The Department for Business, Energy & Industrial Strategy “Building our Industrial Strategy” green paper closed for consultation last week (17 April 2017).
The green paper was designed to set out how the government “propose[d] to build a modern Industrial Strategy” for post-Brexit Britain and to open a consultation with industry and other interested organisations and commentators.
The ERA Foundation’s response can be found in full below or downloaded directly as a PDF.
Input from the ERA Foundation on Questions for Consultation in Industrial Strategy Green Paper.
Does this document identify the right areas of focus: extending our strengths; closing the gaps; and making the UK one of the most competitive places to start or grow a business?
An Industrial Strategy is to be welcomed. It will set the general context and operating conditions for Industry. But as always with strategy, execution is key. Success here requires that detailed decisions are taken at the most appropriate level by those best placed to do so. In that respect it is encouraging to see the emphasis within the Industrial Strategy Green Paper on industry and sector bodies leading implementation.
Government should set the fiscal environment, regulatory framework and operational conditions such that productive industry can flourish and is attractive to investors
As recognised in the Green paper, government’s first priority is to create a fertile environment for industrial investment and operations in the UK and not to try to choose winning companies, sectors or technologies. The principal role of government should be to set the fiscal environment, regulatory framework and operational conditions, with minimum bureaucracy, such that productive industry can flourish and is made attractive to investors. The industrialists and entrepreneurs should be left to decide what and how to make and to sell their products, making real wealth creation an attractive proposition. The Service Sector is important for the UK but emphasising this too strongly can result in what amount to almost anti-industrial policies and a shrinking industrial base.
A survey performed by the ERA Foundation (addressed to industrialists and other knowledgeable individuals) identified a list of 30 key parameters of an effective industrial strategy, all of which can be strongly influenced by Government policies. (see The Sustainability of the UK Economy in an Era of Declining Productive Capability)
An effective industrial strategy can be implemented by working through the full list and taking appropriate corrective action in favour of industrial regeneration.
A lack of capital investment underpins the UK’s low industrial productivity – yet many current policies act to discourage industrial investment. The Green Paper offers a welcome opportunity to correct that situation. If it is to do so successfully, though, it will need to avoid the pit-fall of a silo structure of initiatives – such as could be implied from the ‘pillars’ metaphor – and rather focus on delivering an integrated programme of action with defined objectives.
Are the ten pillars suggested the right ones to tackle low productivity, and unbalanced growth? If not, which areas are missing?
One needs to look at the environment in which productive industry can flourish and productivity can be maximised in an integrated way. The use of ‘pillars’ as a metaphor might be taken to suggest that the challenges can be solved in a fragmented fashion. Such silo thinking is not helpful. The concept of ‘pillars’ follows from the 2015 Treasury White Paper on improving national productivity Fixing the Foundations – but is not the best model for effective implementation of an industrial strategy. What is required is an integrated managed programme of activities with clearly defined objectives. A better example would be the UK Olympics campaign that was so successful in transforming the UK’s Olympic world standing by focusing on all aspects of underlying performance and taking actions, small and large, in all of those aspects.
Are the right central government and local institutions in place to deliver an effective industrial strategy? If not, how should they be reformed? Are the types of measures to strengthen local institutions set out here and below the right ones?
What is needed for the Industrial Strategy to be effective is a large-scale managed programme across government institutions with a defined and common objective of regenerating the UK’s industrial base.
A large-scale integrated managed programme is needed across government institutions with a defined and common objective of regenerating the UK’s industrial base
There are too many Government and local institutions and initiatives. Industry needs to be able to interface with a smaller number of focused institutions and initiatives and these need to be more clearly tasked and incentivised to deliver the Industrial Strategy. The Industrial Strategy – and improving industrial productivity – must be seen by the leaders of these institutions as being at the heart of what they do rather than seen as an [inconvenient] adjunct or tangential objective.
The creation of UK Research and Innovation might offer a model for how interfaces may be simplified to the benefit of business.
Are there important lessons we can learn from the industrial policies of other countries, which are not reflected in these ten pillars?
There are always lessons to be learned from others, especially the more successful industrial nations such as Germany. However, we must recognise that the economic structure, trading environment, skills base and political position of other countries is generally quite different to the UK. Accordingly, in quite appropriately adopting any concepts which have proved successful for others, we must recognise the need at the same time to adjust/refine them for our different circumstances and environment.
We must design a fertile environment for UK industry, taking maximum advantage of such particular opportunities as our post-Brexit fiscal and regulatory environment allows. The objective must be an environment in which investment in UK productive industry is encouraged and operations can flourish. Productivity is closely linked with capital investment and this demands an environment that encourages investment by use of Government controlled or influenced parameters such as taxation benefits, low energy costs, exchange rate stability, banking.
What should be the priority areas for science, research and innovation investment?
There needs to be a broad base for basic research in science, engineering and technology, without priority areas being defined since we cannot know what new knowledge will be needed for the next breakthrough of economic/societal import.
The principal input on prioritisation of research at higher technology readiness levels should come from industry
The existing structures and processes employed by UK Research and Innovation (UKRI), and in particular Research Councils, have proven themselves effective. For research at higher technology readiness levels (TRLs), however, strategic priorities can be specified; the principal input on such prioritisation should come from industry and other users of the science base. This should be collated by UKRI to ensure that action by government is – and is seen to be – appropriately informed and depoliticised.
Which challenge areas should the Industrial Strategy Challenge Fund focus on to drive maximum economic impact?
The topics suggested in the document for the Industry Strategy Challenge Fund are sufficiently broad that they embrace just about all options. Engage industrial leaders to focus these. We observe that the intention of Industrial Strategy Challenge Fund programmes matches that of the ‘challenges’ supported by DARPA in the US.
Engage industrial leaders to focus the Industry Strategy Challenge topics
The DARPA system is based on highly qualified Programme Managers with the authority to change, or indeed terminate, funding depending on progress. This is precisely the bold management and delivery culture, including attitudes to risk, that pertains in world-class industrial organisations. It is appropriate to higher TRL level work and should be reflected in the culture of corresponding government funding arrangements, such as through Innovate UK.
What else can the UK do to create an environment that supports the commercialisation of ideas?
Make life easier for people starting their own businesses. Despite some attempts at simplifying procedures for start-ups and micro-businesses, there is still too much red tape and restrictive legislation relating to health and safety, employee protection etc. Access to patient finance is also an issue – short term finance kills many good companies.
How can we best support the next generation of research leaders and entrepreneurs?
We would commend to you the activities of the Royal Academy of Engineering, which – with the support of ERA Foundation – has created an “Enterprise Hub” where young entrepreneurs of the highest calibre are provided space, introduced to investors, and given mentors who are all experienced entrepreneurs passing on the expertise on a pro bono basis. Increased Government funding for this endeavour would be money well spent.
How can we best support research and innovation strengths in local areas?
Lord Heseltine’s No Stone Unturned provides many excellent ideas and recommendations and taking those as a starting point would serve the Industrial Strategy well.
As a specific suggestion, LEPs could be funded to support business investment in growth and not just for capital. Capital is often the lesser problem for start-ups and SMEs. Funding for growth is the key to a stronger SME base. In this scenario SMEs will engage more strongly with universities to transform research into products and economic growth.
What more can we do to improve basic skills? How can we make a success of the new transition year? Should we change the way that those resitting basic qualifications study, to focus more on basic skills excellence?
Many competent youngsters are put off by the academic nature of the A-level gold standard approach and would develop their skills much more willingly in a more practical applied technological environment. These technical skills are essential for industry (and wealth generation) and yet the under investment in – and undervaluing of – Further Education, in particular, has led to a shortage of skilled technicians.
Underinvestment in and undervaluing of Further Education has led to a shortage of skilled technicians
In terms of education policy, it would be better to focus on improving the attainment in primary and secondary schools than to change the way in which those resitting basic qualifications study. This would require us to attract better qualified teachers, especially in mathematics and sciences. The current scheme of training these teachers in schools is inadequate in subjects such as mathematics since there is already a shortage of good experienced maths and science teachers. Move back to high quality teacher training in universities.
Do you agree with the different elements of the vision for the new technical education system set out here? Are there other lessons from other countries’ systems?
Abolishing the polytechnics in 1992 – turning them into universities – was a mistake. They had an important, distinctive part to play in the national education and training panoply. The current proposal, to create Institutes of Technology, sounding like something of a return to the former polytechnics and technical colleges, seems not dissimilar to arrangements elsewhere in the world (e.g. Germany, Singapore, etc.) where productive industry flourishes.
The proposed Institutes of Technology need to focus on training a new generation of artisans and skilled technicians, working with local companies
The Institutes of Technology need to focus on training a new generation of artisans and skilled technicians, working with local companies (much as did the old polytechnics). They will not – and should not aspire to – produce more professional (on track to be Chartered) engineers; this needs a different level of training and skills and is the domain of universities. The UK is still a leader in tertiary education but the problem lies in primary and secondary education where attainment is lagging behind other countries.
How can we make the application process for further education colleges and apprenticeships clearer and simpler, drawing lessons from the higher education sector?
UCAS and the clearing system works effectively for HEIs. A similar system to cover Further Education Colleges and the new Institutes of Technology should be introduced.
What skills shortages do we have or expect to have, in particular sectors or local areas, and how can we links the skills needs of industry to skills provision by educational institutions in local areas?
‘Manpower’ planning has never worked. Skills shortages do exist (e.g. highly skilled technicians, artisans, are in short supply) – but it is difficult to predict these over the planning time horizon appropriate for education and training. The answer must lie with industry and other employers of skilled labour – to set salaries to attract the brightest and the best. It is gravely concerning that, for example, only about 20% of the graduate engineers from Cambridge stay in engineering, with the largest group going to the City. Industry must be encouraged to live with ‘market forces’ and ‘out-bid’ other sectors to attract the brightest and the best. To do this it is necessary for Government to allow industry to become more profitable (e.g. through lower cost energy, less bureaucracy, attractive use of taxation encouraging investment in industry rather than hedge funds and private equity). At the same time industry needs to recognise that it has a responsibility to train its staff and work with local institutions to achieve this.
How can we enable and encourage people to retrain and up-skill throughout their working lives, particularly in places where industries are changing or declining? Are there particular sectors where this could be appropriate?
Responsible companies recognise the importance of Continued Professional Development (CPD) for up-skilling staff and developing new competences, whilst the Engineering Institutions provide the means to do so in many cases. CPD is certainly cheaper than having to recruit to gain required expertise – and CPD is good for staff morale indicating company commitment to career development. Established companies should do this for themselves; there is a role for government in promoting best practise, with financial support justified for micro- and small companies.
Are there further actions we could take to support private investment in infrastructure?
Taxpayers, especially industry, expect Government to provide for the bulk of the infrastructure the nation needs. PFI and PPP were favoured processes because they enabled a portion of Government debt to be taken out of the Current Account; but this ‘hidden’ debt will have to be paid by future generations.
How can local infrastructure needs be incorporated with national UK infrastructure policy most effectively?
The Victorians managed to achieve massive investment in local infrastructure with the minimum of central government control or central planning. Giving the Cities/Regions greater freedom from central control might be a good place to start. Local Enterprise Partnerships could be used to seed this process and, for bigger projects, could be supported more readily from central government funds.
What further actions can we take to improve the performance of infrastructure towards international benchmarks? How can government work with industry to ensure we have the skills and supply chain needed to deliver strategic infrastructure in the UK?
A major shortfall, which could be put right in short order, is ultra-fast broadband, universal access, with mobile 4G and, building on a recognised area of UK strength, the early rollout of 5G.
Companies would invest more if plans for medium/longer term future infrastructure were more transparent and more certain
Bringing road and rail into the 21st century will take much longer because of the decades of under-investment. Only wealthy nations can afford excellent infrastructure and the UK must regenerate its industrial capability to provide the necessary wealth to effect this.
In terms of skills, companies would invest more (including within their supply chains) if plans for medium/longer term future infrastructure were more transparent and more certain. That additional clarity would serve to de-risk decisions in skills investment.
The construction industry is very short of skilled labour and so the focus on training more apprentices and the new T-levels is welcomed.
What are the most important causes of lower rates of fixed capital investment in the UK compared with other countries, and how can they be addressed?
For SME’s Capital Allowances and Capital Depreciation Relief could be much improved. More investment in industry will only come about when this area of activity is given the opportunity to be as profitable as are some areas of financial services. Better access to longer-term finance and investment allows more capital investment.
What are the most important factors which constrain quoted companies and fund managers from making longer-term investment decisions, and how can we best address these factors?
Successive governments have largely ignored productive industry over a 25-year period on the grounds that the nation had moved into a post-industrial era dominated by financial and business services – and this resulted in less confidence for industrial investment.
Crucially important are: simplification of regulation, competitive energy costs and policies, and a competitive and relatively stable exchange rate
The ‘mood music’ for productive industry in the UK has improved since the financial crisis of 2008 – but still has to be matched by simplification of regulation, competitive energy costs and energy policies, a competitive and relatively stable exchange rate and so forth. Investment requires confidence and the prospect of profitability. To create this environment demands an integrated programme involving a multiplicity of improvements, tilting the playing field towards productive industry.
Given public sector investment already accounts for a large share of equity deals in some regions, how can we best catalyse uptake of equity capital outside the South East?
Simply by making the investment attractive in taxation and other relevant terms. Development of real ‘Banks for Industry’ with localised zones of operations and not limited to high-risk subsidised ‘Green’ products would also be very beneficial.
How can we drive the adoption of new funding opportunities like crowd-funding across the country?
By not interfering and avoiding actions which hinder its natural growth. That said, these opportunities, important though they may be, are unlikely to be the solution to the scale of funding required. We repeat: to create the right environment demands an integrated programme involving a multiplicity of improvements, tilting the playing field towards productive industry.
What are the barriers faced by those businesses that have the potential to scale-up and achieve greater growth, and how can we address these barriers? Where are the outstanding examples of business networks for fast growing firms which we could learn from or spread?
We again refer you to the Annex of the recent ERA Foundation Report for many of the key factors needing attention if companies are to grow and flourish – regardless of size.
Are there further steps that the government can take to support innovation through public procurement?
Learn lessons from the US, where procurement (particularly through the defence budget) is a major driver of innovation. Innovation could be promoted if it is included as a selection procurement criterion in the assessment process. In addition, procurement processes could be amended to ensure externalities and spill overs are reflected in the decision making. For example, the costs of UK unemployment and loss of capability could be taken into account when considering letting large contracts to foreign companies. Other countries seem less reticent than the UK to take such steps. Another option would be to insist on winners of contracts performing the work in the UK regardless of ownership.
What further steps can be taken to use public procurement to drive the industrial strategy in areas where the government is the main client, such as healthcare and defence? Do we have the right institutions and policies in place in these sectors to exploit government’s purchasing power to drive economic growth?
We have institutions but do they have the right attitude to risk, culture and capabilities? We need policies that encourage and reward those institutions and their staff for contributing to the restoration of the UK’s industrial base.
What can the Government do to improve our support for firms wanting to start exporting? What can the Government do to improve support for firms in increasing their exports?
Keep Sterling at a competitive level. The current level is sensible, after being held at unsustainable levels in the decade from 1998 to 2008. Industrial investment is a long-term process and volatile foreign exchange rates kill sales and discourage investment.
Industrial investment is a long-term process and volatile foreign exchange rates kill sales and discourage investment
Provide better finance guarantees and help on the ground through a Department of International Trade whose performance is devoted to, and measured on, improving trade. (It is appropriate here to note that per unit improvement in GDP products are five times more effective than services in terms of addressing the balance of trade deficit.
What can we learn from other countries to improve our support for inward investment and how we measure its success? Should we put more emphasis on measuring the impact of Foreign Direct Investment (FDI) on growth?
Analysis of FDI into the UK shows that nearly two thirds is merely buying up UK assets; experience demonstrates that this is not an inherent good (e.g. Kraft’s takeover of Cadbury). More discrimination is needed of what is good about FDI, encouraging ‘good’ investments and restraining asset sales when they are not in the national interest.
More discrimination is needed of what is good about FDI, encouraging ‘good’ investments and restraining asset sales when they are not in the national interest
Every other nation but the UK does this. Over reliance on a – in practice imperfect, far from fully effective – ‘Open Market’ has deterred sensible analysis of FDI and appropriate corrective action. No market is truly open: it is merely a set of rules that we may accept as open. Unfortunately, the UK’s rules are not those followed by any of the competition – to our cost.
We refer you to the 7th ERAF report challenging the case for uncritical acceptance of FDI as currently formulated/interpreted.
What are the most important steps the Government should take to limit energy costs over the long term?
Revisit the 2008 Climate Change Act with a view to revision to the benefit of productive industry. In its current form it has shaped energy policy in such a way as to place a disadvantageous burden on UK industry compared to others, has led to the premature dismantling of coal and some gas-fired power stations with consequential cost of energy implications which have resulted in the closure and transfer abroad of high-energy-using industries.
The issue of shale drilling licenses and clearing the way for well-regulated and controlled hydraulic fracturing (fracking) must be accelerated
Shale gas and oil offer the UK huge benefits in security of supply and the reduction of a growing import bill for energy. The issue of shale drilling licenses and clearing the way for well-regulated and controlled hydraulic fracturing (fracking) must be accelerated. Emphasize not only the security of supply but also the contribution to reducing the trade deficit that shale offers.
How can we move towards a position in which energy is supplied by competitive markets without the requirement for on-going subsidy?
Remove all subsidies and encourage technological research in the energy sector. Remove the unbalanced carbon taxation that is forcing the early closure of coal-burning power stations and creating an unstable and expensive electricity supply. Post Brexit there is greater freedom with respect to policy formulation in this area, obviating the need for the imposition of anti-industrial EU carbon taxes as at present. The UK is fortunate indeed to have large shale reserves; coupled with balanced nuclear reinvestment these should be able to provide stable, secure and competitive energy supplies in the UK with significant reduction in CO2 emissions.
How can the Government, business and researchers work together to develop the competitive opportunities from innovation in energy and our existing industrial strengths?
Government should concentrate on defining broad policy and creating the fertile industrial environment that encourages industrial investment and operations. The research councils (notably but by no means solely EPSRC) have established a strong culture of catalysing academic-industrial collaborative research projects underpinning a wide range of national challenges (including energy).
How can the Government support businesses in realising cost savings through greater resource and energy efficiency?
Remove carbon taxes. Industry will seek cost-effective ways of improving energy efficiency to maximise its profitability.
How can the Government and industry help different sectors come together to identify the opportunities for a ‘sector deal’ to address – especially where industries are fragmented or not well defined?
Government should encourage Industry to both select its partners and form ‘sectors’ where this make sense. Government itself is not well equipped to make such decisions (and runs the risk of falling foul of excessive lobbying) but the examples of the Aerospace and Automotive sectors over the last few years demonstrate the value that can occur through business and government working together.
Learning from these approaches and building further upon them will be important for Industrial Strategy success. For example, where the UK has real world class industrial capability but there is some form of market distortion then targeted government support (not necessarily financial) is appropriate.
How can the Government ensure that ‘sector deals’ promote competition and incorporate the interests of new entrants?
Government has agencies to monitor and manage monopolies, mergers, competition and regulatory issues. Government could and should set the criteria for assessing such deals to include the way in which they encourage competition and new entrants.
How can the Government ensure that ‘sector deals’ promote competition and incorporate the interests of new entrants?
How can the Government and industry collaborate to enable growth in new sectors of the future that emerge around new technologies and new business models?
The principal approach should be to create the fertile environment and then leave it to the market. Encouraging sectors to self-nucleate, potentially around Sector Deals, along the lines indicated in the Green Paper, seems appropriate.
An overarching consideration for productive industry, though, is the future direction of manufacturing. Whatever the terminology one adopts (Industrie 4.0, Factory of the Future, 4th Industrial Revolution, etc.) the impact of ‘going digital’ in this context is immense – a seismic shift. This transformation of the industry, extending the span of manufacturing business processes both more deeply and yet more intimately integrated down into supply chains and up closer to the customer and the operating environment, represents an opportunity for UK industry. The greater part played by cyber-physical systems, intelligent digital, data management and data analytics capabilities, with its reduced reliance on low labour costs, plays to our strengths. Our established world-class ‘global player’ manufacturing companies are fully aware of and are preparing for this. It is less clear, though, that this applies to the extent required in the SME sector – and to the ‘just above that’ companies. But these are the very companies that may otherwise have the potential to redress concerns about the ‘hollowed out’ nature of our indigenous supply chains. There is a role for UKRI to promote awareness and appropriately foster engagement with and early adoption of these vitally important, emergent, enabling technologies.
Do you agree the principles set out above are the right ones? If not what is missing?
It is unclear as to which principles this question applies. If the question refers to the stated approach described in the chapter i.e. of backing local connectivity with strategic investment; of investing in skills; and of investing in local science and innovation strengths then those principles do seem appropriate although we would refer to our other answers on these topics for more detailed analysis and comment.
What are the most important new approaches to raising skills in areas where they are lower? Where could investments in connectivity or innovation do most to help encourage growth across the country?
If the jobs are there in profitable industry then there are plenty ways that training and upskilling will occur so that less direct government intervention will be needed. If the rewards are there in terms of good well paid jobs in exciting new industries then there will be little problem in getting applicants – and the rest is organised training. This largely takes the problem back to one of attracting investment and an environment that allows industrial companies the fiscal and regulatory space to become profitable.
Key is an environment that allows industrial companies the fiscal and regulatory space to become profitable
We recognise though that there are a number of dimensions to this question. In areas with low skills then the aspiration and attainment of young people in particular may need addressing. The shift to focusing on attainment alone is insufficient to solve the problem. In addition, the UK may need to encourage greater geographical mobility amongst its skilled workforce – and if and where necessary provide some initial incentives (e.g. tax relief for the first year for skilled workers to move to areas of need).
Recognising the need for local initiative and leadership, how should we best work with local areas to create and strengthen local institutions
Encourage local banking on the German model. Shortage of finance is an issue for SME’s that are the backbone of employment in most local areas. More technical support can be provided via the AIRTO independent contract (applied) organisations and by contracting the Catapults to provide more technical support for SME’s.
What are the most important institutions which we need to upgrade or support to back growth in particular areas?
Local banks focussed upon investment (especially industrial investment) in their regions. We view with a mixture of admiration and envy the arrangement in Germany that so effectively supports the ‘Mittelstand’.Higher and Further Education Institutions also have a role, particularly for ensuring access to skills in their local regions but increasingly also with respect to fostering and supporting innovation and enterprise in the SME sector.
Are there institutions missing in certain areas which we could help create or strengthen to support local growth?
See above re Local Banks, as in e.g. Germany.