Government Assistance to Industry

Memorandum submitted by Unite the union

This evidence is submitted by Unite the union. Unite is the UK’s largest trade union with over 1.5 million members across the private and public sectors. The union’s members work in a range of industries including manufacturing, financial services, print, media, construction, transport, local government, education, health and not for profit sectors.

Executive Summary

a) Government must recognise and reflect the need for a balanced economy where industry is a major contributor to the wealth of the country

b) Government has a clear responsibility to create a climate which encourages investment and risk taking across industry including research and development and innovation

c) Unite welcomes the steps taken in the last few years by DBIS to provide more direct support to industry (Section 2)

d) Unite believes that the delivery of such assistance should be supported by the banking sector and where this is not happening government should intervene (section 3)

e) As part of any government industrial policy, a national strategic investment bank should be established to ensure those industries of strategic importance to the economy are adequately supported (Section 4)

f) Unite welcomes the government’s proposal to create a Green Investment Bank as a part of its assistance to industry (Paras 4.3 – 4.5)

g) Unite is calling for streamlining of processes for accessing government assistance but is not convinced that the breaking up of regional development agencies will deliver more effective or efficient systems of assistance (Paras 7.1 – 7.3)

h) Unite recognises that recent improvements to the Export Credit Guarantee Department support but believes that more could be done to promote and support exports from UK based manufacturers (Paras 6.3 – 6.8)

i) Whilst the work of the UKTI contributes to UK business abroad, the evidence suggests that this work needs to be more focussed and inclusive of the business community (Paras 6.1 – 6.2)

j) The current R&D Tax credit system should be improved and made more flexible (Section 5)

k) The role of the Department of Business innovation and skills should embrace all stakeholders. Whilst there is room for sectoral work across industry Unite argues that the absence of a tripartite forum to address the medium to long term strategic industrial policy weakens the knowledge available to the Department and the government. (Para 7.7)

1. Introduction

1.1. Unite has made a number of submissions to this committee and others on the subject of government support for industry. Our views are predicated on the belief that part of government’s role is to provide and support the economic climate necessary for industry to prosper. Economic history both in the past and more recently has clearly demonstrated that national economies cannot survive on services alone and that economic growth and wealth requires the production of goods as well as services.

1.2. It is essential therefore that governments and their departments play a role in developing economic and fiscal policies which encourage investment and risk taking in the business community. This enquiry is clearly looking at the other side of the coin, that of direct intervention in delivering appropriate assistance to companies to enable them to take advantage of a positive economic climate or sustain viable industries through periods of economic downturn.

1.3. Unite does not argue for propping up lame duck companies. But Unite does believe that in the current global climate where companies are struggling to survive due to economic conditions not of their making, government assistance can and should provide the impetus to enhance their sustainability as part of a strategic industrial policy.

1.4. Our comments below point to how this has been done well in the past and also looks to the future to consider the shape of future assistance learning from the mistakes of the past.

2. Recent government financial support programmes

2.1. Probably one of the most successful and innovative support programmes in the last 2 years was the car scrappage scheme. Unite was one of the bodies who called for this as the UK and European motor industry slumped as a result of the global recession and was delighted that government agreed to its introduction in May 2008 and an extension in September 2009. The success of this scheme, which included a shared responsibility from manufacturers and government, delivered increased sales of domestic vehicles and small vans through to May of 2010. As well as benefitting consumers it provided an environmental boost by reducing the average carbon emissions from vehicles and, of course, enabled the workforces of those companies affected to return to full time working following periods of shut down and short time working.

2.2. The automotive assistance programme did provide guarantees for major companies within the automotive sector. It appeared to be a mechanism which was slow to respond and equally slow to deliver but no doubt the employers will be in a better position to comment upon that. It was designed correctly to provide support to an important manufacturing industry in the UK to address the investment needs of the industry at a time when innovation and environmental considerations are essential to its long term sustainability. But it has done little to support directly the SMEs which support the main automotive manufacturers.

2.3. The signals from Government give serious cause for concern as the Secretary of State rules out further financial aid and effectively leaves the Automotive and other strategic industries to fend for themselves when it comes to investment. The collapse of car sales in June following the demise of the scrappage scheme and the suggestion that promised subsidies for new electric cars may be cut, will not be replaced quick enough by a government "creating" the right economic environment for business.

'We've moved on from the era of subsidies. We just have to be realistic about what's affordable.' [1]

2.4. Dr Vince Cable also said that the UK manufacturing base was no longer in an emergency and therefore direct Government support would be withdrawn. Unite would argue that manufacturing output figures from June [2] indicated only a small increase and presented at best a fragile recovery in the context of global problems which industry is currently facing particularly in the Euro Zone. Continuing support at this time is essential.

2.5. On the wider front of the Strategic Investment Fund introduced by the last government, provided a vehicle where potentially sustainable projects were likely to fail due to the unwillingness of the market to invest. The investments made from the fund were allocated through the Technology Strategy Board, the Regional Development Agencies and Scotland, Wales and Northern Ireland in order to identify suitable investments. Projects included advanced technologies and innovative facilities addressing low carbon and export potential. Unite believes such a fund is an essential element of a government’s strategic approach to industry. This view is shared by Sir John Rose, CEO Rolls Royce, who has called for [3] an industrial strategy that involves government support for technology-based enterprises

2.6. The Working Capital Guarantee Scheme and other similar schemes were aimed specifically at small and medium sized enterprises. The intention was to provide guarantees to enable banks which at the time were reluctant to lend following the crisis of 2008. Recent figures announced at the beginning of August would appear to illustrate that major banks were returning to profit and that such guarantees may no longer be necessary. However the evidence of the guarantees themselves was that this did not pump prime bank lending as intended and that stronger intervention in the banking industry is necessary to ensure that the industry fulfils its obligations to the economy at large and not simply its own shareholders.

3. Government and industry relationship with the banks

3.1. Unite takes the view shared by many economists that the global financial crisis was brought about by the irresponsible actions of investment banks across the globe. The consequences of those actions have been most severely felt by the populations of different countries across the globe and the current remedies being instigated by the UK and other governments are, in our view, likely to hit hardest at those least able to afford it.

3.2. One of the opportunities that the crises of the last 2-3 years has produced in the UK is the part nationalisation of two of the countries largest financial institutions. The government share in the Lloyds Banking Group and RBS provides a different relationship to that prior to the financial collapse in 2008. Unite does not believe that the government has taken sufficient advantage of its potential influence in the strategy of these banks regarding business lending.

3.3. The failure of the banks to provide access to businesses to loans and investment funding has slowed down the recovery and risks thousands of jobs being caught in a double dip recession through the impact of public spending cuts and a fiscal policy aimed at the most vulnerable in society.

3.4. Unite has called for the banks to be persuaded, by whatever means are at the disposal of the government, to improve the accessibility of investment funds. The government in the Treasury paper, "Financing a private sector recovery", acknowledges that access to appropriate finance will be key to ensuring that businesses are able to survive and expand. This is not only about new finance but also re-financing existing loans and whilst major corporate entities may have access to alternative finance, small and medium sized enterprises are far more vulnerable. It is inconceivable that a government which is reliant upon the private sector to secure an economic recovery fails to maximise the opportunities to businesses to access funds needed. SMEs make up 99% of all UK manufacturing businesses [4] and account for over 50% of the manufacturing population.

3.5. Recent profit figures from the major banks suggest that in part the growth in profit is due to the increasing differential between the cost of bank borrowing and the level of interest charged to borrowers. This higher cost of borrowing for business has meant that SMEs in particular have found it increasingly difficult to obtain finance at a viable level. An independent survey conducted on behalf of the Institute of Chartered Accountants by Ipsos MORI in 2009 [5] found that SME businesses are finding it harder to access capital, but opinions vary as to the severity – from ‘fairly difficult’ all the way through to bank lending having ‘come to a standstill’. The report found that relationships had deteriorated between businesses and banks. This was largely believed to be the fault of the banks being less supportive and existing direct relationships weakening, for example as branch managers’ decisions on funding are countermanded by head office. Banks are now treating new clients cautiously, and are becoming more stringent with existing clients.

3.6. Research [6] has confirmed that complaints to the Financial Ombudsman about the lack of availability of bank loans to small businesses have risen by nearly 120% over the past year. At the same time UK banks are reporting bumper increases in the first half year‘s profits for 2010.

3.7. Unite believes that responsibility lies in part with government to repair the damage done and improve these relationships. The direct influence that government currently has in two of the largest UK banks provides a direct opportunity which, to date, government has declined to exercise.

4. A national strategic investment bank

4.1. Neither the previous government nor the present Coalition has so far been prepared to commit the funds necessary to provide a source of funding which would guarantee that viable businesses could access investment funds crucial to the strategic economic needs of the country.

4.2. Unite has consistently called for National Investment Bank funded to a level of £13 billion which would enable the government to pump prime strategic manufacturing industries which meeting the demands of government. The case of Sheffield Forgemasters was a clear example of how government funds should have been used. The circumstances of this case have been well documented and Unite regrets that the current government were not prepared to honour the commitments made by the last government prior to the election. However the case serves to make the point that government, through selective intervention, can play a major part in assisting sustainable companies to expand and develop centres of UK excellence in a global market.

4.3. Unite supported the TUC proposal in its submission to the March 2010 budget which argued for a green investment bank. The TUC called for a new strategic investment fund, borrowing from the French model where an independent public sector body takes long-term minority stakes in strategic companies, with a view to supporting their development into world class players, building the British economy, reducing our balance of payments deficit and providing high skill, high value jobs.

4.4. Some companies need to make investments that a risk-averse banking sector will not support. If those investments are in sectors such as green technology, where the outcomes are not proven, it may be understandable that regular banks will not take such a risk. In such obvious cases of market failure, rival economies have industrial investment structures supported by government. This means that entrepreneurs with good ideas in strategic sectors with high start up costs take those ideas abroad – and other governments reap the economic benefits. The TUC demand for a Green Investment Bank to support the growth of a world class green sector would support the UK manufacturing base and help to protect our environment, both at the same time. The previous government responded positively to this proposal in the March 2010 budget and announced the intention to establish a Green Investment Bank operating on a commercial basis and involving both public and private sector capital. The Government undertook to invest up to £1 billion from the sale of mature government-owned infrastructure-related assets and would seek to match this with at least £1 billion of private sector investment

4.5. The proposal from the Coalition government in its emergency budget in June 2010 was to put forward detailed proposals on the creation of a Green Investment Bank to help the UK meet the low-carbon investment challenge but not until after the comprehensive spending review in October. Whilst such a proposal is welcome, the delay in detailed consideration leaves Unite with fears that this will amount to too little too late.

4.6. Having studied the government‘s more recent publications, "A strategy for sustainable growth" (DBIS July 2010) and the consultation on "Financing a private sector recovery", Unite is not convinced that the necessary government support for manufacturing will be forthcoming and that the UK will return to the wholesale reliance on the private sector and market to deliver the support for economic growth needed by manufacturing now.

5. R&D tax credits

5.1. The R&D tax credit was a key part of the last government’s strategy to boost business R&D. Following extensive consultation with business, it was introduced in 2000 for SMEs and extended to large companies in 2002. The tax credits are designed to reduce the real cost of companies’ investment in R&D and raise the firm’s private return towards the higher rate of return to the economy as a whole.

5.2. The UK’s investment in R&D has, since the late 1980s, been low compared with other major developed countries. The last government set a goal to raise overall levels of R&D in the economy from the current level of 1.9 per cent to 2.5 per cent of Gross Domestic Product (GDP), by 2014. Raising UK business R&D should be a government priority; the target will only be met if private sector investment in R&D matches growth in Government investment.

5.3. The business community has overall been very supportive of the R&D Tax Credit facility with a CBI survey in 2008 reporting that 60% of companies surveyed said that their UK research and development activities would have been adversely affected if the tax credit had not been available. However Unite’s own experience has been less positive due to the uncompetitive nature of the UK scheme. As an example when Ericsson decided to close its site at Ansty in Coventry last year part of the decision was affected by the alternative tax credit system offered by the Canadian government which had the effect of reducing the notional hourly costs at the firm’s Montreal site.

5.4. Unite believes that the UK system could be improved not only in quantity but also qualitatively by the scheme being applied in a more flexible manner.

6. UKTI and the Export Credit Guarantee Department (ECGD)

6.1. To limit wasteful duplication and achieve national coordination, there should be a dedicated office at UK Trade and Investment (UKTI) to work with LEPs and devolved administrations to lead and coordinate efforts to attract foreign investment. UKTI should work with LEPs to map out all UK activity designed to attract foreign investment and should take an active role for all major inward FDI opportunities to prevent ‘bidding wars’ between them.

6.2. The UKTI must convert its knowledge of different markets and its wide-ranging influence into concrete export opportunities for business.

6.3. The ECGD only provides a small but significant level of support to UK exports, principally by way of guarantees and insurance. By sector over 72% of support goes to Airbu s, 26% to civil air transport ( Rolls Royce etc), and the remainder to other aerospace and defence. Not only is the ECGD in competition with the private sector but with other E xport C redit A gencies (ECAs) wh ich are often more generously supported by their governments.

6.4. The ECGD's annual report is laid before Parliament and it attracts considerable interest from MPs, S elect C ommittee s , and NGOs, because as an agency of government involved in assessing credit risk management, it is also responsible to Ministers for implementing government policy in a number of areas such as b usiness p rinciples, sustainable development, anti - bribery and corruption, supply chain standards, environmental audits and reporting, sustainable development in government, freedom of information. In an OECD report a few years back ECGD scored well amongst internati onal comparators in terms of it s operation and commitments to social and environmental issues. By comparison the same report identified that where export credit assistance was provided by the private sector the same considerations often did not apply. This distinguishes the ECGD from alternative private sector sources of credit insurance.

6.5. The ECGD has benefited to some degree from the effects of the financial crisis through the erosion of private sector finance . At the same time the risk of defaults has grown. The ECGD remains over dependent on civil aero s pace despite various attempts that have and continue to be ma de to attract business from SME s. Despite this the ECGD interventions continue to grow both in the current year and 2009/10.

6.6. Given the current economic situation and w ith debt finance thin on the ground, it falls upon the ECGD to provide a significant role in the market .

6.7. Evidence that Unite has obtained also suggests that the ECGD would benefit from a more flexible approach to requests. In 2009 a company in the North East Cleveland Potash found itself with surplus stocks of potash due to the recession and were contemplating redundancies. Fortunately the company identified a market opportunity in Brazil with companies known to them and with whom business had previously been done and whose credit ratings were good. Due to the banking crisis insurance for the cargo in transit was difficult to obtain and the assistance of the ECGD was sought. This was rejected because it was not a capital project and therefore outwith their rules. It was only after much lobbying by the company and Unite that the Secretary of State intervened and ordered the department to re-examine the case concerned and check their credit ratings. This resulted ultimately in the insurance being provided and clearly provided security for a significant number of the 1,000 workers employed by the company in the North East.

6.8. Other EU Governmen ts ha ve already boosted state-backed credit guarantees to industry and Unite recommends that the ECGD be enabled to provide direct funding and bond support, and argues for the reactivation of the ECGD’s dormant reinsurance facility.

7. Conclusions

7.1. Future proposals and impact on effective government assistance

In the Emergency Budget of June 2010, the Coalition government set out a clear ambition to radically overhaul the nature of business support in England . The reform s included the abolition of the Regional Development Agencies (RDA) structure with a view to improv ing the accountability and effectiveness of business support. However, Unite believes it will be a huge challenge to carry out such wide-ranging, root-and-branch reform in a way that provides both value for taxpayers’ money and meaningful support for business. Unite acknowledges that the performance of RDAs has not always been consistent but believes that the wholesale restructuring of the support structure for manufacturing in the regions is ill timed and unlikely to provide the solutions to the perceived problems .

7.2. However, given the government’s apparent determination to proceed with this programme t he transition from RDAs to L ocal E nterprise P artnership s must be well-planned, and follow in phase with fiscal consolidation and strategic changes at the national level, and that requires consultation on whether the respective RDA region is a viable economic area for an LEP. Unite is aware that the One North East, a successful RDA, has expressed the desire to maintain the regional scope of the RDA. The government’s consultation on this transition must include the option of s upport for any individual RDA and the possibility of a ‘regional LEP’, which covers an area similar to that of an old RDA, should not be discounted.

7.3. The budget for the RDAs this year was £1.5billion. Any reduction in this budget and the abolition of a number of the national bodies set up to support manufacturing businesses will undermine the government’s overall economic approach of creating a strategy for sustainable growth.

7.4. The comparison of interventionist support from the UK government with support from a number of immediate EU competitors remains unfavourable despite the initiatives taken by the last government during the last 3 years. In the announcements made to date, Unite does not see those comparisons improving. Unite does not believe in government being responsible for supporting what has colloquially been referred to as ‘lame ducks’ of industry, however where the market fails to provide adequate support, the economic responsibility to ensure that sustainable manufacturing industry survives rests with the government. This, Unite believes, would best be achieved by a single industrial investment bank funded, in part by the taxpayer and part through private funds, if necessary drawn from the banks which the government has a major share in.

7.5. Whilst manufacturing has seen a small increase in performance over the first half of 2010, there remain serious reservations about the immediate future. It would, in the view of Unite, be a serious miscalculation on the part of government to start removing the support mechanisms introduced over the last 2/3 years under the auspices of the Department of Business Innovation and Skills. Whilst more could be done and improvements to access to the various funds being examined by the Business Select Committee in this enquiry introduced, the existing funds should be seen as the start not the end of a structured programme of government assistance to manufacturing.

7.6. It is clear that economic growth on a European and global basis is likely to be slower than first forecast at the end of last year and UK manufacturing growth is crucial to the overall recovery of the UK economy. The DBIS has already accepted this in its Strategy for Sustainable Growth [7] published in July this year. However, over reliance on the markets and private finance in the initial stages is likely to restrain growth and Unite believes that direct government assistance, both financial and fiscal, is essential to meet the business needs of the sector. This view, unsurprisingly, is not supported by the Treasury, which in its publication in the same month, argues for a preferred option of a market-led solution. This conflict within government requires to be resolved if UK manufacturing is to benefit from government led strategies to restore manufacturing as the growth engine of the economy.

7.7. Unite would further propose that a tripartite body of government, employers and trade unions be established through the DBIS to monitor and review both the efficiency and effectiveness of government funding schemes on an ongoing basis. Such a body should continue to provide expert advice to the government on strategic industrial policy for the future.

2 September 2010