Oral evidence: Government support for BusinessHC 770-ivTuesday 9 December 2014

Oral evidence, 9 December 2014.

Witnesses

Dr Julie Madigan MBE, Chief Executive, The Manufacturing Institute, John Baragwanath OBE, Projects Director, Advanced Manufacturing Research Centre, Peter Templeton, Director and Chief Executive Officer, Institute for Manufacturing Education and Consultancy Services, and Malcolm Evans, Chief Executive Officer, UK Manufacturing Accelerator, gave evidence.

Chair

Good morning and welcome. Thank you for agreeing to assist us with our inquiry. Can I just ask you to introduce yourselves for voice-transcription purposes, starting with you, Julie?

Dr Madigan

I am Dr Julie Madigan. I am Chief Executive of The Manufacturing Institute.

John Baragwanath

John Baragwanath. I am Projects Director of the Advanced Manufacturing Research Centre in Sheffield.

Peter Templeton

Peter Templeton, Chief Executive of the Institute for Manufacturing’s education and consultancy unit.

Malcolm Evans

Malcolm Evans, Chief Executive of a specialist manufacturing funder called the UK Manufacturing Accelerator and chair of a number of early-stage companies.

Chair

Thank you. I will repeat what I said to the previous panel. You may or may not have heard me say so. Some questions will be person-specific; others will be general. In the case of general questions, do not feel that you have to answer if you feel that the previous speaker has covered all the points that you would have anyway. My first question is to all and it is a fairly general one. How would you describe the overall health of the UK manufacturing sector? Who would like to lead on it?

Dr Madigan

It is reasonably robust. I would say, though, it is quite wary. You see rather a different picture in large organisations to small and medium-sized and micro companies. There is an issue about polarisation, with big national companies influencing policy quite significantly but very different experiences happening on the ground. For example, in Greater Manchester the average size of a company in manufacturing is 18 people and they are sitting on their reserves, primarily, waiting for things to improve before they invest. It is mixed but generally optimistic, I would say, from the numbers of small companies that we are engaged with.

John Baragwanath

I would echo that, really. It is optimistic and it is improving. There are particularly bright sectors, such as aerospace—as we all know—and automotive, which is improving. There are lots of opportunities in other sectors, such as nuclear, where the potential for UK manufacturing in things like the small modular reactor is really something to go for for the UK. It is an improving scene.

Peter Templeton

I would agree that the current situation is really more positive than it has been for quite a number of years. Looking to the medium and longer term, there are a lot of changes happening on, say, technology fronts, with materials technology, sensor technology, big data and so on, that may pose challenges, particularly for smaller and medium-sized companies, as they struggle to come to grips with those technologies.

Malcolm Evans

Thank you very much for inviting me. I do not think we really know what we want to do with it. That is the main issue. 10.5% of our GDP is manufacturing. The capacity and capability is of at least double that. This Committee aside, I am not really sure what the state wants to do with it. I went to a luncheon recently with quite a senior central banker. It was Chatham House rules, but the view in the bank was very much that it is enough and the German model of 15% or 16% is toppy for the UK. There is a huge sense of its quaintness. I do not know if you read the Foresight report. I read the whole lot, for my pains. It was an astonishing treasure map of the potential within British IP—within high-tech knowledge. It was quite an astonishing treasure trove, but it addressed in not one sentence who was going to pay for it and who was going to do it. The potential in UK manufacturing is utterly vast, but we do not quite know what we want to do with it. The will is quite equivocal.

Chair

There are a couple of points that I would just like to pick up. I will start with you, Julie. I got the impression you were saying that for the major manufacturing players it is quite optimistic but there is still a lack of confidence amongst small businesses. Is that a reasonable interpretation of what you said?

Dr Madigan

Yes. In some ways, when you listen to business schools, they often say in these recessions it is survival of the fittest, but it has mostly been survival of the fattest. It is the people who have kept the reserves and had the ability to fall back on reserves that have survived. That has made small companies think long and hard before they start to invest. The investment issue is a time bomb waiting to go off in this country. I would agree with the remark that Peter made about some of the advances in technology that are happening now. To me, one of the major issues that comes out of Foresight is how we are going to take a big population of very small companies forward in terms of investment and lift their aspirations with regard to the potential of these new technologies.

Chair

That is very interesting. It would appear these companies have got the money, and that to a certain extent would underline the point that the banks make all the time: “We are not lending as you say we should because companies do not seem to want to borrow”. Is that a fair comment again?

Dr Madigan

There is an element of that, but it is a question of how to use your reserves to best effect in many organisations. When you look at the number of demands that there are potentially on those reserves to grow sales, to improve productivity, to recruit staff and to engage with new technologies, it is sometimes bewildering for small companies to know which are the priorities and which steps are going to deliver the biggest returns. There are huge risks with all of those decisions.

Chair

Is their failure to invest or use those reserves fear or perhaps just a lack of appreciation of the potential for investment?

Dr Madigan

A mix of both, I would say.

Chair

If I can come to you, Malcolm, you portrayed a pretty bleak picture, if I could say so, slightly in contradiction to the other panellists.

Malcolm Evans

I do not want to be like that. The potential within British manufacturing is huge; it is actually setting it free. May I talk a little bit about the funding situation? I think Julie was more talking about the larger companies. If I can just make a few comments quite quickly—it is our own specialist area, funding. If we start at the absolute beginning, early-to-medium-sized UK manufacturing is under-capitalised by about 40%. That would be our own figure. I am not a bank-basher. Banks should not take growth-capital risks. The problem is that they were never particularly interested in manufacturing in the first place, so from being five out of 10 in terms of enthusiasm they went to zero and a decent bank—I have got no links with them—like Lloyds is back at four now. We are not missing a huge amount of the banking piece. What we are missing is money. In the old days, the state used to pay for a lot of infrastructure around manufacturing, or very wealthy individuals did. These days it is entirely institutional and people do not want to do it. If I could just traverse very quickly, it is too big for business angels; venture capital does not do it; PE is only interested in ownership; and banks do not lend to it, so we do not have the channels of allocation that we need in the UK. The problem is that we do not put money into early-stage industry. I go up and down the country all day long. I was in Huddersfield yesterday and just by walking the streets I found three things I want to invest in. I am in Derby tomorrow doing the same; I am in Bristol in Friday.

Chair

Could you come to West Bromwich?

Malcolm Evans

There is enough manufacturing in the West Midlands to easily supplant the 25% to 30% employment rate in Lancashire if only it had a few billion pounds in it, without being facetious. It is a horrible place, though.

Chair

I am very interested in this observation. One of the things that struck me was when I saw the percentage of regional GDPs coming from the different sectors. London—and I think the south-east, but certainly London—has by far the lowest percentage of manufacturing companies. If you go up the country, you will find there is an increase. My own area is the West Midlands, and East Midlands is probably the highest. Do you think there is a cultural problem with our banking institutions and so on—I was going to say largely centred in London, but I do accept there is a significant element in Edinburgh as well? Do you think it is a reflection of the banking culture, which, because there is so little manufacturing locally, does not really engage with it in the way that it should?

Malcolm Evans

There is definitely a cultural issue. It is a bit like everybody thinks maypoles are cute but nobody wants to dance round one.

Mr Binley

It is my favourite hobby.

Malcolm Evans

I may speak freely at this Committee because you are all pro-manufacturing, but the three party leaders’ idea of doing manufacturing is to put a hair net on and to go to Keighley. There is more to supporting manufacturing than the grandstanding, and it does tend to get very much second-best in terms of cultural plays. So, yes, there is part of what you say. Banks do land to manufacturing—let us just disabuse ourselves of the notion that they do not—but banking is only 50% of the funding equation; the rest is early-stage equity and the next bit is PE or public markets. Ignore the banks. We do not have enough money in industry. Just wind it back to the essentials. The state enables industry, it funds it, it exports it and it strives to keep it in UK ownership. Those are the big issues.

Chair

I have spent rather longer on this than I originally intended to, but it was necessary to pursue one or two lines of inquiry.

Mr Binley

I want to take this thing up of the larger SMEs who have got the reserves. We have got to be very definite about how we divide that up, because micro and small SMEs cannot get money for the life of them and many of them are dying because they are being strangled of finance. Understanding that is really very important. The next question is: in relation to what Malcolm has said, how do we leverage that money out? How do we take their fear away to use the money they are holding? It runs into many tens of billions. How do we leverage it out for the good of not only British manufacturing in the round but productivity particularly?

John Baragwanath

The situation is quite patchy. There are companies that are investing. We have got some really startling companies in manufacturing, particularly in the South Yorkshire area. It is looking at the success of those companies. They are very successful, and other companies need to look at that and see how they have invested and do likewise.

Mr Binley

But it is not the answer. We have got to give them incentive to get rid of their fear, and we are not doing it.

Malcolm Evans

Let me give you a starter for 10. Michael Oliver of Oliver Valves in Knutsford with his bare hands has built a £100 million-turnover valve company. He keeps haranguing Government for serious tax breaks on exports. There is one for 10. I will give you another one then they can give you some more. Massive, sustained investment incentives, not 100 grand one year and 500 the next, like Adam was saying. Visibility. “You spend money on your plant, you will get rewarded for it, and that goes for all time and forever.” There are a couple of clear ones.

Dr Madigan

Look at the Government schemes that have been around—the Regional Growth Fund, for example. When that was first launched it was a £1 million threshold. This comes back to the point about the fragmentation of the landscape in terms of capacity and capability at the LEP level. Some LEPs—for example Hull—have taken some of that RGF money and disbursed it down to small companies. Some of the amounts there are £5,000 or £10,000. They are not £1 million amounts. Those sorts of mechanisms could be shared between LEPs, for example. This comes back to the issue about LEP capacity and capability and the variability of that across the UK, which is one stumbling block, potentially. Look also at some of the schemes that are coming out, like AMSCI, for example. We are fortunate enough to have a number of both very large and very small companies as our members and on our board. When that first came out, the large companies did not deal much below the first tier and the small companies did not have visibility of the OEMs at the top. The scheme is asking for something to be OEM-led. That was dogmatic, really; it was dogma-driven that it had to be OEM-led. Unless the OEM already had a problem that was specific that engaged down that supply chain, there was no way you could get small companies into it, even if you could see a generic problem throughout the supply chain. Bringing that together was quite hard work. I can give you some very specific examples of where there are what I would perceive as new market failures that need to be addressed in that kind of dynamic. For example, a small tooling company in north Manchester. The gentleman knew that rapid tooling, and particularly digital manufacturing, could put him out of business in the future. He is very aware of new technologies. He diversified into them, then the recession hit. He went into administration. He phoenixed—he re-mortgaged his house to buy new machinery. He has not got reserves; he is up to the maximum. He is quite risk-averse now in terms of what he is doing. He is working for some of the big automotive companies on proof-of-concept tooling, but if he wanted to go to the next stage to provide rapid tooling—parts ready for manufacture—to local companies, he would have to invest in metal laser sintering. There is probably about £500,000 worth of kit there, and he cannot afford it. We said, “Could we get a number of small companies together that could share that kit?” That would enable him to do short lead times and repatriate manufacturing, in effect, but the AMSCI scheme was OEM‑driven and because the OEM did not see that need down at the level of north Manchester, that did not fit with the scheme. There is an example of where policies driven by large organisations—aero, auto, process and chemical—do not necessarily fit with this granular landscape down at the local level.

Malcolm Evans

Let us take that straight into the MTC in Warwick, which has got great sintering. The metals and the technologies they have got in there are magnificent.

Dr Madigan

However, it is maxed out.

Malcolm Evans

And it is not for the likes of him. It is the state-funded research centre for Rolls-Royce. That is what it is.

Dr Madigan

But they are at capacity, which is really interesting to show that the catapults are creaking for capacity. That comes back to this death valley in innovation between the universities’ expertise and what happens in terms of commercialisation, which is a real market failure the Government needs to tackle.

Mr Binley

You can lever stuff out. I have done it with Cosworth and we have now got a new engine production assembly line that is about to go on stream. We have done it in 18 months. If you get your finger out, you can do it, but you have got to kick your politicians to get their fingers out in part. I want to come back to this other thing about leveraging money. The big companies with supply chains can do more if they are encouraged to do more, and yet Premier Foods has just gone the opposite direction, in a totally disgraceful way. I hope that is picked up by the press. How can we help our very good engineering organisations to leverage more out of their supply chains and to help them more in this respect?

John Baragwanath

AMSCI is doing some work in that direction as well.

Mr Binley

Yes, they are.

John Baragwanath

We have been involved in some very successful AMSCI projects. It does go right down the supply chain. The catapults now are going right down the supply chains as well. Yes, they are working with the likes of Rolls-Royce and Airbus, but they are going right down into those supply chains. In fact, in our catapult the majority of the companies that we are dealing with now are SMEs.

Mr Binley

That is helpful.

Chair

Can I just point out we have spent 20 minutes on this? If we can move on, that would be helpful.

Mr Binley

Yes. Can I move to MAS now? The All-Party Group on Manufacturing has stated that a “lack of strategic management advice” exists for manufacturers. Is this a failing of MAS? Is it correct? If it is correct, what should we do about it? If not, we should tell the All-Party Group that they are wrong.

Chair

If you could be fairly brief in your answers that would be helpful.

Malcolm Evans

Scaling manufacturing companies is complex. You need to scale them across about a dozen axes ranging from finance to process, plant, people, skills, governance, export, new forms of marketing, supply, etc. There are at least 12. If I scale a modern-style service company—I am involved in digital—all I need to do is bring in technical marketeers after I have hit my pay stream. There is one axis of growth. MAS cannot do that. MAS shuffles plant around and draws white and yellow lines on the floor. It is quite useful, but they are nowhere near multi-skilled enough to exercise multi-factor growth strategies. I know that for a fact.

Mr Binley

Do they need more money to become so?

Malcolm Evans

No.

Mr Binley

What do they need?

Malcolm Evans

Disbanding. I would like to see more investment money. I would like to hire a top-rate production direction and a top-rate digital marketeer. I would like to get proper corporate finance advice. The market provides those things. Export is a different thing. Export needs state support. Internal, market-led expertise does not need a uni-dimensional state body.

Peter Templeton

For manufacturing firms to grow, they really need to do three things in parallel. One is to execute the current business model and continuously improve that business model. Secondly, they need to have a clear vision of their chosen future state, bearing in mind the changes in external context and drivers and changes in technologies. Having selected their chosen future state, they need to build the capabilities across the kinds of factors that Malcolm was talking about over time, which requires investment. Where MAS is strong is in improving the current capabilities within the current business model, such as around production and so on. Where it has not focused, I would say, to date is on helping firms to really understand what markets they should be in, what product groups they should focus on and how they compete, and then on helping those firms to identify a chosen future and how they are going to get there.

Dr Madigan

Having delivered the first, second and third terms of the Manufacturing Advisory Service in its regional state before it went to a national service, and worked with half of the manufacturing base in the North West, which is 9,000 companies, which was the target in the last MAS contract that we ran, which we were on target to achieve, and having been involved at the instigation of MAS when Stephen Byers brought back the Manufacturing Extension Partnership model from the States, MAS was strongly rooted in a very deep market research process about the needs of manufacturers at the time. Productivity—getting the product out the door at the right quality, at the right cost and on time—was and remains a big preoccupation for most manufacturers. For most small companies, just doing that every day is a big challenge. That has been the driver of MAS, and that has been the success of it, in that there is a very strong set of quality, cost and delivery metrics around that so it has got very strong evidence to show that it works. But the gentleman at the end is right; it does come from a productivity origin, and that it is its strength but also its weakness. I do not think you could say, “We have finished with productivity now and we need to move on” because it is a perennial issue in manufacturing. Look at the data on the inflation rates in small companies. 6.71% was quoted by the Federation of Small Businesses. It is the small companies in the supply chain that are having to pay higher input costs and are being squeezed on prices. Productivity is not going to go away as an issue. In fact, it is going to be around even more, particularly with austerity and the public sector cuts, because these all end up down in the micro—

Chair

I think we have got the point. John, did you want to add anything?

John Baragwanath

Just to remark on the fact that it used to be regionally based and now it is nationally based. It lost something when it went national. There was more of the local touch previously.

Paul Blomfield

I am reassured by some of your comments. I have to say I was a bit concerned by the point that Mr Moore from the CBI made. I want to take care not to misquote him and I will look at the transcript, but he was making a passing comment in answer to one of my colleagues’ questions that we have looked at high-value manufacturing and that really has not worked for us, and we now ought to be moving beyond it to creative sectors without diminishing the creative sector. I am reassured that you would all disagree and think that high-value manufacturing has a future. Certainly when I look at the work that John and his colleagues are doing in the AMRC, I would have thought that is the case. But I wanted to come back to the point that Julie and others have made about finance being the critical issue. Do you think that the British Business Bank has the appropriate expertise or resources to help manufacturers access finance? Is that going to provide a solution?

Dr Madigan

There is some optimism there in different sources of finance—crowdfunding and local sources of finance. That is where things are treading. One of the issues for the future is about convergence of sectors. For example, one of the things we have done as a charity is to set up community-based digital fabrication laboratories that are free of charge for people—members of the public—to use to access additive manufacturing. We have our first millionaires that have appeared in that. They have walked in off the street with an idea that we have prototyped; they have then put that idea on Kickstarter. Our first gentleman got 453,000 in advance orders on Kickstarter for a product that was on sale in Apple stores worldwide within six months, and he is now a millionaire. He is a new entrant to manufacturing. There is an example where somebody from a non-manufacturing background has generated wealth for the UK. The issue there is that the product is manufactured in China, because he could not find a UK manufacturer to make that. Different sources lowering the barrier to entry for people to come in from different walks of life to access finance, as with that new initiative, is to be welcomed, but there is more to be done, particularly around investment in capital machinery and kit for manufacturing.

John Baragwanath

Investment and capital is always very difficult for a start-up company. If you had some money you probably would not go into manufacturing; you would invest it in something else. High-value manufacturing really is the future. We are talking about moving it from approximately 11% of GDP up to nearer the German 20%. That is an ambition that we are sure we can succeed in given the time. The opportunities available in high-value manufacturing are absolutely immense. I mentioned the small modular reactor, which is somewhere the UK could move into. They have all the expertise in order to make these things. You are taking a nuclear power station and putting it into a factory environment rather than building it on site. You are building small reactors and coupling them all together to effectively make a large reactor. It is definitely somewhere that the UK could be going. The opportunities in the medical sector are immense as well. Anybody who says high-value manufacturing is not the way forward does not really know high-value manufacturing.

Malcolm Evans

Can I answer your question about the Business Bank? No, it is not going to work. It is one of the huge lost opportunities of the current Parliament. What it does is it allocates wholesale capital to an oversubscribed marketplace. It subscribes to two lines of funding. One is the mortgaging and the discounting, which is asset-backed lending, property mortgages and invoice discounting. Every dog on the street corner is selling you that. There is no market shortage of discounting and mortgaging. The second class of capital it allocates is short-term venture capital, and that only seeks one target; it seeks a three-year flush of a successful moving target. There is no shortage of that in the UK either. What there is a massive shortage of is long-term capital—either pure equity or a German-style roll-over debt product—which is not getting called in any generation soon. We have missed a massive opportunity. It costs £500,000 to start a factory; it takes £2 million to scale it. We uniquely provide capital in that space. It is like spearing fish in a barrel, the amount of enquiries we get. The British Business Bank is competing with the existing private sector, where there is a vast glut of funding, and it is doing nothing to assist the long-term development of manufacturing.

Mr Bain

That is a really interesting point, Malcolm. We know that there are hundreds of billions of pounds of corporate surpluses sloshing around the economy, not able to be invested productively at the moment. People like Professor John Kay have said this is something we should be looking at in terms of promoting investment.

Malcolm Evans

That is up the food chain.

Mr Bain

What kinds of institutions do we need within our banking system that will sort out this problem that you have identified?

Malcolm Evans

Invoicing and mortgaging subtracts from the overall sum of capital available to reinvest in growing businesses. It can help with early-stage businesses. Where it becomes a large part of the capital base, it suffocates businesses. You are robbing Peter to pay Paul. What we need is a different class of capital. This is why I am delighted to come to a group like this but I would not probably walk across the road to a LEP. It needs huge structural decisions by a Government long term, like Adam Marshall was saying, to create a class of capital that sails as close to state assistance rules as it likes—and possibly over them—and that sits in businesses for generations on a low coupon as a quasi-debt product or a quasi-equity product. We need several hundred billion pounds in British industry. We are woefully under-invested. Again, we are 30% to 40% light on invested capital. We need a big state decision to get money into business. Germany is so strong because the Allies put hundreds of billions of dollars into it 70 years ago. They are still taking advantage of that now. We need to do the same in a new guise for new generations or the 10% GDP will not go to 20%. We need money in business. You MPs need to do that; the private sector cannot do that on its own.

Paul Blomfield

I am interested in everybody else’s response to William’s point. You all seem to be agreeing on that, and it seems to echo themes that we have picked up on in previous reports, whether it is looking at R and D investment in our university-business collaboration report or whether it is looking at the operation of equity markets. You seem to be hitting on the nub of an issue here. I wonder if I can come back to a slightly more limited point about the British Business Bank. One of the things that we have heard in our evidence is the complexity of the terrain in terms of the offers to businesses and the difficulties navigating them. Do you think that bringing initiatives together within the remit of a single organisation like the British Business Bank is going to help?

Dr Madigan

I believe it could. I always thought there was a particular requirement for more like an industrial bank, because as technology continues apace part of the issue is understanding the risks and the processes of adopting new technology. When you combine that with the picture that the gentleman at the end just outlined, you have got a double whammy—a triple whammy when you add in the historic low levels of investment in manufacturing in the UK. As we are entering this era of scarcity and convergence between disciplines and this huge technological change—colleagues at MIT refer to it as the next industrial revolution that is picking up, which is echoed in Foresight—we desperately need to come up with different forms and more creative mechanisms for getting new technology and capacity into small manufacturing companies. If that is one way of doing it—it sounds like it is not particularly performing at that level at the moment but it has got the potential—then that has got to be grasped, because the opportunity is going to pass us by otherwise. It is not, as Foresight said, going to be something 30 years down the line; we can already see this happening in businesses. There are massive opportunities to be had.

Paul Blomfield

Peter, you looked as if you wanted to come in on that point.

Peter Templeton

Yes. Thank you. High-value manufacturing has huge potential, but it is not just about increasing the technology readiness levels or putting in place the production facilities; it is the capacity across the enterprise, from how you go to market with the marketing and sales organisation to how you generate the next set of products, processes or service technologies, and then the servitisation and the bringing together of product and service-based business models to really change the way the firm competes using diverse forms of technologies. These are complex things and they are long-term things that firms have to undertake. The challenge as I see it is most of the finance is short-term finance and what is required is long-term finance—patient capital—in the way that the German forms of finance enable the Mittelstand companies to thrive.

Chair

The points that were made about the products for the Business Bank we could do with pursuing more, but we really have not got time to now, so I am going to write to witnesses and ask them to amplify that and also point to potential sources of funding.

Mr Walker

We heard from the Engineering Employers’ Federation that there was a lot more appetite in the manufacturing sector for exports and, Mr Evans, you have commented a couple of times on the possibilities for expanding exports. Do you think that is something that is best supported through UKTI through some form of tax break, as you have suggested—or you suggested that people are interested in.

Malcolm Evans

Yes. It almost seems like an absurd comment that exporting is another world. You do need your hand held in that. But we did not start at the beginning. The very simple thing that we need to do with British exporting, in my opinion, is to create a new cultural imperative around all the businesses conducting an initial and an ongoing export audit. We came at it from the point of view of the schemes of support. The Church of England tried to reinvent itself with the Alpha programme down the road in Brixton about 20 years ago and it became a phenomenon. It needs to be ingrained in the culture of all early-stage businesses and all existing ones about what the possibilities are. UKTI at moment is a little bit reactive. Kazakhstan might be the flavour of the month so you end up exporting to Kazakhstan. There is a place over there called Germany and one over there called the States. I have just invested in a start-up furniture manufacturer in Derbyshire. We are exporting to Germany already. You have got to get it into the culture.

Mr Walker

Surely it is a choice for the business whether it wants to export or not.

Malcolm Evans

It is their choice, but they are not going to be big and successful generally if they do not. We have got to get it more into the culture up front that we do an export audit and we keep doing it and doing it and doing it. It is part of the health of a UK manufacturing business.

Dr Madigan

We are currently working on an ERDF programme that we are matching for 450 small manufacturing companies. Part of the design of that was to allow them to join a network as we grew the group and they would learn from each other. We were astonished to find that hardly any of them were using social media in the business context—they are possibly in the personal context but not in the business context—and very many of them have not even got decent websites. Before you start talking about export, really for me the biggest thing you can do for these organisations is get them visible: get them decent websites, get them skilled up in terms of what they can do and introduce best practice of how manufacturers that are using these social media tools to good effect are generating business from it and transfer that. That will start to raise the bar. That comes back to the issue that in any given population—it also plays to the point Brian raised before about micro companies—there is a bigger and bigger job to do and it takes more and more resource to get down into those small companies to lift their game. That is one big aspect of market failure. There is a lot that could be done just by improving their web presence and their internet connectivity and social media knowledge to promote their business. That will bring in export sales and then that will prompt them to get an export audit and it would go from there.

Mr Walker

One of the striking things we saw in a previous inquiry when we looked at retail and the export opportunities there was the very high proportion of websites that are only in English and the huge proportion of the overseas market that is not only in English, and the opportunity to do more on that front. Peter or John, do you want to comment on this export point?

John Baragwanath

I agree with the previous speaker that more use could be made of social media, etc. It makes a small company quite often look like a much larger company and able to compete in an international market. Yes, I agree with that.

Peter Templeton

There is a range of aspirations and abilities in the leadership teams of smaller firms with respect to exporting and operating internationally. It is relatively easy through web media to export at a pretty low level but rather more challenging to support OEMs or tier-one companies in the supply chain as they grow internationally and often want their suppliers to grow with them. There is quite often a desire from those OEMs and tier-ones to have the suppliers provide the same components or sub-systems into their supply chain internationally. That requires expertise, investment and so on. There is another class of company that sets out to be globally successful from the outset. I spent 10 years with a spin-out from Massachusetts Institute of Technology. When I joined it was turning over $20 million; when I left it was turning over $350 million with a market capital of $2 billion. Right from day one, it was global. It has offices in Boston, Massachusetts; Europe; and Japan as the three chosen markets, and from there they went global. It is the mind-set of the leadership team and the competence of the leadership team that is essential to that kind of global scale and, indeed, supporting OEMs and tier-ones as they grow internationally. We need to perhaps take a more nuanced approach to what we mean by export and export support for those different categories of company.

John Baragwanath

I was out in Brazil recently. We were working with a university out there, ITA—it is one of their leading research organisations. I was impressed by the way the Germans look at the export market. They had the Fraunhofers out there all over the place and German companies were working with those Fraunhofers. We tried to get some help from UKTI to set up an AMRC out there, but the budget was not flexible enough to give us any assistance, so we landed up appointing a consultant to go out there for us. Really we wanted to put people on the ground.

Chair

If you could send some written evidence on that, that would be very helpful indeed.

Malcolm Evans

I know you are keen to finish. It just sounds like the whole thing is a hagiography of Germany, but we have heard a lot about the fact that our own overseas consulates have improved. The Germans do it better. It is heavily nuanced and it is heavily individualised. It really kicks ass, the way they get exports going.

Ann McKechin

We have all talked this morning about the issue of innovation and the need for investment. The Autumn Statement last week announced additional funding for the High-Value Manufacturing Catapult, but you, Julie, mentioned the fact that SMEs are really not benefitting from the catapults per se. How do you think the additional money could support SMEs?

Dr Madigan

The catapults are fantastic; they are a great idea and very successful and they are working with SMEs. But if you were to ask, “What is the total number of SMEs that they are working with compared to the around 250,000 VAT-registered manufacturing businesses in the UK?” you would not find it is a large percentage. One of the issues is the total capacity of all the catapults added together relative to the size of the problem. It is welcome that there is that additional money in the Autumn Statement. I believe that that is going to be used to put some boots on the ground in terms of more capability at local level, but given the magnitude of the funding that is there I do not think it is going to be enough when you do the maths in the first column, which is the total size of the issue. It is not just about leading-edge technologies, which is what the catapults are about; it is about the next stage of technology that is in the market but is inaccessible to SMEs by virtue of the funding required to access it. To me, that is where there is another piece of that jigsaw in the valley of death on innovation that needs to be plugged in. Although universities have played a great part, there needs to be more community-based, granular access to some of this equipment. Hopefully that is something LEPs will pick up on. As we know, individual LEPs have placed manufacturing in a different position in their priorities, and that is a concern with that structure because national economic objectives like rebalancing the economy towards manufacturing might not be reflected in each LEP’s priorities and agenda. It is a complex landscape, but I would like to see more available market capacity down at the level where SMEs can access it to minimise the risk of experimentation with new technologies—and not in universities necessarily, because it is inaccessible to many.

Peter Templeton

If we look at the technology readiness levels of one through nine, universities typically address one through three; the catapults are generally four to six, although sometimes to seven; and then there is the seven, eight and nine to take technologies to market. I suppose what we have seen with SMEs in particular is that even if they can get access to TRL 6 technology, they lack the access to the equipment and the facilities to take the technology to TRL 8 and TRL 9. One of the ideas that we are currently discussing with our local enterprise partnership and the district council is the development of an industrial venture centre that supports and may well have common, shared equipment to help, early-stage ventures and SMEs go through TRLs 7, 8 and 9—working closely in partnership with the catapults but supporting SMEs in commercialising technology applications; and then linking that also with a technical and vocational skills centre that would be providing primarily NVQ Level 3, Level 4 and potentially Level 5 for these technological development operational and also the commercialisation aspects as well.

Ann McKechin

John, you have got a lot of experience in this area. What are your views?

John Baragwanath

Yes. The first view is that we are in this for the long term. This definitely is not a sprint. Fraunhofers, which I mentioned previously, have been supported since the war. We are looking at long-term timescales. Therefore, there is a need to get a cross-party agreement that things like the catapults are going to go for many years. Starting and stopping and moving from one initiative to another just does not work. The extra funding is very welcome; it will enable us to work much more closely with SMEs, with more people on the ground.

Ann McKechin

How feasible is this idea that Peter has mentioned about an intermediary centre where people can access equipment and try to reduce their risks given that the Hauser review, which has just completed recently, has mentioned that catapults should only be expanding at the rate of about one or two a year to allow them to build up and get critical mass?

John Baragwanath

There is nothing really new in this world. Time share of equipment has been going for the past 30 or 40 years that I know of. It comes and it goes. We have spare capacity within our catapult sometimes on some machines, for instance. We could allow SMEs to use those machines. We come into problems with state aid and things like that, but it is a possibility.

Ann McKechin

The Manufacturing Accelerator has highlighted a generally low awareness about R and D tax credits. Who do you think should be responsible for promoting this scheme? Do you think the scheme works for this sector of SMEs that we have been talking about this morning?

Chair

If you could be very concise with your answers it would be helpful.

Malcolm Evans

Yes, it is a cracking scheme. Change your accountant.

Dr Madigan

Yes. More needs to be done to show examples of where manufacturers have used it to good effect to others. That is a job for MAS, potentially. MAS has a recognised brand and is trusted and liked by manufacturers in the main; use that to promote the message.

John Baragwanath

When it first started—and going back as far as when Business Link first started—it was always that the accountants were the people that you should be going through. For me, the accountants are the body that we should be going to.

Ann McKechin

Thanks. Okay, agreement on that.

Rebecca Harris

We have touched a lot on the problems for SMEs and for the manufacturing supply chain, but what do you want to see in the Government’s much-announced action plan for manufacturing supply chains?

Chair

Again, if you could keep it as concise as possible that would be helpful.

Malcolm Evans

It was a bit lukewarm, the previous response. It would be lovely to have more joined-up supply chains. It is an awkward point to come in. It is a bit like you are treating the symptoms of flu—you are treating the rash rather than treating the flu. It is more a systemic thing about supporting manufacturing around skills, capital and exports and hopefully the supply chain will muddle up. I do not see how you can spot-interject in that area. It is very well intentioned. I would love a bigger supply chain. It has withered. The innovation game has moved on. The market will drag it up a bit. I do not think you are putting your efforts in a useful place. The other panellists said that as well.

Peter Templeton

If we consider an industry sector like aerospace or automotive and, first of all, the external context that the sector is facing, there are huge changes, say, driven by environmental requirements—for example, emissions in cars and aircraft—and that set of drivers is creating a set of requirements for change, for new capabilities that are driving changes in the system and sub-system requirements for cars and aircraft. With cars it includes a move to electric vehicles, hydrogen vehicles and so on. That is working well at the OEM and the tier-one level, but it will have an impact down at the tier-two and tier-three level, and they are not seeing it. What they are seeing is a demand for cost, quality and delivery, which is important but it remains order-qualifying rather than order-winning. If we are going to have a really thriving supply chain over time, there needs to be a long programme of support that enables innovation in the supply chain to be realised in the way that it is realised in Germany. If we look at the aerospace supply chain in Germany versus that here, our technologies are significantly behind the German technologies in the aerospace supply chain.

Rebecca Harris

Is that coming down to investment again?

Peter Templeton

It is coming down to investment but also awareness of how the changes over 20 years will affect the systems at, say, the aircraft level or the car level and then the sub-systems and then the components. If one was to take a classical build-to-print company and your customer in the supply chain stops wanting the component you are being asked to build to print, will you have the capability to do the next generation or will that go elsewhere, potentially to Germany or otherwise overseas?

Dr Madigan

I would like to see more investment at a granular local level into smaller companies to enable them to access technologies to get into some of these supply chains more effectively. That would repatriate manufacturing as a result. The last AMSCI I did not think was thought through enough as to what the obstacles are to repatriating manufacturing for the SME. It was very much big-company-driven. There is definitely a need there, as Peter has articulated, but the length of time between investing at the top and seeing that trickle through to micros is enormous. We have to go in a pincer-like movement—more of a Schlieffen Plan—in from the top and then up from the bottom as well. I would like to see some of that funding find its way through LEPs or local structures to small companies.

John Baragwanath

The supply chain initiatives work well where there is an end goal. That was mentioned by the previous panel. In nuclear, automotive, aerospace, etc, they tend to work very well. I agree that more help for small companies at local level would be very welcome.

Mr Binley

I do not believe that we are all that far behind Germany, quite frankly. The way some of you are talking down is unacceptable. Why are Mercedes building their racing cars in this country?

Chair

Can you make it a question?

Mr Binley

I just want these people to know that we are not as far behind as they say. Come to Northamptonshire and I will show you. Let me ask you a question about supply chains. Is it not much more the responsibility of the prime organisation in a supply chain—that is the guy at the top who needs the supply—to do more than they are doing?

John Baragwanath

Yes, and they are doing.

Mr Binley

Not enough.

John Baragwanath

Aerospace is—

Mr Binley

Aerospace and Rolls-Royce are the two best examples you can tell me, but there are many others that ought to be doing more.

John Baragwanath

Yes.

Caroline Dinenage

We have touched on a lot of this, so in a nutshell, last year the Government’s Foresight unit—we have already mentioned it—published a report on the long-term future of the manufacturing sector. How well does industrial strategy address the key future challenges for this sector?

Chair

If you could do it in a very pithy way that would be very helpful.

Dr Madigan

It needs to be longer-term and it needs to be cross-party. You can see from something like MAS that consistency of purpose in business, as in Government, hopefully, is key. The key issue is that a lot of the things that are in Foresight are cross-departmental. That seems to be a recurring theme now. It is within different groups in Departments and across Departments. Things like digital manufacturing and the advent of digital fabrication and community-based digital fabrication sits between the Cabinet Office and several bits of BIS. It is joining all that up. The landscape is changing and the structures and processes need to change with it.

John Baragwanath

Manufacturing is changing considerably. Servitisation is becoming a big issue now. Rolls-Royce we mentioned; 50% of their revenue is derived from servitisation. Products are going to be bespoke products, so they are going to have to change product lines very quickly. Automation is going to be a really big thing. Foresight identified all these things—digitisation, etc. There is a lot of good stuff in there; it is picking the bits out that are going to create wealth.

Peter Templeton

I greatly welcome the industrial sector strategies. It is important that we not only address the sector strategies, such as aerospace and automotive, but recognise that there are common things across the multiple industry sectors of manufacturing. One of the national competencies in high-value manufacturing, for example, is design and manufacture for small scale and miniaturisation, which has applications in aerospace, in defence, in security and in medical. If we were to look purely at a sector-specific strategy, that might not be recognised as an important cross-cutting theme. We have to have a sector focus to make sure that we understand the end-market requirements and the supply-chain linkages, but also the cross-cutting things at a technology level and at a business level. Things like business strategy development, leadership and so on are common across manufacturing sectors.

Malcolm Evans

Industrial policy is in its rudest health in the 30 years of my working life. It is great to see. You need to concentrate less on some of the minutiae and more on the low-hanging fruit and the big themes. You need to enable manufacturing, which is infrastructure and skills. We need to fund it in a spectacularly radical and vigorous way. That includes keeping much more of it in our own national ownership. We keep on holding up automotive as a national exemplar. That money goes out very quickly from this country. We need to export it like every day on earth is our last. We need to pick the low-hanging fruit in those themes and do some really good things in that area. But the industrial strategy generally is the best it has been since the early 1960s.

Chair

Thank you very much. That is very helpful. I will repeat what I said to the previous panel. If you feel there is any more you would like to add to a question that you have been asked, please feel free to do so in supplementary evidence. You have been asked to follow up a number of things with supplementary evidence; we would be grateful to receive them, and we may well write with further questions to you that we would be grateful for your response to. Thank you very much. Examination of Witnesses

Witnesses

Nicola Bolton, Acting Managing Director, Trade, UK Trade and Investment, David Godfrey, Chief Executive Officer, UK Export Finance, Janice Munday, Director of Advanced Manufacturing and Services, Manufacturing Advisory Service, and Steven Barr, National Director, Manufacturing Advisory Service, gave evidence.

Chair

Good morning and sorry for the slight delay. That is because we have been pursuing a number of themes and issues that we needed to bottom out. Can I thank you for agreeing to address the Committee and help us with our inquiry? If you could just introduce yourselves, starting with you, Nicola, that would be helpful.

Nicola Bolton

Hello. I am Nicola Bolton. I am the Acting Managing Director for Trade at UK Trade and Investment.

David Godfrey

Good morning. I am David Godfrey. I am Chief Executive of UK Export Finance.

Janice Munday

I am Janice Munday, and I am Director of Advanced Manufacturing and Services in the Department for Business, Innovation and Skills.

Steven Barr

Hello. I am Steven Barr. I am the National Director for Grant Thornton’s contract for the Manufacturing Advisory Service with the Department for Business, Innovation and Skills.

Chair

Thanks very much. I will repeat again what I have said to other panels. Some questions will be person-specific; others will be to all of you. Do not feel that you all have to respond if the previous speaker has covered the points that you were going to make. I am going to start with a question. We have heard various judgments, if you like, on MAS, from “abolish it” to “give it loads more money”. The Lloyds Banking Group has suggested that the uptake of MAS services is “patchy”—whether this contradictory opinion is a reflection of that I should be interested to know—and that the service delivered is “dependent on the experience and quality of the individual MAS adviser”. Do you think this is a valid criticism?

Janice Munday

It is important that we look at the quality and experience of the MAS advisers. That has always been the reason that MAS is respected: that the MAS advisers are experts in their field. The figures show that we have helped around 17,500 manufacturers, that we have funded around 9,000 in-depth businesses with great results, and that the results were much better than originally forecast, both in GVA contribution and in jobs created. We have strong brand awareness—stronger than for some other business support schemes—which may account for why people feel so strongly about it. If I could ask Steven to talk about the work we are doing to make sure that we continue to upskill our advisers.

Chair

Yes, okay, but please do not go on and on. If you could just summarise it briefly, that would be helpful.

Steven Barr

Perhaps I could just add two points. One is the high level of customer satisfaction we get from SMEs—well over 95%, consistently over the three years. That is a good sign. I do not want to suggest that we are complacent in any way. Training of the advisers is very much part of the service that we provide and it will certainly be part of the new Business Growth Service, which includes manufacturing at the heart of it.

Rebecca Harris

This is a question for all to answer, but on MAS. According to the evidence we have had from BIS, 43% of medium-sized manufacturers are using MAS but a much smaller proportion—only 17%—of what are labelled as micro businesses, of which proportionately there are very many more. Why is it not reaching the micro businesses?

Steven Barr

There are a number of key factors here. Perhaps the one to start with is that we are targeting SMEs with growth potential. What that means is there is a selection process as part of it. We are more interested in those organisations that we can help to grow most rapidly so they can make the biggest impact on the UK economy. Inevitably, you might expect larger companies that are slightly better established, with better ideas and better processes in place, to be better receptive to the kinds of options we have. That is not to say that we are biased against the smaller end of the companies; it is just an inevitable part of how it works.

Rebecca Harris

Does anyone else want to comment on that?

Janice Munday

As Steven has said, we do have to be targeted in our selection, and we want to put our resources behind those companies that can grow fastest. We are going to be part of the Business Growth Service, which means that there will be other advisers who can help non-manufacturing companies who have growth ambitions, and you will cover that in a later session. But the targeting is working.

Rebecca Harris

It is difficult to target, though, is it not? With changing technologies, it may well be that some of these micro businesses really could benefit enormously and grow very rapidly. Do you think there is sufficient awareness of what you have got on offer for businesses and for smaller firms that might have the potential?

Steven Barr

There are two principal ways that we target. One is by looking at data that is in the public domain about what those companies are up to and what their rates of growth are, so we can target the kinds of things that they should be interested in from a manufacturing point of view. Then more broadly, we have our network of 85 advisers, and they are very closely connected with all sorts of companies—even the ones that we do not serve—so they will go and make contact with those companies and find out a lot more about them. It is through that that we really fine-tune who we work with and what we offer them.

Chair

Before we leave the subject, there were some quite strong criticisms of MAS from the previous panel. I could not begin to summarise them at this point, but we will be going through the transcript and we will write to you to make the points that were made and would be grateful for your response.

Ann McKechin

The Government has made a recent announcement about trying to support the supply chain. I wonder if Janice and Steven could explain to us how the Advanced Manufacturing Supply Chain Initiative has supported UK manufacturing and how its success is going to be measured.

Janice Munday

The Advanced Manufacturing Supply Chain is a relatively new initiative and has been going for a relatively few years. We have run now five national rounds and two local rounds. The local rounds were very much focused on businesses in the auto and aerospace manufacturing sectors in the West Midlands and the Liverpool LEP—it was run by four LEPs—and what we have done since is opened up AMSCI to national purpose. It is national, although the money is England-only because we have an arrangement with the governments in the other countries that if there are really good cases coming through then they will pick them up.

Ann McKechin

Is it still just these two sectors, automotive and aerospace?

Janice Munday

No. We started with automotive and aerospace. Since then, we have had some very good successes in construction, life sciences and electronics, which now account for just over 50% of our winners. We have been consciously trying to extend it to other manufacturing sectors since we went national.

Ann McKechin

Under what metrics do you assess success in these schemes?

Janice Munday

We are looking for a slightly narrow range of companies. We are looking at those who want to work in collaboration—within themselves, with institutions such as the High-Value Manufacturing Catapult, and with some universities—and who have really good ideas that are very innovative that will help to re-shore production to the UK or otherwise enhance GVA. The metrics for each of the projects will be set within the metrics for what those projects are. Overall, we are looking at metrics of jobs created, jobs sustained and GVA contribution, and we are also looking at a metric about how much work we have re‑shored or kept in the UK.

Ann McKechin

Is there any metric about exports? That has been one of our focuses this morning.

Janice Munday

The work we are doing on AMSCI is very much around the start of new processes. What we would expect to do through the additional support that is available through the Business Growth Service will be to pick up those companies and help them to export, but it is not a metric. As I say, a lot of this is, “Can we keep some work in the UK?”

Paul Blomfield

Perhaps following on from Ann’s point and asking Nicola a specific question, the Government has given you a target of doubling the value of UK exports to £1 trillion by 2020. Are you going to hit it?

Nicola Bolton

The answer is that we are committed to this and we are doing everything that we can do. It is an energising aspiration. It is a whole-of-Government approach.

Paul Blomfield

That sounds like a politician’s answer.

Chair

Could you just speak up slightly? I am having difficulty hearing.

Nicola Bolton

I was saying it is a whole-of Government approach and it is an energising ambition. We are doing everything that we can do. It would be wrong, though, for me to predict the macroeconomic picture that is going to impact exports between now and 2020. I would look to my friends in the Office for Budget Responsibility to help with that. But certainly we are working very hard and joining up across Government, working with the private sector and businesses, focused by markets and by sectors, towards the 2020 ambition.

Chair

That does seem to me to be Sir Humphrey speak for “no”.

Nicola Bolton

Personally, I believe we are going to do everything within our power to meet it.

Mr Binley

Have you thought about becoming a politician?

Paul Blomfield

What more do you think could be done to enable you to meet the ambition?

Nicola Bolton

What we are really trying to focus on is working in partnership with lots of different organisations. For us, this is about extending our reach—whether it is out through the FSBs of the world or the CBIs of the world, or whether it is extending our reach through the major banks or the big accountancy firms who are dealing with businesses on a daily basis and which are the main organisations that businesses tend to have to deal with. It is about joining up in that way. It is about working with our colleagues in UK Export Finance, for example, to really just extend the power of our reach around the world and raise awareness of exporting. Some of that will be around advertising and marketing type of activities as well as being able to provide specialist expertise for businesses in particular sectors wanting to get to particular markets and countries.

Paul Blomfield

Thank you. I am sure we are going to explore some of those themes a bit further.

Mike Crockart

How would you answer the criticism of, for example, the Britain is GREAT billboard campaign, which is saying it is a great billboard campaign but it does not give businesses the information they need about how to contact you or any of the other people that you are trying to build co-operation with to get them to the point where they are exporting more?

Nicola Bolton

That is why the Business Growth Service has just been launched. It brings together a focal point for business to get really tailored support. I personally believe that it is really important to raise awareness of why it is good to export and to build the capability of your business in the meantime rather than saying you have to come necessarily to UK Trade and Investment, for example. We have got lots of partner organisations, whether it is the local chambers of commerce or overseas business networks, who can help and provide that specialist expertise.

Mike Crockart

Surely the problem with having lots of partners is it is unclear who to approach to get the help.

Nicola Bolton

It is and it is not. It is about signposting. What you cannot rely on is a single place for people to get to. There are multiple channels.

Mike Crockart

But that is exactly what the first panel that we had—the businesses—want. They want a single place to go to.

Nicola Bolton

Yes, and the Business Growth Service is a single place for them to go to, for example—the greatbusiness.gov.uk site.

Mike Crockart

That is what needs to be publicised more, then.

Nicola Bolton

Yes. We just launched it a couple of days ago, as I am sure you are aware, and so partly now we will be driving up the communication and awareness-raising around that.

David Godfrey

Could I just add something from the point of view of UK Export Finance? We were late to the party of Britain is GREAT and Exporting is GREAT but we are now an integral part of it. Whenever there are trade missions, conferences or seminars under the umbrella of Exporting is GREAT, UK Export Finance will have one of our trade stands, saying, “This is what we do”. For us, a Department that I am sure you have heard from previous speakers has variously been described as the Government’s best-kept secret or as having hidden its light under a bushel, this has been really important to get our message out there that we do support exports, exporters and small companies. We do it in partnership with UKTI—you talk about cross-referral. There is an example of how that umbrella, when focused, can be quite beneficial.

Mike Crockart

I suppose the difficulty is how you make it interesting and sexy. I had Edinburgh Business Day in October, and we had people along to give export advice but we also had Google. 70 people went to see Google and five people went to the session on exporting. How do we get past that?

David Godfrey

My own view is that we have over many years lost a generation of businessmen and businesswomen who are adept at and think about exports. There is a cultural thing and there is a financing thing we need to bring together to make companies—particularly the growth companies—think more internationally than just about the UK domestic market and think beyond the EU as to where the real growth is. It needs to be a combined effort. There is a cultural thing as much as anything at play here.

Mr Walker

Nicola, you mentioned the Federation of Small Businesses as one of your partners in this. To be fair, I have seen good work from UKTI in my neck of the woods up in Worcestershire, where there have been good joint shows with UKTI and local organisations like the chamber and the Federation of Small Businesses about how to export, but they have told us that they feel UKTI still needs to make a “concerted effort” to reach out to SMEs and allocate resources “to encourage small firms to export”. Why do you feel that UKTI is perceived to be still struggling to reach out to smaller businesses?

Nicola Bolton

It is a reach-and-range question. There are so many small businesses out there and we are only a finite entity of people and money to do something with. Partly we are limited by purely the resources that we have got. Also, it comes back a little bit to the conversation I was just having with Mike about awareness-raising and the different channels of communication that there are, really.

Mr Walker

There seems to be a good level of awareness that there is support out there and that UKTI exists to do this job. If anything, UKTI has done a good job of raising that awareness. Why do you think small companies are not necessarily engaging in that? Is it simply that there is a proportion of small companies that never will?

Nicola Bolton

There is a proportion of small companies that never will, and then some of them just are not aware of how easy it is to take the next step into exporting. A lot of the work that our team of international trade advisers do in the English regions, for example, is to work with companies not only to help them access overseas markets and learn about the countries but also to build their own capabilities and skills. You cannot start exporting if you are not capable as a business in the first place, so much of the work that we do with the ITAs on that side of things—our Passport to Export programme, the Gateway to Global Growth and so on—is helping them just build their capability as a business. One of the things that will help them is something like our e-Exporting programme, which will help companies reach through online channels other markets. With a lot of the small businesses being founded by more digitally-oriented people these days, it is a more natural step for them to think about exporting in that sort of way. That programme aims to bring together a lot of commercial agreements and memoranda of understanding that we have signed with the Tmalls and Alibabas and so on of the world that help them springboard into new marketplaces. What we are also doing is through-branding some of those on those foreign marketplace websites with the GREAT brand so that you get some really good bringing-together of the awareness and build a “British is best” concept, if you like, behind the particular themes.

Mr Walker

That is very interesting. We had some feedback from some of the earlier panels that the work that the GREAT Britain campaign is doing overseas is very much appreciated and is really good interaction, and yet the advertising campaign domestically in the UK is seen to be a bit less pointful. Do you know what the breakdown is in terms of spending between the two? Do you recognise that concern?

Nicola Bolton

I do not know what the breakdown of spending is, but I can write to you afterwards with the figures.

Mr Walker

That would be useful.

Nicola Bolton

There is a difference there. UKTI is not responsible for the GREAT campaign—that is run from Number 10 and you would need to talk to them more specifically about that—but UKTI ran a campaign in the UK a year ago that was very successful in generating leads and opportunities for new businesses, and I know that we would be keen to do more. I cannot share that because we are in discussions about it, but we are aware of that.

Mr Walker

One other line from the FSB. They concluded that there is a “perception among some of a wider shift in priorities away from smaller businesses”. I have talked with previous panels about this concern that the drive to promote medium-sized businesses exporting has sometimes made small businesses feel like they are not the focus. I am sure that is not the intention, but do you feel there is any risk that UKTI could sometimes cherry-pick the larger companies that are doing bigger deals in order to meet export targets?

Nicola Bolton

No, I do not think we do. We are agnostic about the shape and size of companies that we support, we are blind to the sectors that they operate in and we do not mind which markets they want to go out and trade in. It was new money that was put into the MSB programme, so we did not divert money away from supporting small businesses into the MSB programme when it was launched. That is very clear and on record and Lord Livingston has corresponded with Mike Cherry to that effect. We have a very clear distinction there.

Mr Binley

I was struck by Mr Barr’s view that there is a very high client satisfaction level with MAS. I noticed it was placed at 95%. What are the criteria? Is it increased profitability or increased employment? Is that the basis for satisfaction, or do they just like you?

Steven Barr

I am sure they do.

Mr Binley

I am not sure about that yet; you have got to convince me.

Steven Barr

There is a wide range of factors. It includes the quality of the service, and the knowledge and understanding of the adviser who works with them—a whole range of factors that add up to their experience with the Manufacturing Advisory Service. I do not have the details to hand but I could provide them.

Mr Binley

Could you let us have them? I have heard all this nonsense for a very long time—nine years on this Committee—and what I really want to see is what the improvements are in terms of actual factors. I want to know whether profitability has increased, whether size of exports has increased and whether size of manufacturing has increased. They are the things that count. All too often we do not quite get the answers in those forms. Can you come back to us with those answers?

Steven Barr

Can I just check: is it specifically the jobs and GVA or is it also the quality—

Mr Binley

I want outcomes that we can see and judge by. I have been crying for those for a long time now. If you could come back to me with those outcomes, I would be grateful.

Steven Barr

I will certainly do that.

Chair

And to the Committee.

Mr Binley

Thank you very much. The same for UKTI, if you would, please.

Caroline Dinenage

We have heard concern that UKTI has not guaranteed the level of funding for the Tradeshow Access Programme into 2014. Businesses value continuity and the ability to plan for the future. I wondered if you could confirm what the level of funding for this scheme will be going forward, please.

Nicola Bolton

I would like to start by confirming that overall we have increased the level of funding that goes to business for exhibition support. Spend on things like our Tradeshow Access Programme this full year remains around 28% higher than it was in 2012‑13. I cannot confirm what the funding level is going to be for next year because we are just in the course of doing our business planning at the moment so our budgets are not finalised, but we have doubled the amount of support that we have provided to businesses and we have created a range of offers for them. You have trade-show access that they can get; they have events and missions that they can go to. We are looking at a total package of offers. I am meeting with around 40 trade associations of the Sponsors Alliance later this week to talk about that and to discuss where we are and how we work together on that. I am taking a very collaborative approach to working with them. We have a series, for example, of sector panels that we are convening to allow them to feed in and shape the requirements for next year—for example, which are the core events that they think are really important for businesses in their particular sector—so that we can work together on that.

Mr Binley

What outcomes are you looking for?

Caroline Dinenage

That is what I was about to say.

Nicola Bolton

The outcome I am looking for is to help more businesses get abroad to trade shows and win business. It is very simple.

Caroline Dinenage

It is really difficult to measure the outcomes of these trade shows because sometimes the benefits can be seen a really long way down the track. Is there any way that you can pull the data—

Nicola Bolton

We do measure it. We measure it in two ways. UKTI overall looks at the number of companies that we assist. Every time we help a company go to a trade show, that counts as that type of assistance. We also monitor and ask them to tell us the amount of business they win as a result of working with UKTI—something called a “business win”. We have a form; it is signed by the customer and it sets out exactly the level of support that they have had from UKTI and whether they would have achieved that on their own or not, and various other things that they fill in. That drives and underpins the outcome that we deliver in terms of supporting business. It is robust and auditable.

Mr Binley

So it is going to be easy for you to let us have those figures.

Nicola Bolton

We can let you have figures about business wins, absolutely.

Mike Crockart

Just a very quick question before we leave UKTI. I was struck by the answer you gave to one of the previous questions where you said you were blind to sectors. I was quite surprised by you saying you were blind to sectors given that BIS has spent so much time identifying particular sectors and building strategies around them. Does that not fit into the policies that you then follow of which sectors you are—

Nicola Bolton

Not at all. I think you have misunderstood my point. We have two halves to our business. We have the bit of the business that is the ITAs out on the ground—the 300-plus international trade advisers helping the nearly 48,000 businesses every year who pitch up one day and say, “I would like to export and I would like to do it in France or Germany or China”. We do not say to them, “Ah, but you are in Sector X and therefore we are not interested”; we help them. We have another part of our business that is sector-oriented, and that is where our High Value Opportunities programme comes in. That has delivered some £14 billion worth of business wins since its inception in 2011. That is very sector-oriented. We link into the industrial strategy sectors—in fact, we cover over 20 different sectors, but we are linked into those highlighted in the industrial strategy, where we join up on our trade and our investment activity to bring it together as a whole. Indeed, Janice and I and our bosses are looking at how we do more now to align Janice’s teams in the industrial strategy bit of BIS and the UKTI sector teams so that we can make sure that we are even more tightly working together than we are today. When I say “blind” I mean we have to be reactive and help any business that comes to our doors, but for our high-value opportunities, the whole point of which is about finding the opportunities that have got the most potential to bring the supply chain along behind them, we are very much focused with sector strategies. You will have seen some of those published, I am sure.

Mike Crockart

What is the split of your resources that are going into those two sides?

Nicola Bolton

It depends what you mean by resources. They are not all UKTI resources because we have private-sector delivery partners. That was why I was hesitating; I was getting into how many people we employ.

Mike Crockart

Perhaps it is something to take away, then.

Nicola Bolton

Yes. If you do want a breakdown, there are about 400 people working in the regions in the international trade teams. I will come back with the exact number on our sector teams.

Chair

Yes. You can easily submit that as supplementary evidence. Mr Godfrey, it is your turn. Export finance: an incredibly important but also incredibly arcane area. Can I bring in William Bain to question you on it?

Mr Bain

Thank you. I seem to specialise in incredibly arcane things, Chair. Mr Godfrey, if I can ask you about the buyer credit facility, this was the most popular product that BIS was offering in terms of export finance in terms of the amount of money involved. It was roughly £2 billion last year, helping 16 exporters. What metrics have you established to estimate what value this particular scheme has to the UK economy?

David Godfrey

Stepping back, UK Export Finance has to, through the cycle and over time, not be a drain on the taxpayer. We have to make money for the taxpayer. Indeed, over the last 10 years, we have paid a significant amount of money over to the Treasury as a result of our overall activities. We would not look at an individual buyer credit in that context; we would look at it from the point of view of whether we are earning sufficient premium on that exposure to justify the extension of it, and we would look at what it is doing in terms of both the company that we are helping to secure that contract that it would otherwise not secure and also how many companies in the supply chain are being supported in the UK as a result of that. What we do not look at for an individual buyer credit is some metric of the number of jobs created, for instance.

Mr Bain

The number of companies that export that are helped by this particular facility has risen from three to 16, but what scope have you examined for what is the unmet need amongst particularly our small and medium-sized manufacturers who could be looking at exporting?

David Godfrey

You have to look at the whole range of products that we offer. Buyer credits are one particular traditional form of support whereby we will offer a guarantee in favour of a bank that provides loans to a buyer provided that that foreign buyer uses the proceeds of that to purchase from the UK. That is the traditional form of export credit. As you will know, in 2011 we were given powers to re-enter what is called short-term business. Short-term business was privatised in 1991 because we believed then that the private markets would deal with that kind of support, which I will go on to define. As a result of the credit crisis, we found out that the private market did not provide that sort of support. What we are also providing now by way of support for up to two years is export insurance. That is to say, if you are exporting to Kazakhstan, we will give you insurance that you will be paid for that export, we will support working capital if you need to build working capital in the context of an export contract, and very often you are required to provide bonds—performance bonds or advance-payment bonds—which we will do as well. I really think what one has got to look at now is the whole range of products that UK Export Finance has available to it to support both large companies and small and, indeed, micro companies.

Mr Bain

It is interesting that the number of companies helped by the Bond Support Scheme, for example, has doubled between 2012-13 and 2013-14 to 68. It is, indeed, the most popular scheme in terms of the number of companies helped that you are offering. What would you explain is the particular reason for that?

David Godfrey

Bond support is essentially a contingent liability. A bank is asked to issue a bond on behalf of you, the UK contractor and exporter. It sits on a bank’s balance sheet for quite a long time—it can be there for five years or longer. It uses up credit capacity. In an environment where banks continue to be constrained, particularly for SMEs, it is a product that can be not terribly popular. What we find with smaller companies is that, in my estimation as a former banker, they are often asked for unreasonable and unrealistic terms for that bond support—for instance, to have it cash-collateralised, which for an advance-payment bond, when you are getting the cash in for your working capital, really rather defeats the purpose. We have found that a lot of small companies have come to us on the basis that their bank will only provide a limited amount of support or, indeed, no support at all, and our willingness to shoulder that risk for bond support has been very popular.

Mr Bain

It is a very interesting point. What we have heard repeatedly this morning from the three different panels is that there is still too much of a culture of short-termism, much of it being driven still by the banks, and that we do need to be more creative in the sorts of products that are available to small and medium-sized exporters to allow them to have a chance for the long term. Do you see this particular Bond Support Scheme as one that could expand to meet that gap in the financial services market for SMEs?

David Godfrey

We are there; we are available. Absolutely. To the extent that companies require more by way of bonding support, we are there to support that. We are there to support working capital needs. As I mentioned earlier, you may need to build working capital. Again, the banks have lost a generation of people who are able to look at self-liquidating trade transactions—that is, the security of the transaction itself gives you the comfort to be able to provide the support for it, so you will see a big increase in working capital in anticipation of or ahead of an export contract. We think that is absolutely legitimate. As companies are growing, they build working capital to support exports and to create jobs. Again, we will provide support for working capital. One of the things that we are looking at right now is ways in which we can extend our Act, which is going through the process right now, to be able, particularly for working capital, to make that product available more broadly.

Mr Bain

In the annual report this year it was reported that UKEF underwrote the export of aircraft worth more than £54 million to the Republic of Ireland. Is this just one example of UKEF taking on liabilities to export to EU member states? Is the criticism that could be made of this particular underwriting not that it is simply targeting an easy win rather than supporting those businesses that wish to export to new or harder-to-reach markets?

David Godfrey

Supporting that particular transaction did in no way detract from our ability to support exports to the rest of the world, and particularly to the growing markets that I know we need to attack. We are able to support exports through buyer credits to rich markets—to the EU. It may well be that in that case the alternatives for financing were not available or were not open to that particular buyer and in that case we were able to support it. Since the credit crisis, we have supported business to markets that historically we would not have supported. We have done buses to New Zealand, for instance, which a few years ago you would never have thought we would do. That is lessening now because the banking market is coming back quite strongly, but we are able to support that kind of business—but not to the detriment of those areas particularly where HVOs are involved, which tend to be in the emerging markets where finance and the availability of finance is critical.

Mr Bain

Do we still need export guarantees in order to trade with EU nations such as the one that we have just discussed?

David Godfrey

From time to time. There will be a limited requirement for them. Again, a lot depends on the cycle of finance. In 2008 and 2009 it was difficult to finance things in most countries, quite honestly, particularly long-term. One of the goals I am trying to achieve in my term as CEO is to ensure that we have a portfolio of products that is fit for purpose through the cycle. There is a real danger of short-termism and, “You are not using this, so let us stop it”, whereas as the cycle moves we need to be responsive to that cycle and be able to fill gaps when those gaps arise, as they did in 2008 and 2009, and as they inevitably will do again.

Mr Walker

Both UKTI and UKEF have expanded their offering to small businesses and are making that push to reach out to more small businesses. Both come from a history of having been involved with very large deals particularly, and particularly on the resources front and so on and so forth, in the past. I just wonder if you have looked at the case for cross-subsidy there in terms of charging the biggest companies—the big multinational companies that you work with headquartered in the UK—more for the very valuable support that you provide to them in order to support SMEs and spend more on reaching out to SMEs. Is that something that been considered in either UKTI or UKEF?

Nicola Bolton

I asked the question. I only joined UKTI in the summer and it was one of the questions I asked. I am told that we are not allowed to do that and that there has been investigation into that and there is case law that prevents us doing that. I am not a legal expert, but it is getting into the state aid type of territory when you come to cross‑subsidisation. We can charge for events and indeed we do charge for different events, so that would be our mechanism.

Mr Walker

Yes. But you can only charge the cost; you cannot effectively make a profit and redistribute that. Is that what you are saying?

Nicola Bolton

We are probably getting into definitions of aid and things like that.

Mr Walker

If you can write with some more information on that, I would be very interested to see it, because it is something I have pushed before with Ministers. It would be quite interesting to look at.

David Godfrey

I would say pricing of our products is not an issue. We are governed by a series of pricing grids that are established at the OECD level and that we have been heavily involved in, which is risk-based pricing. For certain types of sovereign there is a floor below which you cannot go, at least if you are an OECD ECA. Those are pretty rigorously adhered to. We do not get criticisms from the likes of Airbus or Rolls-Royce that we are uncompetitive, and if we ever did we would look long and hard at the pricing to make sure that a UK company was competitive. We do not cross-subsidise as such. Is the business that we do for the micro companies profitable per se? If you fully costed it, no, it probably is not, but that is not the way we look at it. I am not looking at whether I am making enough premium on a micro business to cover the expected loss—which will be higher than it will on a bigger business—because overall, going back to the earlier question, our metric is to ensure that we cover our administrative costs, we cover our expected loss and we make a small return on the capital that the Treasury puts aside to support us. I do not think it is an issue.

Chair

Could I just intervene at this point? When you determine whether you are going to support a particular venture, do you have a premium rate that corresponds to the level of risk involved? If so, how do you assess that risk?

David Godfrey

Absolutely. We assess it with very much the same techniques as the banks would use. If it is a sovereign, we would look at the sovereign credit rating, we would look at the likelihood of default and we would look at the expected recovery rate—how long we think it would take us to work that through. We would have a very strong view on the expected loss and what we needed to cover that expected loss.

Mike Crockart

You are talking about credit facilities, corporate bonds and support for working capital, all banking products and particularly trying to fill in where the market has failed. You are doing that aimed very much at companies that are exporting. What is the difference between what you are doing and what the British Business Bank is doing across the economy more generally? Is there internal Government competition going on there? Is there an argument for bringing those two together?

David Godfrey

There is certainly not internal Government competition. I met last week with Lord Livingston and Keith Morgan, who is my counterpart at the British Business Bank, specifically to talk about areas where there may be overlap or underlap between the British Business Bank and UK Export Finance. I would say the business models are very different between the two organisations. The British Business Bank is looking at funding institutions where that funding will create leverage into the economy. For every pound that they invest, the private sector—be it a bank or a fund—will invest £7 or £8. They do it very much on a wholesale basis and it is delegated through delegated authorities to the institution. Ours is much more of a bespoke single-name credit, and it is targeted purely at exports. That sounds like me trying to argue that they are completely different. There are ways in which we think we can work more closely together. We can learn from them through their delegation model to delegate some of our authority to banks and brokers so that they can get more quickly and more efficiently into the private sector. We can work with companies and funds where some of their expansion capital may well go to companies that are going to export and they should know about us, which we already do with the Business Growth Fund—every one of their companies gets a flier on UK Export Finance so that when they invest in a company for growth, hopefully a large element of which will be exports, they know that we are there. We can do more, but we are working with the British Business Bank and the British Growth Fund to make sure that each of us is aware of the others’ capabilities.

Mike Crockart

I accept what you are saying about it being a different model—it is a wholesale model—but equally we have heard evidence from companies that have been arguing for the British Business Bank to be able to take on more of the responsibility, for example, for regional growth funds, which are very much targeted at individual companies. There is definitely a movement there.

David Godfrey

We welcome the discussion, because there are fertile areas to pursue.

Chair

I have a couple of quick questions. What proportion of your guarantees fail? Again, if you want to provide us written evidence, that would be very helpful.

David Godfrey

Yes, I can provide you with that. The best evidence of that is our claims, and our claims paid in the last decade have been very modest. We can get the exact numbers. I think it is as low as £30 million. Remember that our risk portfolio is running at something like £19 billion. That is contingent liabilities that are off the Treasury’s balance sheet and the Treasury would like to keep them that way, but every now and then we have to make claims.

Chair

Given the fact that you effectively operate on a cost-neutral basis to the Government, is there not a danger that you cherry-pick the easy ones that guarantee that you get your money back, if you like?

David Godfrey

The answer to that is no. We do not cherry-pick. We look at cases that are brought to us by banks, by insurance companies and by exporters direct and we will assess them on the merits of the risk involved. There are cases where we will turn transactions down because we just do not think that the risk is the right risk. I can think of one case where we did that. We went back to the company and we said, “We do not think this is the right risk”, and they agreed with us in the end. No, very strongly.

Chair

Could you also give us some figures—again, written evidence will be fine—on the numbers that you turn down?

David Godfrey

Yes, I am sure we can get that information.

Chair

Okay. That concludes the questions. Thank you very much. That is very helpful indeed. Again, if you feel that there is anything you would like to add to any of the questions that we put to you, please feel free to do so, and we will be following up with one or two questions as well. Thank you very much. Oral evidence: Government support for Business, HC 770-iv 21