Examination of Witnesses (Questions 180-199)
UK TRADE & INVESTMENT
14 FEBRUARY 2006
Q180 Roger Berry: It is a very effective
lobby, that is why! Could I ask for your assessment of the extent
to which financial incentives or other incentives to UK companies
considering investing in India are significant? What are the incentives,
as you see them, that the Indian Government provides to encourage
UK companies to invest in India?
Mr Ahmad: The ones of which I
am aware relate to tax holidays, and in some cases fast-tracking
the application for investment. I have yet to come across a customer
telling me that it was because of state incentive that they chose
to do business in India. The rationale usually is just the basics
of whether it is a sensible business proposition.
Q181 Roger Berry: Yes, this is the
question. A previous witness said that their company chose to
invest in India because of "Indian Government support for
foreign investment in off-shoring." When pressed it was reasonably
clear that the financial incentive was not enough to justify a
big decision like that, it just helped create a more favourable
environment. In a sense, that is the area I am exploring: whether
financial incentives, such as tax holidays, that the Indian Government
does offer, make any difference. If they do not, of course, the
Indian Government has got it all wrong and we should advise them
that they do not need to give these tax incentives to UK companies.
Mr Ahmad: I will perhaps pass
the general subject matter to Paul, but I would say specifically
that your assessment accords with mine, in the sense that some
of these incentives offered by the state alone are `nice to haves'
rather than part of the core decision making, because there are
a far greater number of factors that a company would take into
account. The other thing I would say is that Mr Pearson, the Minister,
recently visited Standard Chartered's operation in Chennai, where
an entire back office function has been taken to India, and the
result of that is a group cost-saving exercise. The issue of profits
being generated from that outfit—and typically from many
of these IT related investments—is not material, but, where
there is a joint venture to do IT services or programming, that
is clearly a material factor.
Mr Whiteway: If I could comment
on incentives in reverse. There are of course some incentives
available for inward investors seeking to locate in the United
Kingdom, but we do not market the United Kingdom on the basis
of the incentives on offer. That is partly because those incentives
only apply to relatively restricted areas of the country—and
of course they are being significantly reduced as more of the
associated resources are transferred to the accession states in
Eastern Europe. The incentives offered can be quite substantial
for the right type of project; for example, a manufacturing project
which employs significant numbers of people, but in the case of
India the overwhelming majority of Indian investments in this
country of course are not in manufacturing and they are located
in areas that would not attract such incentives.
Q182 Roger Berry: To be absolutely
clear about the situation: for a UK company that is considering
off-shoring part of its activities in India, as I understand it
from what you have said, the financial incentives or other incentives
that India might offer in comparison with the support that the
UK Government might give should the investment take place in the
UK, that differential is not significant to explain why a company
makes a decision to off-shore an activity in India as opposed
to undertaking an activity in the UK. It is for the lower labour
costs, skilled work force, et cetera—it is other
factors than the incentive regime. Just so that I am clear, that
would be your judgment.
Mr Ahmad: Very much so, yes.
Roger Berry: Thank you.
Q183 Rob Marris: I would like to
carry on from what Roger Berry has talked about in relation to
Indian investment in the UK. We talked about RDAs before. There
are four RDAs: East and West Midlands, Scotland and Wales. Could
you give me an idea as a background as to the budget that the
UK Government is putting into India for trade, for example? It
is a strategic partner, we have the Prime Minister going there,
we have Mr Pearson going there, we have Alan Johnson going there.
For all those kinds of things, plus any cash floating around quite
properly, can you give me a figure?
Mr Ahmad: I can give you very
much a ballpark figure. It is an exercise that I commissioned
just before I came here, anticipating that you might be looking
for that sort of direction. As I explained right at the beginning,
we are an amalgam of various people's budgets and the nearest
figure I can come to by adding all the various bits and pieces
is just under £6.5 million devoted to India.
Q184 Rob Marris: Each year?
Mr Ahmad: Each year. That includes
our High Commission network, the contribution that we make from
the UK head office. It does not include things like overheads
and other corporate expenses that might be, if you like, smeared
over the top of this, which might double the figure.
Q185 Rob Marris: Does that £6.5
million include money that the four RDAs might put as financial
incentives to attract Indian companies to invest in the UK?
Mr Ahmad: No. That figure basically
is the staffing of the devolved administrations and the RDAs on
trade development work, but not, if you like, their investment
promotion budgets.
Q186 Rob Marris: That £6.5 million
is RDA money, is it?
Mr Ahmad: No, it is total UKTI
or UK Government expenditure on trade matters.
Q187 Chairman: Is it trade and investment?
Mr Ahmad: It is trade and investment
to the extent that it is our India network, but in the UK the
figure is largely composed of the trade development activities.
Q188 Rob Marris: Rather than investment
development activities.
Mr Whiteway: I can give you some
more detail on that if you would like.
Q189 Rob Marris: Yes, that would
be helpful.
Mr Whiteway: The money that goes
to the English RDAs is channelled through UKTI and into the so-called
single pot. I think £15 million a year is currently going
to the RDAs. That is the source of their funding for their inward
investment promotion activities. As my colleague says, that is
separate from the money that he is describing for our network
in India.
Q190 Rob Marris: Trade and jobs and
investment are very important. And one has to look at the bottom
line and bear that in mind. The figures we have from 2004 are
that Indian investment in the UK was a negative figure, negative
by £18 million. Probably, one imagines—and you can
correct me if I am wrong—because of remitted profits (profits
made in the UK by Indian companies and sent back to India). That
raises a question mark as to how well we are doing on this and
how much it is benefiting our economy. I wonder if you could comment
on that. We seem to be leeching money out.
Mr Whiteway: We have spoken to
our statisticians about those figures and they do not regard a
4% drop in the stock of inward investment in the UK between one
year and the next as being very significant. It is not possible
really to determine exactly why that stock has gone down. We do
know that inward investment from India has been growing virtually
each year, in terms of project numbers, since 1999-2000. I can
tell you that this year is also going to be a very strong year.
I would not attach too much importance to an apparent drop in
the stock level between two years.
Q191 Rob Marris: You are fairly happy
with the upward trend, are you?
Mr Whiteway: We are happy with
it.
Q192 Rob Marris: Are you suggesting
that is a statistical blip or it might be?
Mr Whiteway: The honest answer
is we do not know exactly what it is, but the difference of 4%
or so is not sufficiently great for us to be concerned about.
We see from our own figures the way in which the project numbers
are climbing and the employment numbers are climbing.
Q193 Rob Marris: That might be good
for employment but if the project numbers are rising and we are
getting repatriated profits, so the net investment figure is negative,
it could be that the trend is the negative debt figure, could
it not?
Mr Whiteway: I think it is very
important not to focus just on issues like repatriated profits.
Obviously repatriated profits can be very important for the foreign
investor because they have a duty to their shareholders to make
a profit. The reason we seek to attract foreign investment from
other countries is not because of the capital investment per
se; it is because of the technology that we obtain in that
sort of way and it is because of all the economic spill-over benefits
for the economy, and it is connected with employment and so on
and so forth.
Rob Marris: Thank you.
Q194 Mr Clapham: A little earlier
we were talking about the problems that companies face, both Indian
companies investing in the UK and UK companies investing in India.
It seems that one of the ways around that is different models,
such as joint ventures. We hear there is a joint venture which
Tata, through Diligenta, is having with the Pearl Group based
in Peterborough. Is that the model that you see for the future,
whereby we are going to see more Indian companies, through joint
ventures, investing in the UK?
Mr Whiteway: I think it is certainly
a model. At the moment, so far as we are aware, there are not
very many examples of joint ventures coming in in this sort of
direction, but we have a so-called global partnership service,
which aims to find partners in the UK for Indian companies in
high technology sectors specifically with a view to forming partnerships.
I have to say that has not been particularly successful in India
so far. We are looking at whether there are particular cultural
factors connected with that. We are keen to try to find partners
for UK companies in India because of the sort of high technology
sectors present in that market.
Q195 Mr Clapham: Could I ask about
investment and joint ventures in India. We know, for example,
that some of our competitors, the Germans, have certainly been
much more successful in joint ventures elsewhere. The Germans,
for example, in the mid '90s were piggy-backing, using large companies
to bring small—and medium—sized companies into engagement
in those particular economies in which they were interested. Are
we using initiatives of that type? Do you see such initiatives
as being successful for UK investment in India?
Mr Ahmad: The answer to that is
very similar to one my colleague Paul Whiteway gave, which is
that in certain circumstances the joint venture model is the right
model, partly because that is the law, whether retail or telecommunications,
and partly it is simply business sense. There have been, for example,
a number of supermarket chains who have invested abroad, where,
even though the regulations do not require a joint venture partner
that has been a preferred way of entering the marketplace. It
is really not UKTI's job to promote such joint ventures; it is
simply to advise customers as to the pros and cons and whatever
information we are able to give towards the regulatory environment
and the prospective partner that they might have. But in India
I think we will see both the go-it-alone model as well as joint
ventures.
Q196 Mr Clapham: I hear what you
say about the advice but would it not be helpful to advise some
of our larger British companies, particularly, say, in the infrastructural
investment, to look at piggy-backing in smaller companies, with
a view to being able to fix up joint ventures?
Mr Ahmad: That is something that
is actively promoted, which is what I describe as taking the supply
chain with you when you go into a marketplace. It is certainly
a feature when we do sectoral briefings; it is a feature when
we do our missions into India, which more often now than before
tend to be industry-sector specific, so you take the big and small
together when exploring the marketplace, whether it is airports,
roads or railways. The linkages that then might then be formed
are something that, again, we will facilitate but not necessarily
promote.
Q197 Mr Clapham: Mr Whiteway, you
were saying that joint ventures are not regularly happening here
in the UK between UK business and Indian business. Are any of
our competitors doing better than us in facilitating joint ventures?
If so, who are they?
Mr Whiteway: I do not have any
information about competitors' products in relation to partnership,
no. I am sorry, I cannot answer the question.
Q198 Chairman: There is one curiosity
in my mind. I know that the very high figures for Mauritius investment
into India flow from very special tax advantages.
Mr Ahmad: Yes.
Q199 Chairman: But do we have any
clue as to what lies behind that investment in Mauritius? Were
British companies part of that extraordinarily high figure for
Mauritius?
Mr Ahmad: There is only one instance
of which I am aware, which is the investment by Vodafone into
Airtel that was routed via Mauritius.
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