Waken the slumbering dragon

Re-igniting the Welsh economy requires radical measures to support our manufacturing industries says Tegid Roberts

Since the Scottish independence referendum in Sept this year and the rather lacklustre Smith Commission that came after it, the question of “what next?” for the Welsh devolution settlement has been something of a never-ending discussion in both civic and political life in Wales. Despite there being a largely cross-party and civic consensus reflected in the Holtham, Silk 1 and Silk 2 commissions, only Silk 1 has so far been brought closer to reality (with some delay) via the current Wales Bill.

However, there is little real radical discussion about the “Elephant in the Room” of Welsh politics: our underperforming economy. Currently the tax gap between what is raised in tax in Wales, and what is spent on services, is well over £10 Billion. So clearly, we have much to do here to build the economy back to levels last seen in the 1960s. This £10 Billion gap includes, of course, expenditure shared across the whole of the UK, including London Crossrail, the armed forces and the banking bailout costs [ No bank headquartered in Wales I might add ].

Obviously, increasing the economy here in Wales will also mean that less public spending will be required as more people are in work, and jobs are better paid. However, in order for us to bridge the current gap, our economy needs to grow by some £25 Billion, or about 50% – no mean feat. The news isn’t all bad though, as our exports since 1999 have doubled, and are currently running higher than the UK average: we export some £15 Billion per annum. So given this head start on what is a strong indicator of economic health – what more can be done to grow the Welsh economy further?

In my opinion, the main area for growth in the Welsh economy is manufacture,  as this has long been a key driver of our exports, and already makes up a substantial proportion of our economy [ 19% down from 26% in the 1990s but still higher than the UK average of 10%]. Key cornerstone large companies here include: Ford, Toyota, EADS/Airbus, General Dynamics, Corning, Sony, Panasonic, Tata, IQE, GE, Qioptiq et al. All are well-established, employing highly skilled people, and support a diverse and deep local supply chain. Highly skilled manufacture also creates opportunities for service and repair markets, and so can contribute even more highly skilled employment to the economy.

In addition to large multinationals, we also have plenty of SMEs here. Unfortunately, as they grow, many of these businesses are often bought by companies outside of Wales, and are therefore at risk of removal outside of the country.

What can we do to support and grow Welsh manufacturing businesses, large, medium and small?

Supporting large cornerstone companies in Wales

The key focus is for us to collectively up our game, with financial support from the Government, and technical support from local consultancies, universities and colleges.

With support from the Welsh government and local businesses, large companies that service capital equipment in Wales, could be encouraged to look to also manufacture here. Companies currently manufacturing in Wales could similarly be encouraged to set up Research and Development facilities here. Research and development companies could be supported in manufacturing their products here, rather than considering off-shoring. Finally, large international firms that currently manufacture here could be encouraged, and assisted, to source as much of their supply chain here as possible. Multinational companies already embedded in Wales should be encouraged to expand, by opening more divisions in different industries.

Support for small- and medium-sized businesses

The main focus should be on retaining and growing successful Welsh businesses. SMEs here, whose owners want to sell an established and profitable business, should have the option to be bought, via a management buyout with help from a Welsh development bank. This would allow a business to continue in Wales.  A development bank in Wales could buy and consolidate businesses in similar markets to create larger Wales based entities – for example value added food producers may consolidate well, and share distribution channels, technology and more clout with the supermarkets.

Creating a Welsh Development Merchant Bank

Our development bank could be owned collectively by the local authorities in Wales, as these authorities have the ability to borrow money in excess of the Welsh Government. It should be managed professionally, and in the manner of a traditional Merchant Bank, of which we used to have several in Wales, a century or two ago. Let’s call it the Cambrian Bank.

In Lower Saxony in Germany, the state government towns 20% of the Volkswagen Group, and has seen its stake grow and produce dividends for decades.

What if Cardiff Council had owned a non-controlling stake in Admiral, right at its creation? What would that be worth to the local economy today? A state government stake could also provide stability to the business in question, as a long-term hands-off shareholder. In Singapore, the national pension fund supports and funds SMEs as well as very large corporation, in a largely hands-off manner. Both Singaporean state and the private sector have flourished.

Infrastructure support for Welsh business

We need far better links between north and south Wales. It’s stifling our ability to work together – we need to consider tunnelling as the Swiss do, and to build lasting infrastructure that copes with our mountainous landscape. Train links within Wales should be the priority, and not shaving 20 minutes off the journey time to London. How about shaving 20 minutes off the journey time from Merthyr to Cardiff?

The airports in Wales need proper links to major hubs. Regular flights from Cardiff or Caernarfon to terminal 5 Heathrow, perhaps? It currently takes from Cardiff central over 4 hours to get to T5 via train, when it could be flown in less than an hour, with Cardiff the main passport control. Regular flights mean people will fly. Irregular and they won’t.

Very fast broadband, though already here in Cardiff, must be made available to any business in Wales that needs it. It is as essential as roads these days, particularly for video conferencing, never mind very large data traffic. I use it weekly to conference with multiple partners in the US, and in Europe, and though never as good as a face-to-face meeting, it is miles better than the alternative. Very fast broadband also allows us to access cloud and distributed-based computing services, at near real-time pace, and reduces the need for dedicated servers in-house that are expensive to maintain.

Energy generation

We already create twice-as-much electricity here in Wales than we use, so on the back of this we need to create much more. Industry needs affordable, stable electricity, and as a priority the WG should be given the right to sign-off large energy creation projects [ unlimited in my view and not the 350MW as proposed by Silk]. If we can provide cheap energy to industry, this will be an excellent draw for domestic and foreign investment. How we create electricity is important- we must look at all options, but we must also consider new forms of energy storage, particularly from the less steady sources such as wind and solar. Storing energy will allow us to timeshift its use, and can create an industry of its own.

Educating the next generation of engineers and scientists

To provide a highly skilled workforce for industry, we must generate more Wales-trained chartered Engineers and scientists, paid for by the Welsh Government. Those that choose to study engineering outside of Wales should be encouraged to complete sandwich courses with companies in Wales, so that there is a job for them in Wales when they have qualified. The Government here should consider paying for these courses, in part or full, and modify the graduates’ income tax rates in a minor way, to fund this, if necessary.

Lowering corporation tax to support Welsh manufacture

It seems unlikely that corporation tax will be devolved completely to Wales, as some fear a race to the bottom damaging tax take. However, in order to compete Wales must have the correct tools: therefore a corporation tax cut should be considered for manufacturing companies here. In the Republic of Ireland [ some 60 miles of water and 4 hours of travel away], corporation tax on trading income and thus, manufacture is 12.5% [it was 10% up until 2003]. We must be able to compete effectively with this low rate. I have seen first hand, how companies in the US that are considering settling here, look at the RoI corporation tax rates and plan to settle there instead. This, despite the fact that we are 4 hours closer to the European market and border 53 million in England. The Holtham report suggested that both Wales and Northern Ireland could have the limited ability to cut the rate while both countries’ economies are underperforming. Implementing such a measure would provide a much-needed stimulus. Now that Northern Ireland is being offered control over Corporation Tax then I wish to see Wales doing the same.

Building up the GVA of Welsh agriculture

Despite 77% of Wales’ total land area being used for agriculture it only accounts for 1% of the Welsh GVA. This seems inefficient; with room for improvement in the amount agriculture contributes to our economy.  France for instance creates 2% of its GDP from agriculture.  Farming in Wales must move towards more value-added food production, as seen successfully with some Welsh farm-based cheese, meat and beer manufacture. Wales has excellent food sources, but must create higher value out of it.

There is also a responsibility on us, the Welsh population, to promote, buy and eat locally sourced food. We should support our homegrown food and drink industry – much of it is excellent- and boost GVA at the same time.

Agricultural manufacture is, of course, not limited to food and drink. For example, why do we not make textiles in anger here anymore? There are pockets of industry but it is little supported. It needs supporting and growing. We have plentiful supplies of good quality wool here, and an industry that is flourishing in the rest of the UK, but less so here in Wales. Despite that we invented the word Flannel [ from Gwlanen] and its industry, little of this high value fabric is currently made here. With such a ready source of wool we need to reverse this, and compete with other European countries in this, and other, lucrative textile markets.

In summary, nothing about the Welsh economy is broken but it needs to get into shape again and we can, and should, learn everything we can from other countries that have similar terroir and similar strengths. And play to our strengths we must. We manufacture more, export more proportionally than the rest of the UK, and have plentiful resources with water, electricity creation and agriculture, but our economy is a little on the portly side and we must get it fitter and adapt faster.

We should be absolutely sure that it is not cheaper to manufacture in other countries if we automate where necessary and skill up – we are closer to the world’s largest market, the EU, than China or the US is. We must make and service capital goods, design and build machines that make products, train our people to design, as well as make, and be just that little bit prouder of our heritage which is extremely rich and steeped in industry. The industrial revolution started here – we must strive for a new one.

Tegid Roberts is Director of Cadarn Consulting. This piece was originally published in an edited format in the Western Mail.

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