Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 160-174)

MR WILL HUTTON, REBECCA HARDING AND ANDY WESTWOOD

TUESDAY 26 FEBRUARY 2002

  160. In particular, the two examples you have given of the USA and Germany are both obviously federal states.
  (Ms Harding) Yes.

  161. How important, as a catalyst to what you are saying, do you see the development of regional government?
  (Ms Harding) I think the development of regional government is extremely important. I think the development of some kind of economic autonomy in stimulating this type of institutional change is extremely important but I think, also, that if you look at the United States and Germany, they are federal states but there is a very clear delineation between where the federal state is involved and where the regional actors are involved. Even within the structure that we have at the moment, the RDA structure that we have at the moment, the RDA is actually an extremely useful vehicle or could be an extremely useful vehicle for mapping what a region is capable of doing. It is about changing the mindset, driving it towards creating innovation structures and having technology in competitiveness and productivity at the heart of the debate. The truth of the matter is we are techno phobic in this country, we really are. I remember when I was putting together some research on entrepreneurship, somebody said to me, and I was speaking to venture capitalists across the UK, "We do not go anywhere near technology based products because if we go anywhere near technology based projects we do not understand what the people are talking about. We suddenly have to start getting involved with the universities and we do not understand their language and we have not got the people to evaluate what the bottom line is going to be in five years' time for our exit strategy so we just do not go near technology projects. That is reflected in the overall levels of investment in technology in this country". So there are two things, first of all it is empowering the regions to identify where the sectoral strengths are and how they can build up an infrastructure around those sectoral strengths and that can be done on the basis of the RDA structures as we have them at the moment but you have to change the mindset of the people in the RDAs themselves towards productivity, technology, innovation in its broadest sense because we do not actually have that in our mindset at the moment. If you go to the United States, the venture capitalists will say "We understand productivity and we understand innovation. The first thing we do is identify in technology markets where we think there is a gap. We wait for a university professor or somebody from a science park to come along with an idea that clogs that gap and then we know there is a market for it and we invest in it". They are actually doing technology audits all the time. It comes back to the point I made earlier which is that you need that kind of intermediary organisation which is translating the knowledge in the university sector into business speak so that it can actually be transferred into commercialisable products. You have that in the United States and you have that in Germany but it is quite limited in its diffusion in this country. It is those kinds of intermediate structures.
  (Mr Hutton) Has the Committee looked at the whole issue of "technopolis" in the States, it relates to this issue? The single most important advantage in my view in the US is its university system. The top 15 to 20 universities in the States, it is rather similar to the technology gap which was revealed in Afghanistan between American military capacity and the rest of the world's. The gap between the top American universities and the rest of the world is now close to incredible. While our university system, I am afraid, remains chronically under resourced, what is emerging is a great source of comparative advantage, if you go anywhere there are 15 "technopolises" in the States, not just in Silicon Valley or in Massachusetts but Kansas City has got one, they exist in Texas. What they are built around is a federally funded university, state of the art frontier research. Then you have this technological transfer, institutional structure which Rebecca has described which in the States is much more market orientated, it is around venture capitalists but in Germany they have a similar system there which is much more in public/private partnership or actually state owned structures that gets it into the corporate sector who are highly specialised, of course, in what they are doing. You have the famous car industry in Munich, you go around Germany you find the clusters are in very specific sectors, as Rebecca described, the same story in the States. If you talk about the East Midlands again, you just look at the universities there, they just simply could not begin to do the world class frontier research in this area, they just simply do not have the resource. That is the place you would start, you would then want this infrastructure that Rebecca has described, you would then want banking structures and you would then want the skill structures that Andy Westwood is concerned about, and then you might have a chance.

Dr Kumar

  162. There are so many questions. Just take the example you cited of the East Midlands, that is one cluster, the North East is a chemical cluster, all across the country there are clusters emerging which the Government papers have identified.
  (Mr Hutton) Yes.

  163. What you are saying is that all those clusters are going to fail because of lack of infrastructure and various other things, financial support, and they are not going to be successful. Then I would say to you but they are multinationals, they are big companies, and if they need financial support could they not go to central banks and get all the help they need, just to come back on that. Okay, at local level they may be lacking support. Can I ask, also, are you saying we need some sort of regional venture capital fund to assist those clusters as well? Would that be something the Government has set up for SMEs but something even bigger which could help those sort of clusters to develop through the RDAs or maybe through other mechanisms? There are a couple of questions.
  (Mr Hutton) On this question about the balance, if you are talking about a manufacturing structure in what I would now call a technopolis or what you might want to call a cluster—we all know what we are talking about—you find geographic concentrations. Now the big companies require supply chains for small and medium sized companies. It is true that actually multinationals have got financial muscle. Mobilising large sums of money is important of course but as important are the terms and price of that money. Now, what you find, interestingly enough, is that UK multinationals with headquarters in London, with the majority of their equity owned and traded on the Stock Market have to make higher rates of return over shorter periods than, amazingly, US multinationals headquartered in the States, traded in the New York Stock Exchange and then they have to make more again than European multinationals with their equity traded in Frankfurt, Amsterdam or Paris. What is going on here is that the time horizons, whether an investor has to pay back in three years or five years, whether the hurdle rate is eight, 12 or 15 per cent is fundamental as to whether an investment project goes forward or not. So the multinational may be based in the East Midlands but it is actually saying to these people "You have to make 15 per cent real and pay back is three years". Now, if the project does not meet that criteria it does not go forward whereas a competitor maybe will have a pay back period of five years, a real rate of return of 12 and it does go forward. Then you have got, over and above that, the issue of in the supply chain, the small and medium sized companies, the mittelstandt in Germany or what we call the SMEs, the small and medium sized enterprises. What are the terms in which they are banked to? What are the terms in which they can get both equity finance and debt finance? New start ups need venture capital but actually those that are growing need access to the capital markets perhaps to supplement their equity and others in parallel, they may need debt at the same time to keep the debt equity ratio stable. There you find that the institutional structure simply does not exist. It does not exist, it has not existed for 100 years. Stephen Byers proposed a knowledge bank, you may remember, at the Labour Party Conference in September 1999 and we were quite closely associated working up that proposal. What we found working with the DTI—the idea has now been killed—was that at the time we had one Scottish bank and two London clearers which had indicated they would support this initiative, it was hardly the banks themselves which were against it, they were going to own part of it but the DTI itself, which defines things wholly in terms of market failure, institutional failure, would not see the case for it. There was this extraordinary situation where the banking sector itself was saying "There is a case for this institution" but the DTI, which thinks wholly in terms of market failure and not as we want it to do in New Jerusalem, to think of it as institutional failure, simply killed the notion. In fact, amazingly, there was one paper from one official saying that actually although there was plainly a case for a knowledge bank if the DTI took the initiative to create this institution it would remove the incentive for the private sector addressing the sorts of market failure itself. This is a kind of world of mirrors in which you cannot do anything, even though there is a problem, because that will preclude the private sector from solving the problem which it should do because there is a market failure. The categories in which you think, disallow you from taking institutional initiatives.
  (Ms Harding) Can I just reinforce that point. The German system is the system I know best. If you look at the way in which the structures work, they are regional and local and national as well. For example, if I had an example in Heidelberg in an area of biotechnology that was related to something that somebody was doing in Berlin, I would be able to go to one of the national organisations like the Max Planck Institute or the Fraunhofer and I would be able to say to them "I have got this idea, have you got some expertise to be able to help me with this idea?" The Fraunhofer person would say to me "Well, actually we have not got any expertise on that but we can do a search for you and we will find out who the best experts are within Germany." Those experts will be able to help you move that idea forward, do a patenting search, be able to assist you in the types of technological due diligence that you need before you can bring that idea to market and would know exactly where to go within the national structure to be able to support that project at a regional level. They would be able to extract some kind of benefit from it themselves. That is what I mean by creating a network reciprocity culture at a regional level. It is being able to understand where the expertise lies. It is being able to pull it in. It is being able to use it to help the small company or the small entrepreneur or the mittelstandt organisation in developing an idea or an innovation whatever area it might be in. Then I would be able to access venture capital. It would not necessarily be a regional venture capital because regional venture capital funds in Germany are actually run at a local level through local banks, local sparkassen and so on. I would be able to access a venture capitalist who had a specialism in that area of technology or knew somebody who did have a specialism. I have actually worked with German venture capital companies and it is fascinating. They say "Yes, we know there is a market in that area. We know we need to do some technological due diligence". They themselves train themselves. Even people in the savings banks, who are responsible for venture capital, have trained themselves up to a level of knowledge about the technology to be able to support an entrepreneur who is coming through. Then they go out and say "Well we need to hook in so and so professor from such a university to be able to move the technological idea forward". So, regional venture capital funds are necessary but not sufficient. What is actually necessary and fundamental to all of this is an understanding of the innovation process and being able to create those network connectivities between different institutional structures. Another word on venture capital. There have been a lot of initiatives around venture capital, and I do not know exactly how many of the regional venture capital funds are actually now up and running and have closed their funds or had their first closing on their funds but the programme was first launched in 1999 and I did some research around the regional venture capital funds at that point. The problem was that you were not going to get the venture capitalists themselves to change their investment mindset towards supporting these companies which needed to grow and were rooted in the innovation structure of the economy and were going to hook together all of these different institutional structures because in the end they were thinking, as Will said, in terms of the three year exit strategy. It is that short termism that is a function of the mindset of the finance system and the system of corporate governance that actually causes so many problems.
  (Mr Hutton) Look at the pressure that Sir Ralph Robbins is under who chairs Rolls Royce. He has been protecting Rolls from financial markets and he is still producing over time really quality earnings performance. As you know, he is coming up for retirement and what the institutions are looking for is a man to replace him. They are overt about it, you can get them to bring evidence to you. They do not want somebody chairing Rolls Royce who has got an engineering background, who wants to think of the organisation's creativity at the time, they want somebody who will deliver shareholder value. These venture capitalists have a very, very similar set of priorities. They fund management buy-outs and they fund property. Their willingness to be instruments of technology transfer from universities or research institutes into the small and medium sized enterprise sectors is not where they are at.

  Mr Berry: Thank you very much for that. Can we move on now to the second part of your argument on skills and workforce development. Andy Westwood has been sitting very quietly there. Linda, I think you want to come in on that.

Linda Perham

  164. Yes. The PIU is going to produce a report during the summer on workforce development. Have you any ideas about what you would like to see in the Government's action plan when that is published? Are there any ideas that you have got?
  (Mr Westwood) We have a fair few ideas. The process, as I am sure you know, started probably 18 months ago. It was very much given the brief to look at the problem of under investment in workforce development. The starting point for that decision was because current outward investment was diagnosed as a major cause of our poor productivity performance. With that given the PIU went off and ran into what the problems preventing investment in workforce development were. You are probably aware that they published what was originally going to be the final report but it became a sort of interim report at exactly the same time as the Chancellor stood up and delivered the PBR. You have to look at what was said in the PBR alongside what the Performance and Innovation Unit came out with because that in a sense came out with much more hard line policy recommendations than the PIU did. In a sense, the second part of what the PIU are saying, and planning to bed down into departmental delivery was already trailed within the PBR at that same time. That was where you saw some of the stuff which we recommended, not qualified, almost an entitlement at level 2, the idea of allowing people time off to follow training up to level 2 but very much around basic skills, the idea of replacement costs for firms, particularly small and medium sized enterprises, allowing their workforce to do that. I think a lot of the things we would like to see the PIU follow up are the recommendations that found their way into the PBR, albeit some at pilot stage, and time off being the other one. I think rather than expecting it to say a great deal more about the subject, what we are really looking at from the PIU's perspective is trying to entrench the actual delivery of those policies which are vocalised within the PBR rather than anything particularly new around policy recommendations.

Mr Berry

  165. You advocate relaunching National Training Organisations as National Performance Organisations, apart from changing the name. In fairness you discuss it, I am not being snidey, sorry.
  (Mr Westwood) I was.

  166. It is late in this evidence session. Could you say something about what the NPOs could do that NTOs cannot and what the resource implications might be? What would Government need to do to make that work?
  (Mr Westwood) The idea behind the NPOs was, as we knew at the time, NTOs were pretty much finished and something was going to replace them. Our view is that NTOs, some of them did a very good job but the problem with a place where skills are always the answer is that people do not always come and ask the questions. So NTOs in isolated cases, but also across the piece, suffered from not enough people within the private sector coming and asking the questions about performance. What we wanted to do, and this was referred to in New Jerusalem as well, was change the emphasis of NTO to a performance based service so that it could not only be a place where skills would still be the answer in many ways, and support in allowing small and large organisations to develop better levels of intermediate skill, but it would also be the place where organisations would go to for the kind of explicit support in business reorganisation, business performance. The idea around the name was just a very explicit idea that if it was about performance more people would come and ask for help to which skills may still be part of the solution but not exclusively so.

  167. What resources would they need?
  (Mr Westwood) Probably not much more than NTOs had and certainly not much more than the replacement sector skills councils will have. I do not think at any time we expected to ask for extra resource for delivering that. I think it was more making it clear that it was a single place that people could dock in to and ask performance questions and get decent answers.

Sir Robert Smith

  168. In your submission you talked also about supporting the concept of statutory time off for learning.
  (Mr Westwood) Yes.

  169. How do you sell that to a small business in terms of the impact on their organisation and the costs of coping with that?
  (Mr Westwood) I think throughout the report what we tried to say was that skills have a place in improving the performance of organisations, small and large. It goes partly back to my previous answer around coaching, solving individual skills problems in overall business performance. Rather than just having a statutory right for people to disappear off and do something potentially unconnected to the main purpose of the organisation, to do something incredibly well focussed, possibly at the bequest of the organisation itself. One of the things we recommended, which is probably being reviewed in a room down the corridor, was bundling together ILAs into organisational learning accounts where small organisations could decide what learning individuals would go off and do. What we wanted to do was try and connect the need to improve the skill level of workers across the piece, actually tie it in to the identified problems from an owner/manager's perspective. The idea of statutory time off when we only recommended, I think, about five days, we did not want to make it too large, was that both the individual and the owner/operator, particularly in a small business, would jointly come to an agreement over what would be the best use of that time and how it would then come back and benefit the organisation.

  170. This is not the perspective every Member has but from a constituency like mine where there is a skill shortage, statistically low unemployment and struggling to meet all your contracts and get the business done, it is extremely difficult for someone in that situation to see how they find the time to let someone go.
  (Mr Westwood) It is a very difficult thing to ask without a doubt but I think part of the solution and the answer is even organisations working in that sort of restricted environment have skill shortages and they have to meet them somehow. Most people are finding that difficult to meet through recruitment in the open market. I would suggest that the best way forward is to develop what they have. If they have got a decent chunk of cash and an incentive to send people away for five days in a year to try and meet some of those shortages then it should be a win/win.

  171. Something which came up in a previous evidence session was if there was one solution that they were allowed to come up with, the suggestion was that what needed doing was dealing with management skills and how to communicate and lead the workforce.
  (Mr Westwood) Yes.

  172. How do you see that being delivered?
  (Mr Hutton) Through the Industrial Society.
  (Mr Westwood) Obviously. Thank you for helping me there. There is a problem, I think, and the PIU certainly alluded to this quite explicitly. If you look at where most workforce development spend takes place it is at managerial level. Now organisations will claim that is for reasons of leverage over the performance of the whole workforce, in reality that may not be entirely true. Certainly I think our management skills' acquisition programmes, whether it is a kind of NVQ level 4 or a business school sort of level, are a solution that lots of organisations have reached for over and over again and still our overall performance does not seem to have benefited too much from that. It is worth trying it the other way round. Rather than trying to squeeze that much more out of a low skilled labour pool again and again and again by putting your foot down on the management gas, try and change gear, step up a gear and look at how you manage a better level of resource in terms of staff skill across the board. I think management skills are absolutely important. I would not knock the need to acquire a better level of management skill across small and large organisations but I would say that it is very easy—and it has proved to be so for many years—to assume that is perhaps the only way to do it. The ideal way would be to carry on with that kind of attempt to acquire better management leadership skills but to complement it with a better resourced and more knowledgeable workforce at the same time.
  (Mr Hutton) There is a book called Built to Last—I do not know whether you know it—it is by two American business writers called Horace and Wilson and it profiles 20 manufacturing companies which have survived the 20th century. It does not include a British one unfortunately. In only two of them has the CEO, when there has been a succession, been recruited from outside the organisation. What characterises all the organisations are two things. One, a powerful sense of what the organisation is about. A real sense of its purpose, its core purpose, making the best planes, making the best cars, whatever it might be, and actually the embodiment of that in the leadership and management style of the top leadership team so that whichever CEO moves on has that culture at his or her heart. You get good leadership, it seems to me, when there is a reciprocal relationship between that culture and the leadership. That is how Andy's agenda hooks in with Rebecca's because you can only get organisations built to last that can generate that kind of culture if they are buttressed by the institutional structures we are talking about so it all connects.

Mr Chope

  173. Can you help us on the relative benefits of tax credits for training and the learning titles to which you refer in your paper? Do you think the Government is going to adopt either or both?
  (Mr Westwood) The one hot certainty as the PIU dived into this process was that the Treasury wanted tax credits for learning. At the time I was involved in that project from the DfEE and DfES perspective. All the time we were expecting that to end up in the final set of recommendations and of course it did not. What struck me about the whole idea of tax credits was that if we took the view, which clearly I did in that report, that our problems were a very specific part of the learning process and our skill deficiencies were a very specific part, tax credits could end up being a very, very blunt object indeed, a sort of mechanism which would allow organisations who spent a particularly large amount in high level training, for instance, to benefit a great deal from. It would not necessarily change the culture that we were trying to address which was the lack of intermediate skills in the labour market and in organisations within that. The tax credit as far as I was concerned, there was always a kind of pay off, and there still is. Do we get the tax credit which is a highly complex thing which is always a problem in itself, a tax credit that people do not understand that is heavily tied in to particular levels of learning at level 1, level 2 and at basic skills, or do we go for a much simpler catch-all tax credit which stimulates learning probably at that level but also takes with it a huge amount of dead weight higher up the scale? That is effectively the choice which still faces the Treasury. If there is tax credit I prefer to see it as a complex one targeted at lower level learning because I think there would be less dead weight and it would be more effective in changing the kind of normative behaviour that we see when people buy training. So that would be my instinctive reaction. In practice, if people were to believe that actually perhaps that was far too complex a piece of an incentive for it to affect learning at level 2 then I would be happily persuaded that it was not necessary at all and you could do far more on the supply side and stimulate demand through business support organisations which would probably be far more effective than a tax credit at all in any form.

  174. How and when do you think this is going to be resolved?
  (Mr Westwood) I suspect it has been resolved. I suspect if we were going to see a tax credit we would have seen it in the PBR. Certainly even the PIU expected it to come out in the PBR and it did not. I suspect the tax credit debate has finished.

  Mr Berry: Thank you very much indeed. That has been a really interesting session. Thank you all for your written and oral contributions. It has been helpful. We will certainly take on board some of the suggestions you have made for the future activities of this Committee. We are always keen to receive advice of that kind. Thank you very much indeed.





 
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