Select Committee on Business and Enterprise Minutes of Evidence


Examination of Witnesses (Question Numbers 80-99)

RT HON LORD MANDELSON, SIR BRIAN BENDER AND MR JOHN EDWARDS

21 OCTOBER 2008

  Q80  Miss Kirkbride: That still does not answer why one set of jobs should be more important, but we will park the RDA. Given that sub-prime got the banks into this position, has the Department made any assessment of the level of corporate debt, and whether that is going to make things worse in the future?

  Lord Mandelson: Sub-prime in the United States got all our banks into this position, and the rather complex and uncreditworthiness of the derivative financial products that stemmed from the sub-prime market got us into this difficulty. We are not going to get out of this difficulty entirely until we go back to the core of the problem and to put that right. That is why this crisis started in the banking sector across the Pond, and that is where the remedies have got to start as well.

  Q81  Miss Kirkbride: So no worries about corporate debt. One final question: you will be aware that the building societies do not require a rating by the ratings agency, yet the Government now requires local councils to put their money with banks and other organisations that have a rating. Are you at all concerned about this and the potential impact that might have on the building society sector?

  Lord Mandelson: I am certainly concerned that the credit ratings agencies need to polish up their performance as well. They need reform, they need clarification of their role and they need to give much sharper, quicker authoritative information to the market than, frankly, has been the case entirely to date.

  Q82  Mr Binley: You will know that 60% of private sector employment is with the SME sector; you will know there are about 4.7 million businesses within that sector, and you will know there is some sizeable concern, and they need to know that their Ministers fully understand what their sector is about. What experience do you have of the SME sector and what understanding might you have—and how you gained it—of the culture of small businesses?

  Lord Mandelson: I have represented, looked to and, indeed, received support in my stance vis-a"-vis small business throughout my time, both as a Member of Parliament and as a previous Secretary of State. I also brought that concern and knowledge into the European Commission where I was a strong advocate of changes in regulation that would benefit small firms. I have never run a business myself—I have run campaigns but not businesses. I think, insofar as a politician is able to expose him or herself to the realities of everyday life amongst small businesses, I have done so. Obviously there are limitations.

  Q83  Mr Binley: Of course I understand that. Let me move on from there because you went through a list of concerns that had been voiced to you: interest rates being shoved up to, maybe, 15% or 16%; facilities, maybe, being withdrawn and certainly being lessened; personal guarantees being demanded—all of which puts on extra pressure, and pressure now—and yet you tell me that you are going to meet to discuss this in a week or so. Can I impress upon you, Secretary of State, that small businesses are in serious trouble now and many of their arrangements are being worked out now? Will you give us an undertaking that you will not leave it for a week or two but that you will get in there now and make sure that the banks, which have had billions and billions of taxpayers' money, treat small and medium sized businesses fairly, because many people think they are not? Will you give that undertaking?

  Lord Mandelson: Yes, firmly and clearly. I am not dragging my feet, and, to demonstrate that, I can announce that I am meeting the chief executives of the banks with the Chancellor this Thursday.

  Q84  Mr Binley: I am delighted. You will tell them to play fair by small business.

  Lord Mandelson: I certainly will. Look, there are two aspects of the problems, the challenges, facing small firms: one concerns cash flow and the other concerns access to finance. As far as cash flow is concerned, we have given a very strong lead (and I championed this myself within days of becoming Secretary of State) in announcing that central Government will pay its suppliers, many of whom are SMEs, as soon as possible and within 10 days at the latest. Yesterday the Regional Development Agencies committed themselves to this, and I can announce today that my colleagues, Hazel Blears and the NHS Chief Executive, David Nicholson, are writing to the local authorities and to the NHS Trusts respectively asking these public bodies to follow suit as well. The other sources of cash flow which have got to act in this context as well are larger businesses themselves. We cannot, as a Government, force larger businesses to make sure that they pay promptly to the, literally, tens of thousands of small firms constituting their supply chains, but we can exhort them to do so and we will do so powerfully and continuously. Obviously, the other aspect of cash flow is not just the sort of cash into these enterprises but cash out, including to the Revenue. The Chancellor has indicated to his colleagues that he is going to look at what options there are for the Revenue authorities to show some discretion and flexibility towards SMEs. I welcome that. There have been particular proposals relating to VAT and to National Insurance. In one case the idea is for concessions to SMEs to be paid for by other businesses, which I do not think will appeal hugely to the other businesses. There is also a concern amongst SMEs that rolling over payments in VAT will lead to an accumulation, as it were, of debt which will make it harder for them to discharge in the future. So we must be careful in this situation of robbing Peter to pay Paul; we must be careful of creating a situation where small firms are building up further problems for themselves in the future by decisions that are being taken now. As far as access to finance is concerned, we are looking to the banks, as you know, to maintain the availability and active marketing for competitively priced lending to SMEs at a level at least equivalent to that of 2007. It is important that we focus on what that means. Availability is not a requirement to lend at 2007 levels in volume terms. Our aim is to ensure that capital provided by Government to the banks through the recapitalisation is allocated in the bank in question to their small businesses lending division to meet demand for lending. I cannot project into the future what level of demand there will be, but it is why we are also requiring banks actively to market lending to SMEs so that small businesses know the banks are open for business. We are not second-guessing the banks' judgment on particular lending decisions; banks will continue to use their own credit assessment, but they do have to offer competitive rates which will attract good business propositions. I think that 2007 gives us a benchmark to measure this against. We want to see banks taking appropriate risk assessment on SME lending and being responsible, but not being unduly risk-averse. I am talking about the banks undergoing recapitalisation. We can, alongside that, exhort banks that are not being recapitalised with that Government facility to follow the same approach, and to adopt the same—

  Q85  Chairman: There is some speculation that some of the banks not being capitalised are the worst offenders in this respect, so it is a very important point you have just made.

  Lord Mandelson: It is a very important point, which is why the Chancellor and I are meeting their chief executives on Thursday. The three putatively recapitalised banks in question do make up 50% of small business lending. Given that they operate in a competitive environment (they are competing with other banks), we can expect other banks to match this activity in the marketplace. They do not want to fall behind in their lending in a way that would put them at a sort of permanent disadvantage in the future. The Government will monitor how the recapitalised banks are delivering their commitment on SME lending. We will ask the banks how they will achieve this, including the availability of capital and liquidity allocated for their small business division, as well, of course, as their mortgage lending. We will be asking them about their marketing plans and their principles for SME lending from head office to branch level. There is no point in talking a good game at the top when what is happening on the ground is very different.

  Q86  Mr Binley: Can I just pursue that theme, because the whole structure of banking has changed and, in many respects, moved away from small business in terms of decision making. It is much harder to get a decision—a quick decision particularly—and at this time quick decisions are vital. You only need a bad debt of £8-10,000 in a small business to be in quite serious trouble, and you need to know your bank is going to get you over that hit, even though you have a profitable business. Will you also impress upon the banks that quick decision-making for small businesses, right at the lower level that you have just talked about, is a vital part of this process?

  Lord Mandelson: It is vital, but it is also important that whilst we have to accept that a good risk for lending to an SME 12 months ago could, for perfectly understandable reasons, look like a much worse risk now, which the banks will have to take into account, that should not mean that they should either drag their feet or attach onerous conditions and interest to that lending which goes beyond the risk that the banks are taking on in making that lending. So there is plenty of discussion to be had between us in the months to come. As I say, what we want is good practice from the non-recapitalised banks as much as we do from the recapitalised ones, but, also, we want some care and sensitivity from the Revenue authorities when it comes to—

  Q87  Mr Binley: That is going to be a difficult task.

  Lord Mandelson:— interacting with business in the current climate. I recognise the important role that Her Majesty's Revenue and Customs approach to business tax compliance can play in managing the economic downturn for small businesses, and my officials have already raised the matter directly with the Treasury and with the Revenue authorities. Actually, they already have a policy of flexibility in dealing with struggling businesses, and I know that the Treasury will impress upon the Revenue and Customs the importance of implementing and publicising this policy in the current climate.

  Mr Binley: I am grateful for that, Secretary of State. Can I just come on to the final point, because you say in your action programme that not only will you look at issues to do with cash flow and finance for investment, but you also talk about regulation.

  Chairman: That is what Adrian Bailey is going to ask about. We will move on to Mark Oaten and then deal with regulation.

  Mr Oaten: Very briefly, your announcement is very welcome about Government and local government and help in trying to pay those bills within 10 days, and we will see how that works through. However, nothing, of course, can replace the concept of being able to win more business for those small businesses. I wonder whether you could do another memo to those various government departments to ask them to look at the incredibly complicated procurement that you have in government. I do a couple of days of help for small businesses and just trying to put the tender together, trying to win anything off Government, at whatever level, is very, very difficult for small businesses. The process is incredibly complicated. I am sure that when you meet with businesses again they will make that point to you. This would make a massive change to the businesses' ability to win more business, if you could just relax the procurement system. It really would help them get more business for the future.

  Chairman: In the interests of making progress I will ask Lindsay Hoyle to ask his question too and you can wrap up in one answer.

  Q88  Mr Hoyle: Obviously, as has been pointed out, we all welcome the act of ensuring bills are paid quickly, but can we also look at another part where small businesses are struggling and that is the business rate. Local authorities are very quick to chase people for money, and not so much a holiday period but a little bit of relaxation to give time for people to pay the business rate rather than taking them straight to court would be one area. The other one, of course, is capital schemes by the health authorities and local government. What we are seeing is those being deferred. At least bring them on time, or bring them forward to, obviously, stimulate the construction market and actually get business going as well. Is there anything that you can do there, through your good offices, to channel those communications?

  Lord Mandelson: I am sorry, which communications?

  Mr Hoyle: Hospitals and local government have got capital schemes and some are deferring them. Rather than deferring them, bring them forward or ensure that they come on time to make sure we get—

  Q89  Chairman: These are the two aspects of procurement: small and large.

  Lord Mandelson: This is very important indeed. We have to recognise that the costs of not doing what you advocate, and allowing the economy to slow down even further and for unemployment to rise, will lead us to much higher costs than we would be incurring if we brought forward these projects and maintained spending and investment in the economy. I think the Chancellor is very mindful of this, and I know that he is weighing these issues very carefully in the run-up to the Pre-Budget Report. In answer to Mr Oaten's question, again, you put your finger on a very, very important issue. We had already asked Anne Glover to review the access of SMEs to the Government's procurement programme. I think she is being invited to report in time for the PBR, which is not, therefore, so long away—although I do not think we have decided on a date for the PBR, but it is not so many more weeks away. So that will be a very important and welcome piece of analysis and advice from Anne Glover.

  Chairman: Can I just add to Mr Hoyle's plea on the business rate, also, that I do hope your department will make representations on the Business Rates Supplement Bill that is coming forward because there are a lot of concerns that businesses have about that as well. I would pursue that at greater length, but in view of the time we will not do that.

  Q90  Mr Bailey: Secretary of State, I represent a Black Country constituency with quite a considerable manufacturing base—virtually all SMEs. Whenever I visit companies there are ongoing complaints about regulation. Obviously, the reported plans that you have to look at that will be very welcome. Can I just bring your attention to an article in the FT this morning (which I appreciate from what you said earlier you will not have seen), and if I can quote from it: there is a "furious backlash from union leaders" because it was reported that you intend to postpone the new working rights directive"—the statutory paid maternity leave. Then, subsequently: "Ministers have backtracked" on it. Can I invite you to put the record straight? What are your plans for reducing regulation and are these measures part and parcel of it?

  Lord Mandelson: This very fierce backlash, if that is what it is, has not reached me yet, and my telephone number is in the book. So I do not know about that, although I did hear what I thought was an intelligent and persuasive interview on the Today programme this morning, by a senior TUC official, Sarah Veale, on this subject. I do not know whether you heard it.

  Q91  Mr Bailey: No, I did not.

  Lord Mandelson: Or whether it is linked to this alleged backlash. Let me say that what I feel my job is, in these circumstances, is to take up questions and look at issues when they are presented to me. If I have the British Chamber of Commerce and the Engineering Employers' Federation saying to me: "Look, your proposals for regulation X or regulation Y is going to be particularly onerous in the emerging economic climate. Can you postpone it for one year or more?" I will consider that. However, that is not the same as agreeing at the outset with the proposition that they are making. I saw a headline yesterday suggesting that I had reached conclusions about one item which was to do with flexible working. It is simply not the case that I have reached a conclusion or that the Government, as a whole, has yet considered it. Indeed, the headline did not actually correspond to what the journalist actually wrote, I noticed. I welcome the views expressed by the TUC, and other trade unions if they are formulating their views, just as I welcome the views of employer organisations as well. I am sure that in an economic climate of the sort we are getting into such debate needs to take place, but it is not a forgone conclusion that we will reach one view or another ahead of that assessment, which we are bound to undertake.

  Q92  Mr Bailey: Yet you can confirm that you are making an assessment of, if you like, legislation which could impact on business regulation?

  Lord Mandelson: Yes, business representatives have asked us to look at future plans for regulation, and I have said that it would be irresponsible of me not to take their concerns into account and to give them proper consideration. So I will do so, but without prejudice to what the Government finally decides on any particular measure.

  Q93  Mr Bailey: Could I just turn now to the Administrative Burdens Reduction Programme and the Department's business plan 2008-11 on reducing administrative burdens. The National Audit Office has said that estimates and reported savings should be treated with caution. If we are to convince business that we are reducing regulation, we obviously must have a robust statistical base for proving that. How much confidence do you think we can have in estimates of reducing administrative burdens and regulatory burdens?

  Lord Mandelson: Let me bring Brian in on this. You have got to have some confidence in the impact assessments that your officials undertake on your behalf. If you take, for example, the impact assessment that was undertaken for the extension of the right of parents of children aged 16 and under to request flexible working, that showed a cost to businesses of £69 million but, also, benefits of £91 million. So that would indicate that that particular flexible working measure—the right to request—shows a net gain or net benefit for businesses. I think that is the sort of impact assessment that we need to take into account. I realise that many of the benefits from such a flexible working measure (for example, improved productivity, reduced staff turnover and lower absenteeism) will not be immediately obvious to employers, and I understand that. I also understand that there is a perception that flexible working can be difficult and burdensome. However, on the other hand, employers in many cases recognise that flexible working brings business benefits. Even if they cannot quantify them, evidence shows that 92% of employers thought people worked best when they can strike a better balance between work and the rest of their lives. So there are complex assessments to be made but they can be undertaken, and I think that we should be guided for them, as illustrated in the case that I have just described to you. Brian, do you want to come in? May I just say, I have a slight problem about time. I have got to be on a train at one o'clock.

  Q94  Chairman: In that case, after Sir Brian's answer we will move on to the Royal Mail group straight away.

  Sir Brian Bender: I will try and be brief—just two or three points. First of all, as I am sure you are aware, Mr Bailey, the Administrative Burdens Reduction Programme refers to the time it takes business to do things—not the policy cost of implementation but simply the time. So the sort of things it has delivered are things like replacing 79 health and safety regimes by one; planning applications being submitted online and what used to take a day taking an hour. The point that the NAO were making, as you say, is that they commented that the savings should be treated with caution because they are only indicative estimates. Those estimates have been established using an internationally recognised standard cost model, and the NAO report that it published a few weeks ago goes on to acknowledge that attempting to carry out a statistically representative assessment would have been time-consuming, more expensive and difficult to achieve due to the variation of business processes. So it is indicative, but the whole exercise focused on the time business takes to do things. I could go on, but I do not think the Committee would want me to, with examples of actually what is meant in practice.

  Chairman: We are going to have you back, Sir Brian, for a session on the Annual Report specifically, so we will keep it for then. There are lots of questions we wanted to ask you but we are running out of time. Lindsay Hoyle.

  Q95  Mr Hoyle: Straight into Royal Mail and the future of the Post Office. You have dismissed the reports in the FT. Time has moved on but we believe in the Post Office (or I certainly do) and the Post Office network. My concern is I believe that the Government has got to ensure that Royal Mail remains. I hope that you are a supporter of Royal Mail. Some of the key questions about it are: have you any insight into the Post Office Card Account, which will help ensure that we do have a Post Office network? The other key one where we are losing money hand-over-fist is bulk mailing. We know that every private company is being subsidised by the British taxpayer because the cost of universal delivery is more than what we are charging the bulk deliverers. Are you going to renegotiate that and ensure that the good old British taxpayer is not subsidising the likes of TNT right through to Business Post, because that is one of the biggest failings. If we can get a real price increase on that and ensure that Royal Mail makes profit out of the universal delivery, rather than losing money, these are the things that will turn Royal Mail round. The thing that I want to know is, do you stand by the `95 commitment to Royal Mail, which is the manifesto that we stood on, and I am sure that you will have adopted it now you have come back into government?

  Lord Mandelson: The biggest problems facing Royal Mail today are the fall in the volumes of letters being sent through its network, and the size of its pension deficit, which is ballooning. These are not down to the regulator and the current price controls applied to Royal Mail. Volumes were down a further 3% last year. The main reason is that domestic consumers and businesses are moving away from the post and using digital media instead. Now, it has therefore become clear that the market conditions for all postal service operators are challenging, to put it mildly, and it is in the light of these developments, which are not new, that an independent review was set up under Richard Hooper, announced in December 2007. I believe that initial findings paint a rather stark picture of the huge challenges in the postal market: new technologies are transforming the way we communicate and this will only intensify in the coming decade. I do not, if you do not mind, want to be drawn on premature responses or conclusions before I have even seen the Hooper review. There is no set timetable for that review, and indeed I may ask Richard Hooper to widen his review and to examine additional factors. It is too early for me to say, but, nevertheless, I am not prepared to put a timetable on publication as of today, but I can reassure you and Members of this Committee and the public that I remain most strongly committed to the Royal Mail. What we want to see is it being efficient, modernised and viable in the face of dramatically changing structural conditions in the market. It is a tough challenge but it is one I come back to after 10 years having been away, and I am up for the job.

  Q96  Mr Hoyle: The point on bulk mailing—and you can understand the frustration—that they are being forced to deliver letters at below cost and subsidising those businesses. There is something wrong when the taxpayer is subsidising these private companies, who have an unfair advantage because Royal Mail has to deliver their mail. If they had set up the universal postage delivery, I could understand it; the fact is that we are actually charging them less than what it costs to deliver. Could you look into renegotiating that to ensure that there is a profit in delivering your rivals' letters rather than subsidising your rivals?

  Lord Mandelson: I will look at all those issues, that included, in the wake of the Hooper review when we take delivery of that.

  Q97  Mr Hoyle: Okay, but it is important. The last, quick question I wanted to ask about is Warwick—the importance of Warwick and, in particular, from my point of view, its procurement. I believe that UK procurement (and we have touched on it)—how that can actually support manufacturing jobs and ensure that that procurement can take place—and it is actually getting the message across: "Where Government is going to buy, let's support British industry". Let us use the same rules as our rivals do. I think there is something absolutely absurd that we buy cars built in Japan with not one British component, not one British job, it is shipped all the way round in cargo polluting ships for Ministers to ride round thinking they have ticked some kind of green box. Surely what we ought to see is the way that Tom Watson has done it and is being driven round in a British-built Mini. That might be the best example of supporting British industry. So can we support Warwick and can we support the procurement part of Warwick?

  Lord Mandelson: I insisted on being driven around Brussels in a British-made Jaguar, and I am still being driven around now, as a new member of this Government, in a British-made—

  Q98  Mr Hoyle: Excellent news.

  Lord Mandelson: And long may it last.

  Chairman: On the subject of British cars.

  Q99  Miss Kirkbride: The Rover inquiry, Secretary of State, has been dragging on for three-and-a-half years and has cost many millions of pounds. It is extremely offensive to many people I represent who lost their jobs when Rover went pear-shaped. When are we going to finish the inquiry, and are you going to look into the system that allows what appears to be an abuse of public money that it should go on for so long without any conclusion?

  Lord Mandelson: As the Committee knows, this is an ongoing independent Companies Act investigation. It is independent of the Government, so it would not be proper for me to discuss the substance. I can say that BERR and the inspectors are intent on completing this inspection as quickly as possible.



 
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