Examination of Witnesses (Questions 180
TUESDAY 17 OCTOBER 2006
Q180 Mr Newmark: We could have it
at the other end. For example, we have 200 years of coal. Should
we be getting EU support for carbon capture, carbon sequestration,
for the coal industry? Is that a role that the EU should be playing
or is that a UK role?
Mr Radley: I think it may be a
case of both. One important priority there is we look at the Emissions
Trading Scheme and we are moving towards greater levels of auctioning
now, initially on the power generators. That is going to raise
a lot of money. One thing governments should be looking at very
closely is investing the money that is raised in that in R&D.
They could play a very important role in making carbon capture
and sequestration a commercial reality. We are still some way
from it being commercially viable, but there are obviously enormous
Q181 Mr Newmark: I am curious, which
do you see as preferable: the Government encouraging R&D by
providing incentives to companies through R&D tax creditsand
I know you touched on this a bit earlieror the Government
increasing public expenditure on R&D itself? Would you flesh
that out a bit more?
Sir George Cox: There are two
elements to this and one is the generosity of the scheme. It is
a tax credit scheme; in other words, it is not a tax allowance.
You do not make losses to get this. It is a straightforward: "We
will fund R&D" provided it is not just product-specific.
I spoke to a number of large companies about itbecause,
although my report focused on the smaller business, large companies
have design units which are actually small units around the worldand
they explained to me, "This is quite competitive. Other people
are competing for us to be based there." I said, "What
makes the difference? Is it the percentage you get?" and
they said, "No, what makes the difference is the consistency
of the schemeif we are going to make a 20-year decision
on where we base research, we want to know the regime is going
to be stable for the next 20-odd yearsand, secondly, the
ease of dealing with the schemewe do not want to spend
all the money on bloody accountants." Saying we should tweak
it by another per cent does not matter. I think a lot of it comes
back to the point we have hammered already: the public sector
demanding innovation. It is very important, because I do not think
there is a single issue that we face in society that is going
to be served by throwing resource at it. Whether you talk of health
care, security, congestion, energy, it is down to innovation.
It really is down to innovation and how one demands that innovation
that is going to have a big impact.
Q182 Mr Newmark: That is answering
a different question from the one I have asked.
Sir George Cox: It is a good question
to have answered though!
Q183 Mr Newmark: Just focusing a
little bit here, you recommended a move to partly an incremental
scheme of R&D tax credits.
Sir George Cox: Yes.
Q184 Mr Newmark: What do you see
the advantages or disadvantages of that particular scheme?
Sir George Cox: That is a good
and specific question.
Q185 Mr Newmark: Your last answer
was very good but it was not question specific!
Sir George Cox: I argued for a
scheme which was incremental. In other words, too much of the
money spent on R&D tax credits at the present, I believe,
is just being spent on R&D which would be done anywaywhich
is great, but you are just giving a large amount of money to people
who would do it anyway, perhaps just helping to keep it here.
I would like to see a scheme where you were rewarded for upping
the level. For example, for the R&D you did above the level
you have donesay, the best of the last five yearsit
should be at a much higher rate. You are trying to get people
to increase their game, not just to maintain it. In other words,
if a company, this year, for the first time spends money on R&D
and they are quite satisfied, get them to do more. The argument
against it was: It complicates the scheme. As a person who in
the past has argued against the complexity of the tax scheme,
I have a fair amount of sympathy with that, but when I argued
this with HMRC and the Treasury, the view, not unreasonably, was:
"All right, we are not rejecting that, but it would be better
to do the other things you are saying and get the present scheme
working well and people using it before we further complicate
it." I have not abandoned that as something I would like
to see or would like to see considered very seriously, but if
they can get a regime at present where people find the scheme
easy to deal with, where they do not have to deal with the tax
inspector who has never encountered research before but deal with
a special unit, good enough for a start.
Q186 Mr Newmark: What difficulties
confront businesses attempting to establish stronger links with
Mr Radley: The starting pint is
that it is becoming more positive. Certainly our survey evidence
suggested that around about half of companies were working with
the universities. In many cases, these are not necessarily high
level projectsI think in many cases it may be about getting
access to a specialist bit of equipment or specialist skills for
a period of timebut we have a strong starting point. In
many cases, we faced a problem of a lack of understanding of the
different cultures, the different timescales, the different objectives
that the two organisations are working towards.
Q187 Mr Newmark: It seems to work
very well in the US and does not seem to work particularly well
Mr Radley: I do not think that
is necessarily the case. We have interviewed quite a lot of companies
which have experience in both countries and they have said that
in some cases the UK universities tend to be as good, if not better,
in understanding how to work with business.
Sir George Cox: I think the issue
with working with universities is that, for the larger companies,
it is working pretty well: if you ring up a university and speak
to the vice-chancellor and say, "I'm from Rolls Royce"
you are in, but if it is Cox & Newmark: Who do I ring up?
Who do I get to?
Q188 Mr Newmark: You get to lots
Sir George Cox: It is difficult
for the smaller company to plug into universities, and in many
cases they could benefit. They could benefit enormously from the
research facilities available in the university, from prototyping
facilities and the like, or if you get a placement. Too many university
graduates are looking for a placement with a blue-chip company.
If you get a placement with a small company, you can transform
them. This is an issue I have debated a lot with universities
and the question for them is: Where do we go for the smaller company?
I have advised them to use the local Chamber of Commerce. Why
are you not a member of the local Chamber of Commerce? Why are
you not a member of the IOD? I once had a meeting with a dozen
university chancellors who wanted to talk, when I was heading
up the IOD, about better relations with business. They entertained
me to dinner. In the Athenaeum. My view was: "Why are we
not eating across at the IOD or somewhere like that?" If
you want to understand the fishes better, jump in their water.
A lot of this has to come down to the universities to reckon on
what you do to access companies. That is a huge potential. I think
it works very well with the large companies but I think the smaller
companies do not take advantage of what the universities could
Q189 Jim Cousins: Sir George, you
were talking earlier about cultural models, which I think is a
very powerful point. Is it not right that a very powerful cultural
model of success that we offer in this country is working in the
professional services that surround the activities of the City
of London and working in financial services and having a huge
bonus and having a tax account in the Cayman Islands, or similar?
Do you think that is the right kind of cultural model to offer
people in this country?
Sir George Cox: I see a fair amount
of truth in what you say. I suppose, to some extent, we have come
through. I think we went through a period of a lot of people,
particularly people who studied maths, thinking that was the glamour
profession, to become traders. I think we are moving through that.
People are recognising, for example, that if you study engineering
it widens up an awful lot of opportunities to you. When you are
talking about the model, you are talking about people who are
studying and what they are going to do. I spoke to the Royal Academy
of Engineering about this, to say that we should encourage people
not to become engineers (because that is a career choice at 17
which a lot of people are not prepared to make) but to study engineering.
Just study it. If you look at the head of the New York Stock Exchange,
who came from Goldman Sachsthe head of Goldman Sachs globally,
and that is pretty well paidhe came from MIT. That is what
he studied. To get more people like that is not a loss to engineering.
More people understanding innovation is an asset. Getting more
people to study technology like that, I think, would be a great
thing. If some of those people want to become traders, that is
a very small element of the world. Even though it is highly paid,
many think, "I wouldn't want to do that." The view that
that was the kind of career opening, I think is changing. I hope
Q190 Jim Cousins: Mr Radley, you
were referring earlier to the training and education system. Is
it not far more economically rational for a British company to
acquire trained workers from Poland or Slovakia than it is to
train British workers from the start?
Mr Radley: I do not think it is
the case of either/or. You may have a temporary increase in demand
for particular skills, you may need to get access to particular
specialist skills, and in many cases it will make sense to import
those skills from abroad, sometimes permanently and sometimes
on a temporary basis. But if you are looking at driving long-term
change in a company and really improving its performance, you
have to invest in your own skills as well, and you have to invest
in skills in order to achieve a change in the culture of an organisation.
In many cases, as well, you will see workers coming over from
Central and Eastern Europe but they may be gone in a couple of
years: Where does that leave you then? I think it makes sense
in a global labour market to tap into those skills where they
are available but you also need to develop your own. We are concerned.
If you look at the evidence the Sector Skills Development Agency
recently issued, some research suggests that business as a whole
is spending £33 billion a year on investing in skills, which
is enormous money, but we need to do it more effectively. Certainly
the evidence we have produced suggests that too few companies
link what they do on training to where their overall business
is going, their business plan, and we need to do more to ensure
that we spend the money better. One of our suggestions is that
you revitalise the Investors in People initiative.
Q191 Jim Cousins: Earlier in your
comments to the Committee you saidand I have not got the
exact phrasethat the British educational system was not
delivering the results in terms of attainment and lifetime training
and being value for money. I think that is more or less what you
said. I wonder if you could explain that to the Committee, say
why you think that, and perhaps give some examples.
Mr Radley: I was not just talking
about the education system, I was also talking about the system
that encourages lifetime investment in workforce skills; so we
are looking beyond the school system. If we look first at schools,
I think there have been some major improvements in the output
from education, but what concerns us particularly in manufacturing
is that too few people are actually studying science, technology,
engineering and mathematics, and in many cases they are not being
taught sufficiently well because they are not being taught by
a teacher with the specialist knowledge, so I think we need to
do more to actually invest in the people who are teaching these
subjects, and that may involve further financial incentives. I
think they are starting to have an impact. Another thing we need
to do is actually improve the quality of careers advice and guidance.
In many cases people are actually receiving very limited advice
and often it is coming too late. I think that what we really need
to do is look from the age of 11, and possibly earlier than that,
at actually enthusing people about taking science subjects by
actually providing concrete examples to them of the relevance
to the world of work, to actually show them that if you are taking
a degree in science you can do lots of things: you could work
in the City, but, for example, you could be working in developing
the next generation of low-carbon technologies that will really
address the problems of climate change that we face. There is
a lot that can be done there. I think there are some areas where
we have high hopes. I think the introduction of specialised diplomas
from 2008, when that is being rolled out, offers a significant
opportunity to raise the number of people that are taking science
and engineering subjects and are attaining good standards in that,
and that will certainly be one of the priorities that we will
be looking for in the forthcoming spending review.
Q192 Jim Cousins: Finally, to both
of you, some people who look at issues of globalisation are increasingly
concerned at the silting up of inequalities in society that create
a kind of low-skilled, low-achieving low-aspiring section of society,
not just in our own society but certainly in other European societies.
We have seen some recent examples of how people actually vote,
perhaps inspired by those kinds of experiences. Are either of
you concerned about this, and, if you are concerned, what would
you suggest we did about it?
Mr Radley: I think the first thing
to say is that, certainly at headline level, clearly what we are
seeing in terms of the trends in globalisation are going to be
increasing the premium on high-skilled, talented workersthe
people who are the best are going to be able to command a significant
wageand, at the other end, if you have got low skills,
your job opportunities are likely to be less secure, you are less
likely to see improvements in your living standard, but I think
that over simplifies it slightly and I think what we will be seeing
looking forward is that some tasks that are considered high skill,
in areas such as accountancy and law, I think in many cases will
be under threat. Any job that can be standardised and located
elsewhere, people who are in those industries will face significant
threats as well. Ultimately, what we need to do, I think, to repeat
an answer I said earlier, is to absolutely invest in basic levels
of numeracy and literacy. If people do not have that, they have
a very limited chance and I think their ability to acquire new
skills is going to be extremely limited. I think what we are really
looking at is what are the skills that are in demand now? Certainly
there are technical skills, but what we find talking to companies
is that it is about problem-solving, being adaptable, being a
good communicator, being able to work in teams, and that does
not just mean just putting your ego to one side but actually having
the ability to work with people from a range of different disciplines
effectively. I think those are some of the areas that we need
to see action on.
Sir George Cox: Perhaps I can
give an answer to that. I think there is a great danger of this
wealth which I see being generated being very unfairly split in
terms of who benefits from it. Internationally the countries which
worry me most are those which globalisation is by-passing. Through
another interest, going to Sub-Saharan Africa, the issue there
is not globalisation, it is that they just will not benefit at
all. Customers will not invest there, they will not operate there.
The Democratic Republic of the Congo, which I visited, the issue
is that it is not taking an interest. It is a big world issue.
If you come down on countries which are not being by-passed yet,
you have a problem in some of a great disparity in wealth. I think
it is a huge threat to Russia that you have got a country generating
enormous wealth, in many ways a very wealthy country, creating,
I think, a very unstable society. I spoke in Russia recently on
corporate governance, which was quite a challenge, and, having
spoken there previously and a month earlier in Lagos
Q193 Jim Cousins: No doubt military
training comes in useful.
Sir George Cox: I am sure it does.
And someone argued with me, I got a question from the audience:
"Mr Cox, you talk of this corporate governance. This all
sounds good stuff, we like that, but your country grows at 3%,
ours grows at 8% and people who ignore this are booming and people
like you in the West are obviously held back by this and there
is a big premium to pay for all this corporate government stuff",
he said. One had to reply, and I said, "Look, if you do not
take any notice of what is said here today about corporate governance,
it will not affect your growth in GDP in the next five, 10 years
at all, but what you are building is a society where that money
will not even attract any external investment and the priority
of people who make the money will be to get it out of the country,
and that is your issue." I think you have got that kind of
disparity which you have to address. When you come down to countries
like our own, there is a danger of disparity as wealth is generated,
and I think the answer to it is exactly what Stephen has said.
The issue there is getting in younger people the aspiration to
want to take advantage of this, to want to work, to want to have
a career, and the education. That really is it. There are a number
of issues to address there. I think when you talk of younger children,
we are very good now at making education much more creative. I
have daughters of 10 and 12 and, if you go and see what they are
doing in any subject, it is remarkably exciting and creative to
compare with when I studied, but, by the time they get into their
O and A Levels, much of that is squeezed out and they do not see
the relevance. We spoke earlier about training. The issue of training
is getting people who want to be trained, want to be educated,
want to be developed. It is the demand. I was recently at a university
degree ceremony and all those doing engineering and computer science,
not all but the vast majority were from overseas and it sends
out a sense of pride. That is not because the universities do
not want to educate them, it is because that is where the applications
come from. I think that is the way we tackle it. It is no good
saying, "Let's make more courses available and more training",
you have got to get people wanting to do it.
Q194 Mr Gauke: Mr Radley, you talked
earlier about the impact of the increased tax burden on Britain's
competitiveness. Is your concern principally the one that in absolute
terms the tax burden has increased in recent years, or is it that
at the same time the tax burden in a number of competing countries,
if you like, has reduced? Is it the absolute tax burden about
which you are concerned or the relative tax burden?
Mr Radley: I think it is both.
Just to elaborate on that a bit more, I think for manufacturers,
what we have seen is that quite a lot of the increase in taxation
that has occurred has been on the cost of doing business; so it
is things like higher national insurance contributions and a variety
of environmental taxes, which are there for understandable reasons,
but for a lot of manufacturers it is extremely difficult to pass
these costs on to their customers. That means that you suffer
a squeeze on profitability. If you look at the recently published
official statistics on profitability in manufacturing, they are
now down to their lowest level since 1992. I think there is also
an issue about whether our tax system is losing some of the competitiveness
that it used to have, and I think that is partly about the fact
that taxation levels, as a share of the economy, have risen in
the UK while they have fallen in many of our competitor countries,
but I think it is not just about that. What we have also seen
is that our tax code has become increasingly complicated. That
ties up a lot of management time and also means there are some
very good incentives out there, but many companies are not accessing
them because the system is too complex. I think what we are also
seeing (certainly this is coming from the larger companies particularly)
is something of a deterioration in the relationship between business
and Her Majesty's Revenue and Customs because of the increased
emphasis on anti-avoidance. Clearly, it is absolutely right to
clamp down on illegal tax evasion activities, but I think this
obsession with tax avoidance is leading to a deteriorating relationship.
What does this mean in practice? I think what you see is that
across the world there are a huge variety of tax systems, a huge
variety of tax rates, and companies do not make decisions in terms
of where they are located overnight, they do not take these decisions
lightly, and they are going to be taking a huge range of factors
into accountthe quality of our universities, our transport
system, skills, science, a whole range of factorsbut we
are starting to see signs that companies are starting to raise
questions: "Is it competitive to be here on the basis of
our tax system?" and people are looking at this really seriously
Q195 Mr Gauke: Sir George, would
you agree with that analysis?
Sir George Cox: Yes, I think you
get to a balance, and you get to the point where tax levels are
a disincentive and also the application of the system is too complex.
I say that, not from the work I did here, but from my previous
role at the IOD, of course. Can I, again, almost answer a question
that has not been asked but it leads on to the regulatory environment
Q196 Mr Gauke: You are about to answer
a question I was going to ask, so please carry on.
Sir George Cox: You talk about
what government can do. It cannot make people want to become entrepreneurs
or heads of companies, but government does play a big role in
setting the environment in which companies operate and I think
with the regulatory environment you can see areas of advantage.
If you look at what has happened to the United States since Sarbanes
Oxley, if you want to see how effective regulation can be and
how negative it can be, look at the impact it has had there, look
at the reaction of American business: a huge impact from clumsy
knee-jerk regulation. Equally, if you talk about regulation here,
one of the big issues that I have always felt is not the need
for regulation, it is how it is applied. When we talk about regulation,
how it is applied is almost as effective as the regulation itself.
Can I give you an example? There was a company, a very good company,
a food processing company, in the Midlands, doing very well, and
they had expanded their factory, which was on an old farm site,
three times over and it was understood that they would not get
any more permission because of vehicles down the lane. Fine. So
they looked for a brownfield side, and they get a brownfield site
six miles away, they can develop it. Everyone is pleased. So,
they are going to move, they are going to employ more people,
all the local produce companies are happy. You know the company,
A&B Foods. Anyway, they buy the site, get planning permission
for it no problem at all. Of course, they have to dispose of the
old site. No-one is going to turn it back into a farm and no-one
is going to put in a factory there. So they put in a planning
application for half a dozen nice residential buildings. Everyone
is happy. They are told there is to be a planning inquiry. As
soon as you say that, that is money, that is a lot of expense,
that is about 40 grand just going in a planning inquiry. Everybody
at the inquiry speaks up for itthe parish council, the
local MPeverybody is in favour. Fine; no problem. You do
not get an answer. The inspector has to give you an answer within
six months. After five months the MD rings up and says, "Have
you got an answer yet?" He gets a snotty reply, "No,
Mr So and So is very busy." I am pretty busy trying to run
a company here, but, just like that, turned down on the grounds
that it is against policy to turn agricultural property into residential
property, and they appeal, and I make this a bit of a cause
céle"bre and eventually they got it.
Q197 Mr Todd: I was going to say,
it is in my constituency, I know they got it. You are talking
about A & B?
Sir George Cox: A & B Foods.
I am not getting against planning permission. Living in Gerrards
Cross, God knows why they allowed Tescos to be built over my railway,
but I am not against planning. Who is against planning? Why on
earth do you not get a quick answer? It is that. It is the cost,
it is the delay, it is the uncertainty. So, when we talk about
regulation, it is not just whether we should have it or not, it
is how easy it is to comply with. Make it easy to comply with.
Q198 Mr Gauke: That is an answer
to a much better question than the one I had. Can I return for
a moment back to the tax point, if I may. The flip side of the
increased taxes we have is increased public expenditure. Can I
ask to what extent, compared to the disadvantages of the higher
taxes, there have been advantages for the competitive position
of UK businesses by the increase in public expenditure we have
seen over the last seven years?
Mr Radley: That is obviously a
very big issue and, clearly, some of the big increases in expenditure
have been in areas such as the National Health Service, in relation
to which, ultimately, there are benefits to business in terms
of a fitter, healthier workforce, but I do not think are necessarily
areas that EEF would hold a detailed view on. In terms of those
that are more directly related to business, we have seen benefits
for increased investment in science, and I think there can be
more that can be done to make that more effective, and we have
talked about some of those issues already, and also greater investment
in skills. If we look at the skills issue in particular, there
have been benefits in terms of improving the standards of educational
attainment from schools, but we are concerned that there has been
quite a lot of money wasted in this area. If we look a bit wider
at the overall skills system, we have actually invented a very
bloated bureaucracy, we have got the Learning and Skills Council,
Sector Skills Councils, the Sector Skills Development Agency,
and at the local level we have got Regional Skills Partnerships,
we are soon going to have Skills Academies, and so you do need
to ask questions. Yes, we have seen an improved increased investment
in skills but in many cases is it actually delivering the outcomes
we are seeking or has a significant chunk of this money gone to
Q199 Mr Gauke: If you were to do
thisthis is a very big questionif you were to try
to balance out the disadvantages of the higher taxes with the
advantages of the higher public expenditure, if you were to do
an audit of the Government on that, what would your conclusion
Mr Radley: I think I would answer
on two fronts. Firstly, if you look at a country like Britain,
I think there are natural limits to the share that public spending
should take as a share of the economy, and I think once we get
much beyond 40% it is starting to cause problems in terms of the
competitiveness of our taxation system. I think probably the other
concern is not necessarily that spending has been in the wrong
areas or that overall it has been wasted spending, but the direction
of the travel. We have gone extremely fast from being a low taxation
country, compared to many of our competitors in the OECD, to having
a tax burden significantly above the OECD average, and I think
that is what most concerns us, the speed at which this change