Written evidence from EEF, The manufacturers'
organisation
ABOUT EEF
EEF is the representative voice of manufacturing,
engineering and technology-based businesses with a membership
of 6,000 companies employing around 800,000 people. A large part
of its representational work focuses on the issues that make a
difference to the productivity and competitiveness of UK manufacturing,
including investment, innovation and tax issues.
INTRODUCTION
We welcome the opportunity to respond to this
enquiry on government assistance to industry. This review is timely
given the pressures on the public finance, the need to prioritise
scarce resources and challenge of building better balanced economy.
— The focus of the government's economic
policies should be a recovery that builds the foundations of better-balanced
and more sustainable growth over the long-term. In practice this
means increasing the contributions to growth from trade and investment.
— Decisions on government assistance to
industry in future will largely be determined through the spending
review process. It will also be informed by the government's forthcoming
strategies on growth, manufacturing and sub-national government.
While the role of the Department for Business, Innovation and
Skills (BIS) will be important in supporting growth, the white
papers and spending review announcement must ensure co-ordination
of ambition across all government departments and agencies.
— Improving the flow of credit to businesses
will be an important component of a private sector recovery, but
there is no simple solution—even if the government has a
large fiscal lever to pull. The government's response must focus
on facilitating better relations between banks and industry, improving
competition and modifying existing schemes.
— UKTI also provides important support
for exporters, with evidence from EEF members showing that its
services have made a tangible difference to export performance.
The spending review and any restructuring must support and enhance
the work of UKTI.
— In addition, supporting skills development,
reducing regulation and a competitive and predictable tax system
are also vital in creating a business environment that gives industry
confidence to invest.
GROWTH POLICIES
AND ASSISTANCE
TO INDUSTRY
MUST SUPPORT
ECONOMIC REBALANCING
1. Growth over the last decade has been
dominated by debt-financed consumer and government spending. The
rise in consumer, government, and particularly financial company
debt over the last ten years is not sustainable. As the financial
crisis and resulting recession showed, inappropriate pricing of
risk and unrealistic expectations of asset price increases have
had very negative consequences for growth. Higher funding costs
for banks, deleveraging by households, the government, and the
corporate sector, as well as adjustments in behaviour and attitudes
to risk mean debt is not able to continue to drive growth.
2. There is a broad consensus, including
from the government, that the UK's economy will need to "rebalance"
to new sources of growth in the future. If government economic
policy is to support this rebalancing process it should focus
on how to increase the share of growth accounted for by investment
and net trade.
3. A greater emphasis on investment and
net exports is a sustainable model for growth. Expanding markets
in the emerging world offer a key source of growth through net
exports well into the medium term as developed economies' consumption
grows more slowly. Increasing business investment is the key to
expanding the productive potential of the real economy to meet
this growing demand.
4. The financial services sector is, nevertheless,
a vital part of the UK economy and will continue to be so in future
years. But the resilience of the UK to future economic uncertainties
will be improved by developing complementary strengths in other
sectors. Export-led growth in particular will need more than just
the UK's traditional strengths to drive strong growth.
5. In this respect, industry, and manufacturing
in particular can play a significant role in delivering better-balanced
economic growth. The sector accounts for around half of UK exports
and has been driving a recovery in trade since the beginning of
the year. A weaker exchange rate combined with manufacturers'
focus to extend their reach into global markets over much of the
past decade provides a good foundation for export-led growth in
future.
6. The government's focus on better-balanced
growth also comes at a time of unprecedented fiscal consolidation.
This provides an additional challenge as government seeks to reduce
public expenditure over this parliament in a way that supports
a strong private sector recovery.
HM GOVERNMENT'S
STRATEGY FOR
SUSTAINABLE GROWTH
IDENTIFIES THESE
PRIORITIES
7. The government's paper in July, A Strategy
for Sustainable Growth, was positive in that it covered the breadth
of issues the government needs to focus on to ensure coordination
of policy. The paper identified the priorities which can underpin
private sector growth in future. While the outcome of a number
of government policy reviews will not be evident for some months,
manufacturers will welcome the attention to issues that could
present barriers to improving the longer-term competitiveness
of the UK economy.
8. In particular decisions to tackle issues
such as reducing regulation, improving access to finance and reviewing
the approach to support skills development early in the parliament
could potentially lay the foundations for sustainable growth.
In addition, the paper also recognises that government needs to
think and act differently—particularly in the areas of public
procurement and engaging with partners to bring down barriers
to trade growth. For example, companies that count the government
as a customer will want to see government deliver on its commitment
to communicating and sticking to infrastructure and investment
priorities, which will enable UK companies to plan for and respond
to procurement opportunities.
9. In addition the growth strategy acknowledges
that the range of horizontal policies to support growth can have
differential impacts on different parts of the economy. The forthcoming
Manufacturing Framework must put this recognition into practice,
by setting how the range of government activity—from tax
policy and access to finance to skills and innovation policy will
impact on manufacturing and its ability to invest and grow in
the UK.
10. While BIS is a key player in the process
of supporting private sector growth and rebalancing the economy,
other government departments and agencies also exert a considerable
influence. As government continues to flesh out its policy agenda
in the months ahead with White Papers on growth, sub-national
government and manufacturing, it must present a unifying theme
to which all parts of government will work towards.
POLICIES TO
SUPPORT GROWTH
AND REBALANCING
AND THE
ROLE OF
THE DEPARTMENT
FOR BUSINESS
11. As indicated above EEF supports the
broad policy priorities set out so far by the coalition. However,
the reviews and consultations that have been published to this
date are only a first step in providing industry with the stable
and predictable business environment that will provide companies
with the confidence to invest and grow in the UK. The government
should also prioritise action in the following areas:
Access to Finance
The government's Green Paper on access to finance
provided a good overview of general lending conditions and the
problems facing some parts of the economy in accessing external
finance. However, in our response to the consultation we highlighted
a number of other areas, which we believed were not sufficiently
addressed in the Green Paper.
Our main concern is the change in assessment,
management and pricing of risk by the banks. While banks may be
taking a more cautious approach to lending decisions given uncertainty
around the strength of the recovery, a shift in the management
of risk is manifesting itself not just in terms of higher interest
rates on borrowing, but also in the additional costs and conditions
attached to a loan.
We recognise that the government does not have
a large fiscal lever to pull to improve lending conditions in
the economy. We do not therefore see a simple solution to increasing
the flow of finance to businesses seeking to expand and grow.
There is however smaller scale action the government can take
that we consider would improve lending conditions—especially
for SMEs.
Relations between banks and the private sector
have deteriorated post-financial crisis and effort is needed on
both sides to improve the situation. It is not evident that the
use of lending targets has or will lead to improvements in accessing
finance. However, government can help facilitate greater transparency
around lending policies and costs.
Competition is a major issue in financial services.
We recognise there are processes underway looking at the overall
structure of the banking sector and also barriers to entry, expansion,
and exit in retail banking. However, there is also scope to increase
non-price competition among banks and also greater competition
with alternatives to bank lending.
There are a range of government schemes already
in place to improve access to finance. The effectiveness of some
of these schemes would be more effective if small adjustments
were made to their operation. For example:
— grouping the government-backed equity
funds together would provide a more complete picture for SMEs
of what is available from government;
— bringing greater non-financial business
expertise into government-backed equity funds to actually make
a difference in the way investment decisions are being made;
— encouraging international investors to
co-invest in its equity funds; and
— conducting analysis of and publishing
the conditions being attached by banks and other lenders to EFG
applications.
The Small Business Finance Forum was an effective
exchange forum between small businesses and banks. There are no
comparable forums that represent both sides of the lending arrangement
and we consider the SBFF was conducive to constructive dialogue.
UKTI and support for exports
The government is committed to a review of the
functions and structure of UK Trade and Investment. This is in
part necessitated by the abolition of the Regional Development
Agencies, which were responsible for some trade and investment
functions. However, this should also be viewed as an opportunity
to consider the most cost-effective deployment of resources and
where the strategies of different parts of UKTI have delivered
the greatest benefits.
In the past, we and the Business, Innovation
and Skills Select Committee[6]
have questioned the regional delivery of elements of UKTI's strategy.
This has led to a degree of competition and duplication across
the Regional Development Agency network. Moving to national sector
strategies, the approach taken to promote advanced engineering
for example, rather than a regional approach could therefore offer
a more efficient and effective deployment of resources.
A survey of EEF members published earlier this
year[7]
showed that the range of services and support available from UKTI
has made a tangible difference to manufacturers' export performance.
We found that around half of companies had accessed some form
of export support service from UKTI in the previous two years.
The most used service, by 42% of UK-based manufacturers, was the
support UKTI provides via International Trade Advisors, with involvement
in sector-specific seminars overseas and meeting key contacts
visiting Britain on inward missions both accessed by 38% of companies.
Overall, the majority of companies reported
real benefits, including gaining access to information, customers
and contacts and increased confidence to enter a new market. In
addition around one in six increased total export sales as a result
of UKTI support.
UKTI's strategic priorities are meeting the
needs of exporters, the outcome of the Spending Review must ensure
that they can stick with them. Turning the funding tap off again
in the forthcoming Spending Review would risk disadvantaging UK
companies in an environment where global opportunities and global
competition will go hand in hand.
OTHER ASSISTANCE
TO INDUSTRY
12. While the Committee is particularly
interested in BIS's role in growing exports and improving access
to finance, the Department funds and manages a broad range of
other areas of support and assistance to industry. These will
also be important in delivering sustainable economic growth, including
on innovation, practical support to improve productivity through
the Manufacturing Advisory Service (MAS) and providing a framework
for low-carbon business opportunities.
13. Inevitably spending on these programmes
will be subject to review as part of the Department's spending
settlement. And decisions on whether these programmes should continue
should be judged on the extent to which they can support better
balanced economic growth.
14. On innovation, for example, a forthcoming
report from EEF will show that UK manufacturers have increased
their focus on a broader range of innovations as part of their
strategy to increase penetration in export markets. Success here
will require companies to commercialise innovations quickly and
overcome hurdles by collaborating up and down the supply chain
and with Higher Education Institutions. Government can have a
role in catalysing private sector investment, but limited resources
must now be focused on developing and commercialising innovative
ideas in the UK. In addition future reforms to the R&D tax
credit should also reflect these aims by covering a wider range
of development costs.
LESSONS FROM
THE RECESSION
AND THE
PREVIOUS GOVERNMENT
15. The planned cuts to public spending
will bring a different approach to industry compared to what manufacturing
has seen in recent years. The recent major synchronised global
financial crisis and decline in worldwide demand created a situation
where extraordinary policy interventions were warranted. In these
circumstances, industrial policies that provided direct support
to firms likely helped preserve and build UK economic strength
that the recession may otherwise have destroyed. In the case of
the interventions to support lending through the Enterprise Finance
Guarantee Scheme, the previous government acted quickly in an
attempt to get credit flowing to the private sector. Other initiatives
such as the car scrappage scheme provided the automotive sector
and its supply chain with a much-needed boost to demand.
16. In addition, a new strategy for industry—New
Industry, New Jobs—set out the sectors of the economy
where the UK had, or could develop, a competitive advantage. It
also put the spotlight on the contribution manufacturing makes
to the UK economy. The Strategic Investment Fund provided an important
source of investment to companies developing leading-edge technologies
and helping to ensure their development and production continued
in the UK. However, the decisions behind individual investments
from the fund were not always transparent or clearly communicated.
And the consequence of this was that some of the decisions were
reversed by the new coalition government.
17. The need for a Strategic Investment
Fund perhaps highlighted some of the broader weaknesses in the
business environment—where companies were left unable to
secure, for example, finance from the private sector to support
growth plans and access new markets. Getting these aspects of
the business environment right in future should reduce the need
for such interventions.
18. Government support for industry over
this parliament can build on the work done by the Department for
Business in identifying the sectors, technologies and markets
where UK companies can successful build a competitive advantage.
If the forthcoming Manufacturing Framework is to fully recognise
that government interventions have differential impacts on different
parts of the economy, policy needs to be driven by a clear sense
of direction on where the UK can excel. This will form the basis
of a more stable policy environment, which can allow businesses
to plan long-term investments in the UK.
19. Finally, with the recovery like to be
an uneven one—both here and across the global economy—decisions
on government spending must be sufficiently flexible and able
to respond should the upturn begin to lose momentum.
29 September 2010
6 BIS Committee report, Exporting out of recession,
January 2010. Back
7
EEF (2010) Rethinking Growth: Building blocks of an export-led
recovery. Back
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