Select Committee on Northern Ireland Affairs Minutes of Evidence


Examination of Witnesses (Questions 100 - 119)

WEDNESDAY 16 FEBRUARY 2000

MR BRYAN JOHNSTON AND MR NIGEL SMYTH

Chairman

  100. Mr Johnston and Mr Smyth, you are very welcome. The pattern which we follow is that should at any stage you want to gloss anything you have said, either here or later in writing, you should feel entirely free to do so, if perhaps we have misunderstood something or there was something you wanted to add on reflection. Equally, we will reserve the right, if we may, to send you some supplementary questions in writing, if on reviewing the evidence it occurs to us that there is something which we ought to have asked you but we did not. We will try to make the order of questions follow a logical pattern but that does not necessarily mean that individuals around the horseshoe may come in, in the strict order, in which we are sitting. I will also encourage my colleagues that if after one of our colleagues has concluded a particular line of questioning, anybody in the Committee wants to ask you a supplementary question in relation to that particular matter, if they catch my eye they will come in. I do not know whether there is anything you would like to say before we embark on questions. If there is, please do not hesitate to do so.

  (Mr Johnston) Initially, the first thing I would like to say is to thank you for seeing us this afternoon, Chairman. It is a pleasure for us to be here and a privilege. I actually chair the Economic Affairs Committee of CBI Northern Ireland and Nigel Smyth is the Director. We have submitted a document to you. Before any questions, would you want us to refer to that document or elaborate on any point at all?

  101. I will test whether anybody in the Committee would like to add something or whether there is anything you wanted to highlight. We were very grateful to you for sending it to us.
  (Mr Johnston) I do not think we have anything to add.

  102. Let me ask an initial question. What assessment has the CBI Northern Ireland themselves made of the contribution to date by inward investment to the Northern Ireland economy? I will ask that question first and then I have a further question arising out of it.
  (Mr Smyth) We have not done a detailed evaluation. Many of our members would be inward investors. Many of them, Du Pont and Gallaghers, have been here a very long time indeed. Others have been in Northern Ireland more recently. In our evidence, from an economic perspective, we believe that the focus tends to be on direct job creation, which is obviously important, but we believe inward investment is much more in terms of developing the economy, both in terms of its impact on indirect job creation; in terms of the sub-supply potential; in terms of links with the universities and the R&D, etc. It is fair to say that there has been no specific evaluation of those much broader aspects of inward investment. Indeed, we would say (and our evidence highlights this), that the companies, the multinationals which come in, tend to be working in more world-class practices. We support and we spread those skills and knowledge out among the broader business community. That is done in a number of ways, partly through the supply chain, but also by managers who work for multinationals who are now working for indigenous medium and small sized companies. We have many of those successful indigenous companies whose managers would have had experience in a multinational sector. As such, we have not done a detailed evaluation. We do look at economic development policy on a regular basis and we have made recommendations to Government in the past.
  (Mr Johnston) Although we have not done any evaluation, there is no doubt that inward investment has made a significant contribution to the Northern Ireland economy. I think it is important also that perhaps more careful evaluation be done of the issues which Mr Smyth has raised. What is important is the skills which these people outside bring with them, and the knowledge of the industries which may not previously have had a base in Northern Ireland. Those skills and that knowledge should be transmitted onwards to the working population and to the policy makers within the Province. There is no evaluation, either of the level to which that has been done, and what success there has been in it.

  103. I can see that the act of attracting inward investment could vary significantly, according to the state of either security or of political development in the Province. Does the impact of inward investors in the Province vary significantly, according to what the surrounding political or security situation is?
  (Mr Johnston) I think there is little doubt that they react significantly to the image, as perceived by them, of the likelihood of particularly security problems in the Province. On many occasions we know that there has been reluctance by people to engage in contracts if there is a doubt about the regularity of supply or the supply of goods being hindered by any security incidents. So I think that the issue is one of perception, and the perception in the eyes of many is the reality. We have to accept it as such. At this moment, I do not know whether we have had any time to evaluate the present situation—it is merely a matter of a few days—there has been a change in the political process but, as yet, the peace has not been shattered, so to speak, on any scale which, at the moment, will affect others. But who knows? The potential of that may well do so.

Mr McWalter

  104. So do you think the events of the last few days may lead potentially to a catastrophic decline in the prospects for the development of the Northern Ireland economy, leading to widespread unemployment and other things, or do you think that will be too alarmist a prognosis?
  (Mr Johnston) I certainly feel that would be too alarmist a prognosis. We are still basically in a peaceful situation. There has been a change in the constitutional arrangements but I do not think that at this early stage one can possibly say that it will have an effect on any inward investment. We will have to see what flows from it.
  (Mr Smyth) Over the last four to five years we have seen a significant increase in interest, particularly from the United States. I understand from speaking with IDB and the Chamber of Commerce, that there is still a weekly flow of people coming through Northern Ireland, where previously we were just not on their agenda whatsoever. I would agree with Mr Johnston. At the moment, this is a very short-term issue and hopefully it will be resolved. But certainly within inward investment projects, they are taking 12 to 18 months actually to go through. Some hold back a little bit more. Some are probably in the pipeline but there have been others, such as from recent announcements, Nortel, and Fujitsu last week, which will go ahead. This is because the message we have been sending out is that the fundamentals for investing in Northern Ireland have not changed; and actually getting people here for the first time to speak with people who have been here for several years.
  (Mr Johnston) There is an important point in that the Fujitsus and the Nortels are companies which are, in fact, established. The other important issue is to bring as many representatives of target companies to the Province as is logical and possible in such projects, to ensure that they see what we see as the reality in the situation and to make a judgment upon that, and not to make judgments at second hand. So it is very important to get people to the Province, and to get to the Province those whom you wish to attract.

Mr Clarke

  105. This is a general question in three parts, in terms of your views on what it is that attracts investors into Northern Ireland from three different categories. First of all, those investing from the United Kingdom. Secondly, those investing from Europe. Thirdly, of course, as already has been mentioned, those investing in other parts of the world. What are your views of what the attractions are for those three specific groups? Are they the same or are they very different?
  (Mr Smyth) My own view of this is from Great Britain. There has been quite a strong targeting, particularly of call centres, back office type of activities. The IDB focus has been very much on London, City, financial institutions. In the last couple of years we have had a number of successes: Prudential, Abbey National, Halifax this year, fairly significant jobs. It is true to say that in our call centres most of it has been English speaking. What they witness in Northern Ireland is our language skills. If you compare that with the Republic, most of that is international call centres. So there is a very distinct difference. In the United States the focus may be more on the high technology sectors, software, health technologies, plus the potential for the call centres. The big selling point there is a big part of the single European market and English speaking. In the EU, Germany and France, in particular, you are looking at what would be auto components and those sorts of sectors; the way the IDB have cemented their marketplace by this targeting.
  (Mr Johnston) That is what is happening. You asked the question: what actually attracts? We tend to pride ourselves on an educational system which produces very good people at the top end. There are certain problems with regard to the educational system at the lower end but there are high educational standards. We would believe as well, and one must particularly congratulate BT on this, on the communications infrastructure, which is already in place. The roads are of a high standard. We would tend to believe also that there are various other (shall we say) social activities that people may engage in. They are able to do this because of the relatively small size of the Province and the relatively low density of population and the easy access of so many facilities. These are obviously selling points at this end. There is also the fact that there are good employee relations, low strikes, and a good work ethic. There are factors such as these which will attract people once they have been made clearly aware of their existence.

  106. A question in three parts and an answer in two parts. You rightly say, Mr Johnston, what attracts. Mr Smyth was very interested in answering in terms of different sectors being attracted from different parts, be it British and those from America, which you said were high-tech, as opposed to call centres. That could be very powerful for you in terms of managing which industries and which sectors gain access to the Northern Ireland economy, or is it still a case of all are welcome? Are you trying to attract particular groups?
  (Mr Smyth) We are looking for the high quality. In call centres it is a very big range. It is a fairly basic job to fairly sophisticated, particularly in financial services. Certainly a lot of the jobs in the Halifax and Abbey National would be very highly trained financial service providers selling financial products. Indeed, if we look at a company in the north west, Stream International, they are selling technical back-up. Hopefully, at some stage, they would start to see individuals spinning off but there is a very high level of call centre services there. On the call centre side it is the people's skills. The surveys indicate that people like hearing Northern Ireland accents. They are reassuring, which is very comforting. There has been a focus. Certainly we have been encouraging IDB in recent years to be focusing on the quality of the jobs. The labour market in Northern Ireland has been tightening up. In terms of economic development you want to raise earnings levels, so you want to get away from the assembly operations. We think it is true to say that in the 1970's and 1980's we did not have much chance, we really did take everything, but certainly in the last five or six years the IDB's focus has been much more on higher quality jobs. We certainly would be encouraging that.

  107. I am suitably reassured by your answer.
  (Mr Johnston) Also, when you were talking about other parts of the world, there is no doubt that one of the reasons why they come to Northern Ireland is access to Europe. In some ways, if they see that as outweighing the advantages or disadvantages they see elsewhere, they will come.

  108. I wanted to probe a little bit further the comments made earlier about the current situation and matters relating to the suspension of the devolved institutions. Do you see that having a significant impact, the suspension of the devolved institutions, or were you saying that in the wider issue people should look at the general security situation rather than necessarily the day-to-day issues, such as this, with the suspension of the devolved institutions?
  (Mr Johnston) I personally think the suspension of the devolved institutions is something which hit the world press initially. If you have a continuous number of incidents reported on the news media throughout the world, then they perceive the situation as one to be returning to violence—I would hope that does not occur. However the changes in the constitutional arrangements may, in fact, be ones which will not have too detrimental an effect or none at all. But that is an aspiration. One would have to see what, in fact, occurs.

Mr Donaldson

  109. May I ask you about the impact of devolution. The devolution arrangements which are, of course, in abeyance at the moment, are in suspension. It introduced a concordat on financial assistance to industry. What impact do you expect this to have on Northern Ireland's ability, vis a" vis other parts of the United Kingdom, to attract inward investment? Is this likely to reduce the flow of inward investment to the Province from Great Britain?
  (Mr Johnston) If I could take your first point, I think we would have noticed in the early stages of the Stormont Assembly, that the Ministers in the devolved Government were setting about their tasks with an enthusiasm and industry which were quite impressive. In that devolved administration there were more Ministers than were involved in any form of direct rule, so we got more specific ministerial involvement in specific activities. There has not been much time to see results coming from it but the approach and the methodology and the accessibility of the Ministers, and their desire to have meetings with organisations such as with CBI and other business organisations, was extremely encouraging. So from that point of view, the suspension in itself will be bound to be detrimental to the progress that we have felt was being made.
  (Mr Smyth) On the concordat, up to now, we assume that there has been some agreement or consultation between the various parts of the United Kingdom, particularly with major investment projects. Certainly it would have made sense to avoid regions outbidding even other and competing with each other on a taxpayer's perspective. It is fair to say that grant rates have been reducing. We would like to see them continue to reduce. Some of the recent investments in Nortel earlier this week yesterday and in Fujitsu were down on 10 or 12 per cent. Obviously it is to focus on and to encourage people to come in on the fundamentals. That is going to be largely around the skills base, the R&D, etc, on the back of that. From our perspective, we are not going to be particularly clear on what liaison went on before, so what impact the current concordat will perhaps actually have.

  110. If we look at the Regional Development Agencies in England, and obviously Scotland and Wales with their devolved administrations, do you think that the competitiveness of those areas or regions of the United Kingdom is going to inhibit the flow of inward investment from Great Britain to Northern Ireland?
  (Mr Smyth) I do not think so. Having had eight weeks or so of the Assembly, anyone I have spoken to in the business community, their expectations have been by what we have seen or heard from Ministers. I believe we can really make things happen in Northern Ireland. I would agree that competition is going to increase from these RDA's, although it is probably unlikely that—obviously Scotland and Wales have fairly significant inward investment units which would compete with IDB. I was thinking of bringing in United States investment, where maybe we have some additional links in terms of the Irish connections. From Great Britain itself, most of those investments have been in the call centre areas. There has been competition all along in that area. I think in Northern Ireland the surveys have indicated that there would be a very low turnover, so I think the fundamentals are so good for Northern Ireland that no doubt there will be an increased element of competition.

  111. Do you think that Government, whether it is direct or in devolution, needs to do more to provide for that competition? Is there more that you feel can be done to increase the competitiveness of packages offered by the IDB to inward investors, that may give Northern Ireland an edge over other regions in the United Kingdom?
  (Mr Smyth) In terms of competition, I think the feeling in Northern Ireland is that our biggest competitor, and this would probably be for the international investment—I said Great Britain would be for the Republic with its taxation regime, etc—that really our biggest concern is looking forward. That in 2003, the Republic is going to offer twelve and a half per cent Corporation Tax for every company in the Republic. We see their personal tax rates coming down. So you are getting a very attractive environment, plus being part of the euro, the lower interest rates. So that is where maybe the general concern would be on that area. In Northern Ireland, the package has to be attractive. One of the problems is that when we do comparisons in Great Britain there is sometimes a lack of transparency in this. We know that local authorities in England have bigger powers and can get involved in terms of property and various things. Certainly one or two companies said to me that they have invested in Great Britain rather than Northern Ireland because there was a more competitive package. But if you are getting down to individual plants, it is very difficult for us in terms of what packages are on offer.

  112. Has the political situation in Northern Ireland impacted on the long-term involvement in Northern Ireland of inward investors? Has this affected the character of businesses willing to invest, i.e. the kind of businesses that have been investing in terms of the sustainability of that investment? Do you think that has been impacted by the political situation and do you see that changing?
  (Mr Smyth) I certainly believe in the last four to five years that both the quality of the organisations—and we have been getting in some very blue chip names in the last few years—and the quality of the jobs, which has reflected the nature of the sectors, have now become our target. These have indicated that with both peace and political stability we will have a better quality overall. Inward investment will make a bigger impact on the economy. I think there is a short-term issue. It all depends on what has happened. We all have to see what happens in the coming weeks and months. Certainly if we go back to political instability—and a perceived higher risk of violence may be associated with that—obviously that is not good for attracting inward investors. Indeed, at our last council meeting one of our members, who is now a joint venture and a United States parent, said that if we go back to political unrest, if there is trouble on the streets, if the logistics unit cannot move their goods, they will have to get out of Northern Ireland and go to the rest in the United Kingdom or elsewhere.

  113. In terms of the character of inward investment, what do you think Northern Ireland needs to do to try and attract investors who are there for the long term? One of the concerns that has been expressed about the spate of call centre type of investments is that the nature of that kind of business is changing, and as there are advances in modern technology the need for manpower levels in call centres will reduce. Therefore, there is an argument that says, "Well, that fills a gap." So what do you think we need to be doing in Northern Ireland to try to attract investment that is long-term in its character?
  (Mr Johnston) Could I come back on an earlier point, which Mr Donaldson was indicating, because I think it is relevant. You were talking about the competition with Scotland and Wales and the RDA's there. In the United Kingdom I am sure that in terms of incentives, differential tax regimes, and the like, the opportunities for giving an edge to one area are going to be limited. I think the most important thing that a government in Northern Ireland can do is to go back to the basics. The quality of the education. The quality of the labour market. The skills. The links with universities. I am not trying to be exhaustive in this because there are many more but I think it is those factors which will tempt people once they are made more aware that they do exist. I would have thought that considerable efforts should go into those areas, particularly the basics which will attract industry and make it clearly seen that there are advantages, in those terms, in being located in Northern Ireland.

  114. So to summarise, you would suggest, Mr Johnston, that the greater resource is the skills and the people rather than some kind of tax incentives. I suppose that implies there is a greater discernment amongst investors today. That, in fact, perhaps it is skills shortages in other countries that drives companies to look to other markets to invest, or locations within those markets, rather than fiscal benefits and grant packages?
  (Mr Johnston) I am not necessarily saying that. I am working on the basis that within the United Kingdom it may not be feasible to have differentials between the regions. If one is competing region by region it is going to be on the basis of the perceived best location. However, as Mr Smyth said, we would certainly see one of our biggest competitors—indeed, the biggest competitor in the area for inward investment—as the Republic. There is not the slightest doubt in our minds that the much lower tax regime has had a significant effect on encouraging companies to locate there.
  (Mr Smyth) Skills are fundamental. There is no point in having a good fiscal regime if you do not have the skills there in the first place. Skills are key. Obviously the attraction in Northern Ireland is that we have very high quality graduates. We are losing a lot of those graduates still, many to the Republic and many to the rest of the United Kingdom. There is potential to bring some of those people back. But I think it is fundamentally skills in the first place. What we are saying, at the moment, because skills are going up, is that in the local indigenous companies and indeed some of the existing investors, wages are going up in the IT sector. They probably are around the world in terms of the demand for them. From an economic perspective that is probably good for an earnings level but it does mean that those companies are constantly going to be having to add more value to their products if they are going to increase their productivity.

  115. Does CBI have any access to figures in terms of graduates who are actually leaving Northern Ireland?
  (Mr Smyth) We do not have any access ourselves. Through the Software Industry Federation I have seen figures. There are figures certainly available because these are monitored in terms of what are produced in various universities and where they go. I may have heard a figure of something like 40 per cent of our graduates leaving in the past. I think the software companies here are recognising that they have to provide more placements. The companies in the Republic have really got their act together in terms of linking in with the universities, providing work placements for the summer, etc. I think it is only in the last year or two that the Northern Ireland companies have been trying to get their act together on that; to make it attractive to come and join local companies.

  Mr Donaldson: Chairman, it would be useful if we were able to get access to those figures because they are in fact pretty important.

Mr Grogan

  116. In your opening remarks you made reference, in paragraph 5 of your memorandum, to best practice being more prevalent amongst the multinational computer inward investors than within the indigenous firms. Why do you think that is? Is that a question of state-of-the-art equipment and new operations setting up, or is it more fundamental than that? Is this something that is peculiar to Northern Ireland or is it United Kingdom wide, that this difference in world practice is noticeable?
  (Mr Smyth) I think there are two questions there. I suppose the first one is to do so with leadership and management. One would anticipate that the multinationals will have managers who are coming in who have been well trained; a lot of time and money has been spent on training them. They have the processes in place. They have brought in the consultants. That is the key one on that. On your second point, I would not expect this to be very much different from anywhere else in the rest of the United Kingdom or the Republic or anywhere else in Europe. I just think that large companies have the resources and management expertise to put these processes into practice.
  (Mr Johnston) Just to elaborate a little upon that. When you have such a large percentage of businesses in Northern Ireland which are small in terms of employing less than ten people, the managing director may also be the production director, the sales director, the secretary, and every other part of the business rolled into one. When you are having to give your attention to running the business, you can so easily make the urgent the enemy of the important. You can be so totally focused on making certain the business continues and ignoring what it is that you need as an individual, and your labour force needs as a group, to acquire in terms of skills and knowledge to ensure the company can progress. So I think that the prevalent smallness of the average company in Northern Ireland is a factor which causes this. In the CBI in recent years we did introduce a programme which we called the Company Fitness Analysis; basically trying to get companies to benchmark themselves against the best practice in their industry; not necessarily the industry in Northern Ireland or the United Kingdom but on a world-wide basis. This was unfortunately, in some ways, rather a new concept to too many people. We have been focusing very heavily on best practice and, of course, the Northern Ireland Quality Centre, which has been established, is also focussing very heavily on this in the attempts to raise these levels of skills.

Mr McWalter

  117. You mentioned earlier that there was some transfer between inward investors and your indigenous industries. Sometimes there will be a work transfer. People will work for the multinational for a bit and then move sideways to an indigenous industry. But to what extent does the CBI seek to encourage the transfer of knowledge and expertise between different companies in other ways, apart from that rather haphazard or unintentioned mechanism?
  (Mr Smyth) We do that a certain amount ourselves but it is fair to say that we have limited resources ourselves. We see the IDB and LEDU, the Local Enterprise Development Unit, having more facilities and programmes to encourage that. Mr Johnston said about the Quality Centre which, in particular, would be promoting total quality management. There are a number of processes on that front. I think that there have been some schemes in place. We certainly see the supply chain as a key way of driving that. There have been programmes in which Shorts have been actively involved, with their supply base improving the capability within those companies supplying them. Currently, this is through the Northern Ireland Growth Challenge, where there is a supplier and development programme, which the IDB and Growth Challenge are working with. Also, there is some sectoral work undertaken through some of the sectoral organisations. There is an initiative called Expertise Exchange within the textile industry, where some of the larger companies and the large indigenous companies, who believe they have a world-class practice on various aspects of design or logistics, are making that available for other companies to link into. There are also various mentoring programmes in place between large companies and firms. I think there are a range of mechanisms out there to try and do that. One of the issues is that you need to ensure that you have smaller companies which are motivated and have a desire to go down this route because it is a very competitive world out there. The largest companies having to look at reducing their cost basis is very competitive, and small companies are going to have to meet up to the standards that they require and the costs needed.

  Chairman: I fear I should have said this before we embarked on this series of questions. We are on a running whip today. Sometimes we are in a situation where we vote at 7 pm or 10 pm or whenever. On this occasion votes can occur at any moment because we are taking continuous business. We have such a division at this moment. What I will do is to suspend the Committee.

  The Committee suspended from 16.52 pm to17.02 pm for a division in the House.

  Chairman: Mr McWalter, I think we may have cut one of the witnesses off, almost in mid-sentence, but perhaps you could help him in remembering where we had got to.

Mr McWalter

  118. We were talking about the transfer of knowledge and experience between inward investors and indigenous companies. We had arrived at the conclusion that CBI resources themselves were very limited, although you were very grateful for the work that is done in this regard by the IDB, including various mentoring schemes and other such things. You also mentioned in your response that there was a competitive dimension to this, however, I was wondering to what extent you feel that the overall Northern Ireland economy might not be able to participate in the wisdom contained within the different companies within Northern Ireland, either because of the demands of competitiveness or the demands of confidentiality. To what extent do you see these as barriers to the sharing of expertise on best practice and indeed the expertise more widely, the technical expertise and so on?
  (Mr Johnston) Those have been problems in the past. Certainly some years ago we had meetings with various sectoral groups. It was very clear that although they knew each other, they certainly did not talk very much to each other. They would not tell each other what they were doing and there were considerable barriers. Our efforts have been to try to break down those barriers. We have been somewhat informal in our contacts with them but we would believe that with such things as the emergence and the success of the Quality Centre, and the large multinationals coming in, they have been able to introduce, or are in the position to introduce, a greater degree of realism and have been doing so. I believe also with the inward investment that there is actually a mutuality to all of this because of what are undoubtedly the greater skills, especially management skills, coming from those inward investors. They may well have some junior manager who would benefit from being seconded or placed with some small firm. It will give him, albeit on a smaller scale, a wider framework for his expertise to be exercised and his knowledge to be increased. That will be a benefit to the multinational but one would feel as well that in those circumstances there would be considerable benefit to the indigenous company which was utilising that individual's skills.
  (Mr Smyth) I agree entirely with Mr Johnston. In the early part of the 1990's, and before that, there was very little co-operation between companies, even in sectors. But through a range of initiatives, including the Northern Ireland Growth Challenge, companies have been sitting down looking at the sectors, assessing their strengths and weaknesses, and what needs to happen within that. Over the last five or six years there has been an increasing amount of co-operation and the realisation that the real competitors are not other guys down the road—this is in the Far East or wherever else—there have been increasing levels of co-operation and sharing. I also think there is a lot more which can be done but we have certainly been moving in the right direction in recent years.

  119. So to summarise your comment there, you are very much more committed to what you might call "co-operation" rather than "defensive competition" between companies in some sectors, is that right?
  (Mr Johnston) I think there is a phrase, which I have heard coined elsewhere, called "co-operative competition" or "competitive co-operation". It is a matter of trying to ensure that where a firm can do something on its own, then it will do so, but if a project is too large for it, then, for the benefit of the area as a whole, it should co-operate with others. To do that they really must exchange information, exchange ideas, and ensure that they work together.



 
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