House of Commons - Trade and Industry

Select Committee on Trade and Industry Minutes of Evidence

APPENDIX 48

Memorandum submitted by the TUC

1. INTRODUCTION

1.1 The TUC welcomes this opportunity to contribute to the House of Commons Trade and Industry Select Committee inquiry into the future of manufacturing in the UK.

1.2 The TUC takes a long-standing interest in the manufacturing sector. Unions affiliated to the TUC represent many thousands of members in a range of manufacturing companies. These include world-class companies in sectors such as aerospace, defence, pharmaceuticals, motor cars, food and drink, environmental technology and many others. The TUC, along with three of our affiliates, represent the trade union movement on the Manufacturing Forum.

1.3 The TUC looks forward to contributing to the various inquiries that will take place into the future of manufacturing in the coming months. For this first inquiry, as requested, we will limit our input to the three issues under scrutiny, ie public procurement, skills shortages and marketing UK plc.

1.4 In its press notice, the Trade and Industry Select Committee states that this inquiry will consider public procurement, with the sub-heading: "The scope for government support for UK industry".[92] In a modern economy, most government support will come through measures like public procurement, as well as through pump priming new markets, such as renewable energy production and energy saving products, via such mechanisms as the renewables obligation. Some of our European partners appear to have a more direct approach to government support, through policies such as "strategic champions".

1.5 The UK's commitment to open markets is well-known. Moreover, European law makes it illegal—even if it were desirable—to operate a modern-day "Buy British" policy. Nevertheless, we must be careful not to portray a situation whereby the policy choices are: political interference in the economy on the one hand; or allowing the market to act as "master" rather than "servant" of the economy on the other.

1.6 In general terms, manufacturing is a private sector activity and the role of the state is limited. Having said that, there is a role for government support and intervention, through passive measures such as tax credits for research and development, and, in certain circumstances, through measures such as the recognition of strategic champions. The TUC acknowledges that other governments hold golden shares in certain strategic companies (such as the French government's 15.7% stake in Renault) and believe there are certain advantages to such an approach. Furthermore, a central argument of our discussion paper, "An Industrial Strategy for the United Kingdom", published last year, was that, where a strategic company has a demonstrable long-term future, but faces short-term difficulties, government assistance should be available.[93]

1.7 We would ask that the government has a coherent approach to UK manufacturing, linking this to other policies such as energy and transport. Adequate support must be provided by the UK government to stimulate new markets in ways that assist UK manufacturers. The way that the Germans and Danes have stimulated markets in wind and solar power is an example of how this might be done. In this way, the Germans and Danes have enabled their wind and solar manufacturing companies to become world leaders.

1.8 However, our main concern is that, at a time when globalisation is putting manufacturing in richer countries under pressure, the performance of France, Germany, Italy and Spain, especially regarding jobs in manufacturing, is better than that of the UK. In such circumstances, it is incumbent upon the Trade and Industry Select Committee, in carrying out this inquiry, to look at the ways in which competitor countries support and enhance their manufacturing sectors, with a view to learning from their successes.

1.9 The section of this paper on procurement will therefore look at what can be done and is done by some European countries in the field of public procurement. It will then briefly consider other types of government support, including state aids and strategic sectors.

2. PUBLIC PROCUREMENT

Public procurement in context

2.1 It is estimated that the public sector, including central and local government, together with bodies such as the Ministry of Defence and the National Health Service, spends £130 billion per year procuring goods and services. The way in which that money is spent could be crucial to the long-term health of the UK's manufacturing sector.

2.2 This is recognised in the Warwick Agreement, which emerged from the Labour Party's National Policy Forum in 2004. This agreement, which set out a policy platform for a third-term Labour Government, said: "Labour will promote a procurement strategy that safeguards UK jobs and skills as permitted by EU rules to ensure that British industry can compete fairly with the rest of Europe. We will fight for industry and help ensure a level playing field. We will encourage public procurement contracts to be given to UK firms within EU law, ensuring value for money for the public, and want UK based firms and UK workers to benefit from orders and contracts."[94]

2.3 The phrase "within EU law" is important. Article 3 of the Treaty of Rome 1957, which established what is now the European Union, commits Europe to "an internal market characterised by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital", together with "a system ensuring that competition in the common market is not distorted".[95]

2.4 This has led to rules around what can and cannot be done with regard to procurement. In general terms, it is illegal for Member States to discriminate against the goods and services of any other Member State in their purchasing decisions. In theory, providers of goods and services from any country should have the same chance of winning a procurement contract in any other country.

2.5 Whether this works in practice is another matter. In November 2004, the Wood Review, "Investigating UK business experiences of competing for public contracts in other EU countries", was presented to the Chancellor.

2.6 This review, conducted by Alan Wood, Chief Executive of Siemens plc, reported that:

"Although we were asked to look in particular at the application of Single Market public procurement rules, it became clear from the consultation that "the rules" in themselves (or their application) are not seen as the key problem. Few examples of discrimination in clear breach of Single Market public procurement law were provided for the Review. Most of these were anecdotal and difficult to substantiate ...

"The problems are seen to be elsewhere, often described as "grey areas" where Single Market rules are formally respected and yet national firms appear to be favoured.

This appears to confirm the stereotype that the UK complies with European rules more strictly than do our competitors.

3. "WARLIKE" EQUIPMENT

3.1 Exemptions to the provisions of Article 3 do exist. For example, Article 296 of the Treaty of Rome states that "any Member State may take such measures as it considers necessary for the essential interests of its security which are connected with the production of or trade in arms, munitions and war material."[97]

3.2 Community rules do apply in principle to the defence sector. The possibility of a derogation under Article 296 cannot apply to either civilian goods or to those not intended for specific military purposes, even if they are purchased by national defence ministries.

3.3 However, despite clarifications by the European Court of Justice, the low number of publications in the Official Journal of the European Union appears to imply that some Member States believe they can apply the derogation automatically. Since the concept of "essential interests of security" is not defined either in Community Law or in the Case Law of the Court of Justice, in practice states allow themselves wide discretion in determining which contracts could damage them.

4. BATTLEDRESS PROCUREMENT

4.1 This issue caused political controversy in December 2004 when a contract for military textiles, known as the "cut and sew tender", was let to a company called Cooneen Watts and Stone. Companies based in Lancashire had delivered this contract for many years. Had they retained the contract, the high-tech element, the camouflage print and material, would have been made in Lancashire. Under the Cooneen Watts and Stone bid, that work would be subcontracted to China.

4.2 This contractual decision provoked an unusual degree of concern, with MPs from the North West vociferously expressing disappointment. This concern was based on factors including:

— Cooneen Watts and Stone bid for the contract, yet was not the company that would carry out the contract;

— The factory in China that would produce the textiles was quoted as paying rates of just over £1 per day. Textile manufacturing in China is carried out in violation of the ILO Core Labour Standards. No free trade unions are allowed in the Chinese factories;

— Many other EU countries classify military uniforms as "warlike", which means they are not covered by EU procurement rules, for reasons of national security;

— The Trade and Industry Secretary of the time, Rt Hon Patricia Hewitt MP, who represented an East Midlands constituency that had suffered in the downsizing of the textile industry, had argued that the UK's future lay in the specialised area of technical textiles. Army uniforms are a prime example of such specialised production.

4.3 The decision to change the contractor for the "cut and sew tender" was not reversed. The TUC believes the government should learn the lessons of this decision and should support its manufacturing workers in the same way as competitor countries do.

4.4 Similarly, the Military Afloat Reach and Sustainability (MARS) project is a high-profile MoD programme that will be providing logistical support to Royal Navy vessels. The project is now at the end of the concept phase and orders will be placed over the coming years. The trade unions have expressed concern that the MoD will not class the order for these vessels as "warlike", thereby opening it to Europe-wide tendering.

4.5 An MoD order in 2000 for four Roll On-Roll Off ferries was similarly not classed as "warlike", was tendered across Europe and was won by a German shipyard, at the expense of UK shipyards and UK jobs. This is contrary to the practices of other European states, which tend to use the "warlike" provision in support of their own shipbuilding industries. The UK appears to be playing by a different set of rules to other European countries, resulting in our manufacturing capacity losing out.

5. DEFENCE INDUSTRIAL STRATEGY

5.1 In December 2005, the Government published its Defence Industrial Strategy. Whilst this was a Ministry of Defence document, the fact that its foreword was signed my Ministers from the DTI and HM Treasury, as well as the MoD, suggested that a cross cutting government agenda, based on the UK's defence needs but also the needs of its industry and the economy, was being addressed.

5.2 The Defence Industrial Strategy provides for the transparency of our future defence requirements and sets out those industrial capabilities we need in the UK to ensure that we can continue to operate in the way we choose. The clarity provided by the Defence Industrial Strategy seeks to promote a dynamic, sustainable and globally competitive defence manufacturing sector.

5.3 The strategy is also realistic, recognising that industry will have to reshape itself, to improve productivity and to adjust to lower production levels once current major equipment projects have been completed. However, in the words of the strategy, "by starting the process today, while workloads are high, we can avoid facing a crisis in a few years time."[98]

5.4 The Defence Industrial Strategy recognises that the UK defence market is the most open in the world. All US defence orders must contain at least a 60% US component, which effectively precludes manufacture outside the US, while our European partners tend to submit military and military support expenditure internally.

5.5 The TUC recognises that the defence sector benefits from Article 296 of the Treaty of Rome, which exempts "warlike" equipment from normal public procurement procedures. Nevertheless, there are principles here that would be valuable if introduced into procurement policy more generally. These include: making a link between the needs of government procurement and the importance of a UK manufacturing presence in certain key areas; identifying key sectors of manufacturing where the UK is world-class, and using procurement policy to promote that sector as far as possible; and recognising future trends, acknowledging that orders will fall in some sectors in years to come and planning for that now, so that no surprises exist when that day arrives.

5.6 Furthermore, it is surely common sense to link the needs of industry with the benefits to the economy of having a strong industrial presence in certain areas. There is no reason why we could not develop a "healthcare" industrial policy, or a "transport" industrial policy, within EU rules. It is important to note that the Defence Industrial Strategy is not a crude "Buy British" policy. Indeed, the strategy specifically notes that "We also recognise the attractions of the US market, given its scale and high levels of investment in research and technology".[99] There will be times when it is not in the interests of the MoD to buy British; but the Defence Industrial Strategy will help to maximise those occasions when it is.

5.7 Finally, the trade unions have concerns that the MoD no longer regard the manufacturing of platforms such as planes, helicopters, ships and submarines as high tech, high quality work. This type of work is certainly of high quality and provides many skilled jobs and apprenticeships at NVQ levels two and three.

6. SOCIAL CLAUSES IN PROCUREMENT

6.1 A separate but related issue is that of social clauses in procurement. Under the new EU Public Procurement Directives, Member States are allowed to invite tenders for the provision of goods and services that include social, employment and environmental considerations. Recital 33 of the Directive lists some of the issues that might be addressed, which include "on-site vocational training, the employment of people experiencing particular difficulty in achieving integration, the fight against unemployment or the protection of the environment".[100]

6.2 The TUC believes this clause can and should be used to provide orders to Remploy, provided that they are able to meet required standards. Such action would ensure that work is provided for the many disabled employees and potential employees of this laudable company. It would also be in line with the government's policy of getting people back to work, especially those on long-term disability and incapacity benefit.

6.3 Some commentators argue that the UK's years as a manufacturing nation are behind us. The TUC could not disagree with this more strongly, but we believe that our years of indulging manufacturing companies that do not train their workforce, do not seek to work in innovative ways and try to compete on the basis of "bargain basement" terms and conditions are most certainly behind us. If manufacturing is to enjoy a healthy future in the UK—and there is no reason to believe that it cannot—it must do so on the basis of high skills, high value and high quality. That in turn requires paying workers decent wages and treating them with respect.

6.4 By inviting tenders that require companies to skill their workforces properly, or that develop the talents of all their workers, male and female, young and old, black and white, public procurement can play a modest but important step in driving up standards in our manufacturing sector. The best manufacturing companies already behave in this way and have nothing to fear. If we are to succeed in the longer term, we must invest for the longer term.

7. SUSTAINABLE PUBLIC PROCUREMENT—INDUSTRIAL OPPORTUNITIES

7.1 Sustainable public procurement, intelligently applied and led by Government, offers the UK major new opportunities to develop the UK's green manufacturing and service industries.

7.2 The TUC was pleased to take part in the Government's Sustainable Procurement Task Force, and believes that its National Action Plan[101] offers the UK a major opportunity not only to tackle the 20 million tonnes of CO2 emissions which is attributed to public procurement activities, but to stimulate a wide range of green manufacturing and service industries.

7.3 The UK Government's Sustainable Development Strategy, Securing the Future, (March 2005) set the ambitious goal for the UK to be recognised as amongst the leaders in Sustainable Procurement, across EU member states, by 2009. In setting that goal, the Prime Minister recognised that the way in which the public sector spends its money—13% of GDP—has a major impact and a great contribution towards delivering sustainable development in the UK.

7.4 According to latest DTI-Defra statistics (a survey undertaken by the Environmental Industries Unit),[102]the UK environmental industries sector is growing rapidly; in recent years it has grown from £16 billion employing 170,000 people, to £25 billion and employing around 400,000.

7.5 Procuring the Future identifies typical spend areas for procurement by all departmental groups, including: £6.5 billion for office machinery and computers; £5.4 billion on transport (cars and business travel); £4.2 billion on IT Services; £3.2 billion on food; and £1.7 billion on pulp and paper.

7.6 The report cites a number of examples[103] of governments already actively driving markets through public procurement, including successes in the US through the use of the Energy Star labelling scheme for computers. In Japan, a combination of policy tools that included legislation on green purchasing, sales of low emission vehicles have increased dramatically in recent years. For the national government the proportion of low-emission vehicles in its fleet has risen from under 20% in 2001 to 100% in 2005.

7.7 With over £5 billion spent on transport procurement, clearly the UK Government has an opportunity through its Low Carbon Vehicle Partnership to develop initiatives to support the sale and supply of low carbon vehicles and fuels. Such spending power could help ensure that UK motor, fuel and related businesses are best placed to capitalise on the opportunities in the low carbon markets of the future, as well as contributing to the achievement of UK Government targets for road transport carbon reductions.

7.8 A similar view has emerged from The Corporate Leaders Group on Climate Change. Its recent submission to the Prime Minister[104] offered a critical assessment of current public procurement strategies. "Many promising low carbon technologies such as fuel cells and energy efficient LED lighting need further investment to bring down costs and enable them to be commercialised. R&D is relatively cheap and leads to many prototype products, but frequently these do not make it to market because the uncertainty of future sales makes it too risky to invest in the expense of demonstration products and scaling-up production. Private sector supply chain management techniques allow suppliers to make these investments by clearly articulating future needs and providing a credible promise of future sales. Public sector procurement currently fails badly in this respect [our emphasis] but has the potential to play a key role at little risk by using the forward commitment procurement techniques common in the private sector."

7.9 Conceptually the process is simple: a government department or agency offers to buy in the future a product or service which delivers specified carbon emission benefits at a defined volume and at a cost that it can afford. Once the product is available in the market place, normal market forces will determine competition and price.

7.10 The Corporate Leaders Group also argued that the EU Emissions Trading Scheme (ETS) was critically important for providing a central signal to business about the rising cost of carbon. But, "there is a need to introduce policies capable of triggering step-changes in technology development in areas such as carbon capture and storage, hydrogen storage, tidal and wave generation and new transport technologies." The TUC supports these views, and has argued that the UK is in danger of missing opportunities to develop clean coal technologies in the UK, allied to carbon sequestration.[105] As currently drafted, the DTI's approach to Phase II of the EU ETS will act as a disincentive to clean coal investments.

7.11 The TUC welcomes the initiative of the Corporate Leaders Group in encouraging Government to act on the recommendations of the Sustainable Procurement Task Force, on how the proactive management of public supply chains can bring innovative low carbon products and services to market. "Such action will create significant competitive advantages for the UK by helping to drive the commercialisation of low carbon products and services", the group suggested.

7.12 Procuring the Future identifies several key challenges for public sector procurers—to lead by example, set clear priorities, and ensure that it builds capacity within the procurement professions—in order to achieve the radical environmental objectives set by Government. The TUC believes that, consistent with these environmental goals, sustainable public procurement offers major opportunities for UK manufacturing and services through an imaginative use of social clauses in procurement (para 6.1, above), allied to a creative approach to Article 3 of the Treaty of Rome (para 2.3, above).

8. LONDON 2012 OLYMPICS

8.1 London's success in winning the 2012 Olympic and Paralympic games provides an important opportunity for UK manufacturers. Among the strategic objectives for the 2012 Olympics is "to maximise the economic, social, health and environmental benefits of the Games for the UK, particularly through regeneration and sustainable development in East London". Among the sub-objectives is: "Maximise the employment and skills benefits for Londoners arising from Games related business".[106]

8.2 The TUC is fully mindful of the need to comply with EU procurement law. In particular, procurement must be non-discriminatory. Procurement decisions cannot discriminate against tenders from non-UK based companies. Nevertheless, the people of East London, one of the most deprived parts of the UK, have a right to expect that preparations for London 2012, together with the Legacy that will follow, will provide benefits for them. There is no reason why, through the use of social clauses and other mechanisms, the Olympics cannot help to deliver one of the objectives of the Warwick Agreement, namely: "public procurement contracts to be given to UK firms within EU law, ensuring value for money for the public, and (for) UK based firms and UK workers to benefit from orders and contracts."

9. STATE AIDS

9.1 The concept of state aid is easily misunderstood. The term "state aid", whilst being used by the European Commission to describe a particular type of assistance, can be portrayed, either by accident or design, as advocating a return to old-style interventionism, with the taxpayer propping up lame duck industries.

9.2 In fact, the EC position on state aid is one of common sense. Since government interventions should not be allowed to distort competition and intra-community trade, there is a general prohibition on state aid. However, as government interventions are deemed to be necessary in some circumstances for a well-functioning and equitable economy, there are exemptions. The trend in the EU, particularly in recent years, has been to try to reduce state aid, while recognising its value in limited circumstances.

9.3 Traditionally, the UK has given very low levels of state aid. Our state aid was the lowest among the EU15 in 2001. In recent years, this has changed slightly. Figures published by the European Commission in Spring 2005 showed that the share of aid given to manufacturing in the UK has more than doubled between 2001 and 2003.[107] Furthermore, the UK has risen from last place, when aid is measured as a proportion of value-added, to 12th place, among the EU15. The TUC has consistently campaigned for levels of state support that match the European average. That hasn't yet been achieved and we continue to seek progress on this issue, but the improvement is nevertheless to be welcomed.

9.4 The TUC campaign for support for strategic manufacturing industries, such as defence, aerospace, the motor industry and pharmaceuticals, continues and will be described in greater detail below. In our view, direct support should be available to help vulnerable companies within those sectors to restructure or specialise. Seventy per cent of UK state aid goes to manufacturing, yet none of that is in the form of direct sectoral aid. It would only take a small proportion of aid to be directed at strategic industries in order to match the manufacturing strategies of France or Germany, whose manufacturing sectors are performing better than that of the UK.

10. STRATEGIC SECTORS

10.1 In April 2004, the French Prime Minister, Jean Pierre Raffarin, said he was committed to a "truly European industrial policy".[108] He added that France must play a strong role in a number of specific industries and had chosen nuclear energy, aerospace and health as strategic sectors.

10.2 Sweden has a particular focus on engineering. Germany, long time home of industrial engineering, is focusing on biotechnology. Wallonia in Belgium is in the centre of an automotive region that produces more than two million vehicles a year at 12 manufacturing sites, comprising General Motors, Ford, DaimlerChrysler, Renault, Nedcar, Toyota, Volkswagen and Volvo. Unsurprisingly, Wallonia's regional government has offered investment incentives for motor companies seeking to locate there.

10.3 In "Globalisation and the UK: strength and opportunity to meet the economic challenge", published by HM Treasury alongside the Pre-Budget Report 2005, the concept of comparative advantage is introduced: "Comparative advantage predicts that, when economies have the flexibility to adapt to more open markets, labour-intensive, lower technology production will take place in countries with an abundance of low cost labour, while advanced economies, where labour costs are higher but physical capital and expertise are more prevalent, will concentrate on exporting more skill- and capital-intensive goods."[109]

10.4 Regarding manufacturing, this suggests that the UK can compete in high-cost high-value production, but low-cost, low-value production is likely to migrate to Eastern Europe or poorer parts of Asia.

10.5 These two scenarios require very different policy responses, yet the UK government is not prepared to identify those industries where we can remain competitive and support them accordingly, and identify those where we are bound to lose jobs in the medium to longer term, admit the fact and develop alternative policies, to support those who find themselves laid off. Any attempt at such identification is confused with "picking winners". Yet this is what our competitors do.

10.6 In the TUC document, "An Industrial Strategy for the United Kingdom",[110] we identified defence, aerospace, motor cars and motor components, and pharmaceuticals, as strategic sectors for the UK. We also called for recognition of the potential of environmental technology, enabling a positive and lucrative development into "green manufacturing". Denmark and Germany have already made a strong start in these latter areas. With government support, there is no reason why the UK cannot join them.

10.7 In this regard, the TUC is particularly concerned about the sale of BAe Systems' 20% stake in Airbus to EADS, Airbus's Franco-German parent company. We accept that BAe Systems is a private company and must do what it believes is in the interests of its shareholders. However, this decision does mean that the UK will no longer have a place on the company's board. As a result, there is no UK involvement in the management of civil aviation manufacturing.

10.8 The TUC is further concerned that no long-term guarantees have been given to the UK workforce by BAe Systems, EADS or the Department of Trade and Industry. Without a UK stake on the board, it is much easier for production to be moved away from the UK as part of any order for aircraft.

10.9 As well as the words on public procurement quoted above, the Warwick Agreement states: "Labour will be proactive to ensure manufacturing does not lose critical mass and disappear".[111] UK manufacturing has been losing jobs at the rate of about 100,000 per annum in recent years. If this continues, the day will come when our critical mass will be lost. If that day is to be prevented, it is time we recognised those strategic sectors where the UK can, with political will, remain competitive in the future, and support them accordingly.

11. SKILLS

11.1 This part of the TUC's submission looks at skills and training issues in the manufacturing sector, but very much within the context of the ongoing Leitch Review of Skills, which is due to report by the end of this year. A recent TUC report[112] set out a five-point plan for reforming the existing skills policy framework, in order to achieve a step-change of the order required to achieve a world-class skills base by 2020. At the heart of this plan is the urgent need for Government to adopt a genuine post-voluntary skills policy framework and to embed this at the sector level by strengthening the role of Sector Skills Councils.

11.2 This approach would be hugely beneficial for sectors such as manufacturing, because it would put in place a sectoral skills system based on a clear balance of rights and responsibilities. A new model of Sector Skills Councils involving a genuine social partnership approach would give employers and employees (via the union role) more control over training provision and ensure that this complemented and boosted business performance whilst also meeting the long-term employability and skills needs of the manufacturing workforce.

11.3 However, this new sectoral approach on skills would need to be accompanied by policy reforms that addressed the legacy of low skills and the need to increase the availability of a much wider range of skills and aptitudes in the manufacturing sector. The combined effect of these policy reforms would be to incentivise a much greater investment in training by manufacturing employers and also to empower more employees to invest in their skills throughout their working lives.

12. GOOD PROGRESS IN RECENT YEARS

12.1 There has been important progress on upskilling in the UK in recent years:

— The trade union movement is actively engaged in the institutional skills framework—the TUC is a member of the Skills Alliance Social and Economic Partnership and trade unions play an important role on a range of skills bodies.

— The TUC has welcomed the clear evidence of concrete progress on skills, especially the aim to reduce the large number of people without the skills or qualifications generally expected of a school leaver (eg five GCSEs at A-C or a NVQ Level 2).

— There is also evidence of concrete progress on measures to tackle skills gaps.

— In recent years trade unions have also played an increasingly important role in enhancing skills at the workplace level and the Government is to be congratulated for providing funding and support for this via the Union Learning Fund and more recently via the establishment of unionlearn.

13. BUT MUCH MORE TO DO ON SKILLS

13.1 However, in spite of recent progress, there is a broad consensus that major deficiencies in British skills are hampering the national drive to improve productivity and competitiveness and to address key social justice issues such as poverty and social mobility. There is also general agreement that by 2020, global, demographic and technological change will place an even greater premium on the UK's skills profile than at present and that this is particularly the case in the manufacturing sector.

13.2 There was therefore widespread support for the Government's decision in the 2004 Pre-Budget Report to ask Lord Leitch to undertake an independent review on skills. Some of the key challenges identified by the review in its interim report are as follows:

— compared to our international competitors, the UK has a serious legacy of low skills, is seriously deficient at intermediate and technical levels (ie NVQ Level 3 or equivalent) and also likely to fall behind at degree level and above;

— it is already proving difficult to achieve the Government's existing skills targets, never mind the scale of what is envisaged in the interim report;

— our skills gap accounts for a fifth of the productivity gap with Germany and an eighth of the gap with France and these countries have ambitious strategies in place to further improve their skills base;

— the interim report estimates that nearly 18 million people will need higher skill levels than at present in order to achieve a world class skills base by 2020;

— we cannot depend on our young people to solve our skills deficit as "over 70% of our 2020 workforce has already completed their compulsory education";

— there is a clear need to achieve an "appropriate balance of responsibility between Government, employers and individuals for the action required to meet this level of change".

13.3 These last two bullet points go to the crux of the debate on what needs to be done to address the skills crisis facing the nation. Demographic trends mean that there must be a much greater focus on upskilling the existing workforce than there is at present and this is particularly the case in manufacturing, due to the age profile of the workforce and the difficulties attracting young people into the sector. But it is increasingly evident that there also needs to be a new "social partners agreement" on how to radically transform the skills system to achieve a world class skills base by 2020.

13.4 In "2020 Vision for Skills" the TUC set out its action plan for achieving a skills revolution along these lines and one of the central conclusions of this report is that there needs to be a new consensus on establishing a post-voluntary skills policy framework. Simply tinkering with the existing wholly voluntary approach is not an option whilst we are still in a position where over a third of employers do not train any of their staff and two fifths of employees (8.5 million individuals) say that they do not receive any training at work.

13.5 he need to focus on the adult workforce does not mean in any way that the Government should lessen its efforts to develop high quality vocational options for young people, for example, by ensuring that high quality Apprenticeships are available in all sectors of the economy and that the academic/vocational divide is tackled. As well as helping to meet the ambitions for 2020, this will be an even more important issue over the longer term as the flow of young people into the labour market gradually displaces the existing workforce.

13.6 Moving towards a post-voluntary system will also involve a major change to the system itself and the TUC envisages that the sectoral route has the potential to drive forward a much more robust skills strategy, that would support the central thrust of existing Government policy on skills as set out in the two Skills White Papers, published in 2003 and 2005. This involves significantly raising demand for skills among employers and employees and ensuring that high quality, flexible provision is in place to meet this demand.

13.7 In the remainder of this submission we look at the skills challenge facing the manufacturing sector in particular and how the TUC's proposals for reform, set out in "2020 Vision for Skills", would bring about a step change in improving skills across the sector.

14. SKILLS SHORTAGES AND SKILLS GAPS IN THE MANUFACTURING SECTOR

14.1 The annual National Employers Skills Survey (NESS) provides us with a much more detailed picture of skills shortages (ie shortages affecting recruitment) and skills gaps (skills gaps among the existing workforce). An analysis of these key trends from the NESS[113] has highlighted the following issues:

— employers emphasise that skills shortages are most severe for skilled trades, associate professional and technical occupations, and also operative staff;

— the biggest source of skill shortages are specific technical skills and that while generic skills are important, such "employability skills are desirable but not sufficient for employer competitiveness";

— skills gaps tend to be concentrated in the following occupations: sales, machine operatives and elementary occupations.

14.2 Importantly, this analysis stresses that "skills deficiencies tend to be highly concentrated in particular sectors, especially related to manufacturing and construction". Furthermore, it says that "the problems are most severe where employment levels are declining, yet there will be productive employment opportunities here for the foreseeable future and these sectors will remain fundamental to the well-being of many local communities". This is an important point in relation to manufacturing—official forecasts of a continued decline in employment in the sector also emphasise that the sector has a very high replacement ratio (ie workforce levels required to replace employees leaving the sector in the coming years) due to its age profile and related factors.

14.3 However, important as they may be to some individual employers, the issue of skills shortages need to be seen in perspective, as the numbers involved are much smaller than the numbers attributed to skills gaps. This is stressed in the interim report of the Leitch Review, which says that "skills gaps are a greater problem for the UK than skill-shortage vacancies; they are reported by a greater proportion of employers and affect a greater proportion of employees".

14.4 Lower-level occupational groupings in manufacturing are particularly in need of upskilling. The findings of the interim report of the Leitch Review shows that over half a million manufacturing employees have no qualifications and nearly a million lack qualification at the school leaving standard of Level 2 (five GCSEs at grade C or above or the vocational equivalent).

15. THE LOW-SKILLS EQUILIBRIUM

15.1 It is also important to note that while the data on skills gaps are challenging enough, the other side of the coin is that many manufacturing employers will not be reporting skills gaps because they are content to produce low-spec products that do not require them to upskill their employees. A recent analysis by the Learning and Skills Council[114] puts this rather bluntly as follows: "Shifting such businesses up the value chain, whilst compelling from the perspective of raising national productivity, is much less attractive to the individual employer who might be getting along quite comfortably (for the time being at least)".

15.2 And even where the evidence shows that investing more in training would increase productivity, too many UK employers remain unconvinced. Research shows that although the overall effect of training as a stimulus for productivity is estimated to be twice as high as the wage effect,[115] employer demand for skills in the UK remains relatively weak. Research by influential academics such as Professor Ewart Keep highlights how poor skills usually go with other organisational problems and that strategies to tackle the former cannot be undertaken in isolation from the latter. Professor Keep contends that too many firms in the UK are trapped in a "low-skills equilibrium" and that demand for skill is therefore limited by this.[116]

15.3 He argues that "if raising demand for skill is a policy goal, policy needs to find ways to encourage more employers to raise their game in terms of their product market strategies". Many firms that fall within this category have poor workplace organisation and employee voice arrangements that are either non-existent or very weak. It is also argued that the lack of investment in skills and innovation in the UK is partly down to weaknesses in management and Nick Bloom of the London School of Economics has estimated that differences in management practices account for 10-15% of the gap in total factor productivity between American and British firms.

15.4 Simply increasing and improving the supply of skills will not automatically lead to higher skill levels across the workforce. To some extent the UK Government has recognised this and is developing a more demand-led approach to skills policy, but it could do much more to drive up both employer and employee demand as set out in the recommendations in "2020 Vision for Skills".

15.5 The Government has also quite rightly acknowledged that improving skills is an integral aspect of its aim to increase the proportion of high performance workplaces in the economy. We know that the presence of a recognised trade union is positively associated with policies that contribute to high performance workplaces and we also know that employees get more training when the issue is negotiated with employers by unions rather than simply consulted on.[117] Research studies demonstrate the positive links between high performance workplaces, union recognition and the negotiation of training via the collective bargaining system and the Leitch Review should be advocating policy reforms that would embed this model in many more workplaces than at present.

15.6 The debate on skills also needs to be seen in the context of a number of key policy themes and, in particular, that education and skills are an increasingly important contribution to achieving further improvements in economic and social priorities. The globalisation agenda is at the heart of this debate and the TUC's recent submission to the Treasury[118] prioritised improving skills levels to raise productivity. However, the submission also emphasised that any skills strategy needs to be linked to an active industrial strategy that addresses the opportunities of globalisation while protecting potential casualties. On this basis, the submission included a number of proposals related directly and indirectly to skills policy, including a new fund to provide training and job search support for employees who lose those their jobs due to major changes in world trade.

16. WORKFORCE TRAINING IN THE MANUFACTURING SECTOR—THE LATEST STATISTICS

16.1 There are two key sources of quantitative data on skills in the manufacturing sector which provide a fairly detailed picture of existing training provision. These are the annual National Employers Skills Survey (NESS) commissioned by the LSC and the Government's Labour Force Survey (LFS). The latest annual data from the LFS showed an increase in the incidence of training among manufacturing employees during the second half of the 1990s, but this has been followed by a decline in more recent years. Between 1995 and 1999 the proportion of manufacturing employees saying that they were in receipt of job-related training during the past three months increased from 18.4% to 21.1%. However, by 2005 this had fallen to 20.5% with most of the decline explained by fewer training opportunities for male employees (down from 21.6% in 1999 to 20.6% in 2005). The latest data from the LFS also shows that 37% of manufacturing employees had never been offered training by their current employer, well above the economy-wide average of 29%.

16.2 The trends set out above clearly demonstrate that too many manufacturing employers are not offering their staff any training at all and that many of those that do provide training are failing to equip their staff with the necessary qualifications for developing a high-skilled manufacturing sector.

17. A NEW SKILLS OFFER FOR THE ECONOMICALLY INACTIVE

17.1 Due to the age profile of the existing workforce and the limitations on a new pool of youth labour, the manufacturing sector is especially dependent on attracting economically inactive people into the sector over the coming years. The TUC has welcomed the fact that in Budget 2006 the Chancellor highlighted that the Leitch Review is considering "whether and how to bring together at a local level, employment and training services for not just the unemployed, but all seeking new skills". The urgent need for a new approach on skills for the economically inactive, especially those on Incapacity Benefit, was highlighted in a recent TUC report.[119] Many of these individuals are casualties of the two recessions that decimated the manufacturing sector in the 1980s and 1990s and many of them would welcome the opportunity to reskill in order to regain employment in the sector.

17.2 The TUC report showed that over one million 50-65 year olds who want to work can't get a job because employers won't recruit older workers or retain the ones they already employ by investing in training or making minor adjustments for disabilities. The interim report by the Leitch Review has highlighted that 60% of the growth in the labour market by 2020 will be attributed to employees aged 50-65, due to demographic trends. The TUC is recommending that the review's final recommendations need to acknowledge that as well as integrating welfare to work and skills provision, there needs to be a range of new measures to ensure that employers are working with unions to eliminate age discrimination and retain older workers. This is particularly important in manufacturing, a sector which can least afford to lose any more of its skilled workforce in the coming years.

17.3 However, there are also other key groups outside the labour market, and especially women, who require additional support with upskilling to enable them to achieve sustainable employment. The TUC has welcomed the proposals on skills by the Women and Work Commission and in particular the new skills initiatives that are being taken forward at the sector level. Black and minority ethnic groups outside the labour market also face "skills discrimination" which is limiting their potential to gain quality employment. The TUC believes that the Government needs to do much more to address the skills barriers faced by particular groups such as these. This is one of the key issues in our five-point plan. Another issue that we are prioritising is the need for additional investment by Government and employers in upskilling adult employees in order to address the fact that the Apprenticeship system cannot at present provide funding for people aged over 26.

18. 2020 VISION FOR SKILLS

18.1 The recent TUC report, "2020 Vision for Skills", set out five key priorities that we believe should be at the heart of the final recommendations of the Leitch Review, which are due by the end of this year. The five key recommendations are as follows:

Employers and Government must invest more in adult skills

18.2 The 2007 Comprehensive Spending Review should include more state funding for boosting workplace skills for adults, including union learning initiatives. Government should also act as an employer of best practice in relation to its own workforce and continue to use public procurement to embed training obligations in contractual arrangements.

18.3 Employers must invest more in staff training that leads to formal qualifications and sustainable skills, and a range of policy measures need to be introduced to achieve this end, especially at the sector level.

Unions must be real social partners in the Government's skills strategies

18.4 There is a need to develop genuine social partnership arrangements on skills policy and delivery at national, regional and sectoral levels in order to drive forward a genuine demand-led approach that reflects the needs of both employers and individual employees.

18.5 The sector approach in particular requires a more robust social partnership approach as it has the potential to deliver some of the key elements of a post-voluntary skills framework. Sector Skills Agreements need to include a new regulatory dimension to drive up employer investment in training and to empower employees to access quality training in the workplace.

New legal rights to paid time off to train are essential

18.6 Adult employees without a Level 2 qualification should have a statutory right to request paid time off to train from their employer to achieve this educational standard, in order to tackle those employers that refuse to allow their staff to access state-subsidised paid time off arrangements (ie via the Train to Gain programme).

Positive action is needed at all levels to tackle skills discrimination

18.7 The Government should develop concrete proposals to tackle skills discrimination for a range of specific groups, including black and minority ethnic workers, disabled employees and older workers, along with further development of ongoing initiatives aimed at women. And Sector Skills Agreements should be strengthened so that Sector Skills Councils are obliged to come up with initiatives for improving training opportunities for all these groups of employees with clearly prescribed targets and outcomes.

Unions and workers must have an equal voice in workplace skills bargaining

18.8 Employers and unions should be incentivised to negotiate on training by including it as a collective bargaining issue in the statutory union recognition procedure.

18.9 As agreed in the Warwick Accord, the Government should examine options to enable trade unions to negotiate more collective arrangements such as Learning Agreements and Learning Committees.

18.10 The new Collective Learning Funds proposed by the TUC, which are to be trialled over the coming year, offer a huge potential for persuading more employers to work with unions to develop a genuine culture of lifelong learning in unionised workplaces.

18.11 Underpinning this new post-voluntary skills framework would be a new "social contract" at the sector level which would enable employers and employees in sectors like manufacturing to have a much greater influence over the provision and delivery of state-subsidised training.

19. INSTITUTIONAL SKILLS FRAMEWORK—A NEW SOCIAL PARTNERSHIP APPROACH?

19.1 The TUC has continued to highlight that one of the factors contributing to the UK's skills deficit is the lack of a robust social partnership approach to skills, something that underpins arrangements in many of the European countries that continue to lead us on skills. The Leitch Review must address this central issue if it is going to achieve a new consensus on building a post-voluntary skills framework. This will require a change of approach in the formulation and delivery of skills provision at the national, regional, and sectoral levels, giving trade unions a much stronger voice than at present.

19.2 For example, there is a need to raise the status of the Skills Alliance so that it is viewed as a national social partnership body with real teeth that genuinely influences the direction of policy on skills. The TUC also remains concerned that the Regional Skills Partnerships (RSPs), which are increasingly being given more high-level functions, lack enough buy-in from employers and workforce representation via trade unions. In its response to the 2003 Skills White Paper, the TUC stated that it was concerned that the Government had decided it would "not prescribe a particular form of partnership in the regions" for the RSPs, in spite of strong recommendations from the TUC that it was essential to give demand-side representatives a leading role on these new bodies. And there remain concerns among both employers and trade unions that they are not in a position to adequately influence the regional skills agenda through these partnerships.

20. SECTOR SKILLS COUNCILS

20.1 The TUC believes that the sectoral approach in particular has the potential to deliver some of the key elements of a post-voluntary skills framework, but this would need to be accompanied by a much more robust form of social partnership than simply obliging SSCs to have at least one union Board member. Whilst it is true that some SSCs have gone beyond this minimal commitment by offering two or three seats to trade unions, the Government needs to send a clear message that all these sectoral bodies should have high-level and wide representation from both sides of industry.

20.2 Such representation should be offered on the basis that SSCs would be much more effective at tackling the skills agenda at the sector level if they adopted this approach. A recent report by the Sector Skills Development Agency[120] highlights the benefits of sectoral approaches in other countries entailing more regulatory levers/fiscal incentives than in the UK but also stronger employee voice to ensure "that both the wider public functions of qualifications and the sector-specific needs of employees are met". The reality is that unions often have a much clearer grasp of the longer-term skill needs of the whole workforce than employers, who tend to focus on providing informal workplace training to meet short-term business strategies and to limiting substantive training opportunities to their more well qualified staff.

20.3 If the sector skills approach in the UK replicated the model in some other countries, the TUC believes that new Sector Skills Agreements being brokered by Sector Skills Councils could do much more to deliver on the priority policy levers highlighted below (ie paid time off to train, action on skills discrimination, and building collective bargaining on skills at the workplace level). They could also examine the potential of other policy measures to increase employer investment in skills, such as the extension of Licence to Practice arrangements and the use of training levies in sub-sectors where it is evident that voluntary arrangements are failing.

20.4 However, using the sector level to implement elements of a new post-voluntary framework on skills along these lines will require the Government to address the growing dominance of an employer-led approach to skills strategies and to replace it with an employment-led approach where unions have equivalent influence. For example, it is not good enough for Government to argue that the new Skills Academies should be left in the hands of employers to devise a flexible model that meets their business needs—the workforce and trade unions need to be at the heart of these academies if they are genuinely going to be demand-led agencies.

20.5 A recent report by the EEF (Learning to Change, 2006) has also recommended that the Government should build on the sector skills approach and that other partnerships (eg Regional Skills Partnerships) need to be more demand-side orientated. However, while elements of this report chime with TUC concerns about the demand side, it is difficult to see how the EEF's recommendations will achieve a step-change in skills simply through institutional reform and without any new policy levers to drive up employer investment in training and employee engagement in work-based training.

20.6 The TUC's recent recommendations to the Leitch Review set out a twin-approach involving institutional reform that would boost social partnership arrangements and thereby boost the impact of the demand-side on skills provision. In particular, there is a strong case for developing this approach via the sectoral route and also ensuring that state provision is delivering training that is relevant to the needs of business and employees in each sector. If the Government adopted an approach along these lines, the manufacturing sector would benefit enormously and many of the skills barriers in existence would be addressed.

21. MARKETING UK PLC

21.1 The work of UK Trade and Investment (UKTI), in supporting exporters and encouraging inward investment, is clearly a vital strand of the DTI's work. The context of this work is described in the UKTI document, "Prosperity in a Changing World".[121]

21.2 Historically, the UK has proved highly successful in winning inward investment. There is probably no single reason why this has been the case. A well-skilled workforce, the UK's place in Europe, and English as the international business language, have probably all been factors in this success.

22. POSITIVE INDUSTRIAL RELATIONS

22.1 The TUC would, naturally enough, wish to highlight the importance of good industrial relations. No company would feel comfortable investing millions of pounds in a country where labour relations are likely to cause problems.

22.2 The UK has a good record of inward investor companies working well with trade unions. This is highlighted by the fact that, during the late 1980s and early 1990s, when a number of high profile Japanese companies, including Toyota, Nissan and Komatsu, came to the UK, they chose to recognise a union. There was no obligation on them to do so, yet rather than operate a non-union regime, they sought a positive relationship with a trade union. None of them has sought to derecognise and anecdotal reports tell of a positive industrial relations experience.

22.3 For this reason, the TUC is disappointed that "Prosperity in a Changing World" does not make any reference to trade unions and the positive role that they can play. An independent voice for the workforce can mean that a company's decision is challenged on occasions, yet such a challenge often leads to a better final decision being made. Mature employers recognise this.

22.4 We also believe there is an important role for trade unionists to be included in trade delegations to foreign countries that are undertaken by the DTI. This role has been largely ignored for a generation—trade union leaders are rarely included in DTI missions, either by the DTI or by the businesses taking part, although the TUC (along with affiliated unions) has participated in more policy-focused DTI delegations to the USA, China and India, and to recent World Trade Organisation Ministerial meetings, and the TUC has been developing some joint projects on labour law and labour market reform in Brazil and Tunisia with the Foreign and Commonwealth Office.

22.5 The role that unions can play in trade missions is to provide possible business partners and inward investors with an understanding of industrial relations, labour standards and diversity and skills issues; and to provide trade union organisations in other countries with an understanding of labour relations and workers' terms and conditions in British companies. Two examples of the role that unions can play are the work that the Transport and General Workers Union (TGWU) did to persuade Chinese companies to invest in Rover in 2005, and the regular briefings that TUC officials have given over the years to Japanese companies considering inward investment. British trade unions have also advised trade unions in India and Poland about British companies opening up in, or outsourcing to, their countries.

22.6 Unlike companies taking part in such missions, trade unions would clearly not be seeking to make a profit out of their involvement, and their participation would need to be subsidised appropriately by business or government.

23. STRATEGIC SECTORS

23.1 Earlier in this paper, we describe our support for the concept of strategic sectors in the UK. It is therefore pleasing that, in "Prosperity in a Changing World", UKTI appears to embrace this concept. In the "Foreword", signed by Ministers Gordon Brown, Margaret Beckett, Alistair Darling and Ian McCartney, the document states:

122

23.2 This message is reinforced on page 14 of the document: "We will focus on specific sectors and technology clusters where we can make the most difference... We will make targeted interventions with high-value clients—whether they be UK owned companies or overseas-owned companies new to, or already established in, the UK."[123]

23.3 The TUC welcomes that emphasis. We support an industrial policy based on the concept of comparative advantage and believe this emphasis by UKTI is a step in the right direction.

24. UKTI FOCUS

24.1 However, the TUC would question the focus of UKTI's marketing activity being on the City of London and the financial institutions of the UK. Whilst we have no objection to those sectors, their success is well-known and it might be more valuable for UKTI to focus on areas of the economy, like UK manufacturing, where there are important success stories that are not always understood. World-class companies such as Rolls Royce, British Aerospace, Toyota and Nissan are highly productive and are well placed to demonstrate just how good UK manufacturing can be.

25. STAFFING IN UKTI

25.1 On page 47 of "Prosperity in a Changing World", the document states: "By March 2007, we will have reduced posts in headquarters by some 40% since 2004. Some 90% of our people will be in the front line overseas, in the English regions, or in customer facing service delivery in headquarters."

25.2 It is necessary to repeat that cuts in public sector workers, whether in client facing or in so-called "back office" jobs, should not be a matter of pride. Cuts in the workforce simply mean a poorer service being delivered. We are sorry that UK politicians continually fail to recognise this.

26. CONCLUSION

26.1 In conclusion, UK manufacturing is at a crossroads. We are losing manufacturing jobs at a rate of 100,000 per year, putting a question mark over the "critical mass" of UK manufacturing that was described in the Warwick Agreement.

26.2 The TUC believes that urgent action is needed and welcomes this inquiry, which we hope will give momentum to a drive across government to support the UK manufacturing sector.

26.3 Procurement policy is one important lever that can be used. We must develop a set of common rules across Europe. It is unacceptable that other governments use derogations and caveats, which were deliberately included in European treaties in order to safeguard and support industry, while our government does not. We must also learn the lessons of the "battledress procurement" incident from 2004.

26.4 The Defence Industrial Strategy is important and offers a model for other industries. Social clauses in procurement should be utilised and the London 2012 Olympic and Paralympic Games offer a marvellous opportunity to use procurement in support of the regeneration of East London, as well as to promote UK manufacturing.

26.5 Sustainable public procurement offers major opportunities for UK manufacturing and services, through an imaginative use of social clauses in procurement, allied to a creative approach to Article 3 of the Treaty of Rome.

26.6 The UK should use state aid creatively and consider the role of strategic industries within manufacturing, building on the UK's comparative advantage.

26.7 With regard to skills, there is an urgent need for a genuine post-voluntary skills framework. The TUC believes this should be embedded at the sector level by strengthening the role of Sector Skills Councils.

26.8 The legacy of low skills must be addressed, together with the need to increase the availability of a much wider range of skills and aptitudes in the manufacturing sector. Good progress has been made in increasing the UK skills base in recent years, but major deficiencies continue to hamper the national drive to improve productivity and competitiveness. Key social justice issues, such as poverty and social mobility, must also be addressed.

26.9 As well as increased investment by government and employers, unions must be allowed to become real social partners in the government's skills strategies. New legal rights to paid time off to train are essential and positive action is needed to tackle skills discrimination.

26.10 Finally, when marketing the UK abroad, the good news story of UK industrial relations should be told. Manufacturing, along with the City of London and the financial sector, should be promoted to would-be investors in the UK.

September 2006

92 Press Notice, "The Future of Manufacturing Industry in the UK", Trade and Industry Committee, 24 July 2006. Back

93 "An Industrial Strategy for the United Kingdom", TUC, December 2005. Back

94 "Britain is Working", National Policy Forum Report, The Labour Party, 2004, p 31-2. Back

95 Treaty establishing the European Community, Rome, 25 March 1957, Article 3. Back

96 "Investigating UK business experiences of competing for public contracts in other EU countries", Office of Government Commerce, paragraphs 1.2.1-1.2.3. Back

97 Treaty establishing the European Community, Article 296. Back

98 Defence Industrial Strategy, Defence White Paper, Ministry of Defence, p 2. Back

99 ibid, p 6. Back

100 2004/18/EC, Recital 33. Back

101 "Procuring the Future", Sustainable Procurement National Action Plan: Recommendations from the Sustainable Procurement Task Force, July 2006. Back

102 Mapping the UK Environmental Goods and Services Sector: The Environmental Industry Unit's Analysis of the Sector in 2004, Mansfield T and Thomas D, February 2005; http://www.dti.gov.uk/sectors/environmental/index.html Back