Examination of Witnesses (Questions 846
- 859)
THURSDAY 14 OCTOBER 2004
WELSH ASSEMBLY
GOVERNMENT
Q846 Chairman: Good morning, Mr Davies,
I should say Minister for Economic Development and Transport and
Mr Pritchard. For the record would you mind introducing yourself,
of course we all know who you are.
Mr Davies: Thank you, Chairman.
My name is Andrew Davies. I am the Minister for Economic Development
and Transport in the Welsh Assembly Government and to my right,
David Pritchard—my senior official—who is Director
of the Economic Development and Transport Group within the Assembly
Government.
Q847 Chairman: Can I apologise for
not having too many of our members here today, but we have the
Children's Commission Bill going through the House, and three
of my Members are on the Committee, it is one of the things we
cannot allow for. I want to thank you both for coming to London,
it does help us at this time of the week. It is much appreciated.
Can I just start by asking your opinion on what is the state of
health and manufacturing in Wales and what do you see as the main
priorities for the Welsh Assembly Government?
Mr Davies: Manufacturing is still
of very significant importance to the Welsh economy. It contributes
23% of gross value added to the Welsh economy compared with the
UK a contribution of 18%. Manufacturing is of huge importance,
both in terms of direct employment but also in terms of contribution
to Welsh GDP. Like manufacturing in all parts of the world, it
is being subject to intense global pressure and competition, particularly
the competition from East and Central Europe, North Africa but
increasingly from China. We have to work within that global context
and help the sector and industry through the challenges. In fact,
late last year, I convened a manufacturing task, and finish group
working with the industry, and, I have given the Committee Clerk
a copy of this, which I think will be given to you. They reported
in May 2004. The group was chaired by Colin Johnson, a former
plant manager of the Ford Engine Plant in Bridgend where I used
to work myself but there was no nepotism involved in that choice.
It has made some very serious recommendations to us, and we are
looking at that as a Government and how we can respond to the
challenges. Clearly, we have to be mindful of the context in which
manufacturing in Wales operates. The challenge is from the 1970s,
where Wales could be marketed as a destination for inward investors,
for example, American and Japanese companies, as a low wage cost
area. Clearly that advantage has gone. I believe we neither can,
nor in fact, should we position Wales as a centre of operation
for low-cost operations. So the challenge for us is how we help
the transformation from high volume, low value added production
to low volume, high value added production. All our policies in
manufacturing are related to that challenge.
Q848 Chairman: Can I ask who takes
responsibility for monitoring the progress of the manufacturing
trade in Wales? Is it the Assembly or the UK Government?
Mr Davies: Clearly there are areas
that devolve matters for which we have responsibility. For example,
the operation of our grant system the Regional Selective Assistance
system, which is a UK system of grant aid, but then below that,
we have the relatively new Assembly investment grant which is
aimed at small and medium sized enterprises. That is a grant between
£5,000 and £50,000 and the RSA is over £50,000.
The trade agenda is another area where we have responsibility.
Clearly, there are responsibilities that the UK Government have
in terms of negotiating at a European Union level over various
issues such as, the assisted area map, discussions and relevant
negotiations over EU regulations: tariff policy, et cetera. There
is a clear distinction between what our role is and what their
role is.
Mr Pritchard: In terms of monitoring,
then obviously, the Office of National Statistics, in a sense,
serves us in Wales as much as the UK Government and we have indices
of industrial production that cover manufacturing, trade inquiries,
customs and the like. So we draw on that information for our monitoring.
I think it is fair to say that the prime responsibility for monitoring
what goes on in the Welsh economy is with the Welsh Assembly Government.
We have regular monitoring sessions, we have targets related to
that and manufacturing forms an important part of that monitoring
effort.
Q849 Chairman: Did you also collect
the statistics in Newport?
Mr Pritchard: The Office of National
Statistics in Newport collect the statistics, but we draw upon
those to analyse what is happening in the Welsh economy.
Mr Davies: If I could just say
on that issue of statistics, there has been some concern for some
years now about the quality of the statistics relating to the
Welsh economy. Now, in fact, we have direct contribution where
we pay an additional amount into ONS to get more reliable statistics,
so the sample sizes and the quality now has improved quite substantially.
Mr Davies: That is the labour
force survey, for example, that breaks down changes in the workforce
by sector, including manufacturing and we have boosted that sample;
we have had to pay for that, quite rightly, but that provides
us with much better information than we would have otherwise.
Mr Davies: Hopefully, with the
additional 600 jobs with the ONS coming to Newport, these statistics
will get even better.
Q850 Chairman: We should get about
a sixth of that in terms of what they are looking at. Foreign
trade investment and indigenous manufacturing are equally important
to the Welsh economy. Are you happy that you have struck the right
balance between attracting foreign investment and nurturing our
own investment?
Mr Davies: I think there was a
very fundamental change made in 1997 with the incoming Labour
Government. There was a general feeling that there was too much
emphasis on FDI prior to 1997. Without going into any detail the
very significant contribution that was made to attracting LG to
Newport, I think, in retrospect, is a decision that would not
be made now. One is just the sheer scale of that investment project
but, also, I think there is a very broad policy thrust that the
days when you can put all your eggs in the one basket, even if
they were valid, they are no longer valid. Firstly, there is a
very clear policy thrust to spread prosperity throughout Wales
and, secondly, there is a more balanced approach to economic development,
balancing FDI, which is still very important. In fact, Wales is
punching above its weight in terms of attracting FDI at a UK level.
We have 5% of the UK population, consistently we are getting 7%
or 8% of overseas investment. Balancing that with a greater emphasis
on indigenous business is encouraging more people to set up their
companies, but also focusing on more direct support for Welsh
companies. For example, we have established the Assembly investment
grant which is targeted on our SME sector.
Mr Pritchard: I think so far about
1,000 offers of Assembly investment grant have been made in the
last two years since it was set up and virtually all of those
are to home-grown businesses.
Mr Davies: If you look at the
figures particularly for RSA, the number of offers made are largely
to Welsh-based companies. However, if you look at the size of
the grant—because inward investment tends to be the larger
companies with larger capital expenditure—a large proportion
of the amount of money is given to FDI but if you look at the
number of offers they are mainly to Welsh based companies.
Q851 Albert Owen: Just before I move
on to competition, I would just like to ask you about FDI. You
said we have 5% of the population and 7% of the UK FDI. The most
recent survey which I saw showed the United Kingdom jump from
ninth to fourth in the world on FDI. Are your figures recent and
has that increase in the UK's share been reflected in Wales as
well?
Mr Pritchard: The share that the
Minister was talking about was of that greater cake, a large cake.
So in fact we were punching above our weight in terms of more
inward investment per head of population, and of the UK total,
which has itself increased in a tough, tough world of course.
Q852 Albert Owen: Moving on to competition,
Welsh manufacturing, as you know, has to compete within the European
Union and outside it. You have talked about the Task and Finish
Group which you have set up where you have identified the challenges,
but what should we be doing to make sure that we are up there
and competing within and outside the European Union? In fact have
you got an action plan or are you just identifying the challenges?
Mr Davies: Yes, we have clear
actions and they cover a range of areas. One is increasing the
emphasis on innovation, but that is not just innovation in terms
of research and development, but also innovation in the business
processes. When I was with the Ford Motor Company, for example,
there was a constant emphasis on improving quality and it was
not just about capital expenditure, it was about looking at the
operation of the factory and how you could have be more efficient
and improve your quality, and that is just a constant process.
It is not a one-off change, but it is constant emphasis on quality
and constant improvement, business improvement. Skills is another
big area where in a knowledge-based economy, a knowledge economy,
there is an increasing premium on skills for people to be adaptable,
so our action plan on skills in Wales is very much focused on
upskilling both the existing workforce as well as making sure
that entrants into the workforce have the right skills. Basic
skills is still a big issue for us. We still have far too many
people of all age groups who lack basic skills and there is a
big emphasis on that. The latest figures in fact show that we
have made significant progress on our skills agenda. Another area
in terms of innovation is 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. In terms of our own investment and grants, Regional Selective
Assistance, I have asked my officials to look at the basis on
which we give grants, particularly RSA. RSA was originally established,
I suppose crudely, as a job-creation scheme and my view is now
that we have virtually closed the unemployment gap with the rest
of the UK, the challenge for us is to put greater premium on high
valued-added, so I have asked my officials to refocus our RSA
scheme to put an increasing emphasis on our priorities as a government,
so innovation, environmental and business sustainability, skills,
Investors in People. So now when any company comes to us for RSA,
their proposal will be judged on those criteria, not just on the
capital expenditure and the number of jobs that they will be creating
or safeguarding.
Mr Pritchard: And we have actually
got a booklet that is available for business which explains the
refocused RSA and if the Committee would welcome sight of that,
I think we can send that to you. It describes exactly what Mr
Davies has said.
Chairman: That would be helpful.
Q853 Albert Owen: So you are confident,
with the upskilling and the other things that you have identified
in your action plan, that that will enable us to compete with
the European Union countries and indeed with others outside?
Mr Davies: I would not say that
we are confident because there is only so much that government
and government bodies can do. Clearly there is a need to work
with business and the private sector. The Manufacturing in Wales
Task and Finish Group, which I mentioned just now. When I launched
it, I think the Chair put his finger on the issue of the challenge
when he said that there is some very good practice in Wales, among
companies both large and small, both Welsh based, indigenous,
as well as inward investors. But the challenge is to make sure
that more companies or the majority of companies are actually
putting the emphasis on innovation and upskilling. So I am more
confident that we have our policies and programmes in place to
help companies. But clearly we need to make a major step change
across all manufacturing sectors.
Mr Pritchard: The bulk of responsibility
of course for being competitive rests with the individual enterprises
themselves and where they have taken up the challenge. Not too
far away from your constituency, DeepStream, which we have supported
in Parc Menai is potentially a world beater, creating 120 excellent
jobs in north Wales. An exceptional entrepreneur, Mark Crozier,
is leading it and if you can do that in Parc Menai and you can
do that in that hi-tech sector by excellent management, good innovation
and good marketing, then you can beat anyone and not just in the
rest of Europe. It is just a matter of companies, large and small,
seizing the opportunities. We have got many world beaters in Wales.
Q854 Albert Owen: I just want to
focus your attention on the European Union. Have you had the opportunity
to assess the impact of the new countries which are coming into
the European Union and indeed those which may come in in future
years?
Mr Davies: Yes, I suppose basically
what we have been doing is a fundamental spot analysis and seeing
where the threats are coming from as well as the opportunities
and clearly we have 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 and increasingly obviously China
as well. As I said, I think manufacturing is changing very substantially.
It is not just a question of companies, for example, relocating
to the Czech Republic or even China. What is happening both in
manufacturing and generally in business, and it is true for the
service industries as well, is that many of the jobs, the lower
value-added jobs, may well be outsourced or placed overseas and
the challenge is to keep the higher value-added headquarter functions
or the product design, the high knowledge-based functions, the
high value-added functions in Wales. We are also seeing another
change in the business model and this is true for manufacturing
as it is true for construction. Many companies are now looking
to extract value throughout the product life cycle rather than
just making the product in the first place. For example, we were
talking on the train coming up of companies like Rolls-Royce and
Boeing in the aerospace sector, which is obviously of great significance
in Wales, who are now looking at what they can do to extract value
throughout the life cycle of, say, a jet engine. Construction
companies are doing the same in terms of buildings. They are not
looking, as they have traditionally, at constructing the building
and that is it: they get paid for constructing the building and
then they hand it over, but now they are looking at how they can
extract value through that life cycle. Boeing now, for example,
at a strategic level are looking more at what they see as moving
more into maintenance rather than just construction. So from our
point of view, it is how can we help companies address those challenges.
The other area of manufacturing is, as I said, just building on
that, that the distinction between the manufacturing and the service
part of it is being increasingly blurred. I met a company, an
opto-electronics company in St Asaph, who were making products,
but very high value-added and it was almost a very bespoke service
they were providing, although in providing the product, it was
almost a service as well to the telecommunications industry. So
it is helping companies be aware of those challenges and helping
them through that process and identify opportunities, whether
it is product design or whether it is in fact breaking into overseas
markets through our overseas trading arm, Wales Trade International,
for example.
Mr Pritchard: I think there is
a point about the new countries and making sure that there is
a level playing field. 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. There
is a view you could take that the gap between the level of support
that it might be possible for Estonia to be able to offer by comparison
with Wales is too wide. So whilst Welsh companies, if they go
up the value chain, can be as competitive as anyone, if then at
the margins finance and financial support just becomes unanswerable
as a proposition from the new countries, it could just push things
too far. So I think we are now having some discussions both with
the DTI and indeed with Brussels about that issue. It needs to
be fair.
Q855 Albert Owen: My final point
on competition, and the Minister touched on it when he talked
about service sector jobs which have gone to developing countries
and, in particular, the call centre job sector, is that I agree
with what you say in response particularly about keeping headquarters
and the higher value-added sector here in Wales, but that is little
comfort to those who work at the shop-face, if you like, in these
call centres, so what can you do as a government and what can
be done by the UK Government at that level to stop manufacturing
going in a similar trend to what we have seen in the service sector?
Mr Davies: I, through my portfolio,
my budget, have now financially supported a call centre forum
or initiative to bring the sector together to identify the needs
of the industry. I think there is a view within the call centre
industry that the outsourcing has been exaggerated, that there
has been a lot of media comment, but it actually exaggerates what
has actually happened and it ignores often the case that some
companies which have outsourced to India have actually reversed
that decision and decided to relocate back to the UK and Wales
because of the quality of the service they have received.
Q856 Albert Owen: Can you give us
any examples of that?
Mr Davies: I have not to hand,
but I can certainly provide those for you. I know that many large
companies, in terms of their decision-making, have actually called
a halt on those issues as well as others which have relocated.
Mr Pritchard: NatWest, I think,
have an advertising campaign on the TV at the moment where NatWest
are making a big marketing point that their call centre operations,
service contact operations, are UK-based and they are a pretty
hard-headed lot within the broader group.
Mr Davies: I think what the call
centre industry or those who have used the services or procured
the services have found, just like in manufacturing, is that if
you drive everything on the basis of cost, you might get a short-term
gain. I know it happened when I worked for the Ford Motor Company
that when Ford were going to suppliers, if they just went on the
basis of cost and ignored quality and reliability, then their
actual business model did not survive and their products were
not good. So as for the service sector, the same is fundamentally
true for the call centre industry as well. The one thing which
recent research, which once again we can provide you with, has
demonstrated is that the turnover in the industry of labour is
slower in Wales than any other part of the UK. Now, that may not
seem an important matter, but if, in a very tight labour market,
you are finding it difficult to recruit anyway and then when you
do recruit people, you have very big wastage, so you have to put
a lot more investment into skills training and all those HR functions,
then that is an additional cost which you just cannot bear in
the long term. What the research has found is that the quality
of the workforce in Wales and the turnover was significantly lower.
In fact I had dinner with a major Italian company last night,
a manufacturer, who was making the same point, that their labour
turnover was 1%, their wastage was 1%, so from that point of view
both the adaptability and flexibility of the workforce, the commitment
and the very low turnover was a big advantage for them in terms
of locating in Wales.
Q857 Dr Francis: If we could move
to questions about UK Government support, could you explain to
us where the biggest interfaces are between yourselves and Westminster
on economic policy. Where, for example, does the Welsh Assembly
Government explicitly need UK Government support?
Mr Davies: David just touched
there on the review which has been undertaken on the regional
aid guidelines, the Assisted Area Map. This is a European-wide
review and the UK Government proposal is one where they are looking,
for example, to spread the benefits perhaps more widely throughout
the UK so that parts of England would be able to use or, rather,
distribute RSA. It is an area where, for example, we are very
mindful that not just the UK context that may disadvantage us,
but it may well disadvantage us in the European context, as David
said. From our point of view, particularly in the context of the
accession countries, we would want as fair or as level a playing
field as possible and we would not want to be in a position where
Wales was disadvantaged in the European context, so that is one
crucial area in terms of the post-2006 agenda, which obviously
is a distinct policy area, but is related to the post-2006 debate
over European Structural Funds. The other area is in terms of
the Manufacturing Advisory Service where all the reviews and the
feedback we have had from the industry show that it is very positively
received by the industry itself. So we were quite disappointed
in fact, as a result of the recent review, that funding for the
Manufacturing Advisory Service, which is a UK service, is going
to be cut. From our point of view, because we think it is such
a valuable service, we are now looking at what we can do to identify
alternative funding of our own to make up for any deficiencies.
Mr Pritchard: I think the other
side, and I think it was brought out in the Minister's memorandum
to you at an earlier stage in your inquiry, is the things that
the UK Government can do to promote R&D in manufacturing,
but also, more broadly, infrastructure. Obviously our responsibility
for promoting innovation is very broad, but the Chancellor of
the Exchequer introduced a few years ago an R&D tax credit
which was very much welcomed, but some might see as slightly over-complex.
I think we make no secret of the fact that we would have liked
the tax credit to be regionally differentiated so that there were
higher benefits to companies operating in places like Wales. So
we have a dialogue with the Treasury in relation to that. The
other one is the broader issue of infrastructure and again we
take responsibility for the M4 and other infrastructure elements
from the Severn Bridge this way, but we would very much welcome,
and so would manufacturers in Wales, perhaps a greater priority
being given to investment along the M4 corridor in England both
on the rail and the road front. So I think we have a dialogue
with the Department for Transport and a range of others on those
sorts of issues. So it is not just business support, but the broader
environment for business that we engage with as well.
Q858 Dr Francis: Could you share
with us your thoughts about the impact of the abolition of the
ELWa and the WDA on relationships and will it place any additional
stress on these relationships or have you got them through?
Mr Davies: Well, I suppose the
business case for that was that in a relatively small country
of just under three million people too great a rise in public
bodies providing similar services or overlapping services led
to too great a fragmentation. For example, coming back to the
issue of overseas investors or FDI, they would say that working
in Wales could be quite frustrating because they would come to
the Assembly Government for regional selective assistance, they
would go to the WDA for property development grant and if they
wanted to have the skills, they would go to ELWa and there was
a general view that it was over-complicated. Certainly we feel
there are huge advantages by having effectively a one-stop shop
which will allow us to be even more focused on the service. If
we just take the manufacturing sector, we have now got very significant
sectors in automotive and aerospace and having a one-stop shop
which is government and the public sector focusing on the needs
of those industries we feel would not only be more effective for
the industry, but also give better value for money for the taxpayer.
Q859 Dr Francis: I assume that they
would see that as simplifying the relationship with the UK Government.
Is that the case?
Mr Pritchard: Most of the relationships
with UK government departments, DTI, Department for Transport,
Education and the like are already between the Welsh Assembly
Government and those departments rather than directly between,
for example, ELWa and the WDA. It is slightly different with the
Wales Tourist Board because they have got a few other links with
Culture. But overwhelmingly the links are already between the
Welsh Assembly Government and Whitehall and this will make it
less complicated.
|
