House of Commons - Trade and Industry

Select Committee on Trade and Industry Thirteenth Report

III. GRANTS

31. DTI's principle visible activity in the regions is the giving of grants, through the GOs.

Regeneration Schemes

REGIONAL SELECTIVE ASSISTANCE

32. Regional Selective Assistance (RSA) was given statutory form by the Industrial Development Act in 1982. By 1988 it had replaced Regional Development Grants. Its purpose is to develop or modernise an industry if it is "likely to provide, maintain or safeguard employment in any part of the assisted area".[34] Assisted areas are designated by the Government on the basis of economic indicators, in several tiers. A new Assisted Areas map was approved by the European Commission in May 2000. It will run to the end of 2006. Those in the highest tier can receive under European State Aid rules a higher proportion of a given investment project. DTI administers RSA in England. Wales and Scotland have their own arrangements.

33. In 1995, in our Regional Policy Report, we made recommendations on RSA, including the suggestion that it be paid in part in loans or guarantees and be targeted at competitiveness and firms with potential for growth rather than solely concerned with job protection.[35] In our 1997 Report on Co-ordination of Inward Investment we concluded that:

The Government Response referred to a:

The results of this exercise were evident in the 1998 DTI Competitiveness White Paper, which promised "refocusing" of RSA:

34. On 2 August 2000 the Secretary of State announced in a speech to the Birmingham Chamber of Commerce that " there should be a strong presumption against intervention" and that RSA "will increasingly be linked to raised productivity and improvement in the skills base."[39] The estimated RSA budget for 2000-01 is £125.25 million.[40] In 1999-2000, 850 grants were awarded, which were expected to safeguard 36,000 jobs.

35. In the South West, 38 offers of RSA were made in 1999-2000, totalling £10 million, and creating 3,400 jobs. In the East Midlands, 20 offers were made in 2000-01, worth £14.7 million, creating 1,832 jobs: this includes a single £6.6 million grant. The North East of England has the most complete coverage in assisted areas in the country. In 1999-2000, 209 offers were made totalling £39 million, creating 5,400 new jobs and safeguarding 2,900 others.

36. The DTI 2001 Annual Report listed key criteria to be taken into account in addition to existing considerations of RSA applications:

the level of wages and salaries, as compared to the average for the sector and the region;

whether the project is creating high skilled, sustainable employment;

the content of R & D (does the business invest in R & D for continuous product development and/or innovative processes); and

training and development (is there high quality training for staff, including the provision of skills beyond job requirements?)".[41]

We sought to discover how the new focus on high value added projects had been implemented. Clearly, fewer and bigger projects are funded, as the smaller projects now fall under the Enterprise Grant Scheme. We found no evidence of different criteria used to judge applications, nor evidence to suggest that much thought had been given as to how the suggested change in focus could be demonstrated. There is no sign of re-balancing between jobs created and saved, nor of a move from job-centred grants to firms with future prospects. We are aware of recent cases in which RSA has been granted which do not come close to meeting the new conditions laid out in the Annual Report, for instance, funds granted to firms for low paid, unskilled jobs.

ENTERPRISE GRANT SCHEME

37. The Enterprise Grant Scheme (EGS) is available to Small and Medium Sized Enterprises (SMEs) operating in the Enterprise Grant Scheme Areas. It has been hived off from the Regional Selective Assistance scheme, and is aimed at both rescuing existing jobs and creating new ones. The EGS was set up in 1999, with funding of £45 million over the first three years. It is targeted at those companies which need small amounts of funding. It is intended to be simple and quickly available — 35 days is the target for delivery of funds — and open to areas not enjoying Assisted Areas status, including some rural areas where the EGS could respond to local black spots. The EGS map is to be reviewed. We understand that there will be slight changes based on experience gained so far, but that major changes are unlikely.

38. GOSW told us that they had distributed £450,000 under the Enterprise Grant Scheme since it began in January 2000, and this budget has been raised to £750,000. 13 projects have been offered grants. Most applications had come from Devon and Cornwall. The low take up of the scheme in the South West was in part attributed to the exclusion of some small towns from the EGS map areas, and in part thought to be a result of an uneasy transition from BL to SBS in some areas. The statistics for the Enterprise Grant in the North East show 113 offers totalling £33.1 million.

PHOENIX FUND

39. The Phoenix Fund was announced by DTI in November 1999. The national fund was originally £30 million, which was more than trebled in July 2000 to £100m. It was set up to address the problems laid out in the 1999 HM Treasury Policy Action Team report Enterprise and Social Exclusion. The Fund is designed to encourage new businesses in disadvantaged areas. It has four elements: a Development Fund; a pilot network of volunteer mentors; a Challenge Fund to help in funding Community Finance Initiatives (CFIs) and loan guarantees to encourage lending to CFIs. We reported on the proposed fund in some detail in our March 2000 Report on Business, Enterprise and the Budget.[42] DTI received 253 bids amounting to £64.3 million for the Development Fund. The first successful applicants were announced in February 2001. £15 million will be given to 50 separate organisations. For the Challenge Fund, 57 bids were made, totalling £20.6 million. Our impression was that the fund does not enjoy a high profile in the regions.

Business and Innovation

SMART

40. The Small Firms Merit Award for Research and Technology (SMART) scheme will be run by the SBS in England, but currently is run by the GO; separate schemes are run in Scotland, Wales and Northern Ireland. The Scottish Executive has retained responsibility for SMART (and SPUR) schemes and has not devolved them to the Enterprise Network. SMART provides grants to help SMEs make better use of technology and develop innovative products. There are around 800 grants made each year in England. In 2000 the requirements for obtaining SMART funding changed. Companies obtaining SMART funds need no longer prove that their research has a competitive element, and applications can be made year round. We talked to a number of businesses during our visits and all were enthusiastic about SMART. Companies such as IDS in the North East and JDS Uniphase in the South West said they would not be as successful nor have expanded as much as they have without the assistance from SMART grants. 46 projects have been supported through SMART in the North East with £2.4 million awarded. In the South West 40 companies have received grants totalling £2.7 million. GOSW is looking at the possibility of using SMART as match funding to draw down EU funds.

41. Most firms regarded it as a well-run and minimally bureaucratic scheme, although several found decision-making slow and unduly secretive. This may be because the GOs refer applications to third parties for assessment, research labs for example, who naturally prefer not to be identified. However, the delay in payment was not seen as so great a problem so long as the cash was known to be on the way. Several companies had found that the award helped increase their credibility with banks, especially where the technology involved was complex or obscure.

42. We were told that SMART may be changed to a loan, equity or royalty scheme. Those businesses we talked to expressed some concerns over this suggestion. If there is to be a change in financing, they would like a consultation process beforehand. There was little support for a change, since the time at which a grant was needed was probably not the right one for equity participation; and the product would not be sufficiently advanced for royalty payments to be practicable. David Irwin told us that he supports a clawback loan scheme. Successful companies would pay back their loans, but those who failed would be under no obligation to return money. He felt that this proposal would speed up the process of obtaining SMART money and enable more companies to benefit. However, no decision has yet been made.[43] There was a consensus that one major unfilled gap was in marketing products once developed, where experience of Business Links had not been good.

43. All we saw and heard of SMART confirmed the view we expressed in our Report of September 1999 that "the success of the scheme should be judged on the results rather than the number of projects."[44] It may not be easy to get more awards simply by raising the budget; we have the impression that few applications are rejected for budgetary reasons, and there would be little gained by deliberately putting money into poor projects. However, there is room for spreading the scope of SMART, in particular by targeting it at universities and research institutes, which are as we understand it relatively slight users. During our visit to Tamar Science Park we heard that SMART has been of value to their start up companies.

44. We see a need for a more holistic approach to the scheme. We know there are few out and out failures among the SMART companies, but we are uncertain as to how the exact outcome of companies receiving SMART funding is measured. There is a sense that SMART could perhaps be more adventurous and less risk-averse.

REGIONAL VENTURE CAPITAL FUNDS

45. The Regional Venture Capital Funds (RVCFs) were introduced in the 1998 Competitiveness White Paper in December 1998.[45] In December 1999, proposed Government funding of £50 million was announced, expected to lever in around £250 million of private backing. The RVCFs were bid for in January 2000. In February 2000 the Secretary of State told us in oral evidence that he expected the funds to be operational by late summer 2000.[46] Plans have since been held up by the European Commission's decision to investigate RVCFs. Although the Commission supports the idea in principle, it feels that it may breach rules on State Aids. A decision is awaited but no date has yet been given. We have been tracking venture capital developments in our reports since the 1998 Competitiveness White Paper, most recently in March 2000.[47] We found a general frustration at having to wait so long for funding because of Commission proceedings. There was impatience, especially in areas ill-served by venture capital or business angels.

46. Despite the fact that the DTI's proposals for Regional Venture Capital Funds are yet to be cleared by the European Commission, One NorthEast introduced its own Regional Investment Fund of £3.5 million to support SMEs. EMDA have a £30 million fund waiting for approval, heavily dependent on the County Council pension funds; managers have been appointed. The BCC expressed doubts about the level of funding RVCFs provide; they considered £250,000 to be too low to attract venture capitalists, but recognised that the Commission would be unlikely to approve a higher cut off for funds.

BUSINESS INCUBATION

47. Business Incubation networks have been set up, using local partnerships of organisations and individuals to improve communication and co-operation. In the 2001 White Paper the Government announced a £75 million incubator fund, to be operated by SBS.[48] This will concentrate particularly on businesses run by women and other under-represented groups. The White Paper mentioned some incubators set up to target high tech start-ups and clusters. The SBS is to part fund the development of local community incubators; the bidding is to be managed by the RDAs. DTI aims to create 75 of these incubators by 2004, each helping 30 to 35 businesses. The South West RDA are establishing an incubation partnership with GOSW, SBS and outside organisations. We visited Tamar Science Park and spoke to some of the companies involved. In Newcastle we heard of the success of Pink Lane and of plans for Gateshead.

Technology Transfer

TEACHING COMPANIES SCHEME

48. The Teaching Companies Scheme (TCS) is an initiative in which high calibre graduates work for two years in a company, enabling research establishments, businesses and the graduates themselves to benefit. The 1998 Competitiveness White Paper (CWP) announced that DTI would double the funding commitment for TCS, enabling an additional 200 projects a year to be financed. In 1997-98 DTI spent £11 million on TCS; the estimated spend for 2000-01 was £14 million. The CWP added "in 2001, the number of TCS programmes will reach the level of 1,000 at any one time."[49]

49. In our 1999 Report, we praised the TCS but questioned its ability to expand in the manner that the 1998 Competitiveness White Paper had imagined:

"There are difficulties in translating an increased level of commitment of resources into increased bodies on the ground."[51]

The Government reply in 1999 confirmed that they still expected to reach 1,000 TCS programmes by 2001-01. In 2000, in response to our question on the figures in the 2000 Departmental report, DTI told us:

We look forward to finding out later this year if this target can be met.

50. We met a number of companies with experience of TCS during our visit to Nottingham. There was a general sense that TCS was a well kept secret. Some felt the scheme was too bureaucratic and rigid, and driven too much by the needs of the academic institutions and the graduates concerned. It is a positive feature of the scheme that it is not confined to technology and science graduates; for example, language skills could also be used. We noted that there was a similar one-year scheme run by Nottingham Trent University with European funding. Those we met at one Scottish University, however, said that in their experience, TCS usually arose from a chance meeting between an academic and a SME, and resulted in little satisfaction for the academic.

FARADAY PARTNERSHIPS

51. Faraday Partnerships were first announced in the 1993 DTI White Paper on Science and Technology, and were funded by the Engineering and Physical Sciences Research Council (EPSRC). The December 1998 CWP set out the Government's intention to establish a national network of Faraday Partnerships, doubling the existing four.[53] In June 1999 DTI announced funding for these four further Faraday Partnerships as part of a 20% expansion of the Innovation Budget. Current funding of £3.5 million should rise to £10 million within two years.[54] Details of the four successful projects were announced in June 2000. An additional two are still under consideration. In July 2000 the DTI Science and Innovation White Paper proposed to launch another ten Partnerships in 2001, aiming at a network of at least 24 by 2002.[55]

52. All eight established Faraday Partnerships are now joint funded by EPSRC and DTI. One of the two planned Partnerships mentioned in the 2001 White Paper will be joint funded by DTI and MAFF; one Partnership in the new round should be part funded by the Particle Physics and Astronomy Research Council (PPARC). This funding reflects the main aim of the Partnerships, expressed by DTI in the "Faraday Principles" as "to encourage closer contact and exchange between the knowledge base and business". DTI hopes that the Faradays eventually will become self-supporting. All Partnerships can apply for extra funding, both from Research Councils and other DTI funds, such as SMART.

53. The first four Partnerships, set up in 1997, are:

PRIME (Products comprising Interdependent Mechanical and Electrical Parts), led by Universities of Loughborough and Nottingham and the Pera Group;

INTErSECT (Intelligent Sensors for Control Technologies), led by the National Physical Laboratory and Sira Ltd;

3D-MATIC (3D Multimedia Engineering Laboratory and Technology Integration Centre), led by University of Glasgow, National Engineering Laboratory and Sira Ltd;

White Rose, led by University of Leeds, Cambridge Consultants and PIRA.

The second four, set up in June 2000, are:

the Faraday Partnership in Aerospace and Automotive Materials, led by Oxford University, Oxford Brookes, Cranfield, the Motor Industries Research Association (MIRA), the Oxford Trust and the Heart of England Business Link;

Faraday Plastics, led by Warwick Manufacturing Group and Rapra Technology;

the Smith Institute Faraday Partnership, led by the Smith Institute and various universities;

TechniTex Faraday Partnership, led by Heriot-Watt, Leeds and UMIST and the British Textiles Technology Group.

Faraday Partnerships work on a national level across sectors. Inevitably, however, they affect regional economies. We have not been briefed in detail on any of the Faradays in the course of our visits, although we touched on them in discussions on knowledge transfer.

SCIENCE ENTERPRISE CHALLENGE

54. The Science Enterprise Challenge was set up in February 1999. They are based at universities, creating a link between academia and business. Twelve entrepreneurship centres have been established,[56] focussing on three areas:

teaching of enterprise and entrepreneurship to science and technology students;

making ideas and know-how available to business to support competitiveness and wealth creation;

encouraging the growth of new businesses by supporting start-ups, including spin-out companies, based on innovative ideas developed by students and faculties within the universities.

Funding for the project totals £28.9 million. The 2000 White Paper, Excellence and Opportunity: a science and innovation policy for the 21st century, announced another £15 million in funding for a second round.[57] The DTI intends the centres to train around 40,000 students in the first five years, establish 700 spin-off companies and create 200 new patents. Each centre aims to be self sustaining within five years. Many of the centres have international academic and business links; over 500 UK companies are involved.

55. During our visit to the East Midlands we met representatives of the University of Nottingham Institute for Enterprise and Innovation. We were told that their Science Enterprise Challenge had been prepared in consultation with the other relevant universities and was intended to have a regional impact. Modules were offered in Nottingham University to third year undergraduates and postgraduates. There is also a new one year MSc in Entrepreneurship, Science and Technology, filling a perceived gap in the business school MBA pattern which requires people to have some experience before studying. In Newcastle we had a meeting with representatives of the five universities involved in the Science Exploitation and Enterprise Centre. All five have been working together as Universities for the North East since 1999 with the aim of stimulating new knowledge-based businesses.

UNIVERSITY CHALLENGE FUND

56. The University Challenge Fund (UCF) is a joint scheme between the Government, the Wellcome Trust and the Gatsby Charitable Foundation. Its purpose is to turn academic research projects into viable businesses. It was announced in 1998 and moved into its second round in 2000. The first round of funding was £45 million, plus £15 million from universities from matched funding. The second round was due to be worth £60 million, plus £20 million in matched funding. Any further activity will be subsumed into the new Higher Education Innovation Fund initiative.[58] Those we met at the University of Glasgow highlighted their frustration at the length of time it takes before a scheme was ready for an approach for venture capital. They felt that the University Challenge fund went some way to filling this gap but that not enough funding was available. They had experienced some disappointment with the way in which their funding had been used.

57. UCF money is used as seedcorn funding for research institutes to fund businesses in the development stage, for example with market research and prototype development. This is intended to catalyse private investment in high technology: venture capitalists are still wary of this area. Universities also gain experience in financing of businesses, paving the way for future projects developed without such help. The first funding round created 15 seed funds, between £1-5 million, with a cap of £250,000 for a single project; 37 institutions (28 universities and 9 institutes) were given access to this investment capital. Progress will be monitored for ten years by annual reports. An HM Treasury study in summer 2000 showed that £5.3 million had been invested.

58. In the spring 2001 Supplementary Estimates, DTI announced that they were reducing their funding of the University Challenge Fund from £9.4 million for the year, to £586,000. We were told that some seed funds had been slow at investing their money:

"Some University Challenge units have found difficulties in identifying and appointing Fund Managers with the appropriate range of experience and skills. In a number of cases, the setting up of larger consortia has proved to be more complex than anticipated. Also, some Seed Funds would appear, initially at least, to be taking a cautious approach to investment."

DTI concluded that:

UNIVERSITY INNOVATION CENTRES

59. The 2001 DTI White Paper announced the setting up of five university innovation centres:[60]

microsystems and nanotechnology in the North East, involving BAE Systems and Procter and Gamble, with Durham and Newcastle Universities;

organic chemicals in the North West, with Astra Zeneca and Unlilever, collaborating with the Manchester Polymer Centre;

communications, computing and content technologies in the South West, including Hewlett Packard and STMicroelectronics, together with Bristol University;

business to business e-commerce in the West Midlands, involving Marconi and Sun Microsystems; and

aerospace manufacturing in Yorkshire, with Boeing and the Hamble Group, centred on a new Technology Park in Sheffield under Sheffield University.

We were told about one of these, the nanotechnology centre, during our visit to the North East. This had attracted £3.2 million of venture capital. A number of other such initiatives were also underway in the region, for example, the Teeside Virtual Reality Centre and the Sunderland Adaptive Systems science park.

OTHERS

60. There are a number of other schemes for knowledge transfer from the academic base.

The new Higher Education Innovation Fund (HEIF) was announced in the 2000 White Paper Excellence and Opportunity. It will bring together funding streams at present spread out and focus them. It will receive funding of £140 million over three years, and become a permanent third stream of funding for universities.[61]

Higher Education Reach Out to Business and the Community (HEROBAC) is a scheme to encourage liaison between academia and business. It works in liaison with SBS and LSCs. We heard many positive comments about HEROBAC. It will be incorporated into the HEIF.

In Scotland the Proof of Concept fund provides £29m for prospective commercialisation projects at the pre-development conceptual stage. These projects must support SEn cluster development priorities. The Universities representatives we met supported the fund, but felt the amounts available were insufficient.

61. We heard at Nottingham University that science enterprise initiatives have caught the wave of public interest. There is a growing breed of people wanting to combine university science and business applications. However, there is also weariness and wariness at the plethora of initiatives and of overlapping activity. The bidding culture is also a strain; it involves much time and money on the part of those applying. It is not clear that the level of existing technology transfer is recognised. The August 2000 Hague Report from the Committee of Vice-Chancellors and Principals, Spin-offs and start-ups in UK universities, made this point.

"Increased commercial exploitation of research has called for new skills in universities, to identify research projects appropriate for exploitation, to obtain patents, find licensees for patents, draw up business plans, and work with external management experts and financiers. The success of universities in developing the necessary professional skills and dedication among staff in technology transfer offices is impressive, but more will be needed as the scale of commercialisation of research increases."[63]

62. There is also a strong sense we gained in Newcastle and Nottingham that universities cannot endlessly be expected to respond to such initiatives and challenges when their core funding is going down, and when academics are assessed for Research Assessment Exercise funding by their publications and academic excellence.[64] Universities UK told us that the only Government funding available for the development of long-term regional initiatives is the Higher Education Innovation Fund. [65]

Clusters

63. The 1998 CWP announced measures to help with the creation and expansion of business clusters. It saw a role for RDAs in the development of clusters and a Ministerial role for the oversight of clusters of "national significance". It also set up a team led by Lord Sainsbury of Turville, the Minister for Science, to look at biotechnology clusters, in order to determine how the UK could establish "Genome Valleys" in the regions.[66] Lord Sainsbury's report, Biotechnology Clusters,[67] was published in August 1999 and we commented on the report in our September 1999 Report on Small Businesses and Enterprise.[68] After our visit to the USA in June 1999, we had a degree of scepticism for the idea of Government financing the creation and growth of clusters. In our Report we stated:

We concluded:

In its reply to this Report the Government responded:

64. The DTI/DfEE 2001 White Paper talks about the work that RDAs are doing on cluster development:

The Government's White Paper included regional annexes, setting out cluster development in each of the nine regions. Examples of clusters given by DTI include: in the North East, chemicals, offshore and high value engineering, electronics; in the South West, antique dealing, environmental industries and financial services; in the East Midlands, technical textiles and clothing, furniture manufacture and plastics. The BCC expressed the opinion that more consideration should be taken on planning policy in developing cluster strategy.[73]

65. On our visits, we discussed cluster work, for which the RDAs are financed from the Regional Innovation Fund.[74] Some regions are pursuing cluster policies with enthusiasm while others are more reserved.

EMDA told us that they were very keen on cluster development; in particular in innovative textile and fashion design, where there is the chance to replace at least some of the losses at the conventional end of the textiles market.

South West RDA told us they considered the South West to have only one cluster; aerospace near Bristol, although there were concentrations of industry which needed to maximise their potential.

Scottish Enterprise identified national and regional clusters: food and drink was a national cluster; in the Forth Valley there is a regional chemicals cluster. SEn described their role in cluster development as one of an 'honest broker' bringing industries together to encourage knowledge sharing.

34 Industrial Development Act 1982, 7 (1(a)) Back

35 Regional Policy, Fourth Report, Session 1994-5, HC 356-I Back

36 HC 355, para 26; Industrial and Trade Relations with Japan, Eleventh Report, Session 1997-98, HC 568 Back

37 Government Observations on the First Report from the Trade and Industry Committee (Session 1997-98) on Coordination of Inward Investment, Fourth Special Report, Session 1997-98, HC 659, para 18 Back

38 Our competitive future: building the knowledge driven economy, DTI, published 1998, Cm 4176 (hereafter Cm 4176) Back

39 Speech to Birmingham Chamber of Commerce, 2/8/00, http://www.dti.gov.uk/ministers/speeches/byers020800.html Back

40 Trade and Industry, The Government's Expenditure Plans, 2000-01, 2001-02, published April 2000, Cm 4611 Back

41 The Government's Expenditure Plans 2001-02 to 2003-04 and Main Estimates 2001-02, DTI, published March 2001, Cm 5112 (hereafter Cm 5112), p75 Back

42 Business, Enterprise and the Budget, Seventh Report, Session 1999-2000, HC 51 (hereafter HC 51) Back

43 Q 70 Back

44 Small Businesses and Enterprise, Thirteenth Report, Session 1998-99, HC 330, (hereafter HC 330), para 35 Back

45 Cm 4176, p19, para 2.24 Back