Select Committee on Trade and Industry Minutes of Evidence

Supplementary memorandum by the Department of Trade and Industry

(1)   What productivity indicators, particularly GDP per worker, are available for the year 2000?

  The productivity numbers in the DTI memorandum to TISC related to 1999 and were sourced from NIESR. This source was used since NIESR, as well as looking at GDP per worker, also produce international comparisons of manufacturing productivity.

  The official source for data for GDP per worker is the Office for National Statistics (ONS). Their latest data release of 7 March 2002 includes estimates up to 2000 and revisions to back data. Their latest data shows the following comparison for GDP per worker (UK = 100):
19971998 19992000
US132.2134.6 135.9137.7
France116.4117.3 117.5117.6
Germany109.4108.9 108.7108.6
Japan101.796.8 96.997.1

  This data is available on the ONS web site.

  Estimates for 2001 are likely to be available in July/August 2002.

(2)   Has the Department reviewed what can be done about the extra charges faced by small and medium sized enterprises when trying to obtain borrowing facilities from the major high street banks?

  As the Secretary of State said in her evidence, it is often easier for large firms to access better deals for financing. They are likely to have access to a wider range of financial instruments, including bonds and, in many cases, share capital and so may get lower cost finance. Larger firms may also be perceived as less risky because they are better able to absorb adverse changes to their revenues or profits. This may mean that they pay lower interest charges than small firms in similar sectors.

  The Competition Commission report on banking services for SMEs considered overdrafts and business loans as part of its analysis of the market for banking services for SMEs.

  The Commission concluded that for a number of reasons competition in the market was limited, and recommended a number of changes, which Ministers have adopted, to stimulate more effective competition. The Commission did not find evidence of excessive returns of loans but did consider that banks failed to promote the scope for SMEs to save on overdraft charges by using set-off facilities.

  The Commission's remedies are expected to improve competition in the supply of SME banking services generally, by requiring unbundling of services, greater transparency of charges, and facilitating the transfer of accounts. They include a requirement for banks to inform SMEs of the imposition and level of overdraft charges. The remedies will help to ensure that bank interest rate charges are at competitive levels.

  Banks are subject to competition and will need to set interest rates that are realistic in the market place, and that reflect their allocation of regulatory capital. They will need to consider their shareholders as well as their competitors when making lending decisions. This may mean that rates are higher for firms in some sectors or for small firms but this must be a commercial decision for each bank. The customer is free to choose another bank if it is offering a better deal.

  The Bank of England's annual reports on Finance for Small Firms indicate that margins on loans to SMEs have been fairly steady over time, and in general, represent good value for the borrower. In addition, the British Bankers' Association's latest statistics show that the provision of term finance by banks to SMEs rose in the third quarter of 2001 by £0.9 billion with overall lending rising to £41.4 billion (up 3.1 per cent). This confirms that the banks remain the main source of external funding for SMEs.

  The Government has recognised, however, that normal bank borrowing is not always the most appropriate source of funding for some small firms, particularly where they are undertaking risky projects or projects with particularly distant returns. That is why we work through interventions such as the Regional Venture Capital Funds, the Small Firms Loan Guarantee Scheme, Early Growth Funding and the Phoenix Fund (Community Development Financial Institutions) to improve access to finance for all small firms.

(3)   Where does the lead responsibility lie for the Government's policy in relation to the Prospectus Directive?

  The draft Prospectus Directive follows the work commissioned by the European Finance Ministers who asked a committee of finance experts under the Chairmanship of Alexandra Lamfalussy to review the regulation of the European Securities Markets and to make recommendations for improvement. The Committee issued their conclusions in February 2001. The draft Prospectus Directive is in response to these recommendations and is intended to improve the framework for investing and raising capital on an EU wide basis by providing a framework, through the mutual recognition of procedures, for enterprises within the EU to offer securities in several Member States using a single prospectus.

  In view of the fact that Financial Market Regulation in the UK falls to HM Treasury this draft Directive is being taken forward by HMT and the Financial Services Authority. DTI is however, working closely with HMT on this issue.

(4)   Could you clarify the number of people engaged on engineering advanced apprenticeships? What are the prospects for achieving the Government's target for the number engaged on such apprenticeships by 2004?

  At 23 December 2001 (the date of the last statistical release) the number of people in apprenticeships were:
Total Advanced MAs116,600
Total Foundation MAs107,600
Total MAs224,200
Engineering Manufacturing Advanced MAs 16,800
Engineering Manufacturing Foundation MAs 4,900

  DfES no longer compare the numbers of people in training by MA subject in their statistical releases, but figures up to 24 June 2001 showed that the largest number of people in training by subject for Advanced MAs was for Engineering Manufacturing (16 per cent).

  DfES and the Learning and Skills Council (LSC) have agreed a target for 2004 of 28 per cent of young people entering apprenticeship between the ages of 16 and 21. DfES and the LSC are committed to meeting this target and the resources are currently in place to do so.

(5)   The Committee would be grateful for a note on the issue of the regulatory burden placed on the UK manufacturing sector, and the role of regulatory impact assessment in policy development by the Government. To what extent would it be possible to take such assessments into account in the development of EU legislative proposals?

(6)   Has the DTI undertaken any surveys of opinion within the manufacturing sector to assess the degree of concern among companies over the impact of regulation, whether UK—or EU—inspired, and the approach taken by UK authorities in implementation? If so, the Committee would be grateful for a summary of the results of such consultation.

  I hope this is helpful and answers the Committee's questions, but please let me know if I can be of further assistance.

Paul Millar

Assistant Director, Manufacturing Issues

12 April 2002


  The Department is pleased to provide the Committee with this paper outlining information on the Government's regulatory agenda, business perceptions of regulation and information about Regulatory Impact Assessments. The paper also examines the structures the Government has established to ensure it regulates only where absolutely necessary and then in a manner consistent with encouraging and developing enterprise and growth.

Introduction—Role of Regulation

  Regulation is necessary to create fair and open markets and effective regulation has a strong and positive economic benefit. Regulation is also necessary to ensure that companies protect their consumers and employees, complete statutory reporting and act in a manner consistent with broader societal concerns, for instance in relation to environmental protection. However, there is a real danger that poorly designed regulation can impose unnecessary costs on business, for example through poor targeting, unintended consequences or burdensome implementation and enforcement. The key task for government is to balance the legitimate concerns of business with the desire to adequately protect the public interest. Numerous surveys suggest the Government has achieved a good balance:

    —  The OECD has noted that the UK has the lowest level of product market regulation of any OECD country (OECD Economic Outlook, December 1999);

    —  The UK labour market is less heavily regulated than other EU countries (Economist Intelligence Unit, 2000);

    —  Employment has risen by over 1.25 million since 1997 and both ILO and claimant unemployment, over the past year, have been the lowest since the 1970s;

but the Government is not complacent and will continue to take action to reduce the potential impact of regulation on business—provided that action is consistent with ensuring the Government's other policy commitments are met.

Business concerns about regulation

  Nigel Griffiths, the DTI Regulatory Reform and Small Firms' Minister meets regularly with the major representative organisations—both bilaterally and at quarterly roundtable events—to discuss the key regulatory concerns of business, identify priority areas for reform and to determine how business and the Small Business Service (SBS) can work best together to reduce regulatory burdens.

  In addition, the SBS's "Omnibus Survey" is used to assess the key concerns of small business. This survey is conducted three times a year with 2000 SMEs, each wave representing the total business population including around 370 manufacturers. The survey indicated that the main unprompted concerns of manufacturing businesses were "cash flow and obtaining finance" and "sales and marketing" with "regulation" third, slightly above "employing, training and keeping staff".

  Government also receives feedback on key concerns about regulation via the surveys conducted by the major business organisations and from the advice provided by independent bodies such as the Small Business Council and the Better Regulation Task Force which make recommendations on how Government can improve aspects of the regulatory environment.

  Through these mechanisms, we understand that quite often it is not the underlying policy objective that causes concern to business, but rather the sheer weight of regulation and the way new regulation is designed, implemented and enforced.

  The key question businesses ask is whether a particular policy objective needs to be achieved through regulation, and if so, whether it could be achieved through lower cost regulation. Concerns are also expressed about proposals that are developed at the European level—in the way they are designed, how they are implemented and enforced in the UK and whether we are more rigorous in our enforcement than our European partners.

Impact of regulation on business

  Some types of regulation clearly produce benefits for business through setting a stable and predictable commercial framework and by ensuring competition is able to flourish. This is backed up by the OECD findings noted earlier and by the IMF staff report (IMF Country Report, March 2002) which welcomes the Government's focus on improving product market efficiency by further strengthening the competition regime. Regulation can, however, assist business in other ways too: ensuring work pays through the minimum wage makes work a practical option—increasing the pool of potential workers; ensuring fairness in the workplace and protecting employees from unsafe working practices increases the willingness of employees to give their all in employment, reducing the number of absences and ensuring a level playing field protecting employers from the few who would otherwise unfairly cut costs through low standards. Consumer protection legislation creates confidence in products, allowing business to flourish. It is worth noting that the IMF survey noted above considered the government's efforts to increase employment finding that remarkable progress had been made in this area—demonstrating that good social policy often produces good outcomes for business; that health and safety regulation can clearly be helpful in reducing the costs to employers of accidents and ill-health in the workplace which have been estimated by the Health and Safety Executive (1997) to cost business between £3.5 billion and £7.3 billion per year; and that US studies have demonstrated that technological innovation resulting from health and safety initiatives, including regulation, can lead to productivity gains (Ashford 1997).

  Poorly designed regulation can, however, impose unnecessary costs on business which could impede innovation, competitiveness, investment and economic efficiency. It is also true that regulations, however necessary, well designed and implemented, can be unpopular with business. Where this is the case, the Government needs strongly to explain its policy position while being sensitive in how the policy is implemented—as it was when it amended the working time regulations to provide greater flexibility to workers to determine their own hours of work and to reduce the detailed record-keeping requirements, and in developing the proposals currently being taken forward in the Employment Bill which have been designed specifically with business and practical implementation in mind.

  While regulation can have a negative impact on business, it is not the key to closing the productivity gap. As noted in the IMF Country Report, the issues having the greatest impact on the productivity gap with our trading partners relate to the size of the physical capital stock and the relative lack of skills in certain areas and the London School of Economics has noted that if regulation were the key to comparative European productivity outcomes, Britain would probably outperform both France and Germany.

  This does not however reduce the Government's desire to minimise regulatory burdens and the Government has established some key structures to ensure that regulation is only used where necessary and then in a manner consistent with enterprise and growth.

Structures to address regulatory concerns

  The structures introduced by the Government ensure that new regulation is prepared in awareness of the needs of business.

  The Regulatory Impact Unit in the Cabinet Office has the task of ensuring that new and existing regulation is necessary, meets the principles of better regulation and imposes minimum burdens. This is achieved by ensuring Departments and Agencies prepare Regulatory Impact Assessments (RIAs) to assess the costs and benefits of significant policy proposals. The RIAs provide part of the advice that goes to Ministers and are also provided for public consultation—helping to inform the options as the policy develops. To ensure we maintain our place at the leading edge of better regulation the Regulatory Impact Unit is currently revising their guidance "Good Policy Making: A Guide to Regulatory Impact Assessment" and are consulting widely with policy makers and external stakeholders including business representative groups.

  The Panel for Regulatory Accountability is a Cabinet Committee with overall responsibility for the RIA process and is able to call to account Departments, individually or collectively, on regulatory issues and on their performance in addressing existing burdens.

  Ministers for Regulatory Reform have been appointed in each main Department to drive forward the better regulation agenda throughout Government and play a key role in ensuring that outdated regulations are removed and that any new regulations are necessary—and where they are necessary, that they are introduced at least cost to business. Nigel Griffiths is the DTI Regulatory Reform Minister and constantly seeks input from business on possible areas for reform. The Ministers for Regulatory Reform are supported in their work by Departmental Regulatory Impact Units, which act as a focal point within the Department to provide advice and information on the preparation of RIAs and to ensure policy officials are aware of, and comply with, the RIA process.

  The Better Regulation Task Force is an external advocate for the better regulation agenda—through numerous task force reports that seek to highlight key concerns of stakeholders and to which the Government is required to respond with proposals for action. David Arculus is the new Chair of the Task Force, succeeding Lord Haskins, and will attend meetings of the Panel for Regulatory Accountability. The Task Force provides a valuable input to Government consideration of many new regulatory proposals and also carries out studies of regulatory issues. It is currently working on four reports: employment law; local delivery of central Government policies; higher education; and science. The BRTF has already prepared work on the principles of better regulation and Alternatives to State Regulation.

  The Small Business Service seeks to ensure that by 2005 the UK will be the best place to start and grow a business. Given the particular concerns of small business about regulation, the SBS has a key role to ensure regulators "think small first and regulate last" in order to achieve the Government's policy objectives.

  The Small Business Council is also an influential voice and following the review of the DTI, William Sargent, the Chair of the SBC, has the ability to look into regulations that significantly affect SMEs. Mr Sargent also sits on the Panel for Regulatory Accountability and is the voice of small business in Whitehall.

Actions to reduce the burden

  The Government is also taking action to reduce the burdens on business by simplifying or reforming outdated or over-burdensome existing regulation. The Regulatory Reform Action Plan, announced by the Prime Minister in February brings together over 250 reforms to provide a strong way to simplify and tackle the existing stock of regulations. The Business Regulation Team in the Cabinet Office was established as part of the Government's commitment to recruit private sector secondees and will be tackling key regulatory problem areas with the purpose to reduce regulatory burdens. The Government has previously taken steps to ensure burdens on business are minimised, for example the Government:

    —  Announced in January 2000 that employers with four or fewer employees will be exempt from the requirements to provide access to stakeholder pensions and deduct pension contributions;

    —  Amended the draft National Minimum Wage regulations to reduce the record-keeping requirements, in response to business concerns;

    —  Exempted employers with 20 or fewer employees from the trade union recognition procedures in the Employment Relations Act;

    —  Exempted small shops from the EU requirement to unit price pre-packaged goods in fixed quantities;

    —  Simplified VAT for more than 300,000 small firms by introducing a new flat rate VAT scheme reducing business costs by up to £1,000 per year;

    —  Consulted on the detail of the Carter Review's proposals to ease further the administration of payroll services for new and small businesses.

  In addition to establishing the right regulatory structures the Government is taking steps to improve consultation and ease the implementation burden—for example by introducing minimum consultation and implementation periods, monitoring compliance with the Cabinet Office guidance on best practice in consultation and by making greater use of the internet—and to ensure consistent enforcement—for example through the Enforcement Concordat.

DTI review and future directions

  Following the DTI Review the newly established Fair Markets Group has responsibility for "better regulation" and will focus on four key deliverables—strengthening the regulatory challenge role within the Department, developing and promoting processes to make a real impact on policy development and implementation, engaging more effectively with key stakeholders and improving the delivery of regulation on the ground. This demonstrates our commitment to better regulation and we aim to be a leading light in Whitehall for consultation with stakeholders and effective policy making. To do this, the Group will build on good practice both within it and elsewhere in DTI and Government. For example, officials involved a wide ranging group of stakeholders in the process that led up to the publication of 50 options for change in the Work and Parents Green Paper in December 2000. The process of talking to groups of businesses, trade unions, family groups and advisers in sessions held across the country was started at a very early stage to develop and shape the agenda for change. The Group will reach out and talk to stakeholders in this way at the start of any process for change to establish and understand concerns. This specific consultation will be backed up by more general engagement such as the recent stakeholders event held by Fair Markets Group, which served to identify priority areas for action. Officials will build on this by holding another event with key stakeholders later this year to discuss DTI's approach to regulation and to ensure that we are focussed on achieving outcomes for business. These actions demonstrate that the Government will stay on the front foot in creating the environment for enterprise and growth.

European agenda

  Business has also raised concerns in relation to regulation which they see as coming from Europe. The Government is committed to better regulation—both in the UK and in Europe—and has taken steps to ensure better quality rule-making in Europe and better quality transposition of those rules into UK law. Equally we strive for fair enforcement of regulatory requirements—whether they originate in Europe or in the UK.

  The Government has pushed very strongly on the design of European regulation—both directly with the European Institutions and indirectly through our contacts with individual member states—to strengthen the better regulation agenda in Europe. The UK believes this is an integral step in ensuring that Europe achieves its objective of becoming the most competitive and dynamic knowledge-based economy in the world.

  The recent European Council held in Barcelona called for efforts to simplify and improve the regulatory environment to be vigorously pursued at both national and Community level including inter-institutional aspects, with particular emphasis on the need to reduce the administrative burden on SMEs. The European Council invited the Commission to submit, in time for its next session at Seville, the Commission's Action Plan, which should take into account in particular the recommendations of the Mandelkern Group on Better Regulation (a high level group of experts from all 15 EU Member States, which recently produced a report which included a set of recommendations for improving the European regulatory environment).

  The UK is also looking forward to the publication of proposals by the European Commission on the introduction of a robust and credible impact assessment system. This too should be available by the Seville European Council meeting in June and we hope that this system will be in place by the end of the year.

  A checklist has been developed for policy makers to ensure the UK transposes European legislation into UK law in the best possible way. This enables all the necessary action to be taken but safeguards against the danger of the UK over-implementing, or gold-plating, European proposals. Where there are choices and options on how to transpose the legislation, the UK always seeks to balance various priorities including the need to minimise unnecessary burdens on business. The recent introduction of Transposition Notes to explain how the Government transposes the main elements of relevant European Directives into UK law also helps to avoid over-implementation.

  As part of the Government's efforts to engage with the business community the Cabinet Office held a conference on transposition in October 2001. This conference was hosted by Lord Macdonald and delegates included, amongst others, business people and officials from government departments. The purpose of the event was to inform business of the progress the Government has already made and to seek suggestions for further improvements.

  DTI recognises that there is a perception that the UK implements and enforces legislation more stringently than our European partners, but there is no evidence to support this perception. In fact, the November 2001 version of the internal market Scoreboard showed that we lagged behind many of our European partners on transposition. (We subsequently made a strong effort to enable us to meet the agreed target deficit of 1.5 per cent by Barcelona).

  Once the UK has supported and adopted specific legislation we believe it should be fairly enforced. Depending on the specfic piece of legislation, this provides appropriate protection to our workers, our consumers or the environment. We must of course ensure that we strike the right balance between protecting individuals and allowing business to thrive and we would welcome examples of where we can improve our performance in this area.

A role for business

  There is an important role for business too. DTI welcomes the support of business as we jointly address their concerns about regulatory burdens. The Department will be looking at ways to more effectively and proactively engage business representative groups such as CBI, EEF, Chambers and Sector Associations in the consultation process providing them with greater opportunities to highlight their concerns and regulatory priorities and to work with us in taking practical steps to reduce the impact of regulation. As we enhance these opportunities it will be important for business and their representative organisations to continue to participate fully so we can obtain greater information about business and shape policies that help meet ther concerns—while of course continuing to protect the rights of others. There is also a role for business in Europe—in helping to shape "European" policies—whether through lobbying individual members of the European Parliament, by working through the Brussels based representative organisations, talking to Commission officials about policy proposals, or through closer links with small business/europe which seeks to strengthen the dialogue between UK SMES and decision-makers in Brussels.


  It is clear that while regulation can provide real benefits to business, when poorly designed and implemented, it can also harm business. It is important, therefore, that the Government strikes the appropriate balance between minimising burdens on business and ensuring necessary policy measures are implemented and enforced. The RIA processes (and the other structures the Government has established) are designed to ensure that this appropriate balance is struck and to ensure that alternatives to regulation are considered early in the policy making process. Early delivery of the European Commission's Action Plan on Better Regulation will see the benefits of RIAs delivered in Europe and the recent strengthening of the Better Regulation function in the DTI (a key outcome of the recent DTI review) will provide a further fillip to better regulation ensuring that we only regulate where necessary and then in a way that is consistent with enterprise and growth—for it is only by doing this that we will meet our objective of promoting productivity and competiveness and thereby enhancing prosperity for all.


April 2002

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