What’s in store for UK industrial strategy following Brexit?

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An illustration of men doing custruction work to illustrate Industrial Strategy

Following eight extraordinary months since the Brexit vote, Theresa May’s government is looking to steady the UK economy with a new industrial strategy. With a focus on exports, skills and innovation, there are grounds for optimism, writes Andy Silvester

The phrase “industrial strategy” does not always warm the cockles of British business’s heart. For many, it is two words that conjure up images of clapped-out British Leyland cars rolling off creaking production lines.

It was with some trepidation therefore that business leaders met the prime minister’s announcement, soon after she took control of 10 Downing Street, that her government would launch just such an “industrial strategy” for post-Brexit Britain. Business and energy secretary, Greg Clark, speaking at the IoD Annual Convention, went so far as to suggest that the government’s role as an investor in British sport and the success of Team GB in the Rio Olympics could potentially be a model for government and business more widely. Did this mean, some asked, that the economic orthodoxy that has broadly reigned since the days of Ronald Reagan and Margaret Thatcher was to be turned on its head?

The answer, it seems, is not really. On 23 January, the government laid out its consultation on what it calls an “active” industrial strategy. Describing “10 pillars” upon which the strategy will stand, it is in some ways more a job description of the Department for Business, Innovation and Skills and of a pro-enterprise government than a return to the 1970s.

The document itself is full of welcome commitments. The government will, it says, build on our strengths and extend excellence into the future; close the gap between the UK’s most productive companies, industries, places and people and the rest; and make the UK one of the most competitive places in the world to start or grow a business.

These are heady aims, ones that all British business can get behind. But what does business want to see in more concrete terms?

Addressing the skills shortage

It’s worth taking a step back and remembering that the UK economy, as a whole, remains strong. It is – depending on what measure you’re using – the fifth, sixth or seventh largest in the world. Employment is at record highs, unemployment at record lows. In recent weeks, despite the doomsday predictions of many beforehand, we have seen votes of confidence in the UK economy with foreign direct investment by firms as diverse as McKinsey and Snapchat. But for all our strengths (world-leading universities, an international language, a near-watertight legal system, advanced manufacturing etc), there are some areas where the government must now focus.

IoD members regularly say that the skills shortage is a top-three barrier to their growth both now and looking to the future. Crucially, it is not just ‘hard’ skills that they feel are lacking – mathematics, science and computing skills – but also the ‘soft’ skills such as communication, teamwork and initiative.

Regardless of one’s views on immigration and the UK’s vote to leave the EU, it has brought the subject of skills into sharper focus. Though it is simplistic to look at foreign workers and home-grown talent as an either/or proposition, the uncertainty around our borders and the future of our visa regime in the years to come needs to be addressed.

The IoD has been lobbying hard for the government to adopt a sensible immigration policy post-Brexit. But it is also crucial that we address those skills shortages in the economy, both within our education system and in adult learning, too.

With the ‘rise of the robots’ sure to be a feature of the 21st-century economy, it is crucial to ensure that adults who have been in the workforce for 10, 20 or 30 years are able to retrain as their industries change. The cliché that there is no such thing as a job for life anymore is no less true for its repetition; but it increasingly looks as though there is no such thing as a career for life, either.

To be fair to the government, both vocational education and lifelong learning feature heavily in the consultation. There is a clear signal that they will look to simplify a “bewildering” qualifications system and do more to increase the quality of careers guidance in schools. There will be a particular focus on boosting mathematics skills, with the consultation noting a clear and worrying gap in maths skills between London and the south-east and the rest of the country – some 57 per cent of A-level students in Reading take maths, compared to a meagre 12 per cent in Hull and Middlesbrough. Such regional disparity in crucial 21st-century skills bodes ill for the government’s other aim – to spread prosperity across the country.

The government is also looking at ways to encourage individuals to retrain. Another approach, which may be more beneficial to businesses, would be to use the tax system to encourage businesses to invest in staff training, a proposal the IoD set out in our Lifelong Learning report last year.

Of course, this consultation is just warm words for now, and it will be in actions that businesses start to feel the benefit. Interestingly, IoD members recognise the role that business has to play, particularly in lifelong learning, with a recent survey suggesting that the most popular model for adult learning and training was a partnership between local and central government and the private sector. There are certainly models that can be replicated – as well as business-backed free schools, there are projects such as the BAE Systems/Lancaster University “productivity academy” which combines school outreach, university education and real-world business experience to ensure that employability is at the heart of the curriculum.

People in lab coats looking into microscopes to illustrate industrial strategy

Laying the groundwork for growth

Let’s be clear: the government cannot direct growth – invariably, when it tries, it simply directs slow, often anguished failure. It can, though, lay the foundations. It’s a phrase that can be taken almost literally.

In 2006, Sir Rod Eddington, who had been commissioned by the Blair government to look at British infrastructure, warned against the tendency to reach for grands projets – those large, eye-catching transport plans that grab the headlines and invariably plenty of taxpayer cash, too. He called for a focus on smaller-scale, shovel-ready projects – and we believe that advice should be heeded.

No politician is going to be rewarded for opening a bypass – indeed, given the short-term nature of politics and the fact that most infrastructure projects require getting rid of existing infrastructure first, with obvious results, they may well be on the end of some unwanted front pages. But, with the government putting the National Infrastructure Commission on a permanent footing, there is a chance for such projects to circumvent the usual political rigmarole that makes building new ways for people to move around so difficult.

Such a commission is useful for those projects that have to be big – digging a tunnel under the Pennines, for instance, or upgrading London Underground – but government also needs to look at less high-profile ones. Dualling A-roads is one example, and so would be finally scrapping the bus-on-wheels Pacer trains which continue to send the most anti-investment message imaginable, as they trundle slowly along too many northern suburban routes. (Ironically, many of these trains still utilise the original chassis from British Leyland buses, which had train wheels simply grafted on to them.) The industrial strategy specifically mentions projects such as the A66 and the Lower Thames Crossing; both would be welcome and cheap and offer deliverable benefits.

And of course, if the government is to deliver an industrial strategy that is “fit for the future”, it must consider digital infrastructure too. We are, alas, sorely lacking in this area – not just in rural areas, but in some of our cities too. London ranked 26th out of 33 European capitals and major cities in a recent Nesta1 study, behind Kiev and only narrowly beating Minsk. And about 1.5 million rural premises – fully 48 per cent of the total – cannot access the 10Mbps speeds that the former prime minister declared to be Britain’s “universal service obligation” in 2016.

The consultation does not specifically ask about the obligation, but making it more ambitious must be part of the government’s strategy. In particular, we need a serious conversation about whether there is an economic case for expanding traditional broadband out to the most remote areas, or whether it would be better to focus on research and investment in future-proofed technologies such as satellite broadband. In a world of limited resources, making a wider roll-out of fibre to the premises (as opposed to fibre to the cabinet, where fast fibre broadband changes to copper wire for the final stage of a journey, slowing the speed) would be a better ambition, coupled with joint public and private-sector investment in exciting new technologies, such as satellite broadband, which could provide a better and cheaper long-term solution for those hardest-to-reach areas.

Brexit: challenge and opportunity

Whatever your views on the vote to leave the European Union, nobody in business can pretend it won’t have a significant impact on our economy. A cottage industry has grown up of consultancies, experts, snake-oil salesmen and those in between to advise on what Brexit could mean for individual industries and businesses. However, for the sake of brevity – for it could probably fill an entire issue of Director – it’s wise to focus on one obvious concern, and one opportunity.

In the immediate aftermath of the referendum, the IoD undertook a series of focus groups around the country looking to find the clearest-cut concerns as a result of the vote. One issue kept coming up: European research funding, and partnerships with European research institutions. This is hardly a surprise: between 2007 and 2013 the UK received some €8.8bn (at the time, around £6.2bn) of a total of €107bn spent on research, development and innovation. The EU referendum campaigns demonstrated – on both sides – the danger of playing too fast and loose with numbers, and there is little gain in re-fighting the battles of last year in the run-up to article 50. It’s also true that it is not government, but taxpayer money. Nonetheless, it is clear that uncertainty over the future of research funding needs to be resolved.

The new industrial strategy looks to do just that. Indeed, the very first “pillar” broached in the consultation is “investment in science, research and innovation”. It is true that the UK, for many years, has done a very good job in coming up with exciting and innovative ideas, many emanating from universities and research parks which have been in receipt of funding. What we have not done as a country is commercialise those ideas and build the world-leading industries that could well become significant drivers of future growth.

Theresa May talking to workers to illustrate her plans for industrial strategy

Strong free-market advocates may say that funding innovation and commercialising is exactly the trap that previous industrial strategies fell into. However, IoD members – not known, on the whole, for their statist tendencies – believe government has a role to play. A majority (53 per cent) believe that research and development of new technology should be a partnership of government and the private sector, compared to just 28 per cent who believe it should be the private sector’s responsibility alone.

There are good models for such work. Britain’s thriving life science industry, based around Cheshire, is built out of partnerships between business, research institutions and local government, backed by initial investment from central government. Ditto Britain’s leading role in graphene development, kick-started by the former chancellor’s investments, again outside London. Could we do the same in quantum technologies, or batteries, and use joined-up thinking on skills, infrastructure and industry to boost economic growth in the parts of the country that need it most? Possibly. But good money must not be spent after bad, and proper safeguards should be in place to ensure that the line between supporting potential growth industries to get off the ground and “picking winners” is not crossed.

And what about the opportunities? It is clear, not just from the industrial strategy, but Theresa May’s trips to Davos, Washington, Ankara and, soon, Beijing, that the government is determined to push the boundaries of our obligation not to negotiate trade deals with non-EU countries while we remain in the union.

Governments of all stripes, and business groups, have made a point of expanding our export base. The IoD even went so far as to fund an advertisement on the famous Piccadilly Circus hoardings in the 1960s: “Either exports go up,” it warned, “or Britain goes down” – all in unrelenting flashing lights. Still only 11 per cent of British businesses export.

One error that the government has made in recent years is to focus almost exclusively on the most far-flung markets. Never was this more obvious than under the administration of David Cameron who, along with George Osborne, made such a point of encouraging exports to China and India.

This is all well and good, and no doubt a valuable effort at enhancing British soft power. But if a businessperson has never even exported to Ireland, it is unlikely that they are about to hop aboard the next flight to Guangzhou. Rather, the government should focus its strategy on reaching out to those businesses already exporting and look to encourage them to export more. Those that are looking to export for the first time would perhaps best be served by advice tailored to markets closer to home.

An intriguing idea put forward in the consultation is to “create a more active approach to winning overseas contracts”. One project currently being trialled sees a “Team UK” ethos being adopted for the new Infrastructure Exports Leadership Forum. In theory, this will allow government and industry to join forces in order to put together pooled bids for the biggest contracts, often underpinned by UK Export Finance. It’s certainly an active policy, and while unusual, it could be a useful kick-starter to get some of our medium-sized firms a slice of the global procurement pie.

In conclusion, the industrial strategy consultation cannot be faulted for its ambitions and its aspirations. The prime minister and the business secretary deserve credit for a document that promises, frankly, to make Britain just about the best place in the world to do anything.

The proof, of course, is in the pudding. Will we be able to truly revolutionise our skills system? Will political pressure really allow us to build the infrastructure and reform the planning system? Can these 10 pillars all be built at the same time, and will HM Treasury have the necessary cash to do it? These questions remain unanswered.

In the aftermath of the Brexit vote, what was in some ways surprising was what didn’t happen. The economy didn’t fall down – firms didn’t start scything off employees, and the City didn’t up sticks and set up shop in Frankfurt. Rather, the atmosphere was one of wait and see, with the government receiving a grace period to demonstrate it truly had a plan for post-Brexit Britain.

The prime minister’s administration pushed that grace period to the limit, and clearly, much is yet to be decided. For all the talk of “post-Brexit”, we are yet to even officially declare our intention to leave. But between the PM’s increased clarity on the manner of Brexit, her broadly warm message to EU leaders, her strikingly internationalist speech at Davos, and this industrial strategy, it is clear that the government’s New Year’s resolution was simply to be more active.

Confidence is a funny thing, and easily shaken. But even the sign of a plan – an ambitious and pro-enterprise plan at that – may be just the boost British business was looking for as we enter what is sure to be a most extraordinary year. 

To find out more search “industrial strategy”at www.gov.uk

Andy Silvester is the IoD’s head of campaigns and deputy director of policy

@silvesterldn

Have your say by joining IoD’s Policy Voice via iod.com/policyvoice

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About author

Andy Silvester

Andy Silvester

Andy Silvester is the IoD’s head of campaigns

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