EEF blog

Today, EEF’s Director of Policy Steve Radley gave evidence to the Science and Technology Select Committee on its inquiry into Engineering Skills. As well as referring to EEF’s submission to the Committee earlier this year, we also used some of the key findings and data from our forthcoming report Skills for Growth: A more productive and flexible labour market to support our evidence.

The Committee’s Chair Andrew Miller MP began by asking the Panel, which also included EEF member Andrew Churchill of JJ Churchill Ltd, exactly what skills engineering companies need now and what skills they may need in the future.  Our survey data reveals that as manufacturers are finding themselves competing in global markets, they are continuously focusing on developing new products, services and processes.

As such, a third of companies expect demand for service-related skills to increase in the next three years. There were also other areas where manufacturers expect skill needs to increase more reflect their growth strategies:

• Launching new products – R&D, technical and design skills;
• Developing new services – service-related and technical skills;
• Selling into new markets – sales and marketing skills;
• Introducing new processes – project management and craft and technician skills.

Stephen Metcalfe MP briefly questioned the Panel on Apprenticeships. Manufacturers have a proven track record with Apprenticeships so it is unsurprising that our survey shows 68% of manufacturing companies offer apprenticeships, and three-quarters of those had manufacturing and engineering Apprenticeship starts in the past 12 months.

The main point we put across was that to remain globally competitive, we must raise our ambitions on Apprenticeships. To achieve this we need to focus more or Advanced and Higher Apprenticeships, which within manufacturing have not accelerated at the same rate as Intermediate Apprenticeships. (Chart 1)

Chart 1: Growth in Manufacturing and Engineering Apprenticeships over recent years

Source: The Data Service (2012)

Following questions on how to encourage further investment in Apprenticeships, we pushed for putting the employer in the driving seat, primarily through routing funding through the employer via a reduction in National Insurance Contributions (NICs). This would increase competition in the training market and drive providers to become more responsive to the needs of industry.

There was a real interest from the Committee on employers’ perspectives on University Technical Colleges. A relatively new concept, driven by Lord Baker, UTCs offer 14-19 year olds the chance to combine academic learning with vocational elements.

The development of UTCs has allowed employers and universities to work more closely together, developing a pipeline of talent in specific sectors, predominantly engineering. UTC students are taught by industry experts and there is plenty of scope for employers to be involved in developing the curriculum.  Of course the future growth of UTCs will depend on educational reform more widely – any new qualifications at Key Stage 4 for example must be compatible with UTCs if they are to survive.

There were plenty of questions from Committee members on careers advice. One of the main points we raised was the disappointment amongst employers at the Government’s decision to remove compulsory Work Experience at Key Stage 4.

Three-quarters of manufacturers currently offer work experience to young people and we would not want to see this figure decline. Not only does work experience provide young people with a taste for a career in a specific job role, it also builds a young person’s employability skills, which businesses are increasingly demanding.

A short session to say everything we need to say on skills, with us barely touching the surface on what our report will reveal next month…. 

Last week Universities Minister David Willetts announced that the Office for National Statistics was working on ways to “better count students in immigration flows”. This is likely to mean publishing student migration data separately to overall migration figures, and whilst this is welcomed it simply does not go far enough – international students should not be included in the UK's net migration figures.

Including international students in the figures sends out the message that the UK is uninviting and not an attractive place to study, despite playing host to some of the world's leading universities. 

This has long been the view of many manufacturers, and increasingly a number of MPs, with the Business, Innovation and Skills Select Committee’s recent report Overseas Students and Net Migration recommending that overseas students should not be included in net migration figures for domestic policy purposes.

Instead of scaring off potential talent from studying in the UK, we must become more welcoming. Until the Government’s reforms were introduced, non-EEA students were able to apply for a Tier 1 post-study work visa, allowing them two years in the UK to seek employment after their course ended. This allowed employers to access a wider pool of talent for highly skilled roles.

Now, following the Government's decision to abolish the route, overseas students have little option but to return to their residing country, or attempt to switch from Tier 4 and obtain a visa under Tier 2 General.

Reforms to the migration system have become so strict and rigid that international students barely stand a chance of staying in the UK after completing their studies. Only graduates who have a highly skilled job offer from a licensed sponsor under Tier 2 are able to stay and work in the UK, and bearing in mind their Tier 4 (student) visa will expire four months after the course has ended, this leaves them with little time to secure a job.

On top of this, Tier 2 is subject to even more rules and criteria, a graduate must have a job offer of at least £20,000, or more in specific occupations, and the sponsoring employer would have already been accredited by the UKBA.

Such a complex format is likely to result in the UK losing some of its best international talent to competing countries, damaging the UK’s reputation as a global leader in education.

If the Government is serious about attracting the best and brightest, then it should reintroduce the Tier 1 post-study work route.  The argument to abolish the route was that it was subject to widespread abuse; however the Government has introduced various measures to tackle such abuse.

And non-EEA students should not be included in the UK’s net migration figures, as they simply do not enter the UK permanently.

If the post-study work route is reintroduced then, at the point the migrant secures employment would be included in the figures, but only at this point and not before.

We know that the UK is facing a real skills shortage, with manufacturers in particular struggling to recruit employees with the skills they need to grow, instead of closing the talent pool, we should be opening it and we can start to achieve this by making it easier to recruit international students who can make a significant contribution to businesses and the wider economy.

Jobs. We need more of them. It’s an issue that keeps the government up at night. Various reports have it that the government is considering options for making employment laws friendlier to employers. Fewer restrictions will make it easier for businesses to justify taking on new staff.

That’s got to be a good thing and EEF has played its part through the Red Tape Challenge in suggesting candidates for reform. We'll hopefully be hearing more specifics from Vince Cable when he comes to EEF's London office on Wednesday.

But is there more to do to encourage employment beyond regulation?

Youth unemployment has cracked a million. This is a big issue of wasted resource sitting there idle – economically costly let alone the negative social impact.

Manufacturing is not going to be a source of mass youth employment. But we do hear fairly continuous noises about a lack of skilled staff available for our members to hire. Companies are always on the lookout for good staff.

Skills is one of four key policy areas we identified in our submission to the government in advance of the Autumn Statement that the government should focus on in enhancing the UK business environment.

What’s wrong with our skills system and how can we connect a large pool of potential workers with what demand is out there?

Firstly some positives.

It's good the government has signaled its deserve to growt the number of UK apprenticeships and to refocus FE training providers generally on the needs of employers.

But manufacturers continue to report difficulties in filling both apprentice and graduate vacancies with adequate foundations in maths and science.

Informing students about career opportunities in engineering and manufacturing is important to breaking the monopoly university-based education seems to have on maths and science students’ imaginations.

We must ensure a strong pipeline of interested and properly qualified young people are coming through from the secondary education system. STEM careers advice should be part of subject curricula and included in continuing professional development training for science teachers.

This is really a specific instance of a wider point about engaging the education system at the secondary level with the needs of employers.

Another important change from the employers’ perspective is clarifying the legal status of apprenticeships. This is important because the legal status has implications for what rights must be afforded to apprentices and thereby how willing employers are to taking on new apprentices.

29 November is the government's Autumn Statement where OBR forecasts will likely show grow expectations having deteriorated sharply. Addressing skills issues in the UK economy has to be part of the response.

Today’s economic data release on UK GDP growth in the third quarter showed a modest upside surprise. But the simultaneous Manufacturing PMI 28 month low doesn’t bode well for the remainder of the year.

The GDP result was ahead of most analysts’ expectations of a 0.3% rise, mainly on the back of stronger growth from business and financial services.

Manufacturing grew too; though at a modest 0.2%, which only equalled the performance of the weak second quarter. And the fourth quarter seems to have opened even more weakly with today’s 47.4 PMI reading indicating contraction in October.

Most concerning in the PMI data is the dive in the new orders reading reaching 44.

So what’s driving this?

Weakness on the domestic side of the economy is the result of well-known factors. The drag on consumption continues from high inflation, a weak housing market, and high unemployment.
The contraction in government spending seems to be showing up most clearly in terms of the number of public sector jobs with some reports suggesting the OBR’s initial forecast may be too light.

These weaknesses remain with us.

The major change since the start of the year, when manufacturing was growing strongly, is the weakening in external demand.

We have increasingly heard from manufacturers saying the continuing problems resolving the eurozone debt crisis were causing firms, particularly SMEs, to hold off investment and recruitment.
What today’s PMI suggests is that the uncertainty and doubt on the strength of future demand that the crisis has created is now spilling into customers’ orders. Worryingly this seems to be impacting markets both within and outside Europe.

As concerning as this is, we still expect growth in the sector to return particularly as demand from emerging markets strengthens. For example, though coming from a low base, quarterly goods exports to China have increased 16% in the 3 months to August 2011 compared with the 3 months to August 2010. These are growing markets.

In the medium term manufacturing is still at the heart of an economy characterised by a greater reliance on trade and investment as sources of growth.

But what today underlines for us is that clearly growth cannot be taken for granted. Europe still accounts for half our exports. And the seriousness of the debt crisis is reaching much further afield.
For this reason we consider more than ever the government must use its Autumn Statement to provide a much stronger focus on growth.

The government cannot decisively change the situation in Europe but it can offset manufacturers’ caution regarding investment by introducing 100% capital allowances for two years.

The government can also match its action with its rhetoric by getting serious about growth enhancing policy reform, especially in terms of reducing the burden of taxation and regulation and increasing the flow of finance and skilled workers - see our blogs for more detailed suggestions.

Ahead of the Chancellor’s Autumn Statement we are blogging about EEF’s recommendations for boosting growth.

As the global economic outlook remains uncertain, it is crucial that the government dismantles the biggest barriers to growth. Yesterday Andrew discussed critical changes to the tax framework, and today I will be focusing on what the government can do to ensure companies have access to the skilled employees they need to grow. Look out later in the week for blogs on access to finance and regulation.

Why do we need to focus on skills?

EEF’s recent Flexible Workplaces survey showed that nearly half of the companies were interested in recruiting an apprentice over the next year and almost 30% had considered taking on new engineering graduates. However, manufacturers continue to report difficulties in filling both apprentice and graduate vacancies with adequate foundations in maths and science.

In fact, in EEF’s Shape of British Industry survey we found that a lack of skills is one of the most significant barriers to growth that manufacturers face.

Recent evidence, such as the UK’s poor productivity performance, suggests that the recession has had a negative impact on the UK’s skills base. In the short-term action must be taken to remove barriers companies face in taking on new apprentices, and over the medium-term there is a need to ensure a steady stream of STEM-qualified school and university graduates.

What are we recommending?

Firstly government should clarify the legal status of apprenticeships.

The government’s continued commitment to growing the Apprenticeship programme has been welcome. A positive direction of travel has been set and we urge government to continue along this path.

However, barriers to recruiting apprentices remain. In particular, there are concerns around the on going lack of clarity about the ‘prescribed form’ a written apprenticeship agreement must take from an employment law perspective.
Steps must be taken to resolve this lack of clarity as soon as possible, so as not to run the risk of this issue inhibiting employers from taking on apprentices.
 
Secondly, STEM careers advice should be part of subject curricula and included in continuing professional development training for science teachers

The Department for Business’ ambition to grow the number of apprentices is positive, but it will be undermined if action is not taken to repair the pipeline of young people studying relevant subjects at ages 14-19 years.

There are a number of helpful initiatives in train, such as additional funding to recruit STEM teachers and funding to increase the University Technical College network, but  there are long-standing issues with the careers advice that is made available in schools. 

The current Education and Skills Growth Review project must start to connect the 14-19 years agenda in schools with the goal of increasing the number of students with the qualifications for a career in industry. This could be done by:

• Making STEM careers advice part of both CPD for science teachers and subject curricula.
• Providing a minimum standard of careers advice on the entire range of employment and learning options available. Including ensuring vocational education and progression routes are given equal billing in careers guidance. 

Anthony Hilton’s Evening Standard article, Let’s get real about manufacturing, suggests politicians – and the public – need to realise manufacturing cannot deliver the rebalancing the economy so desperately needs. Hilton claims the real rebalancing we need is a shift away from debt-fuelled consumption towards savings and investment.

While there is certainly truth in the need for a reappraisal of our debt-fuelled model of growth of the past decade, Hilton misses some important elements where manufacturing is very important.

Firstly exports. It is true that the UK, along with many other developed economies is going through a painful but necessary retrenchment in private consumption and government spending as people and governments learn to live within their means.

But this is not true for the world as a whole. Indeed there are parts of the world where consumption looks set to boom as aspiring and increasingly affluent middle classes emerge in developing economies like China and India.

This is a real opportunity for the UK. If we can export more goods and services to parts of the world that are looking to consume more, we can help drive our own economic growth. This is a key part of the rebalancing story.

So who does the exporting in the UK economy? Manufacturers punch way above their weight. 48% of total UK exports in 2010 came from the manufacturing sector. And we are seeing growth. Goods exports to China in 2011q1 were up 26% over 2010q1. This is admittedly off a small base but shows there is large potential.

Over a longer timeframe what drives an economy’s long run growth potential? Expansion of its technological frontier through investment in innovation.

How does manufacturing look here? Well manufacturing accounted for 71% of UK business R&D in 2008.

Finally what about Hilton’s warning to politicians not to devote ‘too much time to the pursuit of the impossible’?

Well our competitors are showing us what’s possible. Germany is booming on the back of its exports to China where it has a stronger foothold than the UK.

Our competitors take seriously the need to create the right business environment for manufacturing to succeed. It isn’t about ‘perversely damag[ing] those areas where we are competitive’.

It’s about our tax system reflecting the realities of modern capital investment to allow our manufacturers to keep reinvesting in modern technology.

It’s about making sure our world class financial sector actually supports the real economy as well as the inter-bank trade so that SMEs aren’t citing access to finance as a barrier to growth.

And it’s about having a demand-led skills system that delivers what the economy needs and produces a consistent pipeline of skilled young people.

Even if you support Hilton’s premise, it’s hard to see how addressing these areas would distort the economy. But it would mean getting real about manufacturing.

Over the weekend, the Prime Minister committed the government to "taking on the enemies of enterprise":

"...for over a decade in this country the enemies of enterprise have had their way.
 
Taxing.  Regulating.  Smothering. Crushing.  Getting in the way.

...

So I can announce today that we are taking on the enemies of enterprise.
 
The bureaucrats in government departments who concoct those ridiculous rules and regulations...The town hall officials who take forever with those planning decisions...The public sector procurement managers who think that the answer to everything is a big contract....
 
There's only one strategy for growth we can have now...

...and that is rolling up our sleeves and doing everything possible to make it easier for people to start a business and to grow a businesses.

While the wags may have focused on the alliterative powers of the PM's speech writer, we support the PM's focus on doing everything to make it easier for people to start and to grow a business in the UK.

That's why we've put together a Manufacturers' Most Wanted - the top ten 'Enemies of Enterprise' for manufacturers planning to grow over the next 5-10 years.

As we said yesterday, the government can't take growth for granted - not all growth is equal and it doesn't have to happen in the UK.

If the PM lives up to his words and tackles these 'Enemies of Enterprise', he can ensure the UK captures all the benefits - the jobs, the investment and the exports - that the right type of long-term, balanced growth in manufactring can generate.

1.        Lower Capital Allowances: Inefficiently taxing investment in the UK.
The UK’s capital allowance regime is inefficient, outdated and uncompetitive, and the government’s plans to lower the level of allowances from 20% will add to the cost of investing in technology and growth in the UK.

2.        Tax Complexity & Uncertainty: Raising risks to long-term investments in the UK.
The government’s departures from its ‘New Approach to Tax Policy Making’, such as the decision to retain revenues from the Carbon Reduction Commitment, have unnecessarily increased uncertainty for firms making long-term investment decisions.

3.        The Carbon Reduction Commitment: Unnecessarily & inefficiently taxing production in the UK.
Combined with the carbon floor price and the CCL, the CRC provides triple taxation of carbon, inefficiently raising the cost of producing in the UK.

4.        The Climate Change Levy: Taxing electricity consumption at 10x EU minimum.
The EU requires the UK to have the CCL, but the UK has unilaterally chosen to impose a levy 10 times the EU minimum.

5.        The Lack of Competition in Lending: Entrenching a risk-averse approach to lending to UK manufacturers.
Not enough competition means it’s harder for growing firms to secure the loans they need on reasonable terms and tougher to switch providers when service standards aren’t up to scratch.

6.        The T&C’s Attached to Bank Lending: Capping the flow of finance to growing UK manufacturers.
From personal guarantees to impossible covenants, the range of T&Cs attached to lending places a cap on manufacturers’ ability – and willingness – to invest in the UK.  

7.        Inadequate Impact Assessments: Consistently underestimating the burden of red tape on UK manufacturing.
Poor Impact Assessments – such as for the Default Retirement Age and the Carbon Floor Price – fail to accurately assess the additional and cumulative impact to business of UK and EU regulations. These assessments need to improve if the government is the scale of the barriers to private sector growth.

8.        The Default Retirement Age: Reducing labour market flexibility.
Rapid introduction leaves firms scrambling to comply with red tape and complicates plans to manage workforce skills.

9.        10 Years of Tinkering with Apprenticeships: Making apprenticeships and funding unstable.
The lack of stable funding and overuse of centrally-planned targets have made good-quality apprenticeships harder to come by for both students and manufacturers.

10.    Failure to Deliver STEM Skills in Schools: Shrinking the future workforce of manufacturing.
Without a solid foundation in STEM skills, students are less likely to have the skills needed to begin an apprenticeship, pursue an engineering degree or even seek a career in manufacturing.

 

In 2010, in his ‘emergency budget’, George Osborne boldly set out the coalition’s plans for eliminating the structural deficit over the course of the parliament.

This fiscal plan, though tough, gave necessary signals to the market that the deficit would be reined in and removed a key source of uncertainty.

But now it is 2011 and the new challenge to the government is supporting growth - and that's what we need from Budget 2011. The Manufacturer runs a good summary piece on our submission.

2011 is the year the public sector cuts really start to bite and where private sector growth must take up the slack.

Just as we needed a Fiscal Mandate in 2010, in 2011, we now need a Growth Mandate. EEF's CE, Terry Scuoler outlines the Growth Mandate in today's Telegraph. It will signal that the government is serious about our business environment and helping the private sector deliver the growth we need.

The reality is that we need to see this commitment because manufacturers have a choice on where to invest and the smart money is on investing in an economy that offers a business environment that can compete with the best in the world. We need that economy to be the UK.

The Growth Mandate would set out priority areas for growth that the government would address and against which it will be measured. Like the Fiscal Mandate, the Growth Mandate should span the lifetime of a parliament. As the FT picks up we think each subsequent Budget and policy announcement showing further incremental progress.

This multi-year view must be taken. The fiscal mandate cannot be threatened so a big bang approach is not viable. But the barriers to growth must gradually and consistently be dismantled.

And like the fiscal mandate a long term view on the growth mandate will deliver a confidence dividend to businesses who will see the business environment progressively improving.

Each Budget should therefore report, relative to the last budget on the following measures:

• The change in total tax costs faced by businesses;
• Estimates of the net change in bank and non-bank external finance to non-financial companies;
• The change in total climate and environment policy costs faced by businesses;
• All new and withdrawn regulations, and the change in the total cost of all regulation;
• The change in the proportion of companies facing skills shortage and hard-to-fill vacancies; and
• The change in apprenticeship starts at each level.

The challenge is that this holds the government to account for delivering consistent progress.

But a growth mandate isn’t a replacement for action at Budget 2011. Instead, Budget 2011 offers the first opportunity for the government to take small steps forward to support growth – small steps that point to large ambitions.

We see four key areas, mentioned in the Independent, where progress needs to be shown:

- Tax;
- Access to finance;
- Skills; and
- Regulation.

On tax we need the government to appreciate that firms make decisions based on the basket of taxes they face, not just the headline rate. We need reform on the R&D tax credit and capital allowances that properly account for the costs manufacturers face. The environmental tax burden needs to be reduced. Any support we give for a Carbon Tax is conditional on reductions in other energy taxes.

Finance remains a problem for firms post crisis. We need the Independent Commission on Banking to deliver measures that not only make the banking system safer but also increase competition – because growing firms often get their first lending deals secured through banks looking to enter the market. We also need more alternative sources of finance – both non-bank debt and venture capital, critical funding for firms that aren’t ready for bank debt.

Future funding and demand for 14-19 diplomas needs to be reviewed with the aim of increasing support and improving delivery. And the government should introduce a pilot initiative through the Growth & Innovation Fund to support SME collaboration on industry placements

On regulation the government needs to match its rhetoric with action by reviewing the cumulative impact of thresholds for regulation and commit to further action on reform as appropriate. As scope for simplification of individual regulations has largely been exhausted, commitment to structural reform of entire regulatory domains is needed

All these examples provide initial opportunities for government action to support growth.

In 2011, George Osborne will deliver his second budget. We believe his challenge is to set the Growth Mandate for a private sector-led recovery.

As we continue to mark Manufacturing Week with our we ♥ manufacturing campaign, the Chairman of the Commons Business Select Committee, Peter Luff MP, has written a very positive article on the importance of manufacturing, in which he argues:

"[We should] stop talking manufacturing down.  I get more than a little irritated when politicians and journalists lazily talk of the decline of manufacturing. Yes, I know manufacturing’s share of GDP has shrunk, but in absolute terms we are making more things than ever.  We are the sixth largest manufacturing nation on the planet. We are number two in the world in aerospace. We are number two in the world for life sciences. We are number one in the world in motorsport – and that’s a huge and highly specialised industry employing thousands of engineers. We have the second largest premium car industry in the world. And we have a lot of more traditional industries too – chemicals, metals, bricks and so on that can still flourish in a globalised carbon-conscious economy.

Readers from outside the world of skills policy (a confusing place of shifting sands, jungles of tangled bureacracy and constantly mutating acroynyms) may be forgiven for not knowing that it is currently National Apprenticeship Week.

The initiative is being led by the new National Apprenticeship Service (NAS), one of the new bodies which along with the SFA and YPLA is replacing the LSC (do keep up).

Apprenticeships are hugely valued by employers, as an establilshed model for high-quality work-based training, and it is reassuring that there is a degree of cross-party support for them. 

But the squeeze on public spending presents challenges, and the case for apprenticeships (including those for post-19 learners) needs to keep being made.  As I have said in an article for Personnel Today a long-term outlook is essential if we are to guarantee that apprenticeships are valued for life, not just for this one week.