A new report published today, and supported by leading business and investor organisations, sets out 11 recommendations to address a paradox which threatens the future of the UK economy: why are there so few science, engineering and technology (SET) businesses generating wealth in the UK when London is a powerful capital market, and our science base is among the best in the world?
SET and the City: Financing Wealth Creation from Science, Engineering and Technology, is the second report from a group chaired by Sir Peter Williams, chairman of the Engineering and Technology Board*. The group includes the EEF, PriceWaterhouseCoopers, AIM, the Association of British Insurers, the British Venture Capital Association, Rolls-Royce plc and JP Morgan.
At present, there are only 16 SET-related businesses in the FTSE 100 and only 45 in the FTSE 250. In contrast, the US Nasdaq index is dominated by technology based companies with almost a thousand listed.
Though few in number, these companies are the wealth creating engine for the UK economy – SET intensive sectors produced 27.3% (£252.3 billion) of the total UK value added in 2002 – but the level of wealth creation falls short of what would be expected if we were to gain maximum leverage from our world leading science base.
Without increased growth in this sector, the UK will find it increasingly difficult to maintain its standard of living in the face of strong international competition.
SET and the City identifies 3 issues at the heart of the paradox:
- for the current level of public investment in science and engineering to be proved economically worthwhile and sustainable, the private sector has to match Government’s commitment financially, but there is little sign that this message is accepted or understood;
- Government procurement strategies are regarded as ineffective in promoting emerging technology based businesses and may in fact discriminate against them;
- to grow emerging companies into world class enterprises the active support of the capital markets is essential. All the evidence cited calls into question the commitment of the major financial institutions to technology stock and suggests that nothing less than a fundamental change in investment attitudes will reverse these trends.
The report warns that unless these issues are addressed the UK could develop a dependency culture, becoming entirely reliant on overseas innovation and technology, outside the biosciences.
Key recommendations include:
• Recommendation 9: Government should review their public procurement processes to position SMEs correctly within the supply chain for major Government contracts. (paragraph 164 in the report).
By 2006, the Government expects the public services to be purchasing well over £150 billion worth of goods and services. This potential pool of investment could improve the relationship between company and investor for whom secure order books offset the risks inherent in technology business.
Within the report, US policy on small firms and public procurement is noted as a contrasting approach. The Small Business Administration runs a programme that aims to reserve a proportion of Federal procurement (23 per cent overall) for small firms.
• Recommendations 10 and 8: Government should reconsider Supercharged VCTs (Venture Capital Trusts) (paragraph 171) and should examine possible tax incentives for institutional investment in Venture Capital, particularly the Technology VCT by Government, in time for the Budget 2007. (paragraph 151)
• Recommendation 3: Government should review the EIS (Enterprise Investment Scheme) legislation with a view to simplifying it considerably in time for the Budget 2007. (paragraph 51)
In 2004, US pension funds were a larger source for UK venture capital and private equity than their UK counterparts, while the bulk of UK private equity and venture capital went into non-technology funds in 2004, with technology funds at only 3.3% of the funds raised.
In 2004, the volume of US technology venture capital investment was over 10 times greater than in the UK, and around twice the share of GDP, though the UK is slowly catching up on the latter measure.
The most important source of external finance for SMEs is bank finance, while the companies financed by BVCA members are, for the most part, middle sized companies.
• Recommendation 7: The group urges member institutions within the ABI and NAPF and others, to re-examine their vital central role in the development of the industries of the future, recognising their broader impact on the shape of the UK economy. (paragraph 147)
• Recommendation 11: Government is asked to review the activities of the DTI’s Technology Strategy Board (TSB) and its relationship to the Council for Science and Technology (CST). The group feels there is a case for developing a Technology Exploitation Council, perhaps via a merger of the TSB and CST.
Sir Peter Williams said:
“Our report aims to encourage financial institutions and SET-related businesses to work together to produce an economy that contains technologies vital to the UK’s prosperity and well-being in the 21st Century and draws on our strengths in science. We hope Government will continue to help by putting the right tax and regulatory policies into place.”
In its conclusion, the Group views the challenges of addressing the consequences of climate change and the prospective huge magnitude of the investment opportunity as a paradigm for the proposals they make.
“We would like to see the funding in place, principally from the private sector, to ensure that UK SET-related industries are at the forefront of finding technologically sound commercial solutions to addressing the problems created by global warming.
“If we fail to develop this sector, we will be entirely dependent on imported solutions to what in all probability will be the most significant challenge facing the nation for the rest of the century.”
*Sir Peter Williams stepped down as Chairman of the Engineering and Technology Board (ETB) on the 6th June 2006. Sir Gareth Roberts has now taken over Chairmanship of the ETB. Sir Peter will continue to support the ETB during 2007, and will chair a research project on the role of procurement in stimulating innovation.
Notes for editors
The draft report from the steering group was presented to, and debated among 70 representatives from SET businesses, financial institutions and member organisations at JP Morgan Cazenove on 1 June 2006. Comments and suggestions from audience members have been included in the final draft.
The members of the Steering Group on SET and the City were:
Sir Peter Williams: Chairman, Engineering and Technology Board (Chair)
Sir David Cooksey: Chairman, Advent Venture Partners
Ian Cooper: Director, Finance and Administration, The Royal Society
Peter Fellner: Executive Chairman, Vernalis plc
Dougal Goodman: Foundation for Science and Technology
Martin Graham: Director of Market Services and Head of AIM, London Stock Exchange
Mike Howse: Chief Technical Adviser, Rolls-Royce plc
Hermann Hauser: Chairman, Amadeus Capital Partners
Keith Hodgkinson: Industrial Adviser to Canadian Imperial Bank of Commerce World Markets
Geraldine Kenney-Wallace: Director Group e-strategy, learning and Information Technology, City and Guilds
John Mackie: former Chief Executive, BVCA
Michael McKersie: Association of British Insurers
John Morton: Chief Executive, Engineering and Technology Board
David Norwood: Executive Chairman, IP Group
Sarah Philbrick: Development Director, Royal Academy of Engineering
David Phillips: Partner, PricewaterhouseCoopers LLP
Craig Pickering: Money On-Line Education
Stephen Radley: Chief Economist, Engineering Employers Federation
Alison Thomas: PricewaterhouseCoopers LLP
Sir Robin Saxby: Chairman, ARM Holdings plc
Bernard Taylor: Vice Chairman (Europe), JP Morgan and Chairman, Isis Innovation
Michael Webster: Quoted Companies Alliance
For more information please contact
Kirsten Hawes, 0845 226 0803