House of Commons - Welsh Affairs

Select Committee on Welsh Affairs Second Report

6 Governmental Assistance to Manufacturing

Europe and European Structural Funds

66. It is evident that the enlargement of Europe from 15 to 25 Members will have economic implications for the whole of the United Kingdom, and Wales in particular because of its Objective 1 European Funding status.

67. The Welsh Assembly Government explained that it had been conducting an analysis of the threats and opportunities the would result from European enlargement. Andrew Davies acknowledged that Wales had lost a "significant number of jobs to the accession countries, particularly the Czech Republic where wage costs are much lower than they are in Wales". However, while he noted that while lower value-added jobs, may well be outsourced or placed overseas the challenge was to retain and build upon the higher value-added headquarter functions, product design, high knowledge-based functions, the high value-added functions in Wales. [142]

68. Several of our witnesses confirmed that shift in functions. Joachim Reinhart of Matsushita told us that Wales, like other western European countries would have to "move to more value added jobs, R&D design services […] whereas mass production is destined to be in the new accession countries".[143]

69. David Pritchard from the Welsh Assembly Government also highlighted the importance of ensuring that there was a level playing field for both the accession countries and the existing countries of the EU. "Obviously, there are proposals emerging now from Brussels for what the new map might be of support, the Assisted Areas Map, and what the levels of support might be. […] we are now having some discussions both with the DTI and indeed with Brussels about that issue. It needs to be fair".[144]

70. Jacqui Smith believed that, in economic terms, accession was a good thing for the UK, and was likely to be a good thing for Wales. She argued that there had been concerns about the international challenge to Welsh manufacturers from "what are usually cheaper accession country economies" but that those concerns would be mitigated when those accession countries "were placed on the same level playing field".[145] She further argued that Government analysis suggested that each time that the EU had been extended that the enlargement was to the benefit of the UK economy and to UK manufacturing industries.[146]

European Structural Funds

71. A key support from the European Union is European Structural Funds. Structural Funds are intended to strengthen its economic and social cohesion by reducing the disparities between the levels of development of different regions and economic sectors. Two-thirds of Structural Fund money is allocated to Objective 1 regions: those regions whose average GDP per capita is less than 75% of the EU average. In March 1999, West Wales and the Valleys, which represent two-thirds of the population of Wales, were granted Objective 1 status for 2000-2006.[147] We have considered the allocation and administration of those funds in two previous reports, European Structural Funds[148] and Objective 1 European Funding for Wales.[149]

72. Objective 1 European Funding has made a considerable impact on Wales. In its memorandum, the Welsh Assembly Government asserted that the funding would support "nearly £2.7 billion of investment across West Wales and the Valleys".[150] Funds had been committed to over 880 projects that ranged from the "multi-million pound strategic projects […] to smaller private sector and local community-based projects".[151] Andrew Davies, the Assembly Minister for Economic Development and Transport argued that the funding had made "a significant contribution to growing Welsh GDP, creating employment and up-skilling our workforce".[152]

73. The current round of Structural Funding will cease in 2006, and the next round of funding—that will cover 2007-13—is currently under negotiation. Those negotiations were seen as a major priority for the Welsh Assembly Government. Andrew Davies explained that the Welsh Assembly Government, led by the First Minister, had made "very strong representations" about the continuation of European Structural Funds for Wales.[153] Jacqui Smith confirmed that the Welsh Assembly Government had made strong representations and they "still ring strong in my ears".[154]

74. The Welsh Assembly Government Minister was confident that there would be "a level of funding" but did not know at what level that would be.[155] However, he believed that Wales would be in a much better position to take advantage of any future funding than it was in 1999 with the advent of Objective 1 funding.[156] Commenting on the early years of the administration of Objective 1 funds, the Assembly Government Minister argued that many lessons had been learned and that there was now a strategy in place to be even more successfully managed in the future.[157] However he was also at pains to reassure us that the Assembly Governments top priority was "to ensure that Wales would not be disadvantaged by the enlargement of Europe".[158]

75. With respect to Structural Funds, Jacqui Smith explained that a renegotiation of the structural funds post -2006 would have been necessary regardless of European Enlargement but agreed that "enlargement clearly meant that decisions would now have to be made on the basis of the need of that enlarged European Union 25". The Government's position with regard to those negotiations had been, firstly, to keep spending across EU countries under control, in particular on large spending areas of the EU budget such as structural funds. She argued that those funds would need to be focused on those areas in the wider EU that need them most and that could result in more resources going to poorer Member States than to richer Member States.[159]

76. However, the UK Minister acknowledged that Wales benefited and continued to benefit considerably from structural funds. She stated that: "We have quite unusually I think for Government provided a guarantee, if our approach to structural funds was taken up, about future domestic spending which would enable us to continuing focusing regional aid support on those areas of high unemployment and jobs of low income".[160] In this respect she argued that "I would certainly expect, whilst it would not be at the same levels and never would have been at the same levels post -2006 as structural funds currently are, I would certainly expect some of the areas in Wales which fall into that category to benefit from that particular guarantee".[161] However, the Minister accepted that there were no concrete plans or monies set aside, beyond that guarantee, for Wales.[162]

77. The enlargement of the European Union will have a significant impact on the economy of Wales. The accession of countries whose economies are less developed than Wales has the potential to change Wales' qualification for structural funds. Those structural funds have been vital to the economic development of Wales, and we look to the Government to give a clear undertaking that Wales will not lose out as a result of European Enlargement.

Regional Selective Assistance

78. Regional Selective Assistance (RSA) is the DTI's main instrument of direct financial assistance to business.[163] The overarching objectives of the scheme are determined nationally, and apply to the English Regional Development Agencies and the devolved administrations in Wales, Scotland and Northern Ireland. The administration and delivery of the scheme in Wales is through the Welsh Assembly Government.[164]

79. In our discussions with manufacturers in Wales Government grants were highlighted as an important factor in either relocating to Wales or establishing in Wales. CBI Wales told us that amongst its members there was a wide agreement that grant support was a significant factor in the presence of multinationals within the country and remained a significant factor in reinvestment decisions.[165] In particular it cited the examples of Linde, and Hoover who had confirmed that without such grants they would not have relocated to Wales.[166]

80. Professor Wahab explained that the availability of EU and UK Government grants was an important factor in the decision to locate to a particular area but that it should not be seen as the driving factor. "If it is purely on a grants basis, you may find people given grants, and then after two or three years they go somewhere else".[167]

81. Earlier in this report we set out the importance of Regional Selective Assistance to companies in Wales.[168] Ackroyd and Sons explained that it gained government grants to build a new factory on the Bala Industrial Estate and praised the Welsh Development Agency for its "tremendous grant aid". [169] It was a move that it had not regretted and David Aykroyd averred that "yes I would relocate to Wales again, absolutely certainly". [170] Ford also explained that the grant money was a extremely important in its decision to make a major reinvestment at its Bridgend Plant.[171] Bob Murphy, the Manager of the Plant told us that those grants were "critical to the success" of Bridgend and that they played "a big part in deciding where new programmes go".[172]

82. However, the monetary value of the grant is not necessarily the deciding factor. Brian Fleet, Senior Vice-President of AirBus told us that his experience was that the size of the AirBus operation meant that WDA grants were not large as a proportion of its investment, but that the gesture "speaks volumes to our counterparts in Europe that we are supported by our regional government".[173] However, AirBus did receive Repayable Launch Investment loans from the UK Government which did make a considerable difference to its investment plans.[174]

83. General Dynamics explained that relocation grants were part of the decision to locate to Wales but were not the prime motivator. A significant factor was the Welsh Development Agency package which included being "welcomed into the community, giving assistance and being introduced around and helping with everything from where you can lease cars and do business on a smaller scale to how we could hire employees".[175]

84. However, the Federation of Small Businesses were concerned that Regional Selective Assistance was too focused on larger manufacturing enterprises which excluded small businesses. It asserted that RSA was also strictly targeted at job creation and that was not always beneficial. In particular the FSB highlighted the example of RSA grants not being available for automation of processes - as it was job neutral - even if that automation was the basis for future viability for a company.[176] The FSB averred that greater flexibility was necessary in the allocation of Regional Selective Assistance and that it needed "to be flexible to respond to demands from individual businesses and the economy as a whole".[177] Furthermore the Federation of Small Businesses believed that soft loans would be more beneficial and equitable than the current system of grants.[178]

85. The Welsh Assembly Government was aware of that concern and explained that it was attempting to refocus its RSA scheme to from a job creation scheme to one that places an increasing emphasis on innovation, environmental and business sustainability, skills and Investors in People.[179]

86. Regional Selective Assistance has been an important factor in the ability of Wales to attract and sustain Foreign Direct Investment. Its emphasis on job creation has also made significant advances in the drive for full employment. However, small indigenous businesses should not be excluded from Government assistance. We believe that the Welsh Assembly Government should be allowed the greatest appropriate flexibility when delivering Regional Selective Assistance across Wales to meet the challenges of job creation, job retention, and support for innovative small businesses.

Government Assistance for Research and Development

Creating the Environment for Research and Development

87. Both the Government's strategy document for manufacturing and the Welsh Assembly Governments proposals for the future of manufacturing lay great emphasis on research and development. The Welsh Assembly Government argued that the long-term future of manufacturing in Wales would be dependent on "its ability to embrace innovative approaches in securing productivity improvements and in developing or securing the higher value-added products and services that will be the foundation of the knowledge economy".[180] CBI Wales argued that the government could play a key role in helping to provide a "conducive environment for research and development" by ensuring that the UK is an attractive place in which to do business for research intensive companies".[181]

88. Wales does not have the best record on Research and Development. In 1999, R&D spending by Welsh business was measured at 0.6% of GDP against a UK average of 1.2%.[182] David Pritchard told us that "Business R&D in Wales in the latest year for which we have got numbers, 2002, was about £182 million, Government and Research Council R&D in Wales was £41 million in the same year, which was only 2.34% of the UK total spend of nearly £1.8 billion; in Scotland Government R&D spend is standing at around £240 million a year and it is £40 million in Wales".[183] He confirmed that it was an area in which the Welsh Assembly Government was taking a keen interest but that the "UK Government could do better".[184]

89. Andrew Davies highlighted the fact that the task and finish group[185] also looked at how to foster closer links to universities and other areas of expertise for R&D: "We have a series of programmes within Wales which help companies, large and small, access the research development expertise that they need. For many small companies in manufacturing they just do not have the resources to do their own R&D product design and we have set up, for example, through alliance with the DTI, the Manufacturing Advisory Service to help companies with issues such as product design and R&D".[186]

90. Jacqui Smith agreed that there had been difficulties in accessing business support and the confusion that may have surrounded the duplication of various different schemes. However, she argued that the simplification of that structure, and the reduction of Government assistance schemes from over 150 down to 9 basic business support products, had alleviated much of those concerns.[187]

Research and Development Tax Credits

91. An important form of assistance offered to encourage research and development are the Research and Development (R&D) tax credits. R&D tax credits are a company tax relief which can either reduce a company's tax bill or, for some small or medium sized companies, provide a cash sum. The aim of the tax credits is to encourage greater R&D spending in order to promote investment in innovation.[188]

92. The CBI Wales welcomed the introduction of R&D tax credits but had yet to be convinced that they could off-set sufficient R&D costs.[189] TUC Wales agreed that R&D tax credits were widely known within industry, and widely used, but questioned whether they were sufficiently effective.[190] Furthermore it was not confident that in their present form and administration that they would close the gap between levels of R&D in Wales and those levels in the rest of the United Kingdom.[191] There was general agreement among our witnesses that the Research and Development Tax Credits represented a step in the right direction. AirBus argued that tax credits were an important tool for manufacturing while [192] General Dynamics stated that with over one third of its 450 employees in Wales directly or indirectly involved in R&D it was a significant tool.[193]

93. Jacqui Smith acknowledged that in their original form the tax credits were somewhat complicated. She explained that the Government understood business concerns on that issue and had refined the tax credit procedures. In particular it had reduced the minimum expenditure threshold to qualify for R&D tax credits so that more SMEs would be able to claim. Furthermore the UK Government had also changed the way in which staff costs were apportioned so that even when a company had a relatively small part of a staff cost directed to R&D it could claim some of that back.[194]

94. David Pritchard of the Welsh Assembly Government welcomed the introduction of the R&D tax credit but argued that the Welsh Assembly Government wished to see the tax credit regionally differentiated "so that there were higher benefits to companies operating in places like Wales".[195] Andrew Davies told us that the First Minister had been making representations very strongly to Treasury, to DTI and other government departments on this issue and that the Welsh Assembly Government would "continue to make the case very strongly for a more regionally based R&D tax credit system".[196]

95. Jacqui Smith conceded that she understood the desire for a regional differentiation in R&D tax credits, but agued that the disbenefits of "additional record keeping and bureaucracy […] red tape would overcome the benefits that might come from having a regional approach to it". [197] She was not in favour of devolving the allocation of R&D tax credits to the National Assembly. Jacqui Smith argued that "taxation is an area where it is more appropriate for there to be a pan UK approach; I am sure that is what the Chancellor would expect me to say and I think it is right". Notwithstanding that principle the Minister was aware of the importance of R&D and could understand the desire of the National Assembly to have more of an influence over R&D. However, Jacqui Smith did not agree that the tax credit procedure was the most appropriate way to do it. In particular, "because if you are not careful if you take a regional approach to a tax credit you end up with some difficulties at the point at which there are differential rates. If you are not careful you would impact on location decisions in a way in which I do not think would be beneficial".[198]

96. Furthermore, Jacqui Smith believed that a regional approach to tax credits would necessitate a greater level of information collecting and impose a much larger administrative burden on business. "On the whole, as I say, whilst I can understand the concerns I think the costs of taking a regional approach would outweigh the benefits".[199]

97. However, the Minister conceded the availability of R&D tax credits could well be a major influence in a companies decision to locate to a particular area.[200] Although she conceded that regional figures on the take up of R&D tax credits were not compiled.[201]

98. Research and Development Tax Credits have been a welcome addition to the package of support offered to manufacturing in the United Kingdom. However, its introduction has done little to generate a demonstrable flow of R&D activity to Wales. We agree with the National Assembly that a regional element should be included in the allocation of Research and Development tax credits which would better target those areas in need of assistance.

99. We further recommend that the Government compile statistics on the regional take-up of Research and Development Tax Credits.

Grants for Research and Development

100. We received an extensive memorandum from the Research Councils on their research and development activities in Wales.[202] Research Councils UK is a strategic partnership established by the Department of Trade and Industry and the Office of Science and Technology, which brings together the seven Research Councils in the United Kingdom[203] Together with the Arts and Humanities Research Board, the Research Councils manage a combined annual budget of around £2 billion.[204]

101. RCUK explained that in respect of Wales, all Research Councils have formal links with the National Assembly for Wales in the form of Concordats, Memoranda of Understanding or working agreements. Each Research Council has an annual meeting with the National Assembly to identify areas of common interest and to ensure the effective and efficient management and operation of those areas.[205] In addition to those arrangements, the Devolution and Constitutional Change Programme was established by the Economic and Social Research Council to "explore the series of devolution reforms which have established new political institutions […] since 1997".[206]

102. The Annexes to RCUK's memorandum set out the individual Council's activities in Wales. While there are many impressive collaborations in Wales, the proportion of grants and activies in relation to the rest of the United Kingdom appears low. Several examples highlight this shortfall. In 2002-03, the regional dispersal of UK Research Council resources was £1,936,124 to England, £240,307 to Scotland and £62,794 to Wales. Only Northern Ireland received less resources that Wales.[207] By contrast, London and the South East of England receive the lion's share of grant allocation and funding.[208] However, the low level of grant allocation for Wales is not a refection on the Research Councils' approach to Wales. As it states in its memorandum, RCUK "operates on national research policies or strategies supporting science on the basis of excellence, irrespective of geographical location".[209].

103. We remain concerned that without a regional dimension to the dispersal of Research Council grants, London and the South East of England will continue to be the predominant consumers of those funds. While we do not wish to see the dilution of the expertise and excellence derived through the Research Councils, a regional element to grant allocation would greatly assist in the dispersal of centres of excellence outside of the South East of England. Therefore, we recommend that the Government consider including a regional element to the Research Councils' grant allocation procedures.

Public Procurement

104. The UK Government can also assist manufacturing in Wales through its own procurement. As a purchaser, the UK Government's public procurement budget can exert a significant influence upon a regional economy. Professor Gripaios argued that while Wales did well in identifiable public expenditure which is defined as "expenditure incurred on behalf of a particular population", it does very poorly from the non identified component of public expenditure, principally Defence. He asserted that Wales had the lowest defence spending of any UK region.[210] That fact was not lost on Andrew Davies who highlighted the fact that "the bulk of the research and development work is undertaken, both government-funded and also private sector-funded, it is overwhelmingly in London and the south-east and if we are to make that paradigm shift in terms of a knowledge-based economy in Wales, Government is very instrumental in that".[211]

105. That position was put into stark relief by the UK Government announcement that the MoD intended to move the Defence Aviation Repair Agency (DARA) contract for the maintenance of fixed wing aircraft from Wales to England.[212] Andrew Davies told us it was not a secret that the Welsh Assembly Government was "very disappointed with the recent decision by the MoD and we felt it was the wrong one not only in terms of the existing facility, but also in terms of the maintenance for fixed-wing aircraft". He stated that the Welsh Assembly Government had made "very serious representations to MoD and to Whitehall Ministers within MoD and the Wales Office".[213] The Assembly Minister further explained that should the UK Government carry out that move that it would have a serious impact on the National Assembly's plans to establish its R&D base at St Athan.[214] Should the DARA contract be withdrawn the minister confirmed that little business would remain there.[215]

106. Defending the Government's decision, Jacqui Smith argued that it was not a primary objective of government policy to ensure that each region gets "a fair crack of the whip".[216] Government policy was concentrated on ensuring that the UK manufacturing industry gets a fair chance to benefit from UK public procurement.[217] The Minister tried to reassure us with the establishment of a joint working group between the National Assembly and the MoD to consider the future of the DARA and that the DTI wished to be involved in that work to ensure a positive industrial impact of any decision.[218]

107. It is deeply disappointing that the Ministry of Defence has decided to relocate its Defence Aviation Repair Agency operations from Wales to England. In light of the inequitable spread of public procurement we would expect the DTI to have understood both the economic imperative of retaining the DARA in Wales, and also that its withdrawal to England would be perceived as even less public money being spent in Wales. We recommend that the Government reconsider its decision and continue DARA's operations at St Athan.

Infrastructure

108. Both the UK Government and the Welsh Assembly Government have stressed the importance of high quality infrastructure as a vital factor for economic well-being. This issue is one that we have long been aware of as our reports into transport in Wales, and Broadband in Wales will testify.[219] In the previous Session of Parliament we considered the draft Transport (Wales) Bill which proposed changes - primarily to the railways - which would be beneficial to Wales. While the publication of a Bill in similar terms is welcomed, there remain areas of serious concern with infrastructure in Wales.

109. The CBI argued that some of its Members highlighted the perception of peripherality as a weakness when they had considered relocating to Wales. In particular, the CBI Wales argued that the perception of transport and communication links with the rest of the United Kingdom were not good. The Confederation cited the need for improvements to the M4 corridor in Wales and improved air links as pressing examples.[220] CBI Wales further argued that significant improvements were necessary to avoid deterring the growth of business and investment in all parts of Wales".[221]

110. General Dynamics, who relocated to Oakfield, did not see distance from Whitehall (and the Ministry of Defence) as a disadvantage, as it has an office in London. However it considered the distance from Heathrow was problematic. Larry Johnson of General Dynamics stated that "we are an international company and we have many suppliers and customers around the world, we find the inactivity at Cardiff Airport and the inability to get to Cardiff Airport without a struggle to be a severe disadvantage".[222] That view was echoed by Robert Servini of Ethnic Cuisine also wished to see a greater use of Cardiff Airport, both for the transportation of products and to make faster access to and from Wales.[223]

111. The Welsh Assembly Government welcomed the draft Transport (Wales) Bill which the Assembly Minister believed would address many of the Welsh Assembly Government's concerns.[224] However, David Pritchard of the Welsh Assembly Government argued that a greater priority for investment along the M4 corridor in England both on the rail and the road front was necessary: not just to support business but also to create a better and broader business environment".[225] Andrew Davies confirmed that improvements to the M4 corridor remained a pressing concern for the Welsh Assembly Government.[226]

112. The Assembly Minister also highlighted the increasing importance of business air links.[227] While North Wales is well served by Manchester, Cardiff International Airport in South Wales has few overseas routes. Discussions had been taken place with American Airlines to establish daily flights to Newark and with BMI Baby to serve European destinations.[228]

113. We welcome the proposed transfer of powers to the National Assembly contained within the Transport (Wales) Bill and the Railways Bill. However, many important issues regarding Welsh infrastructure will remain the responsibility of the UK Government. We recommend that the UK Government look closely at the National Assembly's concerns about both the M4 road route and the Paddington to South Wales Main Line. We further recommend that the UK Government assist the Welsh Assembly Government in its policies to increase the level of communications and activity at Cardiff Airport.

Power

114. In evidence to the Committee the Welsh Assembly Government asserted that in general it was content with the current division of powers between itself and the UK Government over manufacturing. However, David Pritchard of the Welsh Assembly Government explained that the National Assembly wished to have additional powers in relation to energy; in particular with respect to larger power station capacity[229]

115. During our inquiry we visited two power generators in Wales. In North Wales, we visited Electric Mountain, in Llanberis to see at first hand, the hydro-electric plant; and in South Wales we visited, the Baglan Power Station in Port Talbot. Both stations make an important contribution to the Grid. Both supplied electricity to the National Grid, though a large proportion of the electricity generated by the Baglan Power Station was bought directly by Corus. On Anglesey, the majority of the power generated by the Magnox nuclear power station was consumed by local metal production. Anglesey Aluminium currently employs 570 staff and approximately 80 contractors in the production of aluminium.[230] Its operation is energy intensive and is dependent upon that power supply -consuming 12% of the power generated in Wales.[231]. However, the Magnox generator on Anglesey has been contracted to be closed in 2010. Should a replacement power source not be found, Anglesey Aluminium may be forced to close.[232]

116. Jacqui Smith acknowledged that the Welsh Assembly Government had made representations for increased powers with respect to energy consents and explained that the issue was being looked at by a tripartite working group consisting of officials from the DTI, Welsh Assembly Government and the Wales Office. That working group has consulted with stakeholders and was due to put advice to Ministers by the end of 2004.[233]

117. We welcome the establishment of a working group to consider the Welsh Assembly Government's request for increased powers over energy consents. We expect the Government to look favourably on this request and recommend that the Government update the committee on the findings of that working group at the earliest opportunity.

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147 Second Report from the Welsh Affairs Committee, Objective 1 European Funding for Wales, HC520 of Session 2001-02. Back

148 First Report from the Welsh Affairs Committee, HC46 of Session 1999-2000. Back

149 Second Report from the Welsh Affairs Committee, HC520 of Session 2001-02. Back

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