The Comprehensive Spending Review and its impact on the Department for Business, Innovation and Skills


Business, Innovation and Skills Committee

Comprehensive Spending Review  

Tuesday 26 October 2010

The Rt Hon Vince Cable MP and The Rt Hon David Willetts MP

Evidence heard in  Public Questions  1-141



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Oral Evidence

Taken before the  Business, Innovation and Skills Committee

on  Tuesday 26 October 2010

Members present:


Mr Adrian Bailey (Chair)

Luciana Berger

Mr Brian Binley

Jack Dromey

Rebecca Harris

Margot James

Rachel Reeves

Mr David Ward

Nadhim Zahawi




Examination of Witnesses

Witnesses:  The Rt Hon Vince Cable MP, Secretary of State for Business, Innovation and Skills, and The Rt Hon David Willetts MP, Minister of State for Universities and Science, Department of Business, Innovation and Skills, gave evidence.

Q1 Chair: Good morning Ministers, and in the case of Mr Cable, welcome back. Can I thank you for appearing before us today? Obviously, postCSR announcement there are a whole range of issues that the Committee wishes to tease out. Can I start with a very broad question, in terms of the total funding for the Department? The Chancellor has stated that your Department has been set savings of 7.1% per annum. Overall we’re looking at a total of 25%. In terms of capital, I believe it’s virtually 50%, as opposed to an average of 29% for other Departments. Why has your Department been singled out for cuts over and above those that others have had to sustain?

Vince Cable: Well I don’t think it is, but maybe I can answer your question by putting it in context. Clearly, the Government’s agenda is dominated by the need to deal with the deficit and we have to make a contribution to that. I think it was accepted by the last Government, as well as this one. This is what’s fondly called an ‘unprotected Department’, in other words we’re not in the same position as Schools, Health and Defence. I think our settlement is very much within the same framework as those other Departments. Essentially, what’s been agreed is we have a reduction in the resource budget of 25% over the period of the spending review, which is actually very much in line with other so-called ‘unprotected Departments’. The cut in the capital spend is 44% and that incorporates the receipts we expect to receive on things such as spectrum allocation. In terms of how it’s broken down, the cut in funding on higher education is 40%, which means that the rest of the Department, on a weighted basis, is 16%. The way we like to present it-in a way that is more economically meaningful-is this: about two thirds, around 65%, of the total cut in the budget is accounted for by a reform in the way in which funding takes place. In other words, we’re replacing Government support for university teaching by graduate contribution. It doesn’t affect the level of activity, it’s not a cut in real activity, but it’s a change in the way in which funding takes place-transferring from current Government spending into future contributions by high earning graduates in a progressive way-

Chair: I’m sorry to interrupt you. We will cover higher education spending as a separate thing.

Vince Cable: I’m just trying to explain that there’s a split. There’s 65% through reform, as we described it, in terms of the replacement of Government funding by graduate contribution. About 25% occurs through efficiency, which includes various categories-pay restraint, getting a better deal on international science subscriptions, cutting partner organisations-quangos if you like-from 57 to 33, and waste reduction of various kinds. Only 10%, that’s a tenth, of the cuts that we’re making, involve cutting real activity. Those are things where we’ve consciously made a decision to prioritise-RDAs are one example, another is changing the Train to Gain logic, it will in future focus on SMEs rather than all companies, and ending the entitlement to GCE-equivalent training for people over 25. Those are choices we’ve made, but only 10% of the total cuts represent real activity. I’m sorry it’s a long answer to your opening question, but the final thing is that a lot of fine detail needs to be developed. We’re talking in very, very broad-brush aggregates. We want to work with you on that and exchange information once we’ve done the detailed work. At the moment we’re talking in very broad terms, necessarily.

Q2 Chair: We’ll probe education funding in due course. However, you have described your Department as the "Department for Growth", and yet you have taken, in percentage terms and certainly in terms of public profile, a bigger hit than other Departments. What sort of message do you think that conveys to the world outside?

Vince Cable: I don’t think they are in any way incompatible. I think it is possible, and we will continue to position ourselves as the "Department for Growth" because we’re looking at outcomes, not just inputs of Government spending. Many of the things we are taking on support the growth agenda-things I haven’t yet mentioned. We will have responsibility for the Green Investment Bank as it’s launched, and a key role in the Regional Growth Fund. We have increased, over the spending period, the commitment to apprenticeships-that’s within an FE budget that has necessarily been squeezed. There is a focus, which was announced yesterday, on innovation centres, and that will be an expanding programme of support for the socalled Hauser Centres, and a variety of other very specific initiatives that will promote growth. Growth isn’t just about spending money-it isn’t primarily about spending money-but the output you get from it.

Chair: Could I bring in Jack Dromey, then I’ll go to Margot.

Q3 Jack Dromey: Thank you very much. The biggest challenge is that of growth. It’s common ground that we need to rebalance the economy and grow the private sector. If you look at that period of 1993-1999, the last great period of recovery, the PwC figures are clear, 1.2 million jobs were created; 900,000 of them, however, were in financial services. Now you’re claiming the ability to create 2.5 million new jobs. Yet PwC has pointed to the loss of 1 million jobs-notwithstanding their estimate that there is the capacity for growth-1 million jobs, including half a million in the private sector, as a consequence of the spending review. Is PwC right?

Vince Cable: Well I don’t totally follow each step of that argument in the sense that Government don’t create private sector employment. We can create the framework within which it operates, and we plan to do that. I think it is worth noting that in the last three months something in the order of 150,000 new jobs have emerged-much of it in the private sector.

Q4 Jack Dromey: You wouldn’t want to take credit for that, would you?

Vince Cable: No, I wouldn’t.

Q5 Jack Dromey: I know your ability is legendary, but you would have had to move at the speed of Usain Bolt to be responsible for growth that was clearly the consequence of measures taken by the last Government.

Vince Cable: I wasn’t trying to claim credit for it, or apportion credit between this Government and the last one. I merely state that as a fact of life we are getting substantial job creation in the private sector on a scale which matches the expectations you have described. Our job in Government is to create the framework for it. In terms of the 19931999 period, the whole problem with that period-as you know from the exchanges we’ve had-is that it was based on a completely unreal economic model. It was based on excessive leverage, in households particularly.

Q6 Jack Dromey: Sorry to interrupt, but is PwC right when they predict half a million job losses in the private sector as a consequence of the spending review?

Vince Cable: I don’t know, I haven’t looked at the detailed analysis and the multipliers involved. Clearly, there obviously is a private sector supplier role in relation to the public sector, but I haven’t gone through the arithmetic.

Q7 Jack Dromey: Just to press you further on this, in terms of the methodology of the Government. Communities and Local Government-their budget will be cut by 27%. CLG spends £38 billion on procurement and £20 billion on small and medium enterprises. Has your Department conducted an impact study of what the cuts in the CLG budget will mean in terms of impact on procurement and therefore job losses in the private sector?

Vince Cable: Well, we are looking at certain specific areas where procurement decisions will have a genuine impact. For example, one of the decisions I made last week was establishing a skills group to try to absorb as many as possible of the advanced manufacturing skills that would be displaced from the defence sector.

Q8 Jack Dromey: Has a study been conducted? Because your expensive counterpart in CLG has not conducted a study, I’m asking if BIS, with its particular responsibilities for growth, has conducted a study. Do the Government have any idea what the consequences will be of a 27% cut in the CLG budget for the private sector?

Vince Cable: As part of the growth analysis that we’re conducting in this Department, in conjunction with others, we are looking at the sectoral impact of what’s happening in the economy and future growth. That includes construction, which is clearly impacted by Government decisions, so as part of a wider picture, we’re undoubtedly looking at that. I think that the premise of your question, which is that the private sector is recoiling from the impact of Government spending cuts, is not compatible with the feedback we get from all the private sector organisations we talk to. I was with the CBI yesterday. They’re only one of several, but the FSB, the Institute of Directors and Chambers of Commerce all acknowledge that the starting point in Government policy has to be sorting out the Government’s finances. These are private sector organisations, which represent many of the companies you’re describing as being worried. Their overriding concern is that we sort out the Government finances. They expect, rightly I think, that there will be substantial private sector growth in employment.

Q9 Jack Dromey: If you look at house building, the House Builders Federation have been absolutely clear that the consequences of the stimulus measures that were taken over the last two years, have been to see 100,000 homes being built, effectively sustaining much of the industry through a very difficult period. That programme is starting to run out. What are the stimulus measures that will govern what will happen over the next two to three years? The infrastructure projects are very welcome but they have timelines of five, 10, 20 years. Could I ask this related question-are you lashed to the mast? If the evidence is that growth slows in 2011, do you believe that Government should adjust, including additional stimulus measures, to sustain growth?

Vince Cable: On the latter point, I think what’s absolutely crucial is that we have clear plans that people believe in and are credible and don’t waver every month according to the latest batch of numbers. That’s the purpose of the spending review-you get a four-year time horizon over which to operate, and we’re sticking to that. Obviously there are instruments that can be used to help sustain demand, and monetary policy is the most obvious area for that and the Government have been quite explicit about recognising the need for it.

Jack Dromey: Which would be welcome, because you don’t want to become the "Department of Decline".

Vince Cable: No.

Chair: Brian Binley wishes to come in before Margot.

Q10 Mr Binley: Welcome Ministers, it’s good to see you. It’s always entertaining to listen to Jack Dromey, who has a specific point of view and puts it very effectively. It was well done. But isn’t the truth of the matter that Governments never, ever create jobs-except ones that cost the taxpayer a great deal of money-but that the private sector creates the jobs. You are absolutely right to say that it is our job to create the atmosphere in which they work. The truth of the matter is the 300,000 jobs in the last quarter was about a general upturn rather than about any Government initiative of any kind. Is that fair to say?

Vince Cable: It is. I think, in terms of the concept of Government creating jobs, one of the things we do accept is that most of the jobs that will be created will be in the small-scale enterprise sector. Historically that’s been the case, and many of the things that Governments have to do relate to making it easier for entrepreneurs to start up businesses and expand. This is partly a function of regulation and making that less onerous. It is partly a question of taxation, and the Government have brought in measures on national insurance in relation to small companies, and just generally creating an environment. Credit flows through the banking system are also absolutely critical to small-scale enterprise growth. Those are the policy instruments, rather than direct Government spending and direct Government intervention.

Mr Binley: I am grateful to you.

Chair: It is perfectly legitimate to have a debate about the respective role of the private and public sector in meeting Government employment targets, but I would just like to perhaps refocus on the budget. Margot, you wish to come in.

Q11 Margot James: Thank you, Chairman. Secretary of State, you gave, in your introductory answer, a fulsome account of how the Department has approached the challenge of reducing expenditure by so significant an amount. I think this Committee should be delighted that you’ve been able to make these reductions without affecting the actual project delivery by more than 10% of the total, which must be good news. Could I just bring you back to the administration budget? That part of the budget is to be reduced by 40% and in other Departments the average, I think, is 33%. How is your Department going to manage that reduction in the administration part of your budget?

Vince Cable: I think it will be very tough. We don’t underestimate that, but it seems to me that the key economic Departments-ourselves and the Treasury, among others-should set an example in terms of operating Departments as efficiently as possible. One of the earliest things we did within the Department was to institute a voluntary redundancy programme, to make sure that this whole process took place in an orderly way and with the consent and support of staff. So we sustained morale and we have a very clear focus on operating both the central Department and the partner organisations in as efficient a way as possible. It’s not going to be easy and we don’t pretend that, but if we are going to ask for sacrifices in partner organisations and front-line delivery of service, then we have to set an example in terms of head office costs above all.

Chair: Could I bring in Nadhim Zahawi.

Q12 Nadhim Zahawi: Thank you. Secretary of State, I think I’ve got it right here, in the sense that you said one quarter of the savings is coming from the abolition of the arm’s length bodies and the quangos.

Vince Cable: They contribute part of that quarter, yes.

Q13 Nadhim Zahawi: Not the whole quarter?

Vince Cable: No.


Q14 Nadhim Zahawi: What proportion of the savings is coming from the abolition of the quangos?

Vince Cable: I can’t give you a figure off the top of my head, but we are cutting the number of partner organisations from 57 to 33. A substantial amount of savings originate there. There are other items; we include pay restraint within that general category. David has been directly involved, for example, in overseeing the reduction in subscriptions to international organisations, which we put there. There are several other elements.

Q15 Nadhim Zahawi: Can you give us that figure at a later stage?

Vince Cable: I’m sure we could.

Q16 Nadhim Zahawi: That is very kind. The comprehensive spending review talks about the 57 down to 33, and talks about the saving of £1.5 billion from abolition of the RDAs. What is the total figure that you expect to save, over and above just the RDA reduction, from the quangos? Or is it just coming from the RDA abolition?

Vince Cable: Well, we’ve included the savings from phasing out the RDAs in the final category-the 10%-because that is real activity. We would argue it’s not done in the best way but it is real activity and so we accept the fact that we are taking a direct hit on that, in terms of things that the Department does. The RDA spending features in that last category, though there are administrative overheads as well.

Q17 Nadhim Zahawi: Is it the bulk of that, would you say?

Vince Cable: It is, almost certainly, the largest saving in terms of the real reduction in activity that we’re undertaking. Some of the activities coming out of the RDAs will continue; we think the Manufacturing Advisory Service is excellent. Some of their innovation work is not done very efficiently at regional level but we certainly want to continue innovation activity, that’s why these new innovation centres are being launched. But it will build on the work that’s currently operating at regional level.

Q18 Nadhim Zahawi: I think we’re going back to the innovation centres later in the session, but just a final one on this point. What’s the gross or net reduction in head count in the Department?

Vince Cable: I can’t give you a specific figure. I have to say, as someone who’s seen this operating in the private sector as well, I think just cutting head count is probably not a sensible way to downsize operations. After all, a senior manager costs an awful lot more than a cleaner, so simply cutting numbers isn’t the best way of doing it. We are trying to reduce our administrative costs.

Q19 Nadhim Zahawi: I don’t disagree with you; it would just be good to know. What proportion of the quango employees might be re-employed within the Department? Do you have an idea of that?

Vince Cable: I’d probably need to give you a letter on that. I think there are one or two specific outsourced activities to quangos that will be dealt with within the Department. One of the points we make about the RDAs was that there were some of their activities that are perhaps best done at a co-ordinated national level. UKTI is a good example. We think this is best offered nationally, in a strategic way, rather than have RDAs competing for foreign investment and trade opportunities, so that will come back into a national structure.

Q20 Nadhim Zahawi: When will you know what sort of proportion of people?

Vince Cable: Well, as I said at the beginning, there is a detailed process now going through into what these big numbers actually mean in terms of particular operations that we do, and that will take some time. But we are very happy, once we’ve costed all these things out, to share that with you and have it held to account.

Nadhim Zahawi: Thank you very much.

Chair: Rachel Reeves wanted to come in.

Q21 Rachel Reeves: Thank you, Chair. The Financial Times reported today that the cost of winding up the RDAs will be £1.4 billion over the next four years. When you respond with the savings that are going to be made from winding up the arm’s length and non-departmental bodies, can you give us the net savings so that we can also see the cost of winding up these organisations, including the redundancy costs and what would happen with the assets?

Vince Cable: Yes, we will certainly do that. I think that £1.4 billion per annum figure was based on the assumption that the RDAs would have just continued on their previous spending path rather than, as is now the case, being run down. There will be a process-it’s quite a complex process-of terminating some of their expansions; they obviously have legal commitments and there are commitments that are not legally binding. They have assets that will have to be sold in an orderly way to get value for money. There will be administrative savings, and as you imply in your question, there will be redundancy costs too. It is a complex process, but we would certainly be very happy to share details with you as they emerge.

Q22 Rachel Reeves: On the assets of the RDAs, are you saying that they are all going to be sold, or are some of them going to be transferred, for example to local authorities, as they are assets in the local communities?

Vince Cable: Well, both of those are possible. The RDAs will manage themselves in this final and very difficult stage, but we’re not being prescriptive about how best to utilise their assets.

Q23 Rachel Reeves: So are you saying to the RDAs that they can choose how to dispose of their assets? I’m thinking of things like Tower Works in Leeds, which is an extremely important asset in the city that Leeds would like to maintain for future development rather than the proceeds going back to the Treasury.

Vince Cable: I think the honest answer is we haven’t yet got to the stage of working out in detail how you manage this asset disposal process. We’ve only had a few months signalling to the RDAs that they’re going to disappear in their existing form. The objective will be to get value for money, and how the asset disposal process takes place could happen in varied ways. You may be right that there are sensible local solutions. There is the issue about how the RDAs, as they’re phased out, relate to the Regional Growth Fund; there are projects that may overlap. There are all kinds of possibilities, which we will be working through.

Q24 Rachel Reeves: Is there an option still on the table that those assets can be kept in the region to fund local economic development and for future economic development and regeneration? Or are they all going to be sold and the proceeds returned to the Treasury, because I’m getting conflicting messages from what you’re saying?

Vince Cable: Well, I’m not giving you conflicting messages, I’m just saying we haven’t come to a final resolution about how this process takes place. There will be a White Paper on subnational growth, which will be issued in a few weeks, which will give more guidance, not merely on how the new local enterprise partnerships will operate, but how this will link in with the phasing out of the RDAs, and we may be able to give some indication about how we answer the questions you’re posing. Certainly we haven’t got a detailed blueprint about how this process happens.

Q25 Chair: As you know we’re doing an inquiry into RDAs and I would just like to broaden the discussion. We are talking about efficiency savings and there are other areas where the Department has to make efficiency savings. Can you give us any specific examples where you found any? And a general question-are you dependent on those efficiency savings in order to deliver your Department’s financial settlement?

Vince Cable: Well yes. A substantial amount of the savings we’ve identified are of that form; roughly a quarter are what we would describe as efficiency in a broad sense. I’ll just give you one example, and David may be able to elaborate a little. One way in which things work very inefficiently at the moment is the way in which central Government relate to further education. There are a whole set of different quangos overseeing further education colleges, duplicating each other’s work, duplicating funding streams. We have agreed, as part of the comprehensive spending review, that that whole landscape should be considerably simplified, and we will make savings as a result of that.

David Willetts: If you’d like some other examples, Chairman, of the kind of efficiency savings that we’re envisaging within the Department. All our staff in central London are going to be moved into the single building at 1 Victoria Street. At the moment they are in at least one other building. We have a range of different ICT contracts, held by different BIS organisations. We are trying to negotiate a new, better ICT contract. There is a lot of that going on, which we regard as simple good practice, where there are efficiency savings to be made within our direct departmental budget.

Q26 Chair: Could I clarify whether those efficiency savings have been factored into your departmental budget already?

Vince Cable: Yes, that’s part of the settlement.

Q27 Chair: If there were to be further efficiency savings found, would they be ploughed back into the areas that they had come from, or used in other areas of your Department budget or just go to a central pool?

Vince Cable: I think one area-again, David can elaborate on this-where there is an incentive to go beyond those that have already been factored in, would be in the science budget. As you know, we have agreed a flat cash settlement for science, but there is also a commitment to make substantial improvements in efficiency and those can be recycled. If it’s done in the right way and we’re able to achieve them, this would produce some real growth.

Q28 Chair: I see you’re scheduled to save something like £324 million a year in the science budget. If you make savings over and above that through efficiency will that go back into science?

David Willetts: There is a ringfenced science budget of £4.6 billion and any efficiency savings we make within that stay within the ringfenced cash budget so it enables us to generate more actual scientific research and output. That’s one of the great incentives you get as a result of this ring fence.

Q29 Chair: So efficiency savings will actually be recycled within the budget. You can effectively redistribute administration into front-line science research?

David Willetts: Within that £4.6 billion science budget, there is a separate set of savings specifically on some of the administrative costs of research councils, but within the science ring fence of £4.6 billion we believe that Professor Wakeham’s proposals for efficiency savings will be very fruitful. All the money that we save stays in that ring fence and enables us to deliver more science output, yes.

Chair: Right. Can we just look at asset sales for a moment? I’ll bring in David Ward.

Q30 Mr Ward: Good morning. I’m on the same line really-to do with the overall package and where any savings that are made will in fact find themselves. There was some reference in the CSR to the possibility of asset sales, and the Tote was maybe an example. First of all, are there assumptions built into the amount that would be generated from asset sales, in terms of the overall financial package?

Vince Cable: It breaks down into several components. The general position across Government is that if large asset sales are realised this goes back to deficit reduction. There are a couple of exceptions that apply to us, one of which, in terms of capital spending, is that it’s been agreed that some of the proceeds from spectrum sale would come back into funding capital. The other is in relation to the Green Investment Bank, where we have a commitment from the Treasury to provide £1 billion up front to launch this institution. It could operate on a bigger capital base at the beginning if we’re able to realise revenue from asset sales that are related to environmental activities, and we’re talking to DECC and the Treasury about how that process is managed.

Q31 Mr Ward: Obviously it would not be wise to mention possible sales values, but have they been built into the budget in terms of making it balanced and estimates made of what would be generated from sales? Is that part of the overall package?

Vince Cable: It’s obviously not possible to predict the sale value of particular assets. One doesn’t know what the market position will be several years hence, but the capital budget has been adjusted for what are thought to be plausible figures for how much we could realise from spectrum allocation, for example. They’re notional figures, but clearly market conditions vary enormously.

Chair: Thank you. Have you finished, David?

Q32 Mr Ward: What I think what we’re all trying to dig up, really, is what will go. Certain assumptions are being made, either in terms of efficiency savings or indeed of asset sales, and what is the thing that will go? For the asset sales for instance, will that money go back in to the consolidated fund or will it remain within the BIS budget, and what are the consequences of that in terms of what you are attempting to do through BIS?

Vince Cable: As I’ve said, it’s a complex answer; there isn’t a simple yes or no answer to that. The general approach across Government is that asset sales contribute to deficit reduction, but none the less there are particular exemptions that are being made and I’ve identified two of them.

Chair: Thank you. We have already covered RDAs at some length, but I just wish to bring Jack Dromey in now on a couple of other angles in respect to quangos.

Q33 Jack Dromey: Just to follow on from the answer you’ve just given, Secretary of State. The RDAs currently have very considerable assets-including, for example, 20 in the West Midlands through Advantage West Midlands-identified and purchased for the purposes of industrial development focused on renewables. Will it be local land for local use or will there be a Treasury land grab?

Vince Cable: Well, I don’t think that the phrase "Treasury land grab" puts this in a neutral way. We haven’t yet got into the business of asset disposal on any scale. One thing I have to say on a precautionary basis is that it may well be true in some of the RDAs that the liabilities exceed the assets. There have been a lot of very bad decisions, which may have that unfortunate consequence and until the process starts we can’t really make informed estimates about what the total outcome will be.

Q34 Jack Dromey: Can I press you further, Secretary of State? This goes to an absolutely fundamental issue in terms of both savings and indeed potential from the Treasury’s point of view. The RDAs have immense assets. Are you telling me that there has been no discussion yet between your Department and the Treasury in terms of what happens to those assets? And if there has been, what are your conclusions?

Vince Cable: Well, as I said, they do have large assets and they also have large liabilities and it’s not clear yet whether they have a net asset value or net liabilities. Until their balance sheets are unwound we won’t know the answer to that question. The discussion we had with the Treasury was that, at the moment, we are trying to limit their new commitments, which is a difficult process in itself because they were in the process of negotiating many new projects. We’ve been trying to limit their new commitments, trying to understand the extent to which their new commitments are legally binding, and then there is a process beyond that which is sorting out their balance sheet. That is quite a long time ahead and it’s a tricky process.

Q35 Jack Dromey: In conclusion, in terms of the £1.5 billion, how does that break down, for example in terms of the costs of redundancy and the costs of centralising certain functions?

Vince Cable: I think Rachel asked me earlier about redundancy costs and I can’t give you a precise figure. Clearly there will be a redundancy budget, we fully understand that, but much of the saving will arise as a result of the RDAs not doing things that they are currently doing. But yes, there will be a redundancy cost.

Q36 Jack Dromey: And one quick related question. Start-up costs: what is your calculation as to support that might be given to the LEPs in terms of start-up? And has that been costed against the £1.5 billion saving?

Vince Cable: Well, we’re not providing a budget for LEPs. They can bid for money from the Regional Growth Fund for example. But the White Paper on subregional growth, which is coming out shortly, will indicate some of the parameters within which the LEPs will operate. We certainly don’t envisage large start-up costs, funded by Government-offices, staff paid for by the Government. Those days are over.

Q37 Jack Dromey: The local authorities will have to do it themselves?

Vince Cable: If the local authorities feel that this is a useful vehicle they may well wish to contribute.

Q38 Chair: Has there been any provision in the spending review for DCLG to provide that funding?

Vince Cable: I can’t speak for Mr Pickles. I’m afraid I can’t answer that question for him.

Q39 Nadhim Zahawi: We’re taking evidence, obviously, on the RDAs and, if I remember correctly, Minister Prisk said that the RDAs are all developing their plans of unwinding, to March 2012. I’m just coming back on Jack’s point. That plan presumably includes what will happen to the assets and liabilities so each one of the RDAs is having to submit a plan to Minister Prisk. So within that there is a plan for the assets.

Vince Cable: Yes, but we haven’t seen those and that’s why I’m not able to give precise answers to the questions I was given earlier.

Nadhim Zahawi: Right, thank you.

Q40 Chair: Could I come back to my previous question? Given the role of LEPs in rebalancing the geographic economy, and given its role in the wider strategic objective of rebalancing the private and the public sector, and mopping up the unemployment that will arise from the public sector, is it not odd that nowhere within the process for setting up LEPs, which are key to achieving these outcomes, do you appear to know whether there has been any funding, either requested or allocated, in order to deliver this.

Vince Cable: Sorry, I misunderstood your earlier question. No, we’re not talking about allocating Government money in order for these LEPs to get off the ground. They will have to consider how they want to operate and there are potentially several sources of funding open to them, but there is no Government budget being rolled out in order to launch these LEPs; it will operate in a rather different way from the RDAs, which were Government institutions, funded by Government.

Q41 Chair: So what you’re saying is that there is actually no Government support for the setting up of LEPs or the preparation of the application for the regional growth funds, which are necessary for them to actually achieve the objectives they’re being set up for.

Vince Cable: Well, they’re quite different. The Regional Growth Fund is a central Government body, and we’ve already indicated in the spending review that it will be substantially funded from the outset. I think we’re talking about £1.3 billion-

Q42 Chair: With respect, that’s not the issue. We know that. The fact is that if LEPs are to access money, in order to deliver on their objectives of assisting and developing industry and the private sector within their area, they’re going to have to have resources to do that. You can’t just make an application to the Regional Growth Fund on the back of an envelope; it has to be prepared, it has to be researched, and so on and so forth. It’s quite a skilful job. But it does appear that nowhere in your Department or the DCLG is there money allocated to do that.

Vince Cable: That is correct but I think you’re underestimating the creativity of these local groups coming up from the grass roots. They’ve already, in several cases, submitted highly professional, well thought-through proposals as to how they can operate simply by pooling their own initiatives-local councils and local businesses-and that’s where we expect the drive to come from. Not from central Government funding.

Q43 Chair: If they are to continue to access this fund then they have to develop permanent funding streams in order to do the preparatory work to do so.

Vince Cable: They will have to do that, yes.

Chair: Thank you. Rachel Reeves.

Q44 Rachel Reeves: Thank you, Chair. In Yorkshire, all the LEP bids have put in that they want to set up a community interest company-Yorkshire Enterprise Partnership-to do some of the administrative and some of the crossregional work. But to be able to set that up the Chief Executive of Leeds City Council said quite clearly that they would need some funding from Government, because with cuts in local council budgets of 27% there’s just no way that that could be funded by local authorities. You say that there are several sources of finance available for LEPs. Could you outline what those sources of finance might be?

Vince Cable: If it’s a partnership between local businesses and local authorities, which is the process that we envisage, local authorities may wish to support them directly. The Regional Growth Fund is another source. If there are appropriate projects they will in due course be able to go to the Green Investment Bank. There are various European sources of funding which also have to be factored in. So there are potentially-if these bodies are creative and imaginative-different ways in which they can raise money without resorting to central Government. I’ve said a couple of times that we will be setting out, in a White Paper on subregional growth, how we envisage this process getting under way. I understand your wish to get clear answers at this stage, but we have to take this step by step.

Q45 Rachel Reeves: But it’s very difficult, Secretary of State, for local enterprise partnerships to put in proposals of how they’re going to set up and run, and very difficult for them to work out how they’re going to bid for regional growth fund, when they have no idea what is expected of local enterprise partnerships and what finances they might have to be able to set up and run. The Yorkshire bids have been very clear that they need this community interest company, Yorkshire Enterprise Partnership, to support them, and until today I had not heard that that was not a viable option. But you’re saying that no funding would be available for such a panregional-

Vince Cable: No, I’m not giving you specific answers because the whole process has not yet been mapped out in detail. I’m not making commitments of Government funding, for the reasons I’ve given you. We haven’t even got to the first stage of deciding which of the LEP proposals are viable, but that’s very close, and there will be an announcement made to Parliament very soon about that. The second step is to sketch out how these new LEPs will operate. I fully appreciate that as a local MP you want to know how your particular LE proposal will actually get launched as quickly as possible and actually start doing things. We have to do things in an orderly way and, as I said, the White Paper will help provide answers to some of those questions.

Q46 Rachel Reeves: I would suggest that a more orderly way would have been to publish the White Paper before local enterprise partnerships had to put in their bids.

Vince Cable: No, I think what’s happened, as a result of doing things the way we have, is that we’ve produced some very creative approaches. I think when the list of proposals is announced you’ll find that some of them are very good and very creative, precisely because we didn’t set boundaries within which these new concepts could be launched.

Chair: Well, we will make a judgment on that in due course. Can I just go on to the impact of the CSR on specific functions of the Department, and bring in Brian Binley for the first question?

Q47 Mr Binley: Thank you, Mr Chairman. Secretary of State, one of the specific functions of the Department is to deal with the Enterprise Finance Guarantee Scheme, as you well know. Indeed in your submission to our inquiry, it was stated that "the long-term market failure in the provision of debt finance to credit-worthy SMEs" is a real problem. I note from the report that by the beginning of August, 11,245 businesses had been successful in getting a loan from that fund, and the total amount loaned is just under £1 billion. That is a very, very minute fraction of the businesses that are crying out for working capital and simply not getting it in other ways. What pressure have you put on the Treasury to talk with the banks, to make sure that small and medium-sized businesses do get the finance they need to finance growth-which as you know is a very serious issue for small businesses-and not returned until they have retained profit, which comes much further down the line?

Vince Cable: I think you’ve identified what is potentially the biggest constraint on economic growth going forward, which is the availability of credit on reasonable terms to successful small enterprises. There will be scope within the capital budget that we’ve negotiated to operate the Enterprise Finance Guarantee Scheme, possibly on an enhanced basis. We’ll be giving a response very soon to the Green Paper that we issued on business finance-you may remember it from before the summer. We’ve now got the answers to that. We will be saying how we will take forward the Enterprise Finance Guarantee Scheme when we do that. In terms of the broader approach of the banks, I meet heads of banks periodically, as does the Chancellor. We meet them together. They are under no doubt about the concerns of the Government about lending in that sector. As you know, the underlying problem here is that banks are required to set aside increased amounts of regulatory capital because small-scale business activity is regarded as high risk, relatively; the amount of capital they are required to hold is significant, and this is an inhibiting factor on the supply of credit. There’s also a problem of lack of demand, but that isn’t the only reason. We have a variety of ways in which we can do this. You probably saw last week that the bankers themselves came forward with improved proposals for dealing with their small business customers, as well as a proposal for equity financing on mid-cap companies. Things are beginning to move, but I wouldn’t suggest for one moment that this problem has been solved.

Q48 Mr Binley: Let me pursue that just a little further. I know this is not your direct remit, but you are Secretary of State for Business and this is vital to the whole growth agenda in the budget. Bank lending to businesses in August of this year was less than it was for the same period 12 months ago. That is a deep concern. We’ve listened to what are very fine words-welcome very fine words-and I pay tribute to the Prime Minister’s speech to the CBI of only two days ago. But we still haven’t got the detail. What are you doing, as Secretary of State, to prise open that detail from the Treasury. To get George by the neck and say, "You’ve got to do something George".

Vince Cable: Well you describe in rather graphic ways-

Mr Binley: I do indeed.

Vince Cable: -what are currently very amicable conversations on that subject with the Chancellor. Yes, we accept that there is an issue, a serious, serious issue, with bank lending. The figures you describe are quite right; the trend is down. There is a lot of analysis going on as to why that is going down. Is it a problem of supply? Is it banks being increasingly restrictive in the way they operate, or is it lack of demand because businesses themselves have been leveraging? There is an element of both. My own view, having heard both sides of this argument many times, is that there are many good companies that would borrow more from banks if they were confident they could obtain credit on reasonable terms. There is an issue on the bankers’ side as well as on the demand side. In terms of what you do about it, we’ve now got back the conclusions of the consultation on the Green Paper. We have a variety of measures that can be taken. Some of them, like the Enterprise Finance Guarantee Scheme, are working with the grain of the market and giving guarantees of various kinds. Others may involve continuation of loan schemes-the scheme that we have with the nationalised banks at the moment. We haven’t yet come to a decision on what’s the best combination of instruments. As you quite rightly said, yesterday the Prime Minister spoke very strongly on this subject at the CBI. So did I. We are dealing regularly with the banks on this question.

It’s just worth pointing out by way of anecdote that some banks are expanding their small business lending portfolios very substantially. Some of them are finding a way of doing it. Perhaps I shouldn’t name names, but some have been more forward than others, and there may be lessons in the way they operate.

Mr Binley: I am grateful for that. I’ve been a bit naughty with those questions to you, but I did want to make the point that this is absolutely urgent and vital. I know you know that.

Vince Cable: This is urgent and important, we fully understand.

Q49 Mr Binley: And I am grateful for that. Let me go on to ask what you can do within your Department. Can I ask how much additional funding you hope to make available for the continuation of the Enterprise Finance Guarantee Scheme and what is the new expected date for applications?

Vince Cable: I can’t give you the exact sum, but as I said in my earlier response to you, we are confident that within the capital budget we have agreed there will be scope for continuing and hopefully expanding the Enterprise Finance Guarantee Scheme. We’ll be announcing precise figures of that very, very soon.

Q50 Mr Binley: I look forward to that. Can you give us any idea of what very soon means, because in Government terms very soon can stretch over a very long period?

Vince Cable: I think we’re talking about days, rather than months.

Mr Binley: I am grateful for that. Thank you very much, Secretary of State.

Chair: I will bring in Rachel Reeves in a moment. Beforehand though, there is a very specific question from Luciana Berger.

Q51 Luciana Berger: We saw in the CSR that from January the Government will offer support for low carbon vehicles through an incentive scheme offering up to £5,000 towards the cost of a new ultralow emission vehicle. Can you tell us, please, what the budget will be for this scheme and also what the definition of such a vehicle will be?

Vince Cable: The budget is operated by my colleague, the Secretary of State for Transport. He will be able to tell you exactly how that scheme will operate. It is a partnership arrangement; we’ve supported the manufacturing side of this. You’ll remember from our last meeting that I talked to you about the support that’s been given to Nissan to develop electric vehicles, and of course that’s complementary to the incentive scheme that Philip Hammond’s Department is operating. I’m not avoiding your question, but I think if you just ask him he will give you the details of how that scheme operates.

Q52 Chair: What commitment is there from the Department, apart from the funding that we know is granted to Nissan?

Vince Cable: Well, that’s the main proposal.

Q53 Chair: Yes, but is there any funding over and above that, that the Department is involved in?

Vince Cable: There will be continuing support, which will operate in a different way in future. As I said, the Manufacturing Advisory Service is one channel. While we’re talking about basic technologies, these new innovation centres will be another; that’s rather upstream, in terms of the R&D work. The Green Investment Bank is very much conceived in terms of how we can promote lowcarbon manufacturing, as well as other aspects of the lowcarbon economy.

Q54 Chair: Is there anything in the CSR that could prejudice the BIS funding for this particular project?

Vince Cable: I can’t think of anything negative, we’re very positive about this.

Chair: Right. Can I bring in Rachel Reeves?

Q55 Rachel Reeves: Thank you, Chair. I just want to come back to Brian’s important point about bank lending. The big four banks alone made profits of £15 billion in the first half of this year, and it looks like the bonus payouts this year are going to exceed, by some margin, bonuses last year. Andy Haldane, Executive Director for Markets at the Bank of England, made it very clear that banks could lend substantially more and increase the capital they put aside at the same time, if they were to pay out less in bonuses and dividends. Do you subscribe to that analysis?

Vince Cable: I think there’s quite a bit of truth in that. Andrew Haldane has written extremely well on the banking system. But there isn’t a direct link, of course, between bonus payments and small business lending; as you know, the bonus payments tend to be concentrated in the investment banking arms of some of the leading banks and the free-standing investment banking institutions. But there is an indirect link, and I accept that, and I’ve said that myself on many occasions.

Q56 Rachel Reeves: I guess my point is that many of the banks are saying that they have to put aside more capital and as a result there is not the money to lend out to small businesses. What Andy Haldane was arguing, and what I would subscribe to, is that they could do both if they were willing to reduce their bonus pots and if they were willing to pay out less in dividends.

Vince Cable: Well, certainly that’s the Government view, precisely along those lines. It is a point we have repeatedly made to the banks, whether they’re publicly owned-

Chair: Could I refocus this debate on actual CSR and support? I gave Mr Binley a little licence.

Mr Binley: Very kind.

Chair: I’ve given you a little licence Rachel, but can we actually focus on the specific issue?

Q57 Rachel Reeves: Yes, okay. On the money available for manufacturing, it says in the comprehensive spending review that the Government will be providing £200 million a year by 201415 to support manufacturing. Would you be able to tell us how that’s phased in? Will there be any money, for example, next year, in that scheme?

Vince Cable: Yes, there will. How we break that down precisely we’ll have to report to you. I think there are three basic areas where money will be spent in that general heading. The first is the Manufacturing Advisory Service. The second is the growth hubs, which are being developed by my colleague Mark Prisk, which are for growing companies, giving them support. The third is the innovation centres, which of course are not directly manufacturing activities but the technologies that lie behind them, and we want to make that whole process much more effective. But manufacturing companies will also be able to tap into the Regional Growth Fund, if they have good applications.

Q58 Rachel Reeves: So this £200 million, if it’s for the Manufacturing Advisory Service, is it more around advice than it is around grants or loans for businesses with big business plans who can’t access finance from banks, for example?

Vince Cable: Yes, and I think I’ve said on many occasions that given the overall position of the Government, and perhaps our own reluctance to get too involved in "picking winners", we don’t envisage the Government being heavily involved in lending or making equity investments in individual companies. But this can happen in particular cases’ the Green Investment Bank and the Regional Growth Fund may well involve direct involvement, depending on the strength of the application.

Q59 Rachel Reeves: You say on the one hand that the Government won’t be involved in picking winners or supporting directly, but through the Green Investment Bank, they might do that.

Vince Cable: But it would be done on arm’s length and very professional banking principles. The system that we inherited, in which you may remember there was extensive involvement, as we discussed at our last meeting, where the Government were heavily involved in supporting particular industries-for understandable reasons in the emergency we had-was time limited and that has now come to an end.

Rachel Reeves: Yes. You allowed them all to go through, apart from the loan to Sheffield Forgemasters. I remember that well, Secretary of State.

Chair: Congratulations Rachel, you slipped that one in. Right, can I turn to Nadhim Zahawi?

Q60 Nadhim Zahawi: Just so I understand this correctly, Secretary of State, the £200 million that is allocated to helping manufacturing-

Vince Cable: It’s not just manufacturing, it’s business support in general.

Q61 Nadhim Zahawi: Right. It will be the Manufacturing Advisory Service, the growth hubs that Mr Prisk is suggesting, and the Hauser Institute, which is modelled on the Fraunhofer Institutes in Germany.

Vince Cable: Those are the three main clusters of ideas, but we haven’t yet precisely worked through the numbers of what our allocations will be.

Q62 Nadhim Zahawi: That was going to be my question. How many of the Hauser style, Fraunhofer Institute style centres are you going to create? That £200 million seems to be stretching a long way to cover all those areas.

Vince Cable: Again, I think it’s an area we’re excited about, so I understand your wanting to push us for specifics. It’s the concept we wanted to get established first of all. A lot of these institutions exist already; there are very, very good centres, many of them located in or near our universities, which already take spinoffs from academics and turn them into commercial businesses and have become a centre of excellence in that particular field. So in a sense we’re building on that rather than starting something greenfield from scratch. We would certainly envisage that there is scope for new proposals, even with modest amounts of money, both in terms of current spending and capital.

David Willetts: The technology innovation centres, proposed by Hermann Hauser, do not have to be, and should not be, entirely publicly financed. I think it’s reasonable to expect businesses to make a contribution, and we see this as a research development resource for businesses. There is a Government role, but it’s not exclusively us.

Q63 Nadhim Zahawi: So you’ll be using that money to leverage bigger money from elsewhere?

David Willetts: Correct.

Q64 Nadhim Zahawi: Can it stretch to helping existing SMEs or just new start-up ideas?

David Willetts: The way we see these developing is that, as the Secretary of State said, there will be some projects already under way in universities, or perhaps developed by RDAs, that can be taken over and become a crucial technology innovation centre. There will be some that start completely afresh, that are new initiatives, but we very much hope to get a mix of corporate sponsorship and backing alongside public money in all of this.

Nadhim Zahawi: Thank you very much.

Chair: Can I go on to Brian Binley on digital infrastructure?

Q65 Mr Binley: Thank you Mr Chairman, I am very grateful to you and I will turn to the page in due time. What page are we on?

Chair: Ten.

Mr Binley: Thank you very much. Right, digital infrastructure. I’ve given you a little time to think, Secretary of State. Can you tell us how you will fund the £530 million you intend to invest in the roll-out of superfast broadband? And can you tell me if you think it’s wise to intervene with public funds at this time, before the market has had a chance to fully develop? There is some serious concern about this within the industry, as you know.

Vince Cable: Well, our colleague Ed Vaizey isn’t here to deal directly with that. He acts as a bridge between our Department and DCMS. The reason why the Government are involved with this is that there is a market failure in remote areas; the market simply won’t deliver a universal, digital, superbrand, superfast system, and that’s why the Government are intervening to expedite it. Of course, most of the investment in the digital infrastructure is coming from the private sector.

Mr Binley: Absolutely.

David Willetts : If you look at, say, Cornwall, where there’s recently been an announcement, I think that is a good example of how there is some public money, but there’s equally European Union money and there’s also spending by BT. You can put together partners.

Q66 Mr Binley: I am grateful for that. We do need some answers for our report, as you will appreciate; perhaps you could get Ed to write to us in order that we have those answers.

David Willetts: Yes.

Q67 Chair: Your responses have been vague. Can you give us an analysis-not at this moment, but if you could let the Committee have one-of where the balance of funding is going to come from, both in terms of departmental support and private sector support, and if there are any areas which appear to be not covered?

Vince Cable: Do you mean on digital or generally?

Chair: In the rollout of superfast broadband.

Vince Cable: Yes, we will try to substantialise that.

Chair: Can we go on to the Regional Growth Fund now? Obviously we’ve touched on it before, but there are some specific questions that need to be asked. I’ll start with Rachel Reeves.

Q68 Rachel Reeves: Thank you. Can you tell us how the funding is organised for the Regional Growth Fund, between BIS and the Department for Communities and Local Government?

Vince Cable: There is a common pot of funding. We’re not controlling departmental streams of spending. It’s a pot, and there’s additional money being put in as a consequence of the spending round. It doesn’t operate on the basis of departmental silos.

Q69 Rachel Reeves: Of the ₤1.4 billion, how much of that comes from your Department?

Vince Cable: We don’t think of it in those terms. A pot of money has been allocated under the spending review, in which different Departments have an interest, but funding streams don’t operate in the way you’ve described. We’re starting from scratch, trying to create a new institution, with a specific mandate, with Government backing.

Q70 Rachel Reeves: So the Regional Growth Fund, chaired by Lord Heseltine, will that be under the auspices of the Department for Business, Innovation and Skills, or Communities and Local Government?

Vince Cable: Quite a lot of the technical work and the admin work will certainly be done in my Department, but a lot of this is necessarily collaborative.

Q71 Rachel Reeves: I just wanted to understand whether it is a BIS responsibility, or who leads on it? Will it be you?

Vince Cable: My understanding is that we will be doing a lot of the background heavy lifting in terms of looking at the projects, and I guess we will be reporting to you in Parliament, but clearly a Department has to do so and we will do that. A lot of this is collaborative and cross-Government.

Rachel Reeves: Okay.

Q72 Chair: I’m slightly puzzled, because I thought the whole purpose of having Lord Heseltine and his team was to actually make those assessments themselves, independent of the Government Departments?

Vince Cable: That’s quite right. But there will be an awful lot of technical work looking at individual cases; the board, which they will sit on, will have an oversight of it.

Q73 Chair: They make the decisions, do they not?

Vince Cable: They will make an evaluation of projects, and make recommendations; we’ll be using the resources of the Industrial Development Board as well.

Q74 Chair: Where will they make the recommendations?

Vince Cable: There will be a board that will oversee the Regional Growth Fund.

Chair: Yes, I know that.

Vince Cable: That will make the final decisions on how the funding is allocated.

Q75 Chair: That’s the point I’m trying to get at. Will that board make the final decisions? Because you seemed to imply that BIS and DCLG might have a role.

Vince Cable: I’m talking of different levels of operation. A body will, in the final analysis, have to sign off on big investment decisions. There’s a lot of technical work in terms of looking at the projects as they come in and preparing them and making sure they’re properly vetted, and a lot of that administrative, technical work will be done in my Department. As I say, it will be collaborative. The governance structure, which I think is what you’re getting at, the decisionmaking structure, is one of the issues that will be covered in this White Paper on subregional growth, which is emerging very shortly.

Q76 Chair: As of this the moment, it appears to be a very confused process.

Vince Cable: No, it’s not confused. It’s not yet been described publicly; we’re working on how this will operate, and in due course, when we publish that paper, very soon, you will have answers to a lot of those questions.

Q77 Chair: I was going to say, with respect, if this is a public description, then I can only say I am confused.

Vince Cable: Well, I’m not sure why you should be confused. We’re making the point that within short order, the Government have assembled a substantial amount of money in order to deal with the very specific problem of areas that are very badly hit by a rundown in public sector employment, and other growth difficulties. We’re committed to putting in those resources; different Government Departments are working collaboratively on it. We have access to Lord Heseltine, and to Sir Ian Wrigglesworth, who has helped us in that process. The precise mechanism by which decisions will be made, which is the question you’re asking me, we will describe in due course. Clearly, before the fund starts operating, you will know how that happens.

Q78 Chair: The other issue is that this is Government money. Who is going to be accountable for it?

Vince Cable: If you’re talking about direct response to Parliament, and parliamentary accountability, I will be answering your questions in Parliament.

Q79 Chair: So it will be BIS?

Vince Cable: That’s my understanding.

Chair: Okay. Can I bring in Margot James?

Q80 Margot James: Thank you, Chairman. The CSR sets out the Department expenditure limits for the Regional Growth Fund over the review period. Can you tell us why the resource limits run for three years whereas the capital limits cover only the two years up to the end of 2013?

Vince Cable: I can’t give you a precise answer. My understanding is that the fund is being allocated over a threeyear timeline. It’s a good question; I will try and find out why there is a discrepancy, if there is one.

Q81 Margot James: Thank you. We have discussed, as the Chairman says, the RDAs at some length, but can you confirm whether the Regional Growth Fund will have any obligations to continue to fund the existing commitments of RDAs, and will it have any responsibility for covering any of the wind-up costs associated with RDAs?

Vince Cable: No, it will not have responsibility for meeting their commitments, but it may be that the RDAs are working on interesting projects that will be in the interests of the country and meet the requirements of the Regional Growth Fund, and they may well inherit them from the RDAs and take them forward, if they are good projects. That will be the way it will operate. There is no question of, as I think you were implying, dumping the legacy costs on the Regional Growth Fund. That’s certainly not the intention.

Q82 Margot James: Would any exciting projects that the RDAs currently have in train require the support or the endorsement of any of the successor LEPs in their area? Would that be a precondition for the Regional Growth Fund agreeing to such proposals?

Vince Cable: We don’t think that’s a precondition. The LEPs will be able to come forward with proposals of their own, and that’s partly one of the streams of funding that will emanate from the Regional Growth Fund, but there’s no attempt to bind this in any rigid way.

Margot James: Thank you.

Chair: Can we move on to the Green Investment Bank, an issue which I know has aroused some excitement, not least with the Prime Minister. Can I bring in Luciana Berger to ask some questions?

Q83 Luciana Berger: Thank you, Chair. We’ve heard that the Green Investment Bank is going to have ₤1 billion of funding, "together with additional significant proceeds from the sale of Governmentowned assets". On that particular point about the Governmentowned assets, what are those public assets that are going to be sold to help capitalise the Green Investment Bank?

Vince Cable: I can’t tell you at this stage. There is discussion in Government about potential asset sales, which are related to the objectives of the Green Investment Bank, but I can’t tell you what they are at this stage and I certainly can’t tell you how much they’re worth.

Q84 Luciana Berger: Are you expecting those assets to be solely from the disposal of BIS assets?

Vince Cable: No. They will be across Government.

Q85 Luciana Berger: The spending review also made reference to the Green Investment Bank being supported by private sector investment. What commitment do you have from the private sector to invest in green infrastructure, in light of the recent announcement by the banks of a ₤1.5 billion pound business growth fund?

Vince Cable: I think in the early part of your question you said that you thought the private sector would be investing in the Green Investment Bank. That’s not the concept we have. It will be launched as a public bank, and it will invest in particular projects alongside the private sector. Certainly in the evaluation stage, we talked extensively to people and institutional investors who are very keen to involve themselves in infrastructure of an environmentally beneficial kind. There is an enormous potential investment, which this Green Investment Bank would co-finance. That would be how it would operate. There is a potential in the longer term for the Green Investment Bank to develop in different ways, but at the moment we’re starting in a practical way, with a publicly funded institution that will co-finance projects with the private sector.

Q86 Luciana Berger: The review says that it will catalyse further private sector investment?

Vince Cable: Yes, that’s what I mean.

Q87 Luciana Berger: I think that’s widely been interpreted to mean that that will bring in some private sector investment from the start.

Vince Cable: Let’s say an offshore wind project, or something of that kind; the Green Investment Bank would be one of the participants, and it would hope to leverage in a lot of private capital alongside it. That’s the current concept.

Luciana Berger: Thank you.

Chair: Can I bring in Nadhim Zahawi?

Q88 Nadhim Zahawi: Thank you, Chair. I think this is a very exciting idea, Secretary of State, and I think you’re absolutely right to focus on this, because you can see ways where the Green Investment Bank can just tip investment projects over the edge, where investors may feel the insecurity of a longterm investment-15 years-with changes of Government and whatever else, and the Green Investment Bank can take them over and make it a viable investment. I also applaud its having an independent board and being free from political interference, because I think this could be crucial, it could be a new 3i. I hope it will be bigger than just a UK Green Investment Bank, it could be a global Green Investment Bank. Will it be able to issue bonds?

Vince Cable: Not in its early stages. That begs a lot of questions about rating and so on. We don’t have a closed mind about how this institution could develop. In the first instance, that’s not envisaged, but it could develop in different ways, and while the bank is actually being established, we will look at different models about how it could develop that are consistent, among other things, with sound public finance. That’s the key constraint on what we can do.

Q89 Nadhim Zahawi: But you’re open about it.

Vince Cable: Yes, we have an open mind as to how it could develop.

Q90 Chair: Could I just ask, on that subject, when you anticipate the Green Investment Bank being open for business?

Vince Cable: It won’t open tomorrow.

Chair: We know that. That’s the whole point of the question.

Vince Cable: There are quite a lot of steps to be gone through. We envisage this activity taking place certainly within the spending review period, but whether we are talking about 12 months or 24, it would be unhelpful for me to make blind guesses. You can envisage yourself the process of establishing a soundly based public institution of this kind.

Q91 Chair: I can anticipate the problems. My understanding is that it’s not likely to be operational before 2014.

Vince Cable: That may be pessimistic, but I think you’re right to say that it will take some time.

Q92 Chair: You quoted the offshore wind industry, where potentially we could be a market leader. We are talking about a twoyear delay before the bank could be involved, and we should bear in mind that it could be a very strategic involvement. We could lose out in potentially becoming a world market leader in the absence of any alternative support for offshore wind.

Vince Cable: Those projects are happening anyway, and they’re happening quickly. You will have noticed that in the spending review one of the commitments was for port development, which will enable that industry to get off the ground much quicker than it otherwise would. In terms of the contribution the Green Investment Bank makes, you’re quite right, the world is moving, we need to do this quickly, and we will do it as quickly as we can, subject to all the necessary due diligence being done.

Chair: Right. Could I move to Margot James now, on UKTI, something that seems to have not been on the CSR radar so far?

Q93 Margot James: Thank you. If I could directly follow up on that. We are concerned by the absence of any reference to UKTI in the spending review so far. I was wondering if you share our concern about that and whether you have any knowledge of whether the budget for UKTI is going to be more or less the same as it was in the past, or less?

Vince Cable: You’re right, it is a crucially important institution, and it’s part of being open to business, attracting inward investment and promoting exports, particularly in the emerging markets where we are trying to focus our effort. It does that job very well. It will have to take some efficiency savings; again, we can share the details with you when they’ve been worked through, but we’re very confident that UKTI will be able to absorb these, and continue to provide a very good service.

Q94 Margot James: Are you expecting the UKTI to remain under the auspices of your Department?

Vince Cable: It’s a joint operation with the Foreign Office. It will remain so.

Margot James: It will remain joint?

Vince Cable: Yes.

Q95 Margot James: I wanted to follow up with a question that arose during a visit to Japan that I returned from yesterday, concerning the RDAs. The RDAs, as you probably know, had representation over there, and the intelligence they were able to provide to Japanese inward investors about the individual regions was greatly valued. I just wondered whether, given our discussion about RDAs and their removal, you felt that this was something that the UKTI could take over on a national basis. I know it’s your intention that inward investment goes up to your Department. Will we have sufficient focus on the individual needs of regions within UKTI at your Department level, to replace the expertise that the RDAs held about their own regions?

Vince Cable: I think the simple answer is yes. This is something that we have given a great deal of thought to, because it mustn’t be lost sight of in the running down of the RDAs and the building up of the LEPs. It’s a twostage operation; there is the work that the UKTI does in the field-overseas representatives: they will remain, and it will be part of a national service, as we said, working with my Department and the Foreign Office. But then there is the link that you’re pointing to, which is supposing a foreign investor has an interest in the UK, then following it through at a local level. We will have to ensure that the UKTI personnel who are based in the UK, of course are not based in London, they are based out in the field where they can relate to the needs of particular areas. I would imagine that there will be some management arrangement with LEPs so that they can be located in an area and follow these things at local level. We’re conscious of the need to link those two aspects of their work.

Margot James: Thank you.

Q96 Chair: Can I come back to the efficiency savings that you mentioned earlier? Have they been factored into your financial settlement, or if these efficiency savings are made, will they be recycled within the Department, or recycled within UKTI? Could you just elaborate further?

Vince Cable: In terms of UKTI, they are expected to make efficiency savings, and they will have a reduction in the amount they have to spend as a result of that. It is not a ringfenced budget.

Q97 Chair: There is going to be a reduction in the UKTI budget.

Vince Cable: Yes.

Q98 Chair: Have you any idea what percentage?

Vince Cable: I cannot tell you exactly, but I am happy to provide that.

Q99 Chair: If you could provide that, it would be very helpful indeed. That concludes our questioning on this particular section.

We’d like to go on to education now. First of all, the education budget, in round terms. What is the profile of the budget reduction from 2012 to 2015? What are the implications for the budget of any delay in implementing Browne’s recommendations? Could you give me some idea of what percentage of the teaching budget the cuts will involve? I believe you said in your introduction that the figure was 40% of the higher education budget, but as the teaching budget is considerably less than that-I think it’s ₤5.1 billion of the ₤7 billion point whatever it is-if you’re making £2.9 billion reductions in the budget, a significantly higher proportion must come from the teaching budget. Could you elaborate on those figures?

David Willetts: Yes. First of all, on profiling, the exact profile of the efficiency savings has not yet been agreed. As the Secretary of State said right at the beginning, having agreed the overall headings, we’re still working through the details, and we’ll share them with this Committee and with the Commons as soon as possible. Clearly, on the profiling, there is a proposal for a big shift in the way in which universities are financed. The earliest that that could come in would be the autumn of 2012-people going to university then-and it would take three years before you’ve had the full effect of every university being financed in the new way. The savings do accumulate quite significantly towards the latter half of the spending review timetable. Overall, on your second question, we have indeed got this figure of a shift in the total budget from ₤7.1 billion in 2010-11 to ₤4.2 billion in 2014-15. The teaching grant is only one part of that. There are other significant cost items in there; maintenance support for students, for example. Again, as we break that down, we’ll share with this Committee and the Commons the detailed breakdown. We aim to produce our usual HEFCE grant letter by Christmas, which will give the detail about what the teaching grant element is within that total.

Q100 Chair: Thank you. If I understand that correctly, you’re saying that in effect the tuition fee stream of income will not come on-stream until 2012, but your cuts in the teaching budget are going to start beforehand. What are the implications for the Department?

David Willetts: We are still agreeing and working out a detailed profile. We’re realists; we know that the kind of efficiency savings that we’re expecting from universities and elsewhere can’t all be delayed two years. So yes, we are expecting some savings in 2011-12. However, in our conversations with the Treasury we make it clear that when you think through the logic of this, the reason why we have the very substantial savings that the Secretary of State identified is because of the change in the way that the financing operates, and that’s going to take several years to feed in. For that reason you would expect the savings to be rearend loaded. They do become much bigger towards the end of this time scale.

Q101 Chair: But the cuts are going to be felt pretty well immediately.

David Willetts: This is what is called in the trade-it is a rather lurid expression-"Valley of Death": is there going to be a terrible situation in 2011-12? We are expecting, clearly, some savings in ’11-12, but the bulk of them come from the shift in the way higher education is financed, and that change only starts in the autumn of 2012 and takes three years before it has a full effect. As we set out a detailed profile for the departmental spending in this area, as we work it out, I think you will be able to see that as we share it with the Committee.

Q102 Chair: I see a problem in so far as universities, if they are deprived of funding in the next year, will have to close departments, or take remedial action to keep their budgets balanced. They will effectively not be able to replace those closed departments even when the additional funding comes on-stream. Will there be departments closed? Will there be universities amalgamated? What sort of assessment have you made of it?

David Willetts: We are still making that assessment as we work out the profile of these savings. It’s not possible to give a blanket guarantee that all departments will carry on, and we are indeed looking for savings that will start in 2011-12. However, I absolutely share your analysis of the risks and that is why it is important that, as we develop the profile, we shift as much of the saving as possible towards the second half, so they’re delivered by the new financing mechanisms that Lord Browne has proposed and which we have endorsed.

Q103 Chair: It does seem a huge risk. Can I just briefly ask you about student grants? I think you implied that there would have to be cuts in the funding for them. Over and above tuition fees, student grants-they are going to have to pay more. Have you made any assessment of what that’s going to be?

David Willetts: No. The only point I was trying to make, Chairman, is that the total budget for higher education is not simply a teaching grant budget. There are several other components as well, of which the maintenance grant is a big element. Lord Browne proposes, if anything, a modest increase in the maintenance support for students, and again we hope to be able to bring to the Commons our detailed response to Lord Browne very soon indeed, which will include our proposals on what the level of the maintenance grant and maintenance loan should be.

Q104 Chair: So you are saying there will be an increase in maintenance grants for students?

David Willetts: We’ve got to work out a breakdown of this total between several elements, one of which is maintenance, and we very much hope that we can bring those proposals to the Commons very soon indeed. But we have only just agreed the totals, and we are still considering our response to Lord Browne; but he makes a very important argument about the importance of a proper package of maintenance support, especially for the poorest students.

Q105 Chair: What actual percentage figure do you anticipate the cut in teaching grant will be?

David Willetts: That is what we are working through at the moment, and that will be set out in our letter to HEFCE in the usual way. We fully understand that universities need to know this, and of course the Committee is right to ask about it, but there is no extra uncertainty, beyond the usual uncertainty. These figures are set out in an annual HEFCE grant letter that will go out on the usual timetable; it will set out the detail of exactly what the teaching grant for universities will be in the next year.

Q106 Chair: When can you give a date for this? This is a crucial element in their forward planning, and I would have thought it relatively easy to work out, in bald statistics, what the percentage cut in teaching grant would be.

David Willetts: We have several different parts of the budget, and we both have to do a breakdown between the different parts of the budget. We’ve also got to agree with the Treasury the profile that you were asking about earlier. Last year, I think from memory Lord Mandelson sent out this letter on about 21 September. I think it would be a good efficiency target to try to do better than that. But we’ll certainly try to get it out before Christmas if at all possible. That is the usual timetable; we’re aiming to stick to it.

Chair: Can I bring in Luciana Berger?

Q107 Luciana Berger: Thank you, Chair. Further to that, in the statement about the cuts to the higher education budget, there was a statement that said that "the Department will continue to fund teaching for science, technology, engineering and mathematics, the STEM subjects". Does that mean that there won’t be any funding for teaching arts, humanities and social sciences?

David Willetts: Lord Browne’s proposals, which we have broadly endorsed, do envisage most of this funding going in a different way; going via the student, through the student eventually paying a graduate contribution. As you introduce this new mechanism, it’s clearly part of Lord Browne’s proposals that the teaching grant becomes a much less significant source of resource for universities.

Q108 Luciana Berger: There’s a big difference between "much less significant" and "100% cut".

David Willetts: The teaching grant that you certainly need would be the teaching grant for the extra costs of Band A and B subjects, the subjects that are expensive to teach, the laboratorybased subjects. You would need a teaching grant to cover that extra, on top of the basic teaching element, which on Lord Browne’s model that we’ve broadly endorsed, goes, instead of to universities via HEFCE and teaching grant, goes to universities via students exercising their choice and spending the money with, of course, no cost for them up front, but a loan paid back out of their graduate contribution later. On that model, there is a big reduction in teaching grant. The exact size of it will depend on the detailed decisions we’re taking on implementing Lord Browne, and then the HEFCE grant letter will come out in December.

Q109 Luciana Berger: Bearing in mind the time scales we’re talking about, you must have an idea of whether there’s going to be any proportion of teaching grant available to those subjects that aren’t STEM. Is it a 100% cut or will there be something available for those subjects?

David Willetts: There are four bands-A, B, C, and D. The Browne model that we have broadly endorsed certainly envisages that bands C and D essentially lose their teaching grant support, and that instead goes via students. Then you have bands A and B, which come in much more expensively because they’re labbased, and on his model if you put the basic teaching element through the student you are left with the teaching grant to finance the extra costs. We are not yet at the stage of detailed figures but that is the broad approach we’ve endorsed. There are some other angles, for example whether you keep any special funding for strategically important and vulnerable subjects, like certain foreign languages. That’s why I’m hesitating as to exactly how far it will go and we are not yet in a position to provide detailed figures. We aim to as soon as possible.

Luciana Berger: Can I ask one quick supplementary?

Chair: Yes.

Q110 Luciana Berger: In order for those social science subjects to provide those courses, they will have to raise the cost of the course to ₤7,000. If you’re saying that all C and D subjects, perhaps modern languages to be put to one side, are not to receive any teaching grant, they’ll have to charge ₤7,000 to maintain the current level of funding that they receive.

David Willetts: Those are the kinds of estimates that are floating around. I think that some universities would say it would be rather less; others would say it would be rather more. But those are the kind of estimates that are around, indeed, yes.

Q111 Chair: The figure of 40% is being bandied around, and that I understand is based on the cut in the HE funding. However, the teaching grant is going to be considerably more, and within that you are preserving STEM subjects, so humanities and others are going to be hugely hit. Can you give us some assessment of what impact is going to be made on humanities and nonSTEM courses?

David Willetts: It is a very significant change in the way in which public money gets to universities. That is Lord Browne’s proposal, and that is what we’ve endorsed, and we think that it is a reform that empowers students. It means that many university courses, as they look to their financing, will have to attract students and the students will bring the money with them, though the student does not have any direct cost up front. They have a loan up front which they repay as graduate contribution. It is a big change in financing, which is a reform and does also indeed absolutely, Chairman, have a public expenditure saving. The money will still flow into university departments, provided that there are students who still wish to study these subjects, as I’m confident there will be. Also, as long as they appreciate-it is a key feature of these changes-that they do not have any up-front costs. They would only pay as and when they were in a wellpaid job, and they have a graduate contribution to pay afterwards.

Q112 Chair: Thanks. It was something of a surprise to me, I must admit, to be given information that, in fact, there are more people employed by the creative industries than by the banking sector. What assessment has been done of the impact on the potential reduction in the humanities and social science courses on skills and employment in this sector?

David Willetts: Well, we don’t see it as a reduction in that sense. It is a shift in the way the money reaches the universities, but there is an enormous hunger among young people to study those subjects, and we’re not suggesting that they pay any costs up front. We do believe that alongside these changes there has to be a transformation in the amount of evidence and information that young people have about what they can do after these courses and what their likely employment prospects are, and what those jobs will pay. There’s much more to the university experience than that, but we’re talking about finance and money at the moment, and as you rightly say, Mr Chairman, with such a dynamic, creative industry sector, I hope people will see that these courses, when they’re well taught, in institutions that do a good job of it, are still a very good route into employment, as well as being worthwhile in their own right.

Q113 Chair: You made an interesting comment about how you see it as, in effect, a replacement funding stream. That brings me to the issue of, first of all, do you anticipate, arising from the changes that will be made postBrowne report, that there will be additional funding for universities over and above what they have under the current system?

David Willetts: That’s a very interesting question. If universities are able to attract students then they should be able to carry on with flows of funding of the sort they enjoy at the moment, coming in a different way. But I have to accept that there will be pressures on universities to save money, and we don’t believe universities should be exempt from the wider pursuit of efficiencies. They may find that people, when they are seeing this sum of money, even though they don’t have to pay it directly up front, ask and expect savings to be made. The Secretary of State and I have both signalled that universities do need to look at their pension costs, at their pay structures, at whether there are more backoffice services that can be contracted out. If they can achieve savings like that, I think it will be very desirable all round.

Q114 Chair: When Browne was set up, I think it was conceived by all parties that there needed to be more funding to maintain the quality and offer of our university sector, given the vital strategic role it had in underpinning an advanced industrial economy. Arising from this, it is unclear whether the Browne proposals and the likely Government response are going to be just to finance cuts, or promote that vision of universities in an advanced industrial economy.

David Willetts: There clearly is a shift in money away from the old HEFCE teaching grant route into the hands of students. Then it is for universities themselves, who I think have become very innovative, and I completely agree with what you say, Chairman, they are crucial in a high-growth economy. It is for universities to see exactly what students would be willing to contribute to their course-afterwards, as graduates, not up front-and whether they can secure funding from other sources, like businesses, where universities have done a lot better in the past few years and we’re looking to them to improve further. I look forward to a university system that is well funded and strong as a result of these reforms.

Q115 Chair: It sounds to me as if you’re saying that the Government are withdrawing from this vital strategic role, and just leaving it up to the universities. Is that so, and do you think they will do it better?

David Willetts: We are not withdrawing, because we are going to lend the students all the money they need to pay whatever levels of charges that universities propose, under certain limits. There’s still going to be a very strong level of public support, but it’s going to come in that route rather than the teaching grant, and that does have the great advantage that it clearly empowers the individual student and also forces universities to think very carefully about their costs. There is still going to be very substantial public support. Of course, we are focusing at the moment on the teaching element, where you are absolutely right about the shift from £7.1 billion to £4.2 billion, but that excludes research, and remember on top of this there is the ringfenced protected budget both for research councils and for the research excellence framework, or the RAE at the moment. That funding will carry on as well, so there will be a substantial protected flow of research funding going to universities alongside the Government support via students.

Q116 Chair: I want to move on in a moment. What you said elaborates the process, but at the end of the day there is no guarantee under the change implemented by the Government that there will be the additional funding that universities feel is needed to sustain their position in the world education league, and to sustain its role in underpinning an advanced economy.

David Willetts: Well, there will be substantial taxpayer support, and on top of that it will be for universities, whose initiative and autonomy I value and respect, to secure extra funds on top.

Q117 Chair: You can’t guarantee it?

David Willetts: I cannot guarantee it, but I believe the reform is a step in the right direction.

Chair: Can we go on to science and research? Sorry, David Ward wanted to come in. I do apologise, David.

Q118 Mr Ward: First of all the maths and then the accounting side of this. First of all, the £2.9 billion, less any efficiency savings that can be made. Is the £2.9 billion the figure that is going to be filled up, almost pound for pound, by the graduate, not student, but the graduate contributions? Is that the gap that’s going to be filled?

David Willetts: It is only part of it, because that is the total higher education budget excluding research, of which, as I said, the teaching grant is one element, but there are other elements as well: maintenance, other specific programmes. It is absolutely correct that the biggest single adjustment is on the teaching grant side. I accept that, yes.

Q119 Mr Ward: That’s the maths. The accounting side is that the rise in the graduate fees will appear at a point, but the recoupment of that will appear at a later date and will accumulate as more and more students graduate. Is the withdrawal of the £2.9 billion on the same sliding scale as the increase in the graduate contributions as they come through?

David Willetts: There is a resource issue-this is not simply a cash measure. The biggest single impact here is indeed the teaching grant shift, yes. The exact scale of that we are still calculating.

Q120 Mr Ward: So the savings will increase and accumulate over a period of time as they are matched by an increasing level of graduate contributions coming in.

David Willetts: Yes, they will.

Chair: Luciana Berger.

Q121 Luciana Berger: Thank you. Secretary of State, you referred to the Prime Minister’s speech at the CBI conference in the last couple of days, and particularly the announcement of ₤200 million that’s going to be invested in the technology innovation centres over the next four years. Is this money additional funding, or does it rely on the efficiency savings proposed in the CSR? If it is coming from efficiency savings, is that going to be coming from the teaching budget or from the science budget?

Vince Cable: No, the innovation centres are funded entirely separately from the university budget and the science budget. They are certainly additional to the ringfenced science budget.

Q122 Luciana Berger: You’ve said already, Minister, that the science budget is going to be maintained in cash terms. Maintaining the budget in real terms would require an additional ₤500 million. How do you anticipate this shortfall will affect spending on science and research?

David Willetts: Over the four years the protecting cash does indeed mean, if you assume inflation at 9% or 10%, that you have that kind of gap to bridge. We are fortunate in having Bill Wakeham’s report to hand on how it would be possible to improve efficiency and save money within the science budget. He identifies the current methodologies of full economic costing, where essentially all the costs of a research programme are put into the grant; he argues that that, even if it’s very logical, doesn’t have quite the right incentives. It may mean that costs are excessive. He has identified some ways in which you might be able to save money. My challenge to the sector, and I think by and large they have enormously welcomed this settlement, is to try to ensure that the protected cash becomes protected real spending by delivering the 9% or 10% efficiency savings that would make that difference.

Q123 Luciana Berger: But the efficiency savings that have been identified amount to ₤324 million, and the realterm shortfall in the budget is ₤500 million, so it’s an extra ₤176 million that’s got to be found.

David Willetts: I think with regards to the figures that you may be citing, this is the difference between the two big elements of this budget. One is the research council funding, which I think is where your figure comes from, and it’s true that that’s what Bill Wakeham focuses on in his report. There is secondly, slightly smaller, the money that comes through the research assessment exercise, the REF. It’s up to universities and their departments, but we would hope that universities would be able to achieve similar kinds of savings on the QR funding as on the research council flow.

Q124 Luciana Berger: You just said that you’d hope that the universities would find those savings. But if they don’t, and they don’t achieve the full amount, what in the science budget is going to be at risk?

David Willetts: When I say hope, it is because we do not, quite rightly, micro-manage these arrangements. But what I can say is the incentives are absolutely right. We have a ring-fenced cash budget of £4.6 billion; every pound that is saved in the way in which a research grant is used, or the way in which the research activities of a university are financed, is money that is still going to stay within the research and science budget for more science and research output. That is a very powerful incentive.

Q125 Luciana Berger: When do you anticipate the efficiency savings being realised? Is it in the first year or at the end of the spending review period?

David Willetts: Well again, we have to agree the exact details, but I hope they will build up over time, as we look to try to tackle some of the overhead costs that have been included because of the way in which full economic costing has worked.

Q126 Luciana Berger: I will just push you again. You used the word "hope", and when you use the word "hope", I get very concerned about what is at risk and what programmes and projects will fall by the wayside if these efficiency savings are not realised by 201415.

David Willetts: There is a cast-iron guarantee of £4.6 billion for science and research, and that carries on for four years. Now, you are quite right that over the time of this £4.6 billion protected cash, the forecast inflation is in the 9% or 10% area in total over those four years. I do not wish to micro-manage exactly what happens, but all I can say is we have a toolkit identified by Bill Wakeham that should enable universities and research institutes to deliver the efficiency savings that plug that 9% or 10% gap. That I think is a reasonable challenge to set them. That is what we hope they can do and they have the added incentive that every pound saved goes back into research and science.

Q127 Luciana Berger: Final question. Are you going to support the maintenance of ongoing partnership funding to ensure the sustainability of charityfunded research in universities in England?

David Willetts: There are some very important links with the charitable sector and I hope that that can continue. Indeed, of course, one of the decisions that was announced last week, the UKCMRI, is a classic example of that. It is marvellous that it has finally got the goahead. That is a project where although there is a very large contribution from the MRC, there is also a contribution from UCL and two charities-the Wellcome Trust and Cancer Research UK. Those types of arrangements are, I am tempted to say, an example of the Big Society in action, because we have the voluntary sector alongside public money, and we absolutely want them to continue.

Q128 Luciana Berger: I appreciate that you want them to continue, but there have been a lot of representations made by many charities and organisations that are involved in this and feel worried about what is going to happen with their projects going forward.

David Willetts: Because we have a good, strong settlement, I believe those kinds of arrangements can continue in the future, yes.

Chair: Thank you. Can I bring in Rebecca Harris on further education? Rebecca has been sitting there very patiently.

Q129 Rebecca Harris: I am now watching the clock. At the beginning of the session, Secretary of State, you mentioned that only about 10% of activities are going to be cut. I think you actually identified that some FE funding, for example the entitlement to free first-level training for over25s, might be affected. If I have time, I will try to press you on that, but more generally, I think there is a £1.1 billion cut from the further education budget being made. Where do you see those savings being made and are you planning any additional programme cuts, such as happened with Train to Gain?

Vince Cable: Where will the savings come? Well, there are what are called nonparticipation budgets; a lot of that is administrative support and we envisage substantial savings there. In Train to Gain, we do think there is a role; it has been substantially improved in the last few years and we do think there is a role for training in work, but there is no justification for doing this where large private employers can pay for it. We discovered that one large multinational company, for example, was being paid by the taxpayers to do fairly basic training. We feel this is not a good use of public money and that it should be confined in future to SMEs. There will be a role for Train to Gain, but it will be substantially reduced along the lines that you have suggested.

The other area where we do envisage reform, and this is bringing, in a sense, FE and HE closer together, is where you have advanced skills for older participants in FE. We think it is right that they should pay and should be able to pay on the same basis that graduates pay. So for skill level 4, skill level 3 for over24s-as we now envisage it-they will have a similar kind of graduate contribution arrangement to the one students at universities have. There will be savings in all those different respects.

Q130 Rebecca Harris: Thank you. You also said that colleges will be expected to make greater efficiency savings, but it has not been specified what level of efficiency savings. Do you have an idea of what savings you are expecting them to be able to make and also-I know the colleges themselves would like to know this-over what sort of time scale?

Vince Cable: Some of the efficiency savings, as I say, will come through us clearing up the administrative landscape and these different organisations that duplicate each other. Some of it will come from reducing nonparticipation budgets, which don’t affect teaching. But the colleges themselves will have to make efficiency savings-we can give you numbers for that-as indeed will universities, as indeed will other bits of the Department. There will be pressure on them to become more efficient, like other bits of Government.

Q131 Rebecca Harris: And do you have a target level in mind that you think you will achieve?

Vince Cable: Well, we can produce a figure for that when we have ground the numbers a little further. But I just want to stress also that there are important parts of FE that we see as expanding. I think, as David has already indicated, FE and HE increasingly overlap and we certainly do not see FE as a poor relation of HE. We want to see its status and importance raised. Out of this settlement, there will, for example, be a substantial increase in the number of apprenticeships provided. We had an interim one-year arrangement under the inyear cuts programme that we had earlier this year, but this will now be extended over the whole of the spending review period; increased apprenticeships, particularly targeted at SMEs and in sophisticated advanced technology. That is an increased commitment.

There are other bits of the FE budget that we regard as particularly important and that we want to protect. Adult participation is one. Another is the basic skills. I discovered quite recently, as Secretary of State, and was surprised by, the enormous numbers of adults who are now going through basic skills courses to bring their numeracy and literacy up to the level of an 11-year-old. We have an adult population that simply cannot cope with the very, very basics; they cannot be trained because they do not have those basic building blocks. We certainly do not want to do anything that will result in a reduction in that kind of support.

Chair: David Ward.

Q132 Mr Ward: I will just say that I am really, really pleased with that news. It is much needed, particularly in a place like Bradford. I met a group from the WEA last week and they were expressing concerns about ESOL provision. We have also received a briefing note from the Association of Colleges on the same subject. Apparently among the savings that BIS will be asked to make is a restriction of ESOL funding to "settled communities". There is some lack of clarity about what that particular term means. I wonder if you have a definition of "settled communities"?

David Willetts: This is work that is under way. I think so far the furthest we have got is for those in settled communities. I think there was a concern that people were moving into the country with not even an intention of settling permanently, and were then accessing ESOL courses. The aim is to help people who are permanently resident in this country.

Q133 Mr Ward: Are you aware of the myth of return from 50 years ago?

David Willetts: What? Sorry.

Mr Ward: You are aware of the myth of return, are you? Those who came here for a few months 50 years ago.

Vince Cable: Well, we would hope that immigration procedures do not allow that to happen in future.

David Willetts: Yes. But the reason why we are carrying on with an ESOL budget is precisely because we do recognise that when people come here and are settled here, there is an obligation to help them learn English. For others, we do not feel such an obligation.

Chair: Can I go on to apprenticeships? Nadhim Zahawi.

Q134 Nadhim Zahawi: Thank you, Mr Chairman. Coincidentally, last night I had an e-mail from someone in a niche engineering group in my constituency, called Greenbank, who told me that he met an apprentice from 20 years ago at a Bank of England dinner last night-a person was apprenticing with him and is now a chairman and chief executive of his own engineering company. I am very pleased to see that the focus is on getting apprentices into SMEs. Just a very quick question, Secretary of State. The £250 million that was announced in the CSR for the 75,000 apprenticeships, does that already include the £150 million of funding that was announced earlier in the year as a result of the scrapping of the Train to Gain programme, or is the total figure now £400 million?

Vince Cable: That £150 million related to this year; that was in this year. What we are talking about now is extending that; additional apprenticeships over the whole period. So we are talking about 75,000 additional apprenticeships over the whole spending review period.

Q135 Nadhim Zahawi: Does that now become £250 million instead of £150 million, or does it become £400 million instead of £150 million?

Vince Cable: I think we are talking here about 400, aren’t we? We will check that for you

David Willetts: Yes, I think maybe we will check that.

Vince Cable: Yes, we will check that.

Q136 Nadhim Zahawi: If that is, it is excellent news. How much of this money will be used for the apprenticeship bonus, which I think is very good news, focusing on SMEs to participate in what Minister Hayes announced, and how will that bonus work in terms of SMEs?

Vince Cable: Well, the way it works is this: some of the very big companies have superb apprenticeship programmes of their own. RollsRoyce is probably the most famous. They know what they want and they train their own people and they pay for it; they have their own inhouse apprenticeship training facility. A lot of big companies do that. For smaller companies, it is less attractive to do it because they lose people and there are overhead costs associated with it. So we want to try to ensure that the additional support is channelled in their direction. We do not just want to leave this to the market to produce solutions. One of the things we will be promoting in conjunction with the sector skills councils is what we call "licence to practice"; in other words, where specialised skills are needed, rather as with doctors and lawyers, you have to have a specific training requirement, including an apprenticeship. So that is one factor that will boost the demand for apprenticeships.

David Willetts: Perhaps I could add, Mr Chairman, just to report to the Committee, that we are on track to deliver the extra 50,000 apprenticeship places this year that were promised as part of the coalition agreement. So we believe that we should be funding over 300,000 apprenticeship starts this year, 201011, compared with a figure of about 240,000250,000 before.

Chair: That brings me on to the question that Rebecca Harris was going to ask, if we can just clarify that. Then I will bring in Margot James.

Q137 Rebecca Harris: Yes, I just wanted to clarify it, but I think the answer is 75,000. Initially 50,000 were announced and then it was the figure of 75,000 and that is not in addition. Have I got time to just ask another question?

Chair: Yes.

Rebecca Harris: In terms of people being ana logous with university students and paying for their own skills funding, will you be having some courses that you will support more than others, or will it be a flat rate? Will there be some skills training that you give more Government support to?

Vince Cable: This is completely new in FE, it is a break with tradition; it is a new way of doing things. We are starting from scratch, so we will obviously have to discuss this new system with the colleges and the Sector Skills Council how this new system. The last thing we want to do is discourage people from pursuing skills training when they are adults. We want to encourage them. But it is right that where people derive substantial private benefit they should make a contribution in the same way as university students do. But we have to feed this in very carefully and there will be consultation.

Q138 Rebecca Harris: But is it possible, depending on the course that is being taken, that it could attract more or less public support depending on the need for that skill level or whatever?

Vince Cable: Well, it could do, but we need to go through a very careful consultation process before we bring this scheme in.

Chair: Margot James?

Q139 Margot James: I wanted to ask a question about funding students in the 1619 age group, because you talked earlier about the increase in the maintenance grant fund for higher education, which is very welcome. The removal of the education maintenance allowance was announced in the CSR. Can you tell us yet about any successor arrangements to the education maintenance allowance? I understood from the statement last week that more targeted funding would be put in place. Can you enlarge on that at all?

David Willetts: I think that really that is a matter for the Secretary of State for Education. That is an area of policy that he is responsible for.

Margot James: Of course. Yes, I am sorry; I forgot that, thinking it was an FE area.

Q140 Chair: Thank you for attending. Just to finish off, obviously your Department is being presented with significant cuts. During the course of the questions, you have highlighted a significant number of unknowns. In fact, I have listed them and I think there are 10; I will not go through them all. In your words, these unknowns have to deliver 90% of your Department’s savings. Now, that makes me feel slightly uncomfortable, because it would appear that your savings, if they are based on a whole lot of unknowns, aren’t very reliable. In my days as finance chair of a major metropolitan authority, pre1997, and having to budget for an annual round of cuts, we would basically do profiling based on a certain percentage cut. I cannot believe that your Department did not go through a similar sort of exercise. Did you? If you did, can you share the information with us?

Vince Cable: Well we went through over the last few weeks, indeed months, with the Treasury some very, very detailed discussions about how these major savings can be achieved. But this is a big, complex Department; we just talked, for example, about one microcosm, which is apprenticeships, and how that will eventually be worked through. When we say there are unknowns, there is a lot of detail that still has to be worked through. We are very happy to share that with you, but we are confident that we can deliver the savings that we have been asked to produce and we can do it in a way that still enables this Department to contribute very, very substantially to economic growth, which is what we are about.

Q141 Chair: I think KPMG described the CSR growth assumptions as "heroic". If I submitted the list of unknowns to you and you could provide us with written evidence, that would be very helpful indeed.

Vince Cable: Well, I don’t know about the word "heroic". The Office for Budget Responsibility is the independent body that has just been established to produce forecasts that the Government can work with. This is independent of Government and their forecasts are of increasing rates of growth over the spending review period and that is the framework within which we are operating.

Chair: We will await their next report with great interest. In the meantime, if you could give detailed answers to the unknowns that you have highlighted today, we would be very grateful. On behalf of everybody on the Committee, can I thank you for coming in and undergoing a pretty rigorous examination. Thanks very much.

Vince Cable: Thank you.

David Willetts: It’s a pleasure.