Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 180-197)

MR DIGBY JONES, MR ANDY SCOTT AND MR IAN MCCAFFERTY

TUESDAY 26 FEBRUARY 2002

Mr Hoyle

  180. When you said local authorities have a role to play but they do not understand—
  (Mr Jones) They have a role to play, full stop.

  181. You say they do not understand the changes that are taking place?
  (Mr Jones) Not always.

  182. What role do you believe that local authorities can play?
  (Mr Jones) One of the biggest roles would be in public terms they should acknowledge that they no longer suspect businesses as being polarised to their views. I am concerned, for instance, that a lot of people who are involved in local politics do not always think that businesses want to be engaged in the local community, do not always believe that businesses actually do look after their employees, do not believe that businesses do put the welfare of the community very high up their agendas and they do see businesses as driven by one thing and one thing only, which is profit at all expense. That is not true. Of course I can show you some businesses that are driven by that selfish motive. We have good and bad businesses, we have good and bad politicians, we have good and bad local authorities, good and bad journalists, good and bad teachers and policemen, we are just a reflection of society and business is like that as well. There are so many businesses that want to take their place in a local community as a wealth generator, as a job creator, and of course make a profit, that is what capitalism is about, but to do it in a socially inclusive way. There are more businesses like that than you or I will ever really know. Local authorities have a huge, very, very important and valuable role to play in championing that in the local authority instead of looking at them and suspecting them and then trying to get a self-fulfilling philosophy out of it. Linked to that would be to have a planning regime on a local authority basis and a taxation regime on a local authority basis that would actually encourage business to invest so that, as Ian said, you get a bit more long-term stability so business knows local authority policy ten years out and will invest now because it knows a nice level playing field where it is going to go and it will not be facing chopping and changing of politically motivated decisions over a period of time. Business does not like surprises, it likes a level playing field, and local authorities can provide that.

  Mr Hoyle: That is interesting because I thought you might get round to taxation. I was wondering whether you were hinting at that. You may well be aware that local authorities have no jurisdiction whatsoever over the business rate, it is a unified business rate. Personally, as someone who has come from local government, I was very interested in what you said. Local authorities have not got that right to say "we know you are planning for the future, this will be the rate that we are setting" because they have not got that jurisdiction. I do believe on planning that local authorities have to work with business for the benefit of business but I do think we ought to get this point across to industry that it is a Government responsibility because it is a uniform business rate, the local authorities collect it, they hand it over to Government and then it is distributed. I think we ought to get that message across because it is not understood.

Sir Robert Smith

  183. One of the key messages quite often in the past was people would say "we should give planning permission for that because it will be benefit the local authority area" but in reality now since there is no link between the local authority's own finances and the success or failure of business in a sense there is no direct financial impact because the business rate comes back pro rata on a formula regardless of how much—
  (Mr Jones) You just said there is no link between the success and failure of a business and the local authority's area, that actually is wrong, is it not?

  184. In terms of the direct financial benefit because the business rates do not—
  (Mr Jones) I thought creating jobs, creating employment, creating prosperity in a region was of serious economic benefit for the region.

  185. Also in the past the local authority could see a direct benefit if that was an unpopular planning decision but the consequence was an increased revenue for the authority to carry out its function because the business rates came to the authority and not Central Government.
  (Mr Jones) Of course you are right and that is one other aspect of it, I accept that, but it is only one.

  186. On another issue quickly, in common with other witnesses you have identified the exchange rate between the euro and the pound as a problem for manufacturing. Some of our other witnesses have gone further to say that the uncertainty over the question of Britain's adoption of the euro is also a major problem. Is that something that you would agree with?
  (Mr Jones) If you are going to invest in a business and you are going to create a long-term environment through your investment with a view to making profit you want to eliminate as many risks as possible. There are many risks and exchange rate risk is just one of them. That exchange rate risk, by the way, if you are exporting into euroland is clearly that between sterling and the euro. If you were exporting into America it would be a totally different one. We often forget that we are one of the greatest trading nations on earth. Per capita we actually export more than anyone else in the G7. We have other markets to which we export but the concentration is always on the euroland issue because obviously it is our greatest export market, 60 per cent of what we export goes there. The current exchange rate is one that renders those manufactured exports too expensive for the domestic market in which they are sold and businesses have hung on now for three or four years making little profit on it but to keep the market open. The current exchange rate is a fetter on the development of business and the realisation of investment and, therefore, it must be one of those risks which exists when people are making their investment decisions. Whilst we will always say that the boardrooms of Detroit and Tokyo and Johannesburg will think is this going to change or is it worth not taking that risk, remember there are an awful lot of businesses in Britain that are thinking about the next line, the next tranche of investment on an existing operation, ones that do not tend to get the headline. Business is very globally mobile and they could also think "we will carry on making what we are making now but the next thing we do we will not do here, we will do somewhere else" and they do not tend to get the headlines in the same way. The uncompetitive exchange rate right now is a serious problem for that investment decision going forward. One thing it has done, of course—in quite a grey cloud, one of the silver linings—is it has forced greater productivity enforcement into those operations. For 20 years Germany continued to export successfully on the back of greater productivity and greater quality at a time with a strong deutschemark and a weak sterling, a weak franc and a weak dollar, so it was an aid to productivity enhancement. We can see that already in our membership, companies that are getting more productive because of that competitiveness. I have to say it eats every day into the muscle and the heart of the business and not just fat, which means there are times when if this carries on, which is the second part of your question, companies will say "do I want to carry on eating into the heart and the muscle here or shall I go and try and generate some fat elsewhere?" So the uncertainty, the prevarication, is another issue that influences an investment decision. It is not the only one. The existence of the exchange rate weakness is another one, or the strength depending on how you look at it. So are lots of other things, like we speak the global language of business, we have a culture that welcomes overseas investment, we still have the most flexible labour market in Europe, which is a massive competitive advantage and one that we should jealously guard, we still have a tax competitive environment, which is another advantage. It is not just this but someone deciding on investing in the future would wonder "is this going to be sorted one way or the other so I know where I stand?". It is another brick in the wall.

  187. In that one way or the other, if it was to be ruled out completely would that help investment decisions?
  (Mr Jones) Help is not the verb I would use. Would it clarify the picture to enable a decision to be made one way or the other, of course it would. It depends where you sell, it depends what you sell and it depends on the criteria on which you try to sell.

Linda Perham

  188. In your opening statement you did talk about the skills and training and the need to up skill and other evidence has pointed to the fact that we have got a low education and skills base compared to other countries. How do you think the Government can help with that? Is it better literacy and numeracy, more emphasis on vocational as opposed to academic qualifications, more science and technology in the curriculum even?
  (Mr Jones) Yes, yes, yes and yes. The higher education in Britain is up there with the best, not good enough, it could go further, but is not the source of huge problems for productivity enhancement in Britain. Right at the other end of the scale, adult literacy and numeracy, we have the lowest rate but two in the whole of an enlarged Europe and we have in one in five adults who are functionally illiterate. Indeed, we pay three and a half million adults every day to go to work in Britain who do not have the literacy and numeracy of an 11 year old. As British manufacturing restructures itself and as people are incentivised to invest in better kit and become more competitive and go to value added there are not going to be jobs for unskilled people, therefore there are not going to be jobs for people who cannot read and write. Business has a responsibility here, which it willingly acknowledges, which is it has got to be part of the solution to social inclusion, therefore it is important that business up skills its people in very basic skills and what it needs is fiscal stimulation from the Government so to do and, therefore, a good example would be Investors in People, which is a great tool in two ways. One, it does help find out where adult illiteracy exists in the workplace because these people are not stupid just because they cannot read and write, in fact they become very clever at disguising it. I talk to a lot of businesses that say "I have not got a problem", I ask "have you actually found out" and they say "no, but they are doing the job I want them to do", so they do not think they have got a problem. Investors in People will weed that out because every employee has to sign up to say "I have read this mission statement and I understand it" and that is a bit of a problem if you cannot read. Secondly, it brings better management techniques in accreditation of Investors in People and, therefore, in smaller businesses particularly it enhances better skills in middle management training. We think if you gave a tax credit—this is what the Government can do—to small businesses who actually worked and paid for Investors in People accreditation it would cost £38 million and that would be money very well spent. That is adult skills. If you move through into vocational training, which is the other thing you mentioned, we do applaud the announcement a couple of weeks ago to actually give some currency to vocational training so an employer understands what a GCSE is, an employer understands what an A level is, and therefore linking in, not substituting, to add as another layer on to the existing vocational qualifications, which employers also understand, to get a child of 14, male or female, to say "we would like you to work with a smaller business in the community, keep the school as the base, develop a vocational skill and move into the world of work" rather than being written off as someone who is not going to get to higher education, is therefore a failure and therefore switches off. That is to be applauded. We all know we do not have enough carpenters and plumbers and electricians and brickies and plasterers. Instead of that being seen as the job you do if you are no good, this ought to be seen as the job you can do and excel in and have self-respect and self-fulfilment to do. The drive has to come from Government and teachers have to buy into this so that a job in a manufacturing facility is not seen as a failure. A teacher should be applauded for bringing people into the world of work in that way. Thirdly, business should get better engaged with the schools to work with them. Vocational training is an enormous way of getting more productive in business because you are taking a better trained workforce. If you look at France, which you would have thought has things militating against its productivity, it has a very rigid labour market, 35 hours a week or you go to prison and all this stuff, it is not exactly what the fifth biggest economy in the world should be doing to get globally competitive, yet why is it more productive by a mile than Britain? One of the reasons is it has a much more advanced, both practically and philosophically, education system and what they deliver out into the workplace is better skilled, better trained and born with and nurtured a wish to continue to improve themselves through their working lives, so 30 and 40 year old employees put their own self-improvement training much higher on their agenda, so an employer gets better raw material and can instantly become more productive. If you have a country there that is more productive when so much militates against it in other areas it must be education input into the manufacturing process that is clearly a big way of becoming more productive. Government has got a bigger role to play with tax credits on training, employers have got a bigger role also to play in taking that as well and then feeding it through every day rather than just a good thing to do once a year. Especially in smaller businesses there is a lot more on the job training that could be done rather than structured courses.

Mr Chope

  189. Mr Hutton in his evidence earlier was quoting the same example you have quoted from France, that if we have got a productivity problem in this country it cannot be anything to do with red tape and regulation because they have got so much red tape and regulation in France and yet they have got better productivity. That was his view and that was obviously contradicted by what you said earlier. Do you think you could expand upon this issue as to the extent to which regulation and red tape is a factor in this equation? Could you give us a little bit more detail about what you have done specifically as an organisation to try and draw to the Government's attention the example in Wales that you have quoted because you have got real jobs being lost as a result of a Government regulation?
  (Mr Jones) One thing I should start with saying is that the CBI and TUC worked together on a productivity paper, as you know, it had four heads, and what we tried very hard to do—the Chancellor asked us to do it and we did it and we were very pleased to do it—we did major on the areas where the TUC and the CBI had things in common. Let us major on the things where we can agree and then take things forward rather than spend the entire time smacking each other. I am sure there were areas that the TUC did not put in that paper because it disagreed with us. I know there was one big area that we did not put in the paper because it disagreed with them and that was red tape and regulation. Just because it did not feature in that, I would like that on the record, it does not mean we do not see it as a major inhibitor to productivity enhancement in Britain, because we do. What concerns us is it is systemic. As a government, and that is a small "g" because the predecessor was just as bad, the government in Britain regulates and then you have the implementers of regulation who see its enforcement as virtue. I will not bore you, ladies and gentlemen, but I could give you thousands of examples of my members where they actually have visits from inspectors, they have forms to fill in, where frankly the person doing it really does see it as their life's work to achieve total compliance on the pain of prosecution. I think I could leave the comparison with France by saying they perhaps have a philosophy of implementation which does not quite equal that. They probably have the rules but they see implementation in a totally different way from the British way of implementation. That is a serious problem. I have companies in membership who have facilities in Britain, facilities in France and if you compare it the way in which these same regulations are implemented are different. There is the big old idea that only we do them and the French do not do them, that is not true actually, the French do do them, but the way of implementation comes at it totally differently. Secondly, the regulatory environment in Britain is an inhibitor to growth, especially in small and medium sized businesses. We talked earlier about training credits and Investors in People credits and my worry would be the Chancellor would announce he is going to give this tax credit and he will say "I have listened to this" and I will go away and say "there you are, we have a listening Labour Government and they have agreed to do it" and then in a few months' time along would come our man from the Inland Revenue who is here to help and he would give the small business an Encyclopaedia Britannica, say "fill that in and I will give you your money back". If at the same time you are trying to be sales director, finance director, marketing director, human resource director, managing director and be seen to try to have some semblance of a life as well that is the last thing you need and what you probably do is sign out and do not do it, and you have the policy makers and policy lobbyists thinking they have achieved something but down there the regulatory environment and the way it works in Britain militates against it. The Working Family Tax Credit was a tremendous idea to get people into the world of work and to stop saying "I earn more money sitting on my bum at home on the dole", fantastic, and anybody who believes in social inclusion could not possibly think it is a bad thing, but to go to a small business and say "oh, by the way, you are going to be an unpaid tax administrator here, you are going to do this", they think to themselves "I pay my taxes, why am I being asked to do this", and by and large it militates against growth, it militates against employing people, they begin to think "do I need this trouble" and that does not help. It is a militator against growth and productivity because of the British way of implementing it. One of the reasons for that, of course, especially with European regulation is that we have a different legal system and, therefore, a civil servant looking at a Directive and thinking "how do I implement this through the business environment in Britain" has to, he thinks, cut off every single possible eventuality to prevent somebody taking it to court. That is not how it is implemented in mainland Europe. In the urban nations of Europe, as long as you are working towards it and it is seen as being in accordance with the code of going forward, it is left alone and businesses work within a much looser framework. It is not all about the Civil Service doing it wrongly or badly, it is also about the way that the legal system allows it to be implemented. To get to the specifics on the Climate Change Levy, what you have there is a tax that has been put on energy use, the Treasury would say it is fiscally neutral because there is a rebate on national insurance contributions but, of course, that actually favours big employers, a lot of which are people businesses in the service sector, and there is an unfair falling on manufacturing, who are big energy users, of the levy. If you cannot negotiate one of the discounts available, so it is "I will clean up my act, I will invest in less energy using equipment, in return give me a discount on the tax you are going to give me", which is a great incentive to get it right, nothing wrong with that, but then they have arbitrarily created the boundaries of when you can fall into a tent which allows you to negotiate. If on an arbitrary measure you do not fall within one of those tents you do not get any discount. This company in Wales is not in one of those tents. It is a big energy user but it cleaned up its act years ago. It has invested hugely, it gets no discounts, it cannot fall within it and it gets a bill for £475,000. It has two operations, it has one in Wrexham and it has one in Dunkirk. The French do not have a Climate Change Levy so they are saying to themselves "why should I carry on employing 600 people in Wrexham when I can do all this in Dunkirk and save myself £475,000?" I have then gone to see Mr Boateng, I have written to all and sundry, so have they, so have the Welsh Development Agency, saying you have got to change the rules of implementation. I can see why the Government would say they are not going to change the whole drive of this because they want business to clean up its act, and so by the way does business, but what we are saying is that implementation is flawed and there needs to be a big sign put out by the Chancellor in the Budget saying "we acknowledge that some of the rules of implementation could change" so that we can achieve our aims. I do not believe that at the end of the day the rules of implementation are really there to militate against employment in Wales.

  190. Is the name of that company in the public domain or not?
  (Mr Jones) I think it is. I will check and I will gladly give it to you if it is.

  191. In the Industrial Society's New Jerusalem on page 27 they say this: "A common lament from the business lobby is the weight of existing employment legislation but employer compliance to legislation can be as low as 40 per cent". Would you say that is accurate?
  (Mr Jones) That is a big generalisation. If you have small business compliance then it is difficult to police. It is also difficult, by the way, to get a figure like that out of. I am not doubting their intention to be true but what I am saying is it would be difficult to get an accurate statistic anyway both on policing and also on compliance. What I would say is one of the biggest reasons why 40 cents on every dollar that America spends on investment in Europe comes to Britain, 40 per cent of everything Americans do in Europe comes to Britain, is our flexible labour market. Every time another Directive comes out of Brussels applicable in Britain by virtue of the Social Chapter what it is doing is getting Britain to lose its competitive advantage as a place to create wealth and jobs because of overseas investment. What we ought to be doing in Europe is looking at countries that do things very well and everybody ought to be benchmarking up to that. For instance, we talked about the French education system, Britain should look at that and ask how can we do that better, not try and dumb the French down to our level. Similarly, with the employment regulation we still have a flexible labour market, the rest of Europe should try to reach ours rather than trying to bring in more legislation to bring ours down to their level so that frankly at the end of the day an overseas investor will say "I understand this, I am not going to go to Britain any more. By the way, I will not go anywhere else in Europe either, I will go to China, Brazil or India". I do not see how that is going to create in any way, shape or form employment in Britain in this restructured society of which we spoke. Would they be right in saying that we do not comply with it, I am sure that I can find companies that do not. I talk to businesses of all sizes and I have to tell you that far more comply with it than do not. A lot of them, of course, comply with it and just do not employ any more people. That is no way to create wealth and if you do not create wealth you do not pay tax, if you do not pay tax you do not get the schools and hospitals you need.

  Mr Berry: We are very short of time. We can obviously pursue some of these issues through correspondence but there are three more topics I want to come on to, if we can keep the questions and answers as brief as we can.

Richard Burden

  192. Earlier on you touched on R&D and incentives and you made some reference to changes that have been made. Very briefly, how do you think they are going and what are the kinds of incentives that you are looking for?
  (Mr Scott) What we particularly argue strongly for is to extend the R&D tax credit which is currently available for small companies, for middle sized companies, to be equally applicable to larger companies. There has been a consultation process which has been under way for the last few months looking at the precise mode of scheme that could be introduced. We have been arguing for a scheme which is called the Volume Based Scheme. We have been arguing to say that a company should be assessed for its tax credit on the totality of its research and development investment. That was always our preferred option. There are some concerns as to whether that is sufficiently targeted and that is the debate that we have had with the Treasury, as to whether that can be sufficiently targeted at those companies that can therefore be encouraged to do additional research and development. One of the key criterion we have been looking for in any scheme is that it has a degree of certainty, it has a degree of simplicity and it has the ability to be implemented without overly burdensome regulation and overly burdensome compliance. Our concerns with any other variant, other than a volume scheme, is that it would mitigate against those criteria of simplicity and certainty. Despite having looked at alternatives and come up with one or two variants on that scheme which might have made it more targeted, at the end of the day we feel that the overriding argument on simplicity and certainty carries the day and, therefore, we have argued for a scheme which is based on the totality of the volume of their expenditure on research and development.
  (Mr Jones) It is worth remarking that 75 per cent of all the R&D in Britain is done by ten companies, so there is a stimulation encouragement factor that has got to be brought into play here.
  (Mr Scott) I think there is a key point linked to that in that the pull through effect of encouraging more research and development in those large companies for the small and medium sized companies in the supply chain, which Digby referred to in one of his earlier comments, is sometimes overlooked when people take that view of surely is that not giving a disproportionate amount of benefit to a relatively small number of companies. The pull through effect that those larger companies have both in their R&D expenditure and the impact that has on the medium sized companies and generally on their supply chains is one of the key factors how we would say this cascades and benefits other companies than just those headline companies.
  (Mr Jones) You know I mentioned the clusters and you can get stimulation of a restructured manufacturing base around these clusters, the ones that cluster around academia. The focus must be on the D of R&D because the development of ideas as opposed to the research of them in the first place is actually lacking in Britain, we do not do enough of that, and there is a role there for the pull through. The development of smaller businesses on the pull through to bigger businesses could be enormous in this country.

Mr Berry

  193. In your submission you argue that the industry-academia axis needs to be strengthened and the particular emphasis you place is on academia developing a business-like interface. Very many universities, whether it is because of financial pressures or go-ahead science departments or whatever it might be, are actually very keen to do that kind of thing. Do you see any obstacles at the other end, that businesses are perhaps on occasions not a willing partner in that kind of co-operation?
  (Mr Jones) No actually.

  194. You have never come across a single example where it is the business community that has been lagging and not academia in the past? That is very good.
  (Mr Jones) I have to say, to be fair, that we do not find many universities that are lagging either.

  195. Good.
  (Mr Jones) One of the inhibitors where you might find it is you get a lot of business saying "I cannot afford this", not "I do not want to do it" or "I do not understand it" but "I cannot afford this", and you will get some academia saying "I do not quite know how to do this, these are business people and I feel a bit out of my depth here". You get both of those. This is a strong point. There is no lack of will, there is no lack of understanding of what they have got to do but there is a lack, if you like, of facility and that is where RDAs have a huge role to play.
  (Mr Scott) On that very point, there are many examples of where the whole industry-academia axis has been improving. The universities, the academic institutions, have become much more effective at their marketing of what they themselves are doing. The problem is I think there is still a large amount of business which is unaware of the skills, the capabilities, the capacities of those universities. There might be an interface issue here which is "how do we actually get the awareness of that capability out to a wider range of businesses?" We hear a lot of companies who say "yes, I do have a very good dialogue with university X, Y or Z but I have no idea what other universities in other areas might be doing. They have probably got expertise which would be of real value to my business but I cannot get access to that because there are a limited amount of hours in the day in which I can research what those universities are doing". Perhaps there is an issue here of looking at how we can provide a better interface, a more effective or more commercial interface between the universities' capabilities and how we can get that out to a wider range of businesses.

Mr Hoyle

  196. I am pleased to see you put the emphasis on the D in R&D, I think that is very important because I think the danger is we have seen research and development take place in the UK but then when it comes into full manufacturing it becomes stalled. How can we ensure that the link between R to D and then through to manufacturing takes place in the UK?
  (Mr Jones) Better links between the researchers and the business. The research tends to get done in the universities. A better link into the business, a better understanding on a permanent basis. Secondly, it depends what it is they are developing. One of the big threats to the whole restructured manufacturing picture that I have described—and I would hope that any other person sitting here would see how the restructuring has got to go—is that the concept of India, China, Brazil, Mexico only making things that compete on price over the next 25 years frankly will ignore a huge threat. I have been talking about adult literacy figures. Karnataka in India, Bangalore is the capital, it is quite a small state, it has only got 80 million people, has an adult literacy rate of 92 per cent. At the end of the day it is going to be a very short time before the migration of unskilled commodity work develops into development work of research done in Western democracies, and it will be "thank you for the research, I will go and develop it in China or India". That is a massive challenge and what we have to do is get the interface between university research and business on development much more close. Actually, of course, development calls for two things, it calls for will and dosh. The dosh is going to come from the big companies without a doubt so we have to keep the big companies doing it in Britain. An R&D tax credit hopefully stimulates smaller companies to do it at all but it has got to stimulate the bigger companies to carry on doing it in Britain. When people say "they are big companies, they can afford to do this, the taxpayer does not need to stimulate them", of course they can afford to do it but as it is at their discretion they will go and do it where they can do it more cheaply. We have to have a fiscal environment in R&D that acknowledges the big companies do it. It is not about doing it at all, it is about doing it and staying in the UK to do it.

Mr Berry

  197. Mr Jones, thank you very much indeed. There are two or three other areas that if we had more time—I am sorry but time has gone very quickly—we would have pursued. May we drop you a line and ask for further clarification on one or two issues. Thank you, we are very grateful to you.

  (Mr Jones) Thank you for your time and thank you for your interest as well because it is a big issue.





 
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