House of Commons - Trade and Industry

Select Committee on Trade and Industry Eighth Report

6 Information and Communication Technologies (ICT)

97. Information and Communication Technologies (ICT) have long been a key tool for business. Anecdotal evidence has suggested that capital investment in ICT by business has been providing a boost to productivity and growth over the last fifty years.[191] From the 1950s, increased automation in manufacturing and the introduction of mainframe computers supported nearly three decades of growth in the UK. In the 1980s, personal computers transformed the working environment but it has been the changes which emerged throughout the 1990s, particularly the introduction of the internet, which have led to even more fundamental changes in the way business is conducted. For example, e-commerce was the domain of large organisations which could afford the expensive, custom-built infrastructure and software needed. It was the arrival of the 'World Wide Web', and cheaper, easy-to-use browsers, which allowed even the smallest of UK businesses to enter the global market place.[192] There is now clear evidence emerging that capital investment in ICT does drive productivity in developed countries,[193] accounting for one fifth of productivity growth in the OECD between 1995 and 2001.[194]

The benefits of ICT

98. The introduction of ICT has had direct and indirect benefits for the UK economy. The direct benefits of ICT can be assessed by looking at the importance of the ICT-producing sector to the UK economy and the indirect benefits by looking at the impact the use of ICT has had on the productivity of the whole economy.[195]

99. ICT-producing businesses in the UK accounted for seven percent of UK output in 2002, an increase from six percent in 1992. The output of the ICT sector has increased by 104 percent over the period compared with growth in the whole economy of 70 percent. Over the ten years to 2002, the increase in output from the ICT sector has accounted for around eight percent of growth in the UK economy.[196] ICT producing businesses are also believed to have provided additional productivity growth benefits in other sectors through knowledge transfer to customers and suppliers but this has yet to be proven.[197]

100. The indirect benefits of ICT investment for the UK economy are those resulting from ICT use by businesses across the whole economy. This can be assessed by estimating the contribution which ICT investment has made to growth in output and labour productivity.[198] A recent study by the Groningen Growth and Development Centre[199] found that for the UK, real GDP growth between 1995 and 2000 averaged just under three percent per annum. ICT investment was found to contribute an average of 0.69 percentage points a year to this growth. UK labour productivity growth over the same period averaged just under two percent per annum and ICT investment contributed just under half of this growth.[200]

ICT and the productivity gap

101. ICT has played a central role in helping the US to achieve high productivity gains since the 1990s. This success in harnessing ICT has not been repeated to the same extent in the UK. In the US, average real GDP growth between 1995 and 2000 was just over four percent per annum with ICT contributing just under one percentage points to this growth. Labour productivity growth over the same period in the US averaged 2.21 percent per annum and ICT again contributed to just over one percentage point per annum of this growth.[201] According to these figures, the contribution of ICT in the UK has been about 80 percent of the corresponding contribution in the US. UK businesses have also invested less and later in ICT than those of the US. In the UK, ICT investment accounted for just over 13 percent of total non-residential capital formation in 1990, increasing to 23 percent in 2000. For the US, ICT investment as a proportion of total non-residential capital formation increased from 22 percent in 1990 to 28 percent in 2001.[202]

THE EFFECTIVE USE OF ICT

102. The evidence suggests that ICT has played a central part in US productivity growth since the mid-1990s. But it is equally clear that high levels of ICT investment and adoption do not, in themselves, guarantee faster growth and productivity. ICT investment has also grown in the UK, yet the UK continues to be outpaced by the US economy.

103. A recent study by the Economist Intelligence Unit (EIU) found that differences in productivity growth with the US since 1995 have not in the main been attributable to differences in investment in ICT during the period but in the effectiveness of ICT use. The study suggested that the benefits of ICT investment depend on a complex interaction between technology and a range of other complementary factors relating to the business environment. To help identify which factors were the most important, the EIU conducted a survey of senior business executives, a range of European policymakers and business leaders. A recurring theme they found in their results was that government had paid insufficient attention to a number of external key ICT 'enablers' (the complementary factors which allow businesses to use ICT to the fullest). These included: more effective R&D; spurs to innovation; and ICT-related management skills.[203] We have already discussed the impact on productivity in the UK and Government programmes to address two of the identified ICT enablers - more effective R&D and spurs to innovation - in the preceding two sections of this Report; these are not discussed further here.

ICT and workforce skills

104. Businesses have complained that there is a shortage of basic and intermediate ICT skills in the workforce.[204] However, businesses have been found to be more concerned with the apparent lack of the management skills required to understand ICT and the opportunities its effective use presents to turn technology into business advantage. [205]

105. The recent EIU study found that a lack of ICT knowledge in senior management and the failure of ICT and business managers to work together effectively were the two main barriers to maximising the productivity benefits from ICT investment.[206] Poor management skills can have major consequences for productivity improvements. The McKinsey Global Institute (MGI) has undertaken a number of studies in recent years to look at the relationship between ICT management and productivity.[207] In a recent study of businesses in France, Germany the UK and US, MGI and the London School of Economics found evidence which suggested that it was good management practices and not just investment in ICT that are the key to higher productivity.[208] They found that regardless of a business's size, location, sector or how well it was managed, a small increase in the performance of management had a large impact on a business's productivity. Simply investing in ICT was also found to have had an impact on productivity but this was modest. The study concluded that businesses should first improve their management practices and only then should they invest in ICT as: "a deployment of more powerful IT is associated with productivity improvements of just 2 percent. However, businesses with increased computing power and improved management practices achieve 20 percent higher productivity".[209]

106. Improving productivity from ICT investment requires more effective use of ICT through an improvement in the ICT skills of the workforce. We are aware that the Government has increased the resources and programmes for improving the UK population's basic ICT skills. These have ranged from the recently released e-learning materials to aid primary school teachers to plan across their curriculum using ICT to offering basic ICT skills as a third area of adult basic skills, alongside literacy and numeracy, within its main programmes for adult learning such as the Skills for Life programme.

107. Improving the ICT skills of the workforce should not be left solely to the public sector. Businesses are the ultimate benefactors of a well-trained workforce and should encourage their employees to improve their ICT skills. This could be achieved through the development of businesses' own ICT skills strategies. Moreover, however well-trained the workforce, the benefits of ICT will be small unless senior managers have an informed, well thought out strategy to deploy ICT to increase productivity. This is not the job of government. Companies themselves need to place more emphasis on managers formally improving their knowledge and understanding of the benefits and commercial opportunities offered by the effective use of ICT.

Government as an exemplar

108. The UK Government has a further role as an exemplar of the effective use of ICT by demonstrating the benefits of ICT use through the provision of electronic public services, such as e-health and e-learning, and through promoting government as an 'intelligent customer', favouring those suppliers which use and provide effective ICT solutions.[210]

109. The Modernising Government White Paper published in March 1999 proposed a target date of 2008 for which all Government services to the public and business should be available on-line.[211] The services the White Paper proposed would be part of this target included: information and advice about benefits, complete VAT registration and return, and public procurement. The Prime Minister announced on 30 March 2000 that the target date had been advanced from 2008 to 2005.[212]

ELECTRONIC SERVICES

110. To benchmark Government departments' progress towards achieving the 2005 target, the e-Government Unit within the Cabinet Office has produced a detailed quarterly report since 2000.[213] The latest report from the e-Government Unit shows that as at November 2004 Government departments had identified 657 services provided to the public or business which were either already e-enabled or not yet e-enabled but could be in the future. Of the 657 identified public services, 494 (76%) were e-enabled at November 2004. However, this says little about how fully eenabled individual services were.

111. The eEurope 2005 Action Plan[214] aimed to develop modern public services in EU member states and was launched at the Seville European Council in June 2002.[215] Amongst the policy measures put forward in the Action Plan were two proposed actions relating to the introduction of interactive public services and public procurement that:

— "By end 2005, Member States should carry out a significant part of public procurement electronically. […] Council and Parliament should adopt as quickly as possible the legislative package on procurement"; and

— "By end 2004, Member States should have ensured that basic public services are interactive, and where relevant, accessible for all […] Commission and Member States will agree on a list of public services for which interactivity and interoperability are desirable".[216]

112. The European Commission defined a list of 20 basic public services, which it agreed should be fully available on-line by 2005. For twelve of these services, the citizens were the target group; while for eight of them businesses were the target group. The 20 services included income taxes, social contributions for employees, job search, public procurement and corporate taxes. In order to measure progress towards the full availability of these public services on-line, a four-stage framework was defined:

— Information: The information necessary to start the procedure to obtain this public service is available on-line;

— One-way Interaction: The publicly accessible website offers the possibility to obtain in a non-electronic way (by downloading forms) the paper form to start the procedure to obtain this service;

— Two-way Interaction: The publicly accessible website offers the possibility of an electronic intake with an official electronic form to start the procedure to obtain this service; then

— Full electronic case handling: The publicly accessible website offers the possibility to completely treat the public service via the website, including decision and delivery.

113. The on-line availability of public services would thus be determined by the extent to which it was possible to provide the service electronically, or in other words to the sophistication of the on-line service provision.[217]

114. The EC has carried out an annual benchmarking study to assess Members' progress towards its eEurope 2005 targets.[218] At October 2003, the UK was ranked seventh amongst the EU-15 Member States with an on-line sophistication 'score' of 71 percent, compared to the most advanced country, Sweden (87%). In terms of the 20 basic services which were fully available on-line, the UK ranked sixth amongst the EU-15 Member States with a full on-line 'score' of 50 percent, compared to the most advanced country, Denmark (72%). The most important conclusion from the benchmarking study was that the on-line availability of public services in the UK was growing. However, while on-line-sophistication had grown at October 2003 by nine percentage points compared to a year earlier, it had increased by 21 percentage points over the two years from October 2001, suggesting that growth was slowing down in 2003.[219]

115. Services to the public which were fully available on-line in the UK were: income taxes, job search services, obtaining personal documents and certificates, police statements and enrolment in higher education. On-line public services for businesses which were fully available on-line in the UK were: the handling of social contributions for employees, VAT and corporate tax. On-line public services where the UK performed relatively poorly included car registrations, custom declarations, environment-related permits and public procurement.

PUBLIC PROCUREMENT

116. The eEurope 2005 action plan called for most public procurement to be conducted electronically by the end of 2005.[220] UK public authorities are subject to EC procurement rules. For the awarding of supply contracts over the EC procurement thresholds, supply contracts must be put out to tender by placing a notice in the Official Journal of the European Union (OJEU), which can be done electronically. When we started our inquiry, there was no overall e-procurement platform for central government departments in the UK. However, the Government has recently announced that a joint project between the Small Business Service (SBS) and Office of Government Commerce (OGC) is due to be introduced in Summer 2005 which will allow businesses to have direct access to local and central government business opportunities through a new national web portal.[221]

117. Governments which directly invest in the effective use of ICT, for example by offering successful on-line public services and 'smart' public procurement practices, can increase awareness, amongst businesses and the broader public, of the benefits of ICT. However, even if government provides all its public services on-line there is no guarantee that their use will be taken up by the whole population. On our visit to the US, the City of Chicago, an exemplar for the provision of on-line public services, suggested to us that only one-fifth of the population use the on-line public services they provided.

191 Appendix 3, para 3 Back

192 DTI, Our Competitive Future: Benchmarking the Digital Economy, Cm 4176, December 1998 Back

193 Appendix 10, para, 25 Back

194 OECD, The Economic Impact of ICT, Measurement, Evidence and Implications, 2004, Page 78 Back

195 Appendix 10, para, 30 Back

196 ONS, United Kingdom, Input-Output Analyses, 2004 Back

197 Economist Intelligence Unit, Reaping the Benefits of ICT: Europe's Productivity Challenge, April 2004 Back

198 Appendix 10, para, 32 Back

199 Art van Ark, Johanna Melka, Nanno Mulder, Marcel Timmer and Gerard Ypma, ICT Investments and Growth Accounts for the European Union 1980/2000, Research Memorandum GD-56, September 2002 (Revised March 2003) Back

200 Appendix 10, para, 33 Back

201 Ibid, para, 45 Back

202 Appendix 10, para, 46 Back