WEDNESDAY 6 DECEMBER 2006

MR COLIN PAYNTER, MR STUART MARTIN, MR DAVID WILLIAMS AND SIR MARTIN SWEETING

  Q20  Chairman: But the first phase of ARTES from 2001 onwards was four-, five- or six-year programmes into ARTES 1, 2 or 3. According to our information, the first phase of those programmes has come to an end and what the Government is doing is actually investing in the next phase of ARTES. If they are not investing there, to your knowledge, are they investing in some other programme as part of the ESA programme, or do you see this as a cut?

  Mr Paynter: Yes, I see this as a cut.

  Q21  Chairman: The point I am trying to make very badly is: is this a cut or is it a displacement somewhere else within the space industry?

  Mr Paynter: I see this as a cut, as a priority call on overall government spending, rather than a reprioritisation in the space spend.

  Q22  Chairman: David, Avanti are quite happy to settle for a significantly lower figure. Why?

  Mr Williams: I am not sure if we are. In our evidence, we said that the ARTES contribution should be at least €40 million. Avanti is not going to be seeking any more R&D support itself from the ARTES budget for the foreseeable future because the success of our HYLAS programme has now de-risked our technology to the extent that the capital markets are more than happy to invest as much money as I need to do the things that I want, but I do not think I should say, "Thank you very much, job done". I think it is possible that there might be more Avantis in the future, there might be more innovative technologies that change the way that people do things in space that we have not thought of yet. My own example shows that, a bit like Martin 15 years ago, a tiny amount of ARTES funding eight or nine years ago resulted in the creation of a company whose forecast revenues over the next 15 years are £600 million based on just a first satellite, so the return on investment that the Government will see from the HYLAS programme will be enormous. I think we should keep doing the things that are successful and if it is working, keep doing it, so I think in our response we broadly mirrored the Case4Space recommendation regarding ARTES funding.

  Q23  Chairman: Stuart, we have hardly spoken to you this morning, my apologies for that, but could you perhaps explain how the UK Government's input to ARTES controls the level of overall funding for industry? I do not understand that.

  Mr Martin: I am not sure that I am quite the right person to answer this one.

  Mr Paynter: I do not think it controls it. ARTES as a programme is a partnership between the Government and industry and we have matched funding of £1 for £1, so if the Government invests £20 million in any one year, then industry will do the same.

  Q24  Chairman: Why could you not invest £2 for £1?

  Mr Paynter: The ARTES rules are that, but we do invest more than that in our business or in our industry. The R&D investment is some 12% of direct turnover, so we are investing six times the national average anyhow in terms of R&D, so it is a high R&D area. I think we mentioned earlier on, and I reiterate it now, that the other issue about government investment, and David gave a very good example, is that it does allow the capital markets to have confidence in the area, so one of the important features of ARTES is that the capital markets see the Government's intervention, they see the Government's investment and that gives them great confidence in terms of us being able to draw down from the capital markets as well, so it is a catalyst in that regard, but we do invest more than just the ARTES line, but the ARTES line is really fundamental to keeping us at the leading edge of that technology and to share some of the risks that exist at that leading edge.

  Q25  Chairman: Are you happy with the relationship between ESA, yourselves and the Government on the ARTES programme? Do you think that works well?

  Mr Paynter: I think we get benefit out of ARTES being a European programme because we are able to access and form, which is beneficial sometimes, clusters at the European level as well as the UK level, so I think that is helpful, particularly given the high level of investment in the US, so I think Europe is able to compensate for that as Europe, whereas the UK would not be able to just as the UK.

  Q26  Chairman: But you do feel that it works reasonably effectively?

  Mr Paynter: Yes, I do believe it does.

  Chairman: That is important.

  Q27  Dr Turner: Can we go back to the principle of risk-sharing or the distribution of risk which you were talking about. It seems that, on the face of it, your HYLAS project is a good case example and I would just like to work through that because I think it illustrates what has been said before and you set it out clearly. It is my understanding that the HYLAS project initially had a fundamental reliance on funding from the ARTES budget, but that that then fed through with consequences from private investors. Could you spell that out?

  Mr Williams: HYLAS came about because Europe identified a problem which is that large percentages of its population will not be able to access very high-speed broadband connections. It is now axiomatic in industry that things like cable and copper, they are great technologies, but they leave big gaps all over Europe. Europe decided that that was a problem that resulted in economic disadvantage to lots of people and that Europe should try and fix it. There was a consortium established in another country to try to address that problem and it was seeking, if I recall correctly, about €1 billion of European Commission funding to do it. We identified that actually there were some skills and some technology in the UK which could fix that problem for a tiny fraction of the cost. We discovered that inside one of Colin's facilities there was a piece of technology that enables one to make massive efficiency gains in satellite technology for the delivery of broadband services mainly to rural users. Now, that technology had not got off the drawing board, they had not implemented any of it and it was still theoretical. I could not raise any money at all from my investors to even think about deploying it. We were already a public company at that point on the Stock Exchange, but my investors just were not interested in it. ESA saw it as its role to fix European problems with the use of satellite technology, so when we talked to ESA they felt this was very naturally in the sweet spot of what they do. The British Government wanted to support Astrium's technology and it felt it was strategically important that a British company was seen to be solving a large-scale European problem, so the British Government, through its contribution to the ARTES budget, helped us to get started. We were awarded a contract under ARTES to cover the R&D phase of the cost of Colin's very flexible payload technology which enabled that technology to get off the drawing board and to become real. Now, that enabled Astrium to actually take some commercial risk on a project that otherwise they would not have taken a commercial risk on. Astrium would not normally be expected to write a commercial contract giving very hard promises of delivery times and functionality on technology that is still considered to be very blue-sky; it is not reasonable to ask a company to do that. However, because ESA had taken that first piece of risk, Astrium were willing to step up and give me a commercial contract which I was able to back, so I was able to take that contract to my investors and say, "The technology is blue-sky, but the European Space Agency and all its clever engineers have pored all over it and say it is going to work and they are actually putting their money where their mouth is". Astrium, part of EADS, one of the world's largest hi-tech technology contractors, is so confident that this technology is going to work that they have actually written me a proper commercial contract whereby they promise to deliver on a given date at a given price, at which point my investors were satisfied that the technology would be delivered and they focused just on the market risk, so, "It is all right, Avanti. If this technology gets this, which we believe it will, what is the market? Can you sell the services?", and that is the risk that the capital markets are most comfortable taking. We were able to completely take the technology risks out of the equation for them and get the investors to focus on the market risk which they got very happy with and they invested the money. It took me two days to raise the rest of the money to fund the programme at a total cost of €110 million, of which 30 million was contributed by ARTES, but it was a combination of the British Government, ESA and Astrium which had taken away the commercial risk. Now, if it happened the old-fashioned way, Astrium might have found a way to spend a little bit of money developing the technology over two or three years and it might have persuaded perhaps the Government or some kind of scientific mission or a defence mission to fly a piece of the payload risk and that would take another two or three years. If that had worked, it might have been in a position to sell it to a commercial operator seven years later, and we have done it in three, so the Indians and the Chinese will not have this technology for at least five or six years because it will take them that long to copy what we have done. In the meantime, we will have launched the first one and hopefully Astrium will have sold a half a dozen more to other operators around the world, bringing in a vast amount of earnings to the UK.

  Q28  Dr Turner: Well, that is very interesting. Would you say that this process which you have gone through is unique? Could other companies do this? Could this be a basic pattern of actually using government money to lever away the risk, the technology risk?

  Mr Williams: I think it is unique to the UK. If we look at the way that European space projects have been developed in the past, they have been very bureaucratic, they have been heavily constrained by concepts like juste retour and it has been difficult to get nations to agree. In the UK, this has happened a couple of times. It has happened with Inmarsat where they have developed some very advanced payload technology and SSTL have done a similar project, so there has been a trend in the last five or six years of three of four projects like HYLAS happening as a result of the co-ordination of the British Government, manufacturers, commerce and capital markets.

  Sir Martin Sweeting: If I can add to what David says, another example of that is through the MOSAIC programme which was funded through the DTI and the BNSC which essentially took the technical risk associated with producing small, earth observation satellites and, through the UK's credibility adding in terms of the first satellite into a constellation, we were then able to leverage that and get another five countries to join that constellation, bringing in revenues of about £75 million to the UK. Without that initial seedcorn investment in reducing the technology risk in the first UK satellite, none of these other countries would have had the confidence to join the constellation and hence bring in that business.

  Q29  Dr Turner: So is it fair to conclude that the public investment, the government investment has been an absolutely critical component in dealing with the technology risk, but you also have to be very careful to avoid getting bogged down in bureaucracy, otherwise there is no benefit? You have got to be smart, smart at both things?

  Sir Martin Sweeting: I think that is absolutely right and, as an example, the MOSAIC programme was very good at not getting bureaucratic tape wrapped around the opportunity and hence allowing the UK to make the very most of it and to create something which actually has not yet been emulated anywhere else in the world.

  Q30  Graham Stringer: Mr Paynter, how much of the £300 million invested in R&D comes from the industry's own resources as opposed to external resources?

  Mr Paynter: I think it is approximately 40% from our own resources and 60% from external funding and some of that is the Government and some of that is our customers investing in us doing developments rather than just production, et cetera. I would have to go back and look at the precise figures, but I think it is broadly that.

  Q31  Graham Stringer: Do you envisage that balance remaining the same?

  Mr Paynter: I think it can change by 5 or 10%, but I would not see it changing dramatically because, as I said before, where the wealth-creation is actually occurring in the downstream industry, the wealth-creation does not occur to that level in the upstream industry and, therefore, given the sort of profit balance, the upstream industry is somewhat constrained in terms of its R&D spend, so it will look to downstream entities to fund some of the development of the upstream technology and, as I say, it looks to partner with the Government to do very early on leading-edge technology development.

  Q32  Graham Stringer: That leads on nicely to the question I was going to ask Mr Martin. Why are most of Logica's upstream R&D activities externally funded and who do you look to for that external funding?

  Mr Martin: Most of what we do within the space sector, the upstream sector, is on the development side of R&D, so we have specifications for systems that do not exist yet and we just design them and build them as part of those contracts with the European Space Agency. That is what we mean by most of our R&D spending for customers from organisations like Astrium on the Skynet 5 programme, like ESA on programmes like Galileo and Aurora and Exomars, these kinds of programmes.

  Q33  Graham Stringer: What areas in the UK's skills base within the industry need improvement?

  Mr Martin: Within the space sector, I think we suffer from the same difficulties as other high-technology sectors in the industrial skills base. We are looking to recruit and we always look to recruit students from the top end of the engineering and science schools, so across those sectors we are having the same difficulties as everybody else.

  Q34  Graham Stringer: Could you be slightly more specific than that?

  Mr Martin: At LogicaCMG, probably half our students are computer science graduates, half of our intake in the space sector are physicists, mathematicians, engineers, people with specific skills in numerical disciplines, many of them with higher degrees in space science or satellite communications, satellite navigation, these kinds of areas. I think we mentioned in the Case4Space paper that within the space sector as a whole 60% of our workforce are graduates or higher and within LogicaCMG all our workforce are graduates or higher, so those are the issues we face.

  Q35  Chairman: Do you struggle to get the right level of employees with the right skillsets? Is this a major issue for you?

  Sir Martin Sweeting: When I say that it is a struggle, we work hard at it and we tend to recruit not just of course from the UK, but worldwide and we see differing skills coming from different nationalities, different problem-solving skills, different numerical and mathematical skills and perhaps different practical skills, so we draw from quite a wide range and I think that is critical, but it is quite a struggle.

  Q36  Chairman: You said in your evidence that in the next five to 10 years a very significant proportion of your workforce will be retiring who have those specific skillsets. Are they being replaced with what is coming through or are you increasingly reliant on recruiting from overseas?

  Mr Williams: I am doing a lot of recruitment from overseas. I think 70 to 80% of our highly qualified satellite engineers have come from China or India in the last two years.

  Q37  Chairman: Sorry, what percentage?

  Mr Williams: It is 70 to 80% of the higher-end engineers.

  Q38  Chairman: That is staggering.

  Mr Williams: Because they are the people who apply. We put out an advert and we do not look for Chinese or Indian engineers, but they are the best-qualified and the hardest-working and they turn up. I think there is a lot of work that needs to be done on pushing the right disciplines through the education system and encouraging young people to come into this industry. They still do in large numbers, and I think Astrium has a lot of success with its own British-based graduate intake, but our personal experience has been slightly different.

  Mr Paynter: We have a slightly different issue because a third to a half of our work is actually for the Ministry of Defence, so we have taken a decision that all people coming into our company will be cleared to work on Ministry of Defence projects, so that restricts our intake. At the graduate level, the first degree level, we are fairly successful because actually we find that a lot of people go into physics, maths and engineering degrees and would like to work in the satellite industry. It has some sexy products at the end of it, as it were a loose term "sexy" in that regard, perhaps interesting products would be a better way of saying it. Where we are struggling is to then go out if we need to gather very experienced engineers. We struggle in the UK marketplace to get those because we find that people have either moved abroad or have moved into other industries, so I think that is an area where we struggle and obviously a larger space sector would allow more of a market for that type of senior, experienced engineer.

  Q39  Dr Iddon: The British National Space Centre is a collaboration between, I think, 11 government partnership organisations and of course PPARC and the DTI provide over £200 million of the funding for space research and development of technology. You guys have been rather critical of the Space Centre. Could you tell us why and do you think it would be better replaced by an agency?

  Sir Martin Sweeting: First of all, we must recognise that the majority of the funding that comes through the British National Space Centre from its partners goes out again into the European Space Agency, so the amount of discretionary income that the Centre has is actually relatively tiny. In that, it is a fairly small Centre, staffed with a very modest number of people to administer that activity, and the question as to whether or not an agency would be appropriate I think is really dependent on the scale of activity. An agency would be appropriate if the scale of space activity in the UK were to grow probably ten-fold. I think at the level of the current scale and distribution of the funding, the Centre does a good job, and I would like to ask my colleagues to add to that.

  Mr Paynter: I think we are not critical of the people in the British National Space Centre who actually, as individuals, are doing a really good job. I think I am more critical of the way the Government co-ordinates its involvement in space. We could contrast here two differing things. If we look at the way space science is funded, I think we could argue about money, but the process is quite strong. Money flows through the research councils and the research councils understand how satellite technology and space technology helps them achieve world-class UK science and they fund that as a priority. In areas where they do not need to fund it, they do not. I think the process there is good. The co-ordination outside of that, for example, in Defra or in the Department for Transport obviously at the moment is to ask those departments to lead these programmes, so the Department for Transport was asked to lead Galileo on behalf of the Government and Defra was asked to lead GMES on behalf of the Government. Now, those user departments do not have the same level of understanding of how satellite technology can bring benefits not only to their department, but across government. So I think you are starting with a weaker position and inevitably you are starting with those set technology programmes lower down in priority and lower down in staffing in those departments. I am not blaming the departments. I think the issue of asking the user departments to prioritise what is essentially for the first three or four years a technology programme and it is in only years five, six and seven where they will start to draw beneficial use to themselves out of it is quite a difficult thing to ask. Academically, we want a lead user department, but the practical side of it is that it is very difficult to ask them to do that. So I would like to see a stronger central co-ordination of that. If we look at GMES, it does not just affect Defra, the Global Monitoring for Environment and Security programme, but it also affects departments like DFID, it affects the Foreign Office and it affects the MoD to some extent. We need a stronger co-ordination at the centre of government to understand the importance of these satellite technology programmes so that appropriate decisions can be made early on. And they need to be made early on while unfortunately they are technology programmes, not user-benefit programmes. So it is quite complex. On the question of an agency, I think I would like the UK really to recognise the importance of space and to determine what ambition it needs to have in space as the UK. If the result is a funded agency, then that is right, but I think an agency is a bit prescriptive as an answer just now. I think we need to go through that process of understanding the importance of recognising that and determining the ambition we want and then that might result in a properly funded agency. Around Europe, we are probably one of the few countries without a space agency, so that may well lie as part of the solution set. But I do not think space is given the importance that it needs to be given in Government, so just creating probably an ill-funded agency would make the issue worse, in my view.