Oral evidence: The Productivity Plan, HC 466-iTuesday 13 October 2015

Oral evidence, 13 October 2015.

Witnesses

Rain Newton-Smith, Director of Economics, Confederation of British Industry, Stephen Ibbotson, Director of Business, Institute of Chartered Accountants in England and Wales, Allan E Cook CBE, Chairman, Atkins, and Vice President, Royal Academy of Engineering, and Kenny Richmond, Economics Director, Scottish Enterprise, gave evidence.

Chair

Good morning. Thank you for coming to give evidence. I am sorry to have kept you waiting. Can I ask you to begin by introducing yourselves and saying where you are from?

Rain Newton-Smith

Rain Newton‑Smith, Director of Economics at the CBI.

Stephen Ibbotson

I am Stephen Ibbotson, the Director of Business at the Institute of Chartered Accountants. Previously, for most of my career, I was a finance director.

Allan Cook

I am Allan Cook, Chairman of Atkins engineering consultancy. I am also Vice President of the Royal Academy.

Kenny Richmond

I am Kenny Richmond, Economics Director at Scottish Enterprise, which is the main economic development agency in Scotland.

Chair

We are looking at the Government’s Productivity Plan. Government has a role, but businesses are key to improving productivity. In your experience, are your members doing enough to raise productivity? Are they doing enough to invest in things like new capital, new innovation and new skills? What is the feeling of businesses out there? Should they be doing more?

Rain Newton-Smith

You are right that, ultimately, productivity needs to be led by business, but Government plays an important part in enabling a lot of that productivity. In some of the research we have done and from talking to our members, we know that there is more that can be done to improve management skills. That is one of the things that came out of our “A better off Britain” report, which compared productivity in different sectors but also at the firm level between the US and the UK. You can see from what our members are doing that they are investing in training, but there is clearly more that can be done. One element on that that we welcomed in the Government’s Productivity Plan was the income‑contingent loans for MBAs, because we know that has been a bit of a gap for the UK. There is probably more that can be done within that. We are certainly a big advocate of people learning throughout their careers and the ability to study while you are also in part‑time employment. That is why we think it would be good if the Government looked at lifting the ELQ bar.

Chair

Stephen, can I bring you in? I should also say that I am a member of the Institute of Chartered Accountants in England and Wales.

Stephen Ibbotson

I agree with Rain, in that it is mainly down to business to do this, but clearly the Government has to set the right framework. Over half of our 145,000 members are in business, so they are finance directors, finance controllers and that sort of thing. The other less than half are advisers. They advise over 1.5 million businesses, so they are clearly very involved and engaged. They tell us, in recent surveys, that they are slightly concerned about geopolitical things. It was uncertainty around the election, uncertainty around Europe. They also tell us that, therefore, they are not investing as much as they would and they are keeping hold of their cash. There is a part the Government can play there in terms of creating the right environment for investment, which is an environment of stability and confidence. I can give a more micro example around the annual investment allowance, which has floated up and down from £25,000 to £500,000. There was no certainty. There is now, over how much it is going to be for the long term, and it is going to be fixed at £200,000, but things like that, which actually give confidence and certainty, are the things that can help.

Allan Cook

From my point of view, industry absolutely has a responsibility, Government has a responsibility and education has a responsibility to deal with productivity. If you speak to any of the advanced manufacturing or engineering companies in the UK, they will absolutely tell you that productivity is one of the key drivers towards improved profitability and, of course, future growth. Certainly, there has to be responsibility with industry, but there also has to be, as Stephen said, a framework in which the industry can actually operate effectively within this environment. I really do wish, Chris, there was a silver bullet on this particular one, but, believe me, if there was a silver bullet, I think we would have found it by now, and I do not think we have. It is an ongoing issue and challenge that we face, but it is a joint responsibility, absolutely.

Kenny Richmond

Our evidence and research suggests that there is a relatively small core of companies in the business base that are highly productive, innovative and are growing. It seems to be the wider business base that has a very long tail with less productivity growth and less ambition to grow that is dragging down the UK’s average.

Chair

You have said that Government has a role in terms of producing a framework, and in terms of having an environment that is conducive to investment, to moving up the value chain and to being ultimately better in terms of productivity. Does the Productivity Plan published in the summer achieve that? Allan, you said there is no silver bullet, but is the blend and mix of policy prescriptions contained within the plan appropriate for your members in order to solve the productivity puzzle? If not, what else should be in there that could really help to address businesses’ concerns about productivity?

Allan Cook

The plan itself has 15 points. Effectively, it covers almost everything. To be perfectly honest, there is not a lot there that you could say has been left out or omitted. What I would like to see—and what the fellows of the Royal Academy and industry, if I am speaking on behalf of the engineering industry, would like to see—is a degree of pressure on certain points. There are three points that have been talked about this morning already: skills, innovation and investment. Those three factors, from an engineering and advanced manufacturing point of view, are absolutely critical. Kenny mentioned the fact that there are certain innovative companies that are really, really committed to driving productivity. The reason they are committed is that they are operating on an international stage. The landscape, now, is international. Michelle talked about Norway. Of course, that goes to North Sea oil and the energy side of things. We talk about growth in terms of China and India, where one of the things Paul was talking about was education. In actual fact, our education system itself has been world class, but you will find now, if you look at the top universities in the world, that there are more and more Chinese and Far Eastern universities creeping into that, basically, to challenge Oxford, Cambridge, York, Durham, Leeds, etc. The challenge that we face is actually an international challenge. Productivity is all about how we deal with that international challenge, for my members.

Stephen Ibbotson

In my old job, I would have struggled a bit with the Productivity Plan, I have to say. It is a worthy list of 15 things, but it is not prioritised. There are no timeframes, there are no responsibilities, there are no outputs and there are no measures in there, and they are all things that, as a finance director, I would have looked to see. There was some discussion in the earlier panel about the validity of productivity statistics, but they are what they are—they are internationally accepted at the moment and changing them would be a big thing. We would certainly recommend some form of productivity target that was attached to the plan. Singapore does that and it seems to work very well. They have huge productivity in Singapore. To Allan’s point, too, there are three things that come out from my discussions with our members. They are not quite the same three things, but they are, certainly, skills and education. We are hearing increasingly about difficulties and skills shortages. I was talking to FDs last Thursday in Devon in Cornwall. They could not get anyone to quote to build 20 to 30 developments of houses in Cornwall—not even to quote for it—because of skills shortages and, I guess, a bit about the regional area, so skills and education is the top one. Second would be infrastructure, which would be where we would differ. To your earlier panel, it is digital and physical. We get a lot of feedback on infrastructure. Third would be investment and innovation together.

Rain Newton-Smith

You highlighted the three main drivers around skills, innovation and also investment. I know you have discussed a bit previously around skills. In the UK, we have a unique challenge in terms of getting the people to where jobs are being created, which does relate to our housing and infrastructure. On that, in the plan, where they got things right was the element on brownfield sites and prioritising in particular brownfield sites for housing developments that are related to big infrastructure projects. That shows a more joined‑up approach between decisions made on infrastructure and housing. There is clearly more that needs to be done. We know that, in terms of housing supply, we should be building 200,000 homes a year; we are not coming close to that. On infrastructure, we certainly welcome Lord Adonis heading up the infrastructure board and we really hope that will provide a focus on the long‑term infrastructure needs in the country, but we need to make sure that we deliver on some of the infrastructure projects that are in the pipeline. In particular, we know that we need to see a final decision on south-east capacity in terms of aviation. It is important that we see that, because that is important not just for our productivity, but for our exports. We know there is a clear link between firms that are able to export and their overall productivity. In terms of innovation, the UK ranks fourth according to the World Economic Forum in terms of our overall availability of technology, but we are not so good in terms of how that diffuses throughout the economy. One of the real successes over the previous few years has been the Catapult centres and the work that Innovate UK has done in terms of allowing access to some of these technological innovations to firms of all sizes. It is important that we protect some of those innovations going forward. Finally, in terms of investment, we certainly welcome the annual investment allowance finally being made permanent, but the other element that was welcome within the Productivity Plan was the announcement about a business tax road map and the overall focus on broader business taxation. We know we are in a situation now where, if you make one of your buildings more energy‑efficient or invest in it otherwise, you will end up facing higher business rates. Our broader system of taxation does not recognise some of the issues within that. That is one of the reasons why investment as a proportion of GDP in the UK still lags behind some of our G7 peers.

Kenny Richmond

We see evidence suggesting that the productivity challenge differs by sector, by region and by company size. It is having the evidence underneath that to understand why that is so that we can start to focus our policies at the right area. To recap on a couple of comments made about the importance of innovation and internationalisation, there is lots of evidence, obviously, that internationalisation and innovation are closely linked and both drive productivity. Looking over the last 10 years, though, there are some concerning trends. The proportion of the small and medium‑sized business base that is exporting has been declining, as is the case for those introducing new products and services. Again, that suggests that, within a large proportion of the business base, there is something going on that we need to understand better and to make sure the policy focus is on.

Chair

Kenny, you mentioned sectors. Allan, you are Chair of Semta. Semta has provided a submission to us where it says, “The phrase ‘industrial strategy’ does not feature within the Productivity Plan. Without thinking sectorally, and ensuring that there are co‑ordinated and sustained efforts by Government and employers within individual sectors, we will not meet their skills needs.” Is there a direct correlation between an industrial strategic approach and improvements in productivity?

Allan Cook

Absolutely. I do not think there is any doubt at all about that. In fact, one of the sectors we do represent is aerospace and defence, of course. In the last five years in aerospace, they have seen an improvement in productivity of about 30% over that period, compared with about 4% in the UK as a general figure. That has certainly been helped by demand. Everybody recognises that aerospace, certainly from a civil point of view, is an international marketplace. It is very heavily demanded from an international point of view. Actually, if we are to compete from an aerospace point of view, we have to be competing on an international basis. Also, it is demand‑led, of course. There is a high demand for the skills, expertise and capabilities that we have. The sectoral approach and the industrial strategy that was brought about within BIS over the last five years have proven to be effective. If you talk to probably all the companies in the advanced manufacturing and engineering sector, they will say that a consistent approach over the last five years of the previous Government has led to an improvement in collaboration and co‑operation. Ray mentioned the Catapult. Analysis of the High-Value Manufacturing Catapult[1] has shown that for every £1 investment, you get a £15 return, and that is based upon innovation capabilities, technology and access to that by not only the large companies like Rolls‑Royce, Jaguar Land Rover and JCB, but SMEs. You have access to that sort of information and you see the return. Although it is not mentioned in the Productivity Plan put forward by George Osborne and the Secretary of State for BIS, it is inherent in terms of what needs to be done from a sectoral point of view. I honestly believe that it is fundamentally important to what we are doing.

Chris White

Perhaps it should be more explicit than inherent, I would suggest. My question is directed to yourself, Allan. The written evidence from Engineering the Future stated that, in half of engineering companies, a “shortage of skilled people is causing a significant impact on their productivity and growth”. Would you agree with that statement? If you do agree, what should businesses do to improve this deficit? Are apprenticeships and work experience making a difference? What more could be done?

Allan Cook

There are three big questions in there, Chris.

Chris White

My apologies.

Allan Cook

The first thing is that it is absolutely correct about the skills shortage. People speak about the potential or risk of a shortage. Stephen mentioned it in terms of the West Country already, but our estimates say that probably by 2022 we will be 550,000[2] skilled engineers, technicians and apprentices short in the advanced manufacturing and engineering sector. That is a huge shortage. We need about 1.28[3] million engineers just to satisfy existing growth targets in the engineering sector by 2020. That is to cover for the people who are leaving the industry, going through the area. It is absolutely critical now and it will become even more critical. The second part of your question was: are we doing enough? Absolutely not. We are not doing enough in terms of changing the perception of the industry by a whole generation of schoolchildren, in my view. Too often, teachers and parents certainly regard engineering—I cannot speak for the rest of the sector—as maybe not a career they should be aspiring towards. Maybe it is financial services, medical etc. Actually, when you think about what engineering can do and is doing for this country, it is absolutely something that we should at least be encouraging our children to look towards. Consider this as an option. If you take design and technology, something that is at the heart of innovation, and look at the figures, from 650,000 kids going into GCSEs over the past five years, the number has dropped down to about 225,000. It has halved over the last five years. It is an incredible gap we are going to face. Apprenticeships are part of the solution; they are a big part of the solution. I applaud the previous Government and this Government for highlighting apprenticeships as a part of the solution. There is absolutely no question. In the last session, Anna mentioned the importance that Germany places on apprenticeships and they have had that consistent approach for certainly decades and maybe even centuries. We have had a stop‑start approach to apprenticeships. In the 1970s and 1980s, apprenticeships almost ceased. Companies were not encouraged; Governments did not encourage. There was really a lack of investment into apprenticeships. We are seeing and have seen the importance of this and the difficulties that it creates. I am pleased to say that that has changed. The approach is consistent now. It is absolutely a part of the solution, but it cannot be the only solution. Kids need to have options and those options should include technical training, universities and options for apprenticeships. It is basically “earn while you learn”. It is a great idea; a fantastic idea.

Chris White

To follow up a bit on that, whether that is scholarships, bursaries or work experience schemes, is there a lack of co‑ordination between all the different options on the table? Could businesses, schools, colleges and universities work better together to take a lead on influencing some of our younger people into these industries?

Allan Cook

One of the things that businesses say openly is that they find it very difficult to choose. There are a lot of initiatives around in various forms through BIS and other initiatives. They are all well meaning but, if you look at small and medium enterprises, they find it very difficult to manoeuvre and navigate their way through these options. The co‑ordination that has to exist between education, further education, higher education and industry, helped by the Government, is absolutely essential. It has to be a holistic approach; it cannot just be an individual approach.

Chris White

Do you think that businesses, particularly in your sector, are being forced, because of the skills shortage, to bring people from abroad?

Allan Cook

From an overall point of view, bringing people and encouraging people to work within this country can, in many, many ways, help our productivity and growth. There are certain parts where we have skills shortages and, at this particular moment in time, from a short‑term point of view, it is the only way we can actually address those.

Stephen Ibbotson

I absolutely agree with everything Allan has said, but I would just like to emphasise at least that what I hear from our members is the difference between SMEs and larger companies. For SMEs, particularly around apprentices, while they tell me, at least, that they support the principle, actually getting an apprentice in a small company can be detrimental to productivity because it takes experienced people to work with them and they also sometimes struggle to get the calibre of apprentice that they want. I am just hearing this straight from the coal face, but I do not have any evidence.

Rain Newton-Smith

I would say, more broadly on apprenticeships, that we certainly see eye to eye with the Government and others on the need to increase the overall number of apprenticeships. It is clear that this is one of the keys to addressing some of our skills shortages. We know that by 2022 we need to create over 2 million skilled jobs. In particular, we know in the UK we are less good at developing the level 4 and 5 skilled technicians, and apprenticeships are a clear way to deliver that. Some of our concerns around the apprenticeship levy in particular are that it is a blunt tool and that it could lead to lower‑quality apprenticeships. We are keen to work with Government on making that apprenticeship levy work well, which is why we think there should be an independent apprenticeship levy board that controls the funding and works with businesses on making sure that we have the right skill level for those apprenticeships; that we are ambitious in terms of the overall quality of apprenticeships being offered; and also that the overall levy is put at the appropriate level so we do not crowd out some of the investment that companies need to do in other employees, improving their skill sets and the in‑house training that is vital as well to address overall productivity.

Peter Kyle

I have a follow‑up question to Stephen. Stephen, you mentioned the worthy list and the absence of productivity targets. Can I invite you, on the three areas that you suggested as your priorities—skills shortage, infrastructure and innovation—to say what targets you would like to see in the Productivity Plan?

Stephen Ibbotson

I was referring there to a target for productivity itself, which you would have to break down by segment, and nothing more than that. As I said, in my old job I found that what got measured got done, and that was a way of doing it. I would happily answer your question from the earlier section, too, when you asked about the northern powerhouse. I happened to be with a group of our FD members last week in the north, in Manchester, and they expressed that concern: that infrastructure and the availability of skills would be real handicaps to having a northern powerhouse.

Peter Kyle

Could I come back to the question to you?

Stephen Ibbotson

I thought I had answered it.

Peter Kyle

You did, but, if I could prod your creativity a bit more: if you were to suggest targets for productivity, what would they look like? Could you give more formal productivity targets that are not included in the plan?

Stephen Ibbotson

Again, in my old job as an FD, I would try to quantify the impact of some of the priority areas of those 15. Fifteen, in my view, is too many. I would then apply those potential impacts to the current productivity levels. You would probably have to do something about international comparison and purchasing power, and then those would be the targets.

Peter Kyle

So we get the methodology but not the outcome.

Allan Cook

To that one, I would take the OECD data that was in the graph right at the front of the report and say, “Okay, which countries”—because I come back to the international perspective—“are actually outperforming us in terms of productivity?” It is the USA, France, Germany, etc. The USA is miles ahead of where we are, between 20% and 30% ahead. If we are going to compete as a nation in the international marketplace, we have to take that as a target. I would strip out that information and use that as a benchmark that we should be aiming towards. Certainly, if you talk about investment in R and D, etc, the general impression, certainly from our members and through the Royal Academy, is that we need to have between 2.8% and 3% of GDP invested in R and D. That is the sort of figure that we would see. It has dropped, and we starting to see and have seen the actual effect of that drop in R and D. Actually, it goes back. Even if you whack that up to 5%, the most important thing is: where do the skills come from; and where do the people come from who are actually going to be able to spend that money in terms of developing technologies, capabilities and expertise? It all comes back to the approach that we take with regard to skills and the gap. Stephen mentioned the northern powerhouse, and it is absolutely true. Unless in Manchester, Liverpool, Newcastle and further north, you have a skills structure in place, you are not going to be able to see that powerhouse come through.

Kenny Richmond

On that, the Scottish Government has set targets or aspirations for Scotland’s productivity performance to match the OECD top quartile. Underneath that, for a number of the drivers of productivity, there are targets and aspirations. We think it is really useful, and we can look at those countries that are performing well and try to understand what they are doing and whether there is any learning we can get from those countries. That is a good framework to achieve and to aspire to.

Rain Newton-Smith

Before we get to the stage of setting targets for productivity, we need to get better at measuring productivity itself. That is partly what Sir Charlie Bean has been tasked with, and we know we do not measure well service‑sector output, particularly. When you have a changing technology that drives changes in relative prices, some of our productivity puzzle does reflect measurement. We also know from research we have done and talking to our members that you really need to look at the different sectors and what is driving productivity at the sectoral level. Again, when you introduce a target, it needs to be something that is within your control. Businesses can control productivity within their own business, but it is much harder for them to have control over the sector or the whole economy. I suppose it would probably be more fruitful to hold Government and businesses to account for some of the drivers of productivity, so making sure we deliver on some of our big infrastructure projects that we know help to underpin productivity, and equally on the skills agenda both for businesses and Government.

Paul Blomfield

I wonder if I could follow up on the theme I was raising in the first session; Allan has touched on it. Allan, you said that the Government’s Productivity Plan has everything.

Allan Cook

Yes.

Paul Blomfield

It does not actually have a target for R and D, but you suggested in your contribution a moment ago that it ought to have one of 2.8% to 3%. Is that your view?

Allan Cook

Absolutely. We think it needs to be a minimum of 2.8% on that. Those 15 points, if you stripped them out, actually do cover innovation, skills, gender and diversity. The point that I make is that it needs to be more specific in overall terms. I see the Productivity Plan as the framework. From that, there has to be more detailed work going into that that targets specific areas. The report said, if I am correct, that if we matched the US in terms of our productivity, GDP would increase by something like 31%. That is huge. There are two things: first, it shows the prize that we could get; and, secondly, it shows the gap that we have in overall terms. Certainly our view is that we must increase R and D investment. Actually, this is also proven. Dame Ann Dowling, our president, has just submitted a report that will be discussed after the comprehensive spending review on the relationship between universities and industry, and the role that Government plays in that. Part of that says that for every pound of matched funding that goes in there, we get £1.30 back. Industry is prepared to put even more than that in, so there is a real incentive for industry and Government to work together. On Rain’s point about the companies doing their own part within their own sector, one of the things the industrial strategy did, in certain sectors, was to get organisations—companies and Government—working together to address some of the long‑term challenges that we face.

Paul Blomfield

I wonder if I could pursue that a little more and perhaps ask Rain a question as well. You talked about Government having only a limited role and business having a critical role. That is right, although we have also heard about the benefits of crowding in further investment in R and D. If we look at that generational slide in R and D, actually, public sector investment in R and D masks the real worrying trend, which is the slide in private sector investment in R and D. How do you change that? That is something business has control over.

Rain Newton-Smith

There are some elements we can do in terms of encouraging more R and D. The patent box and the R and D tax credit have helped to increase some of the focus on R and D by businesses. Those are important innovations that we need to keep. The other thing is, in the UK, the overall definition of R and D within that credit is relatively narrow and more focused on the research end. There is probably more that we can do to encourage businesses on the full spectrum of R and D. That is one of the important elements within that. The other issue, as well, is that it does link into the measurement. We know that overall in the UK we are a more services‑oriented economy and the way we measure R and D is probably not a full reflection of the R and D that is taking place. The way we measure intangible investments or investment in brands, creativity and some of the other areas of technology is not properly reflected in the overall average. There is no doubt we need to do a lot more, because the current share of R and D in the UK, at 1.6% of GDP, means we fall way behind our peers. It is much lower than our target, which should be around 3%.

Chair

Thank you. I am conscious of time again, which seems to be passing by. Michelle, it is over to you for the final question.

Michelle Thomson

I have a question for you, Kenny, specifically. In terms of how the Scottish Government is trying to increase productivity, you mentioned internationalisation and a focus on exports. Where do you see upsides and downsides when compared with the productivity plan of the UK Government?

Kenny Richmond

The Scottish Government’s approach to raising productivity based on investment, innovation, internationalisation and that kind of inclusive growth, which looks at the quality of employment and the quality of growth alongside productivity, covers the main drivers. It has been said that the UK Productivity Plan is quite broad; it is quite high level. What we see in the Scottish Government’s approach and strategy is a bit more detail, drilling down and discussing some of the issues in more depth. You could say that the Scottish Government’s economic strategy is a slightly more detailed version or perhaps a slightly narrower version of the UK‑wide Productivity Plan. From a Scottish Enterprise point of view, it really helps us to focus on those areas where we know we can influence to grow productivity. As I mentioned, the overall or wider targets related to some of those drivers are very useful. Those are some of the lessons that could be taken on for the UK Productivity Plan as well.

Chair

Colleagues, thank you very much. That was really valuable and we welcome your input. Thank you for your time. Examination of Witnesses

Witnesses

Mike Cherry, Policy Director, Federation of Small Businesses, Michael Mercieca, Chief Executive, Young Enterprise, Omar Farag, Director of Operations, The Box of T Ltd (PHOM), and Helen Wooldridge, Co‑Founder and Director, Cuddledry Ltd, gave evidence.

Chair

Good morning. Thank you for coming to give evidence. Can I ask you to just briefly introduce yourselves and say where you have come from?

Mike Cherry

I am Mike Cherry, the current Policy Director at the FSB.

Michael Mercieca

I am Michael Mercieca, Chief Executive of Young Enterprise, an educational charity.

Omar Farag

I am Omar Farag, Director of Operations of PHOM Tea.

Helen Wooldridge

I am Helen Wooldridge, Founder and Director of Cuddledry Ltd.

Chair

Thank you. I do not know if you were here for an earlier session we had this morning, but on the first panel it was said that entrants to markets have productivity as relatively low on their priorities. Does productivity matter to you? Helen, let us start with you.

Helen Wooldridge

Is that in relation to entrants to markets around the world?

Chair

I mean in terms of being a relatively new business. You are entering this marketplace and you want to gain market share. You are not bothered about productivity at the moment. Is that true? Is that a fair reflection of where you are in terms of business performance and success?

Helen Wooldridge

No. Productivity is absolutely fundamental to our business. The productivity of every single member of our team is critical. The output that we can create is entirely based on the skills and productivity of the people who are working with us and ourselves. That does apply to us now internationally, as we enter new markets. We are always looking for people with a very ready skill set who can bring that to us very quickly. We are a very small business, so we cannot afford the risk of working with anybody at all who cannot immediately bring the kind of entrepreneurial approach, and the real self‑starting approach, to making their role extremely productive within our business. Otherwise, that role simply cannot exist.

Omar Farag

I would agree with Helen. Being a small business, the human capital and the productivity of your team is essential. There are only eight of us who operate PHOM Tea. We all have to be completely productive all the time; otherwise it just does not work. To grow, it is important for small businesses.

Chair

Does the Government’s Productivity Plan help you in that? Is it relevant to you in terms of growing your business and making you more productive and successful, or is it just a nice, worthy, if bland document that can sit on a shelf?

Helen Wooldridge

It is a good way of putting it. That was going through my mind earlier. I and Omar are coming at this as businesspeople. Everybody else here today has been talking from a policy perspective. My take on things is very different, even in terms of how I would verse it. In my day‑to‑day operations, I am head‑down, making a business succeed. I actually do not spend a lot of time thinking about what the Government is doing or bringing to us as a business. It kind of has to come to us. When we founded the business, we looked into things in depth and we looked at what was available to us from the Government. We started in 2006, so we had Business Link to work with, which was hugely supportive. Subsequent to that, as a business, perhaps we have dropped off the radar a little in terms of information coming to us about productivity and management. Going back to Anna’s earlier point about management and initiative amongst workers and how that interplays for us as a small business, I do not know that we are receiving a great deal of information about that without us initiating that ourselves. What we do find hugely supportive and we do receive, which does affect our productivity and which the Productivity Plan is relevant to, is from UKTI. I say “Government” and I should not say that as a whole. UKTI specifically we find, as a business, hugely supportive in terms of our current growth agenda.

Omar Farag

As Helen said at the beginning of what she was saying, at this stage in our business our heads are down and we are just running it, trying to succeed. Wider Government policy and things like that are not necessarily things that we seek out constantly—all the time. Our main goal is to generate profit, so we are quite blinkered in what we do. Obviously, sometimes it is good to take a step back and assess what you are trying to achieve, but running a small business is quite intense and full on, all the time.

Chair

Mike, you are smiling at that with a hint of recognition. Is that what your members are telling you—that this is not relevant because people running small businesses are just head down, trying to make sure that the money comes in and profits are made?

Mike Cherry

That is true to a certain extent, but I also feel that many small businesses are actually working at their optimum to increase their productivity, which increases profits, which increases competitiveness, which opens up export markets, particularly with exchange rates at their current levels. It all goes hand in hand. We would contend that the Government has a far bigger role to play in this on making sure that delivery on investment in infrastructure in particular—and that includes not just normal infrastructure, but broadband as well—is moved apace. We have a huge problem, as we heard from the earlier session, around education, careers advice and skills. Small businesses have a role to play within that. I am happy to open those areas up to exploration.

Chair

Michael, what is your perspective on this in terms of the relevance to young people thinking about an enterprise career, in terms of entrepreneurialism? Will this help in any way?

Michael Mercieca

Yes. We welcome the report. Young Enterprise has a focus on young people, helping them to earn a living and succeed in life, but also there is an economic angle. We firmly believe that if you have an enterprising workforce, you have an enterprising nation. We came out of the States about 53 years ago and we are part of a global group of charities; Junior Achievement it is called in most places. Maybe there is something in looking at the productivity in the States. We firmly believe that you have to empower young people with skills, and the academic route is not the only way. In a way, the vocational piece is seen as the underdog. You are leaving at least 50% of young people’s potential on the table, because, if you are monitored on academic results, which is what schools have to do, as you go through the education system, you tend to get beaten down and you can go down some very bad paths. If you unleash that potential—and Young Enterprise does that through business and financial skills—you will just empower people to be successful employees; successful businesspeople, as we see from Omar and Helen; and happy people in the community. We are firmly behind the report. A great step was setting up the Careers & Enterprise Company under the Department for Education. We are looking forward to working with them and moving their agenda forward.

Richard Fuller

I will address my first comment to Omar and Helen, and that is to say thank you. Thank you for taking the risk and thank you for starting your business. Through you, thank you to the millions of people who do likewise. Our country is stronger for it. We heard in other sessions about the value of a so‑called industrial strategy, and you talked about how your focus is very much day‑to‑day, getting the work done. Some have fears that an industrial strategy essentially helps your competitors in entrenched companies who do have the ear of Government and have time to structure arguments for subsidies or other policies that can support them. Do you have any concerns about an industrial strategy and the way in which it would support or harm entrepreneurship?

Omar Farag

Being an entrepreneur is finding ways around things like that and not necessarily accepting barriers such as that. For instance, with our company, the loose‑leaf tea market is very saturated in the UK. In the US, it is not that saturated, so we went and started selling tea over there. It was just trying to find ways around a problem. That is a skill that entrepreneurs have. As entrepreneurs, we find ways around things like that.

Helen Wooldridge

I would back that completely and say that people who are operating in an enterprising way, whether it is running your own business or purely using the skills that enterprise encompasses, have what I would class as character skills. They are things like teamwork and communication, i.e. skills for management, but also softer skills like empathy. Confidence, for me, is the absolutely fundamental one. Skills like that are within someone who is an entrepreneur and can be bred into people. I became an entrepreneur because, at the age of 15, I did take part in Young Enterprise. That, for me, is an absolutely clear, powerful and crystallised memory in my mind. There were two particular things. The first was being thrown into the position of a managing director, having to manage my own mates at school and learn immediately about management not being about making best friends but being about commanding respect. The second instance, which is so clear to me today, sitting here, talking to you and having the confidence to do it, is that I had to stand up at the age of 15 in front of a hall full of parents, shareholders, etc. and speak, with legs shaking. That moment—and I am not one to have a good memory—is so clear. I have done a lot of public speaking, television appearances, etc. since, and I attribute that confidence to starting at a very young age. I feel very strongly, also as the mother of three young children, that the sorts of skills, confidence and resilience that Omar is talking about with entrepreneurs comes from a different type of education. I went to a state school that was known for being too focused on academia. There was no opportunity to expand your softer skills. Young Enterprise was something that gave me that at a very young age, and I think it was absolutely fundamental in who I am, in all the different jobs I have done and then subsequently in making the decision, whilst pregnant and in full employment, to start my own business, because I felt that was the right route for me.

Richard Fuller

Can I pick up on that comment, Helen, and address a question to Michael? I firmly believe that we need to create a generation of entrepreneurs if we are going to achieve some of the targets in this plan, and that, sometime between the ages of 16 and 26, a young person starts firing their engines. It might be in business; it might be in sport; or it might be in drama and acting—whatever. That age range seems to me to be critical. Is there anything in this Productivity Plan that addresses trying to encourage more people to be like Omar and Helen? If not, what would you like to see in this plan to accomplish that?

Michael Mercieca

There is too much of a focus, as you said yourself, on 16‑plus. We are great believers in early intervention; we start in primary schools. In fact, I think I am correct in saying that the Careers & Enterprise Company came about on the back of Lord Young’s “Enterprise for All” report. We launched the Fiver programme, which came from our Tenner programme, in primary schools. Lord Young and the Government were very firm that it should start in primary school. As you know, early intervention is crucial whatever you are doing, whether it is health or sport. In terms of financial teaching, financial capability, people like MAS have said that spending habits are formed by the age of seven. We do not see enough in the report about joining up the core education system—primary and secondary—to feed that route to apprenticeships. There is this battle between vocational and academic. Vocational, it was said in the earlier panels, is like the underdog or the poor relation. They are not mutually exclusive; they are complementary. To answer the question, we would like to see more about how you join up the education system to feed entrepreneurship and productive employees. Start early.

Chair

Mike, would that work?

Mike Cherry

I would agree entirely that we need to be starting at a much earlier age. In repeated quarterly surveys, our members continue to raise the issue of skills problems, and fundamental to this is to make sure that the education system works in making sure that young people are ready for the world of work. What we have seen, to the detriment of businesses and young people, is the removal of work experience from the curriculum as a set piece. As Michael has very clearly said, we also start at primary school age so that young people have a better understanding of what is out there, particularly in their local communities. We need to be seeing business more engaged with schools, but also schools need to be better incentivised to reach out and recognise the breadth that small businesses in their local communities have and what they can offer. We need to be making sure that further education delivers what business needs and our younger people need. I question who is actually responsible for identifying the need in the first place. I do not necessarily believe it is always down to business. They need to be working much more closely with others so that we can deliver a holistic approach and get those young people to have the ability to make that choice when they are ready to do so. By the time of 16, it is almost too late if they want to go down that vocational route. We must be making sure that, as a country, we treat vocational as being absolutely equal to academia. As I have said repeatedly, I do believe that, certainly with apprenticeships and higher‑degree apprenticeships, they can be a much better route into that higher education at a later stage in your career development, if that is more appropriate for you. Many people learn by seeing or doing, not by being taught at.

Chair

That collaboration is essential between schools and businesses. Does the Productivity Plan do enough to address those weaknesses?

Mike Cherry

No, I do not think it does.

Chair

What else would you suggest, then, Mike, in terms of what should happen?

Mike Cherry

You need to be incentivising schools, and you need to be helping teachers, and head teachers in particular, to reach out to the wider business community. It does work in some places where there are some very good initiatives, but we also need to be looking at how we measure schools. If you look at the requirement for many pupils—they are often the brightest pupils—to remain in school until sixth form, it means they are not even being given that vocational option, I suggest, at a younger age, when it may suit them better.

Michael Mercieca

I do not think it is a demand and supply thing. The supply, hopefully, through the Careers & Enterprise Company is showing people what is out there in terms of enterprise education but, on the demand side, schools, as we all know, are pretty hammered at the moment with the curriculum changes coming up, and they are focused on academic results. The major barrier to getting Young Enterprise into schools is not actually the money, because we do charge a subsidised price; it is the fact that they have to focus on academic results. We would welcome some specific moves in the plan for how you get it to schools, without getting it on the curriculum, because we do not believe that is realistic. In terms of teacher training, ITT is being worked on by DfE. Something around character and skills could be built in. There could be something in there on continuous professional development to help. There needs to be some demand that schools say, “Yes, I should do this,” and make the space. The difficulty is the space in the curriculum; that is the barrier.

Peter Kyle

Following up on the very good point that Richard made, which was that we need a new generation of entrepreneurs, can I invite you to say that in your businesses—for the two people here who have set businesses up—you need the entrepreneurial skills not just to lead those organisations, but actually to work in a small business, because being entrepreneurial is not just the remit of the people who are leading small businesses? Actually, you need to be decisive, you need to be communicative and you need to be able to be a self‑starter. All the attributes you see of entrepreneurs are required for almost all the people who work in small businesses. The attributes of entrepreneurship are not just about us creating more businesses; they are for the growing number of people who work in the small business sector. If that is the case, do you think that the Productivity Plan covers that aspect of the skills challenge that we face?

Helen Wooldridge

I would broaden it out. You have referred only to small businesses but, on the point you make about entrepreneurial skills, “self‑starter” would be exactly the term I would use, because those would be the people I would look to employ. I think that applies to absolutely every sector and every size of business. It is not just a small business thing. In terms of recruitment, even within a massive firm, you are looking for an individual who is a self‑starter, not just an individual who has a list of academic qualifications, and an individual who can evidence that through experiences they have had or how they present themselves. In terms of the Productivity Plan and whether it addresses that, I would defer to what Michael has said already about where those things can be fitted into education. They are fundamental, core skills in terms of how people present themselves and the choices they make as a result of experiential learning in school at a young age. From the experience I have had, I have been into primary and secondary schools; I have talked to very young children about starting their own enterprises. I have talked to older children who have been excluded about different approaches to work. The response is just overwhelming. That needs to be broadened out so that all schoolchildren, primary and secondary, have some level of experiential learning, so that they have an understanding of the world they are going out into, rather than feeling that they just have to have an academic qualification to go down one certain path.

Omar Farag

Like Michael said, it does need to be integrated at an earlier age. I went to an international school in Cairo for primary school, and they were part of INJAZ, which is the Middle Eastern equivalent. That was run in lower sixth, but in primary school the people who run the lower sixth one would take control of mufti days, bake sales and things like that. They would come in and teach what they had learned from INJAZ to the primary school children. There were six or seven people involved in INJAZ when I was in primary school, and almost everybody would be involved in a company they had started up by the time our generation had got into that age group. The soft skills that you learn are needed not only in small businesses, but now also in big corporations. I have a friend who just applied for a job at Aldi for a graduate programme. They ask in the application, “Are you an entrepreneur and, if so, why?” He asked me to give him a hand with the question; he was confused as to why they were asking it. It is because they see the skills that schemes like Young Enterprise can give people and students, and they are essential for businesses of any size.

Peter Kyle

I just want to rephrase or narrow down the question for Mike and Michael. You have both mentioned the challenges of the curriculum. Of course, there is a huge constraint on the curriculum. Is it not the case, though, that the attributes that have been identified and spoken about by the other two witnesses are already contained within the curriculum? Sport teaches decisiveness and communicative skills. Maths, clearly, has a role in future business, and particularly small business. There is English and so forth. Is it about not trying to cram more into the curriculum, but trying to focus the curriculum more explicitly to the different attributes of entrepreneurship? To finish the question, in terms of the productivity challenge, do you feel, therefore, that the Productivity Plan and any future amendments to the plan should be more closely linked to the Department for Education and any other Departments that have an impact on young people?

Michael Mercieca

As I have said, I firmly believe that the education system has to be plugged into whatever comes out of the Productivity Plan. If you have roughly 14 million students in the system, from primary to higher, who are there for 14 years or so, you have to leverage that. There is the figure of a 0.1% increase in the growth rate leading to £35 billion more GDP by 2030. If you leverage a bit of the education system to get people to be 2% more productive, that has to have an effect. I refer to FSB research a while back that a third of their members saw that the skills gap was hampering their growth. There are figures that show the skills gap. We heard from Allan that there is a huge figure—half a million or so—for the shortage in engineering. There are very specific sector shortages, but there is a wider, general skills‑gap shortage that must have an effect on productivity. I use the software analogy. If you get a job and your job is to write reports for someone, if you go in and you do not know how to use Word, you are going to spend a week or so being taught that, with money being spent. That analogy means that if you go in without the basic skills—communication, teamwork, problem solving—you are going to cost that employer money and reduce productivity. Something has to be done from early on to change the culture, in a way.

Chair

I am conscious of time. We do not have very long left, but I want to mention, particularly with Helen and Omar here, that one of the things mentioned already this morning was that the reason we are lagging in productivity is because of a lack of innovation, and that lack of innovation is because of a lack of finance to innovative firms. Did you have a problem with gaining access to finance and what would you suggest we need to do as a country in order to make sure that that entrepreneurial spirit is financed appropriately?

Omar Farag

There are a lot of finance streams, grants and things that are available from local authorities, but what we saw as a major issue in terms of growth for us was not getting financial support but things like business rates and other barriers. We had the capital to start up, but the overheads then became a lot higher moving forward. As we wanted to grow, that became more of an issue.

Helen Wooldridge

Yes, I would back that and say it is not necessarily an issue of start‑up capital. It is that, as a business progresses, there are other issues that you face. I am trying to think of specific examples. It even comes down to something—it seems minor, but it is fundamental in any business now—like changing your website as your business grows. At an international level, you have to adapt. Everybody has had to adapt websites in recent years to be responsive to mobiles and tablets, etc. Those are major costs for a small business. It is about support as you go, albeit at quite small levels. These do not need to be massive grants, but contributions to developments as you go—with projects such as that or team development—are the things that have become important for us as our business has developed and our needs have changed.

Mike Cherry

You all know that the FSB has focused very heavily on access to finance and making sure that challenger banks and other lenders in the field like the peer‑to‑peers and crowd‑funders have a greater role and that is communicated out to business far more widely. That still continues to be an issue. Alongside that, we have had the issue of late payment, which, as we know, is holding back growth and job creation. There are, though, other areas that play into this, and I sometimes wonder whether or not we load our up‑front costs on to business before they are able to make a sale or a profit far too much in relation to our competitors, which will undoubtedly affect productivity. If you are paying the money out in business rates, for instance, before you open the doors, you are at a disadvantage, because that does not happen anywhere else across Europe or in other parts of the global economy. Also, our business‑support schemes are not focused enough; there are far too many of them. Business cannot access them easily and we need to consolidate those and measure them properly. Alongside that, we need to be simplifying the tax system. It is just not incentivising businesses on R and D, as we heard to some extent in the previous panel. Overall, we really have to deliver long‑term consistent support—be that on our education and skills agenda, be it on tax simplification, or be it on business support—over at least two to three Parliaments to deliver what we need as an economy to fill those skills gaps, and to make sure that businesses can grow and provide the jobs and exports that we desperately need. Alongside that, as you know, again, we have been strong advocates of reducing the cost of doing business, which includes a plethora of issues, particularly around tax simplification and business rates.

Chair

Colleagues, thank you very much for coming. That was very helpful. I have to say, Omar and Helen, that I am very disappointed that we do not have tea with us and we do not have baby towels in order to promote your brands, but can I just say that I wish you the very best of success in your businesses? If there is anything that we in Parliament can do to assist, that is the whole purpose of this Committee. Thank you for your time. It has been really valuable. Oral evidence: The Productivity Plan, HC 466-i 2 [1] The figure is taken from the report High Value Manufacturing Catapult: Pathways to impact by Warwick Economics and Development, June 2015, https://hvm.catapult.org.uk/wp-content/uploads/2015/08/Impact-Evaluation-full-report.pdf [2] Engineering UK’s report The state of engineering 2015, http://www.engineeringuk.com/EngineeringUK2015/EngUK_Report_2015_Interactive.pdf This report finds a shortfall of 25,000 per year of people qualified with engineering skills at level 4+ and a shortfall of 30,000 per year at level 3 for the years between 2012-2022 (totalling 550,000). [3] The Academy’s Engineering for Growth, http://engineeringforgrowth.org.uk/growth_area/explore-engineering-for-growth