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Insights into UK manufacturing

Developing an industrial strategy for the UK

Andrew Johnson February 29, 2012 15:34

On Monday the IPPR hosted an event where Vince Cable spoke about his thoughts on ‘an industrial strategy for the UK’.

This was very much in the mould of thoughts rather than an actual set of policies.

In essence, so far, industrial policy for Cable seems to mean:

• A selection of sectors with good future prospects or existing UK strength;
• ‘Technology Policy’;
• Better procurement practice.

But before hares are sent running, it’s worth peering underneath each of these to see what they actually mean in practice.

A selection of sectors may scare some people off with memories of failed policies in years gone by, most commonly grouped under the heading ‘picking winners’.

To be clear, I don’t think anyone talking about industrial policy means bureaucrats picking out individual companies to receive government funds.

At the most it means picking sectors that ‘go with the grain of the market’ and even then there seems to be relatively little implication for the allocation of government resources.

So on Monday for example Cable talked glowingly of the automotive sector with the Automotive Council as something he saw as a ‘good model’. The Council allows the sector to communicate to government its policy frustrations and priorities for reform e.g. improving the supply of skilled apprentices – but it’s not a receptacle for government slush.

‘Technology policy’ may mean coin for the TSB. Last time I checked this is circa £300 million per annum. A one off £125 million for ‘supply chains’ seems headed its way this year too. Compare that with total business investment of about £110 billion in 2011 and you can see the sums aren't staggering even if they were tripled for argument's sake.

And in financially straitened times tripling doesn't seem that likely.

But perhaps there is another aspect to technology policy that I think Cable favours. And that’s its ability to transcend the Parliamentary cycle and give certainty of support to entrepreneurs and investors looking to develop ideas and technology into marketable business returns.

It seems we may already be on safe ground here - the Coalition hasn't taken an axe to the TSB it inherited from Labour and indeed with the demise of the RDAs it seems to have picked up responsibility (although given its small scale we need to be careful not to ruin what the TSB does well by swamping it with extra activity).

The last area is procurement where recent controversies following large scale government purchases have got a lot of people asking whether we’re mugging ourselves a bit compared with other countries on the continent i.e. the French and Germans seem to give more/all their government contracts to nationally owned companies.

The idea here is that perhaps the UK government needs to be taking into account a fuller range of costs and benefits than it currently does it – for example the impact on UK industrial supply chains. Maybe not a bad idea you might think.

But almost immediately after saying this, Vince Cable qualified his statement by stressing there would be a tension with securing the best price on procurement for the UK taxpayer. That leaves it pretty open as to what the net effect of a new approach might be.

So in summary, I’m not sure we’re much clearer on what industrial policy means in the UK today or how much different it looks in practice from what already happens.

Cable talks SME lending in solo show at BIS Select Committee

Andrew Johnson June 10, 2011 15:24

This week saw Business Secretary Vince Cable turn up to the BIS Select Committee on Wednesday to answer questions on bank lending to SMEs.

His colleague from 1 Horse Guards Road, the Chancellor of the Exchequer, was invited too. But George Osborne politely declined, a move that seemed to frustrate committee chair, Adrian Bailey.

Bailey suggested Osborne was the real organ-grinder to Cable’s monkey when it came to the banks, meaning a Cable-only appearance was more of a side-show than the main event.

Cable calmly deflected criticism of Osborne’s no-show, suggesting the two had distinct – but related – responsibilities – and in any case everyone’s calling the same tune. And with that the meeting turned to matters of substance.

While Cable didn’t come out with a whole lot that was new, he did raise a couple of interesting points.

Firstly, Cable repeatedly drew attention to the non-transparency from the big banks – with the exception of Lloyds and Santander – as to how they were linking CEO pay to SME bank lending.

This pay-link was a commitment under the Merlin agreement on bank lending reached between the banks and the government in February.

In Cable’s view, incentives of this nature were key to changing the internal culture of banks, which needed addressing in his view because the decline in ‘relationship-based banking’ was a major drag on lending to SMEs. Cable repeatedly came back to not knowing how the banks were applying their incentives – but that he really wanted to know. That’s the first inkling of any kind of a challenge to what the banks are doing from the government in a few months.

The second interesting point Cable made was with respect to competition.

Cable said that the Cruickshank report of 2000, which noted that the SME lending market was uncompetitive and high cost, still stood.

If he thinks that’s the current situation it implies he has in mind a new landscape that is characterised by more competitive SME lending and lower cost, linking, one would think, to the ICB’s Sir John Vickers’ call for additional branches of Lloyds to be sold.

Again this seems somewhat at odds with the banks, which themselves were represented at the Treasury Select Committee later the same day (albeit to discuss the ICB’s recommendations not SME lending).

HSBC’s Douglass Flint said a break-up of RBS or further sell off of Lloyds’ branches was not really the way to drive competition in SME lending. Customers will make their choices of institution based on the perception of a bank’s strength, possibly driven by brands.

And Lloyds’ Antonio Horta-Orsorio has, not surprisingly, come out strongly against extending the sale of Lloyds’ branches beyond the currently agreed 600.

It would have been interesting to have George Osborne’s take on it given City A.M.’s comment this week that HM Treasury and Lloyds seems to be ploughing ahead with selling just the 600 branches, which apparently will make it hard to add in more branches later.

So an interesting little appearance from Cable that shows despite relatively modest steps to date, the government is still thinking hard about SME lending and wants to see more from the banking sector on how it’s going to improve.

Business Growth Fund launch - now we need to see access to finance improve

Andrew Johnson May 19, 2011 09:39

Today in Birmingham the BBA Taskforce banks are launching the Business Growth Fund (BGF), providing equity investments for growing SMEs with turnovers of £10-£100 million, looking for £2-10 million.

For the avoidance of doubt this is the banks’ fund, which they committed to as part of their Taskforce commitments in October. The Merlin agreement in February bumped it up from £1.5 billion to £2.5 billion (viz Cable on the radio this morning not a representative of the banks) but there is no government money in here, not even the £50 million previously set aside for the idea that preceded the BGF, the Growth Capital Fund.

We’ve welcomed the intent to address the growth capital gap, identified most recently in the 2009 Rowlands Review, that is holding back some promising UK companies from growing.

Even though this is funded by the banks, it does go towards supporting an increase in sources of finance outside of traditional bank lending – especially important for fast growing companies where bank lending is not appropriate.

This is an area where we have previously called for progress. And we’re further encouraged by positive noises about the BGF’s board including people with real business (even manufacturing!) expertise, again something we’ve been looking for in the financial sector.

However, the launch of the fund again highlights the limited progress being made in increasing the provision of mezzanine debt finance that the Rowlands Review recommended as the best way to address the growth capital gap.

This is important because often growing SMEs have an aversion to giving up an equity stake in their business and the control that goes with that. The BGF will take a seat on the board in the companies it invests in with stakes ranging from 10-50%.

How much this impedes the progress of the Business Growth Fund i.e. by discouraging take up will need to be closely monitored.

With the launch of the BGF all 17 of the Taskforce banks’ commitments set out in October are underway. And of course we have the government’s ‘Project Merlin’ agreement with the banks to increase lending to UK businesses.

However, signs of an improving landscape, particularly for SMEs have been slow to emerge following the financial crisis.

So now we get to the point of all this – improving access to finance. We need to see it happen – and sooner rather than later. And we need to start hearing from the government what that improvement looks like and by when.

The Prime Minister said on Tuesday that Merlin was very much his. While I couldn’t follow his logic on gross v net lending targets, I do agree with him that, so far, results in lending trends have been disappointing. Cable said this morning there's PwC analysis out on Monday looking at performance so far, my hunch is that this too will disappoint.

However, the PM believes the performance of banks needs to judged over the full year of the agreement not off partial data. Fair enough.

But the clock is nevertheless ticking for the actions of both the banks and the government to deliver results. And the benchmark isn't some number on gross lending, which could turn out meaningless if net lending is withdrawn from the economy. The benchmark is meeting the government’s own ambition set out in the Plan for Growth to see ‘more finance for start ups and business expansion’ and inadequate access to finance no longer holding back growth.

With the actions announced so far we’re hopeful of seeing access to finance improve but progress is far from guaranteed.

We need to be thinking now about what more could be done if present measures prove insufficient. Growing companies looking for credit and the UK recovery more generally cannot afford to wait.

Green Investment Bank bickering misses the point

Andrew Johnson May 17, 2011 11:26

Today’s FT reports that Energy Secretary Chris Huhne and Business Secretary Vince Cable are at loggerheads over the mandate for the GIB.

Apparently Cable wants it to stick to solar, wind farms, and energy efficiency. Huhne wants the bank to go further and support newer technologies in wave and tidal power.

What both seem to miss out is the opportunity for the GIB to support low carbon/green manufacturing and decarbonisation of manufacturing processes.

With the government announcing in March the GIB won’t be able to borrow until 2015, does it really make sense to focus on energy infrastructure, which necessarily will require very large investments? Until it can borrow, the GIB will be restricted to its £1 billion in funding (+ asset sales at some point) and whatever it can lever in from the private sector in co-investment.

If you buy the Green Investment Bank Commission’s analysis of the energy infrastructure investment deficit out to 2025, the investment need is in the 10s if not 100s of £ billions.

On the other hand, the opportunities created by climate change are leading many manufacturers to look at developing innovative green products in the UK. Like many new innovative manufacturers, low carbon manufacturers often struggle to access the finance they need to help their business grow through standard financial sources.

So by having a mandate that includes supporting low carbon manufacturing, the GIB would help these firms develop – and that seems a more realistic prospect in the short term with restricted funding than making an impression on our energy infrastructure.

Decarbonisation is a further opportunity missed. Making their processes less carbon intensive would be more attractive to UK manufacturers if this was backed by the GIB.

It’s a missed opportunity that particularly sticks in the craw given Huhne’s 4th carbon budget, out today, also hits UK manufacturers over the head and sticks out our neck on climate policy even further from our European friends (who in turn are well out of line with the rest of the world).

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