WEDNESDAY 13 MARCH 2002
Mr Martin O'Neill
Memorandum submitted by the Department of Trade & Industry
Examination of Witness
MS PATRICIA HEWITT, a Member of the House, The Secretary of State for Trade and Industry, examined.
(Ms Hewitt) First of all, on the issue of departmental responsibilities manufacturing is primarily the responsibility of the Department of Trade and Industry. It is a responsibility that I welcome as Secretary of State and I take extremely seriously. I think everyone here knows I represent a Leicester constituency, an East Midlands constituency, for the two years before I became Secretary of State I was not only the Minister for small business and e-commerce I was also Minister for textiles. I feel extremely strongly committed to the importance and to the future of our high tech manufacturing industry. I spelt that out in the recent speech, which I hope has been made available to members of the Committee, and if not I will make sure that it is. We have that responsibility and, of course, within my excellent ministerial team Brian Wilson takes much of the day-to-day responsibility for manufacturing sectors and Douglas Alexander as Minister for e-commerce and competitiveness also has responsibility for the textile sector. There is a broader set of responsibilities which have to do with productivity, not simply productivity across the whole economy but also productivity within manufacturing. That is an issue, really, for a number of government departments, the Chancellor and the Treasury because of the macroeconomic framework and the tax regime. The Department of Transport Local Government and the Regions because of impact of the planning. Crucially the Department for Education and Skills because of the importance of getting skilled people into manufacturing. The Department of Work and Pensions because of their labour market responsibilities, and so on. The mission to drive up productivity across manufacturing and the rest of the economy is shared across government departments. I am very clear, indeed, about our lead responsibility for ensuring as far as government possibly can, that we have in place the conditions for manufacturing success. On the second part of your question, which is the short to medium term outlook, if you look at the immediate position it is extremely tough out there for manufacturing but it is tough right across the world. In our memorandum we put in a graph of the decline in industrial production in the recent period, which shows that although, of course, manufacturing output is very hard hit Britain it has been much harder hit in Japan or about the same in other countries. I do not say that in any way to diminish the problems facing many of our manufacturing companies. For many of them, particularly their workers, these are horrible times. The pain is not unique to Britain, it is shared right across the world of industry. The second point I would make, just looking backwards for a moment, is that we do have some very long-standing and deep seated problems. If you look back to the mid-90s, from about 1992, the end of that recession, to 1996, about the time when the exchange rate started to appreciate very severely what you will see - particularly in 1995 onwards - is in a pretty sharp increase in industrial production, in America most of all but also in Germany and France and a very, very anaemic increase in industrial production in Britain. It is only in one year, in 1994, I think, when we saw anything resembling a decent increase. In that mid-90s period despite the fact there was a favourable exchange rate we had the familiar problems of under investment, inadequate R&D, not enough innovation and not enough process improvement and in response to that perspective, problems of macroeconomic instability. There are deep-seated problems there alongside deep-seated problems in our skilled people which, of course, underlines why we there a productivity gap. The other point I was looking for is we should not pretend that it is all bad news, we should not delude ourselves into doom and gloom here. We have got some very strong sectors and some very strong companies. Aerospace, motor-manufacturing, pharmaceuticals, the new sector of bio-technology, textiles, and so on. In those sectors, even where there are enormous difficulties at the moment, the medium term prospects are very good and our industrial strategy is designed to strengthen the capacity of our companies to take advantage of those improving prospects.
(Ms Hewitt) If we look at where we are likely to be in terms of the global economic context in 12 months' time, and certainly I am not an economic forecaster, but despite the very serious fall in our industrial production that has just been confirmed in the latest figures from the ONS, there are signs in the most recent forward-looking indicators, if you like, from particularly the CBI and the CIPS, as well as from America, of a recovery, just very early indications of a recovery. I am cautiously optimistic, therefore. What that suggests to me if that is right is that in 12 months' time we should be seeing significant recovery in our export markets. I think we know from the IMF and the OECD view that at the macro economic level of course we are much better placed than the rest of the world to withstand this general downturn. Just focussing on manufacturing, I think we should see, within the next 12 months, renewed demand for our industrial goods particularly in our key export markets. Where I want us to be by then is to have in place, for instance, in the area of innovation and knowledge transfer, the partnerships and the programmes that will already be enabling more companies to raise the quality of the way they manage their people and the way they manage their processes so that they are ready to deliver better products, higher quality products, using better processes. We can talk in more detail if the Committee would like about the regional centres for manufacturing excellence, the innovation centres, the partnerships, the various supply side programmes that we have to help companies drive up productivity. There is a great deal of that activity going on and that is a central part of the strategy for ensuring that we have got more manufacturing companies that are competitive and can stay competitive and, therefore, continue to employ people and indeed we hope by then to increase their numbers of employment rather than, as so many are having to do at the moment, shedding labour.
Chairman: Thank you very much. We are going to move on in a moment to factors affecting productivity but my colleagues, Andrew Lansley and Ashok Kumar, would like to come in and then we will go on to Roger Berry.
(Ms Hewitt) Let me respond to that because I think it is a very important point. The first thing we had to do was create a climate of economic stability. I am not going to go through the usual stuff about boom and bust but Britain has suffered for a very large part of the post war period from a climate of economic instability that has been hugely damaging to long term business investment, particularly in manufacturing industry. It is not the only thing that has to be done but without economic stability we will never get the investment we need. That was the first absolute requirement that had to be put in place before we would have any hope at all of getting the investment that is a key determinant of productivity. One can argue about the numbers but the gap between ourselves and Germany, France and America in terms of plant, tools and technology is a key component of the productivity gap. The second thing that we needed to do post 1997 was to increase employment and get the long term unemployment down. Now we have done that, more than 1.3 million people are in work than there were in 1997, very substantial falls in unemployment particularly in long term unemployment. We have done, therefore, in a sense what happened some years ago in the United States which is very significantly to increase the number of people in work. Almost by definition the people we were bringing in to employment through those labour market policies, welfare reform policies, were less productive than the average of those already employed.
(Ms Hewitt) I have not had a chance, obviously, to see that evidence from yesterday, and I will look at it with great interest. However, not having seen that ---
(Ms Hewitt) The latest figures we have we have put in the memorandum to you. I am making a slightly more general point that if you look at America, which has had very, very substantial productivity growth through its long period of economic growth, until the most recent fall, what happened first was an increase in employment without productivity growth and then what happened was the increase in productivity as the fruit of the capital investment came through and as they raised their skills of the new and the existing workforce. I believe that is what will happen in Britain if we can get other things right. The third point I would make is that not only do we have this big gap in capital investment which has to be closed for the right mix of economic stability and specific incentives, but we have, also, a very, very big gap in skills and it takes time to sort that out. We are sorting it out and Estelle Morris has just announced considerably more but there is a lot more to do on that. If I can just come back, Chairman, to the question about figures.
(Ms Hewitt) No, you gave me a supplementary question on the numbers.
(Ms Hewitt) We do have figures, particularly for GDP per worker, we do not have them for all countries per hour worked for the year 2000 as well. If those are not around I will make sure they are given to you. Our assessment is basically that our gap has remained broadly unchanged and we need to see investment increasing, because that is a particular problem during this downturn in manufacturing, and we need to sustain effort on the skill base coming through in productivity.
(Ms Hewitt) I do share that view. In the speech I gave recently on manufacturing I argued that amongst the reasons why manufacturing is important if we are to succeed in our ambition to have a knowledge-driven economy that is delivering high wage jobs and a high level of prosperity amongst the reasons are, first of all, the fact that you are mostly likely to get high productivity improvements in manufacturing and, secondly, the fact that the majority of our exports, still over 60 per cent, come from the manufacturing sector. Just today we are publishing the latest set of United Kingdom competitiveness indicators which show that if you look at our exports we have a higher proportion of exports coming from knowledge-based manufacturing even than America, Canada and Italy, and we are round the same level as France and Japan. We are doing well, despite the depressed conditions in the rest of the world, in the quality of our export market. That is very important, not in the short-term but in the long-term to be able to continue to pay our way in the world.
Chairman: Can I just say, Secretary of State, I made reference to discussions that some of us had yesterday with some academics and I realised afterwards that it was a closed session. We are very happy to send you a note, you can see it, I do not want to put you at a disadvantage any more than you have to be, if I can put it like that. I am sorry that I took you on in that way, but we did have a briefing yesterday but it was an off-the-record briefing, not that the academics wanted it to be off-the-record, but we thought it would be helpful. We are lobbing-in grenades from afar which I do not think are necessarily anything to fear. We will let you see them and if your officials wish to comment on them it will be recorded on the record of our proceedings.
(Ms Hewitt) No, we are not. I absolutely do not want to leave that impression at all. I was simply making a point that we have got some really strong companies and some very strong sectors and it is important that we all recognise that because there is, you know, far too much, particularly in the media, and parts of the city, just talking manufacturing down, that was simply a "for example" list. With steel, which I do not think I did mention in the list, and as you very well know, we have one of the most productive industries in the world and we are creating real leading-edge products. I think I am right in saying the 70 per cent of the steel used in modern cars did not exist in terms of steel products just 10 years ago. Our strategy is not to say, right we will go for this sector but not that sector, it is to say, how can we help companies that want to be world class to become world class and to innovate and to use the new technologies regardless of what sector they are in. Technical textiles is a very good example of that, an industry that a lot of people write-off, it is typical, traditional, old-fashioned manufacturing but within it we have firms - including firms that were on the brink of disaster when they were making low value added clothing - who switched and used those skills to move into technical textiles and are now world leaders, because we are world leaders in that sector, it is a small sector, but growing and we need more companies doing that sort of thing.
Chairman: I think Lindsay Hoyle wants to come in on this area.
(Ms Hewitt) Indeed. I cannot remember whether you were in the House when I made statement last week in immediate response. Obviously we are dismayed by the action that the American administration has taken, and the Prime Minister repeated that just an hour, or so, ago this afternoon. What are we doing about it? First of all, of course, we have already initiated the case against the United States in the WTO Dispute Resolution Panel because we are absolutely clear that the USA is in breach of the WTO rules. We also made it clear that we expect to get compensation if we win that case. Those discussions with the USA should begin very quickly. Of course WTO dispute cases take a long time to resolve. In the short-term what we are doing, and we are working on this very fast, with our European colleagues is to look at the safeguard measures that should be taken within the WTO rules, particularly to deal with the very big problem of steel products from other parts of the world being diverted from the American market into the British and other parts of the European market. The third thing that we are doing is to work very, very closely with our companies, unions and trade associations and the companies customers in America to try and get product exemptions from the list of proposed tariffs. The irony here is that there are American manufacturing companies and their workers who depend upon our steel companies for very high value added products, for instance in aerospace, and if they cannot get those products it is going to hamper the recovery in manufacturing and thereby the economy within the United States. For instance yesterday, or the day before, I was talking to Tony Pedder at Corus about how we ensure that his key customers in America are making the appropriate representations in Washington and we will continue to do that during the 120 day period there is for discussion about exclusions decision from the tariff list.
(Ms Hewitt) What we have to do - I agree with you that investment is a key factor, it is not the only factor it is an absolutely the crucial factor - get the economic stability right and then we can put in place the right tax incentives to encourage investment. I would point there to the very significant cuts that Chancellor has introduced, such as the corporation tax, the improvements in capital allowances, the tax credit, the very important tax credit for R&D by small and medium-sized firms and the Chancellor's announcement in the pre-Budget Report that that will be extended in this Budget to the large firms as well. All of that, I think, helps to create a climate in which companies are more likely to invest than they were in the past. There is then more that we can do. In aerospace, for instance, we are looking at how we and the industry together increase the levels of investment in R&D, because they are not high enough, they need to be raised and, frankly, I would prefer to see taxpayers' money, which is limited in size, devoted to R&D or research technology and development than simply going into launch aid. So there are specific sector issues there. There are other ways in which we can support investment. If you look at regional selective assistance, about £250 million a year at the moment, the lion's share of that goes to manufacturing, supporting investment that companies are willing to make. What we are seeking to do, also, as we look at the SME manufacturing set is to make it easier for them to get the funding that they need, and particularly in manufacturing that is the real issue. The regional venture capital funds are now up and running. A new and real breakthrough there in terms of European thinking that we have led, where we are putting in public money, and using that to bring in very substantial amounts of private sector investment and investment from the European Bank for Reconstruction and Development. Those are operating now, they are not confined to manufacturing but they will be very useful for manufacturing companies. We have put in place, also, early growth funding designed to produce the smaller amounts of money, up to about £50,000, to close a gap that was quite clearly identified for companies that are start up or just after start up and are finding it impossible to get finance but who are not really yet ready for equity finance but also work to help small companies, including those small manufacturing companies, to become ready as they grow for equity finance. There is a lot being done there to create new institutions as well as a better framework of tax incentives to get the primarily private investment that we need.
(Ms Hewitt) Before I come to that, I would mention also the Small Firms Loan Guarantee Scheme.
(Ms Hewitt) Do not forget that we offer guarantees of up to 70 or 85 per cent on commercial bank loans of up to £250,000. Now that is a pretty significant degree of risk sharing between Government and the banks. This is across the piece, not specifically manufacturing, but if you look at the work of the Bank of England and their annual reports on finance for small firms, they do not believe that there is any general, across the board, long term inadequacy of debt financing for SMEs and, indeed, provision of long term finance by the banks to the SMEs did rise quite significantly in the third quarter of last year. I think there is a much more specific problem and I have to say I draw this in part from just the stories I hear around the country but there is no doubt at all that a number of smaller companies in the manufacturing sector, including some in the very high tech innovative sector, have found it almost impossible to get the banks interested in them. I was very struck over the last couple of years by the number of real technology star companies who said that if it had not been for the DTI's Smart Scheme, which is a grant, not investment, a grant for taking the idea to prototyping, they would simply not have survived, they would not have been able to get to the stage where they could get equity and/or bank finance. I think there is an issue there and certainly we identified some time ago the problem of smaller amounts of equity for the company that is growing but is not at the point where the venture capitalists kick in where the threshold is half a million pounds if you are lucky and probably higher because of the transaction costs involved. We are plugging that gap.
(Ms Hewitt) I am sorry I did not specifically comment on that. It is quite obvious that large companies have got much greater access to a range of financial instruments, including corporate bonds, which enable them to reduce their cost of capital and to get it down much closer to the very low long term interest rates which now operate within the United Kingdom and are now pretty close to those in Germany and the United States which, of course, has not been the case for years and years and years whereas the small companies for debt finance are dependent on the banks and are paying a bank rate plus, particularly of course when they are dependent on overdraft rates and that is where significant amounts of funding for small companies are coming from. Of course there is an issue there. Part of the difficulty, part of the problem there is SMEs are over dependent on debt finance which is why, as I say, we identified quite early on a gap in equity finance for SMEs which we are filling. We also, with the Small Firms Loan Guarantee Scheme, seek to moderate the disability suffered, the handicap suffered, by all SMEs, including the manufacturing ones, in not being able to access those more advantageous rates of gaining capital. Part of the purpose of the equity schemes we have put in place for regional venture capital funds is if we can demonstrate that those are successful then we think that in turn will have an influence on behaviour within the market and we may well create a much better market for capital investment through equity in those small but growing companies.
(Ms Hewitt) Of course, Chairman.
(Ms Hewitt) No, no. I do not want to leave any misapprehension here. We have been looking at this issue of finance for SMEs since we were elected and we have been acting on it as I have described, and I will not go back over that.
(Ms Hewitt) We talk all the time to the various engineering bodies because it is very useful to do so but certainly I will talk to my officials about whether they have had a recent conversation and we will have a look at whether there is anything further we can do. Let me assure you my officials are in touch with those trade associations, and certainly when I talk to the various engineering bodies, and indeed to others in the SME manufacturing sector, we do generally talk about finance for SMEs as well as the range of other issues that we have already, to some extent, touched on today.
(Ms Hewitt) That is a matter on which my colleagues in the Treasury are in the lead. I know, because we have recently discussed it with Treasury colleagues, we are concerned that the proposals may create new barriers rather than doing what we want to do, which is to create a really large and deep capital market for SME financing across the European Union. It was one of the goals the Lisbon Summit, it is undoubtedly one of things that hold our SMEs back compared with America, where it is so easy for an entrepreneur to access capital, from friends and families and business and financial institutions. We need to do that. We are better placed in the United Kingdom than in the rest of the European Union. On our latest competitive indicators we have the highest level of venture capital investment as proportionate GDP within the European Union but compared with America it is still much too difficult for our high tech entrepreneurs, our manufacturers to get access to particularly those smaller amounts of funding that they need in the start-up and early growth phase.
(Ms Hewitt) The Chancellor has an extraordinary track record in building successful alliances across Europe, you might remember the saga of the withholding tax, so we will continue to make the arguments about the framework that is needed on the Prospectus Directive and a whole host of other matters to try and get the right pilot for entrepreneurialism and manufacturing specifically right across the European Union.
Chairman: Before we move on to exchange rates Mr Djanogly is going to ask one question.
(Ms Hewitt) I am not sure. I think the point about it is that it falls within the Action Plan for Financial Services that is being taken forward by finance Ministers and to which, I have to say, I contributed when I was Economic Secretary at the Treasury.
(Ms Hewitt) Yes, but, of course, the Financial Services Authority in Britain is the listing authority, prospectuses fall there. I am very happy to explore this in more detail, that is a very interesting question, and perhaps I can let the Committee have a note on this. That is my understanding of the position.
Chairman: We are always interested to know why the Treasury is where it should not be. We realise that Leviathan tendencies of the Chancellor, much as some of us respect him, have to be curtailed, that is not necessarily for us at every turn.
(Ms Hewitt) As I said before I have no doubt at all that the weakness of euro, which is quite a long-standing problem now, is causing very real difficulties for a lot of our manufacturers who are dependent on exports into the euro-zone. As we say here, they are doing a remarkable job in sustaining their productivity, in some cases improving it and sustaining their export volumes but, of course, not making much of a margin on those exports. We do not have as a Government an exchange rate target. We have seen what happened in the past when governments tried to follow both an inflation rate target and an exchange rate target. As far as euro membership is concerned I think the potential benefits to manufacturing and, indeed, other parts of the economy are very clear in terms of trade, transparency, costs and currency stability. The conditions have to be right for the economy as a whole and looking ahead, not simply in the short-term but in the long term, and hence the five economic tests - which I will not recite to the Committee - and the process of assessment of those tests and the decision-making that I think is very well known to the Committee. I would just reinforce the point, if you look back not just at the experience post our expulsion in the exchange rate mechanism but much longer across the post-war period it is not at all obvious that changes in exchange rates explain over the medium to long term the success or failure of different countries' manufacturing sectors. We saw over a long post-war period a very, very steady decline and a very substantial decline in the value of sterling against the deutschemark. We also saw a very steady decline in our relative productivity. There are some core issues there to do with productivity which cannot be accounted for by the exchange rate. The problem for companies, you mentioned Toyota, and many other is absolutely clear.
Sir Robert Smith
(Ms Hewitt) Of course. That is a point that has been made to me frequently. The timetable is very clear. The Prime Minister and the Chancellor have said that the assessment of the five economic tests will take place and will be done before June of next year and it will be on the basis of that assessment that we decide whether or not to recommend to Parliament, and then to the British people in a referenda, joining the single currency.
(Ms Hewitt) I am aware of the situation with Caterpillar. Of course at this point we have not made the assessment and we have not made a decision whether or not to recommend entry and take it to a referenda. The timetable is absolutely clear. I think it is also worth stressing on the inward investment front that despite those issues the exchange rate and the single currency issue is only one factor in a company's decision on inward investment. We remain quite significantly the number one destination for foreign direct investment in the Europe. Volumes of foreign direct investment have declined over the last year because of the downturn, but in terms of our share of that investment we remain number one and if you look across the world we are the number two only to America in terms of the amount and proportion of foreign direct investment that we attract. We are a very attractive inward investment environment, not least because we have this outstanding science base. We are a very good place for high technology, high value added R&D and production. We are going to keep it that way. Where we identify real problems, we have been talking about investment but there are infrastructure issues above all the skills issues, we are addressing those as well in order to maintain our place as a very good destination for investment.
(Ms Hewitt) Clearly, as I have said, companies make their investment decisions on the basis of a whole range of factors. In some cases the determining factor may be wage costs, by definition that tends to be for the kind of lower value added production where wage costs are a very high proportion of total costs. We are not going to make a really good living in future by trying to attract, or to keep, low wage commodity manufacturing. That is not where our competitive future lies. For other companies the key factor will be the availability of highly skilled engineers where we are very good, despite the difficulties of getting enough of them. We have very good top quality engineers and the excellence of our science base: Boeing for instance, which has got this wonderful partnership with Sheffield University for a new Metals Institute, said recently in order to fulfil their ambition to be one of the best aerospace companies in the world they have to go to where the best scientists and engineers are, that means coming to the United Kingdom and specifically to Yorkshire. That was a key factor for them. In other cases, as for Caterpillar I believe, issues to do with the exchange rate were important. If you look across the board, we get more inward investment than anybody else. The other point that does need to be made about the exchange rate development is, yes, there was a very sharp rise in that 1996/1997 period in the sterling against the euro exchange rate but, of course, if you look at what has happened to sterling against the dollar, that has been really fairly stable until recently when it went down. We have actually had a different experience in the dollar/sterling exchange rate from that in the sterling/euro exchange rate which of course confirms the point, which is not a semantic one it is a real one, that the issue here is the sustained weakness of the euro rather than an over-valuation of the pound, which is how it is sometimes put.
(Ms Hewitt) I do not really accept that.
(Ms Hewitt) Let me develop the point, Chairman, if I may. I have a very close working relationship with the Chancellor. I think that the Treasury and DTI officials are building a closer working relationship than perhaps has sometimes been the case in the past. That is enormously important. You only have to look at last year's pre Budget Report and the work that the Treasury has done since 1997 on productivity to see the importance that the Chancellor attaches to high tech, high value added manufacturing. I think he and I have a common view of the importance of high value added manufacturing to our future prosperity, to high quality, high wage jobs and to raising productivity across the whole economy.
(Ms Hewitt) We are all concerned about the immediate situation but motor car manufacturing is not a low technology, low productivity job at all.
(Ms Hewitt) No. I really do have to challenge you, Chairman, on this characterisation, and I must say I dislike this phrase "metal bashing" intensely because it is used much too often to describe manufacturing industry. It is used to describe steel, it is used to describe motor cars, it is used to describe the supply chain and although, yes, clearly companies vary in the level of value that they add, by and large, in our automobile sector, including down the supply chain, what we are looking at is increasingly high value added production which means high wage jobs. If you just go around any car plant, I have been around a lot of them, but also if you go around many of the smaller engineering companies that supply the volume assembly plants, these are companies which are at the cutting edge of innovation, at the very least they are pretty good in their practice. Now we do not have a magic wand to wave over the current situation and say "yes, we can save jobs that are going because of the external conditions", whether it is in aerospace, particularly following 11th September, or whether it is in steel with the situation which confronts Corus and now the possible impact of the import tariffs, although I have dealt with what we are trying to do on that. If the Committee can come up with a magic wand I will look at it with enormous interest, believe me, but what we will go on doing, and we really are redoubling our efforts on this, is to work with companies, particularly down the supply chain, to get them even more productive and we have done that with enormous success in the automobile supply chain for some years now through the Society of Motor Manufacturers and Traders and the Industry Forum Programme which has delivered demonstrable and lasting improvements in quality and in productivity and therefore in the bottom line. It is not the glamorous stuff and it is easy to say "This is not delivering huge job savings" but actually this is the work that has to be done within companies with our help where the companies want it and will take it to get the productivity improvements that we need. You see I look at textiles, which I see a lot of in my own city of Leicester, and where you have a company that is employing people, and there is a sweat shop end of the market and there is not much we can do if those companies do not want to change, but if you look at companies that have not invested in design, that are using old machinery, they have not trained their workers, if they are not willing to change I cannot save those jobs. The best thing the Government can do in those circumstances is to improve the skills of the workers and help them get better jobs. If the management is not willing to change then Government cannot force them to.
(Ms Hewitt) Let me make a few comments on that. Clearly there are parts of the supply chain that are moving to the Far East, there are parts moving to Central and Eastern Europe, also to take advantage of lower wage costs but closer to the European market. The Dyson example is a very interesting one because, of course, he, as I understand it, has made the decision to shift the manufacturing of the vacuum cleaners to a Far East factory and to get the advantage of scale as well as labour costs in order to supply the global market. What he is keeping in Britain is not only his R&D but also the manufacturing of the new product that he and his firm have now created. I think that is quite an interesting example of a much larger story, which is that the lower value added stuff, the less innovative stuff, may move for a variety of factors, but cost is a crucial one. What we have to do is ensure that we continue.
(Ms Hewitt) The difficult process, the process where you need highly skilled and highly paid labour is in the original research and development, it is in the original manufacturing, where actually the manufacturing and the R&D are still very, very closely linked and then going forward it is going to depend on how much the labour costs, what proportion they are of the total costs, and I do not know all of the figures underlying in the Dyson decision. The point is that we have to keep continuously moving our companies and our sectors up market, up the valued added chain so they are producing the higher value added stuff, where they need to stay here and where wage costs are not the issue, they are simply not the issue. In order to do that what we have to do is to get far more companies investing in R&D, which we talked about, but also partnering with our absolutely outstanding universities and doing far more to generate new products and new processes. It is really shocking that fewer of our companies, rather our manufacturing sector, generates less of its income from new products than the manufacturing sector of any other country, it is a real source of weakness. It is equally dismal that only a tiny proportion of the manufacturing industry, about five per cent, are in partnership with science departments and university departments on R&D. We need to increase that hugely and that is why we have the innovation centres, the centres for manufacturing research and the centres for manufacturing excellence all now coming on stream. I mentioned the Sheffield Metal Centre, in the northwest there is now a Aerospace Innovation Centre partnering the hundreds of the aerospace companies with the eight universities, backed by the RDA and, indeed, initiated by one of the businessmen on the RDA which who chairs the Northwest Aerospace Group. That is the sort of thing we are to do to keep the high tech, high value added manufacturing here. Individual companies will go on making decisions, we just have to keep generating new jobs and new companies and whole new sectors like biotechnology, nowhere 10 years ago and now growing very fast and will grow faster over the next 10 years.
Chairman: Before Roger Berry comes in I just want to make the point that we may well get a message that we are going to have to vote. A friendly Tory bleeper - if such a thing exists - has informed me that a vote is likely. I am giving you due warning of it as I am giving everyone else, we may have leave for a few minutes. We have not got to it yet, Mrs Keeble is continuing to speak.
(Ms Hewitt) As I said, I am very clear that the weakness of euro is very damaging to many of our manufacturers who are dependent on exports to the euro-zone, so we are certainly not indifferent to the exchange rate issue. I agree with you that that is a separate question and separately related to the question of certainty. We do not have an exchange rate target. It is a foolish Minister who starts speculating on exchange rates and I do not intend to do so.
(Ms Hewitt) Of course it matters, we can see what is happening to companies.
(Ms Hewitt) When the Treasury was consulting not only with DTI and DEFRA but with business as a whole on the Climate Change Levy, obviously one of the key issues was that of competitiveness for the traded sector, particularly with the rest of the European Union. Of course a number of countries have their own energy taxes with a variety of designs. As you rightly say, the Climate Change Levy and the reduction in national insurance contributions were designed very specifically to be neutral across the private sector as a whole, so there was no revenue gain to Government as a result of the introduction of the tax. Clearly it is not possible to design a tax so that it is neutral for every specific company, it depends upon their specific situation. The 80 per cent discounts that follow for those companies who have entered into the negotiated agreements with DEFRA are hugely important here. I know, as you rightly said, that of course they do not cover every company that would like to be included and that is an issue that we and our colleagues at DEFRA will continue to look at. But there is no doubt at all the consultation around what the basis for those negotiated agreements should be made it clear that taking the IPPC definition was by far the simplest and most sensible way of approaching that issue. I make two further points. One is that, of course, there is a real incentive in the design of the Climate Change Levy to businesses to secure energy from levy exempt sources, renewable sources, which gives them, if you like, a double benefit, they continue to get the reduction in the national insurance rebate but they also do not pay the levy because they are getting their energy from the exempt renewable sources. The other point is if we look at the medium and longer term strategy, and that really is where Government does have to make the big changes, then improving the resource productivity of our companies is a very important part of the overall productivity strategy. Giving companies an effective incentive to do more rather than less is what the Climate Change Levy is designed to achieve and I believe it is beginning to have that effect. Most European Union countries do now have some form of energy or carbon tax. We are not alone and we should not pretend that we are.
Chairman: I think we will pursue this matter after the division. We will be back in no more than 15 minutes.
The Committee suspended from 5.27pm to 5.41 pm for a division in the House.
(Ms Hewitt) As I said in response to Mr Hammond's question, the whole issue of international competitiveness was part of the consideration, it was one of the very important considerations that obviously Lord Marshall took into account in recommending a Climate Change Levy and that the Treasury took into account in designing the levy. There are issues for sectors or for specific companies which, for whatever reason, are not included within the IPPC embrace. I think that is an issue that we need to continue looking at to see whether there are ways in which my colleagues in DEFRA could extend those negotiated agreements to other companies. It is an issue we are very aware of. The levy, of course, is fairly new and of course we are continuing to talk to business and to listen to business about the impact and the practical experience of it.
(Ms Hewitt) Exactly.
(Ms Hewitt) I think that is a very helpful suggestion. Clearly it is a bit early to be producing a report when, as you rightly say, the Levy has only been in effect for less than 12 months but I think it is a helpful suggestion going forward, and certainly I will discuss it with Treasury and with DEFRA colleagues.
(Ms Hewitt) I am interested in the Canadian model and I know it has been the subject of comments in an earlier Select Committee Report. We always have a look at other country policy initiatives to see if we can learn from them. Clearly companies are very pleased with the fact they can get very substantial grants under the Canadian Partnership Scheme. If you look at the overall effect it is actually not obvious that it is working better for them than our position does. If you look at the latest OECD figures, the figures for 2000, our business enterprise R&D as proportion of GDP is still a bit higher than that of Canada, it 1.24 per cent and Canada is 1.1 per cent. The micro position may be attractive for companies it may not be created for the increase in private sector R&D, which is what you need here. In the case of aerospace specifically, as I said earlier, we are looking very closely with the aerospace sector at what we can do to increase R&D spend. We will certainly see if we can increase public sector R&D spend and we also need to see an increase in private sector investment.
(Ms Hewitt) Yes, I believe we can. I think one of the reasons why we are so successful in attracting inward investment is that more and more companies, the inward investors, want to tap in on our science departments in the universities, that is a very significant factor for Boeing, and it is for a number of other countries, in the initial decision and in a sustained way. One very noticeable element over the last year when we have seen bad news, after bad news in the electronic sector very often companies that have been scaling back globally on the manufacturing capacity and their jobs they have kept their R&D and kept it very often in the United Kingdom. I think we are a very attractive place for R&D. The investment that we have made in the science-base, and will continue to make in the science-base, that is crucial in keeping us at the forefront of R&D. What we need to do is to make an equally intense effort to translate that science and technology into new companies, but also into new products and processes in existing companies. There is a lot more to do in that area.
(Ms Hewitt) We have put on the table rather significant funds through the tax credit, for SMEs, more to come with the extension of that tax credit to large companies. If you look at the investment in aerospace specifically we have committed £1 billion, or thereabouts, to launch aid, much smaller amounts of round £200m into R&D investment. We are looking at what more we can do there but we must leverage in much larger amounts of private sector investment in the sectors that are not making investment at the level of our pharmaceutical sector, which is a world leader in terms of R&D and its productivity.
(Ms Hewitt) If I may say so, you misunderstand the nature of the R&D tax credit because it was designed to kick in with hard cash for companies who are not yet in profit but who are at that early stage of innovation.
(Ms Hewitt) At the very early stage, I would say that is where the SMART programme, which I mentioned, comes in. It is hugely important, it is very successful and it has been evaluated as part of the review of business support from my Department we are looking at how we can build on that. I hope we will be able to put more money, depending on my Spending Review settlement, and I am sure the Committee will be supporting me in needing substantial investment there.
Chairman: The Committee recorded accord on that one!
(Ms Hewitt) Of course there needs to be coordination at various levels. In the case of inward investment we have now created British Trade International, which is doing both the export promotion and trade partners and the attraction and the support of inward investment through Invest UK. British Trade International now has a regional presence that is housed in the regional development agencies. That is, I think, really working very well. I have not come across in relation to the RDAs the problem you mentioned of two of them chasing after the same attractive inward investor. Clearly it has happened in that case, I do not think it is a particularly common problem, but I will check. It has been a common feature in the past of different cities, counties and different parts of the United Kingdom all doing their own promotion. That does in part reflect the fact that there is growing evidence that if we are to get prosperity in every part of our country then you have to have strong regional and subregional organisations and partnerships where you have the local people, the business leadership but also other people in the public sector, on councils, people in the not-for-profit sector, and so on, all working together because they understand the real strength and potential of their region or their city or their county. They have to be enabled to build competitive advantage. That is why the Regional Development Agencies are so important and it is why we are strengthening them, increasing the budget from 1.2 billion in the current year to the 1.7 billion by 2003/2004; given them from next month a single pot of money rather than being tied to very specific and small funding streams; giving them much more flexibility and it is why we are encouraging, pushing them, if you like, to show real delivery, in particular delivery for their manufacturing and industrial strategies. Following the manufacturing summit I asked all of the Regional Development Agencies to come back to me on 27 March, when I will be chairing the next meeting of the chairs of the RDAs, to report on their regional industrial strategies and what they have delivered so far and what is coming down the track. As I go round the country I see all of the time evidence of the RDAs starting to make a difference, sometimes with things where the RDA has not necessarily told me they are involved, recently in my own city I saw De Montfort University - I was in fact opening an innovation centre at De Montfort University - where there is a rapid manufacturing, prototype equipment and expertise available to every manufacturing SME, regardless of the sector. That is an RDA backed initiative and it would not have happened without the RDA. That sort of thing is happening everywhere. What we need to do is ensure those different support centres and innovation centres are really effectively marketed today SMEs in particular and that we see real measurable results over the next year, two years and three years.
(Ms Hewitt) As I said in response to your first question, I will talk to Sir David Wright and BTI as well as to the RDA chairs about whether enough is done to make sure they are not wasting time, lots of them going after the same inward investor. I do not think it is a big problem but I will check on that. What I do want, and it is happening through those regional economic strategies, is for each region to have a clear vision of where its particular strengths are, where it can build on those strengths, in particular where it can get its universities partnering with industry and building up clusters. In some cases you will have technical textile strengths in more than one part of the country. Through our textile strategy we have actually created, if you like, a virtual cluster, bringing three universities together with a number of industries. With the motor sports cluster that already covers three different RDAs who are working very closely together to support that cluster, that area of very high engineering expertise in order to develop that. There is coordination but it is not possible in the modern economy for us to sit in the centre of government and say, right this inward investor is in chemicals, he should go there, this one should go there, it has to come from the bottom up, with some sensible coordination and not central government dictation.
(Ms Hewitt) Of course. When I became Secretary of State I initiated quite a fundamental review of how the Department is organised and whether that organisation actually delivers our strategic objectives. At the highest level our strategic objective is to contribute to greater prosperity for everyone right across the United Kingdom. Our way of doing that is in particular by helping to drive up productivity and competitiveness across the United Kingdom economy but crucially within the manufacturing sector. The strategy for doing that as far as the DTI are concerned, clearly there are other parts, infrastructure investment, that are crucial to the productivity and manufacturing and else where, where we are not the lead department. If you look at what we can do we need to work with the Treasury to ensure that there is that climate for investment, which we discussed, we need to work with the DFES and DWP to ensure that there is the right supply of skills for the manufacturing industry. We need to ensure that there is a dynamic competitive framework because there is very clear evidence that the greater competitive intensity of your economy the more you will get innovation and high productivity in your manufacturing and in your other sectors. We need to have a focus, a much stronger focus, on innovation and on the exploitation of leading-edge technologies and the transfer of proven technologies into the manufacturing industry. We need to have direct business support services, national, regional and sectorial that meet the needs of businesses and that are simple and user friendly. Having said that as a strategy we are organising the Department to deliver that with a new group devoted to innovation, within which this crucial aspect of transferring technologies into the manufacturing industry will sit. I think what we will achieve, this is not overnight, is a much clearer framework for the manufacturing industry and the other business will relate to it and can respond to it and we will then ensure that at the regional level of the RDA there is a clear industrial strategy for that region, that it is understood by a growing number of companies as the RDA builds its partnerships with businesses and that we have at a more local level business links and, indeed, Learning and Skills Councils delivering really good, high quality support services directly to businesses. We are building that, it is not overnight, but I think we are putting in place a much clearer framework to deliver the manufacturing strategy.
(Ms Hewitt) Yes, there will be a focus on manufacturing, not exclusively, because obviously we have other partners in other sectors that we work with, but manufacturing is central to what we do. The reorganisation of the Department will give us three separate groups, one dealing with business relationships and business support, one dealing with innovation and one dealing with fair markets, and the way we shape the competitive environment. In the business group, where we are reorganising, we will have manufacturing sector teams where particularly the larger companies, but also the companies that are really crucial in terms of innovation and driving up value added have a very clear relationship with a team and, indeed, in most cases an individual, who understands them and their needs. We have the Innovation Group focussed on the new technologies and knowledge transfer and the Fair Markets Group focussed on getting the environment right, whether it is a matter of labour standards or World Trade Organisation competitive framework generally. It will be a great deal easier for a company and their sectors and trade associations and unions to relate to the Department and to see what it is that we are offering. The support we offer and will continue to offer for prototyping, we were talking about SMART, is almost entirely geared to manufacturing, the regional selective assistance, the support for investment almost entirely geared to manufacturing. What I want to do is not create a whole lot more schemes, that is last thing that manufacturing companies want, but to ensure that we have an understanding of how we can drive-up productivity within companies - I think we are getting much better - then putting the money behind proven forms of investment, proven programmes that will deliver that. That is why we put more money into the CBI-led For the Future campaign, where we are working with businesses and trade associations in specific manufacturing programmes and it is why we are working with the CBI and Partnership Fund because, again, we have good evidence that businesses that work in partnership with their employees as well as businesses that are sorting out their processes actually deliver greater productivity and greater success.
(Ms Hewitt) I do think that modern apprenticeships have really an important part to play in this. We currently have over 200,000 people doing modern apprenticeships. The engineering/manufacturing sector has the largest number of advanced modern apprentices in training. We do need to increase the numbers and we are planning to increase the number of places so by 2004 more than a quarter of young people can enter an apprenticeship. Alongside that Estelle Morris has just announced the radical reform of the 14 to 19 year old curriculum and the introduction of vocational GCSEs. Those two things and the role of the Learning and Skills Councils and the Sector Skills Councils and Centres for Vocational Excellence I think give us a strategy that has a real chance of overcoming what is about 150 years neglect and, frankly, snobbery, towards vocational education in our country. It is a huge problem but I think we are making some real advances, and modern apprenticeships are, perhaps, the most advanced.
(Ms Hewitt) I am told 217,000. Obviously this is a matter where DFES are in the lead. I can certainly check the numbers for you that we hope that will come through in engineering specifically with that increase. We have a very real shortage at the moment, and it is projected to increase if we cannot make these things work, particularly for engineers and not just at the graduate level but at the technician level where modern apprenticeships are designed to work. Looking across the information and communication sector we already, even now with downturn, we have some skill shortages and the projections are really quite worrying. The other thing I think we have to do is persuade more young women, as well as young men, that engineering and modern manufacturing is incredibly exciting. It should not be difficult to do because that is the reality, as all of us know who know engineering and high tech manufacturing companies. That is not the image in schools. It is difficult to get the girls as well as the boys doing the maths and science subjects at the level they need to do them in order to progress on to an engineering or science qualification that will stand them in good stead. There is big set of issues there that we are trying to tackle.
(Ms Hewitt) I think we provided a fairly comprehensive memorandum, I would be delighted to provide a supplementary one on the whole issue of regulation.
(Ms Hewitt) Given the position we hold in inward investment and given the very long problems of under-investment in plant and in skills and given the productivity announcers, which is very clear it is capital investment and skills that are key issues in the productivity gap, we know that the difficulty the manufacturing industry faces across the whole are going to be cured by better regulation. If you look at the OECD benchmark study you will find that we are in a much better position than, indeed, most other industrial economies. Clearly you have heard complaints and, yes, there are legitimate complaints about the gold-plating of some of the regulations but what you also hear predominantly from business people with small companies as well as large who have operated in not only the United Kingdom but in other countries in the European Union is you may complain about read tape in Britain but if you tried it in France, Germany or Belgium it is a very, very different and much more cumbersome environment.
(Ms Hewitt) The European Commission said that we were doing better than the rest of the European Union. My small business Minister I am afraid to say was rather unhappy with that finding because he wants us to do even better and get complacent about it. It was a very positive report on how well we have already done. We are really improving our regulatory performance. We have the regulatory before the panel. We have Lord Haskins replacement coming along. We have William Sargent, the Chairman of the Small Business Council into a special role actually looking at red tape issues right across Government, not simply from the DTI, from the perspective of SMEs. We are getting better. There is still more to do in terms of regulatory impact assessments and we have made very real progress with our European partners in trying to get equal effort on better regulation in Brussels, where a lot of regulation is coming from. The work of the Mandelkern Group on better regulation gives us an excellent base, and I hope at Barcelona we will get a commitment that the Group will deliver an action plan to implement the Mandelkern Group recommendations, and we get that action plan before the summer. We are making changes there. I am always more than happy to look at specific examples. If you have them from businesses who have given evidence here or businesses in your constituency where they can say, if you look at this particular set of regulations or stuff that some agency is doing we will look at that very, very regularly. As Gus Macdonald's Report showed recently we are doing a great deal to try and improve ---
(Ms Hewitt) No, I did not say that. What I did say was that the main determinants of productivity are the ones that we talked about earlier, it is investment in capital equipment and it is skills and it is the management of people and of processes. These are really key things and clearly if you have excessively cumbersome regulation then for individual companies, particularly the smaller ones, that is going to get in the way, it is going to make it harder for them to do all of the other things
(Ms Hewitt) If you ask businesses, as the CBI has, about what has helped them achieve productivity improvements, what it was working in partnership with their employees to deliver improvements in the processes and productivity. That is the key thing. For individual companies the issue may be that they cannot cope with some particular piece of environmental legislation or whatever and we are tackling that.
(Ms Hewitt) It is clearly important. We gave you a pretty long, possibly over-long ---
(Ms Hewitt) I am very happy to give you a supplementary memorandum. It would be absurd to suggest that our worse productivity performance is primarily or even significantly down to regulatory issues when we have a productivity gap between ourselves, France and Germany where the burden of red tape and regulation is on every objective and subjective measurement much, much higher than it is in the United Kingdom.
Mr Djanogly: One other point which was picked up by a lot of people who gave evidence in different ways, and has been covered this evening in many ways, it is going back to the concept of having a manufacturing strategy. There is no doubt that many people who gave evidence thought that there is a lack of joined-up thinking, we have seen it in our RDAs to extent they work with other agencies, schools and universities not understanding the language of business and the other way round, dare I say some people mentioned the competition between the Treasury and the DTI, how they thought that affected things. Could you just leave us with a message as to how you are going to dispel these assertions?
(Ms Hewitt) I was just contemplating the transformation situation from a government that did not care at all about what happened to manufacturing and presided over recessions that devastated our manufacturing sector and did nothing whatsoever to try and improve the conditions for manufacturing, that is one of reasons why we start further behind other countries, it is not the only reason, some of these problems go back 150 years but they certainly were not helped by nearly 20 years of massive Conservative government neglect, if I may say so. On Monday I was at a meeting chaired by the Chancellor with Secretaries of State in all the departments that have direct interest in how we drive up productivity and competitiveness across our economy. As I said earlier the manufacturing sector is a crucial focus of that productivity drive. I think we have not cracked the problem but I think we are much, much better than we were ourselves four years ago and certainly the previous governments were at understanding that macroeconomic stability, infrastructure, investment, skills, labour market policy, all of these things that are in a competitive environment, all of them, have a role to play and we join them up, and that is what we do.
(Ms Hewitt) It would be an enormous undertaking to try and monitor the implementation of all of the directives that affect manufacturing across all of the European countries and indeed that is a crucial function for the Commission who are responsible for bringing in proceedings where directives are not properly implemented. What we do get, and I am sure that the Committee has had a look at the evidence with interest, are complaints from individual companies, sometimes sectors, that other countries slip their companies subsidies that are clearly in breach of the rules, they somehow seem to get away with it or they are much lighter in their implementation of directive. What we always say is, give us whatever evidence you can so that we can look at it, either learn from it or ensure that action is taken. I have to say that we do not often get evidence, that is a real problem. Where we do we act upon it. There are specific areas where we look very, very carefully at what is happening across the Union, one example of that is the End of Vehicle Life Directive, where we have said very publicly and repeatedly that we will implement that directive, not only on the same timetable, and there was some confusion round that some months ago, we will implement it in a way that does not put our motor manufacturers at a competitive disadvantage with those in other parts the European Union. We are watching very closely what other governments are doing in terms of how that is implemented between the initial introduction and the end date of 2007. We will do that on a case-by-case basis. I referred earlier to this issue of gold-plating. I am not sure I have specific examples to give you, I think there has been occasions in the past where we have been so concerned to dot every "I" and cross every "T" and where our legal system is very different from that of the continent. This is not a point about any particular government, where we may have inadvertently put companies at a disadvantage. We are getting much better at looking at the European directives and not trying to do a kind of over-literal interpretation, when actually that is not intention of the directive or the process by which that directive has been achieved.
Mrs Lawrence: The key is, if there is any evidence it is given to you and you will look at it.
(Ms Hewitt) Thank you.