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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1632-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

BUSINESS, INNOVATION AND SKILLS COMMITTEE

DEPARTMENTAL REPORT

WEDNESDAY 9 NOVEMBER 2011

Vince Cable MP and Martin Donnelly

Evidence heard in Public Questions 1 - 119

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Wednesday 9 November 2011

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Julie Elliott

Rebecca Harris

Margot James

Ann McKechin

Mr David Ward

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Rt Hon. Vince Cable MP, Secretary of State for Business, Innovation and Skills, and Martin Donnelly, Permanent Secretary, Department for Business, Innovation and Skills, gave evidence.

Q1 Chair: Thank you for agreeing to speak to us this morning. We will crack on quickly, but just before we do so, for voice transcription purposes perhaps you could introduce yourselves-even if you need no introduction.

Vince Cable: I am Vince Cable, Secretary of State for Business, Innovation and Skills.

Martin Donnelly: I am Martin Donnelly, Permanent Secretary of the Department.

Q2 Chair: Thank you. We start off on accounts. At the start of Parliament you identified £836 million in in-year savings, which were to be realised in the first year. Have you hit your target?

Martin Donnelly: We are on track to meet our targets over the spending review for reducing our administrative expenditure and our programme spending. Much of the overall reduction in the first years is coming from the process of shrinking and then removing the RDAs. We have been able to reduce staffing in the RDAs from 2,700 in July last year to under 600 last month. This is one of the major delivery mechanisms of our savings so far and we are confident that, although it is a challenging target, we will be able to meet it.

Q3 Chair: Can I seek greater clarification? You were able to identify £836 million potential savings in-year. Can you put a figure to what you have realised so far? I realise that the year is not yet complete.

Martin Donnelly: This is for the current year 2011-12-[Interruption.] For last year. There was a combination of savings to administration, where we have reduced significantly our consultancy and our spend on travel, and we have also reduced our staffing numbers very significantly.

Q4 Chair: Sorry, you are just repeating. Perhaps I should clarify. This annual report was finished in July, so you did have-or should have had-a year’s accounts. Did you realise that target and, if you did not, what was the discrepancy?

Martin Donnelly: For the year in the annual report to the end of March-as you say, the report was published in July but it covers the financial year-we did meet those savings and we are on course to do so for the current year as well.

Q5 Chair: For the current year, right. Were you much above them or did you just hit them?

Martin Donnelly: We had a slight underspend on our admin spending of about 2.8%-about £9 million-which was reasonably within our margin of error and reflected the fact that we have been moving fairly rapidly to reduce the overall staffing levels, so on that front I think we did reasonably well.

Q6 Chair: According to the CSI, you have a really difficult challenge this current year, 2011/12. You indicated in your earlier response that you are on target. You say you are on target, but are you absolutely confident that you can realise this objective? It is about 35% of your DEL.

Martin Donnelly: Just this week, we have been reviewing where we are at the mid-term both to update Ministers and to look at the choices that may have to be made. At present, our finance assessment is that we are on course to make these programme and admin savings. There are some uncertainties and we are in discussion with the Treasury about some issues, particularly around the treatment of the student loan book, but as of now we expect to meet the savings for this year, on both programme and admin spending.

Q7 Chair: Which Departments will be most affected?

Martin Donnelly: The shift coming through, in terms of how we fund higher education, where we move spending through the loans system, is from next year a major change. This year, the removal of the RDAs is one of the largest chunks of what is happening on programmes. In terms of admin spending, we have had to reduce our staff further and we have had a second voluntary redundancy round, which has put a big challenge into the organisation, which we are meeting by being more flexible and, I believe, more innovative in the way that we work. It is a challenging period, though. We have had to reduce our senior staff by 20% over the last year and 30% over the last two years. We are seeking to make the organisation more flexible, in order to continue to focus on our priority tasks, particularly around growth.

Q8 Chair: As you said, these are challenging targets. Are there any areas of activity that you are going to have to downgrade as a result of meeting them?

Martin Donnelly: We are having to look at how we work differently in some areas. I will give you two examples. One is better regulation. We have had to slim down considerably the resource, and rather than marking each Department, we have been focusing on priority areas with a new engagement model that really goes for priorities and expects Departments to do more of the work that, perhaps, we did for them before.

On the life sciences side, which is a priority for Ministers, we are working jointly with the Department of Health on a single office of life science model, where we do not duplicate what we do but bring together a virtual team between Departments. We are doing the same on the regional growth fund work with the Department for Communities and Local Government. A lot of what we are doing is removing areas where previously we would perhaps have worked in-house rather more, and we are consciously setting up models where we work across Government.

Q9 Chair: I am trying to decipher the management speak. I think that loosely means that you are outsourcing things that previously BIS did to other Departments. Is that a fair summary?

Martin Donnelly: I think it is true that we did do more things for other Departments, which they were perhaps also doing, as a way of marking how well they were doing. We are consciously moving away from that model and working on a basis of shared information and shared management, so that we never duplicate what someone else is doing. Similarly, on growth reviews, the Secretary of State and the Chancellor are leading, we have joint teams with the Treasury, but we do not do what they do, and vice versa.

Chair: I think you have answered my question, albeit in a typically management-speak way.

Q10 Mr Binley: I recognise it when you say that times are challenging, but so they are out there for businesses, and every business of any consequence would produce a monthly P&L, cash-flow analysis and aged debt analysis-I could go on. They would need that because they would not want to fly in the dark. I assume you have similar resources available to you. It stirred me when you did not come straight out and tell us exactly where you were this year on that basis. Why did you not do that?

Martin Donnelly: Well, as you know, Government accounting is a little more complex than some private sector-

Mr Binley: You have been doing it for a long time.

Martin Donnelly: But we have internal systems and we use those with the core Department and with the 60 or so partner organisations that we are working with-the main ones being student loans and the medical and science research agencies, and so on. In-house we have a series of internal management and financial controls that allow us to track spending. There is always the issue of the profile of spending during the year, which means of course that it is not necessarily one-twelfth, one-twelfth, and so on, but Howard and our finance team have private sector experience that they bring to this. At the moment we are confident that we are on track and that we will meet our targets for admin, programme and capital-

Q11 Mr Binley: Mr Donnelly, you sound like a politician. I want somebody who is running this Department to tell me exactly what the situation is. Can you send us the latest up-to-date figures on your second-year savings to, let us say, two months ago, to be very kind to you?

Martin Donnelly: We can certainly send you updated figures on where we are. The savings-

Q12 Mr Binley: Ask the gentleman at the back who does it and give me a straight answer. Can you do it?

Martin Donnelly: We can do that.

Mr Binley: Thank you very much.

Q13 Mr Ward: Just out of interest, since we are talking about reductions, including staffing reductions, how many of these are genuine, overall staffing reductions to the public purse, as opposed to transfers? For instance, one response that we had from the RDAs was that, on the management of assets, in many cases they have been transferred to the HCA or other places. Are we talking about transfers of staff or are we talking about reductions of staff?

Martin Donnelly: In the RDAs, there will be a small core movement of some staff, for example, those dealing with European projects, but the vast majority of those posts are being lost. Some 80% of the commitments that the RDAs were managing have now been reduced, so those are real staff savings. Similarly, inside our Department the reductions that we have made through voluntary redundancy programmes this year and last year are real staff savings-not people being moved elsewhere or being replaced by temporary people brought in.

Q14 Ann McKechin: You mentioned that you were discussing with the Treasury issues to do with the student loan book. Is this because of the number of universities that are charging the highest level of fees, or are there other reasons why that has yet to be determined?

Martin Donnelly: No, it is essentially an issue about how we value the student loan book on our accounts, because the value of the loans is obviously affected by inflation, salary levels and assumptions about growth and interest rates going forward. The issue-although it is a technical one, is quite important for us and we are engaged actively with Treasury colleagues on this-is to try to prevent each small adjustment in those things, taken over a long period, from having a major impact on our overall accounts and affecting day-to-day spending unduly. That is what we are actively discussing at official and ministerial levels.

Q15 Ann McKechin: Would it be possible to give the Committee an update on that?

Martin Donnelly: Yes.

Ann McKechin: Obviously it has serious long-term implications for your spending, so we would be grateful to have that. Thank you.

Q16 Nadhim Zahawi: I commend you on this Guide to BIS. It is well set out: no one is in any doubt about who the Permanent Secretary is, and I do actually think it is well set out in terms of the target, because although a lot of businesses may find it difficult to read through this (the Annual Report and Accounts), it could be an easy guide.

I am slightly confused about slide 4, "Making a difference". On the left hand side you have the groups. Are those groups shown in pink, orange, yellow and green all within the Department? You then have the corporate group at the bottom. Is this how you are organised or is slide 8 the organisation ?

Martin Donnelly: These are the groups that we use to run the Department. Each one has a director general and they form the executive board and, with Ministers, the overall board.

Q17 Nadhim Zahawi: So it is not skill sets?

Martin Donnelly: No.

Q18 Nadhim Zahawi: People transfer across those groups. These are all separate human beings?

Martin Donnelly: They are management units.

Q19 Nadhim Zahawi: On slide 5 it says, "Effective BIS: Make BIS into a highly effective organisation that’s a great place to work". In the 2010 survey, in the responses to the question, "I feel that the Department as a whole is managed well", the Department scored 38%, against an average for the civil service of 41%; and in the responses to the statement, "The Department board has a clear vision for the future of the Department", again you score about 6 points below the average. What are you doing to approve these numbers, because those scores obviously need to be above the average, at least, I suspect?

Martin Donnelly: I agree. They are a big challenge to us. We have been going through a major restructuring programme. We have deliberately done it as rapidly as possible, under the guidance of Ministers: we have treated staff with the maximum of respect and support throughout this process, and we have done that well, but it has been a difficult time for staff and I am proud of the way that they have responded. Everyone has had to reapply for jobs and we have moved around 25% of the organisation, which has helped us to refresh, but has meant a lot of disruption and that has come out in the scores. It will take us some time to get over that, although I believe that we are coming up to the curve now.

We are working on the culture of the Department to make it a really great place to work, which means getting everyone involved. We are working more closely with Ministers. The Secretary of State did a helpful session on growth for all staff recently. We bring in outside expertise and we are working with our non-executive directors to make sure that we are drawing on the best available input. Most of all, we are listening to our staff about how we become more flexible, more innovative and more open.

Q20 Nadhim Zahawi: Thank you. You now have a system of actions and milestones against which you monitor performance. Last year, out of 88, 15 were missed by a month, three by two months and five by more than three months. How does that reflect against your own expectations?

Martin Donnelly: Clearly, that was not good enough. We have put a major effort into this over the last months. We have worked with all the directors across the organisation to ensure that meeting those objectives was not simply something that you checked at the end of the month, but you worked actively on. We had another problem last August, just after the major reshuffling of the organisation-we had a poor month-but I am pleased to say that in September and October we met all our objectives and we are back on track. We only have two outstanding, relating to a specific consultation on credit cards, so we are back where we need to be and we will ensure we stay there.

Q21 Nadhim Zahawi: The annual report sets out missed deadlines by priority, but does not give details on what the missed deadlines were; it just lists them as, for example, Milestone 8B, Action 8. Would it not be better to make it clear to the reader exactly what milestones and actions are missed and why?

Martin Donnelly: That is a fair comment. We will aim to do that on our website, where we put up information about all of these. Quite often, it has been a case of a consultation taking longer than we had originally thought because there was more to get through, sometimes because we have shifted focus-for example, from manufacturing to advanced manufacturing-but we need to get that across clearly.

Q22 Nadhim Zahawi: You said that only two or three milestones now are outstanding. Can you give us a bit more detail about those?

Martin Donnelly: I believe there are two and they relate to consumer credit cards and information being provided electronically. We can let you have a brief note on that. It is a longer consultation and we expect that to be complete within the next few weeks.

Nadhim Zahawi: Thank you.

Q23 Chair: I want to pick up on this Guide to BIS, although I do not want it to take over the meeting. I find it odd-I must point out Nadhim’s view was a personal one-and I am not sure whether it is a minority view because I did not hold a vote on it, but there was a range of opinions on the Guide to BIS. One thing that struck me was that, on page 6, "Our Partners", you have listed a range of them, including RDAs, which puzzled me since they are on their way out; then I noticed a little asterisk, with the words, "Currently undergoing reform, abolition or merger", which is fair enough, although it does not jump out from the page. A lot of other bodies have asterisks, though. Would it not be more helpful to list those that are undergoing reform, those undergoing abolition and those undergoing merger, and who they have merged or will merge with?

Martin Donnelly: We can certainly do that. What we were doing in this context was trying to set out which partner organisations worked in which part of the Department. We have provided that information elsewhere. I take the point that it is not very clear on this page. We can happily send you the fuller breakdown.

Margot James: I wanted to add my congratulations on the Guide to BIS.

Chair: There is minority group of admirers and others that are somewhat less enthusiastic.

Margot James: There is a range of views. Some colleagues did not express a view.

Q24 Nadhim Zahawi: The Department has experienced a number of delays in relation to the publication of White Papers-for example, on trade and growth and the higher education White Paper. These delays do not seem to be noted in your performance report. Why do you think such key documents are not included in your list of milestones or actions?

Vince Cable: It is probably fair to say that, in those cases, there was a political decision related to the timetabling of Parliament and the content that we felt able to put in at different stages. That was a political decision, rather than administrative.

Q25 Nadhim Zahawi: Rather than operational.

Vince Cable: Yes.

Q26 Nadhim Zahawi: Thank you. According to the National Audit Office, one of the delays is to the identification of a preferred supplier for the Manufacturing Advisory Service. Why has it taken so long to resolve this issue and does this mean that you will now miss the target launch for the new service this month?

Martin Donnelly: Subject to checking with the team, I believe we are on course to meet that. The process was one where we wanted to be sure we had absolutely defined correctly what we were looking for from the Manufacturing Advisory Service, and we therefore we took the time to do that. It was important: we wanted to make sure that it fitted in with other work, including the new small business advisory system online, and so on. We are confident that is on track. I will confirm to you the precise timing, but we have gone through a process that should give us a lot of value added in that service.

Q27 Nadhim Zahawi: So you will not miss the target.

Martin Donnelly: We do not expect to.

Q28 Mr Binley: On priority 3, performance against individual priorities, where you want to safeguard the future of the Royal Mail and the Post Office, can I ask you three simple but specific questions? Secretary of State, what measures are planned as part of the privatisation of Royal Mail to prevent distortion of competition?

Vince Cable: The measures relating to distortion of competition are matters for the European Commission. The plans we have to, first of all, take over the pension fund following legislation that was helpfully passed in Parliament, are now being reviewed by the Commission.

Q29 Mr Binley: So they are being reviewed at this moment?

Vince Cable: Yes, they have the information and they are reviewing it. The Commission are reviewing the mail services of several European countries on a consistent basis. We know that they are doing it very thoroughly and it is a rather time-consuming process.

Q30 Mr Binley: Okay. When do you expect that back?

Vince Cable: We have targeted something in the order of a year. I have been in touch with commissioners and with Members of the European Parliament to try to expedite it. They are very thorough and they take their time.

Q31 Mr Binley: I understand that. Could you let us know when you get it, so that we can pick up on it? Part of our job is to ensure that the process is scrutinised properly. What guidance has BIS given to Ofcom on maintaining competition, particularly regarding Ofcom’s regulatory regime?

Martin Donnelly: We obviously respect Ofcom’s independence as a regulator and the decisions that they have to make on a statutory basis now that they have responsibility for regulation of postal services. We have been in touch with them at official level to ensure that they have all of the relevant information and that they understand Government policy in this area when they are making their views known.

Q32 Mr Binley: Could you give us any of that information to help us continue to scrutinise this whole process? Have a look at it-I do not need an answer now, but if you could help us in that respect, it keeps us abreast of a moving process.

Martin Donnelly: Yes.

Q33 Mr Binley: Finally, on that basis, what is the current timetable for privatisation of Royal Mail and has there been much interest from potential investors and buyers?

Vince Cable: No, we are not at that stage yet. The pension fund transfers have been taking place. We have to get Commission clearance. The key building block in the policy, which was the parliamentary legislation, is now complete, but we are not yet in a position to contemplate the details of the privatisation.

Q34 Mr Binley: Do you have long-term targets, Secretary of State?

Vince Cable: We are not setting a financial target for it. We are having to trade off various issues. Value for money is a key one, but of course Parliament required the universal service to be protected, among other considerations. There are various ways that it could be privatised, as you know, through an IPO, a trade sale and varying degrees of ownership. We have not got to the stage of looking for buyers or launching the process.

Mr Binley: Okay. Well, you appreciate that we will continue to question you on this issue. I am grateful for your answers.

Q35 Ann McKechin: One observation: when I looked at the inputs and indicators in your annual report, it is very difficult for anyone to work out from the bare figures from that what figures apply to the UK as a whole and what figures apply to England only. Clearly, one of the indicators is the gap between qualification levels and non-free school meal children going on to higher education. Those figures are presumably for England only, but they are not stated on your report as such. Would that be correct?

Martin Donnelly: Since our objectives are for England only, that is what we need to be aiming at. It is a clarification that we need to pull out of this, and we will do so.

Q36 Ann McKechin: That will be helpful. Would you explain what you are measuring in your inputs and impacts a little bit more fully?

Martin Donnelly: I think it is fair to say that both the input and impact indicators are work in progress. We have come up with a series of measures that are designed to be part of a wider transparency framework to help people to understand what we are doing and how much difference it is making. In some areas, it is quite difficult to find a sensible baseline and in others there is a degree of subjective assessment that we need to move beyond. With both of them and with the timetable for the business plan, which we report on every three months, we are seeking to give people some feel for what we are doing, how much difference it is making and allow them to get a sense of the impact of our policies and the value for money that we are delivering. They have to be seen as part of that wider picture, together with the reform plan and the wider information that we give out about where our money is going.

Q37 Ann McKechin: How do you measure one against the other? You said that having baselines is critical for many of these indicators. What information are you providing to the public about what the baselines are, so that they can make some independent judgment as to whether that was an accurate way to make an assessment?

Martin Donnelly: On our website we are providing a brief report on each indicator, which is designed to provide that sort of background. As we go forward, we will review these as we review the structural reform plan and produce another version, aiming for next April. We will want to look at these indicators and see how we can make them clearer and more useable for the public. It is a bit of an iterative process and we will be looking for feedback about which are seen as more helpful and which are perhaps not quite so helpful in their present form.

Q38 Ann McKechin: One of the more difficult ones was, as you have indicated, the social mobility in adulthood indicator, which you say is currently under development. How will you display this as an indicator, both in terms of evidence received and in terms of your improving it, because it not just your Department alone in Government that would have responsibility for this? How will we be able to cross-reference that into other Departments, such as Health and Education, to determine which Department is giving the best input for that indicator?

Martin Donnelly: We will be coming at this primarily from our responsibility for further and higher education and looking at the social mix of people moving into education. You are right, of course: that is only one part of a much wider and complex picture. We will also be trying to look at what we are doing for wider issues around social enterprise and so on, and how far that is helping some of the more disadvantaged to move on. From a departmental point of view, we will try to provide information that people can then pull together with what other Departments are doing. It is probably best if we give the maximum of clarity on our part of the picture, and then people can use that with other indicators across Government. You are right, it is a wider picture.

Q39 Ann McKechin: That is what I am trying to ascertain. Will other Departments have the same indicator in their reports?

Martin Donnelly: Not necessarily in this form, because this will relate to what our Department is seeking to deliver that contributes to wider social mobility.

Q40 Ann McKechin: Another impact indicator is change in the net regulatory burden imposed on business by Government. Your baseline data for that reads "reduction of £3.2 billion". Is that a target reduction or just a figure of where we are going?

Martin Donnelly: That is an estimate made by the regulatory policy committee of how far their work has prevented burdens being placed on business. They produced a report recently on this issue. It is a moving target, because as other regulatory issues come out the net impact is changed, but that is their assessment of where we are on regulation that has not been imposed.

Q41 Ann McKechin: Is that report available to the Committee?

Martin Donnelly: Yes, it has been published.

Vince Cable: That is the One In, One Out system, where each regulatory measure is quantified in terms of its cost and impact on business, and £3.2 billion is the net figure for measures already taken.

Ann McKechin: Thank you for that clarification.

Q42 Chair: Just before I bring in Brian Binley, can I clarify these input and impact indicators? They are described as being to help the public. How are they being displayed to the public?

Martin Donnelly: Apart from being published annually in our report, each of them is on our website, with some explanation. Together with the progress that we are making against the objectives set out in the SRP, which we have been discussing, the idea is to provide an overview of our progress, not just in terms of what we have done but how much difference it is making. They have to be seen as part of the overall picture.

Q43 Chair: The input indicator is fairly clear in the way that you have listed it, I think, but in the baseline data and previous data, it is not clear what is being measured. Can you explain that and would you make that clear in any public presentation of it that you do?

Martin Donnelly: We will aim to go on making that clearer. I hope we are trying to do so already. You are right: the baseline issue is a real challenge for this. It is important not to provide spurious accuracy, if I can put it that way, but there also has to be enough of a numerical basis to be meaningful, so that we can see how far we are getting there or whether something is blowing this off course. There is a trade-off sometimes between the clarity of information that we have and how relevant it is to what we are delivering. That is really what we are working on in this area.

Q44 Chair: Again on the issue of previous data, to my probably uninformed mind, in effect, if you are measuring anything the data that you had previously would provide the baseline to measure how you are doing currently and in future. How do they differ?

Martin Donnelly: Some of the baselines are reasonably straightforward, such as the international comparisons and openness to trade; some are a little bit more difficult. The value of the consumer benefits of the competition regime obviously requires estimates made by experts in those areas and can vary quite a lot, depending on the cases that come up. It is important to have some sense of perspective and commentary on each of these. We welcome all input about which you and other stakeholders find to be the most helpful of these, and which you find perhaps rather more obscure to use. The idea is to find helpful indicators on impact and input.

Q45 Chair: I accept that the one on social mobility in adulthood is underdeveloped-I do not know how that is going to be measured-but there is another one that I should have thought was fairly clear. You mention the proportion of firms that are innovation active. It would be interesting to know how you measure it, but you say that previous data are 63% and baseline data are 58%. Are you implying that the number of firms that are innovating is dropping, increasing or what? It is not clear from that.

Martin Donnelly: We need to put such figures into a wider economic context. The annual report is saying that we had a 58% figure, whereas previous data suggested that figure was 63%. Clearly there is a trend there that is not a helpful one, and it is one that feeds into our policy making in terms of innovation and current work that the Department and the Government have under way in this area.

Q46 Chair: On that one in particular, to be helpful for the public, I think it is necessary to describe what "innovation active" means and to show a clear trend with some explanation with it. That probably applies to others as well. Otherwise it is pretty meaningless, frankly.

Martin Donnelly: May I suggest that we come back to you with a note on that, drawing on the information that we have provided online and trying to go a bit further?

Q47 Mr Binley: Secretary of State, I know how keen you are on the issue of regulation, particularly as it affects small and medium-sized businesses. The Committee welcomes that, as you know, and we have talked about it before. But the One In, One Out rule appears to be taking some time, and I wonder why there was so little activity in the first quarter of the year. It is one of those issues that you have got to keep right at the top of the menu in every Department all the time, isn’t it? I am sure that you have been doing that, so can you explain why there has been so little activity?

Vince Cable: It is an important issue, which we are giving priority. There are two main elements to it: the One In, One Out process, which you have asked about specifically, and the Red Tape Challenge. As you know, we are challenging each of the 22,000 bits of regulation, and we have been through something equivalent to 400 in the hospitality and retail sector, and more than half of those regulations have been scrapped or, in some cases, consolidated. In terms of the One In, One Out process, which Ann McKechin asked about earlier, we estimate the total value of the deregulatory process to be about £3 billion. The reason for the slowing down of the tempo may be a good one. I think that Departments are now realising that whenever they bring forward a new regulatory proposal, it will be subject to an exhaustive critical analysis, so they are hesitating. That may be the answer.

Q48 Mr Binley: Can we expect a great flood of them early next year?

Vince Cable: I do not think so. The experience we have is that all Departments now realise that if they wish to bring in a new regulatory measure, there is a set, established process through the regulatory policy committee, quantification of the costs and benefits and a proper impact assessment, and that measures will simply not be agreed unless they can identify compensating deregulation, so they hesitate to introduce new regulation unless there are extremely compelling reasons for doing so. I think therefore we have not merely deregulated in ways that we can quantify, but changed the culture.

Q49 Mr Binley: I accept that. Are you now beginning to regret the One In, One Out headline?

Vince Cable: No. The slogan does not capture what is involved, as I am sure you are aware. It is not simply about introducing one regulation and removing another. We realise that if you did that you would have some silly, inconsequential measure being used to offset a major increase in regulation. We therefore calculate the costs and benefits. It is a more subtle and sophisticated process than that slogan implies.

Q50 Mr Binley: I really do understand that, but many small businesses, which are disproportionately hit by regulation, took the headline as being pretty much a commitment and they are a bit dissatisfied with progress because of the headline. Do we need to resell this and change the pitch? I do not want to meet with that dissatisfaction and I am sure that you do not.

Vince Cable: We need to continue to sell the proposal to our stakeholders and those in the small business community, I accept that. If there is frustration, it partly relates to the fact that there is a fair amount of regulatory activity that we do not have direct control over. As you know, a fair amount comes from the European Union. We are hopefully changing the culture there as well and the impact assessments are becoming more demanding in the EU. If something comes though ultimately from Europe-the agency workers directive is the most topical recent big change-we can try to improve its implementation in the UK, but ultimately it is a European law that we have to comply with.

Q51 Mr Binley: Your own Department, based on the information that you have given us, has had three new regulations and four out. I suppose that you can claim that, on the basis of One In, One Out, you have done pretty well and have exceeded your target. Are you happy with the amount of regulation impacted upon by this exercise?

Vince Cable: Like you and many small companies, I get frustrated that we cannot do more more quickly. As I said, a lot of this is beyond our control, but we are trying to set up a serious process. The Red Tape Challenge is underestimated in terms of how far-reaching it is-

Chair: We will come to that in a moment.

Vince Cable: I think we have a good story to tell, given that we have been operating this system for just over a year.

Q52 Mr Binley: I want to move on to a specific area of activity in this respect. I come to what arises out of the report of the Cadbury fiasco-I think "fiasco" is a fair word. We sent you our report and recommendations, specifically about the takeover code, but you have not been able to get round to it. I understand how busy you are. Will you tell us when you might get round to responding to that?

Vince Cable: Actually, things have been happening-not in a dramatic way, but in useful ways, I think. The takeover panel have looked at this, as you know-we have encouraged them to look at it-and they have introduced new procedures that are more critical of takeovers: for example, they reduce the time within which a takeover has to proceed following notification. We have encouraged them to proceed with that. They have consulted with their City constituency and the changes are now in effect. Our assessment is that what would previously have been unnecessary and questionable takeovers are now more difficult to pursue. We think the takeover panel regime, which is a voluntary one, is having some results.

Specifically on Kraft-Cadbury, one or two things were recently brought to my attention that are somewhat reassuring. What has happened is that, following the very negative analysis of the takeover, Kraft subsequently decided, having taken over Cadbury, to base some of their global research here. There is now a global centre of chocolate excellence-their worldwide research into chocolate is now being carried out in Bourneville.

Chair: We shall be making our personal investigations.

Vince Cable: I am sure you will. I shall, too.

Q53 Mr Binley: Can we both take some credit for that, then? Are you happy for that to happen?

Vince Cable: You homed in on an important issue. The pressure that you have exerted was helpful. I do not think we should just assume that this problem has been solved.

Q54 Mr Binley: That is the point.

There is concern that all shareholders who appear on the register during the offer period in a hostile bid are able to vote on the offer. From the perspective of natural justice, that seems to be not very just. Can you give us any hope that you might change that scenario? In what ways might you change it, if you were so minded?

Vince Cable: Yes, this is one of a series of problems that takeovers present. There are parallel issues about how far takeovers should have the consent of the taking-over company as well as the taken-over company-how far new shareholders from hedge funds, for example, should have the same voting rights as established shareholders. There is a set of issues there and those are currently being investigated by a group that I established headed by Professor John Kay with a mandate to look at shareholder activity, activities of capital markets, with a view to achieving greater long-termism, which is what we want to come out of this. He will be looking at that specifically.

Q55 Mr Binley: Any idea of when we might come to some conclusions on that?

Vince Cable: An interim report is out soon, I think-I should be carrying this in my head-but I will let you know about that. There is an interim report. He is now working with a group of people, including Sir John Rose from Rolls-Royce, on how to get some practical conclusions.

Q56 Mr Binley: Can I assume that soon is a matter of months and not a matter of years?

Vince Cable: Hopefully less than months, but we will let you have a timetable.

Q57 Chair: Thank you. Getting back to better regulation, obviously this is a huge issue with business and there has been an equivalent huge amount of political rhetoric about it. Would you not agree that the output is somewhat disproportionate to the amount of rhetoric that has been applied to it? There is one and a few more are estimated to be in place by December.

Vince Cable: I do not agree at all. The rhetoric is not all that extreme in our case. I have been concerned about making sure that we have proper processes to deal with this. That is partly the One In, One Out system and partly ensuring that whenever a Government Department wishes to regulate it produces a proper cost-benefit analysis. We have this more offensive approach through the Red Tape Challenge, which I think is working well, although it has not been operating for long.

Chair: We will deal with the Red Tape Challenge in a moment.

Vince Cable: Just to complete the answer to your question, there are areas where regulation has a useful purpose-in terms of environmental policy and protection of vulnerable members of the public, and so on. We have to try to assess the costs and benefits, not just assume that all regulation has to be scrapped.

Q58 Chair: I totally understand your comments there. However, I do not think that any of the comments that I have heard about One In, One Out have ever been prefaced by some comment about the 13 areas of measures that are excluded from its scope. Can you tell me what proportion of total measures that go in are excluded from One In, One Out as a proportion of the whole?

Vince Cable: I cannot give you an off-the-cuff figure. It is fairly substantial, because a lot of regulation relating to the single market, of course, is beyond our national control, and a great deal of social policy legislation, similarly.

Q59 Chair: There is a list of 13 areas. I was astonished by the range of measures that were automatically excluded from this provision. I feel that should be made rather clearer in the debate that goes on about it. I am interested to know what proportion the list covers.

Martin Donnelly: I should like to add a little more detail on one point the Secretary of State made about dealing with Europe, which is an extremely important area. We have been increasing our work to engage with the Commission and with the Council and the European Parliament on the use of impact assessments. Following the Secretary of State’s visit a month ago, I took the Department’s board to Brussels, where we spent a day talking through these issues with senior officials, lobbying the Council to make better use of the Commission’s impact assessments and talking to the Parliament about how they were doing their own impact assessments. We are trying to focus upstream on preventing more of these proposals coming though that have not been properly looked at in terms of their real-life impact.

Q60 Chair: That is an interesting answer, because it leads on to my next question. What assessment is there of regulations that are excluded from the One In, One Out criteria and put in the 13 that are outside that are, shall we say, debatable? What approach is taken in assessing how legitimate that classification is?

Vince Cable: We do not review the regulatory system around tax, where, as you know there is a lot of complexity. Many small businesses would regard this as a problem area, but this does not come within our in-out system. There is a separate exercise working with the Treasury in terms of tax simplification, and we will be reviewing the effectiveness of that, but it is a separate process that does not come within One In, One Out.

Q61 Chair: Those comments are welcome, but there is a general point to be made that, for this to be effective, there has to be the most rigorous scrutiny of the classification of measures to avoid the 13 exclusions becoming a convenient repository for measures, leaving only a tiny proportion of the total liable to this sort of consideration.

Flowing from this, do you genuinely believe that the removal of powers, such as the Distribution of German Enemy Property Order, is really helpful? It is an historical tidying-up measure, not really anything to do with modern, better regulation.

Vince Cable: I genuinely believe it is useful to do a big tidying up of the system. Many successive Governments have talked about regulation and they have left all this nonsense sitting around in the legal codes, and we are getting rid of a lot of it, but I agree that is not central to the issue.

Q62 Chair: I agree, but the fact that it is so irrelevant means that it is not really worthy to be put in an annual report, because it is not impacting on day-to-day Government administration of the Department.

Vince Cable: That is why, if it comes under the One In, One Out process, it would not count as having any quantitative value; but we list it because we are tidying up the system and that is useful in itself.

Q63 Chair: It conveys the impression of a Department that is scraping round trying to find something to justify its activity in a particular area.

Vince Cable: I think that is a little uncharitable, Chair.

Chair: I just find it odd that something like that is included. I am not trying to be uncharitable.

Q64 Rebecca Harris: I would like to return to the issue of EU regulations and gold-plating. We welcome the work that you are doing to try to get the Commission to carry out proper regulatory impact assessments; it could be beneficial if they could improve their act on that. In terms of what you are doing at the moment to tackle these things, you have highlighted audit as an area that you are looking at to reduce the regulatory burden on businesses. What timetable do you have for amending the Companies Act for small businesses? That is seen as a priority, but it does not seem to have happened here, in terms of reducing small business audits.

Vince Cable: There are different elements in your question. One of the substantial bits of deregulation has been removing some of the more complex audit requirements for small companies. We have simultaneously succeeded in stopping the EU Commission from proceeding with some quite onerous requirements in that area. So as opposed to the enemy activities in war legislation, this is real, serious regulation that we have stopped at national and European level.1

If I have understood your question correctly, on companies law reform, certainly we are giving thought to new legislation in the next session of Parliament that will get us into that area, where we have to legislate.

Q65 Rebecca Harris: You give two other examples of progress on EU legislation: the Pregnant Workers’ Directive and the accounting rules for subsidiaries. What progress have you made on those so far?

Vince Cable: In terms of the Pregnant Workers’ Directive, which my colleague Ed Davey has been pursuing in detail, we were not happy with the original proposals and have opposed them. As far as I am aware, there has been no progress with progressing them at the European level against our opposition.

Q66 Katy Clark: There are still negotiations on the Pregnant Workers’ Directive, which would give paid maternity and paternity leave. The European Parliament is still saying that it supports these proposals. Do you accept that they will have to be implemented in some way?

Vince Cable: It depends on the outcome of events-the voting-in the European Parliament. As you know we are looking separately at the issue of parental leave. Hopefully, we will be committed to doing this before the end of this Parliament, making it more flexible for families. We will do this at national level. We will have to consider how that relates to anything coming through Europe, once the European legislation appears to be real, but at the moment we are contesting it. Is that correct?

Martin Donnelly: Yes. We and other like-minded member states are doing this. Unless there is more common ground, there is a current deadlock in negotiations, as I understand it, so it is not automatic that something will come out of Brussels.

Q67 Rebecca Harris: Are you concerned that your annual report is unable to provide any concrete examples of where the Department has delivered change on gold-plating EU regulations? It just talks about proposals for change.

Vince Cable: Let me give one or two concrete examples of how we influence European legislation. One major piece of legislation that affects British business and people generally is the Agency Workers Directive. What happened-under the previous Government-was that in the course of trying to implement it, they sought a consensus between the employers’ groups and the trade unions to find a solution that was applicable and relevant to us, including a delay period in which people are working before the directive comes into effect. In that case, we thought that the original European legislation was unhelpful to business, and we have modified it in a way that represents a reasonable outcome, although not the one we wished for. That was not political; that process happened under the previous Government. That is happening constantly.

Q68 Margot James: You mentioned that you felt that the Red Tape Challenge had been underestimated. Will you expand on your expectations for it and whether we might see a significant amount of deregulation over the next 12 months as a result of it?

Vince Cable: As I said, in the first two exercises that have been completed-in the retail and hospitality sectors-over half of the measures that were identified have been struck out completely or amalgamated. Now, we are just scraping the surface of it-that is some 370 regulations out of 22,000 and we are trying to work our way through the lot. Some big, difficult sectors that have been reviewed-manufacturing and construction, for example-and we will be coming to a conclusion on them very soon. The process has been going effectively for about six months.

Q69 Margot James: The consultation on manufacturing was held earlier in the summer. Can you give us any information on how that went and what deregulation you expect to see as a result of that inquiry?

Vince Cable: I cannot at this stage give you numbers and measures. As you said, the consultation has happened and we are in a position now to be able draw it to a conclusion. Given the priority that we are attaching to manufacturing, we hope it will be a good exercise. I do not know whether we have a date for this.

Martin Donnelly: We are hoping to make announcements later this month on manufacturing.

Q70 Margot James: Apropos manufacturing, although not the Red Tape Challenge, are you in a position to update us on the discussions about the proposed EU revisions to the REACH regulations? I know that DEFRA is the lead agency, but in your co-working with other Departments you have a role.

Vince Cable: Well, we will certainly pull it up for you. I cannot give you an answer now.

Margot James: If you could write to the Chair about the status of the REACH renegotiations, I would be grateful, because manufacturers in the Black Country are very concerned about it. Thank you.

Q71 Chair: I understand that the Department restructured its corporate and admin management in February. What do you think that the benefits of this will be? Why did you do it and what are the benefits?

Martin Donnelly: We have consciously pulled together our human resources and change programme. In the finance side we have been working to pull together our partner organisations so that the so-called line of sight works effectively and we have a clear view on how we can rationalise backroom services-IT procurement, and so on. However, I would separate out the hardware of structures from what you might call the softer but very important issues of culture.

Our aim is really to build a Department that is less hierarchical and more open to outside evidence and partners. We have a scheme that encourages everyone to spend some time in business, preferably small business, working over the next year. We have a 50% increase in our training budget. We are trying to use our director general of change to help lead the process, but it is the responsibility of all of the board, reporting to Ministers, so that we end up with a Department that has less hierarchy, where people have more scope to be autonomous, take measured risks and, above all, be clear how they focus on delivering for growth, which is our central objective.

Q72 Chair: Thanks. In your annual report it states that the departmental board, which contains Ministers, "does not decide policy", while the executive policy board, which does not contain Ministers, does have a policy role. In my no doubt naïve way, I would have assumed that Ministers had an important part in policy making. Can you explain why this is so? If the departmental board does not decide policy, who does?

Martin Donnelly: You are right. Ministers decide policy. The system set up through the Cabinet Office was designed to clarify that the new departmental boards with non-executive directors were not ultimately responsible for policy, because that is a matter for the Secretary of State and supporting Ministers and, of course, for the Government as a whole. The point people were trying to get at here is that this board is meant to help us run the Department more effectively and to support and challenge us in so doing, but policy decisions and responsibility remain with Ministers. We need to be clear about that.

When we meet as an executive team inside the Department, as we did a couple of days ago, talking about small firm finance, for example, we are discussing the proposals that would be put to Ministers for decisions in those areas. That is separate from the wider issues about how effectively we run the Department and how we spend taxpayers’ money on so doing, and how we have maximum impact in delivering these policies.

Q73 Chair: Can I get it clear? Does the executive policy board feed into the departmental board, or is it totally separate and standalone?

Martin Donnelly: On policy issues we report to Ministers, but we keep the departmental board in touch, and under the Secretary of State’s chairmanship we review, for example, the progress we are making on growth or on key policy areas, together with the non-executives. We keep the non-executives fully informed, but we focus at the departmental board level. I appreciate that this is a bit of a confusing system, but it works better in practice than it might sound like it would in theory.

We are looking together at how effectively we are running the organisation to deliver those policy priorities set by Ministers. We, the directors general and I, in our day job, are helping to advise Ministers and then carry out those decisions. That we do regularly every week to make sure that we are pulling together the Department effectively behind Ministers’ priorities.

Vince Cable: May I come in on this?

Chair: Please do. I am even more confused now.

Vince Cable: I chair the departmental board and I think that I have been to all its meetings. It is a new departure that tries to draw on some of the experience of the private sector, in terms of non-executive directors. What essentially happens is that the departmental heads presents a detailed report that is questioned by the external non-execs. It is a way of imposing a level of questioning about our capacity to deliver and about whether risks are being properly managed, in the way that a good plc would operate. That is the model we are adopting; I think it works well. The Permanent Secretary has explained clearly that when the departmental heads are there talking about policy, they are talking about implementation, not creating new policy.

Q74 Chair: What is your involvement and association with the executive policy board as a policy-making body?

Vince Cable: I meet the Permanent Secretary frequently on a one-to-one basis and I meet the heads of departments whenever we have a major discussion in the office-probably several times a day-on areas that they are directly responsible for.

Q75 Chair: That is the minimum that I would expect. I am really still unclear about how you have a departmental board, which I can understand is essentially an administrative body, and an executive policy board, with policy making, that the Minister is not involved with. I cannot understand that.

Vince Cable: It is not policy making, it is policy delivery.

Q76 Nadhim Zahawi: If you add, "does have a policy implementation role", rather than "a policy-making role", that would explain it.

Vince Cable: I would share your concern if it was making policy.

Chair: It is very unclear from the briefing.

Q77 Nadhim Zahawi: I think that came through the questioning. The confusion is that the executive policy board, which does not contain Ministers, comes across as though it is making policy, whereas it is policy implementation, which is how it works.

Martin Donnelly: It is also the occasion for senior officials to ensure that we are co-ordinating internally so that advice on one policy has been connected with advice-

Nadhim Zahawi: So the left hand talks to the right hand.

Martin Donnelly: Exactly.

Q78 Chair: You have a number of non-executive members on your departmental board, all of whom are recruited through fair and open competition. Would you be in favour of those being subject to a pre-appointment hearing process undertaken by this Committee?

Vince Cable: Speaking as a politician, I used to advocate that in the context of the membership of the Monetary Policy Committee. If somebody has a significant decision-making role, that would be appropriate. The role of the non-execs in our departmental board is almost entirely advisory-they are not making decisions-but it is for you to decide whether that is sufficiently important to merit closer scrutiny. I suggest that perhaps it is not, but it is for you to decide.

Q79 Chair: I think we may look at that and come to a view on it, but you do not object in principle to that?

Vince Cable: I would not object in principle, no.

Q80 Paul Blomfield: Returning to staffing changes and the impact on the capacity of the Department, in your annual report you record that BIS reduced staff count by 380 and a further 700 posts almost have been lost from other agencies. What do those figures represent in terms of the total reduction in the staff levels you anticipate needing to make to achieve your savings targets?

Martin Donnelly: We consciously took a decision to move as rapidly as we could through the restructuring and-I do not like the word "downsizing", but you know what I mean-getting the Department smaller. We have got to the stage now where, with just under 2,300 staff in the core Department, we are confident that this is a broadly stable level for the resources we have in the spending review. Obviously without wanting to prejudge what will happen in future, we have relative stability at that level of staff and we do not anticipate having to make further calls for voluntary redundancies, and therefore this is the staffing level that we can use to deliver our policy priorities.

Q81 Paul Blomfield: I am trying to tie figures together. In table 5 of your report, you talk about a staffing level of 2,900.

Martin Donnelly: Yes. The figure I have given you was for the end of September this year, so that is where we are now. We have come down from a little bit over 3,000, depending on how you measure it, to about 2,300.

Q82 Paul Blomfield: Could you flesh out how that has impacted on different parts of the Department? Within table 5, you have a breakdown by agencies, but there are still core BIS functions that are collected together. Let me take two examples. At October 2011, according to the figures I have, you had a headcount of 120 people working on advanced manufacturing. How far had that been reduced?

Martin Donnelly: I cannot give you a precise figure for an individual area, although am happy to look and see what information we have going back. It may not be entirely straightforward, because we have also shifted some of the team responsibilities, so that what teams are doing now is rather different from what they were doing a year or so ago. There are some areas-growth is one of them-where we have more people working in new teams. In other areas we have sought to bring together, for example, business and skills work in a single group.

We have had to change the boundaries, so it is not straightforward to compare back with where we were. Of course, we have fewer people working overall, therefore our challenge is to use them most effectively, to train them better and to ensure that they are engaging with all the expertise externally that we can.

As the Secretary of State mentioned, it is useful having people such as Professor Kay working for us, as are our connections with people such as Will Hutton on innovation. This is a process that we are trying to deepen to ensure that Ministers have access to all the best available analysis and evidence, not just from our own staff.

Q83 Paul Blomfield: It might help if you provide us with further information on the impact in Department sections. Without giving the numbers and taking into account the caveat that you have just given, are there particular functions that have taken a disproportionate share because of a strategic decision that you have made on how you want to lead the Department?

Martin Donnelly: I would highlight the way that the Better Regulation Executive works. We took a conscious decision to shift from marking every Department into a smaller central unit focused on priorities. What is happening inside teams is that there is a much more explicit focus on priorities and an acceptance that some other issues either have to be dealt with differently or have to wait.

I would answer your question by looking forward and saying that, as a board, we are aware of the need to continue to move resources around. We have set up a BIS local in, with a small number of people regions to work effectively on the ground and to liaise with LEPs, and so on. We are looking at-we will advise Ministers on this-whether we need to expand those numbers a bit, but then the question is, where will we find the resources? We are working through that as a board at the moment. It is part of a continuing prioritisation process that also relates to where the economy is and which sectors we think we will have to focus more people on.

Q84 Paul Blomfield: Thank you. Can I just ask about some of the related agencies for which numbers are given in table 5? For example, the Insolvency Service, which sadly would seem to have significant demands on it currently, has had a very big hit, with 534 staff removed. How is that impacting on its function?

Martin Donnelly: The Insolvency Service is having to manage some significant challenges, because it works on a model where, essentially, it is working from fee income, which has been falling and is continuing to fall, and because they have to manage the number of staff to provide the service that is being purchased, that has led to significant requirements for restructuring. They may not be complete yet. The management, with our support, want to minimise that, but we have to ensure that the Insolvency Service is of a size where its funding will pay for it going forward.

Q85 Paul Blomfield: How confident are you, Secretary of State, taking into account the discussion that we have just had and the big numbers that are being removed from the Department, that BIS can provide the necessary level of support across its wide portfolio, with those cuts?

Vince Cable: I am confident. This is a good opportunity to say that, as its political head, I am proud of the fact that the Department is doing an awful lot more with a lot less resource and fewer people. If you review the big picture, we are in the process of tackling some major and complex reforms, not least of which is the RDAs wind-down, the university changes, the skills programme and the Royal Mail legislation and subsequent privatisation. We are taking on major new commitments, including the regional growth fund administration, the launch of the Green Investment Bank, the data systems for the Met Office and others, which we recently acquired as responsibilities, and the big growth review, and so on. We are doing a great deal and I am satisfied that it is being managed competently, with, as you elucidated, fewer people.

Q86 Paul Blomfield: In a sense you have highlighted my point. There are not only existing functions but new challenges for the Department, with a significantly reduced staffing profile. In my previous life before I was elected, I went through similar challenges in leading departments through change. Of course, to keep up morale and for all sorts of other reasons, you talk about organisation change, engineering, and so on, in terms of how you are going forward, but you also recognise that you have to take functions out. Can you give us any examples, with the exception of RDAs, which we are clear on, of areas of activity that have had to be severely curtailed or disbanded as a result of these changes?

Vince Cable: Most bits of the Department have taken cuts in terms of resource. Is that what you meant by curtailment?

Q87 Paul Blomfield: Yes, but what activities? You cannot take these people out without having an impact on the Department. What is the impact and where?

Vince Cable: We would question the premise of the question. I believe that you can achieve, and we are achieving, much higher levels of productivity through good management. There are issues of staff morale. I guess it is primarily an issue for the Permanent Secretary, but I endeavour to engage with staff at all levels, and I met the trade union representatives, for example, when the redundancies were being mooted. I am satisfied that there is a high level of commitment by staff, although they are under pressure.

Q88 Paul Blomfield: I am sure there is a high level of commitment, but, with respect, that was not my question. What areas of activity have had to be severely curtailed or removed as a result of these cuts? Are you saying none?

Vince Cable: Probably individual members of staff are often able to do less within their portfolios. That may mean that they are able to speak to fewer companies in a particular sector, for example, if they have sector responsibility. That is the way it manifests itself, clearly. I do not pretend there is not an impact.

Martin Donnelly: One other point is worth bearing in mind. We are seeking to use new technology to work more effectively, so some of the business advisory services, for example, will in future be provided online, because we are satisfied that this is an effective way of getting to businesses and it means that you do not need so many people on the ground in regions. That is one area where we will be using fewer staff. Otherwise, we are seeking to prioritise. We are spending three months working hard on how we get to be, first, more flexible, then more innovative, and then more open. We have had 1,000 members of staff engaging in a conversation about what that really means. As we know, it is easy to say these things, but how do we do it? That is the challenge that we as managers are working through, so that we can deliver what the Secretary of State and Ministers require.

Vince Cable: You were challenging me on examples of services that we have cut back on. There are some. Business Link is one that is effectively going. The one-to-one contact involved will no longer be there; it will be done through websites. Services of that kind have had to be cut back.

Q89 Mr Ward: One justification for winding down Business Link was not only that it was going online and could be accessed that way, but that the banks would fill the gap with business mentors. How is that going?

Vince Cable: The British Bankers’ Association, which is running that system, would argue that they have got an ambitious scheme that is working well. I try to keep on top of this by meeting senior executives from the banks. To give a concrete example, we were concerned about the commitment of RBS to small business lending, so I spent an afternoon with the whole team, seeing how they operated. There are some new managers who are focused on their new task of supporting small business. I think that there is a real culture change taking place and the support system you describe is being put in place. I am satisfied that the banks, under pressure, are making a bigger effort than they did to engage with their small business customers.

Chair: We are going to deal with banking in a moment.

Mr Ward: My question was specifically on filling the advisory services gap, which you were talking about.

Q90 Paul Blomfield: On a related question about restructuring, your report indicates that 15 people received packages worth over £200,000, 48 between £150,000 and £200,000 and 117 between £100,000 and £150,000. Are those levels and packages consistent with other Departments?

Martin Donnelly: Yes. These are all consistent with Cabinet Office guidelines and they go through a specific process of approval. There are various legal and contractual obligations that have to be taken into account. I am satisfied that we have done so in those cases.

Q91 Paul Blomfield: Can you share with us what is included in those packages?

Martin Donnelly: It will vary between the specific contracts that individuals were on. I can let you have the details of how we approach these issues, so that it is clear where the expenditure comes from, depending on length of service and the specific type of contract, and so on.

Paul Blomfield: That would be helpful, thanks.

Q92 Julie Elliott: The recent statement on the regional growth fund assumed that 164,000 jobs will emerge on the back of the 37,000 jobs directly created out of regional growth fund investment. How did you arrive at that figure and was it discounted for any jobs that would have emerged in any case?

Vince Cable: Necessarily the calculations are approximate. We cannot do a sophisticated macroeconomic model of the labour market, but essentially what happens is that the advisory team, supported by officials in Michael Heseltine’s team and by officials in the Department, will first take the estimate produced by the company, establish whether it is plausible, and then try to work out what indirect benefits flow from that. There is a critical review process. As one of the ministerial team, I see the end product of that-the calculation of costs and benefits and estimated employment-and although the figures cannot be definitive, I think they give consistent and plausible estimates of a fund.

Q93 Julie Elliott: The second bit of that question was: is there any part in that calculation that counts the jobs that would already have been created from what the companies are doing?

Vince Cable: The question is about deadweight, isn’t it? This is always an issue when Government give support: would the activity have happened anyway? One point of having the advisory team is precisely to ask that question: in their judgment, would this activity have occurred in any event? That is a key question, but it is ultimately a matter for judgment. It is difficult to quantify that mechanically.

Q94 Julie Elliott: The second round of bids includes four national projects. Under these, you state that 200 direct jobs will be created, with an additional 16,500 indirect jobs. Can you give us some more detail on how you arrived at those figures? Is it the same system as you have just described or is it a different system?

Vince Cable: It would be the same system. I am not sure which of the four projects we are talking about. Certainly, the same methodology would be used.

Q95 Julie Elliott: The same methodology, okay. It is acknowledged that there have been some problems with the distribution of the cash from the first round of the regional growth fund, which was announced in June. How many firms have received their funding so far? What is the timetable for the other companies to receive their money?

Vince Cable: I question the premise of the question. The issue was never about the speed of disbursement of the funding. The issue in terms of our delivery is whether the projects actually happen and get under way. In the first wave-the 50 projects with the first £450 million-over half of those projects are now happening. These are private projects that Government are supporting. Those projects are taking place, the factories are being built and the jobs are being created. The Government funding only takes place at the end, when we are fully satisfied that the due diligence meets the necessary standards and the cheques are paid.

Quite a small number is involved. I checked last week where we had finally got up to. It is a small number, but that was anticipated, if you see Lord Heseltine’s comments on how he envisaged the process working and what the Government said back in June. We expected this sequence of events to take place and we do not see a problem with the fact that the money has only been disbursed when the projects are under way.

Q96 Chair: May I interrupt for one moment? How many jobs have been created so far as a result of the decisions made by the regional growth fund?

Vince Cable: I cannot give you a figure for two reasons, one of which is that some involve construction, so there are temporary construction jobs before the project has happened, and in quite a few cases they are not working at full capacity. We are talking about an early stage of implementation of the project.

Q97 Chair: I understand that, but a year after the announcement of the RGF and so many months in now, it would be helpful to have some idea about how it is translating into employment on the ground. Could a written estimate of those numbers be sent to the Committee?

Vince Cable: Realistically, we can tell you how many projects are happening-something is happening on the ground-and how many jobs are associated with these projects, based on our original estimate. That is plausible.

Q98 Chair: I would still like to know how many jobs have been created.

Vince Cable: I would, too. It is an interesting question. Given the way that the process works, it is difficult to give you a precise, meaningful number, but we could proceed in the way that I have described.

Q99 Chair: Are you saying that you do not know?

Vince Cable: I certainly do not know, but I can see how one might find a useful number.

Chair: I am sure that the Committee would welcome that information.

Q100 Mr Binley: Secretary of State, clearly most of the RGF development grants went to the private sector. I understand the reasons for that-no argument about that-but equally the Prime Minister announced more money to be spent on public sector infrastructure. I assume that division was made deliberately, knowing that money would come. When will that be up for offer in the same way that the RGF stuff was up for offer?

Vince Cable: The RGF does contain some infrastructure projects.

Mr Binley: Very few.

Vince Cable: Yes, but I think there is rather more in the second wave. Separate from that, there is the fund that the Chief Secretary announced a couple of months ago-£500 million, which is for enabling infrastructure projects. Of course, that is public money going into public sector projects, but it is a support for private development.

Q101 Mr Binley: How does a local public sector project get involved? Do we simply write to you? How do we do that? Or will you just make the decisions yourselves?

Vince Cable: If it is an infrastructure project, it will go through the Department for Transport’s mechanisms.

Q102 Julie Elliott: I asked about how many firms have received their money, and you described the process but you did not answer my question. How many firms have so far received their money from the first round?

Vince Cable: It is changing on a daily basis. Before I left, it was eight or something like that.

Martin Donnelly: We have had final grants signed for 16.

Q103 Julie Elliott: Out of how many?

Vince Cable: Fifty.

Q104 Julie Elliott: What is the timetable for the others to receive their money?

Vince Cable: As soon as they complete their due diligence, and that depends on whether the recipients meet the necessary requirements.

Q105 Julie Elliott: Is there a timetable for that?

Vince Cable: As soon as possible.

Martin Donnelly: As the Secretary of State says, it depends on their moving on with the project. The due diligence tends to take between two and six weeks, so it is not a long process in itself, and the companies and those involved do understand this process.

Q106 Julie Elliott: You mentioned due diligence, which is a key part of the funding experience, but it has been perceived as causing problems. Can you see in the experience of this first round of bids any way to speed up the process for the second round of bids?

Vince Cable: I have not perceived it as a problem. I know that some have criticised it, but we have not perceived it as a problem, because we knew what the process was when we were working on that. Clearly, everything that we can possibly do to speed up implementation is to be desired, given that communities badly need employment, so we need to move as quickly as possible and that includes the disbursement of funding. As the Permanent Secretary has said, we have approximate estimates of the number of weeks that we expect to pass before the legal and accounting disciplines can be completed. We have to do that; we cannot throw public money away without scrutinising it.

Q107 Margot James: The Bank of England’s latest report shows a contraction in bank lending over the last quarter. The credit conditions survey reports on broadly unchanged credit availability, falling demand and the prospect of increased defaults. What is your view of the scene painted by those two reports?

Vince Cable: That is accurate summary and it concerns me-it would concern anybody who is worried about the economy. We have tried to get to the heart of a lot of the data gaps, including through specialised research. When I was last before you I mentioned the work commissioned by the Department working with the banking groups to try to establish how much discouraged demand there was, and how much this was a problem of lack of demand and how much it was about banks withholding money or unreasonable requests. We are trying to get to grips with that as much as possible.

There is a difficult position with regard to access to finance. Brian Binley, particularly, has been pursuing me on this ever since we started this Committee. It is difficult. We would argue that we think we have made some improvement. The Merlin process has been criticised, but under it the gross lending has broadly met its objectives. I am satisfied, having talked at length to the senior executives of the banks concerned, that they are changing their culture and becoming more relationship-minded. They are attaching greater priority to small business lending. I think these things are genuine. I do not think they are fooling us about that. Equally, however, I accept that the gross lending figures do not give you the complete picture. There may be gaming, and in any event a lot of small businesses are accumulating cash-they are not borrowing. That is a market phenomenon that banks cannot change. It is a serious position.

Q108 Margot James: The two successive trends in lending reports, since you last came to see us, indicate that stocks of lending have fallen. You would say the same in response to that, would you?

Vince Cable: Yes. The Government are alert to the need to deal with this in creative ways. As I said, the Merlin exercise was one route we tried and there was some partial success-I would not claim more than that. We have the other mechanisms that are available to the enterprise guarantee scheme. As you know, there are big new developments in monetary policy that I am closely involved with-they are ultimately the Chancellor’s responsibility-where we hope to use credit easing as a mechanism for getting a flow of more funds into SMEs. We are trying different ways to solve this problem, which is very real.

Q109 Margot James: Is there anything more that you can say about those new methods proposed-the small business bonds that were talked about last month?

Vince Cable: That is one possible way in which credit easing could operate. Again, we have to be patient and wait until the Chancellor’s statement on the 29th to know exactly how this will happen. Certainly, one idea is that bundles of SME loans could be securitised and effectively underwritten by the Government’s balance sheet. Medium-sized companies could generate a bond market, which again would have some state support through the Government’s balance sheet. Half a dozen different ideas are being discussed. The questions in each case are: would this have an effect on public finances and how, and would it meet a genuine failure in the markets to supply SMEs with capital? Those are the questions that are being evaluated in Government right now.

Q110 Mr Ward: This does not cover the month you have been asked about. We do not have quarter 3 Merlin figures. Do you know what those figures are likely to show?

Vince Cable: I think the third quarter figures for individual banks-HSBC, at least-were out this week. Barclays was last week, I think. We will be able to consolidate that within a short period of time. I think RBS were slightly below what they had committed themselves to doing. The overall picture is that collectively they will come close to, if not exceed, the targets they set themselves.

Q111 Mr Ward: You used some quite strong language in June, specifically with regard to SME funding and lending, in terms of possibly considering the position on taxation. Are we nearer or further away from requiring that sort of pressure on the banks?

Vince Cable: The situation is changing. We need to be sensitive to this. The overall economic position has become more difficult, for reasons beyond the control of the banking system. You will have read in the financial press that some of the banks have funding difficulties, which affects their ability to long lend. We need to take that into account. It is not simply bloody mindedness; they have genuine difficulties in the markets. I have an open mind about this. As I have just said to Margot James, in respect of the way forward the Merlin process is useful, but we do not want to hinge too much on it. The key will be how credit easing can be used to break this bottleneck.

Q112 Mr Ward: There was a discussion in the Treasury Committee between Sir Mervyn King and Michael Fallon on where responsibility lay for incentivising the banks to lend. The Governor’s view was that the Treasury should do more in that regard. Do you agree with this position and what could it do?

Vince Cable: It is a cross-governmental responsibility. The regulatory responsibilities are with the FSA, the Treasury has direct responsibility via UKFI for the state-owned banks, and my Department is involved to the extent that we are concerned with business access to capital of all kinds. There is a cross-departmental responsibility.

Q113 Nadhim Zahawi: There seems to be a perception gap between what SMEs perceive as fair risk appetite versus the banks’ risk appetite in the price at which they price loans-if you see what I mean. When you talk to the Federation of Small Businesses, or looking at any SME surveys, the risk appetite for default, for example, would be perceived to be, say, one in five-20%-but when you talk to the banks, Peter Ibbotson, for example, would say that a one in 50 default rate would be where their risk appetite is at, because of the constraints within which that type of lending sits. What can the Department do to bridge that perception gap that has developed in the marketplace? A lot of our post bag comes from that type of mismatch.

Vince Cable: Banks clearly have a reduced risk appetite. That is a response to the crisis and to what the regulators are demanding of them-to hold more cash to bring up liquidity. So they do have a reduced risk appetite and that has an impact on the real economy, which is unfortunately negative. It is a question of how we bridge that. You can have guarantee schemes, which mean that the taxpayer takes some of the risk. Maybe credit easing will operate in that way. Or we can try to persuade the banks to give greater priority to certain types of lending-not just treating their risk portfolio in a completely neutral way, but trying to pressurise them in a certain direction. That is what Merlin is all about, with the consequences that I have described.

It is not just a risk appetite problem. There were cultural issues, as the banks are now acknowledging publicly. In the good old days they saw their role as selling products to people; it was not about managing relationships and supporting business growth. They now realise that that was bad-a mistake-and they are rebuilding their networks of relationship managers and advisers. That is at least as important as the general question of risk appetite.

Q114 Mr Ward: Confidence is crucial. It would be useful to have your general reflections on the turmoil in the eurozone and what the impact will be upon the success with which you can do your job.

Vince Cable: I could go on all day about this. I am not sure how you want me to discipline my answer to the remit of the Committee.

Chair: Very disciplined.

Vince Cable: Conditions are very difficult. That affects British business, for which we have responsibility, in two main ways. First, it affects our trade. One of the good trends that was happening until very recently was that British exports were growing briskly, manufacturing was growing strongly; that was part of the successful rebalancing of the economy. We have noticed and surveys show that in the last quarter or so, that is no longer happening, primarily because of the eurozone crisis. Half of British export goods go to the European Union area. The fact that I trot out and worry about is that we export more to Ireland than Russia, China, India and Brazil combined. This has an impact. It affects our trade and our exports.

Secondly, it affects the banks, because of risk and funding issues, and that feeds into the discussion that we have just had. We are all waiting with bated breath to see whether this crisis is going to be resolved or deteriorate, which would have a massive impact on the UK.

Q115 Chair: On the measures on quantitative easing and credit easing, Mervyn King, in his appearance before the Committee, seemed to have no support or appetite for securitising SME loans. How are SMEs going to access funds? Will they get any benefit from it at all?

Vince Cable: As you know, the Governor has taken a strict view about his responsibilities and sees quantitative easing entirely in terms of buying up Government securities. If the Government feel that there is a failure of lending, credit easing is the way of dealing with that and the Government’s balance sheet, his view is that this is essentially a fiscal rather than a monetary question, and that it is therefore a matter for the Treasury’s judgment and not for him. Monetary easing will happen-that is what credit easing means-but it will be done through and by the Government.

Q116 Chair: Are you having conversations with the Treasury about it?

Vince Cable: Yes.

Q117 Chair: Good. Can you give us some idea of when we may have some indication of the outcome?

Vince Cable: I think we will hear on 29 November about at least the first stage of thinking on this.

Q118 Chair: That is interesting. Thank you, Minister.

You may recall at your first appearance before this Committee that you were asked if you would uphold the commitment given to the previous Committee by the previous Government on introducing a code for pub companies.

Mr Binley: A statutory code.

Chair: Yes, obviously a statutory code. The Committee has held an inquiry and reported to the Government and is awaiting a response. Do you still uphold that commitment?

Vince Cable: I am aware that you are awaiting a response. I know how we are preparing that response and have been discussing it with my colleague Ed Davey. Rather than give you a pre-digested account of what our formal response to you is, I would ask you to exercise a little patience and wait for it, because we are taking your recommendations seriously. It is fair to say that the world has changed somewhat since you first reported-there have been changes in the way that the pubcos operate, for example. I would be grateful if you could let us set out how that frames our response formally, within a few days.

Chair: I am sure the Committee understands that the world has changed. I am not so sure that the underlying problems in the industry have changed sufficiently to alter your commitment to it, but we will await the response with interest.

Q119 Mr Binley: You said "a few days", Secretary of State. Does that mean that we can expect it in the next two weeks?

Vince Cable: I have not got an exact date.

Mr Binley: It has just been passed to you.

Vince Cable: The end of November.

Mr Binley: That is good. Thank you very much.

Chair: Thank you, Minister. This has been a comprehensive discussion. Thank you for your contribution. We look forward to more of them.


[1] “ To clarify the position, the EU Commission is supportive of the UK ’ s long-standing campaign to reduce accounting requirements for small companies. The Commission ’ s draft proposal on reform of the accounting regime for small companies also helpfully increases the threshold for audit exemption so that more companies will fall within it. The Commission ’ s proposals on reform of the statutory audit directive and the audit market generally, have still to be published ” .

Prepared 23rd November 2011