Examination of Witnesses (Questions 20-39)
LORD SAINSBURY
OF TURVILLE
21 NOVEMBER 2007
Q20 Dr Blackman-Woods: You did mention
this role of further education. Perhaps you could say a little
bit more about what you think about that role of FE at the moment?
First of all, in such an employer-led system in FE is that going
to be the right way forward to ensure that the science gets embedded?
Lord Sainsbury of Turville: Yes,
there is nothing better than to get FE alongside industry than
doing knowledge transfer. If actually the professors who are teaching,
or people who are teachers, can actually say "This morning
I was working in this factory helping them set up their quality
control system. This was the problem and this is what we did,"
all my experience shows that is what students really like because
they feel this is really what it is all about. It gets the teachers
alongside industry so they make those connections and all the
good things that happen in those situations, ie industry will
put some machines into the FE college, the latest machines, because
they know the students will then be taught the right sort of thing.
It is very common in these situations that the professor rings
up the company and says "I have two very good students, why
do you not recruit them because they will be very useful for you."
That kind of relationship based on knowledge transfer is very
productive both to the quality of the teaching and to the contribution
that the FE college can make to the local community.
Q21 Mr Marsden: Very briefly could
you go back to the point where the Chairman asked you about the
TUC's critique of your Review. You gave us a classic third way
analysis of the situation, which is fine, but is there not something
at the margin here that you sometimes perhaps have, particularly
with small and medium-sized enterprises, particularly those who
are working in absolutely new areas like nano technology, is there
not a point where structured government support for innovation
should go a little further than simply the third way solution
that you advocated?
Lord Sainsbury of Turville: I
was aware I was giving a rather complicated answer to the question
but I think the thing of picking winners has become a phrase which
is designed to cut off intelligent discussion of the issue. Obviously
in one sense that is what all industry is about. Who is in the
business of picking losers or not being concerned whether the
thing is a winner or loser? The question is what kind of decision
are you taking. The best example of what they are doing is they
are doing a big project with the aerospace industry on the environmentally
friendly engine. This is clearly about picking a winner. The aerospace
industry and the TSB knows that the industry has got to find a
solution to this problem of pollution, and producing environmentally
friendly is a winning product but the actual project is hugely
driven by the aerospace industry saying this is what we need,
this is commercially the kind of thing which is the absolute key
if you are going to do user-driven research.
Q22 Mr Marsden: That is a large organisation
not an SME. Do you not accept that there may be situations in
which SMEs need a little more hand holding further down the line?
Lord Sainsbury of Turville: I
start from the basis that the people who know about the market,
the market needs, are the companies and basically they should
drive and do their research and development, and their development
particularly. What government can do is basically in areas where
collaborative research is required, because that is where the
market failures have been, and they can do that. We have an endless
history of failure of civil servants trying to produce products
in the commercial market. They do not know what the realities
of the market-place are and by and large they should not get involved
in it. I think government does have a role to play in these issues
but you need to be careful. It is about creating the right conditions
not trying to run the businesses.
Mr Marsden: That is not what I was suggesting
but we will leave it.
Q23 Mr Cawsey: In your Review you
say that our progress in the race to the top has been slowed down
or hindered by the duplication of research with an annual waste
of maybe £20 billion a year. Do you think that encouragement
is going to be enough to ensure that businesses and governments
do better in the future?
Lord Sainsbury of Turville: I
am not aware we have said there was duplication of £20 billion.
What is the context of that?
Q24 Mr Cawsey: The Review states
that as information in the UK's patent databases has not been
fully exploited, there could be annual waste of up to £20
billion due to the duplication of research. Is encouragement going
to be enough to ensure that business and government do better
in the future?
Lord Sainsbury of Turville: This
is about information. Clearly if you can provide industry with
more information which says this piece of research has been done
and has already produced a patent, then companies are not going
to do it, they are going to make use of patents and go on from
there. This is about patent information flowing through to companies
or allowing companies to go to the patent office so they could
get a really good knowledge of what would have been done in the
field so they did not duplicate research.
Q25 Mr Cawsey: You think encouragement
is the way?
Lord Sainsbury of Turville: It
is about information, yes.
Q26 Mr Cawsey: What consideration
did you give to making financial awards for innovation like HEIF
funding or your proposed proof of concept funding depending on
demonstrating that the technologies in question are novel?
Lord Sainsbury of Turville: The
HEIF funding is essentially about incentives. It is incentives
for university to put in the infrastructure and people to do knowledge
transfer; it is never related to a particular piece of technology.
Clearly when it is proof of concept in awarding those grants one
is always looking to see that it is something novel. The people
doing the evaluation should take that into account. I think there
are a lot of rather different situations.
Q27 Mr Cawsey: You say you consider
HEIF, whether it should be novel, and you rejected that because
you did not think it was appropriate. Is that what you are saying?
Lord Sainsbury of Turville: No.
This is a very good example that you should create the conditions
but not try and get involved in individual decisions as government.
HEIF money is not about individual projects but a grant of a sum
of money made to the university for them to use in supporting
knowledge transfer. You do not get involved in individual projects.
That seems to me exactly right. This is creating the conditions
for knowledge transfer to work. It is not making decisions that
X company or Y company should be supported. That is exactly a
good example of this particular point.
Q28 Mr Cawsey: There have been criticisms
that the benefits of the R&D tax credit system are limited
to the costs involved and would not government money be better
spent in ways that foster innovation and greater return.
Lord Sainsbury of Turville: You
have to take evidence and look across different schemes in different
countries on this and on the whole it says it does support innovative
companies. In some particular cases the R&D cash has been
a huge benefit. For fast growth hi-tech businesses, particularly
biotech companies, it has been hugely valuable because it supported
them during R&D in the early stages. I think when you get
to the very big companies quite often its main benefit is part
of inward investments promotion that actually companies say we
will come to the UK because they have an R&D tax credit and
we put R&D there because that is one of the benefits you get.
Q29 Mr Cawsey: The fact it is generous
means you attract more money. The criticism, as I understand it,
is the tax credit system is a poor return for the taxpayer in
terms of what we get back out of it but you say the fact it is
generous will attract people to come in.
Lord Sainsbury of Turville: It
has an impact on inward investment. It supports the level of R&D
in medium-sized companies and in fast growth hi-tech businesses
it has had a huge benefit.
Q30 Chairman: What evidence is there
at all that R&D tax credits do not, in fact, carry a huge
amount of dead weight costs? Has there been any analysis of that
at all?
Lord Sainsbury of Turville: I
think there has been a review which has shown that it is actually
beneficial. As I say, it has rather different impacts in different
levels of company and there is certainly good international evidence
that it does work.
Q31 Chairman: Is there any evidence
that companies would have put the R&D in anyhow irrespective
of whether they would get the R&D tax credits and therefore
that is a cost on the taxpayer which could be used elsewhere?
That is the point that Ian is making.
Lord Sainsbury of Turville: I
totally agree with you. You cannot rule out there is quite a heavy
dead weight cost here but nevertheless it is beneficial. I rather
look at in a slightly different way, which is if you are going
to lower corporate taxes this is the way to lower it.
Q32 Dr Turner: Do you not think that
one of the acid tests of the effectiveness of R&D tax credits
is the percentage of turnover that British companies invest in
R&D? I know from my own anecdotal experience that lots of
small companies only survive through part of their progress across
the valley of death on the R&D tax credits. It is very useful
but the overall picture seems to show very little change in the
percentage investment in R&D, do you not think?
Lord Sainsbury of Turville: One
of the things which is quite interesting in this report is looking
at our innovation performance in chapter 2. I know this is a pretty
boring chapter and even the Treasury officials said that I could
not expect anyone to read it.
Q33 Chairman: We found in riveting.
Lord Sainsbury of Turville: We
do look in great detail at this question of why our R&D level
is 1.8% and other countries are higher. It is pretty clear that
it is related to the structure of our industry. We are very successful
in one or two industries which have either very little, as a percentage
of GDP, or small amounts of R&D. We are very successful in
financial services where there is virtually no traditional R&D.
We are pretty successful in oil and gas which does quite a bit
of research but as a percentage of GDP is very small. Then there
are one or two areas where we have strong industries but they
are foreign owned and the R&D is done abroad. If you take
all those things into account, where we have industries which
are competing internationally and R&D is very important we
do as well as other countries. What we argue in the report is
this is not a question—and I have to say this is where I
think we are much better informed of raising the level of R&D
across all industry because in the key places we are doing pretty
well but making certain that we have enough emerging new industries
in the hi-tech areas which will be able to help us compete in
the future. That is why policies should support that rather than
trying to bring up R&D across the country because that is
not the problem.
Q34 Dr Turner: Do you think that
R&D tax credits will help in key areas where the R&D does
happen, like aerospace and pharmaceuticals? Do you think it will
help in maintaining our position or even enhancing our position?
Lord Sainsbury of Turville: Yes,
I think it will because this is part of an American pharmaceutical
company deciding where they are going to put their R&D facilities
in Europe. People can say put it in the UK because we have very
good basic research, we have got very creative scientists in this
field and you get an R&D tax credit. That makes quite a compelling
package.
Dr Turner: The icing on the cake.
Q35 Mr Cawsey: In your Review you
talk about the small business research institute, how it was set
up originally to try and mimic the success of the American system.
In reality that has not happened. Particularly you make a comment
about how the behaviour of the departments has not been able to
get the best out of it. You have made a number of reform suggestions.
Why do you think these particular reforms will change the behaviour
of government departments, always assuming they have not lost
them in the post?
Lord Sainsbury of Turville: We
have done two things to deal with this issue: one is effectively
we are saying it is going to be administered and run essentially
by the TSB. I certainly did not understand one particular aspect
of the SBRI, which turns out to be very important, and we did
not build it into the original version. What we did not understand
is that the way it works in America is not a question of 2.5%
of R&D going into grants to SMEs for research, what they actually
do is say we are interested in research in the following areas,
ie medical diagnostics. Then any small business in that area can
come forward with projects, they are evaluated and if they are
thought commercially viable they are supported. That is very different
from saying the department wants to have research done and 2.5%
of it is done by SMEs in technology areas. What we are now going
to have is the TSB contacting departments to ask what are the
areas you want to see projects in, and twice a year we will have
calls for projects in those areas. It will become quite clear
if departments are not putting forward technological areas. I
hope this Committee and others would jump on it if it turned out
that departments were not putting forward projects and then the
evaluation will be done by the TSB and the department. It will
all be very visible what is going on. Secondly, we have suggested,
and this has been taken up with enthusiasm by DIUS, there should
be an innovation report each year which will report on exactly
these sort of issues: have the different departments put forward
areas they are interested in and have there been projects agreed
in those areas. It will be highly visible whether it is working
or not and I hope Committees like this will jump on the innovation
report and kick people around if they are not performing.
Q36 Chairman: We do not kick anybody;
it is not our style!
Lord Sainsbury of Turville: Persuade
them in a participatory manner to perform better.
Q37 Dr Turner: Now that the innovation
activities that were in the DTI have moved into DIUS, how do you
think it will affect the performance of the innovation and knowledge
transfer agenda? Do you think it will help?
Lord Sainsbury of Turville: It
has some pluses and, always with these things, some negatives.
The pluses are you do bring together some things where it is very
important that they are brought together, and the particular one
is funding of the universities. To have a dual funding system,
the two parts of which are in different departments, is not very
clever. We have in recent years got them to work together but
nevertheless there are some real benefits to be had from that.
There is another issue which is focus. The problem with the old
DTI was it covered such a wide range of issues, and as the Secretary
of State moves from one controversial issue to the next, if he
is not dealing with the closure of rural post offices he is dealing
with trade issues or energy problems, and so on. Even if the Secretary
of State is really interested and keen on science and innovation
the amount of time he can give to that, which is usually not a
crisis, is rather small. One of the advantages of setting up DIUS
is that you will get John Denham able to give much more focus
to the science and innovation agenda. If there is a negative it
is that you are taking innovation away from the industry side
and obviously that is something which is very important. I have
to say it was not, even when they were in the same department,
tremendously strong. Maybe at the end of the day the moral is
you can go on moving things around indefinitely but the big question
is whether you achieve anything other than slowing things down.
Q38 Dr Turner: You can reform structures
until you are blue in the face but if they do not have the right
people in them you will not get anywhere.
Lord Sainsbury of Turville: Or
the right processes. How do you bring together the innovation
agenda with industry? This may be not about structure but process.
Q39 Dr Turner: Some of us always
looked upon the old DTI as competitive with the Home Office at
times. There is a real issue, is there not, in the interface between
initial innovation between a company getting to proof of concept
and then wishing to commercialise. At some point they are going
to have to be weaned off relationships with DIUS and into DBER.
How do you think this is going to work in future? As you say,
it was not exactly perfect when they were both in the DTI. Can
having them in separate departments possibly advantage it?
Lord Sainsbury of Turville: I
would like to think that when they are weaned off DIUS they are
going to go into the world of commerce and they do not have to
be supported by anyone. I do not think it is a question of being
handed from DIUS to DBER in that sense. This is where I think
you can put in place processes. The director of innovation in
DIUS is going to be a joint appointment of the two departments
and he should work across the two departments and you should make
certain that you have processes to co-ordinate policy between
the two.
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