Industrial Strategy

Lord Griffiths of Fforestfach Excerpts

Monday 8th January 2018 Lords Chamber

[Lord Griffiths of Fforestfach (Con)]

My Lords, it is a great pleasure to take part in this debate on this very important subject. I thank the Minister for enabling us to take part in it. The Government’s White Paper was an important document, ambitious, strategic and long term. If it is implemented successfully, recognising all the comments that the noble Lord, Lord Hollick, made, it clearly will lead to the long-term creation of jobs, to prosperity and higher wages in the UK economy. Yet to economists of my generation, the term industrial strategy is associated with failure not success—and I shall explain why.

You could say that the first industrial strategy that we had in the post-Second World War UK was the nationalisation of whole swathes of industry by Attlee, which was done so that business could more clearly, as state-owned enterprises, focus on satisfying the consumer. As has already been mentioned by a number of speakers, Harold Macmillan’s Government set up Neddy specifically to bring together business, trade unions and government. Neddy survived until John Major closed it down in 1992. It has been mentioned that Harold Wilson set up the Department of Economic Affairs, with George Brown as Minister, and developed in 1966 a national plan. Something that has not been mentioned is that in Ted Heath’s Government the Industry Act 1972 was passed, enabling the Government to give grants and funding to industries, particularly those in difficulties, and especially shipbuilding. In 1975, Tony Benn argued that there should be a compulsory agreement between the top 100 companies in Britain and the Government but, to avoid that, Harold Wilson deflected things by issuing a White Paper entitled An Approach to Industrial Strategy. So there is a sense of déjà vu.

Frankly, none of those initiatives was a great success. The nationalised industries ultimately had to be privatised because of low productivity and overmanning, and the national plan was soon scrapped, a year after it was published. As to picking winners, we might mention the success of Rolls-Royce—but it is thought of primarily in terms of British Leyland and Upper Clyde Shipbuilders. Therefore, I have to say that when I first heard that the Government were about to announce an industrial strategy, I was sceptical.

I feel that I am open-minded, and the question that I ask is, “Why is it different this time?”. It is different for several reasons. The first is that lessons have been learned from the failures of past initiatives. The Government are not pinning their hopes on state ownership. It is about supporting viable private sector companies. Next, it is not about financial assistance to bail out failing firms; it is about how to support high-growth, innovative firms. It is not about backing state monopolies or cartels, but it is committed to competition being at the heart of the industrial strategy. On page 21 of the White Paper it states:

“We believe in the power of the competitive market—competition, open financial markets, and the profit motive are the foundations of the success of the UK. Indeed the best way to improve productivity is to increase exposure to competition”.


In addition, it is not about backing existing technologies but about supporting the development of new ones at the cutting edge which require basic science and innovation. Finally, it is about supporting companies that are not being hampered by overpowerful trade unions, which so restricted the ability of companies to manage as they wished to manage. These reasons are sufficient to say that lessons have been learned. Although I believe strongly in an enterprise, open, competitive economy, this Government’s approach has nevertheless learned lessons from the past.

Another reason is that the Government have thrown everything at the industrial strategy, as the noble Lord, Lord Hollick, mentioned. Any policy which has any implication for the economy is part of the industrial strategy. That can be seen as a weakness but, on the other hand, it is a strength. The Government are trying to harness resources from all aspects—and it is a vast area—in order to tackle the problem. In that sense, this strategy is not just about support for business. It is not about bringing management and trade unions together. It is about drawing on all the resources of government.

The final reason for feeling that it is different this time has to do with one aspect of the industrial strategy—sector deals. When I first read the paper, this was the part that I was most sceptical about. I have really changed my mind as a result of being, with the noble Lord, Lord Kakkar, and the noble Baroness, Lady Young of Old Scone, a member of the Select Committee on Science and Technology and taking evidence for our review of life sciences in the UK and industrial strategy. What impressed me about the sector deal announced just before Christmas was, first, that private sector firms such as Novo Nordisk, MSD—known as Merck in America—and QIAGEN were making significant commitments to build research facilities in Oxford, London and Manchester, to pioneer medicines, diagnostics and genomics. Secondly, medical charities such as the Wellcome Trust, Cancer Research UK and so on are also making a real commitment. Then there is the Government: we have already heard about the role of the NHS, but there is also basic university science research; the post-Brexit immigration policy commitment which has been made; the infrastructure in clusters; and the Government’s commitment to developing the Oxford-Milton Keynes-Cambridge corridor and, as has already been mentioned, to digital innovation hubs.

There is a story underlying this industrial strategy which marks it out from those of the past. However, there are still questions to be answered. Might the sector deal end up supporting, or even subsidising, weaker firms in that sector? What if shareholders feel that the commitment made to research has not been matched by the financial returns they expected? Will they demand a quid pro quo on what the NHS should be purchasing from them? What about the tariff of prices negotiated for their products which are bought by the NHS? At present, pricing policy is outside the sector deal. Can it remain so? The industrial strategy is clearly a work in progress but, nevertheless, there is everything to play for and it is worth backing.

I will make three final points. First, what came out very clearly when the Select Committee took evidence from business people running pharmaceutical companies and from people involved in research, as well as from Sir John Bell—and at the launch of the life sciences industrial strategy at No. 10 Downing Street—was that senior businessmen from the US and the continent value the fact that we have world-class institutions, such as universities and medical schools, and world-class hospitals where clinical research is done. That is important. The noble Lord, Lord Kakkar, eloquently made that point in his speech.

Secondly, and nearer to home, one of the constant complaints from business is the lack of long-term capital. Here there are two suggestions. The first is from the Treasury committee on patient capital, which looked at the problem. We have pension funds and insurance companies in Britain that have assets of over £3 trillion. They clearly have a long-term investment horizon and, obviously, they have to manage their risk carefully. However, they tend to be quite short term because they have to follow the prudent person principle whereby investment advisers have to approach such matters from the stance of how “a prudent person” would look at them. Interestingly, in two countries, the US and France, they ask themselves, “Could we not continue with a prudent person principle yet allow long-term funds such as pensions and insurance companies to put a slightly greater proportion of their investment into unquoted equities?”. The conclusion of the Treasury’s patient capital review is that that should be examined and the Pensions Regulator should be asked to give advice on it. That is a great idea, and if it could be done, it is the one thing that could transform the supply of capital to innovative companies which want to grow in the UK.

The second suggestion is to do with quantitative easing and the Bank of England’s interest rate policy. I am all in favour of the Bank of England’s managing interest rates to keep inflation down and ensure financial stability. However, quantitative easing has had some quite horrific side effects in terms of the growth of consumer credit, excess credit and inflation, and the misallocation of capital to zombie firms. The OECD did a major study of firms, covering the period 2003 to 2013, that it defined as 10 years of age-plus but with constant problems in meeting interest payments. It concluded that zombie firms are,

“a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies”.

When the Bank of England recently raised interest rates, for the first time in 10 years, it said that in future the rises would be,

“at a gradual pace and to a limited extent”.

I feel that, like the US, we could try to get back to more normal interest rates. That would ease up capital that could go into innovative firms.

The third point concerns the future—this is not something that I will dwell on—and the governance of the industrial strategy. There is a Cabinet committee headed by the Prime Minister and an industrial strategy council with people from the private sector. Beyond that, however, there is a great haziness concerning delivery. As regards the implementation of new policies, during my five and a half years in No. 10 Downing Street I always felt that the design of a new policy was 10% of the problem whereas the implementation—the delivery—was 90%.

In conclusion, this policy is different from what we have seen over the last number of decades. We also live in a different world, with the digital revolution. The industrial strategy is still a work in progress. However, I believe that if it is implemented, as well as striving to lower taxes, it will offer us the best possible way for a successful post-Brexit UK.