EEF blog

The great aviation debate is gathering pace. All eyes are moving to the Davies Commission, the independent inquiry set up to bottom out the UK’s airport capacity needs and how best to meet them.
 
The major airports are beginning to publicise their pitches to the Commission. Last week it was Birmingham’s turn, today it’s Heathrow’s. But amidst the debate and wall-to-wall coverage of the issue, there is an important angle that all too often tends to get neglected - airfreight.

Focusing on the passenger dimension is understandable. It’s the main of focus most airports and airlines. And air travel is an experience known to many, making the issue more readily apparent to the public at large.  

But even a cursory look at some of the statistics quickly brings into focus the vital importance of airfreight to our economy. Nearly 40% of the UK’s exports of goods and commodities by value are air freighted. Whilst Heathrow is the largest UK cargo port by value for non EU trade.

This makes airfreight a crucial enabler for an export-intensive sector like manufacturing and export-led growth in general. It’s our main link to the fastest growing parts of the global marketplace. This importance is underlined by a number of findings in EEF’s recent transport survey.

The majority of manufacturers say that aviation infrastructure is important or critical to sending and receiving goods and raw materials. Amongst the most outward-looking firms, those for whom exports account for more than half of turnover, over 70% cite it as critical or important.

It’s also clear that the current state of the UK’s aviation capacity is causing manufacturers problems. And it is hitting export-intensive firms the hardest. Amongst companies generating more than 75% of sales from exports, more than 40% of firms report experiencing significant delays in receiving goods from suppliers and sending orders to customers as a result.

Intriguingly, there is a suggestion that manufacturers in South East England, where the airport capacity crunch is most acute, are also being hit especially hard by this issue. Firms in the region are more than twice as likely to report a significant increase in operating costs due to the state of the UK’s aviation infrastructure.

So here at EEF we are looking for the Davies Commission to go beyond the narrow confines of the current public debate and pay airfreight the attention its importance to the economy deserves.

The need for a more strategic, less political, approach to major infrastructure decisions is gaining support.  Sir John Armitt is carrying out a review of the issue for the Opposition whilst the Government has announced that it is looking into making more use of independent expertise in shaping infrastructure policy. 

Those calling for a new approach point to a long track record of damaging prevarication and policy reversals on issues like airport capacity and nuclear power. That the UK too often tends to ‘muddle through’ rather than invest strategically and consistently for the long-term. EEF is in that camp.

From a manufacturing perspective, quality infrastructure in areas like transport, energy and communications underpins the ability to do business and compete in an increasingly globalised world. It enables firms to source raw materials and components, fuel industrial processes, get products to market and internationalise their operations.

At the heart of the problem is the ability to make and stick to decisions on long-term issues. For a number of years, the UK has repeatedly struggled to forge and sustain a political consensus on issues like airport capacity or investing in our roads. EEF believes an independent infrastructure commission, along the lines being considered by the Armitt Review, could help overcome this issue.

Such a body could institutionalise the benefits of independent analysis and an apolitical perspective that commissions can bring to bear on complex and long-term issues. The Turner Commission, for example, has helped forge a political consensus on pensions’ policy. However, for such a body to be acceptable and effective, two key criteria would need to be met.

First, the new body would need to be strictly advisory, with decisions remaining firmly with politicians. Major infrastructure decisions often involve getting the balance right between competing objectives, such as trade-offs between economic and environmental considerations.  A lack of legitimacy would hinder rather than help build and sustain a stable approach to controversial issues.   

Second, the commission would have to have the right of initiative. It would be hamstrung from tackling politically controversial but pressing issues were it only able to deliver advice at the request of government on an agenda set by the government. To be effective, it would need the power to initiate inquiries into subjects of its own choosing at a time of its own choosing.

Last week we published the findings of our first major survey on transport issues. There was a clear message from manufacturers on aviation policy. Air links underpin export-led growth, but the UK’s infrastructure needs investment to remain attractive to exporters.

The international connectivity provided by air links is vital to exports and manufacturing accounts for half of UK exports. Outward-looking manufacturers place a premium on quality aviation infrastructure. The majority of manufacturers for whom exports account for more than half of turnover say that aviation infrastructure is critical to their business. It’s easy to understand why.

First, air freight carries 40% of the UK’s exports of goods and commodities by value. It is particularly important for high-value, low weight, products in growth markets such as optical, electronic and medical equipment. 

Second, our survey provides clear evidence that the more a manufacturing business exports, the more important aviation infrastructure is to growth-related activities like identifying new business opportunities, deciding where to invest and building relationships with customers.

We need to give these export-intensive businesses every reason to locate and expand in the UK. And world-class air links is a key consideration for them. Unfortunately, the current state of the UK’s aviation infrastructure is acting as a barrier to their operations and growth plans.

Three-quarters view it as an impediment to building and sustaining relationships with customers, whilst more than half believe it gets in the way of managing their supply chains and moving their products. Crucially, more than a third see it as a barrier to investing in the UK.

So it is vital that the Airports Commission, the independent body established to look at the UK’s capacity needs, takes full account of the importance of aviation to the UK’s long-term growth prospects and the government’s target to double the nation’s exports to £1tn by 2020.

EEF will be making the case loud and clear.

EEF’s first transport survey shows that the UK’s stretched infrastructure risks undermining efforts to rebalance the economy and hit the government’s target to double exports to £1tn a year by 2020. We urgently need to take the politics out of infrastructure, reassess our investment priorities and be bolder on the big issues like airport capacity and funding our road network.

Never has investment in infrastructure been more important. With the UK stagnating and global competition intensifying, investing in the nation’s transport network will give the economy a shot in the arm today and help lay the foundations for our competitiveness tomorrow. Quality infrastructure lowers the cost of doing business, helps attract inward investment and provides access to international markets.

The road network is the backbone of the economy, but it has been neglected. Four-fifths of manufacturers identify it as business-critical. From moving goods and raw materials to accessing labour and running a lean production model, roads underpin their ability to do business.

But high levels of congestion on key arteries and the poor maintenance of many local roads are adversely impacting operations. More than half of firms report significantly increased operating costs and nearly a third a loss of productivity as a result.

Aviation helps connect the UK to the global marketplace. This makes it crucial to an export-intensive sector with a significant proportion of foreign ownership like manufacturing. So we must invest in airport capacity where it is needed to ensure that the UK can continue to compete for overseas business and attract inward investment.

Three-quarters of export-intensive manufacturers identify aviation infrastructure as important to identifying new business opportunities. Half of foreign-owned firms say it is a key factor in deciding where to invest.

Getting transport policy behind efforts to grow the economy means tackling some long-standing issues. Chief amongst them are political prevarication, skewed investment priorities and a lack of ambition.

Step one is avoiding the endless political prevarication and policy reversals that dog major infrastructure issues. Policy must be placed on a more strategic footing by establishing an independent infrastructure commission. An independent and apolitical body tasked with identifying the nation’s long-term needs would help establish, forge and sustain a political consensus on infrastructure major issues.

Step two is getting our investment priorities right. A greater share of public spending on transport infrastructure should be allocated to roads and targeted at projects that provide a significant and timely boost. These include maintenance and bringing forward upgrades to heavily congested arteries that provide access to international gateways such as major ports.

Step three is being bolder and acting faster. In many areas of transport infrastructure, the scale of investment required and the consequences of failing to deliver are significant. All options for funding investment in the road network, including road pricing, should be considered. The timetable for the independent commission set up to look into airport capacity must be accelerated. A final report this side of the next election is essential to giving the next government a clear mandate for taking forward its favoured option.

In EEF’s opinion, there is a strong case for allowing investment in additional runway capacity at Heathrow - it is the most viable way to maintain the UK’s status as a global aviation hub. Much of the infrastructure and transport links are already in place, making it easier to fund without recourse to the hard-pressed taxpayer than construction of a brand new airport.

The latest data on industrial electricity prices make grim reading for UK manufacturing. This makes it all the more troubling that the government announced yesterday that it expects its green policies to ratchet prices up significantly over the coming years.

Official statistics released today show a widening gap between UK and EU industrial electricity prices.  In the second half of last year, medium-sized firms were paying 11% more than the EU average, up from a 3% premium in the previous six months.

The competitiveness gap for the UK’s largest industrial consumers is even more alarming, doubling from 15% in the first half of last year to 30% in the second.

Looking further afield, industrial electricity prices in the UK are now roughly double those in the US.

If the situation today wasn’t bad enough, the government announced yesterday that it expects its policies will be pushing up business electricity prices by 50% in 2020 and by 70% in 2030. This sends the worst possible message at the worst possible time.

With the economy continuing to flat-line, we urgently need businesses to invest, grow and create jobs. Yet for manufacturers deciding where to make their next investment, the direction that electricity prices are going in can only weaken the case for doing it in the UK.

In a recent survey of our members, a third said that more competitive energy prices were among the top three things that would make the UK a more attractive place to invest.

To avoid stymieing future investment, the government urgently needs to get a better grip on spiralling policy costs. Over the past 18 months, there have been some encouraging signs that the affordability and competitiveness of energy prices is being taken more seriously. The commitment to compensate the most energy intensive industries for some policy costs is an example.  But there is clearly much more work to be done.

The place to start is taking a long, hard look at policies like the ‘carbon price floor’, a steeply rising and unilateral tax on fossil fuel generation that comes into effect next week. Unlike direct support for cleaner sources of power like nuclear and renewables, which also push up prices, the environmental merits of this policy are highly questionable. There is a strong risk that it simply displaces investment and emissions overseas without cleaning up UK power generation.

The government has identified LEPs as the main vehicle for its commitment to devolve more control over spending in areas like skills and transport from 2015. More details are expected at the Budget and the Spending Review that will follow shortly afterwards.

This is a big issue. Lord Heseltine has proposed that the ‘pot’ of money devolved be in the region of £60bn. That’s more than five times the £10.8bn the budget of the Regional Development Agencies and more than twenty times as much as the £2.6bn Regional Growth Fund. Whilst there are undoubtedly potential benefits to making public spending more responsive to local needs, these are big decisions that seem to be being taken very quickly and with little consultation of stakeholders.

So safeguards must be built into the process to ensure that public money is used effectively and that services and infrastructure vital to business, like transport and skills, are not adversely affected.     

First, there must be clear evidence that devolving control over funding delivers better value for money. There may be a strong case for giving LEPs responsibility in some areas of spending, in others, such as skills, the evidence points the other way and a national focus must be retained.  

Second, LEPs must demonstrate the capability to take on significant new responsibilities. Some are legal entities that are well-established, well-resourced and well-connected to local businesses. Many others are still finding their feet, have minimal resources, limited engagement with local businesses and remain dependent on local authorities for receiving and distributing funding.

Finally, control should be devolved gradually. Rather than moving immediately to multi-year, competitive, allocations of tens of billions of pounds, to begin with limited funds in a small number of spending areas should be transferred to LEPs. Progressively larger sums, across a broader range of spending areas, could then be devolved over time as LEPs prove their value.

Last autumn EEF gave a cautious response to the headline recommendation in Lord Heseltine’s review of growth policy – the idea of consolidating central government funding for local spending in areas like infrastructure, skills and business support and allocating it directly to local areas on a competitive basis.

We acknowledged the potential benefits of devolving spending decisions to the communities they impact, but cautioned that it may not be appropriate in some areas, such as skills, and that local organisations would need to be up to the task of bidding for and taking on significant new spending responsibilities.

Things have moved on since last autumn. The government’s has endorsed the proposal by committing to devolve a greater proportion of growth-related spending from April 2015.

It has also clearly suggested that it envisions LEPs as the bodies that will compete for money from the ‘single pot’ by saying that it will devolve spending on the basis of the growth strategies it has tasked them with developing.

This raises some serious some questions. Two sets of questions stand out. First, what areas of spending would actually benefit from being devolved to LEPs? Second, what happens in parts of the country that fail to secure any funding?

What will be the criteria for deciding which areas of spending should be devolved? There are doubtless some areas where putting LEPs in charge could lead to better outcomes. However, there are other areas, such as skills, where it might be counterproductive.

The Richards Review of apprenticeships seems to have finally pointed the government in the right direction on skills. Involving another, unproven, intermediary in the process, risks undermining the employer-led approach it recommends.  

Heseltine has proposed running competitions for local funding every five years starting in 2015. This begs the question of what happens to the provision of services like business support and transport in areas that fail to secure funding? Are they left to wither for half a decade? Or, would some alternative, basic, funding be available?

The government will need to start answering these questions, and a host of others, if it is to commit to major devolution in spending decisions as part the upcoming Spending Review.

Now that the dust has settled on last week’s Autumn Statement, it’s worth spending a moment reflecting on what the much trailed infrastructure announcements reveal about the government's priorities.

The £5bn infrastructure package was billed as a step change in the government's growth strategy. But does the pre-Christmas package of goodies actually fit this billing?

From a growth perspective, the attraction of investing in infrastructure is largely two-fold – it helps make the UK a more attractive place to invest in over time and gives the construction industry a shot in the arm in the here and now.

The £1.5bn allocated to the road network fits the bill. It’s a mix of funding for road maintenance that will provide a quick boost for the economy and targeted investment in major bottlenecks that will make a real difference to businesses dependent on these routes.

Other elements of the package, however, are much harder to explain as part of a growth strategy. The biggest single recipient of support is the project to extend the London Underground’s Northern line to Battersea, which will have a £1bn loan underwritten by the taxpayer.

Whilst this is undoubtedly an important project for London and the Malaysian property developers who recently bought the Battersea Power Station site, it’s not the most obvious starting place for a national growth strategy.  

Another case in point is the £120m for flood defences. The social and environmental credentials of this investment may be impeccable, but billing it as an investment in growth seems a stretch.

The more one looks into the infrastructure announcements, the more they look like a mixed bag trying to fulfil a range of policy objectives rather than a coherent and targeted package focused on growth.

This vindicates the widespread view that the Autumn Statement in general contained a lot of good individual measures but didn’t quite add up to a clear and completely convincing national growth strategy.

At the very least, the jury is certainly still out on whether growth is the overriding objective of the government’s infrastructure policy. Let's hope that its transport strategy, which has been pushed back till Spring next year, shows a clearer commitment to growth.

A central theme in Lord Heseltine’s sprawling review of growth policy, published last week, is the need to empower local enterprise partnerships (LEPs). But the jury is still out on how big a role they can and should play going forward.

Heseltine’s most radical idea is consolidating central funding for local spending on areas such as skills, infrastructure and regeneration into a single £50bn+ pot that LEPs would bid into on competitive basis every five years.

There’s a lot to be said for the idea. Replacing hand-outs with competition can deliver better value for money. The UK’s piecemeal local funding arrangements need simplification. And local communities are often best placed to understand their own needs.

But £50bn is a lot of taxpayers’ money to entrust to fledgling voluntary organisations whose performance has been patchy and who continue to divide opinion.

Supporters see them as the ultimate expression of the government’s once much-vaunted ‘localism’ agenda – partnerships of equals between local authorities and businesses coming together to take control of their own destinies.   

Detractors, however, seem them as toothless successors to the Regional Development Agencies that lack the authority and organisational resources to drive local economies.

LEPs have had a good couple of months. In September, the government committed to providing them with core funding for their organisational capabilities. Last month they enjoyed unprecedented success in the third round of the Regional Growth Fund, securing a third of the money on offer.

But it is the next couple of years which will determine their future. They are in the shop window and will need to prove they are up to the task of a bigger role and more financial responsibility.

How they use the money available to them between now and the next election will determine whether there is an appetite to give them anywhere near the authority and scale of resources that Heseltine believes they should have.

Effectively, they are on probation.

EEF's Chief Executive, Terry Scuoler, responds to the recent debate on Britain's place in the EU. 

Business is one of the first audiences to be asked about the UK and its place in Europe, with our views seized upon by both pro and anti-European factions as a vindication of their respective positions. This is natural as Europe matters so much to jobs and our prosperity, especially given half our manufacturing exports go to the EU.

The problem is that it is a highly complicated, political issue and impossible to come up with a homogenous business view.  Business has enough to worry about in the current economic climate, without trying to get to grips with slightly unreal debates about fiscal union, Treaty change or the necessity and timing of referenda.

But, there are at least two certainties, on which most of us in business would agree:
Firstly, there are things that the EU does, which we would like to see changed, particularly its tendency to overregulate and bring forward proposals which threaten our competitiveness.  This is not a call to abandon all EU regulation, as most sensible businesses would recognise that markets need rules.  We do need, however,  to see the Commission and Parliament acting to promote growth and not, as is too often the case, tying businesses up in inflexibilities, which run counter to the harsh reality of global competition.  Unfortunately, while this message may be getting through at Member State level, it has not resonated in Brussels, where the Commission seems wedded to regulating and legislating at all costs.

Secondly, business recognises the importance of the single market, a major destination for UK exports and a significant factor in attracting inward investment. This is especially so for manufacturing, where many companies have used the UK to access European markets.  British business is doing more to successfully broaden trade links with the rest of the world, but the EU is likely to remain our largest trading partner for the foreseeable future. We would be foolish to imperil our access to the single market.  Equally EU Member States must not forget that they have a trade surplus with the UK and which could be at risk if, for any reason, they sought to apply restrictive measures to UK exports.
 
Our relationship with the EU is a trade-off between the benefits of the single market and concerns we may have about over-regulation.  This brings us to the current debate over a referendum. The on-going Eurozone crisis and drive for greater fiscal and political union is adding to the calls for such action.  The “have one’s cake and eat it” simplistic view of cherry picking those elements of EU membership which are most attractive to the UK is however unhelpful at the present time.

We also do not know which question would be asked.  Would a renegotiated agreement be on the table, or would we be asked whether we want to be half in, half out like the Norwegians? Would we go down the Swiss route of simple bi-lateral trade agreements?  There remain a host of unresolved questions even before taking into account that the EU could look very different in a few years given the likelihood of deeper fiscal integration.

The overriding current priority remains the resolution of deficit reduction and promoting growth. In some of the southern peripheral states labour market reform and unemployment also needs to be urgently addressed. So, when I am asked about manufacturing’s view of a referendum on Europe my response is clear. The question of a referendum is not today’s priority for manufacturing.  The UK should instead concentrate on working with our European partners to address immediate issues which will make a real difference to growth such as completing the single market, addressing labour market flexibilities and progressing trade talks with new and emerging markets.

Europe remains a very important market for the UK and global competition is a pressing issue for all manufacturers across the EU. At a time of great difficulty for the Eurozone and the EU any precipitate political action by the UK to further damage the current structure of the EU would be seen as a betrayal to our partner nations and could lead to long term damage in relations. Yes, the time may come for a sensible and constructive debate on the selective return of aspects of regulation and legislation to the UK. But, manufacturers and UK business in general would be best served by policy makers concentrating on the important job in hand of growth and wealth creation.