Enterprise and Lifelong Learning Committee, 25 Feb 2003

Meeting date: Tuesday, February 25, 2003

Official Report 216KB pdf

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Intermediary Technology Institutes

Now that we have a quorum, I open the Enterprise and Lifelong Learning Committee's fifth meeting this year. For agenda item 1, we have Janet Brown from Scottish Enterprise, who has circulated a helpful paper. After she says a few words, we will ask questions.

I will not talk for long, because the paper explains much of what we have been doing. I thank the committee for giving me the opportunity to update it on the status of our planning for the technology institutes. The goals and objectives of the ITIs are well and truly in line with those of "A Smart, Successful Scotland".

The basis of the ITIs is to bring a market focus to an aspect of research and technology development activity while recognising the value of basic research and adding a dimension in market-focused platform development.

We are working as a team in Scottish Enterprise to prepare the ground for establishing the technology institutes after the chief executives and the chairman have been identified. We are in the process of recruiting a chairman, whom we hope to have identified by the end of March, three chief executive officers—one for each technology institute—and a CEO for the holding company, which will manage the infrastructure and the shared services support function.

The team is also providing background information for the CEOs when they come on board. The team will identify and provide information on Scotland's research capability strengths in universities and higher education institutions, as well as research institutes, and in the company base. We are also providing information on linkages that the CEOs might want to take up and key contacts with which they will need to be involved. We are providing an overview of the market and some of the market opportunities that might be available in the three subjects that we have chosen—communications technology and digital media, life sciences and energy—but the chief executives will make the market selection.

We are undertaking a series of communications with the broader community—those in the company stock, and academics and researchers in universities and research institutes—to promote understanding of how the technology institutes will work and to promote potential interactions with them.

I welcome the committee's questions and I hope that I will be able to answer them all.

I welcome Elaine Thomson, who is substituting for Brian Fitzpatrick, who sends his apologies. Tavish Scott sends his apologies; he will be late because he is flying in from Shetland. Rhona Brankin sends her apologies, Marilyn Livingstone is ill, Gordon Jackson is in another committee that is dealing with legislation and David Mundell sends his apologies. I say to Janet Brown that all the top-notch members are here. Talking of top notch, I pass to my colleague Annabel Goldie.

I apologise for being late. I did not realise that my presence would be so crucial.

I thank Janet Brown for her comments. I am interested in two aspects; I appreciate that they might be outwith your knowledge or might not be matters on which you can give specific information. The funding for all of this is £450 million over 10 years. I am interested in how that will work. Is the funding envisaged as being top-heavy, with most of it being distributed in the initial stages, or will it be spread pro rata over the decade?

The way the funding proposal stands is that we propose a £15 million research budget for each institute each year over the course of the 10 years. The £15 million will be worth less in 10 years than it is today, so the assumption in the plan is that there will be increasing private sector funding towards the later stages. The view is that as the technology institutes become more useful to companies through providing them with additional research capacity, companies will see the ITIs as being good places to put their research money. We have done things that way based on discussions with similar institutes around the world.

At the beginning of such initiatives, there is not a lot of value for companies but, as the institutes develop, companies are far more interested in putting their research money into them. One research institution in the US, International Sematech, started with 50:50 funding from the US Government and companies. After five years, it ended up with 100 per cent private sector funding. Such institutions generally require on-going public sector core funding, which is supplemented by the private sector to a greater and greater extent as they go down the road.

That is helpful. The £450 million might be the base component but, if all goes well, leverage will come from the private sector, which proportionately—if all goes really well—might eclipse the public sector donation.

The other aspect that I am interested in is the final point in your submission, about "performance monitoring and measurement". The submission states that that "is under development." Given that the concept of ITIs is quite difficult to envisage, is there any indication of what form performance monitoring will take? Who will monitor whom? What will happen if somebody does something bad?

We are pretty close to closure on the type of measures that we want to put in place. The first thing that we need to think about is that we must distinguish between the direct outputs of the ITIs and the indicators that we would examine in the earlier stages. We acknowledge, having considered similar institutions around the world, that there is a period of time before one starts to see major outputs from the ITIs. It will take between five and 10 years before we see significant figures for company growth, or an impact on economic environment. Prior to that, it is possible to see indications that such institutions are having an impact in the environments in which they work.

We are trying to understand the lead indicators that we need to put in place in the early stages to show whether an institution is having an impact on infrastructure, and we need to indicate what are the connections and linkages. We are considering what has happened in different areas of the world in similar environments and what happens at various stages of the process. We also want to consider the impact of the ITIs, rather than the direct outputs, which is something that we can also learn from other institutions.

We are developing the three types of framework for different stages. The ITIs will work to an annual operating plan, which will be agreed by the board. However, there will be a three-year review and a six-year review; those will feed into the different types of measurement that we will be able to determine.

We need to monitor performance in several ways. We need to ask the ITIs to report their outputs, their linkages and the basic indicators towards which we are trying to get them to work, but we also need to monitor performance continually and we need periodic evaluations of the whole process.

If the ITIs do not work, we will need to stop the process. That is why we cannot simply wait to measure the number of jobs and companies seven to nine years down the road. That would be too long and we would have spent far too much money. We will set indicators and measurements for earlier stages, which we are finalising now.

That is very helpful. Basically, the mechanism will be internal to the board, which will make some sort of assessment of what is happening, and Scottish Enterprise will keep an eye on what is happening. What input will industry have on whether the process works?

The holding company board membership will contain a significant industrial component.

Will the industrial component be a majority presence?

The final numbers have not yet been decided. However, we envisage that a significant number—four or five members—will be from industry.

The model defines a holding company that has two owning members, one of which is Highlands and Islands Enterprise and the other being Scottish Enterprise. The board will also have an academic component, but will have a significant company base, because we believe that the companies are the measure of the ITIs' success.

However, at the moment, the industrial component will not necessarily be a majority presence.

I am rapidly adding up in my head. If the chairman comes from industry, the industrial component will probably be a majority. However, we have not finalised the numbers and we need to discuss the matter with Highlands and Islands Enterprise.

I am interested in how you arrived at the figure of £15 million per year for each institute. As we all know, Scotland's corporate sector does not have a great record on research and development expenditure. I am concerned that the amount of money that we are putting into such public sector pump priming might not be sufficient to get us up and running properly. On what models have you based the initial investment? What are the indications that Scottish industry will respond positively to the establishment of the ITIs and how strong are those indications?

On the amount of money per institute, we examined similar institutions around the world that are focused on specific market areas. That is the key—if we want to focus on a specific area in which we can support companies with technology platforms on which they can build, £15 million is about the right amount of money for focused activity such as in the institutions in Sweden and Singapore, for example. If the activity were to be much broader, more funding would obviously be needed.

We considered funding from that point of view and as something that would have a significant enough impact to change the behaviour of some researchers or increase their desire to participate. Another measure that we have is proof-of-concept funding, which is about £5 million to £6 million a year and is stretched across seven different focuses. That has been extremely successful in taking curiosity-driven research a stage further into proof of concept, but it does not drive the original research work.

We considered the situation using those data and the data that were out there about similar institutions, and with the view that we wanted to impact on the corporate research and development figure. We wanted not a direct impact, but a sort of pseudo-corporate research and development figure. The figure is currently about 20 per cent of what Scotland's research and development spending should be. We came at the issue of funding from those three directions and concluded that £15 million a year is sufficient if it is focused. To be honest, the answer to that question is a bit like the answer to the first question. If we put a load of money in too early, we might not use it appropriately. We believe that £15 million a year is appropriate right now.

I take it that it will not be just Scottish industry that will be able to invest in membership. However, what are the early indications in terms of the response from Scottish industry?

We have had strongly positive responses from the people in the industry to whom we have talked. Obviously, we have talked primarily to a lot of the technology companies. Their view is that the institutes give them the ability to move up a stage and do the type of generic research that lots of different companies in their market spaces need to do. They can then use their hard-earned money to add the different competitive component to it.

The challenge that we face is to broaden participation in the technology institutes beyond the companies that presently see them as valuable. The companies that are already regarded as part of the cluster—part of the particular market focus—are supportive of the institutes. Our challenge is to ensure that we show the market opportunity to more companies throughout Scotland and help them to take advantage of it.

It is nice to be back in the Enterprise and Lifelong Learning Committee, if only temporarily.

It is nice to have you back.

Good afternoon, Janet. I am sorry that I missed your presentation, although of course I have had the benefit of hearing it once or twice before.

To a certain extent, Adam Ingram has covered the area that I wanted to talk about. A significant investment is being made, which I hope will produce real results. Do you have any feel for what every pound that is being invested might produce, or is that like asking how long is a piece of string?

My other question concerns the need to encourage in-house research and development in Scottish industries. We all know that the level of in-house R and D is quite low here—perhaps lower than it should be and lower than it is in comparable industries and companies elsewhere in the world. How might the ITIs help to overcome barriers—as you see them—to increasing the amount of in-house R and D in Scottish industry?

Your first question concerns the amount of leverage that the ITIs can produce. The longer they exist—if they are successful—the greater their leverage; there is a multiplication factor that increases significantly because more companies are able to take advantage of a given piece of work. In Canada, for example, companies see a ratio of return of about 1:4. More important, however, companies can show a family tree that can be traced back to the technology institutes. One can see a rapidly growing company base as a result of the institutes; that base might or might not be directly using the technology now, but can be traced back to it. One of the challenges that we face, and one of the things that we have started to do, is to consider how we evaluate fully the economic benefits that will come out of the ITIs and how we compare similar situations elsewhere to be able to understand that.

In assessing the ability and the drive of companies to undertake more R and D, and in establishing how the ITIs will help them to do that, the first thing to do is to have the companies lever in their own money. The membership fee is intended to be reasonable for a small or medium-sized enterprise. We are trying to enable as many SMEs in Scotland as possible to participate in ITIs. As I have said previously, the aim is that SMEs should participate in, rather than simply be members of, ITIs. The key is that people should be able to use them, not that they should be in the room when something happens.

There is a mechanism in ITIs that allows a company to second an employee to work on a particular programme, so that they get a head start on competitive work. The work that the employee does will be pre-competitive and will be shared by the other members of the ITI. However, as members know, if someone is closely involved in a project, that person learns a great deal more than they would by reading about it in a book or from a piece of paper. We are trying to encourage true participation and levering in of companies' resources.

Scottish Enterprise must ensure that there are mechanisms that will make it easier for companies to undertake competitive research afterwards. The European Union rules that govern R and D funding for companies were changed recently—we removed the de minimis criteria and we are trying to understand how to support companies more broadly. The purpose of the ITIs is to put on the table more ideas and opportunities that intersect with market opportunities. However, we must help companies to take up and support such ideas.

I have another question about companies' being able to access R and D funding. An issue related to proof-of-concept funding, which has been hugely successful, has been flagged up to me. I understand that proof-of-concept funding can be taken up only by higher education institutions; it is not accessible by SMEs. Is that the issue that is being addressed and were you referring to it?

There are two mechanisms by which a company might become involved physically with R and D. First, it might possess a good research facility—as is the case with some companies in Scotland. Research and development can take place in the company's industrial labs, just as it could take place in a research institute. However, it must be recognised that the portion of the work in a company's labs that is funded by the ITI will be accessible by other members.

Secondly, a person might be seconded to another institution to work on a particular programme. Again, that work will be shared with the other members, because it is still pre-competitive. We are not talking about direct funding of competitive company R and D.

You are probably aware that, as an Aberdeen MSP, I am most interested in the energy ITI. Yesterday, Brian Wilson announced the results of the energy review and made some very significant statements about future United Kingdom energy policy. He talked about moving towards using renewables and about energy efficiency. How do you think that policy direction will affect the kinds of pre-competitive research that the energy ITI does?

I reiterate that the CEO will be responsible for the market selection of work areas. However, they will do that in an informed way, based on market opportunities, skills and strengths in Scotland. There is probably more wind around the Scottish coast than there is anywhere else in Europe. That natural resource is a specific Scottish strength, so we should be able to take advantage of wind and wave power. The drive of the British economy and of several other economies will be to consider increased use of renewables. There is good market potential in that area, on which a CEO might want to focus. However, it is for the CEO to make that decision.

I want to pursue the point that you made about defining future market areas. Can you give us a flavour of the work that has been done on that? How confident are we that we will be successful in exploiting the market areas that have been selected?

Secondly, you have made it clear that the CEO will decide what eggs to put in which baskets. Clearly, the appointment of the CEOs will be critical. Where are we looking for those people, and what is the specification for the positions?

I take it that no redundant MSPs need apply.

We do not know which of you will be made redundant yet.

We came up with three focus areas through using much of the work that has been carried out over the past few years on cluster activity and the strengths of Scotland's companies and research base. However, we also considered global market opportunities and examined areas of rapid growth or potentially significant growth that match the skills sets in Scotland. Sufficient data suggest that those spaces present an opportunity and that we have the strengths in Scotland to address them.

Interestingly enough, the white space between the three sectors presents us with an incredibly large opportunity. For example, an IBM supercomputer was donated last week to the University of Edinburgh specifically to examine the interface between life sciences and communications technology. If we focus on the major opportunities that exist both within and between sectors, use the market to identify and choose such areas and do not try to chase someone else's tail, Scotland could become a key player.

Although CEOs will make selections, they cannot be omnipotent and simply make personal decisions. Decisions will be informed by general foresighting work, by the processes of membership and steerage that will be put in place and by steering group support from global players and local companies. However, you are right to point out that the CEO position is absolutely critical.

We are searching for CEOs in two ways. First, we have placed advertisements in the local and international press to solicit input and nominations. Secondly, we are using a search company to target people in the industry who have the right skills set and experience base. Indeed, we have received strong and positive feedback from people around the world who are interested in the positions. Obviously, some of those people are potentially returning Scots, but a significant number are not Scottish and regard the positions as an opportunity to get in on the ground and leverage their expertise.

I apologise for my late arrival. I also apologise if you have already answered this question. If you happen to invest in an intellectual idea that is developed into a commercially successful product, would you expect to see any return on that investment?

Yes, because the ITIs will take a licensing fee. However, their goal is to ensure that companies are successful. As a result, the measure will not be the amount of money that the institutes can bring in from licensing revenue, because we want to ensure that particular work is used and we do not want to charge a specific company an exorbitant amount if it is successful. We might think about charging Scottish companies differently from other companies, if that is legal.

Returns will be generated, because that drives market understanding and market focus. However, the goal is not to make as much money as possible for the ITI, but to make as much viable and commercially exploitable work as possible available to companies.

If you strike it rich, as it were, would that money be reinvested in the ITI?

Yes. We propose that model so that, the more success there is, the more money there will be to reinvest and be successful.

According to information provided by the Scottish Executive enterprise and lifelong department, if Scotland's spend on research and development as a percentage of gross domestic product is compared with the Organisation for Economic Co-operation and Development average, we would need to spend an additional £750 million or so each year to get up to the level of our competitors. That is a big gap, which must be closed. What ballpark contribution will the ITIs make to closing the £750 million gap?

In the longer term, their contribution to that £750 million gap being filled will relate to how companies invest in what enables them to make products for the markets. The ITIs' goal is to provide a leg-up for companies to start to make such investments. The ITIs should help to identify markets and to link companies to those markets so that they know what they should invest in. The ITIs should help companies with early-stage pre-competitive work so that they can focus their money on competitive activity. However, the first target is to facilitate companies' understanding of where they need to put their money. It is not efficient for the public sector to add the research component—companies need to do so.

Eventually, one would need to look for a leverage of around 20:1. Is that a realistic target?

Seven, eight or nine companies that have been going for a while build on the base of the pre-competitive platform. If one assumes the same level of funding in respect of competitive advantage, it is not unreasonable to look at that target for the future. I am talking about only those companies that are directly linked to the ITIs; I am not talking about those that would do things on their own as a result of having learned how to address spaces.

So through time, the ITIs should make a significant contribution to closing the gap.

Yes.

Obviously, another prerequisite to success is the co-operation of the universities. University vice-chancellors are keen on the whole commercialisation process and positive about what needs to be done, but venture capitalists say that, further down the university chain, the bureaucracy and the time that it takes in some universities to reach basic decisions in principle on commercialisation are blowing some projects out of the water. What is being done with the universities to address those problems?

You have touched on two issues. One issue is the universities' interaction with the ITIs, which involves ITIs commissioning work within universities in specific areas; the other is commercialisation of work that is already on-going inside universities and the ability to take that out and use it in the marketplace.

It is important to recognise that, in their commercialisation departments, the universities have capacity that helps to ensure that they do not lose out on intellectual property values for particular levels of work. We are trying to ensure that the right contacts with the appropriate companies and venture capitalists are made in potential markets for any technology that has been developed inside universities. We are also trying to ensure that people see effective models from around the world whereby, as a result of the rapid transfer of technology, a larger share of the revenue is going back to the universities.

There is almost a proof-is-in-the-pudding approach. There are successful examples of the generation of increased revenue from allowing technology to go out quickly, which has started to result in significant changes in how some universities are operating. Those universities have done a good job in understanding what intellectual assets they have. They are increasingly becoming aware of how valuable those assets are and how important it is to move and to do deals quickly. We are seeing significant changes in that area now.

Is there a need for further infrastructural change? On the basic research side, the research assessment exercise builds in incentives for publication of papers, for example. Is there a need for some kind of parallel incentive to encourage universities to spin out more, to move quicker and to be more nimble on their feet?

The universities should be recognised for doing that. We should not just count the number of spin-out companies that we create; we should count the value of the companies that are created. Sometimes it is better to put two pieces of technology into one company than to put one piece into two. Universities should be supported in their efforts in working with the private sector and in supporting understanding of how technology fits markets.

Once the ITIs are up and running, what role will be left for Scottish Enterprise in commercialisation?

There are two aspects. First, the ITIs will identify what needs to be done to address markets. The second aspect is the randomly occurring commercialising activity that is going on across Scotland—that is often where the next big wave comes from. Scottish Enterprise faces a big challenge in providing the infrastructure to allow companies to take advantage of the platforms that will be available through the ITIs and to link more closely into the curiosity-driven commercialisation activities within universities.

So there is still a big role for SE and HIE.

I think so, yes.

That covers everything. Thank you. That was extremely helpful. We look forward to seeing you after 1 May at the new committee.