Innovative and Competitive Technology

HC Deb 24 October 1994 vol 248 cc687-727

7.6 pm

Sir Giles Shaw (Pudsey)

I welcome the fact that the Chancellor of the Duchy of Lancaster is here. I know very well that he has many matters pressing on his attention. I also welcome my hon. Friend the Member for Harrow, West (Mr. Hughes). I suspect that he will undertake his baptism of fire towards the close of the debate. I welcome him to his office of Parliamentary Secretary and trust that he will have a fruitful partnership with the Committee in developing the policies to which the Government have set their hand.

I am sure that my right hon. Friend the Chancellor of the Duchy will not mind if I add my warm respect for the work that was done by his immediate predecessor, my right hon. Friend the Member for Bristol, West (Mr. Waldegrave), who is now Minister of Agriculture, Fisheries and Food. It was, after all, the Government's initiative that created the Office of Science and Technology and thus brought the Committee into being. For that reason, my colleagues and I have double thanks to offer.

We should place on record the fact that my right hon. Friend the Member for Bristol, West was able, in a relatively short period of office, to preside over substantial changes in the way in which science was treated at Government level. During his time in office we witnessed the enlargement of the role of the chief scientific adviser, the development of the director general of the research councils, the alteration of the research councils and their remit, and the first publication, in the "Forward Look", of a White Paper that clearly outlined the developments for science and technology and the role to which the Government were determined to set their hand for the future of British science and innovation. That is a thoroughly worthwhile achievement.

I trust that my right hon. Friend the Chancellor of the Duchy will recognise that we wish to build on those substantial initiatives, and on the developments that are consonant with an increasing commitment showing that the OST is here for keeps. It is the development that best co-ordinates public sector science with private sector requirements. I hope that it will eventually produce, through its policies, a substantial increase in the nation's commitment towards scientific endeavour, innovation, investment in research and a consequential improvement in economic performance.

Hon. Members are grateful to the Leader of the House for allowing us the time to debate the Committee's report this evening. The report is a substantial effort by a Committee that has dedicated itself to investigating, in a relatively short time, significant issues affecting scientific and technological development.

Committee members were aware at the outset that the Select Committee in another place had already dealt with innovation in industry and published a significant report in 1991. We took that not as a disincentive but as an encouragement to build on that initiative to broaden science and technology, and innovation in particular. We felt that they were hugely important to the country.

How grateful I am that Committee members acted as one in that endeavour. We were grateful to the team of advisers who guided us to the report—Professor Ivan Yates, Gerard Fairclough and Professor Michael Gibbons and his excellent team at the Sussex science policy research unit. All colleagues and advisers helped to achieve drive and unanimity on the subject. It is accepted by hon. Members on both sides of the House and by people throughout the country that the science base in the United Kingdom is exceptionally fertile and well regarded, that it has developed effectively both within and without the Government service and that it has been regarded world wide as being of great distinction.

However, in our first report, into the workings of the Office of Science and Technology, we realised that the problems went wider than the science base. The evidence to the Committee at that time showed that, for a wide variety of reasons, there was a need to develop innovation and technology that matched the excellence of British science. That is probably the key reason why we felt it correct to dig deeper than perhaps our noble colleagues had done into the reasons why innovative developments in the UK, despite a fertile industry and a very fertile science base, had been so disappointing when compared with competiti[...]e developments in other countries.

The fact that the science White Paper "Realising our Potential" had stressed so obviously the importance of science and technology to industry, and the fact that it had announced new arrangements to make research councils and universities more responsive to industry's needs, encouraged Committee members to feel that the time was right to match that up with research into industry's problems and the scale of development and innovation that the country had achieved.

Although the White Paper was encouraging and although the Government were right to entitle it "Realising our Potential", the Committee's subsequent inquiry into the routes through which the science base is translated into innovative and competitive technology showed that, even though improvements could be made, the science base was already relatively responsive to industry. Industry was able, as many companies were, to get the scientific input that they needed, at the time that they needed it, and of the quality that they needed.

The real problems, however, were much wider and deeper. In many cases, UK industry appeared unprepared to make use of the resources of the science and technology base. Perhaps it was from ignorance; perhaps it was from industry's own short-sightedness, but, worryingly, there were many reasons why the UK's innovation record was internationally uncompetitive. The Committee believed, therefore, that a policy to encourage innovation could not be narrowly focused purely on the science base.

We might reflect at this point that the position of British industry—let me call it British manufacturing industry for the purposes of the debate—has been perceptibly, and some people would say substantially, in decline in recent years. It is not surprising, therefore, that the pressures of having to survive in a pretty ferocious economic environment have made it difficult for countries to set aside the commitment, both in cash and in people, to investigate and to develop innovatory technology for the markets in which they competed.

During those times, one had to consider inflation rates and the fact that it was relatively difficult to obtain capital to make profitable investments. There is no doubt, however, that, against that background, there has been a substantial diminution in what we should call with some pride manufacturing culture. The consequence of that has been a diminution of interest in, let us say, engineers becoming engineers and graduates seeking to earn their money in the industrial climate, and a general resistance to the smokestack image of manufacturing processes, an image that has, happily, been largely eliminated and that has done no great service to industry.

The Committee was convinced, therefore, that policies to alter attitudes and activities in relation to innovation and technology would be effective only if they were shaped by knowledge of the innovation process and if all the factors promoting or hindering them were recognised. Accordingly, the inquiry was intended to be a major review of the subject. I suspect that that is why it lasted 18 months. In addition to holding 14 sessions of oral evidence and considering more than 160 memoranda submitted by interested parties, the Committee conducted its own research. It commissioned research into six industrial sectors—pharmaceuticals, aerospace, automotive products, food and drink, machine tools and office electronics.

The Committee chose the science policy research unit at the university of Sussex to conduct the research. Professor Gibbons and his team were able to design a substantial questionnaire that produced a great deal of response on the use by industries of the science base, their investment in innovation, their skilled personnel requirements and their ability to raise the money needed for further investment. In addition, the Committee visited both Germany and Japan to see at close and at far hand the way in which those two highly effective economic giants performed in relation to innovation and technology.

Although the particular sectors that we researched varied widely in their needs and in their relative successes, the overall picture that we gained was pretty gloomy. In the past three or four decades, the UK has fallen behind comparable-sized countries in the amount spent on research and development both as a percentage of gross domestic product and as a percentage of patents on the international market. The Committee was forced to agree with one of its witnesses that the UK has tended to under-invest in R and D". There is no doubt that that has been the case.

The Committee said in its report: In the course of our inquiry we have come to believe that unless reforms are urgently undertaken the United Kingdom will remain less able to exploit science and technology than many of its competitors. There is no one reason for this; rather it is the result of a set of interactions between the education and training system, the organisation of industry and the operation of the financial system, all of which are strongly affected by government policies and the state of the economy. That will come as no surprise to hon. Members on either side of the House.

In part, the problems identified involved a culture that failed to reward adequately those people engaged in industry and, in particular, science and engineering. There was no question but that the rewards for those going into the sciences or engineering in Germany or Japan were substantial. I might add that their social stature was considerably enhanced by their so doing.

Colleagues will recall that in Germany, the status of a doctor of engineering commanded a great deal of acceptance at any level and was certainly equivalent to that of a physician or banker in this country. In Japan, in what I think was an aside, a member of the Toyota company said, "We call all our workmen 'engineers' here, at whatever level they operate." Therefore, we are up against cultures which have been established on ground which should still be fertile here but which now is not bearing sufficient fruit.

Industry has indeed recruited engineers but the result has usually been that scientists or engineers tend to remain within their specialities. Few join upper management or reach the general management of their companies and therefore they do not have the ability to gain the high salaries available in industry to those who manage enterprises.

The Government's response to our report stated that there was no firm evidence of a current shortage of science and engineering graduates to fill specialist posts. I agree, but the response misses the point entirely. We are concerned to get the scientist and the engineer into mainstream management, into finance and the City so that they can perha[...]s bring more orthodox attitudes to bear on industry's need for cash for research and on the way in which high risk should be something to which City advisers should respond. We need scientists and engineers in general management. We need them to lead our companies and to bring the disciplines that they have acquired in their specialities to the running of those companies.

Moreover, the lack of scientists and engineers in management sits ill with the fact that, even during the recession from which we are now—thankfullye—merging, nearl[...] half of the companies that responded to our questionnaire had experienced skill shortages, and the majority expected similar problems to arise in the future.

We were forced to conclude that the financial system in the United Kingdom produces a culture that appears to be risk averse and inclined to rely too heavily on short-term measures. I am sure that short-termism will be one of the themes taken up by colleagues in the subsequent debate. One of the problems is that it is quite rational for those who work in the financial world to take the views that I have outlined but to do so can have a very destabilising effect on industry. We welcome the industrial finance initiative study that started when my right hon. Friend the Member for Loughborough (Mr. Dorrell) was at the Treasury. We also welcome Budget initiatives such as the enterprise investment scheme to encourage small and long-term investors in this process.

I sincerely hope that such schemes will be maintained and developed, but we were of the opinion that attitudes tend to vary substantially within the banking system. Some within the financial system claimed that there was plenty of risk capital available but there was clearly no fertile route through which it could flow to those who really needed it. In many cases—certainly in the clearing banks—it rested on the good will of local management to determine such things rather than on head office deciding that it was a policy worth pursuing.

The financial system and the restriction of technological expertise combine to make industry disinclined to invest in innovation. In Japan in 1991, industry-financed research and development amounted to 2.12 per cent. of GDP as opposed to 0.94 per cent. in the United Kingdom. If Japan is thought to be exceptional—which in many ways it is—let me add that German investment was 1.5 per cent. of GDP and that of France 1.01 per cent. There are considerable differences between our measurable performance in investment in innovation and that of those with whom we still seek to compete.

The Committee was presented with recent research which appeared to prove that tax incentives for R and D might not only produce greater R and D expenditure than the revenue forgone but, through stimulating such R and D, might significantly increase the rate of economic growth. We thought that that was an important point to record in our report and the Committee thus recommended that, in the light of this evidence, there should be a major re-examination of the case for fiscal incentives for investment in R and D. It was disappointing that the Government in three lines—I suspect that that was their shortest comment on any item in our report—decided that such a reappraisal was not to be undertaken.

However, we did not want a commitment; we simply thought that it was reasonable for us to make a suggestion and leave it up to the Treasury to take the rash decision to do a little bit of research to see whether the results might lead to better innovation and better economic growth. If that is the way in which the Treasury is to lead our scientific and technical development, I suspect that the policy of mortmain cannot be far behind.

The Committee accepted that many of the problems involved in providing a fertile route for science to bring a competitive innovation into industry were beyond the power of the Government to solve. However, it was clear that the Government intend to take the lead in tackling many of those problems. The White Papers on "Realising our Potential" and on competitiveness show a welcome appreciation of the value of industry. The Government's response to our report is welcome in many respects. We note that many of the Government's recommendations coincide with ours or, to put it another way, that the Government are prepared to agree with many of our recommendations. However, some of the Government's responses cause us concern.

The first of the Government's responses on which I shall comment is in paragraph 11, which deals with the Department of Trade and Industry. I noted with some apprehension the way in which the new departmental restructuring has taken place. We commented on the failure to replace the chief adviser on science and technology, but we were informed that the post is being discontinued for the reason stated. The Government state: A recent Departmental restructuring has brigaded his Division with the Sector Divisions under one Deputy Secretary Industry Command. I was beginning to think that perhaps the President of the Board of Trade had gone back to his flak jacket and was seeking to instal a military system in the DTI. No doubt he will shortly be leaving his office and cascading through the country rather like Sennacherib: The Assyrian came down like a wolf on the fold, His horses, his chariots, his teeth filled with gold". We wish him well if the result is greater innovation, but we can hardly accept the language used.

Paragraph 12 of the Government's response deals with another important issue. In paragraph 332 of the Committee's report we dealt with the form of identifying and maintaining the wider knowledge base that industry requires. The Government's response was: In the Government's view, it is for industry to identify and maintain the expertise it requires. The reason for our demanding—or seeking to provide—that the Government have a role in maintaining the science base was to ensure that the distribution of scientific endeavour leading to innovative technology can reach the places which the larger initiatives do not reach and, in particular, to protect its use for smaller and medium-sized enterprises which the Government, through the DTI initiatives and the business link scheme, recognise as essential for the collective development of better industrial activity in this country.

Therefore, I found the Government's response unsatisfactory. It also appears to conflict with the response contained in paragraph 25 of the Government's report, which agrees with many of our comments in support of collaborative research. It states that the DTI recognises the importance of technology generation but that its efforts would be best directed at encouraging companies, particularly small and medium-sized enterprises … to improve best practice and use new technology more effectively."[...] That seems to be an inconsistency in the report. Perhaps my hon. Friend the Minister will comment on that when he winds up.

We also noted—I have dealt with the matter of general tax incentives—the Government's response at paragraph 21: On the Committee's point … about the lending decisions of the banks, the Government has been informed by the banks that they are seeking to base their lending decisions primarily on the basis of the quality of the proposals being considered, and are making efforts to adopt a more systematic approach to risk assessment. The Committee will certainly welcome that. There is, however, much evidence that small businesses are far too often locked into mortgage-related arrangements with banks, which have brought real distress for the families and have created the impossibility of getting out from under their problems in a humane and generous manner. The developments hinted at in paragraph 21 should be acted on pretty urgently.

My next point on the Government's response relates to paragraph 57. We were talking here about Government laboratories. The Government said: It is not evident to the Government that the value of Government Research Laboratories depends on their ownership, and indeed, their effectiveness and the efficiency with which they use their resources in response to industrial needs may well be greater if they operate under the commercial disciplines of the market. Our concern is that the Government should be responsible for the preservation of the base of scientific knowledge and at least ensure that, at the current level of expenditure, it is preserved or enhanced. On the whole, the Government have been disinclined to make provision for that. I should like my hon. Friend the Minister to express a view on that issue.

I concede that, all in all, the Government's response to the Committee's report is generous in that many of our proposals have been accepted. I also welcome the fact that the direction in which our report is set is one that the Government strategically find convincing. Our debate now, however, will range over many issues that are far from satisfactory. There is great dissatisfaction because we know that many industries are in need of assistance for innovative technology, yet are unable to manage it, to find the finance for it or to develop the techniques that they really need.

We have recognised that the productive qualities of British industry are just as great as they ever were. Indeed, in recent years, British industry has improved enormously in international competitiveness. The sector is ripe, therefore, for a new and substantial step forward not only in efficiency but in technology, and not only in technology but in innovation. It is now that the Government must ensure that the initiatives that they have set in train and the Committee's initiative in comparing how innovation takes place here with how it takes place in other competitive countries lead to an increase in effort and not to a diminution in Government expenditure or Government commitment.

It has always been the case that the Government have a huge role to play in the nation's research and development. Public sector investment is substantial and nowhere more so than in the Ministry of Defence. It is equally true that the Ministry of Defence has, over many years, provided a significant spin-off for civil use in a wide range of industrial applications, but we all know that the role of the Ministry of Defence has been reduced. We all know, therefore, that the requirement of the Ministry of Defence will be reduced and we all know, therefore, that the amount of development through research and innovation in Ministry of Defence activities will also be reduced. If we have that reduction, we must compensate for it by a wider generation of innovative technology springing from our existing science base through industrial application. That is the challenge to which, I trust, the Government will respond.

7.33 pm

Dr. Lewis Moonie (Kirkcaldy)

I unreservedly welcome the report. It will be an invaluable contribution to the debate that we are about to have on innovation and the regeneration of our industry. I also welcome the Minister to the Front Bench and I hope that he lasts a wee bit longer in the job than his predecessor did. I am sure that he will find his new job very interesting and quite a change from some of the things that he has done in the past. Perhaps he will show the same interest in developing his scientific knowledge as the former Chancellor of the Duchy of Lancaster did with his much reported investigation of the Higgs boson and various other arcana of the scientific world. I shall await his comments with interest.

The report, valuable as it is, must be set against the background of a country coming out of an extremely painful recession, which has, once again, seen a contraction of our manufacturing base. It should be obvious that the more the base contracts, the more difficult it becomes to regenerate growth thereafter. The report is, therefore, all the more important and timely as it comes against that background.

Equally, we have the background of Government action over the same period—or should I say Government inaction? Over 15 years, the Department of Trade and Industry has cut its budget of support for industry every year. The Government are fond of saying that they will do something; sadly, they rarely get round to doing it.

The report covers one of the key areas of economic and industrial development—the interface between our science base and industry. British science is the best in the world. All of us here would give ourselves a pat on the back and agree to that. However, that in itself is not sufficient, because if we really want to build a prosperous future and if we really want to provide the money that we shall need to improve the things that we all want to improve—health care, education, our infrastructure, pensions and benefits—we shall have to improve industry's ability to utilise and to benefit from the ideas that we generate in our research departments.

The gap between inventiveness and application is nothing new; it was first recognised in the mid-19th century and has been commented on repeatedly since then. The Labour Governments of the 1960s attempted to redress the balance with the Ministry of Technology and the Department of Economic Affairs. That neither was an unqualified success is a matter of historical fact. Perhaps the tragedy was that both were ideas ahead of their time.

We should compare that record with the record of the DTI. On the very day that the science White Paper "Realising our Potential" was published, the Department announced the [...]abandonment of its advanced technology programme. Every year, we have seen supposedly new advances in support for technology and support for industry being developed with a great flourish—fancy papers and advertisements on television. Each time, there has been a repackaging of less and less cash.

I have said that I welcome the report. I shall single out one or two of its most important features for comment. The Select Committee recognised the need for the Government to play their part in assisting industry to identify and carry the innovation it needs through to production. Were that statement alone to be accepted and acted on by the Government, it would be a significant change in their attitude towards industry.

The complexity of the innovation process is properly identified and due tribute is paid to the pioneering work of those in the Economic and Social Research Council who have carried much of the work forward. As the Chairman of the Committee, the hon. Member for Pudsey (Sir G. Shaw), has just said, the case for Government support for research and development through enhanced tax credits is made. Frankly, I cannot see how the Government can still refuse to recognise the value of such a system in the light of the work of Bronwyn Hall in the United States. How much evidence do they need?

As the Chairman said, the Committee is not even asking for the Government to implement the scheme. It is only asking them to look at it again in the light of the present evidence. Surely that is not too much to ask. I sincerely hope that tonight the Minister will withdraw the comments made in the Government's response to the report and will say that they will go ahead and at least examine the case for looking at research and development credits.

Much emphasis is placed on the importance of creating effective technological databases, both local and national, and the provision of technological consultancy services for small and medium-sized enterprises—something which I have long been in favour of. I feel that appropriate reference in the conclusions and recommendations to the crucial role of our telecommunications network might have been appropriate and might have enhanced what is otherwise an excellent report.

Action is needed to create information super-highways in this country. They are needed to implement the proper use of the databases that the Select Committee is talking about. Our present approach to telecommunications is a guarantee that other countries will bypass us in the race to develop proper broad-band communications. [Interruption.] I welcome the hon. Member for Boothferry (Mr. Davis), the former Parliamentary Secretary, Office of Public Service and Science, to his place on the Front Bench. I am amazed that, with his onerous duties in Europe, he has time to idle here for a few hours to listen to our debate, but he is welcome none the less.

The report underlines the importance of independent research and technology organisations, and points to the significance in Germany of the Max Planck and Fraunhofer institutes for basic and applied research respectively. Again, I feel that we need to re-examine the possibility of developing a similar system in the United Kingdom. How else are we to take full advantage from, for example, the technology foresight programme? That is surely one of the key reasons for our chronic failure to innovate in this country. Applied and near-market research cannot be left to the vagaries of our short-termist industrial and financial sectors.

Apropos short-termism, I am glad to see that the need for effective sources of long-term funding for small and medium-sized enterprises was also given prominence in the report. We must remember that our crucial deficit in the industrial sector is in the middle-sized companies—which we hope that small companies would grow into. That is the crucial lack in Britain's industrial manufacturing sector. One of the key reasons why we do not produce more medium-sized companies in this country is the critical shortage of long-term, secure finance to fund expansion and development. Chronic financial constraints on growth, as well as a lack of technological know-how, undoubtedly inhibit the organic growth of companies. I hope that, at last, the Government will consider doing something about it and not merely confine their response to accepting what was said in the White Paper.

That brings me neatly to my last point: the response of Government to the report. There is a fair old collection of platitudes in the Government's response, which is only to be expected. The Government will, of course, tell us that, in advance of the Budget, they cannot possibly make any concrete proposals that might [...]ost any money. But I do think that they might have tried a little harder than they seem to have done in their response to the report. It is one thing to accept and say, "Oh yes, you are right," and, "Oh yes, we agree with that." It is quite another to say, "And we are going to do something about it."

Sadly, there is a wee hole in the Government's response, which clearly indicates that they have no intention of doing anything about the report. They hope that, like so many Select Committee reports, it will be quietly buried after it has had its stock debate for three hours on the Floor of the House on an otherwise fairly empty Monday evening. That should not be their response.

There are so many things that I could mention, but perhaps the most obvious point has already been mentioned by the Chairman of the Select Committee: the three-line rejection of the consideration for the case for general tax incentives. I was also disappointed with the Government's response on their own research institutions, particularly in view of the editorial in the New Scientist this week, which said: According to government figures, by next year departments will be spending a staggering total of £620 million a year less on research than they did 10 years ago … Next year the Technology Foresight Programme should bring this problem into sharper focus when it identifies commercially valuable areas of research for the country to invest in. But invest what? Where is the money to come from? Government spending on research is being cut year after year—not just the budget for the Department of Trade and Industry, but other areas of research as well. It is the seed corn for future industrial development in this country. We cannot afford to cut investment in that area, which, it seems, the Government wish to do. So the self-congratulatory note of the response to the report leaves me a little cold.

I found paragraph 39 of the report particularly galling. It says: The UK Government has played a leading role in negotiation of the Fourth Framework Programme for EC Research and Technological Development. They certainly did. They spent about two years trying to cut the total sum that was to be spent on research, and congratulated themselves on having done so. Having cut spending on research in this country, they congratulated themselves on having managed to cut it in the European Community as a whole as well. That is scarcely something which I would want to boast about. It is a monumental piece of cheek to claim that they have played a leading role in the negotiations when the role was entirely negative.

The report is an important contribution to the debate on the future of Britain as a successful manufacturing nation. I trust that, in his response tonight, the Minister will show that our Government intend to do more than just take note of the proposals. I fear, however, that they will not and that it will be left to the next Labour Government to begin the process.

7.45 pm

Mr. Robert Jackson (Wantage)

I join other hon. Members and in welcoming my right hon. Friend the Chancellor of the Duchy of Lancaster and my hon. Friend the Parliamentary Secretary to their new positions at the Office of Public Service and Science. They have inherited a curiously assorted collection of responsibilities. Of those, their responsibility for science is probably the most esoteric, but it is also probably the most important and, I believe, the most vulnerable. I hope that they will ensure that it gets a full share of their attention. I wonder whether in time they will come to feel, as I think may prove to he the case, that it was a fundamental mistake to shift the responsibility for the research councils away from the Department for Education. Meanwhile, as they attend to science, they can be reassured by the encouragement and support of the Science and Technology Select Committee. It has indeed produced, for its first report, a weighty document which is full of both detail and good sense.

We are at the beginning of a new era at the OPSS, at both ministerial level and the highest official level. I take this opportunity to congratulate Richard Mottram, the superb founding permanent secretary of the OPSS, on his new appointment to the weighty office of permanent secretary at the Ministry of Defence. As the OPSS is at the beginning of a new era, I hope that my hon. Friends and the House will forgive me if I pitch my speech at a level that is more of philosophy than of detail. In that, I will follow the excellent speech of my hon. Friend the Member for Pudsey (Sir G. Shaw). What I have to say runs counter to much of the current orthodoxy in this area, but I know that Ministers have a taste for the battle of ideas, and I hope that my remarks may be lodged with them as a valid counterbalance to much of the thinking that will surround them in their offices.

Let me express my thoughts in a serious of propositions. First, basic science is necessary for the health of an advanced economy such as that of Britain. By "basic science", I mean science that aims at a theoretical pay-off, rather than at any clearly perceived utility. Fundamental science—what the jargon calls the "science base"—is vital to an economy such as ours because it trains the most highly educated manpower, on which advanced economies depend; because it equips those people to tap into the flow of ideas from the science base both at home and abroad; and because it is the seed bed of innovative technology.

It is important to restate that fundamental proposition, because although lip service is often paid to it, except from time to time by the Treasury, its full implications are not always fully and properly understood, as I hope that I will be able to explain. Historically, as has been said several times in the debate, Britain is strong in basic science. It is one of the jewels in our national crown, but it is not one which we keep highly polished. In its statistical analysis, the Select Committee report does not enter that well-trodden field. However, I believe that it is now well established that our spending on basic science in Britain is relatively low compared with that in the other leading basic science countries—the United States, Germany and France.

My second proposition is that basic science has two intrinsic characteristics which severely limit the extent to which profit-oriented industry can be expected to invest in it. One of the features of basic science is that it has no evident utility at the time it is being undertaken. It develops most effectively under conditions of openness within the global community o[...] scientists, and that makes it difficult for economic operators to appropriate and exploit the intellectual property that i[...] may represent.

From the point of view of science-based companies, basic science is what might be called a necessary externality. In that respect, it resembles many other kinds of infrastructure which must be provided as public goods. That is where we must locate the most important responsibility of Government in science.

Advanced economies around the world have found that the only way to secure a flourishing science base is for the Government to pay for it. In this country, the OPSS has a substantial role in relation to that half of our investment in basic science which flows from the research councils. I suggest to my hon. Friends that that is the responsibility which they must keep closest to their hearts.

With regard to science that aims at commercial and other applications, which is the subject of the report from the Science and Technology Select Committee, I want to state a third proposition. The delicate chain of innovation, of which science is only a part, can be managed successfully only by the organisations and companies that have a direct stake in it. They must have a sense of ownership of the process if they are to manage it successfully and, in particular, they must feel wholly committed in the management of that most difficult transition of all—from the laboratory bench to initial market and production concepts.

Innovative companies must obviously have strategies for gaining access to the science base, especially in universities at home and abroad. There is bound to be an extensive interface between the Government-funded area of basic science and the industry-funded area of applications. As in the science White Paper published earlier this year and the Select Committee's report, thought must be given to the way in which that interface is managed. However, the temptation and the danger are that the Government will become more involved than they should, so that the proper boundaries are blurred and industry's sense of responsibility and ownership in the management of innovation is diminished.

It is still too early to say whether that is happening as a result of the changes constituted by the creation of the OPSS. However, hon. Members should watch that point closely, as should my right hon. Friend the Chancellor of the Duchy of Lancaster. We should bear in mind, as an object lesson, the story of the British Government's engagement with science and industry in the 1950s and 1960s.

In those days, under Governments of both parties, the Government were a heavy investor in what is now called near-market research. The Select Committee report has much to say about the applications gap. It refers to the weakness in innovation in British industry. The report does not offer an extensive explanation of the problem, but I believe that much of our present weakness derives from that period and from the impression it fostered that science is more a matter for Government than for companies.

While there has to be a partnership in that area between the Government, industry and scientists, it is critical that there should be a clear sense of the boundaries between the responsibilities of those different parties. That is why I believe that we were on the right lines in the late 1980s, under the leadership of Baroness Thatcher who had a close personal interest in such matters, when the Government sought to concentrate on their responsibility for the science base and to point industry clearly to its responsibility for profitable applications.

I want now to refer to a point of detail which appears in the Select Committee report in paragraphs 181 to 186. If my analysis is right, one of the implications must surely be that it is better and healthier for Government support for scientific innovation in industry to take the form of tax credits rather than being cast in the form of grants and subsidies.

Of course, public money is involved either way and the Treasury insists, probably rightly, that the public expenditure costs of a grants regime are bound to be cheaper than those of a tax credits system. However, that misses the psychological point that it is better for companies to be encouraged to spend what they see as their own money on R and D than for them to become habituated to the idea that their R and D is basically the Government's business. I strongly support the Select Committee's recommendation at paragraph 186 for a major re-examination of the fiscal incentives for investment in research and development. As has been pointed out, the Government reject that advice in their note at paragraph 19. I continue to find it odd, although not untypical of the Treasury, that the Government should be so certain on that point when so many other countries, with Governments of the right and of the left, believe that tax credits of the kind called for by the Select Committee have an important role to play.

On another point of detail, the Select Committee report is absolutely right to insist at paragraph 164 that the Government should proceed with care in handling applied science for Government purposes in the Government research establishments. I support the concept of the so-called internal market for Government science and, where appropriate, for privatisation of the GREs. However, the report is absolutely right to highlight the risks that that involves.

In that respect, I have particularly in mind the future of AEA Technology, the great British applied science asset whose headquarters are at Harwell in my constituency and which faces the risk of fragmentation on privatisation. That must not happen and the uncertainty which has for too long surrounded the matter should be ended as soon as possible. I hope that the Chancellor of the Duchy and my hon. Friend the Minister will take a close interest in what the Department of Trade and Industry is doing in that respect.

More fundamentally with regard to the GREs, we must remember that there are two sides to the customer-contractor relationship and the Government must be careful to keep them in balance. They should not rush ahead to create contractors before they have adequately developed their capacity to act as a set of intelligent contractees—a problem which the Select Committee report refers to as the "intelligent customer". There may be a danger that the new research contracting organisations will contract in the negative sense as well as simply being contractors.

Returning to the main thread of my argument, I want now to draw a conclusion from what I have said about basic science and applied science and state it in the form of a fourth proposition. As I said earlier, basic science is vulnerable to a host of takeover bids which I see it as the duty of my right hon. Friends to resist. On the part of industry, there will always be a taste for subsidy, although perhaps not from the best companies. On the part of Government, there is always a measure of impatience for quick results. It must be said that, in the current climate, there is also a desire among academic scientists to legitimate themselves through promoting their claims to relevance.

I saw something of the ambitions of other Departments in relation to the science budget of the OPSS—the research councils' budget—when I was a junior Minister in the Department. On that point, I simply want to repeat what I said in any earlier debate about these matters. I pointed out that any significant shift of Government R and D funding to support what are taken to be business objectives will never be enough to make much difference to business and could have potentially catastrophic effects on the availability of resources for basic science.

Let me cite some figures to illustrate what I mean. Twenty per cent. of the annual research councils' budget amounts to about £240 million. That sum is no more than 4 per cent. of the estimated annual spend by British industry on R and D. Yet that £240 million covers just about the whole of the cost of the Medical Research Council, on which we spent £257 million last year, or it equates to the cost of supporting all the work done in astronomy and particle physics, at a cost of £190 million, together with the whole of the sum devoted to the Economic and Social Research Council, £53 million.

"Partnership" is an attractive word and an attractive concept, and I used it earlier—I see that the Select Committee has endorsed it several times—but I want to draw the attention of my right hon. Friends to its risks, and in particular to the risk that the direction of fundamental research may be shifted, through the development of the apparatus of partnership, into directions that serve the interests of the industries of today rather than the industries of the future.

In particular, I must tell my right hon. Friends that, although the Select Committee supports them at paragraphs 346 to 348, I think that the jury must still be out concerning the arrangements for technology foresight, upon which the OPSS has now embarked. That will turn out to be either a set of talking shops, which will be costly in terms of high-grade manpower, but without practical effects or, much worse, it will become a mechanism for distorting the organic development of the science base under academic leadership. I hope that the Government will produce a full report on that exercise in due course so that the House can draw its own conclusions.

That same line of reasoning leads me to dissent from the Select Committee's report when it refers, at paragraph 129, to the universities. The Government's response on that point is at paragraph 52 of its note, and, to the extent to which it follows the line taken by the Select Committee, I believe it to be mistaken. The Committee says that it would support the initiatives to widen the criteria used in assessing research performance and to increase the status of industrial research in universities. That conclusion flows from what I see as the current orthodoxy and it reflects the blurring of the philosophical distinctions which I am attempting to assert.

Contrary to what the Select Committee says, and indeed what the Government think, the Government's policy with regard to the science base in the universities should be to build fundamental science in those universities where that work is best done and to make it clear both to industry and to the universities that it is industry's business to develop and fund appropriate networks with the universities in support of applied research. The danger otherwise is that the Government will end up paying for research which is neither first class as fundamental science nor of any real practical relevance to industry, while first-class, basic research opportunities are neglected and industry is encouraged to go on underestimating its practical interest in building its own links with the universities.

I said earlier that Britain's history of strength in basic science is one of the jewels in our national crown. That position was achieved with much effort over several centuries and it can be sustained only with much effort over a long haul. However, great damage can be done in only a short period of neglect and mistaken priorities. That is why my right hon. Friend and my hon. Friend the Ministers have assumed a heavy burden of responsibility in taking on the S part of the OPSS. We all wish them well in carrying it forward.

8.2 pm

Dr. Jeremy Bray (Motherwell, South)

The hon. Member for Pudsey (Sir G. Shaw) has added to the signal services that he has given the Select Committee by his wide-ranging speech, which clearly presented the scope and depth of the report and reflected many of the views which the whole Committee would take of the Government's response and the Committee's disappointment with some aspects of it.

The Chairman of the Committee rightly referred to the services given to the Committee by its advisers, Professor Ivan Yates, Mr. Gerard Fairtlough and Professor Michael Gibbons. They are distinguished men of great achievement in the scientific world. Ivan Yates is a former chief engineer and deputy chief executive of British Aerospace. Gerard Fairtlough is the founding managing director of Celltech Ltd. Michael Gibbons is the director of the science policy research unit, which is the leading and longest-running science policy unit in the country. Professor Gibbons was assisted by Professor Roy Rothwell, whose books on industry and science have been of great value for many years.

With that breadth of advice and the wide range of evidence taken, the Committee sought to come up with an analysis which was to be of value both to people in the science community and to its neighbours in education and in other parts of government. That objective was achieved. The report is beginning to be quoted in conferences and forums which look for objective analyses of the overall situation. I am sure that the Committee's report will stand the test of time.

My hon. Friend the Member for Kirkcaldy (Dr. Moonie) rightly spelt out our criticisms of the Government's science policy. In his capable hands, that criticism will be extended into further practical developments of our own policy over the next two years.

I welcome the speech of the hon. Member for Wantage (Mr. Jackson), whose fulfilment of the duties of Minister with responsibility for science was enjoyable and always stimulating. I agree with much of what he says. It is a great advantage to the House if a Minister or an hon. Member speaks with long experience of and commitment to a subject, and the hon. Member for Wantage has certainly done so over the years.

There has been a change of personnel and Ministers. I echo what the Chairman of the Committee, the hon. Member for Pudsey, said about the departure of the former Chancellor of the Duchy of Lancaster to other duties. He undoubtedly won acceptance by the science community to an extent that totally exceeded the resources in financial terms which he added to it. I am not saying that his acceptability was undeserved; he took an intelligent interest in science and certainly launched some important developments in the restructuring of the research councils which are still being worked out and implemented. Thanks to the right hon. Gentleman's experience of the machinery of government, he was able to carry through changes to the extent that he did, although he lost some important battles in setting up the Office of Science and Technology which probably will not be won until we have a change of Government. It was, of course, a direction in development which Opposition Members had foreshadowed in our proposals for the setting up of the Office of Science and Technology, and the fulfilment of those proposals and their further development will be in the hands of my hon. Friend the Member for Kirkcaldy.

After the admirable, wide-ranging and direct speech by the Chairman of the Committee, I should like to stand a little outside the vantage point taken by the Committee and consider the problem from a different point of view: Our dissatisfaction with Britain's industrial performance begins when we compare ourselves with our principal competitors. The quality of our manufactured goods is lower than that of Japan. Our record of innovation cannot match that of the United States. The skills of our designers are often outstripped by those of Italy. Our levels of scientific and technical education are lower than those of Germany. The job of research"— and, one might say, of Select Committees— is to find out why those things are so; the job of government is to put them right. Tonight I want to propose a rather different perspective. When I view my own personal performance, I find the outlook equally depressing. I cannot bat as well as Brian Lara. I cannot write as felicitously as Tom Stoppard. I am not as handsome as Hugh Grant. You may feel that I should spend more time in the nets, improve my writing style, and spruce up my image, and indeed I should perhaps do all these things. But the solution I have found is a rather different one. I know I cannot match Lara's cover drive, but when it comes to calculating a demand elasticity I know that I can beat Lara ninety-nine times out of a hundred. Let Lara face the bowling, while I deal with the economics. Competitive advantage is based, not on doing what others already do well, but on doing what others cannot do as well. Those are not my words; they are John Kay's introduction to his recent Economic and Social Research Council annual lecture on the foundations of national competitive advantage, but they put a powerful point of view. Of course, John Kay was one of the advisers to the Select Committee.

What are the things that we are good at as a nation? Surely, one thing is, or used to be, basic science. There is a perfectly legitimate case to be made for that in its own right—the hon. Member for Wantage made the point today—irrespective of its economic application. We need to understand the universe and nature in order to survive. Many scientists reasonably regard their own work and their primary duty as a contribution to that end.

Taking the point of application, however, particularly commercial application, science and research and development have an essential contribution to make and a particular application in Britain. Doing what others cannot do as well does not lead to different conclusions from those reached by the Committee and, indeed, the hon. Member for Wantage. Currently, the test criteria are the contribution to the balance of payments and the avoidance of excessive Government borrowing, given adequate levels of public services and acceptable levels of taxation. For national economic performance, it is no good excelling in the production of formula one motor cars if the consumer taste is for much more massive imports of high-tech Japanese-made consumer goods.

It is argued that manufacturing is nothing special and is a rapidly diminishing proportion of economic activity in an advanced industrial economy. As a country, perhaps we have gone post-industrial somewhat prematurely for the health of our balance of payments. We have ceded to foreigners the control and profits of our motor car firms while rightly, in our reduced circumstances, welcoming branch factory investment from Korean electronics companies which have followed the Japanese example rather more successfully than we have. Never mind: it may well be that in the future the proportion of the community engaged in manufacturing and the utilities will fall to less than 5 per cent. in the same way that employment in agriculture has done.

If that is the scope of the application of science and technology, does that mean that the importance of science and technology will diminish in society and perhaps become an activity that can safely be left to other countries? I do not think so. The last wave of technology-generated industries included cars, trucks, planes, oil, gas, electricity, appliances, central heating, radio, television, telephony, petrochemicals and pharmaceuticals. An earlier wave included rail, steamships, coal, coke, steel, gaslight, public health and telegraphy. An earlier one still, which ushered in the industrial revolution, included canals, heat engines, coal and coke again, cast iron and textiles.

It may be that our concept of research and development at the upstream end of a linear process is too closely related to the industries of those earlier waves. The product is first invented; then it is made. What will happen in the industries of the next wave? Commonly included in the list are information technology, biotechnology, health, new materials, environmental restoration and protection. The manufacturing activities of those industries will be small in relation to their total activities, and activities which we would have called research and development in the past will become a much larger part of their activities.

We have already observed that trend in pharmaceuticals, with expenditure on research and development at well over 10 per cent. of turnover. Recently, Dr. George Poste, the head of research and development at Smith Kline Beecham, presented a scenario in which even the giant pharmaceuticals concerns would cease to exist, becoming a complex web of external alliances spread around the globe. In that web will be some of the new breed of biotech companies which have never made a dollar's profit or even a dollar in sales and where all is research and development.

Again, people say that research and development is mainly a long-term investment. In fact, however, 80 per cent. of British Telecom development expenditure is focused on the delivery of projects within the next one to two years. Development is very much a part of current operations.

As for the clearing banks, it has been estimated that smart cards carrying credit will reduce the cost of processing financial transactions to less than one tenth of the present cost; payments will cease to go through the banking system. The nature of high street banking will be transformed yet again, and there will be massive redundancies. Human resource managers in the clearing banks speak of their industry replacing the mining and steel industries as the principal job shedders of the next decade. As the effort to build up personal financial services to replace present high street banking gathers momentum, high-tech finance will move from the corporate to the personal sector with a matching increase in research and development in that service industry.

In the process of changing the role of research and development within economic activity generally, what happens to the accounting definitions and the research and development figures reported in the accounts will be governed by other considerations. In the future, the mental and physical processes that research and development scientists and engineers go through today will become an increasing part of the overall activity in a firm and in society. Many things, from cars to drugs, will be custom developed and made, with the processes taking place largely within the computer systems used by the researcher-developer-designer.

A consequence of that increasing research intensity is the shortening of the duration of the waves of new technologies, as well as that of individual product lifetimes. It is also a major factor in the need for education and training, and for access to them to continue throughout life.

None of that is to be taken for granted. None of it will happen without a great deal of enterprise and effort. It will all have negative as well as positive aspects. But what is missing in the Government's whole approach to industry, technology, science and social policy is any sense of overall strategy, sense of direction or purpose, and the country senses that they have lost their way.

One small instance of what hon. Members have already underlined is the Government's refusal to examine the case for tax incentives for research and development, as recommended by the Committee. The underlying case is simply that it is impossible to appropriate sufficient of the benefit in much research and development; much of the benefit spills over to other firms and, indeed, other countries. Therefore, firms tend to invest below the level that would be best for the competitiveness of the national economy.

The two papers—by Bronwyn Hall and by Coe and Helpman—which are quoted by the Committee are certainly not the last word, but they are a great deal better than the arguments relied on by the Government's White Paper and the recent ACOST study. The Hall paper outdates the Inland Revenue review of the literature, from which Ministers continue to quote. The Inland Revenue has internally reviewed the Hall paper, but Ministers refuse to publish the new analysis; I am not sure whether they have even seen it.

The Coe and Helpman paper also sets within a coherent framework the OECD international comparative data on the intensity of research and development, output growth, and so on, which Ministers constantly distort but which at long last the annual review of Government is beginning to spell out in honest terms.

I shall give one comparison in relation to corporation tax regimes. In the United Kingdom, a company with surplus advance corporation tax gets back in tax relief only 13 per cent. of the cost of a marginal increase in research and development expenditure. In the United States it receives 35 per cent., in Germany 30 per cent., in France 33.3 per cent., and in Japan 37.5 per cent. That lower marginal support for research and development in Britain has been a material encouragement for important British companies to build up their research effort abroad rather than in Britain. Furthermore, it is a self-perpetuating phenomenon in that as the profits earned abroad from that research increase, so surplus ACT increases and the incentives to the firm become more deeply rooted.

We can achieve the general major shift in Britain's competitive position that is needed, with much of it contributed by improved innovation processes, and more use of a greater intensity of research and development activity through the kind of measures that have been proposed by the Committee. A strong position in the science base is more important than ever in securing access to and winning the understanding of the faster flow of new results and in providing the essential well-trained researchers. It requires a shift in the role and perception of Government, of which there is no trace in the Government's reply to the Committee's report.

8.21 pm

Mr. Nigel Jones (Cheltenham)

What a pleasure it is to follow a thought-provoking speech such as the one that we have just heard from the hon. Member for Motherwell, South (Dr. Bray). I, too, welcome the hon. Member for Harrow, West (Mr. Hughes) to his new responsibilities. When the former Science Minister sat on the Bench I had a flashback to the Standing Committee which considered the Intelligence Services Bill, but fortunately we are discussing something a little more interesting today. I declare an interest in ICL.

I thank the members of the Science and Technology Committee for the excellent report which they produced in April. Clearly, they spent a great deal of time on the report–18 months, as we heard from the Chairman of the Committee. It was time well spent. However, like other hon. Members, I find the Government's response disappointing. One of the reasons why I became a Member of Parliament was that, after spending more than 20 years in the information technology industry, I could see other countries catching up with and overtaking Britain in their standard of living. They did it by investing in the future, not in the short term but in the long term, researching and developing products that might not produce tangible benefits this year or next year but in five, 10, or 15 years or longer down the track. If Britain is to survive as a modern, industrialised nation, the people of which enjoy a high standard of living, we must invest long term, too.

Whole swathes of our industry have contracted. We have heard about some of them, including the machine tools industry, today. The science and technology report identifies the real problem. It is a problem shortly to be exposed in a book entitled "The State We're In" by the eminent journalist Will Hutton. Mr. Hutton gave the inaugural Summerfield lecture at the Cheltenham festival of literature earlier this month and identified the problem as short-termism. Other hon. Members have pointed that out.

The former Chancellor of the Duchy of Lancaster listened positively to the wishes of the science community, but I always felt that he was beating his head against a brick wall in trying to persuade his Cabinet colleagues to invest in research and development. The Government's response to the report confirms those fears. We have already heard about paragraph 186 of the report, which says clearly: We believe the time has come for a major re-examination of the case for fiscal incentives for investment in research and development, both at personal and at company level. Such a review should be conducted openly, and its conclusions should be considered by experts outside the Treasury. In paragraph 19 of the Government's response we read: The Government does not, however, agree with the Committee that there is a case for general tax incentives for spending on research and development". The Government are wrong on that point. We need to invest now in research and development of the new products that will create wealth and jobs in the future. Through the tax system we need to make it financially attractive for companies to invest in research and development, as they do in the United States.

For example, it should be more attractive for companies to invest in the future than to pay out excessive dividends to shareholders. The country, the companies and the shareholders all have an interest in long-term investment for the future instead of short-term gain. We have already heard that Japan, the United States and Germany are investing more in the future than we are. That means that they, not Britain, will create the wealth and the jobs in the last years of this century and into the next.

The banks, too, must be more flexible in supporting manufacturing industries that are investing in the future. There is a hopeful sign in the Government's response that the banks may be changing their attitude. Without properly funded research, we will spend even more time in the House in the coming years debating further cuts in social programmes, health, education, police and social services. As I have just touched on the police, is not it a disgrace that the Home Office is contemplating introducing a new formula which, at a time of record crime, would cut the budget of the chief constable in my area of Gloucestershire by 9.9 per cent?

I fear that the Government will put short-term financial issues before the long-term goal of providing for Britain an adequate base to maintain and improve our quality of life not only for our generation but for future generations. Indeed, the strategy of the Government seems to be to cut investment in key services to create enough elbow room for a cut in income tax before the next election. That is not only short-termism; it is cynical short-termism. One person's tax cut in 1996 could be that same person's job loss in 1998.

I came across an example of what is wrong a few months ago. An excellent company, Johnson Matthey, is one of the leaders in environmental technology, which is one of the growing industries. It makes catalytic converters, among other things, and it has recently carried out research into fuel cells, a subject mentioned in paragraph 346 of the Committee's report.

Johnson Matthey is now in a position to start manufacturing the technology. When I asked where it would make the new product I expected the answer to be Sonning, just outside Reading, where the research was carried out. But no. It will make the fuel cells in Belgium because the Belgian Government almost fell over themselves to attract Johnson Matthey to create Belgian jobs and exports for the Belgian economy. That is an instance where the Department of Trade and Industry could not keep the jobs and the wealth creation in Britain because it has such a small budget.

Many of the skills learnt in research are those of identifying and better understanding problems, and providing basic knowledge to be used in the future. A potential wealth-creating area may be identified, but will there be resources to make anything of it?

One key area which is regarded by some as likely to have bigger world market potential even than information technology—the field I came from—is biotechnology. Some hon. Members may have seen Dr. Chris Evans of Chiroscience in "The Money Programme" on BBC2 some time ago. He bemoaned the fact that it was likely that the new industry would not get off the ground in Britain because research and venture capital was so difficult to obtain.

Yesterday in The Sunday Times there was a report which should interest all hon. Members. It was entitled "Doctors unlock secret of old age". It states: Scientists investigating the development of human cells believe they have unlocked the secret of ageing. The discovery could transform the quality of later life by enabling doctors to delay the onset of age-related illnesses … The research, funded partly by a British company, Biotechnology Investments, was hailed this weekend by international experts, who said that if the promise of early results was fulfilled, it could have profound impacts on the treatment of some of the biggest human killers, including cancer and heart and kidney disease. Clearly there is still an enormous amount of research to be done in that field, but for the sake of mankind it is research that should be done and British scientists should be involved in it. The research is being carried out in California.

That is why it is so vital for the Government to realise that scientific research is not merely something that one should do. Once proven it is something that should permeate all Government Departments—to the Department of Trade and Industry and through it to health, agriculture and beyond.

The reality, as all hon. Members know, is that funding could be limitless. We can all think of projects that are worthy of investment but would far outstrip the budget of any of the parties in the House. There is a shortfall, however, which is damaging Britain's future.

During our debate on science in February, I mentioned David Ko, who was a lecturer in the department of physics at Oxford university. He was worried about the effects of Government funding policy, which was leading to a reduction in the number of physics graduates. Since that time, Mr. Ko has left what I consider to be his vital job at Oxford, because of the lack of funding, and is working for a merchant bank in the City. Perhaps, as the Chairman of the Committee pointed out, he may bring a scientific bent to the workings of that bank, but he went because it pays better and he no longer faces the pressure of making do with a budget that is totally insufficient for the job that he was asked to do.

There should be a proper career structure for research scientists, with salaries and conditions that reflect their level of qualification, which will keep scientists in Britain and encourage others to become scientists. We need to value our scientists in the same way as they are valued in Germany, France, Japan and the United States. We must also match our competitors in research and development.

In this month's edition of Laboratory News, the Government's rejection of tax breaks for research and development is greeted with some concern. The Save British Science executive secretary, Dr. John Malvie, condemned the Government's decision as "blind adherence to dogma." He said: The Government should at least be trying to match the assistance that other countries give to R&D. Other countries adopt pragmatic approaches and are not bound by dogma in the way this Government appears to be. I hope that when the Minister sums up he will provide answers to the questions raised so far and especially to paragraph 19 of the Government's response to the Committee's report. I wish him well in the task of persuading his colleagues of the importance of research in this country. If, as I suspect, he and the Chancellor of the Duchy are unable to persuade the Cabinet to invest more now, that is another example of why Britain needs a fresh start under a new Government.

8.33 pm

Dr. Lynne Jones (Birmingham, Selly Oak)

It is a great pity that the Select Committee report and the report of tonight's debate, in which there has been much consensus on both sides of the House, will not get the attention that they deserve. They are not such good theatre as the performances in the House when we are all at one another's throats, shouting and baying for blood. None the less, I hope that the Minister will listen to the arguments that have been presented and take those back because they are serious and important for our country.

In trying to emphasise the importance of the report I must quote a letter from one managing director to our Committee Clerk. He wrote of the report: I have to say that it is the most sensible and thoughtful summary of our parlous state and prescription to reverse our decline that I remember seeing. It is, in fact, quite magnificent in its measured and intelligent insight. Let it all be done, just as your Committee has set it out, and we can at least plan to put the Great back in front of Britain. Judging by the published Government response, I think that that correspondent will be very disappointed, but perhaps the Minister can reassure us when he sums up.

The report outlined, as the correspondent said, the parlous state of our industrial and our research and development bases. The United Kingdom was the only OECD country in which total expenditure on research and development declined as a percentage of gross domestic product between 1981 and 1988. Since then, it has fallen further. Research and development data suggest that the United Kingdom has tended to underinvest in research and development costs compared with our major competitors. That problem is even more marked when defence expenditure is excluded.

According to the National Westminster bank, United Kingdom companies spend twice as much on dividends as on research and development. By contrast, the top 200 international companies spend twice as much on research and development as on dividends. The business sector in Japan spends as much as a percentage of its gross domestic product on research and development as our entire business and Government expenditure put together.

We have demonstrated how the UK tax system encourages distribution rather than retention of profits. Financial institutions such as pension funds own nearly 60 per cent. of the equity in UK manufacturing—a total of £350 billion. Of course, they receive large tax handouts to encourage them.

Mr. Jackson, the chairman of the Celltech group, told the Committee that the Government should consider with some urgency what steps can be taken to re-divert the savings stream so that more private individuals can contemplate investing in young companies a part of their savings". He said that only a very small part is needed so that we can invest in the future and at the same time people can exercise their right to make their own wealth and provide for the future. The Government need to consider ways in which that change can be brought about. They need to consider ways to encourage long-term investment in British industry and to ensure that small high-tech companies get the investment that they need.

As we heard, the Committee proposed that the Treasury should consider the possibility of providing fiscal incentives for increased expenditure in research and development. We quoted various new items of research which led us to believe that, over a five-year period, there will be more than sufficient payback to justify that expenditure. When we raised the matter with the former Chancellor of the Duchy, he said: We have had discussions with the Treasury about this. It is clear from the Government's response that those discussions quickly terminated.

Although I welcome the initiative to consider the supply of finance and so forth, as explained in paragraph 18 of the response, how can we have an open look at the matter when the Government immediately rule out any possibility of even examining the case for tax incentives, without dealing with any of the arguments that the Committee put forward?

Last March, on the same day as the former Financial Secretary to the Treasury urged the CBI to enter into a dialogue with the Government over the problems of securing funding for British companies on terms comparable with those of our competitors, the Under-Secretary of State for Trade and Technology was answering questions in the House on interest rates for long-term loans. It is difficult to believe that they were speaking about the same issue.

The Under-Secretary of State told the House that British companies had no problems in securing long-term loans at favourable rates, whereas the Financial Secretary identified difficulties in raising capital for high-tech start-ups, problems with high dividend payouts and the short-term nature of many of the loans to small and medium-sized enterprises; many of the problems highlighted in the Committee report. As that Financial Secretary to the Treasury has moved on, it seems that the open mind which seemed to be signalled at that time has now been closed tight.

The Government make great play of their success in securing inward investment into this country. To some extent, that has been recognised by the Committee report, which states: We have been impressed by the potential in inward investment to boost the innovatory and technical capacity of UK industry. The influence of new manufacturers from Japan in raising standards throughout the supply chain has been considerable. That is true, but the figures show that—far from the boast of the Government that we have secured large amounts of inward investment—more money is going out of Britain and being invested abroad than is coming into the country.

The Government try to say that their policies of deregulation and low wages have led to their "success", as they call it. However, when Committee members were in Japan, it was made clear that low wages were not an issue at all for potential investors. They were concerned about the skills of the people and the infrastructure of the areas to which they were coming. Above all, our success in attracting overseas investment has been due to our one great advantage over other European countries—we speak the international language, English.

We have secured a considerable amount of inward investment, but we must address the lack of long-term investment in our own country and stop the haemorrhage of investment that goes from this country abroad. During the past five years for which figures are available, Department of Trade and Industry figures show that more than £8 billion more money has been invested overseas than has come into this country. I understand that the most recent figures are even worse, and show a deterioration. If we are to get the investment that Britain needs—yes, investment from abroad, but also the investment of our own country's wealth—and if we are to ensure that the investment that is available is invested for the future of our country, the Government should take more note of the recommendations in the Select Committee's report.

8.43 pm

Mr. Andrew Miller (Ellesmere Port and Neston)

In welcoming the Minister to his new post, I point out to him that if he cares to visit his boss's constituency in Wirral, West he has to trespass on my territory and pass through Ellesmere Port and Neston. There are other ways round, but that is the natural route in. In doing so, the Minister might care to note that he would have to pass four research centres—two in the private sector and two in the public sector.

The private sector organisations are involved in lubricants and electricity research and both are important centres of industrial research in our community. In the public sector are two parts of Liverpool university; the school of veterinary science and the botanical gardens at Ness, both of which are, in their own right, important centres of research.

The Minister should have a careful look at the work of some of the institutions which contribute greatly to British life, but he must also look at the needs of small and medium-sized companies which are emerging with fresh ideas, and he must look most carefully at how those businesses are supported. The hon. Member for Cheltenham (Mr. Jones) referred to Laboratory News, and quoted from the chairman of Save British Science. I hope that the Minister recognises that Save British Science has taken an objective view of the Government's action—or inaction—on the question of science. It has praised where praise is due and, on the issue of taxation, damned where damnation is due.

The Government take a two-edged position on the matter. When it is convenient, they pass the buck to the Treasury, and this is perhaps one of the examples where, in the interests of science, they should be leaning on the Treasury and persuading officials that this is the right way forward. I have just had an exchange of correspondence with a Minister from the Department of the Environment on the important issue of pollution caused by motor vehicle emissions, and the different fiscal policies that are applied to fuels used by motor cars. The response that I got was that it is a matter for the Treasury. It is extraordinary that matters which have a direct impact upon the environment are regarded by the Government as being simply matters for the Treasury. Surely Departments should be looking long and hard at why pressures are emerging for them to have a fresh look at their fiscal strategy.

I want to dwell on a comparison between some of the successful industries in our nation and the difficulties faced by small and emerging companies. I shall try to illustrate why I think that some of our smaller companies do not become big companies and either become victims of takeovers or disappear off the face of the earth. Companies involved in successful industries such as pharmaceuticals, aerospace and telecommunications would welcome any changes which the Government made. But historically, many of the successes in those areas—for example, the development of the System X switchgear, launch aid programmes in aerospace or developments inside the pharmaceuticals industry with a view to marketing through the national health service—have had a huge inbuilt advantage in that they knew exactly where the marketplace was.

It is interesting that, in telecommunications, much of the private sector work—with the exception of that which is done by Martlesham—has now disappeared out of this country. There is a risk that the successor to System X will be researched outside the UK. I hope that the Government will think carefully about the implications of that for jobs, both in research and development and in manufacturing.

In contrasting those three areas of success with some of the small companies, we must ask what those small companies need. They need ideas, education, training, financial backers, and infrastructure support such as my hon. Friend the Member for Kirkcaldy (Dr. Moonie) mentioned and which is available at institutes in other countries such as the Frauhofer, Max Planck and Steinbeis institutes, and others.

If we look, section by section, at the evidence received by the Committee, one must conclude that the Government are being extremely short-sighted in simply ignoring what was, as many hon. Members have already pointed out, a simple recommendation for a major re-examination of the case for fiscal incentives for research and development conducted by people and by companies. The Committee's recommendation also suggested: Such a review should be conducted openly, and its conclusions considered by experts outside the Treasury. Perhaps the Government are a little uncomfortable with the final part of the sentence, which harks back to their Treasury-driven policy.

In their response, the Government simply said that there was no case for general tax incentives. I want to highlight the support that small and medium-sized companies need to enable the entrepreneurial spirit to flourish. Such support would encourage fresh scientific thinking in the smaller companies in the manufacturing industry and enable them to grow.

On education, most members of the Committee shared my disappointment at the weakness of the evidence that we received from the Department for Education—I found it one of the most depressing sittings of our 18-month study. There was an acute lack of understanding as to what industry needs, for example, in terms of information technology. I find it quite extraordinary that existing benefits in our education system in relation to information technology, especially with the explosion in the use of the information super-highways and the Internet, are simply being played down by the Government.

In September, I read an article in a magazine which jokingly referred to the Government's contribution to the debate on the information super-highway in terms of the Department of Transport. It implied that the cones hotline is to be made available on E-mail. So we will be able to find out which roads might be dug up by various utilities and work out whether it would be wise to drive down them. I wrote to the magazine to point out that although it was a good idea in principle it presupposed that the utility company does not sever the telephone cable as well, as that would make communications rather difficult. Given the potential benefits within government for such information technology development, it is depressing that the Government have such a narrow view on the subject. I hope that they will have a fresh look at the evidence that some of their own Departments gave to our Committee.

The Committee also took evidence about various overseas institutes, particularly in Germany, which give infrastructure support to emergent companies. I was so fascinated by the role of one, the Institute for Micro Electronics at Stuttgart, that during the following summer, while on a holiday to Germany, I took a day out, much to the chagrin of my family, to revisit that institute. I was fascinated by the links that it has established between the major players in the Stuttgart area, such as Siemens, Mercedes Benz and Bosch, and small emerging companies. To see how the those large players give active support to the concept of potential future competition is an interesting challenge not just to British industry but to the British Government. Such institutes, which receive proper support from both the federal and state Governments, have an important role in the future.

As many hon. Members have already said, we need to look at the role of the financial institutions in supporting our science base. To use a well-worn phrase, short-termism seems to be the order of the day. There is no doubt that small and medium-sized companies are the biggest sufferers from that phenomenon. We cannot simply look at the role of the banks and other financial institutions in total isolation. We must consider it in the context of infrastructural support and education and training. One must ask why the banks are not prepared to adopt a positive role to science similar to that evident in other countries. One must conclude that the banks believe that, in comparison with investing in parallel companies in other countries, they would find themselves at a disadvantage if they invested in our science base. That belief is due to our failure to give such infrastructural support to those emergent companies that are full of fresh, good ideas.

That support, unfortunately, falls down in education, because of the lack of the kind of institutes that exist in other countries and because of our failure to give any assistance through our own fiscal policies. As the hon. Member for Pudsey (Sir G. Shaw), who chaired our Committee so admirably, outlined in his contribution, that complex relationship of support must be taken into account. I do not believe that it is adequate for the Government simply to say that they do not agree with the Committee. If the Minister is to be the Minister for science he must understand that science is based on careful study and analysis. The Government's response—a paragraph of a mere three and a half lines—represents neither careful study nor careful analysis. The Minister's conclusions are therefore faulty. I press the Minister to think again along the lines urged by hon. Members on both sides of the House tonight.

8.57 pm

Mrs. Anne Campbell (Cambridge)

I join hon. Members on both sides of the House who welcomed the new Minister to his post this evening. He may not realise it yet, but he probably has one of the most interesting posts in government, and I hope that he will enjoy it as he should. It is important that he immerse himself in science. The previous Chancellor of the Duchy of Lancaster set a good example in doing so, and earned the respect of many scientists in the process.

This has been a high-quality debate, and I am pleased to be able to participate in it. I have enjoyed immensely all the contributions that have been made, and it is satisfying that so much thought and consideration has gone into the speeches this evening.

It is worth reflecting that it is 30 years since a Labour Prime Minister heralded the "white heat of the technological revolution". During the period since then, however, all political parties have come to realise the crucial importance of exploiting science and technology for industrial and commercial success. A recent White Paper on competitiveness underlined the importance of innovation and put in place a series of measures that will, I hope, encourage industry to make better use of the science and engineering base.

Universities are being encouraged to recognise the value of intellectual property rights and to protect their activities appropriately. I should like to say more about that, because how intellectual property rights are treated by universities and exploited by industry is crucial to the whole process of innovation. I am concerned about whether the line which the Government are taking on intellectual property rights will necessarily lead to the industrial success which they are promoting.

When Professor Sir David Williams, vice-chancellor of Cambridge university, gave evidence to the Science and Technology Select Committee's inquiry, he said: It is the policy of this University not to take title itself in the intellectual property rights of its employees nor to apply for any patent in the name of the University itself. He went on to say that the "Cambridge phenomenon" has been attributed to the university's policy on intellectual property rights.

That appears to be unusual, if not unique, among universities in the UK. Indeed, most of the institutions that gave evidence to the Science and Technology Select Committee said that they made every effort to exploit their intellectual property rights, and several universities, such as Edinburgh, quoted the fact that they were making some £3.5 million a year through contract research and the royalties from their intellectual property rights.

The great incentive for universities, which have been starved of funds over the past few years, is for them to follow the Government's advice. Universities have done everything possible to raise income from a variety of sources, one of which must be income from industrial research, whether funded directly by outside firms or by royalties, as I have just described. The reality, however, is that, despite some excellent endeavours by industrial liaison officers and highly professional organisations such as the British Technology Group, universities earn only a tiny fraction from their intellectual property rights of the public funding that they receive in grants. One commentator put that amount at about 1 per cent., which is extremely small.

Chris Elliott, director of Smith Systems Engineering, said: Contract research should be a low priority but has been increasingly popular with Universities because it earns money. It is dangerous because it can distort the priorities and lead to a risk of Universities changing from being centres of academic excellence to centres of industrial mediocrity. He went on: The real value of research lies in the understanding that it generates, not the knowledge—and understanding is not something that can be packaged and sold under licence. When the Science and Technology Select Committee reported on that matter, we said that it was important to take a flexible approach to intellectual property rights. Although in some areas there may be little packets of knowledge that can be sold on to industry for exploitation, the problem is that, when universities are encouraged to exploit all their IPR in that way, the understanding is contained rather than disseminated. We have industrial liaison officers who start behaving like police officers and raising barriers, rather than playing what is perhaps their proper role as salespeople and advertising executives.

Industrial liaison units in universities have problems. Many are understaffed and under-resourced. Industrial liaison officers are often undertrained and do not appreciate the nature of the commodity that they seek to exploit. Several firms have complained that universities demand too high a price for the knowledge and understanding that they have to sell.

I believe that that shows a misunderstanding of the way in which technology transfer is effected. If industry is to benefit from the understanding that is generated by university research, industry must participate throughout the process, and gain a thorough comprehension of the ideas.

One of the ways that the research councils have been trying to promote such comprehension is by means of firms adopting what they call the "heavy uncle model"—that is, providing expertise, guidance and some funding, as well as access to special facilities, if needed. I am pleased to say that I know of an excellent example in my constituency, in the form of the Rolls-Royce university technology centre, which is about to be opened in the department of material science at the university of Cambridge. That is a major collaboration; more than £1 million of funding will be provided by Rolls-Royce.

That type of input from British firms is all too rare: in the past it has been provided by Hitachi and Sony and many Japanese firms and firms from the rest of Europe and from the United States, but infrequently by British firms. Therefore, I very much hope that the Rolls-Royce lead will be followed by other major industrial players in the UK.

The policy of the university of Cambridge, of assigning intellectual property rights to the inventor, has had many other desirable effects. As Sir David Williams has said, it is one of the factors that has led to what is commonly known as the "Cambridge phenomenon"—the growth of many high-tech firms in and around Cambridge. It has encouraged many scientists to become entrepreneurs, and to set up their own high-tech firms and consultancies.

The success of industrial collaboration and the local high-tech economy in Cambridge is a shining example to the rest of the United Kingdom. Cambridgeshire now has 27,000 high-tech jobs, and it is a rapidly expanding sector. The Government should take time to think about that, and to consider what they can learn from that experience. There are some special factors in Cambridge; we should think about whether those can be replicated in other parts of the UK. The approach to intellectual property rights that has been taken in Cambridge is an important factor, which should continue.

Unfortunately, the university of Cambridge is becoming increasingly hampered by the research councils' insistence that intellectual property rights be exploited. Departments with projects that rely on research council funds are being told that they should not collaborate freely with industry without demanding a commission for their time and understanding.

The Select Committee on Science and Technology recommended that there should be a diversity of arrangements for exploitation. That means that universities should be free to build links and co-operate with industry in whatever way is beneficial for that collaboration to succeed. They should not be under pressure from the research councils, or anyone else, to sell every bit of knowledge and understanding. That would be highly counter-productive.

I associate myself with the remarks of the hon. Member for Wantage (Mr. Jackson) about the importance of basic research. That subject is not discussed in the report, because we were speaking about the rather applied and market-oriented research that universities and industry do when they work together. However, basic research is fundamental, and it is crucial that it is not geared into applied areas and mission-oriented sectors that have a practical and applied basis, because there are some excellent centres of basic research in this country.

It is important that those continue, because they are providing the foundation and basis for industries 20 or 30 years' hence, instead of today's industries. I know that there is much concern in my constituency about the way in which the Government now talk about mission-oriented research. There is much alarm that some of the basic research may not continue to be funded.

We said a great deal in the report about the significance of funding. I am anxious about the funding for small technology-based businesses. Many small firms complain about the lack of availability of finance, especially for development.

A survey of such firms in the Cambridge area is quoted in the report; it reveals that only one third of the firms had outstanding bank loans, just two had used the small firms loan guarantee scheme, and venture capital was regarded as far too expensive to be a viable option. Most entrepreneurs had to rely on families and friends—which one firm called the black economy—to start or develop their businesses.

Many Cambridge entrepreneurs attribute the successful start of their firms to an innovative manager at Barclays bank in the early 1980s called Matthew Bullock. It is worth mentioning his name, as it comes to many people's lips when they describe how their own firms were started at that time.

Unlike modern bank managers, Matthew Bullock appeared to have a delegated responsibility for deciding which ideas were worth funding, and he was prepared to take the sort of risks from which banks in the 1990s shy away. If it is impossible for banks to emulate Bullock's success in post-recession Britain, we need to evolve much better systems for financing people who have ideas that they wish to exploit.

Many of our more successful competitors have different arrangements to ensure longer-term financial support is more readily available. We need to shift towards a more co-operative relationship so that banks can offer more advice, and give both technological and business support. Small businesses need access to funds that are both competitive and secure.

Yesterday's edition of The Observer contained an excellent article by William Keegan, in which he discussed a book by David Storey of the university of Warwick, "Understanding the Small Business Sector". He said that 40 per cent. of small businesses starting today do not survive for more than three years. But if firms are technology-based, they are more likely to offer high growth rates, more jobs—and many more interesting jobs—and less risk of failure.

The trouble is that banks and venture capitalists are wary of high tech. During our inquiry, we found that often there was no one in a position of responsibility able to take the relevant decisions, with the depth of knowledge and understanding of high-tech business necessary to take decisions about funding.

That is in contrast to the United States, where 80 per cent. of venture capital portfolios involve technology-based business compared with only 20 per cent. here. But in my constituency in Cambridge, the St John's innovation centre has had an extraordinarily low failure rate among high-tech firms—only 4 per cent. per annum in the past five years, which must have been among the worst years for most small businesses.

Throughout a very damaging recession, we have had a failure rate among high-tech firms of only 4 per cent. That is something of which banks, venture capitalists and everyone else involved in the funding of business need to take note because it is not generally recognised. There is a myth that high-tech firms are high-risk, which is simply not true when one considers the facts. Mr. Storey is quoted as saying: We need a huge cultural change to encourage and promote the development of science-based businesses. I could not agree more.

I welcome the fact that the Labour party is discussing the idea of helping to establish a private sector-managed investment fund whose assets would be available to small businesses. We are considering ways of using the tax system to support that scheme. A fund would be managed regionally and would act as an intermediary between the investor and the small business. Such an arrangement is long overdue.

Very few hon. Members tonight have mentioned the importance of skills and training. I do not intend to dwell very long on that matter, but I want to draw attention to the letter that has been sent, I think, to most hon. Members today by the Institution of Electrical Engineers. It draws attention to the need for professional engineers constantly to update their skills.

The institution today announced an ambitious plan to establish up to eight engineering centres by the end of the century. They will be strategically placed around the country; the first will be located in Birmingham, I believe. The centres will provide easy local access to training courses, lectures and similar activities. They will be available not only to members of the institution but to all similar institutions and private organisations. They will combine modern lecture theatres with meeting rooms and offices. They will become one-stop shops for the professional engineer to gain access to up-to-date technical information and skills training.

That is a welcome recognition of the importance of engineering training and of the continued need to keep skills up to date, particularly in the engineering sector. I hope that other professional organisations will follow suit and try to do the same for their people working in British industry.

One of the Select Committee report's most important recommendations has been mentioned by almost every hon. Member—the major re-examination of fiscal incentives for investment in research and development, both at the personal and at company level. Having carefully considered evidence on the matter, Committee members felt sufficiently strongly to write to the Chancellor of the Exchequer. The reply did not instil confidence. It said: As you will know, the Government's general view is that we see no need for any further change in the already generous arrangements for research and development". The reply to the Select Committee report was even more depressing. It said: The Government does not, however, agree with the Committee that there is a case for general tax incentives for spending on research and development. I started to think about why the Government are saying those things. Is it because they are convinced that the evidence is not worth considering? Have they rejected it in advance? That is one possible explanation. Or are they worried that, if considered properly, the evidence would show overwhelmingly good reasons for spending more money?

I cannot decide which reasons the Minister could possibly have for rejecting an eminently sensible idea. I therefore hope that he will tell us tonight whether I am correct in my assumptions, or whether there is a different reason why the Government do not even want to examine the compelling evidence, which convinced Committee members that the proposal was worth considering and which would convince him if he were seriously to pay attention to it.

Dr. Bray

Is not one of the most worrying aspects of the Chancellor's letter that he says that he is generous? Is the Chancellor in a position to be generous to anyone?

Mrs. Campbell

I was amused and entertained by my hon. Friend when he spoke about true tax incentives, and when he compared the United Kingdom with other countries. It is clear from what he said that the UK is not generous in its tax incentives for R and D. Perhaps that explains why business expenditure on R and D is so low in this country compared with our international competitors.

Sir Giles Shaw

I do not wish to enter into a debate about the generosity of the Chancellor—that is probably a contradiction in terms—but I suggest that the generosity lay in the fact that the experiment on the American basis suggested a percentage of economic growth which more than compensated for the actuality of the fiscal incentive. The generosity had been demonstrated in the experiment.

Mrs. Campbell

I am grateful for that intervention. Our investigations revealed that, if the level of business expenditure in the United Kingdom was increased over five years from 1.36 per cent. to 1.8 per cent. of GDP, it would increase the rate of growth by 0.8 per cent., or £5 billion a year.

That is an enormous sum of money, which no Government could afford to ignore or say is not worth considering. I am sure that the Minister has got the message that we want him to take this point seriously. It is true that the tax yield from the increased incomes would quickly exceed the tax loss from the tax credit. I regret that the Treasury seems unable to take that point on board.

We are trying to encourage our industrial firms to invest in R and D, new equipment and training, but we are not prepared to do so ourselves. Perhaps the Government could ignore Treasury advice for once and set a good example in this instance.

It is essential that the Government do everything possible to expand the R and D they carry out, and that carried out by business. The President of the United States has just announced that he intends to increase the total amount spent on R and D by Government and business from 2.6 per cent. to 3 per cent. of GDP. At the same time, there will be a massive switch from defence R and D to civil R and D. The United States Government call that the transition from a vigilant society to a humane society. They are powerful words, which we too need to note.

Although the Government are intent on cutting defence spending, there is no plan for that money to be switched into civil research in which we clearly need to invest. There is a very sharp contrast between our plans and those of the United States. In this country, R and D has already slipped to 2.1 per cent. of GDP, and the Government appear to be proposing that it should fall even further—there are sharp cuts in the pipeline over the next two years.

Many scientists are alarmed by Sir Peter Levene's inquiry into, or efficiency scrutiny of, Government research establishments. Scientists are worried, but not because they do not welcome change—I think that many feel that the time is right to re-examine Government research establishments and ascertain what ate their objectives and whether they are still being met. What is demoralising and dispiriting most of the people who work in those establishments is the fact that the exercise is Treasury-led. At the end of the day, the Government are hoping to achieve the reduction in R and D spending outlined in their "Forward Look" plans.

There has been a dramatic decrease in Government spend—around 35 per cent. between 1986 and the projected spend for 1996. Some of that reduction in spend still has to be achieved and, as I have said, the great worry is that Sir Peter Levene's inquiry into Government research establishments will find the means of effecting that decrease in Government spend.

I do not know whether the Government hope that private business will make up for the reduction in Government research and development. I am afraid that there is little hope that that will happen. I believe that we are seeing the country spiralling down because essential investment is missing. What worries me is that, in the next century, Britain will become one of the technologically illiterate countries that will make up the new third world.

9.24 pm

The Parliamentary Secretary, Office of Public Service and Science (Mr. Robert G. Hughes)

I thank hon. Members who have made some kind remarks about me and about my right hon. Friend the Chancellor of the Duchy of Lancaster. It is, indeed, a great pleasure and change for me to address the House. As I took a vow of silence in the Whips' Office, it has been two years since I addressed the House. I hope that, after hearing my first address, my constituents will think, "I wonder why he did not speak before," rather than wondering why I spoke at all.

The hon. Member for Kirkcaldy (Dr. Moonie)—I am part Scots and my grandmother, if she were still alive, would kill me for my dreadful pronunciation—mentioned the Higgs boson. After two years in which I sometimes wondered whether there was a majority for the Government in the House, it is an interesting change to wonder whether the top quark exists or not. That is quite a difference.

I welcome, as the Government have, the report from the Select Committee on Science and Technology and I commend it for its work. In particular, I commend my hon. Friend the Member for Pudsey (Sir G. Shaw), not only for his work over such a long period on putting the report together, but for the statesmanlike way in which he put his case tonight. It is fair to say that there is a great deal of agreement between the Government and the Committee, although one would not necessarily have thought so from listening to the debate tonight.

Nevertheless, the debate showed that there is a great deal of expertise and a great deal of knowledgeable concern about these important issues in the House. Some think that it is fashionable to write in the press that if one wants expertise and knowledgeable concern, one has to go to another place. I have never thought that to be true. Tonight's debate has shown that. There is no doubt that the Government are committed to promoting science, engineering and technology. That commitment is shown, although we can bandy statistics—there have been a lot of statistics in the debate—by the fact that the science budget has increased by 30 per cent. in real terms since 1979–80.

Science and technology touch every aspect of our daily lives. Our future prosperity and quality of life depend on them, as has been pointed out by many speakers in the debate. The Prime Minister, of course, is determined that science should play a part in the centre of our lives, at the heart of Government. That is why, as most hon. Members have said, he appointed the first Cabinet Minister with responsibility for science and technology for 30 years. That has been referred to by my hon. Friend the Member for Pudsey and by many other speakers. They have referred to the proud record of my right hon. Friend the Member for Bristol, West (Mr. Waldegrave) in terms of his work and in terms of the trust that built up in the scientific, engineering and technology communities in him as the first Cabinet Minister with responsibility for science, aided as he was first by my hon. Friend the Member for Wantage (Mr. Jackson) and then by my hon. Friend the Member for Boothferry (Mr. Davis).

My right hon. Friend the Chancellor of the Duchy of Lancaster and I will seek to follow very much in the mould of our predecessors. We shall seek to be a friend to the science community, to be a voice at the heart of Government and to ensure that the arguments, some of which have been reflected tonight, are made right at the heart of Government.

One of the points raised by my hon. Friend the Member for Pudsey, the Chairman of the Select Committee, was whether the Office of Science and Technology is here to stay. I can assure the House that it is. It is a voice that must be heard, not just at the heart of Government but across the European Union and throughout the world. I shall refer more to that in a minute, because science is an international endeavour in which we believe Britain must play its full part.

The Government set out their policy for science, engineering and technology in last year's White Paper, "Realising our Potential". At the heart of our policies is a conviction that we need a closer partnership between industry, academia and Government. The report of the Select Committee, on which the debate is rightly focused, showed that, in general, members of the Committee share our view. We welcomed the Select Committee's inquiry and were pleased that the Committee was looking at an area of such central importance.

The Committee's conclusions, in my view—it is perhaps why our response was rather shorter than the report itself—were broadly supportive of what the Government are doing and, of course, we are now seeing the first results of the policies that we set out in "Realising our Potential".

Let me deal now with some of the specific points that were made by right hon. and hon. Members. Several hon. Members, including my hon. Friend the Member for Pudsey and the hon. Members for Kirkcaldy and for Cambridge (Mrs. Campbell), referred to the efficiency unit's scrutiny of public sector research establishments. The report, which was published in July, raises important issues about the future of scientific establishments in the UK. It is important that we get the arrangements right, which is why we are having a period of public consultation. My right hon. Friend the Chancellor of the Duchy of Lancaster will meet the Science and Technology Select Committee on Wednesday and we are very much looking forward to hearing what it and the Committee in another place has to say about it.

Obviously, because we are towards the end of a consultation period, I should like to reassure the House that decisions have not been taken on the recommendations in the report. I am sure that hon. Members would not want me to pre-empt the decisions while we are still listening to those with an interest in what the Committee has to say, but it is important, as we pointed out in the science, engineering and technology White Paper, that the ownership and financing of the public sector research establishments is examined to ensure that the resources that the Government provide are spent as effectively as possible. I do not think that any hon. Member would seriously argue with that. It is an efficiency scrutiny, and we are seeking to spend the money in the best way possible.

I now deal with a matter that every hon. Member speaking in the debate has raised—tax incentives for research and development. There was, as hon. Members pointed out, only a three-and-a-half line reply in the Government's response to that matter. It is simply that we do not consider that there is a case for general tax incentives for spending on research and development. We believe that the current system of relief for R and D is comprehensive and substantial, and almost all expenditure is written off when it occurs, or very shortly thereafter.

A number of foreign comparisons were made, but foreign tax comparisons are notoriously difficult to make, as the complete fiscal picture must be considered. UK corporation tax rates, for instance, are among the lowest in the Organisation for Economic Co-operation and Development and the Government believe that low tax rates, a broad tax base and few special allowances are the best way to promote investment and stimulate industry.

I would add just two points to that. Of course, some of the companies quoted in the debate tonight would prefer tax credits to grants. I understand that. They are bound to say that, because tax credits remove some of the strings that are attached when a grant is paid. It is understandable that they would take that view, but nevertheless, that is not a good reason for changing.

Sir Giles Shaw

I apologis[...] for interrupting my hon. Friend so early in his speech.

I fully understand the reasons why, for example, it is considered that there are other ways of dealing with the matter than tax credits or grants—for example, through taxation, economic management and so on. The crucial point, which my hon. Friend might care to address—probably not tonight, but subsequently—is that the condition in which we find ourselves requires a significant lift in the commitment to innovation and investment technology by industry. It is that aspect of it that makes other systems of releasing new energy in that sector worth re-examination.

Mr. Hughes

My hon. Friend has made an extremely important point. No one would disagree about the importance of lifting the amount of investment in that area. As the point has been made strongly in the debate by every speaker, I will ask the officials in the OST to consider the matter again in terms of the case that has been made.

I listened carefully to the arguments. Of course the argument can be made in terms of what we want to happen. However, the question is whether what we want to happen will be realised by the use of tax credits. I heard no substantial arguments to convince me that the advice that I have been given is wrong, but that does not mean that such advice does not exist. As I have said, I will ask my officials to look at the matter once more.

Dr. Bray

I understand what the Minister is saying and he is right to say that the subject is complex. That is why we asked that it should be thoroughly examined. Has the Minister seen the Inland Revenue evaluation of Bronwyn Hall's paper? If not, will he read it and lay it before the House?

Mr. Hughes

While I have not seen that paper, it is something that only my right hon. and learned Friend the Chancellor of the Exchequer would bring before the House. Funnily enough, that has always been the case with Governments in the past and it will be the case in future.

Mr. Miller

There is a key document which is crucial to the analysis of the problem that we are facing, a problem that has been identified by hon. Members on both sides of the House, but the Government are saying that some of that evidence will not come out for public consumption. I thought that the Minister's Department was responsible for open government.

Mr. Hughes

No Government have published more information about the workings of government than this Government. However, that point is rather removed from the debate.

If people recommend a change as substantial as the proposal, they must produce harder and more concrete arguments than they have produced today. Several hon. Members prayed in aid small companies when they advanced their argument tonight. Many small and perhaps struggling companies would be tax-exhausted and would not pay tax. How can we believe that tax credits would help them better than grants? The argument does not stand up in that sense.

Dr. Bray

Tax credits, as income tax allowances, would help small companies as they would give them credit against future tax liability. The Inland Revenue published an evaluation eight years ago. The Minister was quite right to say that it would be for the Chancellor of the Exchequer to publish it, but surely he could give an undertaking to make representations to the Chancellor to the effect that he should update that study.

Mr. Hughes

If a company is not paying tax and does not believe that it is going to pay tax, it may not be impressed by the idea of receiving a tax credit. I have already given an undertaking to the House that I will ask my officials to consider the matter in the light of the comments that have been made today.

I want now to consider the apparent conflict between paragraphs 12 and 25 in the Government's response. We believe that our approach to innovation in industry is increasingly directed to small and medium-sized companies by improving the climate for innovation, helping to identify and disseminate best practice, helping firms to get the services and support that they need and that industrial research and technology organisations can supply and by helping firms have access to, and use effectively, technology from home and abroad. I do not believe that there is a difference between those two paragraphs.

I want now to refer to the points raised by the hon. Member for Ellesmere Port and Neston (Mr. Miller) about the information super-highway and the Internet. A recent report for the Government by PA Consulting in February 1974—[Interruption.] I beg hon. Members' pardon; we are ahead of our time, but not that far ahead. A report for the Government in February 1994 found that the United Kingdom had a more developed fibre network than the United States or Japan, largely thanks to the investment of billions of pounds by cable companies. Whereas the Americans started by choosing to pay for the installation of the network to lead to the information super-highway, they are now moving toward our approach. It is not wise for us to adopt their approach.

The Government, through the Office of Public Service and Science, are giving a lead by consulting on public service applications of information super-highways. We are proposing to make public service information available as a first step on the Internet, called "open gov".

Mrs. Anne Campbell

I am sure that the House is pleased to hear that. Is it desirable that we have in the United Kingdom several small companies which are financed mainly from across the water in the United States and which are installing a variety of systems, not all optical fibre, with their own standards and regulations? That will make it difficult for us to have a national network that is worthy of the name.

Mr. Hughes

Of course there are some concerns about that matter. Even with the problems that exist and, frankly, even if the money is inward investment from the United States, Canada or anywhere else, that matter does not concern me at all because we have the benefit of that investment. Not all investment is exactly what we would want, but if we state-directed it and told companies precisely what they could and could not do, we would not receive that investment at all. Therefore, I would be loth to go down that road.

My hon. Friend the Member for Wantage rightly spoke about AEA Technology and the importance of ensuring that it is not fragmented on privatisation. We shall do our best to ensure that it is not, for the reasons that my hon. Friend gave, but, if he considers that points are being missed he will be very forthright in telling us what we should do on behalf of his constituents. We would welcome his input.

I have referred to a new partnership. That brings me to the launch of the technology foresight programme, which was one of the most important steps in building the partnership. An enormous number of science-driven opportunities lie before us. Indeed, the hon. Member for Motherwell, South (Dr. Bray) referred to some of them. If we take advantage of them we shall reap large rewards. For instance, victims of heart disease may benefit from the use of miniature robots which can work inside the body to unclog arteries. International business and tourism may benefit from systems that provide real-time translation of telephone conversations into various languages.

Much of the tedium of business travel might be replaced by "virtual meetings" which bring participants from many locations into contact through multi-media communications. When that was mentioned in a debate on the travelling of Select Committees, it did not enjoy a very good reception, and I am not sure whether it would do so more widely. The environment might be cared for with the help of custom-designed organisms which clean up pollutants.

Many of those advances are just around the corner, as hon. Members have said. We must face up to the stark reality, but not all hon. Members did. The United Kingdom cannot afford to do all the necessary science and technology to realise such advances—indeed, no one country can. Technology foresight is important to enable us to identify future market opportunities and emerging technologies to allow United Kingdom companies to exploit them.

My hon. Friend the Member for Wantage referred to the risks to the science base of our moving money from basic science. We recognise that risk as well, and it is our intention to ensure that that does not happen.

The technology foresight programme has built new networks between industry, academics and Government, and the process itself, as I saw at the technology foresight forum, is of great value and importance. We have established 15 panels to conduct foresight in specific areas, and those produced preliminary views during the spring and summer. The programme covers the sectors that one would expect, such as information technology, manufacturing and pharmaceuticals, but it is also breaking new ground by covering financial services, retailing and leisure.

In a most thoughtful speech, the hon. Member for Motherwell, South spoke about smart cards, the effect of new technology on banking and the effect that that could have on jobs, on the way that people use banking and on the way that people shop. All of those things are important. That is part of the work that the financial services panel is undertaking. As the City of London is the centre of financial transactions not only in Europe but in the world, it regards the programme as an opportunity to expand its business. We must never forget that what may be a problem can be an opportunity as well.

The panels are holding 60 regional workshops to consult on the key issues arising out of their initial analysis. To reach the parts that would not be reached otherwise, a postal questionnaire was sent to 8,000 people. It has already elicited more responses than equivalent exercises in Germany and Japan, and the responses are still coming in thick and fast.

The technology foresight programme has attracted enthusiasm and commitment from a wide range of firms, research and technology organisations, academics, professional institutions and learned societies. Looking at the amount of work that is put into the technology foresight programme by important people from all those organisations, I wonder how some of them find time for their day jobs. I simply take this opportunity to thank the companies and institutions that have been so generous in allowing their senior employees to spend so much time on the technology foresight programme.

The programme is on track to produce its first results next spring. They will inform our thinking about science, engineering and technology, and will provide useful guidance for private sector investment. We have already announced our intention to undertake another foresight exercise in a few years' time. We want to learn from our experiences of this programme in devising the next one, and will welcome the views of the Select Committee and other hon. Members in due course on what they have learnt from the technology foresight programme and what they would expect from the next one.

Several hon. Members spoke about education and training. For me, that comes within the important topic that was launched by the White Paper, public understanding of science. As hon. Members, in particular the hon. Members for Ellesmere Port and Neston and for Cambridge, pointed out, it is crucial to cultivate tomorrow's scientists now and to encourage the contributions that they can make to wealth creation and our quality of life.

In January, we launched a campaign to enhance public understanding of science, engineering and technology. The first event in the campaign was the national science week which was organised by the British Association for the Advancement of Science with funding from the Office of Science and Technology. New scientists described the week as a staggering success—and, indeed, it was. We believe that about 1 million people attended some 1,200 events in 230 towns and cities throughout the United Kingdom. I am able to tell the House that in our preliminary examination of national science week for next year, there have already been expressions of interest which substantially outweigh the amount of work done last year.

I put a lot of store by the national week of science, engineering and technology, and my right hon. and hon. Friends and I and, I hope, hon. Members from both sides of the House, will play our part in ensuring that the large number of events that will be run are a success, and that young people will learn more about the importance of science, engineering and technology. SET95, as it will be called, can be a staggering success again and can produce a great deal of important work to increase public understanding.

The Office of Science and Technology will spend £1 million on the overall campaign in this financial year. That includes £270,000 to the British Association and the Gatsby Foundation, to promote and publicise substantial existing activity; £150,000 to the Committee for the Public Understanding of Science in support of two grants schemes; and £120,000 for work in schools, including the highly successful creativity in science and technology awards scheme—CREST—which I had the pleasure of attending a few weeks ago. The awards are for important and interesting schemes and experiments put together mainly by fifth and sixth-formers.

One of our main targets for next year is to encourage greater industrial participation in science week. My right hon. Friend the Chancellor of the Duchy of Lancaster has invited the top 200 companies by R and D spend to consider how they might be involved. We are also keen to encourage more women to participate in science, engineering and technology. The White Paper recognised that in Britain we underuse the talents of women in those sectors, and that that, indeed, was to our cost and to the country's cost. In response, we have established a development unit within the Office of Science and Technology to tackle the issue. I am pleased to tell the House that the head of the unit has just been appointed. Linda Sharp is a civil servant mathematician currently working at the Ministry of Defence. She will take up her duties in a few weeks and will spearhead this important work.

Let me say a few words about the priorities for future action. The Government are continuing to develop their policies for science, engineering and technology. Our priorities for action include, first, taking forward the technology foresight programme. We will have the first overall conclusions next spring, but that is only the start. We must make sure that the results are widely disseminated, so that everyone with an interest—in industry, Government and academia—can take them on board. We shall help to sustain the networks that have been developed, which are so crucial to the new partnerships mentioned in last year's White Paper.

We shall develop the "Forward Look". My hon. Friend the Member for Wantage was worried about what would happen to the "Forward Look". It is safe in the hands of the Government. Government-funded science, engineering and technology is important. Our aim is to produce a more far-sighted approach to science and technology policy and to provide fuller and better information on the Government's investment. Next year's "Forward Look" will reflect the first results of the technology foresight programme.

We shall continue to promote the public understanding of science, engineering and technology. My right hon. Friend the Chancellor of the Duchy of Lancaster and I are concerned that science should be in the mainstream of public debate. Our public understanding campaign will include what we hope will be an even bigger and better science week, as I mentioned earlier.

We shall continue our quest for maximum effort in the administration of the research councils. We want to direct as high a proportion as possible of the science budget into supporting top-quality science and engineering. The director general of the research councils is working with the councils to ensure that this happens.

We must preserve the high quality of basic research, which has been mentioned in the debate, particularly by my hon. Friend the Member for Wantage, but in a framework informed by technology foresight and benefiting from closer partnership between those in industry, in Government and in academia.

The international aspects of the matter have been mentioned in the debate, particularly by the hon. Member for Kirkcaldy. We are developing the specific programmes under the fourth EC framework programme and we look forward to finding a satisfactory basis with our international partners for formal approval of the large hadron collider.

Our guiding principle in each case will be to secure settlements which are good for Britain and good for science. Certainly my experience at the last European Research Council meeting, which agreed 10 research programmes under the fourth framework, is that we are far from being alone in the European Union in putting national interest high on the agenda. Of course, this is an international matter and we want to collaborate. We want to co-operate with our partners in the European Union and beyond and my right hon. Friend and I are doing so. To suggest, however, that we should not put British interests high on our agenda is something with which I would not agree.

Shortly, we shall establish the OST development unit to promote greater participation by women, as I mentioned. We are reviewing the LINK programme, with the objective of broadening it to deliver high-quality collaborative research with minimum bureaucracy.

We shall develop an action plan based on the efficiency unit's scrutiny of public sector research establishments. Again, I assure the House that the priority will be to ensure that resources are devoted to science, with the minimum of overheads.

In Britain, we have always supported and carried out good science. It is not just me saying that—we have supported and carried out good science that is internationally recognised as being the most exciting and innovative in the world and the Government are determined to maintain the tradition of excellence.

When he opened the debate, my hon. Friend the Member for Pudsey said that we must see to it that the initiatives that we have set in train lead to an increase in activity. That one phrase could be our watchword—increase in activity and increase in success for Britain.

The Government's policies will ensure that we boost our economy and enhance our quality of life. That is our concern and it has been the concern of those hon. Members who contributed to the debate. It will continue to be our joint concern as we go forward in the important matters that we have debated tonight.

Mr. Michael Bates (Langbaurgh)

I beg to ask leave to withdraw the motion.

Motion, by leave, withdrawn.