UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 561-iv

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

Government Assistance to Industry

Tuesday 30 November 2010

Mr Feargal Sharkey and Mr BRIAN MESSAGE

Mr Danny Stevens and Dr Gordon Edge

MS Lee Hopley and Mr Martin Walder

Evidence heard in Public Questions 212 - 293

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 30 November 2010

Members present:

Mr Adrian Bailey (Chair)

Paul Blomfield

Margot James

Simon Kirby

Ian Murray

Mr David Ward

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Mr Feargal Sharkey, Chief Executive, UK Music, and Mr Brian Message, Director, UK Music, gave evidence.

Q212 Chair : Good morning and welcome. Thank you for braving the elements to make it here today. I suppose if anyone didn’t want to appear before a Select Committee then today would be the one day when they might feel they had an adequate excuse not to, but I’m grateful that you’re here. Unfortunately, the PACT representative is ill and, at short notice, unable to provide a replacement, so it looks as if it’s going to be a semi-virtuoso performance by yourselves. Before we start the questioning, could you just introduce yourselves so that we have voice levels for transcription purposes?

Feargal Sharkey: Thank you, Chairman, and might I say that Brian and myself would have been only too happy to encounter and overcome snow and any other adversity. We’re incredibly grateful for the opportunity to be here today, and we really do appreciate it. My name, of course, is Feargal Sharkey and I’m Chief Executive of UK Music.

Brian Message: I am Brian Message; I am a chartered accountant and Chairman of an organisation called the Music Managers Forum. We represent over 400 UK managers, which in turn represent over 1,000 of the UK’s leading artists.

Q213 Chair : Good. Thanks very much. I’ll just start with some fairly general questions. I shall repeat what I say to all interviewees: you don’t need, both of you, to speak on every issue if you feel that the other has adequately covered it. Feel free to say that you have nothing to add. To start then: basically, what’s your relationship with BIS like and what sort of contact do you have with the Department?

Feargal Sharkey: It’s a somewhat timely and, indeed, very interesting question. Perhaps if I might just give everyone a little bit of background about the British music industry and, indeed, the creative industries.

Chair : Yes, please do.

Feargal Sharkey: The creative industries overall: we do contribute somewhere in the region of 6.2% of GVA to the nation’s economy. We export about £16.6 billion of business every year and create about 1.1 million to 1.2 million jobs. To give you some comparisons with other sectors of British industry, by way of example, the pharmaceutical industry, I believe, is 0.6% of the UK’s GDP and they employ about 78,000 people, and something like the automotive industry I believe employs about 180,000 people and generates about £10.2 billion. So, as you can see, in terms of creativity we are right up there with any other sector and just as significant, just as vital and just as important.

Specifically, with regard to music, it might be somewhat jingoistic of me to suggest that the UK music industry dominates the world. We are incredibly fortunate in this country that we have generation after generation of remarkably talented young singers, songwriters and performers that go on to dominate the global stage. We are one of only three nations in the world that are net exporters of music. Last year about one in every 10 albums sold in North America and Canada was made by a British artist, and it was the same the year before, the year before that and the year before that. Indeed, earlier this year, for the first time, we did publish, as an industry, our vision of ourselves in 2020, and our ambition is to become the global number one industry. We think that is achievable.

Clearly, for that to be delivered it means a very close, co-operative, supportive working relationship with Government and all external agencies. If I were to be truthful, Chair, I think when it comes to BIS, I do need to give credit where credit is due. Ed Vaizey, as the Minister with a joint portfolio across the Department for Culture, Media and Sport and BIS, has gained a huge amount of respect from my industry in a very short space of time, and quite clearly is a Minister who is very committed and working incredibly hard.

As to the day-to-day relationship, it’s somewhat delicate. I’m trying to think of a diplomatic way of putting this. I perhaps could be tempted to describe it as functional. That’s not to say that it’s productive; that’s not to say it is delivering what it potentially could do. In fact, I find it a location slightly reminiscent, if it’s the right analogy in these circumstances, of a bunch of young teenagers at their first school disco, where everybody quite knows they like each other, but nobody’s quite figured out how to get into the middle of the room and make it really exciting.

Chair : A very creative metaphor, if I may say so.

Feargal Sharkey: Thank you, Chair.

Chair : Brian, is there anything you wish to add to it?

Brian Message: No, I think that was very eloquently put by our lead performer.

Q214 Chair : What you’ve just said leads me very appropriately on to my next question. We understand the Department is very keen to, if you like, adapt its approach to those sectors of the economy that have enormous potential. Quite clearly, the creative industries have enormous potential and, indeed, have already realised a lot of that potential. What further gains do you think there are to be had there? What do you think is your real potential? You obviously have a fairly evangelistic approach, which I think as a Committee we welcome.

Feargal Sharkey: Chairman, in terms of the strategy document that the music industry itself published, called "Liberating Creativity", as I explained in the introduction to that, while it’s easy to be very jingoistic about these things, it is actually a deliverable goal for this country and for the British music industry. The creative industries overall in a number of circumstances have been identified by any number of external Government Departments as one of the few areas we currently have at our disposal as a nation to deliver potentially quite explosive short-term growth. Indeed, if I recall, the Prime Minister himself spoke at some length about that about two years ago in the run-up to the general election.

Clearly, we very much welcome the document issued yesterday by BIS on growth strategy, specifically highlighting the creative industries as one of the areas of the UK economy that we do need to deliver a strategy for, and are looking forward immensely to engaging with the Department. However, I was also very taken that no one in my industry-and so far as I’m aware no one in any of the other creative industries-even knew that that announcement was going to be made, albeit we very much welcome it and we will engage enthusiastically and deliver what we can for it.

Q215 Chair : Could I just ask you a very general question? Until I started to study the figures that you have so effectively given us today, I hadn’t fully appreciated just what a significant part of the economy this was. Do you feel that, not only is this under-recognised, but the attitude of the media to certain of the academic supporting areas is prejudicial to reaching the sort of targets that you want to reach?

Feargal Sharkey: Chairman, if I can put it possibly in a personal context, I can still vividly recall the conversation I had with my parents at 17 years old when I explained to them I had just been given an opportunity by the BBC to appear on Top of the Pops. That was rather long, rather loud and rather one-sided and, if I remember, I wasn’t the one doing the talking. I don’t think it was seen as a serious profession and I’m not sure it is to this day. I occasionally explain to people to put it into context that what some people in the media and perhaps in some other places might possibly rather dismissively think of as nothing more than a bunch of kids making noise in the backroom of a pub on a Friday night, well, as it transpires, when those young people grow up to be big boys and girls, the contribution they make to all our lives, the impact on our national economy, the driver for this economy is just as vital, just as successful and just as necessary as somebody who came with a double first from Oxford and is currently working for a large multinational bank in the City of London. I don’t think we quite have that recognition yet, but my aspiration and my hope is we will.

Q216 Chair : I appreciate that this may not be totally relevant to your particular area, but undoubtedly the arts, humanities and social sciences in higher education are not being looked after in the same way as science and technology. I have to put my hand up; I am one of those who has said that we need to preserve science and technology, but I do know that a very high proportion of graduates from arts and humanities go into the creative industries sector. How do you view this, partly from a national philosophical point of view, but secondly from a very practical point of view of the potential impact on the supply of talented people in your industry?

Feargal Sharkey: It is one of the things the industry has been very focused on over recent years because clearly we do need an intake of incredibly highly educated, knowledgeable, skilled entrants into our industry. By way of illustration I can’t give you a specific figure in terms of the number of graduates from humanities, but overall within my industry about 40% of people have a level four qualification or above. So, again, it’s one of those things that doesn’t get into the outside world-that we do take training and upskilling qualifications incredibly importantly. I think that 40% is against a national average of something like 27%, so it gives you exactly the clarity of the focus we have on it. So, anything that is in any way going to be detrimental or reduce the qualities, the skills and the training of those young people coming into my industry, quite clearly is going to have an impact and that’s quite clearly something we would like to reverse, Chair.

Chair : Brian, do you wish to add anything?

Brian Message: No, I think he’s still doing a good job.

Chair : That’s good.

Q217 Nadhim Zahawi: Feargal and Brian, I’m glad to hear that you welcome the Report that was published yesterday. The Department does talk about creating a culture of growth. Obviously, we’re not going to be able to brainstorm what that means in its entirety for your industry, but what should such a statement mean for your sector, in the limited time we have here?

Feargal Sharkey: It is something that, funnily enough, the industry itself did address and it was part of a process the industry went through last year. Again, to give a little background, UK Music was established by the industry two and a half years ago; it is the first time in the 120-year history of our industry that nine different sectors have come together. Within UK Music sit all of the artists, writers, composers, musicians and performers, but equally record companies, large, small, multinational and domestic music publishers, managers, collection societies and studio producers; or, in one context, all of the talent and all of the money.

We delivered all of that earlier this year. We were very taken, as part of the announcement yesterday, that the Secretary of State did announce this ministerial ad hoc committee to help develop and nurture this strategy policy. Indeed, that was an idea not dissimilar to the one we put forward in our publication earlier this year. Personally, I thought the Government might want to be a little bit bolder with it. What we had suggested at the time was that it should actually be Cabinet-level and the rationale for that was by our counting there are currently seven Secretaries of State whose portfolios all overlap with the creative industries. That’s before we moved on to the then 27 external agencies, bodies and non-departmental Government bodies, and we weren’t sure that they were all communicating with each other in the most productive way possible. Clearly, we welcome it; we think there’s an awful lot more can be done and we do already have some quite clear, specific tasks and ambitions for that grouping of people. I hope there will be someone engaging with that from the creative industries, but we’ve not had that conversation yet, nor have we been approached by BIS. I can assure you though that on leaving this meeting today it will be one of my priorities for this afternoon.

Q218 Nadhim Zahawi: Let me just push you a bit further on that, most specifically to the BIS Department; I know that there is obviously overlap with other Departments. What sort of policies would you like to see BIS implement over the next five years to benefit the sector?

Feargal Sharkey: Clearly, I do think that it’s ultimately industry’s role to deliver growth and employment, but I’m also a firm believer in that Government clearly has a role to play in creating the environment and nudging those end results. In terms of BIS, one of the reasons we’re here today is clearly the lack of success of specifically the music industry, but of the creative industries overall, in drawing down Government support. That is not just a recent innovation and a recent issue.

If you will indulge me for a second, I just want to read you very quickly a paragraph from something that may help clarify this: "Difficulties in raising finance are affecting the ability of the music industry to grow and prosper. Particularly worrying is the evidence uncovered in this report of a growing trend in recent years of a lack of confidence within the industry in accessing external finance." That comes from a report called "Banking on a Hit" published by the Department for Culture, Media and Sport in 2001.

Q219 Chair : We will be going on to this area in a few moments.

Feargal Sharkey: The industry, I think, would contend that in the intervening nine years not an awful lot that’s productive has happened, so clearly we would like to address that. Clearly, within BIS does sit the notion of education, skills and training. As I’ve just indicated, having high-calibre graduates coming into our industry is vitally important to our future, but so is providing opportunities for those that have taken a more vocational route. My industry, I could argue, is the last bastion of true entrepreneurial spirit, where the entry level into the music industry is so low that all you need is a wealth of determination, passion, drive and ambition, and you can succeed. So, the idea of apprenticeships and vocational training is again equally if not just as vital as a graduate training programme.

Q220 Simon Kirby: Just very quickly: Brighton and Hove has over 1,500 creative businesses. I’m struck by something you said: the UK music industry has two parts. It has a very small number of large organisations and a very large number of very small organisations.

Feargal Sharkey: Indeed.

Simon Kirby: That said, how does the Government help everyone within the music industry?

Feargal Sharkey: We’re not sure at the minute that it’s working quite as productively as it could. Indeed, we have been looking right across the piste at all areas of public spending/public investment that should be bringing value, both to young people that want to work in our industry and indeed the industry itself. By way of illustration, Simon, I can tell you that within your constituency, to the best of my knowledge, you do have 272 registered songwriters and composers, and six music publishing companies-that’s within one constituency. That’s the kind of detail we get down to, so we do need to make this system work much better. I’m not at all convinced it’s delivering on the Government’s objectives, or indeed this industry’s, but we are desperately keen to sit down, talk with Government and work through all of those issues, and make sure that it’s functioning.

The "Banking on a Hit" report is by way of illustration of that. Equally, by way of illustration in terms of apprenticeships, there is one organisation in my industry that has now taken almost three years to get its qualification to enable it eventually to draw down funding. In the meantime, this industry funded that organisation to the tune of almost £500,000 simply to provide apprenticeships in my industry. There is an industry pointing at an organisation delivering an apprenticeship role that we quite clearly like, that we think delivers what the industry wants and that adds value and employability to those young people, and it has taken three and a half years to get the necessary qualifications to be able to draw down funding. Something is not quite working right.

Q221 Nadhim Zahawi: What were the problems? What are the specifics of that?

Feargal Sharkey: We did not fit the model that someone had created, so we then ended up spending a huge amount of time getting that model readjusted to suit what the industry felt needed to be delivered and not necessarily what someone else felt.

Q222 Nadhim Zahawi: And so the model was designed without enough consultation with the industry or-

Feargal Sharkey: That would appear to be the case.

Q223 Margot James: My question was along similar lines, really. I represent Stourbridge which, as you probably know, has a very proud musical heritage. It may be that my experience is a bit biased on account of that, but our further education college, Stourbridge College, has a fantastic performing arts specialism with the latest equipment and a very good music department. I just wondered what more it was you felt Government should be doing in terms of the skills and apprenticeship agenda than it currently is to help your industry thrive even more?

Feargal Sharkey: It would be wrong of me not to point out that there are quite clearly real beacons of example, both at FE and at HE level, and the industry is in the process now of potentially developing our own accreditation, particularly at HE, to be able to send out a signal to those graduates and indeed students deciding where they want to go that there are outputs that the industry clearly values. We will work very closely both with those FE and those HE colleges to ensure that is being delivered. In terms of my experience of the system’s tools so far, it’s rigid, it’s inflexible and it’s taking an enormous amount of time, particularly for something like the creative industries and indeed the music industry; we are going through very rapid transformation and we need to be light, we need to be agile, and we need to be competitive. The last thing we need holding us back is some overly rigid system that’s preventing that from happening.

Q224 Mr Ward: As parochial as ever. I represent Bradford East. I just wondered-I was impressed by the level of detail in your stats there-about Asian music: is that a large part of the industry now and does that have potential for growth?

Feargal Sharkey: As it transpires, in a previous incarnation working for Polygram Records I did quite a lot of work on this. Obviously, within the Asian community there is quite a vibrant, independent base, particularly around Bhangra, at that level. Does it overlap occasionally into the mainstream? Occasionally it does, but it is one of those areas that I think has always suffered from a lack of infrastructure and, indeed, if my recollection is correct, going back almost 20 years, there were some issues surrounding piracy and distribution and things like that. Clearly though, it is something we would like to reach out to and support and nurture in any way, shape or form. Our quite clear remit at this point in time is anyone who wants to engage with the word "music" has to be given that opportunity and all the support they need.

Q225 Nadhim Zahawi: Just on your point on FE and HE: Stratford College in my constituency, Stratford-on-Avon, would be the first to come forward because they have a very robust programme on performing arts.

Feargal Sharkey: Perhaps we could sit down and discuss that outside the realms of this meeting. I’d be very happy to.

Q226 Nadhim Zahawi: Some industries-aerospace, automotive, marine industries-have a formal council within BIS. Would you be in favour of a similar council for the creative industries within BIS?

Feargal Sharkey: Very much so. That, in essence, was driving some of the thinking in that recommendation we made earlier this year. Quite clearly, any attempt whatsoever that would help develop that relationship to be more constructive, more pragmatic and more positive, for both the industry and BIS in delivering on all of our objectives, we would welcome with open arms. I can guarantee you right now this industry’s total and enthusiastic support and co-operation.

Q227 Nadhim Zahawi: Because automotive specifically have seen real wins-i.e. practical help-come through.

Feargal Sharkey: Yes, sure. I did notice yesterday that BIS put out yet another document specifically focusing on the construction industry. I think those are real wins for industry and, as I illustrated earlier on, the creative industries are-and it’s no disrespect to the automotive industry-I could argue, I suspect, slightly more successful for our national economy than automotive. I’m sure people working in the automotive industry are fine, wonderful, upstanding people, but when we have an industry of such significance and primary importance and potential to this economy, I think having that kind of structured relationship with BIS would be very positive.

Q228 Nadhim Zahawi: And you think there’ll be support from the industry for people to sit on that body and to actually engage with it?

Feargal Sharkey: As the Chief Executive of UK Music, I can assure you of the music industry’s utmost enthusiasm and support for that notion right now and, from my conversations with the other creative industries, whom I do talk to an awful lot, I could imagine they would also be incredibly enthusiastic about it and would think that was really positive, forward-looking and pragmatic.

Nadhim Zahawi: And Brian?

Brian Message: Absolutely-100%. If we can increase the level of communication, we’ll obviously drive some opportunities, so we’re very much up for that.

Nadhim Zahawi: Thank you very much.

Q229 Chair : Can I just conclude on this section? Obviously, I welcome the remarks that you made, but it’s slightly paradoxical that an area and industry that is to do with communication actually seems historically very poor at communicating its role within the economy and society as a whole. Would you accept that is a legitimate criticism? Do you think that it could organise itself through a sector council or something so that you can do your bit to overcome that deficiency?

Feargal Sharkey: Indeed, Chair, that was one of the factors driving the conversation within the industry two and a half years ago that led to the establishment of UK Music, and one of our functions is now to provide that communication to the outside world. I will acknowledge that we are playing catch-up on 120 years’ worth of history here, but my communications team, the head of which is actually behind me, does a fantastic job and works ferociously hard. So, we are aware we have a big hill to climb, but we will climb it.

Q230 Chair : Earlier you quoted statistics from an individual parliamentary constituency. Now, I represent a manufacturing constituency and I get lobbied very hard-and quite rightly-by manufacturers in that constituency. I suspect there may be a surprising number of creative performers and, perhaps, companies in my constituency. I can think of one or two, but I can’t think of many. Do you think you could do more to bring to the attention of individual Members of Parliament the sheer contribution that performers and companies make in their particular area?

Feargal Sharkey: Absolutely, Chair. I completely agree with you, which is why I have some of these statistics available today. We are now developing those systems and, indeed, I can tell you that in your constituency you have 27 registered members of the PRS for Music. Indeed Robert Plant, lead singer of Led Zeppelin, I believe was born in your constituency and I can highly recommend his new album.

Q231 Margot James: Wasn’t he born in my constituency?

Feargal Sharkey: In which case I shall discuss this with the people behind me very shortly. I’ll tell you what: we can all have Robert Plant.

Chair : We could spend an awful lot of this session on that, but the basic point is that if you could inform Members of Parliament exactly what is the profile of your industry in their constituency, and also inform your members that the Members of Parliament are receptive to the sort of messages they want to give, I think that would be very helpful indeed.

Q232 Paul Blomfield: If I could return to a point you were beginning to raise earlier in terms of problems of accessing finance: we’ve been talking, both to the banks and to industry, about the generality of problems, but there do seem to be some specific issues in relation to the creative industries sector. We are getting conflicting information from the sector and, surprisingly enough, from the banks, in terms of how they see that. I wonder if you could describe how you see that relationship currently.

Feargal Sharkey: The question is, are organisations/companies within the music industry sufficiently good at getting access to and being able to draw down external financing? That might be through schemes like the EFG or the Small Loans Scheme or, indeed, a number of others historically-as I was trying to illustrate with "Banking on a Hit", which was published nine years ago and quite clearly said there was a problem that that wasn’t happening. DCMS reviewed and updated that report in 2006 and identified exactly the same issue, and here we are four years after that and still absolutely nothing has changed whatsoever. Brian, however, if I can hand over him, can give you a more specific, at the coalface, hands-on examples of the experiences we’ve been having.

Brian Message: Thank you. Yes, I was elected Chairman of the Music Managers Forum in January 2009. We did a survey in February, the following month, as to what the issues were within the management community. The biggest issue that came to a head, which was bigger than anything else by some margin, was access to finance. In the March I almost had a slight eureka moment when I read about the EFG, and I specifically read about some relaxations on sector-specific issues. Authors, music composers and own-account artists could now apply for the EFG funding. From my own background in the 1990s and early 2000s I had used the Small Firms Loan Guarantee Scheme for businesses outside of music. It had been an incredibly useful tool: one was a jewellery business; one was a call centre business; and one was an entertainment business.

I stood up in front of 150 of our managers in March that year and said, "Look guys, you’ve all told me that our big issue is access to finance. We have this thing now called the Enterprise Finance Guarantee; the restrictions have been dropped. This is our moment where we can actually go and get some capital, and raise some finance for our entrepreneurial activities." So I said, "Look, I’ll tell you what: I’m an accountant; I’ve done many business plans in my life; we will run a test case." So we took this band, The Rifles, who in the previous year had generated probably about £100,000 of touring profits-so a small, established sort of business. I went to my bank, RBS, and applied for EFG finance. £200,000 is what we went for. Pretty quickly it got turned down; the reason came back that music is too risky a sector; there wasn’t sufficient confidence that a band like The Rifles-a London band-could actually go on and deliver across their third album cycle the finance to repay the loan. So, I then went back to them and said, "Okay guys, look. You’ve got £150,000 of your £200,000 risk covered under EFG. You’re exposed to another £50,000. Why don’t we do this? Why don’t I lodge £50,000 with you so that in fact you are not at risk at all?" They thought that was a good idea, but it went up to Credit and Credit kicked it back again and said, "No. We’re just not interested in this."

Feargal, the team and I discussed what we should do next and we then effectively went through all the banks. We went to HSBC, Lloyds and so forth. The same reaction came back: "Look guys, this isn’t for us. Yes, you can demonstrate that there is a track record; yes, you can demonstrate that your business can be run by a sufficiently capably management team; yes, your business plan is fine, but this just is too risky for us." In fact, we got a whole variety of different reasons. HSBC offered the reason that because a lot of the sales that were driven in the business plan from The Rifles were international-because they do quite well in Germany-it was an export-driven thing and EFG wasn’t specifically designed to be funding export. This obviously was a specific problem and for me, personally, having used the Small Firms Loan Guarantee Scheme, it seemed like it was almost like a sector-specific issue.

Q233 Nadhim Zahawi: What year was that?

Brian Message: This was last year. All the way through 2009 and into the beginning of this year. Since The Rifles were unsuccessful with their application, we’ve had to scale down The Rifles’ business. There were four in the band, so because there wasn’t sufficient finance the band collectively agreed to drop themselves to two. Of the other two, one is now unemployed and the other is working as a contractor. The other two are driving up to Nottingham today to play a little venue in Nottingham-300 people-as an acoustic set because that’s all they can do. They don’t have the finance to be able to keep evolving their business as we would like.

So, it has real, tangible impact and the reason that I’m here, obviously, is that I see a sector, particularly the management, entrepreneurial sector, where EFG would be specifically tailored to work very well, and since I became Chairman of the Music Managers Forum, we’ve seen exactly no cases of Enterprise Finance Guarantee helping any of our managers. We have obviously driven a specific test case with a profitable artist. It’s not just artist’s businesses; it’s obviously all the other businesses around as well-independent record labels, publishers, etc. It’s at that small end.

I think it’s very interesting because obviously Feargal and I, and many managers, we go round and talk to lots of universities and there’s an amazing wealth of accumulated knowledge, expertise and passion. You almost fall off the edge of a cliff when you go out and leave college. Where do you go next? What do you do next? The beauty of the EFG for us was always that this could be an opportunity for young talent to get finance where they don’t have collateral.

Feargal Sharkey: If I could add one further observation, Chairman, picking up on Simon’s point earlier on: what makes up 92% of the music industry is SMEs. It’s true that there are four very large multinational companies, but 92% of the companies are SMEs. As part of a workstream within UK Music from the end of last year, we were working up our own report specifically looking at the detail of access to finance for music industry companies. It was a very fortunate bit of timing that your Committee decided to launch this inquiry that concluded with the finishing of our report. We went to extraordinary lengths, over an eight to nine-month period talking to the industry right across, trying to find successful applicants for EFG funding. Ultimately, after almost a year’s work, we found one out of an industry that is quite clearly dominated by SMEs. Even that one example had to go through some extraordinary hoops and hurdles to eventually qualify. Indeed, it involved one director of a company, as it was a married couple-both directors-resigning in the end; the remaining director ended up transferring their share of the ownership of the family home to the now non-director and, therefore, isolating the home. That took the home out of the conversation and eventually the bank did concede to grant the loan, but that’s one example out of a £5 billion a year industry.

Q234 Simon Kirby: As you say, a good bank these days is hard to find.

Feargal Sharkey: Wiser words never spoken, Simon.

Simon Kirby: But if I bring you back to the point, I understand the problems and they don’t surprise me. What can BIS do to improve the relationship between banks and your sector?

Feargal Sharkey: We have clearly been discussing this quite a lot over the last couple of months with the banks and there are certainly two, now, of the large high street banks, to their credit, that have identified that there is something of a blockage here, and that this is not working the way that it should, and are indicating to us that they would be very happy to engage in a conversation. Standards of application is clearly one thing because each bank seems to be interpreting something slightly different from the music industry and, I don’t mean it disrespectfully to them, simply because they don’t understand it. I think it is actually quite extraordinary to expose the average bank manager in a branch of a high street bank in this way, to make some sort of an assessment of a music industry business plan. I think you might as well ask me to assess a pharmaceutical plant, having absolutely no knowledge or experience in how to do that.

I think what we would ask Government to do right now is to help us work with the banks and to show a bit of leadership and a bit of vision; to help us work with the banks to develop a set of standards and a set of appraisals. We could quite clearly look at mentoring; we’ve offered up to the banks that we can call on blind assessment of applications using people like Brian and people with very long, distinguished, successful careers in my business. I think that perhaps Government, as part of that process, might look to report on a quarterly basis as to what progress has been made and how that blockage has been untangled, and that flow of funding coming back into my industry. I think there’s quite a lot there that we could be looking at very productively.

Q235 Paul Blomfield: The experience you described, Brian, is one that’s echoed by band managers that I’ve spoken to in my constituency in Sheffield. When we pressed banks on it-I spoke specifically to RBS-they said that they’d responded to the problem by establishing a corporate media department and that they’d set aside a £100 million music media fund specifically to address this issue. Has that impacted? From your experience has that changed the situation at all? Are you aware of this initiative effectively in terms of how much difference it makes?

Brian Message: Yes, we’ve been made aware of it only recently.

Feargal Sharkey: In the last couple of days.

Nadhim Zahawi : Surprise, surprise.

Brian Message: The issue with this is the fund-and we know the guys that run the fund within RBS-is very much targeting deal values over £5 million. It’s all about leveraged buyouts of copyrights, maybe sometimes of individual artists, maybe sometimes of catalogue businesses that have been bought and sold, so very much in that traditional buying and selling of assets where the deal size is something that makes some sense. What we’re talking about here, obviously, which is where EFG was so exciting for us, was pitching it at this area of £200,000, or maybe £400,000-it’s that delicate seed capital. Again just to go back to Feargal’s point, we have a wealth of really fabulous, young, talented musicians and micro-people around that-little industries. In our business plan for The Rifles, of the £200,000 that we wanted to borrow, £85,000 of that was to hire specific individuals: radio pluggers, TV pluggers, international sales expertise and so forth. So, there are wider beneficiaries from this that suffer because of it. The RBS thing is not really relevant to this.

Q236 Paul Blomfield: Looking at it for the moment from the bank’s perspective, there is clearly a problem for them in valuing cultural goods, which are much more intangible than a lot of products for export in other industries. What do you think the solution to that problem is?

Feargal Sharkey: Certainly from the conversations I’ve been having with two of the high street banks-and I’m hoping to gauge two others over coming weeks-I think we can get around that problem because actually what those countries are looking for is sustainability, and whether that is another way of making a measurement. The fact that there may be an independent record company out there, by way of example, that has managed to exist, to keep itself profitable for over 12 years, as well as in a number of ups and downs, and recessions and likewise, is that a good indicator of their likelihood to be able to secure that loan and deliver it back as much as being able to put a value on whatever IP, assets and catalogue that they might own? So that was part of the standards thing that we’ve been discussing with the banks in trying to identify other, more transparent areas for them.

From what the banks tell me, by way of example, the first thing they look at in terms of the process is the person. Straight away, we possibly have a slight disjunction as, clearly, those from creative industries, being the wonderfully creative, beautifully eccentric-I mean that in the most joyous sense of the word-and brilliant entrepreneurs and driven people they are, do not necessarily turn up at work every morning at nine o’clock wearing a three-piece suit and a tie. Clearly, there might just be a cultural thing going on there that’s prejudicing that application before you’ve even got anywhere near analysing things like cash-flow, credit risk and everything else. So, I think there’s an awful lot of quite productive work we could go into while leaving aside the intangible idea of trying to place a value. Even if it came to that, there are people in our industry whose career and profession is based on those kinds of valuations; we can tap into that type of expertise if we need to.

Brian Message: I think as well, bank managers have a portfolio of potential risk that they can invest in. It was very telling to me that the first manager that I saw in respect of The Rifles said, "Look, if you were here offering a plan for a Domino’s pizza franchise, we’d have given you the money just like that." You automatically think, "Well, culture and Domino’s pizza franchise…" but from a business perspective you could understand why a bank manager will go down that path and go, "I’ll take the Domino’s pizza franchise; it’s way less risky than this thing called rock ’n’ roll artists, ’60s, ’70s-isn’t that something a little bit racy for us? Maybe that’s not what I should be doing; I’ll go Domino’s any day," and you can understand that.

Q237 Chair : I can see the problem as a Captain Mainwaring meets David Bowie sort of chemistry.

Feargal Sharkey: That’s possibly a very good analogy, Chair.

Chair : But, yes, it’s interesting. Obviously, we need to look at ways around this. Sorry, you were going to say something else.

Feargal Sharkey: Yes, just to follow up your point, Chairman. There are currently as we speak a wave of very young black artists, particularly from the east end of London, who are about to reach out on an international stage, and particularly north America. You can start with Jay Sean, who’s already had a number one record in north America; there’s Tinchy Stryder and obviously Dizzee Rascal. I’m not sure what kind of response Dizzee Rascal would have had five years ago walking in to see his bank manager, but five years later he is now a highly recognised, incredibly gifted, talented, successful young man. That’s the bridge that I need to build.

Brian Message: I think as well in the 2001 report "Banking on a Hit" there was a genuine issue as to how much experience and expertise that there was within the music industry on a professional level. I think if you were to sit just with my board at the Music Managers Forum, you would see a level of qualifications and expertise that are genuine quality business people driving multiple businesses, multiple artists across the world and multiple revenue streams, right from the managers of Paul McCartney down to all of the young ones who are looking to try and forge their business. There is genuinely now a level of expertise that maybe wasn’t there 10 to 15 years ago.

Q238 Ian Murray: Most people here have already laid claim to their constituencies being at the centre of the creative industries in the world, but I think Edinburgh deserves a special shout there.

Feargal Sharkey: It certainly does.

Ian Murray: I’ve had some experience of this directly, and marrying up what still is the third biggest financial centre in Europe in terms of what Edinburgh provides to the financial sector and being at the heart at certain times of the year internationally of the creative sector, the bank managers are living through it for most of the year but still wouldn’t fund it. As someone who ran a creative industries business as part of that process, I know that the people who were selling the doughnuts, the beer and the food were well-funded by the banks, but the people who were actually putting on the creative part of it were paupers in comparison. Not to follow up with Simon Kirby’s puns, but I suppose when Simon said that the first thing that went through my mind was that teenage kicks are hard to fund because if you’re at that level with your very first scribble on a piece of paper, the bank manager’s just not going to look at it, when with Dizzee Rascal they will.

Feargal Sharkey: Ian, if I could carry the analogy on, I grew up in a town that at the time, due to other circumstances, had something like 60% unemployment amongst men. I had a job, and a very good job. I think I can distinctly remember my bank manager’s reaction when I asked him for a £100 loan to buy an amplifier. I also remember that we then went and got that money together and developed a career, and we ended up spending £100 plus £8 VAT as it then was, on a recording session lasting eight hours, and during those eight hours we created a thing called "Teenage Kicks". It was the best £100 investment I ever made in my life and I couldn’t get it from my bank.

Q239 Ian Murray: That leads me on to the substantive question. How do you value the intellectual property better so that you approach the banks with something that says, "This is intellectual property and it is worth x now, but could potentially be worth y, and that needs to be funded to create that growth."

Feargal Sharkey: That is just part of the risk model that the music industry had. It is actually no different from any other industry; whether it’s someone creating a new car, a bar of chocolate or a new widget you’re making assumptions as to what the likely demand and, therefore, income generated in years to come will be. The music industry is no different than that. Clearly, there are experts in our industry who do nothing but acquire catalogue and, indeed, a deal of that nature has taken place within the last 48 hours with Bertelsmann acquiring Chrysalis, and quite clearly, they, because of their knowledge and experience, put a particular value on that catalogue and no doubt will derive value or a return based on that. However, it is also why we’re having the conversation with the banks and trying to ask for help from Government for us to work with the banks to develop some guidelines for the banks that would look at other factors and other indicators. These would help give banks some kind of reassurance that the people running that business do know what they’re doing; they are capable, they’re successful and they will get repayment; and it is a good loan, and a good business to get into. From those initial banks that I’ve been talking to, we’re having quite a lot of positive response, but clearly I’m trying to reach out to Government to help us develop that.

One of the reasons we’re doing that was in fact a meeting back in February or March this year with the European Commission and member states, where they developed what I believe has now become known as the Amsterdam declaration. If it helps the Committee-and, indeed, Simon’s point of what else BIS could do-I will quote you one paragraph: "Member States recognise the lack of access to finance is a core barrier to growth for many businesses in the creative industries"-i.e. that’s on a Commission level-"and calls upon regions, Member States and the European Commission to facilitate more access to finance for the creative industries companies by, firstly, developing dedicated financial instruments, stimulating and leveraging, cross-border private investment and access to loans, e.g. guaranteed funds." So, clearly, I would be delighted to sit down with BIS and discuss what they contemplate doing now to begin implementing the Amsterdam declaration that was issued back in February of this year.

Brian Message: And if I could just add a little rider to that, it’s not just an IP question here. This is actually about real people going out and doing real jobs. The Duke Spirit, Band of Skulls and One eskimO-all British bands-will be on tour in north America generating profitable businesses and generating income. I think part of the difficulty is that notion of a band getting up and then, from a bank’s perspective, going to do a job of work; "What happens if they don’t turn up," and so forth. Well, they all turn up; there are very few examples where a band doesn’t turn up to play because they want to play a show. It’s a professional business; it is a mature business. So, the IP question of it is a small one.

I think what we’ve been trying to show, and there will be new business plans going into banks next week, is that we have British businesses that demonstrably generate multiple revenue streams, of which one is IP, across multiple territories. We’re very lucky that the internet has provided us with a gateway to people all over the world; many of our artists can put new music out there and deliver it for a fraction of the cost to over 200 countries. Given our cultural heritage of how good we are at music over the last generations, it’s a golden moment for us to grasp that and actually drive home some success.

Q240 Mr Ward: A thought that went through my mind was that we’re looking, I guess, at the musicians and performers who are losing out because of maybe a cultural gap that exists between the bankers and those wanting the funds. The other side of this, of course, is you could say the banks are actually missing out on proposals that would potentially bring in finance and profits to the bank. Going back to this cultural thing, I just wonder how much it’s a training issue, really, for banks. There are clearly going to businesses that fail and those that succeed; that’s business. I just wonder how much it is not that the money is not available, but there’s a training issue within the banks themselves.

Feargal Sharkey: My instinct, based on my experience over the last 12 months, is you may not be too far from the truth.

Q241 Mr Ward: You said, for instance, that you couldn’t assess a pharmaceutical proposal.

Feargal Sharkey: Sure. I have no knowledge or experience of how to do that.

Q242 Mr Ward: But if you went to a bank you would expect them to find somebody who could.

Feargal Sharkey: Indeed.

Q243 Mr Ward: And I think you could expect them to find somebody who had an understanding of the music industry.

Feargal Sharkey: And, indeed, it is one of the things that we would like to put on the table. I can think of any number of ways to blind test an application and help provide them with a completely unbiased, arm’s-length objective viewpoint of the application and the business plan that accompanies it from a very specific point of view. So, we’re very willing to do whatever we possibly can to unblock this bottleneck that we have and make it work.

Brian Message: The first business plan that we took to RBS, we took to their music and media division in Piccadilly. So, I would suggest they say they have that expertise, but I wonder whether it’s outward facing; i.e. it’s there to collect music and media accounts, but maybe not loan accounts. So, it’s there just to collect business rather than necessarily having the correct training, I suppose, to assess these things.

Q244 Nadhim Zahawi: Just on that point, Brian: we had the banks here before us. They were all complaining that obviously they were providing the finance and so on, but one of the bits of evidence we had from small business especially is that in certain categories of business, the banks didn’t look positively. For example, in the manufacturing industry, they just don’t think it’s an industry that’s a growth industry, a sexy industry for them. Just picking up on Ian’s point, in your conversations with the banks, is their fear, for example, that the internet was disrupting the business model-they could understand the old business model of the music industry, but they just don’t get the new one-and therefore have officially or unofficially blackballed it because they think, "You know what? We just don’t understand the business model."

Brian Message: Yes, I think the word on the street certainly is that the music industry might be having a bit of difficulty because of the disruptive nature of technology. Technology has been with us for hundreds of years. The changes impact music all the time. The consistent thing is that we continue to perform, whether we change from vinyl to CD, from CD to digital. So, yes, I think you’re absolutely right; there is a perception issue, but I think the underlying reality is the reverse.

Feargal Sharkey: To give you an illustration, at the end of the 19th century the music industry consisted of people selling sheet music. Along comes Thomas Alva Edison and within a single generation he completely transformed and restructured that industry to one based on phonogram. We all appreciate now, I think, what impact the spin-off from the second world war-vinyl-had on rock ’n’ roll in the 1950s, cassettes in the 1970s, CDs in the 1980s and the iPod in the 2000s. In case anybody hasn’t spotted, there’s a clear correlation over 120 years: technology is good for the music industry. Technology needs the music industry; the music industry needs technology. We all looked at an iPod five years ago and thought, "I don’t know what that does, but, if it looks like that, I would quite like one." This morning, travelling in here on the Northern Line I realised what’s really clever about it: it has all my favourite tunes on it. So long as this industry has that, and we always will, we will always have an industry.

Q245 Ian Murray: I’ll just conclude this section. We all know the Enterprise Finance Guarantee Scheme doesn’t work for the music industry or any of the creative industries, it says, right across the board in everything that we’ve done. We’re obviously going to produce a Report about growth and about how we support that industry. What one or two things would you change about that scheme just to make sure it can respond to the creative industries properly? We’re not asking for favouritism here; we’re just saying to be given a fair hearing.

Feargal Sharkey: That’s it.

Ian Murray: And if I could just go slightly off script for a small supplementary to that, you’ve always spoken at great length about how licensing is causing a real issue for the growth of the creative industries. How could we feed into that as well to make sure that the music industry is thriving at grassroots level, which allows you to access funding in the first place?

Feargal Sharkey: On the first question I would extend it beyond the Enterprise Finance Guarantee Scheme. I think I could probably-in fact I will-go so far as to suggest that historically, no Government support finance programme targeting SMEs has ever been successful for the music industry or possibly the other creative industries. That’s just a fact of life.

Q246 Chair : Feargal, I’ll just intervene at that point. Earlier, the Small Firms Loan Guarantee Scheme did get a mildly favourable mention.

Brian Message: Yes.

Chair : In effect, the Enterprise Finance Guarantee was supposed to be a development of that. Where has it gone wrong; what has the difference been?

Brian Message: My experience of it: I used the Small Firms Loan Guarantee Scheme with other partners for three businesses, but they were all outside of music. One was a jewellery business and so forth; it was just manufacturing.

Q247 Chair : It was creative, but not music.

Brian Message: Correct. It was not music.

Feargal Sharkey: It is indeed my point, Chair, that I think I can still stand with some validity on the statement that at no point in history has any Government’s targeted financial support scheme for SMEs brought any benefit to my industry, or, indeed, it is marginal at best.

Clearly, if we are serious about using the creative industries, and I think I can say this across the creative industries, in being a driver of growth in UK plc over the next few years, we need to address that issue. Personally, I don’t mind whether someone calls it the Enterprise Finance Guarantee Scheme, the Small Loans Guarantee Scheme or anything else; we just need a scheme that works. There is if I could say so, a real palpable sense of frustration; certainly within my industry, in my conversations with the other creative industries. Specific to the music industry, we have been talking to Government about this now for 12 years. I did discuss with officials yesterday, as you may know, the announcement of a joint Report between BIS and DCMS specifically looking at the creative industries. We very much welcome it; we will support it; we will give whatever input we can into it, but at what point do we stop talking about these things and stop producing reports, and actually go out and do something that matters?

Q248 Margot James: I don’t know whether you can answer a question on video games, but you did mention your conversations with other creative industries.

Feargal Sharkey: Yes.

Margot James: And obviously there’s a missing expert witness this morning. I wondered if you had any knowledge of the video games industry and the particular issues it faces, and whether the Government can do anything to help that sector.

Feargal Sharkey: I do have a little, but I’m by no means an expert. I do spend a great deal of time talking to other creative industries, as clearly we’re facing a number of similar issues. Clearly, they were anticipating some form of tax support in the run-up to the general election. That appears now to be off the agenda. I think they’ve been incredibly disappointed by that. From my own personal observation, I think I can with some certainty recall Ian Livingstone, the Managing Director of Eidos, I believe, who developed the Lara Croft series of games, as far back as five or six years ago making it pertinently clear to the Government at that time that he was under enormous pressure because of support in other nations for their creative industries and, in particular, IP-based industries; he was probably not going to be able to sustain and retain the IP for the Lara Croft brand in the UK. If I recall correctly, about 12 months ago Ian eventually did sell the company to a Japanese company, and that brand, that IP, that copyright, that asset has now transferred out of this country. We have to stop that kind of thing happening in the future.

Q249 Chair : Thanks. I think almost reluctantly we have to bring this session to an end. It has been absolutely fascinating. I have to admit that I collect records that I then play on my wind-up gramophone, and I have to say that my level of technological comprehension of the industry is pretty well frozen at that level. Today has been a real eye-opener and I think the information you’ve given us is very useful indeed and we will wish to pursue it further. Could I also say that if you feel that there are any questions that you could add further information on then please feel free to write to us. We’ll be very pleased to look at that and incorporate it into the Report. I thank you for your evidence. It has really been very enlightening indeed and we will be taking up the issues with the Department.

Brian Message: Thank you.

Feargal Sharkey: Yes, Chairman. I’m incredibly grateful for your time and your recognition and giving us this opportunity to discuss this. Thank you all so very much.

Examination of Witnesses

Witnesses: Mr Danny Stevens, Policy Director, Environmental Industries Commission, and Dr Gordon Edge, Director of Policy, RenewableUK, gave evidence.

Q250 Chair : Good morning and welcome. I apologise for running slightly over time, but there were obviously issues that raised a lot of interest and that we needed to explore. Could I ask you to introduce yourselves, just for transcription purposes?

Danny Stevens: Good morning. Danny Stevens. I’m the Policy Director for the Environmental Industries Commission.

Gordon Edge: My name is Dr Gordon Edge. I’m Director of Policy for RenewableUK, the trade association for the wind, wave and tidal stream industries in the UK.

Chair : Thanks very much. I’m going to invite Nadhim to open the batting on the issue.

Q251 Nadhim Zahawi: Thank you, Chair. Gentlemen, thank you for coming. BIS have talked about creating a culture of growth and helping private industry flourish. What should that statement mean for your sector?

Gordon Edge: Perhaps if I pick up on that one. We have a general point about Government generally when it comes to my industry and, I believe, also the industries that Danny represents, that is their number one priority in terms of encouraging us as an industry is setting the policy framework for the delivery of our technologies. So, making sure that my members can deliver onshore and offshore wind as well as wave and tidal stream technologies into the water. If that happens then all else can follow; if it does not then we can go home. So, that’s a number one point for us; it’s always the case.

I thought it was quite interesting when energy was taken out of what was then BERR a couple of years ago, that we had an opportunity then to focus on business development from a business point of view for the renewable energy industry. Certainly, under Lord Mandelson, I think they were really getting it and starting to really help us forge an industry going forward. We had some very good funding in partnership with DECC on the innovation side and on the infrastructure for manufacturing. So, for instance, we were very pleased that in the Spending Review the £60 million for port infrastructure for offshore wind manufacturing was protected, and we were very glad of that extra funding for things like Wave Hub down in the south west. We’re very much keen that the low-carbon business team in BIS continues and is doing good work. There’s been some really good engagement, I think, with BIS so far. We tend to see that as a bit of a tip of the iceberg and we sense there is an awful lot more going on underneath with BIS, but it’s a little subterranean; we can’t quite see it, and we’re looking forward to seeing more of that and them being more open and forthright about coming to us and saying, "This is what we can do for you."

Nadhim Zahawi: Thank you.

Danny Stevens: If I may pick up, I would like to echo Gordon’s comments about the importance of the policy and regulatory framework. Our industry-the industries that the Environmental Industries Commission represents-moves forward principally through advances in the policy and regulatory framework. The industry lives and dies by the policy and regulatory framework. You mentioned the importance that BIS has committed to creating a culture of growth. Indeed, it published a sustainable growth strategy recently, all of which is very welcome; welcome in rhetoric alone, I think, unfortunately. The UK environmental industry is currently worth £111 billion, as of last year, and that’s approximately a 5% or 6% share of a global market that is worth £3.2 trillion across the world.

The industry has to be at the heart of Government economic policy and policy towards growth. The figures that were published under the previous Government suggested that the industry could grow by 50% between now and 2014-15 and, equally, that the job prospects in the industry could grow by 50% from just under 1 million people employed by the industry between now and 2014-15. There are huge economic opportunities in the industry. They will come to fruition only if they are supported by Government through targeted intervention.

There have been numerous academic studies, numerous Government reports and, indeed, numerous quotations from various ministerial speeches over the years acknowledging the market failure in the environmental industry, by which I mean that the polluter doesn’t pay for the environmental damage that they cause. To correct that market failure we need targeted Government intervention to put a price on pollution and to internalise the externalities as George Osborne articulately put it in opposition. Achieving that, as I say, requires a level of Government intervention and an active Business Department that supports the low-carbon and renewable industries that Gordon represents and, indeed, the wider environmental industry that EIC represents.

Q252 Mr Ward: Can I ask, Danny, whether it was in 1995 that the EIC was launched?

Danny Stevens: That’s right.

Mr Ward: And I think it was 1978 for your organisation, Gordon. How are we doing? How is it doing now compared with then? It’s a long time ago, certainly in terms of your own organisation. Are we on the way?

Gordon Edge: I’ll start with that one. 1978 was indeed a long time ago, and when we started as the British Wind Energy Association back then, it was very much an R and D, enthusiast kind of job. We only really became a professional organisation in the 1990s. When it comes to being an industrial power in the renewables industry, we are starting from the back of the pack. We had an early sprint start in the 1980s and early 1990s, which we then ceded, essentially, to the Danes, the Germans and, latterly, the Spanish.

But we do have, I think, a lot of key skills that we can transfer into our sector, particularly for offshore wind. So, for instance, in the offshore oil and gas industry we have some direct transfers. For instance, BiFab, a fabrication firm in Methil in Fife, is the leading company for jacket structures for offshore wind turbines, and that comes directly from their experience in oil and gas. We have a lot of good intellectual infrastructure and a lot of strong research in places like Sheffield and Edinburgh Universities, Strathclyde and Durham, which can be brought over to our sector. We have some of the leading technical consultancies in our business here in the UK; we have direct transferrable skills in terms of things like aerospace composites that can be transferred to large wind turbine blades. So, I think we have a lot of advantages that could accelerate us into the forefront so long as we take the opportunity now, fund it correctly, get the right policy environment for the delivery of the technology, but also find ways of encouraging and incentivising the companies to get into this, as much by example as by exhortation. One of the things that I would like to see BIS do particularly is really go out and sell the opportunity that we have to UK business and really underline that it’s a solid opportunity; it is going to happen, and you can be a part of this. It’s something that I don’t think we’ve seen quite yet.

Danny Stevens: In direct answer to your question, I think we’re doing okay with supporting the environmental industry. There have, without doubt, been advances since 1995 since the EIC was established to represent and give a strong voice to the whole environmental industry, by which I mean the renewable, the low-carbon and the wider pollution control industry.

One of the key areas in which there has been advances, if I can start from a very high level, is the rhetoric around support for the environmental industries. There has been a marked change in my five years at EIC around the political importance of green jobs and the narrative around supporting the industry, which has moved from-or taken a few tentative steps away from-the position that environmental protection policy and the environmental regulatory framework is a cost and burden on business, moving towards a narrative that recognises the economic opportunities. I think there’s an awful lot further to go, picking up some of the points that Gordon was making about BIS having a much stronger role in promoting the UK’s environmental industry.

So, I think from a political point of view there have been some very welcome advances that have been supported by advances in the strategic support that BIS has provided. Under the previous Government there was the low-carbon industrial strategy. As I mentioned, I think, before you came in, the new Government has published the sustainable growth strategy. These are all very welcome steps forward; however, where we perhaps haven’t moved forward quite as far as we would like is in the actual implementation of those strategies. I still feel that support for the industry exists not quite in rhetoric alone but the rhetoric hasn’t actually been supported by implementation.

Q253 Mr Ward: I wrote down "rhetoric". My next question was to be about the extent to which we’ve moved beyond the rhetoric. Can you give some concrete examples of where you think there’s clear evidence that we’ve moved beyond the rhetoric in terms of Government initiatives and policies?

Danny Stevens: One of the areas I was going to pick up to demonstrate where we have advanced is the size of the industry within the UK. As I mentioned before, it’s worth £111 billion, approximately a 5% to 6% share on the global environmental marketplace. However, we have lost ground to countries like the US, in recent years to China and certainly to other European countries such as Germany and Denmark. One of the reasons for that is that the UK hasn’t moved far enough away from the rhetoric and actually implemented a domestic policy and regulatory framework that supports the industry and enables it to grow domestically and, therefore, facilitates the huge export opportunities that the industry has for the UK.

There are a number of positive examples, I think, in terms of policy making over recent years. If I can draw on a couple of examples, the first would be advances in our policy towards buildings-new and existing buildings. There have been far greater advances in new build, with a target for zero-carbon homes by 2016 and, under the previous Government, zero-carbon non-domestic buildings by 2019-all very positive policy making. One of the key positions of EIC has been the importance of providing a long-term policy framework that is stuck to and enforced appropriately to give business the confidence it needs to invest. That policy around zero-carbon homes is a fine example of that. It gave a long-term target that the industry had to achieve and a trajectory towards achieving that.

However, inevitably the devil is in the detail and as we approach 2016, as we get into the detail of what actually zero carbon means, that’s when we get bogged down in some of the detailed policy making that has had a negative impact on businesses’ confidence to invest. Still, we don’t have a clear definition of what zero-carbon homes means for 2016. It’s the uncertainty with which that policy making is implemented that has huge detrimental impacts on the industry’s ability to invest.

Gordon Edge: I think in terms of the litmus test of the rhetoric being followed up, we are about to get the Department of Energy and Climate Change releasing its consultation on electricity market reform, which will make it clear precisely how supportive of the renewable industries and their development the Government really is. So, at the moment we’re waiting with bated breath for that particular consultation that we’re promised before Christmas.

When it comes to BIS, we are very pleased with the £60 million being protected for port development infrastructure for offshore wind manufacturing. That was actually a very clear signal from Government as a whole and BIS in particular that they were going to support our technologies. That was indeed followed up very closely by Siemens, General Electric and Gamesa from Spain all making clear announcements about what they were going to do in terms of building manufacturing in the UK. I’m also anticipating an interesting announcement from Mitsubishi this Friday on other similar kinds of issue. So, we can see that there has been support that has been giving fruit already in terms of announcements on potential factories; we’ve yet to see people actually digging ground, but we’re looking forward to that immensely.

Q254 Mr Ward: You’ve called, I think, Danny, at the EIC, for an environmental industry forum to co-ordinate Government activities in promoting the industry. Do you see BIS having a role in that at all, and helping the creation/formation of that?

Danny Stevens: Yes, I think BIS has a central role to play in supporting the environmental industries. One of my biggest concerns since the formation of the new Government is that there is a tendency in BIS and certainly in the Treasury to leave environmental policy and climate change policy to the respective Departments-to DEFRA, DECC and, indeed, the Department for Transport in terms of sustainable, low-carbon transport policy. I think that would be a huge mistake. BIS has an absolutely critical role to play in supporting environmental businesses, not only the industry that we represent, but also in terms of communicating with wider industry. Climate change and environmental policy is business policy; it has to be business policy and it has to be economic policy. In order to co-ordinate that, I think BIS has, as I say, an absolutely critical role.

Q255 Mr Ward: The thing that struck me about the recent visit I had to B&Q, of all places, was just how immensely impressive they were in terms of the contribution they were making to the green agenda. There is a view that it is all about wind turbines and solar panels as opposed to making existing businesses just far, far greener; that’s pollutant emissions. Are both sides receiving attention in your view?

Danny Stevens: Both sides of industry, so the industry that our members supply to?

Mr Ward: Yes, your average, ordinary business. Are they being made fully aware it isn’t all about, as I say, wind turbines; it is also about existing businesses and reducing their contribution to carbon emissions?

Danny Stevens: On whether they’re receiving enough attention, I would hesitate to say that wider mainstream industry and the industry that our members supply to is receiving enough attention in terms of the importance of becoming sustainable, adopting low-carbon practices and adopting resource efficiency as part of the growth strategy. There are of course lots of positive examples of progressive businesses adopting ambitious low-carbon, resource-efficient policies, but I think across the wider industry that’s one of the areas where I see BIS having a central role: actually communicating with wider industry about the importance of moving towards a low-carbon, resource-efficient economy.

Again, there are some positive examples across Government. Of course, there is the EU emissions trading scheme, which is focused on the most polluting industries and at the level below that there is the carbon reduction commitment that was introduced recently in its introductory phase. They are examples of what I’m talking about in terms of policy and regulatory framework that needs to drive the wider economy towards more low-carbon practices.

Again, however, with the carbon reduction commitment, the surprise announcements in the Comprehensive Spending Review were that the revenues from the scheme would be swallowed up by Treasury rather than being recycled back to participants and will be contributing to the public finances, and changes to the actual design of the scheme, which the Committee on Climate Change recently recommended and DECC has recently gone out to consultation on. To supplement all of that, yesterday DECC announced that the scheme would actually be delayed by a further year. None of this gives business the confidence to invest in low-carbon and resource-efficient technologies and to change the way it operates, and to contribute to the UK’s Climate Change Act targets and, indeed, its move towards a more sustainable economy. I think moves like that and the uncertainty around policy making has a very negative impact on that wider industry and its confidence that Government will stick with these policies, and follow them through to make the investment in low-carbon technologies worth while.

Q256 Mr Ward: Because the question is whether it is-and we’ve seen this in other areas we have investigated-simply about creating the right environment for something to happen or whether there should be direct investment in it as well. You mentioned there the failure of the recycling of savings into direct investment; what’s the balance between those? There are, for instance, the Green Investment Bank and other measures in place; do you see those as positive moves forward by the Government?

Danny Stevens: I certainly see them as positive moves forward. I think, coming back to my original point, the most important aspect of this is the policy framework that underpins the entire economy and embeds sustainability, embeds low carbon and embeds resource efficiency into the very fabric of the UK economy.

Q257 Mr Ward: You mentioned buildings; would you add to that? Could you give some other examples on a regulatory basis?

Danny Stevens: Examples that are in place at the moment?

Mr Ward: Of policy. You’ve mentioned buildings earlier on; are there any other policy areas?

Danny Stevens: To just come back to your original question about the balance between public and private investment, and if I can just mention the Green Investment Bank very briefly as well, as I said, the underpinning policy framework, I think, is the most important aspect of all of this and the most important role that the Government can play in supporting the business opportunities in our industry. The Green Investment Bank is a very positive step forward and the Comprehensive Spending Review announced £1 billion of public funding to kick-start the bank. However, again, that bank will only be as successful as the environmental policy framework that underpins it. It is very welcome to have an institution that one would hope will be able to raise its own finance and will be able to direct investment into this industry, but if there is no market within which to invest, then its role is almost redundant. It’s absolutely crucial that the policy framework that creates those markets is implemented and enforced over the long term to give businesses and venture capitalists, etc., the confidence they need to invest.

There have been, just to cover your point on policy, some positive steps forward. If I can use air quality as an example-both from industrial and the transport side-in terms of the industrial side, many years ago the UK Government introduced a scheme that local authorities used to regulate polluting installations within the local authority area. That went above and beyond anything required by EU legislation, and it set an ambitious permitting programme with which these installations had to comply. That created a market for the industry; that created a market for the UK industrial air pollution control sector, which is now exporting across the world. We have a number of members who, because the UK Government was confident enough to establish a domestic policy framework and confident enough to allow the sectors supplying those installations to flourish, those businesses are now exporting across the world. The UK is one of the leaders in terms of supplying industrial air pollution control.

Transport is a very similar story. In terms of London, the low emission zone creates a market for transport pollution control technologies. The UK has approximately 80% of the EU market in terms of transport pollution control technologies; the low emission zone in London created a market, gave businesses the confidence they needed to invest in these new technologies. Across Europe there are many low emission zones, which all of our members are supplying to.

Gordon Edge: If I could just follow up on a point about the Green Investment Bank, I very much agree with Danny that the policy framework is vitally important, and without it the Green Investment Bank is virtually useless. However, I think one of the more interesting things about the Green Investment Bank from our point of view is it should have a positive feedback loop. If Government is there putting its own money up into investments that rest upon its own policy framework, one would hope that the rest of the market can take comfort from the fact that Government is investing on the back of its own policies and, therefore, it wouldn’t get in there and mess them up because they’d lose out themselves. So, I think that’s an important factor in the Green Investment Bank proposal.

Q258 Chair : Just before I bring in David, can I just raise an issue that I’ve been wrestling with-and you’re not bankers so I appreciate you might not be able to give a specialised insight into this-but I would be interested in your views. We know there is an issue that is currently being worked through, whether the Green Investment Bank will be either just a Government money disbursement process or a commercial bank with the ability to raise funds and invest on a commercial basis. I think most of us would prefer the latter model as being potentially the most effective. However, if it does work on a commercial basis and green investment is commercially viable, why do you need a green investment bank as opposed to any other bank to do it? What particular advantages within the market do you see the Green Investment Bank having both to access funds and to invest?

Gordon Edge: I think the point I was just making about confidence in the policy agenda is vital here. Investments might make sense, but people might not have the confidence that the policy environment is stable enough for those investments to follow through. So, having the bank there co-investing, having Government having skin in the game gives people the sense that, "Okay, actually they are serious about this; it will happen; they won’t pull the rug out from under." Therefore, people will co-invest. In due course, the Green Investment Bank could step away and say, "We don’t need to do it any more; it’s a purely commercial venture," and that would be, to my mind, a very successful outcome.

The reason why we’re doing the Green Investment Bank is because we need to accelerate things. In my mind, if we left it long enough, pension funds could very well be investing in offshore wind farms as long-term asset investments and it would match their risk/reward profile very well. But we need it to happen in the near future, not in five or 10 years’ time. You need an institution to try and channel those funds now rather than later. That, for me, is the agenda around the Green Investment Bank.

Chair : Yes. Danny?

Danny Stevens: I would agree 100%. It would be wonderful if the Green Investment Bank wasn’t needed and the banking community was investing in our respective industries. I think, to add to what Gordon was saying, is that in terms of investment in this industry there isn’t a particularly strong track record that the banking community can tie itself to. There haven’t been many examples of returns on investment because this is still a relatively young industry that both the EIC and RenewableUK represent. I think that has a tendency to mean that investors are less likely to invest in our respective industries, which is where I see one of the reasons for the Green Investment Bank.

Gordon Edge: I would, though, follow up that I think renewables has come out reasonably well, relatively speaking, from other sectors. People know that the drivers are very strong-climate change, energy security-and that no project in the UK has ever defaulted on a loan. It’s as safe as houses and, therefore, people are looking at this and going, "Okay, we believe it," and really it’s a matter of constraints on credit generally which hold people back from making loans.

Chair : Yes. David, do you have any further questions?

Q259 Mr Ward: The problem seems to be that there are no short-term gains, are there, from green investments? They are long term and, therefore, likely to be more risky to invest in.

Gordon Edge: I think people would look askance at very high rates of return on projects that are supported by the public. So, I think we would find that there are inherently going to be projects that pay out over 10 to 15 years. That’s certainly true and, therefore, you are deeply dependent on the policy framework you’ve been so strong about.

Q260 Mr Ward: I guess you’re going to say "no", but is the Green Investment Bank enough?

Gordon Edge: It depends what you want to do. It could be enough in the short term-in the next five years-as long as it’s very closely focused on what you want to do, and I’d argue there are lots of things around offshore wind and energy efficiency that are particularly key here, and probably that’s about it. That £1 billion could get you through the next five years as long as there was more coming later. So, it’s enough in the short term, but you would need a promise of more coming down the track for the full panoply of the low-carbon agenda. I think you would have to focus on the low-carbon agenda particularly and, within that, offshore wind and energy efficiency.

Danny Stevens: Can I just add to that and contradict my esteemed colleague? One of the strongest recommendations that we could make is that the Green Investment Bank cannot be focused solely on low carbon. Of course, climate change and renewable energy is absolutely a vital part and must become a vital part of the British economy, but there are huge business opportunities across the rest of the environmental industry. It is approximately one-third of that £111 billion that I mentioned at the beginning, and there are huge domestic business opportunities and huge export opportunities across the industry. Climate change is by no means the only environmental challenge with which we are faced, and tackling those aren’t costs on businesses; they’re opportunities for businesses. They’re opportunities for our industry, but also opportunities for the wider industry in terms of moving towards more sustainable practices. So I would make the strongest possible recommendation that the Green Investment Bank must focus on the entire green industry. If it fails to do so, I fear that the Government will be jeopardising economic opportunities across the wider industry within the UK.

Gordon Edge: I certainly wouldn’t want the Green Investment Bank to be limited to the low-carbon economy, but given the limited amount of capital that is being put on the table, I think we are going to have to focus on those key areas in the first instance.

Q261 Chair : Thanks very much. Just to conclude, the Strategic Investment Fund and Regional Growth Fund: do you see any role for them to play?

Gordon Edge: Potentially, yes. We would like to find out more about what the Regional Growth Fund is particularly going to do. I think they’re part of that iceberg that I was referring to earlier. We know that BIS has money at its disposal for a number of different things and that the Regional Growth Fund is one of these. We would like to see a carve-out and a definite sense that a chunk of this money on the table from the Regional Growth Fund is for the low-carbon economy, but we’ve yet to see the detail really coming out on that.

Danny Stevens: I don’t really have a great deal further to add to those points except, not so much specifically on the Regional Growth Fund but the general local economy support from BIS, the abolition of the RDAs is a concern. The RDAs had a statutory duty with which to promote sustainable development; it’s not clear exactly how the Local Economic Partnerships are going to work, but it’s certainly not clear that they will have a statutory duty to promote sustainable development. So, that is a concern because there was a role that RDAs had to play in terms of supporting our industry. In addition to that, the Government recently published its local growth White Paper, which was lacking in explicit support for green industries. That’s a concern from the regional level.

At a slightly higher level, yesterday the Government, HM Treasury and BIS published a joint Report, "The Path to Strong, Sustainable and Balanced Growth", and identified, I think, six or seven sectors on which it would be focusing in terms of economic opportunities for the UK, and the green industry was not one of them. Low carbon was part of the construction sector of the Report, but that’s as far as it went in terms of acknowledging the need for active support for this industry, which is I think a considerable concern.

Chair: That’s very interesting. Thank you very much. Of course, I think the thrust of what you said will be incorporated into our Report and, again, I will repeat what I’ve said to other interviewees: if you feel that you’ve not fully answered every question to the potential that you could do, please feel free to supplement what you’ve said today with some further written evidence. Thank you very much.

Gordon Edge: Thank you.

Danny Stevens: Thank you very much for your time.

Examination of Witnesses

Witnesses: Ms Lee Hopley, Chief Economist, EEF, and Mr Martin Walder, Chairman, Engineering and Machinery Alliance, gave evidence.

Q262 Chair : Good morning. Thank you for sitting patiently there and welcome to this morning’s deliberations. Again could I just start by asking you to introduce yourselves and then we will get into the substance of the questions.

Ms Lee Hopley: Good afternoon, my name is Lee Hopley. I am Chief Economist at EEF, the manufacturer’s organisation.

Mr Martin Walder: I’m Martin Walder; I am Chairman of the Engineering and Machinery Alliance. We are a body representing around 1,600 SMEs, primarily in the mechanical engineering sector, in the supply chains to a lot of the big sectors: aerospace, automotive, medical and so on.

Q263 Chair : Thank you very much. I will kick off with some fairly general questions. First of all, how effective do you think the work of the Manufacturing and Materials Unit is in supporting manufacturing?

Ms Lee Hopley: I will kick off; I think the Manufacturing and Materials Unit is a small and important part of the Department for Business, Innovation and Skills. At an operational level we have pretty good contact with it in terms of keeping up to date with what is happening across industry, hopefully providing a useful sounding board for emerging ideas, and as a link into other parts of the Department. I think they have got good connections in terms of their sector knowledge, so understanding the different parts of the economy and manufacturing in particular. I do not think you can necessarily look at that team in isolation given that there are other very important bits of BIS that have an impact on the business environment and the wider economy.

Mr Martin Walder: On a day-to-day basis we have good contact involvement with the organisation, regular meetings, some joint initiatives. I think at that level it is solid. We have probably suffered a little bit with the lack of ministerial portfolio in the last period, but I would say generally quite supportive.

Q264 Chair : You have partly covered my next question, which was to ask about the relationship of your organisations with BIS. If you have got anything to add to what you have already said fine, but in effect what practical benefits do you think it brings to your organisation?

Mr Martin Walder: Certainly for us it gives us an insight into what is going on and we are frequently quizzed and asked to provide input when things are going on. In that sense you feel quite connected. I would say there have been some joint initiatives recently that have been very supportive-part BIS, part from industry-which again in this instance has helped forward automation within a manufacturing sector, which we thought was quite positive.

Ms Lee Hopley: I think it is probably more important to reflect on how our engagement with the Department benefits our members. I would like to think that we bring knowledge. We are an influential stakeholder within the Department, which allows them to understand the impact that their decisions and policies have on the broader manufacturing sector.

Q265 Chair : Just to follow that up, what assessment would you make of the level of knowledge that your members have about BIS initiatives and its general industrial policy?

Mr Martin Walder: Clearly not as much information as we have in the trade association but we keep them fairly close, so whenever there is an opportunity to provide input it is put out there to hundreds of members to provide some feedback. Not everyone is an interested as others. I would say it is a moderate level; it certainly could be higher.

Ms Lee Hopley: I think it varies. On specific initiatives and policy documents, I would say the awareness of manufactures was probably relatively low. EEF tries to communicate those areas that are relevant to the broader membership. I think if we think back to the recession and the need to put in place very reactive supportive policies for industry, there was a good awareness. I think those were communicated well to industry and there was a level of responsiveness that was in many instances welcomed by the sector.

Q266 Margot James: You may have made various suggestions as to how the various Government schemes that are improving access to credit for your sector are working and how they could be improved. Are they not working very satisfactorily at the moment? Would you like to tell us what the experience of your members is in terms of the Government schemes to improve access to credit?

Ms Lee Hopley: I think you have to start with what the problem is and where exactly Government intervention can make a difference. I think the problems are more complex than simply a demand versus supply problem. I think clearly Government doesn’t have a large fiscal lever to pull, and even if it did it is not entirely clear what one silver bullet intervention it would be able to make that would result in a game-changing situation in credit conditions. I think the things that were introduced in the height of the financial crisis, such as the Enterprise Finance Guarantee Scheme, for example, have made a difference at the margin and I don’t think there is a great deal of controversy in that statement. I think most people would agree that it has helped some companies but it has not radically changed the landscape and nor was it ever going to. I think the fact that it was introduced very swiftly on the back of a very difficult situation for banks and industry in the depth of the recession was a good thing.

I think if we look to some of the broader interventions and funds that have sought to support investment and innovation across the economy, largely equity funds, I think it is perhaps been a little bit more mixed. I think there has potentially been an absence of industry expertise when these funds have been established, which does raise questions about why the outcomes would be any different than what the market is currently delivering. I think if we look ahead at some of the recommendations that came from the BBA taskforce report, for example, and the establishment of another business growth fund, I think those lessons need to be learnt. Where that is being set up, it does need some kind of industry involvement to make sure it is actually filling the gap that is currently in the market.

Mr Martin Walder: I think what we saw at the worst point of the crash of the financing sector was that a lot of the SMEs suffered by losing their facility, having rates changed, and maybe losing the personal contact with bank managers that they had for years. Their confidence in that relationship and so on really suffered. The EFG came and I think that helped companies that were really up against it, were really suffering and had maybe already extended their personal guarantees and so on; so for that it served a purpose. What I think we see now is a whole raft of companies that are doing okay, and could be growing at 10% or 15% a year or more, but they don’t want to risk taking out finance. If you go to the banks they will say that there is no demand there. Well, the guys are not too sure whether they can trust the link with the bank-they maybe won’t get the loans and the investment unless they put their personal properties on the line-so everyone is being far more conservative, and somehow we need to break that deadlock to really start things motoring. We are not necessarily talking about the most innovative companies with the very latest technology. We are talking about companies with sound engineering products which can live and thrive for years, but they won’t necessarily be growing at twice or three times turnover a year. I think that is the sector that we have to look at and it is not being addressed fully today.

Q267 Nadhim Zahawi: Just before I come to my question, I just wanted to follow that through. In my own constituency those exact SMEs that aren’t in particularly sexy bits of manufacturing are feeling unloved at the moment. They don’t really have much to do with Government. They don’t really know much about the initiatives that are available, so I would suspect that some of the moderate knowledge is probably less moderate. Also banks are being very difficult; the companies have orders but the banks won’t lend to them to buy the raw materials to fulfil those orders, so there is no point having a bigger order. How do you see that relationship with the banks, because you are the collective voice? Are banks looking at certain sectors and blackballing them; i.e. if you are a small or medium-sized enterprise in manufacturing, you have no help in hell of getting anything?

Mr Martin Walder: It is changing. If you go back to the worst position, then they were certainly blackballing some sectors. At one point automotive was a no-no and so on. It is changing. As an organisation we are meeting quarterly with BBA and with a number of the key banks. There is a willingness to change and I think things are slightly moving forward in a positive way. It is tough going and, at the end of the day, it is back down to that individual situation: would the banks rather lend to a larger business with a stable base or a smaller business which is profitable but maybe not that profitable? I think the answer is still they would like to go to the big companies. Somehow we have to accept that for every 10 or 15 loans that are put in place not everyone is going to be successful. We need to get to that point where people are prepared in the banking community to take a level of risk.

Ms Lee Hopley: I am not sure there is necessarily a sector bias amongst the banks. I think there is probably a lack of understanding about what modern industry is and the changes it has been though in the last 10 years: the fact that it invests for the long term, it is capital intensive and it is very focused on global markets. That really changes the risk profiles compared with a manufacturing sector of maybe 15 to 20 years ago. I think there is a lot of work to do in improving the banks’ understanding of industry and its needs, but I don’t think they are taking a biased approach to individual sectors at this particular moment in time. Certainly when we look at the trade credit situation through the recession, yes there was such an approach, and that comes back to the fact that that they didn’t fundamentally understand how interconnected some of these sectors were. I think there have been moves to try and repair and inform those companies.

Q268 Nadhim Zahawi: Just on that point of a lack of understanding and global markets and small business, if we look at what we need to do to rebalance the economy, you have heard the now much-quoted sentence from the Prime Minister about how we export more to Ireland than we do to Brazil, Russia, India and China. Do you think BIS does enough to help small and medium-sized manufacturers who want to export to do so? Is the Department doing enough in that area?

Ms Lee Hopley: I think in our evidence we have a largely positive view of the work of UK Trade & Investment. I know that the statistics around exports to the BRIC economies versus Ireland have been much quoted in recent weeks. Actually, if you look at the contribution to UK goods export growth since the end of the recession, a large chunk of that has in fact come from the BRIC economies. UKTI, from an advanced engineering point of view, because they do take a national sector approach, are very focused on the capabilities within that sector and where the market opportunities are. They raise a focus on those emerging economies. That is not to say that we should certainly take our eye off the ball as far as Europe is concerned because that is obviously where new exporters tend to make their first move.

In terms of the direct support and help that UKTI provides to exporters, a survey that EEF carried out of our membership last year showed quite tangible benefits from the support that UKTI provided in terms of real increases in sales, meeting contacts and hearing about market opportunities that they wouldn’t otherwise have had. I think we have seen that the refreshed strategy of parts of UKTI over the past couple of years is starting to make a difference. I think as we look forward to the outcome of the Spending Review, budgets being pruned back, I think we need to focus on the areas where, if ain’t broke, then let’s not start to try and fix it. I think that is the case with some of the work that has gone on with advanced engineering, for example.

Mr Martin Walder: I think historically our feedback has been very positive, in terms of advice for people and in terms of support for trade shows and the like. There is evidence that some of that is slowing down and there is less going into that, and evidence in quite a few areas where some of the charging that is going on is inhibiting the use by SMEs in particular.

Q269 Nadhim Zahawi: Can you explain that please?

Mr Martin Walder: I believe that a lot of the services now, rather than provided on either a lower cost or a free basis, are being charged and some of those rates are going up to a level that is turning some SMEs off. There is some evidence from one or two of the trade associations. Some other gains could be had because a number of trade associations also operate with offices in China, Brazil, Russia and what have you. We could get a network of these working more effectively with UKTI; I think there could be some pro-active work done there.

Chair : You partly pre-empted Margot James’s question. Do you wish to add anything else, Margot?

Q270 Margot James: I wanted to just follow on from what you just said about those other markets. I was quite shocked to be reminded by the Chancellor last week, when he was informing the House about the Irish situation, that we export more as a country to Ireland than we do to the entire BRIC markets. From your own industry perspective, what more can UKTI do to try and redress this?

Mr Martin Walder: One of the areas that we see that does limit the SMEs’ exporting is when we are competing with other European countries, say for business overseas, and the companies can’t get bonds. Quite often you get a deposit plus 30%, say, of the system that is being ordered, whereas many of the other countries like Germany, France or Italy would provide a bond to the client for their deposit. That is not very easily attainable. If you want a bank guarantee in the UK, that quite often comes off your facility. On the whole issue of bonds for exporting, I think we are at quite a disadvantage in the UK, particularly when you look at SMEs. That is one thing.

Ms Lee Hopley: In terms of what more can be done, I think there is a focus on the direct support that UKTI provides. There are certainly lingering issues around trade finance. I guess the other important aspect to look at is ensuring that UK manufacturers actually choose to invest in the UK as an export base. Increasingly they are global companies; they can choose to locate nearer to market for example. So it’s getting the business environment right that ensures we meet that export demand from a UK base rather than closer to market.

Q271 Chair : Thanks. I was very interested in one of your comments because I was going to follow up by asking you what your perspective is on export credit insurance, and of course we know that a number of companies that applied for the Enterprise Finance Guarantee Scheme were precluded from getting support because they were exporters. So there are two areas there. Martin, you mentioned the bond issue, and certainly we will be doing an inquiry into trade and that’s one of the issues that we want to look at. What are your perspectives on the current situation with export credit insurance? Have you any evidence from rivals in other European countries that seem to have got round the so-called European hurdles that exist at the moment?

Ms Lee Hopley: I would say that this isn’t an area in which we have had a great deal of feedback from members. In the survey on exporting that we produced last year, it didn’t come our particularly strongly as a major barrier. That may just reflect our membership; we don’t have a lot of very small manufacturers within our membership. As far as what European economies have been able to do, it is my understanding that in the height of the financial crisis the European Commission did open a window of opportunity. I think that window might now have closed and the UK didn’t take advantage of that. It is a lingering issue for some companies, but I’ll leave my remarks there.

Mr Martin Walder: We don’t have too much information. We do have some companies that certainly have come up against the brick wall of the EFG when a lot of their business has been exporting, so they have not been able to go any further. We probably can provide some written evidence of individual businesses not getting the export guarantees.

Q272 Chair : I would be interested if you could provide us with something.

Mr Martin Walder: It has certainly been muted, but off the cuff I do not have the information.

Q273 Chair : What about trade credit insurance; you mentioned bonds earlier?

Mr Martin Walder: No further comment really on that.

Q274 Simon Kirby: Mr Walder, you said earlier that the relationship between banks and manufacturers is changing, but I see from your written evidence that, and I quote, "Banks have forgotten how to do business with manufacturers." What is the basis of that particular written claim and what can BIS do to remedy the problem?

Mr Martin Walder: I think that is the process we’re on: trying to repair that. If we look at the last 20 years, from the highest level we’ve been talking ourselves out of manufacturing, and I think that is reflected in the way that the banks have looked to manufacturing as a good way of generating returns. We also recognise that in manufacturing it is pretty capital intensive so you actually need to borrow some sizeable sums of money to invest in capital plant and, at the same time, through this tougher period, a lot of the manufacturers have been suffering. It has not been the obvious place for banks to go to lend money and to get the best returns. It is a process of education. As I said, every quarter we get together with the banks, we bring in SME member companies, and we listen to one another on both sides to better understand what the barriers are, how the banks are thinking and how individuals are thinking, and what we have to do to change that. Certainly RBS and Lloyds and Santander have been very active in that. It is a slow process and when it gets down to every individual case it gets looked at on its own merits.

Q275 Simon Kirby: I can ask the second part of the question again. What can BIS do to help with that coming together again?

Mr Martin Walder: I think they could work with Treasury on how you move the EFG to another level. As I said before, EFG helps companies with their backs to the wall but it doesn’t necessarily help those companies that need to invest for growth. The whole issue about forcing personal guarantees, although it is not written there, in practice that is what is happening. If there could be some move to ease that, it could make quite a difference.

Q276 Simon Kirby: Can I just pick up on that point about personal guarantees, because you mention in the written submission that occasionally businesses are requested to provide personal guarantees above the 25% not covered by the EFG. Does that happen very often and if it does, does that in itself affect your members’ willingness to seek bank finance?

Mr Martin Walder: From what I’ve seen it’s more often than not that it’s happening, very much so. It is impacting. If your business is quite challenged anyway, the last thing you want to do is put all your personal property on the line as well. We speak to owner-managers-these companies may only be 10 or 20 people-and the last thing they want to do is risk their own personal property to go for growth. They would rather just work along at the minimum, and that’s happening very frequently. We are talking about companies that are in traditional engineering areas and supply chains that have been going for 20 to 30 years, not about start-ups; not about venture capital-type situations. The environment for that is much stronger.

Q277 Chair : Can I just intervene and play the devil’s advocate here. Far be it from me to support banks, but do you not feel that there is an issue if somebody who is applying for a loan is not prepared to put up something themselves and risk it? Can you blame the banks for looking at this and saying, "This is too risky"?

Mr Martin Walder: You can’t argue with that logic, no. The banks like to see a commitment on both sides and I don’t disagree with that. But if you want to encourage more of it, you have to break the deadlock.

Q278 Chair : To follow this through slightly, what is the possible role of the Government in effect covering part of that element of risk to the benefit of both the banks and the SMEs in that sector?

Mr Martin Walder: That is possibly the way that it could happen. The personal guarantee may only be a smaller proportion of it, so that there is some stake in there but not the whole amount. If you really get into the bowels of the EFG, the individual has to be extended and at risk to the maximum. That is what it really amounts to. It is not quite what it appears on the face.

Q279 Chair : There is an area where the Government could intervene to mitigate the risk and maximise the potential. That is a very difficult skilled judgement to make.

Mr Martin Walder: And you still need the banks to make a decision in the face of the client.

Q280 Chair : We are conscious that we do not appear to have got it right yet, but I am still groping for something that we could recommend to get it right.

Mr Martin Walder: You are right: some balance is needed.

Ms Lee Hopley: A lot of the issues that you’ve just touched on are part of the same problem about how you improve relations with banks and-I would say industry, but it is not just manufacturing, but the wider private sector that this has happened to over the past couple of years. Personal guarantees are increasingly asked for as a means of managing risk on the part of the banks. Often it is not the issue or the fact that a personal guarantee is being asked for. Sometimes it is the level or the lack of transparency about why. I think increasing transparency around lending policy and the decision-making process for banks is going to be a big step in improving relations between banks and business. I think where Government has a role is that we can’t let the banks necessarily get on with this job on their own. I think this does need to be done in co-operation with private sector and with Government. I think this is something that could actually make a tangible difference in the short term: getting these lending policies and getting greater transparency around the decision making right; something that the BBA taskforce suggested the banks were up for. So it is kind of moving on with that.

Q281 Chair : That was my next question: the intervention. The BBA and the Business Growth Fund, and the procedures that it has recommended, do you see those as having much impact? Will they benefit you?

Ms Lee Hopley: I think we viewed the BBA taskforce recommendations as a really good starting point for dialogue. I think what it brought home was that, if you look at the outcome from the Government’s Green Paper and what industry has been saying and what the BBA taskforce produced, they were actually not a million miles apart on what the problems are and what some of the solutions are. There was not total agreement with all the BBA taskforce’s recommendations but it is certainly a very good start for dialogue. I guess the question is now how we move that forward and where the Department gets involved in that process, particularly in some of the short-term issues that can potentially be dealt with or put in place reasonably quickly.

The Business Growth Fund: fine; banks are putting up £1.5 billion, I think it is. I can’t knock that, obviously. I think from our point of view that is going to be entirely focused on equity investments. Look at owner-managers: small businesses don’t always want a dilution of control. We come back to where the Rowlands review made a useful contribution in that there is a bigger gap on the mezzanine finance side of things. The original plan for the Growth Capital Fund from the Department was to start to address that gap in mezzanine finance. That now doesn’t appear to happen and it is not going to with the Business Growth Fund.

Q282 Chair : Mezzanine finance: I am sure you are very familiar with this in your circles, but for us laypersons it’s not totally obvious. Could you just define it?

Ms Lee Hopley: It is almost a combination of debt and equity.

Chair : Sorry, say that again.

Ms Lee Hopley: It sits in the middle of debt and equity.

Simon Kirby: It’s a halfway house, Chair.

Ms Lee Hopley: But it doesn’t necessarily, at the end of the day, involve the dilution of control in the way that equity does.

Q283 Simon Kirby: Rather surprisingly, Brighton and Hove actually has quite a large manufacturing base; 4.1% of local employment is in manufacturing. There are for instance 670 local business units in the city. Would you agree with me that a lot of the relationship problems between banks are particularly prevalent between small business, and what can BIS do to help those smaller businesses in particular?

Mr Martin Walder: I think it does tend to be at the smaller level. In small companies you have got less people managing the interfaces to lots of different areas. You have got non-finance people and the like having to deal with banks every day and do all the selling and management alongside it. What can BIS do? I’m not sure they can do a lot directly. They can certainly encourage the banks, and a lot of what is going on in the current state I think is in the right direction. I’m not aware of what I could suggest they can do directly other than encourage the interface with the SMEs.

Ms Lee Hopley: I guess this comes back to where BIS can help with this transparency point. Clearly businesses should know what they can expect from their banks in terms of lending decisions. Equally banks can make clear exactly what they expect from businesses when they go and approach the bank for finance.

Q284 Simon Kirby: Do you think that they do not do that now? The transparency is a two-way process; do you think the banks don’t clearly tell their customers what they’re looking for?

Ms Lee Hopley: It is difficult to give a broad-brush response to that, but I would say it is not as good as it could be on both sides. I think there is an opportunity to set out some clear principles as to what you can expect from your bank, but equally, this is what your bank will expect from you.

Mr Martin Walder: My experience is exactly that. They don’t paint a very clear picture about what they are looking for when they are going through the process of evaluating whether someone gets funding or not. Most of the SMEs are not experts in finance, so all these terms are bandied about and what have you, but a lot of the SMEs I talk to are not that sure of what they have to do. They then spend all this time and then maybe it just doesn’t get passed and they just don’t know why. That is fairly frequent-that sort of feedback.

Q285 Margot James: The TUC in one of their sessions with us implied that Britain is a bit too obsessed with small business-it has a small is beautiful construct-and that we don’t do enough for medium and larger companies. What do you think of that view in your own sector?

Mr Martin Walder: Most of what I see is more bias towards bigger businesses in terms of the R&D and the investments, whether it is an aerospace company or a pharmaceutical medical, which is fine, but without the supply chain of SMEs we don’t maintain our aerospace, we don’t maintain our automotive and the like. It is all these SMEs that are providing the technology and the services to the big companies. It is easy to focus on a few big ones. It’s more difficult to focus on thousands of small ones. I would say it is the reverse.

Q286 Margot James: So you wouldn’t agree with their view?

Mr Martin Walder: No I wouldn’t, no.

Ms Lee Hopley: I think sometimes it has been either/or. It has been focused on big national champions or policy focused on start-ups without realising that the problems are different for businesses at different points in their growth cycle. The challenges for a medium-sized company trying to become big and grow and become a global player are very different to a small company who is looking to recruit a couple more people or hit export markets for the first time, for example. I think it does take a more sophisticated approach to policy making if you are trying to do both. Big companies, yes they are important: they do anchor supply chains and make investments that benefit whole industries. We shouldn’t necessarily leave them just to get on with it.

Q287 Chair : Before I bring in your other question, Margot, can I just intervene on that? It is interesting because of course so many SMEs depend for their survival on the success of big companies-a point that you touched on Lee. Certainly in the west midlands historically Rover and now Jaguar Land Rover are very important indeed for a whole number of SMEs. Also, I am trying to remember where the survey came from, but I read a survey that showed a phenomenally high proportion of SMEs not only weren’t interested in exporting but felt comfortable with the markets they provided and weren’t actively seeking to expand very much. Now in view of those two situations, first of all the dependence of SMEs on the major manufacturers and secondly what could be perceived- and I will stress only perceived-as a certain degree of conservatism around the approach of SMEs, isn’t there an argument for investing more in the bigger companies in order to provide a stronger base for SMEs?

Mr Martin Walder: We can’t knock making bigger, stronger companies. The Rolls Royces, the British Aerospace and the like: they are going to feed a lot of the SMEs. There is no doubt. I think the trick we’re missing is making the SMEs thrive in their own right. The UK is a relatively small market, so we need these SMEs that are doing great things for Jaguar Land Rover, Airbus and Rolls Royce to be doing the same overseas. A lot of it is awareness, a lot of it is support, and a lot of it is confidence. They are the sorts of things we need to work on. The UK can be a strong manufacturing base as we go forward as long as we continue to invest throughout that supply chain in the R&D and the capital equipment that these SMEs need to put in, because, as you say, we have been very conservative in the UK in terms of investment in capital in those SMEs and then the export of more of their technologies.

Ms Lee Hopley: I’d go further in saying that we don’t just need large companies to invest more here; we need many, many more large companies. We have significantly fewer companies with over 500 employees as a proportion of all manufacturing companies compared with Germany and the US for example. A survey that we produced a couple of weeks ago really shows that big companies collaborate right up and down the supply chain on innovation, forward planning and often on skills. We know, from speaking to some SMEs, that their close relationship with big companies, particularly through innovation, has allowed them to support some export markets that might not otherwise have been the case. They are important and we need hundreds more of them, frankly.

Q288 Margot James: What should BIS do to help companies grow? In their recent growth report I think they had a statistic that indicted that two-thirds of small businesses wanted to grow, but only about a third actually grew into medium size. I suppose my question was how to get more small into medium, but in view of what you’ve just said, it is equally important how to get more medium-sized to large companies. Is it predominately access to capital or should BIS be playing a more direct role?

Ms Lee Hopley: I think in terms of the role of the Department in supporting growth across the private sector, there needs to be a constructive and strategic partnership with all parts of industry. I think that involves having a really good understanding of the sectors that make up our economy and understanding the different barriers and road blocks that companies face at different parts of their growth cycle. I think it needs to be a stable and predictable business environment. I think the previous session focused quite strongly on that. It needs to make investments or spend its resources in a way that catalyses investment from the private sector. I think in practice, this cuts across many areas that are led by BIS: skills, access to finance, export support and regulatory barriers, which can often be a big issue for medium-sized companies wanting to grow because they suddenly come up against the tangle of regulation. Similarly, there is a role for the Treasury, because similar things can happen on the tax side, and that is a problem for companies that have made significant productivity gains, for example, and then want to turn that into tangible growth. Many of the areas that can make a difference, particularly to the business environment-and making investments that can support private sector investment, for example-do rest with the Department, but they are not alone in that.

Mr Martin Walder: I think the biggest thing that we can do with BIS is stimulate the investment back into the sector. If you look at the 10 years up to 2007, the investment in the manufacturing sector dropped something like 40%, whereas if you look in the comparable markets in Germany, Spain and France, then it was very different from that. I think what BIS can do is work heavily, particularly with the supply chain in SMEs, to stimulate that investment and maybe some will have to be supported with annual investment allowances or what have you that focus very much on manufacturing. If we don’t get investment into that-it’s capital, it’s skills, it’s R&D-if we don’t do that in a strong way over the next five or 10 years we are never going to get to the point we need to.

Q289 Margot James: Do you think your members will welcome the Government’s new 10% corporation tax on patents on products that have been developed by UK R&D in this country? I presume that they will.

Mr Martin Walder: It has to be a positive move to keep the R&D here and to actually get the gains from it; to actually take it from the R&D into the commercial. We’re very good at R&D and quite often we let the commercialisation go overseas. That we shouldn’t do.

Q290 Margot James: And this might help?

Mr Martin Walder: Yes. If you can manufacture something with an automated process in this country, you can do it as effectively as anywhere. We need to be the forerunners of that.

Ms Lee Hopley: Actually we have some reservations about a policy that will cost £1.3 billion. Is this the most effective way to use that money? Patents are a small part of intellectual property, which is a small part of innovation. It benefits some sectors much more than others. Other countries such as a number of Benelux countries already have a patent box and it’s more generous than the proposals that will come in 2013. It’s not quite in the Finance Bill and it’s already less competitive than what is out there. If you are looking at how you stimulate investment in research and development, I think we have some questions as to whether the patent box is the way to do it or whether looking again at the qualifying expenditure under the R&D tax credit, for example, might be more effective and might encourage greater commercialisation across a wider range of business. I’m happy to provide any further follow-up on that.

Q291 Chair : I think that would be interesting because from your response I wasn’t quite sure whether you were arguing that in comparison with potential European competitors we weren’t doing enough, or that, whereas this was worthy, there might be more effective ways of spending the money anyway and we may have a comparative advantage if we looked to a different way of spending.

Ms Lee Hopley: The point I was trying to make is that the proposals for the patent box are already less competitive than what is on offer in other countries. Our starting point is actually further behind what is on offer elsewhere. It would cost more than the estimate to be as competitive as, say, I think it is the Netherlands, but I can confirm that. Inarguably there are better, more effective ways of spending a not inconsiderable amount of money if you are looking at driving innovation in industry.

Q292 Simon Kirby: I’m struck by how in Brighton, particularly at the University of Sussex, many manufacturers in the south east region work very closely to develop not only products but processes and management techniques. Is that something that we should do more to encourage? I appreciate that is slightly off piste, Chair.

Mr Martin Walder: Could you just repeat that?

Simon Kirby: Products, process and management techniques. They work quite closely with the university. I don’t know if that is typical up and down the country, but is that something that we should encourage to help manufacturing?

Mr Martin Walder: Absolutely. I think there is some of it going on and there are some good technology centres now that have been set up in the last two or three years which we would encourage. I think it can only be a positive thing. No, we’d definitely like to see more of that. Also, education in not just the R&D and the products and the processes, but also how we can have world-class manufacturing of those because it is following through from the R&D to the production of them and then the commercialisation and export which I think is key.

Q293 Chair : That issue is really worthy of an inquiry in itself. Indeed, we did a similar one a couple of years ago, but seeing how it has moved on since then I think we should look at it. Could I just conclude with this issue of allowances? SMEs in manufacturing come to me and say capital allowances are what they want. Government policy is moving the other way in order to have, in effect, corporation tax cuts. Now, probably, from a business point of view, in an ideal world they would want both. What do you think is the balance of advantage and what do you feel your members want?

Mr Martin Walder: One thing’s for sure: when you’re in the engineering and manufacturing sector, you have to invest more capital than in a lot of the service sectors. The allowances that have been there for £50,000 a year have been positive, but not enough to really make an impact. When it went up to £100,000 it was positive and really we’re looking for several hundreds. Also it depreciated over a much shorter period of time; at the minute it could effectively be 30 years as opposed to other European countries, where it could be down at 10 or 15 years. If we want to stimulate these SMEs I think we have to purposefully stimulate the investment in capital as opposed to just the corporation tax. Corporation tax we all welcome because I think it encourages people into the UK and to stay in the UK, but we really need to stimulate investment in capital because it’s not about the short-term gains; it’s about the longer term gains. If we don’t we can make ourselves more productive for a period only by reducing our people and our cost base. We have to invest.

Ms Lee Hopley: I agree with that. The changes made in the emergency Budget will hit capital-intensive, small companies. It will hit their cash-flow going forward. It was disappointing that the decision was made. The move to reduce the rate of capital allowances moves away from reflecting the real rate of depreciation rather than towards it. There are other tax proposals that could better reflect the rates of depreciation of capital equipment across manufacturing, which I can go into or follow up with a supplementary. Capital allowances, yes, are important to manufacturing.

Chair : Anything you would like to provide to us on that issue, we would be pleased to have. There are a few moments left; is there anybody else with a question? In that case I thank you very much for you attendance. I do appreciate with what you’ve said and repeat what I have said to others: if you feel that there is anything you can add to any of the answers that you have given, please feel free to write in with a supplementary. Thanks very much.