Examination of Witnesses (Questions 180-199)
BARONESS VADERA
12 MAY 2009
Q180 Chairman: Lady Vadera, it is a real
pleasure to welcome you to the Committee. I believe this is your
first appearance before a Commons Select Committee. I make no
promises, but we shall try to be gentle. We all know who you are.
Perhaps I may begin with some rather functional questions. I cannot
resist teasing you just a little, as I am sure you will understand.
Some years ago I went to see King Lear just after Norman
Lamont saw the green shoots of economic recovery. I remember the
audience roaring with laughter when Lear said to the recently-blinded
Gloucester, "Get thee glass eyes; and, like a scurvy politician,
seem to see the things thou dost not." Do you regret turning
to a scurvy politician and seeing "the things thou dost not"?
Baroness Vadera: I think I have
already been there and I shall not be drawn into that, tempted
though I may be. One thing I spend time doing is watching and
scrutinising data and indicators very carefully. Sometimes one
gets drawn into the minutiae of the data rather than the bigger
picture.
Q181 Mr Hoyle: It is one of those
statements people make of which the media make a big issue. Do
you see any green shoots now?
Baroness Vadera: Everybody has
read the papers this morning and some of the forecasts are looking
at stabilisation of the decline. Whether one classifies that as
something looking forward or still fragile is I suggest open to
question. There are manufacturing and retail data and statements
by the OECD but I do not think you can classify stabilisation
of the level of decline as quite the same thing, so we all need
to be very vigilant. I believe it is still quite fragile.
Q182 Mr Hoyle: That is a "no"?
Baroness Vadera: I suggest it
is fragile and it has to be watched.
Q183 Chairman: We shall not push
you on that; it is not fair. We are not here to catch you out.
We have some serious questions to ask about policy issues. The
Committee has reservations about the way the department is now
structured with four Ministers in the Lords, including Mervyn
Davies as Trade Minister. Many Ministers apparently share quite
heavy responsibilities. You have only three desks: one in BERR,
one in the Cabinet Office and a desk in Mr Brown's open plan war
room, so it is "three desks Vadera". Is this a practical
way to run the department with your very important responsibilities?
Baroness Vadera: To be fair, two
desks are quite close to each other in the Cabinet Office at Number
10. Over time I have found it easier to find synergies and to
get people to work together. Part of my job in the Cabinet Office
is around the NEC and economic competitiveness and a lot of it
is around the business environment. That is one of the jobs I
do in BERR. Given that small businesses are central to recovery
that is something that cuts across the two. The fact it is shared
is not just because there are not enough Ministers to go round;
it is because of the view that to bring some things together actually
works, and I have found that to be increasingly the case.
Q184 Chairman: We appreciate the
way in which Lords Ministers are prepared to come before this
Committee. We have had before us Stephen Carter and Peter Mandelson
on a number of occasions, and they will come again before the
Summer Recess; Mervyn Davies is to come to discuss trade, although
the date has not yet been announced; and you are the fourth one
to appear here. Do you understand the concerns about the democratic
deficit in that the majority of the Ministers of a department
are in the Lords and not the Commons?
Baroness Vadera: Of course we
understand those concerns. I am aware that you took it up with
Peter Mandelson last time he was here. I think it is very important
that we appear before the Committee and I am sorry that I did
not attend earlier.
Q185 Chairman: You tried before and
it was cancelled for very good reasons, so no blame attaches.
Baroness Vadera: It is important
that we have that accountability. Obviously, we answer in the
Lords but this Committee's role is very important because we come
and answer to you essentially.
Q186 Chairman: We value these sessions.
Before I move on to the more important policy questions, perhaps
I may explore your relationship with Ian Pearson in particular.
It seems there is a particular overlap there. He has a huge range
of responsibilities, as do you; he combines them with a very big
job at the Treasury, about which I have reservations in terms
of the workload imposed on that particular Minister. But he has
a very sectoral portfolio; he is concerned with aerospace, marine
defence and the automotive and bioscience sectors. You appear
to have a much more cross-cutting function, looking at competitiveness
in the round. I know the answer that you will give me to this
question, although I shall doubt it: is there unhelpful overlap
to the efficient working of BERR, or is there synergy that you
think benefits the department's work?
Baroness Vadera: I do not think
there is overlap, particularly in the current situation where
the workload is very intensive. It is incredibly helpful that
he is in the Treasury. I hope the department finds it helpful
that I am in the Cabinet Office, so those things assist. Between
the two roles there are some very sector-specific matters, for
example around manufacturing which was the job I used to do. Most
manufacturing companies are SMEs, so when I come to look at them
in the round I must have a particular sectoral awareness. It works
quite well. It probably helps that I did the sector jobs until
some time after the summer. We have a very clear understanding
of our roles and talk regularly. Obviously, the officials are
separate; the sector teams in BERR are separate from the SME team.
Q187 Chairman: I am thinking particularly
of your competitiveness, enterprise, growth and business investment
role. That seems to be very much meat and drink for Ian Pearson's
sectors of work. Looking at the automotive sector at present,
its competitiveness is one of the key issues. We are to take evidence
next week on the automotive assistance programme and what we can
do to ensure that that sector remains competitive. I do not quite
understand how your task works with Ian Pearson's without causing
overlap and confusion.
Baroness Vadera: I do not think
there is overlap and confusion in terms of the individual daily
decisions and responsibilities that arise. It is very clear because
there is an automotive team and manufacturing team that report
to Ian Pearson. There is a team that looks at overall competitiveness
and that reports to me. Therefore, on a daily basis there is no
confusion. I believe that on a strategic basis it is incredibly
helpful because we can talk to each other and have an understanding.
He does the vertical piece and I do the horizontal piece. This
takes us back to something we have discussed at some length in
terms of the new industrial activism and New Industry, New
Jobs where there is an understanding that we will look at
sectors vertically in terms of our future competitiveness much
more stringently than in the past, but we still have an overall
horizontal view. I think it fits quite well with the strategy
set by Peter Mandelson for the department and government.
Chairman: When we have Ian Pearson before
us shortly, and later on the Secretary of State, we shall discuss
the automotive sector and other issues. We shall return to this
theme to make sure it is working as you say. Let us move now to
some policy areas.
Q188 Mr Bailey: I apologise in advance
for the fact that some of my constituents are to arrive at 11
o'clock, so I must ask my questions and then leave. Please do
not interpret that as either rudeness or lack of interest in what
you say; indeed, I am extremely concerned about the issues with
which you are dealing. I deal first with bank lending as a whole.
There seems to be a discrepancy between the bankers' version of
what they are doing for businesses and the detailed information
we receive from SMEs and our constituents that tend to give a
contradictory version. What is your assessment of how bank lending
is going and whether or not it is improving?
Baroness Vadera: I am not surprised
that there is a discrepancy—there always would be—and
it has certainly become wider. That is one of the reasons we have
set up the small business finance forum to have discussion between
the bankers responsible for the SMEs together with all of their
trade associations. We then have a rotation of SMEs themselves
coming through with an opportunity to grill the banks. That has
been an incredibly useful forum. As to what is going on, essentially
the stock of lending to SMEs has been reasonably stable and has
gone up somewhat. It is the new flow of lending that has been
more difficult. It is a little difficult to ascertain whether
that is just because the banks are closing up shops. I do not
believe that is any longer the case; it certainly is not as great
as it was in the last quarter of 2008, but there is a significant
reduction in demand from SMEs at the smaller end. For those with
turnover below £1 million there has been a drop in demand
of about 19%; between £1 million and £25 million turnover
there has been an increase in demand. The approval rates for bank
lending have also dropped which reflects their understanding of
the credit quality of the loans. As to availability of bank loans,
there has been a shift since the last quarter of 2008. There was
a very severe problem. I do not think we are there yet; I do not
suggest that it is all fine, but there has been an improvement.
We now have lending agreements in place with two of the banks;
all of the other banks have made some form of public commitment
to new lending. I believe they find the new business more profitable
than the previous business and some actively look for new business.
RBS and Lloyds have made a commitment of an increase of about
£8 billion in net SME lending this year, so loans are available
out there. There are lots of problems around pricing, arrangement
fees and prices going up arbitrarily, which we have taken up in
the small business finance forum and are monitoring very carefully.
Q189 Mr Bailey: The evidence I am
receiving is that now the money is there but only on conditions
and at interest rates that are often unacceptable to the companies
that wish to apply. If there has been a drop in applications it
may well be because small businesses in effect know that they
are being priced out of the market and therefore there is not
much point in applying. Do you believe there is any evidence of
that?
Baroness Vadera: The evidence
shows that if you have an existing facility your interest rate
will drop, but some SMEs certainly experience an increase in their
margins and the fees which quite often, not always, are made up
by the very significant drop in interest rates. If you are looking
at it in the round more SMEs do not experience an increase than
do. For margins and fees there has been an increase but in the
main that is compensated for in terms of interest rates. There
has been some arbitrary behaviour about which we have had some
tough discussions.
Q190 Mr Bailey: I turn to the working
capital scheme. I had a complaint only last week from a business
in my constituency. I do not expect you to comment on an individual
business; that would be quite unfair. Their complaint was that
their bank disclaimed any knowledge of it. No doubt you will correct
me if I have misunderstood the process, but I believe that under
the scheme basically a bank will look at applications, package
up a portfolio and then apply to BERR to have that portfolio or
at least part of it underwritten. First, my instinct is that that
seems to be a very bureaucratic and slow process. Second, I asked
my assistants to contact the department to see how it worked and
whether this could be due to lack of communication from the department
to the banks or whether it was just the banks, for reasons that
are not quite clear, failing to understand it. We could not get
through to the department. At the industry face there seems to
be a real communication problem. If you do not have it already,
can you have a hotline for businesses which will enable them to
phone BERR so that any problems can be ironed out?
Baroness Vadera: I would like
to know what problem you had.
Q191 Mr Bailey: I shall try to provide
chapter and verse.
Baroness Vadera: I should like
to look at that. We have a unit that provides a hotline service
for companies that have problems. A lot of them contact us via
their MPs and that should be available. Unlike the enterprise
finance guarantee scheme which allows a business to go to a bank
and basically ask for it, the working capital scheme is not that
and was never intended to be, so it is not something of which
a business should be aware. It is intended to be a mechanism to
support banks in their lending particularly around working capital
and exports. The important thing about the working capital facility
was that even before the first agreement with RBS and, in very
short order, Lloyds was signed the lending it was meant to result
in was already in effect from 1 March in the lending agreements.
Therefore, the capital release that arises from the working capital
scheme was already part of the lending agreement that started
on 1 March and it is not visible to the business that that is
the source of the capital, so to speak. But the point is that
these banks were then meant to be open for business. Since then
we have also used the working capital scheme because it became
such a central issue in terms of working capital itself to do
the top-up scheme for trade credit insurance. Up to £5 billion
of the working capital scheme will be used for the trade credit
insurance guarantee. If anybody is interested in that I shall
be happy to talk about it.
Q192 Roger Berry: Perhaps you will
take us back a little in time. I am interested in how well prepared
the department and the Treasury were for the impact of the financial
crisis. I do not think anyone could have foreseen the scale of
the damage caused by the greed and recklessness of a few senior
bankers. On the other hand, six years ago Ben Bernanke said that
modern macro-economic policy had solved the problem of the business
cycle. You will be aware that Robert Lucas said that the problem
of depression prevention had been solved. Did the government buy
in to that orthodoxy, namely that these things really could not
happen any more? Was that the reason it appears that we were not
that well prepared for the possibility of that occurring?
Baroness Vadera: As you correctly
say, I do not think anybody quite foresaw what would happen. If
they said they did I do not think they would be being entirely
truthful. There was a very dramatic change after the Lehman Brothers
collapse and the concept of it being too large to fail and the
banking system being too connected to fail. I do not believe anybody
was able to foresee that. It is not true, however, that there
was either an orthodoxy or that we bought into it. Ben Bernanke
wrote a rather extraordinary paper on what a central bank should
do in the time of a deflationary crisis. I do not suggest that
that meant he saw it coming but it indicates that people were
aware of it. I recall that there was tripartite emergency stress
testing carried out with the US authorities. I think the level
of interconnectedness, the subprime market in particular and the
impaired assets acquired by European banks were not foreseen and
therefore the impact that it would have and the contagion effect
were not foreseen. But I do not believe that there was complacency
about an established orthodoxy that nothing could go wrong after
that.
Q193 Roger Berry: For some people
there appeared to be a lack of any sort of emergency planning
in a bottom drawer somewhere. Lots of public institutions, health
authorities, local councils and so on, have plans about rare but
really damaging events that may occur. I strongly support the
policies that the government has pursued. I would argue that perhaps
there should be rather more of it. Do you not think there is a
real issue about the time it has taken to roll out a series of
policies whether in relation to your department or the Treasury?
The obvious question that follows from that is: given it has taken
so long for these policies to kick in and have some effect, and
indeed to be produced, does it not reflect a lack of perception
that this kind of problem can ever occur? What was the emergency
plan, the risk assessment and the package of policies in the bottom
drawer to be pulled out if ever again lack of demand should kick
the economy hard and this is the response? Am I being unfair or
is it reasonable to ask where the plan was, because I cannot find
it?
Baroness Vadera: You are being
both very reasonable and a little unfair in your question. We
did have emergency planning with the US before. It is interesting
that while you can go through the motions of dealing with what
happens in a scenario when it actually happens it is different.
I do not accept we have been slow to respond. We really should
take a hard look at that without playing politics because it is
quite important. We were the first country to do a recapitalisation
programme which was very timely; we were the first to do an asset
protection scheme in a comprehensive way after the stress test,
and that was also very timely. We were among the first to put
into effect plans—we had an existing scheme—to help
small businesses. In the 2008 Budget that was ramped up in part
in anticipation of seeing the problems that would arise from the
credit crunch. We were among the first to prepare a comprehensive
plan on fiscal stimulus, so what you say about our flexibility
and responsiveness is not something I recognise. I believe it
has been commented on internationally. Dominique Strauss-Kahn,
head of the IMF, has said it; a lot of people have said it publicly
and followed our lead, so I do not believe we have been slow off
the mark in responding. But if the question is whether we could
have foreseen a systemic global banking failure and had the enterprise
finance guarantee scheme in our bottom drawer ready to implement
that is possibly a bit unfair.
Q194 Chairman: I have a lot of sympathy
with Roger Berry's line of questioning. The trade cycle happens
and bust follows boom. This bust is deeper than the one we expected.
One would have expected the department to have some weapons to
deal with the inevitable bust. I accept that your enterprise finance
guarantee scheme could not have foreseen the scale of the financial
crisis, but the FSA did know privately how badly stressed the
financial system was in the UK. The scale of it even took the
FSA by surprise. Do you think there could have been something
perhaps in the bottom drawer to be brought out just a bit quicker?
Baroness Vadera: When it comes
to the banking system perhaps you should question those responsible.
Q195 Chairman: I am not talking about
the banking system. A conventional recession was going to happen;
the bust would happen.
Baroness Vadera: I would not accept
that a conventional recession in the way you imply would happen.
Q196 Chairman: Do you say that growth
would have carried on for ever if there had not been a credit
crunch?
Baroness Vadera: I think we had
demonstrated a degree of smoothing out and obviously had gone
through a downturn in 2002 and were able to deal with it. I simply
point out that the severity and suddenness of the decline is clearly
attributable to a global financial crisis.
Chairman: I will not labour the point,
but I believe that there would have been a recession of a conventional
kind anyhow at some stage and one might have been prepared at
least for that. I accept that this is more serious.
Q197 Mr Oaten: I agree that the government
was very quick in responding with lots and lots of announcements,
but that is the difficulty. There were lots of announcements but
there is considerable concern about the transition of those announcements
into delivery. The speed at which those announcements were turned
into reality has just been too slow. One of those cases is the
enterprise finance guarantee. You said at the start that you were
good at looking at data and enjoyed doing that. Are you in a position
to let us know just how many awards have been made under that
scheme so far?
Baroness Vadera: The number is
about 2,060 for a figure of £186 million and there are others
in the pipeline. There is a lag between companies logging onto
our system and conversions. There is a very high conversion rate,
but not all of them are converted. I will give the exact number,
if that helps.
Q198 Mr Oaten: It would be helpful
for the Committee to know the exact number. It would also be useful
to know the average delay in the process. I am sure you will understand
that a business facing real financial difficulties cannot wait
for a long period of time to get an answer.
Baroness Vadera: Absolutely.
Q199 Chairman: The Committee is to
take formal evidence on 2 June on the workings of the enterprise
finance guarantee scheme, so this will help inform us ahead of
that session.
Baroness Vadera: The exact figure
as of last Thursday is 2,059 and that represents £186 million,
and in the pipeline are 3,071 for a total of £344 million.
We track it on a weekly basis and have a run rate that we need
to watch to ensure that it is disbursed adequately. It is at about
the run rate it should be.
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