MONDAY 28 APRIL 2003

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Members present:

Andrew Bennett, in the Chair
Mr Clive Betts
Mr David Clelland
Mr John Cummings
Chris Mole

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MR MARK LLOYD, Director of Economic Development and Planning, Durham County Council, MR ALAN WANN, Head of Regeneration, Northumberland County Council, and MR LES SOUTHERTON, Chief Executive, Middlesbrough Town Centre Company, examined.

Chairman

  1. Can I welcome you to the Committee and again apologise for the fact that we were not able to see you when we were up in the North East. Can I ask to you identify yourselves for the record please.
  2. (Mr Lloyd) Mark Lloyd, Deputy Chief Executive of Durham County Council.

    (Mr Wann) Alan Wann, Head of Regeneration at Northumberland County Council.

    (Mr Southerton) Les Southerton, Chief Executive, Middlesbrough Town Centre Company.

  3. Thank you very much. Do you want to say anything by way of introduction or are you happy to go straight into the questions?
  4. (Mr Lloyd) Chairman, we might take the opportunity to say a few words each, if we may. During this evidence session I hope to get the opportunity to expand on six themes that I consider vital for tackling the disparities between the fortunes of the North East and other more affluent parts of the United Kingdom. They are: the need for investment in education and skills, knowledge and know-how; the need to focus on improving the life chances of the people living in our most deprived communities; thirdly, the need to nurture and support entrepreneurship and risk-taking; fourthly, the need for government fiscal and policy measures to encourage investment by the public and private sector in the more peripheral regions; penultimately, the importance to the whole of the North East region of Newcastle/Gateshead being the 2008 Capital of Culture; and finally, the importance of the UK government considering most carefully the impact of post-2006 European Union regional development policies on the poorest UK regions.

    (Mr Wann) We have come down to support the regional case for the allocation of greater government funding to the North East and for flexibilities and for fiscal incentives. The North East Assembly has illustrated the scale of regional disparities and identified the North East as the most deprived region. What I would like to do is just to illustrate how in certain parts of the region the problems are further compounded by large rural counties with very sparsely populated areas within which the cost of services can be as much as five times the average, in the most sparsely populated areas. In addition, I would like to demonstrate during the presentation that we have got a lot of good practice within the North East, we can achieve a lot of good change in the North East, and we are trying this in a variety of different ways, but to achieve an acceleration of the change we need an increase in mainstream funding and I hope to illustrate by a number of examples the ways in which we are realising changes in employment and skills in the North East.

    (Mr Southerton) In some ways visiting the North East can be deceptive because there is clearly significant progress if you look at areas such as the Quayside in Newcastle and the Teesdale site in Stockton. I have to say that when you analyse quite coldly the key statistics by any measure - in terms of unemployment, educational attainment or new firm formation, almost whatever statistic you like to judge - it appears that from about 1975 after a massive decline in basic industry the region is not catching up, despite all of those efforts. I have to say from my experience, currently running a public/private regeneration company but having previously been Chief Executive of the City Challenge Authority, that I subscribe to the view that one of the key issues that we need to tackle is job creation - that is a fairly unsurprising comment - and therefore reflecting on the employment agenda to concentrate on how we increase the supply of jobs, whether that is by additional growth or by capital from outside. I think a particular area of concern is how we fit people in deprived communities into those jobs. To give you one statistic, Middlesbrough has a staggering three wards in the top ten wards nationally in the index of multiple deprivation. We need to address the question about availability of premises. In that respect I hope we can explore something of gap funding and the way that the European rules at the minute are written upon that. And also do not forget the question of image - and this is from a company that is promoting one urban centre - because that is vitally important. Perhaps to finish by saying a vital ingredient of the urban setting as well as the rural environment is one of culture and just to endorse the comments already made that Newcastle being successful in that particular competition would be good for the whole region.

    Chairman: Thank you very much. Mr Clelland?

    Mr Clelland

  5. To follow on from what Mr Southerton said about unemployment and job creation, the core cities group have placed their faith in the creation of jobs within the cities. Can I ask the witnesses where they think jobs should be created, should it be in the local area or should it be in the cities, along with measures to help people travel throughout the region?
  6. (Mr Wann) We believe there has got to be both. There has got to be a realism that jobs can be attracted to certain parts of the region but we need to help people to break down the barriers to seek employment by improving transport and encouraging people to look outside their existing boundaries. For example, recently within the Northumberland area, the Ashington One Spec Action Team for Jobs are working with the local partnership and we are looking to find ways of increasing transport accessibility to jobs that actually exist within a 10 to 15-mile radius from Ashington, which has proved very successful and has encouraged Ashington people to look beyond the boundaries. So I think it has got to be a mixture of both, improving accessibility in terms of training, skills and transport and finding ways of attracting jobs into existing areas.

    (Mr Lloyd) Rural settlements would be a sad place if they were simply a base from which people commuted into urban centres. I think we need to strive to build on our urban centres for economic regeneration and I vote for that and support the notion of core cities, but we also need to make sure that the rural hinterlands that surround those urban areas do have opportunities for people to work locally to ensure a sense of community. There are some sorts of jobs that are better placed in a rural community, and if we can ensure that there is a supply of broadband collectivity, for instance, to information communication technologies, there are some sorts of occupations that can be fulfilled equally as well in a rural dale in Northumberland or County Durham as in the city of London.

    (Mr Southerton) To link that to an urban setting, we have to be careful not to rely too much on working in particular deprived communities in terms of job creation. I think in some ways it is a myth to think that we can go into those areas and within them create a very significant number of jobs. I think the magic - I have seen it now twice, once during my period working on City Challenge but also in Middlesbrough New Deal area - is if you can fit people from those deprived communities to jobs elsewhere, wherever they may be. We have to recognise that those jobs will be where the economic circumstances and the area locates them and we have to be alive to that. In the City Challenge area we had a position where 1,200 people from some of our most deprived wards moved into jobs. In the last two years in our New Deal area some 400 people have moved into jobs. The question that begs to me is whether we have to keep reinventing on the back of the specific funding streams these initiatives or whether that should be embedded more in mainstream provision.

  7. I am grateful again to Mr Southerton for leading me into the next question because he mentioned neighbourhood renewal policies and initiatives. How should economic development and neighbourhood renewal policies and initiatives link together? Do you think currently there is enough co-ordination between them?
  8. (Mr Southerton) Perhaps as there is a neighbourhood renewal fund in my area I will answer. In most neighbourhood renewal areas you will find some level of economic activity. It would clearly miss the point if that were not strengthened and supported. As I say, I do not think you can look at the salvation of a neighbourhood renewal area within it. You have to provide this connectivity to job opportunities wherever they are and you have to recognise that many people in these areas are not job ready. You have to recognise that and do significant work to make sure that they can compete for jobs. As I have already said, I think there are schemes in place which are difficult, they take years because to develop people into the job market takes some time, but I think that is the way to do it. I think we do ourselves a disservice if we think there is one answer here. Growing the economy of the town and fitting the neighbourhood renewal area to it is the way forward, rather than concentrating on one particular geographical patch.

    (Mr Wann) Neighbourhood renewal areas are not across the country as a whole. There are some places which exhibit the same mix of problems as some of the areas that have been designated for neighbourhood renewal funding. What we have been trying to do within the region is to find the local solutions to those areas by working in partnership and bringing partnership funding to support areas which have a similar mix of problems. One of the things we would like to emphasise today is that we are able to devise very innovative local solutions to problems by building on national programmes and by bringing together a shared understanding of the problems, a shared willingness of agencies and organisations to bring collective funding to bear. For example, Blyth has benefited from an approach which is similar to the neighbourhood renewal in Ashington, for instance. It is moving good practice around as much as possible.

    (Mr Lloyd) There is an interesting policy issue here for the government in that the key instrument for economic regeneration is through the regional development agency and the sponsorship of the regional development agency has moved fairly recently from the old Department of the Environment, Transport and the Regions to the Department for Trade and Industry. The regional development agencies have since that move taken on very much an economic focus and it begs the question where is the leadership going to come from for the community development, the neighbourhood renewal issue that has been signalled in the question? I think, Chairman, local authorities have taken a leadership role in this regard both in districts that have been designated as neighbourhood renewal fund areas and, importantly, those districts that do not have that designation and those extra resources.

    Chairman: I am getting a little worried about the time. Slightly shorter answers would be helpful.

    Mr Clelland

  9. One last question then. I was interested that mention has been made of the Capital of Culture bid. I am quite sure you gentlemen would agree that one of the problems that an area like the North East has is in the perceptions of people from outside. There is a lot of ignorance about the region. How important would a single project like winning the Capital of Culture bid be to a region like the North East? Would you say of all of the competing regions the North East would be most likely to benefit as a region, more so than any of the other cities competing?
  10. (Mr Lloyd) Chairman, if I may be so bold as to suggest that the North East region is the one that has come together as an homogenous region to support the Newcastle/Gateshead bid. Regardless of whether one lives in Northumberland, County Durham or indeed the Tees Valley, we are all backing the bid, "backing the buzz" as is our local phrase.

    Chairman

  11. Should you be successful because of the support the bid is getting or the quality of the bid?
  12. (Mr Lloyd) The quality of the bid, Chairman. If you look at the offer that the North East has, by looking to County Durham, the World Heritage Site that is Durham Cathedral and Durham Castle, the Bowes Museum, the Beamish Museum, Durham Riverside Cricket Ground, it is a tremendous offer that County Durham has as part of that hinterland surrounding Newcastle/Gateshead. If we win the bid in the North East we know it will bring seven million additional tourists to our region, it will bring 1.2 billion of added investment, it will bring 24,000 new jobs, so powerful reasons.

  13. So you just win the bid, you do not need extra aid to the region at all?
  14. (Mr Lloyd) Far from that, Chairman, but it would be a helpful contribution.

    Mr Cummings

  15. The Committee have been told in evidence that national policies for increasing regional prosperity have tended to focus too much on labour market interventions and perhaps not enough on job creation. Looking at all the agencies and all the organisations involved in trying to promote economic development, do you believe they have the right tools with which to do the job and do you believe they have the right priorities?
  16. (Mr Wann) In the North East region's framework for employment and skills action, one of the key priorities we have identified - one of three - is increasing the rate of development of high level skills in the region. We think this is particularly important and have singled this out as an area for attention. I would say that is one of the areas that we need to tackle. Another area is one of fiscal incentives. We know that parts of the region suffer from a lack of interest from the private sector. Mark has mentioned broadband ICT provision as one example but there are other examples where the private sector are cool in terms of their investment. We would wish to see a range of fiscal incentives available to reflect the different needs of regions.

    (Mr Southerton) It is important that we recognise that labour market interventions are important but they are only half the story. If we are not successfully growing new jobs, training and making people job ready is almost pointless.

  17. Are you agreeing that there is too much focus on labour market interventions rather than job creation?
  18. (Mr Southerton) I do not think there is too much focus. You have to focus on it. We, for example, have 66 per cent of our population in deprived wards with unemployment from double to five times the national average. That may suggest to me that you need to go into those areas and find out why those people are not in the labour market and work with them almost on an individual basis to make them job ready, ut that is pointless if we are not actually creating jobs for them. I am afraid there is no one right answer as to how you improve the job supply in the region and for the sake of brevity I will not explore that further because I am sure it will come up in questions.

    (Mr Lloyd) Mr Cummings asked if we had got all the tools we need. There is one tool that may be taken away post-2006 and that is with the change of regional policy of the European Union. My own county has benefited to the tune of 225 million of European funding. If the UK government is keen to go with the domestic version of regional policy we need to make sure that regions like the North East do not lose those resources.

    (Mr Wann) One of the further tools we need is a fairer distribution of government employment through government departments and research capabilities into the region. We know from the information that the FRESA had in front of it during this year that there are very significant disparities in the expected growth rates of different employment sectors and different occupational sectors between the North East and the rest of the country. This is compounded by the location of research activities in certain parts of the country and also the sheer investment in other parts of the country which naturally takes with it growth in other sectors of employment, consultancies, et cetera, et cetera.

  19. Basically is it a matter of the North East simply wanting more money or is it more money to support particular activities? If that is the case, what examples can you give? Is it more money for transport, for education? Indeed, what difference do you believe it makes?
  20. (Mr Wann) The North East Assembly has identified a need for 1 billion extra each year for the region. We have got examples where we have realised improvement through a variety of different sorts of projects in the region which can really only be sustained in the longer term by improved overall levels of mainstream funding. Those improvements have been, for example, raising educational attainment by putting more resource into schools partnership areas and where that attainment is being evident, enabling that good practice to be moved around into other parts of the region. In addition we know that, for example, the very significantly improved educational facilities provided by places like the Blyth Community College, where it is a very different educational environment, has already raised the stay-on rates of young people into sixth forms and raised aspirations. It is that step change in quality that can only be sustained by increased mainstream funding.

    (Mr Lloyd) There is a need. I do not think the young people of the North East inherently have lower levels of intelligence than those across the rest of the United Kingdom but they achieve at a lower level in our education system so we are failing them. We need to make significant investment to get back to national levels of attainment for our young people. It is not all just about investing cash. There is also an opportunity for government to make some investment decisions itself and to locate those in regions like the North East. For instance, only about one per cent of public sector research and development spend is in the North East.

    Chairman: We will come on to that issue a little bit later.

    Mr Cummings

  21. It is quite interesting what you say because you have touched on a proliferation of organisations coming together in order to co-operate but do you believe that - I will just go through some the lists - local councils, local strategic partnerships, sub-regional partnerships, RDAs, Learning and Skills Council, Business links are co-operating effectively enough or do you believe it could be improved? Are we not drowning?
  22. (Mr Southerton) At that top level there is starting to be some fairly effective working. I know in Tees Valley -

    Chairman

  23. So what you are telling us is it is starting to be but it is a shambles at the moment?
  24. (Mr Southerton) No, I do not think it is a shambles but I think in some sense that top level is one thing. Where I would agree with the point is that quite often that structure leads you to disbursing government monies through a number of grant funding regimes to a myriad of organisations and it is at that level that I have concerns about duplication and whether we are achieving good value for money. I think the basic structure through things like the Regional Economic Strategy is very good in terms of the analysis. Some of the work done specifically in Tees Valley is excellent in terms of its economic analysis. It is the gap between that and delivery. In part that will be about the resource base but also about how we organise ourselves. I have to say there is a challenge for local areas. We have to get away from being too parochial and in the future investing our money in a limited number of things that will make a difference regionally.

  25. Is that the view of you all?
  26. (Mr Wann) If I can speak for Northumberland, we have a Northumberland Strategic Partnership which was set up some four or five years ago in advance of the RDA. We have now got a very effective working relationship between the Learning and Skills Council, the Small Business Service, the private sector and local authorities and it is part of the confidence in that structure that led to One North East proposing to devolve 75 per cent of their funding to the four sub-regions and retain 25 per cent for regional initiatives, which is the big challenge. Part of that challenge is to ensure that the sub-regions support and help to drive forward the regional agenda on things like the five centres of excellence for renewable energy, nanotechnolgy and life sciences, et cetera, to make sure those sub-regions make a significant contribution to it.

  27. Are they making a significant contribution?
  28. (Mr Wann) I think they are beginning to.

  29. Beginning to. Can you point to anything definitive where they made a positive contribution?
  30. (Mr Wann) Again in Northumberland with One North East we have helped to secure the regional centre of excellence for New and Renewable Energy, NAREC, in Blyth. That is now being supported by the sub-region putting its money behind improvement in the Blyth town area, the Quayside redevelopment area, but also seeking to encourage renewable activity in Northumberland as a whole. That is a very good example of joined-up thinking and working and I think that could be further improved if the government, for example, picking up Mark's point, agreed to make this a national centre of excellence which would then enable further research and development jobs to be brought into the area.

  31. Do you believe that the private sector is meaningfully involved to ensure the actions of the public sector take full account of the needs of local companies and potential investors?
  32. (Mr Lloyd) To take forward the last question about real examples, Mr Cummings will be well familiar with Seaham in County Durham and if you take that example of Seaham you have the private sector, the town centre development, a dock company and a hotelier working in a very dynamic partnership with the district council, the county council and the regional development agency to transform the town of Seaham from how it used to be. So I think, yes, when we can identify instances where the private sector can engage and make a meaningful contribution, they are very happy to take a leadership role and we have examples of that.

  33. So you do not see a need for improvements in any direction? You are quite happy, are you?
  34. (Mr Southerton) In terms of private sector engagement?

  35. Yes.
  36. (Mr Southerton) I think there is still some distance to go in terms of engaging the private sector realistically in things like local strategic partnerships. One thing that has been very successful in the region, and it has been touched upon, is the fact that the private sector has been very centrally involved in the centres of excellence and I would add the example of digital media expertise which now resides in both Sunderland and Middlesbrough. It would be remiss of me not to mention my own company. We find in the circumstances of Middlesbrough, which has been perceived as an iron and steel town, that 81 per cent of the employment is in the service sector. We have formed a privately led company to look at the regeneration of that area. The local authority technically and actually is very much in the minority so there is a very overt, very clear private sector view as to what local authorities should be delivering and what other people should be delivering.

    Chris Mole

  37. Good afternoon gentlemen. The evidence you have submitted identifies some of the challenges in terms of your areas being overly dependent on industries such as tourism, manufacturing and farming and you have described the need to diversify your local economies. How is that fundamental change in the economic base going to be achieved? How are you going to get the same or higher quality jobs?
  38. (Mr Lloyd) We all talk about helping our manufacturing companies to climb "the value chain" and we all talk about trying to attract knowledge-based industries to our areas to replace those industries that are in decline but we have to invest in the education and skills of our individuals, our workers, our young people if we are ever going to be able to compete for the sorts of investment I have just described because it is a highly competitive market place for that type of investment. We touched on research and development a little while ago and we do need to find ways of attracting more research and development activity - brain-based business rather than brawn-based business - to a region like the North East. I do believe, Chairman, if I may suggest this, that we need to think about fiscal incentives to help in that regard?

    Chairman

  39. Such as?
  40. (Mr Lloyd) There is not a legacy in the North East of research and development so when I talk to industrialists and I say, "Bring your R&D to the North East", they say, "No, thank you."

  41. You have just told me what the problem is; what is the fiscal solution?
  42. (Mr Lloyd) We floated with the Government the idea of a modern day enterprise zone, we called it an Innovation Zone, to back research and development in a region like the North East. The Government was not prepared to consider different fiscal policies for regions. We think that is perhaps necessary now.

    (Mr Southerton) Perhaps I could add the Tees Valley example which is the chemical industry. There is a rather sterile debate which asks is the chemical industry changing in terms of one firm dominating to many firms and is there a contest between bold products and things like high value pharmaceuticals. The answer is you need both. I am afraid at the moment the RSA framework discriminates against capital intensive industry and we have to take a longer term view on that. We would not have pharmaceutical clever chemicals and research and development based on the critical mass we already have (but we will lose if we are not careful) if we do not keep our world-class companies producing bold product and seeing further investment in the area. An estimate has been made in the region of the Tees Valley that something like 4 billion of investment is required just to keep the basic infrastructure from which we can grow.

    Chris Mole

  43. Looking at the survival rate of new businesses after 24 months you are a couple of percentage points below the UK average, and your business registration rates are at 21 per 10,000 of the resident adult population in 1999, which was half or less of some of the regions in the south. How are you going to create an entrepreneurial culture in the North East?
  44. (Mr Wann) It has got to have a number of dimensions to it. We believe that, small though it is, things like Young Enterprise have got a key part to play, working with schools very early on to encourage an enterprise approach. Part of the reason that there is not such a large growth in start-up rates in the North East is because of the lack of capital that people have. There need to be some ways of overcoming those barriers to enable people to access capital in a way that encourages ---

    Chairman

  45. You mean the banks are not prepared to put money up in the North East and yet they are in other parts of the country?
  46. (Mr Wann) I think that is fair comment, yes.

  47. Explain it to me then.
  48. (Mr Wann) With One North East we are looking at ways of public sector money being made available for encouraging venture capital.

    Chris Mole

  49. It is a regional venture capital fund the RDA is running, is it, and it is established?
  50. (Mr Wann) It is being established.

    Mr Clelland

  51. To return to the question of research and development expenditure which we know in terms of government and the private sector is very low in the North East and that is something we have to tackle at a national level, why has it proved so hard to harness the potential benefits to the local economy from the region's universities and what practical projects are being undertaken to try to increase the impact of university research and development on the regional economy? Perhaps as a final question, what actions are you taking to try and address the flow of graduates out of the region.
  52. (Mr Lloyd) If I could pick up a few of those points in an opening response. Alan Wann talked about the sub-regional partnerships and the impact that they are having. In County Durham, our largest single project is a sub-regional partnership working as agents for the Regional Development Agency to equip and staff the university so that we can exploit the intellectual property that they are developing in a commercial sense. We are investing 19.6 million in that activity because we see the University of Durham, the University of Newcastle and the others in our region as being our greatest assets in terms of future potential. What sort of practical examples are we taking forward? Well, in Durham, the University of Durham is partnering the county sub-regional economic partnership to create something called the North East Technology Park. In the first instance it is 33 acres of parkland setting where we will look to establish research and development industries in our region as a way of growing our own R&D businesses rather than having to rely on inward investment into our county. Chairman, we are about to erect the first building on that site that will be home to two research and development organisations that we are spinning out of the University of Durham. That has the potential to grow to over 1,000 acres of research and development land in our county, as a real practical example.

    (Mr Wann) The universities themselves would say that they have got a job to do. They recognise that they are a series of cottage industries. There is a job to be done for the universities in the North East to prepare themselves better to engage in the regional economic debate, if you like. The five centres of excellence that have been identified in the Regional Economic Strategy are all about taking the research and intelligence capabilities of the universities, translating those into larger scale testing capabilities and eventually through to production in a variety of different ways. Already through the new and renewable energy centre that I mentioned before, we are starting to see the examples of how Newcastle University through its marine technology capabilities, the University of Sunderland through its photovoltaics and others are contributing to this shift in the region's capability to deliver renewable energy technologies.

    Chairman: I am going to have to cut you off at that point. Chris Mole.

    Chris Mole

  53. I wonder if the councils could just say what they are doing to ensure that their purchasing processes actually support local suppliers and local labour?
  54. (Mr Lloyd) It is a difficult area, Chairman. As Members of Parliament will appreciate, there are various European and national laws that relate to our procurement procedures and we have to be driven all the time to ensure best value. What we end up doing is coming at this from the supply side and working with local businesses to build their capacity so they are much more able to compete with other providers of services nationally and internationally for contracts that councils let. It is very much a supply side initiative in County Durham.

    (Mr Wann) This can be true both in the private sector or in social enterprise as well. By helping to develop childcare facilities in areas that have a mixture of problems we can then remove some of those barriers for people looking for work opportunities. It is on both sides really that we will look to see how we can help the private sector and social enterprise.

  55. On a completely different tack, can you give me one change in regional transport or communications that would make the biggest difference to the region? Not to your locality but to the region.
  56. (Mr Southerton) If I could start with that because you might find it from the Tees Valley perspective a strange answer, but upgrading the A1 to motorway status because that will be not only a practical way of accessing the region, connecting it to Scotland, but also changing its image.

    Chairman

  57. You mean you will have bigger traffic jams.
  58. (Mr Southerton) I think there is a debate about whether you can build yourselves out of congestion but having some congestion in the first place would be a very nice starting point.

    (Mr Wann) We would certainly agree with that and coming from Northumberland you are probably aware that we have campaigned with Scotland for a long time to get the A1 dualled and it has been frustrating for us to find that the Scottish Office seem to be able to put loads of cash---

  59. You have got the plug in for culture, you have got the plug in for the road, anything else? One last plug, quick.
  60. (Mr Lloyd) Broadband connectivity for the region, Chairman.

    (Mr Wann) Government departments.

    (Mr Southerton) Rail infrastructure.

    Chairman: On that note, can I thank you all for your evidence. Thank you very much.

    MR SIMON JUDGE, Head of Labour Market Division, Work and Welfare Strategy Directorate, MS VAL GIBSON, Jobcentre Plus, Director for the North East, Department for Work and Pensions; and DR BILL KIRKUP, Regional Director Public Health for the North East, Department of Health, examined.

    Chairman

  61. Can I welcome you to the Committee. I am sorry that we are running a little bit late. Can I ask you to identify yourselves for the record, please.
  62. (Mr Judge) Yes. My name is Simon Judge. I am Head of the Labour Market Division in the Work and Welfare Strategy Directorate at the Department for Work and Pensions.

    (Ms Gibson) I am Val Gibson, Regional Director for Jobcentre Plus in the North East, Jobcentre Plus being a part of the Department for Work and Pensions.

    (Dr Kirkup) Bill Kirkup. I am the Regional Director of Public Health for the North East, Department of Health.

    Chairman: Thank you. Do any of you want to say anything by way of introduction or are you happy to go straight on to questions? Straight on to questions. David Clelland.

    Mr Clelland

  63. Dr Kirkup, the 2001 Census revealed that the proportion of people with long-term limiting illness in the North East was 22.7 per cent compared with 15.5 per cent in London and the South East and that the proportion of people reporting their health as "not good" in the North East was 12 per cent compared with 7.1 per cent in the South East. Can you tell us why that is and what actions need to be taken to rectify this?
  64. (Dr Kirkup) The biggest single determinant of people's health is their economic well-being and as we have the poorest record of economic well-being in the North East of England in the country of England it is not a surprise to me as an epidemiologist that we also have the worst record of health to go along with it. That affects just about all of the health figures that I am aware of, from problems around the time of birth, through ill-health in adult life, through to premature deaths and years of life lost.

  65. It is all to do with unemployment, is it?
  66. (Dr Kirkup) That is the fundamental most predictive factor for a population, their economic and their social well-being. The North East's population is reaping the problems that came from the post-industrial decline and its effect on the area. The most fundamental thing that we can do as a region is to improve its economic conditions and its economic well-being. There are other measures which we need to take that specifically address the health problems but those are in effect putting sticking plasters on the fundamental underlying problem which will not go away until we improve the economic conditions.

  67. So are there any of these factors which are within the control of the Department of Health and how many relate to other organisations and agencies? You have indicated employment being a major one but there must be Department of Health issues as well?
  68. (Dr Kirkup) Yes, there are Department of Health issues to do with improving access to preventive services and also investigation and treatment services. We need to do that in tandem with the other changes. We are a little hampered in that by having to run faster to catch up with a problem which is more severe in that part of the country than in other parts of the UK.

    Mr Clelland: We have got a man here who is fully employed who does not seem that well.

    Mr Cummings: Twenty-nine years underground, mate.

    Chris Mole

  69. To what extent have we got chickens and eggs here? To what degree is the high level of ill-health actually leading to a low rate of labour market participation in the North East?
  70. (Dr Kirkup) There is an element in which the health of the population will affect its ability to function in the economic market but there is evidence that the biggest underlying factors are the economic conditions and the level of education in populations. That seems to be the egg that comes before the chicken, if I can put it like that.

  71. There has been some controversy in recent years about the number of long-term unemployed people signing on for incapacity benefit. Is this a particular issue in the North East? If so, why?
  72. (Dr Kirkup) I am not sure that I am the right person to address that question to, Sir.

    (Mr Judge) The proportion of the population on incapacity benefit does vary to some degree around the country. We find that the variations within regions are obviously much stronger than between regions. I would be happy to say some more about this. We are piloting a number of initiatives to try and deal with the flow of people moving on to incapacity benefit and then over time we will move on to the stock of people who have been there for a longer period.

    (Ms Gibson) It is true to say in the North East that there is a higher percentage of our adult population of working age receiving sickness and incapacity benefits than there is against the GB average. That is true.

  73. Is it anything to do with the historical industrial base of the North East? What are the causes of low participation in the labour market?
  74. (Ms Gibson) I think it is difficult to point to a single answer. I would say the two things that I know from my perspective are that there is a higher proportion of people receiving incapacity benefits in the North East than the GB average and, as Simon has said, the variation within the region is greater. In some parts of the region, Easington in particular, we have very, very high rates, much higher than others. The other thing that we know is that in relation to economic inactivity the North East has a higher proportion of those over 50 than GB as an average. What you want to make of those facts, I think ----

    Chris Mole: What do you make of them?

    Mr Cummings

  75. Can I assist? Surely it is not beyond the realms of anybody's imagination to understand that because Easington once had 12 working mines and were the last coal mines to close, that that is a significant contributory factor to the overall health of the people in the district. Do you find it difficult to say that because it just happens to be a fact of life?
  76. (Ms Gibson) The North East FRESA - Framework for Education and Skills - speculates around the connection, yes.

  77. They speculate? Nobody needs to speculate.
  78. (Ms Gibson) Nobody can prove it I think is what I am trying to say.

  79. The levels of bronchitis and emphysema, levels of pneumoconiosis, levels of people who have been severely injured and have lost limbs, they are statistics, they are lodged in the Department. Does anyone examine them? The evidence is there.
  80. (Dr Kirkup) If I could respond to that one, Chairman. Yes, that is absolutely correct, there is a legacy of ill-health as a result of accidents and conditions in heavy industry. The evidence from the public health point of view is still that it is better to be in work even in a relatively dangerous occupation than it is to be out of work. It is true that there is a legacy of post-industrial ill-health as well in the North East.

  81. Would you tell the Committee what actions you are taking to increase the labour market participation rates in the North East? What measures have proved to be most effective and why are they the most effective?
  82. (Ms Gibson) In the main the work that we do in Jobcentre Plus is with individuals who we are seeking to help to find work and we have a number of programmes of support for those individuals. We have New Deal programmes which work with people with particular disadvantage, provide them with help to overcome barriers to employment and that can include a variety of things: it can help with things like basic skills; it can help people to rehabilitate who have drug dependencies; it can help with confidence building via mentoring programmes. There are a number of initiatives which are geared to an individual's barriers to employment. We have Ambition programmes in the North East, one in retail and one in energy, which look to link better to employer demands, identify what they need and then prepare people to enter those particular occupations. We have Action Teams working in the most disadvantaged communities.

    Chairman

  83. You have told us what you have got but how many do better in the North East than in other parts of the country and have you got more of them than in other parts of the country?
  84. (Ms Gibson) We have eight of the 53 national Action Teams. New Deal is a national programme. We have one of the five Ambition retail programmes, some are national and some are not. The areas that are doing best in terms of helping people into work are those which link most closely to employer need. For example, in Ambition, where we are providing pre-employment training for retail and the retailers have designed with us that pre-employment training, we get better success at helping people into work.

    Mr Cummings

  85. Out of the measures that you have mentioned, which ones have proved most effective?
  86. (Ms Gibson) Those that link most to employer needs. Ambition.

  87. Why?
  88. (Ms Gibson) Because we are helping people find a way into the jobs that are there. We are providing them with training into areas of employment where jobs exist.

  89. How successful has the New Deal been in targeting people over the age of 50?
  90. (Ms Gibson) Within the North East and nationally we have met all of the targets that we have been set in this year and in previous years.

  91. Are they realistic targets?
  92. (Ms Gibson) I would say that they were challenging. They were quite tough for us.

  93. This is to Mr Judge and to yourself, Val. You are both involved in administering national policies which are designed to increase the skills and abilities of unemployed people to get them back to work but is not the problem in our region that there are simply not enough jobs going around for them to do?
  94. (Mr Judge) In general there is a good supply of vacancies coming up in all parts of the country in all sectors of the economy even at quite a local level. On the whole, we do not feel there is a particular problem of the supply of vacancies in terms of getting our particularly disadvantaged clients into jobs, the difficulty is getting our priority clients to have a good crack at those jobs, and that is where we focus our effort.

  95. Are you quite happy that things are progressing in the way in which you would like to see them progress?
  96. (Mr Judge) Yes. All the targets are moving in the right direction. The bringing together of the two halves of the Department to create Jobcentre Plus is having a massive impact on what we are doing on the ground in terms of trying to get lone parent employment up and trying to get more disabled people back into work. Bringing those two halves of the Department together was a massive change and will have a big impact over the next few years.

  97. It has been suggested to the Committee that programmes like the New Deal were designed for places where the unemployed people live close to significant job opportunities. How effective has the New Deal been in the North East compared to the rest of the country?
  98. (Ms Gibson) In fact, we get one in four of our job entries from New Deal participants which compares with an average of one in five across the rest of the country, so more of the people we place in work are via the New Deal route. I think it is proving to be very effective in helping people with disadvantage back to work.

    (Mr Judge) As the Chancellor said in the Budget, the New Deals are not a static programme. We are looking at the scope for giving more flexibility to local managers in high performing Jobcentre Plus offices to actually tailor New Deal provision to meet the real local needs. There is always a tension here between a national policy and maximising local flexibility.

    Chairman

  99. Is that one in four compared with one in five really good news? Is it not really saying that a lot more people have been unemployed for a long time in the North East before they get a job as opposed to other parts of the country where people are getting back into work quicker?
  100. (Ms Gibson) It is saying that more people have come through that New Deal route which is one of disadvantage, yes, but I would also argue that shows that the programme has validity in an area like the North East.

    Chris Mole

  101. Does that not imply there are jobs there to be had if you can match the people to them?
  102. (Ms Gibson) Yes.

  103. Dr Kirkup, what factors determine the level of NHS funding into your region?
  104. (Dr Kirkup) There is an allocation formula for the cash limited element in NHS spending within the region which is based broadly on two different sets of factors. One is the level of need for health care in the region as assessed by statistics to do with health and deprivation in the region and the other, which tends to work in the opposite direction, is the cost of living factors.

  105. Okay. You have referred to the factors that take into account poverty and deprivation which were announced as part of the new formula last December. Does this go any way to sufficiently addressing the health inequalities that your region faces?
  106. (Dr Kirkup) It goes part of the way to addressing the inequalities. If I look at the excess of deaths and ill-health in a wide variety of different categories in the North East, they tend to run at 10, 12, 14 per cent above the national average. The funding for the cash limited element of NHS spending tends to run at about five per cent above the national average. Most of that is consumed by acute reactive care, emergency admissions to hospital, elective admissions for complex procedures in hospital, and it leaves a lower than average spend in the North East on priority services like mental health because it is a fixed pot.

    Chairman

  107. And you have had 50 years of under-funding compared to other regions of the country, have you not, so you have got this legacy?
  108. (Dr Kirkup) It is arguable that you could say that, Chairman.

  109. Are you saying it or am I putting words into your mouth?
  110. (Dr Kirkup) I think that there are a variety of different views about the balance between different factors in any allocation policy.

  111. You are telling me that the North East is doing very well, is that it?
  112. (Dr Kirkup) No, absolutely not. I think the allocation formula could very justifiably work better to the advantage of the North East. I know that there are other people who would take an academic view of the allocation formula and disagree with me, that was all I wanted to get across.

    Chris Mole

  113. Your two Departments both have floor targets for performance from the Government covering things such as conception rates in relation to teenage pregnancies, life expectancy and employment rates. To what extent do you work to an explicitly regional dimension on those floor targets?
  114. (Mr Judge) The relevant DWP floor target here is the one relating to the 30 local authority districts in the UK with the poorest labour market position and reducing the gap in those employment rates with the average. To be honest, the focus there is mainly at a local level and is all about effective working through local strategic partnerships. If anything, the more we look at the data the more we think we should be looking at an even lower level within particular local authorities.

  115. At a neighbourhood level?
  116. (Mr Judge) Yes. The data is beginning to become available to enable us to target resources in that way. The way we target resources geographically, the vast majority of that is through straightforward workloads basically, numbers of people on the various client groups, but also through the target structure for Jobcentre Plus incentivising placements in those particular deprived areas.

  117. So what aspects of that tell me that your floor targets are regionally shaped?
  118. (Mr Judge) To be honest, I do not think that particular one is regionally shaped at all.

  119. What about in health?
  120. (Dr Kirkup) The Department of Health is currently going through its second reorganisation in a year, as a result of which it will complete the abolition of the regional tier with the single exception of public health groups. Therefore, my understanding is there have not been for some time, and there will continue not to be in the future, any regionally calculated targets for the Department of Health.

  121. How then do you feel in terms of your two Departments setting national policy that they listen to what you try to feed up from a regional perspective?
  122. (Ms Gibson) Can I just clarify the question in respect of the floor targets?

  123. No, no, in terms of the national policies that will affect the way you deliver services.
  124. (Ms Gibson) I think it is a fairly iterative and ongoing process and there is an element, if I am entirely honest, of the Department coming to some views and then we implement them as operational managers as well as examples of calls for greater flexibility coming through the organisation being understood and listened to. I think policy making in the Department works in two directions. The access that I get to policymakers is regular and systematic, as it is for my colleagues.

  125. Do you think they listen to you when you say "this works well in the North East and that does not"?
  126. (Ms Gibson) Yes. Policy is generally, if not entirely, made with operational input as well now so that we can say from the very beginning whether it is going to work and whether we can implement it on the ground as well.

  127. And in health?
  128. (Dr Kirkup) I have a role in encouraging and leading health regeneration working across the Government Office for the North East which I think is properly reflected in the Department of Health and I expect that to continue in the future. I think that there is an opportunity which is less well reflected now, and will be less well reflected in the future, around using the National Health Service as a participant in the economic regeneration of the region because of the lack of a regional focus in the Department of Health. The NHS is the biggest employer in the region, it is a very large contributor to the spend of GDP in the region.

    Mr Clelland

  129. We are fond of complaining that the Government does not do enough to help us in the region, that has been a complaint over all of the years I have been in politics, but quite often I think we can do it for ourselves. Dr Kirkup has quite rightly identified unemployment as being a major cause of ill-health in the region but also the National Health Service is a big employer in the region and a big capital investor in the region. I do not know if he has seen the King's Fund report which talks about the potential of the NHS to create local employment and local enterprise. What are we doing to help ourselves?
  130. (Dr Kirkup) We are beginning the process of bringing the strategic health authorities in the region together with key players in the Government Office and in the Regional Development Agency to better align health service investment, capital investment and, indeed, investment in jobs because the NHS is not just a very large employer but it can also be a major growth area because of the NHS plan and the requirement of delivering the NHS plan which will mean significant additional investment in the North East. There are some frustrating road blocks that get in the way of that process around the requirements placed on the NHS to take a rather simplistic view of value for money on occasions which makes it difficult for them to do anything other than invest in the cheapest possible route.

  131. We cannot favour local contractors?
  132. (Dr Kirkup) For example, yes. There are also procurement rules both in UK law and I think in European law which I think personally would bear testing, the extent to which they actually interfere with this process, because I am not sure that anybody has tested them. Certainly they are widely cited as a reason why it is difficult for the NHS to operate in the sort of way that we are talking about.

  133. In terms of measuring the quality or the economic benefit or the value of contracts, you also build into that the benefit to the local community?
  134. (Dr Kirkup) Precisely in terms of improving its health and, therefore, not only treating that as a single good in its own right, which it most definitely is, but also in contributing to easing the reactive burden on the Health Service.

  135. The Department for Work and Pensions is also a major employer in the region. Perhaps you could tell us a little bit about what benefits that has brought the region and how much scope there is to increase the numbers, not necessarily in your Department but in other Government departments? Given this day and age of electronic communications and, despite the criticism, improved transport between the region and elsewhere, there must be scope for outsourcing, if you like, Government departments out to the regions rather than them all concentrated in the South East.
  136. (Mr Judge) I said a bit about the national position and the Chancellor did announce in the Budget a project to look at the scope for further relocation out of London.

    Chairman

  137. Give us a list of your Department that could go up to the North East?
  138. (Mr Judge) Actually within DWP we do have a very good story on this at the moment in that very large chunks ----

  139. I understand you have a good story but what extra can go to the North East, or the North West, I will not argue between the regions?
  140. (Mr Judge) To be honest, Chairman, we have not started looking at that in any detail within the Department at the moment. We just want to keep the Department running as it is.

    Mr Clelland

  141. You say that with a grin on your face but this is controversial.
  142. (Mr Judge) Within the headquarters function of the Department, both the headquarters of the Department and also the headquarters of Jobcentre Plus and our delivery agencies, we are spread all over the country at the moment and that is quite a challenge in terms of running the organisation.

    Chairman

  143. How many people have you got in London?
  144. (Mr Judge) In the London region in head office we have got 2,000 and 12,000 in field delivery. That is 2,000 out of nearly 14,000 head office type functions in the Department.

  145. There is quite a lot that could be moved to the North East, is there not? It is no good shaking your head like that, I have to get something on the record.
  146. (Mr Judge) There are quite a lot of DWP civil servants working in London. There is an issue about how many of those need to be there for dealing with other departments and working with Ministers, that is the issue.

  147. Dr Kirkup, in the Health Service there is a huge amount of waste in terms of food waste, is there not? What about setting up composting schemes? They are pretty good in terms of being locally based rather than something where you can suddenly find all your waste material going to some other part of the country. Are people looking at this in the Health Service?
  148. (Dr Kirkup) That sounds like a very commonsense approach, Chairman. I am not aware of any examples in the bit of the Health Service I am dealing with.

  149. As part of the Jobcentre Plus you were talking about wanting more flexibility. What does that mean?
  150. (Ms Gibson) We have already got quite a lot of flexibility. Our individual advisers have got flexibility to deal with particular circumstances for particular individuals. Our action teams have got a lot of flexibility and are successfully using that. What we would like to see is some of the flexibilities that action teams currently have available to our district managers, so I think the Budget has trialled that that is likely to come our way.

    Chairman: On that note can I thank you very much for your evidence.

    RT HON PATRICIA HEWITT MP, Secretary of State for Trade and Industry, Minister for Women and e-Minister in Cabinet, examined.

    Chairman

  151. Secretary of State, can I welcome you to the Committee and to our final session today on reducing regional disparities in prosperity. Would you introduce yourself to the Committee for the record?
  152. (Ms Hewitt) Thank you very much indeed, Chairman. I am Patricia Hewitt and I am the Secretary of State for Trade and Industry and also Minister in the Cabinet for Women.

  153. Do you want to say anything by way of introduction or are you happy for us to go straight to questions?
  154. (Ms Hewitt) I am happy to go straight to questions.

    Mr Cummings

  155. Would you tell the Committee what you and your Department are trying to achieve with the new Public Service Agreement target on regional growth?
  156. (Ms Hewitt) What we are trying to achieve is to support all regions raising their sustainable rate of growth but in particular to ensure that the regions that have historically had lower rates of growth and now have lower levels of GDP per head grow faster so that we actually close the gap between those regions which have a lower average standard of living and those that have the highest standard of living.

  157. How are you moving towards achieving that particular goal, particularly in the regions that are lagging behind others?
  158. (Ms Hewitt) I think the single most important thing we have to do is strengthen the local and regional leadership in each of the regions and then sub-regions within each of those regions because what is increasingly clear in this thing we call the global economy is that the places that succeed are the places that have got very strong local leadership, elected leadership but working with business leaders, with universities, with the communities and so on, because we cannot sit here in London and say, "These are the strengths of the north west. This is the right strategy for them to follow and we will pass a law or make decisions and make it happen". That has to come from within the region and our job is to make sure that leadership can emerge - and I think we did that in particular by creating the Regional Development Agencies - and then to make sure that we give them the backing and the resources to get on and do the job. What we identify in the document we have published in November 2001, the third document on productivity in the UK, is that if you look at the drivers of productivity and prosperity there are very clear differences in the different regions that account for a very large part of the prosperity gap. Some of it is to do with lower levels of employment, much of it is to do with far lower levels of skills on average in some regions and much lower levels of business start-up, for instance, in the North East compared with the South East. Those five drivers of productivity are some of the key factors that the RDAs and their partnerships need to work on as they develop their regional strategies.

  159. Do you believe that improved regional productivity should be pursued at all costs or should other factors be taken into consideration?
  160. (Ms Hewitt) All of this has to be done within our understanding of sustainable development. In other words, what we are looking for is growth that is socially inclusive, that is economically sustainable and that is environmentally sustainable as well, so I think a very important part of the role of the regional economic strategy is to ensure that the neighbourhoods and communities that have been left behind and that are suffering most within a particular region are given the hand-up that they need to ensure that they can develop. In that sense the social inclusion agenda and the prosperity and productivity agenda have to go absolutely hand in hand.

  161. Could you tell the Committee what you think the role of the environment is in regional economic development?
  162. (Ms Hewitt) I think there are a number of different aspects to this. It comes back to my point about a global economy. We are living in a world where it is increasingly easy for companies to choose where to go. It may be to a different part of the United Kingdom; it may be to go somewhere completely different, to a different country. Increasingly workers, particularly highly skilled workers, are also mobile and so the region or a sub-region that has an exceptionally good quality of life and that has really sought to enhance its environment actually has a great source of competitive advantage because that is a place where people will want to live and that is one of the key factors for people in making location decisions. That is one of the connections between environmental sustainability and economic prosperity, but I would also make the point that, particularly in regions like the North East and the north west, which were in a sense the heart of our industrial economy, there are particular problems, as some of our traditional industry shrinks or closes, of brownfield sites that need a huge amount of reclamation. Derelict sites are miserable for the people living around them and they are often a source of environmental pollution and danger, so there is an additional challenge there to the RDAs to reclaim those sites and then of course to try and turn them into opportunities for new business growth and creation.

    Chris Mole

  163. What about the environmental industries' sustainability?
  164. (Ms Hewitt) I should have made that point myself, so thank you, Mr Mole, for giving me the opportunity to do so. Several of the RDAs have quite rightly identified environmental technologies as a growth area. If you look at the North East, for instance, and the centres of expertise that they are seeking to grow, one of those is in environmental technologies and renewable energy. The East Midlands, my own region, has quite rightly identified that environmental technologies are a strength in a number of the different universities and so, depending on what the strengths and opportunities are in the different regions, I think the RDAs have got a wonderful opportunity to build clusters of new businesses around environmental technology and I think the new policy framework that we have put in place with the Energy White Paper and the emphasis there on renewables and energy efficiency will create the right national market framework within which we can get more businesses growing in that area.

    Chairman

  165. We are actually measuring productivity on the whole in terms of gross value added, but that does not take into account quality of life at all, does it? Ought we not to be looking, if we are looking at productivity, much more at some way of including those environmental issues within the measure of a region's productivity?
  166. (Ms Hewitt) I think we should, and indeed in our own thinking in the Department resource productivity is part of the way we view productivity and, of course, the DTI's mission is to contribute to prosperity for everybody by helping to drive up productivity. Resource productivity fundamentally is about producing more with less use of natural resources and less pollution, so it is a very important part of the strategy for raising the sustainable growth rate across the whole country as well as in individual regions. We have been looking with the Treasury and with colleagues in environmental organisations at what are the best measurements to use to track improvements or deterioration in resource productivity. In the Energy White Paper we put forward the information about the decoupling of energy demand from economic growth that has happened over the last 20 years and which, of course, we have to keep going over the next 10-20 years and beyond that. I think we do need to have a broader view of how we measure our economic success. We need a balance scorecard if you like. Having said that, we also have to recognise that, although the productivity gap between ourselves and, say, Germany and France is narrowing, it is still very wide indeed with the United States, which means that our people are having to work longer hours and work harder in order to produce the same amount of output that an American worker, with better tools and technology, can produce in less time.

  167. These figures on resource productivity, are they available region by region?
  168. (Ms Hewitt) The energy efficiency figures are purely national and at this point we are still trying to define beyond that energy use figure the best set of figures to use, so we have not even got to the stage of breaking them down by region. That would be an interesting thing to do. The first thing we need to do is agree on the set of benchmark figures we want to track.

  169. Any idea when you might achieve that?
  170. (Ms Hewitt) Perhaps I can let you have a note on that because it is an issue that becomes enormously complex once you start talking to the statisticians and economists about it and we have been struggling with it.

  171. We would be happy to have it in a note.
  172. (Ms Hewitt) I will come back to you if I may, Mr Bennett.

    Mr Clelland

  173. As you have indicated, Secretary of State, in order to meet the target the poorer performing regions would have to grow faster than London and the South East. When we discussed this point with the Chief Executive of the London Development Agency he said this would be arithmetically challenging. I do not know whether you would agree that that was perhaps something of an understatement. How realistic is that prospect, and do you not think that targets cannot really be met without a redistribution of public resources between the regions?
  174. (Ms Hewitt) There is no doubt at all that the target is challenging because, as you rightly say, it does involve the regions with lower levels of GDP growing faster than our richest and fastest growing regions. Yes, it is challenging, but I do not think there is any point in having targets that are not challenging.

  175. It is challenging for Government as well as the regions themselves, is it not?
  176. (Ms Hewitt) Of course, because we have committed ourselves. This is a target that we are committed to, that we are working on, and we are trying to make sure that we have the right policies but also the right institutions and leadership in place. It certainly does require, as I said earlier, making sure, for instance, that the RDAs have the resources they need to start delivering on their economic strategies. When we came to the most recent allocation of funding for the RDAs we set out very carefully and with real consultation to establish a set of criteria for how we should allocate those growing resources up to about two billion pounds a year that go through the Single Pot. Unemployment and deprivation were the two key criteria that we used (although there are others as well) and out of that has come a funding allocation that gives the North East a much higher per head allocation of RDA funding than those of all the other regions, about six times those of the South East and the rest of England.

  177. Yes, but you have not said that. Taking the northern regions as a whole, there is a slight weighting of funds towards the RDAs in the north but it is not enough, is it, to compensate for all the current advantages that the south has?
  178. (Ms Hewitt) Of course not. We are talking about two billion pounds of public spending, obviously out of a much larger pot, so of course one has to look, for instance, at how the education budget, which is considerably larger than the RDA budget, is allocated. Of course, through the education budget, the health budget and many of the other main national programmes, there is an increased weighting given to the disadvantaged communities. That of course is not done on a regional basis. It is much more fine-grained than that in order that you can get the money into the local education authorities and into the schools that have got the greatest difficulties to overcome, but almost by definition the regions that are facing the biggest challenge will be those with a pretty high concentration of disadvantaged neighbourhoods which will therefore attract not only higher social security spending and greater tax credits but also higher education and health spending.

  179. All government departments do not have regional responsibilities though. Surely, if there is going to be a proper redistribution of funds to the regions we need to have all government departments looking at this.
  180. (Ms Hewitt) I think all government departments need to look first and foremost at disadvantage and deprivation and what has to be done within their particular sphere of responsibility, for instance, to close the appalling gap in health and mortality between the people living, for instance, on my most disadvantaged council estates and those living in leafy suburbs in Leicestershire, but that is an issue of inequalities within regions as well as an issue of inequality between regions. Certainly programmes like education and health that focus on where the disadvantage is are actually the right place to put it rather than on a regional aggregate. I also think - and I think we are doing this better now - that all government departments need to think about the regional implications of their policy approach.

    Chairman

  181. Would it not be better if Work and Pensions had a regional dimension to their spending?
  182. (Ms Hewitt) I have not had the benefit of hearing the evidence that you have just had from that department but it seems to me, given the very different levels of unemployment in different parts of the country and, as I said, we used that as one of the main indicators for the RDA funding allocation, there is inextricably a regional as well as a sub-regional and local dimension to the way in which DWP spends its money.

  183. We have just had fairly persuasive argument from the North East that the biggest health problem is poverty. Is there not an argument that if poverty is really the thing that is driving public health qualities down in the North East, it would be better to make everyone in the North East a little bit richer, and one of the ways would be for Work and Pensions to be paying out rather more money to people who are unemployed in the North East as an example?
  184. (Ms Hewitt) I understand the logic of that and of course ill health and poverty are very closely connected, but I do not think it is as simple as that, nor do I think that, particularly for people of working age, the answer to poverty is a bigger benefit cheque. I would draw, for instance, on the example of an absolutely ground-breaking health programme within one of Leicester's most disadvantaged estates (it does not happen to be in my own constituency; this is Prince Philip House on St Matthew's Estate) where the GP, Dr Angela Lennox, who created this community transformation programme, says, "I have massive ill health with my practice, amongst my patients. I prescribe employment because actually what those people need" - and I am talking here about people of working age - "is not simply a bigger benefit cheque from Jobseeker Allowance. They need a job", and that generally means that they need not only an employer who is willing to interview them but they need help in building skills, in getting confidence, in perhaps overcoming a disability and so on, and it is really in that area of transforming capacity, at the individual level but also at the level of the local regional economy, that I think our policies to reduce inequality have to be directed.

  185. But if they had a little bit more money they would be able to spend it in the local shops which would create some extra local jobs, would it not, and it would become circular?
  186. (Ms Hewitt) Undoubtedly where you can get local spending power being spent locally that will help to drive up economic activity but it is one of the paradoxes of some of our poorest communities - not all, but many of our poorest communities - that there are almost no local businesses; there is almost no local economic activity, at least of a registered kind, and so the quite large sums of money that go into those communities through the benefit system but also through housing and education and so on are not spent in the local community; they are spent in other parts of the city or the region and do not directly help to employ and improve the prospects of the people living there. That is why I think our more successful neighbourhood regeneration programmes are about building people's employability and creating and growing businesses within those deprived areas, and then the money that people are getting, whether it is from benefits or from a job, will indeed be more likely to be spent locally, and that is when you get into that virtuous circle, but you have to have the businesses and the economic activity within the disadvantaged areas as well as the money coming in.

    Mr Clelland

  187. How can we encourage investment in business in an area like the North East where we have got to compete with the South East? The Government may very well introduce initiatives to encourage the growth of business in the North East but as long as business has the choice between the North East and the South East increasingly we are seeing that they are choosing the South East. Should there not be some disincentives in terms of developing in the South East as well as incentives to develop in the North East?
  188. (Ms Hewitt) I certainly do not think, and I do not think you were implying, that we can ban business from locating in the South East or forcing them to locate elsewhere.

  189. No, but there are fiscal measures, are there not, that could be taken?
  190. (Ms Hewitt) I agree with you that this is about making the North East, to take your region as an example, more attractive compared with, say, the South East. If you look at what is happening in the South East there are very considerable disadvantages arising at the moment from the fact that we have got an extremely tight labour market, we have got a housing market where large numbers of people find it impossible to -----

  191. But the Cabinet Committee report(?) will allow more housing in the South East.
  192. (Ms Hewitt) We need to deal with those problems but we also need to deal, and John Prescott has set out a strategy for this, with housing problems in the north. However, what more and more employers are finding is that other regions are increasingly attractive because the land is cheaper, the office rents are cheaper, people are much more available, and you can get very well qualified and loyal workforces outside London and the South East precisely because of those problems of, if you like, overheating in the South East economy. I think the central part of each region's economic strategy has to be to make itself more attractive. Part of that is about exploiting the strengths of the science base within each region. If I can use the example of the North East, One North East is doing that with these new centres of excellence. In Yorkshire we are seeing Yorkshire Forward creating, for instance, the National Centre for Metals Excellence with a tie-up between Sheffield University, Boeing, the new science park and so on. In the north west it has been done in a different way with the North West Science Council. That is about growing new local companies, spin-outs from the science base and attracting inward investment because they want to be near those centres of excellence and near those centres of a highly skilled and educated graduate workforce, for example. Obviously, if we are to make the regions more attractive then we also need better transport and the National Transport Plan is a hugely important part of that to make sure that as far as we can and as fast as we can we have got the road connections, the rail connections and the airports that will help to make it easier to do business and to retain business in terms of retaining skilled and educated people in the different regions rather than having them come down to the South East in search of the job they want. There is a huge amount of this to be done but we are clear about the direction we have to go in and we are putting in place the institutions and the policies to do that.

    Chris Mole

  193. Whether it is the differences between regions or within regions, and I am sure it is the latter, some people are arguing that it is not just that regions should have different targets but that they should have different policies. Much of the evidence that we have heard criticises the Government tending to a one-size-fits-all approach and the North East Regional Assembly, for example, looks enviously over the border at the flexibilities that the Scottish Parliament have brought there. To what extent to do you agree that regions do have the scope to deliver or develop regionally appropriate solutions rather than just implementing national policies?
  194. (Ms Hewitt) I think that is exactly what the regional economic strategies are about. We have moved very rapidly away from a one-size-fits-all policy. The first step was creating the RDAs themselves and then getting them building up partnerships within the regions in order to come forward with a regional economic strategy that had the broad support of public sector, business and the various other partners and stakeholders in the region. The Single Pot was perhaps the next crucial step forward because instead of having each RDA having to respond to the different funding schemes and targets of different national departments and being micro-managed to an extent that I think was really quite absurd, we have now said the RDA has a Single Pot. It then agrees with Government a framework of objectives, not too detailed but so that there is accountability for that public money, and so that they can be challenged, if they are not delivering on that, within the region as well as from national Government, and then they get on with it. I think that is producing a very exciting process of innovation and learning as different regions see what is what.

  195. So of the dozens and dozens of tier targets that the RDAs have, you expect them to develop those into ones that are regionally appropriate?
  196. (Ms Hewitt) I think that is happening. With the latest round of funding allocation what we have agreed with each region is the tier one and tier two targets, but these are tailor-made for the region; they are not dictated from above. They arrive and there is a process of negotiation and discussion but they are designed to reflect the regional economic strategy but hold the RDA to account for delivery. The next stage, not necessarily in all regions but in some, will be the election of regional assemblies, where those are wanted, by the people of the region.

  197. Just coming back to the strategy, is it appropriate for all regions to be pushing cluster development? Forty three per cent of London businesses are in one form of cluster or another. Only15 per cent are in the North West. Is it right that that is something that should be pushed everywhere?
  198. (Ms Hewitt) When we started looking at this work around clusters, which is, I think, a very fruitful way of looking at how local economies develop, we had a piece of work in which we involved the RDAs but we then had, if I remember correctly, a sort of specific funding stream behind it. That has all gone now with the development of the Single Pot. I was very struck, for instance, last year at a conference that the RDAs themselves organised, and I think it was Yorkshire Forward who took the initiative, where they brought Professor Michael Porter across and they used him as a source of expertise about how to strengthen the work they were doing to build clusters of existing businesses which were helped to grow, new businesses that were helped to start up or inward investors that were helped to come into the region, around an existing base of businesses and of university and, where appropriate, scientific excellence. That was their initiative. It was not something that we had told them they had to do.

    Chairman

  199. How big do you think clusters should be if you are going to offer graduate opportunities for a couple?
  200. (Ms Hewitt) I do not think I can sit here and say a cluster has to be of a certain size or a region has to have a certain number or density of clusters. What I think we have growing evidence on, not just from the United Kingdom but from around the industrialised world, is that you get this almost positive feedback mechanism where you get businesses and the academic base in related sectors and related areas of business and so what you get is a much faster process of innovation. You get intense competition but you also get collaboration and learning. You get highly skilled people who then move between the businesses and then you get other businesses attracted into the area because the expertise is there.

  201. I understand the principle of the cluster. What I am worried about is, do they have to have a certain critical mass in order to work?
  202. (Ms Hewitt) Yes. I am not sure I am going to be able to say to you: "Here is the magic formula". What each RDA has been doing, and we have certainly been supporting them in this, is identifying the clusters or emerging clusters that they already have. In the North West you can see that, for example the aerospace sector is very large. You can also see a very large pharmaceutical sector and a rapidly growing bioscience sector. What the RDA is doing is reinforcing that. If in a few years time they have a bioscience incubator and no businesses to go in it I think you would draw the conclusion that it was not working. When I was in Merseyside recently and announced the funding for the new bioscience centre there what I was being told was they have a waiting list. I think you can judge fairly quickly whether you are growing your cluster or whether there is no interest. If there is no interest you would probably decide not to continue throwing money at it and you would switch to something that looks more promising.

  203. Secretary of State, are you satisfied there is sufficient distinctiveness between regional economic strategies to enable the PSA target of convergence to be met? They all have clusters, they all have biotech, they all have new media knowledge and higher education links, are you confident they are not just competing with one another and there really will be sufficient distinctiveness to allow the North East to level up with the South East?
  204. (Ms Hewitt) That is going to be the acid test. There is no point whatsoever in RDAs saying: "Bioscience is the new thing, we want it". They need to have some existing strength, whether it is in universities or in existing pharmaceutical businesses, that gives them a foundation to build from. From what I remember of going through the RDA strategies I think they all do have foundations that they have identified that they can build from. If you take new media, there is such a range of opportunities, skills and businesses in new media, and more broadly in the creative industries, that there is plenty of scope for the North East to develop something that is quite distinctive, just as Brighton has developed something quite distinctive largely out of its particular university base. That is what we have to do. This cannot be a copycat strategy because that will not work.

  205. RDAs now bear all of the responsibility for the implementation of the Government's regional policy, do they have adequate resources to deliver their objectives? If you look at my region in the East I think the spend of the RDA is 83 million in the latest year, and the regional economy is probably something like 83 billion, is this a bit of a drop in the ocean?
  206. (Ms Hewitt) If the RDAs use their funding strategically, as they are doing, and they do not try and spread it too thinly, and they use it to back a crucial area of advanced manufacturing, like the metal centre I was talking about in relation to Yorkshire, then I think they can make that money go a long way. They can also use it, and they are getting very good at this, to leverage in both private sector investment and in many cases European funding as well. It is not simply a question of looking at what the RDAs money is. The other point is, and in a way it comes back to what we were talking about earlier, it is making sure that wherever possible the main programme spending of the public sector is reinforcing the strategy, so that for instance the higher education spend, both on the research intensive universities and the non-research intensive universities, is reinforcing the regions economic strategies. That is one reason why Charles Clarke and I, who are working closely on this, want the RDAs to have a much bigger role in the funding allocations, particularly for non-research intensive universities, so that we get the universities really developing quite a distinctive mission in terms of knowledge to transfer to the local and regional businesses. That means universities actually having the right courses, the right skills and producing graduates who will help to reinforce and strengthen those existing sectors, as well as growing new ones.

  207. Do you think the RDAs have sufficient power to co-ordinate the activities of the other institutional players in the region? Was it not a mistake to end up with Learning and Skills Councils going from national to local but missing out the regional level, where they would fit in with the RDAs?
  208. (Ms Hewitt) That is a question for Charles Clarke rather than me.

  209. Is it not joined-up Government?
  210. (Ms Hewitt) Indeed.

    Chairman

  211. What you are saying is that he has made a mistake!
  212. (Ms Hewitt) I am not saying that. I was going to be slightly more subtle than that. What I was going to say is I think we made a real step forward when we got the Business Links and the Learning and Skills Councils coterminous, so we reduced the number, we got the boundaries sorted out, however there are still one or two issues round that. At a local level we have the Learning and Skills Councils and the Business Links operating within the same boundaries, and that is very helpful. I agree with you about the danger of simply doing a national, local connection and missing out the regional dimension. There are two things happening on that, one is a series of pilots, which we are just embarking on, where in some cases we are getting the RDAs much more closely involved in actually managing the Business Links so that that business support service is much more closely linked to the regional economic strategy. What we are also doing in one or two of the pilots is getting the RDAs involved much more directly with the LSCs as well as with Business Links. The other thing we are doing is the FRESAs, which are new frameworks for regional employment skills strategies. That is basically the device that will enable us to join up the skill side with the business support side with the analysis of the labour market needs for that particular region. It is early days and we have a huge job here to get the workforce development and the skill strategy working properly, meeting business needs and also fitting within a regional economic strategy. We are very clear about the job to be done here and we have our two departments working much more closely together than has ever previously happened and we are starting to translate that into the regional and the local partnership that will be needed to make it work.

    Chris Mole

  213. You have just initiated a review of innovation policy, to what extent does the review take account of the links between science and innovation activity within a region and between regions?
  214. (Ms Hewitt) Very much so. It is not simply looking at things top-down at a national level. The RDAs and the science and business partnerships at a regional level, like the North West Council, are all very closely involved in the innovation review. I have also just asked Sir Tom McKillop to bring together the chairs of the RDAs and of the emerging science partnerships in other regions just to make sure that we get the best possible work within each of the regions and also feed that into national policy. The innovation review is still at a fairly early stage but what is becoming increasingly clear is that a very large part of the innovation job to be done is to raise our productivity and innovation levels at a regional level.

  215. There is a view that lot of science investment goes into the Golden Triangle between London, Oxford and Cambridge, how does that fit in?
  216. (Ms Hewitt) Much of it does, and that reflects the excellence of university departments in some of those universities. Every region and indeed every nation of our country has world class departments doing world class research. All of those world class departments will be reinforced through the increased scientific and research funding that has come as a result of the latest Spending Review. What we also have to do is ensure that departments that are not yet world class but have a real chance of becoming so get the support and funding to enable them to move up in that way. We also have to make sure that universities and departments that are not going to be research intensive and are not going to be doing that ground-breaking, cutting-edge research nonetheless have this distinctive and extremely important mission of knowledge transfer within their local communities and regions. That is very important. We have strengthened the third leg of the funding stream in higher education through the Higher Education and Innovation Fund.

  217. Coming back to your counterpart in the DfES, when we took evidence from the HEFECE recently they have a total budget of 5.5 billion - 1 billion is going on the quality of research alone - and only about 180 million is going through the Higher Education and Innovation Fund, although RDAs are engaged with that, what more can they do to work with universities in reducing the disparities between regions in the way that you anticipate that transfer of knowledge to businesses within the regions?
  218. (Ms Hewitt) Here I would give the example of the North West, where you have the North West RDA creating the first of the regional science councils, bringing all of the universities together, which was a first in itself, so that they had a better understanding of each others strengths and could start collaborating much more effectively then they were and then move on from that to help broker the merger that has now been announced between UMIST and the University of Manchester. That is going to create an enormous world class university in the North West that will not be the only one but one of these magnets for economic activity within that region. Another example which came directly out of the work of Sir Tom McKillop and his colleagues was the National Bioscience Centre that I announced recently based in Merseyside, building on the great strengths and universities in Liverpool but also acting as a facility for the whole region, and in some senses for the whole country.

  219. Do you not think it would help achieve the PSA target if you could encourage Charles to ensure that DfES through HEFECE was allocating more to support regional research?
  220. (Ms Hewitt) I am delighted that in his recent announcement he did put more money into it and that is adding to the money that we have already put in. I have no doubt that we will need more and that will be a theme for the next Spending Review. I also make the point that the money that we are putting into the science base is also absolutely essential to our future prosperity across the country as a whole and in each of the regions. The under-investment in the science base over the last 20 years was appalling. We have already done a great deal and we will do a great deal more with this Spending Round to compensate for that because it is the science base and our ability to commercialise out of the science base and connect business with the science base that is one of the most important determinants of whether we are going to remain an economically successful country in the future.

    Mr Clelland

  221. On the question of research and development expenditure, there is only so much that universities can do, and the Government also has a role to play, yet uniquely out of all of regions the North East receives virtually no support whatsoever, no Government expenditure on research and development. What is going to be done about that?
  222. (Ms Hewitt) I am just checking this, I am not sure I can put my hand on what I want. The 2001 research assessment exercise gave the biggest percentage growth in funding to the North East and South West. Durham and Newcastle --

  223. That is not growth because it started off with nothing.
  224. (Ms Hewitt) That is a perfectly fair point.

    Chairman

  225. Just tell us how much money?
  226. (Ms Hewitt) I cannot tell you because my very helpful crib sheet does not give me the accurate numbers. I remember visiting Durham University a couple of years ago to open one of the world's largest computer facilities, which they had installed, and they were delighted with the benefit they were getting from the increased science budget, they saw that not just as vital to their ability to do ground-breaking academic work in a particular field of science but also to their ability to help build the economic base within the region. Yes, there has not been enough in the past but the scientific excellence is there in universities like Durham and Newcastle.

    Mr Clelland

  227. When we look at the graphs of Government expenditure on research and development and the pie charts and everything else we see - and this inquiry is about regional disparities - in terms of disparities in this area the North East in particular does very, very badly, are there any Government initiatives to tackle that?
  228. (Ms Hewitt) You are making an absolutely fair point. Now that we have the PSA target in place - and this comes back to our earlier discussion - we are talking to other Government departments about what they need to do to contribute to regional development, and thus the achievement of both parts of the target growing in all of the regions, but closing the gap as well. The difficulty we will have is in changing this very quickly. As I understand it a lot of the public sector, departmental research budgets are committed to quite long-term projects and where those are in place in one particular institution it is not really practical to say we are going to switch them to the other side of the country.

  229. I can see that, but the Government does recognise there is a disparity here and there are measure to tackle it?
  230. (Ms Hewitt) We do recognise there is a disparity and we are certainly looking at it.

  231. You are looking at it. I am looking at it but it does not look very good.
  232. (Ms Hewitt) I am not pretending we have a solution or there is a magic wand we can wave over allocations that have been built up over the last decade or more to suddenly switch them to give other regions a greater chance.

    Chairman

  233. What about new allocations?
  234. (Ms Hewitt) New allocations is one of the issues that we have to look at with each Government department, this is not something that we control out of DTI.

    Mr Betts

  235. An issue of particular concern raised by the RDAs when they gave evidence to us was the development of a neutron scattering facility in Yorkshire, which they said could have added 0.4 per cent to the region's GDP. The RDAs thought Whitehall were apathetic to the issue and did not believe that places like Leeds, Sheffield and York had the expertise and. It will be Oxford and France that has gained the benefit of this new development. Is there a misunderstanding in Whitehall about the capabilities of the universities in the North, or is it simply that the expertise is in the South and therefore every extra new development will be built on what is already there?
  236. (Ms Hewitt) I do not think there is any misunderstanding. There is certainly not a prejudice against science because it is done in the North West, North East or wherever.

  237. The RDAs seem to think there is.
  238. (Ms Hewitt) I am aware of what they said when they gave evidence. What I am saying to you is that I do not think that is an accurate perception. The decision on the synchrotron goes back many years and I know there was enormous disappointment and anger in the North West about the decision to locate the synchrotron at the Rutherford Appleton Laboratory in Oxford. There were all kinds of reasons for that, and I am not sure there is much point in going back over that decision. As you rightly indicate, there were several other partners whose view had to be taken into account. When that decision was made my predecessor Stephen Byers then set up a review of science in the North West and the specific development at Daresbury. Out of that has come this very exciting project, the Curzon Fourth Generation Light Source Project and we recently announced an 11.5 million grant to the laboratory at Daresbury to take that forward. Having spoken to people when I was in the North West recently from Daresbury I know that that decision has been very warmly welcomed there, and more broadly in the region, and it does reflect the excellence of the scientific work and the technical work that is going on at Daresbury. The other point I would make is that the Daresbury Development Group itself has come forward with a very compelling strategy for building the commercial base round that scientific work that is going on at Daresbury, far from turning our backs on it we are positively trying to reinforce it and see it as a centre of growth.

  239. That leads to two further questions. First of all, it still appears that there is not a strong regional element in science decisions, two major decisions have gone to Oxford rather than up to the North West or Yorkshire/Humerberside. It is a repetition of what has already happened after the decision went the wrong way as far the North West was concerned on the new neutron particle centre. What are Sheffield, Leeds and York going to get as compensation for losing the neutron facility?
  240. (Ms Hewitt) Are you talking about the European spoliation source, because that is what I have been lobbied on recently from Yorkshire Forward?

  241. The decision has been made to locate the neutron scattering facility in France and in Oxfordshire.
  242. (Ms Hewitt) Frankly there is some confusion round this. There are two different things here- the two current leading sources of these neutrons are Oxford and Grenoble - the decision that has been made within the European Union in the short-term is to upgrade those two facilities in order to meet the fairly short-term demands of scientists for more neutron facilities. That funding was announced in April. There is a completely separate decision to be made on a European spoliation source, a new source of high energy neutrons, where no decisions have been made at all. There are discussions going on, which we are participating in, about the best way to achieve the new ESS. No decision in principle has been made on that, let alone any decision on location. The kind of campaign that has been run to get it located in the North is in a sense ahead of the game because no decision has been made on whether to have it at all. That decision, as I understand it, will not be made until round 2006/07 because there is a great deal of work to do with the European scientific community. It is very useful that the White Rose universities have been putting themselves forward and contributing to that discussion but it would be premature to start trying to identify a location for a new facility when we have not even decided in Europe whether we are going to have that new facility.

  243. When the decision is made, if it is made the new facility is required, at that point when you look at location for the facility will there be a clear regional element in the criteria you use to reach the final conclusion?
  244. (Ms Hewitt) This will be an across Europe decision and it will be I suspect one for my successor, much as I would still like to be Secretary of State for Trade and Industry in 2007. First of all we will certainly want to look at whether this is the right way forward and secondly whether we should be hosting it, and there needs to be a regional element in that consideration.

  245. To what extent is enterprise a real driver of productivity? One view is there is a good deal of churn amongst smaller companies, with rapid entry and exit of small, poorly managed businesses. Is it not true that if the Government focuses on the establishment of low productivity micro-businesses that it will be impossible to achieve the PSA target?
  246. (Ms Hewitt) I would agree with you that it is very important to look at the value-added of a business and the value-added of businesses generally as well as simply looking at the number of businesses. Having said that, I think we are also more likely to get the higher growth businesses and the higher value-added businesses if we have a larger business base to start from. I am very concerned about the fact that the business birth rate in the North East is about half that of London and the South East. I am very concerned about the fact that if you look at the OECD analysis of entrepreneurship although we do very well across the board amongst women starting up businesses we have a lower birth rate than almost any other OECD country. There is a huge gain to our country's economy if we get more women starting businesses. We would have another 100,000 businesses a year if women were starting up businesses at the same rate as men. That is why we are directing some business support and attention towards supporting women entrepreneurs. I am very concerned about the fact that in some of our most disadvantaged communities the business birth rate is very low. For instance if you look within the African-Caribbean community there is a high rate of self-employment and business ownership but it tends to be concentrated in business sectors that do not have very high profitability. We do need to pay attention to all of that. I think the more people we get starting up in businesses who are getting good support and advice to do so the more likely we are to help a number of those entrepreneurs to grow very successful businesses that will help to raise the overall productivity rate.

  247. The real growth in jobs is going to come in developing those very small firms into the next stage of being a successful, slightly larger business.
  248. (Ms Hewitt) I think if you are unemployed then moving successfully into self-employment is just as effective a way as getting out of unemployment and moving into a job. That is one reason why we put a self-employment stream into the New Deal in the very early days of the Government. We know that most job growth in the future and the last few years has come from smaller businesses taking people on, some of that is a large number of small businesses taking on five or ten people, and some of those growing much faster than that. Increasingly the job growth is not going to come from a small number of large business but from a very large number of smaller businesses. It does seem to be the case in industrialised countries that the regions and cities that have been most dependent on the very big employers in the big traditional industries are the ones who find it hardest to raise their rate of entrenprenurialism because that has not been the traditional pattern of finding employment.

  249. Is there any point in pursuing inward investment?
  250. (Ms Hewitt) Absolutely. Even in conditions of global down-turn we remain the number one destination for foreign direct investment into Europe, and it is our intention to keep it that way. The advantages that inward investment brings are the mirror image of the advantages that exports give companies. The inward investors tend to have higher productivity, they tend to have higher levels of investment and they tend to have better levels of management. All of that is an enormous advantage to our economy. We only have to think of the state of the car industry as it used to be and as it is now. Equally it is hugely beneficial for our own businesses to move into export markets, we have very good evidence that they are the businesses that do tend to grow faster and have higher rates of productivity and profitability.

  251. You recently commissioned Professor Michael Porter to review the performance of UK management, is there a regional element in that review at all?
  252. (Ms Hewitt) Not particularly. What has emerged as quite an important issue in management is that the gap is particularly at the middle management level. You can point to plenty of examples where our senior management, whether in large or small firms, is world class. We have many businesses that exemplify that. There is an issue about middle management, and that is reflected in the productivity figures and in the problems that a number of firms encounter in simply not having an adequate rate of innovation, not managing product processes well enough, not having sufficiently high levels of customer service. There is a real issue there and that is something that we are looking at within the skills strategy to see how we can not only raise the skills of the workforce as a whole but make sure that people that are workers are being managed by managers who can use their skills properly, and in some cases that is simply not happening.

  253. In the terms of the Department's manufacturing strategy what are you doing? To what extent are you monitoring the delivery of that strategy? Are you looking at good practice and rolling that out across the regions?
  254. (Ms Hewitt) Absolutely. The first challenge I had was to put in place a national manufacturing strategy, there has not been a government industrial strategy of that kind for over 30 years. That was the first job. We brought together manufacturing leaders and trade unionists from all round the country, and we were very careful to recruit people from every one of our nations and regions to do that. The next stage was to ensure that the strategy having been built from the bottom up was delivered through each of the regions. Each of the RDAs has been being bringing together their own key industrialists and trade unionists. They have each developed out of their economic strategy a specific manufacturing strategy. We are certainly monitoring the implementation of that but we are also ensuring that they share practice, that they learn from each other and they collaborate on sectors across regions. That is happening very effectively in the motor sport sector, where the motor sport valley crosses three different RDAs. The other thing I would point to is the Manufacturing Advisory Service, which Stephen Byers announced in the White Paper of January 2001, which is now up and running in every one of the regions. I think that is set to become one of our most successful business, and particularly industrial, support programmes ever.

    Chairman

  255. Can you give us a "for instance" of something that it has done?
  256. (Ms Hewitt) Absolutely. It is in its first six to eight months of operation and overall it has already had about 10,000 enquiries and requests for information. As you move down to the several hundred firms that have taken up the free or subsidised consultancy support that each of the regional centres is now offering we are finding average productivity gains of 85,000 per year, per company. At Oxford Engineering, where I recently launched the report of the Advisory Service, they have seen a productivity improvement of nearly 600,000, and this was a good company in advanced manufacturing already, even they have had this enormous boost to their productivity and profitability as a direct result of working with the Centre for Manufacturing Excellence. I think the reason why we have been able to roll-out what is a national programme so effectively is that we have done it through the Regional Development Agencies and each of them very quickly through an open tendering process were able to identify the best partner in that region. In the case of Oxford Engineering in that region it was the Engineering Employers Federation, who were already doing work and built from that. In my own region in the East Midlands it is an organisation called Pira, which is a world class innovation centre. They are now delivering the Manufacturing Advisory Service for us in that region and they are building in some new European funding to create an enhanced service for companies that want to innovate and not simply absorb existing best practice but move up the value-added scale. We are seeing some really exciting work going on there. If I may I will send you the Report we have just published of that first year, or less than first year's operation.

    Mr Betts

  257. Can we look the issue of skills, what is the Department doing to encourage the demand for skills amongst employers, bearing in mind the importance of a report by the Performance and Innovation Unit in the Cabinet Office which stressed the importance of demand and supply? Demand is not always there and employers think they can tick along and manage like they have done for the last 20 years?
  258. (Ms Hewitt) It is very much on our agenda. As we have identified, the absence of skills is one of the key reasons why some regions have lower productivity and lower standards of living than other regions. It is a crucial issue for us in the regions and as a country as a whole. You have a real paradox here, at one end of the spectrum you have small and large firms crying out for skilled people and all too often unable to get the skills that they need. At the other end you have firms who are stuck in low value-added, low margin products who do not have an immediate need for more skilled workers because they have used quite low skilled workers to produce low skilled products and they have not woken up to the fact that those are precisely the kind of products that are going to be produced far more cheaply in other countries across the world. For the first group we have to make sure that we are matching that demand with the right supply and the sector skills councils, the reform of further education is all part of making that work. For the firms that do not realise that they need higher skills we have to do more because simply improving the skills of their workers will not necessarily help the firm to use those skills. As far as the workforce is concerned I think the number one priority is basic skills, it really is a matter of basic equality. It is disgraceful that we have seven million people without basic literacy and numeracy skills. We should take the responsibility as Government for funding and making sure that that happens, because that really reflects the failure of past education policy. We can help those workers get those skills. In some cases that will simply enable those people to move to better jobs or better employers. What we can also do with at least some of those firms is help them to move up the valued-added chain. In textiles we have a very interesting joint DfES/DTI pilot programme going on, where we match the advice that the firm needs to develop better products and better production processes with the training that the workforce need to make and handle those better products and better production processes.

  259. European Structural Funds, one of the successes that people feel the Funds have is they can be used in a very great manner bringing partners together and cross-cutting frameworks. The Government wants to re-nationalise them, can you give assurance that the benefits of the way that the Funds are currently operated will not be lost if re-nationalisation takes place and there will be a commitment in the future to continue to support the poorer regions from the national funds if there is a loss from European funding?
  260. (Ms Hewitt) I think it would be more accurate to say we want to regionalise those funds. At the moment we have, as you say, some real advantages for some of our regions and areas out of the structural funds but we also have frankly this frustrating, and in some respects wasteful, process whereby United Kingdom funding goes via the European Union, then comes back in the form of Structural Funds with quite a lot of bureaucracy and form filling-in attached. I think there is a strong case for using the European Union Structural Funds to do, in a sense, what they were originally designed to do, which is to deal with the very poorest countries who have to make huge structural changes in order to really share in European prosperity. That is primarily an issue for the enlargement countries, which are much further behind average European GDP than even the last wave of new entrant countries were. Then what we have to do is make sure that within our own country, and other countries will have to do the same thing, we invest properly in the nations and regions that have the lowest standards of living. We made it very plain when the Chancellor and I published the consultation process on this, we promised that the nations and regions of our country would not lose out if this new European framework post enlargement is the one that we ---

  261. There is a degree of scepticism round, because at present it is very easy for ministers to say: "Look at the extra money we have from Europe for this region". In the future you are going to have to give extra money to the poorer regions at the expense of the other regions, and that is a difficult political decision.
  262. (Ms Hewitt) There are always arguments about the disadvantage of where the money goes and we did do a very good job on that in the last round of discussions and negotiations within European Objective 1 and Objective 2. I would say we are getting increasingly good at identifying not only regions but within regions the most disadvantaged neighbourhoods and then making sure that they have both the resources and the policy framework to do what is needed. If you look at what we are doing within the enterprise areas, freeing up stamp duty on property development, and so on, making it much easier for businesses to start and grow within those areas, we are developing a much more effective set of tools for growing the economy in disadvantaged regions and disadvantaged neighbourhoods, and that is what will need to be reinforced and backed up with funding. I think the commitment is absolutely there.

  263. On the paper you produced on modern regional policy are you getting any feedback, positive or otherwise, from other European countries? The whole issue of partnership investment programmes is a wonderful example of co-operation within Europe and getting progress very quickly, is it?
  264. (Ms Hewitt) It is fair to say that where we have been the innovators, as we so often are, we have been frustrated by the length of time it has taken to get state aid clearance.

    Chairman

  265. It is not frustrated, they just cut it off, did they not?
  266. (Ms Hewitt) I was thinking of the regional venture capital funds, which were a really important part of our regional economic policy, and they took far longer to get off the ground because it took far too long to get state aid clearance. The reason that happened was because we are creating a new public/private partnership using public funds to leverage in private sector investment to deal with quite an identifiable market failure, the non-availability of smaller amounts of equity capital right across our country. We do need to build Europe's thinking about what the most effective economic policy instruments are for disadvantaged areas and to shift state aid towards this building new economic capacity.

  267. How long do you think it will take, ten or 15 years?
  268. (Ms Hewitt) Oh no, much less than that.

  269. How long?
  270. (Ms Hewitt) Predicting the future is always dangerous, I am not sure I am going to try and do it.

  271. Five years?
  272. (Ms Hewitt) I hope less than that. If you look back five or six years to the nature of the economic debate in Europe then when we came into Government, which was all about demand side management, we have actually helped to shift debate on European economic policy remarkably quickly.

  273. I accept that. I want to know when we are going to succeed.

(Ms Hewitt) I think we have already succeeded in making huge progress, the Lisbon Economic Agenda, the whole structural reform agenda. We were the leaders in that whole debate and we made real progress between 1997 and 2002 at the Lisbon Summit. There was very big progress there and I think we will see more of that in the next three to five years.

Chairman: On that note can I thank you very much for your evidence. Thank you.