House of Commons - Technology and Innovation Centres - Science and Technology Committee

Technology and Innovation Centres - Science and Technology Committee Contents

4 Funding model

61. Following the Spending Review 2010, the Government set out, in the Blueprint for Technology, that over four years it would provide "more than £200 million of funding to establish an elite network of Technology and Innovation Centres [TICs] through the Technology Strategy Board".[96] Rt Hon David Willetts MP, the Minister of State for Universities and Science, confirmed that this "£200 million will be a specific budget line for the TSB that has to be spent on this initiative".[97]

62. Dr Bradshaw, from the Confederation of British Industry (CBI), acknowledged that £200 million was "a drop in the ocean" when compared to the amount of money invested in Germany via the Fraunhofer Institutes.[98] Professor Parker, from Rolls-Royce, urged us to be realistic about the financial scale: "the Fraunhofer network today costs €1.6 billion a year to run [...] we are not going to replicate the German system overnight".[99] He added, however, that £200 million over four years was "a start".[100]

63. Iain Gray, from the Technology Strategy Board (TSB), indicated that the £200 million over four years would be used to fund six to eight TICs:

In quantum terms, £200 million spread across six to eight centres is not dissimilar to the Fraunhofer funding model in terms of funding per centre [...] There is no reason why that could not grow into the future, but it is very important that the amount of money we have is invested wisely and is not spread too thinly across a very large number of centres. I acknowledge, compared with Fraunhofer, that it is a small number, but that number spread across that number of centres is very similar to the investment that goes into the Fraunhofer Institutes.[101]

Dr Bradshaw agreed that "critical mass is absolutely important. Don't try and spread the money too thinly. It's going to mean that there will be some hard decisions to be taken."[102]

64. We asked the Minister whether the level of funding provided by the Government would be sufficient. He told us:

It is very likely that as the bids come in, as reactions to the prospectus come through, there will be a long list of candidates and the TSB won't be able to afford to fund them all within a £200 million budget over four years. They may not all meet the criteria, anyway. I think this aim of six to eight [centres] is a good one to have.[103]

65. In the light of the current economic climate the £200 million over four years for TICs is welcome and provides an acceptable foundation for this new initiative. It is important that the money is not spread too thinly and we consider that an initial target of six to eight centres seems to be sensible. Given the potential for these centres to stimulate economic growth, we also recommend that the funding for TICs be reviewed regularly, in order to increase investment in areas where the results justify it as well as in areas of emerging technologies in which the UK has developed strengths. In the longer term, when compared with the level of investment in Germany, there is a strong case for widening the network of TICs and substantially increasing funding.

Adopting the Fraunhofer funding model

66. The TSB explained that the Fraunhofer funding model was "one third, one third, one third", that is:

Approximately one third of the funding is granted by the German federal government and Lander; one third is collaborative research and development type funding, including funding won competitively from EU programmes, and the remainder is directly contracted commercial revenue.[104]

67. Several organisations that submitted evidence to our inquiry were in favour of the TICs adopting a Fraunhofer-type funding model, including, the Association of Research and Technology Organisations (AIRTO), the Regional Development Agencies (RDAs) and the Judge Business School, University of Cambridge.[105] Dr Bradshaw, from the CBI, told us the funding model was one of Fraunhofer's strengths and that long-term funding and a central core funding from Government "acts as a catalyst to bring in additional funding and helps to de-risk some of the investments that others make".[106]

68. The TSB's TICs prospectus indicated that this funding model would be adopted:

Under this model centres would be required, when fully established, to generate their funding broadly equally from three sources:

- business-funded R&D contracts, won competitively

- collaborative applied R&D projects, funded jointly by the public and private sectors, also won competitively

- core public funding for long-term investment in infrastructure, expertise and skills development.[107]

69. Professor Perry, from the Centre for Process Innovation Ltd (CPI), told us that this funding model "is not something that you can magic overnight".[108] He explained that CPI "started 100% publicly funded and [...] after seven years, we are operating at about 80% public funding and 20% private funding".[109] The RDA, One North East, also recognised that diverse income streams took time to develop and pointed out that "commercial income only can be generated with marketable expertise and services".[110] The Minister accepted this: "We have to be realistic. You could not expect [the TICs] to get to a third, third, third split in year one or year two".[111] However, some organisations with the characteristics of TICs have been able to achieve a greater share of private sector funding. The Advanced Manufacturing Research Centre is operating at approximately 50% private funding.[112]

The first third: core public funding

70. Iain Gray told us that the one third of funding from the public sector represented "a long-term commitment to provide sustainable world-leading skills and world-leading equipment".[113] The TSB's TICs prospectus further explained that the £200 million core funding would, on the basis of international experience, be sufficient for six to eight centres at £5-10 million per annum per centre.[114] Professor Parker, from Rolls-Royce, agreed that £5-10 million per annum per centre was sensible for "development of infrastructure and central support".[115]

71. The Minister confirmed that there would be no further funding for capital: "The £200 million includes our contribution to start-up costs".[116]

THE NEED FOR PERMANENT PUBLIC SUPPORT

72. The TSB's TICs prospectus recognised that core public funding ensured that centres were sustainable and gave business the confidence to invest. The TSB anticipated that core funding would be provided "initially for five years, and renewable in similar increments".[117]

73. Professor Brook told us that AIRTO's existing member organisations were majority private funded. He suggested that "the TICs, in due time, will probably go towards a majority of private funding over public funding, but it will take time, and I think the core funding needs to be there until the market failure has gone away".[118] We asked him whether this meant TICs only needed core public funding in the short to medium term. Professor Brook responded: "We should be looking for the same continuance of public funding."[119] He pointed out that:

the Fraunhofers [...] have evolved, changed and migrated—if you look at them now and 15 or 20 years ago, they are doing different things. They are changing and adapting to the needs of the market, in terms of the function that they perform.[120]

Professor Perry, from the CPI, added that like the Fraunhofer Institutes, the "technology agenda" of TICs would evolve over time.[121] Pam Alexander, from the RDAs, considered that the issue of sustainable public funding was crucial.[122]

74. Professor Parker was reluctant to encourage the TICs to become self-funded. He explained that this was one of the lessons learnt from the Faraday Partnerships of the 1990s (paragraphs 11-12) and that:

you have to recognise that we are in this for the long term [...] We should recognise that Government money will always be necessary to drive them forward, or they should cease to exist if they are not performing. I think it is unrealistic to expect everything to stand on its own two feet.[123]

75. Dr Bembo, representing the Association for University Research and Industry Links (AURIL) and Universities UK, agreed.[124] Iain Gray told us that one of the big differences between TICs and Faraday Partnerships was that TICs would align to TSB strategic priorities and that, to an extent, the sustainability of a centre in gaining both public and private sector funding would depend upon it continuing to work in line with those priorities.[125]

76. A number of organisations were clear that public funding of TICs should be a long-term commitment, including the Russell Group and the CBI.[126] Iain Gray explained that this is "difficult […] in terms of the political budget timetable"[127] but that "we certainly need the longer-term commitment [as] these Technology Innovation Centres are not just here for three to four years".[128]

77. The Minister acknowledged that addressing the issue of continuing long-term public support was critical, but that the TICs already had good cross-party support.[129] We asked whether this could be solved by creating an "innovation endowment", to which the Minister responded, "that is an interesting thought".[130]

78. The dangers of centres suffering from a lack of core public funding and becoming too dependent on commercial income are exemplified by the Faraday Partnerships. We recommend that the Government provide permanent core public funding to keep the centres innovative and to give business the ongoing confidence to invest. If the centres become self-funded, we fear that the research priorities would be set by those providing the funding, rather than aligning with strategic national priorities. Whilst we acknowledge the difficulties in committing to funding beyond the next election, we consider that the Government should further investigate whether an innovation endowment would prove a practical solution to this problem. The Government should seek a cross-party commitment that gives confidence to the TICs.

The second third: competitive public-private sector funding

79. The second third of the funding model, as described by Iain Gray, is "competitively won public-private sector funding against competitions [...] European funding competitions [...] UK funding competitions [and] Technology Strategy Board funding competitions".[131]

UK FUNDING

80. Iain Gray explained that, in terms of accessing UK-based funding, the fact that the TICs aligned with national strategic priorities would be important because it "ensures that there will be a succession of competitions that the centres will have access to in a competitive sense. They need to win it, but there will be competitions in the themed areas in which the centres are involved".[132]

81. If competitive grants are aligned with TICs' priorities, it raises the question of whether TICs may have an unfair advantage over other centres seeking to access competitive funding for innovation projects. This was an issue raised by the Knowledge Centre for Materials Chemistry:

there are significant risks from seeking to concentrate innovation resources in a limited number of TICs without simultaneously ensuring a high level of continuity with existing industry science and innovation networks.[133]

The Institute of Physics was concerned that an indirect effect of setting up the TICs "may well be to put further pressure on the universities which use research contracts as alternative sources of funding".[134]

82. We asked the Minister to clarify the TSB's Spending Review 2010 allocation. He explained that there would be four budget lines:

- the overhead costs for the TSB, where we are looking for efficiency savings;

- the core funding of the activities of the TSB so far which [the Government] can't exempt from savings [this would include TSB funding competitions which TICs and other centres could apply for];

- then there is the R&D grant regime which is taking over some of those responsibilities from RDAs;

- and then, fourthly, there is this very important initiative on Technology Innovation Centres.[135]

83. A reduction in core funding of the TSB's activities concerns us. Indeed, we have heard from the CPI that "in the UK the amount of public funding going into the innovation step is insufficient to ensure that value is created from the UK's excellent science and technology research".[136] The CBI also told us:

Part of the problem which the proposed technology and innovation centres are aimed at addressing is the balance of public funding between the substantial level of support for research and the much lower figure for innovation. The Technology Strategy Board, for example, currently enjoys core funding at a level which is about one-twentieth of the budget for university research dispensed by the Research Councils and the higher education funding bodies such as [...] the Higher Education Funding Council for England. The resulting bottleneck in exploitation of research outcomes puts UK business at a competitive disadvantage internationally, and this is likely to be exacerbated by the disappearance in England of the innovation funding support disbursed hitherto by the RDAs—a total of about £350m.[137]

84. There is already an imbalance in public funding between research and innovation. We are concerned by the prospect of further reductions in the core funding of TSB activities. We consider that, when it comes to innovation, the Government should not expect "more for less" from the TSB. While it is inevitable that TSB competitive grants will be in line with the priorities of TICs, it is important that limited funds for innovation are not monopolised by the TICs. The Government's and the TSB's funds for innovation have to be available to those outside TICs, as their work may be the basis of the TICs of the future.

EUROPEAN FUNDING

85. The CBI told us that the Fraunhofer Institutes in Germany have "an important role in facilitating business engagement in the European Framework Programme for Research and Technological Development".[138] Universities Scotland explained that "the lobbying power of the Fraunhofer Institutes at the European level should not be underestimated and should be a force to be reckoned with if similar institutions wish to influence or benefit from European initiatives in Research and Development".[139] Dr Bembo, from AURIL and Universities UK, added that "the Fraunhofers have tapped into European Regional Development Funds [and] last year they drew down tens of millions of Euros to establish new capital facilities. That is certainly something we should explore in the UK".[140]

86. Professor Parker, from Rolls-Royce, explained that the TICs could apply to win competitive European funds themselves and also assist industry to access European funds directly.[141] Some centres in the UK are already trying to do this. Professor Perry, from the CPI, told us "we will be developing a dedicated team inside CPI, whose sole target will be to identify and target [European] framework programmes".[142] We asked Iain Gray if this was an approach that the TICs might take. He explained that each centre would need to understand the themed area that it worked in but not necessarily have its own in-house grants team. The Minister also considered it might be better if a dedicated team was provided centrally, possibly through BIS or the TSB.[143]

87. There is a huge opportunity for TICs to obtain European funding for themselves and to assist businesses trying to access this money. We conclude that, from the outset, TICs must have mechanisms in place to enable this to happen. We agree with the Minister that there should be a central team in either the TSB or BIS that provides, at the least, general guidance and assistance to the network of TICs. We consider that the TSB should ensure that there is a named individual within each TIC who understands the international funding opportunities within his or her area, and takes responsibility for liaising with the central team.

The third third: private sector contracts

88. The final third of the funding model will come from contracts won from the private sector. Iain Gray explained that "a successful Technology Innovation Centre could see that part of the funding stream actually grow, and over time it could grow quite significantly".[144] We found his words encouraging.

89. During our visit to Germany we learnt that the Fraunhofer Institutes put a cap on the amount of private sector funding that each institute can earn in a given year. This is to prevent them from becoming "too commercial", on the grounds that if there is a bias toward private funding, institutes become too business-oriented and risk averse, whereas a balance of private and public funding generates a more creative approach to innovation. Professor Perry, from the CPI, explained:

If we move a centre to be sustained wholly by its activities in the private sector, all that we have succeeded in doing is setting up an SME that will then behave exactly like an SME […] It is very important that there is creative tension. The comment also applies the other way. It is very important that this thing does not become public sector dominated. It has to operate in this interface between public and private sectors.[145]

90. AURIL and Universities UK suggested that "a threshold of engagement should be agreed—for example, 30-40% income from industrial partners which, if not secured, resulted in a proportion of the core funding returned for re-deployment. In essence, embed a financial claw-back system".[146] Iain Gray told us he had not come across this concept and said:

As a network, it is important that we put in place the right performance metrics so that if something is not working we can either correct it or stop it […] we need to have the mechanisms that make sure that […] if a centre is underperforming, we can stop that. That, for me, is a different approach. Frankly, I don't see how a claw-back mechanism could work.[147]

91. We pressed Mr Gray on the wider issue of a cap on private sector investments, specifically whether TICs would benefit from the Fraunhofer approach. He told us he would not put a cap on private sector funding but added that "the element of long-term commitment from the public sector […] is an important part of the funding model".[148] The same question was put to the Minister, he told us that:

I don't envisage a cap [on commercial income], but if you were able to finance yourself entirely out of commercial income, […] it would certainly change the nature of the operation quite a lot.[149]

92. We conclude that there should be a cap on the amount of private sector funding each TIC can access in a given year. This will promote a more creative approach to innovation. TICs should have a clear objective to follow the "one third, one third, one third" funding model. We recommend that when a TIC earns the majority of its income from the private sector it cease being a TIC and no longer receive core public funding.

ENGAGING SMALL BUSINESSES

93. In both Germany and the UK there is general agreement that in working with the private sector to fund innovation, it is important that TICs engage not only with large companies but also with small businesses.

The nature of work

94. Dr Bembo, from AURIL and Universities UK, told us that the nature of work of the university sector with SMEs is different to that with large companies. He explained that "we see a lot of consultancy take-up from the SMEs [and] we see SMEs wanting to access university facilities [particularly] large scale equipment […] There will be different offerings that appeal to the different sizes of company".[150] Patrick Reeve, from the British Private Equity and Venture Capital Association, agreed that access to facilities was important.[151]

95. Direct access to facilities is not the only way an SME can use a TIC. A number of organisations stressed the benefits to SMEs of working with large companies. Professor Parker, from Rolls-Royce, explained that "many of our successful SMEs don't have a route to market in their own right […] They rely on larger integrators to take their products, their ideas and build it into a system or product that eventually does go to the market."[152] Professor Ridgway, from the Advanced Manufacturing Research Centre, agreed that SMEs were often looking for a market and a business to take their idea forward rather than a grant.[153] Iain Gray also acknowledged the "role that large companies can play in developing the supply chain and actually pulling small companies through".[154]

Finance

96. Barclays Bank explained that the evolution of SMEs in the technology sector could be divided into three phases: (1) proof of concept; (2) commercialisation; and (3) profitability. On the financial challenges faced by SMEs, Barclays Bank explained that:

In stages (1) and (2) the risks of failure are high and the funding model remains an equity one. This equity is obtained from a number of areas including personal resources, friends and family, wealthy entrepreneurs and specialist tech and VC [venture capital] funds. The role for bank funding (i.e. loans and overdrafts) really only applies once the business moves into stage (3) and this is where Barclays continues to be very active.[155]

97. Professor Brook, from AIRTO, considered that "SMEs find it difficult to get bank loans [...] but there are now early-stage funds that will invest modest amounts into an SME for a minority stake, either as equity or as a convertible loan."[156] Pam Alexander, from the RDAs, added that: "we have regional funds, which are helping to bridge that gap, particularly on the early-stage commercialisation funding. Those should be brought together under the new umbrella of Capital for Enterprise Ltd, but should still be available at regional level".[157] The Minister told us that:

Capital for Enterprise as an NDPB [non-departmental public body], although we pass money through it, does not itself directly allocate funding. It in turn passes the money on to organisations like Amadeus that then take the decisions about how the money should be spent. That would be the level where you might see decisions being taken to fund activities at Technology Innovation Centres rather than at Capital for Enterprise itself.[158]

98. Iain Gray explained that the TSB was already working very closely with Capital for Enterprise on the TIC model.[159] He acknowledged that the TICs would help encourage investors to take a long-term view on SMEs. The Minister hoped that "SMEs' involvement with Technology Innovation Centres does strengthen their financial base and increases people's confidence in their commercial performance".[160] Mr Gray continued, however, that "a Technology Innovation Centre is not necessarily the only answer to how [TSB] support small businesses".[161] A small customer who went to a venture capital firm or a bank with a Government procurement contract (funded through the Small Business Research Initiative) was "worth an awful lot more than [a customer] saying that [they] are doing a bit of work in a Technology Innovation Centre".[162]

99. Like the Minister, we hope that SMEs' involvement with TICs will strengthen their financial base and increase lenders' and financiers' confidence in their commercial prospects. We are pleased that the TSB is already working with Capital for Enterprise on the TICs initiative. We encourage the TSB to consult more widely with financial organisations, including venture capital providers and banks, to ensure that there are no barriers to SMEs engaging with TICs. We also expect lenders to engage with TICs to help develop a better understanding of the economic potential of technologies that SMEs are involved with.

96 HM Government, Blueprint for Technology, November 2010, p 9 Back

97 Q 136 Back

98 Q 30 Back

99 Q 12 Back

100 Q 30 Back

101 Q 106 Back

102 Q 29 Back

103 Q 150 Back

104 Ev 62, para 4 Back

105 Ev 40, para 1.14; Ev 56, para 8; and Ev w38, conclusions and recommendations Back

106 Q 12 Back

107 Technology Strategy Board, Technology and Innovation Centres: a prospectus, January 2011, p 5 Back