Examination of Witnesses (Questions 1
- 19)
TUESDAY 7 OCTOBER 2008
MR CHRIS
HANNANT, MR
STEVE RADLEY
AND MS
KAREN DEE
Q1 Chairman: Lady and gentlemen,
thank you very much for coming in today in this opening session
in the Committee's inquiry into the role and effectiveness of
regional development agencies. It may interest you to know that
as far as we can recall this is the biggest inquiry we have ever
launched in terms of volume of evidence received. We thought we
had been flooded during our energy price inquiry but we have now
received almost exactly twice the number of submissions to this
inquiry than we received for that one, 113 pieces of evidence
and growing daily, which I think shows the interest of the issue
to those involved, and we are very grateful. Having the British
Chambers of Commerce in particular before us today, it would be
strange not to invite you to comment on the survey that you published
this morning. I understand that the Engineering Employers' Federation
might also have some comments to make but Karen Dee from the Confederation
of British Industry this is not really your area of responsibility
so we will come to you on the RDAs. Not that the CBI does not
have a lot to say on the situation but not this particular branch
of the CBI. I introduced you implicitly by that but can I do what
I always do and ask you to begin by introducing yourselves for
the record, perhaps starting with Karen, then Steve, and then
Chris and as you introduce yourselves make a comment on what you
have been saying this morning.
Ms Dee: Good morning.
I am Karen Dee and I am Head of Infrastructure at the CBI.
Mr Radley: Good morning. I am
Steven Radley, Chief Economist at the EEF.
Mr Hannant: Chris Hannant, Head
of Policy at the British Chambers of Commerce. This morning we
published our Quarterly Economic Survey. As the name suggests,
we survey our members four times a year. We think it is the biggest
survey of business across the country. We get over 5,000 respondents
and the picture looks pretty grim out there in the real economy.
I think it is worth making a distinction between the real economy
and the world of finance. When I say things look grim, we have
got some of the worst indicators in terms of confidence, cash
flow, order books, et cetera, since we started it nearly
17 years ago. Things are tough but they are not disastrous. We
are at a relatively good place to start in terms of unemployment,
inflation, interest rates, et cetera, so although it looks
a bit grim it is not disastrous. However, there is this looming
crisis in the finance world which is concerning. You look away
for a couple of hours and there are new developments. We are very
concerned about the potential impact and the consequences that
the seizing up of the money markets and the lack of liquidity
for the banks may have for businesses in terms of availability
of credit, overdrafts, loans, et cetera. Working capital
is the life blood of every business and we are concerned that
the financial crisis could turn what is a downturn and a tough
economic situation into something that is much, much more serious.
In that respect we have been calling for prompt action from the
Bank of England for a half point cut in interest rates on Thursday
and also for the Government to cut business taxes, but I think
more generally the thing that is sorely missing at the moment
is any confidence in the financial system, and that has to be
restored some way, and I think it is not the sort of thing that
one specific action can deliver. It is not just the UK Government
but governments around the world which need to be seen to be on
top of the crisis so that people who are lending in the money
markets can start to have a bit more confidence and start to lend
that money and then the credit will flow again.
Q2 Chairman: I know two of my colleagues
want to explore that issue of credit availability in a little
more detail briefly, but, Steve, could I ask you to comment on
EEF's position. EEF has been quite optimistic about manufacturing
(although there are concerns about raw material prices and so
on) but what do you make of what the BCC have said today?
Mr Radley: In terms of the overall
picture I agree completely with what Chris is saying. From a manufacturing
perspective, what we have been saying for the past nine to 12
months is that for a lot of companies they felt a disconnect between
what is happening in the financial markets and their own situation,
for a lot of them continued to be fairly strong. I think more
recently we have seen it starting to impact on manufacturers because
it has squeezed consumer spending and we have seen the hit on
motor vehicle producers and export markets, particularly in the
European Union (which have kept things going for manufacturers
for some time) are now starting to look a lot weaker. I would
add though that there is still a mood of resilience out there
and I think a lot of companies have diversified, they are selling
into the Middle East and emerging markets and you can still look
at companies and individual sectors of manufacturing that are
doing fairly well. However, I think Chris is absolutely right,
the situation is getting a lot tougher. On the issue of credit
a lot of manufacturers say that they have continued to be able
to invest if they felt the project added up because a lot of them
have actually done it out of their own retained earnings. What
we have also found from banks is I think perhaps in the past banks
have regarded manufacturing as a rather unexciting, unattractive
sector and now, with the world becoming so complex and so many
problems in financial markets, some banks have said, "We
understand you, you are a very steady proposition," and for
some companies it has got a little easier. What is getting more
difficult now, as order books get squeezed and as costs rise and
companies are facing more cash flow problems is the fact that
issues and problems in financial markets are going to start to
affect manufacturers.
Chairman: I think that leads nicely to
what Brian wanted to ask you.
Mr Binley: Having met with about 24 small
businesses over the last week, nine of them in the Chamber of
Commerce office in Northampton, I am getting the information that
we are getting real, real pressure on SMEs (but particularly for
small businesses) from the banks. Aged debt is growing and elongating,
bad debt is growing, sales are getting more difficult and cash
flow pressures are getting immense. People have been to see their
banks and talk to their banks—and this is long-term relationships
I am talking about, 11 to 20 years in many cases that I heard—and
their banks are saying not only can they not have any more money
on overdraft terms (because most small businesses rely on overdraft
facilities) but that their overdraft costs are going up, in some
cases to 15%, and banks are saying that that situation might get
worse and overdrafts might be withdrawn towards Christmas and
beyond. I believe that the Government can take some really positive
action. They did when they threw over competition rules and they
ought to with regard to small businesses. I want to see money
ring-fenced for them. If we are giving so much money from the
Treasury we ought to be able to demand a condition of that kind.
I want to see a cut in interest rates, certainly from 15%, and,
finally, I do not want to see any cut back on overdraft facilities;
that would be disastrous. Can you comment on that scenario?
Q3 Chairman: A policy prescription
expressed articulately by Brian Binley.
Mr Hannant: I would agree with
what you have heard, although we are talking constantly to our
members to try and find out what the picture is. It is mixed and
it depends with whom they are currently banking. There is certainly
pressure coming down through the banks to reduce credit because
the banks do not have any money themselves, and that is the problem,
and it will be essential that measures are taken to ensure that
the cash flows and that there is money available to businesses
to enable them to carry on because if the system seizes up then
we are all in trouble.
Mr Binley: Yes.
Chairman: Thank you very much for that.
Lindsay? And then, Steve, do you want to comment at all?
Q4 Mr Hoyle: Just following up from
Brian, it is interesting because what we are asking for—and
you seem to be agreeing—is intervention by the Government
and if we are putting the money in, why are we not getting something
back in return to help protect business, and it is nice to see
the Chambers of Commerce going along with that. Hopefully everybody
is of the same opinion. So what can we do, why are we not naming
the bad boys in the banking game because I think the problem is,
as you said, it is not everybody, it is certain banks, so let
us name and shame and we will know, effectively, who we have to
take on. My concern is, and what small and medium-sized businesses
are saying to me is that their biggest problem is paying their
new energy bills. Not only have we seen oil go down but the fact
is gas is going up by 30%, oil has dropped by 30% so gas has dropped
by 30%, and the projection is a 30% increase on top of what they
are already paying, so we have got a 60% differential in the price
and they cannot pay their energy bills. What do you think we should
do and what are you doing to try and get those bills down?
Mr Hannant: I agree that there
is a problem with the energy markets for small businesses.
Q5 Mr Hoyle: Medium-sized as well.
Mr Hannant: Small and medium-sized
businesses. What we hear a lot about is that they find themselves
on complex contracts, it is difficult to ascertain what the true
price of what they are paying is, sometimes they find themselves
flipped over on to a new contract because they have not picked
up on the small print and the problem is that they do not have
the same rights that you and I have as retail customers. We have
been asking the Department—I still want to call it the DTI—to
look at potentially extending those rights to small and medium-sized
businesses. Certainly we have been talking to Ofgem about looking
at the practices of the energy companies in regard to small businesses.
They have a current investigation into it.
Q6 Chairman: Their provisional results
yesterday are really quite encouraging in this respect. They seem
to have taken a lot of our concerns as a Committee and Mr Hoyle's
concerns in what they have said, and it is something to which
we are planning to return to as well, so there is some sign of
hope there. They have expressed exactly what you have just said
in your report yesterday.
Mr Radley: On the energy issue
I think the only thing I would add is the issue for a lot of manufacturers
is their inability to get gas on the same contractual terms as
their competitors in Continental Europe. This seems to be an issue
that Ofgem has actually taken up and I think it is probably something
that needs to be taken up by the European Commission. On the issue
of banks, measures to help SMEs will be extremely helpful but
it is no substitute for an overall strategy that is actually going
to shore up confidence in the financial system and that is probably
something again that we are going to need to do at a co-ordinated
level across Europe. At the moment what is extremely unhelpful
is that the key European economies do not seem to be working as
closely together as they should do.
Mr Hannant: I do not think it
is just a question about naming and shaming. Banks are in the
business of lending and if they do not lend there is no point
to them, and the problem where they are cutting back on lending
is because they have not got anything that they can lend, so I
would agree with Steve that we need to get the whole market moving,
the money markets and all the rest of it, so they are in a position
to shift the money around.
Q7 Mr Clapham: Steve, can I just
ask in relation to what you were saying about manufacturing whereby
you said that because manufacturing had previously not had the
kind of relationship with the banks that others might have, they
had found their own route through, but nevertheless there were
implications for the future. Is it a matter that if we see the
Government intervening immediately then we might well avoid tipping
manufacturing into a worse position than it already is?
Mr Radley: I think what we need
to do is we need to move fairly quickly here to intervene to shore
up confidence in the banking system. That is going to have implications
not just for manufacturers but business across the economy. What
we do not need to do is rush into something that does not work.
We need to come up with a plan fairly quickly that is going to
be credible and actually underpin the banking system, and I think
that is the key issue for manufacturing. If you get that right,
manufacturers have been through a lot of tough times over the
last couple of decades, and they are extremely resilient now and
they have got stresses in place to actually move forward, but
what we need to do is get the financial system fixed for them
to be able to do that.
Chairman: We must move on to the main
subject of the inquiry but it may interest you, and indeed other
people, to know that we do hope to have the new Secretary of State
in relatively soon to explore these issues in rather greater depth
than we have been able to do in this brief 10 or 15-minute beginning.
Thank you very much for that. It does set in context the issues
about RDAs to which we must now turn and I look to Lindsay Hoyle.
Q8 Mr Hoyle: Karen, can we start
off, if we look at the RDAs, what do you think are their strengths
and also what are their weaknesses?
Ms Dee: I will not take that as
a leading question. Basically, as we have outlined in our submission
to the Committee, the CBI right from the start of the set-up of
the RDAs were supportive of the RDAs. We thought that it was a
good idea to have a regional tier or body to focus on economic
development. I think that some are better than others, performance
is mixed, but we continue to see that as an important role. I
think there are some key policy areas for us where it is clear
that that regional level is important, things like planning for
infrastructure and some transport issues which are not unique
to local authority-type boundaries and getting that co-ordination
and having a body to be able to do that is something that we see
as particularly valuable. In terms of weaknesses, it is not easy
to say that they are all the same because there are regional differences.
Some of the key concerns that our members would express are things
like making sure that they focus on what they were intended to
deliver, so the focus on economic development should be what they
spend their time doing, not trying to do too much and spreading
themselves too thinly. I guess there is patchy business engagement
and some are very good and others are less good. Those are some
of the headline things from us.
Q9 Mr Hoyle: How do you think the
RDAs' effectiveness should be measured? You have said that you
have seen the strengths and weaknesses, some are good, some are
bad, so how do you think we should measure them?
Ms Dee: I think that is quite
a tricky question. From a business perspective what we are really
interested in is the outcomes. You can measure outputs, you can
measure inputs, but it is sometimes very difficult to assess even
if you have outputs what that actually means, does it mean that
those businesses in their areas were successful? It is getting
a real feel for how they have delivered real, genuine effectiveness
based on outcomes not just outputs, and I am not sure we have
a fixed idea about exactly how that should be done.
Q10 Mr Hoyle: I want to test you
a little bit more on that because what is interesting is if you
know that some are good and some are bad then obviously you are
measuring the effectiveness.
Ms Dee: What we do not do currently
is gather empirical evidence.
Q11 Mr Hoyle: Right, so it is a gut
feeling you are giving your evidence on.
Ms Dee: It is not a gut feeling;
it is the feeling we get from our members. When we have asked
them (which is what we have done as part of this) some say, "Yes,
we are really pleased because they are effective and they engage
with us well and they are doing a good job, we feel," and
others will say, "We are not so sure".
Q12 Mr Hoyle: So who is a shining
example?
Ms Dee: I am not in a position
to say—
Q13 Mr Hoyle: But it will help us
with our evidence, to be honest. What I will not do is ask you
who is the poorest but it might be good to say who you believe
is top of the tree. Or one of the best if that is easier.
Ms Dee: One of the things that
members have commented is in the North East they are particularly
strong at business engagement. Businesses that commented to us
said, "We are particularly pleased with the way that the
North East Development Agency engages with us," so that was
one particular area.
Q14 Mr Hoyle: My final question on
that because I think that is absolutely key, is do you think that
is down to size because it is a smaller agency? If we take one
of the biggest compared to the North East, which is the North
West, do you think size matters?
Ms Dee: I am not sure if it is
size as much as whether or not there is a distinct regional identity.
In the North East there is that and I think in part that helps.
Mr Hoyle: Thank you, Chairman.
Q15 Chairman: Before I bring in the
next questioner, and I will call Mark Oaten in on a supplementary,
can I ask you an overarching question, and you might want to respond
to some of Lindsay Hoyle's points as well. I am struck by how
few of the pieces of evidence we have received for this inquiry
actually come from the business sector. They have come from central
government agencies, the local authorities, the RDAs themselves,
academia, various lobby groups and professional bodies, and the
voluntary sector, but only about 20 of the 113 or so submissions
received actually come from business. What I see here, if I am
very frank with you, is a reluctance to bite the hand that feeds.
Many trade associations have spoken to me privately about their
views about RDAs and have encouraged me to undertake this inquiry
because they are critical, but they have not submitted evidence
to this inquiry because they are reluctant to be seen to be criticising
their pay masters. Do you think that criticism is fair? Chris?
Mr Hannant: I think there is an
element of that. I endorse most of what Karen says. There is definitely
patchy performance and I would also say that even where an RDA
is perceived as doing well they may have variable delivery across
what they do. There is also a desire to be supportive because
when the original proposal came out it said look at economic development
at a sub-national level, and people thought, "Yes, that is
a good idea, we endorse that, we support that," and I think
one of our concerns is that what we have got now is quite far
from the original model. They have acquired a whole range of what
you might call non-economic responsibilities to deliver government
policy because they happen to be something that can deliver a
policy objective below national level and that is the tool the
government alights on. That has been one of their problems because
it has diluted their focus away from economic issues. I would
also like to just develop one of the themes that Karen picked
up. Where they are failing from our perspective or the performance
is below what is ideal, there is no real mechanism to pull them
up by their boot straps.
Q16 Chairman: We will come to accountability
questions later. I do not want to cut you off because other colleagues
will come to those questions later. Steve, do you want to comment?
Mr Radley: Just to add a couple
of points. I think measurement of effectiveness is an extremely
difficult thing to do. You probably need a range of tools there.
I think in terms of looking at outcomes we are very attracted
by the original recommendations of the sub-national review where
you look to gross value added per head and measured productivity
and you supported it by a number of indicators that were not perfect
(such as enterprise, skills, research and development spending)
but were probably the best available. I think you have to supplement
that by looking at the effectiveness of individual programmes
and also the level of engagement with business. You have to look
at a range of things, but I think Karen is absolutely right, the
focus needs to be on output. On the issue of commenting on the
performance of individual RDAs, I do not think I would want to
be drawn to say one is better than the other, but I think you
can identify some areas of very good practice. I think for example
the northern RDAs have done extremely well in working with other
partners in terms of regenerating some of the cities that were
going into decline.
Q17 Chairman: But you are going back
on the good stuff again. What I am asking you is whether there
are failings. I think your submission pulls its punches a bit.
Let us take the issue of boundaries of RDAs, the CBI evidence
and the EEF evidence both tuck away inside their evidence a criticism
that the boundaries are unhelpful. That is one of the major criticisms
I get from industry. A national industry like aerospace or automotive—to
just choose two at random—operate nationally and when it
comes to innovation which the CBI evidence refers to, or general
competitiveness questions, as yours does, you say the boundaries
of RDAs are irrelevant for day-to-day operations.
Mr Hannant: I would add that one
of the key things that helps an RDA be successful is where their
administrative boundary coincides with the real economic area.
Q18 Chairman: Like the North East?
Mr Hannant: Yes and, to be honest,
it works less well across the South East. The economic area really
is London, East Anglia, and the South East. It is a huge economic
area with London at its heart and we have got three RDAs. Where
you have not got the RDAs joining up effectively that makes for
a slightly piecemeal approach to economic strategy.
Q19 Mr Oaten: For a Select Committee
to do its job properly we need to know who are good performing
and who are bad performing RDAs. That seems to me completely simple.
The only question is that you either will not tell us or you do
not know. I do not accept that you do not know because I know
you all know who is good and who is bad and I know you know because
you have done surveys and the British Chamber of Commerce has
done its survey last August and on all of those five questions
about a third of businesses said that their RDAs were doing badly.
You must therefore know who submitted that from which regions
and you must have a regional breakdown of where those figures
came from. Why are you not prepared to give the Select Committee
that information? We do not necessarily want to name and shame
but for us to do our job it would be very helpful to know who
is good and bad. I do believe you know the answer to that question
because you must have it from the data from your survey.
Mr Hannant:. One thing I would
just say though is that some of those people saying they are good
and bad will be talking of the same RDA.
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