TUESDAY 29 OCTOBER 2002
Mr Martin O'Neill
Rt Hon Patricia Hewitt, a Member of the House, Secretary of State for Trade and Industry, examined.
(Ms Hewitt) Thank you very much indeed for inviting me along this afternoon and thank you for that question. I made it very clear I think when I was appointed 15 months ago that I did not think we had given, or that we had been seen to have given, enough attention to manufacturing. I think that we did quite inadvertently let the impression grow up in our first term that we were much more interested in the so-called new economy than in the so-called old economies such as traditional manufacturing. As I have said repeatedly, I think that that distinction between the so-called new and the so-called old economies, which we hear rather less about now that the dot-com bubble has burst, is simply misleading and ignores the fact that it is manufacturing industry that is at the forefront of the application and creation of the new technologies that are transforming the entire economy. I readily accept and agree with the view that certainly this Committee and I have expressed that we needed to sharpen up our focus on manufacturing. By working together with industry, business, manufacturers and union leaders, we put in place a manufacturing strategy some months ago, on which your Committee has very helpful reported. We are now working to put that into practice because the strategy itself, which is the first Government strategy for manufacturing for over 30 years, has been very widely welcomed, but the real issue is what we do about it. A lot of the implementation is going to fall to the regional development agencies and other regional institutions. Alan Johnson, my Industry Minister, and I have been working with the RDAs to ensure that in every region, depending on the exact nature of the manufacturing base in that region, we have an effective partnership and effective delivery to support particularly the SME manufacturing. Part of that of course is being done through the new regional centres for manufacturing excellence, most of which are now up and running, while three are about to come on stream. Also, of course, we have a role nationally not only to ensure that the national environment is as good as it can be for manufacturing, but also to focus on innovation. That is where the reorganisation of the department that came into effect in April is so important because we have now created for the first time an Innovation Group within the Department. Simply by brining together all the different teams of officials who were working on innovation across the Department previously, we are already getting a much sharper focus and much more effective relationships with business. I hope the Committee is aware that we have now appointed a new Director General of the Innovation Group, David Hughes, who has come to us from a long career in industry, most recently from British Aerospace. That group and David himself will have the task of building on the work that we have been doing on the science base and the investment in that science base to get far more existing businesses partnering the science base and helping to apply the new technology to their own products and processes. That is going to be a key focus for the DTI over the next three years as we try and raise the determination and therefore the levels of competitiveness and productivity in British manufacturing.
(Ms Hewitt) You are talking about the output numbers and predictions?
(Ms Hewitt) What I am hearing all around, and I am hearing it directly from manufacturers as well as from these surveys, is just enormous uncertainty about what is happening in very significant parts of the world economy. That is crystal clear in America where uncertainty is the word you hear over and over again. It is certainly true in relation to many of our continental European partners. When you have, frankly, very sluggish growth and uncertainty in two major economic blocks and Japan still suffering recession, inevitably that has a knock-on effect on the performance, but also on the perceptions and expectations, of manufacturers in Britain. We have delivered, I think, in the United Kingdom a remarkable record of macroeconomic stability and manufacturers all the time are saying to me, "Gordon Brown did exactly the right thing." We have low interest rates. We have a macroeconomic climate that we have never previously had, but we cannot completely insulate the United Kingdom, which is a very open trading economy, and rightly so, from what is happening in so many other markets. So companies which trade in particular with Germany, for instance, or with America or in the past with Japan, are suffering. Those which have other markets, in south-east Asia for instance, are often doing better because those markets, and of course the Chinese market, remain robust. But, in terms of the United Kingdom itself, we, as you know, are expected by the OECD and IMF to be the fastest growing major European economy in 2002, but we cannot completely protect our manufacturers from the problems that they are encountering in those other markets, nor can we protect them from the problem that is caused for them at the moment by the weakness of the euro. Those two factors are very difficult for a number of our manufacturers.
(Ms Hewitt) No, I am certainly not talking lightly at all about it, Chairman, because many of our manufacturers are taking very tough decisions indeed, but of course they are also dependent not just on the state of health or otherwise of major overseas markets but on the health of the UK market, and the fact that the UK economy is continuing to grow faster than other industrialised countries and that consumers remain confident is very important for many of our manufacturers who are selling directly into that market. As far as other countries are concerned, as you rightly say, all the major industrialised countries have seen and are seeing a reduction in manufacturing output. I think it is actually a bit unfair to our manufacturing industry to suggest that we are in a completely different position. In fact, if you look at the percentage of national output, this is going back to 1999 and it is difficult to get the most up-to-date figures, that was the starting point: in fact UK manufacturing output was 19 per cent of our total; in America it was 16 per cent; in France it was 18 per cent; in Germany it was 22 per cent. All major well-off industrialised countries have a manufacturing base that is a minority of their total output. For all the reasons that this Committee has said and I have discussed and put in the Manufacturing Strategy, that sector is incredibly important to the health of the whole economy. My concern is that we should not repeat the experience we had in the mid-1990s when recovery came and our manufacturing industry did not grow dramatically compared with the manufacturing sectors of Germany, France and the United States which did. That is a very real concern, particularly given the drop-off in manufacturing investment that we are seeing at the moment.
(Ms Hewitt) I am certainly not shooting from the hip. This is very much part of the strategy. In the strategy document itself, you will see that one of the pillars was this whole issue of best practice. If you look at the reasons why our manufacturing sector lags behind Germany and France in productivity and output per hour, one of the reasons for that is the poorer take-up, on average, of best practice and weaker adoption of manufacturing techniques. I think that is the responsibility of management. Of course, another of the pillars of the Manufacturing Strategy was skills. Everyone thinks of skills as being about workforce skills and, yes, that is hugely important, but the reality is, as we have said on a number of occasions, that a better skilled individual can only actually make their full contribution if the entire team and the entire organisation is well-managed. My comments are not directed specifically towards manufacturing. What I said recently was that the best of British management is the best in the world, and that is undoubtedly true, and they are running a number of world-class companies, based here or in other parts of the world, but the average is well below the best. As the Council for Excellence in Management and Leadership recently pointed out, we have a long tail of under-performing management, some in parts of the SME sector, some in middle management level. It is an issue that is of enormous concern, particularly to the leaders in manufacturing. That is where it fits within the strategy, and that is where it fits in our analysis of the productivity gap.
(Ms Hewitt) It is one of the issues. In the much more detailed document that we recently published, the report from the Council and our response on management, you will find the whole thing is about the skills of management in order that they can actually get the best performance out of the best skilled workforce. They go together.
(Ms Hewitt) First of all, at a regional venture level, as the Committee is aware, it took us longer to get these funds off the ground because, in order to get state aid approval, we effectively had to persuade the Commission to rewrite the state aid rules. We were inundated in terms of European policy but it delayed the start of the funds. What those funds will do is to start meeting fully a real gap in the market that we identify, which is more venture capital investment in growing firms below the half million mark, which is where the private venture capital sector typically comes in. Although the venture capital funds are not restricted to manufacturing, there is no doubt that they will be particularly valuable sources of funding for the smaller and medium-sized manufacturing firms, particularly the more innovative firms that are looking to grow. One of the things that has held back British manufacturing is that it is often so difficult for them to get reasonably long-term serious funding. You are very well aware of this in the West Midlands. I am very struck to find how often the really successful, medium-sized firms that I visit, which are making huge investments in the new equipment, which they have to do to stay at the leading edge, are private firms, family-owned firms where the family is willing to make the long-term investment; in some cases they are firms that have gone public, found that it was not working for them because of the pressure for short-term results, and gone back to being a private firm via a management buy-out or employee buy-out, or whatever. Regional venture capital funds, are quite rightly being run by professional management, and will help both to fill that gap and to meet strategic objectives of the RDA economic strategy for that particular region. In terms of the centres of manufacturing excellence, we have got the West Midlands one up and running and they and several of the others have already opened for business and are taking clients and advising clients. The remaining three, which are London, Wales and the East of England, will come up in the next month or so.
(Ms Hewitt) I am not aware of the most recent proposals of the Work Foundation on this. In terms of how we should evaluate their success, the first key benchmark was: could they raise the additional funding from the private sector? They were always constructed as public/private partnerships where we would put in a significant amount of taxpayer funding but the balance of more than £100 million would come from the private sector. That has been achieved already. The next key indicator for me is going to be how successful they are at finding real, good quality investment propositions. It is no good having money to put in the bank. That will be the next stage. So far, from the informal reports I have had, they are very encouraging but actually in looking at the portfolio of investment and seeing how quickly they can get the money out, it will be the next stage where we can make sure we are on track. Then, thirdly, we will want to look at the success of their investment. I would not expect every single investment they make to be successful; that is not in the nature of venture capital. But we will obviously be looking for firms to grow and succeed as a result of this venture capital investment which might well not have done so otherwise if we had not come in.
(Ms Hewitt) This is very much about a network. It is about getting really practical advice and expertise into the hands of manufacturing SMEs. Although some of the centres have got a physical presence quite often in the building of one of the partners in the consortium that is running it, this is not about expecting manufacturers to come to a centre, which may be a very difficult thing for them to do. This is about having a network of specialist and expert advisers who can go out to the manufacturer, do an initial diagnosis of what it is they actually need, and then make sure, either directly or by calling on the right kind of expertise, that they get that help. That obviously involves a lot of marketing, and we are trying to do that with direct mail, business links, through other intermediaries, the trade press and so on, but it is certainly beginning to work. To give you one example from your own region, the centre of manufacturing excellence got a phone call approach, I think it was, from an SME manufacturer that wanted advice on how they could improve the quality of their suppliers. They were totally dependent on local suppliers; they wanted to have more of a choice. The adviser went out to them and sat down and got to know the company. He began to understand their needs. The upshot is a much more exciting piece of work than simply saying, "There are some other suppliers that might be useful to you", and which actually involved working with the company on new products, one in particular, and improved processes right down into their supply chain. That is a nice example of the kind of expertise that can be brought in. Behind the centres is, as it were, the Manufacturing Advisory Service, which is a network of centres of expertise in manufacturing that is all around the country, often based in academic institutions, specialising in technical textiles, for instance, can be called on to help a particular textile firm, wherever it is located, get the expertise that it may need.
(Ms Hewitt) The work is very well advanced on this. What we have done is to say to each of the RDAs that we want them to work with local partners, industrialists and trade unionists in particular, to develop their approach to manufacturing. They all have a manufacturing context within their broader regional economic strategies, but it has not been brought out and discussed with the manufacturing community of the region as a manufacturing document. They have all been doing that and in some cases in fact they have already held regional conferences on manufacturing before I held our national summit last December. We will be publishing all those regional manufacturing documents. I will shortly be meeting all the chairs of the regional development agencies to review where they have got to on that. We will then be able to set a benchmark for each of the regions. We will be setting benchmarks within those documents and we will be able to measure progress on that. For all of the regions, the crucial component is going to be work on innovation and getting the manufacturing base partnering with the science base, so that we not only get new spin-off companies out of the science base, but we get the existing companies benefiting from the work that is going on in the science base. The North-West RDA has been making real progress on that with the science partnership they have set up in the north-west. The West Midlands RDA, with the technology corridors, is beginning to show some real success, for instance in Malvern, the centre where I opened an extension recently, and again we are seeing that in other regions as well. But we need to get each RDA focussed on that. We need the partners in each region understanding what it is the RDA is committed to, getting involved in those efforts and then holding them to account.
Sir Robert Smith
(Ms Hewitt) This is a hugely important issue because I do think our ability to attract inward investment is a real measure of our success as a government, but also as a country. If you take something like the car industry, which is now hugely successful in terms of volume of production, volume of exports and productivity as well as the excellence of so many of the models produced here, and you look back over 25 years, it is inward investment that has really driven the turnaround in the British motor car industry. I set great store by that. Over the last 18 months or so, we have suffered more than other European countries because we have been by such a long way the number one destination for America's inward investment and for inward investment in the electronic, telecommunication and IT sectors, and those two things of course overlap in that sector. The collapse of that sector, which is really what tipped the American economy into recession, has hit the United Kingdom as a destination for inward investment very hard indeed. On top of that, there have been a couple of very large mergers and acquisitions in Germany and France, which have also improved their figures. We have to go on working extremely hard on this to make sure that we remain, as I think all the benchmark indicators say we do, a very attractive environment for business and in particular for inward investment, but we also have to recognise that the problem of the exchange rate and the whole issue of the single currency is undoubtedly a factor, it is not the only factor, but it is a factor in the investment decisions that are being made now. For that of course we will await the assessment that we will be making before June next year of the five economic tests and the possibility of euro entry. These are certainly factors in some of the investment decisions that are being made now that will show up in the figures in future.
(Ms Hewitt) It is important to distinguish different points here. The point I was making is that changing the exchange rate and, over a period of 50 years, progressively moving to a weaker and weaker value for sterling has not solved our productivity problem, and indeed if you look over the long post-war period where the pound against the Deutschemark devalued progressively over decades by an enormous extent, the productivity figures moved very sharply against us. Our relative productivity simply continued to deteriorate. I was simply making the point that you cannot expect a relative improvement in the exchange rate from the point of view of exporters to compensate for the underlying problems we have in the productivity and performance of many, by no means all, of our manufacturing companies. That is an issue. Of course there is a separate issue about what happens not only to inward investment but to location divisions generally where we are part of what will be, with enlargement, an enormous single market, bigger than the USA and Japan combined, but not at the moment part of the single currency. That is a factor; it is not the only factor. In a sense, we have to redouble our efforts at the moment on all the other factors.
(Ms Hewitt) I understand the Liberal Democrat policy on this issue, which has always seemed to me to involve joining the single currency quite regardless of whether or not it is a good thing for the economy. I think the really important thing for us to do is the evaluation of the five economic tests. Of course, work on that has now begun and a decision on that will be made by June of next year and we have said repeatedly that that will be the basis for the decision about entry into the single currency. Of course, if we decide that is in all our interests for the longer term, then we will move speedily and decisively to a referendum, but beyond that these are really not matters that are for me.
(Ms Hewitt) Let me just stress that this issue of the currency and single currency membership is only one of the factors that inward investors are taking into account. Certainly in my visits abroad and my discussions with inward investors and potential inward investors, what they are also very interested in is our outstanding science base, the fact that we still have this supply of superb engineers. Those two factors are very important and the fact that we have a very attractive tax and regulatory environment compared not with some mythical ideal, although we all move in that direction, but with the reality in the other countries that they are also considering for possible inward investment. That is why even in these very difficult times when inward investment is way down around the world, we are continuing to attract some very good inward investment projects.
(Ms Hewitt) The Prime Minister has made the position absolutely clear, and we will continue to be the strongest voice arguing for radical reform of the Common Agricultural Policy within the European Union. The agreement that was reached over the weekend certainly does not match our ambitions for Agricultural Common Policy reform. It does, however, open the way to enlargement, which is important. We will continue on the basis of the mid-term review and proposals that were made in that, which we still want to see strengthened, to argue for radical reform and in particular for the de-coupling of certain income subsidies to farmers from production subsidies. That, I think, is the absolutely crucial issue from the point of view of world trade. As the Prime Minister, Clare Short, Margaret Beckett and I have all been saying recently, we well understand, even if not all of our European partners do, that delivering on the promise of the Doha Round depends to a critical extent upon the European Union grasping the nettle of agricultural policy reform. So we will just go on making that case. I am delighted that I have the wholehearted support of all parties in the House of Commons in making that case because we have got in Britain a very effective mobilisation of faith groups and the NGOs and so on. We saw that at the recent March for Trade and Justice. There is huge public support in Britain for trade justice and for the Doha Round and therefore for Common Agricultural Policy reform. What I hope the faith groups and voluntary organisations can do is, in a sense, extend their reach and build effective relationships with their counterparts in the rest of the European Union, as well as in the United States, so that, as we are making the government-to-government argument with the European Union, we are also getting a more public-to-public argument and broader support within civil society and much better understanding on the Continent of what our export subsidies are doing to low income farmers, desperately poor farmers, in their own home market, let alone what we are doing by looking at our own.
(Ms Hewitt) On the argument about 2006, which is where the financial horizons ran to, not as I understand it 2016, of course we are not going to sit on our hands and give up on the argument.
(Ms Hewitt) I am very sorry if I have given that impression because I have said on repeated occasions that there would be very clear potential advantages, particularly to our manufacturing sector, to be gained from joining the single currency, subject to the five economic tests and all the rest of it, which very much mirror the concerns of manufacturing. I have also said, and indeed in my response to the Chairman's first question, that one of the reasons why conditions are so tough for so many manufacturing firms and manufacturing workers at the moment is the weakness of the euro and the difficulty even of highly productive firms coping with that exchange rate if the eurozone is their major market. We know that that is a huge problem for many motorcar manufacturers, even some who have got world class and world beating levels of productivity. Of course there is an issue there. That does not mean the Government can wave a magic wand over the levels of the exchange rate.
(Ms Hewitt) First of all, on the specific point about the supply chain, I think we are all very conscious, particularly in the motor car industry, that on the one hand we have had enormous success in attracting inward investment, and you mention specifically the Micra plant in Sunderland, and we certainly wanted that and we were jolly pleased to get it, but that has been coupled with a globalisation and a Europeanisation, if I can use the jargon, of the supply chain. More and more component manufacturing is being done within the eurozone, or indeed in Central and Eastern Europe, in accession countries. It is a mixed picture in terms of the manufacturing base we have kept and the part of the manufacturing base that is reducing at the moment. In terms of enlargement, perhaps I could let you have a note because we have done some work with fairly high level numbers. The bottom line is that of course the candidate countries, the accession countries, offer very low wage costs and non-wage labour costs, in many cases highly skilled people, to manufacturers who are making decisions about where to locate or where to expand. Of course, that is a competitive challenge to us and it is certainly a competitive challenge to other countries, other existing Member States, which have much higher wage and non-wage labour costs than we do. At the same time, enlargement, as I think you have indicated, is an enormous opportunity. In a sense, one looked back at what happened when Ireland and then Greece and then Portugal joined the European Union and the huge advances in living standards that people made in those countries, which then of course makes them purchasers of our exports. We are clear that the benefits from enlargement outweigh the difficulties and costs that may come. I will certainly let you have a note on that. For individual companies, perhaps those owners are meeting those location costs but for those competing against companies in countries where they can see a competitive advantage, it can be very difficult. My officials have been working with the Commission to ensure that, as far as possible, there is a level playing field on accession. We certainly have concerns about state aid in steel, for instance. It is a matter of huge concern to Corus and some of our other steel manufacturers. I raised this matter with the Polish Government when I was there a couple of weeks ago. We are still waiting for the Commission's judgment on the restructuring plan that the Polish Government put forward, but there are also concerns from coal manufacturers about, for instance, lower standards on environmental protection and health and safety, and we are continuing to discuss those with the Commission, so that there is not an unfair advantage for companies in some of those accession countries compared with our own.
(Ms Hewitt) No, the stretch is bigger, and it is also true that, for instance in the Czech Republic, there is a very long tradition of engineering and technical excellence.
(Ms Hewitt) The southern European countries compared with us at the time, yes, had lower skills, lower productivity, but also clearly significantly lower wage and non-wage labour costs. It is a different picture with the accession countries but still that issue of a challenge undoubtedly to our manufacturers, a further challenge to us to raise our game on productivity and on innovation because that is where we will compete. We are not going to compete against Poland or the Czech Republic, or against Morocco, Indonesia or wherever, on the basis of low wages, low margins and low value-added goods. It is very much about innovation and quality and moving our manufacturing companies up the value-added chain, which is why we are doing all the stuff we set out in the strategy, and the fact of accession in 14 months time just makes the rest of this work all the more urgent.
(Ms Hewitt) First of all, we have the Inland Revenue, Customs and the Small Business Service working very closely together - and this will broaden out into other government departments as well - to make sure that here is single seamless advice for somebody who wants to start up in business. We are making some real improvements there. For instance, we are just about to announce, and you have pre-empted something that Nigel Griffiths, my Small Business Minister, has been working on with Shell to run the Livewire Scheme for young entrepreneurs. We are working on a single, simple, start-up pack for young entrepreneurs. We are working, as I say, with Inland Revenue and Customs to ensure that both electronically and in hard copy, which some people still prefer, we have the advice that people need when they are starting up in business, and as simple as we can possibly make it, so that people know from the outset what they need to do, for instance to comply with employment law, if they are going to start immediately employing somebody, but also the support and help that we can offer them. We have tried to make that as simple as possible. I do not know if you have had a chance to look on the latest version of the UK-Online website, but there you will see that we have a section on starting as a self-employed person. That is what we are trying to do much more broadly. As well as that, we have got the Phoenix Fund, which is very successful, and I got another £20 million for that out of the Spending Review. With the Phoenix Fund we are supporting a whole range of initiatives and organisations which are working either in the very disadvantaged, low income community or working with groups that are under-represented in business, particularly some of our minority ethnic communities but also women, older people and so on. Those are starting to show results and we are tracking that through. I have also made it very clear to all business links operators that we expect them not just to work with the customers as they have always worked, but to reach out to minority communities in their particular area to get out there and find the women entrepreneurs whose potential is being lost. We have reminded them of the OECD study, the Global Entrepreneurship Monitor Study that recently came out, which said that the fastest and most sensible way to raise the start-up rate in an economy, to raise the entrepreneurship level, is to target women. America is one of the very few countries where half the start-ups are coming from women. In Britain it is about one-third. In many other European countries it is less than that. We can be quite confident that there is a lot of entrepreneurial potential out there and we need to reach it. Indeed tomorrow I am helping to launch an organisation called Prowess, which is specifically about support for women entrepreneurs. We will be measuring the business links in part on their success in getting out into those under-represented groups.
(Ms Hewitt) No, I do not think so at all. The SBS is still a relatively new organisation. Their first challenge, which was quite huge, was to reorganise, slim down and sort out the entire Business Links network. That was very much where they focussed their work. The cost-cutting review, for which I was a travelling minister, and the SBS was very closely engaged in that, has been hugely helpful. It gives the SBS the position it needs to act right across government and ensure that instead of different government departments having different channels to SMEs and all bombarding them from different directions or offering so many different initiatives that nobody could find their way through them, it is all done in a simplified, streamlined way with the SBS. The test for that change is just bringing it all together.
(Ms Hewitt) I completely agree with you about the cumulative effect, and that is very much the issue. Of course, I recognise that. As far as I am concerned, in a sense, the whole of the cost-cutting review was about how we make it easier for small firms to do business the market, both in terms of compliance - paying employment or paying taxes and so on - but more importantly in terms of gaining support from government to make it as easy as possible and to raise the chance that those businesses will be successful. Out of that cost-cutting review comes the work that the SBS is taking forward with the Inland Revenue and Customs and Excise initially but gradually with a much larger range of agencies. That has been very important, but of course we also have the work of William Sargent in his new role as Chairman of the Small Business Council, and David Arculus, the Regulator of the small business task force and panel. In terms of what the answer to the problem is, one of the difficulties is that of course when you ask a small business where are the worst problems, they say that it is the cumulative effect. In order to deal with the problem, you have got, as it were, to cut the elephant into bite-sized chunks, so that you have to deal with individual regulations; you have to sort out weights and measures, for instance; you have to deal with the complex set of regulations that affect small businesses in the food and restaurant trade, for instance. You do have to deal with it chunk by chunk. But what you can also do is make it much easier for small businesses to get the information that they need and not to flood them with information that they do not need. That is very much what this joint project is about: it is making sure, particularly using electronic means, that an SME, for instance in the hotel and restaurant business, gets information about regulations that affects it, but does not get irrelevant stuff or, worse still, it does not find itself inadvertently not complying with something because it simply has not heard about. I think we can make it much easier to get the right information to the right business at the right time.
(Ms Hewitt) One has to be quite careful about this business of simply saying that exempting small businesses is the answer to the problem. In some cases, it is entirely appropriate. For instance, we have very substantially raised the threshold for statutory audit and we have exempted a lot of small businesses or small companies from the need to do a statutory audit as a result of that. Gordon Brown has continued to raise the VAT threshold - and we have one of the highest in Europe - so that we do not burden the smaller companies or the smaller firm unnecessarily with VAT. We have been pressing very hard, for instance within the European Union, on the Waste Electrical Directive for an exemption for the large number of small producers and retailers who are responsible for a very small part of the waste. We have not won that argument yet but we continue to make it. We exempted a very large number of small firms with employees fewer than five from the shareholder pension requirements. Each of those was absolutely the right thing to do. Indeed, after consultation, we were happy to agree to that Directive, in part because it did not apply to any business with fewer than 50 employees, which of course was the vast majority of business in our country. But I am not in favour of a blanket exception for small firms, either from employment regulations or anything else, not least because small firms themselves are telling us they do not want that. Most of them are quite worried about the idea of being badged as a sort of second class employer or suddenly coming to a threshold where perhaps they go from five to six or from ten to eleven, or whatever, and they then have to take on everything at once. I think the case-by-case approach to exemption is a more sensible one, coupled with what we are doing to simplify different packages of regulations, and to simplify the way in which Government and small businesses do business with each other and the information and compliance procedures we give them.
(Ms Hewitt) We do it through the regulatory impact assessments, so that we have not perfect but better than most other countries regulatory impact assessments on every proposal. Of course, we can see what the cumulative burden is. As we spread the whole philosophy of "think small first", which is very much the philosophy we are trying to ingrain right across Whitehall, we want to change the regulatory culture so that we are sitting down with small businesses in the sector or of the kind that are most likely to be affected, at quite an early stage to discuss what is the problem for which a regulatory solution is being proposed; are there better ways of dealing with this problem; and, if regulation is being envisaged, either by our own Government or by the European Union, how can we do this in the most sensible and light touch way possible that gets the results we want without damaging the competitiveness and growth of small firms? The other thing I would mention is that one of the very regular complaints we got from small firms was about the complexity of maternity pay and leave. Most small firms only deal with this once every few years, so they learn to do it once and then forget about it and then it comes along again. It is appalling, if you have ever had to deal with it; it was very complicated. We have radically simplified maternity pay and leave regulation as part of the reform package in the Employment Act that has just gone through. That will come into effect next April. By raising the threshold, in other words by bringing far more small businesses into the net for the 105 per cent rebate we give them on statutory maternity pay, we have actually doubled the number of small businesses which qualify for that enhanced rebate at the same time as we have hugely simplified the administrative burden for them of dealing with an employee on maternity leave.
(Ms Hewitt) That is very helpful feedback. We clearly need to explain it better, and we will think about ways in which we can do that. The Regional Innovation Fund is only one of a whole number of instruments that we have got to drive up innovation and performance within the economy. Some of it, a great deal of it I hope, will be done within regions, led by a regional development agency. Some of that will be done pretty much within an individual region. For instance, we have got at Sheffield an RDA-backed Centre of Metals Excellence, building on the work of the Metallurgy Department at the University of Sheffield, but bringing in Boeing, one of our key inward investors, who came precisely because of the excellence of that university. We now see a centre of excellent with a business park around it and so on. That was very much done within that region and linking the strengths they had within that particular sector and expanding it. There are many other examples of that. In other cases, we have several RDAs working together because a particular industry, a particular sector, may well be important to a number of different regions. One example of that is the Motor Sports sector, which Mr Burden has a particular interest in, which crosses two or three different RDAs. They are now working together with the Motor Sports Panel that I chair to look at what we need to do really to exploit the excellence that we have in that cluster and also fend off some of the threats perhaps to that position. In textiles, we have I think four RDAs collaborating. They all have important textile sectors; they are all interested in the transition to technical textiles and higher value-added goods. Across the piece, we do indeed get all the RDAs working together in order to ensure that they are sharing best practice, they are learning lessons from mistakes, but they are also learning lessons from success, and in particular, they are not reinventing the wheel and they are not setting up isolated initiatives for the same sector where one centre of excellence will do very well and can serve more than one region. As far as the Regional Innovation Fund itself goes, perhaps I should have explained that more clearly, and I am sorry it is not in here, but that has now been absorbed within the single pot that we have given the Regional Development Agencies. Instead of the RDAs having to bid for or use all these different streams of funding, which just made life very complicated and constrained them quite unnecessarily, we have given them the freedom and the increased funding of the single pot, so that they can now, in line with their strategy and in line with the targets they have agreed with us, deploy their resources to what they think is going to be the most important and most effective investment. They will, of course, be accountable for achieving the targets, and we are going through their business plans at the moment. A final point I would make comes back to the national dimension of the innovation strategy. Part of what the Innovation Group and David Hughes and his team will do is to focus on the real breakthrough technologies that are going to transform different sectors and companies in ways that we are only just beginning to imagine. One of those is nanotechnology. We are putting a lot of money behind the exploitation of nanotechnology, with the creation of academic centres of excellence and also the new Nanotechnology Application Centre. Some of the most exciting developments are going on in Britain but, if we do not exploit them in the form of new products and new processes, we will simply miss the boat on the new sources of prosperity.
(Ms Hewitt) Okay.
(Ms Hewitt) It is not this fund that we will be evaluating because we are moving away from having all these different funding streams and all these different schemes and evaluating each one individually, it is just a mess and we have been sorting it out. The way in which we will measure the success of the innovation strategy, which is what matters here, there are a number of different measures. First of all the spin-offs that we get out of the science base. We have seen a huge increase, trebling over the last three years, a massive increase and we want to see that continue to go up. Secondly, we will want to look at the number of existing manufacturing companies who are entering into new partnerships with the science and technology base in order to raise their own rate of innovation. Now we can measure that partly by just looking at the companies and what they are doing but there is a very powerful measure, also, it is in the manufacturing strategy, which is the proportion of revenue for manufacturing companies that comes from products introduced in the last three years. That is a pretty key benchmark. We perform quite poorly compared with the European average. It is a pretty good rule of thumb that our best companies are retiring their old products, they are creating new products and new production processes and we will want to measure that and see if we can get that driven up. Then, obviously, we have touched on much broader issues like inward investment but, in part, our inward investment success will reflect our success in innovation as well.
(Ms Hewitt) Absolutely. The skills issue is an enormous problem and because we have been so successful in bringing unemployment down, we have got a very tight labour market in many parts of the country, it is a real challenge to employers very often to get the skilled people whom they need. Now what I find in my own visits to manufacturers is that they hugely welcome and many of them are using modern apprenticeships. I think we are getting very good feedback on the modern apprenticeships programme. What we need to do, of course, is to drive up the numbers of people going into modern apprenticeships so that it becomes really a very big part of the route for young people who are not going on to university. Certainly we have got more to do there, which of course DfES is in the lead on. As far as schools go, as you know we have been looking at the whole of the 14 to 19 curriculum because as a country for a very long time we have been much, much better at the academic track than at the vocational track. They were going on about this 150 years ago and we do not want them going on about it for in another 150 years' time.
(Ms Hewitt) There are.
(Ms Hewitt) Well, I do not accept that for a minute. I see it in my own disadvantaged council estate neighbourhoods where nobody in those schools has ever gone to university. Then you meet people, as it were the older generation from those estates, who through adult learning opportunities have got degrees. I was at Jaguar yesterday and they were talking about this very issue. The plant manager was saying "What we are putting in place is a system which will enable a shop floor worker to go right through to a masters degree and, indeed, for that matter, to PhD level as well." They have shop floor workers who never got the chance to go to university when they were at school who have now got degree level qualifications. There is a huge wealth of unused talent in this country which has frankly not been used because of our past system. Of course those people should be going to university and we should be celebrating the fact that we are getting far more of them to university now but we have to be equally good at the vocational route and creating the technically qualified people because that missing middle is one of the very big reasons for our productivity and prosperity gap. That is very well illustrated I think in the table in the strategy. As David Miliband said recently we have still got a lot more left to do on this 14 to 19 curriculum reform. That work is in hand, there is still a long way to go.
(Ms Hewitt) Yes, of course we are, just as we have been working with the Department for Education on links between business and schools because what we have, as the Howard Davies review showed very clearly, is a plethora of schemes - often very, very good, there is some wonderful practice going on in these schools - but it is patchy and it is inconsistent. We need to build more effective relationships so that every school is welcoming business into a school, it is forging those relationships which in turn means that young people, particularly through good quality work experience, can see the job opportunities, including the job opportunities in manufacturing, that are out there and then pursue an appropriate route to the qualifications that they need. I do welcome the fact also that as well as DfES and ourselves and Treasury we have got a growing number of businesses partnering with us and doing some very innovative things. Transco, for instance, particularly in Reading, have found it impossible to get gas fitters and they are desperate for gas fitters. This is a matter of some concern for safety reasons as well. What they have done is to create a partnership within that community where they get youngsters who have effectively dropped out of school and embarked on a life of possibly lucrative crime and they are taking them through the New Deal and through a training programme with a guarantee of a job at the end if they qualify. The starting rate for that gas fitter job is £22,000 a year. As the Chairman said, it is enough to get them off drugs and drug dealing.
(Ms Hewitt) Absolutely.
(Ms Hewitt) Yes, I do not think we have settled on the publication date but my own Department is involved very closely in that and we are building on the work the Strategy Unit did on Workforce Development. We have a very direct interest in it, both from the point of view of businesses that are being held back and from the point of view of Business Link who of course deliver programmes like Investors in People for a number of SMEs.
(Ms Hewitt) Thank you for that invitation. We certainly live in interesting times. Starting with your very first point, a relatively minor issue, as far as BNFL is concerned we pursue a very deliberate policy of leaving the management to get on with running the company. We made it very clear to BNFL during the summer and the earlier negotiations with British Energy that BNFL and its board should take a view on what was in the commercial interests of BNFL as a company and in doing that I believe we were acting properly as a shareholder, not trying to second guess management or run the company on a day-to-day basis but preserving the interests of the shareholder, in other words taxpayers. The same goes for continuing discussions between BNFL and British Energy. As far as the Climate Change Levy goes, as I said recently we have no plans to exempt nuclear power from the Climate Change Levy. The whole policy rationale for the Climate Change Levy was set out very extensively, indeed when I was Economic Secretary at the Treasury, for the introduction of the Climate Change Levy. It is absolutely designed to encourage investment in new good quality renewable plant. The much larger issues about carbon tax, the European Emissions Trading Scheme and so on, are all, of course, issues that we are looking at for the Energy White Paper which will come out at the turn of the year. We are looking at these very large issues but they are not being driven by the particular events at British Energy. As far as British Energy is concerned, and as you rightly say this is a sensitive issue, I decided to give a very significant financial facility to British Energy for two very simple reasons. One is because I have the responsibility as Secretary of State of ensuring that nuclear generation remains safe, a responsibility that of course I share with the regulators, and I also have responsibility as Secretary of State jointly with the regulator, with OFGEM, for maintaining security of electricity supplies. British Energy cannot, therefore, be treated just like any other energy company, as some were urging us to do, because on the one hand it has nuclear power stations and we have the ultimate responsibility for ensuring the safety of those stations and, secondly, because it is generating, supplying, some 20 per cent of the total electricity market, so there are significant security of supply issues there. We decided for that reason to put in place a short-term loan, initially for four weeks while we entered into discussions with them, and then, as I announced recently, extended until 29 November to secure those two objectives of safety and security of supply and to put in place or to make the initial decisions on the longer term restructuring plan. I do not at this stage know what those decisions are going to be, we still have some weeks of intensively hard work to go, but obviously before 29 November when the current facility runs out I will be asking the Speaker's permission to make a full statement to the House on this subject. Of course, Brian will be delighted to come along and discuss all that in detail with you. Let me stress that this is a facility that we have put in place. We have not handed over taxpayers' cash to the company. We have put in place a facility and we have put in place extremely tough controls on the use of that facility so that our accountancy advisors, Deloitte & Touche, actually check any use of that facility. Quite a bit of it is being used simply for counter-party guarantees so that British Energy can continue to trade on meter because otherwise parts of our electricity supply would cease. Where there is a question of paying invoices, for instance, all of that is checked by us before funds are released from the special account that has been set up to handle the funds. This is not a question of my signing a single cheque for a frighteningly large sum of money and then leaving the company to get on with spending it, it is nothing of the kind. In addition, of course, both originally and when we extended the facility we succeeded in taking security over the assets of the companies involved, the holding company and the various subsidiaries, to ensure that we became the number one creditor in the queue of creditors that are involved in this situation.
(Ms Hewitt) No, I regret to say, Chairman, that it would not. They are commercially confidential and it would be up to British Energy to decide whether it wishes to make the details public. If there are further detailed questions that the Committee has on the issue of controls or how we are protecting taxpayers' interests then I will be very happy to do a separate note and to give you as much information as we can without breaching the commercial confidentiality or damaging the commercial position of a company that is continuing to trade.
Chairman: We may well take that up. We will have to discuss that. We are grateful for the qualified response which you have given us to that question. We would like to move on briefly to employer liability and insurance. We would like, if we have time, to touch on the Post Office and company pension schemes.
(Ms Hewitt) I think we would say we have got a two-fold interest. One is obviously to ensure that there is a competitive and well functioning market in the supply of insurance to employers and companies. The other is to ensure that the business voice is heard loud and clear in the discussions and in the review that is going on and that is why we are working so closely with the Treasury on this matter. I am sure that every Member of this Committee has had the experience that I have had in my own constituency, as well as the conversations I have had as Secretary of State, with companies who are facing the most appalling increases in their insurance premia. Unfortunately this reflects some very large difficulties in the insurance market that will no doubt be compounded by the events of the weekend and the claims to which that is going to give rise, the storm that we have had. It is very difficult in the insurance market at the moment. We are very concerned about what is happening to companies but, of course, because it is financial services it is a matter on which the Treasury leads and we are simply working very closely with them to see what, if anything, can be done.
Chairman: If it happened in some industries that would be called cross subsidisation.
(Ms Hewitt) I think the problem that we have got is, first of all, one very large insurance company has gone out of business, secondly the insurance companies have been affected, as many others have been, by the downturn of the stock market, thirdly in some sectors there has been a very significant increase in claims and fourthly, a lot of the insurers are reporting a general increase in claims and in litigation. All of that is being reflected in various proportions for different companies and different sectors in the rise in the premiums that employers are facing now.
(Ms Hewitt) That is true, certainly. Fundamentally here we are looking at the financial health of the companies as well as the number of companies who are competing in this market. Of course a number of employers are finding that their broker, however hard they try, can only get one company to give them a quote.
(Ms Hewitt) No. I think there are some real issues there.
(Ms Hewitt) Of course we are looking at that. As I said we are doing it with the Treasury which has to look at the overall state of the insurance market but we are concerned also about the overall state of the market because it is very clear, or at least the story we are hearing from more and more employers is that competition is not working in some sectors of this market and they find themselves trapped or simply reliant on only one company which is prepared to offer that particular company in that particular sector employers' liability insurance and the price is a 200-300 per cent, whatever, increase in the premium. There is a real concern there and we are trying to get to the bottom of it and see what appropriate action might be.
Chairman: Doubtless we will return to this issue but we have a couple more questions. Roger.
(Ms Hewitt) We are making good progress on the universal bank, in fact rather than use that phase "universal bank" I think it would be more accurate to talk about banking at post offices. This has really got three strands to it. One is the basic bank account, which we have got all the banks signed up to effectively, and of course it is inherent in the basic bank account that it is accessible at the post office and that agreement has been reached with all the banks concerned. That is the basic bank account. Then we have the Post Office card account which the Post Office itself will be launching before April of next year. Then we have also ordinary current accounts which for many banks, not all banks but many banks, can also be used at the post office so you can draw your cash out and pay your cheques in, do your banking using a regular current account at the post office. The introduction of ATMs into 3,000 post offices in the fastest roll out of ATMs that has ever been done makes it easier for even more customers to do a significant part of their banking at post offices. All three routes to banking at the post office will not only generate direct payments, transaction payments, to the sub post masters and mistresses but will help also to keep up the foot fall that they rely on to buy the other products that they are selling in those shops.
Mr Berry: I think given the time I will leave it there.
Sir Robert Smith
(Ms Hewitt) We will make an announcement on that very, very soon. I am afraid I cannot pre-empt it this afternoon but it will be good news for rural post offices and particularly rural communities.
(Ms Hewitt) This is an enormous issue and obviously a very complicated issue as we look at how Government, employers and individuals share the whole challenge of making proper pension provision in a time when life expectancy is growing really very rapidly and, particularly for men, working lives have been shortened. There are a number of issues there and of course we are working very closely with Andrew Smith and his team who are in the lead on this issue. We will address a lot of those issues, I think, in the Green Paper that Andrew will be publishing later this year. Of course we are looking at how this particular issue of occupational pensions fits within the employment relationship as a whole but are very conscious of the fact that we have to balance here the objective of getting a good pension provision and adequate savings levels for people's retirement against imposing excessive burdens on business. It is an issue that we are looking at very carefully but of course I am aware of what the TUC and others have been saying on the collective bargaining issue.
Linda Perham: I shall wait for the Green Paper.
(Ms Hewitt) Thank you, Chairman, for the opportunity. I cannot give you the whole figure at the moment because we are still working on it but when we counted all the schemes we did find about 186/183, a very large number. Rather than simply look at which of those we can cut off we have actually started from a blank sheet of paper and said "What are the objectives here? What are the ways in which we can help companies become more productive and more successful? What is it appropriate for us to be doing?" Then we will simply put in place much simpler ways of delivering to those objectives. That new system will gradually replace all of those existing schemes. What we are doing, by using the evaluation that has been done on many, not all but many of those schemes, we can really build on what works so that, for instance, on something like the Smart Scheme, which has been hugely successful, grants to companies, to small firms to prototype new products, that has been responsible for the survival and growth of many world beating manufacturing companies that we have got now, we are going to keep the essence of Smart but it will become something much bigger.
The team that I have got working on this have been making fantastic progress and, again, I expect to make an announcement on that certainly before Christmas. I would be delighted to come back and share the details of that with you but I will certainly, if I may, accept your invitation to write to you with the details as soon as I make that announcement.
(Ms Hewitt) I shall look forward to it. Thank you very much.