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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 702 -i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Business, Innovation and Skills Committee

BIS annual report and Accounts 2011-12

Tuesday 30 October 2012

RT HON Vince Cable MP, MARTIN DONNELLY and HOWARD ORME

Evidence heard in Public Questions 1-136

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 30 October 2012

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Katy Clark

Mike Crockart

Julie Elliott

Ann McKechin

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Rt Hon Vince Cable MP, Secretary of State for Business, Innovation and Skills and President of the Board of Trade, Martin Donnelly, Permanent Secretary, Department for Business, Innovation and Skills, and Howard Orme, Director General, Finance and Commercial, Department for Business, Innovation and Skills, gave evidence.

Q1 Chair: Good morning, Minister, and welcome. Thank you for coming to speak to the Committee about the annual report. I would be grateful if you could just introduce yourselves, for voice transcription purposes. We knew Mr Donnelly was coming; could you also introduce yourself for our records?

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

Martin Donnelly: I am Martin Donnelly. I am the Permanent Secretary in the Department.

Howard Orme: I am Howard Orme. I am the Director General for Finance and Commercial.

Q2 Chair: We have some general questions on the economy to start with. Last week, we had the good news that the GDP grew by 1% in the third quarter of 2012. However, there were some patchy bits, not least construction, which fell by 2.5%. Minister, you recently described it as an "enabling industry" that "will continue to be important to the UK economy". While we do appear to be growing again, how concerned are you that this vital sector of the economy still seems to be in recession? How do you think that will impact on our coming out of recession?

Vince Cable: I am very concerned. Your summary was a very fair one. There are some positive signals, such as the most recent GDP figures, reduced unemployment and reduced inflation, but we certainly should not get carried away. There are a lot of problems in our main major export markets; we have continuing serious problems with bank lending, particularly in the SME sector; and we have a lot of the legacy problems of the collapsed property bubble, one of which is the impact on the construction industry.

You can put its problems down to two things. One is the way in which housing and commercial property markets tanked very badly after the bubble burst, and banks are now no longer willing to lend into those sectors because of negative equity worries, so you get very little movement in house building and in commercial property. Starting in 2009, the last Government and now this Government have had very tight control over capital spending by Government, and that has been another factor that has played into that sector in a negative way. The story in construction is not a good one and it has had an impact on the manufacturing figures, because the biggest component of the manufacturing sector is construction products. You are right to warn that there are these negatives as well as the positives.

Q3 Ann McKechin: Yesterday there was some media coverage regarding the Cabinet Growth Implementation Committee, the formation of which was announced just under two months ago. In response to a parliamentary question by Ian Murray, your Minister stated that you will be the deputy chair, but a membership list has still to be published or announced. Given the timescale and the priority that you rightly say the Government has on growth, can you explain to me why it is taking so long to get this committee up and running?

Vince Cable: It is one of a whole series of coordination bodies in Government designed to move things. There is also a Cabinet subcommittee that focuses particularly on infrastructure projects, which is a large part of that delivery mechanism, which certainly met very recently. The Economic Affairs Committee of the Cabinet is the overriding body. I cannot tell you why that committee has not been convened yet. The Minister in the Treasury who will have direct linemanagement responsibility for following up those projects has only just come into post and is no doubt getting on top of his jobs. It is not that the Government has ground to a halt; we are doing what we have to do in our own Departments. That is a coordination mechanism.

Q4 Ann McKechin: Presumably the committee was set up for a purpose. Given that there is an urgent need to achieve higher growth figures, are we going to see this committee up and running and a membership list confirmed in November?

Vince Cable: I do not think anybody in Government or anywhere else would imagine that Cabinet committees drive economic growth. It is there to take check and hold Government Departments accountable for delivering on those things that they have agreed to do, and it is an important part of the machinery of Government, but it does not drive economic growth. But it is a fair question and I will endeavour to find out why this group has not yet met.

Q5 Ann McKechin: If you could come back to the Committee to confirm, that would be helpful.

Vince Cable: Yes, I can do so.

Q6 Chair: On page eight of your annual report, you state that the Government has made over 250 commitments under its growth review to help improve the UK’s growth potential. How many of these have been implemented so far?

Vince Cable: From recollection, a very high percentage, but I do not think we have currently got it stated in exactly those terms where we are on them. This arises out of the growth review that was initiated 18 months ago. There was a whole series of interrogations of the way Government works in areas like infrastructure, logistics and planning, and out of that arose a whole series of policy commitments that are now being followed though. Some of them have a direct impact on growth; most of them are very long term and incremental. If you want a tickbox list of what has and has not been done, I am sure that could be made available.

Martin Donnelly: Yes. We produce regular updates. We have produced two so far and there is another one due. We would be happy to let the Committee have the latest update on where we are across the board. There is a group that takes forward all these commitments.

Q7 Chair: Thank you; please let us have that. How do you think you will measure the impact on growth of these commitments?

Vince Cable: It is extraordinarily difficult. Most of these are qualitative changes. Most of the factors that drive economic growth are to do with macroeconomic policy, monetary policy, the Budget, external demand and things of this kind. In the short run, anyway, these are the things that make growth happen. In the longer term, it is about the productivity of the economy, and that is where these mostly supplyside measures that we are talking about kick in and become important. It is extraordinarily difficult to quantify them, but we should not sit around handicapped by philosophical debates.

We all recognise that these things are important. To take the topical example of the planning system that is going to be introduced into Parliament very soon, you cannot quantify how much freeing up the planning system directly contributes to growth, but we know there is a missing link. The difficulty people have getting on with developments is a tangible problem, and we are trying to address it.

Q8 Mike Crockart: Before we move on from the general growth figures, we have a table of the different component parts of the economy and we are seeing growth in the quarter across them all, with the obvious exception of construction. The one that particularly worries me is utilities, which does have a quite changeable set of figures, but we seem to have moved from 5.1% growth to 2.2% contraction. Do you have any views on what you believe has caused that? Green investors are complaining to me about political noise. Do you think that is something that is affecting investment decisions?

Vince Cable: Nobody, until your question, had picked up on the utilities component of GNP. I had not. I guess this is a combination of electricity, water and transport.

Mike Crockart: And gas, yes.

Vince Cable: These things, in turn, depend on what is happening in the rest of the economy. I know there is a debate going on in Government about longterm investment in green energy, which I am part of, because of the role of the Green Investment Bank, among other things. That is an important debate, but that will affect the economy five years down the track, not next month. I suspect that those rather poor figures are simply a reflection of the fact that other bits of the economy are not going and therefore are not pulling up demand for electricity, water and whatever.

Q9 Chair: The Government has set great store by inward investment and the ease of doing business, and implemented a number of measures designed to improve that. But in the World Bank’s ratings, we dropped from 6th to 7th in 2011. Why do you think that is? What are those countries that are ahead of us doing that we are not and perhaps should be?

Vince Cable: I am just trying to cast my memory back to the launch of the trade and investment report that we did several months ago. As I recall it, the figures you refer to relate to the value of transactions, and that is probably explained by a decline in merger and takeover activity; that does not necessarily imply real things happening on the ground. In terms of projects-real things happening-as far as I recall, our position had held up remarkably well and we are still the most attractive destination for inward investment in Europe. One can understand, given the dynamics of it, why investment is currently flowing to China and some of the other big emerging markets. But in terms of mature markets, Britain remains a very attractive destination for inward investment. The feedback we had from the Business Embassy at the time of the Olympics, which was an unprecedented turnout of chief executives and chairmen of global companies, many of whom expressed an interest in, and some a commitment to, investment in the UK, reinforced our optimism that we remain a very good place for foreign investors to do business in.

Q10 Chair: I note that top of the list is Singapore. I believe that their Ministers, MPs and civil servants are paid in relation to the level of economic growth. Do you think there is any potential there?

Mr Binley: Good idea.

Vince Cable: It would be rather dangerous to say yes, in the current circumstances, but I can see where they are going. Singapore is a very impressively run country; we will have to take our hats off to them.

Martin Donnelly: Perhaps I could just add that last year the Secretary of State signed an economic and business partnership with Singapore, precisely for those reasons. We have been following up, and a couple of weeks ago we agreed that we would be doing joint trade work with them in countries in ASEAN and also exporting into China, precisely to pick up on some of the dynamism of that region and mutually beneficial contacts with Singapore.

Q11 Nadhim Zahawi: On the Singapore point you make, their pay is also docked if there is no, or low, growth.

Mr Binley: Good idea.

Vince Cable: That is why I expressed some caution about that.

Q12 Nadhim Zahawi: Your annual report and accounts highlight a figure of over 25,000 businesses helped by UKTI last year. That is on page 21. How have you measured the actual impact and effectiveness of that assistance in terms of additional export by companies?

Vince Cable: They can track from that the volume of turnover and the amount of employment that they are dealing with. UKTI is trying to reorientate its activities in ways that add more value to the country. One that I know is close to your heart is that it has very tough targets now for concentrating its efforts on SMEs, because that is where the real problem is. Many of the big companies can do their own trade promotion; SMEs cannot. Being able to offer tangible help to small business is a much more productive use of its time and effort than others. It is that kind of shift that is important.

UKTI-and this goes back to your earlier question about Singapore-does have some quite tough metrics in terms of the number of companies that it helps and the volume of transactions that are involved. It has set itself targets for high-value projects that it hopes to be able to deliver. It is only a catalyst; it cannot claim responsibility. Particularly arising out of the Olympics, there are a set of very specific targeted objectives in terms of the number of projects that it is hoping to land.

Q13 Nadhim Zahawi: Indeed, the head of the German CBI, at a recent meeting, held UKTI up as an example for Germany to aspire to, so congratulations on that point.

Vince Cable: We often look at it the other way round.

Q14 Nadhim Zahawi: Do you monitor British exports as an indicator of success within that? You have mentioned that there is a sophisticated monitoring system. If so, why are there no impact indicators relating to exports quoted in your annual report?

Vince Cable: I do not know why they are not in the annual report, because it clearly is important. No doubt the Permanent Secretary can add something to that. Yes, export growth is critical to the overall economic strategy, which is not simply about getting the Government’s finances in order, important though that is. It is about rebalancing the economy, it is about export orientation and it is about concentrating particularly on big emerging markets. The annual report does refer to our performance in particular emerging markets. There is very rapid growth of British exports to Russia, which I think is our most successful; India is not far behind. UKTI does have targets in those specific countries where it is more relevant and is, by and large, meeting them. Is that not correct?

Martin Donnelly: Yes. Its focus has been on helping a specific number of companies and, having helped 25,000 businesses in 2011-12, of which 90% were SMEs, it is on track to help about 32,000 this year. It also focuses on how many are new to exporting, because we are aware that is a massive challenge; 18% were in that category. As you will know, there is an overall target for broadly doubling our total exports, which is also monitored, and we monitor the balance between the European Union and fastergrowing markets elsewhere. We are now back in a situation where we are exporting more outside the European Union for the first time in about 15 years. There are a range of indicators. They are not all in the report because we just chose some highlighted ones, but there are more details given by UKTI in its own updates, which we would be happy to send you with its business plan.

Vince Cable: The other indicator that is relevant is that it does track the response of its customers, and there is around a 75% satisfaction rate. I do not know whether you would regard that as good or bad, but it does measure what their own customers think about what it is doing.

Q15 Nadhim Zahawi: Moving on to the Enterprise Finance Guarantee scheme, the scheme for small and mediumsized enterprises loaned less in the first quarter of 2012 than at any time since early 2009. Why has there been such a decline?

Vince Cable: It was important in the 2009 period, because that was when the credit crunch was at its most extreme and banks were simply not willing to lend unless there was additional surety, which that scheme provided. There is something quite worrying going on in bank lending. Brian Binley asks me about this every time I come before you, and rightly so. The latest figures on bank lending to SMEs are very discouraging; it is falling. Since the banks are clearly not out there promoting bank lending, they are not going to the next step of making use of the guarantees. The other reason why it may be falling is that there are other mechanisms now coming in, like Funding for Lending, which is this Treasury scheme providing Government support through its own balance sheet for banks, which have in some ways superseded it, or at least complement it and made it less central to credit promotion.

Martin Donnelly: We have also commissioned a review of the effectiveness of the EFG scheme, for the reasons that the Secretary of State has given. But we think it is on track to guarantee about £300 million in the current financial year.

Q16 Nadhim Zahawi: You say in the report that the takeup of EFG loans is influenced by the level of SME demand for bank finance in the wider economy and the extent to which this demand is being met by banks. Which of these is responsible for the decline in loans? What evidence do you have to back your view up on that?

Vince Cable: The Bank of England figures produced 10 days ago were quite negative. It is often quite difficult to interpret these things, with the relevant factors of supply and demand and whether you are looking at net and gross figures-we know, because we have had the arguments in this Committee-but the most recent figures are not good.

Q17 Chair: Time and time again, banks say to me, "We want to lend. We are in the business of lending-that is our job-but the demand is not there." I am sure you have had the same points made to you. It does seem to me that this poses a real problem, insofar as Government produces many schemes to improve lending to small businesses, but if small businesses do not feel confident enough to borrow and invest, then it is rather like pushing on a piece of string. What can you, as a Department, do in terms of influencing the Government to take measures that will improve the level of business confidence in order to take up those loans?

Vince Cable: You have put your finger on the core argument. Is the difficulty because business-particularly small business-lacks confidence and therefore will not borrow, or is it because the banks are rationing credit? In truth, there is a bit of both. There is a problem with large numbers of companies that are simply sitting on cash, and even many small ones, which prefer to keep the money in their deposit rather than invest it. That is a factor and that gets back to the issue of confidence. But I certainly believe, on the evidence I have seen, that there is a problem that arises from the fact that most of the major banks are these days highly riskaverse and very reluctant to lend, particularly where property is involved that they think may depreciate in value. We have evidence of that in terms of discouraged demand. The very detailed surveys that my own Department has done suggest that bank credit is particularly difficult to obtain in certain areas, like manufacturing, which is particularly unfortunate. There are lots of anecdotes, but we all have anecdotes.

In terms of stimulating the overall economy and what we can do about it, as you know, we have tried a variety of schemes, starting with the EFG and other forms of guarantees; we are now trying Funding for Lending. This all makes a difference, but there is still a big problem at the end of it.

Q18 Chair: You have not really answered the question about what can be done that would raise the level of confidence. I appreciate your Department is not responsible for the macroeconomic strategy, to which confidence may be related, but what representations do you make to the Treasury and other Departments to try to improve that?

Vince Cable: In my conversations in Government, I will always draw attention to the need for active policies to get banks lending and, indeed, active demand management, which, as you know, has been primarily operating through the Bank of England. But there are many, many other things that we can do. The whole purpose of the growth review, which you referred to a few moments ago, and the 800 measures there-everything from planning and housing policy to promoting infrastructure-was to help to stimulate confidence. Supplyside measures-deregulation and things of that kind-are all relevant, though none of them in themselves solve the problem.

Q19 Chair: Did that make Merlin a failure?

Vince Cable: No, I would never accept it was a failure. We believe that it almost certainly helped to persuade the banks to do more lending than they otherwise would have done. Many companies would have gone under had they not been under pressure to maintain their credit. In that sense, it was successful, but it was not enough, which is why we have now moved on to more sophisticated instruments. Funding for Lending is probably the bestconceived of those initiatives, and you will see in the next few months the extent to which it is having an impact. So far it is too soon, but in a couple of months you will hopefully see the results.

Q20 Mr Binley: It is the very fact that confidence should now begin to grow because of the green shoots that causes great concern. More companies go bust in a growth period than they do in a period where they are reducing activity. That is because of the increased cash flow drag that they face. I am very concerned that, now the pickup is occurring-and thank God it is-and now that confidence should be returning, the money will not be available, particularly to SMEs, to pay for that cash flow drag as they begin to grow more. One of the problems is that SMEs operate locally and high street banks operate locally, but I am not sure, every time I go into a high street bank, there is the competence around in order to understand and explain what is available and what opportunities are there. What work are you doing to ensure that banks genuinely are trying, now that things are beginning to happen, to help those small businesses grow and overcome that cash flow drag, but, equally importantly, to ensure their competence once somebody walks through the door of a high street bank?

Vince Cable: That is a crucial issue. We can argue until the cows come home as to whether there is a demand or supply problem at present, but you are right that, once recovery gets under way, it is important that it is not choked off because of lack of credit. What is happening to improve the situation? First of all, you are now beginning to get banks becoming significant that are genuinely interested in business lending and that take a longterm approach and are going out looking for business. We have talked here before about Handelsbanken; you now have Metro Bank, Aldermore and others in that area. The Co-op is also trying to do that and Nationwide wishes to do it. There is a stream of new challenger banks that will add to the supply.

It is very difficult to quantify, but there is also a lot of nonbank activity; the kind of thing that was analysed by the Breedon report, which I commissioned some months ago and which we are now trying to follow through. This is supply-chain finance, which is happening partly spontaneously, partly with Government encouragement.

The third area where change needs to happen, and we are beginning to see it, is the bigger banks themselves changing their own culture. Ten or 15 years ago, traditional relationship banking of the kind that you are familiar with was gradually run down and all that competence in bank branches and decentralised responsibility was ripped out, and they lost that capacity to engage with their local small businesses. What I have picked up from the comments of leading people in all the big four banks is that they realise they made a terrible mistake by doing that, and they are now trying to restore it, but changing the culture back is not easy, straightforward or quick.

Q21 Nadhim Zahawi: Back down to the detail of one of the schemes, the Government proposes a new Business Finance Partnership. How will this differ from its predecessor scheme?

Vince Cable: Are we talking about the new business bank?

Q22 Nadhim Zahawi: No. That is coming next, Secretary of State. We are talking about the Business Finance Partnership. There will be £100 million of loans made. My supplementary was going to be: is that going to be over a single year, or is it going to be spread more thinly over a number of years? That was in the report.

Martin Donnelly: We probably need to let you have a note on the precise timing of that. I do not have that information to hand.

Vince Cable: Is this nonbank finance lending?

Martin Donnelly: We are not familiar with our own acronyms here.

Nadhim Zahawi: This is still under the Enterprise Finance Guarantee scheme, under the innovative lending.

Chair: May I clarify? Page 11 of the report says: "The Review reported in March 2012. Building on the Review’s recommendations, BIS will invest £100 million from the Business Finance Partnership through innovative lending channels."

Vince Cable: Yes, this is what I referred to a moment ago. This is the postBreedon proposals. This is supply-chain finance, assetbacked finance and peer-to-peer lending. A series of bids have been made by different organisations. We have got to the stage of evaluating them, and the money will go out of the door once we have satisfied the usual due diligence. That is happening. Exactly when the money will get out of the door I cannot tell you.

Q23 Nadhim Zahawi: You will come back on that point about the £100 million?

Martin Donnelly: We will give you an update on the timing.

Q24 Chair: Can you promise that those successful bidders will receive the money rather more quickly than they have under the RGF?

Vince Cable: I cannot promise that, because we always try to be very careful in checking where the money goes. Providing the projects happen-that has been the story of the Regional Growth Fund-and providing the private investment goes in, it does not matter how rapidly the Government money is spent. Obviously it has to be done as efficiently as possible, but it is absolutely right that we first of all improve the projects that they have bid for and that we are certain it is going to be properly used. That is an essential discipline of Government that we must not give up on.

Chair: I do not think anyone would dispute the importance of the Government exercising due diligence; what they would dispute is the necessity for it to take a year, as in some cases in the Regional Growth Fund.

Q25 Nadhim Zahawi: On the business bank, you have rightly said that this will play a big part in the coming year. What consultation have you had with private banks, businesses and investors in the design of the bank?

Vince Cable: I am having a whole series of personal meetings with banks, people in the City and people who have got creative ideas, and my officials are doing a great deal of that. We are now trying to refine the design of this institution before we put it into a more formal shape, let alone start hiring staff. The concept is this: there is roughly £1 billion that has been pledged from central Government funding, which we hope to match with equity from private investors-the people we are talking to-some of whom like this idea, and then, with Government guarantees, hopefully build up a lending capacity of something of the order of £10 billion. These are very approximate figures at this stage.

There then is the question about what would be the central purpose of this bank. There is no point just duplicating what other institutions are doing. There are several objectives, which we are trying to refine at the moment. The first is that we do see, and I think there is general agreement, that there is a big gap in the market for long-term lending to growing medium-sized companies, which I think we have all recognised are at the core of economic recovery. It is very, very difficult if you are a company trying to get 10 to 20year finance; the Funding for Lending scheme only covers guarantees for five years, for example, so they would have to roll over any funding that they got. There is a gap in the market. It is a longstanding one, from even before the present financial crisis; it is the so-called patient capital problem. That is one area. Certainly the CBI have been very supportive of our moving into that space and meeting a real demand for British business.

A second, more conjectural idea, but quite an important one, I think, is taking a leaf out of the book of institutions like the Kreditanstalt für Wiederaufbau in Germany, that do wholesale lending. In other words, they do not lend to individual customers; they lend at one remove. There arguably is a gap in the market for wholesale funding for some of the expanding challenger banks. That case remains to be solidified, but I think it is a case.

Then the third area is that we do recognise-and it has indeed been one of the comments or criticisms of your Committee-that the Government has a lot of streams of funding for business, and it would make sense to rationalise some of these and bring them under the same roof, and make it easier for small business to access them.

Q26 Nadhim Zahawi: That is very positive. On the actual assessing of the risk, given your previous comments to us that Ministers and civil servants do not have any training in risk assessment, who will, in your view, be responsible for that?

Vince Cable: They will be professionals. There is no question of Ministers and officials being involved in the retail operations of this institution. You can take comfort from the way in which we have approached the establishment of the Green Investment Bank, where there is a very highly professional team operating on clear criteria, but at arm’s length from Ministers.

Q27 Nadhim Zahawi: Will the same apply for loans and so forth?

Vince Cable: Yes.

Q28 Nadhim Zahawi: Given the projection that 90% of the investments made through the business bank will be funded from private sources-

Vince Cable: That is based on the guarantee component. A large part of the volume of lending would be private money underwritten by Government guarantee.

Q29 Nadhim Zahawi: On whose terms will the debt be serviced: the business bank or the private investor? Where would the debt sit?

Vince Cable: The Government would be an equity partner and there would be private equity as well. It remains to be determined whether the Government has a majority or a minority in equity. It would then be geared. Quite high gearing is what we envisage, which would be made possible through the guarantees.

Q30 Nadhim Zahawi: I know my colleagues are going to deal with the survey issue, but, having a background in research, I could not resist. Looking at your staff survey-the selfassessment of the Department-it makes quite depressing reading. The detail will be covered by my colleagues, but you score in almost every category below the average for the rest of the civil service. Does that worry you?

Vince Cable: I will ask the Permanent Secretary to comment on that. I do meet the staff, through their representatives and sometimes en masse-we have big meetings through television screens and so on. Our Department has been through some very, very radical surgery. We have lost a higher proportion of our staff through downsizing than most Government Departments, and you could say that is our contribution to cost savings and reduction in administrative overheads. It has been very painful and there has been a certain amount of insecurity associated with it. It does not surprise me that, when you are going through a very painful downsizing, members of staff feel somewhat beleaguered. On the other side, I think they do feel that we are a Department with a purpose, they have more responsibilities, they are trying to do more with less and there is a positive mission. But on the personal level, you can understand why staff feel a little bit under siege.

Q31 Nadhim Zahawi: The positivity element of that does not come through in the numbers.

Martin Donnelly: I do agree with you; it does concern and worry me personally and the whole board.

Nadhim Zahawi: Good.

Martin Donnelly: But I underline what the Secretary of State said. This survey was done a year ago: last October. We are at the point of completing the current year’s survey.

Q32 Nadhim Zahawi: Will we see better numbers this year?

Martin Donnelly: I hope and expect that we will, yes.

Q33 Nadhim Zahawi: We will hold you to that.

Martin Donnelly: That is not just wishful thinking; do hold me to that.

Q34 Mr Binley: If you do not, we are going to advise you get a salary cut, as was previously suggested. Does that motivate you?

I want to talk about the survey that my colleague Nadhim broached. I notice that there are three criteria under which leadership is rated. One of them is to "ignite compassion, pace and drive". I wonder whether the Secretary of State could tell me if his passion is diminishing, because this is the only one that has a red/amber rating on the traffic light signal. I would not have thought so from seeing him perform in the Chamber, but maybe he could tell us whether he feels his passion is diminishing.

Vince Cable: No; it is increasing. Perhaps you can explain the amber/red.

Martin Donnelly: Yes. Again, it goes back to the figures of a year ago. If I may carry on from the last answer, we did, as the Secretary of State said, go through our restructuring very rapidly. Just over a year ago we had completed a very significant downsizing. We have taken around 20% of the staff out of the core organisation; we have made a £36 million real manpower cost saving. Over the last year, we have been able to rebuild on that basis. We have taken out levels of bureaucracy. I believe that we are a more flexible, more innovative Department. We have set up improved structures of governance. Talking to colleagues around the Department, I would say we were even more passionate to deliver the agenda of our Ministers, most recently on industrial strategy. We are just moving 20 staff around to do key work on that; we will be moving another 20 before the end of the year. We are extremely committed to making the best use of the resources we have got, in partnership with our Ministers, to deliver on this really important agenda.

Q35 Mr Binley: In business, I would not consider it good enough to have information of this kind a year out of date. I certainly would not consider it good enough to report information of this kind to a meeting of this kind that is a year out of date. Your programme timing is pretty appalling. It is maybe not your fault, because you have only been there for a relatively short time, but it is unacceptable for you to come here and say, "Ah, they are old figures, but we have not got the new figures yet." If it happened in my boardroom, I would be quite angry.

Martin Donnelly: Let me explain where we are. You are quite right; those are figures from a year ago. They are the figures that go into our annual report and accounts, which we have a duty, as a Whitehall Department, to produce each year. We also do three-month pulse surveys, taking a quick view of where morale and delivery in the Department are. We also, as the Secretary of State said, run a series of open meetings and discussions with staff. We have a 57point programme, which is now substantially complete, to deliver a better Department.

Q36 Mr Binley: That does not help answer my question, Mr Donnelly. Forgive me; let me interrupt. My question was specifically about outdated figures and that was the argument you made. I am not going to listen to civil servant waffle, quite frankly, to get around that particular point. What will you be doing to improve that situation and assure me you have much more uptodate figures?

Martin Donnelly: We have very uptodate management information, which the board look at every month.

Q37 Mr Binley: Why have we not got some of that?

Martin Donnelly: Because you have got the annual report and accounts. We have to do an annual survey each year as part of being a civil service department, and we report the key outcomes of that in the annual report. But you are right: that is not the management data we work on to run the Department.

Q38 Mr Binley: Then can I suggest next time we have the management data you work on? These figures, if they are outdated, simply are not good enough. We cannot make a judgment. That is our job; we need to scrutinise and challenge you. We cannot do that job if you do not provide us with updated figures.

Martin Donnelly: We can certainly give you an update from our threemonthly figures, yes.

Q39 Mr Binley: Can I go on to talk about leadership and managing change in terms of the civil service people survey? For BIS to be pretty much the worst Department in Government is simply unacceptable. I genuinely find that deeply concerning. I notice that, of the 10 criteria that are used to collect the survey information, eight of them showed a drop over the previous year; 80% showed a drop in satisfaction standards, right through the criteria of the previous year. That does not give us great confidence, does it?

Martin Donnelly: Over the previous year, we have been going through the largest restructuring this Department has known in 60 years. To finish the point, if I may, Mr Binley, that naturally reflects itself in terms of survey results and morale. If you look at what the Department has delivered over the past 12 months, that record speaks for itself.

Mr Binley: I will come to that in a minute. Almost every business in the land has gone through the same thing, so it does not help me. I do not feel sympathy when a civil servant tells me that they have had some bad times, because out there the people you serve have had some very bad times indeed. That is why we need the most uptodate figures and that is why, next time, it seems to me to be your job to make sure, if they are available-and you say they are-that we have them.

Q40 Chair: Mr Donnelly, other Government Departments have been going through very similar restructuring exercises and staff downsizing. The impression I get is that your figures are far worse than certainly most other Departments. Why is that so?

Martin Donnelly: I think it is more accurate to say that they are a bit worse in aggregate terms. It is also the case that we in our Department, taking advice from the members of our board who come from the commercial world and run often very large organisations themselves, believed it was right to do our restructuring as rapidly as we could. We also handled it, working closely with Ministers, in a way that treated all of our staff decently and transparently, which was very important, but we completed our restructuring of staff before almost any other major Government Department. If you like, we took the pain early on, in order to be able to refocus on getting the job done.

Q41 Chair: You would think that next year the satisfaction levels of other Departments will be lower than those of BIS as a result of the fact that, effectively, BIS is taking the hit earlier.

Martin Donnelly: I am hoping that ours will be higher for a variety of reasons. Partly for that one; partly because people are aware of and committed to the importance of the work we are doing; and also because over the last year we have been modernising the culture of the Department to make it more flexible, we have been spending more money on training, which is really important, and we have been ensuring that we are making the best of our staff. Although, of course, we are still in a tough economic background and still have a pay freeze, I would expect BIS figures to improve, yes.

Chair: I do not want to overlabour this point.

Mr Binley: I do a little more, Mr Chairman.

Chair: I will bring you in and let you do it, Brian.

Q42 Mr Binley: I do want to labour it, because you are saying you had a period of change a year ago and yet the previous figures, which on your accounting relate to 2009, showed six areas of criteria down on the year before that. We are not talking about a Department that has had a difficult year but one that is on the slide. I want to know what you are doing about it, because this needs urgent attention. If it was my business, I would be deeply worried.

Martin Donnelly: First of all, I do not think that is an accurate reflection of what has happened.

Mr Binley: Well, here it is.

Martin Donnelly: What we have is an annual staff survey from last year that reflects how people felt about having gone through two successive rounds of redundancies, a very rapid downsizing and a significant reform of the organisation, with 25% of staff moving around internally. All of that created a lot of discomfort, and it is to the credit of my colleagues that they carried on professionally during it, but we have seen some of the results of that in the survey. Since then, we have had a year of stability. We have rebuilt morale; we have had an ambitious reform program under way; I believe we have improved our partnership working with Ministers; and we have delivered successfully across a range of policies inside BIS and through our partner organisations.

Q43 Mr Binley: Mr Donnelly, I have been in business for 40 years. I have started two successful businesses. I know that there are peaks and troughs. I am saying that there is a trend here. You say you have got uptodate figures. Send us them, so that we can prove that the words we are receiving from you have more truth than these figures suggest.

Martin Donnelly: We will have the results of this year’s staff survey in about four or five weeks’ time, and we can give you those.

Q44 Mr Binley: Forgive me; you said you had up-to-date figures. You told me you had them. Will you send them to us?

Martin Donnelly: I will send you the three-month pulse figures that we have done to make sure that we are not simply working on the annual data.

Mr Binley: That will help us. Thank you.

Chair: I think I can speak for every member of the Committee when I say that we feel these figures are absolutely dreadful. You have given us some explanations. We will test those explanations against outcomes over the year, and we will have further questions on them.

Q45 Mr Binley: I note that the departmental board made some pointed remarks and suggested there was "scope for greater ministerial engagement with the Departmental Board. Resolution of the Departmental Board role will help, but full commitment from the ministerial team is required." That is what Sir Andrew Witty said. Can I ask what you are doing to ensure that there is greater commitment with the board? Might that joinedup working help us improve the sorts of figures we are talking about?

Vince Cable: I have discussed that with Andrew Witty, who was quite complimentary about most of the workings of the board, but did indeed make that point, which is fair. The issue is not really around attendance, because the ministerial team do attend the discussions. He wanted the board to be directly engaged in forwardlooking strategic types of issues, rather than simply going through the mechanics of the administration of the Department, which is where the earlier discussions have tended to focus. I have agreed with him that in future the agenda needs to be structured in a way so that they can give us advice. These are, after all, top business people, university vicechancellors and others, and we want to make best use of their talents. We probably have not been so far.

Q46 Mr Binley: When you next visit us in four or six months, Secretary of State, will you let us know how that is proceeding? I am deeply concerned about what I have called, right across the Government sector, lack of good management skills. I have said it before publicly on a number of occasions. I would hate for BIS to be a part of that process, so I am trying to be helpful. Will you please come back to us?

Vince Cable: I know you are and I will come back to you. Andrew Witty’s comments were the opposite, in a way. I think what he was saying was we were spending quite a lot of time in the board talking about management issues, and where they felt they could add most value was in thinking about the strategic policy questions. That is where we were shifting the agenda. I will happily report back.

Martin Donnelly: If I could just add one specific example to that, we had an extremely useful half-day of the board focusing on industrial strategy work earlier this year, which I think contributed significantly to the outcomes that we had. We are also very aware, as the Secretary of State has said, that when you have got high-quality business people, both large and small businesses, on your board team, you want to make the best of them. We are immensely grateful for the input that our nonexecutive directors make to running a really effective Department.

Q47 Julie Elliott: Government support for regional development is focused on the Regional Growth Fund and Local Enterprise Partnerships. What are the new funding arrangements achieving that the old ones were not achieving?

Vince Cable: The Regional Growth Fund had, in its earlier stages, some criticism from one of your sister committees, but we now feel, particularly with the new Regional Growth Fund round 3, that we have got a very good system up and running. Your question is: how does it differ from earlier arrangements? Where it differs fundamentally is that most of the funding from the Regional Growth Fund levers in large amounts of private investment. This is not simply a question of the Government spending money; it is spending money with a very large multiplier through private investment, and it is concentrated on manufacturing, exports and activities of this kind. We now feel that the Regional Growth Fund model is a good one.

The second area where the mechanisms I think work better-though I do not have comparative experience-is in the new City Deal arrangements, which is another key way in which we are engaging with other parts of the country than London. The City Deals involve a significant amount of devolution of spending decisions and business-rate freedom, and they also bring together local councils so that they operate on a city-region basis, which I think was often missing before. The arrangements, with those two streams of funding, do work better, and overall, the Local Enterprise Partnership, although it is quite soon and it is a bit uneven, is more closely aligned with geographic realities and has more of a business input than we had before. I would say that, in all those different respects, we have got some improvement in the models.

Q48 Julie Elliott: Have you got any evidence that there is more money coming in from private investors than there was under the old system?

Vince Cable: The evidence is the evaluations that we do of the Regional Growth Fund projects. Clearly, when they make their applications, we have the estimates from the companies that we crosscheck. It will take some years to look retrospectively at how successful those projects have been. One of the key criteria that they are tested against is how much money they leverage in from the private sector.

Q49 Julie Elliott: I would be very interested if you could provide us with figures of that compared with the old system.

Vince Cable: The evidence we have given to the Public Accounts Committee does try to address that problem directly on the basis of such information we have and can give.

Q50 Julie Elliott: Could you provide us with what you do have on that?

Vince Cable: It may involve just giving you the same information the Public Accounts Committee have got, but we will certainly try to be as helpful as we can.

Q51 Julie Elliott: You have partly answered this, but how is funding targeted and how will you measure the success?

Vince Cable: There are several criteria that we use. One is value for money. There is a cost-benefit calculation. That is the main metric that is used, and if it slips behind a certain level, projects tend not to go ahead. The multiplier of private investment is the second. Then there will be a qualitative judgment, which is made initially by the review panel, which is chaired by Lord Heseltine and Lord Shipley, who will try to make assessments about the impact on the regional economy and if there is a particular need in a particular area or they may make a business judgment that this is exciting and has wider spinoff effects. But we start with quantitative measures against which the projects can be tested.

Q52 Julie Elliott: Which sorts of projects or programmes are no longer receiving support? Why are they no longer receiving support?

Vince Cable: Our early experience was that we were reluctant to channel money through intermediaries, like the banks, for example. We have some ongoing projects where we are satisfied that the banks provide additional funding that they would not otherwise have done, but that is quite difficult to assess and so we have become a bit cautious about that. There is some reluctance by the Regional Growth Fund panel to look at projects that could be construed as speculative property development. A lot of things of that kind-industrial estates, commercial propertybuilding-you can often make a case for, but there was a feeling that this is not high priority, so those kinds of projects often do not get very far. Infrastructure is clearly essential, but the Government has other mechanisms for funding infrastructure, so there are not very many infrastructure projects. When we look down the list of Regional Growth Fund round 3, which was announced provisionally a few days ago, they are mostly manufacturing projects, concentrated in regions with relatively high unemployment-but not all of them-and with a potential for job creation and exports.

Q53 Julie Elliott: The total spending under the BIS and DCLG headings will fall from £4.1 billion in 2009-10 to just £1.2 billion in 2014-15.

Vince Cable: Sorry, what was your definition of total spending?

Q54 Julie Elliott: Under the BIS and DCLG headings on this area of work.

Vince Cable: Yes, that is correct.

Q55 Julie Elliott: That is a drastic reduction in support. How do you think that is going to impact on growth in the regions?

Vince Cable: It would be nice to be able to do more, but we are operating within overall Government financing constraints, so we are endeavouring to get better value from the reduced resources that we do have. We were sceptical of whether the RDAs delivered maximum value, so we are hoping to do it in a more satisfactory way, but I have no doubt that, if we did have more money, we could use it productively.

Q56 Julie Elliott: But do you think that drastic reduction in funding will impact on growth in the regions?

Vince Cable: Not necessarily, but, other things being equal, if you have a good system of distributing capital investment, then you can do more with it. That follows. But I think what we have seen is a combination of two things; we have seen a combination of reduction in resource, which you are quite right to point to, but resources being used in a more effective way. We have to balance the outcomes.

Q57 Julie Elliott: We are talking about a 75% reduction in funding. Do you think you can carry on without any impact on growth in the regions?

Vince Cable: That is correct, but there are other things that you are not taking into account. The universities sector, for example, is not included in that; they have major impacts on their regional economies. As a result of the financial reforms in universities, a lot of universities are now investing very heavily. We now have this new scheme, which you are probably aware of, for drawing in private capital alongside investment in R and D facilities. That will have a significant impact on regions, which we are not counting in those numbers.

Q58 Julie Elliott: But not all regions have massive university sectors.

Vince Cable: Most of them have universities and, if not, good FE colleges. That is another mechanism.

Q59 Julie Elliott: What consultation took place with local authorities, local businesses and other local bodies, such as enterprise partnerships, to assess the impact of these reductions before the cuts started to be made?

Vince Cable: Given the urgency of the problem, we did not have the opportunity to go through a prolonged consultation process; we had to make big and difficult decisions and we had to make them quickly.

Q60 Julie Elliott: If you did not consult with the people who were involved on the ground, what guided those decisions?

Vince Cable: We talked to the regional development agencies about their problems before they were wound up. We got a very good mechanism for doing it. Your Committee warned us that was potentially a disastrous process, but it has been done in very good order and with minimum side effects. As a result of working very closely with the agencies, we were able to avoid difficulties. In terms of consultation more generally, the workings of the City Deals does involve very intensive consultation with heads of local government-council leaders and others-from different parties. I think we have got away from party politics. We discuss with them in detail what the leaders of those councils want to do in their areas and how to use greater freedoms and Government resources. So to answer your question directly, we had to make big, difficult decisions on spending cuts. We have made them. They had to be done quickly, but we are now introducing processes-I think City Deals is a very good example-that do involve active consultation with the people on the ground in the regions that are affected by the problem you are describing.

Q61 Julie Elliott: But the City Deals do not cover everywhere, do they?

Vince Cable: No, they do not. Those so far were the first eight, and we have now talked about potentially another group just yesterday. But certainly the large urban areas will be covered by these arrangements fairly soon.

Q62 Julie Elliott: Finally, given that BIS funding in this area is now greater than that of DCLG in the same area, why does programmes funding still sit within DCLG?

Vince Cable: Well, I think there were machinery of government changes made at an early stage, and that is where it happens to be.

Q63 Julie Elliott: Do you think that is satisfactory?

Vince Cable: In fact, there is pretty close consultation. Maybe the Permanent Secretary will explain exactly how the two Departments work together. But, yes, a machinery of government decision was made early on, and that is where it now sits.

It is not answering your question, but there was something I said earlier on I would like to correct for the record. Ann McKechin asked me about the Growth Implementation Committee, and I raided my memory very quickly and I could not recall meetings of the committee. There were in fact two, on 18 September and 22 October, so that committee is operating and has met. I felt it was a good opportunity to correct that.

Martin Donnelly: Just briefly, I will add two points. Obviously, for financial clarity-for example, on the Regional Growth Fund-we have to have one accounting officer, who is the Permanent Secretary of DCLG. But we have a joint team, who work together, prepare the bids, and analyse them, and a joint management unit, which we both sit on. We also have very close working relations on the whole cities agenda, and in our case, one of our Directors General, Bernadette Kelly, leads this work and works very closely with her opposite number in CLG. So we make sure that we are providing a seriously joined-up answer to the various issues, because ultimately all growth is local. So we have to work very closely together, and we do.

Q64 Ann McKechin: I welcome the clarification. I wonder, if that is the case and the Committee has met, if perhaps the membership list could be published.

Vince Cable: Yes. Okay.

Q65 Ann McKechin: Your written answer on 25 October seemed to suggest that was not yet available, and I presume it now is.

If I could turn to the Green Investment Bank, obviously earlier this month you got state aid clearance for the launch of the Green Investment Bank. Could you tell us when the Government is going to launch the bank officially?

Vince Cable: I think within the next few days. I have an event lined up in Scotland, where the official launch will take place.

Q66 Ann McKechin: Well, that is good news. I am sure it will be welcome. I wonder if you could also clarify for the Committee how reliant the bank will be on leveraging or cash matching from private resources.

Vince Cable: Well, there are different stages of its development, as you know, because you have followed this very closely. In the first stage, we are utilising the £3 billion pot of funding that has been allocated to it, and the Government, of course, is now passing over its powers to the fully constituted Green Investment Bank. It will seek match funding from private investors. We have had several projects already in the waste management and energy efficiency sector, and I think we have sufficient data on those to be able to give the relative contributions of the Green Investment Bank team and the private investors.

The original aspiration was that over this Parliament we would be looking at a gearing of something of the order of four or five, or something of that magnitude, but it remains to be seen how successful we are in bringing in private capital. Then, eventually, when this becomes a mature institution with borrowing powers, it will operate on different criteria.

Q67 Ann McKechin: Having spoken to a number of people in the energy industry, the point that they make, time and time again, is that they are looking for the Green Investment Bank to lead the way, not to be the bank of last resort. Obviously, I welcome the fact that there are some projects that have already been announced, but one example of where there is a lack of clarity is carbon capture. Do you foresee that this bank will be leading the way in terms of that industry?

Vince Cable: No, it has not been leading the way in that sector, because that particular process is operating through a competition that DECC is running, and they have a fund for that purpose. As I understand it, they have either agreed publicly or are on the threshold of agreeing what the shortlist should be, so that is what is driving carbon capture and storage. It is quite possible that the Green Investment Bank could be asked to participate, but it is the DECC competition that is the driver.

Q68 Ann McKechin: Could you tell the Committee in what way the bank would differ from the UK Green Investments initiative, which is already up and running.

Vince Cable: Yes. The fundamental difference is that it now has full state aid clearance. Under pre-state aid clearance, UK Green Investment Bank was highly constrained in what it could do. It had to operate on a fully commercial basis, which was what the European Commission rules demanded. It is now able to operate more flexibly.

Q69 Ann McKechin: You say that the Green Investment Bank would meet environmental directives and promote economic growth. Which of the two is the bank’s key objective, and how will it be promoted ahead of the other? Are you going to ensure objectives both at the same time?

Vince Cable: Yes. We use this cliché about the double bottom line, and it is the job of the chairman and the board to define more concretely what that means. But we are looking for good, viable projects that have an environmental good and purpose to them. It is a unique institution. We do not think there is anything of this kind anywhere else. The answer to that question will evolve, but part of the purpose of putting this legislation through Parliament was to ensure that the green purposes were embedded in law, so it is not just another bank.

Q70 Ann McKechin: Will it take cognisance of the recommendations of the Committee on Climate Change, for example, in terms of which industries it decides to invest in?

Vince Cable: Yes. Of course, that committee is quite an important influence in setting the policy and intellectual climate, and clearly it is an influence. One of the things we have been keen to ensure, however, is that although climate change rightly permeates an awful lot of environmental policy, there may well be good environmental projects that do not directly impinge on carbon reduction. Waste reduction is one of them.

Q71 Ann McKechin: Where is the public funding for the bank to come from, and will this money be allocated during the current spending review?

Vince Cable: The £3 billion that we are talking about is money that has been allocated for this current spending review. There is a profiling that has been agreed that we are trying to comply with. The aim is to use that money within the spending review, but obviously before the end of the spending review we are going to have to have sight of where it goes from there. Those are decisions that have not yet been made.

Q72 Ann McKechin: So there could be a change in the Government’s engagement with the bank in the midst of the current spending review period?

Vince Cable: There will have to be engagement on the issue of borrowing powers, because it clearly needs to plan several years ahead, but those are conversations that we have not yet had.

Q73 Paul Blomfield: May I ask a few questions about the higher education area of your brief, starting with a look at the new student loan system, its costs and the underlying assumptions that you have made as a Department in relation to them. You will be aware of the Higher Education Policy Institute report published last week, which challenged those assumptions, particularly in relation to the RAB charge, and suggested that, if they were right, the Government would be bearing an additional cost of £0.68 billion pounds in relation to the loans system. How are you going to cover that cost if they are right?

Vince Cable: We do not accept that they are right. We are in the world of forecasting, and by definition nobody is right about forecasts. We had the HEPI view put to us two years ago, when we were thinking of the current changes, so we are aware. But they are an outlier in this whole debate. We had to make a variety of assumptions when we were trying to forecast the future about a whole variety of things, including the student take-up of loans and future discount rates.

The Government’s forecasts by definition cannot be right, because we do not know about the future, but they were basically reinforced by the Institute for Fiscal Studies. They basically felt that our assumptions were as sensible as any that could be made. There were some who thought that we were being too conservative, and I think Professor Shephard at Oxford argued that we should apply a lower discount rate. Then there was HEPI, which is on the other wing, which basically argued that there would be a deficit. We are talking 10 years’ time. So nobody can be absolutely right on this, but we have cross-checked our analysis with reputable forecasters, and I think the consensus is we are pretty much in the right place.

Q74 Paul Blomfield: HEPI used your modelling system in preparing their report.

Vince Cable: But I think they used different assumptions.

Q75 Paul Blomfield: That is what I was going to come on to. Which of their assumptions, specifically, do you think were wrong?

Vince Cable: Well, I can give you a more detailed answer.

Q76 Paul Blomfield: You just told me that you think they were flawed. In which specific areas were they flawed?

Vince Cable: I think there were differences around the discount rate, the number of students and default rates. Of course, default rates in turn depend on the assumptions you make about the growth of the economy. I would need to go back to check.

Q77 Paul Blomfield: What about, for example, average graduates’ starting salaries, which was an area of dispute, and an assumption of £100,000 now being more realistically £75,000.

Martin Donnelly: That obviously reflects one’s assumptions about growth in the economy, inflation, and so on.

Q78 Paul Blomfield: So do you think that HEPI are wrong on that?

Martin Donnelly: Just going back to the point that the Secretary of State made, the assumptions that we have taken have been looked at by bodies including the IFS and the OECD, and, I think, the Office for Budget Responsibility. While there are a range of arguments around each of those, the general view is that the assumptions we have made are reasonable ones. Another one where I think we differed from HEPI was the long-term assumption that the Government borrows at an interest rate of 2.2%. Borrowing rates are currently lower than this, so you could argue that we are exaggerating the public cost of each student or you could argue that is a very prudent assumption.

There are also issues about assuming how much each student actually borrows of the total cost, and you can take different views there as well. But it is the case that our assumptions are both in the middle and have been looked at by several very serious bodies.

Vince Cable: Would it help just to add to a point I made? Let us assume for a moment that HEPI were right and we were wrong. The consequences would become apparent 10 years hence, and would be fully realised 30 years hence. Of course, all long-term government programmes suffer from that degree of uncertainty in the very, very long term. I think the impression was given a little bit by the newspaper headline on the HEPI report that, somehow, this is an immediate threat to the Government’s finances. It is nothing of the kind.

Q79 Paul Blomfield: But equally you would be concerned if it was a long-term threat to Government finances, wouldn’t you?

Vince Cable: Yes, and if the main forecasting bodies that we rely on, like the IFS, were to share the HEPI assumptions, then we would be somewhat concerned. But we are not.

Q80 Paul Blomfield: You talked about the IFS critique of the HEPI report, and their assessment of your own assumptions. Didn’t the IFS estimate that the RAB charge would be 33% whereas your assumptions are based on 30%?

Vince Cable: Do you know? Is that correct?

Martin Donnelly: I think we set the figure closer to 30%.

Q81 Paul Blomfield: The IFS said it should be 33%. So the IFS, who you were citing as endorsing your assumptions, actually said that they were wrong in that degree-not to the same extent as HEPI, but nevertheless wrong.

Vince Cable: Well, they are not right or wrong. We are dealing with a wide, wide range of possible outcomes and what our plausible assumptions were.

Martin Donnelly: Yes, and it is worth making the point that there is a roughly 10% difference at the moment, and these figures do move around. But HEPI argued that 40p of every pound loaned would never be repaid, which is very significantly different from where both we and the IFS are, given that this is not, by definition, precise.

Q82 Paul Blomfield: I think that HEPI said that the RAB charge should be set at 37%. You have assumed 30%, and the IFS has said 33%, somewhere in the middle. That does suggest that both you and HEPI are wrong. If you could, nevertheless, give us that detailed critique of the HEPI analysis that you offered, I think that would be helpful.

Vince Cable: Yes. We are certainly happy to engage in public debate on that.

Q83 Paul Blomfield: Can I move on to another area in relation to student loans, which is write-offs? In your annual report you highlight the very significant increase in the number of loans written off because of bankruptcy, from 110,000 in 2010-11 to almost 4.5 million in 2011-12. How do you assess the risk to the loan system of that huge increase, which is perhaps understandable in the current circumstances?

Vince Cable: Well, I think you may have answered your own question. The current circumstances, or recent circumstances, have been spectacularly awful.

Q84 Paul Blomfield: No, my question was: what is the risk to the loan system as a result of that?

Vince Cable: Well, there is no risk to the system in the short run. Can you explain how bankruptcy works?

Martin Donnelly: It is one of a series of adjustments that we need to make regularly to the cost on our balance sheet of these loans going forward, and I might ask Howard to say something on that.

Howard Orme: When losses are realised, they are reported in this way. So in terms of the RAB charge, there is an assumption over the long term that loans will not be repaid in certain ways: some because students will not reach the threshold over the time limit, and some because of circumstances like disability, death, and bankruptcy. So we take long-term assumptions on those, and monitor how the experience goes over time. What you are seeing is the Student Loans Company at the moment registering what is happening to these numbers at the moment, but they have been assumed in the RAB charge that has been made.

Q85 Paul Blomfield: So when you were assessing the RAB charge at 30%, you were assuming that bankruptcies were going to increase from 110,000 to 4.4 million?

Vince Cable: The other answer to your question as to whether the system is imperilled by this is that there are natural compensating factors. The fact that we have been through this terrible economic crisis has driven up bankruptcies, but it has also driven down interest rates. So you get some natural offset.

Q86 Paul Blomfield: While understandable, it seems an extraordinary change in the landscape in terms of your original modelling assumptions. Perhaps you could address that point when you come back to us on those issues.

Vince Cable: Yes.

Q87 Paul Blomfield: Can I move on to student numbers? What assessment have you made, or will you be making, of the impact of the changes in student fees, student loans and university funding on the numbers of students studying?

Vince Cable: Well, there are very detailed calculations, which I am sure we can share with you. As you know, the number of students in the current academic year is lower than expected. That is not because of lack of demand, because universities are still heavily oversubscribed; it was primarily because universities were not able to fill their places, partially as a consequence of the AAB system that we have freed up selectively, as you know. So there was a shortfall in numbers, and the short-term impact of that is that we have spent less than we thought we would.

Q88 Paul Blomfield: As a Committee, we recommended that you should hold back on the changes in the student numbers controls for a year, until the new fee system had bedded in and we had an opportunity to see the impact. You went ahead with that, but that has created what I think you would accept is an extraordinary position, where many of our universities-and indeed some of our top universities-have several hundred vacant places.

Vince Cable: Yes, it has had that negative side effect. It has had positive effects, too. Universities have been clamouring for years to have greater freedom from numbers control. Students have greater freedom of choice. Those are the positives, but you are right that it has had a negative side effect, in that some of the places are not utilised.

Q89 Paul Blomfield: How are you going to respond to that?

Vince Cable: Well, we will discuss with HEFCE-which actually administers this system-how we can make it more flexible so we do not have a recurrence of this problem. We do not know, obviously, what will happen to A grades next year. It may go in the opposite direction; we obviously do not know. We want to make the system as flexible as possible. We are moving to ABB rather than AAB, which, of course, gives greater freedom, certainly at the top grades. We do regret the negative aspects of it, but we think there are compensating positives to be taken from this experiment.

Martin Donnelly: It is perhaps worth adding that there are two other factors this year that we do not expect to recur. One is the fact that inevitably a lot of students did not choose to take deferred entry into this year from last year. That is a one-off. There was a slight demographic drop in the number of 18-year-olds, as well. So we do not expect this trend to necessarily continue.

Q90 Paul Blomfield: I will not continue that, given the time available. I wonder if I could move to another point. When we met with the Minister of State for Universities in July, we explored the issue of VAT exemption for for-profit providers in higher education. At the time, the Minister was unaware of the fact-although he subsequently confirmed it to us-that for several months, BIS, Treasury and HMRC officials had been looking at whether to extend VAT exemption to for-profit providers. Have you made an assessment of the cost of granting VAT exemption to commercial providers?

Vince Cable: Well, there has been no change of policy, but yes. Evaluations have been done of that, which I am sure we can share with you.

Martin Donnelly: Yes, I am sure we could, too.

Q91 Paul Blomfield: So you could let us have an assessment of the loss to the Exchequer of that change? Could I also ask if you have made any assessment of the cost of the precedent that that would create, in terms of other commercial providers of public services lobbying for exemption?

Martin Donnelly: That would be an issue that HMRC and Treasury would naturally be aware of in the discussions that we have had, and it would be something that they would take into account.

Q92 Paul Blomfield: Can I just also ask whether, specifically for your Department, you have made any assessment of the impact on existing colleges and universities of granting VAT exemption to commercial providers?

Martin Donnelly: I would need to get back to you on the detail of that and how it fits into our overall forecasting.

Q93 Paul Blomfield: I am assuming that, if you have been looking at this issue for several months, you would have given some consideration to the question, "If we go ahead with this policy change, as the Treasury seem to be wanting, what is the impact going to be on the existing higher education sector?"

Vince Cable: Well, that makes a whole series of jumps. We can assess the fiscal cost-that is not perfectly straightforward-but what the effect would be on the rest of the university system makes a whole series of assumptions about how the two things are linked, and that is very difficult to assess.

Q94 Paul Blomfield: But I guess the thing to do is scenario planning.

Vince Cable: I think one could assess the fiscal cost of it. There are, of course, benefits too, and the Government has been evaluating opening up to private providers. The policy has not changed.

Q95 Paul Blomfield: But very specifically-and I will conclude on this point-you have presumably done some scenario planning in terms of the sector as to what would happen if this policy change was made?

Vince Cable: Yes, it is one of a large number of potential moving parts. Yes, we certainly looked at it in detail.

Q96 Paul Blomfield: Could you share that assessment with us?

Vince Cable: Well, if there is material, we are perfectly happy to share it. I do not think there is any great secret about it. It is just whether it is in a digestible form.

Q97 Chair: I am going to bring in Mike Crockart in a moment, but an issue surrounding the impact of tuition fees on overall government funding has arisen. That is, of course, the impact of the increase in tuition fees on the consumer price index and the knock-on impact that will have on levels of future benefits, and the potential for the extra cost of that offsetting the savings of the introduction of the tuition fees in the national Exchequer. An exercise has been done by LSE and the Intergenerational Foundation, a charity, on the funding. I tabled a series of questions, and I have only had a response to one of them, and that is on the weighting of higher education in terms of the consumer price index.

I asked for the estimates of the effect of the increase in tuition fees on the level of CPI in 2013, 2014 and 2015, and was told that BIS does not make estimates of this but the OBR has some forecasts. Lastly, I asked for the estimation of the impact of higher tuition fees on the social security budget by 2016. I have not received an answer to this at all. While I appreciate it may not be within the Department’s remit to have that information to hand, I would have thought it absolutely crucial, given the importance of this policy, to at least have some evidence, or to be asking about evidence, on this issue. Can you give any clarification on it?

Vince Cable: Well, I do not quite understand what your question is driving at. As you know, Chairman, nobody pays fees in cash. In fact, the people who used to-the part-time students-will not. It is not a cash payment. There is no reason why this should figure in the price index at all. If I just explain my understanding of the problem, the way in which student fees will be paid is effectively through a form of taxation. People will pay 9p in the pound, depending on their income, which is exactly what it is at the moment.

Q98 Chair: Well, can I just enlighten you? University Tuition Fees, UK Student, has a weighting of 6.46 in 1,000, which I appreciate is only a very small part of it. But if you look at the Exchequer, then it does have a significant long-term impact. Given the figures quoted by the Intergenerational Foundation and the LSE, I would have thought that the Department would need to have done that exercise, and, if they are incorrect, to at least have the evidence to say they are.

Vince Cable: It will figure in the current measure, because of the legacy of past student loans. The terms on which past student loans have been awarded are not being changed. We have not changed the interest rate on those loans, so there should not be any impact on the current index. Since they are still paying at 9p in the pound, there should not be any impact in the medium term either. The overall burden on future graduates will be felt through the length of time over which they pay, so it may be that in 30 years’ time, there will be an issue. But I do not think it is terribly relevant to current policy, unless I have misunderstood your question.

Q99 Chair: It seems to me as if what you are saying is that there is going to be a short-term gain for long-term pain. Because, in the long term, it will be more costly.

Vince Cable: Well, clearly, if the fees on which the graduate contribution is based are higher, there is more to pay. That is certainly correct. But I think the big advantage of the policy we are pursuing is that nobody pays cash and they only pay later in life, depending on their income. We regard that as a progressive solution that does not actually, in any way, impact on the short-term cost of living.

Q100 Chair: I think you are defining it in terms of the impact on the individual, while we are looking at the figures as they impact on the national Exchequer. I think I have made my point. I would just say, since I have put a question-what estimate has been made of the impact of higher tuition fees on the social security budget by 2016?-I have not yet received an answer. I would ask to receive one. If there is to be none, then I would have thought it was to be quite an easy way of responding.

Vince Cable: No, I am sorry, Chairman. I am very happy to be helpful: I always try to provide the information you want. I am just trying to be clear what the problem is. Why should it impact on the social security budget?

Q101 Chair: Because it is linked to the consumer price index.

Vince Cable: I thought there may be another way in which it would impact, and it relates to Mr Blomfield’s question. If indeed more existing students are not able to pay because they are bankrupt, or in some other way, then clearly it does impact on the social security budget if they are out of work. So there may be something there that we need to look at.

Q102 Chair: No. I would have thought it quite simple. Higher education tuition fees are an element of the calculation that is made for the consumer price index. Social security payments are based, in part, on the consumer price index. Therefore, logically, it is likely to result in an increase in benefits in the future. Now, you have raised another issue, which is very interesting. There is a secondary cost to the Exchequer of the number of students who go bankrupt. I am not exploring that at this particular moment, but that is the issue, and I would like some response from the Department on it.

Vince Cable: Well, we will try to. To be very honest, I do not follow the logic, because, of course, fees are not paid. This is not a consumer good that people pay for. It is a long-term graduate contribution, which is very different.

Q103 Chair: I think there is a logic, and there has been quite a bit of research done into it. I would like some sort of response to my question.

Vince Cable: We will try to give you that. I will scrutinise your comments.

Q104 Mike Crockart: I have got a few questions, broadly around the topic of regulation and Red Tape Challenge. Can we start with a comment that you made about the annual report when you appeared before the Committee last year? You said that you were frustrated that you could not do more, more quickly in relation to regulations in and out. At that point, it was three regulations in and four out. Well, that seems to be the situation in this year’s annual report. Why are we not seeing more progress on this?

Vince Cable: I think there has been a fair bit of progress. I think we calculated that there is a net advantage to business of £800 million, or something of that order, as a result of the "one in, one out" system. It is quite a tricky process, but we are making headway with that, and there are some big deregulatory measures that have had an impact. The most useful one, I think, is freeing up some of the very complex audit requirements for small business that were going to be demanded as a result of European legislation. We have stopped that.

Q105 Mike Crockart: You mention the £800 million there; that is the next thing I was going to come on to. The report states that net saving to business was £23.66 million, whereas last year’s report talked about a net saving of £23.36 million, which sounds very similar. So can you confirm whether that is ongoing savings to business from last year’s regulatory changes, or are these completely new savings that are being made in this year?

Martin Donnelly: Can I give you an update? The latest figures from the Better Regulation team are that we have actually built up £130 million of net savings for business from measures taken by BIS. We expect that to rise to £180 million, which would be continuing savings, by the end of this year. So there is quite a lot that has been coming through the pipeline on the company law side, and, as the Secretary of State has mentioned, on audit exemption, and also some of the employment law review work that we have been taking forward. We are continuing to look at how we can do more in areas like manufacturing and for innovative businesses.

Q106 Mike Crockart: I am now even more confused as to what the savings are and where they come from. I mean, is this £23-point-whatever million directly related to what BIS are doing with regulations?

Martin Donnelly: That was in the annual report for BIS last year. Since then, partly because these are very lumpy changes-and we would be very happy to send you a more detailed note setting out how the figure is made up-we are now actually at £130 million, and are going towards £180 million.

Q107 Mike Crockart: Well, it would be very useful to have further information to make it clear because the comparisons between the previous year’s annual report and this annual report make it quite difficult to see exactly what the progress is, and whether there have been small or large amounts of progress. You now seem be outlining that there is a large amount of progress.

Martin Donnelly: Yes. I think one point I take away from this, more generally, is that there are areas in the report that it would be helpful to the Committee if updated before we came, so we are not just working on the report. We will do that.

Q108 Mike Crockart: I agree entirely. If we can move on, then, to the ambition stated in the annual report, which was to repeal or improve more than half of the existing 1,500 regulations considered so far, how many of those regulations are the responsibility of BIS?

Vince Cable: I cannot give you a number. The Regulatory Reform Bill that is going at the moment has embedded some of those changes. Others are going through statutory instruments. No, I cannot give you a number for BIS directly.

Martin Donnelly: We also work through the Red Tape Challenge across the entire range of regulations, whether or not they are from a particular sector and come from Department A or B. Quite often a surprising number of Departments have added regulations to different bits of business, so we try to look at them all together.

Q109 Mike Crockart: No, I understand that. Obviously, we are looking at the annual report for BIS, so we are trying to pin down what impact BIS specifically has had on the regulations within its remit. So it is all very well to talk about progress over the piece, but I am trying to pin down exactly what BIS has achieved.

Martin Donnelly: That is what the £130 million figure specifically refers to. So we do it in net cost, rather than number. We try to work out-because obviously some regulations have a much bigger impact on business than others-what the cost saving of each one will be. Those are checked independently, and that is how we come up with, as it were, our credit figure of £130 million to date.

Q110 Mike Crockart: Right. So the £130 million is directly regulations that are under BIS control?

Martin Donnelly: That is right-ones that we have been responsible for amending or removing.

Q111 Mike Crockart: I look forward to seeing the detail of that. I have two particular points, one of which I think you mentioned briefly there, which was that last year’s annual report stated the intention to "amend the Companies Act to bring small company audit rules in line with the EU minimum". Did I pick you up correctly in saying that has now been done?

Vince Cable: My understanding is it has.

Martin Donnelly: We think that will save at least £100 million a year, going forward. Again, we can give you details on that.

Q112 Mike Crockart: That is where the difference came. The major difference comes between the £23 million and the £130 million, if that in itself is bringing in £100 million.

Martin Donnelly: We think that is probably about the second most important deregulatory measure that the Government has put in place. It is very significant.

Q113 Mike Crockart: A final point that you raised in the annual report was your proposal to remove existing gold plating of the fourth EU Company Law Directive. Now, that was due to come into force on 1 October 2012. Can you confirm whether that did, in fact, happen?

Martin Donnelly: I think so, but I will confirm in writing.

Q114 Katy Clark: I want to ask specifically about regulations and requirements that relate to health and safety. Could you outline in more detail your approach in relation to this, and in particular, how you quantify the benefits when considering getting rid of a health and safety regulation. Do you just look at the very narrow cost to business, or do you look at the wider benefits of a health and safety regulation: for example, not just the financial benefits to the business, but also what the impact will be on the public purse and to society if the health and safety requirement is taken away. That is something that, for example, the European Union does when it looks at a health and safety regulation; it looks both at the cost to business, but also how much it might save, for example, the health service in bringing forward the regulation in a particular sector. Could you expand on how you are actually looking at this in relation to health and safety?

Vince Cable: Simply on the narrow methodological point, the Regulatory Policy Committee does not look at those wider impacts. It looks at the cost to business, and it is up to government in general to take those wider things into account. Regarding, for example, the issue of the smoking display ban, where there clearly are health impacts, we have to take those into account. But there is a separate estimate of the cost to business-small business-of the ban. It is a fair question, but the methodology that the Regulatory Policy Committee uses is a narrow one, and it relates to business costs.

There are a variety of initiatives that have been taken to try to deal with health and safety issues. The most recent one, and that may be what you are referring to, is that a decision was made that we need to classify industries in terms of whether they are high-risk or lowrisk, and the degree of inspection needs to reflect that risk assessment. I think the feeling was that very often low-risk sectors are subject to very intensive levels of inspection, which is not justified. We are concerned to protect the public, but to do it in a way that is as sensible as possible for small business, so we should discriminate in some way, and we have drawn up sectors that are judged to be relatively low-risk-say, retail, as opposed to fishing or construction or mining.

Q115 Katy Clark: Are there more inspections in high-risk now? For example, are there inspections without notice? Do you have surprise visits in high-risk sectors now? My understanding is that that is not happening.

Vince Cable: I think it should be. If they are high-risk businesses, and they are designated as such, then they will be subject to much closer attention. That is the policy.

Q116 Katy Clark: Would you expect there to be no-notice inspections in such high-risk sectors?

Vince Cable: Yes. That is my understanding of it, yes.

Q117 Mr Binley: Secretary of State, you know of my great interest in pubs. We have been talking about it for some time now, and the annual report highlights pub companies as a successful area in which new regulation was unnecessary, and states that BIS worked with pub companies to strengthen the existing code of practice, rather than introduce new regulation. Unfortunately, in a letter received by Jo Swinson MP, the president of the FLVA, expressed his disappointment that the Minister considered the Government’s role in regulation of pub companies to be over. What evidence have you got to show that the voluntary code of practice has brought about immediate improvements in rent, insurance, training and dilapidations?

Vince Cable: We do not have any evidence, because, disappointingly, as I understand it, that strengthened code of practice has not yet appeared or been agreed. That is a considerable disappointment.

Q118 Mr Binley: I thought it had been agreed?

Vince Cable: As I understand it, there is a code of conduct for the industry that is under negotiation but has not yet appeared. That is the complaint that I have had from people representing pubs: they were waiting to see the impact of this code of conduct and they have not seen the impact of it yet.

Q119 Mr Binley: Let me then ask you a further question. As I understand it, this Committee was intent on pushing for a regulatory code of practice. And Ministers at the time argued that they felt that a voluntary code of practice would do the job, and I thought that that code of practice was to be put into effect about the middle of last year.

Vince Cable: I think it was later than that, but nonetheless, you are quite right to point it out. I keep asking about this, because I am as concerned about it as you are, and I continue to get the same complaints, particularly about enterprise. My understanding is that there has been a lot of to-ing and fro-ing, but that the strengthened code of practice has not been agreed. It is, as you say, very disappointing that that is the case.

Q120 Mr Binley: I am surprised, and not a little shocked, and I think we need some answers quickly from your Department to know the exact situation we are in, because it was a matter that we pursued very diligently on this Committee, and it was one that we promised to monitor.

Vince Cable: You are quite right, and indeed we reassured you that it would be pursued through the voluntary route. I continue to get very negative feedback. I asked recently what progress had been made, and the answer was, "Not very much". As it happens, I am in the process of writing to the people involved in the code of practice to ask what on earth is going on.

Mr Binley: Then I am grateful, Secretary of State. I have got a couple of other questions that there is no point in asking. We will wait until we hear from you.

Q121 Chair: The whole rationale for taking the self-regulatory approach to this from the Government, after our last report, was that it could be implemented more quickly and more effectively. Now we have the Minister telling us that he is not satisfied with the progress. I must raise another issue, because it is a matter of real concern. Your Department refused a request from the Morning Advertiser, the trade magazine in the industry, to an interview with Jo Swinson with the line that that this is not an area appropriate for a BIS Minister to be interviewed on and, effectively, it was not part of her remit. Now, we have been interviewing BIS Ministers and their predecessor Departments for the last ten years on this. Can you explain why your Department is now washing its hands of it?

Vince Cable: We are not washing our hands of it.

Q122 Chair: That is the impression we are getting.

Vince Cable: We realise that there is a problem. I think the underlying rationale for going down the voluntary route was at least partly connected with the fact that you could not establish monopoly in the traditional sense. There were practices going on that were clearly unfortunate and had negative impacts on publicans, but it was not monopoly of the type that the competition authorities would normally pursue through a regulatory route. That was the reason for the voluntary approach. I follow this, because I have been asked about this in your Committee before. I was assured that a strengthened code of conduct was coming. It has not appeared. Like you, I am disappointed, and I want to find out why nothing is happening on that front.

Mr Binley: Then we have to wait for the letter, Mr Chairman. We look forward to that.

Q123 Chair: Can I just have it on the record? Can you please clearly state who is responsible for the pub industry? Is it yourself, or the Secretary of State for Communities and Local Government.

Vince Cable: I think there is an element of each. DCLG are responsible in the sense that this impacts on the cities and urban planning, and the aspect of community development. We are responsible for it in relation to consumer protection and competition policy, and it sits between the two. We do accept that we have a share of responsibility. I am not trying to wash my hands of that.

Martin Donnelly: Can I just add that we are trying to monitor how effectively the various legally binding forms of self-regulation which have been put in place in different areas, are working? The point, as the Secretary of State says, is: "If it does not feel better on the ground, what can we do about it?"

Chair: The evidence is that it is not working yet.

Q124 Mr Binley: It is not working yet because, clearly, the code has not been accepted and put into practice. That is quite simple. May I ask how quickly you might be able to be able to come back to us? I think this Committee has produced four reports on this issue over the last ten years.

Vince Cable: I was approached by a group of MPs about this a couple of weeks ago. I have undertaken, when I have had more evidence from them, to write immediately to the people involved in the code. Subject to the response, we will let you know what happens.

Q125 Mr Binley: So we are talking some weeks, rather than months.

Vince Cable: Yes.

Chair: Also in the context of the ownership of this issue, it has always been BIS and its predecessor Departments that have responded to the reports that we produce.

Q126 Katy Clark: I have a question about the Royal Mail pension scheme. We debated the second reading of the Public Service Pensions Bill yesterday and independent analysts say that those changes would reduce public sector pension values by more than onethird. However, in relation to the Royal Mail pension scheme, the Government has taken over pension liabilities of £32 billion. Could you perhaps just talk us through the approach that you are taking in relation to the Royal Mail pension scheme and how it relates to the general policy on public sector pensions?

Martin Donnelly: Howard, I think you are probably best able to explain that.

Howard Orme: Yes. The £32 billion represents 4% of overall public sector pensions, so it is very significant. However, it is coming into the management of public sector pensions; it will therefore benefit from the focus that that will give it. It is as straightforward as that. The Civil Service pension arrangements have taken over the administration for 180,000 pensioners and there are 242,000 deferred members to come. It is a big pension scheme and it will be administered that way. As I say, it represents 4% of the unfunded schemes in the public sector.

Q127 Katy Clark: So there are not really any wider implications.

Howard Orme: As far as I am aware, no.

Q128 Katy Clark: The National Audit Office recently reviewed the most recent business plan and summarised that there was no coverage of Royal Mail in the structural reform plan indicator set. Why is that?

Vince Cable: There has been a formidable improvement in performance by the Royal Mail and there is plenty of evidence of that. We have complimented them on how much progress has been made and we have acknowledged, in particular, the very constructive approach of the trade unions, who worked with changed practices to produce big increases in productivity. There is a lot of evidence.

Martin Donnelly: I believe we are now aiming to pick that up, following the NAO report, in the indicators, but as the Secretary of State said, there is a large amount of information regularly produced on the Royal Mail and its progress against the targets it needs to meet.

Q129 Katy Clark: You accept there was probably a valid criticism there and it is something that you will incorporate for the future.

Martin Donnelly: The information was available; it simply was not attached to that.

Q130 Katy Clark: But not in that place. I understand. How did you go about that selection of indicators to judge the Department’s performance? Given that you now are going to incorporate the comments from the National Audit Office, how will you determine what those indicators will be in relation to the Royal Mail?

Martin Donnelly: It is difficult to come up with one or two indicators that give the total picture, so I suspect part of the answer is to give a link when we have the one or two headlines to where there is much more information, either in the Royal Mail report and accounts or elsewhere. It is just a question of making it easier for people to get at what is going on. The information is out there, but how do we communicate it more effectively?

Q131 Katy Clark: So you are going to just simply use other work that has been done before and ensure that it is incorporated. If we are not happy with that, we will no doubt let you know.

In terms of government investment, clearly Royal Mail has had significant investment, both in terms of loans and direct payment of monies. How are you going to ensure that that money and those loans are wisely spent? As you know, there has been a lot of criticism in the past that some of the money that has gone into Royal Mail has not been wisely spent by previous managements. What guarantee do you have that the Government will get value for money? How are you going to ensure that?

Vince Cable: I, as a Minister, do not direct its investment decisions; we are very clear that, although it is currently stateowned, it is an independent corporation with highly professional management and an independent board. They are the people who set the strategy and make the investment decisions and the results of recent modernisation, including big investment decisions, have been very encouraging.

Q132 Katy Clark: But I know you are aware of the huge criticisms.

Vince Cable: I know there is an old history here. For many years the criticism was that, because of Treasury restrictions on borrowing, they did not invest enough. In recent years they have, and that is right, but it has been done on a strictly commercial basis.

Q133 Katy Clark: If you felt that the way Royal Mail is managing the business is not using the taxpayers’ money wisely, how would you intervene? You say it is an arm’s length organisation. Do you not think you have got a responsibility to intervene if you are concerned?

Vince Cable: The Government, of course, nominates members of the board and the chairman and that is how we would exercise our concerns. The shareholder executive of course ultimately holds the shares and is the shareholder in the business. Shareholder views would express themselves through board representatives whom I appoint. That does not involve directly interfering in the management; we are very pleased with the quality of the management and we want to let them get on with their job.

Martin Donnelly: The shareholder executive does have day-to-day contact with the Royal Mail at working level to ensure full transparency against the plans that we have in place to allow private capital to come into the business. As a further reassurance, we have reached state aid agreement with the European Commission about what that plan is.

Q134 Katy Clark: You clearly have got responsibility, even though you have given arm’s length control, and you will ensure that there is appropriate Government scrutiny of the work that is carried out using taxpayers’ money.

Vince Cable: Yes. It operates, as I say, though board membership and through the involvement of the shareholder executive.

Q135 Katy Clark: What do you see as the biggest financial risks relating to Royal Mail at present? What is your view on that?

Vince Cable: It is operating in a very tough commercial environment. Its traditional mail business has been declining-it has in many other countries. Electronic mail is replacing paper mail. It is a very, very severe problem that it has to cope with. On the other hand, it has done extremely well in building up its parcels business. There was a news story this morning about a big, successful contract; that is how it is building up profitability. Despite the very difficult trading environment for a mail operator, we are pleased with the management.

Q136 Katy Clark: Do you feel they have got the correct strategy to deal with the current financial risks and challenges?

Vince Cable: Yes. They have a strategy, which, as I say, is designed to try to hold up the market share as far as possible in their traditional mail business and to build parcels. A lot of that is internetbased commerce like Amazon; it is something where they have a competitive advantage and they are proceeding well with it.

Chair: We do have one or two more questions, but, in view of the lack of time, we will write to you with them. During the course of the questioning, you have undertaken to give us a variety of information on different issues. We have listed this and we will write to you, just for clarification’s sake, and await your response on it. I thank you once again for what has been a pretty marathon session, and promise you that there is probably more to come. We are seeing you informally next week; maybe we can have a general discussion on some of these issues then, but thank you once again, and we will be in correspondence with you to obtain further information and clarification on a number of points.

Prepared 6th November 2012