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The House of Lords Science and Technology Committee recently held two evidence sessions to question witnesses on the future of Innovate UK. Big changes are afoot at the agency, with a bill currently going through Parliament that will bring it under an umbrella with the Research Councils and the introduction of “new finance products”, which will significantly alter the support it can provide to businesses. So what have we learned from the peers’ recent interrogation of the Science Minister and other witnesses?

Peers unconvinced by UKRI

The Higher Education and Research Bill, introduced to the House of Commons last month, proposes creating a new body – UK Research and Innovation (UKRI) – to have strategic oversight and provide back and mid-office functions for the seven Research Councils, Innovate UK and a new body, called Research England. This follows recommendations by Sir Paul Nurse and a Government white paper. The current funding bodies will lose their statutory independence and become “Councils” of UKRI. The Members of the S&T Committee were keen to understand the reasons for this rearrangement of the funding landscape.

jo_headshot_welcome_3The Science Minister, Jo Johnson, was unequivocal in his support for Innovate UK, saying that it is “an essential strand to the Government’s approach to addressing the productivity challenge”. But he said greater coordination was needed between academic research funded by the Research Councils and industry supported by Innovate UK. He also wanted to break down silo behaviour and barriers to multi-disciplinary research. He said that the bill would do this while delivering safeguards for Innovate UK’s independence.

Ruth McKernan, Innovate UK’s Chief Executive, also had positive words for the proposed new setup, which she thought would help academics have a better understanding of what businesses want. She welcomed a protected budget for her agency and the inclusion of innovation in UKRI’s name as well as planned business representation on its board. Merging grant systems with the Research Councils would also provide a powerful source of data to allow the tracking and analysis of grant impact.

The former Chief Executive of the BBSRC, Jackie Hunter, wasn’t so convinced on UKRI, however. Although she believed greater collaboration between research disciplines and between academia and industry is needed, she didn’t think an over-arching body is necessary to achieve it and questioned whether the very different grant funding processes of the Research Councils and Innovate UK could be successfully merged.

Many Members of the Committee seemed equally sceptical (and they aren’t the only ones in the House of Lords). Baroness Neville-Jones questioned the need for the move and said that the new Councils would lack independence. “I think you have described a very top-down system, minister,” she said. The issue of independence is likely to receive more attention when the bill reaches the Lords chamber later this year.

A range of options being considered for the new innovation finance products

In the 2015 Spending Review, George Osborne announced plans to introduce new finance products to replace some existing Innovate UK grants to the value of £165 million per year by 2019-20, so that total Innovate UK support is maintained in cash terms. The BIA has been following the development of this policy carefully but little is publically known; so this session was a good opportunity to glean intelligence.

Government officials are busy developing the new products with help from Innovate UK and the British Business Bank. Although the Department for Business Innovation and Skills is leading on the policy, Dr McKernan’s views will likely be very influential. She was “enthusiastic” about new funding models but thought that 2020 was a very ambitious timescale to bring in £165m-worth of new finance products.

The products would support businesses to scale up according to Dr McKernan, but Innovate UK must not “lose sight” of the role of grants in supporting early, riskier research, she added. Filling in the gaps where funding from other sources isn’t available would remain Innovate UK’s raison d’être.

The BIA understands that BIS is looking at a range of options for the new finance products, from low-interest loans to buying equity in companies. Dr McKernan supported equity-based products as part of the suite, saying that the tax payer should see a return when companies succeed. Speaking of loans, she said they should aim to provide cash for things that normal banks would not lend for, such as big kit where there is no collateral, or long-term projects; she specifically mentioned the long development timelines for biotechnology, adding that there could be an early interest-free period to make the loan more attractive.

Mr Johnson only briefly spoke about the finance products but did say he wants to see a full range of support made available, including equity, “to reflect the balance of risk between the tax payer and private investors”.

The new finance products will require specialist expertise that Innovate UK doesn’t have. Dr Hunter pointed out that the organisation currently has flexibility in the salaries that it can offer to attract experts and cautioned that this could be lost under UKRI.

The new finance products are intended to be gradually introduced over the coming years. Gareth Davies from BIS told the Committee that they will be piloted in the next financial year but other reports, including from the Minister, say later in 2016. Whenever they land, there isn’t much time to get them right!

What next?

The Committee plan to write a letter to Mr Johnson setting out their thoughts and concerns about the future of Innovate UK. I’m told this will be sometime after the EU referendum. The inquiry will also inform the peers’ interrogation of the Higher Education and Research Bill when it reaches them; however, it will not likely arrive in their chamber until the autumn, as it has not yet had second reading in the Commons.

The BIA is engaging with BIS and Innovate UK to feed in the views of the biotechnology sector as they develop the new finance products. Our sector is not opposed to loans or other forms of finance products in principle, but we are clear that grants must remain available to support the early, riskier end of research and innovation in businesses. In consultation with our members, we have drawn up some over-arching principles that should guide the development of the products:

  • We do not believe a loan in the form of equity will work as the government will find it difficult to value companies accurately.
  • Any government loan needs to be super-subordinated (meaning it is paid back after other debts and investors) in order to attract, not repel other forms of financing.
  • Payback of a loan should only kick in post-revenue generation from the investment or at company/asset exit.
  • Loans should be interest free, money repaid can then be recycled in real terms value.
  • At a fundamental level a loan can only work in a timescale of at least 4-5 years for the life sciences sector due to long development times.
  • A one size fits all approach may not be suitable. Government and Innovate UK need to explore and understand how different types of companies and projects will be suited to different types of non-grant product. That said, it is important that overall funding schemes are easy to understand and use in order not to reverse company engagement with Innovate UK schemes. Striking the balance between these two points will be a challenge and requires serious and thorough consideration and industry consultation.

These principles and our views on the future of Innovate UK funding are discussed in greater detail in the BIA’s submission to the National Innovation Plan call for ideas.

Innovation Plan submission