UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 598-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

Progress on Local Enterprise Partnerships (LEPs) and the Regional Growth Fund

Tuesday 16 October 2012

The right Hon.Michael Fallon MP

Evidence heard in Public Questions 106-224

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 16 October 2012

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Mike Crockart

Julie Elliott

Rebecca Harris

Ann McKechin

________________

Examination of Witness

Witness: The right Hon. Michael Fallon MP, Minister of State for Business and Enterprise, Department for Business, Innovation and Skills, gave evidence.

Q106 Chair: Can I start by first congratulating you on your ministerial appointment and, secondly, thanking you for agreeing to speak to the Committee so early in the new session? If you could just introduce yourself for voice transcription purposes, that would be helpful.

Michael Fallon: Thank you, Mr Chairman. My name is Michael Fallon. I am Minister of State for Business and Enterprise. As you can tell, my voice is going slightly.

Q107 Chair: I would like to say that we will not impose too much strain on your voice, but I may not be able to control my members sufficiently. Could I just start with fairly general opening questions, first of all, about the LEP vision? Obviously, LEPs were introduced two years ago. How do you think they are performing, in terms of the vision you had then and the reality now?

Michael Fallon: Thank you, Mr Chairman, and thank you for the invitation. You have seen the written evidence that my predecessor submitted to you in July, which explained this Government’s different approach to growth. It is that local growth must be locally led and must reflect functional economic areas rather than simple administrative or politically expedient boundaries. It must be driven by business leaders and people who create wealth, on the premise that those who create private-sector jobs are probably best placed to understand the barriers to growth-the barriers that prevent other businesses from growing. That was the original vision from the beginning.

My aim has been to sharpen the focus and to accelerate the pace. I have met the LEP chairmen and indicated to them that I want to see a significant stepup in pace. I have responded to their request for core funding to assist their capacity. As you will have read, I have announced £125,000 this year and £250,000 for each of the next two years as core funding, on condition that they submit to me a growth plan by Christmas, and on condition, too, that the £250,000 in each of the two subsequent years is matched by other funding.

The only other change that I think I can announce today is that I also want to clarify the relationship between LEPs and Whitehall. I want there to be a single point of contact between the LEPs. They already have contact with BIS Local, our regional offices. They already have contact through UKTI, but I want them to have a much more direct contact with Whitehall, and they will, therefore, from now on, have a single strategy adviser in the Department, or in the Department for Communities and Local Government, as a direct point of focus as they move forward to finalising their growth plans and telling us about their plans for the next two years.

Q108 Chair: You partly anticipated some of my questions, so I will not labour the point. Certainly in terms of accountability, that is helpful. One of the accusations is that BIS is too centralist, while the DCLG is only interested in localism. Given the, shall we say, locus that both of these Departments have on LEPs, how do you think you are going to address this tension? You have pointed to one or two things you want to do, but could you perhaps develop that?

Michael Fallon: I do not see the tension between the two Departments. We work extremely closely together. I have regular meetings with my counterpart, who happens to be my predecessor in this role, so that is a very close relationship ministerially. There is a very close relationship at official level between the two Departments, and I do not recognise your characterisation of one Department as localist and one as centralist.

Q109 Chair: It is not mine; it is what one of the witnesses said.

Michael Fallon: Fair enough, but I do not recognise the characterisation of one Department as localist and one as centralist. It is perfectly true, of course-

Q110 Chair: If I could just stop you there, Minister, while you may not recognise it, if there is that perception among those involved, then even if the reality is not there, one has to change the perception.

Michael Fallon: I accept that. I fully accept that. If the perception is there, we have to tackle it. It may well arise from the fact that my Department, of course, runs a number of central funds that LEPs bid into-and not simply the Regional Growth Fund, which I think we are going to go on to discuss. We are involved across the piece in other funds as well-the Enterprise Zones, the City Deals and so on. There are national programmes that LEPs are increasingly involved in bidding into, so that may account for some of the perception.

Q111 Chair: Getting back to this issue of accountability, I can see that, shall we say, having your predecessor in DCLG is potentially quite helpful, but could you define your different areas of responsibility in the context of the LEPs?

Michael Fallon: They are not different. I suppose they are only technically different, in the sense that the Permanent Secretary at the Department for Communities and Local Government remains the accounting officer, because the funding flows through local authorities to the LEPs, whether it is the core funding or, indeed, some programme that they are involved in. Otherwise, however, there are not differences between us. We are both heavily engaged in discussing future policy and programmes with the LEPs, and we do not have different objectives for them. Perhaps it would be better to turn it round and say that we expect the LEPs to publish their own strategies and to have their own objectives; these are not objectives or targets laid down by central Government. The whole point of LEPs is that these are their plans, driven locally and driven upwards.

Q112 Chair: Given the fact that funding is split 50/50 with BIS and DCLG, I was going to ask, "Who is in charge of the funding?" but from your previous answer it sounds as if this is DCLG funding. Does this not make it confusing, in terms of BIS input into the objectives of the LEPs if the funding is coming from DCLG?

Michael Fallon: The funding is not just coming from DCLG; some of the funding, of course, comes from my Department, through the programmes that I have described, like the Regional Growth Fund, City Deals and so on. I think there has to be a single accounting officer, although both the Department’s Permanent Secretary and the Permanent Secretary at DCLG appeared in front of the Public Accounts Committee. I think it is right that there should be a single accounting officer, because the money, as I said, flows through local authorities. There are two Departments here engaged at the centre; there are other Departments involved as well. The Department for Transport has a very keen interest in the plans and progress of LEPs, as does the Department for Environment, Food and Rural Affairs, so this is not just two Departments, but we stand at the centre of it.

Q113 Chair: It is very confusing, because you have just quoted that BIS will provide funding through the Regional Growth Fund, whereas, in fact, a relatively small amount of funding from the Regional Growth Fund has gone through the LEPs to date. Could you just clarify exactly what DCLG is providing, in terms of the core funding, and what BIS is?

Michael Fallon: I cannot do that in respect of the Regional Growth Fund, but what I can say is that the LEPs are increasingly involved, as you said, in the bids for the Regional Growth Fund. I think they were involved in some 16% of round 1; that rose to 42% in round 2; and we are planning to announce round 3 very shortly, but I think you will see there quite a significant increase in that percentage. Alongside that, while I cannot reveal the results of round 3, I think you will also see a number of programme bids led by LEPs themselves, so there is increasing involvement by the LEPs with the fund.

Q114 Chair: Yes, we are going to cover this in the section on the Regional Growth Fund, but what about the core funding that you have announced?

Michael Fallon: The core funding is divided simply between the two Departments, in terms of the capacity funding. It is split equally between the two Departments.

Q115 Chair: Are there no criteria for what funding one Department provides and what funding the other Department provides?

Michael Fallon: No, absolutely not. It was a joint announcement. This is simply to strengthen the capacity of LEPs. It is something they have been asking for for some time, and I thought it right that we respond to it.

Q116 Chair: Just finally on my section, you have talked about accountability. Do you think there should be just one formal LEP-sponsoring Minister?

Michael Fallon: No, because both Departments sit right at the centre of this and, provided we work extremely closely together, which we do, I think the system we have at the moment can work well. What I am announcing today is that I want to strengthen it below ministerial level, so that LEPs are very clear that they have a single point of contact with Whitehall, so that, if you like, they have a sponsoring official, rather than, for different purposes, having to contact different people in different Departments.

Q117 Chair: Certainly, the witnesses we had were pretty well united in saying that one of the problems was that they just did not know who to go to to respond to problems that they were having. You are saying that this will be sorted by having a specific official.

Michael Fallon: It is already sorted locally, because they can approach the BIS Local office and have contact there. They are already developing relationships, as I said, with UKTI. They can approach myself or Mark Prisk, Minister at the Department for Communities and Local Government, but, from now on, they will also have a senior official in one or other of the two Departments, who will be their strategy adviser.

Q118 Chair: Have you not determined which Department it will be in?

Michael Fallon: There are 39 LEPs. I guess we will split them between us. We may want to involve the Department for Transport as well, but I guess we would split them between the two main Departments.

Q119 Chair: Sorry, I am not clear; if you have one official, how can that official be split between two Departments?

Michael Fallon: No, I am sorry; I was not clear. If there are 39 LEPs, we would probably split the strategic advisers between the two Departments, so each Department would have whatever it is-19 or 20.

Q120 Chair: We are, then, not having one single official taking ownership of the LEP programme, but different LEPs will have a dedicated official to deal with; is that correct?

Michael Fallon: We have officials in each Department who have overall responsibility for LEPs, in both BIS and the Department for Communities and Local Government, but the criticism has been-and I have accepted that it is a reasonable criticism-that the 39 LEPs, in approaching Government for different purposes, have not quite been clear, sometimes, who to turn to. I am the Minister, and Mark Prisk is the Minister in the other Department, but I want each LEP to have a single named official as their strategy adviser, and he might be in one Department or he might be in the other.

Q121 Chair: Certainly, again, the evidence that we had before indicated that they wanted somebody to take ownership of the LEP programme as a whole. When you said earlier that somebody would, in effect, be accountable, that is what I thought you were implying; now, it would seem we would have a multiplicity of officials answerable or accountable to different LEPs.

Michael Fallon: I am accountable; it is one of the reasons I am here this morning. Mark Prisk is also accountable. We are accountable as the Ministers, but I just want to be very sure that the 39 LEPs have a named official who they can turn to if there are any issues, and then, of course, they can come and approach me.

Q122 Chair: In terms of the overall performance of LEPs, however, there is not one official and one Minister who is answerable for it.

Michael Fallon: There are teams of officials who are working on LEPs, certainly in my Department, and who are helping them with their progress all the time, and we are going to get more closely involved as they finalise their growth plans and as they come forward to deliver the various Government programmes, including their bids under the Regional Growth Fund. The relationship is going to get closer and closer. Overall, however, I take responsibility for it.

Q123 Mr Binley: Does the fact that LEPs are supposed to be responsible for their own activities, are supposed to be raising their own money in the main, and will differ in terms of the work they do at local level mean that having a Minister responsible argues against the whole process of what LEPs are about?

Michael Fallon: I think there is a lot in that. These are not creatures of government. The whole point is that these are locally driven organisations that are focused much more closely on their local priorities than a Minister or a Department could ever be. That is how they originated. I thought it was right, though, to help them demonstrate to their local community and their business community that, equally, they were not creatures of local government, and that is why I thought it was right to provide some core funding to help them with their capacity, so that, when they were dealing with local businesses, they were not wholly reliant on the local council or the local authority in their area.

Chair: What you have done is in conformity with one of our recommendations that we made in our earlier report, so that is welcome. I think the real issue is that, while LEPs are locally driven and have local priorities, a lot of LEPs do not fully understand what their role is and potentially what they may be able to do. It is helpful to have some sort of ministerial oversight both to inform them and to monitor them.

Q124 Paul Blomfield: I was going to ask a wider question on accountability, but I would just like to follow up on one point there, which is that, if we are looking at the LEPs being split between two Departments in terms of their point of contact, how are you going to ensure consistency of strategy and practice in relation to them between those two Departments?

Michael Fallon: It is a fair question, but that is an issue we have faced right from the start. There are two Departments; we work extremely closely together at ministerial level and at official level to ensure that the approach is absolutely common between us. There is no philosophical difference in the way that we deal with LEPs between the two Departments, and we just have to make sure that we are completely co-ordinated.

Q125 Paul Blomfield: Government Departments being completely co-ordinated and acting as with one mind is not necessarily always the practice, is it? How are you going to put structures or frameworks in place to make sure that does happen?

Michael Fallon: I know I have only been there five weeks, but I have not seen any evidence that it is not happening. I have met the LEP chairmen and they have not told me that there is a difference of approach. I think you have had it, perhaps, in criticism or in evidence, but I have not heard that from the LEP chairmen themselves. They do not see this particular distinction. I think it is something we have to continue to work through but, as I say, I think one way of dealing with it is to make sure that they have a single point of contact from now on, so that, when they do approach Government, they know exactly who to call.

Q126 Paul Blomfield: How would you make sure those two single points of contact are co-ordinated and operating as with one mind, in terms of the approach to LEPs?

Michael Fallon: There will be 39 points of contact, or maybe some officials have more than one-I do not know; we will work through the details of that-but they are all people who have been working on the LEP programme up to now. As I say, I have not come across any hard evidence of a serious disjoint between the two.

Q127 Paul Blomfield: Thanks, Minister. If I could move to a different issue of accountability, we met, as you know, with a range of LEPs last month and asked them to whom they thought they were accountable. It was quite interesting, because each answer we got was different. We got a range of beliefs in terms of local accountability or national accountability, local accountabilities being different. Who do you think the LEPs are accountable to?

Michael Fallon: First and foremost, they are accountable to themselves. They are accountable to their local community. They set objectives, and it is for them to measure how well they stand up to them. It is not for us to impose targets on LEPs or to prescribe how they are going to respond to the challenges in their own area. That is a matter for the LEPs themselves. I think we have to get away from thinking of these things as agencies of Government, as small bits of a Department, or something that Ministers simply issue orders to. The whole point of LEPs is that they are local; they will differ from each other; they will have a different view of the world; and, in the end, they are responsible and accountable to their own communities. Of course, where there is public money involved, they are then responsible up to Government as well.

Q128 Paul Blomfield: Are you concerned, then, that at least one of the answers we got was that one LEP saw itself as accountable to Ministers as the appointing body of their role as chair?

Michael Fallon: They all have a slightly different approach. I am not sure which LEP you are referring to, and you may not want to name that particular LEP, but they do all have a slightly different view of the world. We meet them regularly. There is the LEP Network, which helps spread good practice and so on, but what I do not want to do is lay down some sort of code or guidance from the centre as to how LEPs should behave. The whole point of LEPs is that it is for them to find their future and it is for them to deal with the challenges in their area, and that is bound to differ, area by area. They differ, of course, fundamentally, in size: some of them are extremely small; some of them-my own, for example, in the southeast-are vast LEPs, so they will all have different approaches.

Q129 Paul Blomfield: In terms of the way they see their role, we have had, in evidence, concern expressed that they are perhaps not looking at wider community interests-for example, sustainable development. Do you see that as part of their role, or should they be very narrowly businessfocused, in your view?

Michael Fallon: Their role is growth. Their role is to make sure the local economy grows, and grows in a sustainable way. To that extent, I would hope, obviously, they would focus on development that is sustainable, but that is for them to decide. The temptation for Ministers is to start, slowly but surely, laying down LEP policies they must follow, and I really do not want to do that. It is for them to identify how sustainable growth can be promoted in their area, but I do emphasise "sustainable".

Q130 Paul Blomfield: Can I move on to a different area? Some of the evidence we have had is that you should support LEPs by devolving more powers to shape local economies, and you said in your opening remarks that we needed to sharpen the focus and step up the pace. Is it implicit within that that you are looking for greater devolution of powers?

Michael Fallon: It is for LEPs to tell us what they want to do. One area that they are going to be looking at is whether they cover enough of the functions of economic development originally envisaged. Of course, you could easily see them having a very strong interest in skills in their area, for example, or, indeed, in the output from schools and colleges. These may well be things that LEPs want to talk to us about in future. I would not be surprised, for example, if Lord Heseltine, in his review of all this and the work of our Department, looks at this particular area. LEPs, however, are very new in the field; some of them are very recent indeed, and it is perhaps slightly too early to start saying that they should be ready to take on more and more official functions. I want the ideas to come from them, and I know some of them are already thinking about the skills gaps in their particular areas and how those are best tackled.

Q131 Paul Blomfield: While fully accepting your desire for the ideas to come from them, given that LEPs were created by Government, I guess you have some vision for them. Where do you see them going, in your view, in terms of what powers they might have?

Michael Fallon: They were not created by Government; they were created by themselves with inspiration from Government.

Paul Blomfield: We can discuss that.

Michael Fallon: It was for them to choose their areas, it is for them to choose their focus, and it is for them to work out best how they can support and foster local growth. That has to come from them, but my vision of a successful LEP would certainly be them identifying all the barriers to growth, and that would include skills gaps in their local areas, and gaps that they identify, for example, in infrastructure and the other things that businesses need to grow.

Q132 Paul Blomfield: Would that vision include the devolution of additional powers?

Michael Fallon: They do not, at the moment, have powers at all.

Paul Blomfield: That is right.

Michael Fallon: So I think that is probably the wrong way to look at it, but as LEPs go forward, I would, as I said, not be surprised if they started to focus on some of the wider barriers to growth, which, as I say, must include skills gaps in their local areas, and the bits of infrastructure they want to see updated and modernised.

Q133 Chair: Could I just pick up a response you gave to one of Paul’s earlier questions? I think I am right in saying that when you were asked to whom LEPs should be accountable, you said that they should be accountable to their local communities; is that correct?

Michael Fallon: I said two things: I said that they should, first, be accountable to themselves-they should set objectives and measure their success against them-but they should also, in a wider sense, be accountable to their community. That is why their boards are representative. Some have representatives, for example, of local businesses, local authorities, chambers of commerce, further education colleges and so on. Through that, there is a wider accountability to the area that they represent.

Q134 Chair: How do you think the local community should exercise their potential accountability? How can they make a LEP accountable?

Michael Fallon: First of all, through the local authority, which is very closely involved. In almost every case, there is very strong local authority involvement in the LEP, so there is some form of democratic connection, if you like, there. However, you need to think of this more widely through other ways in the community, as I said-through the local chamber of commerce, if you are a small businessman; your voice will then be heard in the LEP. If there is somebody from the chamber on the LEP board or otherwise involved in the LEP, which there is in the majority of cases, your voice as a small businessperson will be heard. If you are involved in other areas of the community, there will be other people on the board who may well be representative of what you are doing.

Q135 Chair: I see it as a problem that the only really democratically accountable body is the local authority, but the whole objective of LEPs is that they should be businessdriven, not local authoritydriven. There does seem to be, if you like, a differential democratic deficit there between the business and the local authority community.

Michael Fallon: I think, Mr Chairman, that comes back to what I said at the start: we firmly believe that it is not for Ministers or for local authorities best to determine the barriers to growth in their own areas. We think these are best identified by local business people, who are already creating wealth and jobs, and we think they are better placed to understand what the barriers to further growth are. They are in the driving seat, but obviously each LEP is fairly closely intertwined now with its local authority, so local authorities are involved with business; that is why they are called partnerships.

Q136 Mr Binley: Can I follow that up? I think there are other ways of communicating and being responsible to the local community; for instance, in Northampton, we have set up a people’s forum. Every four to six months, the LEP and other organisations report back to that people’s forum and get feedback from it. Those people represent the various sectors in a given area-the ethnic groups, the churches, the business and so forth. You can create a local democratic network, which does not necessarily have to be elected, that can do the job you want it to do.

Michael Fallon: As I expected, I have learned something about the people’s forum in Northampton.

Q137 Mr Binley: Have a look at it, and you will find that there is a way of going ahead.

Michael Fallon: Sure, I would like to look at that in more detail.

Chair: I think this is a very valuable point, because certainly, despite the best efforts of LEPs-I have one in the Black Country-there is still a very low level of understanding or participation amongst the wider business community and SMEs. Ways of developing their involvement need to be looked at.

Q138 Ann McKechin: You mentioned the fact that you have recently announced core funding for the next two years for the LEPs as part of an interim £5 million funding package. I understand this is going to be based on a bidding process, and I just wonder if you could clarify to the Committee today how that funding allocation will work and whether there will be any evaluation of the manner in which it is spent.

Michael Fallon: The core funding will not be done on a bidding basis. It is simply straightforward: it is £125,000 for this year and £250,000 for each of the next two years, provided they come up with matched funding alongside it, and provided they have agreed with us a growth plan by Christmas this year for the years 2013-14 and 2014-15. That does not require any kind of formal bidding process, and we really want to make that as simple as possible. Indeed, I am very anxious to get that £125,000 to them as quickly as possible. I think that is going to be done in the next week or so. That is not a formal bidding process. Obviously, in the bigger government programmes, they are bidding. They were involved in the Growing Places Fund and they have increasingly got involved in the Regional Growth Fund, so there, they are involved in bidding.

Q139 Ann McKechin: You mentioned that your Department had to agree a growth plan. Is this the way in which you are evaluating how the LEPs are actually operating?

Michael Fallon: We are talking with and meeting LEPs all the time. I meet the chairmen, and my officials are talking to LEPs all the time. The BIS Local teams are talking to LEPs all the time. However, I want them to be very clear now, and the Government are impatient for growth, as I am sure you are. We want to see the economy growing more rapidly, particularly locally and particularly outside London and the south-east, and that is why I want them to step up the pace and to get on with this now. Some of them are relatively new; others have been around for a year and a bit now, and I do not think it is unreasonable to require them to come up with a firmer plan now. Some of them have done that in the context of bidding for Regional Growth Fund money, but I want all of them to be clear now about what their priorities are for local growth and how they see their way forward.

Q140 Ann McKechin: Will the plan be the key indicator, in terms of your evaluation of their work?

Michael Fallon: It will be one indicator, certainly. The amount of money I am providing is not a huge amount of money in terms of core funding, but I think it is enough to help detach them a little from the world of local authorities, so they can show the business community and the wider community that they are not simply a desk in the town hall, if I can characterise it like that, but have a more substantial status than that.

Q141 Ann McKechin: You mentioned in your evidence earlier this morning that you did not want the LEPs to be creatures of local government, but there has been concern expressed in the evidence that this Committee has taken from LEPs that the funding, in some cases, has resulted in "little separation or independence from the dominant local authorities". Does the high level of funding from certain county councils mean that they are, in effect, calling the shots, and where do you think the progress of LEPs will change as they develop their plans?

Michael Fallon: First, perhaps I can just come back on my remark: I do not want them to be creatures of local government and I do not want them to be creatures of central Government. I do not want them to be creatures of any government: I want them to be themselves, locally formed, locally driven and locally inspired. There are LEPs-for example, the Tees Valley LEP-which were in existence before we thought of LEPs. It was already combining the economic development functions of the local authorities in its area, it is very well resourced, and it knows exactly what it is doing and fits very well into our vision of what a LEP should be. It was already drawing quite substantial commitments of funding from its local authorities. There is, obviously, a balance here. We want them to look and feel independent of local authorities, but I would have thought that local authorities that have the funding and the expertise would want to be fully engaged in the partnership with their local LEP and working with them when it comes to submitting bids, whether it is for a City Deal, for the Regional Growth Fund or some of the other funds that are available, like Enterprise Zones.

Q142 Ann McKechin: If I could just stretch you a little bit further on this, this is the issue about cash-matching. Increasingly, you are saying that if they want funds from Government through the Regional Growth Fund or from core funding, you are looking for them to match funds. Some suggested to us in evidence-particularly, perhaps, the smaller LEPs-that if you ask them to do that, they are going to end up having to take more money from local government, because they are not really getting, perhaps, a buyin at the moment from industry or from the banks, in terms of investment. I just wonder to what extent you have made an indicator to them that, as they progress in their development, this matched cash has to be increasingly from a greater variety of income streams, rather than simply from local authorities.

Michael Fallon: It is a very fair point, and I certainly reflected on this because of the different sizes of the LEPs-there are some much smaller ones-but I came to the conclusion that it would be far too complicated, really, to give them core funding based on size and differing amounts and so on. I thought it was just easier to get the money out to them as quickly as possible, so I think the bigger ones have probably more grounds for complaint, because they are getting a relatively small sum of money compared to their population.

I take your point on the difficulty of raising matched funding. These are not easy times for the public authorities that they are approaching for matched funding, let alone the private sector, but these are partnerships; I do not want them, as I said, to be either creatures of local government, as you picked up, or, indeed, wholly dependent on central Government funding. The way forward has to be that they are fully engaged in their community in a partnership between business and other public-sector bodies in their area.

Q143 Mr Binley: I want to talk about private-sector funding sources, and that means local business, banks and other areas of income. Certainly, we are involved in one area in using marketing for the whole of Northamptonshire, highlighting local businesses of repute and profile, such as Carlsberg, Church’s shoes, and Weetabix-people like that. In that way, they see a reason for being involved as well. I really want to know how you feel that the private sector can be involved in these things. There is no absolute formula, but there are a number of ways in which we can hook the private sector, and it is vital that we do. What are your thoughts on that?

Michael Fallon: I hope the private sector sees the wider interest, but also sees their own interest, in having an organisation locally-a partnership-that can identify barriers to growth and improve their chances of growing, as well as the wider business community. All the large companies will rely on improvements, for example, to infrastructure and improvements to the skills base, and these may be priorities that neither central Government nor local government have been able to respond to before, but that local businesses can identify much more sharply through the Local Enterprise Partnership. They could therefore focus that partnership in a way that, perhaps, the Regional Development Agencies were not able to, because they were covering a much broader canvas. They will be able to focus those priorities much more locally and directly and say, "This is what we want to do in Northamptonshire; now let us find a funding stream to enable us to do it."

Q144 Mr Binley: The point I am trying to make is that various things will be happening to hook on or involve business and, indeed, place business at the forefront of LEPs, but they are happening at a local level. How do you collate that and get that information out? Is there a way of getting a newsletter every three months providing information to help people achieve that objective?

Michael Fallon: We have the LEP Network, through which we share good practice across the LEPs, and that is a very important way of disseminating information. Obviously, a much smaller LEP can feel a little lonely up against the bigger ones, or the ones like Tees Valley that have been established for a while, so the LEP Network is extremely important in spreading good practice. We bring the chairmen of LEPs together regularly, and the LEPs are pretty adept at organising conferences for their area, at which I and other Ministers speak, to ensure that good practice is spread. However, we want that to come from the LEPs. We want LEPs to learn from each other, and we want them to be competitive in that sense, and competitive in ideas and approaches.

Q145 Mr Binley: Of course, Minister, but the monitoring of the spreading of good practice is a vital part of this process, and what I am really asking is whether that monitoring is in place, so that you can be absolutely sure that good practice is spread.

Michael Fallon: Yes, I suppose that the answer is that it is spread through the LEP Network, but it is picked up through our local offices-through BIS Local-which are in contact with their LEPs, and will come back to us in Whitehall and back to the LEP Network and say, "Have you heard what that particular LEP is doing? Nobody thought of that before." That is something that, if it is worth while, we can then help them disseminate.

Q146 Mr Binley: My final question is this: you mentioned Enterprise Zones-we have one of the biggest in the country, actually, in Northampton-and I wonder whether you can do something with the Treasury with regard to capital allowances, because without that sort of additional incentive, it is going to be a very much harder job to get 400 new companies to Northampton. Would you take that on board, Minister?

Michael Fallon: I will certainly take it on board, and it is a timely moment to make the point, in advance of the autumn statement and in preparation for next year’s Budget, but I am not a Treasury Minister.

Q147 Mr Binley: I am aware of that, but you are very close to him.

Michael Fallon: I cannot make any particular promises. I can assure you that that sort of issue-how we can further help business grow-is under very active consideration between my Department and the Treasury at the moment. We are looking at all these things. Everybody, and I hope this Committee too, is impatient for growth, and we need to look at every kind of incentive and obstacle that there is at the moment.

Chair: Can I make it clear that there is total cross-party support on that?

Q148 Julie Elliott: We have talked about how realistic it is to bring in privatesector funding in the current economic climate. On the core funding, what percentage of the matched funding are you expecting to come from the private sector?

Michael Fallon: We have not set that. It can come from the private sector-

Q149 Julie Elliott: No, but what percentage are you expecting?

Michael Fallon: We have not set that out. We do not have a figure for that. We expect the matched funding to come from multiple sources-public-sector bodies, local authorities or, indeed, the private sector. We are not specifying where it necessarily should come from. I would hope it came from a reasonable spread of other sources, so that the LEP was not wholly dependent on one particular source.

Q150 Julie Elliott: But are you expecting that to happen?

Michael Fallon: Yes.

Q151 Julie Elliott: You are expecting a significant amount of privatesector funding to be in the matched funding.

Michael Fallon: You have chosen the word "significant"; you are trying to pin me down to a percentage. I am expecting matched funding to come from a number of sources. I do not want to see LEPs, as I have said before, end up simply as sponsored by the local authority because they cannot find funding anywhere else.

Q152 Julie Elliott: Can I put it a different way? Do you expect that the majority of matched funding will come from the public sector?

Michael Fallon: I have not really got a view on that, and we certainly have not specified that. We just want it to come from as many sources as possible; £250,000 is not a huge amount of money for a reasonable-sized LEP to go out and raise. They do not have to raise it this year for the £125,000. Some of them have that money coming in anyway; I know it is not an easy time, but others will have to go out and work for it.

Q153 Rebecca Harris: You talked earlier a little bit about the skills gap and the need for LEPs to be focusing on this a bit more. What do you think the biggest challenges have been for the LEPs in making sure that they are promoting the right skills for growth in their area?

Michael Fallon: They have had to get up to speed relatively quickly in identifying where the gaps are, and in building relationships with their further education colleges and the other strategic bodies involved there, whether it is the local jobcentre network or whether it is the local authority. They have to develop working relationships with these bodies, and they have had to get on pretty quickly and do that.

Secondly, they have to go out there and try to assess better for us what the employer demand is. That has always been hard to do in the past, and it is one of the reasons why I think LEPs are the unit to do this kind of analysis, which was not, I think, possible under the much broader Regional Development Agencies, or is not always possible inside a district council, for example. The LEP unit is the right unit and the right level at which to look at what the employer demand is across this particular area. I think our own particular LEP is a rather large one, but most LEPs are the right size. I think ours is an unusually large size, and is working through the challenge of that, but other LEPs have to engage themselves with local employers and see exactly what the skills demand and the gap is in their particular area. Then I would hope they would start to formulate demands on the suppliers-the FE colleges and the schools or whatever.

You asked what my vision for LEPs is; I would love to see a LEP making it increasingly clear to its further education college or to the local authority responsible for schools exactly what it thought the gaps were, and what it wanted to see coming out of schools and colleges to meet the employer demand in their area.

Q154 Rebecca Harris: I know, in Essex, where there is clear evidence that some of the current skills provision is not matching what businesses are saying they need, some LEPs have said they would like more influence on the Skills Funding Agency. Do you think that, or even starting to take over some of the budgets, and directing skills provision in their area, would be a route forward?

Michael Fallon: These are ideas that have been floated around already-that LEPs should be more involved more generally with the skills budget. That is for them to put forward to us. Obviously, these budgets are set now for the rest of the spending period up to the end of 2014-15, but we look to LEPs to come forward with ideas and to tell us exactly how they would like to get more involved in filling the skills gap in their own particular areas. I am not ruling out a bigger future for LEPs if they show that that is the way they want to go, and that is the way that they are able to go.

There is clearly-I hear it from employers all the time-still a substantial skills gap. They are not getting school or college-leavers of the quality that they need, and I think we all have to be honest about that. It is a problem that has not just arisen in the last few years; it has been there for a very long time, and I think we all have to work hard at dealing with it. LEPs, I think, give us quite a unique, local, very direct focus on it, because they are dealing with local employers all the time.

Q155 Rebecca Harris: Are you open to suggestions from them?

Michael Fallon: I am absolutely open to suggestions.

Q156 Rebecca Harris: The Association of Colleges has also said that it was concerned that there was not enough representation from FE colleges on LEP boards. Do you think that it is important that educational representatives are on the boards of the LEPs?

Michael Fallon: Many are. Many are directly representative, as leaders of their colleges are directly on the boards; some others have some other involvement with the LEPs. Most LEPs have some further education involvement, one way or another. We have not prescribed that each board should contain one person representing small business, one person representing the chambers and one person representing further education colleges, because these are not prescriptive bodies; we want this to come from the LEPs themselves. However, most LEPs now have some further education involvement, and a great many have direct representation on the boards.

Q157 Rebecca Harris: You do not want to be prescriptive about who is on those boards, then. I take the point, but there was also some evidence to this Committee that micro-businesses were possibly under-represented on boards because their directors maybe did not have the time to contribute, and that is quite an important sector of the economy that might not be getting its voice in on the board and on the LEP. Have you got any views on that?

Michael Fallon: I accept that. It is always difficult for the very smallest businesses to be represented in any of this dialogue with Government or focus on the wider community economy. It is always difficult for them. We get them together for conferences all the time, but these are people who have just set up companies, they are running their companies and they do not have time to go and listen to Ministers or get involved in forums or anything like that. However, it is for the LEP, really, to make sure that its representation is properly reflective of its local area. There are some LEPs that do not have very large-scale employers, but they do have a multiplicity of SMEs, and you would expect the board to represent that. However, we are not laying that down; we are not dictating that from the centre. A good LEP should be very sure that it is fully covering the business community in its area.

Q158 Mr Binley: There is not only a skills gap, Minister; there is a resources gap in our FE colleges. For instance, we have two particular industries miles apart: one is right at the forefront of technology-precision engineering, automotive and aerospace-and the second is the boot and shoe industry, which is a traditional craft industry in many respects, and yet our colleges of further education simply cannot afford the equipment to do the practical work. We produce programmes in which we suggest that the practical work be done in the evenings on the worksites, so that students can work on the equipment necessary to give them that workplace background. We are trying to get money. Do you think this is a good way forward and, again, will you press the Department for Education to provide money for a pilot scheme for us?

Michael Fallon: That is the second bid this morning for some more money.

Mr Binley: It is, and I shall be following it up with you, Minister.

Michael Fallon: I do not want to go back too much over the past, Mr Chairman, but I know there was a hiccup, if I can describe it as that, in further education capital funding back in 2008-09. We have to try to put that right, so I certainly hear what you say. There is a bigger point behind this: Government give a lot of support-and I know this as the Minister for the aerospace industries-to aeronautics and the new technologies. The crafts often feel completely left out of the way we support these different sectors like aerospace, automotive and so on, so I think that is certainly something we are thinking about.

Mr Binley: We can perhaps talk later.

Michael Fallon: Of course.

Q159 Mr Binley: Let us go on. Let us talk about the boundaries. I am sorry to localise this, but this is a local issue with LEPs, so we are all talking about our own experiences-we have to, if this is to be relevant. Are you satisfied that the boundaries that have been selected have the appropriate strategic context and the economicdevelopment abilities to do the job you want them to do? Can I just ask you to look at those areas where we have a big LEP with a smaller LEP operating within it, and how you see that operating?

Michael Fallon: First, I repeat what I said: we think LEPs are the most appropriate spatial level for all of us to get the kind of interventions that we want to stimulate growth. Most of them are much smaller than the regional agencies that they replaced, and most of them are obviously much bigger than the district council or whatever in their particular area. We think this is the right level to reflect functional economic areas rather than administrative boundaries, which, of course, suit Whitehall, politicians and district councils. Of course, it is more convenient that way, but they do not always reflect the functional economic area. That, then, is the motor behind the LEP geography, if you like. I am aware, having looked at it quite closely, that there are areas of overlap, and there is this issue of LEPs inside other LEPs. I am perfectly prepared, if the LEPs themselves are in agreement and if there is widespread support from the local authorities and so on, for the LEPs to come forward in the next year or so and say, "We want to tweak our particular boundary to reduce an overlap here or an overlap there" or to come and tell us about that. These boundaries are not set in cement.

Mr Binley: Good.

Michael Fallon: I do not want to promise a review of the map or anything disruptive like that, but where, very locally, there are overlap issues or the kind of hole-in-the-middle issue-not hole-in-the-middle, but you know what I mean-I am quite open for the LEPs to come forward and say they want to make some adjustments.

Q160 Mr Binley: The other side of that particular coin is that there will be areas where a LEP is not working as well as it should, but maybe next door there is a very good LEP indeed. Are you keeping your eye on the ability for LEPs to work together in that respect?

Michael Fallon: Yes, I am. There are 39 LEPs. There are some extremely successful LEPs; there are some that are making very good progress and have improved very rapidly; there are others that still have challenges to face, where, for example, the leadership of the LEPs has changed, the original chairman has left, and some of the original impetus may have gone and so on. They are all moving at a slightly different pace. We are monitoring that and providing support where necessary, and I think the preparation of growth plans by the end of this year will give renewed focus to that, but they are not all moving at the same pace and I want to be sure that they are ready for the challenge of stimulating the growth that we want.

Q161 Mr Binley: It is good news to hear that you are monitoring that. Just a final question, really, from the Royal Town Planning Institute, which expressed concern that many LEP areas are not the "natural economic areas" that were originally envisaged. Is the Royal Town Planning Institute thinking as a quasi-government body? Would you knock that sort of view on the head, or do you think it has a point?

Michael Fallon: I do not. When it says they are not "natural economic areas", that is what they were designed to be. They were deliberately designed not necessarily to fit, as I said, administrative areas or political areas; they were designed to reflect functional economic areas, so I do not accept that criticism. I think, for the most part, they do reflect local economies, but as I say, the boundaries are not set in cement and, if there is agreement everywhere, I am certainly prepared to look at them again.

Q162 Julie Elliott: You have talked about the difference in size quite a bit throughout the evidence you have given us today. Centre for Cities has said that some LEPs are "either too big or too small" and should be "reconfigured before further funding is allocated". Are you satisfied that all LEPs are appropriately sized, or do you see some merit in what Centre for Cities is saying?

Michael Fallon: I do not want the LEPs all to be the same size, and I do not want us in Whitehall to say exactly what the LEP geography should be. I do not want that prescribed. I think, by and large, they do reflect functional economic areas; they have got to grips with those areas, and they are producing plans and so on. There are some very large ones-my own is very large, for example, and covers a very wide area-and there are a couple of relatively small ones. If you do not prescribe a set size, there are inevitably going to be outliers at one end or the other, but I do not have a fixed view on what the ideal size is, because I simply do not think the economy is like that. However, as I say, if people come to me with agreed suggestions as to how the geography can be changed, I am happy to look at that.

Q163 Julie Elliott: In the beginning, when people put forward the plans for the original LEPs, the Government did say some were the right size and some were not. That did happen, because it happened in my own region. Is there a problem with overlapping geography with LEPs? Again, you have talked about this a little bit. Do you think there is a need to change where there is this overlap? You have said you will look at it if people come forward themselves, but do you see it as a problem? Do you think there is a need to change it where there is overlap?

Michael Fallon: The worst problem would be underlap, and there being a real gap where a small piece of a sub-region simply was not being covered at all. That would be much more serious. There are five or six areas where there is some overlap, and I think we need to be a little clearer-I think it is slightly too early-as to whether that is actually a problem or not. Of course, in other regions, as I well recall from the north-east, there is some traditional tension, as between Tyneside and Teesside, and perhaps even between Tyneside and Wearside.

Julie Elliott: Probably more.

Michael Fallon: There are some of those tensions. I think one of the advantages of the LEPs is they are much more local than the regions. They are generally smaller units. We will have to see how the plans come forward and whether, as I say, agreement builds on the case for adjustment to the boundaries or not.

Q164 Chair: Can we move on to the Regional Growth Fund? Again, can I start off with a fairly general question? Last month, we had evidence from organisations that put forward bids for the Regional Growth Fund. One described the process as being unclear in its outlook. In your view, is it a public-sector-led or a private-sector-led initiative?

Michael Fallon: It is both. The public sector is increasingly involved in the bidding, alongside the private sector. LEPs and other public bodies have been bidding but, of course, in the end, it is the Government who decide the allocation. That is something for the Ministers involved, because it is public money alongside the private money that has been provided.

Q165 Chair: Would you be able to give us figures of how many publicsectorled bids obtained approval. as compared to privatesectorled? If you do not have the figures to hand, could the Committee please have them at some stage?

Michael Fallon: Yes, I am almost certain we have that information. I gave the figures earlier for LEP bids, but, of course, there are other public-sector bodies involved in bidding as well. In terms of LEP bids, as I told you, in round 1 there was involvement in 24% of the bids by LEPs; in round 2, 42%; and, in the round we are about to announce, 64% of the selected bids have some LEP involvement. There is, then, increasing involvement from the public sector in the bidding process.

Q166 Chair: It does seem that there is an element of contradiction here, in that a process that should be business-led seems to be more and more subscribed to by the public sector. If you are going to involve LEPs, and given the fact that the public sector is strongly represented on them, that, as you have indicated, will get greater.

Michael Fallon: The projects themselves have to involve matched funding from the private sector. That is one of the reasons why, sometimes, bids are withdrawn-because the private-sector matched funding that the bidders thought would be available does not materialise, and even where the programmes, as distinct from the project, are run or managed by a public body, there is private-sector involvement there as well. It is a partnership between public and private. The funding is shared, and so is the delivery.

Q167 Chair: I would agree with that particular assessment. How do you reconcile the demands of local business communities for a more businessled approach with what is happening?

Michael Fallon: I am not sure I understand when you say "what is happening".

Q168 Chair: I think the whole purpose of the Government’s regional growth policy was to have a more businessled priority. Yet the mechanisms that appear to have been developed are actually going the other way.

Michael Fallon: It has always been the case that the public money provided for the projects under the fund has to be matched by private money. If what you are referring to is the increasing involvement of programme funding, programme funding is really the only way to ensure Regional Growth Fund money gets to SMEs, which are not able to go through the bidding process. SMEs can, through these intermediaries, whether it is the LEP or other publicsector organisations, access grants that they would not have been able to if they had to bid for specific projects, because the projects would not have been big enough.

Q169 Chair: Certainly the threshold requirement does impose that particular process on SMEs. A lot does depend on the commitment and quality of local authority input into the LEP. Do you not think that has its own dangers?

Michael Fallon: I am not sure what you mean by "dangers". The projects and programmes are considered together; the same criteria, in terms of cost-benefit analysis and value for money, are applied to both. Where local authorities hold the funding, it is simply a programme-management role. It is a technical role; they do not actually decide where the funding should go. That is done through the LEP that is involved in that particular bid. I am not quite clear what the problem is that you are driving at.

Q170 Chair: What I am trying to get at, again, is that a process that was originally understood as being private sector, business-led, is increasingly being determined by the local authority, and could in some cases be affected by the quality and commitment of the local authority.

Michael Fallon: I do not think that is the case. There are an increasing number of bids coming from the LEPs themselves, but those are not of course local authority bids.

Q171 Chair: No, but there is 50% local authority representation, and a lot of concern that local authorities have an undue influence, or a disproportionate level of authority.

Michael Fallon: I do not think I would accept the word "disproportionate". Local authorities have been involved in the bids, yes, but I would not accept the word "disproportionate".

Q172 Chair: Is the fact that you have awarded or are about to award funds to them not recognition of that particular danger?

Michael Fallon: No, it is recognition that, increasingly, the LEPs are aware of the priorities in their own particular area. They are focusing on the barriers they need to tackle. They want to give support to SMEs particularly. They want to hone in on gaps in infrastructure that the local authority or central Government have not been able to deal with over the last few years. They have identified those particular priorities and, through their partnership, they have gone alongside the local authority in bidding to the programme.

Q173 Chair: To date, how much of the £1.4 billion allocated through the first two rounds of the growth fund has been "unlocked" into the economy-I think that is the phrase used by the Department?

Michael Fallon: It is. Let me give you the percentage figure. The drawdown for round 1 is £224 million; the drawdown for round 2 is £290 million. I may have to write to you on the exact figure in terms of the spend, but you can take it that almost all of round 1 and 2 is now completely spent; in fact, we are able to reallocate some of the underspend into round 3. Nine out of 10 bids in rounds 1 and 2 are now fully under way and six out of 10 projects or programmes under rounds 1 and 2 have actually started.

Q174 Chair: In your written ministerial statement on 6 September, you said, "Progress is good on rounds 1 and 2 with over half the bidders (127) contracted and able to draw down funding and a further 51 completing their due diligence reports. So far, agreed offers have unlocked almost 198,352 jobs." What do you mean by "unlocked" in this context?

Michael Fallon: I mean having fulfilled what the bidders have specified. Those are jobs that are either being created or specifically safeguarded by the allocation of the money.

Q175 Chair: Do you know how many jobs have been created?

Michael Fallon: I do not think I have a breakdown of the job numbers by either creation or safeguarding. The gross number of jobs in round 1 is 122,485. The gross number of jobs in round 2 is 205,517.

Q176 Chair: How much of that money has gone to the companies? Is this figure predicated on the assumption that they will get it?

Michael Fallon: The current state of play is that 140 final offer letters have been signed; that means they can now draw down the funding at any point they want to. As you will appreciate, some of these projects have actually started; some firms have been quite happy to go ahead. That is around 60% of the total. 45 conditional offers have been signed; 14 other offers are being worked up to take conditional offers this autumn; and there are about nine that we are still in correspondence with. That leaves, I think, 29 offers where the company concerned has decided not to proceed.

Q177 Chair: Just to get it clear in my own mind, for 60% of those bids, the companies involved could draw down money as of this moment.

Michael Fallon: Yes, the total was 238; 140 are able now to draw down funding. Some have done so; some could do so at the moment of their choosing.

Q178 Paul Blomfield: I just wanted to clarify the amount of money that had actually reached the front line. According to the Public Accounts Committee, £60 million has reached front-line projects.

Michael Fallon: That probably needs updating.

Q179 Paul Blomfield: Could you update it for us?

Michael Fallon: I can certainly write you an update for that; I cannot give you the actual total at the moment. I may be able to in a minute or two. As I said, the total number of offers as of this week was 140, so I think we will have moved on from the £60 million.

Q180 Paul Blomfield: Even if we have moved on, Minister, would you accept that there is a relatively small amount of money allocated that has reached front-line projects? Are you satisfied with progress? Do you think the Public Accounts Committee has raised real issues that need to be addressed, or would you agree with the Deputy Prime Minister that their report was just a "shameless piece of political posturing"?

Michael Fallon: I do not want to get into that. It raised a legitimate question about the handling of bids, which is one reason I want to have accelerated that process for round 3, by setting, for the first time, a time limit between the announcement of which bid is selected and reaching agreement on the final offer. That time limit is three months. From then on, there is a second time limit of a further three months between a final offer and the completion of due diligence, which the company concerned has to commission, and we have to agree to and evaluate. So from now on, for round 3, once the selected bids are announced, as they will be very shortly, those involved will have a very tight timetable to get their bids finalised and agreed.

You will appreciate we are doing something quite different here to almost all previous forms of regional funding, in that Ministers are announcing the bids they are selecting before they do any due diligence. In all previous schemes, due diligence is done first and then Ministers have announced which bids they have agreed or preferred. We have reversed that in the interests of speed and getting the money out of the door. I want to make it sharper still by introducing these two particular time limits to make sure everybody involved has the same interest as I think you do, in getting money out of the door and spent out there in the constituencies.

Q181 Chair: It has been put to me by businesses that if the Government actually used those bodies that exercised due diligence to work with the companies in the formulation of their bids, a lot of the delay could be preempted.

Michael Fallon: I do not accept that. I have read the criticism from the chartered accountants that says that if we had contracted all this out to them it would somehow have been quicker. I do not accept that. I notice that the National Audit Office also did not accept that; it too was happy with our process, as is our independent appeals panel, which Lord Heseltine chairs, and the Industrial Development Advisory Board. We take advice from both those bodies.

Q182 Chair: What is the problem with doing that? As a lay person, I would be interested to know, because it would seem quite sensible.

Michael Fallon: I do not think it would necessarily be any quicker. The point of a due diligence process is that it is for the companies themselves to commission the due diligence, which we then evaluate. It is not for us to do the due diligence on them. So there is a key difference.

We have 10 members of staff working on due diligence. Eight of those are qualified accountants; the other two are qualified bankers. They are very experienced in due diligence work, and they are evaluating the due diligence that is being done on each project. I am quite satisfied, as I thought the National Audit Office was, with the due diligence process that we have. This is, of course, public money; we have to remember that. We all want to get money out into the constituencies.

Q183 Chair: I do not think anybody would dispute the need for the process to be gone through; it is just how we can speed it up.

Michael Fallon: It does have to be gone through, because we are accountable for it. I think everybody would like to rush the cheques out to the companies concerned, but we do have to account for it and there are a number of instances where the due diligence has revealed the jobs created, for example, were not going to be jobs created, or that the private sector funding or the planning permission that was supposed to be there were not.

Q184 Julie Elliott: This has less to do with the due diligence, and more to do with the jobs created or protected. You have mentioned some very large numbers of jobs being either protected or created earlier in this session. In your letter of 6 September you talk about 198,000plus jobs being unlocked, protected or created, but that is at complete odds with the Public Accounts Committee’s Regional Growth Fund report, which talks about a far lower number: 17,000. There is clearly a discrepancy there. Do you know the actual number of jobs protected and created through the Regional Growth Fund?

Michael Fallon: I have offered to write to the Chairman on the exact split between created and safeguarded. However, you are raising a bigger point that I do want to address, which is the Public Accounts Committee’s emphasis on the net number of jobs. It has used an assumption that I have not seen used quite so widely before: that some of the people whose jobs have been created would have found other employment anyway. Indeed, I think it says that 80% to 90% of them would have got jobs somewhere else, so they are discounting those.

That is not the way I have looked at it. I do not think it is the way, by the way, that you would look at it. If a plant in your constituency closed, with a loss of 500 jobs, I do not think you would come to Ministers and say, "I am only losing 50 jobs, because 450 of those will get employment somewhere else." That is 500 jobs taken out of the economy. I do not think they are right simply to focus on the net, eventual total; I think we do have to look at the gross figures, and it is unfortunate that the PAC has approached it in that way.

Q185 Julie Elliott: Do you know what the actual number of jobs protected or created is?

Michael Fallon: Yes, we do. I have offered to write to the Chairman on the exact split.

Q186 Chair: On the issue of the regional spread of successful bids, do you have any figures on the relative success of the different regions?

Michael Fallon: Yes, I do. I have figures for rounds 1 and 2. I cannot, at the moment, reveal what is happening under round 3, but I certainly have the number of successful bids for each of rounds 1 and 2. They show, as you would expect, a large proportion of successful bidders in the northwest, the northeast, the Midlands and some of the more traditional areas. That is because one of the criteria for the fund was to focus assistance on those areas that had hitherto been overly dependent on the public sector. I do not think it is any surprise that there now appears to be a tilt in the awards towards those regions.

Q187 Chair: So you could get bids of equal quality in different regions, but one would get it on the basis of the criterion that you have just outlined.

Michael Fallon: That is one of the criteria. I make no apology for that; we want to rebalance the economy. Where regions have been overly dependent on the public sector, where there has been a dearth of private-sector job creation, that is one of the criteria. Inevitably, from that, you are likely to see a higher number of bids from those areas. But there is no preference; neither Ministers nor our advisers have said that we ought to focus more of the money on any particular regions.

Q188 Chair: How much do you use the Public Sector Mapping Agreement, which provides the public sector in England and Wales with a portfolio of digital mapping products from Ordnance Survey? How much have you used that in your assessment of bids?

Michael Fallon: I am not aware of how much we have used that; I will certainly get back to you on that.

Q189 Chair: Can I just point to a document that is on display on the counter of the BIS reception? It says, "The Regional Growth Fund Secretariat make extensive use of PSMA data and geographical applications that support appraisal and decisionmaking on bids and maps, reporting the spatial distribution of successful applicants and their likely impacts on the economy to the general public." On the basis of that, I would have thought it seems to be used quite a lot.

Michael Fallon: It certainly sounds like it. I was not aware of that particular usage.

Chair: As I say, it is on display at the front of the BIS office.

Michael Fallon: We take advice from lots of people. Let me just be clear. We do create a unique geography for each bid; each bid is looked at uniquely, so we do not wholly rely on any particular external modelling.

Q190 Mr Binley: Minister, can I advise you to read every leaflet at the front of the BIS office in future?

Overall, were the initial allocation rounds well designed? Did they deliver value for money? Are you, overall, happy with the way that went?

Michael Fallon: Overall, yes, I am. This was a new fund so, inevitably, it took time for bidders to understand it and, to be honest, for us to hone down our processes. The decision was taken quite quickly after the fund was launched very significantly to increase its size and step it up. That may have accounted for some of the slowness of the initial bids. The quality of bidding has increased each time. The number of bids for round 3 far exceeds the money available. There were over £2.5 billion of bids for £1 billion of funding, which we will therefore be able to allocate fully, as you will see when round 3 is announced. The quality of bids has improved each time, and we had some very tough decisions to make in choosing between them. We were not short of good bids.

Mr Binley: Which is good news.

Michael Fallon: Which is very good news.

Q191 Mr Binley: One witness described the bidding process as a "blind application process; you did not know even the category headings under which you were trying to achieve certain things, such as leverage or cost per job." If I were managing director, I would tell the man to use a bit of creativity and set his own parameters, and that it would be a wonderful opportunity, but that is by the by. What I really want to know is how you have been evaluating whether the successful bids did deliver value for money, especially as the allocations were decided by Ministers.

Michael Fallon: We monitor progress of each bid quarterly; we then audit it annually. We then evaluate the bids, some of which are spread over three, four or five years, or even longer periods. So we monitor them quarterly, and audit them annually. We will then do an interim evaluation of all of them in 2015, and we will do a final evaluation, right at the very end, in 2020. So there is some pretty thorough monitoring going on.

Q192 Mr Binley: So the programme for evaluation is a pretty rigorous one.

Michael Fallon: Absolutely.

Q193 Mr Binley: However, we have seen from West Coast Main Line that the adequate resource and skills needed to put that programme into effect is a vital part of the process. How do you monitor that you have those adequate skills and resources, particularly in areas like indexation, which seem to have been missed out totally?

Michael Fallon: As you know, West Coast Main Line was not an RGF bid.

Q194 Mr Binley: I am not asking you to blame another Ministry, but I want to know how you are ensuring you got the skills.

Michael Fallon: The quarterly monitoring, as I say, once a year has to be properly audited by an independent accountant who is not an official from my Department. The evaluation will involve external advice as well. That is the first thing. I must not be tempted on the West Coast Main Line bid, but there is an external element to our evaluation.

Mr Binley: I am very pleased to hear that.

Q195 Paul Blomfield: I wonder if I could probe a bit further on the issue of job creation. Would you agree that a main driver of the Regional Growth Fund was to create jobs in areas of high unemployment?

Michael Fallon: Yes, but as I said, it was specifically areas that had become overdependent on the public sector and had a relatively poor record of private-sector job creation. That was certainly one of the criteria for the fund.

Q196 Paul Blomfield: Was that made clear to bidders?

Michael Fallon: Yes.

Q197 Paul Blomfield: I would like to get down to some of the numbers. Following on from Julie’s point earlier, I am a little confused by your response challenging the Public Accounts Committee’s methodology. My understanding is that your Department’s evidence to the Committee was that 2,442 jobs had been created, and 2,762 safeguarded. Is that right?

Michael Fallon: I am not sure that is right. The evidence from the Department, of course, was back in May.

Q198 Paul Blomfield: This is what the Public Accounts Committee reported, so for the sake of our discussion perhaps we could assume it is right. Are you satisfied with that level of progress against a target of 36,779?

Michael Fallon: Yes, I am. Some of these jobs have been created over a longer period. They are not immediate jobs.

Q199 Paul Blomfield: It seems like a very small bite into that target of 36,000.

Michael Fallon: I do not accept that.

Q200 Paul Blomfield: Just over 5,000 out of a target of 36,000.

Michael Fallon: I am not sure where you are getting 5,000 from.

Q201 Paul Blomfield: By adding 2,442 and 2,762, you get just over 5,000. Your target was 36,779. Is that satisfactory progress?

Michael Fallon: I am not sure where you are getting this figure of 5,000 from, but perhaps I can give you the uptodate figures. The total number of jobs created or safeguarded is 22,337. That is the figure as of last week.

Q202 Chair: How can you reconcile that with the statement in rounds 1 and 2 that, so far, agreed offers have unlocked almost 198,352 jobs?

Michael Fallon: Because these are jobs that are going to be either created or safeguarded, as these projects are developed.

Chair: There is a huge gap between the figures you gave to the Public Accounts Committee and the figure you gave in your statement. I appreciate that you may not be able to clarify it off the cuff, but could you give us a written response clarifying that?

Q203 Paul Blomfield: A written response would be helpful, because I was citing what I understood to be the Department’s submission to the Public Accounts Committee, which was that just over 5,000 jobs have been created or safeguarded, from a target of 36,779.

Michael Fallon: I think our letter to the NAO said 22,000 jobs.

Paul Blomfield: This was evidence submitted in September, and I understood that to be the case.

Q204 Mr Binley: Can we just clear up one fact? There is a massive difference between a job offer and job acceptance. A job offer can last for a long period of time, and there is a big buildup there. Is that the case-in order to help you clarify this, Minister?

Michael Fallon: As I have said, some of these projects go over many years-three, five and sevenyear programmes. These are not jobs that have been created or safeguarded the minute the letter goes out or the money is drawn down, so this is a cumulative total. I will certainly write to you on what appears to be a discrepancy.

Mr Binley: It would be helpful.

Q205 Chair: Given the huge disparity between what was said in your September statement and what has been said at the Public Accounts Committee and by the National Audit Office, it would be helpful to have a breakdown and clarification of that.

Michael Fallon: I will certainly do that.

Q206 Paul Blomfield: There seems to be some difference between the National Audit Office estimation of what might happen and the statement of your Department to the Public Accounts Committee of what had happened. On that basis, the figure I cited of just over 5,000 is what had happened in terms of jobs being created or safeguarded. It is in that context that I ask again the question: against a target of 36,779, do you think that is satisfactory progress?

Michael Fallon: That is taking us back to the distinction between gross and net employment. The Public Accounts Committee is looking at what would have happened if the intervention had not been made.

Paul Blomfield: As I understand it, Minister, I am citing not the Public Accounts Committee’s methodology but your Department’s evidence in terms of the number of jobs that you understood to have been created or safeguarded as of September 2012.

Michael Fallon: Right.

Q207 Chair: What we would like is the rationale underpinning the statistical evidence that has been given.

Michael Fallon: I will certainly do that. I think you may be referring to the number of jobs that we have reported under our quarterly monitoring as 5,200, from the offer letters that were finalised as of that point. That does not take into account the other projects where offer letters are still being finalised, and where the actual job target has not been agreed, but where the beneficiary receiving the allocation has already stated that they are safeguarding employment that might have been lost if they had not been awarded the RGF funding. That is what we mean by safeguarding. There are some 17,000 jobs that, in aggregate, are being safeguarded as a result of those projects that have not yet been finalised. That may take you from the 5,000 to the 22,000.

Chair: Even then, there is a huge gap to the 198,000 quoted.

Q208 Paul Blomfield: I was citing the Public Accounts Committee’s report. The Department subsequently reported that 2,442 new jobs had been created, and 2,762 existing jobs safeguarded, so far, in the 88 projects where offers had been finalised, against a target of 36,779. My question is-let’s have some more amplification of the figures-is that satisfactory progress?

Michael Fallon: No, we need to keep accelerating progress. One of the purposes of setting time limits for round 3 was to make sure that we do not have any of the delays that may have taken place in rounds 1 and 2. We need to move faster. I am aware there were delays; there were projects we were counting on that were withdrawn for a whole host of reasons-there was not planning permission; there was not permission from the parent company; the private sector funding did not materialise or whatever; or the job totals they put in their application turned out not to be verifiable. There were a number of projects that were lost, and were lost perhaps too slowly. Setting these new time limits will ensure that the whole thing is done more quickly.

Q209 Paul Blomfield: Beyond accelerating the due diligence process, what plans have you got to secure the creation of more jobs?

Michael Fallon: Due diligence is part of that. It is making sure that, when they say jobs are going to be created or safeguarded, that is actually the case, and that these are actually new jobs and they are not counting people who are already being employed and so on. That is part of the due diligence, so due diligence is a key part of this. The number of jobs being created and safeguarded is one of the key factors when we come to select the winning bids. There is value for money, but there is also value for money per job. That is one of the key things that the independent panel and Ministers look at. That is an integral part of the programme.

Q210 Paul Blomfield: Is there going to be a fourth round?

Michael Fallon: It is too early to answer that. Round 3, being announced very shortly, will involve programmes that will take us well beyond the current spending review; some programmes, lasting three, five or seven years, will take us well up to nearly 2020. We are already providing funding and support outside the current spending review, so it is a little too early to judge whether we need a Regional Growth Fund 4, but in the end these are matters for the Government as a whole to consider.

Q211 Ann McKechin: The Public Accounts Committee, at page 6 of the report, stated, "The Fund set far too low a threshold for acceptable value for money in the selection of projects and programmes. The value for money threshold only required the projects’ economic benefits to outweigh the public cost. This low hurdle allowed significant leeway to select projects that offered, at best, marginal benefits for the taxpayer." Do you agree with the conclusion, and if you do, what steps are being taken to improve the criteria?

Michael Fallon: I do not wholly agree with the conclusion. It is important that we do support job creation wherever we can, even if sometimes the actual cost-benefit analysis is more marginal than you might otherwise want, or than applies under other programmes. These are bids selected in regions that have traditionally had a poorer record of private-sector job creation. I do think it is right to do everything we can to ensure new jobs are created there. Of course we look at the ratios and the analysis provided, and we do need to make sure that they are good value for money, but in the end we are all in the business of ensuring more jobs are created.

Q212 Ann McKechin: The Public Accounts Committee mentioned a cost per job of £60,000 or less, but there were a number of projects that rose to over £200,000 per net additional job. What do you think is the maximum level you should consider? I can understand in some areas of really low economic development you might want to set a higher net additional figure and, in some more prosperous areas, a much lower figure. But where is that range sensibly set at?

Michael Fallon: First of all, we knock out the really weak projects at the bottom. That is one of the functions of due diligence: to ensure that the truly weak ones, where the jobs they claim to be creating simply are not there or where jobs already exist and they have simply been trying to game the system, are knocked out at the bottom. At the top end, you are asking me about something that has bedevilled regional policy since the 1960s. In every form that regional policy has taken, we have had the question of whether there should be some upper limit, which different Governments have chosen to apply in different ways, to the amount of money you should spend per job. It is a difficult balance. You do want those jobs created in areas like the northeast and the northwest. You do want the indirect effects of that employment. That is the whole purpose of not leaving this entirely to the market and having a Regional Growth Fund in the first place.

However, there is a balance to be struck in terms of value for money. I make no bones about it: there is an element of subjective judgment to this. We take advice. We take advice from Lord Heseltine’s panel, the independent appraisal panel that he chairs with a number of business experts. They strike out projects they simply do not think can be justified, especially on the cost per job. We then take other advice internally on these various projects. Ministers then meet and consider them. But in the end we have to make a judgment, and there is a bias, of course, to helping those regions where, traditionally, private-sector job creation has been more difficult.

Q213 Ann McKechin: I do not want to pin you down but, when you come to your decisions on the third round, are we likely to find any projects that have a cost of net additional job of £200,000, or is that likely not to happen now?

Michael Fallon: I think that is less likely to happen. I do not rule it out entirely, because there were 418 bids and I do not have them all in my head. It is much less likely to happen, because we had a much better range of bids and a much higher number of high-quality bids than we did for rounds 1 and 2. So that is certainly less likely to happen, but there is quite a wide variation amongst the bids as to what the actual cost per job is.

Q214 Ann McKechin: Thanks for that information to the Committee. You mentioned the necessity of thorough due diligence, and I am sure this Committee would not contradict your views about it, but there have been concerns expressed about the length of time that process took. Why was there no timetable set for due diligence in rounds 1 and 2?

Michael Fallon: I have no idea. I set one as soon as I arrived. I do not want to criticise what happened before, but this was one of the concerns, and I hope I have addressed it by setting a very specific time limit for stage 2 of the process, between the final offer and the completion of the due diligence. It does take time; the company has to agree the due diligence and appoint someone to do it. There are discussions between the audit firm and the company. They require information, usually a lot more information than was put alongside the bid. They want to double check everything. They do all that work and try to come to an agreed position with the bidder. That then has to come up to the Department; we have to evaluate whether it was done correctly and so on; we may have further questions to ask. It does take a bit of time, but it should not, from now on, take more than three months.

Q215 Ann McKechin: I think that will be reassuring. Some of the witnesses we have heard have said that it needs to be proportionate to the level of the risk; in some cases, in the technology and software sectors, it is still too long and costly, because they do need to make quick decisions if they are going to get anything to the market, in terms of development.

Michael Fallon: It is important that they bear a share of the cost to pay for this. That in itself eliminates some of the purely frivolous bids, and ensures they are serious about bidding. This is public money; it is not helicopter money. We have to account for it. I think you would be equally critical had we simply thrown money at plants or projects that did not exist and had no prospect of existing. We all remember the DeLoreans of the past where a great deal of money was sprayed around, so I make no apology for the fact that we have to do thorough due diligence, but we do not have to do it slowly; we have to do it more quickly. That is the purpose of the time limit I have now set.

Q216 Julie Elliott: According to the Public Accounts Committee report published in September 2012, most of the money authorised by your Department, including about £364 million of endowments, has been parked in intermediary bodies, over which you have limited control. Do you find this to be a satisfactory position for the Department to be in?

Michael Fallon: The purpose of using intermediaries is that we are able to channel money to SMEs that would not otherwise be able to bid, because their projects simply would not be large enough. They therefore play a very important role in this. There is no particular bias towards programmes or endowment funding; they have to follow exactly the same criteria. It is the only way, really, of channelling this kind of money through to SMEs in a region.

Q217 Julie Elliott: What are the management arrangements for programmes operated by intermediaries? In particular, what mechanisms have been put in place to make sure that management charges are kept to a minimum, and resources are allocated quickly to projects?

Michael Fallon: Where there are national programmes, they are directly monitored by my Department. As you will be aware, there are national programmes organised by banks and some other institutions; Visit England, for example, has got one. That is relatively easy for us to monitor centrally, and we do monitor them. We also have arrangements in place for monitoring some of the local programmes; some of the large city councils have programmes, for example, that we monitor. I cannot give you a direct answer on management charges today. I would be happy to write to you about that.

Q218 Mike Crockart: It is particularly useful that today we have legislation going through Parliament to establish one state-sponsored bank, the Green Investment Bank, which I am very thankful for. I have a question on the business bank, however. While it was a welcome response to calls from British Chambers of Commerce, FSB and others to improve access to finance, what is this bank actually going to look like? When designing the statement, what consultations have you had with banks, businesses and investors? Who is it aimed at helping, and how will you measure the success of this new institution?

Michael Fallon: I hope you will welcome the legislation today to put the Green Investment Bank on to a statutory footing. I think this is something supported across the political spectrum. You probably welcome the location of its headquarters.

Mike Crockart: Even more so.

Michael Fallon: I have not yet had a bid for the location of the business bank, but no doubt Edinburgh will be in there as well.

Mike Crockart: Don’t wait too long.

Michael Fallon: The business bank is new; we have only just made the announcement, so we are still working through the details. Part of my remit at the Department is to make sure SMEs in particular have more access to finance than at the moment. I am not satisfied with the scale or degree of bank lending to SMEs. We need to see if there is some way in which the business bank can help accelerate that through performing some form of wholesale function, and secondly, whether it can help to simplify and rationalise all the various schemes we have-grants, loans and so on. We have a multiplicity of schemes, particularly for helping small business, entrepreneurs and start-ups. We are looking at whether the business bank can be a way of bringing all that activity together. However, it is very early days; we have not yet got details to announce.

Q219 Mike Crockart: The difficulty is: what is going to be different about a business bank? Even in this past year, we have moved from the Enterprise Finance Guarantee Scheme to the National Loan Guarantee Scheme to Funding for Lending. What will it be about the state business bank that will make sure the finance gets to the smaller SMEs in the way that, originally, the Funding for Lending scheme looked as though it was intended to ensure? That now seems to be aimed more at medium-sized businesses.

Michael Fallon: We have not abandoned these schemes. The Enterprise Finance Guarantee Scheme is still there. I am encouraging the banks to increase their take-up of it. Some are, but some have not, recently. I have written to all the chief executives concerned because I want to see more takeup of that particular scheme. Indeed, I have suggested that, if I do not see increased take-up, I may publish the individual figures bank by bank, so that we can all see what they are doing.

Funding for Lending falls into the same category. There is substantial help being provided by Government, and by your constituents as taxpayers in one way or another, whether it is through quantitative easing or Funding for Lending and all these various schemes. It is really now for the banks to step up and ensure that the benefits that they enjoy-I know they have to set aside more money for capital and so on-from the cheaper cost of borrowing from the wholesale financial markets are passed on and through to the businesses, especially the SMEs, that need them. There is a gap there, and a businessman could play a part in plugging it, but we are still working out the details.

Q220 Mike Crockart: You say it is time for the banks to step up, but, of course, it has been announced already that the state business bank would not lend directly but act as a wholesale institution, funding via small new banks and non-bank bodies. Perhaps you could be a little clearer as to what exactly a non-bank body is, and what small new banks you imagine are going to come through to administer this.

Michael Fallon: There are new small banks coming through. Part of the Government’s policy, of course, is to have more competition in banking, so that there is a tier of challenger banks that are challenging the older, established banks. You have seen some of these being launched, such as Metro Bank; you have seen other banks coming into this country, like Handelsbanken, who are increasingly involved in the SME sector.

Q221 Mike Crockart: Metro Bank is the first new bank in 160 or 170 years.

Michael Fallon: Indeed, and why is that? Because it is so difficult for a new bank to get established. That is something we need to make easier and faster. We also need to encourage some of the foreign lenders who disappeared after the crisis to come back here in the way that Handelsbanken has done, which I hope others will follow.

There are also other institutions, financial intermediaries, that are involved in lending. One way or another, we have to get more money through to small businesses. I am quite struck by a single statistic: 40% of the so-called declines for loans that are appealed are overturned. That tells me that something is not quite right about the relationship networks or the scoring criteria banks have. If 40% of appeals have the original decision being overturned, something is not quite right. Banks need to look to their networks again to build up the more traditional kind of relationship manager, who understands local business needs. The business bank I hope will be a fillip to that process, but it is too early to go into the details.

Q222 Mr Binley: I was delighted to hear you talk about banks and their lack of risktaking, not least because they have moved the whole process of lending to SMEs, which are local to banks, up to regional level on a matrix basis. They build in a high cost of risk because nobody knows who the hell they are talking about at local level. It is a real problem, and it has changed over 20 years. Will you raise this specifically, both with the Treasury and other Departments, to ensure that banks really get to grips with this problem?

Michael Fallon: I am raising it with banks themselves. I met the chief executive of one bank and his team yesterday, and I am meeting others; I have a meeting later today with the British Bankers’ Association, so I am pushing that agenda. One of my responsibilities is to make sure SMEs have more access to funding. If you would like another statistic, we published a report last week into not failure but success: what is it that makes a really small business grow? One of the findings was that only a quarter of them relied on any form of bank lending to start up. That does not tell me that banks are fully involved in the businesses I have described, so there is more work to be done there. My job is to keep on the banks’ case, to drive up that percentage of small business lending, and to ensure that the various schemes we have are understood and being properly accessed by SMEs.

Q223 Mike Crockart: It is not at the point of startup that the gap in funding actually happens. It is when it gets to a much more commercial stage that the bank funding is required, and that is when the risk is priced as being too great and the cost of finance stops the SME from being able to move forward. Are you saying there is not a problem with the pricing of risk, but that the problem is actually the perception by banks of risk rather than the actual, real risk? This is £1 billion worth of public funds that is being loaned to SMEs. How can we ensure that risk is properly priced so that the money is safely invested on our behalf and we are not merely displacing money that should be going there from the normal banking network?

Michael Fallon: I take your point about start-ups; you do not want banks to be in the equity business right at the start. The banks say there are not enough good borrowers out there. There are two issues. One is the perception. I am quite struck, talking to SMEs, by how many do not rely on bank finance at all, now. They use it for transaction purposes, but do not rely on it for any kind of lending; it can be years since they last took out a bank loan. There is a perception issue: banks feel they should not even ask, for some reason. That again is down to the kind of networks that banks used to have and perhaps lost during the frothier days of the financial services boom, which they are now, to be fair to them, trying to rebuild.

The second problem is debt serviceability. It is not so much the price; it is the view of the banks that some of the debt has become much more difficult to service. We are going to do some work with the banks on that; we may do some piloting to see how serious a problem that is at the moment for SMEs. It is a problem we have to work on with banks.

Q224 Chair: Can I thank you, Minister? I hope we did not put too much strain on your voice. Thank you for your contribution. Obviously, if we feel that, on reflection, there are one or two issues we have not yet covered, we will write to you to ask for your views. If you feel there are any points you would wish to make that were not brought out by the Committee, we would welcome them from you before we do our final report. Thanks very much, and we look forward to working with you over the next few years.

Michael Fallon: Thank you, Mr Chairman. I am conscious we owe you some bits of paper as a result of this morning, and certainly some clarification on these job numbers, which we will get to you.

Prepared 22nd October 2012