Industrial Strategy

George Kerevan Excerpts

Thursday 20th October 2016 Commons Chamber

[George Kerevan (East Lothian) (SNP)]

Will the hon. Gentleman way?

[Chris White]

I am sorry; I will not give way again.

Clearly, an industrial strategy needs to establish a framework—from how many children are studying STEM subjects at primary school, right through the industrially strategic pipeline to how many businesses are exporting. Where have targets been met, and where is further intervention required? As the strategy becomes more embedded, those things will not come as shocks, but more as minor adjustments to the levers of policy. We used to say quite a lot about the long-term economic plan. We need an economic plan, and underneath any economic plan, we need a strong and robust industrial strategy.

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[Stephen Hammond]

There will be some real opportunities. We will have the chance to re-examine our regulatory regime and competition policy to ensure that the UK is at the forefront of not only oversight, but competition.

If the movement of labour is restricted, there will be an acute skills shortage in this country, so we urgently need to look at ways of curing that. The Government have been at the forefront of one of such initiative, namely specialist academies for major infrastructure projects that allow us to build some of the skills that we have lost, but we need to do more. The Crossrail tunnelling academy is a prime example, and several other major rail projects are establishing academies alongside their projects. We would do well to continue to push that forward.

The recent Institution of Civil Engineers “State of the Nation 2016: Devolution” report recommends the creation of regional pipelines for infrastructure to identify where opportunities exist so that industry and academic institutions can invest in the training required.

In the longer term, there are two things the Government should urgently study and consider. The first is giving 14 to 18-year-olds an understanding of the fact that academic skills are not the only requirement for success in life, and that other things should be set alongside such skills. Why not have a national vocational qualification, alongside GCSEs and A-levels, to attract people into engineering? Equally, it would be perfectly possible for the Government to set up outreach projects that go beyond the theoretical and teach the application of STEM subjects.

Secondly, on finance, I hope the Minister will take the opportunity of our being rid of the state aid rules to consider some of the possibilities open to us. Almost inevitably, sovereign debt is chosen as the way to fund projects, because the weighted average cost of capital is cheaper. However, many countries look at possibilities in the private sector, such as pension funds, venture capital and sovereign wealth funds. The UK still seems to be suspicious of such funding. We should encourage the UK pension industry and other industries to set up direct investment funds. Equally, with the new freedoms they will have, the Government should explore setting up regional infrastructure and industry bonds, or regional equity schemes. This could be the new popular capitalism—the Mayism of the new century, just as popular capitalism was the Thatcherism of the 1980s. That will mean that people can invest in their country and region, and invest in their country’s success.

[George Kerevan]

The Scottish Government have already set up a Scottish investment bank, managed by Scottish Enterprise, which has significantly increased equity investment in small businesses.

[Stephen Hammond]

I am delighted to hear that. I am sure that the Scottish Government will want to take the opportunity of raising a sovereign wealth bond as well.

[George Kerevan]

indicated assent.

[Stephen Hammond]

I see that the hon. Gentleman agrees. My point is that we could now do this regionally, probably by using local enterprise partnerships as a delivery mechanism.

With any infrastructure policy, there is the challenge of what the Government need to do to organise the machinery of government that will support it. The National Infrastructure Commission represents a great strategic advantage to this country. The Minister has already heard me talk about the need to ensure that the IPA delivers on making the Government a smart client. Equally, the Government should look at the machinery in place and then sweat that machinery to ensure industrial success. Many of the LEPs can play a role in helping with regional skills and financing.

Finally, many incubators have already been set up in universities, which is fabulous. My hon. Friend the Member for Warwick and Leamington (Chris White) mentioned the one in his constituency, and there are others around the country, such as the agri-corridor in East Anglia, and particularly those in Cambridge, Leeds and Manchester, and across the north. However, we now want accelerators, which are for the next stage up. Businesses that have been in an incubator and have received some support are sometimes left to drift, and that is where universities can play a big role by bringing forward accelerators to help those businesses to reach the next phase of growth. We have talked a lot about picking winners, and if I had not spoken for longer than my eight minutes, I would have said much more about that. The Government need to ensure that universities focus those accelerators on our areas of comparative advantage. I know that the Minister—wearing not only the business hat he has on this afternoon, but his universities hat—will make that point to them. I am grateful for the opportunity to have spoken in the debate.

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[Mr Steve Baker (Wycombe) (Con)]

It is with considerable trepidation that I rise to speak in a debate led by my hon. Friend the Member for Warwick and Leamington (Chris White). The last time I did so, I think I persuaded the Government to accept only the first clause of his three-clause social value Bill, but he kindly asked me to serve on the Bill Committee, by which time the civil service had vastly expanded it into something of a Christmas tree Bill. I very much hope that on this occasion there will be a different outcome, but it was of course a great pleasure to serve on that Committee.

Competition on the merits is a perfectly reasonable industrial strategy for the Government to adopt. It is the one that creates the most wealth and it has been proven to lift people out of poverty. I encourage any Member and anyone listening to have a look at the website HumanProgress.org and its Twitter feed for bite-sized snippets that illustrate just how well entrepreneurship, strong property rights and freedom to contract in a market economy not only facilitate production but engage other social forces that are healthy. It is social co-operation through the mechanism of competition in the market. Other mechanisms have always brought about poverty and misery. The goal of the Government’s domestic policy should be to lower anti-competitive market distortions, and it is on that concept that I wish to focus my remarks.

Anti-competitive market distortions adversely affect economies and contribute to high costs. If we reduce distortions in both the UK and the world we could, according to the Legatum Institute’s productivity simulator, see a significant increase in productivity and public welfare. One of the great problems with domestic suggestions is that they increase the level of ACMDs, which can lead to higher costs and push more people into poverty.

I would like to offer a taxonomy of ACMDs from a paper in the competition law journal, Concurrences— No. 4 of 2014—entitled, “The effect of anticompetitive market distortions (ACMDs) on global markets” by Singham et al. The authors classify those distortions into six areas, and I offer them not as a menu from which interventionists might pluck their preferred action, but as a description of areas in which Governments take policy choices that push people into poverty by prejudicing competition.

The first and most obvious is the type 1 distortion, described as

“government laws, regulations or practices that eliminate competition completely. Examples might include a local content regulation that eliminates foreign production from competition, or a capital adequacy regulation set so high that some banks are forced to exit the market.”

That produces monopoly or oligopoly.

Type 2 distortions are

“government laws, regulations or practices that lessen competition. These are laws, regulations or practices that make markets less competitive, but do not necessarily foreclose competitors from the market entirely.”

Those distortions

“elevate the costs of certain companies.”

[George Kerevan]

I thank my colleague on the Treasury Committee for giving way. Does he accept that there is a middle way whereby Government can encourage competition, as we have seen with the superb Catapult centres, which are an example of an industrial strategy that works? By offering prizes for competitive solutions to technical problems, it is possible to create the ecology that the hon. Gentleman seeks.

[Mr Baker]

Well of course, the great prize in a free market should be a profit, which one is allowed to keep and invest in further production. I do not wish to bore the hon. Gentleman or the House, but by the time I get to point 5, he will see that I will turn to competition authorities.

I was saying that type 2 distortions that lessen competition create dead-weight costs in the economy. Examples would include distribution laws that increase costs for certain suppliers. Types 2a and 2b can be split up—[Interruption]—but I shall not go through them all. The hon. Gentleman has generously indicated that reading from this fascinating paper is perhaps not the most engaging speech for him, so I shall cut some of it down.

Type 3 distortions

“apply different rules to different firms”.

One would have thought that in a society governed by the rule of law, no one would stoop so low, yet they do. Other countries around the world—particularly, I am afraid, India and the Philippines—have such regulations.

Type 4 distortions

“are largely caused by state-owned enterprises”,

which include “government privileges in licensing” and distortions relating to the pricing practices of state-owned enterprises and to “abuse of regulatory process”; while type 5 are

“largely due to action or inaction by competition agencies”.

I will happily share with the hon. Gentleman some of the detail on how competition authorities, either by acts of omission or commission, fail properly to promote competition.

Type 6 distortions are

“caused by anticompetitive state aid or support”

whereby firms are given

“subsidies and other subventions that may or may not be anticompetitive”.

The point is that it is now well known in academic literature that various categories of Government interventions make us poorer. They can be subjected to a taxonomy, and their costs can be estimated—[Interruption.] I apologise if the hon. Member for Newcastle upon Tyne Central (Chi Onwurah) does not like me using a particular word.

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[Chi Onwurah (Newcastle upon Tyne Central) (Lab)]

I declare an interest in that I have worked for a competition regulator, Ofcom. The hon. Gentleman is suggesting that a lack of competition is always the fault of the Government, either by doing or not doing something. Does he not recognise that it is possible—indeed, it is what the literature shows—that companies acting in monopolistic ways or capturing markets are themselves responsible for a lack of competition?

[George Kerevan]

He’s read his Adam Smith.

[Mr Baker]

I have; I am grateful to the hon. Gentleman, my colleague on the Treasury Committee, for saying that. I absolutely have, but perhaps not the same extent that he has. I certainly cannot quote the passage that I know he has in mind.

I say to the hon. Member for Newcastle upon Tyne Central that I certainly did not suggest that a lack of competition is due only to the Government. I think she has applied her own ideas about what I stand for in order to come to that conclusion. I shall certainly read Hansard very closely tomorrow to see whether I suggested that. What I am suggesting is that in a taxonomy of six different categories of anti-competitive market distortion set out in a serious journal of competition law, two sub-categories of one category relate to mistakes that can provably be seen to be made by competition authorities. They are not perfect; no human institution is perfect, including competition authorities.

We are undergoing a process of becoming more open to trade, as indeed we should—seeking comparative advantage, seeking to supply new markets, and seeking to buy from new markets in order to drive down prices. However, the experience of trade negotiators whom I have consulted is that if we go and talk to nations in which the largest segment of the economy is agriculture, we find that we cannot do a deal with them if we take agriculture off the table. Why? Because of the extent to which we subsidise it. We must ensure that agriculture is well looked after, within the expectations that the Government have set; we must ensure we can continue to supply food. What we must not do, though, is try to negotiate with other nations if we ourselves are substantially distorting our own domestic markets in such a way that they cannot hope to compete with us.

I want to impress on the Government—there is substantial literature about this issue—that it is conceivable that both domestic and global productivity could be radically improved for the long term by means of a productivity and consumer welfare Act, which would entrench the very best of competition policy in British law in order to eliminate anti-competitive market distortion.

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[Joseph Johnson]

At the autumn statement this year.

Let me give Members a broad overview of the context in which we are developing the industrial strategy and a flavour for some of the principles guiding us as we do so. First, however, I want to thank my hon. Friend the Member for Warwick and Leamington (Chris White) and the hon. Members for Hove (Peter Kyle), for Edinburgh West (Michelle Thomson)—who is no longer in her place—and for Hartlepool (Mr Wright) for securing the debate and making such powerful contributions.

The UK economy has delivered a huge amount of growth and employment over recent years. Unemployment has been reduced from 8% in 2010 to 5% now, while full-time employment has climbed from 70% to 74% over the same period—a faster rate of employment growth than France, Germany or the USA. But, as the Prime Minster has made clear, our economy is not working perfectly. Gains are not always shared across the country and too many people are losing out. We want to deliver an economy that works for everyone.

[George Kerevan]

Will the Minister add to that catalogue of statistics that exports have flatlined for the past five years?

[Joseph Johnson]

Our export performance is one of the features of our economy that we are seeking to improve through our industrial strategy, and I am looking forward to explaining a bit more about how we will do that.

The UK has the second lowest productivity in the G7, a fifth below the G7 average, and closing just half that gap would add £250 billion to the economy by 2025. A proper industrial strategy can play a key role in that, by delivering real benefits to the work and lives of businesses, consumers and employees.

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[Joseph Johnson]

Our research base is globally competitive, and organisations and scientists from around the world are keen to collaborate with institutions in this country. Collaborations between institutions in the UK and others around the world have some of the highest impacts of any science undertaken anywhere. We are desirable partners for collaboration, and I have every expectation that, with the support of the Government, we will continue to be a globally competitive science power in the years to come.

We are competitive in science, but we are also at the cutting edge of industry—for example, in advanced manufacturing. In the UK, almost 1.6 million cars were produced in 2015, up 4% on 2014 and up by nearly 60% since 2009. The hon. Member for Hartlepool asked why the Government did not procure cars for its fleet solely from Nissan in Sunderland. I must point out to him that we make fantastic cars all over the country. I believe that the Prime Minister drives a Jaguar XJ that was built in Castle Bromwich in the west midlands. So there is no need to buy cars from only one place in the United Kingdom. Globally competitive cars are made in a vast number of locations in the UK.

[George Kerevan]

Surely, the Minister is aware that we have a net deficit in trade in automotive products. We assemble car parts that are brought in from the rest of the world.

[Joseph Johnson]

The hon. Gentleman might recall that there was a point during the last Parliament—I think, in 2013—when this country became a net exporter of cars for the first time since 1975, when the then Labour Government nationalised British Leyland. It is the automotive policies of this Government and our predecessor coalition Government that have taken the car industry to the heights that it currently enjoys and that have not been seen since the early 1970s.

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[George Kerevan (East Lothian) (SNP)]

I am glad to be tail-end Charlie. Fortunately for someone in this situation, my book on industrial policy is published next month, so I may save time and send it to the Minister.

The challenge is: is there is an industrial policy? I accept that there is no generic policy—the hon. Member for Bedford (Richard Fuller) is correct—but there is industrial strategy in the here and now. Its definition is what the state does to help to provide competitive advantage to the companies in that state. If the state does not do that, other states will help theirs, which will wipe out those companies. I remind the hon. Gentleman that that is why the UK’s exports have flatlined for the past five years.

I put that point to the Chancellor of the Exchequer yesterday, and he spoke about international conditions and lack of demand. Yet Germany’s total industrial exports have risen by a third in the past five years, helped by the German Government. They tax industry more than it is taxed in this country, but they pour the money back into industrial support. In the United States, generations of productivity growth have been funded by investment in its defence industries, which flows through into the private sector. The point about the state picking winners is that there is a partnership in which the state backs up its industries, and particularly its companies. The state gets out of the way where it needs to, but there has to be such a partnership.

I do not have a lot of time, so I will do something really strange, which is to support something that has been a Government policy for the past five years. I was originally very cynical about it, but the more I have researched it and talked to people in the industry, the more I think it has been very successful, although it may have been stumbled on by accident. That is the policy of having Catapult centres. Public money is put into centres for technology that small companies cannot buy on their own, so that such companies can use it, which helps to provide a competitive advantage. Catapult centres provide competitive grants and challenge companies to come up with solutions to problems, and that works. Catapult centres are the solution. They are not about picking winners, but about creating a competitive environment and providing resources. If we do not do that, other countries will.

To give a very simple example, there is a close correlation between exports as a percentage of GDP and how much is spent on research and development—not blue-skies R and D in universities, but industrial R and D. In countries that have a higher share of exports in their GDP, industrial R and D is orders of magnitude higher than the amount we spend, because their Governments and their military put money into it. The hon. Member for Havant (Mr Mak) made a very good point about the role of the military.

I found a statistic that my good friend the hon. Member for Wycombe (Mr Baker) might like, as an ex-RAF officer. At the moment, the RAF has 475 aircraft that were built in Britain. For the first time, the majority of its aircraft have been bought from abroad—507 of them. I should say that I tried to bump up the number of British-built planes by including the Spitfires in the Battle of Britain memorial flight. If we buy from Boeing and Lockheed, and let those companies use their technology, we cannot survive. We have to use the weight of the state behind our companies. That is what industrial policy is about.

My final point is that the budget for the Catapult centres is about £600 million a year. That sounds a lot, but if we look at a comparable organisation in Finland, we find that its budget is about 75% of that. The UK spend is peanuts. We should treble that amount. Will some of that money be wasted? Yes, but some will produce the ideas and new technology that we need.