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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