Examination of Witnesses (Questions 1-84)
VINCE CABLE, MIKE KEOGHAN AND JANICE MUNDAY
14 OCTOBER 2010
Q1 Chair: I understand that
since everyone is here there is no particular problem with starting
early. I start by welcoming you, Secretary of State, and thanking
you for agreeing to come to the Committee.
The reason why we convened this meeting was
what I can only describe as an element of bafflement, in the business
community and, I think, a considerable number of members of the
Committee and myself, as to how a grant for a project that seemed
so central to the Government's agenda, both on balancing the economy
and greening the economy, should have been withdrawn. That bafflement
has, I think, been compounded by the range of reasons that we
have heard, which started with the argument that it was a cheque
that would bounce—subsequent investigation has demonstrated
that that was not the case—and moved on to the fact that
the owners would not dilute their share, which again has been
refuted. Then I heard—not from you, I have to say—that
there was potential private sector alternative funding, and at
last there was the argument that it was actually not given just
on the basis of affordability, which I think has been your consistent
position. What the Committee wants to do is to bottom out first
the scale of obligation in terms of finance from the Government
and then why Forgemasters did not get their funding when others
did and, lastly, to try to seek from you whether there is any
way forward on it.
Before we open questions to the Committee generally,
there is just one that I would like to ask you: how many of the
Department for Business, Innovation and Skills projects that you
inherited were you already contractually legally obliged to take
forward? Were there any that you had to take forward?
Vince Cable: I will answer your
question shortly, but could I just preface by introducing the
two officials sitting next to me: Janice Munday and Mike Keoghan?
They have been with this project for all that time. Can I also
preface by putting the discussion in context, just to explain
how we have seen Sheffield Forgemasters as a company? That would
help to clear up some of the misunderstandings that you alluded
to.
First of all, I will be quite unambiguous: we
regard this as a very good company. It was established in 2005,
and Dr Honeyman developed it in a very successful way, steering
it through the recession without loss of employment. He was the
Institute of Directors director of the year, and we are delighted
that his contributions to a very successful Yorkshire business
in a high-tech manufacturing industry have been acknowledged.
I and my Department share that appreciation; I do not want there
to be any ambiguity about that.
The position that we are now dealing with is
that we have inherited a very difficult financial position. We
had to make some very quick decisions on cuts in my Department
and others, and in the context of those discussions we decided
that the £80 million loan to Sheffield Forgemasters was not
affordable. You have referred to various other arguments, but
those were not arguments that I and my Department's Ministers
have advanced. We took the decision on affordability grounds.
You asked, "What about other projects?"
When we looked at the stream of projects that we were inheriting,
there were one or two big ones and high-profile ones—the
£20 million grant to Nissan, for example. We took the view
on that that we were contractually obliged to proceed with it.
There was also a very good project, on green technology grounds,
in the north-east of England, but it was not contractually committed.
A much bigger sum was involved, for example,
in the Ford loan guarantee, but that was a loan guarantee, not
a loan. Because of the way in which the public accounts handle
these things—you will understand this—although there
is a cost to the Government for any guarantee, it is accounted
for in a very different way. The problem with the Sheffield Forgemasters
loan, and the reason why we made this difficult decision on it,
was the affordability grounds. In a context in which there was
an £80 million loan, supported by £80 million of Government
borrowing, it would have been cash straight out of the door in
the financial year, and in terms of the way in which the Government
had to address the issue of cuts, we judged that that was the
best and most sensible decision to make.
Q2 Chair: Thanks. You rightly
alluded to the fact that others had given different explanations
for this decision, but of course when it is the Prime Minister
and the Deputy Prime Minister, they are fairly senior "others".
But we really want to move on to the situation that we have now.
Just in the context of the comment that you
made about Ford, that it was a loan guarantee, my understanding
is—no doubt you will correct me if I am wrong—that
there is a financial obligation to the Treasury when a loan guarantee
is given. Am I right in saying that a certain percentage of the
loan has to be covered and that in itself would have—?
Vince Cable: That is correct.
There is a charge against the Government's indebtedness, but because
of the way in which a loan would have had to be directly financed
by borrowing from the markets in order to make that loan available,
remembering that we're borrowing 8 or 9% of GDP through the Government
and this would have added to Government borrowing in order to
make the loan, that was different. But you're quite right that
any form of assistance does involve a cost at some point.
Q3 Chair:
Would not a loan guarantee have done exactly the same thing, but
just would not have been the full amount?
Vince Cable: Well, we would of
looked at the possibility of a loan guarantee for this particular
project, but it did not work in terms of the project's own economics.
Q4 Chair:
Yes, but that did not answer my question. Would not a loan guarantee
have involved extra Government debt, if you like, to cover the
Ford loan?
Vince Cable:
Well, as I understand it, it would not have affected the borrowing
position in this financial year.
Chair: I can see that Rachel as an ex-banker
is itching to get in, so I will ask Rachel to come in on that
point.
Q5 Rachel Reeves: And as a
Yorkshire Member of Parliament, as well.
You say, Secretary of State, that this is an
affordability issue, but of the 241 projects that the Government
reassessed when they came to power—you had every right to
do that—217 are going forward, 12 have been cancelled and
12 have been postponed. The 241 projects totalled £34 billion
and you have found savings of, I think, between £1 billion
and £2 billion. Some £32 billion worth of projects are
going ahead, so what I do not understand is why Sheffield Forgemasters
is one of the 12 projects that have been cancelled, when you came
before this Committee a couple of months ago and said that this
project was good value for money.
Vince Cable: The vast majority
of the projects that you referred to were contractually committed
and would have involved very considerable costs to the Government
if we had withdrawn from them.
Q6 Rachel Reeves: Do you know—sorry
to interrupt, Secretary of State—of the 217 that are going
ahead, how many were contractually committed to?
Vince Cable: I cannot give you
a number now. We can give you a number if you would like that
information.
Rachel Reeves: Yes, I would appreciate
that.
Vince Cable: As I recall, a lot
of them were being financed through regional development agencies.
Q7 Rachel Reeves: Sorry, but
only five of the 217 are being financed by RDAs. Other projects
going ahead include the Queen's Diamond Jubilee 2012, Transforming
Tate Britain, the Poole Bridge regeneration initiative, the Taunton
Third Way and Isle of Wight maintenance PFI. I am sure that they
are all good projects, but I do not understand why they are all
going ahead and the Sheffield Forgemasters' loan is being cancelled.
Vince Cable: I do not think that
those were BIS commitments.
Rachel Reeves: No, but they are the 241
commitments that the Government looked into. They have been allowed
to go ahead, but the loan to Sheffield Forgemasters has been cancelled.
That may not be within your domain, Secretary of State, but you
are part of a Government who decided which of the 241 projects
could go ahead. I do not understand why such a good value-for-money
project—you have said to our Committee before that it was
good value—which even under the lowest rates of returns
estimated by your Department would bring in an internal rate of
return of 7.4%, with an upside estimate of 10.9%, is being cancelled
and all the other 217 projects are going ahead. The reason cannot
be value for money because £32 billion-worth of projects,
which your Government reassessed, are going ahead and this one
is being cancelled, and we do not understand why.
Vince Cable: Well, I cannot account
for the decisions that were made across Government.
Rachel Reeves: It is your Government.
Vince Cable: I am a part of Government,
but I cannot account for how those individual decisions were made.
I can tell you how we made prioritisation within our own Department,
which is what I am endeavouring to do. You moved on to the issue
of value for money. You are quite right; we have never disputed
the fact that there was a positive value-for-money estimation.
I think that there was a multiplier of 2.5. Undoubtedly, there
are many projects that would pass a value-for-money test, not
all of which are affordable. Let me give you an example. Before
I came into Government, a decision was made by the previous Government
substantially to cut back the funding in the National Physical
Laboratory, which happens to be in my constituency. I had an Adjournment
debate on it. One of the things that I succeeded in discovering
was that those cuts were made despite the fact that there was
a value-for-money multiplier of 80 as opposed to one of 2.5. None
the less, a decision was made to contract funding at that stage.
Government do not necessarily make decisions exclusively on a
value-for-money ladder, though clearly that has to be a key input
into decisions.
Q8 Rachel Reeves: What we
do not understand is how these decisions were made. Of the 241
projects, how was it decided which 12 of them would be cancelled?
If it was not value for money, what objective criteria are the
Government applying?
Vince Cable: You will have to
ask my colleagues across Government how the selection process
was made. I have tried to explain how decisions were made in relation
to my Department for which I had direct responsibility. We were
aware of positive value-for-money calculations. Within the first
few weeks of the Government taking office, I had to decide on
the cuts that had to be made. It was going to be very difficult
however we did it. This was one substantial project that we decided
not to proceed with. There were others that we could have cut,
but for contractual and other reasons we decided not to do so.
Q9 Rachel Reeves: What was
the criteria that enabled the other projects—the Discovery
research ship, the International Space Innovation Centre or the
student loan sale programme—to go ahead while Sheffield
Forgemasters was cancelled?
Vince Cable: There is an individual
story around each of those. I cannot tell you off the cuff how
far they had progressed in their contractual commitments, but
that was certainly a key factor.
Q10 Rachel Reeves: Perhaps
you could explain then how you went about making your decisions.
If it is not just about value for money or how far down the road
the projects are, what criteria are you using to decide which
projects should go ahead and which should be cancelled?
Vince Cable: We had a list of
projects, which the last Government had advanced to varying degrees.
We had an understanding of the scale of the cuts that we had to
make. We undoubtedly considered value for money. Where value-for-money
calculations had been made, as they are for big industrial projects
but not necessarily for some of the other cases, we had to consider
how far they were along the pipeline in terms of contractual commitments.
There are a set of considerations that any decision-making body
has to take into account.
Q11 Rachel Reeves: The question
I was going to ask originally—but I thought this was more
important—comes back to Adrian's point: of the £80
million that was being loaned to Sheffield Forgemasters, how much
of that would have been drawn down this year?
Vince Cable: I can confirm this
factually for you if you like, but our assumption was that the
loan was going to be, as it were, out of the door—fully
committed—within the financial year.
Q12 Rachel Reeves: I find
that surprising because I did not believe that Sheffield Forgemasters
was ready to immediately draw down the loan. I did not think this
would all show up on the balance sheet of the Government in this
financial year. So, yes, I would like that to be confirmed. Also,
given that it is a loan over a period of time, would that loan
not be amortised across the balance sheet? Does it all have to
show up in one year? I am thinking, for example, of student loans,
which are not all in one financial year. I know that that is another
issue you are grappling with at the moment.
Vince Cable: There is no analogy
with student loans. The student loans scheme operates on completely
different principles, as you well know. Precisely those arguments
apply to the Government's own borrowing. The fact is that in order
to finance this loan, the Government would have had to borrow.
Q13 Rachel Reeves: But would
they have had to have borrowed all the money this year, and would
it have shown up on the balance sheet all in this year if the
loan was over a period of time?
Vince Cable: The working assumption
was that, indeed, we would have had to borrow this money this
financial year.
Rachel Reeves: I would like that to be
looked into and confirmed.
Q14 Margot James: I just wanted
clarification on when you were asked about the criteria that you
used to decide which projects were going ahead and which were
not. I am sure you mentioned this, but I would have thought that
affordability, which is a slightly different thing from value
for money—something can be value for money, but not be affordable—would
have been one of your criteria.
Vince Cable: Indeed, I started
by saying that. You are absolutely right: you could construct
a ladder of value. Of course, we are currently doing this in the
spending round in relation to capital projects. But, at the end
of the day, there is a process of rationing capital. As somebody
who was involved in a big company where big investment decisions
had to be made, I can say that rate of return was one factor,
but that availability and affordability were another.
Q15 Margot James: Quite. I
think the Committee needs to be mindful of that. Thank you. What
would have been the total debt to the Government in terms of the
loan and associated bond issues—if there were to be any—if
you had decided to back the loan and had signed it off?
Vince Cable: I cannot give you
an off-the-cuff answer. I would guess that every pound that went
out of the door had to be borrowed. What that means in terms of
the discounted present value of the loan I cannot tell you of
the cuff. We come back to this central point: the Government have
very large borrowing requirements. This would have had to be financed
by additional borrowing, with all the associated costs.
Q16 Chair: It would be helpful
if we could get a response. I appreciate that it is very difficult
just to give all these figures off the top of your head, but if
an assessment could be sent to the Committee, that would be helpful.
Q17 Rachel Reeves: Just coming
back to the assessment of the loan, can you confirm that Deloitte
and the Industrial Development Advisory Board said to you—to
the Government—that this was good value for money?
Vince Cable: Yes, I can confirm
that. The Deloitte analysis was one of the inputs into the evaluation
that was made by, I think, the Industrial Development Advisory
Board.
Q18 Rachel Reeves: Have you
had a chance to go to Sheffield Forgemasters and see the company?
Will you confirm that there was never the seeking of a direction
of value on money grounds and that this was a decision signed
off by officials, which never had to go to Ministers, under the
previous Government?
Janice Munday: I can confirm
that, on the basis of a positive recommendation from the Industrial
Development Advisory Board—which was set up under the relevant
Act and is a statutory body that advises Ministers on these loans—that
there was no need for a direction because all of the tests were
met in that IDAB assessment.
Vince Cable: On the first part
of your question, I have been to Sheffield, but I have not yet
been to Sheffield Forgemasters. I would certainly like to visit
it.
Q19 Margot James: Have you
got as far as having discussions about a potential division of
equity within the company between Foregmasters and the Government,
had the loan been approved?
Vince Cable: There were equity
warrants attached to the original proposal. That was one of the
bells and whistles attached to the loans. I think that that was
negotiated before we came in. Could you explain that?
Janice Munday: One of the terms
that IDAB asked for was that equity warrants would be attached
to the loan. In the offer letter there was a value attached to
those. We knew and understood that at the stage we were at, there
would be further work to establish the cost of the equipment and
the terms on which the other providers of financing were engaged,
which would mean that that would be refined as we went through
the testing process. There were certainly equity warrants in the
loan offer, however, and that was understood.
Q20 Chair: Can you indicate
whether you are satisfied that, in the event of an application
to a loan-giving body or a Government agency for a further loan
for Forgemasters to be made, this issue has been resolved, or
whether it is likely to be an issue again?
Vince Cable: Well, affordability
remains an issue for the Government across the board.
Q21 Chair: No, I am talking
about the equity.
Mike Keoghan: Obviously that would
depend on what proposal came forward. In terms of the assessment
that went into IDAB, it was very clear that, given the likely
risks and returns, if the Government were to intervene with a
loan at the level proposed, there should be some sharing with
the taxpayer. The warrant structure was regarded as the most appropriate
way of doing that.
Q22 Chair: Are you satisfied
that were the solution that was arrived at to be put forward again,
it would not present an obstacle to any further granting of the
loan?
Mike Keoghan: In terms of the
financial structure that came forward at the time, that was within
the affordability of the constraints that the rules at the time
regarded as appropriate to the structure. At the moment, there
is no request from Forgemasters for a loan; there is no project
on the table. Given that we do not know any project financials
or costs and benefits, it is difficult to say what would be an
appropriate risk-sharing mechanism.
Q23 Chair: That seems a little
odd to me, given the length of time that was spent on this. I
think that the reasonable assumption would be that any further
application would not be in any way substantially different.
Vince Cable: Well, I am not sure
that we should speculate on what future applications might be,
since there is not an application on the table. I said that affordability
is a continuing worry and a constraint. If the company wishes
to put something forward, however, we have said that we will look
at it on its merits, through the various mechanisms that we have.
Q24 Rachel Reeves: I think
that part of the issue about the equity dilution relates to some
of the points made by the Deputy Prime Minister and the Prime
Minister in the House of Commons. The Deputy Prime Minister asked:
"Do I think it is the role of government to help out owners
of companies that do not want to dilute their shareholdings? No,
I do not." The Prime Minister said in the House: "The
question is whether it is an appropriate use of taxpayers' money
to give it to a business that could raise that money by diluting
its shareholding." That had to be corrected, as you know
Secretary of State, in a letter that the Deputy Prime Minister
wrote to Graham Honeyman, which stated, "You made clear to
me your unwillingness to dilute your equity share."
There seems to be some confusion in Government,
perhaps not with yourself, about why this loan was rejected, about
whether it was because of affordability or whether it was about
equity dilution. One of the points that the Committee are trying
to understand is whether there is an understanding in Government
that this is not an issue of equity dilution, because the company
have always made it very clear—as Nick Clegg had to later
correct himself—that they were always willing to dilute
their equity shareholding in return for this loan.
Vince Cable: Yes, you are right.
Equity dilution is not an issue. The company did indeed make it
clear that it was willing to dilute. As I explained in my first
appearance before this Committee, there is an inherent problem,
if you are a very small company doing a very big project; equity
dilution is an issue that arises, but it is an issue for the company
rather than for the Government. It is not a factor.
Q25 Rachel Reeves: And the
company had said that they were willing to dilute those shareholdings
in return for the loan. So, if this company came before you for
a loan again, we would not hopefully have to have the same debate
about equity or the same confusion in Government about the willingness
to reduce equity shareholding.
Vince Cable: You would not have
to have the same debate, no.
Mr Binley: May I say how much we appreciate
you coming here? I am sure the members agree. We recognise that
you have taken a massive burden of the early work of the Government—in
Northamptonshire terms, it has been bloody hard work—and
you are very kind to spend the time to see us today.
Vince Cable: Thank you.
Q26 Mr Binley: May I ask you
whether you think it should be the role of Government to provide
financial assistance to companies that can raise money on the
open market?
Vince Cable: As I said in my early
comments as Secretary of State, I was sceptical in general about
assistance provided to individual companies, but there are cases
in which it is justified—where there are market failures,
and there are market failures of various kinds, particularly in
the environmental field—and we continue to make selective
assistance available, particularly in the electrical vehicles
area. We reserve the position that we want to continue to do that
in some cases.
Mr Binley: Of course. And I can understand
that, in specific areas, it would be in the national interest,
I guess.
Vince Cable: Yes, exactly.
Q27 Mr Binley: May I ask what
was so special about the Sheffield Forgemasters loan? What set
the company apart from other, similar-sized companies, which normally
would not fit into the Government's lending scenario?
Vince Cable: As I said at the
beginning, it is a very good company, which produced a project
that was good value for money—but you are perfectly right
to say that there are a lot of other companies around the country
that could have produced extremely attractive projects and which
would no doubt have liked Government funding.
Q28 Mr Binley: A final question
at this stage: when you made the decision, may I ask what assessment
you made of the ability of Forgemasters to continue to prosper
and to provide the additional service that it wished to provide?
Vince Cable: We were aware—this
has been borne out—that Sheffield Forgemasters was actually
a very good company that would continue to do what it was doing.
There is a misunderstanding sometimes, that we have forced a contraction
on it, but we have not. The company is continuing with its presses,
doing excellent work in the nuclear supply chain—it has
gone back to doing that, which it will continue to do, and it
remains a successful and flourishing industry as it is.
Mr Binley: Thank you for that.
Q29 Luciana Berger: I just
want to explore a bit further, in detail, your assertion that
the decision not to proceed with the Sheffield Forgemasters loan
was based on affordability. Of the 217 projects that Rachel referred
to, 22 came under the jurisdiction of BIS; of that 22 projects,
21 went ahead. Can you expand a bit more, please, in absolute
terms, why there were no funds available for Sheffield Forgemasters?
Vince Cable: I think I explained
that in response to your colleague. I think we can give you a
full list—I do not think there is a problem with it—explaining
those that already had substantial contractual commitments, some
of them extremely small, whereas Sheffield Forgemasters was a
big commitment. I took two of the more high-profile projects,
one of which was Ford and the other Nissan, to explain some of
the thinking behind the affordability decision, but we can give
you a fuller list.
Luciana Berger: So there were no funds
available for this loan.
Vince Cable: That is what affordability
means, yes.
Q30 Rachel Reeves: In total,
Secretary of State, how much did the 21 that went ahead cost?
Vince Cable: I cannot tell you
off the cuff, but I can provide that for you.
Rachel Reeves: Just to confirm: the Government
looked at £34 billion-worth of projects overall, and £32
billion-worth, roughly, went ahead.
Vince Cable: I take your word
for it. I did not have the whole capital portfolio or, indeed,
the spending portfolio to make judgments on myself. However, if
that is what you are saying, I am sure it is right.
Q31 Chair: Looking at the
BIS funding which was allowed and at the Forgemasters funding
which was not, I see projects such as Nissan, Ford, Mitsubishi
and Airbus that were all allowed. Given the fact that the Forgemasters
funding was, according to my calculations, one quarter of 1% of
the £32 billion allowed for other organisations—not
just in BIS, obviously, but in total—and given the fact
that it was so strategic to the Government's direction of travel
and so small in comparison to the funding given to others, surely
there must be some sort of criterion which made you decide that
this one had to go when others could be sustained.
Vince Cable: I was not making
allocation decisions among the whole £30 billion, if that
is what it was. A bit of mental arithmetic: £80 million out
of roughly £800 million is almost 10%. That is a very substantial
part of the funding that we were considering when we were making
a reduction. We went over £800 million, but the net figure
was something of that magnitude. We are talking about 10%, a very
substantial chunk.
Q32 Chair: What also puzzles
me is that some of the alternative sources of funding are major
companies, household names. Some I accept were in some difficulties,
such as Ford, though I would not say Airbus. Would it not have
been a better strategy to secure money from the private finance
markets for those companies and to free up money for others such
as Forgemasters, which was smaller and perhaps needed the money
more than the larger ones?
Vince Cable: In a way that is
a question that you should perhaps direct to Lord Mandelson who
made the decision that very large interventions needed to be made
in the car industry in order to support them.
Chair: He was "okaying" them
across the board. He was not making choices, which you did.
Vince Cable: I am sure that my
colleagues in Government did the same kind of evaluation on affordability
that we did in BIS. Part of the test of affordability would have
been to establish whether there were alternative sources of funds.
In relation to the ones that we had to consider, of course Ford
is an international company, but, as I said, my predecessor made
a decision on broad strategic grounds that, if the car industry
were allowed to deteriorate in that critical period of recession,
great damage would be done to the supply chain. He made a decision
which we endorsed.
Q33 Chair: What about Airbus
and the financial commitment from the Treasury on that?
Vince Cable: The Airbus story,
as you probably know, is a very complex and tortured one. I can
have a full discussion with you about the economics of Airbus
if you like at another time, but there were major commitments
there which we felt we had to honour. There were international
obligations there, too.
Q34 Jack Dromey: You just
referred to strategic grounds. It is a matter of public policy
now that there will be a new generation of new build nuclear power
stations. That is part of a strategic and welcome decision, together
with the development of renewable and other sources of energy,
to tackle the problems of global warming on the one hand and security
of supply on the other. I want to explore, following on from what
you said just now, the value for money grounds. You referred to
a 2.5 multiplier.
Vince Cable: I did not invent
that figure. I thought it was a figure your colleague was using.
It is certainly in the documentation.
Q35 Jack Dromey: It is not
in the documentation. What is the multiplier?
Mike Keoghan: Depending on the
assumptions that we use, the benefit-cost ratio on Forgemasters
was between 2 and 3 to one.
Q36 Jack Dromey: Typically,
if you are looking at forgings and castings domestically and internationally,
you look at multipliers of between 4 and 6. What is interesting
about the letter that we have had back from you is that you are
asked to spell out the value for money grounds and the answer
is, "I am not going to tell you." What your Department
has done is hide behind the Freedom of Information Act to say
that we are not going to allow freedom of information. I quote:
"The documents you refer to are the subject of a number
of current FOI requests and the decision has been made to withhold
them under Section 43 of the Act." That was specifically
on this issue, the value for money multiplier. For every pound
invested, what would be the benefit? What would be the benefit
along the supply chain, in terms of jobs created? Why are you
withholding that information?
Vince Cable: I have just stated
it, so I clearly was not—
Q37 Jack Dromey: There was
some confusion between yourself and your civil servant as to exactly
what the multiplier is.
Vince Cable: I do not think so.
I think he corroborated it very precisely.
Can I just go back a little bit? You started,
in the preface of your question, by asking if we acknowledged
the strategic importance of the nuclear supply chain. I think
that was how you started the question.
Q38 Jack Dromey:
Yes.
Vince Cable: We do. Indeed, a
couple of months ago, I attended a major meeting with the nuclear
industry in the Queen Elizabeth hall opposite, to spell out some
of the ways in which we do and want to help develop the nuclear
supply chain. Vincent de Rivaz organised this event, which was
perfectly public and I was quoted in it. We help with training
and apprenticeships, and we help with the Sheffield Nuclear Advanced
Manufacturing Research Centre, and in other ways. We recognise
that and we provide support for it.
Q39 Jack Dromey: I must press
you on this. The Committee has asked you to disclose your departmental
assessment of what the value-for-money benefits would be, looking
at the wider economic benefits—jobs created and wealth in
our economy—and your Department has withheld that information.
Why?
Vince Cable: I cannot tell you
the specific grounds on which that particular FOI request was
refused, but I am quite open about explaining to you and acknowledging
that there was a positive value-for-money assessment rating 1,
and to give you the ballpark estimate of what it was. I do not
know whether we can say more.
Q40 Jack Dromey: I put this
question to you and your civil servants; if you are looking at
multiplier benefits in terms of jobs created, you would probably
be talking about between 4 and 6—is that right?
Mike Keoghan: The way the benefit-cost
ratio was done was to look at jobs created and wider supply chain
impact.
Q41 Jack Dromey: What was
your assessment of the jobs that that would create?
Mike Keoghan: The overall benefit
was, depending on the assumptions used and the scenarios applied,
between 2 and 3:1.
Q42 Jack Dromey: What does
overall benefit mean? Are you referring specifically to the jobs
created?
Mike Keoghan: We are referring
to jobs created and supply chain benefits signalling impact to
the wider nuclear industry.
Q43 Jack Dromey: Progressively,
more is coming out. Why are you hiding behind refusing a Freedom
of Information Act request? Why do not you put that information
into the public arena? Why did you refuse to put that information
into the public arena in the first place?
Mike Keoghan: Essentially, it
was the commercial IDAB paper that was refused and was not put
into the public domain, because it had commercially confidential
material in it.
Q44 Jack Dromey: A cost-benefit
analysis assessment cannot be frustrated by a commercial in confidence
issue relating to Sheffield Forgemasters.
Janice Munday: It contained information
that was commercially confidential to Sheffield Forgemasters and
to Westinghouse about the terms of their engagement so we advised
that it should not be revealed. It was because of that commercially
confidential information.
Q45 Jack Dromey: It is of
the highest importance that Parliament and the public know exactly
what the benefits would have been. Will you now put that information
before Parliament?
Vince Cable: I do not think you
can expect us to put it before Parliament if it encroaches on
commercially confidential information from those two companies.
Q46 Jack Dromey: In which
case, can I ask you this? If we had a private session at the next
stage, would you put that information before this Committee?
Vince Cable: I am not sufficiently
familiar with the law around freedom of information. Is that a
reasonable request?
Q47 Jack Dromey:
You cannot hide behind commercial in confidence to refuse to disclose
why you turned down this application. Will you put the information
concerned into the public arena or disclose it in a private session
of this Committee?
Vince Cable: I think you have
made a jump in the argument which is not justified. I have made
it clear from the outset that the project was not turned down
on value-for-money grounds. We have accepted from the outset that
there was a positive value-for-money evaluation. That was not
the issue. Casting more light on that particular assessment would
not, in any way, help to explain why this decision was made.
Q48 Jack Dromey:
Can I, with respect, disagree with that? The final question I
asked was this. If we are scrutinising why you took this decision,
which cannot be in the best long-term strategic interests of the
nuclear industry generally or of our industrial base in particular,
this Committee and Parliament are entitled to know precisely why
you turned down the decision. And if, as I believe the information
in the Department demonstrates, this would have been very good
news indeed, creating thousands of jobs and tens, and ultimately
hundreds of millions, of pounds of benefit to the private sector
economy, and if that information has been withheld, we are entitled
to ask for it.
Vince Cable: Well, as I say, on
the precise limitations of freedom of information, I can not help,
but I simply repeat the point. We do not dispute your basic argument.
There were undoubtedly benefits; of course there were—whether
that was in terms of employment—
Q49 Jack Dromey: I put it
to you that the benefits would have been on a grand scale, but
you are not prepared to put that information into the public arena.
Vince Cable: If you regard
a 2 to 3 ratio as a grand scale, then indeed it was. There will
no doubt be an opportunity to discuss the overall methodology
employed by the board, but I think my officials are quite right
to say—we would say this in any other case—that we
cannot disclose commercial information. Indeed, there are second
parties here, companies who are not directly involved in the application
and who had to make information available to enable the evaluation
to take place, but who would not have provided that unless that
information was protected.
Q50 Jack Dromey: In which
case, I would ask you to consider the request being made to you:
if there is a commercial-in-confidence issue, which I do not accept,
are you prepared to give evidence to a private session of this
Committee and disclose that information?
Vince Cable: Well, we can
look at what the legal constraints on us are, but I just repeat
the point: it does not answer the question that your Committee
is posing. You asked me why the decision had been made—
Q51 Jack Dromey: But Secretary of
State, I think it would demonstrate that you have turned down
a project that would have had immense, wider and longer-term benefits
for our economy. We need that information to be out in the public
arena.
Vince Cable: Well, I would
merely dissent from the word "immense." I think we would
accept the fact that there are undoubtedly net benefits. We have
explained in aggregate terms what these are. I repeat the point
I made in answer to the first question from your colleague: there
are many projects that would produce positive net benefits. The
Government have to ration capital expenditure; we have a constraint
on what we can do, and if something is not affordable we can't
do it even though it produces net benefits. Any company and any
Government have to operate on that financially disciplined basis.
Q52 Jack Dromey: We will only
know how great the benefits are—forgive me if I say this—if
you come clean.
Vince Cable: Well, we have
told you what the order of magnitudes are.
Q53 Chair: You quite rightly
said that there are a whole range of projects that would bring
benefits. Looking at the ones that your Department agreed, I think
I am right in saying that there were five wind energy projects,
which I am thoroughly in favour of and I am delighted that they
were accepted, but the one nuclear energy project was turned down.
That seems odd. Are you saying that the Government are prepared
to back renewable projects if they are wind energy but not prepared
to back new nuclear projects? Given your party's traditional political
position on this, can you assure the Committee that that was in
no way a factor that determined the outcome of this decision?
Vince Cable: I can confirm
to you definitely that that was not a factor in the decisions.
I have already explained that I personally have appeared at nuclear
industry events and suggested how we can support their supply
chain. My colleague at DECC has equally been supportive of it.
This was not a factor in the decision.
Q54Chair: Is it reasonable to interpret
from what you said that if there were further project applications
involving new nuclear they would, in effect, be considered on
an equal basis to those from other renewable sources?
Vince Cable: Yes, absolutely.
Q55 Mr Binley: I just want
to clarify this point about commercial sensitivity. I founded
two companies which now employ 250 people, and if banks were prepared
to talk about discussions that I have had on financial matters
that either affected the future well-being of my company or benefited
my competitors I would be horrified. Do not you agree that thank
God we have that protection in this country?
Vince Cable: Well, thank
you. That clarifies it and you put it more robustly than I did,
and you do it from it personal experience.
Q56 Luciana Berger: We know
that the assertion made by the Deputy Prime Minister on 5 July—that
the decision to originally grant the loan to Forgemasters was
a political one—was incorrect, because it came after a two-year
period of intense scrutiny by BIS. It was signed off by the then
permanent secretary of BIS, following strict processes independent
of Ministers. In addition to that, the Treasury had to give consent
to the project because the loan was larger than BIS's £25
million-worth of delegated authority. In light of that fact, what
representations did you make to the Treasury in respect of the
loan?
Vince Cable: We have—as
I have already explained, we had to make a decision in the Department
about what was affordable and what was not. But I am not quite
sure how that links to the preamble to your question, which was
about processes that preceded the general election.
Q57 Luciana Berger: The Treasury
was involved in the decision to grant the loan to Sheffield Forgemasters,
and had to sign it off because it was higher than the delegated
authority. Did you have conversations with the Treasury?
Vince Cable: Of course we did,
but this was a Government decision. We agreed with the Treasury
that given the constraints on funding, this was something we couldn't
proceed with on affordability grounds.
Q58 Rebecca Harris: The Government
talked about the importance of rebalancing the economy, in terms
of geography and what have you, so this is a general question.
To what extent did you assess the wider impact, specifically on
the local area, when making your decision?
Vince Cable: Well, that—you
know, as I said, the criterion was affordability. There were wider
impacts—cost-benefit—and that no doubt took into account
the circumstances in Sheffield. But at the end of the day, the
decision was an affordability one rather than in terms of its
cost-benefit implications locally or nationally.
Q59 Rebecca Harris: You covered
that to some extent with Jack. At the time that you made the decision,
to what extent did you consult other organisations inside the
nuclear industry to see what impact they felt this would have
on the sector generally? Was that part of your considerations
when you decided to cancel the loan? For example, I gather the
nuclear development board was very strongly in favour of the loan.
Vince Cable: Yes, I believe so.
Q60 Rebecca Harris: You believe
you consulted?
Vince Cable: Yes. Well, in fact,
we know that when the project was being looked at under the last
Government, they did indeed make that assessment, and it should
not surprise me and it was certainly a factor—
Q61 Rebecca Harris: When you
were re-evaluating whether to cancel the loan, it was not something
you considered?
Vince Cable: No, it was not.
Q62 Rebecca Harris: You did
not make any—
Vince Cable: No. We did not.
Q63 Chair: Before I bring
Rachel Reeves in, I was a little surprised by your response there,
about this being determined on affordability. Yes, we know that,
but I do find it odd that the wider benefits to a community are
not factored in to any assessment of affordability.
Vince Cable: Well, they are valid,
obviously, but it is a separate calculation. We have had a long
discussion a few minutes ago about the value for money of the
project, and we have acknowledged that it did provide value for
money. The value lay in employment locally and more widespread
through the chain. We have acknowledged that there was a positive
value-for-money assessment. That obviously was a consideration
when the project was being formulated. But the decision not to
proceed with it was not based on that; it was based on affordability,
which is availability of cash.
Q64 Rachel Reeves: Leading
on from Rebecca's question about the impact on the nuclear industry,
it is my understanding that there is only one other country in
the world that can do what Sheffield Forgemasters was attempting
to do, and that is Japan, and that in light of the decision not
to go ahead with the loan to Sheffield Forgemasters, the industry
will look to other countries and other companies now to do this
work.
You are publishing the growth White Paper, I
believe, on 24 or 25 October. I hope that that will be telling
us things about how you want to rebalance the economy away from
financial services and away from London and the south-east, and
that you want to build jobs in high-tech, high-skill and low-carbon
industries. I think that Sheffield Forgemasters ticks all of those
boxes, and yet your Department and you seem willing to allow those
jobs to go overseas to our competitors, which means losing exactly
the sort of investment and jobs that we need to see if we are
going to rebalance the economy in the way that I hope you want
to.
Vince Cable: Well, that could
be said of any project in a part—
Q65 Rachel Reeves: I do not
know about that.
Vince Cable: Of course it could.
It could be said of any project that has merit and is in a part
of the country that needs support. There is a virtually unlimited
demand for Government funds if put in the way that you have just
put it, and we do not have unlimited funds.
Q66 Rachel Reeves: With all
due respect, Secretary of State, I really do not think that that
is true. These are high-skill, high-tech jobs in a low-carbon
industry. These are not just any old jobs; these are exactly the
sort of jobs that I expect you will be talking about in your White
Paper. Yet your Government are not willing to support them with
a loan—not a grant, but a loan—that would have been
repaid with a rate of return of between 7.5% and 10.9%. If you
are not willing to support these sorts of jobs and this sort of
investment, how are the Government going to try and help support
the rebalancing of the economy that we are so desperately going
to need, especially after the comprehensive spending review next
week?
Vince Cable: Well, several of
the projects that we did proceed with—and you have pushed
me on why certain projects did proceed—were precisely of
the kind that you are praising. They were high-skill, low-carbon
jobs; Nissan was a good example. I have explained that the fact
that it was a loan was not relevant to this, because if it was
a loan, the Government would still have had to borrow the money.
Of course, you get a return on a loan—there is a risk element
to it but you get a return on it—but the simple truth of
the matter is that we have to manage the cash flow of the Government
as well as companies and there simply was not the cash available
to finance every single project which is, in an abstract sense,
desirable.
Q67 Rachel Reeves: But, Secretary
of State, I do think that there is a difference between a loan
and a grant. If you wanted to borrow £10 from me, it would
make a difference, in terms of affordability, whether you were
going to pay that money back or not. This money was going to be
paid back, at your own estimates, with a rate of return of between
7.5% and 10%. That makes a big difference, actually, in terms
of whether it is affordable or not. But that was not my point;
my point is about whether you are willing to see jobs and investment
go overseas, or whether, in terms of rebalancing the economy,
the Government are willing to support the types of investments
that will yield high returns and help to rebalance the economy
in the way that I hope we all want to see.
Vince Cable: Well, the Government
cannot finance every single project in the country simply on the
grounds that other countries are competing with them—we
cannot do that. Your Government could not do it and we cannot.
Q68Rachel Reeves: With all respect, Secretary
of State, that is not what I was asking. This is a loan of £80
million with a high rate of return. I would argue that it is affordable.
In fact, I would go further and say that you are making a big
mistake to cancel this loan, because it would have generated jobs
and investment, which are exactly the sorts of things that are
needed to bring down the budget deficit.
Chair: Rachel, could you confine it to
questions? I am conscious of the fact that we are running out
of time and there is another section I want to come to. Margot
James and Jack Dromey have indicated to me that they want to speak.
Q69 Margot James: You have
heard from Jack about the exciting prospects for the supply line
and the multiple that you were previously discussing and you have
heard Rachel's point that there was only one other company, and
that was based in Japan, that could possibly compete in this area
at this time. Given what you have heard from Jack and Rachel,
would you not agree that if it was that good, or anything like
that good, and given those rosy circumstances, the private sector
ought to be able to come in with the necessary finance for this
company? It increasingly sounds to me as if it is not, in fact,
a good candidate for Government support. Given the potential rosy
scenario, it should be able to raise its money independently of
the taxpayer.
Vince Cable: You make a very good
argument, but we did accept that, on cost-benefit grounds, there
was an argument for Government intervention—we just could
not afford it. But you make an alternative case very well.
Q70 Jack Dromey: Following
on from that, this is the world's largest independent company
of its kind, with castings of 300 tonnes and forgings of 200-plus
tonnes. There is a simple reality, is there not, that if this
project does not go ahead, the next generation of nuclear power
stations in Britain will be turning for their forgings and castings
to Japan?
Vince Cable: That is likely, if
the project does not go ahead. Clearly, if there is not the capacity
here, it would have to be imported from somewhere else.
Q71 Jack Dromey: In which
case, in circumstances where it cannot be in the national interest
that once again we lose a manufacturing opportunity to our global
competitors, how can we go forward at the next stages? If Sheffield
Forgemasters were to make a fresh application, would it be entertained?
Vince Cable: Yes, it would be
entertained. We have various mechanisms available, and if it satisfies
the various conditions and it is affordable, we will certainly
look at it.
Q72 Jack Dromey: How would
it be entertained? Out of the green investment bank, which is
not yet operational?
Vince Cable: No, it is not yet
operational, and the regional growth fund is not yet operational,
but these are potential mechanisms that could be explored for
them and other people.
Chair: Before you go on, Jack Dromey,
Brian Binley had a question.
Q73 Mr Binley: Secretary of
State, it is clear both from your comments and from press releases
from Sheffield Forgemasters that the option of pursuing a commercial
loan is not viable. Considering your comments on the lending arrangements
of nationalised banks, why do you not direct those banks to provide
what is considered to be a sensible, profitable loan? Can I also
say, I do not believe that for a loan in these circumstances,
given the rosy potential marketplace for this company, that it
is not viable to get the money in the private sector. But truthfully,
if that is the case, there is a serious, serious job for your
Department to do to knock the heads of the banks together and
kick their bottoms and get them working in the national interest.
Vince Cable: The Chancellor and
I met them yesterday and I think they probably felt we were doing
just that.
Mr Binley: I am delighted.
Q74 Chair: May I add to the
question that I posed in BIS questions today? Given the new growth
fund that is being proposed by the banking community and the potential
option for the Government to have a place on its board, will you
be pressing to have a member of the Government on that board in
order to develop lending policy, and do you think that this might
be the sort of project that they would be interested in funding?
Vince Cable: Well, we are not
pressing, but we are considering it. The proposal was only made
yesterday and we are reflecting on it.
Q75 Chair: With respect, Minister,
given your public statements about state-funded banks helping
industry, is this not fully, squarely in line with your public
statements over the past 18 months to two years? Should you not
be doing rather more than just considering but actually twisting
arms?
Vince Cable: Well, this proposal
that came up yesterday is actually for an equity fund rather than
for a loan fund. It is an equity fund and it is targeted at a
specific segment of the mid-cap market. It has long been acknowledged
that there is a gap, going back to 1929 and the Macmillan report.
Hopefully, this institution will fill it, but it was not designed
with projects like this in mind.
Q76 Jack Dromey: It is important
that we know why you took the decision that you did, and that
is why I stress once again that I will be pressing for that information
on the value for money case to be put before this Committee, but
it is also important that we focus on the future. Given the immense
potential that there is for this project and for our national
industrial base and economy if it goes ahead, are you saying that
your door is open to Sheffield Forgemasters now to submit a fresh
application?
Vince Cable: Well, the Departments—me,
personally—are certainly willing to look at new approaches.
But I just stress, whenever I go out on a provincial tour, of
which I do a great many, I meet large numbers of companies with
tempting projects, which they would like to come and talk to me
and the Department about. We are highly constrained—we will
discover next week how constrained—but I am just trying
to make it clear that if people wish to make fresh approaches,
they know the institutions available and the criteria, and they
will do with the green investment bank—
Q77 Jack Dromey: Your door
will be open?
Vince Cable: I am always happy
to talk to people—
Q78 Jack Dromey: The potential
of a grant or a loan?
Vince Cable: —Members of
Parliament and businesses about how we can help. I cannot promise
that we will deliver, because of the limitations on our funding,
but I am always very happy to talk to people.
Q79 Jack Dromey: But it is
important that we know this. I historically used to deal with
the nuclear industry. I know the employers in the nuclear industry.
Every single employer in the nuclear industry is as one that this
is a good project, which should have been supported. They have
been dismayed by the decision taken by Government. They would
welcome a firm statement by you that your door is open.
Vince Cable: No, I hear what you
say. As I said a few weeks ago, I did speak to the major employers
in the nuclear supply chain. They did not actually make that point
to me. They did want to be reassured that the Government were
supporting the supply chain in various ways—training, research
and elsewhere—and I have given them that assurance. We want
to support that.
As far as this particular project is concerned,
I think I have said enough in terms of problems of affordability,
but as I said, I have an open mind in terms of proposals—
Jack Dromey: An open mind and an open
door. Well, we will look forward to what happens at the next stages.
Q80 Rachel Reeves: I know
we are running out of time. I just want to stress that there might
be a lot of projects that come before you, and a lot of business
people who approach you with good projects, but there aren't very
many projects, I would imagine, that would be signed off by the
permanent secretary of your Department, as it was before the election,
and not many projects that would then get the go-ahead from the
Treasury. So I do think that this is not just another business
case that comes before you.
I also just want to see whether the regional
growth fund will provide money in terms of loans as well as grants,
and, building on what Jack said, whether Sheffield Forgemasters
would be able to approach the regional growth fund for this money
that you have refused.
Vince Cable: Well, I do not know
what its operating criteria will be, and what type of funding
it will provide, but we have specified that it does exist to support
private sector growth, particularly in those parts of the country
that are suffering a loss of employment. So in those very broad
terms it may well be eligible, but as I say, we have not yet agreed
the terms of reference and the way it will operate.
Q81 Chair: Just before we
conclude, may I make a final request that we could have, as a
Committee, details of the extra Treasury commitment that has resulted
in the case of the funding for Nissan, Ford, Mitsubishi and Airbus,
and that which would have arisen had we accepted the Forgemasters
bid?
Vince Cable: I do not fully understand
the question. I am quite happy to be helpful, but I do not fully
understand what we are being asked to do here.
Q82 Chair: Well, one of the
arguments that has been put forward for not accepting the Forgemasters
project was the fact that it would have resulted in a further
£80 million-worth of bonds having to be issued. What I am
looking for is a comparison with the extra funding obligation
that was incurred by the granting of the list that I have just
given you, so that we can make some sort of assessment of how
they compared.
Vince Cable: I think we can certainly
tell you how far the incoming Government were legally bound by
various projects as a result of commitments that were made.
Q83 Chair: Well, that was
my opening question. What I want to know is the funding obligations
for the Treasury that arose from them.
Vince Cable: Well, in relation
to BIS projects, I am sure that we can tell you what was legally
committed and what was not. I cannot, obviously, speak for other
Departments.
Q84 Mr Binley: Chair, may
I just add a supplement to that? I think that the programming
of this whole process is very important too, and you suggested
that you could provide us with that?
Vince Cable: I hope that is right,
yes.
Chair: Thank you. If there are no other
questions, I thank everybody, and I thank you for coming, Minister.
I look forward to seeing you, no doubt, to tell us about the CSR.
Vince Cable: I am sure you will.
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