Challenge for Policymakers on the Economy

Geraint Talfan Davies discovers a gulf between business and government at the IWA’s inaugural National Economy Conference

If the IWA’s first National Economy Conference held last Friday achieved anything, it was to underline the gulf in thinking that exists between the worlds of business and the Welsh Government. On this showing the good relations between government and business, said to have been forged during the recent Welsh economic summits, may well be only skin deep. The government’s current review of economic development has a lot to do to persuade business that policymakers here are up to the challenge that Wales faces.

It wasn’t just the torrent of depressing statistics – Wales now the lowest UK region in terms of Gross Value Added per head, 10th out of 12 for research and development expenditure, the lowest for private equity and venture capital investment, as well as for overall competitiveness – it was more the unanimous conviction that the government has yet to deliver a coherent strategy and, more importantly, a delivery plan that business finds convincing.

Nigel Roberts, chair of Cardiff-based Paramount, told the conference that business was disillusioned with the Assembly, that initiatives took forever, that there was a state of “paralysis”, and that “dealing with the Assembly is like punching a sponge”.

The conference had drawn a wide range of top-flight speakers, including the new First Minister, Carwyn Jones, to give Welsh, UK and world perspectives on the economic challenges that face us.

Gerald Holtham, one of the UK’s top investment managers and chair of the Holtham Commission that is examining the Barnett formula and other Assembly funding options, warned us that although growth over the next year could turn out to be better than forecast, we were in for 8-9 years of tight fiscal policy, with those at the bottom of the skills ladder sure to be the hardest hit.

The only silver lining that Holtham could see was the fall in the value of the pound which would help Welsh manufacturing. But since a later speaker, Professor Robert Huggins of the University of Wales Institute, Cardiff, reminded us that Wales is also at the bottom of the export league table, with only 2.16 per cent of Welsh companies exporting, this might not make a huge difference to the overall situation in Wales.

Concentrating on competitiveness, Huggins reminded us that the low R&D expenditure by business in Wales meant that Wales was more dependent on R&D in the higher education sector than any other UK region. But he also pointed out that the whole of the UK is unbalanced in this regard: only the southeast England ‘super-region’ scores above the UK average for competitiveness, a factor that, he thought might account for the fact that the UK has dropped from 7th to 12th in world competitiveness rankings in recent years. The concentration model is not working for the UK, he said.

Within Wales, Cardiff is the only city whose competitiveness is above the UK average. It ranks 12th, against Newport at 30th and Swansea at 38th. Merthyr and Blaenau Gwent are at the very bottom of the pile – 405th and 407th out of all UK local authority areas. In the Welsh context Huggins believed that it would make more sense to concentrate resources in regions that are strong – notably the Cardiff-based city-region – a call echoed by several people through the day, but one which runs counter to current political orthodoxy in the Assembly itself.

But the root cause of business frustration may have been identified by Dr. Stevie Upton, the IWA’s own Research Officer. This, she thought, was the information deficit: the fact that, following the absorption of the WDA into the civil service, it is almost impossible now to tell where the money spent on economic development in Wales actually goes. This is all the more important in the light of Upton’s other finding that Wales is spending more per head on economic development than any other UK region – £107 per head, £10 per head more than the north east of England, and £30 more than Scotland. She has been seeking out this information over recent months at the request of the IWA’s recently formed Economy and Finance Study Group.

There is no little irony in the fact that the abolition of the greatest of the Welsh quangos, allegedly in the interest of accountability, has resulted in reduced accountability: no annual reports, no reporting of spend by detailed programme, no external evaluation of the effectiveness of individual programmes. The Welsh Government’s ‘Flexible Support for Business’ scheme, which telescoped several other programmes, was a particular target of criticism throughout the day, because of the way it rolls up so many different programme spends under one heading.

Upton was able to point to figures which, on the face of it, suggest that while the Yorkshire RDA is spending 19 percent of its budget on enterprise, Wales is spending only 9 per cent – a comparison that the Assembly’s Enterprise and Learning Committee might like to explore.

What the conference audience found most worrying was that this now stands in stark contrast to the situation in Scotland and England. Upton was able to point to an illuminating report, commissioned by the UK Government from PricewaterhouseCoopers, that examined the effectiveness of each of the English RDAs in considerable detail. There has been no comparable external evaluation of the economic development spending and programmes of the Welsh Government. Everyone, including the Assembly’s own scrutiny committees, are in the dark.

The suggestion that this might be an endemic problem was raised from the floor of the conference by Ian Courtney, part of a three man task and finish group, charged by the Welsh Government itself with investigating the commercialisation of intellectual property in Wales. He revealed that, despite being a government-sponsored group, they had had so much difficulty getting information from government departments that they had to threaten the government with the Freedom of Information Act.

Apart from the lack of external evaluation, Upton detected evidence of risk aversion in the absence of any demanding performance indicators, allied to a too frequent shift to new initiatives, with little innovative thinking and policies too dependent on a changing politics with each Assembly term.

Professor David Blackaby, from Swansea University, made a big plea for improving skills of Welsh workers and managers – a call that struck a chord with a large number. He reminded us that the problem of inadequate skills was apparent at several levels. He pointed out that among the 30 top OECD countries, the UK had the lowest proportion of managers with degrees. He questioned whether education  was currently fit for purpose, which led to some debate about whether university education should be vocationally focused or not. More encouragingly, David Stevens, Chief Operating Officer for Admiral Insurance plc, Wales only FTSE 100 company, said they had built the business largely on home grown talent.

When it came to the question of what to do, Chris Rowlands, the Welsh businessman who last year produced a report on finance for business for No 10, was clear that there was a financing gap to be filled – for investments of between £2m and £10m – that would not be covered by normal debt finance or by private equity and venture capital companies. He accused private equity of being lazy, having concentrated for so many years on the easy pickings of leveraged buy-outs.

There would have to be a major intervention to fill this financing gap. It would need scale – a fund of funds – and a strong risk management function, but would have to be a regionally distributed fund. He did not think there would be any problem of lack of demand from business in Wales, but it would need people on the ground to search out and create opportunities. However it would have to be done on a commercial basis, not by government. It was clear that he would not be averse to a new Welsh banking institution and pointed to plans for Scottish Investment Bank. Could we see a Bank of Wales re-emerge, as many of us have been urging?

There were those who thought that government should not be in the business ‘picking winners’ and should stick to ‘educating people, keeping them healthy and moving them around’. Not unnaturally, this was not the view of speakers who were in government: the First Minister, Carwyn Jones, the UK Trade Minister and former Chairman of Standard Chartered Bank, Lord (Mervyn) Davies.

Lord Davies, who is also Chair of the Council of Bangor University, threw away his prepared text and, once he had excoriated the banks for not learning the lessons of the recent crisis, delivered an impassioned plea for Wales and the UK to concentrate on the industries of the future: IT, mobile technology, medicine and life sciences, education (where the UK has 20 per cent of the world market for students) and the creative industries.

Infrastructure was another priority, and Government faced a huge challenge to find the £450 billion that would be needed for infrastructure investment over the next 15 years: investment in energy security, universal broadband, high speed rail, roads and water.

He also thought it essential to develop long-term strategies that went beyond the five-year political cycle. This argument also applied to Wales, and he urged the Welsh Government to copy Gordon Brown, by bringing business people like himself into government. Carwyn Jones, the First Minister, wasn’t present at this point to respond.

Later, however, Carwyn Jones picked upon on the criticisms of poor delivery and stressed that the last thing he wanted was for government to become ‘a strategy factory’. Asked whether stood by the ‘clear red water’ message of his predecessor, he said it was important that the government believed in reducing inequality, but that did not mean Wales was shut for business.

As for the recent case of health service reform where no redundancies appear to have ensued, he acknowledged that “this cannot go on for ever” and that “voluntary redundancies would have to come”. Faced with criticism of the Flexible Support for Business (FS4B) scheme, he took the line that while this was new to him, if that was the perception he would take it on board. His barrister’s training means that he has little fear of a critical audience, but there were signs that he was in listening mode, and that this honest exchange of views with business at the start of his tenure may have been timely.

Geraint Talfan Davies is Chair of the IWA.

Also within Politics and Policy