UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 281-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

WELSH AFFAIRS COMMITTEE

Globalisation and its impact on Wales

Tuesday 6 February 2007

RT HON IAN McCARTNEY, MR CHRISTOPHER MOIR, MR PATRICK ROBINSON

and MR KEVIN PUGH

MR STEVE LAZENBY, MR PETER JONES and MR JEFF EVANS

Evidence heard in Public Questions 73 - 138

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Welsh Affairs Committee

on Tuesday 6 February 2007

Members present

Dr Hywel Francis, in the Chair

Nia Griffith

Mr David Jones

Mr Martyn Jones

Albert Owen

Hywel Williams

________________

Memoranda submitted by DTI

Examination of Witnesses

Witnesses: Rt Hon Ian McCartney, Minister for Trade, Investment and Foreign Affairs, Mr Christopher Moir, Director Industry Economics and Statistics, Business Group, Mr Patrick Robinson, Director, Regional Directorate, UK Trade and Investment and Mr Kevin Pugh, Head of Branch - Economic Affairs policy, Wales Office, gave evidence.

Q73 Chairman: Good morning, welcome to the Welsh Affairs Committee. As you know, this is an inquiry into globalisation and we are currently looking at employment. Welcome, Minister, could you introduce yourself and your colleagues?

Mr McCartney: Yes, sir, Ian McCartney, Minister for Trade, Investment and Foreign Affairs. Kevin Pugh is in charge of economic affairs in the Welsh Office; Chris Moir is an economist from the DTI and Patrick Robinson is an officer on the ground for the UKTI in relation with Wales.

Q74 Chairman: Could I, at the outset, thank you very much for your memoranda, particularly the second one which we felt was especially helpful as it related very strongly to the Welsh scene, and we look forward to hearing your answers to our questions. Could I begin by referring to the Treasury analysis for the 2007 Comprehensive Spending Review which notes that "The period since the Second World War has seen global economic integration, enabled by rapid technological advance, profoundly re-shape UK society." What do you consider, Minister, to be the key issues in the coming decade in terms of how globalisation will impact itself? What are going to be the key challenges in that coming decade for us?

Mr McCartney: I will not put the key challenges in any particular order; perhaps you as a Committee might want to decide what you think the priorities are - indeed, you may have other priorities. The UK economy has to do a number of things. We have already commenced the process of up-skilling and re-skilling and over the next 20 years we will be increasingly needing less and less semi-skilled and unskilled workers in the public and the private sector; therefore we require the capacity in our schools, colleges and universities to up-skill those who are not in the workforce yet and to re-skill those who are currently in the workforce. Secondly, we need to see that our commercial activity is very much at the core of our foreign affairs activity; that is to say increasingly, whether it is in services or manufacturing trade goods, we will have to as a country with only 1% of the world's population have the ability to get into both new markets that are emerging and the older markets that are changing to make sure that we are innovative in the changes, whether it is in Europe or the United States so that there is a capacity to invest in our science base and our research and development base, a capacity to maintain the UK corporate headquarters and with that the capacity to influence the flow of outward and inward direct investment. We have an ability to seek inward investment and with that seek a second and third tranche so that companies coming here embed themselves in the economy, remain here and develop here and see this as a major hub for the wider European market. We need greater collaboration with our universities and colleges and with the business community to ensure that we can offer packages for inward investment where there is certainty with the skill levels, a capacity for innovation at manufacturing base level and an ability for us in trade negotiations to ensure that we have an open and transparent trading regime to allow us to expand into areas. New manufacturing bases, do they need technology that will come about with climate change, the need for shared and new technology and a capacity for us to be innovative in terms of developing new technology, not just for ourselves but for sales abroad of the new types of manufacturing. We need an ability to be innovative to take from our university sector ideas and put them into new manufacturing capacity and our ability as a country to be able to partner other countries and other businesses to develop and open up new markets. Those are just some of the challenges we have got.

Q75 Chairman: Could I ask you to pause at that point because you are anticipating lots of our questions.

Mr McCartney: That was not my intention, Chairman.

Q76 Chairman: Could I follow that by asking you about what the Chancellor has said recently? He said that globalisation "poses fundamental questions about traditional models of European development" as the move is made from a European trade bloc to a global Europe. What are your observations about that particular analysis? What challenges to Government do these developments present and what would characterise a global Wales?

Mr McCartney: As a statement of fact by the Chancellor it cannot be challenged. If you look over the next 20 years or so, 30% of the world's manufacturing capacity will come out of two countries, India and China, and almost 50% of the world's trading capacity will come out of Asia as a whole. The consequence for us is a serious one, as I said, with 1% of the population and therefore all of the challenges and the devices I have talked about have to be put in place. That is why we recently reorganised and refocused UK trade and investment to ensure that in these new emerging markets, and with the changes taking place in old markets, we are at the cutting edge in Wales, the English regions, Scotland and Northern Ireland and on a co-operative basis across the whole of the UK the ability to assist United Kingdom businesses to get access to these markets. It is not just markets for large companies with technology and advances and changes; small innovative companies will have to come to the global marketplace quicker than they would normally do to provide a range of services and capacity in the marketplace to gain access to those markets and sustain their businesses in those markets.

Q77 Albert Owen: Could I ask a supplementary on that? Minister, you talked about the European bloc becoming global Europe but is it not the case that Asia may form their own blocs and South America may form their own blocs and that European trade will still be significant for the UK and other European countries?

Mr McCartney: Our outlets will continue to be G8 economic flexible blocs, as the issues are in relation to trade with America, North America. The big issue for us is to ensure we get a successful Doha round so we can get a pro-development Doha round where we can reduce agricultural subsidies in the United States and in Europe and gain access to the non-agricultural facilities in the new and emerging economies. If we get a successful round, difficult as it is, it is really important to areas like Wales because Wales actually - I do not want to sound complacent about it - does not sing its trumpet enough in this regard. Wales has seized the opportunity of globalisation in the last 10 or 15 years quite dramatically and it still out-performs much of the rest of the United Kingdom in its ability to gain access to inward investment at one level and break into new and emerging markets at the other. I was looking at some of the figures and they are very interesting. Growth in the Asian markets is particularly strong. Between 1996 and 2005 Welsh exports to Asia and Oceania was about 117% despite disruptions caused by some of the Asian crises. Wales has indeed got the capacity to be able to play up and be successful and, despite its size, it is able to be very successful in terms of opening up opportunities in these new marketplaces Also, inward investment in Wales is a dramatically good news story, and we will talk about that later no doubt. Wales is well placed in terms of what it needs to do to take advantage of the globalised world; that does not mean that there are no challenges and that there will not be job losses in certain places because this is true and any politician who says they can save every job is not telling the truth. What we can do and what we need to do in the public and private sector is to put frameworks in place so that when job losses do occur we have the capacity to be able to remain in the labour market or get them back and up-skill and re-skill them, but at the same time continue to have a stable economy with inward investment flows coming into places like Wales at an unprecedented level.

Q78 Mr Martyn Jones: Minister, you have answered one of my questions about the opportunities presented by globalisation, but can you expand on the opportunities for Wales particularly, and the sectors in Wales where there is likely to be an opportunity for Wales to enter into globalisation?

Mr McCartney: The best way we can answer this is just in the last few days, if I can just show the success in Wales, where in the new economy, the creative industries, Wales has got a real opportunity in the creative industries and it has also got an opportunity in the IT industry, it has got opportunities in electronics and energy. Indeed, one of my first jobs as DTI Trade Minister was actually to go to Japan for discussions there to try and encourage Sharp to make their Wrexham factory a centre of world excellence. It is not because of me that it has happened, it has happened because of the workforce there, the executive, the local authority and MPs all working over a long period of time. The importance of this centre of excellence is this: the technology in five years time will move on, and you are always vulnerable in a global situation if you cannot keep pace with new technology, but to do that you need to keep increasing investment with the skill base. Those are areas and then retail, the service sector. For example, as we see the shift in construction and shipbuilding you could throw your hands up in dismay and say that has gone forever here, but actually in Wales you have companies like Craigs which has kept its R&D, its research, its sales capacity, its financial capacity and its services capacity in Wales and has grown the business in Wales, but in the last few years has built 90 ships alone in China. It is a major shipbuilder, it just does not do it in the Cardiff Bay, but as a consequence of that it is a big international player with lots of jobs in Wales and is repatriating its profits back to Wales and re-investing and regenerating. That is the balance in a globalised economy and if you do not get that balance right your company will not survive.

Q79 Mr David Jones: Minister, pursuing that particular point, is it not the case that where the business in question is indigenous to Wales it is more likely that R&D will remain in Wales, but where you are talking about a company which is already globalised - for example, Sony, Ford or whatever - the first jobs that will go from Wales will be the hands-on manufacturing jobs, but then there will be the temptation for those companies to relocate their R&D jobs, their more high-tech jobs, to the emerging economies such as India which, as your own memorandum says, has a huge pool of graduates.

Mr McCartney: It is a very fair question and it will be a mixed bag, will it not? You have increasingly seen inward investment to the UK of high tech R&D companies. Why? Because of our university and our innovation and science base. We are moving on from where we were in the Seventies and Eighties in the face of globalisation - the screwdriver-type operations where the ideas came from somewhere else and we built the facility, and if R&D did not follow up it was always at risk. Even where R&D comes it can be at risk if the product development does not work properly, but the fact is that in Britain and in Wales we have a huge R&D base. Some of it is indigenous, but a lot of it is not indigenous. If you look at the latest announcements from various companies, all inward investors, they are all bringing high value product development to Wales. Why? Because of its skilled labour force, its stable economy and its ability to work in the public and private sector. There will be continued opportunities for R&D research; we have to get there, but with 1% of the world's population - it is the third time I have said it - we can only compete with large global players if we are able to up-skill and go into the high value marketplace, whereas in traditional goods like knitwear, traditional goods like textiles, wherever, we have to go up the value added chain. Your final point, which is a very well-placed point about graduates, we have a quarter of a million graduates a year but we have to increase that substantially, not just in total but in areas like science, like mathematics, like manufacturing, like construction, like electronics, IT. We have to increase our base. Why? Not just because in China and India with the size of their populations they are able to provide millions of graduates, but again, that is an opportunity for us by the way: one of the biggest earners that used to come from Wales and Britain as a whole is our educational services. We can actually help educate the world's workforce and with that a huge economic base for our own university sector and our college sector to grow and to prosper. There are opportunities, therefore, in all of the areas Mr Jones has raised with us but again there are challenges and there will be occasions when you will lose investment, it will go somewhere else, that is true. Do you want to add anything, Kevin?

Mr Pugh: If I could just say that one of the benefits of devolution, Mr Chairman, is that the Assembly Government themselves are able to focus efforts on promoting R&D and they have done that through initiatives like the Technium incubators, which are all across Wales, and that is helping to increase high value added research and development. Also I would like to say that there are benefits to engineering and high tech employment through the recent announcement of the Defence Training Academy which will go to St Athan, and although that is in the education sector that will have an indirect benefit on high tech jobs because of all the high tech and aerospace employers that will come to the area as a result of that.

Chairman: We are increasingly becoming aware of what is really very obvious but the Inquiry will need to underline the point that you are making, namely that education and training is, as the Leitch Report emphasised and the Chancellor has emphasised, the critical issue, and I suspect that we will need to be visiting some of our universities to pose the questions that you have been posing back to us really that they have a lead role to play in all of this. Mr Albert Owen.

Q80 Albert Owen: Along with that education and skills training the Government has said that flexibility across the whole of the economy is key to the success of UK businesses. What is the Government actually doing or what is its role in encouraging this flexibility?

Mr McCartney: First of all, what is of critical importance is a stable macroeconomic policy and, without being partisan about it, all the statistics show that that is exactly what we have had and we have seen some tremendous advances in places like Wales in a reduction in levels of unemployment and, at the same time, the largest ever participation rate in the labour force and that continues. Indeed, Wales in the last four years has outperformed any other part of the UK in terms of increasing participation in employment levels and Wales ought to be congratulated for that. Secondly, in terms of Government resources in R&D and research, like the science base, an investment strategy, a tax strategy, these are all strategies about encouraging and creating investment, inward investment, and getting access, for example, into new technologies and into new manufacturing businesses and bases. Activities in terms of trade barriers and getting access to other key markets which are either going untapped or because of trade barriers have been closed to us until recently like financial services or the service sector are increasingly growing hugely in terms of getting access to new opportunities in emerging markets. Indeed, for example, my own local college, Wigan & Leigh College, is currently training in India and in China for UK inward investors in the financial services and the IT sector; so there are opportunities all the way down the chain if you can get the partnerships together.

Q81 Albert Owen: Are we flexible enough to compete with those challenges?

Mr McCartney: It is what you define as flexible. You could ask someone and say do you mean by flexibility skills and innovation, partnership? Yes, but it is not a downward spiral. We have always argued and continue to argue - indeed we are arguing now in terms of the Doha trade round, for example - the equal labour standard, you need corporate social responsibility, these are all part and parcel of it. You will not succeed in driving down an economy on wages, you have to drive it up, you drive it up by skills and improved productivity, improved competitiveness and the Government has a role to play with the private and public sectors in doing that.

Q82 Nia Griffith: Could you perhaps give us a little bit more detail about the actual impact that globalisation has had so far on jobs and living standards in Wales?

Mr McCartney: Yes, I have actually got some stuff here that I prepared earlier. Employment in Wales is up 130,000 or 11% since devolution compared to 7% increase across the UK as a whole. The average fulltime earnings in Wales have more than kept pace with the UK average, in recent years increasing by 23% since 2001 compared to a 21% increase for the UK as a whole. The working employment rate in Wales is now 71.8% up 2.3 percentage points since devolution and nearly halving the gap with the UK rate. The unemployment rate in Wales is currently below the UK average and has been for the last four years. The Welsh economy has grown by around 2.3% a year between 1999 and 2005 compared to 2% a year between 1979 and 1997. Employment rates in West Wales and the Valleys for the year to June 2006 were up 4.3 percentage points in 1999 compared to increases of 2.9% and 0.5% for Wales and the UK respectively. Gross disposable household income per head in West Wales and the Valleys has seen a bigger percentage increase since 1999 than across the UK as a whole at 25.1% compared to 23.6%. This is part and parcel of the story of the changing nature of the Welsh economy; where it was, where it is going to and where it needs to get to next, and therefore by giving these figures I do not want to give the impression that there are not huge challenges ahead or that there are not people under pressure and people still not in work, or that there are not companies under pressure to be able to cope with the demand. This is all absolutely true, but if you can see what is being done at the Assembly level through interconnection with the Government level here and UKTI, the business support services in Wales, again you hear that the business support services in Wales have got an international reputation. When I say that I mean an excellent reputation and, as a consequence of that, Wales can get through doors initially that other people might take months or even years to knock down. Wales is seen in Asia and other places in Europe as very proactive at engaging and encouraging over 500 companies so far to come into Wales and to inward invest and to feel they are Welsh when they come. That is really important: if people invest in Britain we have to follow that up and see them as a Welsh resource, as a UK resource, and not simply a factory that came here from Japan or other parts of the world - America, Europe or wherever. When they are here we want them to be part of our economic family; it is really important that they feel that way.

Q83 Nia Griffith: I am very glad, Minister, that you do recognise some of the difficulties because as you know we do have quite a high dependence on certain sectors; for example, automotive where there is actually worldwide over-capacity. I just wondered really, you know, the Treasury has noted that "regions with declining sectors [may] find it harder to attract skilled labour and knowledge-intensive industries and to promote regional centres of growth". How will the UK Government support Wales as a regional centre of growth?

Mr McCartney: I will bring my colleagues in a minute, because there are a whole range of packages that we do that with, but in general terms we work very closely with the Assembly, both in terms of the support services we provide in terms of looking for access to inward investment, looking to break into, in trade terms, both the manufacturing and service sectors, a great deal of co-operation across the piece in investment in the skills agenda, the university sector, the science and R&D base and an ability to provide services for skilling up those who are coming into the labour market for the first time and the services we provide for those who are in the labour market but need to be up-skilled. Then where a situation happens where companies decide either that they are closing down, for whatever reason, or moving on, the ability to immediately come in with a team of people who are specialised to try to ensure that we can find employment and training opportunities for those who are about to lose their job, that we do not leave people to their own devices but we actually come in and work with the outgoing employer, if they still exist and, where they do not, to put a team of people in to immediately work in the local labour market and wider afield to try and get people to re-enter into the labour market as quickly as we can.

Mr Pugh: There are examples both where the UK Government and the Assembly Government have helped manufacturing in particular. The UK Government's project for science and research since 1997 is doubling to £3.4 billion by 2008, the tax credits is increasing from 250 to 500 employees, it has also introduced strong, employer-led sector skills councils with regional skill partnerships; that is an example of some of the things the UK Government is doing, but the Assembly also has provided £43 million of RSA to manufacturing in Wales in 2005-06 and the Manufacturing Advisory Service in Wales has generated over £24 million in improvement in productivity up to June 2006. They are examples of how both the UK Government and the Welsh Assembly Government have been taking action directly to improve things for manufacturers.

Mr McCartney: Behind the question also is an issue about assisted areas and structural funds. As you probably know there has been a controversial review of the map within Europe - it always is when these reviews take place. The new map was approved in December and will run from 2007 to 2013; Wales is the only nation or region in Great Britain which has not had its cover reduced and the consequences are that over 70% of the Welsh population is covered, compared to under 24% for the UK as a whole, with West Wales and the Valleys retaining Tier 1 coverage which is the highest intervention rate and Tier 2 coverage, although it is a lower intervention rate, covers large parts of Flintshire, Powys and parts of Cardiff, Newport and Llanwern. In addition to that the UK Structural Fund receipts in terms of West Wales and the Valleys will be something like €1.85 billion and there is a range of other areas in West Wales where there will be increased funding to help with competitive pressures in the regions, and East Wales will receive €121 million in competitors funding in addition to that under the ERDF and ESF - big titles but also big money. We are also, in terms of ourselves, combining quite a lot of the resources at European level and Assembly level to add value to that investment, so there are potentially huge investments and continuing investments in Wales. I need to congratulate the Welsh MEPs for persuading the European Commission and for being able to do the job they have done. One of the reasons for that is that value for money is important here, and Wales were able to show that they could turn around that investment and turn it into real jobs on the ground, to very much change the labour markets in their area and create new economies where economies were not existing or were in trouble. It is one of the major factors why, in this controversial redrawing of the map, Wales succeeded in the way they have.

Q84 Hywel Williams: Good morning, Minister. Some people would argue though that the acquisition of structural funds has more to do with the relative failure of the Welsh economy, particularly in the West and the Valleys, as well as the lobbying powers of MEPs or the UK Government. How would you respond to those sorts of points?

Mr McCartney: You could say the glass is half empty or half full, but I will tell you what, ten years ago in the whole of Wales the glass was completely empty and communities North and South felt abandoned by the Government of the time. Overnight almost it lost its heavy engineering, its mining, and yes these structural funds are a recognition of the special needs of an area; that is absolutely true. One thing that is also true is that to get a second phase is quite extraordinary and the reason why they got a second phase, as the figures have shown in the earlier questions, is that Wales is turning round dramatically its economic and social base. That is a point I made earlier; I was not saying that to be complacent. Yes, there is a lot, lot more that needs to be done, it is true, but the fact that we have now got the financial capacity to assist the public and the private sector to do it I think is a welcome feature, and as a consequence of that Wales will continue to grow and, despite the pressures of globalisation, Wales is a success story in my view.

Q85 Hywel Williams: You would accept however, Minister, that there are objective measures which have led to us acquiring these extra monies and that is to do with the value added of the Welsh economy which is consistently below the threshold level and continues to be so, despite many years of European investment and investment from the UK Government.

Mr McCartney: It is very easy to tear something down like that, an economy, and it takes a lot longer to rebuild it. To rebuild an economy is not just inward investment, it is getting people who have not been in work for a long time, are unskilled, with no skill at all, who have no sense of their self worth, to reinvest in them. You then have to look at your public and private sector infrastructure and in parts of West Wales the infrastructure has been an issue, as it has been in North Wales - you see, I come to Wales quite often. It is important, therefore, to try to get a new economy, a restructured economy, when you have this support and assistance in terms of infrastructure. Having had that support, what do you do with it? I would contend that the public and private sectors in Wales are beginning to turn round Wales in a significant way and are utilising these resources in a very effective way. That is why you continue to get, disproportionately, a large part of inward investment to the UK; inward investors like what they see. They do not come in with any love for any particular place, they come in and they want to know if they are investing their dollars or yen or whatever, they want to make sure that that investment is going to work for them, and the first thing they look at is your infrastructure, your skill mix, your co-operation between your public and private sector, your macroeconomic capacity and the skill level and ability of the workers to deliver in a flexible way. If you have got all those things right, they will invest in Wales and that is what they are doing.

Q86 Hywel Williams: Can I just ask you a general question about the way the UK Government works with the Welsh Assembly Government in dealing with the challenges of globalisation. Would you like just to outline briefly how that relationship works?

Mr McCartney: At ministerial level we work very closely so, for example, I might as well mention it - it is an elephant in the room that has not been mentioned yet - the latest Burberry closure. That was an act of co-operation between myself and other DTI ministers with Andrew Davies and we will continue to do that. You will see co-operation between the Assembly and agencies like the Department of Works and Pensions, you will see co-operation between UKTI and the New Business Development Agency; you will see co-operation between us in terms of trying, in this particular circumstance, to be able to ensure very quickly if the company in the end does close, as it is likely to do, that there is an intervention to try and ensure that people are back in the labour market very quickly and have opportunities in the local labour market and beyond. At every level, therefore, there is a close working relationship. There is also a close working relationship in terms of investing in the science and R&D base, the university and college base, the school base. Obviously in Wales you do things somewhat differently on occasions, but you try to make no criticism of that, that does not mean we cannot have the maximum co-operation and that is the case whether it is at Treasury level, at educational level, school level. That is how we work as a team in terms of meeting the challenges, not just of globalisation but the challenges of modernising your public services and infrastructure projects. A final point on this is energy, both security of energy supply and in terms of protecting the environment; there is much here to be done in terms of co-operation between ourselves but also getting international co-operation in terms of zero emissions. Here we have the opportunity to look to new forms of investment, for new forms of energy procurement and distribution and here is a capacity for the Welsh Assembly along with ourselves to co-operate fully over the next few years to see additional investment in Wales in these areas.

Q87 Chairman: Minister, you described very clearly your view of a global Wales and I was very interested in your observations about Burberry. If you roll forward a little bit and look at a situation here, instead of picking up the pieces so to speak in relation to Burberry, anticipate the change that is now going to occur with Tata and the takeover of Corus - how would you say, from what you have described in the last half hour, that Wales can respond to that situation? The Welsh Assembly Government has described its approach as very similar to yours, a team Wales approach. Where do local authorities, trade unions, universities fit in? Would you have a lead role to play in all of that in order to explain to Tata what the benefits are of investing more in the steel industry in Wales?

Mr McCartney: One of the reasons Tata has purchased Corus is because of the specialist types of products it produces and, in emerging markets and the push for growth, these will be products that are very much needed and required. Secondly, there is its skill base and its investment base and I am quite certain that Tata has bought the company on that basis. I have not met the company but I have recently, by coincidence, had the opportunity to write to the trade union and if they wish to meet we have offered them to meet. The DTI are very keen indeed to work with this new inward investor and work with them not just on our own but with the Welsh Assembly; we have to ensure that Tata, as they have said, are looking to expand into markets with the materials and products that are developed by Corus. We want them to do that. It is a huge, global organisation, and as a consequence of that there is not only the capacity to take Corus products into hitherto new markets for Corus, but the traditional basics Tata has worked in hopefully will give Corus the opportunity as well to get business within the context of Tata's current business. I was pleased to see that Tata have confirmed their commitment in terms of their previous issue of capital investments and I am pleased to see that they have come to a deal with the trustees of the pension fund to sustain and invest in the pension fund; that seems to give me an impression that they are here for the long haul. I am hoping that they will soon sit down with the employees because in any situation like this it is always difficult because rumours abound and people do not know what is happening, is there going to be restructuring? Tata has given a commitment in terms of the location of the business here in the UK and so we will be looking to work with the company very proactively, and if there are issues that come up where we can assist we will do so.

Q88 Mr Martyn Jones: Minister, I am sure you are very familiar with the Review of Skills report by Lord Leitch - I expect you go to bed with it every night.

Mr McCartney: I am 56, but I am not that old, to go to bed with that.

Q89 Mr Martyn Jones: Do you agree with his assessment that "Our nation's skills are not world class and we run the risk that this will undermine the UK's long-term prosperity"?

Mr McCartney: The reason why we asked him to do a report with warts and all goes back to a point I made right at the outset, that over the next two decades if we are going to actually succeed in this global economy we are working in then nobody but nobody should be left out in terms of investing in our human resource. It is the greatest asset we have, with only 1% of the world's population, and what this report sets out is a road map in terms of both those who are in work who need to be up-skilled and re-skilled, and we want to try and ensure that people do not have to come out of work to be trained and retrained; it is important, therefore, that we invest and build capacity. Secondly, for those who go into the labour market, we have to ensure there is integration of our local colleges in their relationship with local employers; that we are able to train people in a way that will give them access to the labour market but then continue to invest in their skills and skills development. To be able to do that we have a shared burden from the state and with the employer. We have to encourage those who have been in work who have never actually, since they left school, had any involvement with education to find a way of doing that. The first one might not be work-related education, it might be something to do with their social life or whatever, but we have to encourage them into education, to up-skill and re-skill. If we do not do this and we do not succeed then we will have a huge number of people who may find it difficult in 20 years time to get in the labour market and sustain themselves in the labour market. Something like 95% of all new jobs - if I have that figure wrong I will write to the Committee - have a technical or IT skill related base to it, and this will grow and grow and grow. Even where we get sectors like, for example, in the public sector, where you will get growth of an aging society and a need for care workers - care workers have to be highly skilled now, so whether it is the public sector or the private sector the skill base is absolutely critical to the success of the organisation and more importantly the success of an individual to be able to enter the labour market and to remain there.

Q90 Mr Martyn Jones: Are you aware of any particular skills advantages or disadvantages that the workforce in Wales has?

Mr McCartney: If I can just say from my perspective, if you look at the trend of inward investors and where they come from and the types of product they want to develop in Wales, there is clearly a skill base which is not just around the aerospace industry. There is a skill base, but it is also clear because of Objective 1 and other measures that there is a large pool of people who have not got the skill base, who are either in work or are not in work and need to get into work.

Mr Pugh: There are some complex issues around skills and how you address that. The current round of convergence funding spending programme, which the Welsh Assembly Government will be submitting soon, I believe, is a real opportunity to try and address that. The Commission have stressed that the Lisbon agenda for jobs and skills should be a main focus of that, so the new round of convergence funding spending is the opportunity for the Welsh Assembly Government to co-ordinate the approach, to identify where the skills gaps are and how they deal with that over the next seven years, and it is one of the benefits of devolution that they are able to do that. The convergence funding was negotiated at UK level but the spending will be done by the Assembly Government so it is one of the benefits that they can then identify at local level where the skills gaps are and then deal with that accordingly.

Mr McCartney: A final point that maybe the Committee would like to consider in any recommendations it makes, the 2007 spending review will look to allocating resources for the implementation of the Leitch Report and you may want to consider making comment on that.

Q91 Hywel Williams: In your memorandum you note that the UK's comparative advantage is in services rather than goods, as compared to other competitor countries, and also it looks as if it is insurance and financial services where we have, as a UK economy, these advantages. In which sectors would you identify Wales as having a comparative advantage as opposed to the UK?

Mr McCartney: Electronics is an area and, as I said, it is significant that in a short period of time with inward investment it has now become a world centre of excellence. It has a comparative advantage in technology, in aerospace and a high level of skill and investment, and it has the ability because of the nature of the infrastructure in Wales to look to not just the current models of flight but future models of flight. It has got advantages in terms of those companies that are coming in from the service sector, it has a very skilled base in the service sector, it has a very adaptable force that can learn very quickly indeed so a company can come in from absolute scratch with a product to sell, in Wales and outside Wales and beyond the UK borders, and they can set their operation up very quickly indeed and become a world class facility very quickly indeed. Service sector growth in Wales has been remarkable: it is the ability of the workforce, working with the local authority, investing time in Wales and a can-do attitude, is it not? A company comes into the Valleys somewhere: this is what we need to do, we need to set up by this particular time, we need this level of workforce, this is what we need to do in terms of provision of skills and training. What happens? The local authority steps in, the local college of education steps in, the chamber of commerce steps in and, before you know it, along with the Assembly and ourselves there is not just a package put in place but it actually assists the company physically get established. If you make a big investment you want a return on it very quickly, and that is one of the big advantages Wales has got.

Mr Pugh: If I may add, we talk a lot about manufacturing and why it is important to preserve that, but Wales's strength is in the breadth of sectors and it needs to remain flexible. The fact is that there are success stories in manufacturing, in retail, in education and training with the DTA, in the service industry. We think of contact centres as perhaps being low, entry level jobs, but they are big providers of employment and they are on the increase in Wales, so the fact that there is a broad range of sectors for Wales is one of its strengths.

Q92 Hywel Williams: Minister, would you then agree or disagree that there is such a thing as a separate Welsh economy and to what degree is it different from the UK economy? That has implications, of course, for the management of both.

Mr McCartney: The economic is physically in Wales. I have a North West economy but I am an MP and I have a Wigan economy where I stay, so there is a Welsh economy, yes, but it is a Welsh economy within a global economy, just like my little economy in Wigan is a Wigan economy within a global economy. Increasingly, that is the importance of us working together to maximise the opportunity in this global economy. Our marketplace is no longer just down our local high street, our marketplace is the high street in Calcutta, Mumbai, Beijing, Guangzhou, Tokyo. That is our high street and we have companies in Wales who are actually operating in those high streets or providing services in those high streets, and it is not just financial services, it is architectural services, construction services; across the breadth of the service sector Wales has got an ability to capture and does capture significant overseas business and trade.

Q93 Albert Owen: If I could concentrate now on the social challenges of globalisation, you have touched on them with education and training, but the Treasury acknowledges that the flexibility that comes out of globalisation does make individuals vulnerable and that the transition period causes uncertainty for individuals. What should the Government do to help in that case, what is it doing and how is it working in partnership with the Assembly Government?

Mr McCartney: Globalisation is one of those words that strike fear into people in the sense that everybody talks about globalisation in global terms, but it does actually start in your own community. In some communities it has a positive impact and in some communities from time to time it has a negative impact - I know as a local constituency MP that sometimes it is negative. Thankfully, so far it has been overwhelmingly positive and for those who live in a developing world it has an ability to be very positive, taking hundreds of millions of people out of poverty; however, it has the capacity to exploit people unless there are international rules both in trade and in terms of corporate responsibility. It is important here, in a globalised world, that the Government is frank and honest with people, but what it has to do is to provide support and services that allow them individually to be able - and as a community - to deal with the issues and the challenges around globalisation. It is the personal skills, it is the infrastructure, it is the stable economy, it is the investment in science, R&D, our schools, our colleges and universities and the ability to provide services for UK businesses whether it is manufacturing or in the service sector to do trade and do business and increase the access to overseas markets; it is all of those things. Where there is a negative impact, where an organisation either leaves or loses out completely and its goods and services are no longer wanted - and we know all about that, do we not, and when that has happened - then we have now got intellectual organisation with the Government, intervention strategies which immediately go into the community. It is not to impose on a community but to work with the community, to work with employers, to work with local authorities, to work with other public sector and private sector organisations to try and engage and find a way of having a positive outcome for those who have had a negative impact in terms of their job. It is important that we do that and over the years we will have to do more of it - that is why the Leitch Report is so important - because this is about investing for the future, not waiting until someone can no longer get a job; that is disaster time. We have to invest now for 2020 and in five years time we will be investing for 2025 and 2030; that is the lead time for these investments and changes. That is what we are doing and that is what we want to continue to do.

Q94 Albert Owen: You will be aware of the European Union's Globalisation Adjustment Fund which provides training and job search support to workers who lose their jobs because of the structural changes. How has Wales benefited from this Fund?

Mr McCartney: To be honest with you I have got no individual details but, as I understand it, it is only particular sizes of job losses that would benefit and I think it is job losses above 1000. There will be some areas where there have been job losses that will not have benefited, but I will write to the Committee rather than give you a wrong answer. It would be wrong to suggest that it has had a massive impact in Wales because I am not sure that that has been the scale of job losses since this Fund came in, but maybe Kevin can help.

Mr Pugh: I do not have the exact figures on that with me, but one can also point to European funding in terms of convergence funding, so one has to bear that in mind as well, that is the most important factor in terms of how convergence funding is used to address skills and jobs challenges going forward. One can talk about mitigating social problems, but the best way to do that is to get people into work and both DWP and WAG are working together very well to find new ways of doing that. There are strategic partnerships there, there is the Wales Employment Advisory Panel, also getting external employers in to advise on that, so there are ways of working together strategically to do that and the convergence funding programme will be the really important part of delivering that programme.

Q95 Albert Owen: How would you respond to a community such as many in Wales where there are vulnerable people finding it difficult to get into the job market and inward migration is coming and taking those lower-skilled jobs. Apart from up-skilling, what is the Government doing to assist those areas and those individuals?

Mr Pugh: Are you differentiating an area of high inward migration with an area of low inward migration?

Q96 Albert Owen: There are areas of high unemployment that have been identified in this inquiry where people do feel vulnerable. We hear about the challenges and the up-skilling but it somehow misses them, and then additional to that employers are bringing in inward migration.

Mr Pugh: There are a number of strategies; there is Pathways to Work, the Cities Strategy, the New Deal for Lone Parents. There are a number of strategies at the UK level and with the joint UK/WAG there is the Want to Work scheme. There are, therefore, a number of initiatives that DWP and WAG are working on but I am not clear how there is a distinction here between an area of high inward migration and low inward migration; the fact is that you have high unemployment to deal with.

Q97 Albert Owen: I am really responding to what the Minister said about the negative impact. We all see that there is a difficulty and it is that area in which Wales traditionally has high unemployment and although employment levels are rising there is still this hard core of people who find it difficult to get into the job market and, in addition, there is this inward migration in the low-paid and low-skilled sector.

Mr McCartney: I understand what our colleague is saying here. I understand and I recognise the kind of individuals he is talking about from my own constituency. In my constituency it is middle-aged men of my age who lost out in the early Eighties and never got back into the labour market. Some of them are on invalidity benefit, some have just opted out. That is why the change that was announced by John Hutton is so important, about individualising both job search and training. One of the worst things that can happen to someone if they are out of the labour market for any period of time is that they lose a sense of their self-worth, they lose any sense of their capacity to engage in the labour market. Skills move on so quickly that even if when they left the labour market they were a skilled worker, the skills may no longer be required in their local labour market so it is important that we provide these individualised services to ensure, assist and promote individuals back into the labour market. There are people with long-term disabilities who want to work and we have to provide them with individualised services, working with employers whether they are in the public or private sector and give support. We do all those things, but it is true to say that there are still people who have missed out, despite all this investment, the hard-to-get-to, that feel themselves aged or they feel they have been excluded and they are angry about it and resent it. Again, I recognise that kind of trait and that is why what John Hutton said - and I will send a note to the Committee because this is really important - about changing the nature in which the welfare state works, is critically important. It has got to be an enabling organisation, it has to invest in individuals and in their skills. There is a responsibility back as well, so I will do a note to the Committee if that is okay.

Albert Owen: Thank you.

Q98 Mr David Jones: Minister, I want to return to a point I touched on earlier and that is the concern that higher skilled R&D jobs might migrate outwards and follow manufacturing jobs. The Treasury's analysis for the 2007 Comprehensive Spending Review noted that "emerging markets are now increasingly able to challenge advanced economies in innovation ... Goldman Sachs estimates that India's overall R&D costs are only one-eighth of western levels". Can we compete against that?

Mr McCartney: Yes, and we are, but having said that, unless we do all the other things we spoke about in this hearing so far we will not and it will be increasingly difficult. Interestingly enough - and again I will send the Committee the exact figures - you would think there had been a complete outflow from the UK of jobs and investment to India, but actually last year we had substantial investment - and I mean record investment - inwards from India, both in terms of investment in the manufacturing and service sector in jobs - high value jobs - coming to the United Kingdom from India. It is a two-way flow and it is not just about the Tatas of this world, it goes back to our R&D, our science base, our infrastructure and our access to the markets in Europe and beyond. Yes, it is a challenge, you are absolutely right, but if you say to me do we compete on the basis that we should pay graduates £1000 every three months instead of the salary that they get - to answer a question a colleague asked me half an hour or so ago - you cannot compete on that basis, nor should we compete on that basis, but we can compete on a different basis and that is why, for example, you have companies working in Cardiff Bay providing a whole range of consultancy and other jobs into markets in India and China and, with that, having substantial employment bases back here in Wales. Why can they do that? Because of our graduate base; our graduates are highly skilled, they are motivated, they are innovative, they can take an idea and turn it into a product base for an Indian company and do it very quickly indeed. That is the advantage we have got; it is not about paying people the same rate of pay as in India and China. However, as the eastern economies emerge - and it has already been seen both in India and in China - they will have to increasingly pay their workforce a greater reward and as we see the emerging economy there are a lot of advantages we have got. China, like ourselves, is an aging society, its workforce is getting older. We have actually started to address that problem and reinvest in the skills and older people and we are actually seeing a better participation rate among older workers than we have seen for 20 years or more. India has a different problem; they have a young workforce but it is still one which has not been skilled up to the level it needs to be skilled up to, so what do you do in this process? As well as getting inward investment and product development into the UK we penetrate the Indian market with our educational base. My local college is currently in India training huge numbers of people. A decade ago the college did not even exist, it lost all of its customer base, it lost its textile industry, its heavy engineering and it lost its mining base. It could have rolled up and died but it did not, it looked at globalisation, it looked at the emerging economies and decided that the skills that were no longer needed in Wigan were those technological skills, but they needed them somewhere else and we are now training them. It meant that we completely rebuilt our college and we have a rebuilt college to the equivalent of a university. Why? Because we embraced globalisation. We can meet the challenges by rolling over and dying, saying it is too much, or we can look to see where we can actually get access and gain access to goods and services in these emerging markets, but we do it because our workforce is highly skilled and innovative; that is how we do it.

Q99 Mr David Jones: Is it not the case that Indian graduates are being churned out in much larger numbers than British graduates, they are able to perform precisely the same functions to precisely the same standards and if, in fact, they are prepared to work at only one-eighth of the cost of a British graduate how realistically do we compete?

Mr McCartney: This is all true, but then if you look at the other side of the coin as we produce our graduates and skilled graduates and need to produce more as a percentage, this is all true, that is why we put all of the investment strategies in place. It is also true to say that our graduates now, for example, will probably be helping the West Bengal Government to restructure the infrastructure base of Calcutta; it is our graduates who are just now helping to build the Shanghai Expo Centre, including the refurbishment of the Yangtze River and the first eco-city ever in China. Why? It is not because we are paying one-eighth of the wages, it is because they have that international skill and capacity to be innovative. They are very highly skilled and motivated and they work in companies which can very quickly gain access to the markets because that is what in the end sells Britain, it is that capacity, that innate ability to turn around huge projects on time and within cost and to design them from scratch because of our intellectual base. When it is good it is very, very good, but the thing is we have to make it very, very good in breadth and in depth and that is the challenge. The point you make is well-made, but let us not be too pessimistic, we can get there.

Mr Moir: If you consider the number of graduates in China, there are plenty of people who have noted that they are producing more graduates than they have in the UK. From that they deduced that their capacity will go up, the extent to which they can produce goods and services will go up and the UK will lose out. The question I ask is what are these graduates going to do if they are not developing IPFs in university? Answer: they are probably going to be administrators to administer still a largely developing country with poor infrastructure in terms of local government, poor infrastructure in terms of roads and poor infrastructure in terms of rail. There is tremendous local demand for very able, very clever Chinese people to do things which will not directly have a bearing on the ability of China to make goods or services and sell them to the rest of the world. The issue is whether China will use its own graduates to do its own investment in its own infrastructure et cetera, and not develop particular scientific goods which will then turn into goods which they export to the rest of the world. Most of China's intellectual property is brought in from inward investors into China which they protect very closely. It does not spill out into China. China is starting from a much lower base of knowledge to build highly sophisticated products and has an awful long way to go. I am more optimistic about the ability of the UK to survive in a highly technical world with very intelligent, very able Chinese and Indian graduates designing products which they will then sell to the world and compete with UK firms. We have a problem but I do not think it is a very big one.

Q100 Mr David Jones: You mentioned China but what about India where I believe the number of IT graduates leaving universities is enormous? Can we in this country compete in terms of IT development with a country like India which has a huge number of graduates and has overall a much lower wage bill?

Mr McCartney: There is a lot of UK investment in India in the IT sector and in other service sectors. I welcome this because it gives the opportunity for companies in the UK to remain in the UK and to continue to invest in R&D, corporate headquarters, financial headquarters and develop the service sector in Europe and in the UK. It gives companies the capacity to survive in a globalised world because it opens up access to huge emerging economies, far larger than our economy. For a consultancy company to serve a local Welsh or even a wider economy, it will survive that but it wants to grow its base as a company. Sooner rather than later, it has to have the opportunity to provide services outside the borders of the United Kingdom. Surprisingly, small and medium sized enterprises in Britain are becoming very adept at this. You find in India not just big names but potentially small companies who started in the last five years. They are getting access into markets like India and we should welcome that. It broadens our economic base and our capacity for investment earnings for this country. It helps R&D and science. That is why India is hungry to invest in our science and R&D base. It is hungry to invest in our manufacturing capacity because it is world class. To enter into the global economy we need to have a relationship with them so it is a good working partnership.

Q101 Mr David Jones: Could I turn to the question of R&D tax credits? The TUC has said that the government's system of R&D tax credits is not delivering the change that is needed if UK plc is to remain competitive. What is your assessment of the effectiveness of R&D tax credits?

Mr McCartney: As a Minister, I would say it is very effective. If you look at the improvements in R&D across all sectors of the UK in the last few years, yes, it is a monumental task. For many years the United Kingdom did little R&D and little in its science base as the first phase of globalisation came in. That impacted on us greatly. We now have a huge, growing investment in R&D and in the science base, in terms of work with the public and the private sector. We completely refurbished the working role of government in these areas and that is important, not just for the level of investment but in providing resources. People in business increasingly recognise that the UK government is very serious about attracting R&D and linking R&D with the productive capacity of the country to ensure that our universities can turn ideas into products and have the financial investment and skills base to produce those products. I give you an upbeat message.

Q102 Hywel Williams: There is more than a suspicion that small companies are less able to apply for R&D tax credits and there are lots of small companies in Wales. You might not have the figures to hand. Could you let the Committee know what the relative success of Welsh businesses is in applying for R&D tax credits?

Mr McCartney: Do you want me to give you Welsh specific figures? I will do the same for Mr Jones as well.

Q103 Hywel Williams: That is as compared to other needs as well.

Mr McCartney: Yes, I understand.

Q104 Chairman: Could I end this evidence session on this note: you were talking about being upbeat and we welcome that but the Treasury not only has been upbeat; it also has a dose of realism in its description of what it calls the risks to globalisation and the possibility of a reversal of globalisation as a consequence of protectionism, global recession, geopolitical instability and so forth. Given that the Treasury has that precautionary note, does the government have a contingency plan for that possibility of a reversal of globalisation?

Mr McCartney: I would not put it as a reversal of globalisation because the process is not reversed. If you want to get rid of the cycles of immediate downturns in the world economy, critical to this and development is getting a new sustainable development trade round. The Doha round is very important to ourselves, America, the European Union, the Brazilians, the Indians and China and it is really important to other emerging economies and to the least developed world. A vibrant, open, transparent, international trading system is critically important. Secondly, the reform of the IMF, the World Bank and those other international institutions is critically important as well to get sustainability of investment. The third area about sustainable development is that in areas, countries and regions of conflict we should have an international effort to have stability, good governance, anti-corruption strategies to be able then to invest in the infrastructures of those countries and regions. Africa is a classic example. If it only increased its productive capacity by just over 1%, it would be equivalent to all the investment made in terms of aid in Africa. We can make huge differences but to do that we have to have an international trading system and all the other processes I spoke about. Yes, there are challenges. There will always be challenges in a global economy. I am not an economist but nowadays countries and regions are more able and willing to cooperate on an international basis, to deal with sudden changes in oil price or whatever. It is important to have international stability. The other, big area is security of energy supplies and global security in terms of the environment. That is really important. That is the next big challenge for what we do after Kyoto 2012. Discussions will be commencing soon about that. It is really important that we get that right because that is a huge risk to globalisation and, more importantly, the risk to the continuing ability of the world as a whole to trade and invest more effectively and take hundreds of millions of people out of poverty. In the end, for me, that is the success of globalisation and having a sustainable planet in all respects. These are the big challenges that we all face and I am sure Wales, given a fair wind, will do well. I wish you well.

Chairman: On that very positive note, could I thank you, Minister, and your colleagues for coming today and for your memoranda. You promised that you would give us some additional information and we look forward to receiving that. Finally, could I thank you for the comments you made concerning TATA and the steel industry? As someone who comes from a steel constituency, obviously we have a close interest in that matter. We have visited Corus in Port Talbot and I look forward to the leading role that the DTI has in bringing about what someone recently called a progressive globalisation. I hope they will play a full part in the investment strategy of the steel industry in Wales. Thank you very much.

Memorandum submitted by the Public and Commercial Services Union

Examination of Witnesses

Witnesses: Mr Steve Lazenby, Branch Organiser, Mr Peter Jones, President, PCS South West Wales Branch; Mr Jeff Evans, Senior Officer, PCS Wales, gave evidence.

Q105 Chairman: Welcome to the Welsh Affairs Committee. Could you introduce yourselves, please?

Mr Evans: My name is Jeff Evans. I am the senior national officer for PCS in Wales.

Mr Lazenby: My name is Steve Lazenby. I am the branch organiser for PCS in South West Wales.

Mr Jones: My name is Peter Jones. I am the branch president of the PCS in South West Wales.

Q106 Chairman: Could I begin by asking a very general question about globalisation and employment and your perspective on it? What has been the effect of globalisation on employment in Wales so far and what effect do you think it is likely to have over the next ten years, in particular in relation to your own sector?

Mr Evans: We face challenging times and we are certainly conscious of public sector developments across the world where there is focus on outsourcing and privatisation. From a union perspective, we are concerned about those developments. From our perspective, it is important to recognise the importance of public sector employment in Wales, particularly our sector, the Civil Service. The Civil Service is a big employer in Wales. There are more civil servants employed proportionately in Wales than in any other part of the country. There are about 800 civil servants in each constituency on average in Wales. In a rapidly changing world, we believe it is important to recognise the importance of civil servants in public sector employment in general given the heavy reliance on the Welsh economy by the public sector. Naturally, that has a beneficial effect in terms of the private sector through the money in our economy. The big issue for us at the moment is the threat to Civil Service jobs in Wales, which is something we want to touch on.

Q107 Mr David Jones: Would you agree that possibly the Civil Service is the one area of the economy which is likely to remain almost wholly untouched by globalisation to the extent that it is inconceivable that Civil Service jobs will be outsourced overseas?

Mr Evans: I wish that was the case. There are some government departments who have brought in consultants. Outsourcing to India is actively being considered in many Civil Service departments. That is something we would oppose. We think the government needs to take a strong lead on this because it is something it can dictate directly. In the context of Wales the Civil Service is a huge employer. It benefited massively from relocation in the 1970s. There has been a smaller scale relocation more recently but if we look at the M4 corridor, particularly the DVLA, ONS, the Patent Office, Companies House, and there is a big Inland Revenue site there, these jobs are precious to Wales. They are very much a mainstay for local economies and they should be protected. Nobody should be complacent on this. Globalisation poses a threat to public sector jobs just as it does to our private sector jobs in Wales.

Q108 Mr David Jones: In terms of consultants, I see that HMRC spent about £330 million on outside consultants over the last three years. Were any of those from overseas?

Mr Evans: I cannot give you an answer to that. We are very, very concerned about the overuse of consultants by the UK government. It spent £2.5 billion on consultants in 2004. I work very closely with consultants in many Civil Service departments and I am not convinced that we are getting value for money from them. What we are finding is that a lot of senior managers now are using consultants almost like a comfort blanket. Whenever they have to deal with a difficult decision they bring in consultants. Whether they are providing for better decision making is very much open to question. We agree that there are efficiencies to be made in the Civil Service and I think a lesser reliance on consultants would be one way of achieving those efficiencies.

Q109 Mr David Jones: The TUC has said that positive labour market flexibility based on increased skills and better working practices is the true route to economic competitiveness in a globalised economy. What would you say to that?

Mr Evans: Naturally we would agree with that, being part of the TUC. We have an ambitious skills agenda ourselves in the trade union, particularly in the PCS, through union learning. The union learning reps now have statutory time off. Our ambition is to make our workplaces into places of learning. If we are going to meet the challenges of the future in terms of globalisation, upskilling the workforce is essential for that. Union learning, we think, plays an important role in that through the appointment of reps who effectively provide a gateway to our members to further their higher education, working closely with management to upskill the workforce. It is a new frontier for trade unions and something we are very positive about.

Q110 Mr David Jones: What about better working practices? I understand HMRC has introduced the LEAN model. Would you regard that as a better working practice?

Mr Lazenby: No, we do not. LEAN has been introduced initially into the large processing offices in Wales - for example, Wrexham and Cardiff. The experience of our members is that LEAN is very much a deskilling and demotivational process. Once, you would have an officer within processing who carried out a range of duties, so you would have the log-in process for self-assessment tax returns, making sure that people's tax codes are correct, making sure that people have paid the correct amount of tax at the end of the year. LEAN tries to break those processes down so one person deals with one specific thing and it goes on and on. PCS has produced figures based on the department's own statistics. As a result of LEAN being introduced in processing in the large processing offices, there are now in excess of one million pieces of correspondence that lie unanswered in a box somewhere. The department seem to be admitting to at least half of this correspondence. That has a very large impact upon an awful lot of people in constituencies in Wales who have either paid too much tax or of course, as far as the economy is concerned, the downside is that there is an awful lot of money that remains uncollected simply because of these processes.

Q111 Mr David Jones: The Chancellor is on record as saying, "There is an urgent need for modern social and labour market policies geared towards promoting opportunity and employability." What would you advocate in order to increase labour market flexibility?

Mr Evans: Certainly in the public sector we very much share the Welsh Assembly's ambition for more flexibility in the workforce in terms of breaking down barriers, for example, between public sector organisations to allow for freer transfer of staff between organisations within the public sector. Making connections, despite the challenges it provides us in terms of the efficiency savings that go with it, the emphasis on cooperation and collaboration is one that we very much share. We are prepared to invest, even if it means making difficult decisions for us, in terms of enhancing that flexibility of staff and that transfer of staff to the public sector organisations. If you have that, when public service organisations are reducing numbers, it means there is more opportunity for staff to transfer elsewhere.

Q112 Mr David Jones: I understand that that is not available to any great extent. Is that right?

Mr Evans: One of the barriers against transfers within the Civil Service is that we have this ridiculous delegated pay situation where we have 280 separate pay and grading schemes where we used to have one. There are big gaps now between different Civil Service departments doing work of good value. Part of our dispute with government at the moment is about returning to national Civil Service pay to get back to that transferability and flexibility that we once had.

Q113 Mr David Jones: It seems to me that in areas of Wales, for example, where HMRC posts are under threat there may be posts available in other sections of the Civil Service into which those who are made redundant could easily transfer. Are there not barriers to that within the Civil Service structure?

Mr Evans: Fortunately there are. These are self-imposed barriers through having different pay and grading systems. We have a situation where you can have several Civil Service employees in one office and staff doing the same work but they are paid at different levels. The answer is to go back to a single, national, Civil Service pay negotiation. There are costs associated with that but done over time it is something that is possible.

Q114 Mr David Jones: The flexibility in the labour market will obviously require changes as labour and capital are redeployed from traditional activities into new activities. What do you think the government should do to assist individuals and particular industries which are disproportionately affected by the transition in the short term?

Mr Evans: We would like to reach an agreement with government on Civil Service job losses and transferability of staff. We believe as a union that, for an employer with half a million employees in the UK, it should be quite straightforward to say to every member of staff who wants a job that they can have a job. That fundamentally is what our difference with the UK government is at the moment. Compulsory redundancies now have commenced and we think that there will be even more redundancies over time. In terms of supporting staff, we have touched on skills. We would like to see the UK government do more, working with us in partnership, to enhance the skills of the workforce. We touched on the union learning rep and this is incredibly positive. There is some brilliant, innovative work taking place. Government departments can be exemplars in terms of delivering this agenda. Some are; some are not. Working together with the unions, that is something where we could equip people to deal with this rapidly changing economy in a much better way.

Q115 Mr David Jones: Is it fair to say that in terms of flexibility the government really ought to be practising what it preaches?

Mr Evans: There is enormous scope for us to be working in partnership with government, yes, and for the government to be an exemplar in this field would demonstrate to the private sector in particular a way forward.

Mr Lazenby: HM Revenue and Customs has reorganised itself into 36 very distinct and separate business functions within the Department. It is virtually impossible for the people at the grades that we represent through to grade seven in the Civil Service to transfer between different business streams. There is a virtual cull on recruitment. The original intention with the roll out of the processing side was to redeploy the processing staff into compliance activities. Now that compliance is taking a fairly substantial hit in terms of the job losses that have been mooted by the department that has been completely stopped.

Q116 Hywel Williams: Can I move to the effects of globalisation and obstacles to the labour market's participation? We have large numbers of people in Wales who are economically inactive. What do PCS see as the main obstacles to the labour market's participation in Wales and how can these be overcome?

Mr Evans: Our members have an important role to play in getting people back to work because we represent people who work in job centres and benefits offices. The closure of many job centres and benefits offices we do not think is helping our cause. Our members are trained and equipped to provide support and assistance to job seekers. The front line of staff is being cut back. We are seeing the centralisation of services. We are seeing the focus of Civil Service delivery through call centres and the Internet. Whilst we think that has an important part to play in future delivery, what also needs to be in place is that face to face contact and that mentoring that our members have traditionally done. The Department for Work and Pensions now has absented itself from 30 towns in Wales over the last couple of years. This is where we take issue with where the Chancellor was saying that 104,000 Civil Service job cuts was about getting rid of back office staff and recruiting, which caused a lot of offence amongst our members supporting the front line. The evidence is quite the opposite. These 30 offices were front-line staff supporting people without jobs, and those offices have been closed now. We support modernisation, and we understand that there needs to be an efficiency agenda but in the Welsh context what we are losing is that local service.

Q117 Hywel Williams: Are you aware of any objective statistics about the consequences of closing these face to face offices? Are targets being met as effectively? Are numbers of people being helped back into employment?

Mr Evans: There is growing evidence about the impacts of the cuts on service delivery. One statistic which stands out quite sharply is that there were 24 million unanswered calls in the Department for Work and Pensions. Our members want to provide the best possible service, but a combination of job cuts, office closures and new IT systems all coming on stream at the same time has meant that we are not providing the service the public deserve. The DWP looked at these particular issues, and criticised the Department for the speed of reform. They said, "We understand the general direction you are going in, but you need to do things at a much slower level." One of the frustrating things from our point of view is that a lot of these efficiencies are taking place without any involvement from the unions, so that there is no input from the staff themselves. There is a demotivational impact as well from the staff's point of view. It is a shame, because we are not going to run away from efficiencies. Taking the Welsh Assembly as an example, we are working very closely with them in partnership to deliver their efficiency programmes, so there is an alternative way here.

Q118 Albert Owen: We heard in the previous evidence session about the Leitch report which notes that the UK has to take a major step change to upskill for the challenges by 2020. You mentioned working in partnership. How is your union working in partnership with the Welsh Assembly in Wales's case, and with skills providers also to ensure that this will be achieved and that the skills base will be there for future challenges?

Mr Evans: The Assembly has a very positive agenda in terms of enhancing skills and we are working closely in partnership with them. Our basic philosophy is that we are trying to appoint what we call the union learning rep in each workplace. The function of the union learning rep would be to encourage learning amongst the workforce, to provide a gateway to universities, colleges and so on, and it is the sort of issue where management, the union and government are all singing from the same hymn sheet. It is the sort of issue where we can build bridges in terms of delivering the skilled workforce that we are all seeking. Employers that treat their workers well and provide them with those skills reap the rewards in terms of loyalty and so on. Through the Wales Union Fund, which I am glad to say has been in place now for four or five years, we have taken quite a bit of money and the projects have all been very successful in developing learning centres. We have the basic skills programme. All of those things combined are making a contribution to the Welsh cause.

Q119 Albert Owen: Most of these courses are for your employees and members during working hours or is there evening learning and is there that sort of flexibility?

Mr Evans: It depends on the organisation. For most Civil Service employers, if it is a work related skill, there is probably an argument that some of that would be in their own time but if the connection to work is looser it would be in people's lunchtimes and outside of work. I think there is scope for Civil Service departments to be exemplar employers in this field and to lead the way.

Q120 Albert Owen: You talked about possible closures. How are these affecting this learning programme? How enthused are members to take part in this in the current climate?

Mr Evans: It is not helping, obviously.

Mr Lazenby: It is very difficult. The danger is that in an area like South West Wales, where we have managed to obtain dedicated computers specifically for our members to learn on, the closure of the offices will take that provision away completely. We are also of course talking about people who are starting from a fairly high skills base anyway. These are people who have a high training worth and a lot to give to the local communities in terms of those skills and what they can give back. With the loss of that local communities will very much suffer.

Q121 Albert Owen: What is the PCS's involvement with the Sector Skills Councils in Wales?

Mr Evans: There is a big Sector Skills Council for central government. We have senior officers who are very much involved in that board. It is still in the very early stages of development, and we have not yet seen many initiatives coming from that, but I think we all recognise the value of the board and the potential it offers.

Q122 Albert Owen: What more do you think the Welsh Assembly Government can do to upskill the workforce? We are not just talking about the public sector, although the responsibility of your members is there. What more can the government be doing and what is the Welsh Assembly's perception? Do you think they are doing enough?

Mr Evans: Given the success that trade union led learning projects have had, there is a strong case for more money to be invested in trade union learning. When you look at the European example, in some countries trade unions are instrumental in delivering training programmes for the whole economy. I am not suggesting we should go that far at this stage anyway, but we need to build on the success we have already had. Union learning reps are only about five years old so it is still in its formative stages. What we are finding from a union perspective is that we are bringing on a new type of union learning rep. Whereas people like Steve and Peter deal with the day to day, ordinary problems, we have union reps now coming through who are free of all that and prefer just to deal with learning. It is a very positive issue, where there are good relationships with management. It is really exciting, and I think if we invest in it it will produce great results for us.

Q123 Albert Owen: Do you think there is any best practice in Wales that other areas of the UK could learn from?

Mr Evans: There is a huge number of innovative union learning rep projects in Wales. We have a learning centre in Llanishen, in the tax office, where all HMRC staff in Wales now have access to courses. The value for PCS is that a lot of them are IT literate. Many of them work in offices and have computers on their desks so e-learning is very big in our union. All 5,500 HMRC members have access to a range of courses, which we have bought on licence, whether they are IT courses, foreign languages, and so on, free of charge, and provided by the union and with great cooperation from the management. We have a suite of computers all over the country so that is a particularly good example.

Q124 Mr Martyn Jones: Is PCS thinking globally? Are you building strategic partnerships with trade union movements abroad, particularly in developing countries, and do you have any experience of migrant labour?

Mr Evans: We are obviously very much part of the PSI, and we have strong international links. They tend to be around causes: Colombia, Cuba, and so on. There is more to be done in terms of the relationships with other public sector unions, particularly in Europe. It is not something I profess to be totally briefed on but we are keeping a close eye on public sector developments.

Q125 Mr Martyn Jones: What about migrant labour? Presumably your members deal with that. Do you have any experience of migrant labour?

Mr Lazenby: To work in departments?

Q126 Mr Martyn Jones: Yes.

Mr Lazenby: Very little. The biggest contact we have with considerable communities of migrant workers would be, for example, tax credit claims and other benefit claims. We think there is more that can be done. For example, there are reports that a lot of the migrant workers coming in are being paid below the minimum wage. Our department is the department responsible for administering and policing the minimum wage. There is no minimum wage compliance in our area whatsoever. We think there needs to be, because local knowledge is absolutely key to identifying where these migrant workers are, who they are working for and the patterns of non-compliance amongst employers and gang masters in not paying their dues. That is the sort of experience that we have as a union with migrant workers. It is very little in terms of membership, but in terms of direct customer contact and ensuring that the system is policed properly. We are not doing enough and we could do an awful lot more.

Q127 Albert Owen: You said that contact was minimal on the initial migration issue, but surely you deal with agencies? You have this intelligence on the minimum wage and on benefit claims. Do you have direct contact with agencies?

Mr Lazenby: There will be statutory gateways for the department to obtain information and intelligence to risk assess on that basis. In our branch, we have nothing like that whatsoever. The risk side of our department is being withdrawn from Wales altogether. By 2008 there will be no risk department in the country at all. It is being centralised in England. We regard it as being absolutely crucial that we retain an element of local knowledge. Local knowledge drives risk right across the board, if you are talking about VAT fraud, the national minimum wage and so on. Once you lose that local knowledge, it becomes very difficult for things to be policed adequately.

Q128 Nia Griffith: Does that suggest that you think we might lose revenue by a centralisation process?

Mr Lazenby: Yes. The department's own figures confirm that cuts in local compliance, basically the policing agency of the department that ensures that businesses, individuals and companies pay the right amount of tax at the right time, will save the department something in the order of £74 million and will lose the Exchequer in excess of £204 million in lost revenue. We recognise that there are more efficiencies to be made. I personally work as an inspector of taxes. That is my day job. There are many ways that the department could make the whole process of compliance far more efficient in reducing the time spent on inquiries and the various support mechanisms there. What they are choosing to do is a crude headcount reduction and it is a great shame because Wales had a big success story in terms of upskilling and new methods of working with compliance. We were approached in our branch to engage in a new way of working with tax inquiries about self-assessment returns for businesses, which was called multigrade team working. This meant you did not just have one person like myself as an inspector doing all the analysis of the records, all the meeting notes from cradle to grave. You had a team of people at lower grades, assistants, officers et cetera doing the analyses for you, doing the interview notes. The whole driver behind that was to reduce costs for the department and for businesses. The pilots were placed in Haverfordwest and Bridgend. They have proven to be a massive success and we have been very strongly engaged with quite visionary management in South West Wales. The money that has been brought in by these pilots, compared to cost, has increased over fourfold. The amount of time it takes for an inquiry for a business has reduced considerably which of course saves business costs. The two locations where that pilot has been running, Haverfordwest and Bridgend, will be closing under the proposals made by the department. It makes no economic sense whatsoever.

Q129 Nia Griffith: You have referred there to a number of the effects that this so-called rationalisation of the office estate of central government is going to have. Are there any other factors you would like to mention?

Mr Evans: We believe there needs to be a debate about the location of public sector jobs in Wales because there are two diverging policies taking place where you have the National Assembly, committed to redistribution of wealth, spreading out Cardiff based jobs to other parts of Wales, to opening new offices in Aberystwyth and Llandudno; whereas we have the UK government policy with London based decisions. HMRC is a good example of this where we are seeing the centralisation of jobs within big city centres, in Cardiff, Swansea and Wrexham. We do not dispute that there is a short term saving to be made in terms of accommodation costs but, on the other hand, it is a high price to pay. These jobs are lost to local economies for good. In many cases, the Civil Service is the mainstay of some of these local economies. There is an environmental cost in terms of our congested roads into our city centres being even more congested and there is the loss of that face to face public service which we think should be provided in addition to all the other modernising facilities that we provide. There are two governments here with diametrically opposed policies, with the UK government, we believe, undermining the other government in terms of what it is trying to achieve with objective one funding in particular. These jobs will have to be replaced when they go. It seems pretty nonsensical to us that we are using Objective 1 money to replace jobs which are being taken away by a government in London.

Q130 Nia Griffith: Obviously you are campaigning very hard against any proposed cuts. What would you see as the role of the PCS and other unions in assisting the people who are affected?

Mr Lazenby: In terms of finding new employment?

Q131 Nia Griffith: What other remit would you see for the union, apart from protection of the jobs, which is key to you?

Mr Lazenby: The key job of all our members right across the board is to serve the public, be it with passports, tax, benefits or whatever. We are a public service. One of the things that we have found very strongly while spending a few hours on a Saturday morning or afternoon inviting the public to comment on the proposals that have been made by more than one department is that the public value very highly that local service that we provide. They are very loath to see it go. I have had something of the order of 500 responses to a survey that we put out and all barring one member of the public wished to keep a face to face service and to have a choice of how they do their business with government. Yes, there is a place for electronic business and phone business but there is also a very big space for properly trained, highly skilled, face to face service in the light of what is, after all, exceptionally complex legislation that the public have to deal with.

Q132 Albert Owen: You have both mentioned the fact that there is a need for computer centres and call centres, et cetera. They could be placed in North West Wales and in other areas. You said we needed a debate. I presume you are in the middle of a debate. What is the non-joined up thinking between the two governments? Is your union as one on this? Is it felt just that the two governments have a different view or is there competing competition from some of your members in the city as well?

Mr Lazenby: No. We have been working very closely. There are four branches working very closely together in Wales and our colleagues in South East Wales whose branch includes the tower in Llanishen have published proposals, with us, that concede the release of 300 jobs from Llanishen to outlying offices in the valleys and West Wales. We believe that that would be beneficial to the department in terms of efficiency savings because estate costs in towns like Llanelli and Pontypridd et cetera are cheaper than they are in Cardiff. You could probably empty one of the three phase developments in Llanishen and let it out. The department takes the view that 75% of their people, as they put it, work in large cities. That might be the case but not all that 75% live in the big cities. An awful lot of them have to commute. We know from a survey done in South East Wales that there are members of ours in Pontypridd, Bridgend, Merthyr, Central and West Wales who would welcome the opportunity to work in the locality. Clearly, there is an environmental issue here. I have surveyed my members on how they travel to work currently from West Wales and how they would have to travel in the future. If Llanelli were to be closed and staff relocated to Swansea, there would be a fourfold increase in carbon emissions in tonnes per year. If Haverfordwest were to close, it would be something in the order of five fold. Aberystwyth goes through the ceiling. We obtained an answer from the department which I hope will give the Committee some sense of the department's lack of joined up thinking, because the department has committed itself to sustainable development, to cutting its carbon emissions. The question was asked of the department: are carbon issues considered when relocating staff and should the department not consider providing carbon offset arrangements where such moves create large, additional footprints? The answer came back: "I believe we have to make the best use of our existing estate, bearing in mind that most of our business streams wish to concentrate their work in a smaller number of offices. Although the closure of offices may mean additional travelling time for some people, by reducing the number of offices we occupy and using the remaining office space more efficiently, we will reduce our heating, lighting, IT equipment, emissions and so reduce our carbon footprint." That might be the case if they were to knock the buildings down and plant a few trees and flowers but that is not going to happen. The buildings will be sold by Mapeley. The office estate is owned by Mapeley, a company based in the British Virgin Islands which happens to be a tax haven. This means they do not pay any corporation tax on the rental income they receive.

Q133 Albert Owen: Whilst the environment is a huge issue, as is travel to work, there is also a big issue in Wales as well about centralising the north to Wrexham and there is a linguistic issue. Do you have a comment on that?

Mr Lazenby: The Welsh language unit is presently based in Porthmadog and that is earmarked for closure under these proposals. The Welsh language issue is a massive one. In counties such as Ceredigion, Carmarthenshire and Gwynedd there is a high number of Welsh speakers in proportion to the population. The Welsh language issue was a massive issue on the picket lines when we had the dispute last week. At offices like Aberystwyth, Carmarthen, Llanelli and North Wales as well, people value the fact that they can come in to a local office and converse with staff in the language that they choose to speak in. The Committee might be interested to know that the call centre for the Department of Work and Pensions which is based in Pembroke Dock does not take any calls from Welsh benefit claimants; it takes calls from London claimants. Welsh benefit claimants have an office in York. This is the strange logic that seems to apply to the issue.

Q134 Albert Owen: York and Bangor?

Mr Lazenby: Yes.

Q135 Hywel Williams: Can I take you back to the question of the ownership of the estate itself by an offshore - i.e., globalised - company? Do you have any idea as to whether the cost of renting office space is factored into the decisions to close certain offices? Is the fact that it is an offshore company an important issue?

Mr Lazenby: Mapeley have a commitment to reduce the size of their estate by 40%. As a higher officer within the department, I am not party to the discussions between the department and Mapeley. The public are not privy to the discussions between the department and Mapeley because the department always cite commercial confidentiality so we never get to see any of this. The fact is that Mapeley took ownership of the estate under a private financial initiative deal with the ex-Customs and Excise. They do not pay a penny in corporation tax because they are based offshore. When they sell the estate they will not pay a penny in capital gains tax. One can imagine, with the appreciation of the value of the estate, that is likely to amount to a fair bit of revenue loss for the Exchequer. From our perspective as Welsh trade unionists representing our members and the public it simply beggars belief that the department and the agency responsible for the correct assessment and collection of all duties in this country should sell their estate to a company that is based in a tax haven. You could not make it up.

Hywel Williams: You might not know a lot about it as a representative of workers and I as a representative of my constituency might not know but that is a comment.

Q136 Mr David Jones: As a matter of clarification, how much of the estate is owned by Mapeley?

Mr Lazenby: In our branch in South West Wales, Haverfordwest, Swansea and Bridgend are owned by Mapeley. Llanelli is in joint occupation with the Department for Work and Pensions and that building is owned by a company called Trilliom because there was a similar PFI deal within the Department for Work and Pensions. Aberystwyth I believe is leased from BT. Not every building in Wales is owned by Mapeley. Where we have joint occupation - for example, the Welsh Assembly buildings in Pixel Terrace in Carmarthen - that is their building and we lease space from them. Where HM Revenue and Customs, the two old departments, are the major occupiers of those buildings, which is the majority of buildings within Wales, then Mapeley would be the estate owner. If we are talking about efficiencies and best use of money, there is in Haverfordwest half of a building lying completely empty because the social security office there is closed. There are four floors empty in Pontypridd doing absolutely nothing. There is an entire floor in Llanelli doing absolutely nothing. We can make far better use of the estate than we presently do and the use of that estate in what are economically disadvantaged areas would save the department money, in our opinion.

Q137 Chairman: How can sectors like your own in Wales which are facing serious rationalisation position themselves, if they can, to take advantage of any positive features of globalisation?

Mr Evans: We talked about skills and the importance of upskilling the workforce. The message we would like is, firstly, that there is a role for government to treat its own workforce in a proper way. We do not think that is happening at the moment. There is a difference between the UK government's approach and the Welsh Assembly government's approach on this, where the Welsh Assembly government are treating public sector staff with the priority that they deserve, given that they are delivering policies for the government. We have a far closer relationship with them and it is a model that the UK government could be using. We would like to see a much better partnership between the unions and management in our particular sector. At the moment we are in dispute and that is very sad. We took strike action and a lot of low paid members lost a day's pay last week. We would rather not be in this situation. It is very difficult to look at any bright light at the end of the tunnel at the moment. The message for the Committee is that PCS want to deliver world class public services for the Welsh public. We are not afraid of modernisation. We believe there is a common agenda in terms of skills in particular. With that collaboration and cooperation between us, that is the way forward which our members and the public would want to see.

Q138 Chairman: I am tempted to ask a further question but I will pose it to you and maybe you can reflect on it and write to us. This is an inquiry about globalisation but implicit in that word is the antithesis of it and that is localisation. Much of what you have been describing to us is the virtue of localisation. Is there any increase in home working? Is the union promoting that? Is it part of its wider strategy? Maybe you could reflect on all of that and write to us about the union's developing strategy in relation to globalisation and localisation and how that relates to those areas in Wales like the valleys and West Wales which objective one is trying to help in terms of employment prospects.

Mr Evans: Absolutely. The answer to that question is simply yes. The union is very supportive of flexible working and home working in the context of localism. With IT developments, there is no longer any reason for large, centralised government departments. Times have moved on.

Chairman: We would be very interested to receive a further memorandum from you on that particular subject. Thank you very much for your evidence today.