UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 625-i

HOUSE OF COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE THE

NORTH EAST REGIONAL COMMITTEE

 

INDUSTRY AND INNOVATION IN THE NORTH EAST

FRIDAY 5 JUNE 2009

(GATESHEAD)

 

SARAH GREEN, SIMON HANSON, TONY SARGINSON and ANDREW SUGDEN

JULIE ELLIOTT, GILL HALE, DAVEY HALL and KEVIN ROWAN

CRAIG ILEY, SIMON LENNEY, AMANDA SHEPHERD and MARK VINES

 

Evidence heard in Public

Questions 1 - 87

 

USE OF THE TRANSCRIPT

1.	This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
3.	Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.
4.	Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

 

Oral Evidence

Taken before the North East Regional Committee

on Friday 5 June 2009

Members present:

Ms Dari Taylor (Chairman)

Mr. David Anderson

Mrs. Sharon Hodgson

Mr. Denis Murphy

Phil Wilson

 

Examination of Witnesses

Witnesses: Sarah Green, Director, CBI North East, Simon Hanson, Policy Manager, Federation of Small Businesses North East, Tony Sarginson, Regional Manager, Engineering Employers Federation, and Andrew Sugden, Director of Membership and Policy, North East Chamber of Commerce, gave evidence.

 

Q1 Chairman: May I warmly welcome you all? I think you know the team. I am going to press you, as we are miserably short of time. We have an hour and a half with you and it is not long enough. We might have to do another session with you at some stage, as this is one of the most critical parts of our investigation.

As you know, we are looking at innovation and industry. Critical to us is the question of how the regional development agency is working. Is there value added and is it sustainable? What is the RDA doing to ensure that innovation throughout the region is being captured, delivered and organised? That is where we are. I think that you know that we have serious concerns about the way in which our gross value added has been dipping. I think you also know that there is a gap in terms of gross value added between us and the rest of the UK. We are equally concerned that there is gap in terms of productive activity between us and the rest of the UK. So we have some real concerns, and although I am sure that you will weave them into your answers, we are keen in this session to hear how you see Government organisations-the Government Office for the North-East and the regional development agency-supporting the working life, the innovative life and the growth of our economy.

I want to start by asking you one thing. Incidentally, Andrew, if you give us a full response, and the rest of you totally agree, I would be pleased if people did not restate what has been said, because we have a lot of questions and the time span is tight. I want to start by asking each of you to give us a two-minuter on the unique economic challenges faced by the north-east, compared with other UK regions. In particular, what is the importance of manufacturing to the North-East from the Engineering Employers Federation's perspective? Will manufacturing ever not be important? I would also like to ask you all what the key manufacturing industries are. So, the questions are these: what are the unique challenges, what is the importance of manufacturing, will manufacturing be sustained and what are the key manufacturing industries in the region?

Andrew Sugden: For the record, I am Andrew Sugden, director of membership and policy at the North-East Chamber of Commerce. We are based in the north-east, our membership is in the north-east and we are managed in the region. We are very passionate about the north-east. We see ourselves as champions of business in the region.

There is tremendous manufacturing depth right across the north-east, and some of that is historical. We will no doubt get the chance to speak about some of the businesses that are a little more challenged today than they have been until very recently, but there are some real strengths. Certainly, when we look to some of the newer industries, there are particular strengths around the energy sector-whether that is energy fabrication or energy production, in the shape of some of the new opportunities that we have in renewables and even in clean coal technology and other areas that have not been focused on yet.

There are some real challenges facing the region. We have a very uneven economy and an economy that is quite different from that in many other parts of England in particular. We have a substantial reliance on public sector employment, and that will obviously be more of a concern as public sector finances become increasingly stretched. That is something that we are particularly concerned about.

As a region, we have other challenges around our infrastructure-not just transport infrastructure, which I have spoken to most of you about in various guises, but the wider infrastructure to support businesses, such as broadband and other innovative technologies that north-east businesses that need to be competitive. We will probably get chance to talk about some of those issues in more detail later.

Chairman: We certainly will. That is great. That was a good two minutes.

Simon Hanson: For the record, I am Simon Hanson, the policy manager for the Federation of Small Businesses in the north-east. We have approximately 4,500 members across all sectors in the north-east, and we span the area covered by the Government office and the regional development agency.

To echo what Andrew said, one of the big challenges is how we overcome the reliance on the public sector. We do not want to look at that necessarily in a negative way, but to ask how we can build on it in the future and encourage more enterprise and get the trend in small business up. One of our key focuses at the moment is ensuring that irrespective of the problems that we are suffering-for example with redundancies and unemployment-we encourage people who have thought about starting up a business to do so and ensure that the funding is out there so that we can get up to speed.

From a small business perspective, the big challenges for our members are access to finance, access to credit and the costs of credit as well. Alongside that, the challenges are the impact of late payments and the like on our members. It can take up to 90 to 120 days for payments to be made. So they are the real challenges-the cash flow-but again, we are trying to turn that around and work with people like the local authorities to improve small business rate relief, and so on.

On the manufacturing side, I think it is the renewable and green technologies that we can lead on-not just within the UK, but worldwide as well. A lot of innovation happens in small businesses first, which is then taken on by the bigger companies and made industry-wide. From this year's Budget, it is simply a question that needs to be answered. There was a big emphasis on infrastructure and green investment, but there was not a lot of substance behind it. It is those key questions that need to be answered-those telephone number figures that were printed-and how much is available. But that does not seem to have fed down to the regional development agencies so that we can access that and take it forward.

Chairman: So it is a serious criticism of Government.

Simon Hanson: Yes.

Tony Sarginson: I am Tony Sarginson from the Engineering Employers Federation. We provide professional services to about 600 subscribing members in this region, mainly from the manufacturing and engineering sectors. Manufacturing has not gone away from the north-east: it has not died. It always has been, and will continue to be, a big part of our economy. Some 19% of our GVA comes from manufacturing; it employs over 140,000 people in the industry in our region. It has a very vibrant future.

In terms of unique challenges, which is what you were asking, I will try to pin it down to the north-east. We have a shortage of big companies with research and development facilities, and so on. There are some good exceptions, such as the Nissans of this world, but generally speaking, the manufacturing sector is made up of a certain kind of small business with 300 or 400 people, and that brings its own challenges. The image of engineering and manufacturing is poor. It is poor with young people; it is poor with parents and grandparents. As a region, believe it or not, we really struggle to attract and retain higher-skilled engineers. So the image of the region is linked to the shortage of big companies, because that is a draw for higher-skilled people. They are some of the unique challenges.

In terms of going forward, manufacturing, until fairly recently with the demise of the financial sector, enjoyed a very good space. We were the new kids on the block, almost. We were bright-eyed, bushy-tailed people riding high. Having said that, round about October through to January, the wheels came off for us as well. It was a great shame, because people were starting to think about expansion, and about apprenticeships for the first time. Young people were starting to think about engineering and manufacturing as a good career, a good place to be, and that was temporarily dented. Encouraging things, as in "New Industry, New Jobs"-the paper that Lord Mandelson produced-is a doctrine we ought to be following.

Chairman: That was brilliant. I think you pleased every single one of us with the statement that manufacturing is still there and will still be there. From my perspective on the Tees, it is a critical statement.

Sarah Green: I am Sarah Green, from the CBI. I have the difficult position of going last, while agreeing with everything that everybody has said so far. I will try to differentiate what I was going to say. One of things the region has failed to do in public sector employment-let us admit that the size of the public sector is what it is-is drive the level of public service reform that we have seen in other parts of the country, and, equally, look at how we can spin out and commercialise some of the opportunities around the size of our public sector. So, for example, there are opportunities for the region to lead in health care because of its excellent health care facilities. Going forward, the aging agenda will be an area of pre-eminence for us.

Talent retention and attraction will be critical. Given the region's location and the difficult period that we are going through, businesses fear that talent will have to move elsewhere when they recruit after we come out of this recession. There is evidence that it will be difficult to recruit people who have no experience of the north-east-people who do not have a nexus or historical connection to the region. That is why universities are so important.

The supply chain is the other real concern in the current economic period. As a region, there is probably more interdependence between our industries because of the nature of our heavy manufacturing. Should we lose critical parts of the supply chain, we will be in a very difficult situation in keeping those industries alive, and we will feel the domino effect of losing more businesses and jobs. When we talk about industrial activism and industrial route maps, there is a greater opportunity for this region to take that forward, but it has to be done quickly because this is a critical period and we do not have time to waste. The automotive and process industries are critically important to this region. They have long supply chains in this region and we have to understand both of those supply chains and the implications of what is happening.

 

Q2 Chairman: That is great, thank you very much. Could you follow up with your beliefs about the role of One North East? How and in what way has One North East been an effective partner or supporter to the development or the downturns that you have witnessed? In the region, what would not have happened if One North East had not been there? Would there have been gaps in support? If it is appropriate, what criticisms do you have of One North East?

Sarah Green: If we look at "Building Britain's Future-New Industry, New Jobs", One North East's strategic economic change team has positioned this region well-work has been going on for nine years in the centres for excellence and these have developed and put us in a position to maximise those opportunities. The Sainsbury review of science and innovation said that RDAs must work closely with science and industry councils, the Technology Strategy Board and so on. In this region, the Science and Industry Council and One North East have worked closely together and engaged businesses-we have a real opportunity in that area.

 

Q3Chairman: That is valuable. You have not mentioned any criticisms-and you may not want to-but are there any? Are the Government asking them to do too much?

Sarah Green: Yes. They have had scope creep and they have far too many things to do. I know that others want to pick up on this, but I think that there are areas where business would want further focus, particularly in transport.

Tony Sarginson: In the immediate term, in terms of specific help, the RDA's taskforces have been good. I was involved with the Nissan and Corus taskforces-I gather that there was also one for Northern Rock, but that passed us by, as it is outside our specific interest-which were good to work with, and we tried to provide what help we could in bringing the key players together. I think that that was a very good thing. The "Real help for businesses now" campaign-the idea of bringing together all the help that was available in an easy, readable manner-was also good and my members used that quite extensively.

As for criticism-and I am not sure if it is specifically a criticism of the RDA or the system-in our region, 40% of my member companies are foreign-owned and the availability of help is often confusing to those companies: they are eligible for some things but not other things. The whole system becomes complex and difficult to access-a lot of people give up and do not bother. There needs to be greater clarity in the funding that is available.

Chairman: That is valuable, because in much of the material that we have been given, there is a clear statement that we have to communicate, and that the communication must be much more effective and directed so that people pick it up. People are working hard at keeping their industries going; they do not want to work hard and try to work out what the devil is on the table.

 

Q4Mr. Anderson: May I pick up on a point that Tony made? Will he get us details of where people have given up so that we can be more specific about how we address this, and will he tell us the reasons why they gave up?

Tony Sarginson: Sure.

Chairman: Again, this is not to be overly critical, it is to get the constructive processes in place where they are not already.

Simon Hanson: Our members would say that if the RDA were not there, that there would have to be something very like it. As Sarah implied, a sense of mission creep has resulted from the fact that One North East is asked to do everything; a lot of our members would like to see a clearer focus on economic development and would like to strip back some of those functions. Again, there is wide recognition that One North East is taking the lead on certain European funds-like Jeremy's-and was the first to announce that it wanted to help out. That has been widely recognised by our members in the north-east and widely derided by members in other regions whose RDAs are not doing more to help out. As Tony said about the "Real help for businesses now" campaign, it is about putting that clarity of communication into one pot because, frankly, our members do not care where the support comes from. They do not want to see the wiring behind the scenes-they just want to see how they can access the funding. They want it to be really easy, so that there is somebody at the end of the phone or so that e-mails are answered quickly. They do not want to be frustrated by having to wait and wait for funding to come through.

 

Q5Chairman: Simon, if the grant capability is limited, is that a problem?

Simon Hanson: It is not the capability but the communication. If you consider innovation, for example, there is a raft of funds available for research and development, and innovation. That is not well communicated, as with the grant for research and development from One North East; no one has come to us as the FSB and said, "Do your businesses know that this is available? Here are the criteria to help out." That is not necessarily a criticism of One North East-it is just an area where both the FSB and the agency need to work harder to get that message out to all members, so that they are aware of all the support that is available and not just that which has been introduced in response to the credit crunch and the dreaded "R" word. With One North East, there has been that more strategic focus on key areas where the region can lead the way both nationally and internationally. That has been widely welcomed. The one criticism that people have of national Government is that when the funding streams are tight, the RDAs are targeted first. That limits the role that the RDA can have. Again, that is a criticism, but not of the RDA.

Chairman: Absolutely. We take that on board.

Andrew Sugden: I echo the points that most other people have made. We are lucky in the north-east; we have a RDA that has a strong business backing, which is not shared across the country-it is worth reiterating that. I speak to other chambers of commerce in other parts of the country and they would quite happily see their RDA no longer exist. That is not the feedback I get from my members in this region. Certainly the RDA has been far-sighted. Sarah mentioned the centres of excellence-the whole agenda around them and, increasingly, the innovation connectors route which has followed on from them is innovative. That is exactly what the region needs, and it is great to see the RDA leading on that.

 

Q6 Chairman: If they were not here, would it happen? Would the universities work together? Would universities and industry work together?

Andrew Sugden: The RDA has been the catalyst for that to happen on a regional scale. There is one renewable energy centre in the north-east. However, that would be likely to fracture if we relied on collaborations on a one-to-one basis between universities and industry. That gives a critical mass and a scale of investment that we would not get were we not to have the RDA. The RDA has also provided a challenge to businesses to step up and be counted in those areas. Jeremy's is one example, but being on the forefront of the registry with the European Investment Bank is a real innovation-it is a first mover advantage for the north-east, and something that the RDA was able to do on a regional scale.

In the more medium term, the move towards the single Business Link with brokerage on skills and business support is way ahead of the business support simplification programme that is being rolled out nationally. It is great to see this region leading on that. There has been mission creep. The RDA has additional responsibilities today that it did not have when the Regional Development Agencies Act 1998 came into force. Slightly more fundamentally, those responsibilities have been added with a degree of budget, so that when budget raids happen, the responsibilities do not shrink. When we saw the £1 billion housing funding across the UK, it was the RDA in this region that took a substantial hit. None of its responsibilities were reduced. I think that that was a mistake-not of the RDA, but of wider Government policy.

You asked about criticisms. One significant area in which our RDA has not been at the forefront is transport. The leadership of the RDA in Yorkshire has been much more on the front foot with the transport investment requirements in Yorkshire and the Humber. No doubt you drive north to south regularly and see the transport investment that has gone into Yorkshire. That is partly because the RDA has decided in the past 10 years to lead beyond its authority. We have not seen that in this region.

 

Q7 Phil Wilson: On the transport aspect, how important are the regional airports in this regard, especially with the links to London for businesses and so on? Do you think that the RDA should play a more proactive role in ensuring that the Government do something about that?

Andrew Sugden: The RDA can play two roles in that. First, it can lobby behind the scenes. I guess that that is part of what we do not see, so we are not able to comment on it here. It can lobby about some of the challenges that the regional airports face. Regional airports are essential for a vibrant and growing economy. We would like to see the RDA on the front foot with that. It is important that it lobbies behind the scenes with Government, but publicly it should be seen to be four-square.

 

Q8 Phil Wilson: What concerns are raised by companies that want to do inward investment in the region? What do they say to you about the transport links: the roads, railways and airports?

Andrew Sugden: The most significant one is from people wishing to move freight. The issue is with roads and our railhead infrastructure. We have made some great moves with our railhead infrastructure. Our investment in the ports has been phenomenal. That is largely private sector investment, which has been great. Public investment in roads has not caught up at the same speed, which is unfortunate.

Sarah Green: I re-emphasise what Andrew is saying. This must be seen in the context of this being an exporting region and a remote region. Road and rail investment are therefore critical. The airports are critical, because we want the region to be a global player in the future.

 

Q9 Mr. Murphy: How would you prioritise investment for the roads? Do you see the A1, the A69 or the A66 as the priority?

Sarah Green: Our members do not feel that the A1 beyond the western bypass is necessarily the key priority. Getting through the western bypass is a priority, but they then look at the A69. The east to west connections are important, as is getting into Scotland. You have to look at it in the round. It is difficult to prioritise one set of roads. If we look at the planning long term, we have to break it down. To say that we will do only one aspect at a time is difficult. A key issue is the complexity of who has power over our roads. Some parts are part of strategic networks and some are local. The amount of money that we are given in regional funding allocations makes it feel like we are messing around on the outsides. That is frustrating because people are told they have authority, but only in a very small area where they can make no difference. If the region is to be able to decide its transport priorities, we must be given the full pot and the flexibility to look at the whole piece. We could then come up with sensible ideas about where the priorities are and where the flows will go. At the moment, that is difficult because of the different structures.

Chairman: We are going to move on. Phil is going to ask some questions on the region's economic strategy.

 

Q10 Phil Wilson: Which sectors in the region have been hit hardest in the past year with the global downturn? Is it other sectors or is it in manufacturing, and if it is in manufacturing, which particular parts of the industry?

Tony Sarginson: All sectors of manufacturing have been hit to a certain extent. By far and away the biggest hit was taken in the automotive and construction industries and anything that supplies the construction industry; from earth moving equipment through to guttering and that sort of thing. Those are the sectors that have been hit hardest. Less badly hit were some of the higher-value engineering companies, which include those that were supplying to satellite, medical and the defence sectors. Those held up quite well, so you could not just say manufacturing has been hit, because it has been different across the sector. Of course, now, we have seen a downturn in some of the process industries and in the demand for steel. That is how I would crudely categorise the sectors.

Sarah Green: We have to add the professional service sector to that, particularly within the centre of Newcastle. It has been decimated from the perspective of the impact of things such as the construction and the manufacturing industry. If you talk to architects, a number of law firms and surveyors, they are having a very tough time. One of the fears there is that those people have higher-level skills-they have been taken direct from university-and if we lose them from the region, it might be difficult to bring those people back. There is also the fear that the hit will be a double whammy, in that as the public-sector purse starts to contract, those professional service organisations will take another kick. This is a considerable concern.

 

Q11 Phil Wilson: In the automotive industry-you may not know the answer to this, but I have heard that scrappage schemes, which are being started in other EU countries, are having a positive effect on places like Nissan. They are actually helping our own industries.

Tony Sarginson: What had an impact on Nissan was the scrappage scheme that occurred in Germany-it was not actually what we were doing, although I am sure what we have now done will eventually filter through. However, the fact that Nissan was able to retain and actually put on another line was a direct result in this region of that scrappage policy. Of course, as Andrew said earlier, what is really important in this region is the supply chain. Nissan will get through this; it is a brilliant company with great products and a great future, but the supply chain that backs it up is critical. It could be at least twice the size-in terms of jobs-as what is at Nissan. You lose a key supplier like that and what happens? That area is of greatest concern to me and my members.

 

Q12 Phil Wilson: I would like to make one other point on the help that the RDA and the Government have been giving to businesses through "Real help for businesses now", which has been co-ordinated by the RDA. Do you think that it is being proactive enough? Do you think the Government or the RDA has been on the front foot in this, or are we just reacting all the time?

Sarah Green: Our members would say the Government made a series of announcements before the practicalities of the schemes were in place. That was hugely frustrating, because people were reading about it in the newspapers, then going to talk to their banks and the Business Links of this world. When they actually got there, the schemes were not up and running and there was no detail behind them. Our message would be to embed what is there, make sure it is working and measure its impact. We should move on a scheme of announcement on announcement, or initiative on initiative.

Andrew Sugden: There is a good example of that, which is the Enterprise Finance Guarantee scheme. This is a good scheme with some good aims, but it was announced before the banks were able to cope with what was, in some cases, misinterpreted as a grant scheme, rather than a security support scheme.

Chairman: Which it is, of course.

 

Q13 Phil Wilson: One last point on strategy going forward: do you think there is a strategy for ensuring short-term industry requirements are met, without jeopardising the longer-term development of the region?

Andrew Sugden: That is a good question.

Tony Sarginson: I thought of one example of something that the RDA has been good at that has helped in the short term: a project called North East Productivity Alliance-[Interruption.] I would separate those things and not confuse them because they are for distinct, different reasons. NEPA, which spun out of the automotive industry, is a kind of a short-term fix to improve productivity and organisation and stuff like that-it is a good short-term intervention. Latterly, it has been expanded to include a lot more products and services in its portfolio. In terms of the short-term intervention to get companies performing better, that was quite a good initiative, and it did not jeopardise the longer term. In fact, now, it is actually being expanded, and it has been more integrated into businesses' usual practises, because it is broader thing.

Andrew Sugden: There is a wider example, which is Business Link. The amount of investment that has gone into the Business Link service and the wider business support brokerage has been quite extensive. The tempo that Business and Enterprise North East is expected to operate at to deliver that has also increased. NEPA is very specific in terms of a manufacturing context, but Business Link is being put under considerable pressure, and rightly so, by One North East, to help a larger number of businesses in the region access that breadth of support, whether skills or consultancy support in other areas.

Sarah Green: Another example is the access to finance in some of the bodies that have been put together, because they are quite unique to our region, and they are meeting a short-term need.

 

Q14 Chairman: And this time? Is the communication made at the time when the finance is available; are the banks very much aware; and are the RDAs ensuring that the whole thing works as a whole support to industry?

Sarah Green: I was thinking of the specific funds-the Proof of Concept funds etc.-that have been brought in for the specific requirements of, maybe, small, fast-growing businesses. Some of the innovation funds that have been pulled together have had real advantage in areas where it would have been difficult to have access to that sort of finance.

Chairman: That is an interesting point to end on for the moment, because Sharon is going to come in. She is actually going to look at some of this, because we have some very serious concerns about achieving investment for new product that requires start-up money of between £1 million and £14 million, and we know the banks are very resistant.

 

Q15 Mrs. Hodgson: You have already touched on the enterprise finance guarantee scheme, and I would like to tease a bit more out of you about that, especially with regard to how successful it has been across small businesses and all businesses across the region. As you know, it applies to businesses with a turnover up to £25 million, which I imagine takes in the majority of the businesses in the region apart from the big ones. How successful has it been?

Also, in answering-our time is limited, but I could have a whole session on this-will you talk about innovation funds? You touched on those, Sarah; but in the last session, we received evidence from the chemical industry about the gap, which Dari mentioned, from £1 million to £14 million. People want to take something from the idea and innovate in the region. Often we are very good at the beginning of the ideas and at the delivery at the end, but we seem to have a problem joining the two together. We think it could be down to the funding. Will you talk first about the enterprise finance guarantee and then everyone can come in to talk about innovation?

Andrew Sugden: Shall I follow on about enterprise finance guarantee schemes? We have had conversations at NECC with people involved in the whole spectrum of the EFGS-banks and professional advisers, as well as applicants for the fund. One thing that has been misinterpreted right from the beginning is that the loans are commercial loans from the banks' point of view, and they are assessed the same way as any other bank commercial lending decision. That important piece of information did not get across as early as it should have to businesses who might have been looking to lend. Importantly, when it was first announced, it was announced with a good fanfare and the information was simply not there. The professional adviser community-some of whom even now are not fully briefed in what the EFGS is eligible for-and the banking community were not fully briefed on the product and its availability for business.

 

Q16 Mrs. Hodgson: Whose fault was that?

Andrew Sugden: It was the Government's fault. There was an enthusiasm to get a response to an increasingly panicked business community about the growing recession, and it was made with the best of intentions. However, operationally the banking community-and importantly, organisations such as mine-did not have the information at their fingertips to really understand what was on offer.

 

Q17 Mrs. Hodgson: How could the Government have helped? What could the Government have done differently in that regard, bearing in mind that they wanted to do something quickly? Government moves very slowly, as we all know, but what could have been done differently in your opinion?

Andrew Sugden: Three very simple things: the banks could have been pre-briefed, pre-trained and had things, such as the application forms, available before it was announced; organisations, such as the four represented here, could have been provided with headline information on what we needed to tell our members about the EFGS; and the adviser community could have pre-prepared applicants for those sorts of lending options. If those three things had happened-there was probably only a two-week lead time to enable that to happen-that could have helped. More broadly, with "Real help for businesses now" and some of the investment coming through that, we have seen that happen. The business link advisers and others have been fully briefed on some of the newer innovations, so I think it has been a lesson learned.

 

Q18 Mrs. Hodgson: Are we there now?

Andrew Sugden: We are not seeing many EFGS applicants.

Mrs. Hodgson: Really?

Andrew Sugden: No.

Mrs. Hodgson: Interesting.

Simon Hanson: Again, we lobbied for a £1 billion survival fund for small businesses and businesses in the round in the pre-Budget report. What subsequently came out from the Government looked very similar to what we were lobbying for. However, as Andrew said, I think there have been some problems with the delivery of EFGS. Again, it has been a miscommunication. When the banks have come out and said, "We've still got this money to lend," some our members have gone to them and said, "We've seen the adverts in the paper, can we access that?" The banks have replied, "No, it isn't viable for you. You aren't the ones that we are looking to lend to." Now, I would not say that that has been all banks by any means, but certain ones have come back-

 

Q19 Mrs. Hodgson: Even though they have fulfilled the criteria?

Simon Hanson: Even on the criteria. There have been concerns from our members that, where they are a business person first, they have been asked to put the matrimonial home down as security, which they are just not willing to do. For example, one of our members only wanted £5,000-only-and was told to put his £500,000 house down as collateral to support that, to which he said that he could not go back to his wife and say, "Guess what I've done this morning?" so to speak, as most husbands would probably appreciate.

 

Q20 Chairman: Simon, are the banks being risk-averse?

Simon Hanson: Yes.

 

Q21 Chairman: Are they seriously undermining what could happen, because we have moved from the banks being cavalier to now seeing them put all sorts of stringent qualifications, which, frankly, are often totally unrealistic?

Simon Hanson: Let us be honest: the banks are in a difficult position. They are getting two messages from Government. First, they are being told to build up their capital, but they are also being pressured to lend out to businesses as well. So they are in a difficult position, and I do not think that our members would deny that. It is about getting that message across that they do want to lend to viable businesses. We would never say that we want to see a return to that cavalier approach, where you go in with an idea and then return with a pot of money, but it is the viable businesses that want to survive and have got a future that we want to see the money going to. There is a fear that there is a blanket approach, rather than actually trying to find the viable businesses to support.

 

Q22 Chairman: We accept that banks could lack confidence and are now walking very carefully, but the absolute fact is that public money has been put in, in considerable order, and it is disappointing to hear the Government get it in the neck because they are not communicating effectively, when actually it could take two to tango here. The banks are just about as bad.

Simon Hanson: We are not hearing as many bad news stories now about the banks as we were at the start of the crisis, but that is not to say that there are not any. The stories that we were hearing, to be perfectly honest, were absolute horror stories, where the fees were 25% and things like that for existing finance. A lot of our members were put off going to the banks because, as they walk in and say that you may need some money, that is when the alarm bells start ringing within the banks, or at least that is the perception of our members. No one wants to more or less admit that they have failed to some extent. The message is for the banks to let us know. We want to know the pressures that banks are under, so that we can tell our members and feed out that information. We do not want to get into the scenario when we are operating against two conflicting messages. If the banks have problems, we want to know, so that we can tell the members, so that they are prepared for when they ask for help.

 

Q23 Chairman: We need to hear from you if that situation is persisting. We are talking about industry and innovation, and you cannot innovate when the capital support is not there or might be there. It is not appropriate. Sarah is desperate to come in. Simon has not finished, and David is also desperate to come in. There is a three-way shift. Simon, are you ready?

Simon Hanson: I am happy to take further questions.

 

Q24 Mr. Anderson: You made the point that things do not seem as bad now as they were. Is that because your members could have given up trying? Six to nine months ago, ridiculous criteria were placed on us. All of a sudden, people are not knocking at our door. I wonder whether they have just given up and gone home, or is it actually better than it was?

Simon Hanson: I do not think that the conditions have particularly improved. There are signs of optimism. A lot of our members have said that, over the past six months, things have been made less worse. Perhaps a lot of our members are giving up because they are hearing such horror stories. Even Business Link is saying that we can change the funding around in a certain period, and three months after that, they can still be waiting to find the finance.

Sarah Green: Our latest access-to-finance survey shows that existing and new credit is continuing to deteriorate further. However, the rate decline becomes less. It is not getting any better in absolute terms. There are a number of issues, such as the direct finance costs, the indirect finance costs, the costs of getting the loan, the arrangement fees and the terms of the loan. Specific issues, such as trade credit and insurance are adding to finance pressures, but the reality is that we just operate in a very different world.

There is a short-term transition that will be very difficult. We need to be looking at different models if we want to finance business, particularly medium-sized business, in the longer term. We have put forward a new form of ICFC model. There is a real role for everyone to look at the swap between whether debt is the way forward or whether we should be looking at a more equity-based model. There is a communication and a consultation role in that respect, because if we are to move our business models significantly and our culture around investment, that will take a broad awareness. It is not something very familiar to businesses, particularly in the north-east if we consider equity investment in business, as we have relatively low private equity investment and so on. It will therefore be a big cultural shift for the north-east.

 

Q25 Chairman: Do we have your paper on the new models?

Sarah Green: I will make sure you get it.

Andrew Sugden: To pick up on David's question, one of the factors that we have seen, certainly from the point of view of our members and what has been discussed in a number of our seminars on the banking environment in 2009, is the different banking environment. It has had to be a learning process on which some businesses have embarked, assuming that lending policies and various other approaches to their banking relationships would be the same now as they were before the tightening of credit, particularly in October last year. Things like the emphasis on managers to provide detailed cash-flow forecasts and detailed management accounts to meet all of their requirements of their lending were perhaps not turned a blind eye to, but were not enforced as rigidly by the banks previously. They are now non-negotiable from the banking point of view. That has been a big learning curve for a lot of businesses. It does not mean that those issues have completely gone away, but some of the discipline and initial kick-back from businesses, which were finding a different relationship with their bankers, is probably now where it should have been before.

Tony Sarginson: Andrew has more or less said what the position is. My in-tray is still full of banking inquiries, problems and issues, but their nature has changed. They are having to do business differently-probably the way that they should have been doing business. The rules have changed. Some of my member companies have taken time and found it difficult to make those changes. I think that we are through that now. We will just see if we can get to a more stable state.

 

Q26 Mrs. Hodgson: I have a couple of questions, the first of which is probably just for Tony to answer. You made a submission where you stated that the recession had highlighted structural imbalances in the UK economy and particularly how that affects the north-east, such as our preponderance to public sector employees and the collapse of Northern Rock. I wondered whether you could expand on that.

Tony Sarginson: Sarah picked up some of that in her statement about reliance on the public sector. In a way, that goes back to where I started. The manufacturing in this region had almost been dismissed. It was the other industries-the public and finance sectors-that were being supported. One North East was looking quite closely at things such as health sciences and other areas. Manufacturing, which was the heart of our traditional region, was being overlooked. That is what we meant by the imbalances.

In going forward, we are now looking for an industrial strategy that supports manufacturing in every way. If you invest, you will get returns. If you invest in research and development and skills, there will be a return. We need a tax regime that will support that investment in the long term. It is about holding your nerve, because this is the long term. You cannot just switch it on and off-it takes time. That is what is at the heart of that comment. It is about sticking to an industrial strategy, which has perhaps been neglected. We stick with it, through thick and thin. We are going to come out of this, but are we going to have the skilled people? Are we going to have the investments that we need? Have we replaced those machines that should have been replaced? That is at the heart of that.

 

Q27 Mrs. Hodgson: This question probably requires a quick answer from all the panellists. What do you see as the role of the Government Office for the North-East, and how does it support the business community? What role has it played during the current economic climate, and what would you like to have seen it do?

Chairman: Perhaps you can also add a bit about the Regional Minister.

Andrew Sugden: I think that it was the North-East Chamber of Commerce that was boldest in our submission in this regard. There is some confusion among businesses in the region as to what the Government office's role is, whether it is an office of Government in the region, or whether it is an opportunity for regional issues and concerns to be accurately and effectively relayed to Whitehall in a way that changes policy. We have seen examples, and the most obvious one, which we decided to submit, is around the regional spatial strategy. Quite frankly, the Government office was not relaying back to Whitehall what the vast majority of business people, constrained by the planning environment in the north-east, have seen. Thankfully, that was changed, but in that instance, the Government Office for the North-East let us down.

There is some confusion, but there are some good examples. Certainly, people who are focused on the business environment at the moment have been very much on the front foot in the current crisis. We have seen, in the Regional Minister, somebody who is very clearly an advocate for the region and is very passionate about it. He has done more for representing some of the challenges faced by this region in Whitehall than what we have seen from the Government office.

Simon Hanson: If I am honest, I think that many of our members would not even be aware that there is a Government Office for the North-East, never mind what its functions are and what it does. They would see this nice, big building over in Newcastle, but would not have a clue as to who was actually housed in there. That said, I think that the regional economy team in GONE has been very proactive in coming to us. We believe in all organisations trying to foster their own meetings with the Regional Minister, to see what the problems are across specific sectors, so that the Regional Minister could take them back down to the Government.

Again, there is a difficulty from my perspective that we are not quite sure what the Government office is there to do. It is under a bit of challenge as well, because it is seen to go native in the region when it speaks up for the region, but then it is also seen as being native to Whitehall when it does not do what the region wants it to do. We just need to get round as to what the Government office should be doing on behalf of businesses.

 

Q28 Mrs. Hodgson: Could it have played a better role during the current crisis?

Simon Hanson: Against whom? The RDA is there for the business sector and the Government office is a representative of Government across a range of Departments in the regions. We would have preferred to see stronger collaboration between all of the public sector regional agencies, including the Learning and Skills Council and Business and Enterprise North East, to come up with a co-ordinated response not only for small businesses, but also for businesses in and around the north-east. Again, I think there are some difficulties. Returning to an earlier point, some of our members are not quite sure about things such as Train to Gain; some changes were announced, but nobody really knew what those changes were, which is again related to clarity of communication.

Tony Sarginson: I am a bit biased, Dari. I declare that, for four years, I was a non-executive director of the Government office, so I have got my fingerprints all over it. It has changed considerably, but from what the guys here say, that change has probably not been communicated as well as it ought to have been. I am a fan of the Government office, because I think that I know the kind of role that it plays. There are two specific things that I think it has done well. For me, the Regional Minister has been refreshing and great; we got a lot of value out of the sectoral meetings and so on and the Minster, through his energy and when he has gone away, has definitely solved some issues and knocked heads together.

Another specific area that has been very helpful is that the Government office regularly brings people such as Andrew, Sarah, Simon and me, and others, together in an economic forum. In that forum, my colleagues and I do our engineering surveys, which look at what the members are doing. We therefore do very accurate, regional-base intelligence gathering, but we bring all that together and regularly talk about each other's surveys and also talk to the Bank of England. All the key players with all the indicators are there. I think that that helps the agency, the Government and others make better informed decisions, because we have a lot of relevant, accurate and up-to-date information and intelligence on what is going on in the region. The Government office pulls all that together.

Sarah Green: I think that our members would be in the Andrew and Simon space, in that I do not think that they would necessarily relate to a Government officer as somebody they should have a direct relationship with per se. I am not sure whether that is necessarily a bad thing; it is just the way it is. The question begs the bigger question about the confusion around the infrastructure and the very complex infrastructure of policy making within the region. Businesses as a whole find that whole piece very confusing, which is probably partially why they come to people like us, because they cannot navigate around it. I reiterate the points about it being very important to the region, particularly during this period, to have a very strong voice through the Regional Minister; we really appreciate that. We also appreciate the fact that, unlike other regions that have had big, broad meetings, the Minister has specifically looked in detail at some business sectoral issues, which I think is important, because it is often the detail that matters with these things, and you do not get that in larger, broader, cross-sector meetings. It has been great that we have had that detailed sector focus.

Chairman: That is really positive. Denis is taking us on to look very clearly at what is, I hope, one of the most startling examples of brilliant manufacturing activity, namely that in the energy sphere. He knows-we all know-that I am so proud of everything that is done on Teesside, and I know that Denis will talk about coal in equally warm and romantic terms.

Mr. Murphy: And historical terms.

Chairman: Indeed.

 

Q29 Mr. Murphy: Dari has set the scene in that this is potentially the most exciting opportunity that the region has ever had to embark on what could be the single biggest change that has taken place globally in the past 50 years. Apart from the renewable technologies that we have in the region, we now have an opportunity that does not come along very often to develop carbon capture and storage on a scale that has never been done before. Progressive Energy has been working with Alcan for some time on developing a carbon grid for the region that would stretch from Teesside to Northumberland. It would give all the industries in the area, which are huge energy users, the ability to capture the carbon and store it in a North sea aquifer. CCS has never been done on that scale in the world. Whether Greenpeace likes it or not, we will continue to burn coal for perhaps the next 30 or 40 years, but it is right to say we cannot keep burning it in the way that we have. My question to you is, will the private sector alone be able to develop such a carbon grid? If your answer is yes, how quickly do you think that could be achieved and will the finance be available in the region? That is a nice easy question to start.

Andrew Sugden: You are right about the opportunities for coal. We are also incredibly lucky in that we are still sitting on an enormous coal asset in this region; it is just being extracted differently from the way we were used to. The private sector can go so far in clean coal technology, but so much is experimental and this is being done on a scale that has never been tried before. There has to be a balance of risk. Climate change is a national and international issue, and there is a role for the public sector-certainly for making public sector R and D investment to help those private organisations look for the best possible way to achieve solutions. Can the finance be found in this region? I have to say no. We are a small region with amazing demands on our industrial infrastructure, so I don't think the finance is available here. If a wider lobbying role has to be played by public organisations and the likes of the RDA, it will involve finding those investment routes outside the north-east.

Tony Sarginson: Like you, Denis, we are enthused and excited about carbon capture. Like Andrew, I do not know, but I would not have thought that we would be able to finance it from within. I cannot see that happening. Let me tell you what is happening, because we are in the foothills. My organisation is working very closely with the local authorities, which will have a big part to play here and we need them on board. We are now working up plans with them on how it can be done, how can we scale it up and how we can create the evidence base of what can be done. That work is going on. What worries me is that we are in competition with other parts of the UK. Yorkshire, for some reason, seems to think that it can do this, when, in fact, we have the natural assets. Therefore, we have to move fast and quickly because others might get in before us. I have not really answered your question, but the enthusiasm and the excitement is shared by others and it is about trying to work that out.

The whole energy thing in the north-east is a great opportunity-massive. We are lobbying for nuclear power, because we need a balance, but coal will be burnt for a long time. We have some fantastic manufacturing companies in this region that are supporting coal burning and will do so for as long as I am alive. It is interesting that you have majored on the subject of energy, as it is such a great opportunity for the region.

 

Q30 Chairman: Take us a stage further, Tony. I think that this is a question that all of us will have an input in, but you must have an input because you are our Engineering Employers Federation representative. How and in what way has the RDA played a role in either carbon capture or renewables?

Tony Sarginson: I don't know much about what it has done on carbon capture-it isn't hitting my radar, so I don't know. Others are doing it though. The Association of North East Councils seems to be taking the lead for some reason, but it is working with companies such as Alcan.

On the new and renewables side, as you know, the New and Renewable Energy Centre has been set up in Blyth. That is fantastic-absolutely brilliant. It is doing what you would expect an RDA to do, which is to fund-seed-fund, if you like-something that is going to attract the big companies, because you need test facilities and blade test facilities. You need a supply chain to supply those big companies and, of course, we need to make it attractive for companies-Clipper Windpower is a good example of that; it has got the money. Equally, so have the users of energy-the other ones that are going to call the shots. Around that, the New and Renewable Energy Centre, working with organisations such as mine and colleagues', needs to build up things like the supply chain, because these things are going to be built here and, hopefully, exported to the UK and elsewhere from here. Therefore, we keep on-personally, I am never away from NaREC, and I am trying to get it closer to my members. NaREC will want things made here that are not currently made here: castings, gear boxes, switch gears. We have not got the capability-we had it, but have lost it, and we need to bring it back.

 

Q31 Chairman: How about moving on, before you finish, to renewables-biofuels, bioethanol, that whole tranche of renewables? For me, those have a seriously viable future. They are world leaders. Do you know if the RDA is working with the companies involved in that?

Tony Sarginson: What seems to be happening now through an initiative that Sarah shared with us seems to be coming through the Science and Industry Council. That is where the new thrust of bringing together is coming from. These are competing technologies, such as wind-not competing, but which one is the way back? The emerging thing seems to be coming through the Science and Industry Council-Sarah might want to add to that. That is where it seems to be-the Science and Industry Council, part of the RDA, is picking up this issue and trying to make sense of and map what is there. What we should be doing is arranging where we are likely to be successful. Where will companies come in to support whatever it is that we are trying to create?

 

Q32 Chairman: In my head, I think that groups such as NEPEC are doing that in the most profound way. I worry that what we are doing is duplicating. Is that so?

Tony Sarginson: No, I don't think we're duplicating. They have their own unique places.

Sarah Green: To develop that point, there is a concern and there are some great things happening. My concern is whether the approach of the Science and Industry Council-to go only for those things in which we can be global leaders and to align public resources around that, and ensuring that the private sector is so aligned-is the right approach. I am not sure that that message is being held in all areas. I have not heard mention of carbon capture and storage as one of those key priorities, yet I hear from the Association of North East Councils, the local authorities, yourself and Alcan that that is something that is being looked at.

As a region we need to be very clear about what our priorities are, how much investment is going in and how we can align business, because each one of these industries has the opportunity to transform our region, but each one of these industries will take huge amounts of investment, of skill and of resource. The time frame in which we have to operate, if we are going to be the pioneers and take that competitive advantage, is very small. The danger is that we back too many, spread ourselves too thin and win on none. The region now faces some very difficult decisions, which we all need to take part in. Whether we are winners or losers, at the end of it we just have to pick ourselves up and say, "Yes, we will back those that the majority feels have the best bet, based on the research we have." Some of those technologies are further forward in some of those areas.

There is also a trade-off. The north-east cannot be the best in everything, necessarily, but is in reality based on the resources, the skills, and so on that we have. There are other regions. There will be trade-offs where we have to say-I am using this as an example-"Okay, Yorkshire, you have that, and we will concentrate on this." However, we are going to be the best in the world on this, or one of the best, one of a small number-one in four is what the Science and Industry Council is using. It is very clear that we create the platforms where we can make those priorities and those decisions.

 

Q33 Mr. Murphy: On carbon capture and storage, you say that it is mentioned, but it is actually much more important than that now. The Government have decreed that no more coal-fired power stations will be built without carbon capture and storage fitted-not available, not ready, but fitted. We shall face a desperate power shortage in 10 to 15 years' time if we do not start building these now. RWE npower has proposed a site at North Blyth, at Cambois, in Northumberland-a £2 billion project. That would consume 6 million tons of coal a year, but it cannot go ahead without carbon capture and storage being available. My point is that the private and public sectors need to get working very quickly on this one, because the potential is massive-so much so that the Prime Minister has agreed to visit Alcan, as has Ed Miliband. It is an exciting programme that has massive potential for the region.

Sarah Green: Denis, don't get me wrong-I'm not against that, I'm very much in favour of carbon capture and storage and the opportunities that it might bring. However, we need to be very clear, as a region, about what our priorities are. There is some divergence, as you talk to different parties, about exactly what they are. If the private sector is to invest, and if you are to be part of any of these supply chains and you are a smaller business, you need certainty, but I am not sure that we have it. I am not the expert to say what the right technologies are. The point is about the priorities.

Chairman: Denis, I think that we have hit all the questions on renewables, which was really valuable. However, we would like to move on now. You can hear the enthusiasm for carbon capture and renewables-

Tony Sarginson: We share it.

Chairman: Absolutely. We think that we can be global beasts. We are global leaders-we just need to get our act together. Sarah is right to say that priorities are crucial. Dave will take us on to the other significant issue: skills and talents. We need those too.

 

Q34 Mr. Anderson: I would like to make one point about the last debate. It doesn't need to be a choice between us, Yorkshire and Scotland-it could be all three. We don't want too many eggs in one basket. We have a specific kind of basket up here that is probably better than many-Denis mentioned the aquifer. What is the current skills need in this region and have we got enough skills to maintain the growth that we all want? If not, what do we do about it?

Sarah Green: It is clear that, as we move into new industries, we shall have to reskill and ensure that people have different skills. That is one reason why we need some clear messages about what our region's priorities are. We need to be talking to young people in schools to ensure that those industries are attractive to them. We need to ensure that we bring through young people with the appropriate skills. It is clear across the board that, whichever industry you go for-this is equally the case with the current industrial mix-we need more STEM skills. We need to look very clearly at that in our schools. This week there were announcements on the number of children taking combined rather than single sciences. Those sorts of issues are critical to our region. They sound quite simple, but we need to solve such issues, because they are having a dramatic impact.

Tony Sarginson: I would like to make two fairly different points. In the world of apprentices, engineers in manufacturing companies need more apprenticeships. Again, David, we were getting there. Nine months ago, the mood music had changed. For the first time, in some companies, people were starting to think about apprenticeships, but with the downturn that has stopped. In fact, there is a grave danger that many apprentices will find themselves in limbo, which is a great shame. We need to look after them. However, I am fairly confident that when we get through this period, apprenticeships will come back again.

Even now, in the downturn, there is still a chronic shortage of higher engineering skills in this region. Design engineers, project managers and any leadership-type engineering people are in real short supply in this region. One initiative on which I am working with the development agency is its "Passionate People, Passionate Places" campaign. The next round of images and so on will be directed to young people who have carved out successful engineering careers in this region. They will feature. That is all part of the need to attract and retain the talent. Our universities turn out great engineers, but they leave because they do not think that there are the opportunities.

Sarah Green: And they also leave because they leave engineering. They go to finance and so on, so there is a role as well around the image of all these new industries, which presents us with an opportunity to redesign what young people see as attractive and to make sure that happens.

Simon Hanson: From our perspective, obviously there is that focus on the need for the higher level skills, but there are also the problems with basic skills. A lot of our members say that the school leavers that they take on do not have the basic numeracy and literacy skills, which can seem a bit of a whinge from small businesses. But if they happen to then retrain after 11 years of formal education, and it is about getting those basic building blocks for a lot of our members in place, as well as looking at the new industries that we can create, the big concern that a lot of our members have if they want to reskill their employees or take on skilled employees is where do they go for the information?

I know I seem to have banged on a bit about the need for clarity and information, but certainly at the current time, with the demise of the Learning and Skills Council changing into the Skills Funding Agency and local authorities getting control over some funding streams, there is massive confusion now. I think an Innovation, Universities, Science and Skills Committee report said that there were only a few academics and Whitehall civil servants who actually understood what the system looks like now. If you try to get that down to some of our members with five members of staff, or even two members, or sole traders, they have not got the time to trawl through a whole load of skills websites to try to find some funding.

I think that there needs to be a bit more clarity as to where to go for the funding and what you can get, but almost to step back from that and, rather than just focus on funding all the time with all these areas, actually sit down with a lot of businesses and find out where they want to go as a business. The funding should come in last. It should almost be, "Where do you think you can go as a business? What more can we do on mentoring?" and things like that. Then we can have a look to find the relevant funding after that, rather than always chasing the funding first and then thinking about the rest afterwards.

On the formal education, I think a lot of our members would prefer to see informal, non-accredited short courses that could be done that are not at the behest of the timetables of the colleges, so that they can be a bit more flexible and responsive.

 

Q35 Chairman: Are the people you represent not enthused by Train to Gain? I don't expect you to be, Tony, because this is a different ball game.

Tony Sarginson: NVQ level 3, yes.

Chairman: Exactly. We could even do that through Train to Gain, but it is invariably level 2. Absolutely.

Simon Hanson: I have tried, but a lot of our members feel that Train to Gain is focused more on the bigger companies. Maybe that is because the sterling examples that you see are Nissan and Gateshead College using Train to Gain money. In a survey that we did recently, a lot of our members said that they hadn't even heard of Train to Gain and wouldn't know where to ask.

Chairman: That is really disappointing. I was at Tetley Tea the other day, and Train to Gain had worked magnificently there with a lot of people from the shop floor upwards, so I am disappointed to hear that. We will take back that statement about communication.

Simon Hanson: On the positive side, Train to Gain funding in the North-East has been recognised as being at the forefront, and the LSC has done it well in the wide sense. There will always be problems for some of our members, but it has been recognised as the UK leader, if you like.

Andrew Sugden: There are three issues in play here that we need to be concerned about. One is about investment in existing employees and how they are trained. It is not about new skills for new jobs, but about people who are already in employment. Train to Gain is one angle, but even with 19-plus apprenticeships, we are seeing caps on that funding, and that is at exactly the same time in a recession that businesses are scaling down their training and investment plans. I think it is entirely appropriate to put the challenge back to industry as to where the successful future is going to come from if you are reining in investment now.

We as organisations have chosen to take that leadership position with our own members at times to challenge them-you cannot constantly be looking for ready produced employees to come out of the sausage factory. There is a real responsibility on your organisation to do that. That is not happening, and it is going to happen even less over the next two to three years when we are going to be seeing training and investment plans really constrained. We need to have a major concern about that, and it is certainly not helped with the LSC funding regime.

A second issue is about new entrants to employment. We are expecting 30,000 fewer undergraduate places in universities, which is a major concern. Again, it is down to the public sector funding envelope, but that is at a time when there are not the job opportunities for 18 to 24-year-olds. We are seeing unemployment really taking a spike within that demographic. One option for some people is to move into higher education. At the same time, Department for Innovation, Universities and Skills funding for undergraduates is being constrained, which is a major issue. With that comes the funding that is available for apprentices, or potential apprentices, who are perhaps leaving school at 16 or 18. The funding model for apprentices is not all but 90-plus per cent. employer-led. Again, in the employment environment that we are working in, in the recession that we are in the midst of-it is going to take some time to feel the full effects-it is almost a no-no for increasing headcount, however worthy that investment should be for businesses. That is a second concern for us.

The third one is what we think was absolutely the wrong time to start reshuffling the pack with the structures. The decision has been taken and it is well on the way now. We have known for 18 months that there were going to be some pretty straitened economic times and I think we all thought for the first 12 of those 18 months that we might be able to escape without too much damage, but here we are in the midst of the deepest recession for God knows how many years and our principal engine for funding investment and skills is being restructured-carved into pieces-and there is no clarity of thought. That is a big mistake and a major Government policy decision that really should not have been made.

 

Q36 Chairman: We will end on that very serious note. We are getting to the end of the session. We have some serious questions about infrastructure. Both Denis and Phil will take on these questions. There are loads more, as you can well imagine. We would have liked a rather more in-depth discussion with you about apprenticeships and the way in which our economic lives are being shaped. Unfortunately, time is beating us. Unless you have a last throw of the dice, I shall say that this has been an excellent session for us.

Simon Hanson: I have one general point. A lot of our members are reporting, with regard to the circumstances in which we are living, that there is a massive focus nationally on the expenses scandal. Our members are saying that this has taken people's eye off the ball. A recession is still going on out there.

Mr. Anderson: A lot of us are saying exactly the same thing.

Simon Hanson: I appreciate that. Again, this is not meant to be a criticism in any way, but there seems to be a focus on personalities, Cabinet reshuffles and the like when realistically businesses are still going to be there, pre and post whoever is in, out and shaking it all about. I just think we need to see a better focus now on the economy, rather than the expenses scandal and the like.

Hon. Members: Hear, hear.

Chairman: We totally agree with you. It has taken the bloodline out. Sadly, there are people in our midst-not today-who have abused the system and abused it badly. They have to be brought to book. That is the absolute, but you are absolutely right. The critical concern for me as a Teessider is Corus. The second line for that is all other industry. It is critically important, yet I spent hours with the press justifying my expenses and there was nothing wrong with my expenses. We all have. So we do take your point to heart and we would say we totally concur with the sentiment. Thank you very much. This has been very valuable. If you think we have slid over areas and you still have things to say, we would appreciate hearing from you.

Tony Sarginson: We have given our written evidence.

Chairman: Indeed. That evidence was very valuable. I have not slept for three nights reading it. Could you give us a synopsis in future? Remember, we are only politicians.

Tony Sarginson: Keep up the good work with Corus. It is important.

Chairman: Absolutely. Tony, we are in there.

Tony Sarginson: It is really important.

Chairman: Absolutely right. Thank you very much.

 

Examination of Witnesses

Witnesses: Julie Elliott, GMB Regional Political Officer, Gill Hale, Regional Secretary, Unison, Davey Hall, UNITE Regional Secretary, and Kevin Rowan, TUC Regional Secretary, gave evidence.

 

Q37 Chairman: We have a very short time with some close colleagues and we are feeling itchy and embarrassed about it, so may I say to Kevin, Davey, Julie and Gill that I do not anticipate that we are necessarily going to get to the end of where we need to be today. We will re-establish the session and speak with each other again, because this is a very short period. With a bit of licence, we will push it to about 2.40pm, but that is it, because it should be from 2.00pm until 2.30pm. I say it as an apology-I am really sorry that we have so short a time together.

You know that our modus operandi is to say how industry and innovation are an absolute factor in the northern region. We want to believe that that is there: we have a tremendous manufacturing background, and we know that in renewables, in the automotive and other areas, we still have a very keen operational manufacturing base and we are looking at how innovation is part of that. We are very keen to ask you-it is the area that is central to our remit-how the RDA is playing an effective role? Are they there, are they valuable, are they delivering, are they focused? Critically, as you know, they spend £240 million-plus and there are other agencies in the region spending very large sums of money. We are keen to hear from you about where we are doing it right and where we might do it better.

Gill Hale: I need to declare an interest, in that I am an RDA member.

Chairman: We know you are on big bucks from them, Gill. We have taken that into account.

Gill Hale: That is great, thank you.

Chairman: This afternoon, David Anderson is going to start the questioning. We will rattle through quite a few questions, we will get to where we get to and then we will ask if we can re-establish this session.

 

Q38 Mr. Anderson: Good afternoon, nice to see you all in different circumstances from normal. What do you see as the biggest economic challenges facing us in the north-east, compared with other regions?

Kevin Rowan: There are long-term challenges and immediate challenges. The region has faced 50 years of structural change and is still in the process of trying to respond to those long-term structural challenges. We have gone from a world-leading region in manufacturing and primary industries to a much more diverse economy, but probably still not as diverse as we would like. Those long-term challenges of restructuring our industrial economic base are still important in the region and we need to keep our minds on those long-term economic industrial trends and changes.

The immediate challenges we face, not within the economic recession, but within broader economic conditions that are exacerbated by the recession, are things such as low productivity, low participation rates and a relatively ageing work force. One of the key challenges we face is that our brightest and best, youngest people tend to find opportunities outside the region more than they find opportunities within the region. Finding a hook to keep them here-an economic platform that is diverse and interesting enough to keep them here and that they are aware of-is a fundamental challenge. We obviously have the highest rates of economic inactivity compared with other regions, which is a long-term problem which we had started to see some progress on before the recession bit, but it is still a huge challenge in the region. Allied to that, there are pockets of severe deprivation, with the long-term impact that that has on health, opportunity and aspiration. Those are fundamental challenges for us.

There are different challenges with the skills prospectus. We still have significant skills-for-life challenges. We do okay on intermediate skill levels, but people are leaving school without the skills that we would want them to have. On higher-level skills, too, we face some quite fundamental challenges. It is also important that I highlight transport as a major economic challenge for us. Across the region, local authorities, the business community and ourselves would all say that we have some fundamental, significant transport challenges in the region and in terms of connecting to markets and connecting internationally. That is a very short answer, but that is my assessment of the key challenges.

Chairman: That is very valuable. Davey, do you want to pick it up from there?

Davey Hall: No, I am waiting for another question.

Chairman: All right. Julie?

Julie Elliott: No.

Chairman: That's okay. Gill?

Gill Hale: I'm fine.

Chairman: Hey, we'll invite them again.

 

Q39 Mr. Anderson: May I follow up one specific point about skills? When we talked earlier to colleagues from the private sector, they clearly recognised that when their members face tough times, one of the first things to go to the wall is training and skills. What do you think is happening? What should we do more? What support are you getting from bodies such as the RDA? Could the public sector play a bigger role in closing the skills gap?

Kevin Rowan: It is not a simple answer. In the region, businesses and individuals are investing more in skills than they ever have, and the same is true of public sector investment in skills. That is very welcome, and the commitment of employers and individuals in the public sector is hugely important, but employers are still identifying skills shortages as a constraint on growth, which is a challenge for us. Some individuals still do not have the skill sets that they need to progress using the opportunities that are here now or those that we will see in the future. There are particular challenges in terms of different skill levels. So the region still faces a huge challenge in terms of basic skills, although we have made a lot of progress in the past 10 years. We still face a huge challenge-it is probably a bigger challenge-in getting people up to level 4 and level 5 qualifications and higher-level skills. So participation in those areas is quite important.

On public investment, it is interesting that the Train to Gain route to skills through the employer has been an important catalyst in getting on board employers who were not previously on board in skills development. It is a shame that it often took a recession and downtime for workers for some employers to think about investing in skills. There are still issues around skills demand where public sector investment can lever in an increase. We would also make a broader point about the demand-led model in skills. If you rely on employers alone to articulate their skills needs, and then facilitate training on the back of that, there is a chance that you will miss future economic opportunities. So we would be inclined to support a demand-led skills infrastructure, but it should involve demand from different sources, and future opportunities-future economic potential-should be one of the factors influencing demand, not just what employers say they need now and in the short term.

 

Q40 Chairman: That is valuable. I would just like to ask Davey in particular a question. The economic situation is pretty harsh. Has that affected the number of businesses that are training and that see apprenticeships as a bit of luxury, as opposed to an absolute necessity?

Davey Hall: When I cast my mind back to when I was an apprentice as a lad, some of the big establishments used to have an intake of about 100 apprentices. We are well aware that shipbuilding and heavy engineering are going through a real downturn in the region, although training is still prominent in engineering. A limited number of employers are prepared to continue with training. Every now and again, we end up with a situation where they get into some difficulty, and the first knock at the door is, "How am I going to get my hands on some more money that somebody can give us to continue with the training of apprentices?"

We end up, as well, with situations where, inevitably, if there is a receivership or a closure of a company, then a request is made to the training organisations, the trade unions and, on some occasions, the Engineering Employers Federation, to see whether we can actually fix these people up with the continuation of their apprenticeships. The last thing that we would want to happen is for an apprenticeship to start, and then to be blown out two or three years down the line. We should do everything that can possibly be done to retain people in an apprenticeship, to ensure they get something at the end of it. A qualification is so vitally important, not just to us as a trade union, but to the whole region.

 

Q41 Chairman: This question is an offshoot of that. In your day and my day, my first employment was Joseph Lucas. You were absolutely right-we had a training school. We were very focussed on the way in which we delivered. We regulated very clearly how we delivered-I thought-in a brilliant way. Do you think we need more regulation now, or is it feasible that good apprenticeships and flexibility, responding to specific industrial or commercial requirements, will be the way forward?

Davey Hall: There is a need to assess the companies that we are currently dealing with, as companies come to the North-East, if some of them need specific training on a specific area that necessitates-dare I say it?-a reduced apprenticeship term, for instance. In my day as well, there was a five-year apprenticeship, reduced to a four-year apprenticeship, and in some instances, it has become a mature apprenticeship for two years. You sometimes question whether another two-year period is sufficient to bring somebody through to give them the necessary skills and abilities that will take them into the real world. The downside is that training specifically for one employer leads to one employment. A broader view of apprenticeships in a bigger and wider field gives an individual the opportunity to plant their skills elsewhere.

Chairman: That is good. Gill, are you okay with that?

Gill Hale: On the skills issue, we talked earlier on about the public sector. Obviously, the public sector is going through some tough times as well, and a lot of training that happens in the public sector spills over into the rest of the economy. There is just a worry that that training element will go as part of the general cuts and efficiencies that we will face in the future. The plea is that this is really important because of the large part of the work force-the one in three-who work there, in terms of the wider economy.

Chairman: I think that we take that on board. It is a very valuable point. We are going to move on very swiftly.

 

Q42Phil Wilson: Lord Mandelson's statement on industrial activism came out a few months ago. Do you accept it? Is it a good idea? What exactly does it mean for trade unions in the north-east?

Kevin Rowan: The TUC very much welcomed it; it is almost cut-and-paste TUC policy recommendations. This is not a new argument for us. We have suggested that the Government could and should have been much more interventionist in its industrial policy since 1997 and before. The question for us is how it is applied; moving forward, we see significant opportunities in key sectors that are sustainable and likely to offer good numbers of high-quality jobs in this region. We are anxious to make sure that all other colleagues, including central Government, play their full role in making sure that the region maximises the opportunity. That is the kind of language that we use when we talk about industrial activism. It is about making sure that government at all levels intervenes in a coherent and meaningful way to develop sustainable economic and industrial bases around the regions. That needs to be done, we might add from a regional perspective, in a regionally sensitive way. It is about managing a national policy through a coherent local, regional and national intervention approach.

 

Q43 Chairman: To what extent is the RDA going to take the central role here in persuading everybody to fall in behind those very valuable words?

Kevin Rowan: We very much welcome the key role that the RDA has had in co-ordinating all of those different dynamic actors. There are important roles at different levels. It is important that local authorities get their planning regimes lined up to support industrial activism. We do not know that that has always been the case.

It is also important that the RDA does not just look inwards to the region, but that it also looks at central Government and says, "Hang on. There are some things that you can do to make sure we are maximising opportunities at local and regional level." The RDA is a crucial point in the process in that it can co-ordinate those local actors in an effective way. It is a difficult job. We have not seen the best evidence of all the local authorities in the region working collectively or even sub-regionally. Although we have seen progress in that area, we want to accelerate it. Equally, the RDA can be one of the voices, as this Committee can, into central Government to make sure that they are acting in a way that supports regional developments.

 

Q44 Chairman: Gill, is that going to be the RDA's mission?

Gill Hale: I should hope so. It is not for me to say, as a board member, what the mission is, but there is a real commitment on the RDA to that strategic co-ordinating role.

Kevin Rowan: There are particular examples where we would want to exercise that role. When you look at the opportunities that are coming in terms of the offshore wind developments, you will see that the potential for the region is significant. We have got a mixture of support at different levels.

I certainly think the RDA has got its act together by developing NaREC, as it did a few years ago. It was absolutely crucial for, and far-sighted of, the agency to support that, underpinned by the science, industry and innovation strategy in the region. We need to make sure that the opportunities that are afforded nationally in terms of the development around Crown estates and the offshore wind farm licensing process, support not just developing wind farms but economic activity, employment and manufacturing, as it has in other countries.

Gill Hale: I was going to make a point about prioritisation and how, in difficult circumstances, the RDA has had to prioritise.

Julie Elliott: One thing the RDA has done is that has always been looking ahead for opportunities, knowing that our industrial base and everything is changing-you can see the difference between this time and last time, when the RDA was not there. As Kevin said, the development at Blyth of the research and testing facility was very foresighted, knowing what was coming in down the line, when some of our traditional jobs and other jobs would be going away. It is about having that foresight, and the agency has acted in a very strategic way and has helped enormously.

As Kevin said, there is another problem around planning, where I do not think we have got our act together properly and have made the process a little bit more difficult.

 

Q45 Mr. Murphy: What more can the Government do to support this move from research and development into manufacture, particularly with turbines?

Julie Elliott: The capacity for developing the industry in this area is enormous, because although we have skills shortages, we also have a skills base. Many of our skilled people would come back and work on these things-they are in employment, but not in the north-east, and they would far rather be here. The Government can help in supporting, as I said, more streamlined planning and by stepping in on things like that both regionally and nationally. When jobs are procured and licensed, the Government can specifically state in the licensing agreement that they want the supply of the component parts to be used to build the turbines and whatever else to come from the area. They can also state a requirement for the training of a number of apprentices. So it is in those areas that the Government can get involved and help, and that can make the difference to the estimates of jobs being created. At the lowest level, the estimate is about 2,000 to 2,500, and at the highest level, if all these things are done, we could be up to 15,000 or 16,000 jobs. So it can make a dramatic impact on the economy of this region.

 

Q46 Mr. Murphy: Do you see any of that happening now, on the ground?

Julie Elliott: I think that it can happen if the will is there. Particularly, with the start of the process on the Tyne, we have a fantastic opportunity to take advantage of this, of having a green energy supply capacity on the river, because the work force, existing skills base and industrial base are already there. Rather than new companies coming in, the ones already there can adapt what they do to create these things, which are not massively different to the things that have been done in the past.

Also, there is the proximity to the market; the sea wind farms need to be taken offshore, and next to the river is exactly how they do that. There is a history of adaptability. We have done rigs and all that kind of thing in the past; people know how to do it here. Transporting these types of thing by road is complex and logistically not possible here. So it is a fantastic opportunity, but we have to take advantage of it. If we miss that opportunity, somebody else will take advantage of it, not necessarily in this country-more possibly abroad.

Davey Hall: It has correctly been pointed out that there is an available skills base here in the north-east. At the current time, if you go across the Barras to Scotland, you will get people saying, "Hello, Davey," or "Hello, Tommy." These are workers who I have linked up with for many years. They are not working just around this country, but in different parts of the world. Giving them the opportunity to come back on a good rate of pay and with good terms and conditions of employment would really set the scene. One element to remember is that we also have the facilities readily available to provide for manufacturing. That also means a lot of work, such as add-on factors that have to be built into it in engineering, shipping and tonnage capabilities. There are opportunities for thousands of additional jobs.

 

Q47 Mr. Murphy: Why are we not building them now then, if that is the case?

Davey Hall: Somebody needs to give some direction and a little bit of assistance. I think that sums it up. I was just having a discussion, prior to entering here, about how we heard two weeks ago that the only wind turbine manufacturer in the Isle of Wight has wrapped up. It could not make it. It is in receivership. But there is a need for them. Everybody is saying that we need to go green, but we are closing the green places and not opening something up as an alternative. We believe that there is a great opportunity here for the people in the north east to take advantage of it.

 

Q48 Chairman: We were hearing that we can do the analysis very well, but that we are not good at limiting our range of options by defining the priority. Are you saying that we need to get from the Government and through the RDA clear priorities that we follow, so that we can deliver those products?

Davey Hall: The priority that we would be looking for would be to make sure that there is an enhancement to the north-east that is going to provide benefits to the people here: finances, income and decent jobs. If that is what it means to prioritise to make sure that we are in the frame, that is what we have to do.

Julie Elliott: It is a long-term thing. This is looking ahead. It is not something that is going to come in and be here for five minutes. It is looking to the long-term stability of the industrial base.

Chairman: I'm not sure whether you answered my question.

Davey Hall: I probably didn't.

 

Q49 Chairman: The question is: is it wind farms? Is it bioethanol? Is it biofuels? Where should the Government be focusing so that we have a long-term delivery but a short-term commitment?

Davey Hall: I'm not sitting on that side of the table, Dari, so I can't make a determination of what the MPs or the Government actually do. If there are opportunities for us to have the bios, the wind farms, shipbuilding, engineering and manufacturing here, let's leave it open. I'm not going to say that we can go from one specific, defined manufacturing base-or any kind of industrial base-as it is now so wide in comparison with what it used to be. The finance sector, for instance, is probably one of the biggest sectors that we have in the northern region, so it cannot be defined down to one specific factor.

Kevin Rowan: If your question is about how we prioritise and what the role of the development agency is, that is an important point. One of the things that the agency can and has done well is analyse the strengths of the region, understand with a bit of far sight about where future economic and sustainable industrial growth will be and try to effect investment in that area. It is not only about Government investment; it is about private sector investment. One of the encouraging things about the wind power opportunities is that we are seeing all the main private sector players in this area sniffing around north Tyneside and looking at this as a real opportunity. If it can, the role for the agency is to try, with the national Government, to take out some of the risk for those major multinational corporate investors who want to get a main foothold on that. It should try to ensure that the opportunity is maximised through its influence on procurement policy when issuing a licence to the wind farms and by developing the supply chains as effectively as possible, as that is where the bulk of the jobs are.

Chairman: That is valuable.

Gill Hale: I know that we have talked about transferable skills, but this is also about aligning skills development to fit in with that need, so that we are at the cutting edge and the supply of skilled people is there. If we get a gap, there is a problem.

Chairman: David, you have asked about skills, so I think we can move on. Sharon is going to look at some of the financial constraints that are a questionable fact in the northern region.

 

Q50 Mrs. Hodgson: With the panel from which we took evidence earlier, we went into a lot of detail about enterprise, the finance initiative scheme-or whatever it is called-and the constraints on business from the banking sector in the current economic downturn. You received evidence from the TUC regarding the financial constraints on the development of the renewables sector. Perhaps you could say what more the Government should be doing to ensure that those constraints no longer exist. Perhaps you want to touch on what you have picked up from your members about financial constraints on business.

Kevin Rowan: There are probably two or three broad points to make, although this is not our main area of expertise. The first point is that the region has traditionally and consistently attracted much less private sector investment than anywhere else in the country, whether that is through big investment projects, venture capital or other aspects of capital. That has been a significant challenge for us. We suggest that the RDA has done quite well in responding to that situation by creatively trying to lever in private sector investment through public sector support. Various models of access to finance that have been initiated by the RDA have improved the rate of access to finance in the region at different levels of business. I do not have a handle on the information, but I think that there has been relative success in terms of increasing business access to finance. That is something for which we should congratulate the RDA. However, notwithstanding those interventions, as a region, we still do not attract as much capital investment as we can, nor as much as the region should relatively speaking.

The second point is about R and D investment, because the region's share of that resource is absolutely woeful, and has been so consistently. Perhaps that is something that needs a good deal more response from regional and central Government, particularly when you look at the scale of our public sector employment that we have in the region; public sector R and D investment is outside of the region. There seems to be a bit of a mismatch in terms of R and D investment to our industrial base. Specifically, I think, a few years ago, Davey and the GMB and ourselves were arguing around MOD research spending. We do pretty well in the region in terms of MOD contracts, but we do not get our share of the R and D money, and all the evidence would suggest that there are long-term industrial benefits to having that kind of R and D base in the region. So finance is another element of it.

I think that the other link to industrial progression is around the role of finance, particularly public sector finance, in taking some of the risk out of private sector investment and trying to use that as a way of encouraging the private sector to invest in major projects here. If you talk to Clipper, for instance-one of the potential investors in offshore wind-one of things that they say would make their investment more likely is if there is a direct link in terms of public procurement, which arguably is a finance element to the licensing of the wind farms and the investment that companies make to supply the windmills for those wind farms. To follow on from Davey's point, the factory is closing on the Isle of Wight, and at the same time, they are going to announce a licence for the Thames Estuary for 100 windmills that will be imported; it seems the lack of joined-upness is almost comical, but it is not funny because people are losing their jobs on the back of it.

Davey Hall: Sticking with the finance side of things, in January 2009, the Enterprise Finance Guarantee scheme replaced the now suspended Small Firms Loan Guarantee scheme. The scheme provides a guarantee on individual loans of up to £1 million to viable businesses within the annual turnover of up to £25 million. In March this year, a survey was conducted of 250 UK companies-conducted by the British Chambers of Commerce-and it found that 90% of respondents had no idea that the banks offered the scheme. This is important as well. If there are schemes available, and financial terms, someone has to be aware that they are available, how they are available and how they can be accessed.

Gill Hale: And when people were asking the banks, the banks didn't know.

Julie Elliott: You asked about members' experiences, anecdotally. Companies have both found that the banks that they go to don't know about what's available, and when they hear about it in the newspapers, they don't know how they are supposed to access these things, so I think there has been a little bit of a breakdown between the Government announcing things that, if they are working, will be very helpful, and how that is working in practice, in disseminating the information to both businesses and other people.

Mrs. Hodgson: That totally backs up what we just heard from the previous witnesses, from the North East Chamber of Commerce and the Federation of Small Businesses. The banks just were not ready at all. It was almost like it had been pre-announced before the banks even had got off the starting blocks. They did not have the application forms, and nobody knew anything about it. I think that the Government, in trying to do the right thing, and trying to get that money out there, just failed with regard to joining it all up, and government does move very slowly, so it has been interesting to hear what you have got to say, because it totally backs up what we have heard.

 

Q51 Chairman: We would be interested-Sharon has said it, and you have said it quite clearly, but we would actually also like to hear from your knowledge of companies-in whether banks are persisting with this sense of being risk-averse.

Julie Elliott: Absolutely. I think that banks have been very risk-averse. When dealing with companies-without naming companies-that have very good track records and very good finances, the decisions that they have made in not supporting projects have been really quite outrageous at times. I am not talking about small companies with no track record, but about very large companies employing lots of people that operate million-pound contracts regularly and for a long time. They just pull the plug on the money, and things cannot move forward. That has caused us massive problems, and a lot of jobs have gone in those places. Those jobs do not always appear in statistics due to the nature of contracts. They often involve agency workers or contract workers. They are often not direct employees, so they are missing from the statistics, but it is a big problem.

 

Q52 Chairman: You have done brilliantly. You have gone through our 15 questions and added considerably to this afternoon's information. Kevin, I don't know who wrote the TUC memorandum, but it is excellent. Was it a young woman?

Kevin Rowan: Not that young, to be fair.

Chairman: There we go again. Behind every man who is getting the big bucks and the high status is a brilliant woman. Dear me.

Kevin Rowan: I am sure those comments are very much appreciated.

 

Q53 Chairman: It was an excellent briefing. I enjoyed reading it. It has added considerably to my knowledge and structured it. Is there anything else that you would like to say to us? This is not a closed-door meeting or a one-off. We are doing industry and innovation. We are enthusiastic about innovation, manufacturing, the automotive industry, the chemical process, offshore wind farms and so on.

Davey Hall: There is one thing that I would like to raise. It probably stems from what we have seen in the media in recent months and has to do with imported labour being brought in to work on certain contracts. If there is an opportunity for the north-east to be associated with what are classified as pan-European contracts, which must inevitably be extended to Europe, there must be real involvement with the trade unions and discussions with anyone involved. That is actually happening now at Hatfield in relation to the power station that is being built.

The last thing that we want to see, in trade union terms, is a dispute. Total was not a nice scenario. We are hoping to provide some kind of input, but inevitably, it boils down to what the contract states. We believe that the contract should state that where local labour is available and accessible and has the necessary skills, local people should be given the opportunity to work on it. If it is necessary to incorporate other people where this region or this country does not have the necessary skills and labour must be taken abroad, that is an understandable factor, but doing anything otherwise will end up in a problem. The last thing that we want to happen is to receive some kind of contract-I am really not sure; this is hypothetical and futuristic-and for it to end in a scenario like that. I just wanted to say that contracts are important, and the wording in them is important as well.

Chairman: That is excellent, and it is a valuable point on which to end. Thank you very much. We are very appreciative.

 

Examination of Witnesses

 

Witnesses: Craig Iley, Regional Director North East, Alliance and Leicester Commercial Bank, Simon Lenney, Commercial Director, North East Commercial Bank Team, Barclays, Amanda Shepherd, Head of Local Business Banking-North East Region, Barclays, and Mark Vines, Regional Commercial Director, North East, HSBC, gave evidence.

 

Chairman: May I thank the next group of witnesses for coming here? We are very grateful to you. We have been given a number of briefing papers, and they are very valuable. We appreciate that. Our job is to see how and in what way innovation in industry is an absolute, or can be made more of an absolute in the northern region. We have a clear focus; we want to consider how and in what way the RDA is working. Is it functioning? Is it spending money wisely? Is value added?

We are considering a Government agency, but inevitably you are absolutely critical, to innovation. You will invest or choose not to invest. Your words to us this afternoon will probably be a starter for 10, to be straight with you, in us understanding where you are, and where you are not in terms of innovation. Time seems to have gone so quickly this afternoon that I have not asked which of my colleagues is to start, but I assume that Dave Anderson might want to start with the first question, which is about your assessment of the northern region.

 

Q54 Mr. Anderson: Good afternoon, folks. Would you say what you think is the state of the north-east economy at the moment?

Simon Lenney: For the record, my name is Simon Lenney and I am the corporate director for Barclays bank in the north-east. I look after the small and medium-sized enterprises market with a turnover of £1 million and above, with other members of my team taking up to 40 to 50 businesses.

As far as the north-east is concerned, the economy is experiencing very tough and challenging conditions. There was a weakness in the opening quarter of 2009 and we certainly expect to see production fall by around 9 per cent. this year. We remain fully committed to the north-east, which is a very important region for the bank. We are there to support our existing customer base, which is experiencing some very difficult issues at this point in time. One of the main issues at present is that a lot of the customer base, particularly in manufacturing, is making some very reluctant cost savings by way of labour reduction, and is not actually sure if the cut is deep enough at this point in time. The one word that I would wrap around everything is "confidence", because there really is a lack of confidence in the marketplace.

Chairman: That is valuable. Again, your words are not surprising. I think it is going to take us a couple more years. Slowly but surely, you can see the confidence getting better.

Simon Lenney: The decline is slowing, which is very encouraging. The manufacturing sector is certainly beginning to experience that, and de-stocking is actually playing a part now. People have de-stocked and you would hope that production will impact on orders going forward.

 

Q55 Mr. Murphy: Does the bank suffer from a lack of confidence in the region?

Simon Lenney: Absolutely not. The banking sector-I speak on behalf of Barclays, as everybody else will get an opportunity to speak, too-has every commitment to this region. The sector has a customer base that it has supported over the past 10 to 15 years, and it will continue to support it very strongly. A good experience, we find, is that our customers are going through a completely different experience at the moment from where they were maybe 12 to 24 months ago. That demands a different skill set from within their existing labour force, as well as from the owners of the businesses themselves.

 

Q56 Mr. Murphy: But is your attitude to some of the businesses affecting their confidence?

Simon Lenney: We have given a significant amount of support to the businesses. I watched your initial session with CBI and the North-East Chamber of Commerce, and I think it was Tony Sarginson who said that the businesses are having to change very quickly and are having a lot of pressure put on them, both by their work force and externally. I think that they are now getting the right support from their banks. We have had to change our credit policy to match the existing circumstances, and we are asking a bit more of the customer. We are trying to engage with the professional community and its advisers to ensure that they have the ability to deliver that information to us, and we can get them that decision.

 

Q57 Mr. Murphy: We have a lot of anecdotal evidence that you are asking much more of the customer than you did previously. Established businesses that have a good track record and order book are coming under financial pressure from your organisation.

Simon Lenney: We are asking for a lot more information from our customers, which we probably should have asked for over the past two or three years. They should have been in a position to deliver that information as well. There is a mutual skill set here where the actual businesses should be producing regular information, but are not, and I am working very closely with Business Link, Business and Enterprise North East, Alastair McColl and other banking colleagues to put packages together that explain to the customer what we are now looking for, particularly around the small and medium-sized enterprise market.

 

Q58 Mr. Murphy: So you genuinely don't feel that the banking sector in general is making the current economic situation worse in relation to businesses being able to invest and continue trading?

Simon Lenney: I don't think we are making it worse. I genuinely think we are there and being very supportive.

 

Q59 Phil Wilson: One issue for the region is investment in new industries, innovation, science and new technologies, but, of course, some investment might not show a return in the short term. Studies by the Innovation, Universities, Science and Skills Committee pointed out a problem in the private sector and banks-not just now in this global recession, but in general. Small companies might need to go to the City or to banks for loans, in the range of £200,000-not very big money-because they have new ideas, but need the money to invest. However, according to the Committee, banks want very quick returns on their investments and are risk averse when investing for the long-term. How would you counter that? Is that rubbish?

Simon Lenney: I would counter it on the basis that investment in innovation has always been a long-term plan and requires capital, not just debt. The capital markets are experiencing difficulties at a much higher level and therefore the level of investment on major projects has fallen away as well. The principle is just the same. The longer-term investment requires equity, and the banks are there to provide working capital and term debt, but over a period, so that the business is viable and can repay the bank. There are stakeholders to go back to as well.

 

Q60 Phil Wilson: So you would not say that the banks are risk averse towards companies with new ideas in innovation and science? You have to look at it as a whole. You cannot just give them some money. Do you not agree with what the Select Committee have said about risk aversion among private banks?

Simon Lenney: We are working in a different environment now. We will always look more closely at a business and its ability to remain viable going forward. The opportunity to develop new projects and innovation should be balanced with an element of bank debt and, as I said earlier, with a greater element of capital and equity. That is where I believe that the RDA should be involved. We have already seen BERR picking this up. We have worked very closely with it and Lord Mandelson around the Enterprise Finance Guarantee scheme. I am sure that we will come on to that. However, more equity investment needs to be available in the market, given banks' capital restraint. We should bear in mind what the banks have just been through. Nobody wants the banks to get in that state over the next four or five years again. We do not want this situation repeated.

Chairman: Mark, Craig, Amanda, do you want to add to that?

Craig Iley: Simon is right. I think that we need to make a distinction between what a bank is there to do-provide liquidity and term funding-and where a business needs capital or equity.

 

Q61 Chairman: We have seen how renewables are developing and will continue to develop. This is certainly the case on the Tees. Invariably, research is done and a product developed that people think could get to market, but they cannot get the money to get the product up and running and to market. The research is there, but there is that gap in the middle.

Craig Iley: I think you're right. The guys at Renew-John Barton and his team-and Graham Hiller and others are doing a lot of work on grading between what is an idea and what effectively is market-ready technology. Let us consider getting to the point when something is proven technology and really you only have a scaling issue, which you had with the large autoclave being developed near the Metro centre. I think that you will find people willing to fund that. In fact, I can confirm that we have been willing to be involved in projects at that stage. In terms of the other renewables, it again depends on whether the technology is proven. If you look at proposals such as the 300 MW biomass power plant on Teesside, I think biomass technology is proven in terms of power generation. It is not so easy to make the call of where the technology currently sits with pyrolysis and gasification.

 

Q62 Chairman: How could Government help? Invariably we can see that the research side is brilliant. We understand that we or industry have put money in and that the R and D works very well but the product delivery is still lagging. Invariably it goes to America-80% of anything we get near to product design and delivery goes to America. The Americans do it and then we buy it back from them. It is crazy nonsense.

Craig Iley: If we are talking about equity, which is effectively what you are talking about, one interesting thing that may come out of the current financial crisis is that you will see-you are seeing-new forms of financing emerge. When I was at BERR in November last year I was asked whether there was a requirement for some kind of small equity fund. I would say yes there is. We did actually have that in 3i but of course 3i's history has moved on since then. Perhaps it is not a case of new things but of bringing back some of the older things that we had available to us.

Mark Vines: It is not just seedcorn; it is stage one and stage two development as well. The cash burn of some of these new businesses is often a lot longer and more than you would expect.

Chairman: Absolutely. That is not always easy to determine.

That was very valuable. I will ask my colleague, Sharon, to come in on the next question.

 

Q63 Mrs. Hodgson: Talking about access to credit, you might have heard the evidence from the Federation of Small Businesses and the North-East Chamber of Commerce, in which they said it is harder to access credit. In particular, the FSB said the fees have increased by 25% and that trade credit terms were a lot worse. The CBI said that some of the terms being offered were becoming almost prohibitive. Have the criteria for accessing credit changed and how much has the availability of credit within your own bank changed?

Craig Iley: Speaking for Alliance and Leicester Commercial Bank I do not think there has been any change in the availability of funding. We are relatively small at the moment. We are not one of the big four players that have dominated the market for decades. We are more what you would call an insurgent brand. During 2008, we doubled the amount of lending that we had previously done in this region. We are hoping to double it again this year. Certainly, in the first five months of this year, we handled three times more applications than in the same period last year. Our approval rate is running at 70%. I would suggest that three out of four is good in any environment. In the current difficult and challenging environment, I would suggest that it supports the fact that funding is available for good viable businesses.

 

Q64 Mr. Murphy: Are these people you are now funding making their first application to you? Have they been turned down anywhere else?

Craig Iley: It depends on what type of business it is and how big. You have to understand that, particularly at the moment, people will very often approach more than one funder. We often find ourselves in competition with one another for winning deals. It really depends. Sometimes they come to us first; sometimes they will go to one of our counterparts here first; sometimes we will be quoting against each other.

 

Q65 Mr. Murphy: Would you say that your rates are significantly better than the opposition's?

Craig Iley: I would like to think so. We have fixed-cost funds in the same way as the other banks do, but I like to think that we can provide very good value products and services-indeed we do so across the board. If you move from the funding side to the cost of banking side, for example, below the £1 million mark, we have a free business current account that has won the award for the best business account for the past seven years from the independent body, Moneyfacts. Above that level, we are typically 35% cheaper than the big four banks.

 

Q66 Mrs. Hodgson: So what about Barclays and HSBC? Why would the FSB say that fees have increased by 25%? Do you have an answer to that?

Amanda Shepherd: You first asked whether we were open for business, and Barclays is very well capitalised-we are open for business to all businesses with a viable proposition. Lending in the north-east for us this year was at about 8%, which indicates that we are open for business, and we very much want to promote that fact. As Simon implied, we are trying to get a message out to our customers to let them know that we want to lend to them at this point. Barclays made a commitment at the end of last year to increase our lending book from £15 billion to £16.5 billion. In April, we came out and said that we would increase that by a further £4 billion. We are committed to lending

Mark Vines: At HSBC, we are very strongly capitalised, massively liquid and very much open for business. Our lending balances last year went up 7%. On that 7% against the SME segment, we were higher in the corporate and structured finance segment. On your point about fees, I have some figures here; we attracted 34,000 bank accounts from businesses to us last year, which is a 36% increase in the number of accounts switching to HSBC.

 

Q67 Mr. Murphy: Is that regionally or nationally?

Mark Vines: That is nationally.

 

Q68 Mr. Murphy: What proportion of the lending comes into the region?

Mark Vines: The regional figures are no different from the national figures.

 

Q69 Mr. Murphy: What proportion of the national lending does the region get? Is it 10%? Is it 5%?

Mark Vines: I haven't got the figures to hand and it depends how you define the region. I'm not sure, but I can find out and come back to you.

Chairman: That would be very valuable.

 

Q70 Mrs. Hodgson: May I press you again on the lending criteria for credit worthiness? Has that changed at all?

Amanda Shepherd: With regards to credit worthiness, we are going to do more due diligence to ensure that the customer is in a position to repay any funds that they borrow from Barclays. That is not only important to us as a bank but important to the customer. We have a responsibility to the customer and our shareholder. The fees that we would charge a customer are based on the higher the risk, the higher the charge and the lower the risk, the lower the charge. We feel that that is a very fair approach.

 

Q71 Mrs. Hodgson: So, are you assessing them as being a higher risk in the current climate and that is why the fees are going up? I am sure that the FSB would not have said that the fees have gone up by 25% without evidence. I am not saying that it is necessarily Barclays or any of the banks here, but we have a snapshot of the region's banks.

Amanda Shepherd: When I say, "the higher the risk" it is not about the current climate, it is purely about looking at the business individually and at the circumstances of that business at that point in time. There are some really good businesses trading very well through this particular period, so it would be wrong to say that because of the current climate every business is being charged a higher rate. That is absolutely not true.

 

Q72 Chairman: May I take it on a bit further? We had a very serious discussion with our first group in particular, but less so with the second group, on the Enterprise Finance Guarantee scheme. We found the information that we received shocking. I do not think that a blame culture is where we are. We read that 10% of the respondents to a survey organised by the Federation of Small Businesses in January 2009 said that the Government's EFGS was available from the banks and 25% said that it was not, and you think, "Where are we here?" You are right to say that Government have a serious responsibility. For me that means the RDA, because it is the agent in the region. How on earth are we not getting our communications right? We have got one group of businesses thinking one thing, another something else, and a vast number-the majority-making no comment whatsoever. Is the EFGS problematic for you?

Craig Iley: Could I just ask you when that was undertaken?

Chairman: January 2009.

Craig Iley: We didn't become members until 6 March 2009.

 

Q73 Chairman: It is really important for us to get the sense of what you are saying. Is it the case that Government made that available, or stated the policy, but didn't actually ensure that it was available to the banks until four or two months later? Is there a problem here?

Craig Iley: It is possible that the announcement, which I am sure was well intentioned and designed to improve confidence, perhaps pre-dated a full rollout with all the banks. We didn't join that scheme until 6 March, but I don't know about our counterparts.

Amanda Shepherd: We joined from the very beginning. Regarding the EFGS, it is a remedy and it is certainly serving a purpose. You heard earlier, from a few people from the Chambers of Commerce, that part of it was around the communication.

 

Q74 Chairman: And you would agree with that, Amanda?

Amanda Shepherd: I would have to agree that in the early stages the communication came out and we then went through a period where it prepared and trained our people to make sure that they were fit to support our customers. Equally, from a customer perspective, there was a misinterpretation that this could have been a grant, rather than support for their business through a form of debt.

 

Q75 Chairman: It is important for us to say that when something is being said it should be said as clearly as possible, with less ambivalence, about what is actually available. Do you think you too have a responsibility, because you are handling the interpretation of whatever the regulation is? Is there a side where you think you could have done better?

Amanda Shepherd: Early on, it is important that we get the messages out to our people very quickly, because once you have customers coming in and inquiring it is important that we know the facts. Following that, we made sure that every single local business manager in the north-east was trained and understood the product and also that we took that communication to our front-line branch managers so that they were also aware. So, realistically, when anybody comes into Barclays now, there is somebody who has some sort of awareness of what the EFGS will do to help businesses.

 

Q76 Chairman: You are quite right; it is very valuable support finance. Did you at any stage say, "Right we are going to have the RDA in here. We want to make sure that we have got this right and that we know exactly how to access it"? Or was it just through written communication?

Amanda Shepherd: I will let Simon take that one, because he has been doing some work with the RDA.

Simon Lenney: We worked very closely. I attended a meeting at the Government office just before Christmas. Out of that came the first bankers meeting in January hosted by Alan Clarke and Margaret Fay. All the banks were represented at that point and the common theme throughout was the lack of communication and understanding of the small print. It was announced very quickly, for absolutely the right reasons, but the message did not filter through quickly enough. I think we would all say that the infrastructure within the banks is pretty good, but took a while to sink in. The process is very streamlined now. I believe there was a Select Committee hearing on Wednesday, and I have read the transcript. There were some very positive thoughts coming out of that indicating that, in fact, we are getting it right now, but the RDA played a fundamental part in helping that through as well.

Chairman: You just think to yourself, it can't take us four months to do this correctly.

Simon Lenney: If you think back to when the small firms loan was launched, that took nine months, so we have actually launched it far faster, in an environment deteriorating far faster, and we are right in business with it as well.

 

Q77 Chairman: Mark and Craig, are you rolling with the statements that have been made?

Craig Iley: As Simon said, the various schemes that have been launched by the Government in this economic environment have all been done with the best of intentions. The key has been maintaining confidence. Our biggest enemy, particularly in the business community, is confidence. It can have such a large impact-for better or for worse. Whether it could have been done differently in different circumstances-and perhaps it would have been-we have to accept that it was done with the best of intentions to maintain confidence.

 

Q78 Chairman: Would you take us one stage further-we are nearly there? Is there a demand for loans in the north-east region equivalent to the rest of the country? Are we lagging behind? Are we ahead?

Mark Vines: From HSBC's perspective we are seeing no difference. In the north-east, we are in line with the national trend.

Craig Iley: We are ahead of the national trend, but we are further advanced in our expansion strategy than we are in some other parts of the country.

 

Q79 Chairman: Barclays too?

Simon Lenney: Yes, it follows the national trend.

 

Q80 Chairman: Finally, have you streamlined all the processes that are used when a loan has been requested? Do you have a smart, focussed process?

Amanda Shepherd: Provided that we receive all the details from the customer, we are able to give a decision within 48 hours. We have streamlined our processes, so hopefully we shall be able to move from 22 days to drawdown to 16 days. We have worked hard to do that.

Mark Vines: We are also comfortable with our processes.

Craig Iley: The other thing to bear in mind with getting down to the drawdown stage is that we are not the only people in the chain, particularly if there is legal work involved, but we are comfortable that we can get money out the door quickly.

 

Q81 Chairman: That is valuable. We haven't spoken about the Working Capital scheme. Do you participate in that?

Craig Iley: We don't. The reason that we don't participate is that the Working Capital scheme was designed to help banks free up their own capital, and we didn't have the liquidity issues that it was designed to address.

 

Q82 Chairman: I don't think Barclays did either. Did you?

Simon Lenney: No.

Mark Vines: HSBC didn't either. We launched our £1 billion SME working capital fund as well-I think that Lord Mandelson and the Chancellor were pleased with that.

 

Q83 Chairman: We want you to see a keenness from us to understand where you are. We are equally keen that you should see that we are determined to say that we will innovate where currently we do not, and we need you on board with us. We need you to tell us about your footprints. We want to have a positive and robust relationship with you. We are keen to see the development of the renewable sector-carbon capture-as it is probably the north-east's future. If it is the north-east's future in terms of work, then it is the North-East's future in terms of banking. We would be keen to receive any further information that you have on renewables. I was grateful to receive information from Barclays. I didn't receive anything from HSBC, did I?

Mark Vines: I don't think so, but we have a lot of information, and we have a global programme on renewables and sustainability.

Craig Iley: We would be more than happy to send you more information about that. We are working with a number of people on Teesside, many of whom you will know-Peter Ellis was one of the founders of the Eco-Park in Redcar and Cleveland.

 

Q84 Mr. Anderson: In the discussion that we had with colleagues from business earlier, they we were saying-particularly about the development of carbon capture and storage-that they did not think that there was finance in this region to facilitate that. What is your view on that? If that is true, what do we do? Some of us are committed to making sure that it happens here-we have natural resources that nobody else has.

Simon Lenney: Carbon capture and storage is an embryonic process, which by definition dictates the need for capital, and that goes back to what we are saying before about the long-term need for investment. Fossil fuel power and labour must come to the fore. Denis, you mentioned in the first session that the Government won't allow another coal burner without capture and storage facilities. Finance, I believe, will have to come from the private sector as well as Government, but it will also come from the utilities that will benefit from it. Essentially, they will put themselves in a better position, with a cleaner footprint, if they deliver on further investment in the process. You could ask where the banks want to sit on that. The utilities will obtain all sorts of funding, and no doubt there will be some bank funding on the back of that as well, but essentially it must come through the utilities.

Craig Iley: The only thing I would add is that I think the Renewables Obligation Credit scheme is very important in how it evolves going forward. I agree very much that renewables and clean energy generation are important in Teesside. We have a number of attributes down there that, quite honestly, leave the rest of the country standing. I am thinking of things like access through the port to ensure sustainability of supply and the upgrade that we had at the pylons into the grid not too many years ago, which caused a little bit of a stir. We have access to the grid. Some companies are quite advanced in getting access to the grid ready; there is quite a long lead time. On a political level, that might help the process along for energy generation. That is not something that you can sign off on locally in terms of planning; I believe that it needs to go to central Government.

Mr. Murphy: It depends how big it is.

Craig Iley: If we are designated as an eco-energy producing environment, the north-east might perhaps gain some kind of exemption, which could speed the process up. If the Renewables Obligation Credit scheme is overhauled, that is a key part of proving viability. As Simon was saying, the sooner that we get from embryonic technology to proven technology and viability, the sooner that it opens up access to all sorts of capital, from the capital markets all the way through to debt financing.

 

Q85 Mr. Anderson: It is a bit chicken and egg, isn't it? Somebody somewhere is going to start putting something in to prove the technology. What we need to know from you is whether you will be there supporting the companies.

Simon Lenney: It goes back to the viability of the business and whether its cash is well balanced. Is it a form of equity? Is it a form of long-term bank finance? If you prove viability, the banks will have a look at it.

 

Q86 Mr. Murphy: It is probably a combination of both. It is the infrastructure that is required for the individual industries that will take advantage of it. The cost of the infrastructure is the factor that is preventing it from happening at the moment. That is where a public private partnership could come together. We need to do it sooner rather than later.

Simon Lenney: It has to work really fast, doesn't it? If it isn't tested commercially, that is the stage that you have to get to before you get the funders or the equity providers involved. That has to happen fast: we are aware of that. It is very exciting. We have a project finance team down in London who know about it, but you have to get it to stage 2 before you attract the investment.

 

Q87 Mr. Murphy: The reality in the project that is currently under discussion for Blyth is that the company has said, quite reasonably, that it is just going to wait and see what happens with regards to CCS. That is a £2 billion investment in the region.

Simon Lenney: But we should not underestimate the value of renewables that the north-east attracts. Wilton 10, Yanmar, NaREC, Clipper Windpower-there are some fabulous names in there. We are known for considering and welcoming everything new.

Chairman: Absolutely. We are world leaders. You make the point that everybody is making. We have a very short time interval to capture this for the northern region. We have to get on with it. On that note, could I say thank you very much? That was really very valuable. Anything that you wish to send us we would be more than grateful to receive. Thank you.