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Lord Chorley: My Lords, on this occasion I wholly support the noble Lord, Lord Skidelsky, including his rather deft quotations from Karl Marx. My real objection is that it is one thing for a body like NESTA to be composed of people rather like those at university who give grants and that sort of thing, but it is quite another to get involved in the world of venture capital, business and so forth. There would be a very great danger to NESTA's effectiveness and future health if it started confusing its objectives by carrying out two totally different activities.

Baroness Ramsay of Cartvale: My Lords, one of NESTA's key tasks, which is set out in Clause 15(2)(b), will be to help to turn ventures and ideas into products or services which can be effectively exploited. The noble Lord's amendment would prevent NESTA from taking on that role. The noble Lord and I had to agree to differ in Committee on this question and we are no nearer seeing eye to eye now than we were then.

The noble Lord argues that what we are suggesting that NESTA becomes involved in is properly a function of the venture capital market. However, the Government believe that there is a gap which is not currently filled by venture capital which it is essential for NESTA to address. Later I shall cite examples of bodies which agree.

The noble Lord has raised again the point that he raised in Committee, which is that because of the global aspect of scientific and technological development, it does not really matter where in the world a good idea or a good invention is exploited and brought to fruition. We all benefit. However, we are talking about the economic benefit that accrues to the economy of the country which exploits the invention. That is the point that we are trying to address. I refer to the fact that so many good British ideas and inventions come to fruition and are implemented in other countries, thus bringing primary economic benefits to those countries before benefiting mankind.

NESTA will not seek to compete with banks or other sources of venture capital. The formal venture capital market is usually only interested in well-packaged "proven-concept" proposals, backed up by a strong

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management team. Most individuals or small companies acting alone do not have the financial resources or contacts to put this in place. This is where NESTA's work will be vital.

NESTA will aim to bridge the gap between a bright idea and commercial success by providing limited financial support to demonstrate "proof of concept". It will aim to nurture good, innovative ideas to the point where they are in a position to attract more substantial investment from the formal venture capital market by providing limited seed capital. Without this support at the early stages of development, many good ideas will continue to be lost in Britain.

NESTA will also be able to help individuals to develop the business skills necessary to attract formal venture capital. It may, for example, establish networking and mentoring programmes in collaboration with partner organisations to help innovative and creative people to acquire the marketing and business skills necessary to demonstrate the value of their ideas to the formal venture capital market.

The noble Lord, Lord Skidelsky, questioned whether we really are losing our innovative ideas and inventions overseas due to a lack of venture capital in this country. I would draw his attention to the report last year by the Confederation of British Industry on breaking the growth barriers for technology-based small and medium-sized enterprises which highlighted the need to make special provision for early stage finance because of the difficulties faced by many start-up companies in raising early-stage equity.

There is ample evidence from respected sources that barriers to sources of finance are a particular problem for small ventures at the cutting edge of science and technology. A 1996 report by the Bank of England entitled The Financing of Technology-Based Small Firms found, after visiting almost 60 technology-based firms across the UK, that in practice, venture capital for very early stage starts-ups is not readily available, particularly for technology-based firms. The seed capital sector in the UK is small in size and the sector itself considers that, as a result, a number of good proposals do not obtain the early-stage funding that they need.

The British Venture Capital Association has reported that in 1995 only 2.2 per cent. of the total investment activity of the formal venture capital industry was invested in seed start-up and early-stage technology firms. The Bank's report called for,

    "a partnership between public and private sectors, based on a fair distribution of both risks and rewards",

to improve the financing of technology-based firms. This is exactly the kind of role that we expect NESTA to fill.

Finally and, I hope, most tellingly, I would refer the House to the report last year by the Select Committee on Science and Technology on The Innovation-Exploitation Barrier which recommended that there should be a greater focus on the management of innovation and that the importance of intellectual property rights should be fully recognised. Again, these are two areas where NESTA will be able to make a real difference for individuals and companies throughout the country.

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As these reports show, there are imperfections in the current UK venture capital market, serious gaps in the market, about which we cannot afford to be complacent. The provisions in this Bill will allow NESTA to address this in a number of ways: by providing limited seed capital to help turn a good idea into a proven concept; by providing guidance on the protection of intellectual property rights; by helping to raise awareness among banks and venture capitalist companies about technological entrepreneurship; by promoting networking support for creative individuals; by setting up mentoring schemes to help to improve the management and marketing skills of our inventors; by developing links, and perhaps partnerships, with what are called "business angel" networks, affording them greater visibility; and by providing a one-stop source of information and advice about seed capital funds, incubators and grants.

The kinds of activities we have suggested for NESTA will make a real difference to ensuring that our best inventions and ideas are not taken up overseas but are exploited in this country, where their benefits can be enjoyed to the full. Therefore, I oppose the amendment.

Lord Skidelsky: My Lords, I thank the noble Baroness for that reply. All that I can say is, "We shall see". I do not believe that rosy picture. I think that there will be a lot of trouble down the line. If there is a gap in the venture capital market--I am open to that--I do not think that NESTA is the organisation to fill that gap. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 [General duty and powers]:

Baroness Ramsay of Cartvale moved Amendment No. 19:

Page 18, line 37, after ("acquiring") insert ("and disposing of").

The noble Baroness said: My Lords, this amendment fills a small but significant gap in the list of NESTA's powers in Clause 16. It would add the power to "dispose of" as well as to "acquire" interests in bodies corporate. Clearly, it must be allowed to do the one if it can do the other. While the list of powers is not meant to be exclusive, it is as well to include all the obvious things we would wish NESTA to be able to do in the normal course of its activities. This amendment makes it explicit that NESTA can dispose of such interests. I beg to move.

On Question, amendment agreed to.

6 p.m.

Clause 17 [Initial and subsequent endowment]:

Lord Chorley moved Amendment No. 20:

Page 19, line 28, at end insert ("adjusted for the effects of monetary inflation measured by the Retail Price Index").

The noble Lord said: My Lords, Clause 17(6) defines NESTA's "endowment"--and that is necessary because Clause 17(5) states that the endowment may not be spent without the Secretary of State's approval. It is also relevant to Clause 17(2) and to Clauses 18 and 19.

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However, those references need not detain us in respect of my amendment, although I shall touch on Clauses 18 and 19 in a slightly different context.

It will be apparent that, as drafted, the definition of "endowment" is couched in strictly historical monetary terms. It is the sum of the cash amounts paid into NESTA by the Secretary of State at particular dates--in other words, it ignores the effects of subsequent inflation on the real value of the endowment. My amendment seeks to remedy that defect by defining the endowment in real terms. I touched on this matter when noble Lords debated a different amendment to Clause 17(6) in Committee. I admit that I was then speaking on the hoof because the point had not occurred to me before. Subsequently, I have been in correspondence and discussion with the noble Lord, Lord McIntosh, and his officials. I hope that that has been helpful to both sides--certainly it has helped me--in clarifying points. I thank the noble Lord for that.

To me, the point is fairly obvious but then I have been much involved professionally in the problem of the effect of inflation on company accounts, including those of nationalised industries, and the measurement of capital and income. Perhaps I should elaborate. In general parlance, an endowment is a capital fund. It is clear from the whole tenor of the Bill and Clause 17 in particular that NESTA should operate by way of income from its capital fund or endowment. I cannot believe therefore that it is either the intention of the Government or the wish of Parliament that the effect of future inflation on the capital of NESTA should be ignored. It must surely be right, as in the case of properly run companies as well as charities, that future generations of beneficiaries of NESTA should not be disadvantaged. We must seek to be even-handed and not unfairly to benefit today's beneficiaries at the expense of tomorrow's.

In Committee it appeared to me that this was a simple case of Homer having nodded, but these things do happen. The point was then made to me--it was touched on in Committee--that if NESTA had to save part of the interest generated by its endowment in order to preserve its value against inflation the funds available to it for its programmes would be severely limited; in other words, it appeared that the Government envisaged robbing tomorrow's Peter to pay today's Paul. I suggest that that cannot be right. Nor can it be right to say that if part of the capital is spent, there can be a raid on the distribution fund or use of the gifts and legacies that are looked for under Clause 18(1). Moreover, the trustees of NESTA would in any case be legally entitled, as the Bill now stands, to run down the real value of the fund without reference to the Secretary of State. They may even be unaware of it.

The objection may be raised that my amendment is rather a heavy-handed approach to the problem. If the Minister said that on reflection he recognised the thrust of my point I should be considerably reassured. For example, the point could readily be dealt with by a direction under Clause 19(1) or the effects of inflation could be highlighted in the accounts by way of a direction under Clause 21(2). I indicated to the noble Lord that I should like to know in general terms how

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the endowment fund would be invested. For example, would the funds be restricted to investment in short/medium-term debt? If so, that would not be reassuring. On the other hand, a typical pension fund or charity fund mix of gilts and equities would appear to be sensible. I beg to move.

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