Select Committee on Science and Technology Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

WEDNESDAY 6 DECEMBER 2006

MR COLIN PAYNTER, MR STUART MARTIN, MR DAVID WILLIAMS AND SIR MARTIN SWEETING

  Q1  Chairman: Good morning and could I welcome our first panel this morning on what is the first oral session of our inquiry into Britain's space policy, and a particularly warm welcome to Colin Paynter, the Managing Director of EADS Astrium, Stuart Martin, the Business Director of LogicaCMG, David Williams, the CEO of Avanti, and last, but by no means least, Sir Martin Sweeting, the CEO of Surrey Satellite Technology Limited. I wonder if we could ask you, Martin, if you would chair your panel and, in case there are any problems with our colleagues, you can be the arbiter and make sure they are kept in good order. We are being televised this morning and this programme will be beamed out across the world on satellite television! Could I also welcome our guests this morning. Could I start perhaps with you, Colin, and ask the same question also to you, Martin. We have read the Case4Space and it is a very, very impressive document indeed and we are also having some work done on the background to that, looking at some of the assertions within the document, as you would expect us to do as a committee. It does seem as if the UK space industry is a thriving set of organisations and we are asking the question, therefore, why do you need investment from the Government?

  Mr Paynter: Well, the Government invests in a number of areas of space, as you know, certainly to support world-class solar system earth observation science and also to provide infrastructure which enhances the UK. Both of those affect industry and support industry, but in terms of the wealth-creation aspects, which I think is the point of your question, what the UK has to do, it cannot be a low-cost environment, it cannot pursue the low-cost solution, it has to be at the leading edge; it has to do difficult things. We are looking to the Government to support, through R&T, the very early stages of that technology development which creates the environment for wealth to be created. It is because it is right at the leading edge each time we tackle a new type of technology that we can actually offer the differentiation to other UK companies, whether it is services or application-providers, and wealth can be significantly created. I think figures have shown that investment returns of seven or 10 to one can be achieved with relatively small seedcorn R&T investment.

  Q2  Chairman: But the question that we find difficult to get an answer to is: if it is so successful, why will the markets not actually provide those resources? Why are you different from any other area of British industry?

  Mr Paynter: There are a number of factors, I think, here. Leading-edge satellite technology is inherently risky and takes a longer lead-time to market and part of that is that you have to have a maturity in that development before it is launched and, unlike standard software or anything like that, we cannot update it as readily because, once launched, obviously it is very difficult to alter. The other issue is it is quite a wide-ranging market, so the wealth-creation aspects are quite often a long way away from that initial R&D, so if I give the example of navigation, the real wealth-creation in navigation is small- and medium-sized companies creating applications from the infrastructure that Galileo will produce and that is quite a long way from the initial R&D investment by the Government or by ourselves in the upstream industry. Also I think there is recognition and that other countries recognise the importance now of satellite R&D in particular to wealth-creation and are investing in R&D, so there is a level playing field effect here. Government involvement really does drive up the capital market confidence so that they can invest and I think HYLAS is a very good example which David Williams will cover later, so it is that confidence in risk-reduction which is also very important.

  Q3  Chairman: Martin, would you add anything to that?

  Sir Martin Sweeting: I think Colin has listed the main points. I think one can summarise it by saying that space is a driver of technology and it has been very successful, but it has been based on a fairly thin investment in science and technology with regard to space and, therefore, we are not capitalising fully on the opportunities that we see. Because of the very long-term nature and, to an extent, high risk over that lengthy investment cycle, the UK would stand to benefit much more strongly if it could capitalise on these opportunities through a stronger programme.

  Q4  Chairman: But is it not the Government's job to actually invest in the basic science, the basic technology, the blue-skies research, rather than try to best-guess what the market needs in order to deliver a return on investment?

  Sir Martin Sweeting: I do not think we are looking to the Government to second-guess or best-guess the market at all. What we are looking for is to build up the fundamental technology base which comes from science, but then develop the science through technology in order that it provides the tools for the market then to grow. By having a strong technology base, we are then, as a nation, able to capitalise on the opportunities. Without that investment, which of course is also done by industry, it is not done solely by the Government, industry invests very strongly in the R&D base, by having those two together, we can then have a strong foundation or platform from which the country can then respond to the opportunities to a far greater extent than it has so far.

  Q5  Chairman: For how long do you think the industry will continue to need that seedcorn funding from the Government?

  Sir Martin Sweeting: I think it is an ongoing process because technology is moving—

  Q6  Chairman: So it will never stop?

  Sir Martin Sweeting:—and markets are developing, so this is part of the infrastructure that is required.

  Q7  Adam Afriyie: If each of you had a choice over which project should enjoy the highest level of funding at the moment from the Government, and there are four or five key projects going on at the moment, where would each of you suggest that the Government provided that seedcorn finance or key finance because I am sure for each of you it may be marginally different in terms of your own focus?

  Mr Williams: That is a difficult question because there are projects that the industry is engaging in which have got very strong social or environmental benefits, but space technology is a great driver of social change, in my opinion, and it is very difficult to put a price on the value contributed by systems which warn emerging nations of impending disasters or which address our environmental issues. There are projects which will result, like Galileo, for example, in very strong revenues inbound into this country and the creation of technology clustering in this country if we take a lead in it. It is very difficult for me to say which one is more important, the one which produces the bucks today or the one that stops the rain tomorrow, I do not know. I would probably plump for Galileo because I think the money today gives us flexibility to do other things.

  Q8  Adam Afriyie: Martin, obviously you have a keen interest in smaller satellite technology. Is yours a similar view, would it be Galileo in terms of your own particular circumstances?

  Sir Martin Sweeting: I think it really depends on how far out you look. As you said in your statement, there are a number of strands and you could argue for any one of those as being important and it is rather difficult to pull out one of those as being overwhelming. I think what we need to do is to make sure in fact that we do not necessarily just focus on one opportunity because it is not clear yet which of those is going to be in the best long-term interests. We have clearly GMES for the environment essentially, we have navigation, we have communications as being very-well established, but we also should be looking, I think, further afield for the exploitation of activities beyond orbit, not necessarily manned activities, but the exploitation later on of some inter-planetary activities. These are all on different horizons with different risks and we need to move ahead balanced across those.

  Mr Martin: I would agree with what David said, that it is very difficult to compare the programmes that we are talking about now as being the key choices for government investment, but one thing I think we need to do is maintain investment and development in the core generic-type technologies which will be important when the next series of programmes comes up in enabling the UK to take the leading role in those programmes if we have that bedrock of investment in the underlying technologies beforehand.

  Mr Paynter: I will not repeat the answers that other people have given. The facts in the UK are that 80% of the industry and perhaps more of the wealth-creation is locked into telecoms research and development leading to wealth-creation. I think that will be balanced more in the future as really the applications of Galileo come on side, so if we are looking at wealth-creation rather than science benefits at the moment, then clearly telecoms and Galileo stand high in my measure.

  Q9  Adam Afriyie: To Martin and David really, are there different demands or different challenges for small- and medium-sized enterprises in terms of benefiting from space investment compared to larger corporations?

  Mr Williams: Yes, I think there are. The large proportion of wealth generated in the UK is generated by medium-sized and small-sized companies. Traditionally, it has not been possible for small companies to play a big role in the space industry. Martin's company is larger than mine, but we are both classified as small- and medium-sized companies and, in our own ways, we are both leading the world. We have both managed to do that as a result of extraordinary partnerships between the Government, industry, commerce and finance and that really is the essence of what I think is the most important answer that can come out of today which is that we do have a world-beating industry. We do not have many of them in the UK, possibly three or four, but in areas of space technology we are genuinely world-beaters and we do not have to remain world-beaters, we do not have to carry on doing things the same way, but we have got an opportunity to get better at it. We have got ourselves into this position by pooling the resources that we have got. Government is very good engaging in space projects in the UK or it certainly has been in the last seven or eight years and there are some key individuals inside the DTI, for example, who have pushed that forward. We have the world's most innovative capital markets for space finance, we have the world's best insurance market and we have some of the world's best technology brains. What we have been able to do in the last few years is to pull together these different sectors of the economy and the space economy specifically to extract maximum value from everyone's particular skills. It is a bit like why the England rugby team is playing badly at the moment, that they have got the right players, but they are not coaching them in the right way. We have been coached very well over the last few years and we have managed to accelerate, as a result of team work, the deployment of very blue-skies technology from the lab into the commercial service in a short number of years and that is our advantage. Our advantage is speed. Now, if we are able to do that, then small companies can leverage the skillsets of large companies of Astrium and Logica and government support in the capital markets which results in quite extraordinary things, small companies taking a lead in the space industry.

  Q10  Adam Afriyie: One big concern I have is that I have been to two Case4Space presentations and my background is in business for 15 years and I have to say that I am not entirely convinced that the case has been made for further government investment. I have not been convinced yet that there is a very strong case for further or additional government investment of seedcorn finance in the space industry. Why? Because of all the things you have been saying now which is that it is a great industry, it has a great return, people do wonderful things in the medium term and the long term, it creates jobs and that it makes profits. Under those circumstances, surely the private finance industry, venture capitalists and longer-term pension funds would wish to invest in such a great opportunity, so why the Government at all?

  Mr Williams: I have an answer to that. I was a banker for 10 years, so I have been on both sides of the fence, and Colin referred to this at the start. In the UK we cannot compete on the low-cost things anymore. The Chinese and the Indians particularly have accelerated the development of their own space industries and there are elements of the space industry which are low cost and are becoming commoditised. There is always technology further down the development curve which becomes commoditised and can be done cheaply by other people. We are never going to compete there because our labour rates are just too high and the vast majority of space manufacturing cost really is labour, so if we want to remain in the development and manufacture of space technology, we do not have to, but if we want to remain there, we have to be at the cutting edge. Now, if you are going to be at the cutting edge, you have got to make sure that you are extracting benefits as quickly as possible. There is no point developing very clever technology, but taking a long time about it because, if you do take a long time, by the time you have got it into the market for the first time, the Chinese and the Indians have caught up, so what we have been able to do is to collapse the timescale from lab to market from about seven years, which is what it normally takes to get a new technology into space, to three years. We have done that by using the Government, the City, industry and commerce to each take a different piece of risk in relation to the development of one project and, rather than those risk elements being implemented sequentially, we have done it all at once.

  Q11  Chairman: I just want to intervene at this particular point because what you are describing, and in fact you said in the Case4Space, is that "Government intervention remains essential to share the technology risk which industry and the capital markets find it difficult to absorb in the current conditions of market failure". You are describing market failure in actual fact, so would the Government not be better addressing the issue of why the market fails to be able to deliver that speed of technology from the lab to application rather than investing in the industry?

  Mr Williams: I think the Government is addressing that. I do not think you are going to hold back the tide of investor sentiment. It was very difficult for me in the early days to persuade venture capitalists that they should be investing in technology that was on a drawing board and fundamentally unproven. My market risks are big enough, but actually being the first guy to buy the piece of technology is something that commercial investors are just not really set up to do in most industries, let alone the space industry where the available skillset of investors is very, very narrow, so what we have managed to do is to get the Government to take out some of that blue-skies risk. In my own problem, it was not just the money, it was the fact that the European Space Agency and the experts of the British National Space Centre, for example, had put their imprimatur of quality on to the technology that I was buying that got the capital markets interested and we managed to leverage the government investment two thirds and, as a result, we have deployed technology which hopefully Astrium will sell many more times.

  Q12  Adam Afriyie: The Government has been investing to a certain degree in obviously basic research as well as in certain projects and there is a certain amount at the ESA. What opportunities, so looking back over the last 20 or 30 years, have we missed out on with the lack of government investment? It seems to me that perhaps the level of investment is about right.

  Mr Paynter: This is a really difficult question to answer looking back over 30 years. I think we sit at present at about 7.3% market share in a very significant, growing market. If the investment profile had been twice as much as it has been over the last 10 years, I think we would have seen us sitting at 15% in that very growing market. Our industry has grown 10% each year in the last four years and that is based upon some sound decisions that we have made and the Government has made in terms of technology and research. I think we would have been in an absolute world-leading position, particularly in satcoms, and we would have increased significantly our market share.

  Q13  Graham Stringer: I would just like to return to the question about why is there a sustained need for government investment. I think you have answered quite adequately as to what has happened, but, as the industry gets more successful, are the capital markets not likely to say, "This is somewhere where we will invest in the future"? I do not understand why you think that will not happen.

  Mr Williams: Capital markets do not like large amounts of speculative R&D. If you are a big fund manager, you are sitting at your desk thinking, "What percentage return am I showing my investors today?" What they care about is cashflow, they care about today's profits. It is a refrain that I was reading about when I studied economics in the 1980s, that we have got this tradition of being short-termist, but that is just the way of the world. The people who deploy capital want to see returns today and they would far rather see some cash today than highly speculative returns in the future which is what makes space a difficult business. Now, that is why governments around the world take a very active role in investing in blue-skies space technology; it is the way it happens around the world. We have great successes in the UK in the last six or seven years by getting the Government to take some of that blue-skies risk and then putting the muscle of the capital markets and industry behind it, but if there is not someone there to take the first risk, I do not think that the capital markets will step up to that plate.

  Q14  Graham Stringer: And you do not see that changing at any time in the future?

  Mr Williams: No, because we have to maintain a continual lead of three or four years over economies like China or India. They do the commodity things, the cheap things very well. If we are not continually developing brand-new technology, they will overtake us and the industry will go elsewhere and to an extent, as a satellite operator, I do not care. If I can buy cheap, fabulous technology in India or China, I will, but I do believe that there is a strong benefit to be had from clustering both service and manufacturing operations in the UK, keeping brains, skills and technology in one country. As a government and as an economy, that matters a lot more than it matters to me as an operator.

  Q15  Graham Stringer: I am not sure if this is a question that can be answered, but would all the things you are saying not apply to the drugs industry?

  Mr Williams: I think to an extent yes, they do.

  Q16  Graham Stringer: But they are not coming for government handouts, are they, so why is your industry different?

  Mr Williams: Well, the biotechnology industry, I think, it applies to and there is vast investment from the Government going into biotech. The drugs industry is very large and very global compared with space, so there is probably a greater understanding of what R&D means in drugs than there is in space. Not every country has a space industry, but virtually every country does have a drugs industry.

  Q17  Graham Stringer: Martin, do you have anything to add?

  Sir Martin Sweeting: Yes, I would use an example in my own field of small satellites. In the 1980s, the research councils invested a small amount of money into investigating the possibilities of small satellites at a time when satellites were getting bigger and bigger and small satellites were considered, at the very best, a mild form of lunacy, so that investment of about £¾ million over a period of 15 or more years has created a new small satellite industry which is now within the UK generating something in the region of about £120 million in exports, but it was 15 years and it was an investment into a topic which at the time seemed to be going totally in the different direction from the established field. It is only the Government really that has the opportunity to provide that initial seedcorn to try to de-risk it to the level where 10 years later, possibly then, the financial markets and the market itself start to take over because it is really a very long cycle in those climates.

  Q18  Chairman: You will appreciate that this is a key area for the Committee because I think it is one of the very, very key issues in your Case4Space and it is important that we actually examine that. Could I move on to ARTES and ask, Colin, what discussions you have had with the Government regarding the investment in ARTES?

  Mr Paynter: ARTES is the only advanced research and technology money coming into satellite telecoms. In previous years, it has been an investment broadly running at about £20 million per year, but at the last ESA ministerial conference, that was reduced to £8 million a year. I have not received really an adequate explanation of that, apart from general priorities and other issues. That, I think, was very disappointing to me because it is an area that has shown tremendous return and all the indications are that there could be really strong wealth-creation returns in the future. I have asked the Government to not only recover the situation, but actually to increase funding to £30 million a year so that we can grow our market share in the UK and create wealth in the UK in the years to come and that is under consideration at the present time in the Government's Spending Review.

  Q19  Chairman: Why did you come up with the figure of £30 million?

  Mr Paynter: Well, we looked at what spend profile we would look at and what technology developments we would see emerging which would keep us at the leading edge and drive us forward over the next five years. Working back from that analysis, we looked at a figure of approximately £30 million allowing us to do that and to grow the UK market share in satcoms around the world.


 
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