The work of the Department for Business, Innovation and Skills - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Quesitons 1-124)


19 JANUARY 2010

  Q1 Chairman: Secretary of State, Minister, it is great to see you again. Thank you very much for coming. It is a very unsatisfactory start we are going to have because we are expecting a vote in the House of Commons in about ten minutes' time, so we will have to crack on with the first few questions, go away and come back as quickly as we can to pick up the questioning again. I am sorry about that, but that is the nature of this place. It is good to see you. Thank you for coming before us as regularly as you do. We are grateful. I know sometimes we can be irritable and cross with you and say things that displease you, but let me make it perfectly clear that many of the things that you do personally and as a Department give us great pleasure. There is no catch in this. Do not worry.

  Lord Mandelson: I am waiting with bated breath!

  Q2 Chairman: They all come in the remaining two hours after this opening comment! We have said we think the new Department has a lot to recommend it; so thank you for that. We are particularly grateful, as we have said before, for the creation of the post of Chief Construction Adviser in response to one of this Committee's recommendations. We thought Lord Davies responded magnificently well to our recommendations on strengthening the Saudi Arabia and UKTI team after a visit there. We are grateful for that. We have just agreed to publish your response to our Report giving you, largely, a praiseworthy account for the establishment of the Enterprise Finance Guarantee Scheme. We might come on to some details of that later on. We thought the National Composite Centre in the South West was very good, a very sensible decision. We are pleased about that. At a personal level, I praise your continuing interest in India, Secretary of State, where you have been again recently promoting trade and business relations. That is all very good. Nevertheless, it does not mean we do not have some complaints. It is in the nature of these occasions, I am afraid, that we focus on those; so I apologise for that. Can I begin by asking you about your accountability to the House of Commons? It has been sharpened a bit. I think it is the day after tomorrow, or is it tomorrow, that you have your first departmental question time in the House of Lords. The House of Lords now has an opportunity, all of them, to put the kind of questions only those of us in this room have had the privilege of doing in the Commons. You have been very generous in your comments on this in the past. You have indicated that you would welcome the opportunity of being able to answer questions in the House of Commons in some way, and we have produced a report recommending that Westminster Hall or Committee Room 14 would be suitable for this. You said you want it; we have said we want it; the Speaker of the House of Commons has now said he wants it too. When is it going to happen?

  Lord Mandelson: It sounds like a fairly formidable coalition, does it not?

  Q3  Chairman: You are part of it, so it is certainly formidable.

  Lord Mandelson: I am part of it, and proud to be. In fact, it was my idea, right at the beginning, when I suggested that a Lords member who is head of a department should be able to answer questions in the House of Commons. Some have reacted warmly, some less enthusiastically to that. Every time somebody refers to this, the opportunity and my physical presence in relation to the House of Commons seems to move further and further away from the Chamber, and so if the occasion ever did arise I fear where I would be—somewhere down the Thames—to answer these questions. I am happy to answer any question that anyone wants to put to me, within reason.

  Q4  Chairman: As the second most senior member of the Government you should be driving this forward.

  Lord Mandelson: But how the House of Commons authorities do this is a matter for them. As you know, the Government does not control the House of Commons.

  Q5  Chairman: That is an interesting view. We will not discuss that; we have got other matters to discuss in relation to the Department. I think, with a bit of a push from you, given your seniority, we will get there. We do value this opportunity. We were pleasantly surprised to be offered Pat McFadden as well at rather the eleventh hour, but we do see this very much as our opportunity in the Commons to scrutinise you today.

  Lord Mandelson: You should not look a gift horse in the mouth.

  Chairman: No, we do not do that. We do not go round looking gift horses in the mouth. A very capable minister he is too.

  Q6  Mr Hoyle: I was at the Press Gallery lunch last Thursday and the Speaker, quite rightly, stated his views; that he thinks it only right that secretary of states in the Lords, possibly ministers, should be accountable to the Commons. His view was that there are two options: Westminster Hall or the Commons Chamber, but in the Commons Chamber, I believe, coming to the Bar is sacrosanct for MPs, unless you are on trial, which I do not think you should be, therefore, maybe Westminster Hall, or would you tell us that you are going to stand for the Commons once again? Maybe that can be the alternative. Which is your preference?

  Lord Mandelson: As things stand at the moment, the only possibilities are for me to come to the Bar of the House or to remain confined to Westminster Hall or some other part of the Palace of Westminster. It is a matter for the House of Commons authorities. I have shown my willingness. I want to be as accountable as possible. I think, in my appearances in the Lords, but also in front of this Committee and when I meet other members of the House of Commons, I have established a reputation for being fairly open and forthright in my views, my opinions are never easily disguised. The exact format, I just have to say again, is a matter for the House of Commons authorities and I do not want to appear to be begging, beseeching or bullying anyone.

  Chairman: We will not labour the point today, Secretary of State, but it is still a matter of concern and, should there be members of the House of Lords occupying senior Cabinet positions after the next election, I think it is a matter that will have to go back on the agenda with some urgency. We appreciate this, but others do not have the opportunity. Shall we turn to matters of substance? If we may, we will begin with the consequences of the Cadbury/Kraft issue, shareholder empowerment, joint stock companies, and so on.

  Q7  Roger Berry: May I start with a general question about foreign takeovers and then come to the specifics of Cadbury a little later. You have given a lot of interviews recently on the issue of foreign takeovers. In September, for example, the Wall Street Journal quoted you as saying, "I am keeping a weather eye on this area because I have started to become concerned that over a lengthy period of time UK manufacturing could be the loser." Could you say how you think foreign takeovers can damage UK manufacturing and what specific areas of policy you are reviewing to address that problem?

  Lord Mandelson: We know that they can do damage when, in the event of a foreign takeover, future decisions relating to production, investment, employment, lead to a gravitation towards the foreign based headquarters of the owning company rather than favouring, on an entirely objective and dispassionate ground, those points of production within the company's ownership which are away in another country from its corporate headquarters, and we have seen this happen from time to time. We see how in some cases, both in the case of the purchased company and the purchasing company, the costs of the takeover are such that they start having to be paid off through production, employment, investment being slimmed down. Indeed, there is quite a lot of academic research suggesting that in the case of somewhere in the region of 50% of foreign takeovers, the company itself which has made the purchase has not benefited in the long-term. It rather depends on the motivation, it depends on the price they pay, it depends on the debt they have to accumulate in order to make the purchase, it depends on the projected benefits, synergies that are analysed actually coming about and paying a reward to the company through its organic growth as a whole, increasing its range and quality of products, its market share. If these gains are not realised, the benefits are not afforded, and that is not simply in the case of the company that is purchased.

  Q8  Roger Berry: How does the Government intend to respond to these problems?

  Lord Mandelson: We have to engage both directors of companies and shareholders, particularly institutional shareholders but others as well, in a discussion about the responsibilities that both company managements and directors and shareholders have equally in ensuring that the long-term interests of a company are pursued and that they keep their eyes clearly focused on the long-term value growth of a company and the measures they have to take to pursue that rather than shorter term financial returns and benefits from transactions in shares, and that is a discussion that the Government has had in the past. We had discussions about corporate governance leading up to the 2006 legislation. Recently, I initiated a further discussion with institutional shareholders about how their decisions and behaviour can be linked to long-term interests and value of the companies in which they have holdings.

  Q9  Roger Berry: But fund managers, certainly hedge fund managers, will be aware of short-term advantages that can be obtained, and that will influence their behaviour. How does the Government see it being possible to modify that through public policy? Clearly discussions are useful, but what happens after there has been a chat about the problem?

  Lord Mandelson: You have to form a judgment about whether it is desirable and necessary to change legislation to introduce some sort of public interest criterion that the Government might operate in relation to takeovers and mergers. I am unconvinced that such a change is necessary or desirable. I would rather stick, for the time being, with the terms and the spirit of the 2006 Companies Act, which said that directors needed to discharge their responsibilities by taking a properly balanced view and pursuing "enlightened shareholder value", ie a value that is not limited to the short-term. One, incidentally, that recognises the value of effective relationships with employees, stakeholders and suppliers and, indeed, the community more widely. This approach, in our view, is likely to drive long-term performance and maximise overall competitiveness of that company. I am not persuaded that it is necessary or desirable to move away from the terms of the 2006 Act, but I do remind (and will continue to remind) shareholders that they do have responsibilities as well as rights; that they should engage as responsible owners with the companies in which they hold shares, it is in their interests to do so as well as the wider interest.

  Q10  Roger Berry: But, Secretary of State, it may not be in their interests to do so. Shareholders will buy and sell short-term because there are short-term gains to be made. If you asked shareholders to forgo a short-term gain, do you think they would respond to that exhortation?

  Lord Mandelson: Yes, because there is longer-term growth and value that they need also to remain focused on—what the 2006 Act called "enlightened shareholder value"—and that is what we are asking them to do. You might say the very essence or ethos of shareholder capitalism is wrong, it leads to poor perspective, or judgment, or counterproductive decisions and we should legislate against it. That is not the Government's view. We think that there are considerable and well demonstrated proven benefits for the economy of distributing capital in the way that shareholdings do and we do not question that. Having said that, for example, I had a very useful meeting I convened with senior and institutional investors and fund managers and company chairmen only last week about the high quality and long-term engagement that they as shareholders and fund managers need to have with the companies in which they hold major share ownership, that they need to work with that company to secure its long-term growth, its increasing value and returns to them as shareholders and, in the process, they would also be securing the employment and the interests of all the stakeholders in that company. I think that they were receptive to that.

The Committee suspended at 4.44 p.m. to 4.55 p.m. for a division in the House

  Q11 Roger Berry: Let us move on to Cadbury and Kraft perhaps in relation to foreign takeovers. Secretary of State, the FT reported you in December as saying that you were against asset stripping and any decisions that would damage Cadbury, and specifically the FT said, "Asked if he had a message for foreign bidders, Lord Mandelson replied, `If you think you can come here and make a fast buck, you will find that you face huge opposition from the local population and from the British Government'." What kind of opposition from the British Government did you have in mind?

  Lord Mandelson: Very close scrutiny. People are going to make money, obviously, but what we do not want to see is people engaging in short-term investments in financial assets as opposed to long-term investments in real assets, ie they are going for the arbitrage and the short-term return and gain in the transaction that is taking place rather than long-term investment, long-term focus and a long-term return; and I understand that modern share ownership can sometimes walk a fine line between these two things. I also made it absolutely clear that it is not my place as a member of the Government to say which mergers and takeovers shall or shall not take place, except in respect of national security and media plurality. I do not have powers that extend beyond that. I am not pretending that I can block something or stop something when I do not have the powers to do so, but, equally, as a minister I have to understand and reflect the fact that in our country Cadbury is regarded as a great company, an iconic brand, producing some of the country's top favourite chocolate bars, with a very strong community presence and sense of loyalty. Of course I understand that emotions are going to be riding high, but, equally, I have always made clear that ultimately the decision would be one for the shareholders of Cadbury. Having said that, undertakings, I gather, have been given by Kraft and by their chief executive today, and my responsibility is to watch out for these long-term interests of Cadbury and to do everything I can to keep Kraft to the undertakings they have given, and that is what I am going to do.

  Q12  Roger Berry: I think your analysis of the long-term probably is absolutely spot on. I agree with all of that. My concern, partly because I have got constituents who have worked for Cadbury all their lives, partly my general concern about the issue, is not that you are wrong to stress the long-term issues as being fundamentally the most important ones for companies, indeed certainly for the UK economy. My concern is that I am not sure what the policy response to it is; I am not sure what policy instruments you have that you intend to use to move in that direction. Kraft may well make undertakings. They have been engaged in takeovers in the past where they have given undertakings and in subsequent years things have changed. Circumstances do change and it is inevitable that undertakings have to be taken with a pinch of salt unless there is something there to make them robust and enforceable.

  Lord Mandelson: I do not want to reverse our roles in this, but what are you suggesting, that I equip myself with the powers at some time in the future down the course, after a takeover has taken place, to determine that it is not in the public interest and that it should be undone?

  Q13  Roger Berry: I am delighted and flattered that you have publicly asked for my advice. I suspect the Committee would probably want me to give that to you privately, because we are here to ask you questions, rather than the other way round, but do you not accept my analysis of the problem? We need a policy response to these issues, not simply recognition that it is all about long-term and discussions might get us there. I do not know how you can persuade hedge fund managers to suddenly be obsessed with the long-term, for example. It would be an interesting situation. Do we agree the problem is to devise a policy response to address what is the short-termism that we both agree can be a severely damaging impairment to the UK economy?

  Lord Mandelson: It is partly short-termism, but it can equally be poor analysis and faulty judgment about the projected return from a merger. It may be that mergers may fail, either through poor evaluation that has been undertaken in the first place when the takeover has first been mounted, or aggressive cost-cutting that can ensue, not least when a debt accumulates in order to finance the takeover and it just becomes too expensive an operation and they start having to cut costs and eating into the capacity of the company that they have taken over. That is why sometimes mergers fail to bring the additional long-term value that is projected for them, and that is why I have also said that directors of companies can expect to come under some fairly hardnosed scrutiny and expect some public and shareholder criticism if they have not done their homework properly, if their plan leads to excessive debt that they have had to take on in the course of mounting the takeover, or if they have been motivated chiefly by a desire to strip assets or simply want to make a quick return off the share price. They can expect very heavy criticism chiefly from the shareholders involved but also from a company's workforce and those who represent it; and, I would say, the Government is entitled to express an opinion in quite stark circumstances or extreme circumstances. Where I am wary, however, just going back to your original question, is broadening the grounds for government intervention in mergers and takeovers. As I said, some have suggested that we should introduce some more open-ended public interest test that a government or arm's length authority should apply to takeovers. The reason I am unconvinced of the desirability of introducing such a test and equipping the Government with such powers is because I think that in those circumstances a government's judgment and intervention could be too exposed to political lobbying and short-term populist pressures which are unable to make an assessment of long-term growth and value that might come from the move. It might give rise to capricious decision-making of one sort or another, depending on the ministers and their official advisers, and it can lead to a loss of transparency and a loss of predictability which at the moment makes the current UK regime open to investors from which, I just underline, we benefit a great deal.

  Q14  Chairman: Other colleagues want to try and press some views on this as well and ask you questions on this. Can I bring them in one at a time?

  Lord Mandelson: Of course

  Q15  Miss Kirkbride: In the light of what you have just been saying there, I do not know whether you heard the interview by the Government's former GOAT, Lord Digby Jones, on the radio this lunchtime?

  Lord Mandelson: I did actually.

  Q16  Miss Kirkbride: As a politician I think I could see the point he was making, which was to say that where companies are internationally owned, in this circumstance where Kraft, an American company, are buying a British company like Cadbury, when there is cost-cutting and when perhaps the company is not doing as well as it might do, it is political that they cut the jobs in the UK because they do not have to answer to UK politicians, they have to answer to their own state senators and their own politicians locally. These things can get very political when an international company is involved and he, therefore, thought that there might be scope for action. What is your view of the Government's former business adviser on this?

  Lord Mandelson: On the same programme a currently serving Labour Member of Parliament, Geoffrey Robinson, also spoke and gave his views, and he was suggesting that the freedom and flexibility that operates in our markets for such takeovers and mergers should be more restricted and the Government's powers should be greater; so there are obviously differing views on this. It works both ways. American trade unions and workers might argue that when British companies take over ownership of American companies and plants that they will be taking decisions which are more related to, or dependent on, British interests. It does work both ways. Indeed, in 2003 Cadbury itself bought the iconic US chewing gum company Adams, and there may well have been trade unions and their members who were voicing similar concerns and misgivings as our own are doing today in the case of Kraft's takeover of Cadbury. It is also relevant here, of course, that Cadbury itself, in addition to buying Adams, the chewing gum company, in 2003, is a major multinational company, I think it has ownership in production of something in the region of 40 or 50 companies around the world. Only a minority of its workforce are employed in Britain. So you can see how similar questions would have arisen in those countries when Cadbury arrived and had taken on ownership and employer responsibility in those countries.

  Q17  Miss Kirkbride: Do you have a message for the UK-based Cadbury workforce?

  Lord Mandelson: My message is that Kraft's management have given undertakings today about their future ownership of Cadbury. Indeed, in the last ten minutes arriving on my BlackBerry is a letter from the chief executive of Kraft who says that she is confident that the combination of Kraft Foods and Cadbury is good news for both companies. "As we have said", she adds, "the offer reflects our view of the strength of Cadbury's business, its brands and the future potential for growth." She says she also believes that "over the long-term this is good news for British manufacturing and will enable us to accelerate growth beyond what the two companies could achieve alone. I recognise the concerns of the UK Government, but I can again assure you of our intentions to proceed with sincere respect for Cadbury's heritage, people and identity." I have already invited her to come in and meet me to discuss the undertakings that she has now communicated to me via this letter, and I will want to know what the exact terms, conditions and small print are of those undertakings and, when I have had that discussion, I will make them public to Cadbury's workforce.

  Miss Kirkbride: Let us hope she is right!

  Q18  Lembit Öpik: It is very interesting that you will be meeting with Kraft senior management. Given the iconic nature of Cadbury's brand, would one of the undertakings you would like to see from Kraft is to maintain the Cadbury name? Given that you said yourself the Government can express opinions about some of this at least, would that be one of the things that you would seek to get an undertaking on?

  Lord Mandelson: It would be commercially crazy for them to lose the Cadbury brand. It is not just iconic in Britain; it is well-known, established and admired all over the world. I cannot imagine that they would do something so stupid as to replace Cadbury with Kraft when Cadbury means so much to so many consumers and so many countries and so many continents around the world.

  Q19  Mr Hoyle: Obviously, it is quite interesting what you have had to say, Lord Mandelson, but what I would say is that some brands, or some industries, if we take utilities, that have been taken over cannot be moved. I think that is the difference with Cadbury's: jobs can be moved overseas. You talk about iconic brands, you would not want to lose it, but Terry's Orange was made in York. It is now made in Poland. The issue is that no-one is manufacturing for Terry's in York at all. That is the worry that we suffer, and I am sure you must suffer those long-term worries—they must niggle at the back of the mind—because the undertakings and the discussions that will take place are after the doors have closed. I think that is part of the problem. You said you would have to create new powers. Would you like new powers, or do you believe the powers you have is where the Government should remain?

  Lord Mandelson: The powers that I have are not extensive. They do not give me much scope for intervention, except, as I say, in respect of national security, which is not quite the same as the national interest, and media plurality. My fear, as I have said, is that if I acquired new powers over mergers and takeovers, applying some public interest tests, would be—not, of course, in my own case—that subsequent holders of my office might be open to less than objective judgments, less than evidence or analysis based decisions, that they would be swayed by short-term political considerations and emotions, and that, I think, would have a similar, if not equivalent, downside to some of the consequences and some of the poor decision-making we see in the present system; so I do not think there is a perfect alternative available for us to grasp.

  Q20  Mr Hoyle: It is interesting. You did mention about British companies buying overseas companies. In fact, Rolls-Royce bought an energy company in America, so they closed Rolls-Royce Energy at Liverpool but not in America. I assume they have a different way of looking than, say, Kraft. With hedge funds, whether we like it or not, short-term gain and long-term loss is the way that they operate, and I just wondered: if hedge funds make out of Cadbury's, they would also make out of Kraft when they start to unload some of that debt because of the takeover. I just wonder how you feel about that. I also wonder, will you be happy for your creme egg to come from Poland or do you believe it will still be manufactured in the UK?

  Lord Mandelson: No, I would like my creme egg to continue to be produced in this country because it is a perfectly formed, perfectly produced, perfectly tasty creme egg and that must come from all the inputs that we have come to know, love and respect in this country, and I would not have faith in equivalent inputs being provided in other countries.

  Q21  Mr Hoyle: That was what was said about Terry's Orange!

  Lord Mandelson: But that is my taste and that is my prejudice as an individual, it is not me exercising power as the Secretary of State, and therein lies the difference. You do put your finger on rather an important point. Blocking inward investment or restricting foreign ownership is in danger of creating a precedent that others would use to block British investment abroad, and we have to understand that not only does foreign investment offer major synergies and returns to British companies, it is sometimes critical to giving UK firms a domestic productive presence in foreign markets from which they would otherwise be shut out and excluded. For Great British companies to operate internationally, they need often-times to get behind the tariff borders of a particular large and growing market. They do that by taking up ownership and establishing a productive presence in that company within its market. If we were to start excluding companies from our own market and restricting foreign ownership in Britain, we could find, very quickly, that the shoe was transferring to the other foot and we were excluded from others' markets, and that would be very greatly to our economic and commercial detriment.

  Q22  Roger Berry: I am certainly not suggesting we block foreign investment, but do you not agree that the UK has one of the most open markets in relation to inward investment and that most other countries, to varying degrees, put a bit of grit in the system? Although it is true that public policy might be inefficient, it might potentially be corrupt, I do not know, certainly, by definition, political, it might get it wrong, but markets get it wrong as well and that is why most of the countries do have a bit more grit in the system to restrict the freedom of markets than we do. Do you not think the experience of other countries is perhaps worth looking at and that it may not be the case that having the most open system, the most non-interventionist system to respond to foreign investment is necessarily the right approach?

  Lord Mandelson: We can see this on our own doorstep in what is our domestic market in Europe's single trading area.

  Q23  Roger Berry: I accept that, about which you are very knowledgeable, which is why I raised the issue.

  Lord Mandelson: We do not always have our ability to invest or take over or take up ownership shares in European companies that they are able to do in the UK. It is something which I have raised again and again, and most recently did so this morning when we met the new President of the European Council, Mr Herman van Rompuy, and these are very serious issues for us. I am perfectly happy, more than prepared, to reflect on other countries' experiences. I am perfectly prepared to continue the dialogue that I have started now, not just with company directors but their main shareholders as well, about whether the British legislative framework that surrounds this is performing in the best possible interests of our corporate growth, our manufacturing sector and the longer-term growth of the UK economy. I am certainly prepared to look at that, reflect on it and continue my discussions, but one person's grit is another person's protectionism, and we have to be very careful that we do not make a false move that costs us too much in the openness, accessibility and freedom of our markets in this country, which, on the whole, have served us well over generations.

  Q24  Mr Clapham: Lord Mandelson, when the research and development facilities of a company tend to move towards an overseas buyer, one sees, generally, a shift in the gravity of the company. Given the research and development facilities for Cadbury's are at Reading University, with 200 people employed there, when you meet the chief executive of Kraft will you be seeking some undertakings regarding the research and development facilities of Cadbury's?

  Lord Mandelson: I want to see reassurances offered by Kraft in respect of Cadbury's production in this country, the workforce, the R&D capability and the excellent Cadbury products that we want to see continue to be made in this country. I am not replacing my judgment for the new management of this combined company, but they must know that having offered reassurances and certain undertakings, as I gather they have, to the Cadbury's Board about future employment then we as a government will continue to be on the case. We will be looking not only at the terms that have been volunteered in this takeover, but at how those are implemented and how they continue to be features of this company in years to come. I am certainly not going to walk away from this, having expressed the Government's concerns to date, even though, ultimately, I entirely accept the decision is one for the Cadbury Board.

  Q25  Chairman: I am left with the uncomfortable feeling that politicians in these circumstances cannot do anything except talk and actually there is nothing you can do to make a reality of the very honourable pledges and undertakings you have given yourself today, but ultimately you are powerless. You can fulminate like King Lear on the blasted heath against the winds, but ultimately you cannot control those winds, can you? Kraft will now decide the situation for themselves.

  Lord Mandelson: What powers do you want to equip me with?

  Q26  Chairman: I accept your analysis; I think your analysis is right. I think it is a little unfair to hold out the prospect that in some sense you can hold Kraft to their undertakings. History shows you cannot.

  Lord Mandelson: There is a force of public opinion and political pressure which I think it is entirely legitimate to express in circumstances like this. If people volunteer undertakings and assurances then they should expect to be kept to their word, and we will play our part in that.

  Q27  Chairman: Can I ask you before we move on, because we have spent quite a long time on this, the Round Table you held last Thursday appeared to me—call me cynical if you like—to be timed to be indicating action in relation to the Kraft/Cadbury takeover, but was it part, genuinely, of a longer-term attempt to rethink how joint stock companies behave in the 21st century, was it an attempt to think about shareholder engagement, because there is no such thing as "shareholder" any more, there are all different classes. There are individual shareholders, institutional shareholders, hedge funds, all behaving with different motives for different reasons. We are all in this room, as I said last week in another evidence session, shareholders in Cadbury through pension funds and ISAs, and so on, but we have no power to influence where those shares are voted. Was it a bigger debate you were trying to start or was it just a gesture timed with Kraft/Cadbury?

  Lord Mandelson: A wider bigger debate. It was entirely coincidental that the meeting should be taking place when the Cadbury's bid was so topical. The meeting that I organised was in the context of the reviews of corporate governance that have been undertaken by Sir Christopher Hogg and Sir David Walker which has focused debate on the role of shareholders.

  Q28  Chairman: What is the next stage of the process?

  Lord Mandelson: I am very keen on a new stewardship code, combined code, being promulgated, and the discussions I held, the meeting I held, should be seen in that light. What I want to do is to discuss the why and the how of the UK setting a new standard for high quality, long-term shareholder engagement with the companies in which they have holdings.

  Q29  Chairman: What is the next step? What comes next in that process?

  Lord Mandelson: The code is being consulted upon (the stewardship code)—I think it will become a combined code—and after discussion in which the Government has been involved, that code will be published and we will see that, again, sparking a relevant and important public debate.

  Q30  Ian Stewart: Good evening. I have been thinking carefully about the question you raised back to us about what powers do we think you should have. Have you got the power to reclaim government grants to companies who have a track record of asset stripping and then leaving the country? If you do not have it, why should you not have such a power?

  Lord Mandelson: That is a particular circumstance which obviously does not arise in this case—I am not aware of any government loans or grants to Cadbury—but, yes, if a company is in breach of the covenant, the agreement it has made with the Government which provides the terms for that grant or loan being offered, it is part of that agreement that we have the power, that we have the ability to recover what we have granted or loaned.

  Q31  Lembit Öpik: If you have not got any power to influence the actions of Kraft, why do they want to meet you?

  Lord Mandelson: I think because they want to demonstrate their sincerity and the responsibility that they are taking on to all the stakeholders of Cadbury. I think they want to satisfy me and the Government as a whole that the undertakings they have offered they mean genuinely, and it also implies that we will be able to hold them to account subsequently, and that is what I intend to do.

  Q32  Lembit Öpik: Here is hoping. Moving on to Post Offices, it seems that we are heading into another period of consultation. There is already a large body of evidence supporting the expansion of Post Office financial services, not least from our own, if I may say so, outstanding report on the future of the Post Office network. Why is it that a further consultation on the Post Office was found necessary rather than just going on the extensive dialogue and debate that we have already had?

  Lord Mandelson: Because it is a good practice by government not simply to introduce changes or new measures without consulting stakeholders and relevant parties, because in the course of such consultation you are able to assemble different points of view and ideas which you are then able to draw on when you reach your final decisions, and also because there may be aspects or elements which we had not focused on in the first instance which come to light during the course of the consultation; so I regard it as good governance.

  Q33  Lembit Öpik: How soon after the consultation does the Government intend to produce its response, because, whilst it is laudable to consult, if that consultation never really leads to any kind of meaningful measurable result, then it is just talk. In that context, how do you see the timetable and also the process afterwards?

  Lord Mandelson: We have approached it rather more proactively than that. We have not just simply tossed an idea into the air and asked people to consider it, catch it and give us their views on it. What we have done is to set out our vision for an expanded financial services role for the Post Office. We have outlined a series of proposals for new services that the Post Office could offer. These include a weekly budgeting account, a current account, a children's saving account of the sort that many of us had when we were younger, business accounts, more mortgages and closer links to credit unions. We are asking for views on all those things. What we want to do is to bring banking services back to the heart of people's communities. That is why we are looking to the role of the Post Office. It is already a financial service provider as it is in the sense it is already a bank. What we are asking is how it might expand that role, building on what is a very well, very trusted and popular brand.

  Q34  Lembit Öpik: I want to explore that a bit further, but in terms of the timetable, do you intend to reach decisions before the General Election?

  Lord Mandelson: Yes, we do.

  Q35  Lembit Öpik: And to publish those, obviously.

  Lord Mandelson: Yes. The consultation, I think, actually closes, if I am not mistaken, towards the end of February.

  Q36  Lembit Öpik: On 24 of February, I think it is.

  Lord Mandelson: That will give us plenty of time before the General Election, will it not?

  Q37  Lembit Öpik: It will be 6 May then! Make a note, Chairman. We will get a response before 6 May.

  Lord Mandelson: I told you it was useful having these sessions.

  Q38  Lembit Öpik: So the Government will respond within about two months?

  Lord Mandelson: I could not say, obviously, exactly how long, how much time, but enough.

  Q39  Chairman: That does, in practice, mean before Easter, so we will hold you to that.

  Lord Mandelson: Please, do not start tying me down.

  Q40  Lembit Öpik: Presumably it would have to be before the House rises for the Easter break. Turning to the actual services being offered, and you listed them, it does sound to me that we are going to go back to more or less what the Post Office used to provide. Do you have any concern that these products will be provided in partnership with the Bank of Ireland? In other words, is there any necessary condition being established here that any financial services will be in partnership with the Bank of Ireland? The reason I ask the question is because there have been commentaries which criticise that arrangement as taking half the profit out of the UK and less revenue for the Post Office itself. This is a concern, actually, which has been expressed by Post Office masters and sub-postmasters.

  Lord Mandelson: It is a partnership, is it not, and obviously both partners put something in, both take something out. It is an enduring partnership. The basis of it is a longer-term, medium-term agreement between the Post Office and the Bank of Ireland and obviously implications would flow from any question marks being put over that agreement, question marks which the Government is not offering but of which we have to be mindful. There are a number of ways forward. The purpose of a consultation like this is to define the options. I think it is fair to say that that is our approach, is it not?

  Mr McFadden: Yes. I think the Post Office's banking services are probably not as well known as they should be. I think I have told this Committee the story before about an MP who came to see me a couple of years ago and said, "I think I know the answer to the future financial health of the Post Office." I leant forward and said, "What is it?" He said, "I think they need to get into foreign currency. I think post offices need to start selling foreign currency." I told him that they were actually the market leader on the high street in foreign currency, and he just did not know. I think that is in some ways common, but they have got two million customers on various financial services products, they have a big advantage in terms of being trusted as a trusted brand with a presence in the community. Lord Mandelson referred to children's saving, for example. Given the economic period that we have just been through, with a great deal discussion about debt, both personal debt, national debt, and so on, to encourage children to start saving is something we probably all agree would be a good thing and I suspect for many of us sitting this room the first savings account when we were kids would have been with the Post Office. That currently is not available, but they are thinking of bringing that back. There is then a question of how you do all this. If we are all agreed on the desirability of greater financial services at the Post Office, and you raised the issue of the partnership with the Bank of Ireland, this is an existing legal long-term partnership agreement with the Post Office.

  Q41  Chairman: How long-term?

  Mr McFadden: Until 2020. If you look around the world, which we did (and there is some reference to this in the consultation document), there are different models of post offices providing financial services, but a partnership with a bank is certainly not uncommon, it is quite common, and, indeed, a partnership with a bank that does not otherwise have a big domestic presence in the market in which that Post Office is operating is also not uncommon. If you look across the Irish Sea to the post banking offer from the Irish Post Office, for example, their banking partner was Fortis, not based in Ireland, not one of their high street banks. The situation that we have here is not uncommon, and it is completely legitimate to have a discussion and a debate about how best this is structured and if there should be a partner who should that partner be. The two points I am trying to make are that it is not unusual or uncommon around the world, it was freely entered into by the Post Office, and also there is a legal contract there for quite a long time in the future. I think that is worth bearing in mind in this debate because sometimes it takes place as though those factors did not really exist.

  Q42  Lembit Öpik: Is the Post Office obliged to necessarily offer those new financial services in partnership with the Bank of Ireland?

  Mr McFadden: It does not exclusively use the Bank of Ireland for all the services, but I think it covers the vast majority of them.

  Q43  Lembit Öpik: That is a very important point. For example, you could use some of the banks that the British Government currently owns. Is there anything to prevent these additional services being provided under a different contract?

  Mr McFadden: I think if you wanted to get into exactly what products are covered by the Bank of Ireland contract you are probably best getting the Post Office to come and give evidence to you, but I think it is most of them. My understanding of that contract is that the Post Office are not in a position where they could simply offer children's savings with one bank and perhaps the weekly budgeting account through another bank, and so on. It is quite a broadly based contract that they have. I have also met with the Bank of Ireland about this and I have said that if we want to grow financial services through the Post Office, as we do, we need to know that they are an enthusiastic partner in this, that they want to see an expansion in the kinds of products that we are talking about today. They are fully aware of the kind of debate that is going on about post banking and what kind of model people would prefer, and so on, and I think it is important that they and the Post Office as well as the Government are part of this conversation, and that speaks to your question about the timetable of rolling out these products. It is not purely a matter for the Government; the Post Office and the Bank of Ireland are part of this, it is their partnership that is there, and what we want to see is these products if they have public support, if these are the kinds of services that are there, coming on stream. They probably will not all happen on one day but rolling out in the future. For example, the Post Office have recently been increasing their mortgage presence and their mortgage offer.

  Chairman: I am very conscious of the fact that you are playing a Geoffrey Boycott role, both of you today, playing the ball nice and slow and long, but actually we need to score a few quick runs and move on, if we may. If you could just shorten the questions and answers, I would be very grateful.

  Q44  Lembit Öpik: Just for the record, I think it would be useful for us to understand exactly what the limitations of the Post Office contract with the Bank of Ireland are. I have really only got one last question. In the light of both yourself, Lord Mandelson, and the Prime Minister saying (and I quote the Prime Minister) he wanted the Post Office to play a much bigger role in bringing banking services back to the heart of people's communities (a phrase that you have almost precisely repeated), was it a mistake to scale down the Post Office network because it is very hard for it to be at the heart of the community if you have ripped that heart out?

  Mr McFadden: We spoke during that period. It was an extremely difficult thing to do. The Chairman has encouraged us to be quick, so let me just say it was difficult. I know how unpopular it was in the communities that were affected, but if you go back to the reasons why that decision was taken, it was because the Post Office network was losing £4 million a week.

  Q45  Chairman: I do not want to go over that.

  Mr McFadden: I am just trying to answer the question. The important point to make here is, having gone through the contraction of the network by about a sixth of its size, the reason for that was to try and make the rest of the network more viable. What I would like to see is us moving on from that debate about closures to having a proper debate about what the remaining network can do, and banking services, I think, are a really important part of that.

  Q46  Chairman: Lord Mandelson, please feel to express a view on the Royal Mail and the Post Office, please. You are not always so reticent.

  Lord Mandelson: You know me, any little encouragement!

  Q47  Mr Hoyle: We do not want to go over the scars that every constituency has already suffered, I agree with that. It is about the future of the Post Office: that iconic brand, well loved, the Post Office is the centre of the community. I just wonder what more we can do to ensure that we do not go back to Post Office closures. It is about putting new business in there.

  Lord Mandelson: We are investing £1.7 billion in the Post Office network up to 2011, and we have already made clear that we will continue to support the network beyond this date.

  Q48  Mr Hoyle: Do you want me to finish the question? It is a good anticipation, but you are not going to get a starter for ten on that! The question I was going to raise was that it is important, it is how we work together to ensure there is a strong future, and I do recognise there is a commitment there. It is about the reduction, on the one hand, of people who will claim the benefits and use the Post Office and, at the same time, building up business that will replace it. It is about that crossover, which will be a very difficult time. I just wondered: the community bank that everybody wished for and supported, there are question marks over the Bank of Ireland, we do own banks well. Could Northern Rock not have been the vehicle that we should have been using through every Post Office? It would have given good competition to the high street banks but also would have given a whole new set of customers to Northern Rock as well. Is it too late? I understand what you are saying about 2020, but I just wonder, if it is too late, what else can we do save that brand? I understand what the Government has already done, Lord Mandelson. I am not against that. I am just trying to make sure that the future is safe as we see the reduction of services.

  Lord Mandelson: Are you envisaging folding Northern Rock into the Post Office?

  Q49  Mr Hoyle: Could that have been considered and would it have been worth doing, as you are the owner of both?

  Lord Mandelson: These are very different businesses operating very different models and I think it would be highly expensive to start trying to combine two such very different businesses. What is important is that we get a new range of services for those who want to use them delivered through the Post Office. If you were going to go via an attempt to fold in Northern Rock, that would be very time consuming, rather complicated and possibly more expensive than we would want to take on.

  Q50  Mr Hoyle: The biggest issue is that the Post Office, or Royal Mail, does not have a banking licence so you need a partner with a banking licence, and I understand why the Bank of Ireland was used. What I would say to you is that with mortgages and what Northern Rock already does it would have been an expansion as you already have headquarters, infrastructure, you have got the computer backup. All I am saying is it is there, it is within the ownership, and it is something that could have been feasible. Is it still worth looking at?

  Mr McFadden: As I said when we discussed this earlier, you can have a perfectly legitimate debate about who should the banking partner be but there is an existing banking partner with an existing contract and a business relationship which, if we are being fair, has grown Post Office financial services in recent years to two million customers. That is there. What we are all agreed about is that we want to see those banking services expand. I hope we do not let an argument about structure get in the way of the main point which is the expansion of the services.

  Q51  Chairman: The impression I have formed is that people out there are more concerned about the structure than the services and that is why I think consultation is a waste of time. We all know what services you want, it was the structure they wanted to talk about and they have been denied that opportunity. The services they can write themselves.

  Lord Mandelson: They are not being denied that. If people want to make this argument they can but they would not necessarily be sighted on the fact. If you did want to, as it were, switch horses from the Bank of Ireland to some alternative banking vehicle, the expense of buying out that existing agreement with the Bank of Ireland would be quite considerable.

  Q52  Mr Hoyle: That is fine, yet the trust and faith in the viability of the Bank of Ireland have been able to financially support this.

  Mr McFadden: They have got to play their part. They have got to be able to play their part, that is absolutely right. The reason I point it out is—

  Q53  Mr Hoyle: Iceland is an example.

  Mr McFadden: --- sometimes the debate takes place as though they are not there, as though there are not existing banking services or an existing partner. All of that is there. If you were to change from that to some other model, there is a whole set of questions about cost, about contract, about who a viable new partner would be, and you would have to go through that process.

  Chairman: I think we will move on to the regulatory issues.

  Q54  Lembit Öpik: Let us talk about Post Office regulation. I think the previous conversation was useful and we probably have some work to do to look at the contract. In terms of the Government's intention for Ofcom to take over Postcomm's responsibilities, that fell because the Postal Services Bill was abandoned. Your Permanent Secretary told us in October 2009 that Postcomm's situation was "far from ideal". Do you accept that the delay in implementing the Postal Services Bill has actually led to uncertainty for Postcomm and a less effective regulatory regime for postal services?

  Lord Mandelson: Since Simon met the Committee there has been greater evidence of the regulatory arrangements stabilising, Postcomm getting on top of and on with its job. I think that in taking account of Richard Hooper's findings, to the extent that they are able to within the existing legislative framework, they are undertaking a market study seen as fundamental to understanding the way that changes that have happened in the postal sector have impacted on the Royal Mail. They are also undertaking a review of how the difference between the Royal Mail's retail price, what it charges members of the public to send mail, and the wholesale price, what is known as the headroom, is regulated. Both in respect of the market study and the headroom review, final mile review, they are getting on with their work, and I praise them for doing so. Obviously this year they expected to be in a different place following the passage of legislation but in the event it was not possible to pursue the legislation because market conditions discouraged this. I applaud them for the way in which they have reverted to their original role and got on with their job.

  Q55  Lembit Öpik: How are we to interpret the Permanent Secretary's words that the situation for Postcomm is "far from ideal"? What was that referring to?

  Lord Mandelson: He was referring to conditions at the time when he spoke.

  Q56  Lembit Öpik: That is all fine now?

  Lord Mandelson: As I say, arrangements have stabilised since then.

  Q57  Lembit Öpik: Others may want to explore that. You could, nevertheless, have resolved the whole issue by including the provisions in the Digital Economy Bill because the long title makes it possible. The long title includes the phrase: "Make provision about the functions of the Office of Communications". Why has that not been done?

  Lord Mandelson: There are 50 clauses in the Digital Economy Bill. If you were to take on the regulatory section of the original Postal Services Bill that would mean adding another 32, I think, additional clauses and it is not a simple couple of clauses, couple of debates on clause stand part and Bob's your uncle. We did not have the time simply to shoehorn the major part of an original Bill into a different one.

  Q58  Chairman: The Government is pretty good at dropping large numbers of clauses at a report stage with no debate when they are quite controversial. This is not controversial, it had widespread support. Really you could do this quite easily and solve the regulatory uncertainty of Postcomm at a stroke.

  Lord Mandelson: First of all, I do not think there is any regulatory uncertainty. Postcomm is doing its job in accordance with the law perfectly well. Secondly, you know that we want in the context of modernisation and reform of Royal Mail as a whole to bring about changes in the partnership between Royal Mail and a private sector minority shareholder, reform of the pensions and solving of the deficit and changes in regulation, but they are part of a combined package.

  Q59  Chairman: They are not, Secretary of State.

  Lord Mandelson: That is your view.

  Q60  Chairman: I can understand the pension stuff and ownership stuff are linked, but the regulatory stuff is completely separate.

  Lord Mandelson: I do not accept that.

  Q61  Chairman: It would enable you to proceed with any ownership change you wanted more easily the more certain the regulatory regime.

  Lord Mandelson: I am afraid I just do not accept that.

  Q62  Chairman: What is the link?

  Lord Mandelson: They are an integral part of how we bring about change in the Royal Mail.

  Q63  Chairman: They are all necessary conditions but that does not mean they are linked in the way that you claim.

  Lord Mandelson: I do not accept that changing the regulatory regime alone would bring about the modernisation that we need in Royal Mail. I would much rather everyone remained focused on all the needs for change and reform and modernisation in the Royal Mail rather than fragmenting both our effort and the original package of recommendations that Richard Hooper made.

  Q64  Lembit Öpik: I do not think we will get any further with this. I think there is a qualitative difference between the financial arrangements and the regulatory arrangements. There is no obstacle for getting the relatively uncontroversial regulatory changes through that everybody was expecting while leaving the other more controversial bits on hold. Where would you put this change in your list of priorities for the Royal Mail? You have made a list of other issues. Where would you say those 30 clauses stand in your list of things to do in regard to moving things from Postcomm to Ofcom?

  Lord Mandelson: When market conditions allow we want to return to the Postal Services Bill. We want it to have a successful passage through Parliament so that we can implement Hooper as a whole.

  Q65  Chairman: We will have to agree to differ because I can see absolutely no intellectual case for what you are saying, that the regulatory changes are linked, which I agree are linked, to the pension and ownership issues. I do not think we will persuade each other today somehow.

  Lord Mandelson: I do not think we will.

  Mr Hoyle: We will not be delivering that one, Chairman.

  Chairman: No, we will not be delivering that one although we will work on it. We will try and persuade you at a later date. Michael Clapham on a new subject.

  Q66  Mr Clapham: One of the other super reports that this Committee produced was on the Enterprise Finance Guarantee Scheme. We have received the Government's response which is very realistic. On 9 December last year mention was made of a further £500 million to be available and you will recall that when the scheme was first launched on 14 January 2009 there was £1.3 billion. Is the £500 million that was referred to on 9 December in your press release new money or is it money that was left over unused from the £1.3 billion?

  Mr McFadden: That is an additional facility on top of the £1.3 billion going beyond the period when originally the scheme was envisaged to end. Without being too technical about this, because of the way that this scheme works it does not mean that the Government spends £500 million, that is not the way this works. What it means is this will facilitate new lending of that amount which we underwrite the greater proportion of the risk for. It is not that we write out a cheque for £500 million from the Government; it is that we underwrite that degree of extra facility under this scheme. As I say, the way that it works and the reason that the scheme does work, as the Committee knows, is because the banks and the Government share the risk on this borrowing, unlike conventional borrowing where the bank takes all the risk.

  Q67  Mr Clapham: It does flag up to business that there is money out there to be had if businesses approach banks, but what we are finding is that businesses are complaining, particularly smaller SMEs, about the slowness of the response of the banks. Is there anything that you have done lately to try to speed that up?

  Mr McFadden: As you found in your report, that was probably a greater problem in the early weeks and months of the scheme when it was probably fair to say that having launched the scheme it took a little bit of time for knowledge about that to filter down from bank chief executives to the level at which the small and medium-sized businesses in our constituencies are dealing with in the banks. I think it has got better since then. Awareness of the scheme is much better now than it was in the early months. We have got something like 7,000 businesses having been offered loans of around £750 million. There is a network of 37 approved lenders taking part in the scheme. Knowledge of it is better established now and, therefore, extending it through the extra £500 million probably does not demand the kind of learning curve that was there when we launched the scheme at first.

  Lord Mandelson: We have undertaken an early stage assessment of the Enterprise Finance Guarantee and the business attitudes to it.

  Q68  Chairman: Which you shared with us.

  Lord Mandelson: This shows that two-thirds are fairly or very satisfied with the way it has worked and the majority of businesses report very positive business outcomes. 94% of respondents indicated that their business prospects had improved through their use of the Government's Enterprise Finance Guarantee, 84% reported that it had helped their prospects of survival, and 84% of businesses said it would serve as a platform for future growth. Without in any sense taking premature credit for something that got off to a weak start but very quickly started performing very well, I think those who are responsible for operating it within Government can receive some congratulation.

  Q69  Mr Clapham: I think overall the scheme is a good scheme but, nevertheless, since we finished that report we have received letters from business saying they are still slow in accessing the loans after discussion with the banks. I met my Chamber of Commerce, Barnsley and Rotherham, this weekend and one of the things they were cribbing about was the way in which the loans are available. For example, I think the average loan is about £93,000 and when you think that many of the small businesses, particularly in areas that are regenerating, are small businesses with five or six workers, they do not need £93,000 but they do need £10,000 and they are finding it hard to access those small amounts of money. Is there anything that we could do there, for example further advertisements or an instruction to banks, discussions with banks on how to perhaps make it a facility that is easier for small businesses to access?

  Lord Mandelson: I do think that the behaviour and practice of the banks in operating the guarantee has markedly improved from when it was launched. I know from my own postbag that businesses are unhappy sometimes about the administrative charges levied by lenders and also the interest rates on what is lent. I know that there are complaints about this. Also there are businesses which come away disappointed. We are not substituting our judgment for that of the banks in assessing the viability and commerciality of the lending propositions that are brought to them by SMEs. I know that sometimes people come away disappointed. We are providing a guarantee and agreeing to pick up a fair amount of the cost if the borrower should default. We are not saying we are going to decide who gets what, that is not something the Government can do.

  Q70  Mr Clapham: In terms of the analysis, have you noticed that there is an administrative backlog? The reason I ask that is because we have seen evidence that suggests there are more applications accepted than loans drawn down by business. Is there a particular reason for that? Are some businesses deciding maybe because of the conditions the banks put on them that they do not want the loan after all?

  Lord Mandelson: Sometimes. Sometimes they find that they can get a cheaper alternative.

  Q71  Mr Clapham: If it is the banks that are putting conditions on small and medium-sized businesses, the businesses that are very important to areas that are regenerating, then we need to be taking that issue up with the banks.

  Lord Mandelson: The whole point of this and purpose of the government guarantee is to reduce the risk and exposure of the banks in order to encourage them to lend. Not to lend to businesses that do not have a future or on which they are taking a huge gamble, but in the context of a recession, post-recession or emerging from recession, banks will tend to be more wary and that is why the Government has intervened to take some of the risks from the banks' shoulders so as to encourage that lending notwithstanding the difficult economic times that are prevailing.

  Q72  Mr Clapham: I understand that totally but there is a need in areas like my own, particularly in Rotherham and Barnsley where we see small businesses that had really grown before the recession, offering jobs in areas where there was a high degree of joblessness, facing difficult situations. I do think there is a need to prod the banks to make sure that they are going to facilitate those small businesses that are crucial to regeneration.

  Lord Mandelson: I accept that entirely and we are doing it all the time.

  Q73  Ian Stewart: Can I press you a little further to check your awareness of some of the implications for what I would call single-handers, sole traders, who may have property portfolios which in banking terms may include their own home. That is not uncommon. When my constituents write to me saying that they have written to some of the banks we invest in with public money saying no more than, "We would like to go on to interest-only which will help us get through the period" whilst their business is still viable, to be told that they are going to be charged £6,000 just to be able to take up that interest-only facility is prohibitive. When they try to put wider packages together in other instances you are talking about fees of £50,000 for single traders that are finding times difficult in financial terms. I am in correspondence with the banks, and I will not talk about individual cases, but it does not sound as though the intent of your Department is getting through to that hard edge frontline for the smallest of companies.

  Lord Mandelson: You are generalising from the particular circumstances or experience of a number of companies. I am not denying that that experience takes place, but I would question whether that is the experience of every sole trader going to a bank. We are asking the banks to be slightly more risk-averse, slightly more responsible in their lending decisions. We are asking them to repair their balance sheets and put themselves in order to get all of them fully back on their feet. This is going to result in a change of behaviour on the part of the banks and we want that at one level but, at the same time—

  Q74  Ian Stewart: Lord Mandelson, can I just stop you there?

  Lord Mandelson: Let me just complete the point, if I may. Banks have a utility function or responsibility to lend to the corporate sector of UK plc. They also have a responsibility to themselves to nurture their client relationships to lend in order to get a return and if the terms they are offering are prohibitive then they are in danger of cutting their noses off to spite their faces.

  Q75  Ian Stewart: I think you may have missed my point.

  Lord Mandelson: I am sorry.

  Q76  Ian Stewart: These are not organisations or individuals who are asking for more money.

  Lord Mandelson: Existing arrangements.

  Q77  Ian Stewart: These are individuals who are saying, "Can our existing arrangement be moved to interest-only for a set period of time?"

  Lord Mandelson: And the banks are not showing flexibility.

  Q78  Ian Stewart: I agree with everything you have said about people who do not have viable businesses wanting more money just to cover a hole. I totally agree with that, but this is different.

  Lord Mandelson: The point you are making is about the flexibility shown by the banks.

  Q79  Ian Stewart: Absolutely.

  Lord Mandelson: There are so many examples where in the case of small breaches of a covenant the bank has descended and said, "Right, we're going to rewrite all the terms and it is going to cost you this and cost you that". We have had this continuing conversation with the banks. Yes, there are many instances where they are or appear to be acting unfairly, inflexibly, in too rigid a way and where those cases come to me or the business relations officials who work in my Department we are prepared to help and take up individual cases and ask banks to look again and consider whether in everyone's interests they should not think again and adopt a different approach and different template. I am aware of the problems, we are focused on them, we do help when we are asked and where we can, and it does produce some different results.

  Q80  Mr Wright: One of the issues that came to my attention when we were doing the report on this last year was the question of whether banks were insisting. One small company in particular that I was taking up the issue for could not have the Enterprise Guarantee but they offered them factoring which created other problems for them, in other words other costs. The fact is it was another wing of the bank that was offering them the factoring facility and it was a case of "take or leave it". When your back is up against the wall and you have that as an option you either go to the wall or take that which can incur other problems for the future. One is quite clearly when you go to customers you have been dealing with for a number of years and then all of a sudden the factoring company issues you with the invoice, that in itself is sometimes a barrier in many cases because it flags up all sorts of problems. Has that been brought to your attention as a particular issue where banks are using the power that they have got? Quite clearly I cannot comment on the fact of whether or not this was a company financially secure or otherwise, but it is unfair to offer "take it or leave it" on this basis of saying factoring is going to be answer.

  Lord Mandelson: That is not good customer relations. It is not a good bank-client relationship. There has to be a dialogue, not banks arriving at some summary decision, letting their client know by email or letter and presenting it to them on a "take it or leave it" basis. That is not how banks should be conducting themselves. That is not in the best business interests of the banks. Equally, these problems have not been invented by or since the financial crisis, there were issues and tensions in the relationship between lenders and borrowers in the corporate sector long before now. Where there seems to be a pattern of unhelpful behaviour then we do discuss that with the banks because we have a responsibility to do everything we can as the Government to make sure that there is a proper, appropriate, legitimate supply of lending finance to the corporate sector. It is a very great concern for our growth prospects.

  Q81  Mr Wright: I accept that in terms of the bank-customer relationship, but what happens in that situation is the bank takes less of a risk and the business is taking the risk at extra cost. In times of recession I think there has to be an element of give and take, that the bank has to say, "On balance it might be a bit of a risk but we are prepared to help you in this particular way" and understand the concept and commitment that there is going to be. It is not a question of going to a factoring company whilst the recession is on, the fact is you are in it and you are in it for the long haul and it is an extra cost to a small company. It is more about the banks taking the risks, and I know that they have taken risks in the past—

  Lord Mandelson: Sometimes excessive risks.

  Q82  Mr Wright: Absolutely. Quite clearly where there is a small company involved it can make the difference between going bust or survival, but the long-term future of the company may be put at risk because of the extra costs.

  Lord Mandelson: I accept that.

  Q83  Chairman: Can we just spend five minutes on another business support programme, moving on to another area of questioning. Last October, the Permanent Secretary came before us and he told us that under the Automotive Assistance Programme no funds had been disbursed or guaranteed whatsoever. How many loans have been made or guaranteed under the Automotive Assistance Programme now?

  Lord Mandelson: The situation is the same as it was last described to you, Chairman. Currently we have a pipeline of projects to support long-term investment in the automotive sector under negotiation worth something in the region of £2 billion. The timing and the pace of the application process is dictated by the applicants, not by us. They need time both to develop business cases but also to negotiate financing with potential lenders for which we are giving guarantees.

  Q84  Chairman: Did you expect it would take this long when you launched the scheme a year ago?

  Lord Mandelson: It depends what you mean by "take this long".

  Q85  Chairman: Did you expect that a year on there would not be a single loan made or guaranteed? Was that your expectation?

  Lord Mandelson: Well, we have made two offers but in both cases they found alternatives in the private sector. I do not complain about that.

  Q86  Chairman: Which were those offers? I was aware of one but I was not aware of the second one.

  Lord Mandelson: This in the case of Jaguar Land Rover and TMETC. Two formal offers of support were made and not taken up due to their success in obtaining financial support from the private sector. This is not an ATM you know. This is a last resort, a safety net.

  Q87  Chairman: My experience is different from yours. I know companies that have applied under the Automotive Assistance Programme and have walked away in frustration at the bureaucracy and delay that they faced from your Department. They blame your Department fairly and squarely for the delay. The account you are giving is a complete contradiction to what I am hearing of the day-to-day experience of companies.

  Lord Mandelson: I am not sure. I know that some people may be frustrated when they discover they are not eligible or that they do not have their own lending in place for which they are asking us to stand guarantor. There are all sorts of reasons why things may not come to fruition. Given the very considerable projects and investments in the car manufacturing sector which are currently in the air, if and when they land and we are being asked to guarantee or underwrite them I can assure you these will more than use up the provision we have in this programme.

  Q88  Chairman: At the back end of July we published our report on this programme and we made a number of practical suggestions for change which your Department subsequently endorsed and made.

  Lord Mandelson: Some, yes.

  Q89  Chairman: Which we are very grateful for. The fact remains that still no loans have been made. You will understand why I felt a slight sense of surprise, shall we say, that when we launched our report on the very same day you said we did not know what we were talking about and do not know what is happening on the ground.

  Lord Mandelson: I am sure that was only referring to certain aspects of the report.

  Q90  Chairman: That was not the way it came across on the BBC, Secretary of State.

  Lord Mandelson: I wish I had more responsibility for what is reported on the BBC. I have tried over the years!

  Q91  Chairman: That is a very charming answer but I watched the live interview. It was an interview live on the BBC One O'clock News as far as I recall.

  Lord Mandelson: Really.

  Q92  Chairman: Do you not think that our concerns that were expressed in that report have been well borne out by experience in that a year on not a single loan has been made or guaranteed?

  Lord Mandelson: I do not regard the fact that in cases people have been able to go to alternative private sector sources as tantamount to a failure or bad news for the taxpayer. It is rather encouraging.

  Q93  Chairman: I respect that view, but I know one of the companies that applied in some detail and they feel that they wasted months negotiating in good faith with your Department. They could not get what they wanted from your Department. They were a supplier. Eventually they managed to get it from the OEM itself. Your Department, when they asked what the consequence would be of not giving a loan, were told, "Well, the company will have to import from Japan", and your Department said, "Well, why would that matter?" That was the attitude from officials. I am not convinced that there was the urgency in the Department or sense of commitment to this programme needed to make it a success and I am not convinced it is there yet. Prove me wrong.

  Lord Mandelson: I respect the commercial confidentiality of the case you are talking about, but I wish you had drawn it to my attention at the time.

  Q94  Chairman: I might do subsequently. I really do think that the big hopes of this programme have not been fulfilled and our competitors in Europe receive more direct and more immediate support.

  Lord Mandelson: This is a programme to support investment, new technologies, new models, to assist the automotive sector to change and pursue market trends and developments. It is not about giving operating subsidies to car manufacturers. Therefore, we are dependent on those investment plans coming forward and in most cases we are dependent on lending being put in place which we can then guarantee. If you just take an example, say the case of Vauxhall, General Motors, we have already said that we would be prepared to support Vauxhall to underwrite the new financial arrangements going forward and we expect that funding when it is called on—it has not been called on yet—to be funded from the Automotive Assistance Programme. I would rather the resource be there ready for that major investment than having been parcelled out of the door just for the sake of spending money.

  Q95  Chairman: You prove me wrong. I would be very happy to be proved wrong. It is one I would like to be proved wrong on. I just do not think the SMMT if they were sitting there would give the same answers you have given about the reasons for what still seem to me to be the disappointing results of this scheme.

  Lord Mandelson: I do not think at the end of the day when all the provisions we have made have been taken up you will find the result disappointing. If anything, my concern is that there will be too great a call on the resources we have available, rather than that we are not getting enough money out of the door.

  Chairman: I will offer personal and public congratulations when that happens. We will change subjects again and go to higher education.

  Q96  Ian Stewart: I take it you would agree with me that the role of colleges, universities and learning and skills is fundamental to the growth agenda coming out recession?

  Lord Mandelson: It is at the heart of everything I believe, argue for and articulate. British economic growth depends on continued investment in our capabilities, including our research capabilities, our science base and the skills we equip people with both in our higher and further education sectors.

  Q97  Ian Stewart: I thought that you would say that. We have a £400 million reduction—savings, protected spending reductions—in the current climate and, of those, around £135 million were announced. Will that £135 million which Universities UK are really concerned about form part of the Pre-Budget Report figure or will it be something else?

  Lord Mandelson: No. The figure identified in the PBR for savings from right across the board—higher education, research and science—was in the region of £600 million. That will be from changes to student support within the existing arrangements, efficiency savings and prioritisation across universities and science and research, some switching of modes of study in higher education and reductions in budgets that do not support student participation. The £135 million you are talking about was additional to an original amount of specified efficiency savings in the Budget this year.

  Q98  Ian Stewart: £180 million.

  Lord Mandelson: That was £180 million. In the case of the £135 million I can assure you we aim to deliver the savings in ways which minimise the impact on teaching and students, which protect research. We also agreed in that connection a switch of £84 million from capital. Reductions to the teaching grant were actually held at £51 million, the balance being represented by the switch in capital spend, and that represents 1% only of the teaching grants. I think it is important to see this in perspective.

  Q99  Ian Stewart: Let me just take you a wee bit further bearing in mind our agreement at the outset of how important this agenda is. Professor Steve Smith, on behalf of Universities UK, says: "A reduction in public funding per student could seriously threaten our ability to offer the high quality experience our students deserve and expect". The University and College Union have said in response to an internet exercise about your proposals that 14,000 jobs in higher education are expected to go. How do you reconcile these two points?

  Lord Mandelson: The operative word in what Steve Smith said is "could". I know that a lot of the speculation that some have voiced in the university sector comes from a purely speculative sum coming from an independent body that has offered a figure as the possible reduction in spending that could be taken from this sector over quite a period of years. When you produce an Aunt Sally like that and wave it in front of the university sector, of course they are going to react in that way. The idea that what we have announced so far could bring British higher education to its knees is completely absurd, it is hyperbole. I understand the emotion from which that hyperbole comes but I do not think it does anything to strengthen the hand of the universities because they need to see this in proportion with a realistic perspective.

  Q100  Ian Stewart: That sounds to me as though you are minimising this expressed concern. When you wrote your letter to HEFCE in December you wanted the Funding Council to further develop proposals for the inclusion of impact in the Research Excellence Framework and HEFCE informed you that 18,000 academics had responded to this consultation on 16 December by calling on the Funding Council to withdraw these proposals. Are there really 18,000 on the periphery in academia seeing this as a minimal issue?

  Lord Mandelson: I am sorry, I do not know who the 18,000 academics are.

  Q101  Ian Stewart: Have HEFCE not talked to you about that consultation response?

  Lord Mandelson: I am not aware of it, no. I know that when you are asked by your professional association or union to reply in the following terms people quite sincerely will want to do so because they want to mount their case, they want to be able to get their retaliation in urgently because, given all the speculated amounts that have been flying around the ether, they fear the consequences for higher education and their jobs and want to put their marker down. I think it is right that we have a reasoned discussion over how to maintain university teaching and research quality in the face of new fiscal realities. I am afraid that I simply do not accept either the sums that are being bandied around or their consequences. In reality, the savings we have set out amount to a reduction of under 5% of spend in higher education over the next three years. I am afraid tighter budgets can be a spur to perfectly legitimate cost saving, a spur to reform and doing things differently in the higher education sector. They are not immune any more than any other part of the public sector.

  Q102  Ian Stewart: I will come to that.

  Lord Mandelson: If I can just finish my point.

  Q103  Ian Stewart: I do not want you to repeat this when I ask you the next question. I am coming on to that.

  Lord Mandelson: I just think the higher education sector is capable of reforming, refining and producing slightly different and better ways.

  Q104  Ian Stewart: That is twice you have said that and I am going to ask you about it in a minute. The Chairman wants to ask a question, but can I just put something on the record. I think implicit in your statement was something about my trade union affiliations. I am not a member of the UCU or a teaching union, I am a proud Unite member.

  Lord Mandelson: Congratulations!

  Q105  Chairman: Can I just get some facts. I am a bit confused about the numbers, to be honest with you. In October 2008 there was an £85 million adjustment in HE spending, there was £180 million of efficiency savings announced in the 2009 Budget and the letter we are talking about, the HEFCE letter, said there would be £135 million.

  Lord Mandelson: Additional to that.

  Q106  Chairman: Then how does that £600 million relate to the other figures?

  Lord Mandelson: That is an additional sum.

  Q107  Chairman: They are cumulative, they all add up?

  Lord Mandelson: Yes. That is why I have talked about a change in funding of something in the region of £900 million. I have been perfectly clear about that. The £600 million is by 2012-13, not by the day after tomorrow.

  Q108  Chairman: Where did the £600 million come from? What empirical basis did you use to get to £600 million and not £500 million or £700 million? Why £600 million? Who did you ask what the right sum was over that period?

  Lord Mandelson: That is not quite how I would characterise discussions with the Treasury.

  Q109  Chairman: That answers my question, that is fine. That is an admirably succinct answer which I will accept. Thank you very much indeed.

  Mr McFadden: Chairman, there is just one other point which I think it is worth making. It is perfectly fair, of course, to ask us about the HEFCE letter before Christmas and the other sums that we are talking about, but I think you have also got to look at what happened before and the current position that the universities are in. There has been a 25% increase in funding for universities in the last 12 years or so. Combined spending is around £23 billion, not all from Government but the combined spending right throughout the whole sector. The figures that we are talking about are in the context of both that increase and the overall total. That does not mean it is easy to find, but it does mean that suddenly saying the sector is going to be on its knees in six months after a 25% increase in funding over 12 years has to be seen in context. What we are saying is we want the sector to try and find those savings without damaging the teaching quality and research quality that we all value. That is after a sustained year-on-year increase in funding for universities.

  Lord Mandelson: And research activity that has doubled in our universities over the last ten years. We have the highest number of student numbers—over two million—we have ever had in higher education in this country before. That is a huge achievement and we are not about to take an axe and enforce swingeing cuts across this sector. That would not be in the interests of the country, our economy, our society or the individuals who would be affected by it.

  Q110  Ian Stewart: You will notice that I did not interrupt either of you.

  Lord Mandelson: I know.

  Q111  Ian Stewart: I accept what you have said.

  Lord Mandelson: That is kind of you.

  Q112  Ian Stewart: Now to move on to the positive stuff. How are you going to meet Lord Leitch's proposals for a 40% increase in skills? What steps are you going to take to ensure that employers genuinely engage both financially and in commitment terms and contribute to this skills agenda? How do we achieve what this Government's aims are?

  Mr McFadden: There has already been a huge expansion in apprenticeships. If you go back a decade or so there were about 60,000 and there are now about a quarter of a million. We have also got the Train to Gain budget which is for in-work training which employers in some circumstances can contribute to as well. During the recession we made some changes to that to free it up, to make it a bit more flexible. That budget is there too. The skills document that we published a few months ago had two or three main points in it. One was a greater emphasis on what we have identified, and I think was broadly accepted, as a weakness in the technician class in the UK. We have got to become stronger in the skilled technicians that are so important in many workplaces. We also wanted to empower learners more through Skills Accounts to give them more choice and more power over what they learn. Through the growth in apprenticeships, through the Train to Gain budget and through some of the changes that we announced a few months ago it is absolutely right we need to make sure that the workers in this country have got the skills and opportunities to do the kinds of jobs that industrial and economic change requires.

  Q113  Ian Stewart: I have got two quick questions. What would be the implication of abolishing Train to Gain?

  Mr McFadden: That is certainly not our policy.

  Ian Stewart: Other parties are advocating that.

  Q114  Chairman: We have been very good at avoiding party politics up until now and let us leave it that way.

  Lord Mandelson: Very undesirable. I implore people not to vote in favour of them in the coming election.

  Q115  Ian Stewart: A little anomaly that has always niggled me is I have a prison in my constituency, and I have every respect for that prison's education service, they are stunning in their work with prisoners, but why should prison educators be on less terms and conditions than mainstream educators in this country?

  Lord Mandelson: Why are they not?

  Q116  Ian Stewart: Apparently, in prisons the educators are on different terms and conditions that are less than mainstream educators of equivalent quality. If you do not have an answer now, would you please look into this?

  Lord Mandelson: The qualifications presumably that people are working for are national ones.

  Q117  Ian Stewart: Yes.

  Lord Mandelson: They are within a national framework.

  Q118  Ian Stewart: Yes.

  Lord Mandelson: I do not know about those employed, I am sorry.

  Q119  Ian Stewart: It is the tutors I am talking about, the teachers.

  Lord Mandelson: I do not know. Probably for some historical anomalous reason.

  Q120  Ian Stewart: Could you please look into that and write to me?

  Lord Mandelson: We will look and I will write to you.

  Ian Stewart: Thank you.

  Q121  Chairman: It will not surprise you to know that I am broken-hearted there are issues we have not discussed with you today but we are out of time.

  Mr McFadden: Can we not do EU block exemptions?

  Q122  Chairman: EU block exemptions, they are all here, Going for Growth. All these questions are here.

  Lord Mandelson: Industrial activism, technologies of the future.

  Q123  Chairman: They are all there on the list and we have not got time. Does not two hours fly when you are enjoying yourself!

  Lord Mandelson: It does. Can I just say one thing before you release us. Your Committee was kind enough to produce a report that recorded your satisfaction about how the new Department had got underway and had found its feet. I, in turn, want to thank you for that, but I want to place on record that is due to the extraordinary work of the officials who came together from different departments, came together as one so quickly and easily so it seemed to me, but no doubt there were lots of problems, tensions and frictions beyond my sight. They really have delivered in the most extraordinarily professional way. They have thrown their hearts and souls, and many man and woman hours into the work they do to deliver for my Department, and I want to place that on record.

  Lembit Öpik: Thanks to your Department today I got news that due to the influence of some of your staff RBS has released enough funds to create seven new jobs for my constituency, and I am very grateful.

  Q124  Chairman: All these nice things we do say to you—we try to be constructive and positive as well as negative and critical when we have to be—always go unnoticed. I am glad you appreciate them, Secretary of State, it warms our hearts.

  Lord Mandelson: I look forward to coming back for more.

  Mr Hoyle: Next week!

  Chairman: For the unasked questions. Thank you very much indeed.

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