The following is the text of a talk given by the President of the ERA Foundation, Sir Alan Rudge, at an ERA Foundation lunch held on 9th May 2013.
ERA Foundation AGM Luncheon Address 2013
(A Last Hurrah from the outgoing Chairman)
Sir Alan Rudge CBE FREng FRS, President of the ERA Foundation
My objective today is not to merely regale you with the history of the Foundation, but rather to stimulate your thoughts and hopefully to encourage you to initiate and support action in some of the areas I will touch upon. My comments today are mine and my responsibility alone: But if you do have comments, or suggestions, or just to seek further information please email me, David Clark or Richard Brook at the ERA Foundation.
The ERA Foundation is not a charity, but a non-profit distributing organization, operating commercially but with charitable intent.
Our resources comprise a financial endowment and the efforts of our Board and other colleagues who are willing to give their time and effort to put something back into engineering, science and industry, to which they largely owe their successful careers.
Over the past decade we have undertaken a number of initiatives. We have sought to provide support and encouragement for engineering and science education, for the relevant scientific and professional institutions, for early stage investments in young companies and the support of electro-technology projects at early stages of commercialization.
Our investments in start-up companies are made either directly, or as a Limited Partner in venture capital funds that invest in appropriate companies. Our support for engineering, science and industry has involved a variety of co-operative activities with the EPSRC, the Royal Academy of Engineering, The Royal Society, the Royal Commission for the Great Exhibition of 1851, Arkwright, Smallpeice, Young Engineers, Civitas, IMechE, IET and others.
We believe these have been worthwhile, but since there are senior representatives from all of these sectors of activity here today, I will leave it to them to decide whether our efforts have been helpful. With the limited resources at our disposal, our policy has been to seek opportunities where we can make a difference, in partnership with others.
We have gained useful experience in all of these activities and to date our direct investments in start-ups have restored the funds committed. However, we have no illusions in this regard. Numerically our initiatives are few – no more than pilot scale. There are investment funds active in this sector but not enough to provide a major boost to the UK economy. But this regeneration activity is critical; the small and medium-sized enterprise (SME) sector provides half of the nation’s GDP.
Increasingly over the past decade we have been drawn into the issues affecting the UK’s economic performance. In particular, the decline of productive industry and its impact upon the economy as a whole. The issues and some proposed solutions were set out in a series of ERA Foundation Reports. These are all available on the Foundation’s website and we have used them to lobby Government and to provide support to others with similar concerns.
From 1998 onwards the then UK Government adopted a blinkered approach to the economy with the entire focus upon expanding the nation’s GDP and an almost total neglect of the Trade Balance and Balance of Payments. Our research showed that, while the internal activities contributing to GDP were growing, our Trade Balance was worsening at a rate of 20% per year, primarily due to the relative decline of manufacturing.
The trade deficit in goods had reached £60Bn by 2008 with an overall trade deficit of £40Bn and an overall current account shortfall of 25Bn. But still no signs of serious concern. Last year the deficit in goods was approaching £100Bn and the current account deficit £58Bn. Time to wake up and face the facts perhaps?
In essence we have been living beyond our means and maintaining our apparent prosperity by selling assets and debt. The assets sold were not only the gold reserves and property; more than 2000 UK companies were sold into foreign ownership in the decade and the trend continues today. Even before the banking crash there was a huge miscalculation based upon the myth that the UK was a post-industrial nation and that the future lay with services rather than goods.
Services as a whole make a very important contribution to the economy, but the combination of all services including financial services and our external earnings have never balanced the books in trade. Pound for pound of GDP they are about six times less effective in providing exports than are goods. While manufacturing has now shrunk to just 11% of GDP it still provides nearly half of our total exports.
Throughout this period, the Banks were allowed, if not encouraged, to turn their backs on the UK; to withdraw from a fundamental duty of providing finance for real wealth generation at home; and to gamble the nation’s savings in the international casino. The result was a very underfinanced SME sector with no confidence in the banks as a source of finance; and a tendency to self-fund with slower growth. The net result for the gambling banks should not have been a surprise. Big Bang followed by Big Profits, Big Bonuses, and then Bad Bets and Big Bust.
The banking collapse increased the national debt substantially and the nation is now burdened with interest payments of £50Bn per year. To put this into perspective, our entire annual defence budget amounts to less than £40Bn. And we are still borrowing, and selling assets and debt. Today a very large part of the nation’s assets are foreign-owned. For example, according to ONS data there are only 282 manufacturing companies in the UK that employ more than 1000 people and only 92 of these are still UK controlled.
The nation has been persuaded that this is all a good thing. Indeed the Banking Industry and Private Equity have become highly expert in expediting the marketing and selling process: Often financing foreign buyers to buy UK assets. The fact that most of our utilities, ports, airports, financial institutions, property, gold and large industry has been sold off is explained as a natural effect of globalization rather than a consequence of our poor trade performance and declining net wealth. We are now in our 16th consecutive year of trade deficit and the resultant borrowing is being used to finance spending rather than invest in new earning capacity.
Foreign Direct Investment in the UK is promoted unreservedly as ‘a good thing’. Despite the fact that two thirds of all Foreign Direct Investment has been to acquire existing UK assets rather than providing green field investment. It is also hinted that the UK is buying equivalent assets abroad; but this is not true, the imbalance is enormous. Christopher Simpson, who is here today, has shown that in the first decade of this century, sale of national assets exceeded outward investment by £700 Bn.
One does not have to be xenophobic, or a Little Englander and against all foreign ownership to be concerned. Nor need we be unaware of the impact of globalization. Of course there are very good examples of foreign investment, made by excellent international companies. Nevertheless we should not be blind to the fact that in a competitive world national interests have not disappeared. There are serious consequences arising from our “Britain for Sale” policies.
We should be more concerned not with foreign ownership per se, but the balance of ownership and its impact upon the economy and ultimately upon democracy in the UK. Our policies are leading us toward virtually total foreign ownership of all the worthwhile assets in the UK. The endpoint is not an Industrial Economy or even a Services Economy, but perhaps a Servant Economy; merely providing workers for foreign-controlled companies. It would be naïve to believe that the owners, with their economic muscle, are not going to affect the politics of the UK in pursuing their own interests.
So what can be done? Is the game lost and the damage beyond repair? The answer is…. no it isn’t. Not if we have the spirit to recognise and tackle the issues. The underlying problem is the economy. Our first priority must be to get our trade balance and balance of payments back in order: A challenging but not impossible task. We can either accept a lower standard of living, or find the means of increasing our exports and substituting for some of our imports. While we have little control over the larger international companies there is much that can be done to accelerate growth in the productive SME sector.
Professors, Coutts and Rowthorn, the Cambridge economists, who are here today, showed in 2008 that a 10% increase in manufactured exports and a 10% substitution of manufactured imports would be enough to close the trade gap. Today it might demand a bit more. But to achieve the same result we would have to increase our financial services by 100% or all other knowledge-based services by 150%. I leave you to draw your own conclusions as to what is realistic and where the priorities should lay. The question has to be asked: If the UK is not to be a nation based primarily upon productive industry, how else will it earn its keep in a competitive world?
In our 2008 Report the ERA Foundation listed 31 parameters that warranted attention if the UK was to create the conditions for a renaissance in manufacturing. Many of these have now been accepted by the Coalition Government. Their awakening is very encouraging, but the scale of the response and the urgency has been disappointing. There is still too much focus on financial services and a lack of a top priority, fully committed, well-publicised campaign to restore the UK as a productive industrial power. A more positive Plan B for the Chancellor perhaps?
This does not imply a return to supporting lame ducks and nationalized industries. What is needed is the development of a modern well-financed business environment that encourages investment and operations in productive industry. This will be good not only for the industry itself but for all of the services that support it. A return to real wealth creation. If this runs foul of EU directives then we should look to renegotiate them as a minimum. To be constrained to an impoverishing status quo makes no sense whatever.
To create such an environment the underlying cost of energy, and the security of its supply, are key elements. When Britain was at the height of its industrial might its energy needs were provided in-house by about 180,000 coal miners. They were the basis of our industrial strength. Today, we are struggling with a disastrous expensive energy policy that is based upon an illusion of a green economy with a huge dependence on imports.
The 2008 Climate Change Act was conceived during a period of great alarm over the consequences of Man-made Global Warming. The Act was intended to reduce carbon emissions and thereby save the planet from imminent catastrophic overheating. However, in practice it does nothing of the sort. It is more about dogma and posturing than reducing carbon emissions. It is also evident that the science upon which it was based had rather more uncertainties and was less settled than was being mooted at the time.
Despite an increase in emissions there has been no increase in global temperature for the past 16 years. The computer models, upon which the catastrophic heating was justified, have to be questioned and there is a need for more research, particularly to separate man-made effects from natural variability. In the meantime, however, regardless of the rights and wrongs of the scientific debate, the 2008 Act continues to impose unrealistic targets and huge taxes upon fossil fuels that will increasingly cripple the UK economy, with no sensible effect on global carbon dioxide emissions.
When it comes to meeting the energy needs of the nation, wind farms and solar panels are not the answer. Policies based upon dogma, rather than economic reality, are not going to sustain the nation. Indeed they can only encourage poor investments in non-viable businesses and the exodus of industry to locations offering more reliable and competitively priced energy. This we cannot afford.
But ‘Lucky Britain’ has an energy solution at hand: A means of providing a secure and competitively priced supply of energy in-house. An in-house supply that will provide a major contribution to the balance of trade and to the security of supply. An excellent trigger for the renewal of productive industry and the services that support it. ‘Lucky Britain’ is sitting on potentially massive resources of Shale Gas which, thanks to developments in fracking technology, can now be exploited safely and commercially.
Shale Gas developments in the USA have already reduced energy costs there by a staggering 40%, made them a net exporter of gas, and commenced the rejuvenation of productive industry.
Shale Gas has half the CO2 content of coal and has significantly reduced emissions in the USA. The location of major Shale Gas reserves will undoubtedly reshape world politics and the associated flow of wealth.
Britain’s resources are estimated to be between trillions and thousands of trillions of cubic feet, sufficient to heat every home for the next 100 years as a minimum – and could be far greater. A report from the British Geological Survey quantifying the deposits is imminent.
The Chancellor gave the go ahead for Shale Gas at the last budget but there has been continued negative commentary and delaying tactics from environmental alarmists who support the dogma that wind and solar power are viable alternatives. They are not, and pursuing these options other than as marginal contributors will be disastrous for the UK economy.
A combination of Shale Gas with nuclear energy provides a realistic basis for the energy needs of the nation, with a reduction in carbon emissions as a bonus. Is this not a sensible half-way house even for extreme environmentalists? Let us bear in mind that while we are closing coal-fired power stations, or converting them to burning more expensive imported wood-chips with an increased carbon footprint, China, India and Germany are busy building new coal-fired stations that will far outweigh our total contribution to CO2 emissions. (i.e. 20 in Germany, 363 in China, 453 in India, 2 in Japan)
The message must be made clear. If we wish to save the environment then we must first save the economy. Poor nations are unable to save anything – and certainly cannot afford to undertake the research necessary to allow more options in the future.
The UK is precariously positioned, heavily in debt, with a dwindling industrial base and facing serious economic difficulties. A major drive to reindustrialize, triggered by Shale Gas, offers a realistic hope of restoring the fortunes of this lucky country, north and south alike. We still have a strong science base, so let us make good use of it while we can afford it. This regeneration of productive industry deserves the highest national priority and unified political support.
My Last Hurrah is simply this – if you accept the message then spread the word, tackle the dogma and argue the case. It’s our grandchildren’s legacy that’s at stake. As a minimum, let us provide them with an independent democracy with a sound economic base to deal with whatever the future may hold.
On the way out you will find a card listing briefly some of the elements of a campaign for the Regeneration of Britain’s Productive Industry. This address may be my last hurrah but I have every hope that Britain will awake to reality and go on to bigger and better things.
Ten elements of a Campaign for the Regeneration of Britain’s Productive Industry.
- A national publicity campaign led by Government to explain clearly the trade imbalance and resulting debt problems and the logic of productive industrial regeneration.
- An accelerated drive to develop Shale Gas while retaining either a share of profits or tax revenue in the long term.
- Creation of a Sovereign Fund to invest Shale Gas tax and/or profits, in the regeneration of Industry.
- Repeal of the 2008 Climate Change Act that is acting directly against the economic interests of the nation.
- Accelerate and upscale the current plans for a Bank for Industry, targeting productive SME businesses. Encourage more local investment banking.
- Reduce bureaucracy for start-ups and SME’s
- Use tax policies to encourage manufacturing investment and operations. e.g. increased capital allowances.
- Boost the volume of venture capital investment for start-ups with further tax incentives and support for Venture Capitalists operating in the productive industry sector.
- Initiate a drive for more engineers and technicians based upon the campaign goals above.
- Renegotiate as necessary any restrictive terms of our EU membership. It will be a benefit to Europe as a whole.
Sir Alan Rudge CBE FREng FRS
President of the ERA Foundation