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

Examination of Witnesses (Questions 1-82)

RT HON VINCE CABLE MP AND MR DAVID WILLETTS MP

20 JULY 2010

  Q1 Chair: Can I welcome you, Dr Cable and Mr Willetts, to our first evidence session. I will start with a couple of very broad questions. First of all, Dr Cable, we are in this situation where, according to the Office for Budget Responsibility, over the next five years our exports have got to rise by £90 billion, our fixed investment by £60 billion and we have got to cut our trade deficit from £44 to £9 billion. That is a huge challenge, particularly given the world markets at the moment. How do you see your departmental role in delivering this?

Vince Cable: As you say, it is a huge task. The way I would answer your question and define the problem is we are trying to do three interconnected things at the same time. We are trying to deal with the massive problem of the budget deficit and BIS has to make its contribution to that process, and we are. We have to support economic growth, not just growth as in the past but growth in a rebalanced economy; rebalancing between sectors, no longer dependent on banking to the same extent, more manufacturing; rebalancing as between regions; rebalancing as between the private and public sector, between investment and consumption. We have got these three big interconnected problems. The heart of the problem is how we recapture economic growth because without growth we cannot deal with the deficit problem. In order to clarify what we mean by that, we have prepared this document which we made available to you yesterday. I would not dignify it by calling it any more than a pamphlet. It is couched in broad terms. It is an attempt to state what we are and backed up by an annex which is economic analysis which shows how we get from the generalities to the specifics. If I can just conclude my answer by saying what we say in these pamphlets, and I think it addresses your question, there are three major areas where we have a role. The first is in terms of getting the market frameworks right, and that is partly about trade promotion and trade policy; it is partly about competition, takeover rules; it is partly about deregulation, the one in, one out principle; and it is also about things which do not directly fall to our Department but existing as a department within Government that argues the growth agenda, for example, over issues like planning. That is one area, getting the market framework right. Secondly, making sure that investment is channelled productively in the way that we can through our Department, notably in areas of training, higher education, science, but also the influence that we have, which is necessarily indirect, on bank lending to business. The third area is enterprise innovation creating an environment in which small businesses particularly can grow and flourish. That is a fairly comprehensive answer but I hope it deals with your broad question.

  Q2  Chair: Thank you very much. Picking up on your document, Strategy for Sustainable Growth, and I thank you for the advance notice of that, a number of items in it, like the national infrastructure plan, the fast planning procedures and the proposals for forms for business to help with HMRC, plus finance, are all in part at least to be delivered by other government departments. Are you confident that those departments reflect, if you like, the priorities of your Department and are prepared to engage with you on them?

  Vince Cable: We are certainly engaging with other departments and I am confident that we have got the processes in place to get the right outcome. Essentially we see ourselves as a department of economic growth, we are a voice for that. There are some things we can do directly, and I have summarised some of them, and there are other issues where we have to make an input to Whitehall discussions, and you have summarised some of the areas, I could add others. Immigration is an interesting area where there are very strong political pressures in one direction but there is economically an economic growth issue about how you bring in empire level manpower and it is part of the role of our Department to make sure that the growth agenda and the interests of the business community in delivering growth are properly considered, although inevitably there are differences that will emerge over time and we have to reconcile them.

  Q3  Chair: You have got to do all this at a time when your Department, in common with most other departments, has got to make cuts. Can you tell us something about your priorities and potentially how many agencies and non-departmental public bodies and delivery partners you may have to axe if you are to meet your target?

  Vince Cable: Specifically on the last point I think we have something like 78 partner organisations, something of that order, but they are very different in character. We have already made the decision that 17 of them should go and another 16 we expect to go within a year or so, and others are under discussion with the Cabinet Office process. There are different stories behind each one obviously. In some cases we do not think they perform a terribly useful function, in other cases they are best amalgamated and in other cases they are best done within the Government itself. That is the approach. We think that something like a third or more of the partner organisations will have gone within a fairly short period of time.

  Q4  Chair: When will we know which ones they are?

  Vince Cable: Announcements are being made in the case of individual bodies. If you like I can give you a letter summarising where we currently are with that agenda because it is quite complex, if that is helpful to you.[1]

  Chair: I think that would be very helpful. I am now going to bring in Jack Dromey.

  Q5  Jack Dromey: Thank you, Chair. Secretary of State, on the proposed abolition of Regional Development Agencies what I would like to do is explore with you first of all why the Government is proceeding in this way and then to explore with you the very considerable problem that has been created by the confusion arising out of the process that the Government has engaged in thus far, and then to ask you about precisely how decisions will be made at the next stages. Chair, if I get time, a couple of questions in relation to proposals on funding. I am surprised at the Government's approach, not least, for example, because of the recent OECD report commending the importance of strong regional structures and, dare I say it, praying-in-aid Canada which would appear to be the Holy Grail for the Government. How would you describe a Regional Development Agency, in this case Advantage West Midlands, which this year has been awarded the maximum possible ratings by the NAO, and was awarded the maximum possible ratings by the NAO in 2007, has achieved a return of £8.14 for the regional economy for every pound invested and by way of inward investment £22 for every pound invested, and has received strong backing from employers in the Midlands—Business Voice West Midlands, the CBI, the Engineering Employers' Federation, Federation of Small Businesses, IoD—with a proven track record of managing shocks to the regional economy on the one hand when Rover collapsed and promoting innovation and infrastructure projects on the other hand? On the basis of that evidence, would you agree that Advantage West Midlands is a successful organisation?

  Vince Cable: I would agree that there are some successful activities in the West Midlands and in the other RDAs. There are good things that have happened through the RDAs, I do not want to rubbish everything that they have done in any sense. The reasoning behind the abolition of the RDAs and the move to Local Enterprise Partnerships is partly that they were doing things that were not necessary to be done or were much better done by other people, for example. It did not seem to us to make a great deal of sense that RDAs are out there around the world competing with each other for inward investment. Once an inward investor has decided to invest, say in the West Midlands, there is an argument for a body that then relates to it on the ground. Competition for overseas investment and all the costs associated with it did not seem to us a very sensible use of resources. There are a lot of strategic investment type activities being undertaken competitively by the RDAs, quite substantial numbers of nanotechnology centres, for example, which appear to be duplicating and not terribly helpful. That was one aspect of the reasoning. The other was there are parts of the country, and I am not prejudging the West Midlands, where there is a very strong sense of regional identity and others where there is not. Imposing a regional framework, which as I understand historically arose from the division of aerodromes during the Second World War, on to this system is frankly arbitrary. There may be parts of the country where the business groups and the local authorities will feel it is helpful to have a regional structure, but there are others where they will not and we do not want to prejudge them.

  Q6  Jack Dromey: If the purpose of establishing a new structure by way of reorganisation is to improve on the existing arrangements, how do you believe what the Government is proposing will do that in the West Midlands?

  Vince Cable: I think it very much depends on how, as it were, the two sides of the new Local Enterprise Partnerships emerge and how they work together. If, as you say, it is the case that business groups, the CBI regionally, the Chambers of Commerce, have a very clear view about how they wish that part of the country to be organised in order to deal with development activities then clearly they should put that forward. The other side of the partnership is local government, and if Birmingham, Coventry and the rest were to have a unified view on it that would obviously shape what comes out of it. Our sense is that in large parts of the country there is frustration with an artificial regional structure which they do not think has worked for them and that by creating Local Enterprise Partnerships we will actually get more energy and more commitment.

  Q7  Jack Dromey: Can I explore with you the problems arising out of the confusion created by the process that the Government has engaged in thus far. Only yesterday talking here to the Engineering Employers' Federation and to the Federation of Small Businesses, we got a very strong view from business which was, "We're not sure where the Government is going in the next stages". I have two questions. First, would it not have been more sensible to have published a White Paper to provide context to what you are asking local authorities to do, to submit proposals on the LEPs? If I can just throw in the second question: you instigated a process seeking proposals, new to replace the old, but in the meantime the very valuable work that RDAs do in a number of regions is being undermined because the organisations concerned are withering on the vine. What we do not want to do, therefore, is to see the existing arrangements effectively collapse in circumstances where new arrangements are not in place, not least because this Committee is conducting an inquiry into your proposals and there will be a debate on the floor of the House of Commons on the White Paper. Can you help us about the process that we are going through?

  Vince Cable: We certainly do not want confusion and we certainly do not want a vacuum, and there is no reason why there should be. The RDAs are up and running, they have funding arrangements in place and they have been given guidance through the Treasury as to how they should allocate their funding in the meantime. There is no lack of clarity on the issue. What the Government did in the form of a letter from myself and the Secretary of State for Local Government was to indicate the direction of policy, the abolition of the RDAs, the intention to launch Local Enterprise Partnerships, to invite initiatives, but the White Paper which will come out in late summer will give much more clarity and flesh to this process. I see no reason why it should be problematic. Just to give you an example. We hear various rumours, for example, that European funding is being disrupted. There is no reason whatever why it should be disrupted because if there is matched funding from the private sector or if there is matched funding of funds that were already there until the end of this financial year from the combined pot then those projects should simply be proceeding. In some cases it is a question of giving reassurance to local MPs, business groups and others that there is not actually a problem.

  Q8  Jack Dromey: Can I move on, Chair, in conclusion, perhaps linked to my colleague, Rachel, on a question in relation to funding, this really crucial question in terms of clarity for the regions generally and those regions where, as you acknowledge, there is a desire to explore the maintenance of strong strategic regional arrangements underlaid by new LEP arrangements. Are you serious about this because there is an apparent contradiction between what would seem to be your open-mindedness of approach and your colleague, the Secretary of State in Communities and Local Government, who has said some rather colourful things about RDAs, including that they should go the same way as Anne Boleyn. You have spoken about being open-minded to where there is a case and where a proposal comes forward, but what would be the procedure that you would use to evaluate where there is a will?

  Vince Cable: I may use less colourful language than my colleague but we are giving the same message. I was talking about beheading and Anne Boleyn. We are very clear that RDAs as institutions are to be abolished, call that beheading or whatever. I use more neutral language. There is no difference on that central point. The question you are asking which is about the process, how do we decide whether it should be an LEP on a regional basis or more localised basis, the White Paper will set out more specifically how that whole process of selection will be carried out. It will also give more detail on other aspects of the regional agenda. You have not touched on them but there are other bits of regional policy. We are pursuing a regional growth fund, for example, and there will be clarity over the summer about that too.

  Q9  Jack Dromey: It is important, Secretary of State, that we do not mislead those we represent and the regions from which we come.

  Vince Cable: Yes.

  Q10  Jack Dromey: Can I ask for perhaps a straight answer to this question. If Advantage West Midlands, together with the employers' organisations who have been approaching us and the local authorities, were to come forward with a proposal for a combination of a strong regional structure allied to sub-regional arrangements by way of local employment partnerships, would you entertain that proposal?

  Vince Cable: I see absolutely no reason why a coherent proposal of that kind would not find favour. As I say, the process we have yet to set out but that is exactly the kind of constructive, creative approach we want to encourage.

  Q11  Nadhim Zahawi: Secretary of State, thank you for those answers. I think I am going to keep you going on Advantage West Midlands a bit longer. I think what Jack outlined is right in the sense that clarity is important and people are anticipating the White Paper and wanting to see the detail. The bit that is not so cut and dried, and I would love to hear your view on it, from what I am hearing is when the RDAs were set up 11 years ago the profile of manufacturing and industry in the UK was very different and, therefore, the targeting of the LEPs needs to be reflective of the changing profile of industry and, therefore, a lot of small businesses, certainly in my patch of the West Midlands, would very much like to see the new structure much more focused on them than it is on the larger organisations who have large departments which can cope with the bureaucracy of applying for grants and so on. I would like to hear your view. I am encouraged to hear that you would look at a coherent proposal from the area but just taking a step back to say that should have a bigger element of support for SMEs.

  Vince Cable: The key point is we see this process as being bottom up rather than top down. If, as you describe, the dynamic is the small business sector expressing themselves through their Chambers of Commerce rather than the big inward investors then that will shape what the proposals come up with. We are not prejudging that. Certainly over the last 11 years there are big things that have happened. The first and important point is that the country has become more unequal in regional terms in the sense that the central mission which the RDAs had has not been successful. There are many reasons for that, but the gap in terms of gross value-added per head between the South-East and the rest of the country has widened, partly banking but other factors too. The central mission has failed. The second is that the manufacturing sector is much smaller. We were then talking about 20% of GDP and it is now nearer to 12%, there has been an accelerated decline in manufacturing. What there is, much of it is extremely good, very high technology, very high quality, and much of it centred in small scale enterprises. The structures that emerge have got to reflect that new reality now and I accept that proposition.

  Chair: Can I bring in Rachel Reeves with a Yorkshire perspective.

  Q12  Rachel Reeves: Thank you very much, Chair. Secretary of State, I welcomed your opening remarks when you talked about rebalancing the economy from both a sectoral and a regional perspective, but I was disappointed in the document that you published this morning where there is only one mention of localism in it and that is on page 14 of a 16-page document. I do hope that the opening remarks are going to be put into practice and I hope to see that in future documents from your Department. I want to specifically ask about what areas stay in the regions and in the localities and what areas are going to be renationalised and brought back to Whitehall. In the letter that you wrote to local authorities and the RDAs I think I am right in saying that innovation, business support, R&D, venture capital funds, support for sectors, inward investment and international trade support are all to be brought back to Whitehall. I would like to know what evidence you have got and what consultation has been undertaken by the Department that suggested that is the right decision. If you look, for example, and you mentioned trade and investment, at the data where UK Trade & Investment have been involved 32% of investment has come to London, 27% to the South-East and to the three northern regions combined—Yorkshire and Humber, the North-West and the North-East—only 14% of that FDI has come to those three regions. It seems to me that the evidence, but perhaps you have better evidence, is that when UK Trade & Investment are involved the investment comes to London and the South-East. If you are bringing back all powers on trade and inward investment to London I think that is bad news for the regions and will go against what you explicitly said at the beginning about rebalancing the economy sectorally and regionally. I would be interested in your views on why these powers are coming back to Whitehall when I think they could be better done in the regions.

  Vince Cable: You started your question by saying that there were not very many references to localism and local initiative. Together with the White Paper on RDAs we are preparing a paper on sub-regional developments and regional growth which is to take into account this whole issue about imbalances in the regional growth fund. We are going to address that with the paper later in the summer. In terms of functions, we are not being prescriptive about exactly what the new LEPs do as opposed to what they should not do. We are not being prescriptive. We have given suggestions about the areas they would better cover and not cover. We are trying not to be too definite about that because we want to leave scope for people to come up with initiatives from the grass roots. In the list of things that you mentioned I think there are one or two examples that make our case for us. There are lots of very small venture capital funds around the country, some of them supported by RDAs, which have got very, very high overheads and if they were combined, as the Chancellor suggested in the Budget, into this enterprise capital fund we could achieve more for business venture capital more efficiently. There are arguments for doing a lot of things strategically. Some of the innovation activities, and David Willetts might want to say a little bit about this, which were undertaken by RDAs have got a very scattergun approach and have not been very efficiently delivered. There are activities around Regional Spatial Strategies which, as you know, the Government is not keen to encourage. On your particular point about UKTI and its promotion activities, I think there is an issue about cause and effect. They are out there promoting trade and inward investment and whether it has gone to the south-east and London because of their activities or in spite of it clearly analysis would show. It is an interesting point you make and I am very happy to look into how far the organisation is sensitive to the regional impact. I think that is a good point and I am happy to take it away and do more on it.

  Q13  Rachel Reeves: Can I ask to get a little bit more detail. First of all, you talked about the overheads but actually the admin costs of the RDAs amount to just 7% of their budget and my understanding is that is quite a low proportion compared to other quangos or government departments. I did specifically ask about what consultation had been undertaken and what evidence had been collected by your Department. Jack's point earlier about his discussions with the EEF and the FSB and other small businesses, large businesses, entrepreneurs in our regions have valued the work that the RDA has done. Even if we are not keeping RDAs we are going to have Local Economic Partnerships, I would just like to understand what discussions you have had and what advice and evidence you have gathered to show that some of these functions would be better off being renationalised in the corridors of Whitehall whereas the evidence I am hearing from people on the ground is that they prefer that to continue in the local area where the knowledge of the local economy is greater than, with all respect, the civil servants in Whitehall might have.

  Vince Cable: As I said in my last answer, we are not being rigidly prescriptive about the functions that these bodies should have. If a case is made out for them doing certain things through an LEP we are willing to listen to that, so we are not being rigid about it. In terms of consultation, I have spent a lot of time in my relatively few weeks in the job talking to the various business federations; there are three or four of them, as well as to people in the Government, and I am trying to get round the country. I confess I do not get a great feeling, particularly from business groups, of a tremendous upsurge of support from people saying, "Please, please, keep the RDAs; they are doing a wonderful job". You get good stories. I do not want to be negative. There are good companies that have got a good story to tell about their RDA, but overwhelmingly the feeling we have got back from our business consultation is that this system has got to be radically reformed.

  Q14  Rachel Reeves: Would you publish that consultation and that evidence?

  Vince Cable: I am referring to conversations I have had with the various business groups, and they themselves have expressed their opinions on the subject and they will continue to do so. I do not think there is any evidence that they are arguing for the status quo.

  Mr Willetts: Can I just reinforce that, if I may, following on from what the Secretary of State said about innovation? We did have in the Department the other week a discussion of how we carry forward the Hauser report on innovation, which was a report to the previous Secretary of State, Peter Mandelson, and also James Dyson's report to my party in opposition on innovation. In that meeting was a very strong sense that there were large numbers of quite small-scale initiatives that individual RDAs—as the Secretary of State referred to, 24 nanotechnology centres—and that for us to have really effective centres that take research ideas and bring them to a level where they can be commercially applied we needed to have fewer, bigger centres that had national strengths. That was a message that came across from the experts we did consult.

  Q15  Mr Binley: Very simply, Secretary of State, what assessment have you made of the real benefit brought by RDAs that would not have happened had they not been there?

  Vince Cable: There has been work done by the National Audit Office; it is objective evidence and we obviously take that into account. As Mr Dromey said in his intervention, attempts have been made to quantify this. We think things could be done better, functions could be different, geographical areas could be different, and we do not think the status quo is justified on the basis of the evidence we have, but there have been positive outcomes.

  Q16  Chi Onwurah: Very specifically, Secretary of State, if I can bring to you evidence of large-scale small, large and medium business support for a regional authority in the North East does your recent reply to Rachel indicate that you would therefore listen to that and take that into account in enabling a regional authority which had similar functions to One North East's?

  Vince Cable: The simple answer is yes, we would be sympathetic to that approach. I know that in the North East where your constituency is that feeling is quite strong, but they have to express it through the process we are setting up.

  Q17  Rebecca Harris: I have a question about the skills agenda but first I have a quite general question. The previous Government had implemented a new structure for further education funding just prior to the election replacing the Learning and Skills Council with a Skills Funding Agency and a Young People's Learning Agency across two departments, which appears to have introduced even greater complexity into what was already from some people's point of view a bewilderingly complex system for providers and learners. Given that there might be a tension between a general desire to make the system less complex but also make it flexible so that it responds to the needs of the economy and learners, can you tell us a little bit about how you envisage the delivery structure developing, what we are going to lose, what it is going to look like, how you are going to be able to streamline it and make it work for what is an incredibly important upskill?

  Mr Willetts: Yes, this is something that we are looking at. Of course, it does straddle the two departments because the Department for Education are in the lead on the 16 to 18 provision, so I do not think it would be right for me to talk about the thinking that is going on there, though, of course, we are consulting very closely, but we do want to reduce the number of quangos. We want to have as simple a funding stream as possible for further education colleges and we ideally want the money to go with the individual learner. Of course, we produced, I think last week, Chris Banks' very useful report on funding arrangements and reform of the structure of further education which is out to consultation and it would be very helpful to have this Committee's reactions to that report.

  Q18  Rebecca Harris: The other question is about the commitment you have made to spend £150 million on 50,000 new apprenticeships focused on SMEs, which from my point of view seems a very worthwhile and exciting thing, but complexity in the system has always been a big deterrent for smaller firms to get involved and I am just wondering how that money is going to be spent, what kinds of apprenticeships you envisage it will be delivering, and the main thing is how confident you are about how you are going to make sure you stimulate demand from smaller firms, how the apprenticeship bonus will operate, and how you envisage getting businesses involved, because it is not going to work otherwise.

  Mr Willetts: There are two stages to this. Down the track we want to ease the burden of regulation and we are very keen to support group training associations which we think is a very cost effective way of helping small businesses take on apprentices when they do not necessarily want to have all the direct responsibility themselves. What we have been able to do this year, in the current financial year, is already identify funding currently going into Train to Gain, so it is a tough decision; it is not extra money, and we are aiming to take £150 million of that and put it into financing 50,000 extra apprenticeships. We are not going to have a direct central instruction because that is now how we believe in doing things, but we have told FE colleges and other trainers that any money that they were allocated by the previous Government for Train to Gain they can instead put into delivering apprenticeships. It is early days but our understanding is that there is genuine employer appetite out there for more apprenticeships and so with the extra budgetary flexibility we have already given them in year they are responding to that demand by shifting the use of some of that money into paying for extra apprenticeships. It is early days but we think on this level of employer demand we should be able to deliver 50,000 extra from shifting funding in year this year.

  Q19  Rebecca Harris: But it is largely down to the colleges talking with their local businesses and that is a relationship that relies on them building it up to make it work.

  Mr Willetts: Yes, and through the National Apprenticeship Service as well, but employers that wish to take on apprentices will find that even if a training body or a college was instructed to spend the money on Train to Gain, that money is now available to pay for extra apprenticeships and the evidence is that demand from employers is there and the shift is occurring.

  Q20  Rebecca Harris: So is there a marketing exercise for employers on this?

  Mr Willetts: There is some communication with employers about this but the frustration has been that there has been unsatisfied demand. Employers have not always been able to secure the financing for the apprenticeships they wanted, so employers coming forward are now finding we are able to provide more apprenticeships than previously could be provided. Of course, this is not extra money; this is with fewer Train to Gain places instead, but the evidence is that apprenticeships are particularly rewarding for individuals, they are particularly valued by employers and, as I said, this is an early example of our belief in a demand-driven system, not one with central control, and so far it looks as if the demand is there.

  Q21  Chair: How will the apprenticeship bonus operate?

  Mr Willetts: This is a proposal that is still being looked at for future years but the aim is to provide extra financial support for SMEs. This is all part of the development of our skills policy and, of course, it has to be—and you are all very aware of this—part also of the consideration in the Comprehensive Spending Review.

  Q22  Chair: Will there be any targets set for the NAS?

  Mr Willetts: We identified a specific figure of 50,000 this year, which is a direct exchange of budgets. When it comes to targets, especially with apprenticeships where we are talking about wanting to focus on apprenticeship places that are with real employers and that employers wish to take on, it is very hard to set firm targets because these emerge from the decisions of large numbers of individual employers, but at the moment, as we see the demand there, this year we are able to meet that demand and are optimistic that there will be an increase in the number of apprenticeships.

  Q23  Mr Ward: You mentioned SMEs. Is there any sectoral targeting there for the apprenticeships? Is there a strategic approach to this as well?

  Mr Willetts: We do collect detailed figures which I would be happy to send to the Committee on the breakdown between different sectors. We do not try to direct employers, but again one of the rather encouraging pieces of evidence we have found as we have delivered this liberalisation is that the manufacturing industry is up there recruiting more apprenticeships along with, for example, the services sector, but I am happy to provide the Committee with detailed figures on where we are so far. Obviously, some of them are provisional figures.[2]

  Q24  Chi Onwurah: Whilst recognising absolutely the importance of demand in apprenticeships, so that they lead on to real jobs, would you recognise also that in certain particularly nascent new industries there is a role for your Department to, shall we say, stoke that demand and do you plan to do any work in encouraging or directing funds and apprenticeships particularly into the green renewable industries on which a lot of the growth agenda is based?

  Mr Willetts: Yes, we do. As I say, we do not wish to get into setting large numbers of targets. We see apprenticeships as emerging from decisions of employers, but we do attach priority to and will communicate the value of apprenticeships in the green sector. There is another example, which is the IT sector. Historically the IT sector has been very weak on apprenticeships, as the sector themselves will concede. They did not have a training model that particularly used apprenticeships. Even in opposition I was having discussions with them and with SSC on this and I think the sector now, with some chivvying from us, because they themselves recognise they have got a problem, are doing rather better at apprenticeships in IT, and again, as the figures emerge during the year, we are cautiously optimistic that there will be a significant increase in apprenticeships in the IT sector.

  Vince Cable: If I may add a slight footnote to that question, I think it is worth emphasising at this stage that we do not see the green sector as opposed to the non-green sector of the economy as being distinct. Some of the best things I now see happening in industry are things in the car industry. We are now getting very advanced hybrid vehicles and battery cars, so it is the car industry that wants apprenticeships, and equally, in the aeronautical industry very fuel efficient engines, Rolls Royce and so on, so that the process of getting apprenticeships into industry is not compartmentalised in the way you imply.

  Q25  Chi Onwurah: I recognise that. The point I was making was that whilst the industries are not compartmentalised the skills may be. Fuel cells in green cars is a different skill from the combustion engine and that is something that the departments needs to recognise.

  Mr Willetts: We are looking at this also through qualifications, and if I may draw an example from my own constituency, we had some new social housing projects with solar panels. Sadly, although the solar panels may have been fantastic, it was clear that the construction industry had not put enough effort into training people to install solar panels.

  Q26  Chi Onwurah: That is my exact point.

  Mr Willetts: There is a gap in the qualifications and the training so that it proved to be a nightmare for the tenants in the social housing who found that the solar panels were not properly linked to the boiler and the electric system. There are specific things there where we need to improve the training so that those types of new green skills are incorporated into sector skills.

  Q27  Luciana Berger: I hope to cover a lot of things about higher education over the course of the next couple of minutes. In the immediate term, following on from Adrian's opening remarks about the cuts, despite BIS being the Department with the sixth largest spending, it has had to shoulder the largest total amount in its cuts going forward, and that is an advance over the CSR in the autumn; it is £836 million. More than half of these cuts are falling into higher education and medical research budgets. My question is how this correlates with the statement in the Strategy for Growth document released this morning which says that public investment is absolutely vital to support higher education and science and innovation because they are central to our growth capacity but also because there are so many market failures, particularly in higher education and science and innovation.

  Vince Cable: Can I make a general response to that and David, I am sure, will take it on? In terms of our approach to cuts, I think you are probably right that in terms of aggregate sums of money it probably was the largest. We had £836 million in the £6 billion cuts exercise but £200 million of that was recycled. I do not know whether your numbers incorporate that. That is the apprenticeships and the rebuilding of FE colleges, so there is about £636 million there. There is another £100 million which was administrative savings, and about a third of that in the Department, the rest in partner organisations, and there were also what in the Treasury jargon are called unfunded pressures, and that is another £265 million that we had to take out, so we are talking of just over £1 billion over a £22 billion budget. I think as a share of the total spending it was roughly in the mid range of the departments that were, again in the jargon, unprotected but it is a very large sum and we acknowledge that. We accept as an economic department that we had to make our contribution to reducing the deficit. We know that the incoming Government, of whatever party, would have been in the same position, and I am sure you are familiar with the Institute of Fiscal Studies work which showed that BIS and other departments would have faced 20-25% cuts under the outgoing Government's own proposals that were already under way, so we were in that world anyway. What we are now trying to do is more with less. We recognise there is a shortage of resources and we are trying to use them effectively to deliver objectives in here.

  Mr Willetts: You mentioned the impact on HE and you particularly drew attention to the UK Centre for Medical Research and Innovation. That at £233 million is, I think, the biggest single item but remember we are still committed to that project. It had a rather eccentric financing arrangement we found when we arrived in office in which all of the money was supposed to be spent because it was allocated for one year, although in reality the project will require funding over five or six years, so we think it is sensible to spend the money as the costs occur. That seems to be better than trying to put it all into one.

  Q28  Luciana Berger: There is an immediate problem that we are going to face, having spoken to a number of vice chancellors. In advance of the Browne report there is a much more urgent problem about the number of students applying to university. The number of people reapplying to university this year has increased by 25% and overall applications have increased by 11% this year alone. Vice chancellors are warning that up to 150,000 students this summer in two months' time are being faced with the prospect of no university to go to despite the fact that they have adequate qualifications to go and apply for the courses. What is going to happen to those students come September?

  Mr Willetts: It is tough; I am not going to pretend otherwise. The only thing I would say is that we have increased the number of university places so there will be more university places available this year than ever before, a small increase but nevertheless they are continuing to increase. You are right that there has been a surge in applications. Going to university has always been a competitive process. Nobody has been able to guarantee every applicant a place, and for those who do, sadly, prove unable to get a place there will be, we hope, a range of other options available to them and they can also consider applying again in the future. It is going to be tight this year but, given the fiscal position that we faced, we think we have got the balance right with extra places but, sadly, not enough for the surge in applications.

  Q29  Luciana Berger: There are extra places of 10,000 and vice chancellors are anticipating it will be 150,000 that are going to be without places this summer. Could you expand a bit more on what you mean when you say that there are going to be some alternative options for them?

  Mr Willetts: We have just been talking about apprenticeships, for example. We do not want to get into a situation where the entire focus is on the academic route, important though that is. We think that the practical implication of it also has value and the Secretary of State and I both attach a lot of importance to that. I would go on and say that we do not want to have two divergent routes. It is possible that people who get extra practical experience, who do work experience, who perhaps take up an apprenticeship, may themselves in future be able to apply for university and benefit from university having also had the experience of being an apprentice. One of the things I regularly raise with UCAS is the importance of, in their application form, attaching UCAS points to apprenticeships along with A levels. It is not that you have one opportunity at the age of 18 to go to university, a kind of Club Med model of university. People can carry on applying and can perhaps have extra experiences and then apply again with a better chance of getting in.

  Q30  Margot James: I would like to pursue two lines, if I may, Minister. I just want to revisit the medical research issue and ask you about how you might bring in other aspects of your Department's work to make up for some of the shortfall and pursue the "less is more" route. Yesterday I had the pleasure of listening to you at the All Party Group on Medical Research, at which we heard from Sir Mark Walport, the Director of the Wellcome Trust, about the huge regulatory burden that is placed on clinical research and medical research, the proliferation of protocols that companies and charities who wish to pursue clinical research have to cope with at the national governmental level, at the university level, at the individual NHS trust level. I wondered how you could make the most of the Department's desire to reduce regulation across the board and apply it to this area so as to improve the situation despite the necessary expenditure reduction.

  Mr Willetts: This is a very important point because it is absolutely right that in tough times if we are smart there are ways in which we can encourage more research and innovation even if, sadly, public money is tight. I agree with you. I have been shocked, as I know the Secretary of State has been, by some of the reports we have had of the difficulties for pharmaceutical companies and others to conduct clinical trials and other medical tests. This is something that I have discussed with Department of Health ministers. I believe there has been already some progress on the ethics committees but there are many other challenges as well. The way we see it is that the NHS in some ways is going to become more diverse with much greater local accountability, but equally there are areas where the NHS, as a nationwide patient database, is an incredibly valuable resource and we can do more to ensure that medical researchers have full access to that, but, obviously, it is something that we have to do with the Department of Health and I know that they are very seized of this point as well.

  Q31  Mr Ward: We have heard about the surplus demand for places and I just wondered within that scenario where the wider participation agenda sat and whether we are still committed to that.

  Mr Willetts: Absolutely. It is very important that we broaden access to university. I think it is true to say that from Martin Howes's most recent report came out in May it was quite encouraging that although many of us in different political parties were worried that the introduction of fees was going to mean that prospective students from poorer backgrounds did not apply to university it does look as if applications have carried on growing and are particularly growing from people from black and minority ethnic groups from poorer backgrounds, so we are committed and indeed it is one of the key features of the coalition agreement. Both parties agreed that when we come to assess whatever proposals are put forward by Lord Browne this should be one of the criteria that we use.

  Vince Cable: If I may add to that, when we talk about participation rates there is a danger of just assuming that it is what David calls the standard Club Med model. You can have participation in higher education in all kinds of ways and it can be part time as well as full time. It can be modular courses. Both David and myself in recent speeches have been looking forward to a world where higher education provision is much more flexible and varied than it is at the moment.

  Q32  Mr Ward: Can I ask if that will be supported by specific initiatives, such as the Aim Higher programme?

  Mr Willetts: Aim Higher is one of the initiatives that we have inherited from the previous Government and I have visited Aim Higher initiatives and they can be very effective. We are obviously, in the context of the spending review, having to look at how we get the best possible impact on participation where money is tight and I hope we can learn the most effective initiatives that have had the biggest impact. Something that I think is particularly effective is information, advice and guidance. We attach a lot of importance to ensuring that prospective students have the greatest possible information about routes through into university, the right kind of A levels or other qualifications to get. We are trying to look at this overall so that as we emerge from the CSR we have got the best single effective way of delivering the commitments we have made in the coalition agreement.

  Q33  Mr Ward: Although we are collecting evidence maybe I can give some evidence. On some projects like the Aim Higher one even those who do not go on to higher education go through a programme which opens their eyes to alternatives which they probably would not have considered, so I am putting a bid in for funds for that.

  Mr Willetts: Very subtle!

  Q34  Nadhim Zahawi: Part of rebalancing the economy is to focus on the STEM subjects and the Department funds the HE STEM programme, the STEMNET and LSIS. The first two have regional STEM networks. LSIS has announced that it is going to build its own regional STEM network and with the change away from regional structures is this the right way forward or is there a better way of using existing organisations in the first sector to deliver some of this? Linked to that, you have got the STEM ambassador programme with 20,000 ambassadors signed up but is that really the right KPI, ie, are we focusing on 20,000 sign-ups but where are the outcomes?

  Mr Willetts: I am a great admirer of the STEM ambassadors and they can do a really good job reaching out to schools so that young people who may not quite have made the connection in understanding what engineering is about can suddenly be excited and turned on by the subject. I have seen it happen myself and it is very impressive when it does. I have to say that all this is something we are looking at at the moment in the context both of the CSR and also, of course, as the Secretary of State was saying earlier, with the abolition of RDAs how we get the right balance between these being supported nationally and having an area for local initiative, and that will be one of the areas we cover in the White Paper.

  Q35  Nadhim Zahawi: I agree with you on the ambassadors except there are some experiences where the 20,000 sounded like a wonderful headline but the reality was closer to hundreds who were delivering outcomes, and that is the area I would ask you to look at quite closely.

  Mr Willetts: That is a very interesting point. We will take that away. In general we should try to measure results, not inputs, and I accept that. That is a very important point and we will consider it as part of our deliberations about how we carry that programme forward.

  Q36  Rachel Reeves: I want to come back to the point that Luciana was making before about the prospects for young people come September of this year. In my constituency of Leeds West has some of the highest proportion of NEETs, young people not in education, employment or training. A lot has been done to support those young people and the number of apprenticeships has tripled in the last ten years in Leeds West, which is extremely welcome, but I went to Solihull Community College, one of our local schools, last week and was talking to sixth-formers there who are extremely nervous. They have worked very hard. They are waiting for their results in the summer of this year but then what happens to them in September? I welcome the increase in the number of apprenticeship places, I think 50,000, and I am hoping they will come on stream this year, and maybe you can clarify that, but if Luciana's statistics that there are 150,000 people who will miss out on university places is correct we know that youth unemployment is high and not currently falling. Are we not just wasting huge talent and capability if, come September, there is nothing for these young people to do? There are not the jobs, there are not sufficient number of university places and the increase in apprenticeships is not going to plug that gap. I just wonder what you envisage these people doing come September.

  Mr Willetts: I fully recognise that these are tough times for younger people trying to get into education and training or the jobs market for the first time. Given the state of the public finances that we have inherited, to be combining an increase in the number of university places and 50,000 extra apprenticeships means that the education and training routes available to them through those two mainstream approaches are continuing to increase. I know there will be individuals who are frustrated but I think in tough times to deliver that is an achievement. There are, of course, other opportunities for young people as well. There are many individual training courses run by colleges, run by employers as well, which do not count as a full-blown apprenticeship and do not constitute going to university, so there are those options available for them. You mentioned NEETs. I have been very struck by the evidence from the Rathbone inquiry last year and others that a lot of these young people do have aspirations for mainstream jobs. Sometimes it is said they lack aspiration. I do not think they lack aspiration.

  Q37  Rachel Reeves: No, they do not.

  Mr Willetts: However, what we have failed to do under successive governments is give them a clear route from where they are to the job they want as a plumber or a chef or a police officer or a cook. We are working very hard to try to improve the quality of careers advice and improve the quality of information so they can see the defined routes into those jobs which may not even involve having to go to university or do an apprenticeship.

  Q38  Rachel Reeves: I recognise, Minister, that there are costs involved and that bringing down the budget deficit is a priority, and I think we all share that understanding and that need to reduce the deficit, but allowing young people to go into unemployment, the hysteresis that they will lose their skills, they will then find it harder in the future to get jobs or to get back into education, means we risk stoking up problems for the future if we do not act now. These are unprecedented times with the global financial crisis and I just hope that maybe more can be done in September of this year to help young people who, as you say, do have aspirations and want to do the right thing.

  Mr Willetts: Yes, I recognise that and, of course, I have read the warnings from Professor Blanchflower and others which do say that there can be a kind of scarring effect and it can take young people a long time to recover from a period of unemployment when they are young. But remember that we have got extra university places, we have got extra apprenticeships and at the same we are trying to provide financial incentives for employers to take on more staff by not going through with the national insurance increase that was threatened and by in particular reducing national insurance bills for new companies, start-ups taking on new staff outside the South East, so we are trying even in a recession with public money tight to do everything we can for this incredibly important group of young people.

  Q39  Margot James: I want to ask you, Minister, about the tension between excellence and participation because we have heard a lot about participation. Meanwhile, in your own area of science over the last decade the UK has slipped from fourth to 17th in the world rankings. I am a governor of the London School of Economics and I am most concerned at the pressure put on establishments of excellence like the LSE to take more and more foreign students. If they ever have any surplus places they apply to the Higher Education Funding Council for permission to give UK students those places and they are always turned down, and my fear is that this is because the Higher Education Funding Council are under pressure to fill the places in universities where there are fewer applications. I would like your comments, please, on the tension between excellence and participation in that context.

  Mr Willetts: I hope for the future we can get the balance right. We certainly do understand the importance of our world-leading research institutions, and when it came to the allocation of the 10,000 extra places in May HEFCE had received a range of bids for places, particularly in the STEM subjects, and we had a ruthless quality test: which were the ones that we thought were going to be the most successful and effective extra university places, and on HEFCE's advice we went for the 10,000 best. On Thursday HEFCE will be releasing their funding settlement for individual institutions. That is their decision, not ministers', but I hope that people feel that HEFCE has got the balance right.

  Q40  Luciana Berger: Minister of State, during your speech on 10 June at Oxford Brookes University you promoted the development of a two-tier university system and talked about variable fees, while the Secretary of State last week, during his speech, said that it was not fair that a city analyst should contribute the same towards a degree as a social worker and compared the system of fees to the poll tax. I would like to ask what is the position of the Department on fees? Who is going to be leading on the policy of fees following the Browne report in the autumn, and what is the timetable for any reform of higher education funding in this country?

  Vince Cable: Our comments were entirely compatible. Indeed, we are pointing in exactly the same direction; there is no problem in that sense. The decisions will be made in the ultimate response to what Browne has to say. I think part of the problem, and the Minister of State will enlarge on this, I am sure, is that there is a lot of very confusing language. We talk about a system of fees but actually it is a deferred contribution by graduates. The current system operates like a tax but it is pretty much the same tax for everybody and most people pay £3,000. There is some variation but not a great deal. The idea I was discussing last week, and Lord Browne confirmed that he was looking at this option, was the possibility of trying to make that payment more related to people's earnings subsequent to graduation on the basis that that would be a fairer principle. There is no inconsistency at all and that is the process we are going through.

  Mr Willetts: I think the Secretary of State and I have both had the experience of these extraordinarily thoughtful speeches then being analysed in various ways. I do not think I did say in my speech that there would be a two-tier system and I agree with what the Secretary of State has just said about our overall approach. Obviously, the crucial thing is that we are waiting for the Browne review.

  Q41  Nicky Morgan: Just building on the question about the Browne review, I think we know it is coming out in the autumn, which seems to be rather vague at the moment, but what opportunity will there be for anybody to input on the Browne recommendations? Luciana was just asking about the timetable for reform, because obviously this is a very heated subject which we will get a lot of representations about, and I know people will want to have the opportunity to give their thoughts to you on what Lord Browne recommends.

  Mr Willetts: It is very likely to be published in October, which I hope is a bit less vague than what you may have heard before, and it has already been an open exercise, I have to say. Lord Browne's terms of reference were agreed last year. He has invited evidence. There is a website up. He has then invited in individuals to give evidence in public to his committee, so it has been, I think, a properly open exercise, but, obviously, his report when it is published will be something that people may wish to comment on further.

  Q42  Chi Onwurah: I would like to start with a point of clarification about departmental responsibilities. Given the importance of the digital economy and superfast broadband to the Coalition's growth agenda, I think it is quite critical. It is about where the digital economy and superfast broadband sit. I ask because a number of questions around broadband have been answered by the Department for Culture, Media, Olympics and Sport, and the recent published BIS paper on broadband infrastructure had a foreword from the Secretary of State for Culture, Media, Olympics and Sport but nothing from yourself, whereas, as I am sure you remember, Digital Britain a year ago benefited not only from a shared forward but the smiling faces of both department heads, so is broadband and the Digital Economy culture or is it culture and business?

  Vince Cable: Departments do work together. It is one of the great things about government when we get that right, and there are two departments involved in it. You are quite right in your first reference that DCMS and Jeremy Hunt lead on this but we have a joint Minister, Ed Vaizey, who also operates in our Department. The reason we have an interest in it is very simple. It is a generic technology that has enormous impact on the economy and growth but the specifics will be led by DCMS.

  Q43  Chi Onwurah: I just want to comment that the digital infrastructure is going to be a huge part of the Business, Innovation and Skills agenda, so I hope to see that the Department is very active in that. What I welcome about your opening remarks was the agreed need to support industry and not only support industry but rebalance it. You and your ministers have publicly supported a number of the existing programmes but others look less certain and I wondered whether you could confirm the future of the Growth Capital Scheme, the Early Growth Scheme, the Strategic Investment Fund, the UK Innovation Fund, as well as the status of the Green Investment Bank. Further, could you indicate the proportion of funds which is likely to be directed at manufacturing and the impact that you expect it to achieve? Manufacturing is a key part of the growth agenda, particularly in the North East, and whilst your Strategy for Sustainable Growth says, quite rightly, that there is not a consensus on the proportion of the economy which should be manufacturing, I would hope that your Department would have an idea of what success would mean for yourselves in terms of the funds that you are directing and how you would be able to measure that.

  Vince Cable: You asked about quite a long list of institutions. I picked up some of them as we were going along but we will come back to the others. The Strategic Investment Fund was time limited. It is due to expire at the end of the financial year. We inherited quite a few projects from the last Government. Most of them have got the go-ahead while two of them have not, but that is a time-limited initiative. The Green Investment Bank is a concept we are working on. We have not got much beyond that stage but there is a very clear commitment in the coalition agreement to promote, to go back to your first question right at the beginning of the session, investments that have a strong environmental flavour. Some of them will be infrastructure related; some of them will be industry related. We are currently looking with other government departments at the best mechanism for delivering that and the best ways of attracting in private capital to leverage whatever Government does, but that is at an early stage of exploration. I think one of the others on your list was the Growth Capital Fund, which is one of the ideas that goes back to the 1930s around the so-called Macmillan gap when it was recognised that one of the problems with the British financial system was that medium sized companies which are growing quite rapidly find it very difficult to get equity capital from stock markets. The Growth Capital Fund was something that was floated in the Budget, and we want to get it off the ground, which will help, through government support working with the private sector, to get some of that equity capital into growth companies. You also asked us various other things on the back of it about manufacturing. One of the points to emphasise, in answer to your question, is that manufacturing is not just about fixed investment. Some quite interesting work has been done which is, I think, referred to in our annex here, that about half of all the investment in manufacturing is in things like IT and intellectual property, branding, copyright, softer things than machinery, but that is manufacturing. It keeps the manufacturing sector going, so the old-fashioned way of looking at manufacturing, which was just about plant and capital, is rapidly being superseded. The manufacturing sector is the knowledge economy, so when we talk about encouraging investment in manufacturing we need to have that broader concept, and that is also why measurement is quite tricky and slippery.

  Q44  Chi Onwurah: But you do have quite specific measures of the proportion of manufacturing in the economy now?

  Vince Cable: Yes, that is correct.

  Q45  Chi Onwurah: Do you have any views on what success would mean?

  Vince Cable: I think if you are asking us would we set a target for the share of manufacturing in GDP—

  Q46  Chi Onwurah: No, no.

  Vince Cable:— I do not think that would be productive. It depends on things like where we are with the exchange rate. These are the key factors which determine the success of traded goods like manufactures.

  Q47  Chi Onwurah: Moving on, those funds obviously come with a cost and your Department, as we have discussed, is suffering from some of the highest proportion of cuts. How will you ensure your Department's programmes are delivered and can I ask what role you see the public procurement process playing, which is a relatively cost-free way of supporting industry?

  Vince Cable: In terms of our budget, I am afraid I have to give you an unsatisfactory answer. we are waiting for the spending review and that will determine how much money we have and what we have to spend it on, and I am afraid all ministers are going to give you that answer at this stage in the cycle. In terms of procurement, it is potentially quite an important tool of economic policy but we are heavily constrained by European Union rules. We cannot operate in a protectionist way. It is a temptation sometimes but the rules are quite clear. We cannot just favour British over other companies through procurement. The rules are very strict. What we are trying to do is ensure that procurement operates in a way that small enterprises have better access to government procurement because that has often been a block in the past, lowering the ceiling under which things can be opened up to small business, making the whole thing transparent and simple for them.

  Q48  Nadhim Zahawi: Can I just press you a little bit further on the point of procurement? You quite rightly mentioned EU legislation and us keeping within that, but there is a different interpretation, certainly in EU countries, for example, in defence procurement as to what war-like items are defined as, and therefore do we tend to gold-plate these things more over here? Following on from that, if, as in the case of Germany and France, Government buys smaller parcels more often it tends to favour SMEs that are local to that country, and is that one of the strategies that we are going to pursue to try and get the target in the coalition document that 25% of procurement will go to SMEs? Is there a strategy of smaller and more frequent procurement?

  Vince Cable: Yes, that is the objective but, as you imply in your question, it is not straightforward to deliver because we are bound by rules. The Department is in a process of discussion with the OGC which oversees this operation to try to make it much more accessible to small companies. I am sure people in the Committee have this problem that I have, just endless processions of small companies in my constituency saying, "We just cannot fight our way through this morass of paper-filling and difficulties of access". I think that is probably how we can help most.

  Q49  Nadhim Zahawi: Just on general government support for industry, the document that we have talks about the Department continuing to work closely with the FCO and UKTI in order to strengthen UK relations in the fast-growing economies around the world. Through my own experience, certainly in the past few weeks, of meeting delegations from developing countries, there is a concern that we are not as forthcoming as other countries in terms of visas for business from developing countries. Is that something that your Department can influence, ie, if businessmen cannot come here from developing countries they are not very likely to buy British and if they can go to Germany or France or Spain they are more likely to buy from them?

  Vince Cable: We do influence it and there has been a quite well publicised debate within Government about how liberal we can be on visas for people with badly needed skills, including people from business, inter-company transfers and things of this kind. From a business point of view they would like the system to be as liberal as possible. We understand that; there is a case for it, but equally there is a political imperative to reassure the British public about overall levels of migration. Yes, we discuss this with the Home Office. There are debates within Government about exactly striking the right balance and I think we will strike the right balance.

  Q50  Nadhim Zahawi: The new Manufacturing Framework will be published in the autumn, and the document here says it will enhance the impact of horizontal policy and address specific barriers currently restraining manufacturing industries. Can you explain what horizontal policy is?

  Vince Cable: I am sorry; I have not picked up on this jargon in my own document; I apologise. I will try and find out what I meant and come back, but if we are talking about barriers to manufacturing industry, yes, there are many, partly about skills, and the Minister of State has given an extended discussion on that. Skills are probably the most important single factor that come to us when we discuss with manufacturing groups but it is also about deregulation and red tape. We have set up a process in Government, the one-in, one-out process, to make it easier for companies to operate, and there is access to finance, particularly at the small end of the manufacturing sector. That is a really critical issue and there is a paper shortly coming out from myself and the Chancellor of the Exchequer which is about access to business financed through the banking system and through equity, so, yes, we recognise there are major barriers but that phrase I do not recognise and I will try and find out what it means.[3]

  Q51  Nadhim Zahawi: I am trying to be helpful. It is on page 14. Lastly, there was an article circulated to the Committee this morning in the FT about Sheffield Forgemasters, and I know Rachel wants to come in on this, and access to finance, and one of the reasons that the Government put forward was that directors and shareholders were not willing to dilute their equity. Apparently, according to the leader this morning, they are willing to dilute. Will the Department re-look at that case or is this it?

  Vince Cable: The decision has been made. That was not the reason why we were not able to proceed with it. There was an issue of affordability. We had a long list of commitments which we had to look at afresh and decided on affordability grounds that we could not proceed with that one. It does not represent a criticism of the promoter who is an immensely respected businessman who had done a great job in Sheffield with his company and we acknowledge that. There is an inherent problem when you have a fairly small company taking on a very big project that either they finance it entirely through loans, when it becomes very highly geared, or they take on equity, in which case they dilute the shares. That is not a criticism of the company; that is just defining the problem, and that is the difficulty they have had with this project, which in many respects is a very attractive project commercially but it has not been possible to crack that issue. As I understand it, what has now happened is that the company continues. It is a very successful company. Its future has not in any way been undermined by the argument that has gone on over the Forgemasters project. It will continue. They are taking, as it were, a respite for a year or so and stepping back from that, and then they may have a fresh look at it.

  Q52  Rachel Reeves: I would like to come in on this because obviously, along with the abolition of the Regional Development Agencies, the cancellation of the £80 million loan—it is not a grant but a loan—to Sheffield Forgemasters has had the biggest impact on our region from your Department since the election. I just want to give you two quotes from the Prime Minister and the Deputy Prime Minister which we thought in Yorkshire were the reasons for that loan being cancelled. David Cameron told MPs this month, "The question is whether it is an appropriate use of taxpayers' money to give the loan to a business that could raise the money by diluting its shareholding". The Deputy Prime Minister said, "Do I think it is the role of Government to help out owners of companies who do not want to dilute their shareholdings? No, I do not". We thought in Yorkshire that the reason that loan was cancelled was because the owners of the company would not dilute their shareholdings, but the Deputy Prime Minister has now had to say that the company did make clear to him their willingness to dilute their equity share. We feel that the goalposts in Yorkshire keep moving. We do not understand the reason for this loan being cancelled given the new evidence that has come forward and the devastation. You say that the business carries on but that loan had been agreed by the previous Government. The plans were being put in place not just for Forgemasters but also for the supplier companies in the region and that devastation, I guess, has just been enhanced by this revelation that the statements made in the House by the Prime Minister and the Deputy Prime Minister now turn out to be false.

  Vince Cable: No, not false, not at all. I think I have answered this with Mr Zahawi's question. The reason was affordability. The quotation from the letter you read out from the Deputy Prime Minister is right. There is no criticism of the company whatever. I know you use this word "devastation" but let us be very clear. We are not talking about closure; we are just talking about a project, which has many attractive elements to it, not proceeding with government funding. It may well proceed in due course on a commercial basis. That is not concluded. Certainly department officials are talking to see whether we can help in different ways, but I think when you use language like "devastating" it puts it in a completely wrong context.

  Q53  Rachel Reeves: The people of Sheffield, I think, would feel very differently about the impact of the cancellation of the loan to Sheffield Forgemasters than perhaps you and the Government do. The loan had been agreed, Secretary of State. Plans were being made, not just for Forgemasters but also for the whole supply chain, and so for Forgemasters, the people who work there, the people in the supply chain who thought that they had a project to develop hi-tech, nuclear capabilities that could have contributed greatly in a region where unemployment is above the national average, could have helped rebalance the economy sectorally and regionally, those plans have not gone ahead because of a decision by the incoming Government. To add to that we are now left in a state of bewilderment about why that happened. You say it was because of unaffordability but I read you two statements from the Prime Minister and the Deputy Prime Minister that seemed to make clear to us in Yorkshire that the reason for the cancellation of the loan was something different, was about the dilution of shareholdings, and that is what today people in Sheffield and Yorkshire are finding difficult to comprehend.

  Vince Cable: I think both of those quotations refer to the problem that I described in an earlier answer, which was not making judgments; it was just describing that that was why that was a difficult project to get off the ground. It was not blaming anybody for it. It was just that that was the nature of the problem, but there is an issue of affordability. I accept much of what you say. There is a lot of disappointment; I fully understand that. Expectations were high, there are a lot of attractive features of this project, but we are in a difficult position in the Government that we are faced with this horrendous financial problem. We are going to have to have to do due diligence over everything that we inherited and we are in the process of doing that. We have to say no to a lot of people who come with very plausible ideas and very plausible projects. I have met quite a lot already. I go round the country. I have been talking to people in the automotive industry and the aerospace industry and there are fantastic things we would love to be able to pour money into in an ideal world but the money is not there and there has to be a process by which at the end of the day we say no, and this was unfortunately one case where we did have to say no.

  Q54  Rachel Reeves: But, Secretary of State, you know that to reduce the budget deficit we need to get the economy back on track. That means supporting apprenticeships and higher education. It means supporting industry, in this case with a loan,—not a grant, a loan—and it means supporting Advantage West Midlands, Yorkshire Forward, organisations that were bringing jobs and growth and investment to all parts of the economy. I understand the need to reduce the budget deficit but you need to do that in a way that is sustainable and that is why we need to get growth back on track, which means that more people will be in work, more businesses will be paying taxes and fewer people will be claiming benefits, and I believe that the cancellation of the loan to Sheffield Forgemasters will make it harder for the economy of South Yorkshire to get back on track and deliver that growth that we all need to see.

  Vince Cable: I think your comment is a very good statement of our growth agenda, but the problem is we cannot fund industrial growth through government spending; that cannot happen, but you are quite right in what we are trying to achieve. We totally share your objectives, but there is a very strict limit on what Government can spend as part of this process, and I am hopeful that in the course of time what is undoubtedly a very attractive project from a commercial point of view will get off the ground and achieve the objectives you describe.

  Q55  Mr Binley: I am going to mention that awful word Kraft. You will remember, certainly you will have read about, Secretary of State, the inquiry we undertook in this Committee, and you will know that we recommended that your Department monitor closely a series of undertakings given by Kraft. There were five of them in all and I am sure I do not have to remind you what they were. Can I ask whether you are in fact doing that and what you might have found? Is Kraft abiding by the undertakings it gave this Committee or is it not?

  Vince Cable: I think the answer to your question will be contained in an extended reply to your Committee's report which I have signed off and is on its way to you and you will be getting very soon so there will be detailed answers to that question. We are monitoring it and there will be detailed comments. I think it will be more satisfactory if you see the full reply.

  Q56  Mr Binley: I just want to be reassured because many people were involved in this and involved in a way that most of us would not want to see. We felt that Kraft handled the whole issue badly and had total disregard seemingly for the people who were affected. I would just like your assurance that the company is now acting in a way that I would like, I am sure you would like and I think this Committee would like.

  Vince Cable: Your criticisms are shared by us; they are entirely valid. They behaved badly and there were some very negative consequences. I just stress, however, that, as my predecessor discovered, there was limited scope for the Government to intervene in the takeover. It did not fall within the category of the public interest test as currently defined in legislation and therefore did not have to go through the competition procedures, and so there was no sanction that we had over the company, but you are quite right: we have made a commitment to monitor it. We are monitoring it and we are going to report back to you very soon and you will have the document soon with our conclusions in it.

  Q57  Mr Binley: Not even a glimmer of comfort for us at this stage?

  Vince Cable: In a way, my predecessor raised the stakes by saying, I think, at one point that he was going to stop it but there were no powers to stop it and that is the position we are in. Other than moral pressure and monitoring we do not have a great deal of hold over that company.

  Q58  Jack Dromey: Secretary of State, the takeover by Kraft, a debt-laden American multinational, of a successful British company was an outrage, in particular for breaking promises given by Kraft to Cadbury workers. Can I push you then on the lessons for the future because right now there is speculation over BP? BP deserve all the criticism that they have had for their disastrous mishandling of the situation in the Gulf in America with catastrophic environmental consequences for the people of America but it cannot be in the British national interest that BP, as its share price slips, falls prey to a hostile takeover. Are you going to address this in your response to this Committee because, as the Committee earlier this year considered, there are interesting experiences from Belgium, Holland and France, for example, on articles of association that make it more difficult for there to be hostile takeovers, time limits as to how long you have to hold the shares? Germany also has taken powers to protect industry against predatory bids by sovereign wealth funds. Are you going to address this in your response to the inquiry earlier on this year, because it is absolutely vital that we do not see a repeat of what happened over Kraft, not least because 25% of the shares were bought up by the boys in red braces in the hedge funds in Mayfair which at a critical time undermined Cadburys which had wanted to see off the hostile takeover?

  Vince Cable: As I said to Mr Binley, we do agree with a lot of the Committee's concerns. You have wrapped up several questions in one. I cannot say very much about the BP issue because there is not a takeover bid. It is actually a very strong company financially in terms of its cash flow and its balance sheet. There is no reason to assume there will be a takeover so there is no point my addressing that in an entirely hypothetical circumstance but I think your question contained a very important issue, which is how we deal more generally with takeovers.

  Q59  Jack Dromey: The takeover regime.

  Vince Cable: The takeover regime, and that is an issue which I have already commented on publicly and want to take forward. The approach I have to it is this. In many respects takeovers are an important discipline in the market on inefficient management. There is nothing wrong with the takeover as a principle, and certainly we are not nationalistic. The fact is that a lot of foreign companies want to invest in Britain. Some do it through the takeover route; some do it through the greenfield route. They are welcome. We want foreign investment here and we are certainly not going to adopt a nationalistic approach to it. Having said that, there is quite a lot of evidence that takeovers are almost certainly excessive in number. There is a kind of incentive to people through fees to promote takeovers which are not going to yield any additional value. There is quite a lot of research which shows that they reduce shareholder value, let alone the wider social impact, so there is a strong case for looking at the takeover regime again. There are several specific quite limited things which I have already suggested and we will come back to you with further proposals on this. For example, there are ways of, as it were, throwing sand in the machine, increasing the fees that any company would have to pay to the Office of Fair Trading if a competition really took place. At the moment they are £90,000 which is nothing for a big company. The notification procedure could be made longer to give the Takeover Panel more opportunity to scrutinise takeovers. The Takeover Panel is itself investigating some of the issues you raise in your question, for example, the short-term interest of hedge funds and whether this is distorting decision-making and whether you should have some brake on that process. They are an independent body. I am waiting to see what they have to say, but I have been publicly on the record expressing concern about the way the takeover process works at present. This is a long answer but I think the simple summary is that we do think the regime needs reform.

  Q60  Jack Dromey: It is a welcome answer and there are crucial issues like length of time that shareholders have to hold shares on the one hand and also moving from the 50% trigger, for example, to a two-thirds or more per cent trigger on the other hand.

  Vince Cable: Both those specific issues have been addressed by the Takeover Panel and I welcome the fact that they are looking at them. I do not want to pre-judge their conclusion. They are an independent body.

  Q61  Mr Binley: Can I say how much I welcome your comments in this document about corporate governance in this respect? I particularly welcome the sentence which reads, "An important example lies with the rules on takeovers which should focus on generating long-term returns for investment rather than short-term returns for speculative trading", which sums up all that you are saying. You will therefore have made your submissions to the Takeover Panel during their consultations. Can you give us some idea of what you might have said to achieve that objective?

  Vince Cable: We have a point of view which I have just reflected here, so there is nothing I can say in addition to the answer I have given.

  Q62  Mr Binley: You will come back and talk to us again, though, Secretary of State, will you not, because there is a lot in the air at the moment that we need to delve into slightly more deeply?

  Vince Cable: I will. There is a slight issue of governance within government. The Takeover Panel is linked to my Department indirectly but it is an independent body. It is not appropriate for me to direct them what to think. They are completing their consultation process in a few days' time. They will be reporting, I think before the end of the summer, and in response to that we will be able to come forward with some clear statements.

  Q63  Mr Binley: I understand your need to act in a proper manner. I accept that and respect it. However, there are sizeable issues about a statement you have already made in a document. You must therefore have some idea of how you will back that statement up. It would be helpful, given our ability to question you on this document, to know how in general terms you might back that statement up. What are your plans for wider reform of corporate governance in the light of the manner of recent takeovers? You must have a general assumption of the way you are going to proceed that you can divulge to this Committee.

  Vince Cable: I think I have tried to give you a steer but let me summarise it again. The general approach would be that there is an argument for reducing the incentives to have takeovers and we can look at the various procedures and fees that make that possible. There is a strong argument for looking at the issue of short-termism in terms of the way the takeover process happens but again we are dependent on the independent process for that, and there is an argument for having a fresh look at what the public interest test is. I am reflecting on this at the moment. I do not have any recommendations to put to you. We are constrained in part by European Union rules on competition but I certainly want to approach that in an open-minded way because it is quite narrow at the moment.

  Q64  Mr Binley: Let me be specific then. France has the power of veto over foreign acquisitions of national importance. Would you favour our Government having such a power, which is clearly quite within the regulations of the EU?

  Vince Cable: I am not a French nationalist and I do not want to take us in that direction.

  Q65  Mr Binley: I would not suggest that you were.

  Vince Cable: I do not think that is the right approach. I think one of the attractions we have as a country over France, if I might say so, is that we are more open to foreign investors. One of the criteria for the public interest—as you know, there are three. There is media diversity, there is financial stability and the other is national security, so if national security is threatened by a takeover from overseas we have the powers to refer this to the Competition Authority.

  Q66  Mr Binley: I understand that. We will press you further later.

  Vince Cable: Thank you.

  Q67  Rachel Reeves: I want to ask you about banking support for industry. I know that you have argued strongly, Secretary of State, that the banks need to do more to support industry. In your Cass Business School speech—I hope you remember this better than the horizontal manufacturing point—you said, "I am taking a tough line with parts of the banking system which have not served enterprise in this country as well as they could". Can you tell us, Secretary of State, what your role is and what the Department's role is in terms of banking responsibility, and also what levers you plan to use to get the banks lending to industry and especially to small businesses?

  Vince Cable: The Department has several specific responsibilities in respect of the banking sector. It is oversees the various agreements that have been reached with the semi-nationalised banks. We have a consumer protection function. We have a governance function. We have a competition function. Those are also BIS responsibilities in respect of banks. In practical terms we are working with the Chancellor. The Department is working with the Treasury. I am trying to address these problems and we have a joint paper coming out very soon on business finance, particularly because it is the business lending aspects that are of particular concern to the Department. There is a range of instruments, sticks and carrots. We have not rushed out with any simple solution to that but there is a mixture of financial incentives which you can give through the Enterprise Finance Guarantee Scheme which was announced in the Budget to cover risk, or there are pressures you can bring to bear through agreements of different kinds, but mainly through the regulatory system, which, of course, is overseen by the FSA.

  Q68  Rachel Reeves: Thank you very much, Secretary of State. You have said things about the Government's role in terms of the nationalised banks and I think in your answer there you were perhaps going further and looking at a wider number of banks because it is not just the nationalised banks that have received a great deal of support form the Government, both this Government and the previous Government. All banks have benefited from the Loan Guarantee Scheme. They have all benefited from the guarantees in terms of if a bank went the customers would be covered. All banks have benefited from quantitative easing, for example, so I was wondering whether, when you are looking at targets perhaps for bank lending—and I know you do not like targets very much—they would be just for the nationalised banks or for a wider range of banks.

  Vince Cable: You are right that the banks are not a normal industry. They enjoy taxpayer protection because of the "too big to fail" problem, which is a problem which affects much of the western world, not just the UK, but we have exceptional problems here because bank balance sheets as a share of the economy are much larger than in continental European countries, except for a handful, or in the United States. The specific way we are trying to address the "too big to fail" problem, and the last Government set in train some measures, is that what I have done with the Chancellor is set up this Banking Commission which is due to investigate the whole issue of break-up in order to make banks safer as well as more competitive. That is how we are trying to address the fundamental issue of systemic stability. In terms of how you get banks lending more in the short run, as I say, the joint paper we issue will address some of those questions. There is a genuine debate to be had about whether you achieve more through setting targets and negotiating agreements or through incentives or whether you try to operate through the regulator who sets capital requirements, and it is those capital requirements which determine how much the banks can prudently lend.

  Q69  Rachel Reeves: In that document that is going to be published will it be looking then at the whole array of banks and will it include targets?

  Vince Cable: Yes, it is about the banking system as a whole. It is not simply about the semi-nationalised banks.

  Q70  Rachel Reeves: Sorry to pre-empt, but are you mindful to continue the lending targets that were put in place by the previous Government?

  Vince Cable: The lending targets are in place for the semi-nationalised banks until next year, so they are operating at present and we are not proposing to renegotiate the existing agreements. What we do next year is an open question.

  Q71  Nicky Morgan: Can I just press you a bit further on the whole issue of the separation of the banks, if indeed that is what happens? First, I want to understand how the relationship is working between your Department and the Treasury and who is responsible for the banking industry and who will be making the ultimate decisions on that.

  Vince Cable: That particular exercise establishing the Banking Commission was a joint exercise. It was done very quickly and it worked very well, but the Treasury clearly has major responsibilities in the banking sector, not least because the Financial Services Authority reports to the Treasury and therefore the Treasury has overall responsibility for the regulatory environment affecting banks as well as bank taxation.

  Q72  Nicky Morgan: In the paper that was published this morning I think it talks about the structure of the UK banking sector but it seems to me, and again this may be a matter for the Treasury too, that it is not just the structure; it is also the complex products and the way in which debts were repackaged and sold on, or is the Commission going to be looking very much just at the structure in terms of the separation between potentially retail and investment banking?

  Vince Cable: They have terms of reference which I will make available to you which describe exactly what the Commission is looking at, but it would be very difficult to look at the structure in some kind of abstract formulaic way without looking at what banks actually do and therefore some complex derivatives are part of the things that investment banks do. To look at it thoughtfully, as they will be doing, they are going to have to look at the whole picture.

  Q73  Nicky Morgan: You mentioned earlier on in answer to Rachel the business finance paper that is going to be coming out, the Green Paper. I think earlier on in the evidence you talked about access to business finance via banks and also equity. Could you say a little bit more about that? Is it going to be a general look at how businesses raise finance?

  Vince Cable: That is what the paper is designed to address. It is a complex story. The evidence that is coming out is that most big companies in the UK are not having enormous difficulty raising the capital they need because if you are a big company with a big reputation you can go to the capital markets and there is a big increase in funds raised from capital markets. They do not need to have a local friendly bank manager; they do not operate like that. They can also raise equity through the stock market. For the very small businesses, including one-person companies, it is much more difficult because they raise money through their own families, that is their equity, but they are very highly dependent on banks for their working capital, and all the evidence coming in from the business federations is that they are finding it very difficult. It is not that the banks turn them down because the rejection rate is actually very low. It is that they are inhibited in applying because they think they will be turned down or because they think the conditions in terms of interest rate costs, security, will be too onerous. There is a very strong feeling in the business community that it is just very difficult to raise capital and there is a worry that the position could get worse because the banks are being required by international rules to hold more capital, they have to refinance a lot of their existing obligations, so there is a really big challenge ahead. This is a long answer; I apologise, Chair, but between the very big companies that can go to capital markets and the very small companies that very much depend on the overdraft from the local bank there are mid-size companies and this is where there is the possibility of some movement by helping those companies get access to equity and that is the purpose of the schemes that we are initiating in the banking world.

  Q74  Rachel Reeves: May I ask one final question? I think as part of your Department the Shareholder Executive is one of the bodies. We talked earlier on about long-term returns or getting shareholders to think about longer term returns in the context of takeovers. Obviously, the Government is a shareholder in a number of banks and the question that is put to me by constituents who do not necessarily understand the banking industry but, you are right, are having difficulty finding finance is why are those banks not being encouraged more to lend to businesses and is there anything the Government can do as a shareholder in those banks at this stage to send a clear signal about lending to small and medium-sized businesses?

  Vince Cable: Yes. On a technical point, the Shareholder Executive does not mediate that process. It is UKFI[4] (UK Financial Investments Ltd) which is essentially a Treasury body. The role of government agencies in this is that the Financial Services Authority is requiring banks to hold more capital because it does not want another crisis in the future, and in the process of holding more capital, of course, this inhibits what the banks can lend. It is a very paradoxical situation. We are telling the banks to be prudent but we are also telling them to lend more. It is a point they throw back to us, but we have to do both and managing what are two different objectives is very tricky.

  Q75  Chair: Could I just pick up on one point? The Government has announced what on the surface is a welcome £200 million extension of the Enterprise Finance Guarantee Scheme, but at the same time we are getting reports that there is a decrease in loans being issued, so there would seem to be a mismatch between funds available and demand. What is your Department doing to ensure that they are better matched?

  Vince Cable: One thing is making the procedures easier for companies to access. I think at one stage there were quite long time lags between people applying under that scheme and receiving money. Next year a tougher regime is due to come into effect. They have to clear their applications within 20 working days, so that will speed up the process. Our understanding is that this is quite a popular scheme and large numbers of companies are taking advantage of it and that is why the Chancellor enlarged its scope from £500 million to £700 million within the Budget.

  Chair: Can I move on to something entirely different?

  Q76  Mr Binley: There is a connection because those questions are related again to a report from our previous Committee which has a bit of a hangover. There is another thing I want to achieve. I want the people out there, the pubcos, to recognise that this is still in our mind, quite frankly, so you will understand why I am asking these questions. You will know that we recommended that we should re-look at the question of code of practice in the industry if we felt the pubcos were not acting properly within that voluntary code, and the previous Government accepted that they would take action if our findings were that the pubcos were not acting properly within that code. Can I ask if you will confirm that the present Government would continue that policy?

  Vince Cable: I can confirm that.

  Q77  Mr Binley: I am delighted. Secondly, your Department said that it would actively monitor pubcos in this respect. Can you tell me if that is happening and give me any idea of how you feel that monitoring is going? Is it going favourably or are you concerned?

  Vince Cable: The main monitoring I do with my local pubs.

  Q78  Mr Binley: I do the same.

  Vince Cable: They tell me they are very frustrated with the tie arrangements and they do want reform but, as you know because of your Committee's recommendations, they are on probation at the moment.

  Q79  Mr Binley: They are indeed.

  Vince Cable: I think the commitment is to give them until 11 June and if they have not delivered a more satisfactory arrangement then there will have to be legislative action.

  Mr Binley: Thank you very much for that answer.

  Q80  Chair: Can I conclude by coming back to Sheffield Forgemasters? This is a company that was intended to deliver a product, the alternative of which could only be delivered by, I believe, two foreign companies, and, obviously, the fact that this loan is now being withdrawn means that that particular product will now be delivered by foreign companies. What assessment did the Department do in analysing the impact, if you like, on the number of jobs and the potential impact on suppliers of the loss of this contract and what benefits the alternative foreign supplier might get from it?

  Vince Cable: There was an evaluation done in the last Government which we have acknowledged and there was a value-for-money assessment and there was the Industrial Development Board.

  Q81  Chair: Which you rejected, presumably?

  Vince Cable: Yes, indeed. There are a lot of projects which have cleared those hurdles and would clear them, but we cannot finance all of them. We accept that there were genuine benefits and you have defined them well in terms of its international context, but we are faced at the end of the day with an affordability issue of what we can fund and what we cannot fund.

  Q82  Chair: So in effect you did not feel that the long term benefits outweighed the short term costs?

  Vince Cable: The benefits may well have outweighed the costs in an environment where there was no budget constraint, but there was a budget constraint.

  Chair: Can I thank you very much for your time and effort.

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1   See written evidence at Ev 19. Back

2   Footnote by witness: It is important to reaffirm that Apprenticeships funding is not targeted by sector. It is a demand-led programme and BIS does not have specific targets, or funding allocations by sector. See attached at Ev 26, a breakdown by sector and framework for ease of reference. Please note that this data is simply an illustration of where learners have started an Apprenticeship and not where we are specifically making places available. This information is available publicly on the Data Service Website link as follows: http://www.thedataservice.org.uk/statistics/statisticalfirstrelease/sfr_current/ Back

3   See written evidence at Ev 19. Back

4   See written evidence at Ev 20. Back

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Prepared 15 November 2010