Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 260-279)



Mr Hoyle

  260. It is interesting looking at the strong pound, we look back at Germany when they had a strong deutschemark that they never had a problem—manufacturing, in fact, went from strength to strength. Is it not because industry does not invest at the right time that is part of the problem we are suffering now?
  (Mr Legg) Yes, I think you are absolutely right; because Germany has coped with a strengthening deutschemark over a long period of time. What happened really (and I think is what we have described in our presentation as a "shock", if you like) was that the weakening of the euro happened very quickly. We basically got caught out, if you like. If it had happened over a period of time, which is what happened with the deutschemark, during that period (and statistics in the presentation demonstrate this) they have continuously invested in new equipment and new technology; and therefore maintained the strength of their companies. They have been able, if you like, to take 3 per cent or 4 per cent out of the cost per annum with productivity improvements and using technology. We, on the other hand, suffered a 15-20 per cent loss of competitiveness very, very quickly. With this history we have had of years of under-investment we were basically caught with our trousers down—for want of a better expression.
  (Mr Davis) On investment generally, Chairman, I think for the plastics, rubber and coatings industry there was a brief golden age, which was in the late 1980s, early 1990s, when the UK was seen as a kind of aircraft carrier for 1992 and the Single European Market. Certainly our industry has benefited substantially from a huge amount of inward investment from the US and from South East Asian companies, particularly into the car industry, electronics and other areas with about £10 billion of inward investment. That was a benefit to our industries because everybody had to pull their socks up and meet better quality, better delivery deadlines, better everything; and it was a great thing for our particular industrial sector at that particular time. Of course, we have now seen firms, and the examples are well known, who came in at that time and made big investments, Motorola, Siemens and many others, who are now reducing their UK exposure substantially, and this is quite a worry to us. We had correspondence with Patricia Hewitt about this and she reassured us that there was an aftercare programme being run by the DTI to make quite sure these firms that came in did stay here and were not going to leave the UK. It is a fact that many of those customer bodies that our industry supplies into are looking for other locations abroad and we are not as attractive for inward investment as we were in those years. I back-up what Mike says—the DTI are very helpful indeed, extremely helpful. We have listed in our nine association submission the various programmes we have for our plastics, rubber, coatings and associated machinery sectors to help us with competitiveness initiatives. I think we hope their eye has not been taken off the ball by the DTI review which has been going on for a long time now and is much delayed, and that we can get back to really making sure there is a strong voice for manufacturing. Everything Mike says about the Treasury is correct. I went in to see Treasury officials with one of our member companies who, because of their £½ million Climate Change Levy bill, is seriously thinking of closing production and moving production to France which has abandoned plans for such a tax; the Treasury officials tried to be helpful but stuck rigidly to their points over which they have points for all sorts of things, as we know. They have four points for judging the Climate Change Levy—one of which is not the effect on competitiveness where Lord Marshall did play some part in pushing this tax some years ago and specifically requested that there should be a test as to whether competitiveness was actually in this proposal or not; and that is not one of the four tests. Although the Treasury officials were as helpful as they could be, they could really offer no solace to the company we brought in, who are due to make a decision very soon on where their production goes.

Mr Djanogly

  261. Staying on investment, there cannot be much of a better time to borrow money in terms of interest rates than now, where probably at or around the bottom of the cycle most people are saying at the latest in 2002 there will be some kind of recovery; and yet you are still incredibly negative in terms of investment; which in some ways gives great cause for concern because if people are not investing at this stage of the cycle, which would be the normal time to do so, then what is going to happen later? You still have not really given a reason why it is not happening. A very good reason was given in relation to the Climate Change Levy, but are there other factors that you think need to be addressed in order for companies to want to invest?
  (Mr Legg) First of all, as far as the SMEs are concerned, I have to repeat what I said before, which is that many of those are finding themselves financially weak at the moment, which means it is very difficult for them to borrow money, it does not matter what the rate is. Traditionally, in the UK our interest rates have been marginally higher than in Europe; but then on top of that the risk factor that our banks add to that is very significantly more than it is in Germany, for instance, sometimes as much as 5 per cent. The cost of borrowing is quite expensive in the UK. As against that, why are people not investing now in readiness for the upturn? There is a general lack of confidence—I do not think there is any doubt about that. I am trying to be very cautious. I do not want to create this idea of doom and gloom; it is not beyond recovery by any means. I am trying to relate the feelings we see from day to day amongst our customer base, for instance, as to why they are not investing at the moment. One is, as always, they are not getting the work, they are not getting the business that gives them the confidence to be able to do it. Sometimes there is a chicken and egg situation. Some companies will invest in new technology and then go out and try to find the work to fill it up. That used to be much more predominant 15 years ago—today it is very, very rare. The kit, basically, is quite expensive, and it is too risky for them to do that. What they are tending to do now is say, "We'll buy the kit if and when we get the work". Of course, the people giving the work are saying, "You haven't got the kit, so how do I know you can make it?" It is a difficult situation. As against that, there is the question of skills levels. A lack of skills levels can sometimes limit people's intention to invest in capital. If they are going to spend £ million on a machine tool they want to know they are going to be able to use it with at least 85-90 per cent efficiency. Skill levels sometimes reduce that. We would argue very much today that investment in new high technology equipment brings with it skills training, not only directly as far as the supplier is concerned, but inhouse it boosts confidence tremendously if the workforce sees a company is prepared to investment a significant sum of money in new kit; and you find people queuing up saying, "Please can I be trained on that piece of kit, I'm fed up of working on a two-handled lathe". I think from that point of view it is extremely good. Coming back to your question, people do not have the confidence; and I think that is the single biggest reason today why people are not going out and saying to their bank managers, "Can I borrow £ million to buy a machine tool?" The first thing he is going to say is, "What's your return going to be on that? Have you got the work to go on it?" I think probably lack of work is one of the problems.

Mr Hoyle

  262. To take you on and talk about investments and companies not having the resources to invest—do you believe that a Regional Venture Capital Fund will help address the problem for SMEs?
  (Mr Legg) It is a very interesting question because, as I mentioned before, at the present time less than 1 per cent of SME finance is coming through venture capital. There has been a reluctance in the UK to go down this line. It has been much more acceptable for instance, typically in Germany, for banks to take an equity share to be involved in the management of the company. I think, to a limited extent, culturally in this country, especially amongst the SMEs, there is a reluctance to let an outsider a) take equity and b) sit on a Board meeting. Therefore, it is not just a question of making this capital available—it is a question of a cultural change. The other thing I would question is, my understanding of the Regional Venture Capital sources is that it has to be an commercial rate; 50 per cent of the money is coming from the private sector; and my question would be: is there going to be any interest rate benefit to the end user over the normal sources; or is there going to be a greater comfort that the source is not going to withdraw the money in the short-term; because that has been one of the major problems for SMEs in the past, that the banks have been far too quick to pull the rug, rather than to support companies through a difficult period of time. Again, this is a cultural thing that differentiates us from the rest of Europe. I hate to keep mentioning Germany, but it is fact of life that they do have a much more manufacturing-friendly environment in which people can invest than we do in the UK. I am not sure personally whether these Funds will be successful. I am sure it is worth trying. I think it is a good idea, but I think there has to be a cultural change as well.

Mr Lansley

  263. The availability of finance to SMEs has been the subject of a report and the Treasury are considering their response to that. Have you made any submission to the Treasury in respect of that? Is there anything in particular you want to see done in relation to banks?
  (Mr Legg) We have not made a representation to Treasury in the current run of things. The MTTA some years ago did do that. We produced a report, in fact we commissioned Oxford Economic Forecasting to produce a report about the difficulties of obtaining finance for SMEs. At that time my recommendation was that the Treasury should consider, or the DTI should consider some scheme where they could support (and I hesitate to use the word "subsidise") a reduction in commercial interest rates for SMEs investing over the long-term, something like 2 per cent, in order to reduce this differential that exists of higher interest rates being charged to UK SMEs compared with their competitors within Europe. One of the other things we recommended at the time was an extension of the small firms loan guarantee scheme, which actually did come about but has not been effective, which is one of the major problems. I think this is perhaps indicative of a lot of these schemes that are put forward by the DTI and Treasury; it is not just putting the idea forward, it is how it is promoted. The small firms loan guarantee scheme was left to the clearing banks to promote and use as they saw fit when somebody came in to them and asked for money. As a consequence, very few SMEs were aware of the availability of these guarantees, or how to get them, or what they were for. Certainly in the early stages (I do not know of late) there was a very low uptake of small firms guaranteed loans, which I think is a shame; because one of the major worries for a company investing is the problem of what happens if they hit hard times. Let us face it, there is a business cycle; all firms suffer, as we can see at the moment. In those bad times, some sort of guarantee to cover bank borrowings would help companies and would prevent the banks from pulling the rug too quickly. I think there is probably an avenue to be looking at there.

Richard Burden

  264. I would like to pursue further the issue of cultural differences between ourselves and Europe which you have alluded to, and maybe what the key things are you would like to see us to do over here. When you mentioned Germany, and you have mentioned it on several occasions, you have talked about a willingness to accept equity stakes in manufacturing?
  (Mr Legg) Yes.

  265. In a couple of your comments you have linked that fairly directly to the banks themselves being structured regionally, and the fact that regional government in Germany has a big role in that. Do you see any lessons for Britain in that? How far do you think decisions being made regionally would help or hinder the kind of processes you are talking about?
  (Mr Legg) This is a huge question. The problem is I guess that in Germany, for instance, this has been the culture for many, many decades. We do not have that culture in the UK. If we are looking for RDAs, for instance—particularly the current DTI review, which we were very concerned about, seems to be pushing a lot more decision making and power out to the regions; if that was at the cost of sectoral support we would be very concerned. We think there should be national policy for manufacturing and for sectors of manufacturing, or sectors of anything basically; there should be national policy for sectors. That policy should then be administered in the regions. I do not think the policy should be made in the regions themselves as such. I think there is a danger if you put too much power into the regions they simply are going to be wasting their resource competing with each other. I think that is a real possibility from what I have seen.

  266. How would you get the kind of sensitivity at local level of the banks, government institutions and industry unless you actually base it more regionally? As you say, Germany have built up over many years; but do you think it has been an important issue there? How do you do that in Britain?
  (Mr Legg) I certainly believe it is very, very important for investment in manufacturing companies in Germany. I think it is a good example of where investment has taken place enabling them to cope with this continuously strengthening exchange rate. They have improved their efficiency, and they have been able to hold their costs down, and they have invested continuously in R&D and product, which clearly has not happened in the UK. How much of that is related to the regional cultural thing I do not honestly know, but I think it is an important factor. I would again come back to what I talked about before, about our number one request to government. The buzz word I did not use was a manufacturing "strategy". I think there should be a manufacturing strategy. I am not sure whether there should be a minister for manufacturing as has been mooted around. If there was a minister for manufacturing I am absolutely certain he should be in the Treasury and not the DTI, which might cause some problems. I believe a national manufacturing strategy, policy if you like, is what is required to change the cultural attitude towards manufacturing as a whole and investment in manufacturing; and then that would be able to be implemented in the regions. I do not think the regions should make their own policies.
  (Mr Davis) Chairman, could I support what Mike has just said. Our industry in the plastics and rubber industry is a very spread out industry. There are certainly pockets in certain parts of the UK but it is very spread out. There are a large number of SMEs in every town and city in the country. We are concerned, although regional development is desirable and led locally, that in RDAs competing with each other we may lose the national picture. That is certainly a concern of ours. On the manufacturing strategy and manufacturing representative point, I think there is no question that we would like to see a stronger voice from government on the importance of the manufacturing sector. We have a lot of indigenous strengths in this country for my industry, plastics, rubber and coatings. We have of course our own oil and gas supplies; we have substantial chemical facilities in this country which are great national strengths for our industry, and a great record of innovation as well. I think the Budget is obviously a signpost for everyone. Conditions are very bad indeed, and we are looking to the Budget to see some recognition, particularly from the Chancellor, that there is a recognition of the difficulties we are in. I will not go into it now, but EAMA and our nine associations have made a strong point about the need to do something on capital allowances. We have also made a strong point about the need to do something about the burden of the unfair and poorly designed Climate Change Levy as well. We need some signals from the Budget strongly for the manufacturing industry; perhaps not a manufacturing minister, but we do need recognition from the Treasury itself that their assistance and government policy could make a lot of difference in the particular area we are in.

  267. You have made the point about losing the national picture and over-emphasis on regionalisation. Could I ask you your view about whether we could have similar problems coming out from sectoralism, and how you would see, for instance, the problems mentioned to us by one or two witnesses, and to me anecdotally as well, of particular clusters of industries that are not easily definable by this sector or that sector—for example, performance engineering, which straddles automotive, aerospace, information technology and all sorts of things. When you look in terms of various strategy documents it actually does not exist as such. How would you get that network of industrial clusters working as well as a fairly regimented sector approach?
  (Mr Davis) In a sense I think it already is operating at an industry level. For example, the component suppliers to the car industry work very closely together. The trade associations involved in components and car supply work extremely closely together. The Industry Forum, which the Society of Motor Manufacturers and Traders started some years ago, we have been heavily involved in, and my colleagues in the rubber industry have been heavily involved in as well. It does exist already; this clustering round the particular marketplace that we are actually supplying into does happen. This is where, in certain regions where there are such strong clusters, the RDA is already trying to give some assistance. West Midlands Advantage, for example, is already making a difference, I think, in the car sector, component suppliers and, indeed, the car industry themselves. Within industry itself, these networks are well developed. We cannot afford to live in separate shell-like structures; we have to work with each other. Certainly in the industries that I come from, in the larger realms these are European or even international businesses in the larger and medium-sized companies, which may be British owned, and maybe British owned manufacturers in Europe as well. So we are not an inward-looking industry in the sense of the customers of the our industry; or, indeed, in the sense of the European Community either.

Mr Lansley

  268. Could I stay with this point you are making about the forthcoming Budget. In EAMA's evidence there is reference to the desirability of extending and making permanent capital allowances—100 per cent capital allowances. At the same time you make the point that SMEs may not be making a great deal of profit, the level of Corporation Tax by the SMEs is relatively low, so allowances themselves do not necessarily give the benefit that is sufficient to promote an investment incentive. What kind of incentive are you looking for? Can you explain a little more about what in practice you want to see from the Budget?
  (Mr Legg) I think you are absolutely right, there is a problem with the Capital Allowances, in that inevitably the company has to be profitable in the first instance to take advantage of it. Also, it does not actually get a cash advantage from this until the Allowance is knocked off its tax bill nine months after its year end. So there is a considerable delay factor. As against that I would argue, one of the major benefits of the government coming out and saying, "We believe in manufacturing, and to prove it we are going to give 100 per cent Capital Allowance to SMEs", is the enormous boost in confidence it would give. It would give confidence to the companies and to the people who, after all, are being required to invest their own money. I think that is very important. Perhaps it would also send the right message to those providing finance, to the bankers, the finance companies or what-have-you, that the government is going to support manufacturing in the long term. I might add, we have not put it in our presentation but something actually cropped up over the weekend, one of the problems that arises for companies making investments is putting up the VAT at the front end. Whether they are buying machine tools, for instance, outright themselves from retained profits, or whether they are using bank finance, hire purchase for instance, they invariably have to put 100 per cent of the VAT upfront which is 17.5 per cent of the investment. Okay, they get it back after three months but you would be surprised, because we are talking about quite high value equipment, that can be a barrier in some instances. It may well be that the Treasury could consider some deferment on the VAT payment on capital investment.

  269. You make a reference in your memorandum to us about the small engineering firms investment grant scheme. Do I gather from what you are just saying that you anticipate and wish to see changes in tax, changes to the Climate Change Levy and Capital Allowances; but you are neither anticipating a government grant scheme nor is it likely to be able to be introduced by the government because of the EU State Aid rules?
  (Mr Legg) Exactly. I think this is the only reason not to be emphasising it because, as I mentioned in the presentation, it is undoubtedly the best thing that ever happened to small engineering firms in the UK back in 1982. Something like £200 million was handed out—one-third of the value of the investment—and it gave companies enormous confidence, it enabled them to put down that 20 per cent deposit they very often have to do with the hire purchase; but the most important thing was, in those days, there was a significant change happening in engineering in machine tools; it was a change from manually operated machines to computer controlled machines. The timing was good because it enabled a lot of engineering companies to make that quantum leap into the new technology and ensure their survival at a time when otherwise if they had not been able to make that leap they would have faded into obscurity. It was extremely valuable, it was well taken up. Unfortunately, the Government commissioned some independent advisers afterwards to do an appraisal of whether it had been successful or not and it got at best a mixed report, if not a damning report, saying they were not sure that it had been successful. I think that is very disappointing because from first hand experience at the sharp end I know very well what good that scheme did. We are not emphasising it, I have been warned off it, if you like, because it is highly unlikely that the Treasury would be prepared to put cash up; secondly, it is highly unlikely that it would come within the bounds of European aid. Having said that, I would like to say that the European Commission has come out openly more than five years ago to suggest to member governments that they should support SMEs.[3] They are the powerhouse of a lot of industries and are a sound basis for economies. It seems to me that there are ways of offering state support, state aid, if it is focused very much on SMEs and particularly focused on high technology investment in manufacturing. Certainly there seemed to be a little bit of a blind eye turned and I think the Government can make a lot more of what the Community allows in terms of state aid or support to SMEs than it is doing. We could quote examples. For instance, in Italy the Tremonti law has been re-introduced for a second time, giving substantial support and tax advantages to companies investing in new high technology equipment. They have always had a culture of soft loans, interest rate support, guarantees. Similarly, in Germany and France there is an enormous amount of support for SMEs. I would agree that this very often comes through the regions. It would almost seem as though the regional approach is very much favoured in terms of being able to fund support for investment. If I am critical, we have had regional aid in the UK. I would be critical in that it has been cumbersomely organised so that a lot of people have become so frustrated when they are applying because the whole process takes too long. So often in making investment decisions people are having, particularly in this country, to make short term quick decisions, "Yes, I have got a contract. I need to be able to invest to be able to fulfil that contract. I cannot afford to wait for three, four or five months to apply for a regional grant. The opportunity will be gone." I have seen it happen in a number of cases.

  (Mr Davis) To take on a point Mike made there about cumbersome regional aid, we all very much welcome in the DTI review the review they are undertaking of all the different grant mechanisms that the DTI has which are very confusing for many companies and indeed for their trade associations. This cull is something which we have looked forward to for a long time. It is a fact that in an organisation called Faraday Plastics, which is an R&D body, they found in a survey they did recently that 31 per cent of companies they surveyed in the plastics sector have never sought technological support from outside agencies, and 71 per cent have never received a government grant or other funding support. This is lack of awareness but it is also the off-putting form-filling that goes with it. These are very small firms in many cases with very limited management time under a lot of stress at the present time and they just do not have the time to get into the paperwork, even though bodies like my own try and give them the maximum help we can. We particularly welcome that cull. We would also like to see attached to that a bit more oomph put behind the drive to drive out unnecessary regulation. We have made something of this in our nine-association submission. Patricia Hewitt has announced a new initiative only aimed at small business which we do not think is tough enough and we give our reasons in our submission. We do not think it is adequate at all and a lot of legislation needs to be retrospectively visited and culled as well. In our industry, plastics, rubber and coatings we are facing a tidal wave of new regulation which has not reached us yet, much of it coming from Europe. There is the Waste, Electrical and Electronics Directive and only part of that has appeared in the form of the fridge mountain. There is a lot more than that on the horizon and a lot more bureaucracy and costs for the companies to come. There is also the End of Life Vehicles Directive which is being implemented at the present time, although extremely slowly, by the Government, and there is a lot more bureaucracy and costs that are going to come out of that too for our particular industry sectors. There is a tidal wave on the horizon heading towards us apart from what we are already having to cope with, which is particularly tough on SMEs.

  Chairman: It is not only coming in the one direction. Let us face it: this is an active British regulation. It is conflicting with European competitors. There will be a sharing of the suffering. It might not make it any more acceptable but—

Mrs Lawrence

  270. I wanted to come back on the point of support and specific capital allowances. I was very interested to read in your submission a point that you made and I wondered if I could invite you to expand on it, and that was the inconsistency in terms of capital allowances on computer equipment. You pointed in your evidence that ironically computer aided design software is eligible but the actual machinery which could do a lot to improve productivity is not. I wondered whether you wanted to raise some points on that inconsistency.
  (Mr Legg) It is a total anomaly basically. It is something the Chancellor introduced in his budget a year or two ago now whereby small companies (and it is only small companies, not even SMEs) are allowed to write off 100 per cent of computer hardware and software. As you say, I put in the evidence that this equipment is being used to produce design drawings and programmes to run the machine tool and yet the machine tool itself, where the cost (anywhere between 20 and 30 per cent of that machine tool) is computer and electronic based, does not enjoy this 100 per cent write-down. We believe it would make a lot more sense to extend the 100 per cent capital allowance to the machine tool as a whole. There could be an argument to say that if the Treasury does not want to go the whole hog it could at least give 100 per cent to that percentage of the machine tool that is controlled by the electronics. It would be difficult to apply probably because everybody would say it was 80 per cent now. I am grateful that you raised the subject because it is a clear anomaly.

Mr Djanogly

  271. BPF has asked the Government for a programme to attract more inward investment. What would you like to see of such a programme?
  (Mr Davis) One thing we asked the Government to look at quite a while ago was to check out—and of course this is governed by state aid rules—evidence that we have that in certain European countries there seemed to be a very generous grant regime for inward investments. We picked up an example of a company,—and this is interesting for the Committee to know—one of our member companies which supplies automotive parts which received a request for a 14 per cent price decrease. The only way they could meet it was by closing a factory in the UK, about 150 staff, and moving all the machinery to Spain and setting up a new factory, which they have done, in Spain next to a certain big car plant in Valencia. We were picking up information on very generous grants from the Spanish Government for this and we did refer it to the DTI and ask them if they would check that out. We have not heard what happened on that but we do know there are rules for governments. We do think that, looking at the assistance that other countries within the Community offer, and indeed now in Poland and the Czech Republic particularly, where quite a lot of our customers are being attracted to at the present time, which is mainly because of labour costs, of course, there may be some assistance there which needs to be examined. The first premise was that we felt that should be looked at by the DTI just to check it out to make sure we were not offering less than other countries within the guidance of the EU. We would like to see as part of the programme of the boost for manufacturing more promotion of the UK as an inward investment centre. It is going on and, like many things with the DTI, there are programmes. The trouble is that awareness of them seems to be rather slight. My British Plastics Federation, we have DTI grants, we take British firms abroad to trade fairs all over the world. One thing we could do there as part of that programme is to try and aid the DTI, the local people in the embassies, to connect in on the ground with potential investors in the UK. There is much more that can be done. Certainly the golden age I referred to, albeit a rather brief one, in the late 1980s and 1990s, there really was a substantial drive to attract inward investment into the UK then, which in our case was rather successful and we would like to see that repeated.


  272. I am sorry but you do not seem to be up to date with the figures. Britain has sustained its successful rate of inward investment and where it has declined it has declined internationally. Where other countries have come in is because they have woken up to the success of the British method. I do not recognise the pattern of inward investment you are painting at the moment, to be perfectly frank. I do not think it is supported by statistics. With respect, you have quoted no statistics in anything you have said about inward investment.
  (Mr Davis) There is over all our figures an increase in inward investment and that we are well aware of. But how much of that is going into the manufacturing industry itself? There is a lot of inward investment but in the manufacturing industry the figure is not that substantial. In my own industry there have been examples of companies, US companies particularly, buying UK companies and it has inevitably led to some closures. It has led to some investment, of course, but it has led to some closures as well, so it is a double-edged sword. Overall the inward investment figures look good but one has to analyse the depth of them. I did not say that we had suffered from inward investment. I just said that we were not visible enough in my opinion in wanting to show that we were attracting inward investment. I think we could do more. We could be much more visible overseas in showing the UK as a friendly place for manufacturing, albeit we have got this reputation for being rather over-regulated these days which is partially of course being part of the European Union.[4]

Linda Perham

  273. Can I talk about skill shortages? You mentioned in your submission quite a bit about skills and the advance model apprenticeships. You say you are about 10,000 short and you also mention the graduate apprenticeships. What sort of support do SMEs require to improve that situation?
  (Mr Davis) It is very worrying for us, I must say. As I mentioned earlier, our national training organisation, which is facing some turmoil in that since they all end at the end of March, has to decide does it become a Sector Skills Council on its own or not. There is a big meeting in Telford today to try and decide that, which is a risk because you could lose some of your best trainers with this big shake-up in scrapping the NTOs and having Sector Skills Councils. As I mentioned earlier, we are concerned that at our national training facility bookings for training are 20 to 30 per cent down. Much of this is due to the pressures the industry is under. Staff have been shed. Managers in firms have very little time themselves to do anything. An example of this is that the DTI and the British Plastics Federation and two other trade bodies were due next week to have an e-business seminar aimed specifically at SMEs at a very low cost price in The Belfry near Birmingham. We had so few registrations that it had to be called off. We had about 21 registrations. That is something which SMEs badly need to understand: e-business. That was a disappointment but I think it is a reflection of the fact that in hard-pressed companies it is difficult for the managers themselves to find time and it is difficult for them to find time to send their workers out, and of course funds are very tight as well. All of us in industry do our utmost to encourage greater training because in the plastics industry the profile is of an ageing workforce—I am thinking particularly of the shop floor here—with a reducing level of qualification. That is obviously worrying and something we must tackle. We hope this NTO/Sector Skills Council thing sorts itself out quickly so that we know quite clearly where we are going to go in the future. We shall continue to do our best to encourage our firms to send staff for training. It is very important indeed to upskill them and keep the workforce fresh.

  274. What more can be done at the national level to improve the situation for upskilling and filling the gaps in shortages of skills?
  (Mr Davis) Obviously one hopes the current climate for manufacturing will improve because people are under pressure; they have had to reduce their staff and they have had to cut back on things like training and marketing and R&D and all these essential long term investments for the future. The economic condition side is one part of it. The scrapping of the NTOs at the end of March and their replacement with Sector Skills Councils, run and owned by employers, was for many a very substantial change. We had expected the Government to recommend a reduction in the NTOs. Seventy-five is rather a lot. What we had not expected was such a substantial change that there should be only between 15 and 25 Sector Skills Councils, and the tight timetable, which of course was affected by the timing of the general election. The Government did not have as much time as it had hoped for because of the general election timing. The timetable has been so severe that we are scurrying around trying to sort out the future of our training operations in our industry on a very tight timescale. There is a requirement also, which is a good requirement, that the Sector Skills Councils should be run and owned by employers and we need to get more companies, small and large, interested in the training of their employees and to sit on the governing councils of these bodies. That is not easy when time is very limited for senior managers in industry. It is not easy to find people to give the time.

  275. What about the Learning Skills Councils?
  (Mr Davis) They are a valuable initiative. Many of our firms are taking advantage of that as a good initiative and I think the support is good although it could be stronger.

  276. You did talk about the problems, especially for small business, with giving people time off for training and personal development. Would you see having tax training credits as a help or some form of learning entitlement with appropriate compensation for employers?
  (Mr Davis) It would undoubtedly assist; no question. It would push more people into training.

  277. So either of those things, claiming credits or compensatory time off? You have mentioned an ageing workforce. Perhaps most of us in this room might be considered part of an ageing workforce with present trends. You are obviously concerned about European legislation which has got to be taken on board about equality of employment. I am just wondering whether it is perhaps something that is being missed here, that it is easy to worry about having to keep on elderly employees but whether there is a case there for saying, "We have still got these people. How about upskilling the people we have got or retraining them?" I am sure most of us would subscribe to what I have just talked about and would not consider that we were over the hill in what we are doing now and it is such an easy image to say that we have got to have opportunities for young people but you have got people in your existing workforce that you could probably use better or put them on other things or even higher things and perhaps that is missed in looking at opportunities for younger people.
  (Mr Davis) Yes, that is a very strong point. The older workers are very valuable because in many cases they have been with the firms in question for quite a while. They are very flexible, they understand the full operations of the firm. They may have worked in different departments of it. They are an asset that one wants to keep. However, the years march on and eventually they will retire and we need to bring into our industry of course the new young employees, but they are certainly a valued asset and all our companies would say that the older workers are a lynchpin in the workforce, but of course many of them are heading towards retirement. With younger workers they are much more mobile. This of course is a trend we are very familiar with now and they move from one job to another quite fast. I was up with a firm I mentioned earlier who are seriously thinking of moving production to France because of the climate change levy, which is Schmalbach-Lubeca outside Chester. The thing they dread is that there may be a Sainsbury's or Tesco's superstore opening not far away from them and they are worried that their younger workers would be attracted away to working in perhaps a slightly more pleasant environment, although plastic factories are not an unpleasant environment at all, to such a superstore. There is nothing wrong with that but the younger population is a very transient workforce and the attraction of working in a place like that is perhaps quite strong. There is an issue of keeping younger workers and showing to them quite clearly a career path as well. Quite a lot of work is done by our national training organisation in showing in plastics, in that whatever rank you go in at, managerial or at the technical level or at the workforce level, there is a career path, but the nature of things is that younger people do move up and on.
  (Mr Legg) With regard to recruitment of young people into our industry, we do have a problem. We have mentioned before manufacturing has a poor image if you like through the media etc. Therefore right at the early stages of encouraging children to choose the right subjects to study at school we believe that very often they are not aware of the opportunities that are offered in engineering and manufacturing. It has got a bad image, quite unjustifiably, because the modern-day factory is extremely hi-tech. All the kids love dealing with computers. We can offer them very good opportunities but unfortunately they are not aware of that. Their careers teachers probably are not aware; they do not have the knowledge. We would like to see more action taken to encourage schools to offer vocational training, and I know this is happening at the moment. There is a private sector initiative to support the schools in technology. I absolutely welcome that. I think it is terrific, but we need more of it. Finally, one of the problems that we have is that because of the press saying that manufacturing is in decline it discourages children from coming into an industry where they are not sure there is going to be a job for them in ten or 20 years' time. Unfortunately, because we seem to have a more exaggerated cycle in manufacturing than elsewhere, we do see a higher level of lay-offs and redundancies in the bad times and then suddenly there is a skill shortage when things improve. We need to try and smooth this out in some way so that the students coming into the industry and all the knowledge and experience that they have stays in the industry. In the last few years we have seen a drain of skilled people having to be laid off and those skills are lost to the industry for ever. In those circumstances it gets doubly difficult to recruit new people to come in. Maybe they have seen their father go that way before and they say, "No; I will go up to the City. There are a lot better opportunities up there", or there used to be.

Dr Kumar

  278. Just to explore this problem on the skill side, earlier on during the questions on capital investment and venture funds there was a lot of emphasis on Europe and comparisons being drawn with Germany and so on. How well do we do we do relatively on the skills front compared with European countries, certainly Germany? Are they better than we are regarding the model apprenticeships or graduate schemes? I wonder if you would say a little bit about that.
  (Mr Legg) I personally do not have first-hand experience of the structure, for instance, in Germany but I do in my dealings with German companies and with Scandinavia as well, where we do business, experience shows that there is a high level of skill on the shop floor. In particular, there are a lot more graduates in engineering and in manufacturing than there seem to be in this country. As I mentioned before, I think it is equally important that we have a strong level of vocational training. Not everybody should go through the graduate training route. There are plenty of people that leave school at 16 who have a good training and come through to being senior managers and directors. It is not the be-all and end-all to go down the graduate route and sometimes I think Government emphasises that too much. They have created a lot more graduate places and I think there is a question mark, certainly in our area, as to whether the quality of people that they have been able to get to fill those places justify the expenditure on higher education. Those people might often have been much better off going into vocational training and coming up through that route. From my experience, and I have to say it is limited, it seems to me that education in technology is more structured in Europe than it is here. There seem to be more colleges specifically for technology training and engineering training.
  (Mr Davis) I would agree with Mike.
  (Mr Legg) In that case maybe we can come back to you in due course.[5]

  Dr Kumar: That would be helpful if you could put something in writing. There is no reference to it in your submission.

Mrs Lawrence

  279. You have mentioned regulation and the regulatory burdens on a couple of occasions this morning. I noticed in your evidence you say that from discussions with fellow Europeans it is evident that the UK Government and Civil Service have applied the European regulations with greater vigour than any other nation. Do you have any evidence that shows and supports your assertions that regulations are enforced with greater vigour here?
  (Mr Davis) There is one piece of evidence which straddles the previous Government as well as the current one. The application of the Packaging Wastes Directive in the UK was particularly complex and onerous. I will not go into all the detail of this but the obligation for companies to pay something towards the recovery and recycling of packaging waste in most European countries will fall on one part of the packaging chain, if I can call it that. In the UK there are tortuous discussions over how it should fall in this country and it actually falls in four parts of the chain and the regulations that were put through to back this up were very onerous indeed. Although the Government would argue that the costs compared to other European countries (or some of them anyway) are not too bad on companies, the actual bureaucracy that is created within a firm is quite substantial. That is an area where one day one hopes that can be reviewed and a simpler system brought in. At the time certain of the European models did not look too attractive at all because they were expensive. The German system for dealing with packaging waste was very expensive and still is, but there were other examples in other countries which were better, France, for example. That is one good example. This directive is currently being reviewed at a European level and there is a big battle going on, if I can put it that way, between industry and the Commission over new targets for the next few years. That is one example which I am particularly well versed on. On other things like the forthcoming tidal wave I referred to earlier, particularly on end-of-life vehicles, the Government have been very keen to avoid the kind of complexity that the packaging waste regulations led to and would like as far as is possible a kind of voluntary system to be applied, but in actual practice in negotiations that turns out to be really difficult. If you look at the southern states who, in the Councils of Europe, say, "Yes, bring it in, we must have these measures immediately", when you look at how they interpret the regulations and what they do about them, they are extremely slow-moving, and if the Committee wishes we can come forward with some evidence about that. They do urge for these measures to be implemented and so on but their action in making sure they go through in their own countries is extremely slow. Some might argue that it is to give their countries an element of advantage for two or three years over industries in other countries before they have to abide by the rules and conform to the legislation.

3   Note by witness: This Commission Regulation sets out the guidelines regarding this matter and would seem to be a way forward for the Government to do more to assist SMEs. Back

4   Note by witness: figures produced by British Trade International show clearly the point that whilst overall investment and projects have increased during the past 10 year period, the manufacturing percentage of the total has declined. Back

5   Note by witness: see supplementary memorandum on Skills and Training. This document compares the UK skills scenario with European and other countries. Back

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