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5.10 p.m.

Lord Cochrane of Cults: My Lords, I start by thanking my noble friend Lord Trefgarne for introducing this subject today. It is right, as said by others, that he plays an important part in the engineering training organisations. I should mention also that he is a non-executive director of an interesting SME which

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has perhaps become more large than small, as I shall relate in a moment. I refer to Siebe, a company with a history extending back 170 years. It was founded by an Austrian artillery man by the name of Augustus Siebe who came to this country in 1816. In due time he invented, among other things, a better method for making screws—a vital engineering component—but is now predominantly remembered for the invention of the first serviceable and durable method of working underwater, the traditional hard-hat diver as it later became known.

Siebe is an interesting company. For a long time, it remained quite small, describing its activities as those of submarine engineers. It remained with the descendants of Siebe for a long time and came to the market in the 1950s. I should perhaps declare an interest. I have been a shareholder fairly continuously ever since. The vicissitudes of school fees and so forth perhaps led me to reduce my shareholding; otherwise I might not feel quite so poor as I sometimes do.

Siebe is now an immense company. It has a huge turnover. The profits published today are a great improvement. It is not particularly highly geared. That has all taken place due to a change of ethos in the company and the arrival of determined and skilful managers on the board of directors. At one stage it looked as though they had slightly overdone it but in fact they got it exactly right. The results we see today illustrate how growth is possible if it is well aimed and well controlled. The traditional manufacturer is often described as a maker of "widgets". I gather that that word is now obsolete because widgets are those things which cause beer to shoot out of tins. While useful that is not quite what was originally intended.

As the last Back Bench speaker I do not want to bore your Lordships with a multitude of figures or anything else. But I shall make one or two points and reiterate what was said earlier, particularly by my noble friend Lord Caldecote, on the role of banks. In this country small businesses rely immensely—as I know personally—on bank finance. Banks get cold feet at intervals. I mentioned that the other day in another context. A bank manager was overplaying his hand; he received a rude answer from me; eventually he lost the account and lost a good many other people's accounts too. That merely shows that not all bank managers are wise. We know that, but there was a chap determined that a certain class of business within his branch was unacceptable.

The role of the banks must be continually supportive. They must support us from the word go. In order to do that they need information. In order to give them the information, as my noble friend Lord Caldecote said, we need a decent financial system. That is of prime importance. Again, it tells us whether or not we are actually making money. There was a famous case many years ago of Crittall Engineering which could not get stuff out of the factory quick enough. Yet, mysteriously, it never seemed to have more money in the bank. It was during the period of Nye Bevan's housing boom. The company made steel windows. Unfortunately, it was receiving five shillings a window less than the cost of making them; so gradually it went down and down.

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I saw something similar in my father's time with his mineral supply business. When my brother and I picked it up after his death we discovered that we were popping a 10 shilling note into every lorry-load of stuff we sold. Nobody realised that. Therefore, if one can persuade the banks to be more supportive on a continuing basis they will lose less money, feel less endangered and will not ultimately find themselves in the situation which was put to me by an experienced bank manager who said, "It is all very well having security of this factory and that factory, but they are worthless when the whole industrial estate is empty."

Another role which could be played by the banks in relation to companies is to put in a part-time, non-executive director who acts as liaison. He can say, "I do not think that that is a good idea; perhaps we should go this way rather than that way". That happened to my grandfather. The Royal Bank put him as signatory and director into a privately-owned coal company many years ago. Following the death of the head of that family, the coal company was discovered to be immensely in debt. I believe the personal guarantee of the executors was well over £7 million at the turn of the century. Through the energy of the next generation and possibly the wise guidance given by my grandfather and the bank, they all lived happily ever after, although they did have to mine under the castle gardens. I am sure that the noble Lord, Lord Ezra, appreciates the risks of mining, especially when one already has a huge bank overdraft.

I shall not continue except to say that in relation to part-time expertise in finance—picking up a point made by the noble Earl, Lord Kintore—there are plenty of retired executives with good financial experience who could be obtained to attend one day a week to keep control of a company's finances. That is particularly important when it is at the dangerous stage when, the idea having taken off, capacity needs to be expanded. The question is: more money is needed but how will it be obtained?

In a recent speech the Chancellor of the Exchequer eased the climate. But if those running small businesses think more carefully about the financial implications of what they are doing, they are more likely to prosper in the way we all want.

5.17 p.m.

Lord Ezra: My Lords, although there have been a number of debates in this House on manufacturing in recent years, the noble Lord, Lord Trefgarne, was right to introduce this debate today. Manufacturing remains a vital ingredient in the future economic development of the country. That is shown by the large number of important reports recently published on the subject. They include the Government's White Paper on competitiveness, the European Commission's White Paper on growth, competitiveness and employment, the House of Commons Trade and Industry Committee report on the competitiveness of the UK manufacturing industry, the CBI series of reports issued by the National Manufacturing Council and the report by UNICEE (the

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European equivalent of the CBI) on making Europe more competitive. All those centred on the vital role of manufacturing.

I have participated in most of the debates on manufacturing in this House over the past 10 years. I believe that the most significant development has been the changing attitude of the Government. In the 1980s the Government's attitude was that manufacturing represented only one element in the economy and it did not really matter how wealth was created so long as that was achieved. As we moved into the 1990s, however, the Government have increasingly recognised the importance of manufacturing, and they are right to do so. Fifty per cent. of consumer spending and 70 per cent. of exports of goods and related services are accounted for by manufacturing. In spite of the diminution in the industrial base, to which the noble Lord, Lord Desai, referred, there are still 4 million people employed in manufacturing with at least as many more supplying supporting services. There is therefore little doubt that manufacturing remains a crucial element in the economy.

The Government repeatedly draw our attention, and I am sure will do so again today, to the various positive signs in the economy, such as improved growth, better exports and reduced inflation. It is perfectly true that those developments have taken place. However, the impression created by the repetition of these positive developments is one of complacency. That is regrettable.

While the present indicators may be positive, the underlying trends are not. As the CBI and others have shown, we are still lagging some 20 per cent. to 40 per cent. in average levels of productivity below our principal competitors, even though there has been a narrowing of the gap in recent times. Our investment in manufacturing and related activities has been sluggish to say the least and leads to capacity restraints even at an early stage of economic recovery, such as we are beginning to witness at the present time. We have noticeably lower levels of skills than our main competitors. The noble Lord, Lord Trefgarne, and others referred to that. Finally, our inadequate capacity shows up in terms of a major trade deficit in manufactured goods, which is still running at the level of £10 billion a year, in spite of recent improvements in export performance. It is to these long-term problems, particularly the role of the smaller firms in overcoming them, that we should be addressing ourselves.

If we were asked to encapsulate in a very few words the major weakness which has developed in the British economy for several years past, I believe the answer must be lack of adequate investment, both of a physical nature and in people. Let us look for a moment at physical investment in the public sector, which is very necessary to create the conditions under which private enterprise can thrive. In spite of repeated pleas that the last thing that should be cut is investment in capital projects which are intended to provide an improved infrastructure, this seems to be the first thing the Government turn to when they wish to reduce the public sector borrowing requirement. I am afraid that we saw evidence of that in the recent Budget, when expenditure

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on transport infrastructure was cut from £10.8 billion to £8.8 billion. The main argument for doing that, according to the Chancellor, was that the private finance initiative would close the gap. All I can say is that that is by no means certain. In the meantime, industry, and in particular manufacturing industry, will go on suffering from continued congestion and delays.

Much reference has been made to the inadequacy of investment in manufacturing industry, a point made by the noble Lord, Lord Desai, the noble Viscount, Lord Caldecote, and others. One of the reasons for this inadequacy has been the uncertainty about demand caused by macro-economic volatility. We have just lived through a classic example of this, with the major stimulus to consumption in the late 1980s leading to overheating and then a massive cutback. It is no wonder, with these memories of not so long ago, that manufacturers are cautious about moving ahead too fast with investment and are insisting on high rates of return, to which the CBI, the Governor of the Bank and others have recently drawn attention, in spite of the current low level of inflation. I believe that there is a major role for the Government at the present time to try to put this right.

Of course the Government must continue to take the necessary measures—we saw one of them today—to keep inflation under control. But in addition—this is what is lacking so far—they must take complementary measures to stimulate investment. In this connection, I share with the noble Viscount, Lord Caldecote, the regret that the Government did not follow the advice of the CBI, the Engineering Employers Federation and many others in introducing fiscal measures in the recent Budget to stimulate investment. One of the measures proposed, as the noble Viscount pointed out, was for a 100 per cent. capital allowance on the first £200,000 of investment in any one year. That would have been particularly helpful to small firms.

As many other speakers have emphasised in the debate today, small firms play a crucial role in the economy. Within manufacturing industry almost a third of employment and a quarter of output are accounted for by such firms. Access to finance and the cost of finance are crucial elements in their success. In addition to capital allowances directed at small firms, to which I have referred, there is a strong case for considering an investment bank on lines which have existed for many years in France and Germany, and which are now being looked at in many quarters, to offer debt finance to small firms on terms which are at the very least no worse than those obtainable by larger firms. To get bank money these days small firms have to pay 3, 4, 5 or 6 per cent. above bank rate, whereas a large firm, with all its connections and its ability to go anywhere in the world to raise its money, can usually achieve a rate of between 1 and 2 per cent. That is a big impediment to the small firm.

What is required is a long-term strategy for stimulating investment in essential public infrastructure and in manufacturing to offset the uncertainties which have been created by past policies. No one can be certain that those policies will be avoided in the future. The upturn through which we are now going is being

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seen in many other countries. As we noted in the recent debate on the economy, while we have done very well in containing inflation, some of our neighbours have done even better, such as France which has inflation at only 1.6 per cent.

There is a need, agreed on all sides, in addition to a stimulus to investment, for greater resources and efforts to be devoted to training. Differences in skill levels are a significant factor contributing to the UK's lower productivity compared with its main trading partners. The noble Lord, Lord Trefgarne, referred to that point in his opening speech and the noble Lord, Lord Weatherill, gave us good examples of voluntary efforts to try to deal with this matter. More than 60 per cent. of the UK's manufacturing labourforce have no vocational qualifications compared with 50 per cent. in France, 40 per cent. in Holland and 25 per cent. in Germany. The gap is most pronounced in people with intermediate skills. This is therefore the area where the greatest efforts need to be made.

The Government repeatedly state that the economy is set on a virtuous path of sustained growth with minimum inflation. Well, that has yet to be proved. The recovery in Britain has been mirrored elsewhere. The test will come when a cyclical downturn sets in. In such circumstances, will the British economy suffer less than it has in the past? If manufacturing is to thrive in spite of future possible cyclical recession, the Government will need to set a framework within which there is a consistent macro-economic policy, a point made by many noble Lords. A major impetus on a continuing basis must be given to investment in physical assets in the public and private sectors and to the development of the necessary skills to make the best use of those assets.


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