capital allocation on the roadmap. We have then, in effect, transferred any residual risk to the Research Council, which we believe should engender best practice in putting the risk for overrun with the research council itself. To first order, that is the right way to do it.

  Q25  Mr Dunne: That is on the capital cost but what about the operating cost?

  Sir Brian Bender: And on operating cost.

  Professor Sir Keith O'Nions: And on operating cost.

  Q26  Mr Touhig: The Comptroller and Auditor General's Report expresses concern that the economic benefits of research facilities do not get the same level of consideration as the scientific benefits. Would you accept that?

  Sir Brian Bender: Yes, I accept there is more for us to do on that.

  Q27  Mr Touhig: Why is that so?

  Sir Brian Bender: The answer is not terribly satisfactory but it is that the primary purpose of these projects is for science and the analysis of what economic benefit flows from that science is less mature. We have actually just put out some economic analysis work for tender to give us a better model of looking at some of the whole-life benefits that flow from some of these projects. It is a less mature area to work out what the benefit of R&D spend is generally and in particular what the spin-off benefit of these is. We are working on it and we have not done enough of it yet.

  Q28  Mr Touhig: Do you think it is right to emphasise the scientific benefits and look at those first before any economic benefits?

  Sir Brian Bender: The purpose of building a project like the Diamond facility that the Chairman and Mr Dunne saw this morning and these other ones is science. The overall cost-benefit analysis of proceeding needs to take account of the economic benefit as well as the scientific benefit, but if it were only economic benefit and there were no real science benefit, then my own view is that we should not be proceeding; it would actually come back probably to one of the Chairman's earlier questions about why the taxpayer should be paying if there is an economic benefit, whereas if it is to help the scientific infrastructure of the country that the private sector will not pay for, then there is every reason why the taxpayer should pay for that.

  Q29  Mr Touhig: Looking at paragraphs 1.14 and 1.17 on pages 13 to 14, it says that the analysis of potential economic impact is less detailed. Why should that be?

  Sir Brian Bender: The answer to that is what I have tried to describe already, that we have not done enough sophisticated work on some of the spill-over benefits.

  Professor Sir Keith O'Nions: What we know quite a lot about is the social rate of return from overall spending of government R&D. There has been a lot of economics work on that. We have been doing considerable work over the last few years in the DTI with our own economists on the economic impact of the overall science budget, the £3.4 billion we spend in science and we are making good headway on that vis-a"-vis other nations that are trying to do it. What we have not done is the specific and that is to try to look at the economic impact of the investment in these large facilities independent of other parts of the spend. We entirely can see that it is time to do that and we have just put out to tender for an attempt to get an analysis and some econometrics of that particular thing, so it is appropriate to do it. Without question we have concentrated in the past on the high quality of the science, knowing something about the social rate of return of R&D investment overall.

  Q30  Mr Touhig: But that is not sufficient. You have to do better than that.

  Professor Sir Keith O'Nions: We accept that.

  Sir Brian Bender: We have to do better. I would say in slight mitigation of us, no-one in the world does this very well. We are seen to be pioneers in this area but we have to do better, as you are saying.

  Professor Mason: Just to illustrate the complexity of the problem, in very general terms you can separate the economic benefit of a facility like this into at least three components: there is the economic benefit of the research done on the machine; there is the economic benefit of hosting it into the local economy; and probably the largest impact is the impact of the trained manpower that is produced by that facility and the pool of knowledge. Tracking those latter impacts in particular is actually a very complex thing to do which we are trying to get a handle on but it is a difficult process.

  Q31  Mr Touhig: The Chairman pointed out paragraph 1.17 and I will read it again: "Neither the large facilities road map as a whole, nor the prioritisation of projects within it, is the subject of direct consultation of bodies representing industrial interest in government science policy". The right hand is not talking to the left.

  Professor Mason: That is certainly a true statement and there are reasons for it, primary amongst them is the lead time on these facilities. Diamond, for example, was built rather quickly in four years but many of these take much longer to build and then to operate. So the lead time between actually doing the research and actually getting the industrial benefit is too long for industrial companies to take an interest at that level. Now that we have the facilities up and running we have, for example in Diamond, a thing called DISCo which is an advisory body which is specifically composed of industrialists who go out and look at the capabilities and how it might map into today's industrial needs. We are doing that on a timescale that industry actually need but they are not interested in engaging in 10 to 20 year timeframes as to what they might need in the future.

  Sir Brian Bender: I also would not want to leave the impression that there have not been very good industrial uses of this sort of machine in the past. The predecessor of Diamond, the synchrotron at Daresbury, led to some very good work by the pharmaceutical and drug industry which they paid for to help protect their patents or develop new drugs or whatever. We are not dealing with an untilled field here; it is a question of how we can maximise it.

  Q32  Mr Touhig: That is the thrust of what I am trying to get at. The assessment of scientific benefits used by research councils focuses on the likely scientific benefit. Is that too narrow? You really do have to expand it somewhat.

  Professor Sir Keith O'Nions: For the world that we are in now, yes it is. We will formalise the process not only of discussions with business at an early stage but also, and I will not go over the economic impact analysis we try to do, you are absolutely right and this in effect maps off our agreement with the PSA target with the Treasury to get more emphasis and better understanding of the economic impact of the science budgets overall. We must be slightly cautious. There are few facilities here. Building a Halley IV base floating on ice in Antarctica is unlikely to attract a great deal of business interest beyond constructing it.

  Q33  Mr Touhig: With your wider responsibilities Sir Brian, do you think that these sorts of decisions should be left to research councils or does the department get much more involved?

  Sir Brian Bender: The decisions ultimately are for ministers as I understand it. The research councils have the prioritisation exercise which is described in the Report. The Director General oversees that, but any business case that is then actually approved is approved by a minister; there is a matter of policy and political judgment. Clearly the ministers do not second-guess the scientific advice, but they make a public policy decision on the basis of the business case and the overall advice put to them.

  Q34  Mr Touhig: The Report tells us that sometimes the analysis supporting the choice of location has not been timely or independent.

  Sir Brian Bender: For some of these projects there is not much choice of location: clearly Halley is going to be in Antarctica; the Institute of Animal Health building will be there. The only ones where there have been real choices were Diamond and whether that should be in Daresbury or at Harwell, and the computer project HECToR (High End Computing Terascale Resource): those decisions are based on an analysis of what the options are with, again, the science being the predominant consideration.

  Q35  Mr Touhig: Can we ask the Comptroller and Auditor General what is meant in the Report when it says that this analysis has not been independent?

  Mr Gray: In the context of location, clearly research teams may already be working in a particular part of the country. What we are suggesting is that people independent of the project look at the location options that are there. As the Accounting Officer has explained, in some instances it may be self-evident that a particular location is the prime one to choose, but on other occasions there will clearly be options and we suggest that people independent of the project should analyse those options.

  Sir Brian Bender: We would accept that.

  Q36  Mr Touhig: Could we just step back a little bit? Is there a conflict between science and the wealth creators in the way you approach, in the sense that it seems to me, from what you have said, the whole essence of what you are doing is science and research based and so on, but there is an economic impact which would roll from some of the work that you do? Is there that sort of conflict there between looking at ways in which we can exploit and create wealth as an economy, as a country, as a society, as opposed to just pure science and research?

  Sir Brian Bender: I will ask Sir Keith to supplement what I am about to say if I may, but the purpose of the Government's very significant investment in science over a long period, 5.4% growth in real terms under the previous spending review, is basically quality of life and scientific infrastructure. What we are coming quite rightly under pressure to look at as officials is how to maximise the economic spin-off and wealth creation spin-off from that and also, as part of a separate DTI programme, the technology programme, how to maximise the technology and business pull-through from these programmes. There is not a conflict in all this, but what we do need to get better at—and we have done quite a lot of work on it so Sir Keith can say a bit more on that in a moment—is understanding where the wealth creation does come from and how to maximise it from what is the right science. The starting point should be the right science that the nation needs.

  Q37  Mr Touhig: I can just perceive that there is some conflict then. You have your political masters who are saying you really just need to see how this is going to benefit our economy and your scientists are saying you need to do this in terms of research.

  Professor Sir Keith O'Nions: The bottom line is that there is not a significant conflict and actually it is being handled in a very intelligent way. Let me just put a gloss on that. Our job, in terms of meeting PSA targets with the Treasury, is really to deliver three things: one is world-class science in the UK and I will not go into that but we are second only to the US and holding our own very, very well; then two other outputs, one of which is for public good and this will be climate change, environmental things, healthcare, national security, things that do not immediately create wealth; and wealth creation. These are very clearly understood. There is clearly scope there for producing conflict of investment—why not put all your money into business?—but that has not arisen. We have quite a sophisticated way of managing it and it is being managed by ministers in a very intelligent way and in a way that is something of an exemplar internationally. I accept that there is always a risk but it is not one we are dealing with day to day.

  Q38  Mr Touhig: When I was a minister and I was responsible for a research and science facility, we needed a chief executive and all the advice I had was that I must appoint a scientist, yet the organisation operated in a commercial market and I believed it needed a commercial manager and that is what they got Was I right?

  Sir Brian Bender: I do not want to second guess the precise circumstances. For any of these organisations you need someone who can manage and someone who is scientifically literate and the question of which may be more important and which can be secondary would depend on the case. I certainly would not dare to say you were wrong on it.

  Q39  Mr Touhig: My civil servants did.

  Sir Brian Bender: I would not want to appoint a chief executive of, was it the Met Office you were talking about? I would not want to appoint a chief executive who was a brilliant scientist who had no management competence at all, because they need to motivate a significant number of people. Striking a balance would be my answer, without knowing the details of the specific case.


 
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