MR JOHN MONKS, MR DAVID COATS AND MR IAN BRINKLEY

TUESDAY 26 FEBRUARY 2002

  198. Good afternoon, Mr Monks, you are very welcome. Would you like to start by introducing your colleagues, for the record?

  (Mr Monks) Yes. David Coats, on my right, is the Head of Economic and Social Affairs at the TUC; and Ian Brinkley, on my left, is a Senior Policy Officer and a leading economist in the organisation.

  199. Thank you again for coming this afternoon, and for your written submission. As we all know, UK manufacturing is facing some difficult problems at the moment. I wonder if you could briefly review manufacturing from your perspective, and in particular perhaps focus on the prospects for recovery and the key obstacles to recovery from the present position?
  (Mr Monks) Yes, thank you. There is no question, we are certainly in a short-term crisis, and I think primarily caused by the collapse in world export markets. There has been a bigger fall in UK manufacturing output across the world than there has been in the eurozone, and I cannot say that we are optimistic about recovery; we cannot see, given the projections in other countries in the world, much light at the end of the tunnel before 2003. The present downturn, of course, does come on top of years of stagnation in output and in investment levels, and widespread job-shedding too. And the record since 1995, actually, in the UK, is pretty poor, manufacturing output has gone up by only 2 per cent, against 19 per cent in the eurozone and 25 per cent in the United States. Why: well, I think a combination of some short-term factors and some longer-term ones, a short-term one being the persistently high value of the pound relative to the euro, but the longer-term problems are the weaknesses in competitiveness and productivity. I think the Committee will be well aware of the productivity deficit, however measured, actually, against France, Germany and the United States, to pick the three most frequently used comparators. I think, just on which are the different, maybe trying to weight the two factors, the strong pound has made it impossible to build markets in areas of strength, and, I think, to offset some deficits with the non-OECD countries, and certainly profitability, investment and productivity have all been reduced as a result of it, there has been a lot of overseas sourcing going on from companies in this country, and shedding labour, again, at a quicker rate than most other advanced countries, in the manufacturing sector in this country. But, in a way, what devaluation masked sometimes, in the past, a stronger pound actually accelerates; and I think, in a sense, we come in a spirit of some humility, recognising that as a key part of British industry the performance just simply has not been good enough: investment levels, R&D, training, all these expenditures per head are in the bottom parts of the OECD country league tables. So it is a fairly grim picture, Chairman, and we see, without some action in relation to the exchange rate, which is by no means an easy thing to do, we rather think that a firmer position on the euro might well help, and we are also arguing for a Budget for industry from the Chancellor this time. But it is a very, very difficult situation, and I am glad you are investigating it, because it seems that it does not get enough attention, it is almost fatalistically viewed, sometimes, that because services are doing reasonably well, in employment terms, we can do without the vibrant manufacturing sector. And yet it does account for 60 per cent of our overseas earnings and it is crucial to the way this country earns its living, the balance of payments is worryingly wide, and it must not just be allowed to die quietly, it must receive all the help that we can possibly give it.

  200. One of the features of the written submissions we have had is that, without being unkind to anyone, we tend to get the same shopping lists, so it is all about capital investment, it is all about skills, it is all about R&D, it is all about workplace relations, it may be about the exchange rate, and so on and so forth. Presumably, some of these factors are more important than others, and trying to identify the major causes of the problem is obviously an important part of what we are seeking to do. But, of the various problems identified in your submission, what would be your top one or two things that you think Government should focus upon?
  (Mr Monks) I think, in the short term and long term, if I can sort of slightly adjust the question, and if you will forgive me for a moment, you can pin me down again if it does not satisfy you, but I think, in the short term, undoubtedly, the exchange rate is a crucial one. I think that is the thing that has exposed some underlying weaknesses, to the extent that they have been exposed, and has given us a worse record on job loss and on output than comparable countries, over the period. Undoubtedly, if there were a slightly longer-term expansion of world trade, that would be of huge benefit to Britain. And we are not in recession, but some countries are in recession, and there is still this sluggishness, particularly in Japan, Germany, the United States, it may be recovering, but while that is around it is difficult, again, with a currency which, I think, most people think is overvalued, to see a bright future. I think, in a sense, we are arguing for some palliative, short-term measures the Government might do, in our submission on the Budget for Industry, and at some stage I will be happy to talk about those.

  Mr Berry: Thank you.

  201. Mr Monks, you mentioned productivity deficit, in response to the Chairman's question, and highlighted it in your submission; can I just explore that a little bit more. Is there one particular key thing that Government should be doing, as part of the national strategy, which it is not doing at the moment, to enhance this productivity deficit that you mention, compared with other countries, one specific key thing which could have an influence on improving our productivity?
  (Mr Monks) Yes. I think we targeted two things, and I am sure they are familiar to all the Committee, as the Chairman said, but one is investment, and research and development as well; and the second thing is skills. Now it is a matter of carrots and sticks in both cases, and what can be done to boost those things. I am sure a relatively stable, macroeconomic framework has been a great help. The long-run, economic history of Germany, I think, has been based on pretty low inflation rates, and a decent return on capital employed over a long period, was the secret of their, until recently, post-war success, and, for the first time for quite a long time, we have had a long run in this country on that. So, the macroeconomic framework, we do not underestimate its importance, but, of course, the price of that certainly has been the pound sterling being overvalued against our major competitors, or nearest competitors, certainly, in the world economy; and, in a sense, you can see that France, in particular, has done rather well during that period, in terms of output growth. But acting jointly with the CBI we did propose the tax credits on R&D and tax credits on training as the centrepiece of our Budget for Industry submission, which we have put into the Chancellor.

  202. You very kindly said we might try to pin you down on the Chairman's previous question; perhaps I could try to do precisely that, because, as I understood the Chairman's question, he was saying what are some of the priorities that you think the Government should do, and yet the things you referred to were the exchange rate and the expansion of world trade, neither of which, of themselves, adequately explain our relative lack of productivity growth in recent years. Looking at your memorandum, where the exchange rate is concerned, you particularly draw attention to the relationship with some of the more dynamic Asian economies, which, of course, is not a product of a relationship between the pound and the euro, and they, of course, are winning a share of world trade at the expense of all developed countries. So, in a sense, I come back to the point, what is the priority, from your point of view, for manufacturing, in relation to those things that the Government might conceivably influence to improve our productivity growth?
  (Mr Monks) I acknowledge the long-term trends from all advanced countries, and the decline in share of manufacturing in total employment, which is affecting Germany, France and other major manufacturing countries as well, though at a slower rate than they are affecting this country. I think we accept that there are some limitations on what governments can do in this area, but that does not mean to say there is nothing they can do, and sometimes we think that that is the impression that is given. So the two areas that we are focusing in on, maybe just to go back to the previous question, are on encouraging training and on encouraging research and development. A third area would be on intelligent state aid. I know this gets very ideological and it gets into Single Market rules in the European Union, but we did provide, in the section on industrial aid of our evidence, a table entitled "State Aid for Manufacturing Compared", the UK, second from the bottom in the European Union. Now we are not arguing for big subsidies to industries that are going nowhere, but we are arguing for some intelligent interventions from time to time, and perhaps on a bigger scale than they have been done before. There are interventions that go on, Aerospace and Rolls-Royce are two that often spring to mind, with a major development exercise, and they sustain us in a strategically important area; but there are other areas. For example, we have got a ten-year railway development programme; what industry policy considerations are there from that? If we are investing in defence things, we tend to get joint ventures, some jobs in Britain, and so on; the railway engineering, as far as I can see, I cannot see any significant benefit for British manufacturing, and it is some of the big multinational companies that are building the trains, and so on, and they have not got any obligations to this country, for this huge investment programme that will span out over the next ten years. So it is that kind of intelligent, smart intervention that we are looking to see done more; and other countries do do it, within the Single Market rules, and we do not, and we should.

  203. You have mentioned investment earlier on and just now, and in the UK we have been lagging behind our competitors for a very long time, and you have noted that in the past it is macroeconomic instability that has actually been a major barrier to investment, but now we have got a stable economy with low inflation but investment has not picked up. Do you see any reason for that, or do you think that there are things that could be done by Government, or anywhere else, that could improve investment in manufacturing?
  (Mr Monks) Can I pass this to David.
  (Mr Coats) We do make reference to a piece of work that Nigel Pain, at the National Institute, did for the TUC-CBI working group, which compares the behaviour of non-UK companies investing in the UK, and UK companies investing in the UK and overseas. And what you find is that the non-UK companies both invest more in their home countries and more in the UK than the UK companies do in the UK or overseas. And it suggests that there is something more than simply a stable macroeconomic environment which is influencing the behaviour of UK firms, in particular. Now some of it you might put down to culture, some of it you might put down to other institutional factors, like corporate governance arrangements, the notion of maximising shareholder value, as opposed to other forms of corporate governance, that apply in France, Germany and The Netherlands. To come up with one simple and straightforward answer to that question, I think, is very, very difficult, but at least the foundations have been laid now, we have got some solid analytical work which proves that there is something different and distinctive about the way that UK firms behave, both here and abroad.

  204. And so is there anything that Government can do?
  (Mr Coats) Government has made a start, I think, by getting the economy right, but changing cultural behaviour is a more medium to long-term project. I think there are other measures that are being considered that may be helpful. The proposals in the Company Law Review, for example, the changes to directors' duties, the requirement for companies to report on their medium-term plans, including an assessment of the pressures that they are faced with, and so on; all of that may well help. But will it be enough; I am not certain.
  (Mr Monks) I think it is worth just saying, as well, because the DTI is the major Department in this area, that we are not satisfied that the DTI is taking this issue seriously enough, and, indeed, that sometimes you suspect there is sort of a view that maybe the British are not very good at manufacturing, that its time has passed, we were pretty good at it in the 19th century, but now we are good at banking, or retailing, or, I was going to say tourism then, the services sector. And so it is money wasted; any help really is going to be misplaced. I heard Ken Clarke saying something similar about that at the weekend, on some interview: he considered all the DTI's money wasted; and that view is around. But we are actually doing very little, in terms of either taking on any of these cultural factors that David touched on, we are doing very little about any activist, interventionist policy, both from Whitehall or from the regional level. And yet there are tremendous successes, as the Committee will know, in terms of inventing things, in Britain, many of which have been exploited by companies overseas; and I think we are railing against the fact that there seems a fatalism around but we cannot do anything about it. And I hope the Committee will be prodding action, rather than sort of wringing hands and saying, "Well, we recognise there are limits to what the Government can do." There is a lot that the industrial leadership of our country can do as well, but the Government should be prodding and prompting and encouraging and giving some tax credits, in some areas, about they will not do it themselves, but other measures might well help.

  205. You refer yourselves, in your memorandum, to the importance of attracting inward investment, and, Mr Coats, in effect, you have just explained that if we have a substantial number of foreign-owned companies then their investment performance might be different from those of UK companies. And when the Engineering Employers' Federation were with us, of course, they were talking about the relative uptake of leading manufacturing techniques in US-owned companies, and indeed in French-owned companies, in this country, as compared to UK companies. Now when you look at that, what are the factors which derive from that, which you think are most important in encouraging some of those international mobile investors to come to the UK in future, and what are the constraints?
  (Mr Monks) Obviously, Britain has had a very good record on inward investment for a long time, and there is, I think, a range of considerations. Firstly, Britain's membership of the European Union, and it is a location for the Single Market, it is very, very important to remember that, and I think that is probably the single most important thing. Secondly, English. Thirdly, a degree of flexibility of arrangements, they can make arrangements to suit themselves, that reflect more, maybe, the practices they are used to in their own countries, which is rather more difficult to do in the rest of the Single Market countries. Having said that, we are worried about inward investment at the moment, France is doing very well on inward investment, that may be something to do with land prices, in particular, and transport links, infrastructure problems that there are around Britain, and getting goods into the Single Market, being perhaps the major factors. We do not think actually that labour market issues have been paramount, but clearly that might be what was lying behind your question, I do not know.

  206. Yes, in a way; let me go on then: you refer, in the memorandum, in part, to infrastructure, public sector infrastructure issues, and I guess there is a link there with what you were saying previously about the availability of state aids to support some of that investment. Because, clearly, it would be very difficult to extend state aids to encourage investment into Kent, or, at least, most parts of Kent, easier to do so and to justify state aid to support investment into more peripheral areas, in Wales and Scotland and the north, and so on; but then one encounters the issue of infrastructure and access to markets. Now how far in your mind do these things connect together? I notice you did not really feel able to quantify the contribution to this problem that infrastructure might make, but, even speaking qualitatively, how important do you regard that investment in transport infrastructure for this purpose?
  (Mr Monks) We certainly think it is a very important factor. I think many employers from all over the world see particularly the movement of physical goods is extremely difficult; and there is this bottle-neck towards the South East, in particular, getting round London, through London, which is a particular problem, I know some employers claim so many billion pounds for it, we simply do not know really how they do those sums. And, as I say, we do look at France, which has got a good infrastructure, relatively, and cheap land, as now getting a very high proportion of the inward investment. And those companies do talk about the access factors. And I would say it is from all parts of the country, actually, not just the poorer, peripheral areas but the Midlands, the Toyota decision to locate at Valenciennes, the latest European development was certainly something to do with access, and physical access, to their markets. They may have been spreading their investments around, I do not know, as well, but I do not know, David, whether you have anything to add here.
  (Mr Coats) Nothing particularly on that point, no.

  207. Can I just move you on to R&D and innovation, and obviously we noticed that you have stated that you welcome the Government changes to help larger firms with R&D in the forthcoming Budget, and you say that fiscal incentives alone will not solve the problem of R&D. What do you believe is the right way to encourage more R&D, and how do you actually connect that to ensuring that full-blown manufacturing takes place here, rather than just the R&D and then they transfer offshore?
  (Mr Coats) A number of related policy issues are raised by that. First of all, the R&D tax credit is an essential element in raising the intensity of R&D, and there is very persuasive evidence to prove, I think, that tax credits do work, in the US, Canada, France, and so on. But I think that we move on from that and say that if you really want to raise the level of innovation across the economy then you need to ensure that the benefits of innovation are spread widely, and that means, first of all, you need to look at the links that exist between universities and industry, the extent to which pure research can be spun off into practical ideas, and that means that there are questions about access to capital, can people raise the money to turn these great ideas into a profitable product or service. You need to think about how innovation can be spread across a sector, or a cluster, and the TUC's assessment is that employers in the UK do not talk to each other enough, they are not really well enough organised in employers' associations to exchange information and transfer technology, in a way that is often the case in Germany and France and the Netherlands. And also, although RDAs are moving in this direction, there is an absence of strong regional institutions that can bring all the relevant parties together and facilitate that transfer of technology and information exchange and dissemination of best practice. So all of those things added together, I think, make for a successful innovation strategy; but it is not just fiscal incentives, it is a lot more than that.

  208. When you were describing in your evidence the question of regional aid, the sub-text of it appears to be that we seem to be missing a trick, and it may be something to do with relationships and networks. And also, in another part of your evidence, you draw attention to and argue that maybe there needs to be some kind of rationalisation of current systems for business support, advice and guidance, and you mention Germany and the States, as the kind of thing that could be done. As well as identifying that problem, what do you think actually should be done in the UK to try to build the kinds of mechanisms of business support that could overcome maybe, or at least alleviate, some of those problems?
  (Mr Monks) Maybe I will just take a first stab at that. I think we stressed the fact that the regional level could be a very important level of doing this, and it is possible, not least within Single Market rules, to give assistance at regional level that you cannot give from Whitehall and Westminster. In the Chairman's part of the world, there was one intelligent intervention recently, which was done by the RDA, with the DTI's support, whereby a company that basically is a sound one, was in trouble, developing a new diesel engine, and the RDA, to help it, bought the land and rented it back quite cheaply. Now that is a legitimate intervention, and it helped finance this new generation of engines, and the company is doing reasonably well, I am pleased to say, at the moment. It is that kind of thing, that can be done rather locally, that seems to us to be important, and keeps us going in certain areas where perhaps the market, of itself, and British financial institutions would not be all well-tuned to doing that kind of thing; and the Government will not lose by that, because they have got a decent site that is worth quite a lot of money. So that is an answer by way of an example. I do not know whether, David, you want to add anything to answer Richard's question.
  (Mr Coats) Just a couple of points. First of all, I think it is important that there is a strong sense of direction at the centre, from the DTI, that there is a national industrial strategy, which is then delivered in the regions. And I think we are moving in the right direction, in this country, in developing some effective regional institutions, the RDAs are developing in that way, and I think that the Government is looking for people like the TUC to say RDAs should be stronger and more effective. And I think you need to pull together the work of RDAs as the hub, with Learning and Skills Councils, local authorities, other sources of business support, the Small Business Service, all singing from the same hymn-sheet; at the moment, it is not always clear that all those institutions are pulling in the same direction. And the TUC assessment is that if the RDAs can establish themselves as the lynch-pin in each region then things will begin to move in a more positive way.
  (Mr Monks) I will just add, we tend to do it in crisis, in that you will know from the Longbridge issue, a few years ago, that there is, in a crisis, a coming together of these institutions and a programme is hammered out by the task force concerned; we have seen that in a few major closures across the UK. But it takes a closure, in a sense, to do what we should be doing perhaps more proactively before we get into that position.

  209. Would you see the examples, and other witnesses have said similar things, perhaps in a different way, about the need for developing institutional change at regional level to foster some of these developments, and the examples of Germany and the States have come up time and time again? And one of the points we have made to them on each occasion is that, of course, both of those are federal states, Britain is not; but how far do you think that the development of regional government has actually got an economic imperative to it, whether or not it has a democratic one?
  (Mr Monks) I do not know about regional government, in the sense of democratic assemblies in the English regions; we supported devolution to Scotland and Wales and we certainly support the RDAs, and I notice some growing support around the trade union world for some English regional assemblies, but that is not something the TUC has shown any great interest in so far. And I think that we like to put the emphasis upon the discretion, as far as industry policy and perhaps some labour market policy is concerned, at the regional level, under the wing of the RDA, as the priority, and they are just beginning to take on their job, they will only fully take it on in April this year, and it seems to me that that is the next phase that we need to concern ourselves with. It may be, some time down the line, that we do go a bit more federal, I do not know, but that will be a big constitutional debate, which we have not got a view on.

  210. One last question, in terms of what you say about those kinds of ends and put some emphasis on the development of stronger social partnerships, both at regional level and nationally, what would you say would be the key elements of developing those social partnerships to achieve those kinds of ends?
  (Mr Monks) Yes; we aspire to a system of social partnership in Britain, and we do not believe we have got one at the moment, there are oases of it around, there are trade union representatives on every RDA. But we do think that one of the persistent causes—and the Chairman mentioned it in his responses from a range of people—workplace relationships are not as good as they should be in too many sectors, in some places they are excellent, but in all places they are not good enough, and this sense of mutual dependence and mutual effort to improve things seems to us to be very important, under the social partnership banner. So we want to see RDAs encouraging social partnership, responsible relationships at work, and this sense of common endeavour to improve things; that has not been a feature of every industry in every part of the United Kingdom, and it needs to be more widespread.

  211. Could I just ask, on that, the enthusiasm for the regional dimension, is that because you feel there that the social partners work better together, in the sense there are practical things you can do? I sort of get the impression that, there was a time, of course, when the trade union was looking to Europe, because it felt it could do things in Europe it could not do in the UK, and it seems to me I have a similar impression about the regional dimension, that, yes, through the RDAs, and so on, you have talked very positively about the social partners getting together, and you have given two examples from different regions of actually directly affecting something, not just talking about things in an airy-fairy way but actually doing something. And is that one of the reasons for your enthusiasm for the regional dimension, that you really do believe that you can make a difference there?
  (Mr Monks) Yes.

  212. And that that may be lacking nationally?
  (Mr Monks) I am not knocking the national level, because there are certain strategically important industries and sectors where an overall view is necessary, for the United Kingdom, not just even for England; and it seems to me that this concept that David mentioned of an industrial strategy is still very important and we should not let the DTI off the hook. But when it comes to a company that has got a good product and a decent market, that a land deal could be a deal which can help them through it, then it was, I think, brought to the attention of the RDA by Amicus, whom I think you are seeing shortly, and they fixed it up with the DTI, it is a level of flexible response at that level which often has been much more sluggish to effect at the national level. I would only say, Chairman, that we have not given up on our expectations from the European Union either.

  213. Can I ask you to say perhaps a little more about what you would like to see in a national industrial strategy? One of the comments this morning that I recall, and you will have heard this before from the Industrial Society, and Will Hutton in particular, is the argument that Government, in his view, tends to focus on market failure problems, so it says, "Okay, you know, there aren't enough skills, there's not enough training, market failure. Government, do a bit of training. There is an externality here: environmental issues, whatever. Government, intervene to address that, insufficient competition, address that, infrastructure, address that." And the comment that the Industrial Society made was this comment about, at present, in their view, the Government focuses on market failure rather than institutional failure, and institutional failure is about building up the kinds of institutions you have referred to, in passing, actually to get things moving, in a way that they perhaps are not at present. Can you say a bit more about your industrial strategy; if you were Patricia Hewitt, what would you write on your blank piece of paper, as your industrial strategy?
  (Mr Monks) We are rather proud of this, actually.

  214. What else would you write?
  (Mr Monks) We would, in a sense, have a long term and a short term, and maybe the longer term is easier than the short term at the moment, but I think the general promotion of British manufacturing is going to be important. I think, the celebration of our successes, we have no problem in getting publicity for celebrating what is doing well on the West End stage, or something, but manufacturing publicity is a fraction of anything compared with some other areas, and yet it is the way a large part of the country earns its living, in one way or another. Secondly, David talked about the interlinking of the education system with the world of employers, unions have got a contribution to make; it is a mobilisation process. We had the manufacturing summit in Birmingham a couple of months ago, which was a pretty good start, actually; the TUC-CBI work, which was on innovation, on investment and best practice and on skills, was a pretty good start. And it is really keeping the momentum going; it is a bit stop-start at the moment. Will Hutton could have added into that list, we have an initiative on manufacturing every so often, after a bunch of job losses, and then it all goes quiet for a bit and everyone keeps their fingers crossed. But it seems to me to be a consistent approach from the DTI, looking at particular industries, can they develop these clusters, what is the one we have got in Britain, the Scotch whisky industry, say, where there is a mixture of co-operation and competition, which is extremely successful; but there are too few things like that. And it is encouraging that kind of thing, and again with some intelligent intervention, which seems to me to be very important. There is a programme there, but it does need a lot of Government oomph behind it, and that then, I hope, would evoke a positive response from industry; because I am conscious that a lot of people beat their way to the doors of Government and Parliament and say the British manufacturer is doing nothing, and yet they are not doing anything much themselves. And this is a national problem and it is one that will need concerted action.

  215. Mr Monks, you keep saying "intelligent intervention" in every few sentences. Do you think that the DTI, the Department, restructure is prepared to meet this intelligent intervention that you seek, bearing in mind when the intervention was first suggested you had doubts about it? I wonder if you could comment on that?
  (Mr Monks) This is the DTI restructuring.

  216. Yes, I am trying to link in with your "intelligent intervention"?
  (Mr Monks) I know, the Financial Times reported the DTI restructuring as bringing in the private sector as non-executive directors on a range of boards, including the Government's own strategy, in this area. And I took some exception, not because the TUC was not mentioned but simply because I think Government is accountable for its strategy, and not non-executive directors; that is a politician's answer to Parliament. Actually, I would say that the reorganisation paper, which I then saw in detail, was nothing like quite so dramatic as the Financial Times story had painted it, and, without wishing to underestimate what it might do for the DTI, I could not see that it was a fundamental difference with what is going on at the moment. And we have been assured that directors are welcome from a wide range of organisations, who have got a useful contribution to make on these key issues of productivity, competitiveness and the state of British manufacturing; and, on that basis, we will be seeking to play some part in it. But I do not see it as a transforming process for the DTI. I think, in a sense, the DTI needs to start with the job it has got to do, the structures should follow after that, but maybe these structural changes will increase the amount of weight that identifies the job it has got to do.

  217. May I just come in on that particular point. I do not recall, I confess I do not have the papers with me from the DTI from when we spoke to the Secretary of State about the restructuring of the DTI, but I do not recall a specific focus in the restructure of DTI on manufacturing. And if, as your memorandum suggests, the manufacturing summit is designed to lead towards the creation of a manufacturing strategy, by implication, it would be designed also to deliver a mechanism through which that is itself delivered from DTI itself, and through DTI from the rest of Government. Now, on the face of it, that was not there, there were business support frameworks, and so on, and competition, and so on, but not manufacturing, as such; is that something you would prefer to have seen?
  (Mr Monks) Yes, I think that is a fair comment. Actually, the manufacturing does not receive any prominence separate from e-commerce, or science-based type questions, within that document, and we think it should. And the second area, by the way of absence from that document, is any reference to social partnership type initiatives; although the Secretary of State will say, on both issues, "I think they are both important," they are not actually mentioned in the DTI reorganisation document. And we have been arguing that these are omissions which can be put right, I think, relatively straightforwardly.

  218. Could I just ask a question, coming back to the exchange rate for a second. You mentioned that in the short term the exchange rate had been perhaps one of the key problems for manufacturing; in your submission you make the comment that there is little chance that market forces will cause the pound to fall against the euro, so there is not much hope, you are suggesting there, given the likely developments in the eurozone and in the UK. But, at the same time, as you have before, you urge the Government to take a clearer and firmer stance on the UK's entry to a single currency. Could I ask here whether it is the exchange rate that you think is the major problem for manufacturing, or whether it is the uncertainty about membership of the euro, or are they both a problem?
  (Mr Monks) I think, immediately, it is the exchange rate, that undoubtedly is the major factor. There is uncertainty. If people thought we were going to join the euro—and that would of itself cause a reduction in the exchange rate, given the euro's weakness at the moment—then that, I think, would be reassuring to some investors that Britain was worth staying with; but the immediate problem is the euro. And I think people have noticed that every time Peter Hain makes a speech the pound goes down a bit, but then the euro reasserts its weakness, or the pound its strength, whichever way you want to put it. And I think why we call for a firmer, more consistent approach is, it would have an effect on ameliorating the present high level of the pound for British manufacturers.

  219. We have just entered a new WTO round; how do you think that that is likely to impact on British productivity, say, in the medium term?
  (Mr Coats) It is a good question; it is not an easy question to answer.
  (Mr Monks) Ian, I think, is looking to answer that.
  (Mr Brinkley) I think the short answer is we do not know.

  220. Well, what are your concerns?
  (Mr Brinkley) I would not be too concerned about the manufacturing sector, we are a pretty open economy anyway, so it is not going to make an awful lot of difference to Britain's position in the world. Probably the significance of the WTO round might be, if we opened up our own agricultural markets to the products of the third world, we would actually do quite a lot, in terms of their own development. Of the manufacturing sector, I would not have thought the WTO round necessarily is going to lead to any big changes. The things where it might be affected is if we moved to a much more protectionist stance, and I think that would be a real danger, but if we were moving towards a more free trade and open system I can only see more opportunities for British manufacturing rather than fewer.

  221. Could I ask just one more, on skills. You have drawn attention to the need to address the vocational skills gap, and you did mention earlier that you have been talking about tax suggestions with the CBI, but you also seem to believe that fiscal incentivisation will not be adequate. Are you supporting mandatory requirements for training, of any sort?
  (Mr Monks) We would do, yes. Without being desperately specific about how best to do it, we are very much aware of the fact that at the moment some employers carry the burden of training for the whole of the industry, and some then get their staff poached by some non-trainer; and the sum total of the training effort that is produced is some way short of what the industries in the country need. It was, I think, in 1992, the then Director General of the CBI, John Banham, said that it was the last chance for voluntaries, the CBI have said that on at least three occasions since; and we look with interest at the Government and the Learning and Skills Council plans for some arrangements for time off, in exchange for some compensation, particularly the small firms, if their staff are absent on training, and that the time off would be a statutory entitlement to time off. That seems to be, basically, where the Government is working at the moment, and that is a sort of statutory right rather than a requirement on every employer, it is a statutory right for the employee with some financial compensation somehow paid to the employer, the small employer in particular, who is affected. And I think that is a step in the right direction. I will just say, on labour market regulation, employers are opposed to it, in general, but there is a significant minority of employers who would go along with some sharing arrangement more, on training, than exists at the moment, with some very good companies doing a totally disproportionate share of the training for particular industries.

  222. One issue, Chairman, if I may, that I find coming up, with a lot of employers, is that they find that they cannot find apprentices at 16-18 years; in fact, quite a few of them said they have not been allowed entry into local schools, because schools get paid for bums on seats, so they are keen to keep them in there, rather than have them going, even though these are very high quality apprenticeship schemes. Do you have a view on the 16-18 year old age range?
  (Mr Monks) I would certainly be very disappointed if that was the attitude of schools, because this emphasis on preferring higher education to vocational learning routes is one of the cultural factors which has done British manufacturing no good over many, many years. I would just say, we are enthusiastic about this new 14-19 approach that is opening up, which we hope will strengthen the vocational routes. I concur with what you said about the shortages; it varies regionally quite a lot, there are regions where an apprenticeship has still got that ring that it had in the 1960s and where there are plenty of candidates for it. But it is quite disappointing to find out, I was in Scotland, not long ago, and the second labour shortage area, after information and communication technology engineers, was plumbers, they were desperately short of plumbers, and so is every part of Britain. And basic crafts like that, there are huge shortages, where really we seem to find it difficult to close the gap. I would just add that this is where these cultural factors do operate, that there is a problem, I think, convincing quite a lot of young people that these things are worth doing seriously. And we do know, on apprenticeships, the Modern Apprenticeships, at the moment, the reason the final figures do not look too good is that a lot of employers will take a young person off the scheme and pay them the adult rate very quickly, when they have mastered the rudiments of the job, and hope they can pick up the rest of the job actually on an "on the job" basis. But it is not the basis for a firm learning platform for the rest of one's life, and establishing clearer, rather more protected apprenticeship arrangements, I think, would benefit British industry a lot.

  Mr Berry: Thank you very much indeed, Mr Monks and your colleagues. Thank you for the written memorandum and for coming along this afternoon. I think it has been really very helpful to us. And if we have got any further questions obviously we will get back to you; but thank you again, it has been very helpful.