IAN PEARSON MP AND PROFESSOR SIR KEITH O'NIONS

23 OCTOBER 2007

  Q40  Chairman: We are actually going backwards rather than forwards on that target?

  Ian Pearson: We are pretty static again because we have had quite high levels of growth in the UK economy, and the increase in investments that we have actually seen in R&D in the public sector have not always been matched by R&D in the private sector. When you look at BERD, business investment in research and development, those figures have not grown. We have, though, through R&D tax credits tried to introduce a policy measure that is going to make a difference and through the Technology Strategy Board that I was talking about earlier as well we are encouraging collaborative research with industry. I think when you look at it—and I would be interested in the Committee's observations on this—when you look at R&D percentages at an aggregate level, you have to ask yourself how much useful information does this provide? In the first instance, it is an input measure rather than an output measure, and what I am really interested in is outcomes and outputs rather than necessarily inputs. You have got to bear in mind that it is an aggregation of R&D that is conducted by a range of different sectors from the big Pharma to construction to—

  Q41  Dr Harris: We understand what it is. It was considered of sufficient use for the Government to have a main target on it, and I would like to offer you this observation, which is that we have had R&D tax credits for some years now and no sign, as you say, of that increasing the proportion of private sector investment in R&D, so unless you are arguing that the position would have been even worse had it not been for R&D tax credits, are you certain that they are the best way forward?

  Ian Pearson: We will obviously want to fully evaluate R&D tax credits. They are still relatively new as a policy instrument and it takes some time for the effects to be felt. When you look at the figures, over 23,000 companies have taken advantage of R&D tax credits so far, and that has underpinned £16.5 billion worth of research and development work, so a lot of R&D is going on and tax credits are being claimed on the basis of it, and that has got to be welcomed. I just think that when you look at it—and I think this is partly recognised by the Sainsbury Review when Lord Sainsbury talks about looking at R&D by different industrial sectors—and compare how our Pharm R&D compares with Pharma R&D that is being conducted in the United States, Switzerland, Germany and other countries, and compare how our IT R&D compares with other countries that tells you a lot more in terms of useful information for policy purposes than aggregating all the figures. There is some good work that has been done by NESTA looking at the service sector, which is over 80% of the UK economy. I do not think we capture R&D in the service sector very well and we do not capture innovation very well either when we look at the service sector, and that is something we are looking at in government at the moment because we are probably missing out on part of the story.

  Q42  Dr Iddon: You mentioned farms and that is quite an exciting picture of course, although we are in danger of losing some of that in my opinion, but defence and aerospace are the other two major contributors to the 2.5%. Nevertheless, 27% of business investment in R&D comes from abroad and we are way behind the OECD average. I have got 1.09% here compared with a 1.5% OECD average, which is quite a difference. We are way behind France, Germany, the US and Japan in terms of business investment. Why does British industry do so poorly by comparison with our continental neighbours?

  Ian Pearson: I think those figures tell you more about the industrial structure of different countries than they do about R&D performance overall. Japan, which is still heavily manufacturing intensive and a lot of its economy would be R&D intensive, is very different to the UK, where over 80% of our economy now is in the service sector, which actually is very innovative, does do R&D, but that does not necessarily show up in the figures. That was the general point I was trying to make about how when you look at an aggregate R&D figure it does not really help you because comparing one country with another at an aggregate level does not tell you much about the performance of the UK pharmaceutical industry compared with that in other countries, or the UK IT industry compared with that in other countries, and it is those more fine-grained comparisons that I think are more helpful when it comes to looking at overall performance and looking at what we need to do if we are going to drive Government policy.

  Q43  Chris Mole: Ian, you rightly want to look at output and one of the measures that the Government makes of output is published academic papers where we have clearly outperformed and been very strongly placed in international comparison. Some of the new economies, China particularly, are coming up very fast on us with that. Are you concerned about that and what do you think our response to that should be?

  Ian Pearson: Our response has got to be to continue to invest in science. I think it is probably fair to say that if we are looking five, 10, 15 years ahead it is going to be very difficult for the UK to maintain its percentage of world citations at the current level because of the sheer volume of research that is being undertaken in China at the moment. Keith will obviously have a view on this, but the best strategy for us has got to be to continue to invest heavily in science and innovation to make sure that we have got a truly world-class science and innovation eco-system, and also to make sure that we can work in partnership with countries like China and India that are growing rapidly. I have not got the figures in my head but increasingly when you are looking at citations, citations are not just UK-based but are often a collaboration of UK academics in collaboration with academics in other countries. One of the things that the Sainsbury Review has been talking about is expanding the Science Bridges initiative. I have seen some examples of work under the Science Bridges initiative that we have funded between the UK and the United States and we are now going to be looking to expand that to China and to India as well. Already our universities at a range of levels have strong international contacts.

  Q44  Dr Harris: Can I say that in answer to my previous question you made the point, which may be fair, that overall R&D as a percentage of GDP may not be that useful a measure. Your view is that it could be said that sectoral comparisons are more appropriate. Do you think that if the Government was on target to meet its target, then the Government would be saying, "Well, although we are on course to meet this target, and we have met this target, it is not really the right thing to be looking at and actually we were wrong to have this as the target", or do you think the Government will be saying "Yahoo, we have reached the target"? In other words, are you putting your point because you are missing the target? Does the corollary apply?

  Ian Pearson: No, I am putting my point because we have done research and I think it is the right way forward and that actually aggregate level figures do not tell you a great deal.

  Q45  Dr Harris: It is just that I have done research and I never found the Government reach a target and say, "Well, it was not really a very good target to reach," but maybe there is hope for the future. My last question on this section is about other departmental spends on research in particular, because, as you know, we did a report looking at the research councils and there was a big issue for the science base around the Department of Environment's spending on R&D, and that is not the only area. What influence do you think you will be able to bring to bear on the level of R&D spending by other government departments as DIUS which is the figurehead department for this?

  Ian Pearson: Other government departments will be looking at their budgets in the wake of the Comprehensive Spending Review announcement and looking at the amount that they propose to spend on R&D, and in some departments that is a very significant sum, the MoD being the obvious case. You are right to say that Defra also funds R&D programmes as well. Certainly through the Government Office of Science we would expect to have an input at a strategic level into some of the decisions that are being taken by other government departments on their research spend.

  Q46  Chairman: Could I ask you one brief question about R&D tax credits. You said that you were going to have a review to see how effective they were.

  Ian Pearson: This is a matter for the Treasury but my understanding is that the Treasury have asked the question about looking at R&D tax credits and their effectiveness as a policy instrument. There is an evaluation programme that they are looking at, but some of the consultants have advised them that it is too early to judge the overall effectiveness of the programme. They will obviously monitor it on a regular basis.

  Q47  Chairman: Do you think then as part of that review it would be useful to actually look at dead weight costs within the R&D tax credits? In other words, the money which companies would actually spend irrespective of whether they were getting those credits or not which therefore means that you have got less resource to be able to target elsewhere? Would that be useful?

  Ian Pearson: It is clearly a matter for the Treasury as to how it wants to conduct an evaluation of R&D tax credits as a programme. Good practice principles in evaluation would dictate that you look at dead weight, you look at additionality, you look at displacement activity, you look at the spill-over benefits, all the normal things that you would look at as part of the evaluative process. I am sure that those will be taken into account. Indeed, I am also sure that dead weight was a strong factor when looking at the overall design of the R&D tax credit programme in the first place because I know that there was significant debate about whether you should be trying to fund the marginal additional R&D research, and again sometimes there is a choice that we have to make between additional complexity and a simple and easy-to-understand system.

  Q48  Chairman: You have obviously been on the training course, Minister!

  Ian Pearson: In a former life I used to train departmental officials in policy evaluation.

  Dr Harris: What an exciting life you led!

  Chairman: On that note, we will move on to another exciting area and Dr Brian Iddon.

  Q49  Dr Iddon: Ian, it is looks as if the Technology Strategy Board is going to be a pretty powerful player in the future in that it is going to interact more with the research councils and more with the regional development agencies. Some people are already saying that perhaps this will centralise policy-making more than it has been in the past. What would you say to those critics?

  Ian Pearson: What we have to do is get the balance right between decisions that are going to be taken at a regional level and national level decisions. That is a general issue for us as a Government. As far as the TSB is concerned, what we have here is a business-led body that was established as an independent body back at the beginning of July this year. It has already got a good programme of work under its belt, but I think it is right that we actually give a strong business focus to the work of the TSB. It has developed a number of innovation platforms so far which is the broad level of looking at priorities for doing collaborative research, and it is going to be issuing a call for proposals next month to the value of another £100 million, so it is doing a lot of good work at the moment, but I do not get the sense that that is centrally controlled. It is certainly not controlled at a ministerial level, the budget is delegated. There is a new Chief Executive, Iain Gray, who is going to be taking up position at the beginning of next month, and there is an expert board that is going to drive this. They are closest to business and business research needs and I think it is right that it should have that focus.

  Q50  Dr Iddon: Right. It says here that the research councils are expected to contribute £120 million to collaborative projects. Does that mean that there will be less in the pot for the research councils to fund basic research?

  Ian Pearson: The research councils have agreed to spend £120 million over three years. When you look at their total budget over the CSR period, which is something like £9.7 billion, I do not think it is a really big ask of the research councils. We are seeing an overall increase in basic research taking place as well. Keith, did you want to add something?

  Professor Sir Keith O'Nions: Maybe just to help on that, as part of this delivery plan we did ask research councils how much they may wish to contribute and spend alongside TSB. I think the interesting thing is that over the last few years they have spent £22 million anyway, if you like totally of their own volition. It is unsurprising because the Technology Strategy Board is finding opportunities, such as innovation platforms, intelligent transport, and immediately a research council looks at it and says, "My goodness, there is some really interesting engineering and basic stuff we should be doing underneath that." £22 million investment has taken place in that way. In the new scheme of things where the target is £120 million or so, and that is what they have come up with, which is the right way to do it, they will be spending that money in the universities. They are not putting the money into the TSB to spend in business. They are looking at the programmes and saying, "Okay, there is an appropriate part of this particular innovation platform for collaborative research which is a priority thing for us to do in the research base," so the research councils will be putting their part of the investment in the universities in a complementary way. So I think it is a very, very good development and it is not a matter of saying "you have got to spend £120 million on whatever the Technology Strategy Board is interested in and do less basic research." I think it has moved into an area where the appetite was already displayed.

  Q51  Dr Iddon: The TSB apparently have identified certain barriers to innovation. Perhaps you could tell us what those are and also, Sir Keith, if you are going to answer this, tell us which of their recommendations have been accepted and are going to be implemented?

  Professor Sir Keith O'Nions: The recom- mendations of?

  Q52  Dr Iddon: The barriers to innovation. They have been looking at what the barriers are, I believe.

  Professor Sir Keith O'Nions: Well, I can think of any number of barriers to innovation. I am afraid I do not have in my head the specific list of barriers that come out of the present Technology Strategy Board, but if you mention one I will probably give you an answer to it, if you have got it.

  Dr Iddon: No, I have not got a list of them here, I am afraid, so I am as stuck as you are.

  Q53  Chairman: Just to assist, it actually says that the TSB Board advised the Government of potential barriers to exploitation, and that is part of their terms of reference, which presumably had been agreed by you, Minister.

  Ian Pearson: My predecessor actually but, yes, the TSB are there to advise us as a Government and I think, like Keith, I am struggling to see whether there is any specific report because I am not aware of any.

  Professor Sir Keith O'Nions: They have terms of reference which are relatively straightforward. We are preparing at the moment a tasking letter that ministers have not yet sent but will send to the TSB that defines in broad-brush terms what the programme should be. The barriers to innovation are those opportunities that they define with business and so on. Clearly things like innovation platforms and the lack of them are something of a barrier, but I am not actually aware of a formal checklist of things.

  Q54  Dr Iddon: Can I just move on then very quickly to regional development agencies. Have they been accountable? was the big question in the past. I am all in favour of them becoming more accountable for the way they spend money in the future and it looks as if the setting up of regional committees and the appointment of regional ministers is one way of doing that. Obviously the regional development agencies are going to work closely with the TSB as well. Are they not going to be pulled two ways; answerable to the TSB and answerable to the regional minister and the regional committee?

  Ian Pearson: Certainly RDAs will be responsible to the regional minister, and I think the new accountability arrangements that were announced a couple of months ago. Ensuring that they can co-ordinate the work that they want to do on science and innovation with the work that the TSB wants to do on science and innovation, I think is really important. Again, having talked to RDA chairs and chief executives about this, they are very much up for working with the TSB. They do already, but actually doing more of it and making sure it is part of an overall coherent picture, I think makes great strategic sense. I do not think there is a problem with them being drawn in different ways. As organisations, RDAs will want to work with a number of different partners, and working with the TSB particularly on knowledge transfer partnerships is a good way forward. They also work with the TSB in a number of different areas as well. The environmentally friendly engine programme, for instance, which was announced a couple of months ago, saw a partnership between, I think, six regional development agencies and the RDA and a number of different universities, and Rolls Royce leading on behalf of a number of other companies. It is those sorts of partnerships that I think are important because when it comes to innovation, it is not just done in one particular place by one particular organisation. We need to make sure that we build up those links.

  Q55  Dr Iddon: So what is the big innovation? What are going to be the key priorities of the TSB? Is it knowledge transfer, is it collaboration, or what?

  Professor Sir Keith O'Nions: It is certainly both of those. The TSB will develop a strategy and publish it, I think, by next spring and at the moment, as the Minister says, there is an on-going excellent programme of collaborative research across a number of thematic areas which have been identified with business and innovation platforms. It will now develop its strategy and I fully expect that we will see a continuation of those sorts of thematic priorities and of innovation platforms, but they will develop a strategy as to how they deal with their collaboration with the RDAs in discussion with them. I think next spring you will see much more detail of how they will work together with the research councils. There has already been quite a lot of discussion about having joint peer review committees to look at these things and so on but, understandably, that is going to take a few months to flesh out into a document that is published as a strategy.

  Dr Iddon: I am sure the new DIUS Committee will be interviewing Iain Gray eventually. Thank you.

  Q56  Chris Mole: Ian, in his review Lord Sainsbury suggested that not all universities should have the same goals. He talked about "research-facing universities focusing on curiosity driven research, knowledge transfer and teaching, and business-facing universities focusing on the equally important economic mission of professional teaching, user-driven research and problem-solving with local and regional companies." Anyone who comes from the East of England understands the importance of centres of excellence like Cambridge to the regional technology clusters. These sorts of places also receive the largest share of the Higher Education Innovation Fund which is intended to support innovation by SMEs. If they are consuming most of that, is it practicable to make this distinction between business-facing and research-facing universities? Sorry, that was rather a long question but you can probably see why it took a while to get there.

  Ian Pearson: The first thing I would want to say in response is that I think there has been significant mission differentiation that has taken place over the last ten years, and I think that is very much to be welcomed, because there was during the 1990s a period where there was maybe a coming together and all universities saying "we all want to be doing the same thing." I personally do not find particularly helpful attempts to categorise universities and pigeon-hole them into one particular group or another. I want all universities to be business-oriented and to ensure that whatever they do there is a potential for economic benefit that could come from it. I prefer to say that I think we have a world-class university system rather than saying some universities are business facing and some universities are not, some universities are regional universities and some are not; and some universities are research intensive and others are not. I do not think those sorts of taxonomies add a great deal.

  Professor Sir Keith O'Nions: Can I just add to that because in terms of functions that universities perform I think they are reasonable descriptors, but different universities have a different mix of those sorts of activities. I think when the new formula for the distribution of the Higher Education Innovation Fund is revealed, you will see in that that it does not categorise universities as being category A or category B or category C. It is much more of a continuum of activity. I think you will see that there are some universities that have a strong business-facing differentiation at the moment, and are perhaps getting less research council income as a ratio than maybe Cambridge, which may do rather better under the new fund, so I think the formula has been designed to put money in the right place and not attempt to categorise universities as business-facing or research-facing. I think you will find it is a good step in the right direction.

  Q57  Chairman: Can I just clarify that point, Sir Keith, because currently the spend is very much geared towards the research-intensive universities. Are you actually saying that under the new formula there is going to be a shift away from putting that resource into the research-intensive universities into what Lord Sainsbury called the business-facing universities, perhaps the old polytechnics, if we can use a form of shorthand for that? Is that what is going to happen because they will not be happy?

  Professor Sir Keith O'Nions: Let me not give the full answer before the formula is published.

  Q58  Chairman: This is breaking news.

  Ian Pearson: It is on HEFCE's website!

  Professor Sir Keith O'Nions: What has happened in previous years is the formulaic part of the allocation of HEIF has had a series of elements in it which were discussed with the community. If you just used the formula in a raw way, it would actually put all the money in a very small number of universities. We imposed a cap so that no university can get more than £3 million, although the elements of the formula may say you should get a lot less, and we put a floor in it so that no university can get less than £200,000, so there was a curve that was then shifted artificially with a cap and a floor. The new formula will not make a huge difference and there will still be a capped limit on those universities that are the big winners in research. Let me use the word "subtle"—I think subtly it will advantage certain universities that have done very well in a business-facing environment and they may benefit under this. Remember the amount of money is going up, it is going up to £150 million, but, no, it will not be signalling a shift away from several million for the most research-intensive universities.

  Q59  Chris Mole: Ian, earlier this year you said that in addition to the HEIF you believe that Government could do more to encourage university business links. Can you expand on that? What beyond the monies can be done?

  Ian Pearson: HEIF, as Keith was saying, is going to be rising to £150 million a year, but it is quite a small policy instrument overall when you look at the totality of research council funding or the general funding for the university system. What I was trying to get at there is that I think there is scope for universities right across the country to do more when it comes to working with business. You will see some that are, as Lord Sainsbury says in his report, extremely business facing. I went to the University of Hertfordshire recently and they own their local Business Link, for instance, which is really unique out of all the universities in the UK at the moment. When you look at some of the work that the University of Central Lancashire is doing, for instance, their business community is clearly embedded in it. Overall when you look at our university system, I think their links with industry are patchy. Some of that reflects their different chosen missions, but I think there is more that we can do to raise all boats, and that is where I think we need to focus on a sort of learning process.