2 The Automotive Assistance Programme
13. The Automotive Assistance Programme
was announced on 27 January 2009 and received state aid approval
from the European Commission on 27 February 2009. The Government
told us:
The Automotive Assistance Programme
(AAP) is a support package that offers a total of £2.3bn
of loan guarantees or loans to the UK automotive sector, which
are available for draw down over a two-year period ending December
2010. The final maturity dates of such loans and guarantees can
extend beyond 2010. The scheme is designed primarily to use Government
guarantees to unlock up to £1.3bn loans from the European
Investment Bank (EIB) and a further £1bn in loans from other
lenders. In exceptional circumstances, Government loans may be
provided under the AAP.[17]
14. To be eligible, a company should
have a turnover of a least £25 million per year, and, at
least at the start of the scheme, should be proposing an investment
of a least £5 million. Further criteria are:
- Investment proposals should be consistent,
deliver new activity or investment that would not happen without
the provision of Government support and be consistent with the
Government's objectives for the loan carbon economy.
- Proposals should be in need of a
Government guarantee in respect of lending from the EIB or another
bank; as a general rule, it is not intended that guarantees would
exceed 75% of any loans, although the Temporary State Aid Framework
provides flexibility to consider guarantees up to 90%. In addition,
the Government is also prepared to consider direct loans in exceptional
circumstances.
- Companies should be viable as at
1 July 2008.
Projects need to be consistent with
the Government's plans for a low carbon economy. In the words
of the Government:
Principally the £2.3 billion
support package aims to support the continued delivery of the
investment vital to ensure that the UK industry emerges from the
current downturn with the skills and technology base needed to
be competitive in the global automotive market.[18]
Are the criteria right?
15. In principle, supporting continued
investment to ensure that the British automotive industry is well
placed to play a leading role in any upturn should be sensible.
Moreover, the requirement that projects should be compatible with
the Government's plans for a low carbon economy fits with the
NAIGT's vision of:
a competitive, growing and dynamic
industry making a large and increasing contribution to the UK's
employment and prosperity, playing a decisive global role in developing
exciting, low carbon vehicle transportation solutions.[19]
There was widespread support for encouragement
of green technologies;[20]
Mr David Smith, Chief Executive of Jaguar Land Rover agreed that
"environmental innovation is absolutely critical to our future".[21]
The CBI considered that:
The offer of loans and loan guarantees
within the Automotive Assistance Programme is a reasonable policy
response to the difficult credit conditions facing car-makers
and suppliers. Rather than propping up failing companies, the
scheme should help to unlock funds that will allow viable firms
to continue with their investment plans. In linking funds to only
'low carbon' related projects, the government is encouraging the
industry to make transformational investments to position the
United Kingdom as a major player in a future low carbon economy,
which is welcomed by the CBI.[22]
As Mr David Smith said:
if we want to seriously have a low
carbon vehicle industry in the United Kingdom we are going to
have to invest in it. The Germans are investing hundreds of millions
of pounds in their vehicle technologies and there are similar
investments from the Japanese, the US and certainly the French.
We either choose to make these investments now or we do not.[23]
16. In contrast, Mr Culloty, Chief Engineer
of Leyland Trucks, pointed out that low carbon vehicles might
be important, but there were wider issues to consider and that
"We would encourage a broad perspective to include advanced
safety concepts, road-friendly concepts and more beyond just low
carbon vehicle initiatives alone."[24]
He also called for "better focused and targeted grant support
for real added value technical projects. It would not just be
low carbon and electric trucks that may or may not happen, it
would be optimising the practical real solutions that we know
will be on the road in the next four to five years." We
agree that it is sensible to use government support for the automotive
industry to foster innovation, and that the emphasis on low carbon
technology is appropriate. This approach is a key part of the
package. However, it is not all that is required; other innovative
technologies, such as those relating to safety, should also be
eligible for support.
17. Witnesses were also concerned that
the eligibility criteria were set too high, both in terms of the
turnover required of companies involved, and in terms of the size
of the project proposed. The Enterprise Finance Guarantee Scheme,
which provides guarantees for SME lending in all sectors, covers
companies with a turnover of up to £25 million, but only
deals with loans of up to £1 million. While the Department
had said it would be flexible about the threshold for applications,
many witnesses felt there was an unhelpful gap between the two
schemes. Mr Ian Gregory of the new Department for Business, Innovation
and Skills (BIS), told us there was a concern that setting a lower
threshold:
might swamp the scheme with a lot
of very small applications, but we are entirely happy to discuss
projects smaller than that, and I know the Minister wants me to
look at any flexibility on that.[25]
The new Minister emphasised that:
The message going out today is,
"Don't let that £5 million barrier prevent you from
approaching the scheme."[26]
However, at the time of writing, the
information on the BIS website says quite clearly "Projects
must be for a minimum value of £5 million."[27]
18. As noted above, the NAIGT report
drew attention to the "hollowing out" of the supply
chain in the United Kingdom. It warned that:
a competitive UK supply chain is
essential to retaining an increasing investment by vehicle manufacturers
in the UK, as well as maximising the added value in that supply
chain. Supply chains, rather than individual companies, compete
on the international stage.[28]
Our witnesses agreed that the supply
chain needed to be strengthened and supported. We ourselves are
concerned that if the threshold for projects which can be supported
under the AAP is too high, supply chain companies will not be
able to access vital support.
19. We also heard that the criteria
for support might mean the most innovative companies were excluded.
Semta, the Sector Skills Council for science, engineering and
manufacturing technologies in the United Kingdom, told us that
"given the focus on innovative low carbon investment"
there was disappointment "that smaller companies, which are
developing exciting new technology in this area, are not able
to access the funding".[29]
Mr Gately of Multipart told us that the companies too small to
qualify were "where the innovation starts"[30]
and "if you are going to do something real you have got to
push it hard by looking at those small organisations that will
be innovative and drive change".[31]
20. We understand the Government's
initial concern that if eligibility criteria were set too low
the scheme would be swamped. However, there is too great a gap
between eligibility for the Enterprise Finance Guarantee Scheme,
and eligibility for the Automotive Assistance Programme. We recommend
that the loan guarantee threshold for the Automotive Assistance
Programme should be lowered urgently to £1 million. Moreover,
the Government has said that under exceptional circumstances it
may make direct loans to automotive companies. There should be
no lower limit on such loans.
OTHER ASSISTANCE
21. Witnesses also warned that assistance
to the automotive industry was required urgently, and that in
the short term more was needed. Professor Parry-Jones told us:
The speed of response of the various
initiatives that have been requested by the industry has not been
quick enough. Time is of the essence during this crisis because
this industry probably more than most has been hit by the double
whammy of collapsing consumer confidence and therefore collapsing
demand and of course the shortage of credit availability for industry.
The cash flow issues that rapidly plunging demand have imposed
on the industry have really high fixed costs. It is very difficult
to cut cash requirements in this industry. That has been exacerbated
by the fact that credit lines cannot be extended.[32]
22. Like other witnesses, Professor
Parry-Jones suggested that other types of help were also needed.
He suggested help was needed to provide access to finance for
car buyers, and finance was also raised by other witnesses. There
was support for some sort of scrappage scheme. Both these issues
are discussed later in this Report. Companies need to survive
this recession in order to help produce the low carbon vehicles
of the future. Some will need help with their current range of
products. We expect the Government to show a pragmatic approach
to ensuring the future of the industry; its help needs to be swift,
and it needs to deal with current problems. The AAP should be
flexible enough to support industry in other ways than simply
through guaranteeing loans to support investment in low carbon
technology.
The
scheme in practice
23. Despite the high hopes for the AAP,
the scheme has been slow to produce results. When we took evidence
from the Department, the Chairman asked how many projects had
been supported so far:
Ian Lucas: I think it is
a round figure.
Mr Gregory: It is a round
number; it is none.[33]
On 17 June, in response to a PQ, we
were given the following information:
We are currently in detailed discussions
with a number of businesses about their applications for funding
under the Automotive Assistance Programme (AAP).
There have been more than 70 further
requests for information on the scheme with the AAP team working
with companies resulting in around 15 approaches being developed
into detailed discussions with BIS for serious applications.
The details are commercially sensitive
and subject to agreement. However, some details about the support
provided under the AAP will become available in due course.[34]
24. The Department has made reasonable
attempts to publicise the scheme. Officials have tried to reach
out to the industry, approaching the SMMT to use their networks
to publicise the scheme and briefing RDAs about the support available.[35]
Given the importance we place on the supply chain, we were particularly
pleased to learn that they had used a Jaguar Land Rover supplier
seminar to ensure that suppliers were aware of the scheme and
were in talks with other OEMs[36]
about the possibility of working with them to reach their supplier
base.[37] In addition,
Ms Whewell told us:
I think one other point to flag
is that Ian Pearson[38]
has also written specifically to the supply chain via the manufacturers
on more than one occasion setting out a complete list tailored
to the automotive sector of all the support available. That has
been sent to the manufacturers, who have undertaken to send it
to their entire supply chain and we have evidence that it has
been getting through.[39]
25. It was also clear that not all the
delays arose from the Government side. Mr Gregory told us that
at least two companies in negotiations with the Department had
asked them to be delayed to allow time for them to approach the
banks and that:
We have been proceeding in almost
every case at the pace which has been dictated to us by the company.
The last thing I want to do is to cut across their commercial
relationships with other customers or with banks and queer that
pitch.[40]
26. There are particular difficulties
in that a loan guarantee scheme depends on the existence of loans
to guarantee. The SMMT told us that "the banking sector is
currently in many cases reluctant to provide credit to companies
within the automotive sector".[41]
The Government has attempted to address this. It has involved
banks in publicising the AAP, and ensured that they attended the
supplier seminar in March.[42]
Indeed, Mr Gregory went further:
a bank might take the view at a
corporate level that it wishes to be helpful to the sector. It
is very difficult to translate that on the ground into a particular
person in a bank thinking about lending to company X for project
Y. Where we can, we will get involved in those relationships.
We want to be step by step with the bank as they are considering
the proposition. As the Minister has already said, if it proves
that the bank is simply unwilling to finance, we do have in extremis
the ability to make a direct loan and it seems to me in that case
the additionality argument is quite strong because clearly the
bank is unwilling in a particular proposition to loan.[43]
27. The Government ascribed the delays
in advancing help under the scheme to individual companies' desire
to deal directly with their own banks. Nonetheless, the industry
considered that although the AAP was "exactly what we were
looking for",[44]
administration of the scheme was imperfect. There was a fear that
the criteria were not as flexibly interpreted as they might be,
or might be elsewhere.[45]
There is certainly a widely held view that the scheme is slow
and bureaucratic.[46]
28. The SMMT told us:
Some companies have found it initially
difficult to gain access to relevant information and to meet all
the eligibility criteria. The process has been improving but such
initial obstacles have had an impact on take-up.
Even though the AAP directorate
has proved helpful in assisting and directing companies through
the application process, for many of our smaller members the application
process remains confusing and unclear and all the companies who
have shown an initial expression of interest have found the process
longer than anticipated.[47]
General Motors pointed out that the
delay was inherent in the way the scheme worked:
To be able to apply for AAP support
companies must provide evidence of support from a bank. The AAP
requires a company to have approached a bank (most will already
have exhausted all opportunities before approaching the AAP) for
support and if rejected, enquire whether support could be achieved
through an HMG loan guarantee. Although we understand that BERR
must ensure enough evidence is provided to satisfy requirements
that tax payers money will be protected the balance between the
time to undertake this and the rate at which the industry is continuing
to decline must be considered.[48]
29. Moreover, where negotiations had
started, progress appears to have been slow and difficult. It
does not seem to have taken account of strategic priorities. Professor
Parry-Jones told us:
The large car sector in many ways
is an even more important sector to develop the technology for
lower carbon vehicles than the small car sector. That may sound
surprising and counter-intuitive. Large car customers are more
affluent than small car customers. In the early stages of deploying
new technology it is inevitably more expensive for two reasons.
One is because it is early we have not learned how to make it
cheap yet and the second is it is small scale so we have not benefited
from economies of scale. [...] Jaguar Land Rover first of all
needs to reduce the carbon emissions in its fleet to be competitive
with Mercedes, BMW and Lexus and, secondly, it provides the industrial
base opportunity for Britain to participate in that in real time
with regard to piloting in the premium sector. If we miss that
opportunity it will be really difficult to piggy-back on it for
the volume applications later.[49]
30. Despite its strategic importance,
and although the Government considered that Jaguar Land Rover
was a "top priority", the company told us it had proved
impossible to conclude negotiations between the company and BERR
about the terms of a guarantee,[50]
even though it had "already received loan approval from the
EIB for a substantial facility, £340 million, against our
future technology investments. To unlock that we have to have
the loan guarantees in place from the Government".[51]
The premium car sector and its supply chain is likely to be
the source of many of the innovations which, used more widely,
will aid the transition to low carbon vehicles. The fact that
the United Kingdom has the second largest premium car industry
in the world should be seen as a key strategic strength. Jaguar
Land Rover has already secured funding for its future technology
investments; all that is under discussion is the Government's
guarantee. As at 7 July 2009 there has been no indication that
there will be such a guarantee: we are astounded that it has taken
so long to arrange this, particularly since the support needed
is so limited.
31. It is clear that the Government
has taken a number of sensible steps to make the AAP successful.
It is working with a wide range of people within the industry,
it has not forgotten the need to reach the supply chain, and it
is trying to involve the banks in the scheme. However, we cannot
discount the industry's complaints about the delays in agreeing
support measures, and we are profoundly disappointed that to date
not one single penny has been advanced through the scheme. We
hope that this will change rapidly.
17 Ev 64 [BERR] Back
18
Ev 65 [BERR] Back
19
NAIGT report, p 17 Back
20
Ev 88 [Semta], Ev 83 [GLA], Ev 89 [SMMT] Back
21
Q 60 Back
22
Ev 74 [CBI] Back
23
Q 85 Back
24
Q 236 Back
25
Q 395 Back
26
Q 395 Back
27
http://www.berr.gov.uk/whatwedo/sectors/automotive/aap/page50296.html Back
28
P 49 Back
29
Ev 88 [Semta] Back
30
Q 209 Back
31
Q 212 Back
32
Q 33 Back
33
Q 384 Back
34
HC Deb, 17 June 2009, col 416W Back
35
Q 351 Back
36
Original Equipment Manufacturers - essentially, vehicle producers. Back
37
Q 50 Back
38
The Minister previously responsible for the automotive industry. Back
39
Q 353 Back
40
Q 389 Back
41
Ev 83 [GLA], see also Q 71 Back
42
Q 391 Back
43
Q 391 Back
44
Q 69 Back
45
Q 82 Back
46
Q 218 Back
47
Ev 89 [BERR] Back
48
Ev 79 [General Motors] Back
49
Q 12 Back
50
QQ 55-56 Back
51
Q 53 Back
|
