Examination of Witnesses (Quesitons 1-124)
RT HON
LORD MANDELSON
AND RT
HON PAT
MCFADDEN
MP
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 besomewhere down the Thamesto
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 onwhat 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 worriesthey must niggle at the back of
the mindbecause 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
benot, of course, in my own casethat 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 mecall me
cynical if you liketo 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 codeand 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 caseI
am not aware of any government loans or grants to Cadburybut,
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 onit has not been called on yetto
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 reductionsavings,
protected spending reductionsin 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 boardhigher
education, research and sciencewas 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 numbersover two millionwe
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 youwe try to be constructive and positive
as well as negative and critical when we have to bealways
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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