|
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 143-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE BUSINESS & ENTERPRISE COMMITTEE
THE WORK OF BERR IN THE CURRENT CRISIS
Tuesday 12 MAY 2009
Evidence heard in Public Questions 180 - 302
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Business & Enterprise Committee on Tuesday 12 May 2009 Members present Peter Luff, in the Chair Mr Adrian Bailey Roger Berry Mr Brian Binley Mr Lindsay Hoyle Miss Julie Kirkbride Anne Moffat Mr Mark Oaten Lembit Öpik Mr Anthony Wright ________________
Witness: Baroness Vadera, a Member of the House of Lords, Parliamentary Under-Secretary of State and Government Spokesperson, Department for Business, Enterprise and Regulatory Reform and Cabinet Office, gave evidence. 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. 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 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 it that 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 you 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 2,050 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. Q200 Mr Oaten: What should it be? Baroness Vadera: It is about £30 million to £35 million a week. Q201 Mr Oaten: What should be the waiting time? You have 3,000 in the pipeline. How long is the pipe? Baroness Vadera: There are two pipelines. When I was talking about delay I was referring to the fact that banks had two weeks to log onto our system, so there is a lag in picking up the data. That was the one I meant. In terms of businesses there are only three or four additional questions that a business would have to answer in order to benefit under the enterprise finance guarantee scheme, so the process needs to be the bank's normal process of assessing credit and whether they want to do this. There should be no additional delay, but because in the small business finance forum there is anecdotal evidence of delay we have investigated it and found that possibly more than one or two banks have an additional process, which we have taken up with them, that requires them to refer each one back. Instead of doing it at branch level each one is referred back to the head office, so we are in discussion with them to try to streamline their process, but the rest of the processes that we have done with the other banks is basically as it would be if they just proceeded in the usual way. Q202 Mr Oaten: I sense that we will not get an answer to the question. Baroness Vadera: I have answered the question: it is the same amount of time. Q203 Mr Oaten: No; that was not the question. The question was: how long is it? If I apply for this guarantee how long on average do I as a businessman desperate for the money have to wait for a yes or no? What is the answer? Baroness Vadera: I understand that it is done by each bank in accordance with its own timeline. Q204 Mr Oaten: Minister, it is fine to say you do not know. Baroness Vadera: Some of them do five days; some do 20 days. All I am saying is that if I gave you an average it would be incorrect because it does not work like that. It is the average of what they would do for a normal business. Q205 Mr Oaten: But as the Minister responsible for this sector do you not think you should have an idea of how long businesses have to wait for this? Surely, that is an indicator. Baroness Vadera: I have explained to you that it ranges from five days to three weeks. Q206 Chairman: Do you reject what the Federation of Small Businesses told me a week or so ago that the normal wait is two weeks for a loan and the enterprise financed guarantee scheme takes six weeks on average? Do you reject that anecdotal evidence? Baroness Vadera: We investigated this because of our discussion with the Federation of Small Businesses and found that in the main it is within the period that a bank would normally do it which is between five days and three weeks. We found evidence, however, that a couple of banks, which I shall not name, had a lengthened period because they referred back to the head office. We have taken that up in discussion with them to ensure that that is shortened. Q207 Mr Oaten: Are you comfortable with the fact that the banks are asking for personal security in many of the cases aside from the guarantee? Was that something you envisaged would be required as part of the scheme? Baroness Vadera: I would not describe myself as comfortable, but it was certainly envisaged. We had a long discussion and consultation with both the banks and small business associations. It was not an easy decision to make, but after some discussion we decided that they should be entitled to ask for a personal guarantee but not for a primary home. The reason for that, which was a balanced decision, was that the small firms loan guarantee scheme was specifically targeted; it was a very narrow and much smaller scheme. It was targeted on the group of people who would not have security available anyway, so it was not relevant. Almost all small firm lending, whether or not it is under the guarantee scheme, has some form of security provided for it. If the business has inadequate security then personal guarantees are the norm and are required. We took the view that we should follow normal banking practice and that if we did not essentially we would have a situation where the taxpayer was taking the risk that in one sense the entrepreneur was not prepared to take if it had security. Q208 Mr Oaten: Do you accept that in many cases these businesses have already taken that personal risk? Baroness Vadera: Indeed they have, but if they walked into a bank in a normal scenario, which would not be the current circumstances, and were prepared to provide a personal guarantee and had a home or property or something to provide as security they would do so. We did not take the view that just because the taxpayer in this instance would be standing behind it was the taxpayer's job to replace what the entrepreneur would normally have done. That was why the decision was taken. It may not have been the most comfortable decision to make but it was one we felt we had to. Q209 Mr Oaten: Are you sure that primary homes are not being required as security? You said they were excluded, but my understanding is that they are required. Baroness Vadera: They should not be required. I am prepared to take up any such case. We investigated it and in the first couple of weeks certainly errors were made. That was we put out a clarification. We have had a discussion with the banks. If the primary home is already part of an existing guarantee lending arrangement that the entrepreneur has with the bank which is then being extended into the enterprise financed guarantee scheme then it is rolled over; otherwise, in a new situation it should not be included and I should like to know of any instances where it is. Q210 Mr Oaten: There has been a complaint that this scheme was not particularly well publicised. Some surveys have shown that only 9%, 10% or 15% of businesses are aware of these guarantees. Do you think you could have done more? Baroness Vadera: When one is asked whether one could have done more almost always the answer is yes. We could always do more. Within a month of its launch we conducted a mystery shopping-type survey and we discovered that about 77% of banks at branch level were aware of it. We have asked for it to be increased. It is not just that small businesses should be aware of it; the onus should also be on the banks to say to a business that although it may not be eligible for a loan under normal circumstances this scheme exists. Q211 Chairman: This scheme was first trailed in the pre-Budget Report. We took evidence from the SME sector in December about how important it was, and here we are in May with questions still being asked about its effectiveness. It was formally announced on 14 January. Only last week a small business in my constituency said that the managers of two high street banks had been told by their bosses actively to deter people from applying for the scheme; they would rather give them conventional lending. Six months on there are still big questions on whether it works. That must cause concern. You have admitted that there are still delays in some banks in processing applications and that must worry you. Baroness Vadera: The delays are simply a process issue, not an acceptance issue; it is just the bureaucracy involved. Q212 Chairman: But this scheme started in the middle of November and the question should have been resolved before Christmas. Baroness Vadera: I do not believe there is now a problem in terms of the availability of drawdown. We have pretty much hit the weekly run rate we need to disburse the facility in the timetable allowed. There is perhaps one issue that it might be useful to discuss. There is potential misunderstanding about the purpose of the scheme. The purpose of the scheme is not as a substitute for conventional lending. If an appropriate small business that would not otherwise get bank lending comes in this scheme would be applicable. You gave the example of a bank being deterred from lending. I do not believe that is what is happening but if there are such cases I would like to know about them. The guidance is that if a bank would normally without the government guarantee provide an SME with a loan then it should carry on and do so because our job is not to substitute for that; it is to help those at the margins who would not otherwise be able to lend to get them over the line. What counts is the additionality. Chairman: My concern is that perhaps we are focussing too much on a scheme that is very marginal. It provides rather small sums of money when business has much bigger demands. That is the issue we have to address. Q213 Mr Binley: It is obvious that we live in two different worlds. You live in a world where you say you have received great international praise; I live in a world where small businesses are, quite frankly, slagging you off every week. That is the fact of the matter. I want to return to Roger Berry's earlier question about the department not being prepared for this. You say that it could not have been. Many small businesses including my own - I am a non‑executive chairman of a company that employs 140 people - first started talking about contingency plans in July of last year. We went to see our bank in August of last year, and that practice was undertaken by many, many small businesses. Why did not the department pick it up when small businesses picked it up all the time? Baroness Vadera: We did pick it up during the Budget of last year. Q214 Mr Binley: In November? Baroness Vadera: No, the Budget in March of last year. We very much focused on the needs of small business. We have an enterprise strategy that has delivered very significantly the things small businesses need. We increased the then small firms loan guarantee scheme very significantly because we wanted to deal with what we thought would be a problem. We did not anticipate that the problem would be exacerbated during the course of the year in quite the way it was. I am very happy to admit that. We did foresee those issues and problems in part, if not fully, and we made some contingency plans. I do not accept the claim that we were completely unaware. The enterprise strategy set out a whole number of ways in which we would be assisting businesses in terms of access to finance, training and skills and innovation but clearly the downturn in the banks particularly after Lehman's collapse in September was much more severe than anybody anticipated. Q215 Mr Binley: You are telling me that you had even more time which means that the management of the process took even longer than suggested. Are you concerned about that? What contingency might the department take in a future situation to learn those lessons? Baroness Vadera: I do not want to get into a political battle about whether or not we were prepared or we responded in a longer period. Q216 Mr Binley: I am talking about business. Baroness Vadera: The real question is: what more could we do? One interesting point is that when we have market failures of the level, persistence and spread that we currently have it puts the onus on the government to step in and that places a huge strain on the resources of government. I do not mean the financial resources but just the people in the departments who have to deliver it. That is something we see just about everywhere in the world we go. I think it would be a good thing for all departments, not just BERR, to be able to access people with the right level of expertise to deal with crises as they arise. Q217 Mr Binley: I leap forward to the situation with regard to small businesses that hate loans and work on overdraft. That seems not to have been taken into account by the department in the way it should have been. Do you now regret that? Baroness Vadera: I do not think it is true, so I do not accept that. Q218 Mr Binley: I tell you it is true. Baroness Vadera: We did two things specifically on overdrafts. The first was to ensure that, unlike the small firms loan guarantee scheme, the enterprise finance guarantee scheme allowed it because we understand that it is so important to small businesses. In the classification of small businesses up to £25 million with, say, £100 billion of term loans and £20 billion of overdrafts, it is a very significant portion. Some of them rely on it entirely. The second point is that we had discussions with the banks about their overdraft facilities well before any of the schemes and that was why there was an announcement for example by RBS about rolling over overdrafts and not changing the terms of them. That was followed by a similar announcement by Lloyds and, if I am not mistaken, HSBC and Barclays. One of the reasons we were aware of it was because of our regular discussion with small businesses in both the small business forum and the finance forum. That was one of the earliest points raised and that was why it was included in both the enterprise finance guarantee scheme and the discussions we had with the banks in which we asked them to consider their position and they made the announcements they did. We have found that overdrafts have remained stable. Obviously, there is a continuing issue around pricing and arrangement fees as there is also around term loans. Q219 Mr Binley: There are also issues around personal guarantees, mostly primary homes, all the time; there are issues about negotiating fees in relation to much smaller periods. All of those things impact heavily on small businesses, and you will know that when the manager or owner of a small business goes back to his or her partner and says, "We have to put the house on the line", in many cases they say it is not worth carrying on the business. That is the reality of the matter at the level I live it. How will you deal with that with the banks? Baroness Vadera: I give you the answer that clearly you are not prepared to listen to from my sense of it. Nevertheless, I shall try. When there are deteriorating credit conditions it is not surprising that approval rates decrease, but the biggest focus in the past six months has been on the maintenance of the flow of credit. When we took all the actions we did in terms of bank recapitalisation or the asset protection scheme it was not to save the banks but to save the economy from the banks as Mervyn King has said. All of these actions have been designed to keep credit flowing. We put in place those schemes and with the capital and funding and liquidity released from them we have implemented lending agreements with the two banks in which we have shares, plus we have had discussions with other banks who have not made legally binding contracts but commitments around lending. We now have a net increase over the past year in public lending commitments of £60 billion to £70 billion. In the case of those banks with which we have contractual lending agreements they also include overdrafts that are meant to be in the same sort of form that they would normally be conducting business with specific commitments about overdraft rollovers, not changing pricing in an arbitrary fashion. In the event that the enterprise finance guarantee scheme asks for primary homes as security that is not allowed and I should like to hear about it, but in the normal course of events personal guarantees and security are asked for, and always have been, so it is not something that we believe we can step in to prevent. Mr Binley: I should say that we live in separate universes rather than different worlds. Q220 Miss Kirkbride: You say that about 2,000 businesses have already applied under the business enterprise guarantee scheme and 2,000 are in the pipeline as you put it. To get an idea of how useful and widespread the scheme has been, how many businesses have applied and been turned down? Baroness Vadera: The number is 3,436 of which 3,071 were eligible in the first instance and had their applications considered. Currently, of those 2,059 have been offered. Q221 Miss Kirkbride: Two in three are successful? Baroness Vadera: Yes; it is 2,059 out of 3,436, but there is usually a lag. Therefore, the conversion rate from just looking at eligible applications is quite high; it is 3,436 to 3,071 and the rate of conversion into a successful loan varies each week. We are waiting for a clear trend to emerge, but it is around two thirds to 85%. Q222 Miss Kirkbride: Two out of three of the people who apply would get a loan? Baroness Vadera: It changes on a weekly basis, and we are looking to try to increase the conversion level but it could be that they are just not eligible for some reason. Q223 Miss Kirkbride: One in three fails? Baroness Vadera: Currently. Q224 Miss Kirkbride: Is that largely because of the banks? Baroness Vadera: No. For example, there are state aid restrictions which mean that certain sectors are just not eligible. If they come from a certain sector the bank might then put them onto something else. We have a clear requirement that this needs to be additional. We do not put out taxpayer's money to substitute something that the banks ought to do themselves. If the banks in any case would have lent this money it is not a product that we suggest is needed for them. We need to look after taxpayer's funding as well. Q225 Chairman: I want to check the point about state aids. I pressed Ministers in the Commons about this and have not had answers. There are sectors that are not eligible under this scheme? Baroness Vadera: That is correct. Q226 Chairman: Can you give an indication of the kinds of sectors that are not eligible? Baroness Vadera: The ineligible sectors are: coal mining, insurance, public administration, national defence and social security. There are sectors that are subject to restrictions: primary agriculture, banking finance, commission agents, fisheries, forestry, real estate dealing, professional sports players, sporting promoters and transport. Q227 Lembit Öpik: Why is agriculture excluded? Baroness Vadera: It is not excluded in its entirety; it is restricted to certain types of agricultural activity. It is an EU requirement because it is believed that it gets aid from other sources, so we have to do it to be legally compliant. Q228 Miss Kirkbride: Referring to your responses to earlier questions, one question that struck me was about why Britain was in a recession today. Do you think it was wise of Gordon Brown to tell the British public that he would abolish boom and bust? Baroness Vadera: You are very welcome to ask anybody any of those questions. I am not a Minister who enjoys getting into overly-politicised debates; I would rather talk about the substance of it, quite frankly. I think he has explained his position frequently and very well in Parliament. If you wish I could read from a transcript. Q229 Miss Kirkbride: From your previous answers it seemed to me that you had done so, but I shall leave it at that. Referring to the capital for enterprise fund, can you give an update on what has happened? Baroness Vadera: We have received applications that are currently being looked at and four offers of £6 million have been made. Q230 Miss Kirkbride: Four offers of £6 million? Baroness Vadera: Yes. Q231 Chairman: Is it £6 million each or £6 million in total? Baroness Vadera: In total. The first thing I should explain about the fund is that, as you would expect with any normal equity fund, we shall be keeping an amount in reserve for the reason that all funds tend to do that because people who come in to ask for equity quite often make second calls on it. We are in discussion on how much of the funding we should keep in reserve. The estimates are between 10% and 15%. We would not expect or wish to utilise the full £75 million because we want to keep that reserve for existing users to come back for a second call. We have received 329 applications totalling about £100 million and due diligence is being done on them. There are two fund managers. Four offers have been made for £6 million which is approximately 10% of what we would expect to be disbursed and utilised. Q232 Miss Kirkbride: When did this scheme start? Baroness Vadera: I believe it started in March. Q233 Miss Kirkbride: And just four offers have been made out of 329 applications? Baroness Vadera: Equity is a very different instrument and one needs to do a degree of due diligence that is quite different. In terms of the rate and pace of what we would expect I check it regularly. I check when it is anticipated. We believe it is quite in order for the time it takes to do due diligence on equity as opposed to loan applications. We believe that it is on track to be utilised completely except for the reserve. We are currently in discussion on how much should be reserved. Q234 Miss Kirkbride: Have the four got it or are they on track to get it? Baroness Vadera: They have received it. Q235 Miss Kirkbride: Based on your flow charts how many of the 329 do you think are likely to be found acceptable? Baroness Vadera: It depends on the average amount. I think there would be a high rate of decline and it will simply be a matter of checking whether they are eligible again. If they can get funding from elsewhere we would not wish to be a substitute for that. We would put them in touch with other people. If there is a huge demand that is not being met we can also always consider using some of the other funding we have such as the enterprise capital funds or see if there are other sources available to them. We are keeping a very close eye on it, but it is a little too early to say whether or not it will be over-utilised at this stage. Right now based on the information we have we believe that it is on track to meet our projections. Q236 Miss Kirkbride: Three hundred and twenty nine companies have already applied for £100 million worth of funding, so clearly there will be a lot of people turned down? Baroness Vadera: But that does not mean it is all suitable. An application is not the same as suitability. Q237 Miss Kirkbride: I accept that, but in terms of the enormity of the UK's problem it seems pretty small beer. It is very helpful to those who get it, but an awful lot of ministerial and civil servant activity is going into what amounts to quite small beer. Baroness Vadera: I will try to explain again what perhaps I have not explained very well. Both the enterprise finance guarantee scheme and the capital for enterprise scheme are targeted at the margins to help people who might be viable in other circumstances; they can prove some viability but will not be able to do that to the banks particularly in current circumstances. Our main effort goes into the £55 billion for lending to SMEs below £1 million turnover, to the £120 billion that goes to SME below turnover of £25 million and to the £500 billion that goes to lending to businesses across the piece in the UK, and you cannot do that by having a scheme; you have to do that by fixing the banks. That is why the major effort has been concerned with the banks. On the second issue of equity, which is what we are talking about under the capital for enterprise scheme, we are targeting additionality. Are we ensuring that we help every business that we can at the margins that might not otherwise be able to receive assistance? The equity markets have recently shown that there have been very significant issues; it is £4 billion. It is great to see that that market has had both an appetite for and provided assistance to companies that need equity. The primary issue is to look at markets and the banks and try to fix those as a system because we cannot substitute for that. At the margins we have these targeted areas where market failures persist and that is the overall approach. When it is small beer the intention is to target it at a specific market failure. Q238 Miss Kirkbride: How happy are you about Ministers and civil servants picking winners? Baroness Vadera: I would be extremely unhappy if we did, and we do not. Q239 Miss Kirkbride: How else do you decide who gets the equity funding? Baroness Vadera: It is assessed by two professional private sector fund managers, Aberdeen and Octopus. I would be extremely unhappy to find any civil servant picking anybody in which to invest equity. Q240 Chairman: My understanding is that the Secretary of State has aspirations that this particular scheme should grow into a very large source of equity finance for business. Is that the understanding? Baroness Vadera: I think you are referring to something in the industrial activism paper which refers to carrying out a study, in which we are currently engaged, into the possibility of having a version of ICFC. It is not exactly this scheme, but the concept is that particularly when emerging from recession certain types of debt will be more difficult to access. Possibly it has been too easy to access it in the past. There are certain types of growth companies, not all high tech, start ups or university spin-offs, that are very important to the productivity of the UK economy and to our sense of from where future growth will come. Possibly they would not be able to meet normal banking covenants, so there is potential for us to take a degree of risk there. That is particularly true when the economy emerges from recession and is in recovery but there is also evidence that that has been a persistent failure. The question is whether we consider doing something similar to ICFC across the regions which would be a more permanent structure both for debt and equity and take some of the risks that, like a public/private partnership approach, would allow other lenders and providers of funding to be involved. That is something we are currently studying and it could be a very exciting development. Q241 Miss Kirkbride: The capital for enterprise fund was announced, albeit under a different name, in the 2008 pre-Budget Report. You have been telling us that it started in March, so why did it take four months for the department to focus on a scheme that had already been announced and re-announce it? Baroness Vadera: I think we needed to get the scheme in place and appoint the fund managers. I apologise for an error. It started in January. Q242 Miss Kirkbride: So, it was announced in the pre-Budget Report? Baroness Vadera: It was announced in the pre-Budget Report. We had to get funding. We announced our contribution of £50 million and got an additional contribution from the private sector - the banks - of £25 million. We had to get funds structured and make sure they were compliant with state aids. We started it in January and had a helpline ready for applications to come in and that was in parallel with the appointment of the fund managers; and we obviously had to do the correct due diligence. At the same time we were already taking in applications and advising people on whether or not they were eligible. Q243 Miss Kirkbride: So, four months later four lucky companies got it? Baroness Vadera: Yes. I think that from January to now, which is the correct period in which to look at this, would not be a bad timetable for any new fund to start. Chairman: We could spend the rest of the session on this matter. We could examine whether or not whichever government sold 3i got it right. I have no idea whether it was a labour or conservative government, but let us move on because we have other areas to cover. Q244 Mr Wright: Turning to taxation and some of the policies adopted to help small businesses during this particularly difficult period, some of the tools in contemplation to help during the current economic climate are: late payment provisions to spread tax payments over a timetable they can afford; extended loss carry back provisions; and deferral of the small companies' corporation tax increase. All of these measures are aimed at helping small businesses. Are there any other tools that will be used in future, or are there some you have looked at and deferred for now or perhaps have turned down? Baroness Vadera: Tempted though I might be, I do not think I could announce what the Chancellor might want to do in a future Budget or PBR. We have tried to be very flexible particularly in terms of helping with what SMEs tell us are issues for them. The essential one is cash flow. I believe that time to pay is one of the biggest helps we have provided. Business people tend not to talk about it very much, but about 116,000 businesses have been able to spread their payments of about £2 billion. The loss carry-back was incredibly important. The exemption from the empty property tax relief helps about 70% of premises. You have mentioned FCR and others. We have attempted to be as flexible as we can in particular in helping businesses with cash flow. Q245 Mr Wright: Has there been any suggested way forward by the FSB as one organisation that has been turned down by the government or perhaps has even been looked at seriously? Baroness Vadera: I know the Chairman is very much aware of this given his Private Members' Bill. One issue we looked at was the automaticity of business rates relief. I am pleased to say that CLG is still reviewing ways in which we can help to get the rates relief to SMEs as widely as possible, but automaticity is quite difficult because local authorities do not have the ability to differentiate between a small premise and a small business. They require that information from the person who applies. We have changed as much as we can, in that an application needs to be made only once every five years. It is really a one or two-page application form. In addition, when local authorities write to small businesses telling them about deferral of the uplift announced by the Chancellor in March they can also inform them that they can apply and enclose the application form. We shall try to do that but CLG continues to examine it. It is not always practical to implement all of the ideas. Q246 Chairman: Is it correct that you are now taking a personal interest in this subject? Baroness Vadera: I am. Q247 Chairman: I am very encouraged by that because you have a reputation in Whitehall for getting things done. Recently I had a very encouraging Written Answer from John Healey which said that automaticity was not yet ruled out. Baroness Vadera: I am glad to hear it. Q248 Chairman: Can I have a discussion with you at a later date about this matter? Baroness Vadera: Yes. Q249 Mr Wright: I have heard one or two small businesses, shops and cafes say that one of the difficulties they have faced in recent months is the fact that they defer some of their payments and perhaps the business rates element is the last one they will pay and they have fallen foul of it. Can anything be done for small businesses in that particular direction? In some cases the council calls in the bailiff because of these difficulties when in reality if the business could see its way through this particularly difficult time it would be a thriving concern in future. This may well be a blunder. In some cases they find it difficult to manage in these times and for the sake of a small amount of business rates they have been pulled down. Baroness Vadera: I would be very happy to look at that and take it up. I do not know whether you can provide specific details. Q250 Mr Wright: Yes, but at the moment I am generalising. Baroness Vadera: I would be surprised if it was just the rates piece that created a problem of viability for the business. You are right to say that if they can defer all of their other taxes by calling HMRC then perhaps local authorities need to be a bit more flexible, and I would be happy to look at it. It is not the easiest thing in the world to corral many local authorities but I am very happy to look at that. Q251 Mr Wright: In the past 12 months because of a bad auditor's report from the previous year my local authority now tends to use the bailiffs more often at an earlier stage than it did before. Prior to last year it would probably have been more relaxed about it and extended the period but now it just sends in the bailiffs. To me, that is ludicrous. It gets a bad auditor's report and responds by closing down some businesses. Baroness Vadera: Clearly, they need to improve their cash management but perhaps not just right now. I would be very happy to look at that issue. Q252 Mr Wright: Obviously, there has always been an issue about the burden of regulation on small businesses. Recently, the breakdown in negotiations over the Working Time Directive in Europe means that working hours in the UK are now much more flexible than they are in the rest of the European Union. Do you consider that to be a good or bad thing? Baroness Vadera: I think flexibility has been one of the key drivers of our success over the past 10 years and it is incredibly important. It is also probably helping with what will inevitably be a very difficult time in the labour market. Although my view is not always shared by colleagues in my own party I am a firm believer in very flexible markets including labour markets. Q253 Mr Wright: Do you think that this time the rest of the European Union will follow our lead in terms of flexibility? Baroness Vadera: That is much more difficult to say. Member States run very different systems and it is difficult to change midstream. I cannot imagine that to change in the middle of a recession is the easiest thing to do, so I suspect that we will not see many changes in the rules that govern labour markets in Europe. Q254 Mr Wright: Does the government have any plans to lift some of the burdens on small businesses or delay the implementation of new policies to help them weather the economic downturn? Baroness Vadera: Yes. We have been looking at that very closely. I understand that you are to see Stephen Carter. Q255 Chairman: He is probably to appear before our sister Committee, the Regulatory Reform Committee. Baroness Vadera: Yes. We are to introduce a number of matters. I feel passionately that the burden of regulation does fall disproportionately on SMEs, not least because quite often large firms can afford to have people to deal with the regulation and it becomes a kind of barrier to entry of small businesses. One matter we have introduced is a test for all regulations to see the specific impact on small businesses. They are required to see if the regulation ought to be slightly different, delayed or simpler in its application. Most recently, in the Equalities Bill SMEs who employ fewer than 2500 people are not required to pay audit, for example. We have these exemptions. We have also said that for both secondary legislation from this year end and primary legislation from next year the legislation needs to state the impact on small businesses, so we are very conscious of this. There are some specific examples of exemptions, but we are trying also to make systemic change. Q256 Roger Berry: If I may refer to the cut in VAT of £12 billion, clearly the benefit of that will be split between consumers and businesses. Do you have any idea what proportion of that amounts to a benefit to business directly as opposed to consumers? Baroness Vadera: That is a complicated question because the benefit to consumers is also a benefit to businesses. Q257 Roger Berry: People often forget the potentially large benefit to business from that. Baroness Vadera: Basically, about two thirds of the cut in VAT is estimated independently to have been passed on to consumers and about a third mainly on the SME side to have benefited small retail. Obviously, that is the direct impact. There is now significant evidence emerging of an indirect impact. I understand that CIER[?] said that it led to an increase in retail sales of about £89 billion. There is already evidence that our retail consumer spend has held up somewhat better than it might have done in other circumstances which again ultimately benefits business activity. Currently, that is the approximate split. Q258 Lembit Öpik: Leaving aside all the hyperbole and party-politicking on the cut in VAT, are you genuinely persuaded that it has made a measurable difference as you have described? Baroness Vadera: There is evidence emerging that that is the case, yes. Q259 Lembit Öpik: It seems to me that the problem will always be the pricing points £12.99 and £14.99. What stops all of the prices going more or less to where they were before after they have been at some strange figure like £14.72 or £14.15 because of the VAT cut? What stops them from going up to £14.99 again? It seemed to me that that was the biggest single issue about maintaining the VAT cut. Baroness Vadera: Do you mean that prices will potentially go up? Q260 Lembit Öpik: In retail terms there are natural pricing points, for example £14.99, £9.99 and so on. The VAT cut was obvious because £9.99 became £9.27 or something like that. Why will they not all creep up to the natural pricing points again? Why will not marketing consideration subsume the cut in VAT over time? Baroness Vadera: I think that pricing at the time will depend on quite a lot of things including obviously RPI, competition and demand. I do not believe we can say one thing or another thing will prevail. The point about the cut in VAT was that it was meant to be a temporary stimulus, in particular to bring forward spending, so it is not so obvious to say that the point was to maintain pricing at the £9.27 level permanently. That was not its purpose; its purpose was quite different. Q261 Mr Hoyle: Some businesses never introduced the VAT cut. We know that some local authorities that charged small businesses rent with a VAT element kept the VAT at the high point and never reduced it. Do you have a message for those people who did not reduce the VAT? Baroness Vadera: I think the messages were given out very clearly and loudly at the time of the announcement. All I would say as Minister for small businesses is that the intention was also to help small businesses. The intention was to create a stimulus and injection to the economy and to the extent that you assist small businesses who have cash flow issues you also stimulate and help the economy. The evidence suggests that most of the major retailers did pass on the cut. It does not mean that in every product you see that reflected; and that would not be appropriate either. Q262 Mr Hoyle: I was referring to local authorities that, say, rented market stalls. They did not reduce the VAT element and kept the extra money. What message do you have for those authorities? Baroness Vadera: I will take it up with Hazel Blears. Q263 Mr Hoyle: I move on to the big issue of trade credit insurance. Different schemes have been proposed. Quite rightly, small and big business were all looking for help and support. Lord Mandelson stated earlier that it was "difficult to design intervention that would make a substantial difference. Would it be so marginal so as to be - frankly - useless?" What confidence do you have that the credit insurance scheme will make a difference? Baroness Vadera: I think it will make a small difference but a vital differences to the companies that use it. I should like to be very clear and upfront about the scheme and how it works. Trade credit insurers who operate in a particular type of market for catastrophic risk really do not have business models that work to provide insurance for credit in the current market. To give you an idea, they earn £300 million of premium income and write business of £300 billion. It is not the sort of thing that can sustain very high levels of risk. Therefore, they are withdrawing and it is not appropriate for the taxpayer to step in and completely replace that. What we are trying to do is help provide temporary relief to small businesses - about 20% of business transactions depend on trade credit insurance and on a specific set of suppliers - by saying to them that they have six months in which they can talk to their banks, look for working capital elsewhere, try to diversify their buyer base and have a conversation with business links or anybody else who can help and we will top up a withdrawal. It is meant to be in that grey area. All of these schemes are targeted for the additionality that we can provide. Of the total market size we believe that the level of trade credit insurance which has been partially as opposed to completely withdrawn is about £8 billion. We have said that we will top it up to about £5 billion and we expect utilisation to be between £2 billion and £3 billion. That does not sound very much given the size of the whole market but for the small businesses that use it it will be vital and can tide them over those six months and help them get to a better place at the other end. Q264 Mr Hoyle: Obviously, the scheme is scheduled to end on 31 December 2009. At what point will the government reassess whether or not to extend it, or have you been monitoring throughout the benefits it has given? What do you have in mind to replace it, or is it just sudden death? Baroness Vadera: We monitor it weekly along with the other schemes. We have a monthly monitoring board which will look at value added, usage and if it is doing what it says it will do or if there has been a radical change elsewhere in the market. We will keep it under review. We cannot go in and substitute entirely for trade credit insurers who are withdrawing in very significant part. We are trying to provide temporary support for SMEs to adjust and find alternative ways of handling their business, so it is meant to be a transitional scheme which by definition does not go on for ever. Obviously, if we find that we need flexibility towards the end I am sure we will consider that. Q265 Mr Hoyle: Do you have anything in mind to replace it with another scheme? Baroness Vadera: Trade credit insurers have been used to provide credit insurance in a way that is perhaps not the most appropriate. It is meant to be there for catastrophic risks. We believe that SMEs should be looking at alternative ways of covering their risks with buyers and to cover their working capital needs. It started to become a substitute for working capital needs. We need to look at the whole gamut of alternatives, but it is not about providing an alternative trade credit insurance product. Q266 Mr Hoyle: I welcome what you say. If there is nothing else out there what will happen? Will the government be flexible and assess the position if need be? Baroness Vadera: We will always look at it and be flexible, and I hope we have demonstrated that in the past few months. Q267 Mr Hoyle: You ruled out the Conservatives' proposal; you binned it straight away. Do you stand by that decision? Baroness Vadera: Which proposal? Q268 Mr Hoyle: Last December you ruled out the possibility of extending a state guarantee for all credit insurance. You ruled out adopting the Conservative proposal of offering a state guarantee for all credit insurance saying, "That is like saying 'let's guarantee the economy.'" The question is: do you still stand by that? Was that the right decision at the time? Baroness Vadera: Yes. The idea that we step in and guarantee cover for any sort of business in a blanket way is not the most effective method. A better way is to try to make the market work and have targeted measures for the bits that are failing. Q269 Mr Binley: The government seeks to target so-called medium risk companies with regard to trade credit but only those that have credit insurance reduced and not withdrawn completely are covered by the scheme. Some insurers claim that credit insurance which has been reduced was only extended to a firm on a temporary basis and so does not count as reduced for the purpose of the scheme; in other words, there is a loophole there. Baroness Vadera: I think you will have to run that by me again. Q270 Mr Binley: I will put it exactly. The government is targeting medium risk firms but only those that have credit insurance reduced but not withdrawn completely. Baroness Vadera: That is correct. Q271 Mr Binley: Only those are covered by the scheme. Some insurers however claim that credit insurance which has been reduced was only extended to the firm on a temporary basis and so does not count as reduced for the purpose of the scheme. It is a loophole. Will you look at it and put it right? Baroness Vadera: I will certainly look at it. My understanding is that if they have reduced as opposed to withdrawn their cover even with a view finally to withdrawing altogether, which is what you imply, we will match it to the point to which it is reduced in order to help the transition for the SME or business that is using it, but if it claims that therefore it is not eligible I shall look at it. The person sitting behind me is responsible for that and he will look at it. Q272 Mr Binley: I would be very grateful if you could come back to us on that matter. Baroness Vadera: I will certainly do that. Q273 Mr Hoyle: On 1 May 2009 BERR announced that from that day firms suffering from a reduction in credit insurance would be able to buy up to six months' top-up cover under the Export Credit Guarantee Department. ECGD is out there to help businesses. Do you believe that it is helping business or do you believe that it is there to assist the government at the expense of business? Baroness Vadera: I believe that it is there to help business. Obviously, you will be talking to Mervyn Davies and Ian Pearson who are the Ministers responsible for ECGD. My recent interactions with ECGD have indicated that it is very constructive and eager to help. In particular there has been a significant issue around trade finance globally. One of the purposes for which the working capital scheme will be used, for example, is to help guarantee the reconfirmation of letters of credit which are proving incredibly difficult for small firms that are exporting. ECGD is doing a consultation exercise for us on that at the moment. We will also look at the possibility of export credit insurance which is the international equivalent of the trade credit insurance scheme. Those are the things on which we are currently working with ECGD. In relation to the New Industry, New Jobs paper launched by Lord Mandelson, we are looking at the revitalisation of ECGD in order to play its full and proper role which perhaps it has not played to best advantage in the past few years. Q274 Mr Hoyle: With the chief executive you have been brought up to speed with the way they operate? Baroness Vadera: I think they are looking at a much more ambitious vision for ECGD, not just narrow issues. Q275 Mr Hoyle: I have a company in my constituency called NIS. It did a deal with Saudi Arabia which went pear shaped. The government or ECGD dragged their feet. In the end NIS took the Saudi Arabians to court, won the award - it cost them £700,000 to get back £4.7 million - and ECGD said they were keeping the £4.7 million, yet the company had spent £700,000 getting the money back for the government. There was no contribution from ECGD; instead, the firm got a very arrogant stand-off letter from the chief executive. I hope that you will investigate it and ensure that it is working for business. If you would personally look at that case I would be very grateful. Baroness Vadera: I will take it up. Because I am not the responsible Minister I will pass it on to those responsible. Q276 Chairman: You have just said something very interesting about your aspirations for ECGD. Do you want to say more or leave it to Lord Davies when he comes before us? Baroness Vadera: We are still working on it and looking at it, but one point that the paper makes very clear is that we expect exports to be a much more significant part of future growth of the economy and therefore we need to have an ECGD that is fit for purpose for that vision. Obviously, in 1980s ECGD did withdraw very significantly from certain markets and bits of it were privatised. I have personally seen that gap when working on the G20 in terms of trade finance which has been a very serious and significant issue. We have not had an instrument or government entity involved at all in a way that some other countries do. It is a very good moment to look at it in time for a recovery and that is what Peter Mandelson in particular is very anxious to do. Chairman: I would love to explore this at greater length but I will not do so given the time. You have given our inquiry a helpful direction into exporting out of recession which the Committee staff will want to take up with the relevant people in the department. Thank you for that very helpful observation. Q277 Lembit Öpik: Turning to the Business Council for Britain, do you know how many times it has met since it was set up? Baroness Vadera: Five I think. Q278 Lembit Öpik: How often do you meet with the members of the business council? Is there as formal process or is it ad hoc? Baroness Vadera: It works in several ways. First, the formal meetings are chaired by the Prime Minister. Groups then peel off and meet on specific issues. They have met quite frequently with Alistair Darling. It will not be the whole group but parts of it which have a particular interest. They will meet the Secretary of State, Peter Mandelson, but also other Ministers, for example John Denham on skills, Ed Miliband on climate change and David Miliband on how business is represented overseas. They have got some changes as a result of that meeting. A set of meetings goes on with other Ministers on specific subjects. I often have one-to-ones just to make sure that I get people's views and that they are happy with their own involvement in the BCB. Q279 Lembit Öpik: By the sound of it it also has a wider emit. How do you define its role? What is there to accomplish? What is its mission statement? Baroness Vadera: I would say it is there to provide us with a sounding board of the views of business which do not come directly from a trade association and do not necessarily represent one specific sector or necessarily the lowest common denominator. It meets in private and therefore is able to express a view and come together in quite an interesting format for the Prime Minister to be able to hear and informally discuss things. It alerts us to specific sets of issues. Sovereign wealth funds was a matter raised directly by them I believe at the very first meeting. Then we went on to discuss that internationally. There is now a code on sovereign wealth funds. Climate change has always been an interesting discussion, and trade finance is something that was raised early. They also alert us to issues. It is also very helpful to other Ministers who turn up to the main meeting but also realise that it may not always be as easy or as obvious for them to meet with some of these business leaders. That is also incredibly helpful. It does not represent SMEs although William Sargent has been on it. We have had meetings with SMEs and BCB separately, but it represents a certain type of business community that is vital. Q280 Lembit Öpik: You are saying that there are measurable outcomes from the existence of that organisation? Baroness Vadera: I did not use the word "measurable"; I would not choose to measure them in that way. I think there are some clear, tangible outcomes. I mention sovereign wealth funds, trade finance, climate change and the skills agenda. All of these are issues that have arisen and led to changes in the way the Foreign Office represents business abroad. Q281 Lembit Öpik: The reason I use the phrase "measurable outcomes" is that in the company for which I used to work, Procter & Gamble, you would not set something up unless you could measure the outcome pretty much. It seems important to me that there is not mission creep in this and you can point to certain measures. Does it conduct reviews? Is there any formalised process? Baroness Vadera: It does not have a formalised process but when I joined BERR the first thing I did was speak to each of the members to check what they thought about it and then fed back to the chair, who was then Mervyn Davies, about what people thought. There was some shifting around that. The chair has changed and so automatically the new chair tends to do a review. I think that it is in the rollover of the people and the chair that things start to evolve. I completely understand the issue about not setting up something without having a measurable outcome, but it is meant to be primarily a sounding board for the Prime Minister who finds it very valuable, so in a sense that is one outcome. Q282 Lembit Öpik: I will not labour the point, but from our point of view it might be very constructive if there was some kind of mission statement. If the Prime Minister already feels that it is working the mission statement probably exists even if it is has not been codified. Baroness Vadera: I am sure there is a mission statement. At the time it was set up there were terms of reference that I would be very happy to send to you. Q283 Lembit Öpik: Thank you. Lastly, you have said that it has a formal international role. Would you expect the council to promote Britain abroad in an overt sense? Baroness Vadera: We have not asked them to promote Britain abroad or anybody. They represent their own views when they come to the meeting. They are not always views that one finds it comfortable to hear but that is their value. They have not been given a specific role, but we have had a lot of international interest and I think that makes them quite aware of some of the issue we face. Subsequently, one suggestion that came out of the BCB was the network for international ambassadors who are business people. There are a couple on the BCB in common, so to speak, and they have a specific mandate and role which is overseen by UKTI when they travel abroad or need to make special visits abroad to represent Britain. Mervyn Davies is now in charge of them, so you should ask him when he is here. Q284 Chairman: I just make the observation that if the CBI had been doing its job properly you would not need the Business Council for Britain. Surely, it just duplicates what the CBI does, does it not? Baroness Vadera: I do not think it does duplicate what the CBI does. When we set it up we had quite a long discussion with Richard Lambert about its role and the CBI's role. He was very well satisfied. To hear a common view from somebody who represents all businesses is different from hearing a disparate set of views which shows that there is not always a unified view on the part of business. Chairman: As we saw at Heathrow recently, for example. Q285 Mr Hoyle: How does the national industrial strategy relate to the manufacturing strategy, the automotive industry strategy and the newly-announced review of the engineering construction industry? There appears to be an abundance of strategies but in the absence of knowing which is working how do we know what impact they are having and measure any of those benefits, or are we in danger of just naming and announcing another strategy? Are they all working or do you think we should cut them back a little? Baroness Vadera: The industrial activism strategy under New Industry, New Jobs - whatever you call it - is in one sense the overarching vision of where we want to be, how we want to approach our recovery and what we want from the economy in future. It set out some very interesting challenges for us. It talks about how we need to look at things vertically as well as horizontally. Within that the manufacturing strategy or the low carbon industrial strategy would be one of the vertical pieces to be delved into. What we have said specifically in New Industry, New Jobs is that it is not about picking a sector, let alone a firm; we need a view of the impact of our actions and policies on a sector, so it is appropriate to have sector strategies underneath that. The manufacturing strategy obviously has proceeded but fits quite neatly into that approach. Q286 Mr Hoyle: You say that manufacturing has a future and government is committed to that even though at times there is a question over low carbon manufacturing. Some industries struggle with low carbon. The fact is that governments have been accused of exporting the carbon problem in order to tick some boxes. Is that fair? Baroness Vadera: I do not think that is fair, but I believe that manufacturing is one of the most central sectors in the economy. It has one of the highest productivity levels, is a huge exporter and is most R&D intensive. The problem is that sometimes it is talked down because people do not recognise it as manufacturing; it looks completely different from what people expect manufacturing to look like. It is one of the unsung success stories. The problem is that it is now having an incredibly difficult time. As one of the most globalised sectors it is one of the hardest hit in the current climate, but we believe it is absolutely vital for the future. For that reason, Peter Mandelson, BERR and the whole of government are committed to it. Miss Kirkbride: You are correct in saying that. Obviously, the car-making sector is of particular concern to many MPs. In my constituency and also the Chairman's Jaguar Land Rover has been asking the government for special help. There are stories that they are not necessarily receiving it or there is some problem. I would be grateful if you could offer the Committee any reassurance because not just cars are produced there; it is the entire automotive engineering sector that underpins the West Midlands. Q287 Chairman: That is also germane to Mr Hoyle's question about low carbon. Baroness Vadera: As to JLR, the Secretary of State has said very clearly that we are committed to the company and the capability that it brings to UK manufacturing and the supply chain and its importance regionally as well as in terms of technology. We are in negotiations. I do not believe it is appropriate to conduct negotiations in public, so you will not be surprised to hear me say it is not appropriate to comment on it in public. Obviously, we must find the right balance of the measures we need to protect the taxpayer and assistance to the company and we are completely committed to that. Q288 Chairman: We shall be speaking to Jaguar Land Rover in public next week, so obviously we will hear what they have to say. Baroness Vadera: I am sure they do not have the same compunction about negotiating publicly. Q289 Chairman: I would expect that to be the case. Baroness Vadera: I was unclear about the question you asked on low carbon. I did not mean to evade it. Was the essence of it that you do not believe that low carbon is the only form of manufacturing, or were you just making a point about climate change? Q290 Mr Hoyle: What I am worrying about is that manufacturing is the backbone of this economy and that the government should give even more support to manufacturing jobs in the UK. Quite rightly, we want to meet environmental targets and we take very seriously our commitment. The problem is that companies then move out of the UK to China where they will probably get their electricity from a coal-fired power station. In the end all we are doing is exporting our problems to China which does not care, only for it to export those goods back all the way to the UK. It is a double-whammy because we are banning these plants in the UK where we once used to manufacture. Baroness Vadera: This is a very difficult issue and it is something we have taken up and discussed at EU level many times. We are in an evolving state where everybody is committing to environmental standards. Although it creates an immediate burden in some cases for manufacturing firms to move to low carbon I believe if they were able to do so it could be a competitive edge going forward. The issue around low carbon is not just about environmental concerns; potentially it is the creator of a comparative advantage to Britain as well as new jobs if we can get the technology right. That is why a lot of what we are doing including the measures under New Industry, New Jobs is about investing particularly in green technology. We have to find the right balance and assist in investment in manufacturers to make the transition and have a comparative advantage, ensuring at the same time that globally everybody meets their climate change obligations. Q291 Mr Hoyle: We are saying that heavy industry and traditional manufacturing have a future in the UK and the government is there to support it? Baroness Vadera: Absolutely. Q292 Mr Hoyle: That is the key message. The Chairman quite rightly touched on the car industry. We have Jaguar Land Rover in the North West; we have GM and a lot of other manufacturers, but we also have the last heavy vehicle manufacturer in the UK. That is an important sector and we cannot afford to lose it. The government also takes seriously the need to retain the supply chain and component sector in the UK? Baroness Vadera: Yes. The supply chain is central and is one of the areas that people have not understood in terms of overall industrial strategy. What comes through very strongly in this recession is that fragmentation has led to the need to deal with supply chains very differently, but it has also highlighted that manufacturing in particular is one of the most globalised sectors. There is a lot of fragmentation in the supply chain. We have to find ways to help entire supply chains in terms of access to finance which is also a big issue. Sometimes one entity in a supply chain has a problem of finance and that has a domino effect elsewhere. The issue of helping supply chains and the impact of our actions on the supply chains is very central and again is one of the matters we are talking about under both the working capital scheme and in future under New Industry, New Jobs. Q293 Mr Hoyle: We see that part of the supply chain that moved into Europe is now looking to locate back in the UK because of the strength of the euro and the weak pound. Is there help and support to get that supply chain manufacturing back in the UK? Is the government actively seeking to help companies to bring it back to the UK? Baroness Vadera: Yes. Q294 Mr Wright: I want to ask about the government's policy on the £2,000 car scrappage scheme. Are there any early indications that it is having an effect within the industry, or would it be seen to have a greater effect on car importation? Baroness Vadera: It has already had an impact. Nissan has said that it is employing more people as a result of both the European scrappage scheme as well as the announcement of ours. I understand your question to be whether it all seeps abroad and is exported. It goes back to the question of supply chains. It is a very integrated system. 75% of Ford Fiestas are manufactured in the UK; engines are manufactured here. I do not believe that the issue of seepage is as severe as people say based on the immediate statistics. It also helps the supply chain and dealers and goes through the whole system; it is not just the manufacturing side of it. Q295 Mr Wright: Bearing in mind that it is a fifty-fifty split - £1,000 from the manufacturer and £1,000 from government - it is proving to be value for money? Baroness Vadera: I would like to think that it will be value for money. It is a much more measured and targeted scheme than some of the others because we have tried to find a balance between value and it having an impact. We are talking about 300,000 cars. We would expect about 1.4 million cars or thereabouts this year, so you can see where we are targeting it. Q296 Mr Hoyle: You are quite right in what you say about the supply chain, for example the Fiesta's engine and gearbox. Ford does well because we have the engine plants in the UK. What do you say about ministerial cars that do not have one British part or British job in them? They are shipped all the way from Japan to the UK. Whom does that help? Baroness Vadera: I am aware you have asked this question before. Mr Hoyle: We never get an answer. Chairman: We did from Digby Jones. Q297 Mr Hoyle: Yes; he changed his car to a Jaguar and said he was backing Britain. Who are you backing? Baroness Vadera: I probably have not given it sufficient thought. Q298 Mr Hoyle: I will let you come back to it some time. Baroness Vadera: But I do not think I shall necessarily be changing my car to a Jaguar. Q299 Mr Hoyle: I am quite happy to have a British-built car or a car with British products in it. I do not suggest it should be a Jaguar; perhaps it should be an Aventis which is built in Derby. Baroness Vadera: We also have public obligations to meet. Q300 Mr Hoyle: Minis are built here. Do not worry; if Tom Watson can fit into a mini I am sure you will fit in very easily. But he is backing Britain. What we see is support being given at the Jobcentre to train people so they can find work. Have we considered short time working subsidy to keep people in manufacturing and in jobs and train them in the workplace rather than lose the jobs and people going to the Jobcentre? When the upturn comes we will have to find the skills which are spread all over and try to get them back into manufacturing companies when they look for recruits. Have we thought about doing that? If not, will you consider the value of that? It has happened in Wales and it has happened in France, Germany and Italy and has proved to be a very successful way forward to retain skills, provide retraining and keep the jobs there. Baroness Vadera: I understand the scheme to which you refer. I think I am correct that it was a scheme proposed by the TUC. The government completely agree with the object of the exercise. It is absolutely vital that as we go into recovery we maintain the skills level and do not have the degree of deskilling that we have seen in previous recessions, particularly the impact on young people that we saw during the 1980s which then lasts for a generation. Our focus has been very much on train to gain and giving subsidies to train people in work. We have looked at the scheme proposed by the TUC and we have not found evidence that it has worked very successfully in the past. It costs a significant amount more than was suggested in the costings, and we are not yet convinced that it works effectively. I am very happy to go into that in more detail. Mr Hoyle: The estimated cost is £1.2 billion for 600,000 jobs for 12 months. There is already evidence from France, Germany and Wales. It has proved successful in Wales, which is only down the road. I would have thought that existing, not historic, evidence proves it is successful and maybe it is something we should look at again and re‑evaluate. Q301 Chairman: Lord Mandelson is to appear before us in July. As to this particular issue, unemployment tends to fall after recovery begins and this issue will still be relevant in a few months' time. I think we will want to ask quite a lot of questions about it at that time. I have a good deal of sympathy for what Lindsay Hoyle says, but if you have evidence to suggest that it is not working that is also very important. Baroness Vadera: It is important to look at the evidence and the cost. The cost of £1.2 billion is not in our view the correct figure because basically before the training costs it assumes there is no dead weight which is one of the biggest issues and sometimes has a perverse impact. It assumes a period of four and a half rather than six months. There is an assumption about all of the cost of the benefits would not otherwise be paid, so it is significantly more expensive. Q302 Mr Hoyle: But you are not deducting the cost of what you pay people to be unemployed and spending that money to train them. Baroness Vadera: That is exactly my point. The assumption of the scheme is that everybody on that scheme would otherwise be unemployed. That is not the case. Chairman: Economists would say ceteris paribus, or all other things being equal. This is an issue to which we shall return with the Minister because it is one that we need to explore at some length. Minister, we have taken two hours and you have been very patient. We are very grateful to you. |