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Industrial Development (Financial Assistance) Bill

1.12 p.m.

Lord McIntosh of Haringey: My Lords, on behalf of my noble friend Lord Sainsbury, I beg to move that this Bill be now read a second time.

Section 8 of the Industrial Development Act 1982 has been a great success. It provides the legislative basis for a number of measures providing financial assistance to industry. I shall give some examples of how it has been used in a moment. But the power will run out in about a year's time, unless the ceiling of expenditure is raised. The Bill provides for that by raising the ceiling and allowing the Section 8 power to continue to be used. Since 1972, when a similar power was first introduced, more than 60 measures have been established using the Section 8 power, of which 15 are still in operation at present.

In recent years, we have increased our expenditure under Section 8, for which we make no apologies. We are using it more than the previous government, although the previous government enacted both the 1972 and 1982 Acts. We have been introducing initiatives to improve the competitiveness of the economy and to help with the consequences of industries in transition, such as coal.

Eight of the current schemes are operated by the Small Business Service, established in 2000 to meet the needs of small businesses. With the exception of the small firms loan guarantee, all of them have been introduced by this Government as part of measures to bridge the funding gap faced by small businesses. The small firms loan guarantee offers guarantees on loans to small firms with viable business proposals that cannot get conventional finance because they do not have assets to offer as security against a loan. We provide a guarantee against default, which encourages lenders to lend where they would not otherwise do so.

We have reviewed that process and extended the small firms loan guarantee on 1st April. The other Small Business Service schemes are the UK high-technology

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fund, the regional venture capital funds, the early growth funding initiative, the enterprise grant scheme, the business incubation fund and two elements of the Phoenix Fund—support for community development finance institutions and the Government's investment in a community development venture capital fund.

The scheme is also used for particular industrial sectors, notably the UK Coal Operating Aid Scheme, introduced in 2000 to help the coal industry at an especially difficult time. That scheme came to an end at the end of December and had accounted for almost 170 million by the end of the previous financial year. It did what it set out to do: it helped coal producers to stay afloat and to overcome short-term market problems. That was good news for the miners employed and for the local communities and service industries that depended on them.

We also used Section 8 last year to supplement redundancy payments to those who lost their jobs following flooding at Longannet Colliery, the last deep mine in Scotland. We are in negotiation with the European Commission about our intention to use Section 8 to support redundancy payments arising from closure of UK Coal's Selby complex.

Section 8 was also used to make payments to redundant steelworkers through the iron and steel employees readaptation benefits scheme. Most recently, we used it for the urban post office reinvention programme, to enable the Post Office to carry out its programme to restructure the urban post office network and ensure that sub-postmasters whose offices close are compensated for the loss of value of their business, and that those who stay can benefit from investment grants. That will probably account for about 210 million of the money left under the 1982 Act.

The National Assembly for Wales uses Section 8 to operate two schemes: the regional innovation grant and Assembly investment grant schemes. It funds those initiatives, but the expenditure counts towards the cumulative Section 8 limit.

The European Community is involved because, where assistance under Section 8 is regarded as state aid, it must be compatible with state aid rules. Any new scheme under Section 8 that is a state aid needs to be notified to and approved by the European Commission before it can be introduced, unless it falls within one of the bloc exemptions, when simpler notifications procedures can be adopted and the aid can be given immediately. We have told the Commission of our intention to raise the limits in the Bill.

Together, those schemes have accounted for the increase in Section 8 expenditure. Without the new limits, we would run out of money when the current limit of 2.7 billion allowed for under the 1982 Act is reached. At the end of March 2002, cumulative expenditure since 1972 was almost 2.35 billion. For the financial year 2002–03, the provisional figure is 130 million. For the current financial year, we forecast a further 208 million, and 221 million in financial year 2004–05. So we expect to reach the current limit by early next year.

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Section 8 assistance has always been subject to a statutory limit that could be raised by Commons affirmative order on up to four occasions. That dates back to the Industry Act 1972. All expenditure since then counts towards the cumulative limit. We have retained the structure of tranches in the 1982 Act, but replaced the numerical ceilings with new, higher ones, reflecting the growth of the economy since 1982.

Clause 1 replaces Section 8(5) of the 1982 Act by increasing the initial ceiling from 1.9 billion to 3.7 billion, and the subsequent four tranches from up to 200 million to up to 600 million each. Clause 2 simply gives the short title.

Limits were chosen with regard to the effect of rolling forward the existing limit of 2.7 billion in real terms, using 2.5 per cent as the proxy for the long term gross domestic product deflator for a 20-year period. That gave a ceiling of 4.5 billion and four subsequent tranches of 400 million each. We varied that to create a lower ceiling and larger tranches because we wanted to provide more regular scrutiny than that which would have been provided otherwise. If we have a lower initial ceiling and bigger tranches, we reach the same ultimate ceiling of 6.1 billion. As this is a money Bill, the House of Commons has more regular scrutiny.

To give an example from the 1982 Act, the first tranche was not exhausted; therefore, there was no parliamentary scrutiny for 14 years after the Act was passed. Under this Act, there will be scrutiny after around six years and after that at more regular intervals—probably every three years—until the ultimate limit is reached. Parliamentary scrutiny is not very serious. The House of Commons takes an average of around half an hour to consider the orders. We expect the provisions under this Bill to continue for almost 20 years. If expenditure increases, the limit will be reached sooner, and, if it is reduced, it will be reached later. That compares favourably with how the 1982 Act operated. It provides a more rational chance for the House of Commons to consider the need for more money.

The House of Commons also has the opportunity to scrutinise larger cases of assistance to industry—those of more than 10 million for any one project. That was provided in Section 8(8) of the 1982 Act and is being maintained. We have no plans to raise that threshold.

I suggest that the proposals represent a way of continuing a worthwhile project agreed by both major parties and, I believe, supported by the Liberal Democrats. We believe that the Bill provides the best basis for continuing support for industry and accountability to Parliament. I beg to move.

Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)

1.22 p.m.

Lord Razzall: My Lords, 1st May being election day I cannot allow one of the Minister's points to go unanswered. So far as I am aware, the Conservative

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Opposition are still one of the three major parties. But I am perfectly happy to accept that the Minister's remark was a slip of the tongue.

The debate on this Bill in the House of Commons was materially extensive. The Conservative Opposition and my own party raised several very significant points and concerns. Having read the material and reflected on the matter, I do not believe that this House is the appropriate place for an extensive debate on the Bill, because not only are we approaching the lunch hour but this is a money Bill. Our words will simply be recorded in Hansard without any potential effect other than perhaps to influence debate.

The underlying thrust of the concerns expressed on the Bill in another place—which I share—relates to whether a framework of legislation that was appropriate in 1982 will remain an appropriate structure for the modern economy from 2003 onwards. After all, taking the example of industrial assistance, in 1982, when the legislation originated, we still had a significant manufacturing sector, with highly concentrated industries such as coal, steel and shipbuilding. As those industries ran down, there was a significant need for adjustment assistance, which could be provided under the Section 8 powers. I would welcome a response from the Minister as to whether he really thinks that, 21 years later, that degree of industrial assistance is still as necessary.

The second concern, which was raised quite extensively in another place, relates to the small industry loan guarantee scheme which the Minister correctly said was significantly used. He failed to mention that, since the scheme was introduced in recognition of the fact that the banking system was defective in providing loans to small- and medium-sized businesses, the Cruickshank report has been published. It made many recommendations on how the banking sector ought to deal with the difficulties that the small industry loan guarantee scheme was introduced to deal with. The Minister seems to assume that the guarantee scheme will continue in its existing format, with exactly the same requirements. He makes no reference to how the Government propose to ensure that the Cruickshank report's conclusions are followed through. To a large extent, that would remove the need for the scheme.

The third substantive point raised on all sides of the House of Commons was accountability. I note with interest that the Minister indicated wryly that, although parliamentary scrutiny took place in another place, we should not take it seriously as regards its effectiveness. The substantive point is that, notwithstanding the existence of this power for more than 20 years, there has never been a significant report from the DTI—which would normally be expected in the commercial sector—evaluating the success of the programmes and financial assistance given, using normal means of business measurement; the opportunity cost, alternatives and effectiveness. Although noble Lords have no power other than to speak in this debate on the Bill, it would reassure many of us and many critics of the increase in

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the power if the Minister could indicate whether the Government propose to improve DTI's reporting mechanisms on accountability.

1.27 p.m.

Lord Hodgson of Astley Abbotts: My Lords, I begin with an apology. My noble friend Lady Miller was due to speak in the debate today. Sadly, yesterday afternoon, her husband fell and broke his hip. He had to undergo an operation this morning, which is why my noble friend cannot be present. She asked me to present her apologies to the House for her non-appearance.

I declare an interest, albeit historical: for a number of years I was a member of the West Midlands Industrial Development Board. In that role, I considered, and was involved with, applications for regional selective assistance and other grants.

As the Minister explained, the Bill has its origins in the Industry Act 1972, introduced by the then Conservative government. That Act was substantially modernised by the Industrial Development Act 1982, which was also passed under a Conservative government. Both Acts had the provisions contained in the section that this Bill seeks to amend—Section 8.

Noble Lords may therefore assume that we on these Benches support the principles of the original legislation and the principles of this present Bill. However, that does not mean that we should allow it to pass without raising some important questions, to which the Government should provide answers. As Mr Speaker has certified this as a Money Bill, we in this House may not table probing or other amendments. This debate is the one opportunity for us to request clarification from the Government.

Three years ago, in a debate in the Standing Committee in another place, the Government stated that they anticipated that the funds available under the present legislation would last until 2010, and that replacement legislation, such as we are now debating, would not be needed before then. Will the Minister tell us what unexpected, unbudgeted events have occurred since then that have resulted in this legislation being brought forward by no fewer than seven years?

The main purposes for which funds may be provided pursuant to Section 7 of the 1982 Act are, in general terms,

    "to provide, maintain or safeguard employment in any part of the assisted areas".

Subsection (2) more closely defines, in six paragraphs, the way in which that is to be achieved. Four of those paragraphs refer to such positive matters as the promotion of development and modernisation; the promotion of efficiency; the creation, expansion or sustaining of productive capacity; and the encouragement of growth.

In contrast to those positive objectives, there are two paragraphs that provide for assistance in promoting the reconstruction or reorganisation of industry—subsection (2)(d)—and ensuring that the contraction of an industry proceeds in an orderly way. Some of the funds were used to prevent the premature closure of

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viable coalmines, which certainly seems to be within the ambit of the Act. However, Ministers here and in another place have explained that funds have been used to support redundancy payments arising out of the closure of the Selby coal complex and the disastrous flooding of the Longannet colliery. However laudable those two objectives were and however much they fell strictly within the wording of Section 8, subsections (2)(d) and (2)(f) were intended for the purpose of introducing new employment into areas hit by large industrial closures. They are not for the purposes of meeting the Government's obligations under the Employment Rights Act 1996. On the other hand, the payments that the Government have made under Section 8 to redundant steelworkers through the iron and steelworkers re-adaptation benefits scheme seem to comply with the purposes of the Act.

This morning, the Minister, like his colleague in another place, explained that Section 8 funds had been used for the urban post office re-organisation. The Minister's colleague said that it was done,

    "to enable the Post Office to carry out its programme to restructure the urban post office network, and to ensure that sub-postmasters whose offices close are adequately compensated for the loss of the value of their business and that those who remain can benefit from investment grants".—[Official Report, Commons, 24/2/03; col. 51.]

My noble friends Lady Miller of Hendon and Lady Byford and many others have campaigned in the House for support for urban and rural post offices. However, I must ask by what stretch of interpretation post offices can be described as an industry. Despite the fact that the Government's compensation proposals were, apparently, discussed in another place on 15th October 2002, the funds that the Government promised to provide are not new money. They are money taken by the Treasury from the funds that are supposed to be used for the purposes of the 1982 Act—namely, to maintain employment in assisted areas. If that is true, it is a classic piece of government double counting, perpetrated by experts in creative book-keeping.

The use of money earmarked for the purposes of the Act to meet the Government's other obligations is not appropriate. The Minister should tell us in detail what the Government have spent so much money on in the past three years that it has resulted in their having to come back to Parliament for more money seven years earlier than previously predicted. I appreciate that the Government have presided over an unprecedented decline in our industrial base, but the money provided under the Act is intended to establish new jobs and opportunities and not to enable the Treasury to evade its obligations under other Acts, or to fulfil high-blown promises by using the usual government smoke and mirrors.

Several requests for greater transparency and more information about the operation of the 1982 Act were made during the debates at all three stages of the Bill's passage. The noble Lord, Lord Razzall, has already raised that issue. Although it is possible to find accounts of different schemes on the DTI website, it would be helpful if comprehensive interim written

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reports were published at intervals. As the DTI has a continuous data-gathering operation, will the Minister offer to see that that is done and is made available to interested parties, especially those in Parliament?

We are talking about large sums—an immediate increase to the ceiling of 1 billion and provision for subsequent increases totalling 2.4 billion. When I sat on the West Midlands Industrial Development Board, I became concerned at the activities of professional grant-getters; that is, firms, or individuals, who offered grant-getting help for a fee that was usually linked to success. They knew how to present cases, how to hit the hot buttons—to use modern parlance—and how to achieve a good outcome for their clients.

My worries then and now are twofold. First, there is the issue of what is known as "additionality". Is the grant critical to the proposal going ahead or, in the last resort, would it proceed in any case? If the latter is the case, taxpayers' money is not being used to best effect. My second worry is about what is called "cross-competition". Grants that are obtained can adversely affect the operations of other perfectly competent, well-run competing firms that have not gone cap-in-hand to the Government. In his response, will the Minister reassure me and the noble Lord, Lord Razzall, about the analysis that the Government have done of the impact of those important topics?

We also need an answer to the question of the extent to which the Government's operation of the Act is controlled by the European Commission. At Second Reading in another place, the Minister told the House that,

    "The Government are in negotiation with the European Commission over our intention to use Section 8 to support redundancy payments arising from the closure of UK Coal's Selby complex".—[Official Report, Commons, 24/2/03; col. 51.]

I have already referred to the inappropriateness of using the funds available under the Act for the purpose of meeting the Government's obligations under other legislation with regard to the payment of redundancy money, as distinct from the laudable objective of introducing new employment opportunities in areas affected by large-scale industrial closures. What is the current role of Brussels as regards this country's policies for compensating workers who have lost their job?

In parallel with that issue, there is also the fact, as I remember from my experience in the West Midlands, that international competition used to develop between governments to attract new industries. Too often, it seemed from our worm's eye view in Birmingham that the UK played scrupulously by the rules. Other countries appeared to be less fastidious. Whatever provisions are laid down in Brussels, is the Minister satisfied that they are fairly and evenly enforced throughout the European Union?

At Second Reading in another place, Mr Henry Bellingham, the honourable Member for North West Norfolk, asked the Minister to consider the removal of some of the sector restrictions, including vehicle

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repairs and servicing and retailing. I accept that they are on the borderline of the definition of "industry", but no more so than urban post offices, for which the Government took funds from the resources for this Act. Many of those made redundant in a major closure must resort to that sort of trade, as there is no other way for them to make a living. Even the Government's Small Business Service, which provides funds under the Act, is unable to help such businesses.

Under the Act, the turnover limit is 5 million. That figure has remained unchanged for some time. My honourable friend Mr Bellingham suggested that it was now too restrictive, but the Minister did not respond. Now that the Government have had a couple of months to think about the matter, will the Minister give us a more a considered reaction? My honourable friend also asked for details of the sums that have had to be written off from loans in the past four years and for the global figure that the Government have had to pay under guarantees. The Minister admitted and expressed surprise that the analysis existed but was, as he put it, "all over the place". He promised a proper analysis to the members of the Standing Committee in another place, and I assume that it was prepared and circulated. Will the Minister ensure that Members of this House who are interested in the matter receive the same courtesy?

More important for the transparency that I have called for than the bare figures for the money paid out and paid back would be some sort of periodic report on how productive the funding has proved to be overall, especially in helping small businesses. As my honourable friend the Member for Sevenoaks pointed out in an intervention at Second Reading in another place, we are progressing in one step from a commitment of 2.7 billion—the current total—to 6.1 billion. An extra 3.4 billion, even spread out over 20 years, is a lot of money. That is especially so, given that, in the last period for which we had a report, expenditure under Section 8 was 113 million. In his introductory remarks, the Minister said that that figure would rise in the current year. We look forward to hearing from the Minister what extra calls the Government expect to be made on the facility.

I ask for this information because, as I said, the Government expect the present funding to run out seven years ahead of schedule, hence the need for the Bill. I also ask because of my suspicion that the Government may be planning to use the facilities of the Bill to fund activities that should be more openly discussed elsewhere in the accounts.

As Mr Henry Bellingham pointed out, this is a small Bill, but one with a large price tag. At 92 words long, I calculate it to have a price of about 37 million per word.

For all those reasons, and the points adduced by the noble Lord, Lord Razzall, there must be a strong argument for an improved method of parliamentary scrutiny. That could take several forms, including a requirement for a specific report to be debated in both Houses when either a specified increased level of Section 8 funding was reached—say, the 600 million tranches to which the Government refer—or at

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chronological intervals of, say, three years. That would have the effect of increasing public confidence that taxpayers' money was being used to best effect. Given all the circumstances, it was a pity that the Government could not respond more constructively to the amendments proposed on this issue in another place. When he responds, perhaps the Minister will also give us his considered reflections on that point.

Finally, and nevertheless, as originators of this concept and sponsors of the two preceding Acts, we on these Benches support the principles of the Bill and the need for some industry-specific intervention by the Government as well as for assistance in some of the regions, perhaps especially for small businesses, which are so often described as the engine of new employment opportunities.

1.42 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for the detailed consideration they have given to this small but important Bill. I shall do my best to respond to the particular points made.

I start with the noble Lord, Lord Razzall, who queried whether the 1982 legislation is still relevant 21 years later. The demand for assistance, particularly for small businesses, in relatively small sums to individual enterprises, is continuing and will continue in good times and in bad times. As the noble Lord, Lord Hodgson, said, small and medium enterprises are in many ways the engine room of the economy. It is the case that one of the measures of the success of the economy is the extent to which small businesses start up.

There is no doubt—it has never been questioned—that small businesses have benefited from the programmes which have been operated by the Department of Trade and Industry. It is true that there have been far too many of these programmes; the fact that there are more than 100 of them is confusing for businesses and for government. We recognise that, and that is why the Secretary of State has conducted a review and is proposing to reduce the number of schemes from more than 100 to more like 20 or 25. The ones that are included in Section 8 provision are undoubtedly important parts of the schemes that will survive the review.

The noble Lord, Lord Razzall, asked me whether the small firms loan guarantee scheme was necessary after the Cruickshank report and after the Government are able to implement that report. The recommendations of the Cruickshank report are, of course, only partly to the Government; they are also to the venture capital industry. It is not within the Government's powers to control these matters. We do our best to help, but we cannot actually say what venture capital will do. The latest report of the British Venture Capital Association shows that only 3 per cent of total private equity investment was invested at the start-up stage in 2001 and only 8 per cent in early-stage investments, whereas MBOs and MBIs accounted for 60 per cent of investment. There is not much change there. I suggest that it is a good justification for continuation of the small firms loan guarantee scheme.

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The noble Lord asked me about accountability. The extent to which the House of Commons considers the reports that are made is a matter for the House of Commons. There is an annual report under the 1982 Act. It is capable of being debated by the House of Commons, and if they wish to do it no doubt they will do so. If the Liberal Democrat or Conservative Opposition feel like doing so, I have no doubt that they will demand government time or provide time of their own. But that is not a matter for me.

The noble Lord, Lord Hodgson, asked why the money which three years ago we thought would last until 2010 will now last only until 2004. The answer is that there have been worthwhile schemes under Section 8 which do seem to be justified. With one or two exceptions, I think that the noble Lord, Lord Hodgson, accepts that the schemes that we have been funding come under the proper purposes of the 1982 Act—the purposes in Section 7(2), and including those in (2)(d) and (2)(f).

The noble Lord's two queries are, first, about coal redundancy payments—although I noticed not about steel redundancy payments—and about the use for post offices, which he describes as not being "industry". On the question of redundancy payments, the European Commission has agreed that redundancy payments are proper uses of industrial development funding. It is, after all, in the interest not only of those who are made redundant, in the way in which the coal industry and the steel industry have been making people redundant, that they are compensated, but in the interest of the communities in which they live. It also increases the chance that replacement employment opportunities will arise.

The noble Lord talked about a stretch of interpretation to count post offices as industry. When I started a market research company, in 1965, I called it Industrial Facts and Forecasting because the contrast which we then made was between industrial and consumer market research. It became very apparent that the real market for us in non-consumer market research was business. I suggest to him that our economy consists of manufacturing industry and service industry. To make a point about the wording as to whether something is industry or part of the effective economy is not very helpful. These are all essential parts of our economy and if there were to be service industries which fell within the remit of Section 8 I am sure that we would take those opportunities regardless of the title of the 1982 Act. It was the correct title at the time. It is not the correct title now, but the provision is still appropriate.

I understand what the noble Lord says about the work of professional grant-getters. I have seen that in action myself and it is not particularly valuable. However, I think that the review of these small business schemes that the DTI is carrying out will attack that issue as well.

The noble Lord asked me about the European policy on compensation for job loss. All uses of Section 8 which are state aids under the EC treaty require notification to meet our obligations under the treaties. We require that

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support for Selby, which is one of those that he questions, and that is why we have notified it to the European Commission. We do scrutinise possible cases of non-compliance by other member states which are publicised, and we have been known to intervene in the European Court of Justice if we think that there are cases of intervention. We believe that if we are to obey the rules, other people should keep to the rules themselves.

The noble Lord asked me whether the measure we are discussing constituted new money. Each government department or devolved administration funds its Section 8 schemes out of its own budget in the context of the overall priorities of each department. Section 8 is not a budget; it is an enabling power. All the money has to come out of DTI budgets and those are determined by the spending review.

I believe that I have responded to the point made about the reports. I do not believe that a comprehensive evaluation of such a wide variety of schemes would be possible but there have been evaluations of individual schemes. For example, the small firms loan guarantee scheme was evaluated by KPMG. The small business services schemes are also subject to evaluation. In any case, the business support review which I have already described is in itself a form of evaluation. I am strongly in favour of evaluation. I am very sympathetic to what both noble Lords have said but I do not believe that a cross-cutting evaluation of such a wide variety of schemes would be appropriate.

I shall ensure that both noble Lords have a copy of the analysis which was given to the Standing Committee in another place. I do not think that I can say what extra calls will be made in the future on Section 8. Clearly, those are matters which arise from time to time. For example, one does not have notice of flooding at Longannet. If I can tell the noble Lord anything further about the future, I shall certainly do so. However, at present I rest my case on the position that, broadly, the schemes that have been funded and continue to be funded are worthwhile. There is no other way of funding them. The proposals to extend the scheme are rational and legitimate and provide such accountability to Parliament as the House of Commons wishes. I commend the Bill to the House.

On Question, Bill read a second time; Committee negatived.

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