Select Committee on Welsh Affairs Minutes of Evidence


Written evidence from the Welsh Assembly Government

INQUIRY INTO MANUFACTURING AND TRADE IN WALES

INTRODUCTION

  The Welsh Assembly Government is pleased to respond to the request from the Welsh Affairs Committee for a memorandum setting out:

    —  UK and EU Government involvement with, and assistance to, the manufacturing sector.

    —  UK Government policy on manufacturing and trade in Wales.

    —  The impact of trade tariffs on Wales.

    —  The transition from traditional industrial and rural economies to modern economies.

    —  The maintenance of existing Foreign Direct Investment (FDI) in Wales and encouragement of new FDI.

    —  The role of R&D in job and wealth creation.

    —  Support for SMEs.

    —  Links between universities and the productive economy.

  This memorandum:

    —  Summarises the trends and changing role of manufacturing and trade in the economy of Wales.

    —  Sets out the main economic policy initiatives of the Assembly Government, particularly those geared to promoting innovation in manufacturing and encouraging trade.

    —  Highlights the support mechanisms available for manufacturers and exporters operating in Wales, including those now possible through the European Structural Funds Programmes.

    —  Signals the Assembly Government's intention to work with manufacturers in Wales to develop an Action Plan to increase yet further the sector's competitiveness by boosting relevant skills and its capacity to innovate.

  Additional information is presented in supporting annexes.

  These policies are taken forward within the framework of the Assembly's vision for sustainable development, reinforced in "Wales: A Better Country". This was published in September 2003 and sets out the strategic agenda of the Welsh Assembly Government for the second term of the National Assembly for Wales.

THE IMPORTANCE OF MANUFACTURING

  The manufacturing sector has been and continues to be of immense significance to the economy of Wales. World-class companies such as Airbus, Ford and General Dynamics find Wales a first class base for their operations. However, employment and investment trends indicate that the sector as a whole faces a continuing challenge.

  Across all OECD countries, manufacturing's share of Gross Value Added (GVA) is falling with lower added value production moving at a fairly rapid rate to lower cost locations elsewhere in the world. It is clear that a great deal of "churn" (opening and closing of businesses) takes place in successful economies and this phenomenon occurs in manufacturing as in other sectors. In addition, there is a blurring of the boundary between manufacturing and the service sector as a result of the continuing trend to out-source functions ranging from logistics to ICT. This suggests that some care needs to be taken when interpreting long term trends in the economy as a whole.

  Neither the UK nor Wales is Immune from these Pressures and Trends.

  Manufacturing accounted for 24% of Welsh GVA in 2000 and about 17% of employee jobs as at March 2003. This is above the UK average of 18% for GVA and 14% for employment, but slightly below the figures for the Midlands (25% and 19% respectively). The sector provides some 179,000 direct jobs in Wales and supports many others.

  On-going structural change in the economy of Wales is reflected in the continuing decline of the traditional heavy industries that once characterised Welsh manufacturing. There have been further significant job losses in the steel industry in Wales over the past two years: however, even here the outlook is brighter than it has been for some time with Celsa re-opening the ASW plant in Cardiff and Corus' plans for growing the capacity of its operation at Port Talbot.

  Jobs in manufacturing as a whole have fallen over the past five years: by 16% in both Wales and the UK as a whole between March 1998 and March 2003. Nonetheless, as noted above, Wales still has a higher proportion of jobs in manufacturing than the UK as a whole.

  Foreign Direct Investment (FDI) into Wales has greatly assisted the diversification of the traditional manufacturing base. While the emergence of low-cost production locations around the globe has created intense competition for future FDI, during 2002-03 the UK remained Europe's top inward investment location and Wales increased its share of that investment. To a large extent, this reflects the excellent partnership between Invest UK and the Welsh Development Agency (WDA) and the Agency's own high standing reputation as a first class operator in this highly competitive arena.

  Further economic analysis of the role of the manufacturing sector appears at Annex 1.

EXPORTSA RECORD OF GROWTH

  Latest Customs and Excise figures (for the second quarter of 2003) show that the EU continues to account for the greatest proportion of Welsh exports: 63% compared to 54% for the UK. Wales has 4.45% of total UK exports, compared to around 4% of GVA, and continues to punch above its "economic" weight in this area.

  The latest figures also show an improvement in performance, with Welsh exports for the second quarter of 2003 being 12.6% higher than the second quarter of 2002, compared to a 0.8% reduction in the total of all UK regions. In addition, the value of exports for Wales for the year ending quarter 2, 2003 rose by £393 million (5.9%) compared to the corresponding period a year earlier, while the value of exports for the total of all UK regions rose by £1,794 million (1.1%) over the same period. Exports to non-EU countries were responsible for £240 million of the £393 million increase for Wales.

  There is no information to show the specific impact of trade tariffs on Welsh companies. However, it is safe to assume that the impact would be broadly the same as that felt by businesses across the UK community (and, indeed, other trading nations). Also, with the EU accounting for around 68% of Wales' export trade, our exposure to tariffs is not as high as it might have been even 10 years ago.

ECONOMIC POLICIES

  In the round, the Assembly Government attaches importance to the same policy priorities as the business community. It recognises the critical value of sustaining a business environment which is competitive by international standards and of investing in skills, transport and other infrastructure and the promotion of R&D and innovation. A Winning Wales—the Assembly Government's policy framework for economic development—is built very largely around these priorities.

  The UK Government has a key role to play in complementing the policies in A Winning Wales. In addition to its impressive track record in promoting growth, Whitehall can add real value to our efforts by:

    —  Investing in improved road and rail communications between Wales and its markets elsewhere in the UK and in Europe: "time to market" is critical for all manufacturers and reducing it would help make Wales an even more attractive location for high added value activity and HQ functions.

    —  Boosting financial incentives for companies to invest in training and R&D: in the case of R&D, the Assembly Government has argued for some time that higher tax credits (or similar) for companies operating in the Assisted Areas could play a key part in promoting the knowledge economy outside of the South East of England where the bulk of R&D is currently undertaken.

    —  Locating Government-sponsored R&D facilities in Wales to draw on the expertise of Welsh universities and to help create the critical mass necessary for more R&D-driven manufacturing.

    —  Making a determined effort to help universities across the UK to become centres of excellence and even stronger engines for growth in their regions.

A WINNING WALES

  A Winning Wales was published in January 2002. It sets out a range of actions in Wales geared to making the economy more dynamic, inclusive and sustainable. The strategic priorities identified have a very clear relationship to manufacturing in Wales.

  Further information on Foreign Direct Investment and Trade is presented in Annex 2.

  The DTI Manufacturing Strategy, published in May 2002, highlights the critical need to assist the manufacturing sector to improve its competitiveness. The Assembly Government supports the broad thrust of the DTI strategy, and this is reflected in "A Winning Wales".

  The European Structural Funds Programme 2000-06 provides an important opportunity for Wales to increase its economic and social prosperity.

  For the Objective 1 Programme, the largest of the programmes in Wales, nearly £1.2 billion of structural funds will support some £2.7 billion of investment across West Wales and the Valleys. To date, over £530 million has been committed to some 880 projects, which are helping to support a stronger Welsh economy and a better-trained workforce. Annex 4 provides further details of the importance of European funding.

  Those policy measures within A Winning Wales which impact most directly on manufacturing and trade are now discussed in more detail.

SKILLS

  Critically, there is a need to ensure that manufacturers in Wales have access to the range of skills needed, at all levels, to facilitate high performance working practices and environments. The availability of European Structural funds in the Objective One region of Wales provides a unique opportunity to support the development and retention of those key skills.

  The Assembly Government has a comprehensive set of policies to make Wales a Learning Country, committed to lifelong-skills development. A key priority is helping to ensure that the needs of employers are met, both by supplying entrants to the labour market that have the necessary skills and by helping employers to develop the skills of their existing workforce.

  These aspects of our agenda are fully developed in the Skills and Employment Action Plan 2002. This is based to a significant extent on the findings of the Future Skills Wales research programme, which included a major survey of the skills needs of employers, and on the advice of the Skills Task Force. Aspects of the action plan that are particularly relevant to manufacturing include:

    —  Ensuring that the new network of Sector Skills Councils operates effectively in Wales and is supported by National Council-ELWa.

    —  Strengthening the Future Skills Wales partnership by establishing an Employer Group.

    —  Implementing the National Basic Skills Strategy for Wales, including the Employer Pledge.

    —  Re-vamp the work-based training programmes, such as Modern Apprenticeships and the new Modern Skills Diploma for Adults, using an all-age approach to improve their attractiveness and quality.

    —  Undertaking the Learning Worker Project in Llanelli to assess the impact and value for money of providing free learning for all employees up to NVQ Level 3.

    —  National Council-ELWa is introducing a programme of Company Learning Accounts to provide flexible packages of learning support based on employer needs.

    —  Joint working between National Council-ELWa and the Wales Management Council to produce and implement a strategy to boost management training.

R&D AND INNOVATION

  Looking forward, the long term future for much of the manufacturing sector in Wales will undoubtedly be determined by 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.

  Supporting the transition from a traditional, investment-driven manufacturing to a modern, knowledge-based, innovation-driven, high value-added manufacturing environment is a key plank of both UK Government and Welsh Assembly Government strategy, as outlined in "Wales for Innovation", the Assembly Government's Innovation Action Plan.

  "Wales for Innovation" sets out an ambitious agenda for change. It includes an ambitious, £150 million programme for promoting high-end manufacturing through the roll out of the Technium concept developed in Swansea.

  It also demonstrates the Assembly Government's commitment to streamlining the way in which support for innovation is managed by Team Wales: the most obvious example of this is the bringing together of a range of measures into a single, coherent and easy to access programme—Smart Cymru.

  The Assembly Government will build on this by creating a Knowledge Bank to support ideas and intellectual property, providing entrepreneurs with funding for their ideas in early stages as well as business skills and mentoring. The Bank will be of benefit to manufacturers as well as service businesses. Work on developing the Knowledge Bank concept is underway and decisions on the delivery mechanism will be made by the turn of the year with a view to implementation from April 2005.

  The vision and competence of leaders and managers in the manufacturing sector will be a key determinant of whether the innovation challenge is met. The Wales Management Council has recently published its "Agenda for Action" which provides the framework through which the development needs of leaders and managers will be addressed in Wales.

  The Welsh Assembly Government is committing significant resources to fuelling the innovation process within Wales. The key components of "Wales for Innovation" include:

    —  Communicating what can be achieved through innovation.

    —  Developing more businesses with high growth potential.

    —  Better equipping people to innovate.

    —  Promoting simpler, more accessible support for innovation.

    —  Maximising the economic development impact of Welsh universities and colleges.

    —  Investment in the attainment of the objectives of this Plan will exceed £260 million by 2005.

TRANSPORT AND OTHER INFRASTRUCTURE

Transport

  The Welsh Assembly Government fully recognises the business need for modern transport infrastructure both to improve access to markets elsewhere in the UK and in Europe and to facilitate travel to work and communications within Wales.

  The Assembly Government's aim of developing a better co-ordinated and sustainable transport system that supports economic growth and local communities is presented in the Transport Framework for Wales' policy document.

  This policy is being implemented by sustained investment both in the strategic road network and public transport improvements. The Assembly Government has published a forward programme of work on the trunk road network. This includes eight major road schemes scheduled for delivery before March 2005 and 23 schemes that should be due to start before March 2008. The estimated cost of this ambitious programme is £400 million.

  The Assembly Government is also making a significant investment in local authority road infrastructure through the transport grant scheme. There are 16 major road projects currently being funded that will address economic, social access and safety issues.

  Investment in infrastructure has not been limited to the road network. There are two major rail infrastructure projects being funded by the Welsh Assembly Government. The re-opening of the Ebbw Valley railway as a passenger line will create opportunities to communities in Blaenau Gwent that have been severely hit by recent steel closures. The Assembly Government has also agreed to meet the full capital costs of re-opening the Vale of Glamorgan railway line (including two new stations at Rhoose and Llantwit Major). This will provide rail passenger services to those living in the Vale and improved public transport access to Cardiff International Airport.

  The Assembly Government is also providing Freight Facilities Grant to encourage a transfer of freight movement from the road to the rail network. The Wentloog to St Mellons road link in Cardiff is also being funded by the Welsh Assembly Government and will provide direct vehicle access to the new Euro Rail Freight terminal at Wentloog.

Promoting information and communication technologies

  The Welsh Assembly Government is committed to developing a Wales where all businesses, wherever they are located, are able to exploit information and communication technologies fully in order to improve their competitiveness, innovate and achieve sustainable growth. Improvements in this critical area will help manufacturers and exporters drive up productivity and gain easier and more rapid access to markets.

  There are a range of important measures in place or planned to deliver on this commitment.

  The All Wales network of ICT Support Centres offer impartial "low-end" ICT help and guidance to about 5,000 businesses each year. An ICT Support Centre is based in each of the 22 Unitary Authorities. These centres also showcase the various Broadband technologies to SMEs through the "Try-Before-You-Buy" scheme.

  Building on the success of an initial SME-Business programme, the Objective One funded Wales SME-Business 2 will provide "high-end" ICT advice, awareness raising events, seminars and one to one mentoring to SMEs looking for full integration of ICT into their businesses.

  Opportunity Wales offers e-Commerce support to SMEs in the Objective One area of Wales. A Contact Centre has been established to provide a fully effective Customer Relationship Management operation. Over 80 trained, accredited professional advisors are able to visit businesses too.

  The Wales Information Society (WIS) Mobile Exhibition Technology Trailer is equipped with the latest state-of-the-art technology including broadband satellite, video conferencing and other facilities and travels throughout Wales throughout the year. The trailer aims to raise awareness of the potential benefits offered by ICT, particularly in rural areas where such facilities are more difficult to access.

  There are a variety of Objective One funded projects which support businesses in Wales on the effective and appropriate application of ICT. For example the Wales Application Service Provision (WASP) provides affordable access to ERP and SAP based software to SMEs in the Objective One region.

Broadband Wales

  Though all the measures in this critical sector are important, there is little doubt that the £115 million "Broadband Wales" Action Plan launched in July 2002 will have the most impact on business competitiveness.

  The Action Plan sets a number of important targets for achieving an increase in the access and take up of broadband services that are vital toward the successful transition from an industrial to a modern, knowledge economy. The targets are to:

    —  Increase the availability of affordable broadband services in Wales by approximately 30%, with 310,000 extra homes and 67,000 extra businesses potentially being able to access broadband.

    —  Provide broadband connectivity in relevant business parks/locations in Wales.

    —  Make broadband services more widely available throughout Wales at near-DSL prices.

    —  Develop 50-100 local or regional initiatives to deliver broadband solutions.

    —  Increase awareness of broadband communications and its benefits.

    —  Provide approximately 1,200 additional public sector sites with broadband connectivity (as part of aggregation of public sector demand activities).

  A range of projects are underway to achieve these targets.

  The Broadband Infrastructure Subsidy Initiative (BISI) will provide broadband connectivity to the Objective 1 area of Wales. This will be achieved through a subsidy process that will give suppliers the opportunity, the market, and the viability to invest in establishing broadband infrastructure within areas where there is market failure.

  The Regional Innovative Broadband Support Programme (RIBS) will part fund local broadband projects that are capable of improving the competitiveness of disadvantaged regions through the use of broadband infrastructure. The first call for RIBS projects will begin in 2004.

  The SME broadband Satellite Subsidy Scheme and associated "Try Before You Buy" Scheme has encouraged businesses to realise the benefits of broadband. The Broadband to Business Parks Project will provide connectivity to a number of business parks and key business locations. The procurement associated with this project will begin before the end of 2003.

  The Assembly Government is actively pursuing the aggregation of public sector demand for broadband agenda and already provides connectivity to schools, libraries, learning centres and the health service in Wales. This will be built upon over the coming months and years. The subsidy scheme will become technology neutral by the end of 2003.

MEASURES TO SUPPORT MANUFACTURING IN PARTICULAR

Generic support

  The provision of support to ensure that manufacturers in Wales are able to secure the investment necessary to achieve ongoing improvements in productivity is critical to the sector's future. This is particularly true in the context of those businesses where competitive factors are forcing a move towards more sophisticated, higher value-added products, as production of lower value-added products is transferred to low cost production locations around the globe.

  The Welsh Assembly Government has a key role to play in supporting manufacturing investment through the administration of Regional Selective Assistance (RSA) and through its Assembly Investment Grant (AIG). These schemes support capital investment projects in the Assisted Areas that create new jobs or safeguard existing ones. They are the main forms of financial incentive to businesses to encourage investment and growth in Wales.

  RSA is a discretionary grant scheme and the main form of financial incentive available to businesses to assist investment and growth in Wales. The aim of the scheme is to reduce disparities in employment opportunities between the Assisted and non-assisted areas. RSA operates under Section 7 of the Industrial Development Act 1982 and is an approved scheme under the European Commission's Regional Aid Guidelines.

  RSA is currently administered in Wales, England and Scotland under a common GB framework. In Wales, the scheme is funded entirely by the Welsh Assembly Government. Grants of more than £50,000 are generally available and there is no upper limit, although non-SMEs can qualify for lower levels of support for smaller projects. To qualify for support, a project must involve new investment in capital assets such as buildings, equipment and intellectual property and create or safeguard jobs.

  AIG is also a discretionary grant scheme and operates under Sections 7 and 8 of the Industrial Development Act 1982. It is also an approved scheme under the European Commission's Regional Aid Guidelines but only operates in Wales and is funded entirely by the Welsh Assembly Government. Based on RSA, AIG was launched in April 2002 and is aimed at providing fast-track financial assistance specifically to SMEs. Grants of between £5,001 and £50,000 are available and unlike RSA, an AIG project can take place anywhere in Wales and does not necessarily need to create or safeguard jobs.

  Between 1 July 1999 and 30 November 2002, 430 offers of RSA were made to projects in the Assisted Areas of Wales with a total value of £250 million. These projects are expected to lever in almost £1.2 billion of private sector investment, create 20,000 jobs and safeguard a further 9,493. Of the total number of RSA offers made, 325 offers (76%) relate to manufacturing, involving £193 million grant (77%).

  During the first 12 months following the launch of AIG in April 2002, 380 AIG grant offers were made to SMEs throughout Wales with a total value of £12 million. These projects are expected to lever in almost £32 million of private sector investment and create 654 jobs.

  Further details of grant awards appear in Annex 2.

Sector-specific support

  Within the broad portfolio of support available to business in Wales, there are a number of schemes which target manufacturing specifically and which emanate from broader, UK-wide initiatives. Examples include a joint DTI initiative, the Wales Manufacturing Advisory Service and the associated Regional Centre for Manufacturing Excellence.

  The emergence of Sector Forums in Wales, covering key manufacturing sectors including for example Automotive, Aerospace and Opto-Electronics, has resulted in an improved appreciation of the key issues facing manufacturers. This improved engagement of the private sector in determining policy responses to key issues has ensured that, increasingly, support programmes are able to target improvements within the sector more effectively.

  A good example is the development and implementation of the "Accelerate Wales" programme that targets the implementation of lean manufacturing techniques within automotive supply chains. The successful roll-out of the programme has been in no small measure due to the engagement of key figures from the sector with the Wales Automotive Forum and the involvement of a broad range of partners in steering the project.

POLICIES FOR EXPORTS

  The Welsh Assembly Government recognises that the development of improved international trading performance is key to improving the prosperity of the nation.

  Wales Trade International (WTI) was formed by the Welsh Assembly Government in 2000 specifically to promote international trade in Wales and to act as the driving force in establishing strategic business alliances between Welsh companies and their counterparts world-wide. A key objective is to find smarter ways of connecting Wales to international business opportunities with the aim of at least matching the UK export growth rate.

  In delivering on its agenda, WTI works very closely with Trade Partners UK and their network of posts across the world.

  The Welsh Assembly Government's International Trade Strategy "A World of Opportunity" was launched in March 2003. It promotes a partnership approach to the creation of a culture of internationalisation in the Welsh economy. Its vision is "To increase the prosperity of the people of Wales, by developing a culture of internationalisation within the business community of Wales, thereby developing new opportunities in the global market". The Strategy is focussing on the following six strategic objectives:

    —  Developing the capacity and capability of existing Welsh companies to trade internationally, as well as supporting the creation of new exporters.

    —  Increasing the value of Welsh international trade with overseas markets.

    —  Promoting key sectors of the Welsh economy in priority overseas markets.

    —  Creating and maintaining effective partnerships with other business support agencies in Wales and the UK—"Joined-Up-Delivery".

    —  Developing and maintaining a customer focused approach to service delivery ie; demand led.

    —  Monitoring the effectiveness of services and programmes, and in conjunction with partners, review the Strategy and make any necessary changes in direction or approach.

GREENING BUSINESS

  The Welsh Assembly Government is committed to developing a greener economy that can contribute to sustainable development. The published Business and Environment Action Plan for Wales (BEAP) focuses, in its first phase, upon resource management.

  This focus on resource management has the objective of "making more with less". The Action Plan is aimed at assisting businesses in Wales to exploit the opportunities that result from reconciling economic growth with environmental concerns.

  It is becoming increasingly evident that there is significant scope to improve the management of resources and associated issues such as energy efficiency; on-site generation of clean energy; waste management and minimisation; recycling; use of sustainable building materials; pursuit of environmentally conscious site management etc. These and other areas are being targeted by the Welsh Assembly Government, WDA and partner organisations.

  Partnership is very much the key to delivering the vision as set out in the action plan. A steering group has been established by the Welsh Assembly and the WDA to co-ordinate the activities of all the partners and facilitate the achievement of stated outcomes. The partner organisations are recognised for their valuable input and commitment: essential ingredients for ensuring the successful delivery of the plan."

SETTING THE FORWARD AGENDA: AN ACTION PLAN FOR MANUFACTURING

  As in the rest of the developed world, the manufacturing sector in Wales is experiencing considerable, ongoing change. This change process is complex and driven by a range of global, national and local factors. The policy response is therefore, of necessity, broad and complex.

  Manufacturing in Wales is supported through a range of instruments and initiatives. Increasingly, it has become recognised that key decision-makers within the private sector need to be more engaged in setting the future agenda for public sector support if interventions are going to deliver the scale of benefits that are necessary to achieve the desired, positive, impact. The emergence and development of sector fora, covering key industrial sectors in Wales, has provided a vehicle through which this process has been enhanced and business-driven.

  The Assembly Government recognises that the time is now right to build on the success of the sector fora. It will work directly with key players from across the whole spectrum of manufacturing to develop an ambitious but practical Action Plan to ensure that the sector can flourish in Wales.

  The Assembly Government wants Wales to become nothing less than a European centre of excellence for the production of high added value manufacturing, particularly in those areas in which it is already strong or could realistically develop a competitive advantage.

Rob Halford

Head of Economic and Business Partnerships Branch

13 October 2003



 
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