Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents



EXAMINATION OF WITNESSES (QUESTIONS 420-439)

CBI

4 NOVEMBER 2008

  Q420  MR HOYLE: Do you think part of it is that we have been too reliant on the finance service sector and we have not put enough emphasis on manufacturing—like Germany and like France, who still believe in a very strong manufacturing base—and that has been our weakness?

  MR CRIDLAND: We have the economy we have. The capital intensity of our economy is different and therefore that produces a different economic pattern. We may subsequently come on to questions of innovation. We are often criticised on innovation, but I think that we have the R&D rates you would expect from the capital intensity of our economy. But on your question "Should we be in this position or should we have adopted a different approach?" the CBI would not have wished to try to maintain a commodity-based manufacturing economy based on high volumes of low value-added labour. We think that would have been a short-term palliative and be likely in the long term to have declined.

  CHAIRMAN: We are actually moving into Brian Binley's questions, so I think what I will do is cut you off so that Brian can ask his questions and make sure we shape the context of what he wants to ask.

  Q421  MR BINLEY: Can I ask you to explain to us what the CBI's view is on government proposals to support business so far in the short to medium term? What would you like to see introduced in addition to what the Government has done, or indeed taken away?

  MR CRIDLAND: The most important thing the Government has done is the measures to stabilise the banking sector, because that was a whole economy problem and that was widely supported by all CBI members. There was no criticism of the special help for the banking sector. I think that now the Government needs to avoid trying to do the same thing for the whole economy, because I think that measures of that kind would be doomed to failure. Without repeating what I said previously, that was behind my comment about public borrowing. In some areas I am afraid that the die is now cast. We are in for a prolonged period of zero or negative growth, and therefore what the Government can do has to be carefully targeted, because it is likely to be at the margins but none the less of importance. We have welcomed the Government's focus on measures for help for small businesses. That must be the right targeting of attention. If you were looking for further things that the Government could do, of particular importance going forward—and this is a whole economy request—would be to reverse the Government's decisions in April on empty property rate relief. I think that there are large parts of the economy, both industrial and commercial, that, in a grim 2009, will have empty property which they cannot offload in a falling property market. That was our position when the Government made what we felt were unhelpful changes to empty property rate relief, and I think that it would help small, large, manufacturing, and service companies if those changes were reversed.

  Q422  MR BINLEY: Are you happy with the way the Government introduced its added liquidity into the banking structure? Do you think that it received enough scrutiny? Do you think that we ought to have looked at it in more depth?

  MR CRIDLAND: I certainly think that it requires very close scrutiny. I think that this is a long-term project, to ensure that it achieves its purpose and that the taxpayer gets a proper return. At the moment of crisis, we felt that it was appropriate for the Government to take bold decisions, and those bold decisions have been supported by the business community. We were not critical of the terms of the package when it was announced, therefore, but you are absolutely right: vigilance to make sure that this package achieves its original objective; that money does flow to small businesses; that the banks are able to restore liquidity; and that banking practices are reformed such that the taxpayer receives the appropriate return on investment. We will need to watch that extremely carefully.

  Q423  MR BINLEY: We are getting reports—at least, I am getting reports certainly, and we have had some information from the British Chambers of Commerce that this is so—that the banks' relationship and their approach to SMEs has been very ad hoc and not very sensitive. Would you tell us how we might, in government, improve that scenario?

  MR CRIDLAND: I think that it is difficult for government to improve that scenario. We can all of us encourage the banks to move to previous practice, but this comes right down to branch level and is actually an issue of management practice and case officer practice—where, with the best will in the world, requests from the Chancellor to the chief executives of banks may get lost in transmission. What our small firms are telling us is that one of the biggest casualties of September was the relationship between bank managers and small businesses; that bank managers would throw their hands up and say that their discretion, their ability to use sensitivity, had been removed in the moment of crisis by a centralised approach from bank headquarters. One can understand why that would have happened in the moment of crisis but, with the moment of crisis past, we need to rebuild those relationships. The problem when relationships are tarnished, when small business owners feel that the bank has shut the door in their face—that is their perception, I am not commenting on the reality of it—is that it will take a long time to rebuild that mutual trust. Clearly what some small business have done, believing that the banks were not interested, is that they have withdrawn from asking the banks for finance, which reinforces the problem.

  Q424  MR BINLEY: Can I put it to you that in fact this is not a reaction in crisis, but this has been happening as a matter of policy for 25 or 30 years with the banks? In fact, the knowledge of local businesses that they used to have 25 or 30 years ago no longer exists with the banks, and therefore the ability to impact upon a given precise situation simply does not exist in the banking structure any more. Is that a fair comment?

  MR CRIDLAND: I have sympathy with that view. We have both banks and many small businesses in membership, and one of the services we provide by having both people within the CBI family is a regular dialogue over many recent years to try to tackle some of these issues. However, I would suggest that, to the extent to which relationships were positive, they were heavily dented in the late summer and early autumn.

  MR BINLEY: A final question. Should the Government develop a national economic strategy and, if so, what should it contain?

  Q425  CHAIRMAN: This is the point that you were beginning to answer with Mr Hoyle and a point the TUC made play of in their responses to us.

  MR CRIDLAND: We welcome the establishment of the National Economic Council. We have received requests from many ministers attending those meetings for our input on ideas to help with the economy and to help with small businesses. I guess the difficulty in answering the question is the definition of a national economic strategy. As I have already mentioned, we do not feel that a comprehensive, economy-wide, interventionist approach, as delivered with the banks, would be appropriate for the wider economy. We do not believe that public finances would allow for it; we do not believe that it would be targeted; we do not believe that it would be effective. The limited, at the margins but none the less important, measures that we have seen from a number of government departments—on issues like energy, on housing, on training, on skills, on public procurement—are welcome, if they each pass a value-added test. I do not think that we want to move back to a time when there is a single national economic strategy. In preparing evidence for your inquiry, I think that this is a moment when there is increased interest in, and we use the words "an industrial route map", for the future of the UK economy. I think that the earlier question on whether we could have a stronger manufacturing sector is an entirely legitimate one. We welcomed the Government's manufacturing strategy when it was published recently. We felt that was a helpful step in the right direction. We do believe that some of the important business policy objectives that need to be achieved in the next few years, particularly in the energy infrastructure arena—and I think of renewables and nuclear new-build—provide significant opportunities for a British manufacturing renaissance. It is appropriate for government to have a strategy to seek to achieve that, but I think that is one step short of what some people would look for in a national economic strategy.

  Q426  CHAIRMAN: So you are not looking for another national plan, as we had under George Brown?

  MR CRIDLAND: No.

  Q427  CHAIRMAN: Perhaps I could test this a little longer, because it goes to the heart of the inquiry about value added and the point that Mr Hoyle was making about the perceived imbalance in the economy. NESTA have given us evidence saying that the Finnish Government has very successfully had the kind of industrial route map you are describing, identifying potential strengths in the Finnish economy, which they can then shape the rest of public policy around to enhance. Not just a strategy of picking winners but a greenhouse in which the best fruits can actually grow strongest. Have you looked at the Finnish experience and do you think that there is anything we can learn from it?

  MR CRIDLAND: Yes, I think that the Finnish experience is quite encouraging and there are always lessons we can learn from international benchmarking. An industrial route map seeks to specify areas where you can see how, left to its own, business will not be able to deliver the transformational change that is needed. If you look at the moves required to deliver a low-carbon economy, the cliff-edge investment required in carbon capture and storage, to take an example, is beyond most private companies and their shareholders. That is a legitimate area for government to focus, with the Technology Strategy Board, the Energy Technology Institute, a certain amount of public funding, to get demonstration projects up and running. Otherwise, the private market will not be able to deliver. I think that the area the Finnish example most clearly throws up is the role of science. The Government is the prime funder of science in this country and therefore it has a very significant knock-on effect on industrial policy. We have always accepted that that is a legitimate area of strategic government planning.

  Q428  CHAIRMAN: Do you think that there is any significance at all, therefore, in the move of science away from the old DTI to BERR to the new department of DIUS? Does that matter or is it just playing with deckchairs on the boat? It does not matter where it rests, as long as it is done well.

  MR CRIDLAND: The CBI tends to be a little bit coy on making suggestions to government on the machinery of government. Ultimately, every change produces an upside and a downside at the same time. What we welcomed with the creation of DIUS was bringing innovation, science and universities together, because it was always slightly artificial to have universities, which play such an important part in the debate we have just been having, in a separate department to the department trying to promote innovation and business-university collaboration. Clearly it is now a cause of disappointment to us that the Department for Business is no longer a main player in the science and innovation debate. In a sense, if you improve one thing, you produce another boundary line.

  CHAIRMAN: It is a matter to which the Committee may turn its attention. Mr Hoyle?

  Q429  MR HOYLE: Does that mean it should go back to the old DTI and we should change our name back to a real name? Can I take you on to innovation? How can the Government extend its support for innovations in the service industry and beyond the science and technology R&D? Something close to your heart.

  MR CRIDLAND: It is close to our heart, yes. We have felt for a long while that the way government was measuring innovation was leading to a set of false assumptions and therefore sub-optimal policies. Their tendency was to focus on research rather than development. Their focus was on R&D rather than innovation. Their metrics were not capturing the activity that I would consider innovation in the broader economy. We were hugely encouraged by Lord Sainsbury's most recent report and by his definition of the innovation eco-system. For us it achieved two things. It explained why traditional R&D was lower in this country than in Germany. It explained it on the rationale that our capital intensity was lower and so we had the traditional industrial R&D that was justified by the size of the economy. However, I did not want to give a complacent message because the second statement Lord Sainsbury made was equally if not more important, which was that government needed to embrace and encourage innovation in the service sector. I remember a chief executive, who had come out of manufacturing and moved into the service sector, saying to me that he had recently signed off £100 million worth of business development expenditure in his service sector company—which nobody in that company considered research and development but which he, as an engineer with a manufacturing background, considered R&D. That has been the problem. Some of the exciting innovation we have seen in supermarket logistic chains, some of the exciting innovation we have seen in banking practices, before the most recent challenges, have not been captured in the way government has addressed this problem—until now.

  Q430  MR HOYLE: The big question therefore is can the intangible innovations be accurately and meaningfully measured now?

  MR CRIDLAND: I believe that they can. I think that a value added approach is a much better approach to capturing innovation in service sector companies. I believe that there is still a lot to be done in widening the definition of R&D within the R&D tax credit; so you do something about the metrics and you then do something about the policy measures. I think that the Technology Strategy Board, which we are very greatly supportive of, needs to have that wider vision and is now adopting it. I think that business-university collaboration needs increasingly to be in the service sector as much as it is in the manufacturing sector—and that is not currently the case.

  Q431  MR HOYLE: We have had different views expressed to the Committee and part of that view has been the successful innovation networks clusters—as we know, the big American theme of clusters. To what extent can this government or any government's policies actually ensure that the impact is there to help with their development? Can it be done? Is it being done? If not, what should we do?

  MR CRIDLAND: I think that we have most of the right tools in the policy toolbox. The need now is to sustain them. It is our view that business-university collaboration has much improved since the Lambert Report of 2003. I think that we have transformed the spin-out of commercial activities from universities. The permeation that I am looking for, rather than new policy, has to be to reach small businesses. That is difficult. It is difficult for all of us, but I think that we still do not have enough capturing of the potential of smaller businesses within the innovation eco-system.

  Q432  MR HOYLE: Do you believe that the Government's mainstream pro-innovation policies cross all departments?

  MR CRIDLAND: This is one of the areas where I think DIUS has a major challenge. DIUS is the champion of innovation policy but it is a small department in Whitehall. It is asking a great deal of DIUS to act as that champion across the whole of Whitehall. We are getting there but we are getting there slowly.

  Q433  MR HOYLE: Which department is the enemy then?

  MR CRIDLAND: I would not say there was an enemy but -

  Q434  MR HOYLE: All right. Who is the reluctant one?

  MR CRIDLAND: Coming back to my earlier comments about public procurement, I would say that it was a cultural issue across Whitehall. Without being in any way disparaging, if you are a civil servant in a non-economics department and you are looking at a public procurement deal, your main considerations will be the advice you have received from the Office of Government Commerce, best value considerations and whether, at some point in the future, might I suggest, you may be before the Public Accounts Committee to justify the position you took as an officer of the Crown. It is asking a lot of a civil servant in a non-economic facing department to think about what public procurement can do to achieve a low-carbon economy; what it can do to promote equality; what it can do to promote innovation. Permeating those cross-cutting themes, across all those many small parcels of public procurement, is genuinely very difficult. It is why it has proved so difficult to open up public procurement genuinely to small businesses.

  Q435  CHAIRMAN: Mr Oaten is going to ask you about procurement, so we must not steal all his thunder.

  MR CRIDLAND: I suggest that it is cultural across Whitehall and DIUS has a very big job to do to change that, alongside the OGC and the role of the Technology Strategy Board.

  Q436  MR HOYLE: Do you think there is a gap between innovation and getting that into manufacturing in the UK and not overseas?

  MR CRIDLAND: Yes, I think there is because there is ultimately a clash with OGC guidance on best value. If you are being asked to justify why you have chosen a more expensive procurement, because you believe that procurement will promote a cluster of small companies in the UK develop new technology, rather than buy an existing piece of kit off the shelf from America, that is a big ask of a public official.

  Q437  CHAIRMAN: You have sort of answered many of my questions implicitly. I was going to ask about business-university links. You have talked, though, about the need for a more effective intermediary between universities and business. Do you want to expand on that theme?

  MR CRIDLAND: Intermediary in which sense?

  Q438  CHAIRMAN: It is your evidence to us, as I understand it. You are suggesting that there are still problems in getting the two sides together.

  MR CRIDLAND: The CBI now has more than 60 of Britain's universities who have joined the CBI because they believe they are part of the wider business economy. With virtually all of those universities we have collaborative projects on issues like employability or technology transfer. I think the challenge is that there is no single portal, particularly for small businesses who want to work with a university. Our concern is that, for the large industrial corporate, they know who to talk to and where to get access; but, for small companies, they get passed round from one department to another department; not all universities currently operate a single portal and not all academics within universities necessarily have the incentive to work with small businesses on short-term projects. I think that limits the extent to which collaboration permeates down. I would also suggest that if you said to a university "Give me five examples of your best collaboration on research", they would have no problem. If you said, "Give me five examples of your best collaboration on skills or curriculum", the system is less flexible. That is not a criticism of universities; it is the way in which funding for teaching comes through to universities. They have less opportunity to make it flexibly available for collaboration with companies. It is in those areas, therefore, that I think there is not sufficient collaboration and that the mechanisms do not work.

  Q439  CHAIRMAN: So your solution is to encourage universities to have a single portal for approach, a single area of responsibility?

  MR CRIDLAND: A single portal approach. We currently have a task force on business and higher education. It is a single Thought Leadership task force the CBI is operating over the coming year, chaired by Sam Laidlaw, the Chief Executive of Centrica, with three university vice-chancellors sitting alongside 15 business leaders. One of the things we are trying to do is identify a model for collaboration whereby, as we move out of the downturn, the universities' position as the outsourced provider of choice to business, in giving them the high skills and the innovation collaboration that they may currently buy from other parts of the private market.


 
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