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

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

WELSH AFFAIRS COMMITTEE

Globalisation and its impact on Wales

Tuesday 13 March 2007

MR ANDREW DAVIES AM, MR JAMES PRICE and MR ROB HALFORD

MR CLIVE DAVENPORT, MR RUSSELL LAWSON and MR BEN COTTAM

Evidence heard in Public Questions 384 - 456

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Welsh Affairs Committee

on Tuesday 13 March 2007

Members present

Dr Hywel Francis, in the Chair

Nia Griffith

Mrs Siān C James

Mr David Jones

Hywel Williams

Mark Williams

________________

Memorandum submitted by Andrew Davies AM

Examination of Witnesses

Witnesses: Andrew Davies AM, Minister for Enterprise, Innovation and Networks, Mr James Price, Director for Policy and Strategy, and Mr Rob Halford, Principal Policy Analyst, Welsh Assembly Government, gave evidence.

Q384 Chairman: Good morning. Welcome back to the Welsh Affairs Committee, Minister. For the record, could you introduce yourself and your colleagues, please.

Andrew Davies: Good morning, Chair. Good morning, colleagues. Andrew Davies, Minister for Enterprise, Innovation and Networks in the Welsh Assembly Government. I am joined by James Price, one of my officials, who is the Director of the Policy and Strategy Group within my Department, and Rob Halford who is the Principal Policy Analyst in the Policy and Strategy Group.

Q385 Chairman: Minister, in your memorandum you note that the Assembly Government is "introducing sweeping changes in [the Assembly's] approach to business support." After a year of progress in terms of reorganisation could you explain to us what has been happening, particularly in the context of this inquiry on globalisation.

Andrew Davies: The rationale behind the changes goes back to the decision by the First Minister Rhodri Morgan in terms of the merger of the former ASPBs, the WDA, the Welsh Tourist Board and their Forum Training Agency. After that decision, I had something like 100 meetings with business representatives across Wales and they said that dealing with government public sector in Wales in terms of the development of business support was very complex; there was a huge amount of duplication and confusion but in many cases the public sector provide products and services rather than analysing what a business wanted. We have moved increasingly towards a demand-led rather than a supply-led system. We are looking very closely in terms of the interventions we make as a government at where we can add value. We are looking at issues such as the return on the investment and the value we are adding through our support and interventions. We are streamlining business support; for example, we have lots of grant schemes: regional selection assistance, survey investment grant, property development grant, innovation support through SMART Cymru, and we are moving towards a single flexible investment fund whereby we can provide a financial package which is dependent on businesses' needs and not on what we, as a government, think they should need, and also towards an investment culture and away from a subsidy culture and a grant culture. We are exploring, for example, through property interventions with the WITS project, joint ventures through which, again, we can get a greater return for taxpayers' investment rather than giving a straight grant. There are two other fundamental principles: that public sector intervention should only be made where the market is not working, so that if the private sector is providing a solution for business support then the public sector should exit and seek to complement what the private sector is doing, and, also, developing very clearly a system of support for business which is based on account and relationship management. Up until last year, many of the staff in my department were not customer-facing: they were running programmes and products rather than being customer-facing. The whole package is really moving towards a demand-led system, helping to create a climate which encourages and develops business competitiveness.

Q386 Chairman: Looking back on the 1970s and reflecting on the success of the Welsh Development Agency, in terms of inward investment in an earlier period of rapid globalisation, how are you being proactive in that sense? Notwithstanding everything you have said, how are you responding to that increasing challenge of globalisation? Are these changes a response to that as well?

Andrew Davies: Very much so. I felt our previous inward investment strategy was misplaced. It was based on an old understanding of failed direct investment. With increasing globalisation and the rapid pressure, particularly, but not exclusively, on manufacturing - the service industries as well are experiencing the same global pressures - we needed to ensure that our strategies were following the way of the market and our competitive position was moving; for example, we establishing new overseas operations, International Business Wales, which brought together the former international division of the WDA and the Wales Trade International, the export arm of the Assembly Government, into one overseas body.

Q387 Chairman: Could we move on to Objective 1. How successful has Objective 1 funding been? What lessons are there for the new round of European Structural Fund Programmes in this wider context of globalisation?

Andrew Davies: In terms of Objective 1, I think we have been very successful both on the management of the programme but also the impact it is having in West Wales and the Valleys. We have now committed 100 per cent to the Objective 1 grant, which, with matched funding, leads to a total investment of £3.2 billion. An independent external evaluation of the programme estimated that by the end of the programme in 2008-09, over 40,000 net jobs will have been created; 85,000 people in West Wales and the Valleys will have been helped into employment through skills training and other interventions; and just under 2,000 small and medium sized enterprises will have been established. Also, if you look at employment growth, if you look at the reduction in unemployment and economic inactivity and, in terms of earnings, particularly at gross domestic household income, West Valleys and the Valleys has outperformed the rest of Wales, and in most instances has slightly outperformed the UK at a UK level. In terms of its impact on management, it has been very successful. That has been signalled by the fact that the European Commissioner, last autumn, allowed Wales for its present convergence programme - and to the best of my knowledge we are the only part of the European Union who would be allowed - to self-audit our European funding programmes, which I think is a vote of confidence in our management of the programme.

Q388 Hywel Williams: Minister, what has happened to GDP GVA during the first period of Objective 1? Do you foresee any change in that strength during the new period?

Andrew Davies: Yes. If you look at the latest Eurostat figures there has been a bigger growth in GVA per capita in West Wales and the Valleys than the rest of the United Kingdom.

Q389 Hywel Williams: What do you foresee happening in the oncoming period?

Andrew Davies: All other things being equal, I would imagine that the substantial progress we have made would be continued in the future. We have learned a lot of lessons from the previous round of Objective 1. The overwhelming conclusion is that we need fewer but larger and more strategic projects. If you take all the European funding programmes, Objective 1, 2 and 3, the Inter-reg and all the others, we estimate that something like 3,000 projects have been funded. We think that is a very inefficient use of that investment and that is why we are moving towards fewer, larger but more strategic projects and interventions, which is in line with my response to the first question of where we can add value to the process. We would then expect that we would be creating more jobs and more highly paid jobs as well.

Q390 Mr Jones: Minister, could you give us an example of the larger scale projects you have in mind?

Andrew Davies: One of the most successful programmes under the Objective 1 programme, which we very much expect to be continued under the convergence programme, are programmes like Finance Wales, which is a joint venture between what was the WDA and is now simply the Government and Barclays Bank. One of the weaknesses we have in the Welsh economy is that we have very few financial institutions, unlike the Scots, and Finance Wales was a clear attempt to make up for that market failure of providing financial support to companies, investment support to companies. I think Finance Wales would be an example of adding capacity and adding value in our support that we can give to companies in Wales.

Q391 Chairman: One aspect of our inquiry is migration patterns, migrant labour. You refer in your business plan to this and you are undertaking some studies and consultations. Could you explain to us what you have done and what learned about this?

Andrew Davies: Our Economic Research Advisor Panel (ERAP) which was established by the First Minister in the first term of the Assembly Government has commissioned research into the impact of migration on the Welsh economy. Perhaps I could ask Rob Halford to supplement that answer.

Mr Halford: There are four separate studies that are either underway or about to commence. The critical issue that these studies are seeking to understand is the incidence of migrant labour in the first case. It is a very dynamic picture in Wales and it is very difficult to establish precisely how many migrant workers there are. It changes on a weekly if not monthly basis. The Accession Monitoring Report, which is a Home Office Department of Work and Pensions report, estimated that in the period May 2004 to June 2006 there were in the order of 10,700 legal migrant workers in Wales. If you add to that the pro-rata number of individuals that were self-employed within the UK, it brought the figure to around 14,500, but that figure, as I have indicated, was changing on a weekly basis. Clearly one of the primary issues is to establish quite how many legal immigrants there are, and then, on the back of that, to understand some of the characteristics in terms of their needs and the impact they may have not only from an economic perspective but in terms of their demand on social services and so on.

Q392 Chairman: Could you explain in a little more detail what these four studies are and who is undertaking them.

Mr Halford: I am only familiar with one of those studies, which is being undertaken by our Economic Advice Division through consultants. It seeks to analyse the impact of migrants in two local authority areas of Wales and to draw conclusions from that which can inform both the Assembly and its activities but also the potential interventions of local government. I could provide further detail on the other three studies if that would be helpful.

Q393 Mr Jones: Mr Davies, you mentioned - and I think it was an estimate - that there were potentially 14,000 migrant workers in Wales. Was there not a report on the BBC news website last week which indicated that that figure was probably significantly low and that it could be as many as ten times that figure?

Mr Halford: Absolutely. That is the reason for this additional study.

Q394 Mr Jones: You really have no clue how many migrant workers there are in Wales.

Mr Halford: It is certainly very difficult to establish a precise number.

Q395 Mr Jones: And you accept that there could be well over 100,000.

Mr Halford: It is potentially possible.

Q396 Chairman: Minister, do you have any observations on that and how we could be a little more accurate? In our short inquiry we have discovered not only that this is a major issue but the more we explore it the more detail we find and the greater the numbers.

Andrew Davies: As Rob Halford has said, we do not have accurate figures and hence the commissioning of the report. Obviously we can make that information available to you. Certainly, anecdotally, we are aware that in some parts of Wales in certain industries - in the hospitality industry, hotels and restaurants; agricultural workers in the agricultural sector, as well as in food processing (for example, in Merryn Meats in Merthyr Tydfil and Dawn Meats and Dawn Pack in Cross Hands) - there is obviously a significant number of migrant workers. We are aware of that in manufacturing as well. In North East Wales, in Flintshire, when I met the Business Forum on the Wrexham Industrial estate early last year, they were informing me that they estimated about 5,000 accession country workers, particularly Polish workers, were working on the industrial estate. I know from talking to manufacturers - Airbus, Sharp, Toyota - that they also employ a significant number. Clearly we do not have information at the moment. They are based on estimates. Many businesses see the access to migrant workers as a very important factor in their continued growth and remaining competitive. Access to highly skilled and highly committed workers is vital for them. Obviously that is one of the benefits of being part of the European Union, having access to a wider pool of labour.

Q397 Chairman: Are you finding that those businesses are happy to come forward with evidence as you indicate or is the impression we are getting that it is variable in their desire to share information?

Andrew Davies: Certainly I am not aware that they have ever resisted discussing it. The ones I have spoken to have always been very open about the fact that they have employed Polish workers and Portuguese workers and have said clearly that if they were not able to access that source of labour their continued growth would be under a threat.

Q398 Mr Jones: Mr Davies, you mentioned the hospitality industry. I know from the part of the world I come from that there is a significant number of overseas workers working, for example, in Llandudno in the hospitality area. Not all of those are coming from EU countries. I know, for example, that some of them are coming from the Ukraine in Russia which are not EU States. Do you have any evidence at all as to the extent to which there maybe illegal migrants working within, particularly, the hospitality industry in Wales?

Andrew Davies: I am not aware of any evidence that there is a significant factor or a significant issue to be addressed. Clearly the hospitality industry, as you have quite rightly said, employs people from a wide range of countries, including Australasia. I am aware in West Wales of people from Australia and New Zealand who are working in hotels and restaurants. When it comes to the use of illegal immigrants, I am not aware there is a significant issue.

Q399 Mr Jones: Does your Department collect figures on the extent to which illegal migrants are working in Wales?

Andrew Davies: No. I would say it is a non-devolved matter in terms of work in this area. Certainly we do not collect them. I am not aware that we have any statistics that we could quote.

Q400 Mark Williams: Turning to your Department's work in the area of research and innovation, what are you doing to encourage stronger links between industry and the science base to develop those links and to enable the new technologies to be exploited by business? Perhaps you could give us some detail in terms of the work of the technology and innovation team and the Innovation Action Plan.

Andrew Davies: I see innovation as key in continuing the transformation of the Welsh economy away from a heavy industry base, based on industries such as coal, steel, agriculture, mining and quarrying, to one which is increasingly knowledge based. That is why I established the Innovation Action Plan for Wales and why we have now developed a science policy. In terms of the development of the science policy - and again we can make this available to the Committee - we are increasingly emphasising investment in higher education institutions, the links to the knowledge economy. For example, investments such as the Institute of Life Science at Swansea University, a joint venture between ourselves, the university and IBM, a £50 million joint venture which includes Objective 1 funding. It is aligning our strategies and actions so that we are able to maximise the investment through government interventions, through, for example, higher education, and developing links between universities and our businesses. We have found this is true for industries such as Corus, where we have a very successful programme for linking graduates to the industry, and with a company in the same area, in Port Talbot, in Baglan Bay, a Spanish company called Envases which makes aluminium aerosols for the pharmaceutical and cosmetic industry. Once again, one of the reasons they are investing there is because of the links to the Materials Science Department at Swansea University. In terms of mainstream support in innovation, we are enhancing innovation. That is one of the reasons why the title of my Department contains "innovation" because we see it as a priority. There is a whole area of intervention in innovation centres, specialist R&D centres, such as the technium centres, the all-Wales network of high-tech incubation centres, such as OpTIC Technium, and the massive Technium CAST at Bangor.

Q401 Mark Williams: We were in Port Talbot last week. There was, I suppose, a slight frustration really, seeing the number of empty units on a site like that. I know that is the experience of the technium in Aberystwyth as well. There is very good work going on, but it is the pace of it. Perhaps some of us are naturally impatient, I do not know.

Andrew Davies: The Sustainable Technologies Technium has not seen the growth that other technium centres have experienced. The original techniums in Swansea, the OpTIC Technium and CAST Technium in North Wales have both been very successful in attracting tenants and high growth potential companies.

Q402 Mark Williams: Is there any reason for that in those areas?

Andrew Davies: The Sustainable Technologies Technium is still a relatively new building. James may be able to tell you when it became operational and was commissioned.

Mr Price: I think it was within the last 12 months.

Andrew Davies: It is still quite early days. Clearly it is always a balance. If we were to see that as a conventional property then we could get any company in there, but we have been very clear that for companies to be able to enter the technium site they have to fulfil very strict criteria. There are missions in terms of high-growth potential and the type of companies we would want to be tenants. In fact, there has been some criticism by some companies that because they have not been able to fulfil the criteria therefore we have not allowed them to become tenants. This has been true in the Aber Technium as well as others.

Q403 Mark Williams: And probably Parc Aberporth as well.

Andrew Davies: Parc Aberforth, yes. A classic example of government intervention round an area where we have, I think, a competitive advantage: a unique testing facility for UAVs on the former MoD site. But, again, we are seeing a lot of commercial interest in a key growth sector. At last year's UAV day in July, we were able to signal two or three tenants coming in to Parc Aberforth Business Centre. On innovation generally, we can make more information available for you about the whole range of interventions we are making. Again it is a point I was making in my first response: it is making sure that as a government and the public sector we are adding value to the economy, not competing with a network, and helping companies to become increasingly competitive through the application of innovation. Whether that is research and development or working with SMART and using, for example, lead manufacturing principles for the care industry, aerospace and a range of other manufacturing sectors.

Q404 Mark Williams: The SMART Cymru funding initially is part funding from Objective 1. How do you envisage the continued funding of SMART Cymru? How much of a priority is that?

Andrew Davies: It is a key priority. We have already streamlined the SMART Cymru grant process. It used to be three or four different funding streams which we simplified into SMART Cymru, just one innovation grant, but we clearly feel there is a need for greater flexibility. It comes back to the point I made about having a single flexible investment fund. Rather than the public sector saying to companies, "We can provide you with X product and Y product" we would now analyse what the needs of a company are and be able to provide the financial and other business support package that they require not what the public sector thinks they need. Part of that obviously will be an emphasis on innovation through SMART Cymru.

Q405 Mark Williams: You are confident that the budget is going to be sufficient.

Andrew Davies: In any area, whether it is transport investment or any other, you could always make an argument for more but, as ever, for my budget for my department we have to make funding decisions. Clearly we see the convergence programme and, to a lesser extent, the competitiveness programme as an opportunity to enhance significantly the investment we are able to make. We are in negotiations with the European Commission now about the convergence programme but clearly the emphasis of the convergence and competitiveness programmes will be the Lisbon Agenda. We are negotiating with the European Commission at this very moment the allocations but clearly the overwhelming bulk of the funding will go the Lisbon Agenda, which will mean a higher emphasis on innovation and research and development. Certainly we are at one with the Commission on that.

Q406 Hywel Williams: I would like to ask you about transport and infrastructure investment. What improvements do you think are needed to the transport infrastructure to make sure business locates in Wales successfully?

Andrew Davies: In the recent report commissioned by Secretary of State for Transport and the Chancellor, the Eddington Review, by Sir Rod Eddington, Eddington's fundamental conclusion was that the existing transport infrastructure is sound and in the right place, it is just that we need to use it more effectively. I agree with Rod Eddington's conclusions. That is why the bulk of our investment is going into improving the existing infrastructure. The scale of investment is very significant. In 2000 the Government were spending about £200 million on transport investment. This current financial year it is over £500 million, which is about one-third of my total budget. That is a very significant investment in all transport modes. In rail, for example, we are increasing capacity on the most congested parts of our network, and that is in the Cardiff Valleys area. We are investing, for example, in new passenger services. The Abervale passenger services will reopen the Abervale line later this year. That will be the first time those lines will have carried passenger services since the cuts at the end of the 1960s. We are increasing capacity on the Abervale line, the Merthyr line, the Rumney Valley line, lengthening stations, investing in more rolling stock with the Arriva Trains franchise - which I am now responsible for the management of - as well as improving reliability and efficiency. I see my role as a Minister holding Arriva Trains Wales to account for the expenditure, the very significant expenditure, of £140 million subsidy to Arriva this year. Their performance has improved very significantly. The latest PPM was nearly 90% which is the highest figure they have performed at. It is investment in increasing capacity and quality. On road, it is increasing capacity where we have the biggest constraints on our rail network. That is in North East Wales, in the Deeside area, and also in South East Wales, where the biggest problems of congestion arise. That is why I made the decision in my transport review in December 2004 to go ahead with the new M4 south of Newport, where the biggest problems of congestion are experienced, as well as other significant investments in our road infrastructure, both in trunk road and local road networks. In air services, as well, we are trying to increase the number of destinations. For example, from Cardiff Airport, through the developed use of the Route Development Fund, we are opening up more destinations, and also within Wales announcing the start of the North-South Air Service recently from Cardiff Airport to RAF Valley in Anglesey. Again, we are investing in improving capacity and increasing capacity of whatever the transport mode is.

Q407 Hywel Williams: All that investment is extremely welcome. I am sure in my constituency we will have some benefit from improvements to the A55. However, the point you made about North Wales/South Wales link is one that interests me for obvious reasons. We did have evidence from Outwood(?) Insurance some time ago. When questioned by Mr Jones as to whether, as a successful Welsh company expanding to the west and east, they had ever considered going north, they said they were extremely unlikely to do so. When you are promoting foreign investment into Wales, are you promoting Wales as an integrated economy or two corridors with not a lot in the middle?

Andrew Davies: We would promote any part of Wales depending on the competitive advantage of an area. Mark Williams made reference to Parc Aberforth. That is a unique facility in mid-West Wales which is unparalleled in the UK, let alone in any other part of Wales. Clearly we promote Gwyneth as a location and we have been very successful. I mentioned Technium CAST at Parc Menai. There are two inward investment projects there: Inspired Broadcast with a large amount of jobs and similarly Brand Sauce another inward investment with about 30 jobs there. Again the reason we are able to attract them to places like Bangor is because of the proximity to the university and the availability of the highly skilled, committed workforce as well as quality of life. It is promoting different parts of Wales depending on their particular advantages and competitive advantage.

Q408 Mr Jones: Mr Davies, you mentioned the Bangor to Cardiff air service which is heavily subsidised. Can you assist the Committee by telling us the extent to which each passenger is subsidised by public money?

Andrew Davies: I cannot give those figures because obviously it would depend on the patronage of the service, but the rationale beside the North-South Air Service and the use of subsidy is that normally within European Commission rules you are not allowed to subsidise commercial air services. However, the European Commission do allow, in what are termed peripheral areas, for air services to be subsidised for a time-limited period. It is what is known as a public service obligation. This has been used very successfully in Ireland and in the Highlands and islands of Scotland. The annual subsidy will be in the region of £1 million a year. We very much hope and expect that after the end of the three-year period the service will be commercially viable. There is obviously the opportunity to extend the network with possible flights not just from Cardiff to Anglesey but from Anglesey to Dublin and possibly other destinations as well.

Q409 Mr Jones: How many passengers would be accommodated in the aircraft that are operating on this route?

Andrew Davies: It is a small plane. It is in the region of a 20-seater, initially, but of course there is the capacity for the airline in this case to increase the size of the plane. This has been the experience in Ireland, for example, where an airline company has been very successful in exploiting PSOs in Ireland. They started initially with a small plane and in most cases they have increased the capacity.

Q410 Mr Jones: Could you possibly assist the Committee further by writing to the Chairman with the calculation of the level of subsidy per passenger over a 12-month period of the basis that the plane is fully occupied?

Andrew Davies: Yes, certainly.

Q411 Mrs James: One of the things that is particularly concerning us in the West Wales area is cross-border services, the fact that First Great Western franchise remains a Westminster franchise and within Wales rail is obviously a devolved issue now. I am wondering if there are any problems or issues that might cause constraint to future business development.

Andrew Davies: Clearly transport is key. For South Wales, North Wales mainline services between Holyhead, North Wales and London Euston are run by Virgin, whereas in South Wales they are run by First Great Western. My concerns are public. I feel that the service is not what we require. The South Wales mainline service is the worst performing aspect of First Great Western franchise, regrettably. Certainly from the point of view of an Enterprise Minister, it is not helpful having a service which is not as reliable as one would expect. Unlike in Scotland where there are alternatives - obviously people can travel to Edinburgh and Glasgow by plane - we do not have that opportunity in South Wales, particularly to our capital. There are no London-Cardiff airport services. Air services are very important and anything which undermines that competition position, such as unreliable services, is not helpful.

Q412 Mark Williams: On the subject of reliability, I would like to return to Arriva Trains and mid-Wales. How closely are you monitoring the position? It strikes me that one of the barriers there, notwithstanding the provision of the hourly services we are going to see soon, is that there is still a huge amount of concern locally which is inevitably going to have an effect on attracting business to the area.

Andrew Davies: It does relate to the point Siān James made about cross-border services. As you are aware, on the service from Aberystwyth to Birmingham the major constraint we have is that of infrastructure problems in the West Midlands. Obviously my room for manoeuvre or intervention is limited in terms of the network in England but, where we do have responsibility, we have increased capacity, as you are aware. We have introduced a temporary increase in capacity in terms of the number of carriages on certain services and we will continue with that extra investment. We have been working very closely with Network Rail and Arriva Trains to improve performance. Unfortunately, the Cumbrian line is the worst performing part of the Arriva Trains network. It is something they accept and we have been working very hard to address those concerns but it does depend on additional investment in the West Midlands. Unfortunately it is not something I have any control over.

Q413 Hywel Williams: Could I pursue that for a moment. The split between the Assembly's responsibilities and Westminster's responsibilities was a deliberate choice and we were assured at the time that there would be the closest cooperation between Cardiff and Westminster on these sorts of issues. What is your assessment of the quality of your relationship with ministers here? You have said that your room for manoeuvre is limited. Give me an assessment: is it limited or is it the closest and fullest and most fruitful cooperation possible, as we were assured would happen?

Andrew Davies: When I said my room for manoeuvre is limited, I meant that as a Minister in Wales I can obviously not make investment. My room for intervention is limited in terms of investment in infrastructure in England, but the relationship with the Department of Transport I think is good. There is a recognition by DfT that with the First Great Western franchise, for example, there is room for very significant improvement. We continue with DfT to make sure that First Great Western continue to improve.

Chairman: Could I ask my colleagues to focus on globalisation and away from localisation. I am very grateful to you, Minister, for your patience, but I am getting a little impatient now, so let us press on.

Q414 Hywel Williams: What is the Welsh Assembly Government doing to stimulate the development of successful business clusters in Wales?

Andrew Davies: Again, it is taking a very different approach, which I suppose could be characterised previously by the one-size-fits-all approach, in terms of business support. We are increasingly emphasising a sectoral approach. For example, in the automotive sector we established under the former WDI, but it is something we have continued, the Wales Automotive Forum. And, similarly, in the aerospace sector, the Wales Aerospace Forum and, in electronics sector, the Welsh Electronics Forum. We have also done it in other sectors as well, in relation to call centres and financial services. It is taking a sectoral approach. We are working very closely with my colleague Jane Davidson, the Minister for Education, Lifelong Learning and Skills, and the development of Sector Skills Councils, again, realigning our support, whether it is financial investment or skill support to the needs of businesses.

Q415 Nia Griffith: That moves us nicely on to the skills agenda. We have seen for ourselves in our visits as well as hearing evidence of how much difference skills can make to the survival of companies. We have noted that in your memorandum you referred to inward investors which "have located and embedded themselves in Wales with strong links to universities and well developed local supply chains." How have those links been encouraged and developed? Do you have any particular examples you can give us?

Andrew Davies: One example would be the automotive sector. That is probably the area of manufacturing which has experienced the most competitive pressures. Through the Wales Automotive Forum, working with industry, we have helped through programmes such as the Accelerate Wales Programme to spread best practice, for example, to the introduction of lead manufacturing principles, looking at ways in which we can increase efficiencies, improve productivity and individual companies, and also, in helping companies diversify. For example, when MG Rover was experiencing difficulties in 2000 there were several companies in the automotive sector in Wales who had all their eggs in one basket; ie, MG Rover. Through the Wales Automotive Forum and the Accelerate Wales Programme we were able to help those companies diversify so that they had a much wider customer base, so that regrettably, when MG Rover finally expired as a company, the number of companies in Wales which were overexposed to that demise was very few. I think there were only one or two. Obviously one of them was in your constituency, Camford, and there were others, such as TRW, but that was a significantly smaller number than were originally exposed. We work also with companies like the Ford Motor Company. One of the advantages of having major companies like Ford is that they can drive best practice through their supply chain. When I worked with the Ford Motor Company, for example, in the early 1990s, for a company to be a supplier to Ford they had to sign up to Ford's quality standards. Again, that was one way in which changed lead manufacturing principles, more efficient working, was driven throughout the companies and industry sector. I do not know if Rob would want to add anything to that.

Mr Halford: I think the Minister touched earlier upon the significance of higher education establishments in terms of the attraction of inward investment and as part of the process of introducing an inward investor to an area early links would be made with such establishments. It is no more sophisticated in some cases than simply the account manager or the relationship manager dealing with that inward investor, ensuring that there is an adequate degree of aftercare and management, and through that process ensuring that the links develop. In some instances, it is a natural process of individual companies arriving and developing linkages and then building upon those linkages.

Andrew Davies: I gave an example earlier on of Envases, a Spanish company in Bangor. One of the reasons they are expanding and continue to expand is because of the links to the Materials Science Department at Swansea University. Again, there are lots of examples of that. I mentioned Inspired Broadcast at Park Menai and the reasons they have invested in Bangor is the proximity to the university. Similarly, with many of the companies in the photonic centre who are investing in St Asaph in North Wales is not only the clustering effect of the optic electronic sector, it is also access to the university R&D, for example at Bangor University.

Q416 Nia Griffith: You mentioned about improvements right the way through from foundation years to older workers. How exactly is this trend going to work in practice? Are there any particular examples you can give us of up-skilling in the work place?

Andrew Davies: Again, it is increasingly moving towards a demand-led system as opposed to a supply-led system. The education system, for example at the further education level, could be described as colleges providing courses which they think business wants. With the development of sector skills councils that is going to be increasingly demand-led; that is, on what local industry and local businesses need in order to remain and to become even more positive. It is also achieved through the education system; for example, the development of the Welsh Baccalaureate, giving greater equality between the vocational and the academic, and also through our Learning Pathways Programme, again encouraging young people to look at vocational opportunities as well as the more traditional academic routes, and also through the 14-19 agenda, which is a new departure in Wales. So it is a quite fundamental change in the education system to one where there is increasing emphasis on the vocational element and one, again, which is tuned into the needs of the local economy.

Mr Halford: I think the interesting thing is that in those sectors that are under global pressure, global competition, particularly sectors like manufacturing, it is becoming increasingly clear that the differential between Wales and other locations is the skills base that we have or are developing. One particularly good example is a company previously known as Ina Bearings, now known as Schaeffler UK, which is in your area. The issue there is that this is a company which is part of a privately owned, multinational group and it is competing for investment within that group. When we talk about globalisation, very often we see that as being about companies moving plants around the globe, but many multinationals are looking at which plants within their group they allocate investment to, so you need to win the investment race not just in terms of new companies coming in but in terms of the retention of companies that you already have. In the case of Ina Bearings,, they recognised that they had the same facilities, the same machinery in Llanelli as they did in other parts of the group, and clearly the issue that would differentiate them was the productivity of their people. They embarked upon a fairly innovative programme of training and development where they identified that the key to success was that the rate of learning should be greater than the rate of change, but if they were able to affect a change in the mindsets of their people and the engagement of their people and develop their skill bases to a point where they were more productive than those in competitor plants within the group then they would continue to attract investment. That has certainly been the case and that company in a very, very competitive market continues to attract that investment and the jobs that they have there have been safeguarded. Regrettably, in that particular sector it is not necessarily a recipe for creating additional jobs, but certainly they have stemmed the outflow of jobs and are a very good example. There are a couple of other examples. Sharp Manufacturing in Wrexham plans to expand its photovoltaic solar module capacity and again attributed that very much to the skills of its workforce. Interestingly, in Wales we have particular problems in the area of basic skills. We have quite high levels of graduate output, slightly lower than the rest of the UK, but we have a long tail of low skills. Trevor Ball Bonded Seals at Newtown, which is in the business of making seals for the automotive sector, engaged in the Welsh Assembly Government's basic skills pledge and through that were supported in the development of their workforce. They report now that productivity has improved by 40% and a projected £1 million loss has now been turned into a profit. Twenty-nine of the firm's 59 employees have attended training course developing their basic skills. Again, this seems to be contributing significantly to the performance of that company, which underlines the mantra that skills are increasingly important in terms of differentiating our competitive position.

Q417 Nia Griffith: We were very impressed by Schaeffler/Ina Bearings last week. I believe we are hoping to visit Sharp shortly.

Andrew Davies: The Leech report we see as absolutely central. Increasingly the link between economic performance and skills is the crucial one. We recently had a Leech conference in Cardiff. Sir Digby Jones was there and he was very complementary about the progress we have made on a whole range of areas but we do have significant challenges. Rob has mentioned about basic skills and we do have a very long low-skills tail. The other crucial area, of course, is leadership management development where there are clearly big challenges as well.

Q418 Mrs James: During the course of the inquiry, we have heard a lot of evidence and we have visited a lot of companies where we have talked about this basic skills gap and of linking in as soon as possible with local schools, local primary schools, even. We saw some examples in Schaeffler with games in local primary schools. I am very concerned about the nature of this project. Here we have a huge project. Should we not be starting now, working with local colleges, local schools, et cetera? What plans are under way?

Andrew Davies: Very much so. One of the key factors that helped us - and although it was not a government project, we supported the Metrix Consortium - was our ability to answer the queries about the local supply of skills, the connection with local colleges, both further and higher education. In fact, when we had the launch in support of the Metrix bid here in Portcullis House, it was very significant that there were many FE and HE colleges in the room in support of that bid. A key factor in the Metrix Consortium winning the bid was the tie in to the pool of labour in terms of skills but also the access to higher and further education expertise.

Q419 Mrs James: You have talked about the education agenda. Do you think possibly we should be a little more like other parts of Europe, where young people can specialise in more practical skills at an earlier age? What about even primary schools, because in ten years' time those five year olds are going to be thinking about making choices.

Andrew Davies: Very much so. As I said earlier on, our approach is changing in terms of the approach to the Baccalaureate, for example, about parity of esteem between the academic and the vocational, and with Learning Pathways an increasing emphasis of introducing young people to the experience of work, as well as, at an even younger age, through our Five Star Programme, which is about encouraging a more positive attitude to learning amongst the very young children as well. I think it is about a very different approach to the whole gamut of learning.

Q420 Mr Jones: Minister, could I ask you some questions about the Welsh economy. In your memorandum you say, "Wales has seen a remarkable growth in Gross Value Added" and you also say that "growth in GDP per head in Wales has out-paced growth in some of the world's major economies." I suppose that is strictly true, but is the difficulty not that, in relation to the rest of the United Kingdom, Wales has made no progress at all since devolution. In fact, even on the basis of your own memorandum you say, "GVA per head in Wales has increased by 31%, virtually the same as UK growth of 32%." In other words, less than UK growth generally. Is that not a concern to you?

Andrew Davies: The first very significant improvement in the economy over the progress of the development of the Welsh economy. Employment growth has been very significant. 130,000 jobs have been created in Wales since 1999 in the establishment of the Assembly. The fall in unemployment and the fall in economic inactivity in Wales has been faster than the UK average. Factors such as gross domestic household income and a growth in average weekly earnings again has outstripped the rest of the UK. Within that, as I said earlier on, the performance of West Wales and the Valleys, the Objective 1 area, has been very significant indeed. If you look at GVA growth, there has been very significant growth. We certainly have matched the growth in recent years for the UK and when you look at the growth of the UK compared with other major economies then obviously ours is able to benefit from that faster, more sustained growth. The challenge of using GVA, of course, is if you look at the historical perspective there was an 8% drop in relative GVA in Wales during the early 1990s. Obviously the Welsh Assembly was not established then and it was pre the 1997 Government being elected. We have stabilised that relative decline and in fact in the last year there has been an improvement in relative performance. I think that is a very significant development and one we obviously want to build on.

Q421 Mr Jones: I do not know if you have had an opportunity of reading the Western Mail this morning. There is a very interesting answer by Mr Thomas Livingston, the Political Editor, which quotes a report carried out for S G Hambros which says that there is a bleak outlook for the Welsh economy over the next decade, while other parts of the UK will close the wealth gap with London. It says that Wales has the second lowest rate of growth in wealth creation and income-based wealth is growing at the slowest rate of any region in the UK. It concludes by saying that Wales has the least growth of any region in terms of income-based wealth. Is it not the case that the gap is not closing, that Wales in fact remains the poorest part of the UK and on the basis of that report shows no sign of it ever improving.

Andrew Davies: No, I do not think that is true. I cannot comment on the article because I have not read it and I do not know the model that Hambros was using for its prediction. But if you look at, for example, GVA as an indicator, there are problems with it but nevertheless it is the standard one and we do have a longstanding time series which allows comparison. Clearly there are two major elements in the way in which GVA is calculated: compensation for employees (that is the income they receive) on the one hand, and the other is the profits of companies. If you look at the compensation for employees, which is the element that most people would reflect is most important because it reflects living standards, growth in Wales, in terms of compensation for employers, has been very significantly greater than most other parts of the UK, but the element where we have not been so successful is in terms of the profitability of companies. I think that, again, reflects the economic and industrial structure in Wales, whereby we do not have that many large companies whose headquarters are in Wales. On most objective assessments, growth in employment, falling unemployment, increase in average weekly earnings, gross domestic household income, progress has been very substantial. Only last week, the Global Enterprise Monitor, an international global benchmarking study of entrepreneurial activity carried out at the University of Glamorgan, showed again that in terms of entrepreneurial activity Wales has grown. Certainly the latest indicator is that there has been a slight increase in what they call "total entrepreneurial activity" whereas for most of the UK there has been a decline. I think on most indicators the Welsh economy has shown very remarkable resilience, diversity and dynamism.

Q422 Mr Jones: If one has regard to you own memorandum, for example figure 3 on page 3, we see Wales in terms of GVA considerably behind the rest of the UK. Clearly no improvement throughout the whole period from 1999 to 2005. Does that not substantiate the views of Hambros that Wales will continue to lag well behind the rest of the UK for the foreseeable future? As I said in my earlier response, the biggest decline in relative GVA took place during the late 1980s and early 1990s, when of course manufacturing in Wales and much of our industry was closed down. It was the end of our mining industry. From 1979 to 1997, 360,000 manufacturing jobs were lost in Wales. That was an average of 20,000 a year for every year between 1979 and 1997. That is why there was a decline in Wales's relative performance, as indicated by relative GVA. We have halted that decline and in recent years there is every sign that we are beginning to close the gap.

Q423 Hywel Williams: You say in your memorandum that "Wales has been developing its international identity to provide a firm platform from which to pursue [its] economic objectives." Can you tell us how the Assembly Government has developed Wales's international identity and how it will measure the success this has achieved?

Andrew Davies: Yes, we have undertaken a considerable amount of research on Wales's competitive position and identity. That is why we have taken forward a very substantial branding exercise about what is Wales's unique identity and competitive advantage and I suppose it could summed up in the proposition "focused excellence". Wales is a very distinctive part not just of the UK but of Europe, with our own distinctive cultures, very diverse cultures, but clearly the area on which we are able to focus is quality, particularly quality of life but also quality of the workforce. I speak to many, many companies, large companies, global companies, who say the reason why they invest in Wales and continue to invest in Wales is because of the quality of the workforce, which they regard as second to none. Of course, it is not just the quality of the workforce, it is the very low turnover of staff, the very low attrition rate. For a lot of companies, that is a very significant factor, as well as of course other factors which I referred to earlier, for example, access to universities and world class centres of excellence in many of our higher education institutions. Therefore it is building on our unique identity but also maintaining and growing our competitive advantage. That is where, for example, investment in innovation and skills is so important.

Q424 Hywel Williams: You say in your memorandum, on page 7, paragraph 43, that: "Key markets for Wales are the USA, Germany, the Republic o f Ireland, Belgium and France with metals, energy, engineering, chemicals and automotive components being significant sectors." When I asked you about clusters earlier on, you did not mention food and that particular paragraph there does not mention food either. I would invite you to remedy that omission.

Andrew Davies: I do not have lead responsibility in terms of the food industry and agri-food industry, that is Carwyn Jones, my Environment, Planning and Countryside colleague, but clearly we work very closely together. Many companies investing in Wales, for example, were able to provide financial assistance through regional selective assistance, and, again, the promoter we are using, for example, through A Taste of Wales and other programmes, emphasising the quality of the Welsh food products and Welsh food offer. Again, we use that in our overseas trade export activity; for example through trade missions in many parts of the world. Whether it is Welsh lamb or Welsh cheese or other Welsh products, again it is emphasising the distinctiveness and the quality of that offer.

Q425 Hywel Williams: Do you think you should be responsible for enterprising innovation in the food sector rather than Carwyn Jones?

Andrew Davies: No. In the case of food, Carwyn takes all the lead responsibility in terms of farming industry and agriculture but obviously we seek to avoid any silo mentality. We work very closely together on developing the food industry, just like I work very closely with Jane Davidson on developing the skills agenda.

Q426 Mark Williams: In your memorandum you talked about some of the inroads that have been made by international businesses in countries like China and India. Would you elaborate a bit more on the work of International Business Wales and, in particular, any plans you may have to expand the number of countries in which that group is operating?

Andrew Davies: In terms of China, we have organised two trade missions. We have done two a year to China. This year it will be Hong Kong and the Pearl River Delta and Beijing and Shanghai in October of this year. We are also having a stand at HOFEX, the food and drink trade fair in May. The First Minster was in China, Chongqing in March 2006 and signed a memorandum of understanding with that province. It is the fourth largest municipality in China, with 33 million people. Again, it is very much on the basis of the MOUs that we have signed with other parts of the world, particularly the accession countries, Silesia in Poland and also with the Czech Republic It is about developing those economic, political and cultural links. International Business Wales has taken a general trade mission to India every autumn/winter. This year there will be a visit to Delhi and Mumbai in November. There are also sectoral group visits as well. Recently, for example, we hosted a visit by the head of the Indian film institute, which I met, and we discussed again collaboration between our increasingly dynamic creative industry, the film and TV sector, with what is, through Bollywood, the largest film industry in the world - and that is including Hollywood - developing on a sectoral approach those sorts of links. Obviously China and India are huge markets. Again, I made the point earlier on, we cannot attempt to be all things to all people so we have to take a very focused approach. Whether it is geographically - I mentioned links with Chongqing or sectorally, we have to take a very focused approach in terms of developing those international links. We cannot afford to spread our investment and our efforts too thinly.

Q427 Mark Williams: Whether they be sectoral or geographical, what areas are you looking for?

Andrew Davies: Clearly where we think we have a competitive advantage. As I mentioned, the creative industries, where there has been quite significant growth in Wales in film, TV animation - the creative industries generally - and also in areas such as biotechnology, where we have key strengths, and other manufacturing areas, where we, again, have very significant strengths. In the service sector, we see financial services as a big growth area, where we have been very successful and we have exceeded our targets in terms of the growth in financial services. So, again, exploring those international global links.

Q428 Mr Jones: You mentioned the creative industries, but is in not the case that in the year 2005-06 that sector had the worst performance of all, with a decrease in exports of 49%?

Andrew Davies: In terms of exports that may be true, but in terms of the development of the sector in Wales and its contribution to the Welsh economy there has been very significant development. If you take the TV and film sector alone, the growth development through the BBC of Dr Who and the spin-out from that Torchwood, the growth of companies like Tonopolis, the Llanelli-based TV and animation company, which is in the Top-10 UK independent film and TV companies, and the growth of companies such as Green Bay, Boomerang and others. I think there has been very significant growth. I would need to look at the overall contribution in terms of exports, but, again, I can make that information available to the Committee.

Q429 Mr Jones: We have had a memorandum from the FSB which has told us that of the small and medium sized businesses that they represent, under 5% state that they intend to increase their export volume. What is your Department doing to encourage that sort of Welsh company to export and prepare them for trading in global markets?

Andrew Davies: The work was formerly undertaken by Welsh Trade International which is now part of International Business Wales. We run a very comprehensive series of overseas trade missions and we are able to give, for example, financial support to companies to take part in those trade missions. That is one of the successes of the Objective 1 programme. Through Export Assist, which is a European-funded programme, we are able to help small companies, SMEs, to undertake activity in trade missions. I, for example, have accompanied trade missions in the United States. Small companies throughout Wales would not have been able to benefit from access to those markets without the support of International Business Wales. We are also working very closely with the five Export Clubs for Wales. In fact, I was at an International Business Wales event at the Royal Welsh Showground last week, talking to the heads of the five Export Clubs. These are business-led organisations, working on a regional basis with companies in their regions and localities to access export markets - that could be Ireland, it could be the other parts of Europe or indeed it could be China and India. Again, it is building on those existing networks and adding value to companies activities.

Q430 Chairman: Minister, we are very conscious of time, so we do not wish to ask you any further questions, but could I request some additional information that you and your colleagues could supply us with in the form of an additional memorandum. In relation to companies which Wales has lost and Wales has gained could you give us some illustrative examples and how you analyse the reasons for these changes in the recent past. Secondly, with regard to enterprise and innovation and exports in the Welsh food industry, could you write to us about the organisation of responsibilities within the Welsh Assembly Government in relation to that. Thirdly, you mentioned in passing the Czech Republic and possibly a memorandum of understanding. This Committee is particularly interested in the Czech Republic and Poland. Perhaps you could give us some information about your links in those two countries. You mentioned Silesia. Finally, although I do not want to overburden you, I was particularly interested in what you had to say about the creative industries and if there is some additional information that you might wish to give us about that. I am particularly interested in your views on expansion there and why and how that could be developed.

Andrew Davies: I would be delighted to do that.

Chairman: Thank you very much for the clarity of your evidence and the comprehensive way in which you and your colleagues have presented it. I wish you a safe and speedy journey home. I will not make any comments on the means by which you will get there - no doubt that will appear in the Western Mail as well!

Memorandum submitted by FSB Wales

Examination of Witnesses

Witnesses: Mr Clive Davenport, Chairman, FSB Trade and Industry Committee, Mr Russell Lawson, FSB Wales Press and Parliamentary Officer, and Mr Ben Cottam, Welsh Policy Adviser, Federation of Small Businesses, gave evidence.

Q431 Chairman: Good morning, welcome. For the record, could you please introduce yourselves.

Mr Cottam: I am Ben Cottam. I am Welsh Policy Adviser for the Federation of Small Businesses.

Mr Davenport: I am Clive Davenport, Chairman of the FSB Trade and Industry Committee.

Mr Lawson: I am Russell Lawson, Press and Parliamentary Officer for Wales.

Q432 Chairman: Thank you very much. I would like to begin by asking you a general question about FSB Wales and its members. How do you prepare your members for the challenges of globalisation to take advantage of the opportunities and the difficulties and the challenges?

Mr Cottam: Our membership is very diverse. Our membership is drawn across all sectors. Globalisation will affect our members in very different ways, so our role is in making them aware of the more strategic challenges of globalisation, making them aware of government policy, whether at Westminster or in Cardiff Bay, as it affects them. In terms of our guidance of our members, that is fairly limited, other than making sure they are aware of the greater environment in which they operate. You will understand and appreciate that most of our members are micro businesses; many of those operate in very small areas with any regard of the world around them because it is a case of getting your head down and getting the work done, so we act as a conduit of information, if you like.

Q433 Chairman: Do I get from that reply that there is an assumption, perhaps a wrong assumption amongst some of your members, that because they are so small they do not have any opportunities in terms of overseas markets?

Mr Cottam: I think that is a fair assumption. Many of them are aware of the potential opportunities that are out there. That is where the FSB and organisations like the FSB have an important role but it is very much the case of getting their house in order first before they can see outside the front door. That is one of the very difficult steps that any aspiring SME has to make: in the first case how to grow your business and in the second case how to spread your business and seek export markets.

Mr Lawson: There does appear to be a difficulty in embracing the whole idea of globalisation, which is of course to see your market in terms of the global market and the barriers are artificial barriers. For small businesses, very much their market is the local market. and really they want to look at how they are going to market the local schools, local councils or whatever their goods and services are that they supply. It is really trying to get this perception, if you like, redressed, so that the markets really do not just end at the end of your city boundary or your town boundary, if you like. It is more about changing perceptions as well as the practicalities of how do you deal with export agents, et cetera.

Q434 Chairman: In your memorandum - and think you very much for that, it was very useful to us - you call for "a dynamic relationship between decision makers and businesses." How is this dynamic relationship going to be developed and encouraged?

Mr Lawson: One of the things on which we have been working with the Assembly Government, particularly with Andrew Davies' department, is the idea that we very much have a problem traditionally with consultation documents, in that they are very much written by the time they come to organisations like ours. It is not just our organisation that has a problem with this, it is also organisations like the CBI and the Chamber of Commerce and other organisations in other sectors like Health, et cetera. Really, by the time the consultation document comes out that very much is how things are going to operate, if you like. It is very, very difficult to change. So we are actually trying to set up more of a foundation for consultation documents so that the department, particularly the economic development department, will actually come to organisations like ours before anything is written so that we can put them in contact with a good cross-section of members, whether they are going to be looking at manufacturing, and a cross-section of businesses - small, medium or large, their sort of turnover and whether they export, etc - so that they can get a flavour of the kind of the issues that these businesses are facing on the ground which will inform the initial consultation process, so that they will have a better understanding of what the real issues are. All too often we will find, when a consultation document comes out, it is not really addressing the issues that our members want looking at; it is peripheral and kind of missing the mark. They will say: "That is fine, but really the point is this". So it is just to inform that initial consultation process so that the documents we see coming out are taking more of a broad account of views before they are written. It is not about pre-consultation but it is more about gathering the views of businesses before going to that consultation stage. We are hoping to have discussion with the DTI who are running a similar project which has been rolled out across a few countries in Europe so far and we will be discussing that with the Assembly Government. We are hopeful that could be a useful way forward.

Q435 Nia Griffith: We were talking earlier with the Minister about the whole issue of the link with higher education. Obviously, from your point of view, you again are calling for those links between business and higher education. Can you give us any examples you have got of businesses linking with higher education? Also, what do you see as the way forward in terms of trying to foster that sort of innovation and developing appropriate technology?

Mr Davenport: There are several problems that we encounter when we are dealing with education, colleges, etc. The problem we have is that generally the education/college system is geared to looking upwards in the chain, not downwards towards the actual individual company that requires the added value of education. The problem is that the whole system is geared to finance and, therefore, you get a series of stages where an individual is enrolled and an individual goes through certain stages of a programme. So the programmes within the colleges tend to be geared to what resource can be given to them as far as the Assembly is concerned. Very little conversation goes on with the actual SMEs themselves to say: "What do you really need and what is the most important thing?" One of the other things that tends to happen is that a lot of courses, certainly in manufacturing, can be very expensive to run and colleges, because they are run as a business, see themselves as saying: "Can we afford to run this? Shall we tailor it? Shall we reduce its performance or should we say that we have not got enough members to run the course; therefore we will not run the course?" That happens on a reasonably regular basis.

Q436 Nia Griffith: Can I ask: obviously you have got a problem with the size of a small business, so there must be a big temptation for colleges to go, perhaps, for larger ----

Mr Davenport: The one hit - yes.

Q437 Nia Griffith: Where they can give everybody that, and that is done, sort of thing. Is there any work being done either by yourselves or by the colleges to gather information about where there could be a number of small businesses all requiring the same type of skills, so they can be brought together and create that unit, which obviously the college needs to deliver the course?

Mr Davenport: Yes, there has been some work done on that. I, for my sins, have been involved in the Objective One partnership in the Caerphilly area and there is a deal of talk with the colleges. The colleges are on board there and, using me as the conduit, that is how the information is given to the colleges. They do try and change it but they then have the constraints within the college system, within the financial delivery system, coming down from the Assembly. They are in a difficult position, trying to balance the two. We are screaming our heads off saying we want this, that or the other, and they are saying: "We can't deliver it because we have not got enough resource or we are not prepared to commit that much finance to it."

Mr Lawson: It is also where the education establishment is geared towards as well. Obviously, they are very much geared towards trying to attract students because that is where the main body of funding comes from. For example, we were talking to the head of the business school at North East Wales Institute in Wrexham and what they are trying to do is set up a particular business centre which will be away from the actual Institute itself. They are going to run a course with what they have just bought on loan from Lancaster University, which is very successful, in that it has proved to save small businesses, through management development, up to 60% off their bottom line per year. I do not know the details, and do not ask me how they do that, but I think the success from that is that is how they are actually appealing to the market; they are using the same kind of business language, and that is how they are gearing this product towards the business community. Of course, that is something we do not really see very much of, particularly with higher education and further education; it is very much geared towards attracting students and someone may have the responsibility of trying to work with the local community, whereas if there were more incentive, if you like, for them to start working with economic development issues and with local businesses then you would probably have more success.

Q438 Mr Jones: In paragraph 15 of your memorandum you say that one of the problems facing your members in Wales in meeting the global challenges will be growing your micro and small businesses into medium-sized enterprises. You mention in that paragraph that a number of your members have indicated concerns about employing more staff due to new employment structures, and that these keep the business artificially small. Can you expand on that, please?

Mr Davenport: As far as businesses below five you do not have the criteria of an awful lot of the statutory requirements for larger companies. That tends to constrain quite a lot of small businesses. You have got to bear in mind that Wales is a slightly strange place, as I am sure you are aware, in that 93/94% are micro businesses, but they represent 54% of the GDP of Wales. It is a very strange situation in relationship to, say, the rest of the UK.

Q439 Mr Jones: What do you think that the Government, both nationally and at Welsh Assembly level, could do to try to remove barriers and making it easier for smaller businesses to expand?

Mr Davenport: A lot of the Assembly systems are geared to the larger organisations all the time; they do not tend to communicate with the FSB. They do on a political level but, as Russell was saying, one of the problems is that consultations are done and you have virtually got a de facto position before we are even aware of it. There is no discussion between us and the Assembly. This is a problem.

Mr Cottam: In terms of practical measures, I think, what is needed first is a greater degree of understanding of the way in which micro businesses operate. Once that relationship is established and understood the next step is invariably talking to businesses, understanding and taking into account those problems, and nurturing them, if you like. There has to be a babysitting approach, to a certain extent, because it can be such a significant step for a business to grow. It has to adapt not only to taking on more staff and the personnel issues that go with that but, also, to having a more corporate structure, which is something that they are not used to. Micro businesses, particularly, operate in the way that they invariably always have and are very, very reluctant to grow. So there is not only an artificial constraint on them but, quite often, there is a reluctance on the part of the business owner to grow because of the unknown.

Q440 Mr Jones: You mention in your memorandum that you welcome the Welsh Assembly Government's Knowledge Bank for Business as a helpful programme aimed at small businesses. Are there any other programmes that have been effective so far as small businesses are concerned?

Mr Cottam: Certainly the principle of the Knowledge Bank is absolutely right. One of the issues is the definition of what is a high-growth business. Obviously, the Knowledge Bank has a particular purpose and that is to target the high-growth businesses. There is an assumption that high-tech means high-growth, though that is not necessarily the case. Obviously, that is the way, in terms of punching our weight in terms of the world economy, that we may well need to pursue, but in terms of other schemes there are many streams of funding available - under Finance for Wales, for example - which are very well-tailored to small and medium-sized enterprises. It does tend to be a bit fragmented; the nature of business support in Wales is still quite fragmented, and I think that needs to be addressed. Many of our members are completely unaware of the sort of business support that is available to them.

Mr Davenport: If I could declare an interest here; I also - as well as doing all the other things I do - own a micro business of four people myself; a manufacturing company doing computer controlled high-precision manufacturing. So I would see this from both sides of the coin. Just so that you are all aware of that situation.

Q441 Mark Williams: In your memorandum you expressed concern that GVA in Wales is "the lowest of any region in the UK", but you described this as a position that is "far from insurmountable". How can we turn that around? What are your recommendations in that area?

Mr Cottam: I should clarify something that is not properly clarified in the memorandum, which is that that is, obviously, GVA per head as a proportion of the UK average. We do have a target, and as far as I am aware it still remains a rise in GDP then, but, obviously, GVA to 90% of the UK average by 2010. I think that is unhelpful because it is now an unrealistic aspiration. It is very unlikely that we are going to be able to get GDP to that level, so I think we have to be realistic in what we can do, and that has got to be the first step. In re-tasking the Welsh economy towards the needs of SMEs you will encourage SMEs to become slightly more dynamic than previously they have been. There is a concern among many small businesses that the economy is tasked towards the larger businesses; that there is an obsession with foreign direct investment at the level that we saw during the 1990s, and that is simply not the case. It is blatantly obvious that we are going to have to get used to the reality that this will not be the case from now on. It is very difficult for us to compete, so there is a case to say that we need to have a wholesale re-tasking of the Welsh economy to growing those micro businesses and small businesses to the level of medium-sized businesses. Probably not great for economic comparison, but if you look at Germany, for example, it has a much greater number of medium businesses from which smaller businesses feed, and those medium businesses play into the supply chains of much larger businesses. If we can just get to the situation where we are growing businesses to a medium size then that will have a very positive impact on GVA, as those businesses become more dynamic and as they start to seek export markets.

Mr Davenport: If I can add to that, as well, one of the problems we have is that if we take the inward investment of the 1980s and 1990s we are left with no Sony, no Panasonic, no Aiwa, no LG - and we can go on and on. If those companies were grown within Wales they very rarely move from Wales - it is just a natural reaction. So, encouraging and developing smaller businesses within Wales to grow, and focusing not on large businesses but on small businesses, would create a much more dynamic economy.

Mr Lawson: We also do need to raise our game in terms of the kind of support that we offer because for far too long it has been very generic business support that is on offer; it is not really tailored towards individual businesses. We talk about growing businesses as if we can just throw them a couple of handbooks on marketing and staff development and they can go away and do it themselves; it is very much about taking an individual business, looking at that business, looking at its strengths, looking at its weaknesses, looking at the environment it operates in and finding out where the opportunities lie for that individual business and where the staff need to be developed within this business - because, again, we do tend to see within new business support structures there is not an integration between staff development and business development. There needs to be much more of an integration at that very ground level. There are, obviously, as you heard from the Minister, good links at the top level but at the implementation level at the bottom there still needs to be much stronger links than there are now. It is all about taking an individual look at individual businesses, making business support relevant and making staff development relevant, and that is really the way we need to push it forward.

Q442 Mark Williams: Turning to the question of innovation, and research and development, which you have highlighted as two key areas if Wales is going to compete effectively, what more should the Welsh Assembly Government and the UK Government be doing to build that culture of innovation? We had a glowing picture presented by the Minister. Was that something you and your members relate to?

Mr Cottam: I think the number of, certainly SMEs, undertaking research and development in Wales is disappointingly low, let alone the number of businesses across the board.

Q443 Mark Williams: Which you attribute to?

Mr Cottam: Largely, there is a big problem with the culture differences between higher education and businesses. We have heard slightly earlier some of this culture clash, if you want to call it that. I think there is very little understanding within academia as to how businesses have to operate. Similarly, there is very little understanding within the world of business as to how academic institutions operate and how to engage with academia, if you like. So we have this problem that there is no lack of scientific talent within academia in Wales, but it is marrying it with the entrepreneurial talent of our businesses. I come with no great fix for this. I think it is one of the great challenges we will have in terms of increasing our innovative capacity. Certainly, it is a cultural difference that we need to start working on now because many times we hear from our businesses that they hear about scientific expertise, if you like, and they have an idea for commercialising that, but how do they go about it? That is one of the issues that we have been talking to the Assembly Government about for some time, and I hope there will be an open relationship with a view to working on that in the future.

Mr Lawson: There is no real scheme for SMEs to exploit their intellectual property. Obviously, you have R&D Tax Credits but unless you are actually undertaking R&D to quite a great extent that is not going to be a lot of use to you (a) because it is not worth applying for it and (b) because it is a very complicated process to go through to get anything out of the system. We really need to start looking at a Wales-wide scheme that is going to encourage innovation within SMEs, that is going to be incentive-based and is going to have some sort of finance attached to it.

Mr Davenport: I was speaking with Dr Evans last week of the DTI on the innovation side of things. He was telling me that R&D has dropped in this country from 2.6 to 1.7%. One of the reasons, as I understand it, is that the R&D Tax Credits are so complex and you are likely to have an investigation by the HMRC that people are just not applying for them and not going down that route. Most small businesses are extremely cautious; they do not want to get bitten. All they want to do is carry on and do their job on a daily basis. They try to do the best they can for their employees because their employees are friends, generally, because they are so close to them; it is not like the finance director or the managing director of 300 people where he does not know half the faces; this is somebody you have lunch with every day. So you are conscious of the fact that you want to do the best you can for those people, and the last thing you want to do is to have an investigation which could damage the company or could even break the company. So you steer clear of it and you become ultra-cautious. I think that is one of the reasons that R&D has not been taken up as much as it could.

Q444 Mrs James: I would like to turn to skills and training. In your memorandum you mention on several occasions your concerns on the skills gap. As an organisation with almost 10,000 members in Wales from across all sectors, where do you think the skills gaps are, and where are they most acute?

Mr Davenport: From my own point of view - just to give you one small example of the situation - the lack of flexibility between colleges, which creates a skills gap. If you buy a machine tool you have special programmes that run only that machine tool. You cannot get any information from the college because they do not know anything about that machine tool, because it is state-of-the-art; it is absolutely at the sharp edge of the point. So you have to go back to the company, which will cost you tens of thousands of pounds, to get that training done. However, when you do that, you cannot get any grant for it because it is not under any little umbrella that the Assembly Government or the Westminster Government are geared to taking care of. So a little bit more flexibility and, again, a little bit more conversation with the businesses involved would make a huge difference.

Q445 Mrs James: We have heard from taking evidence from several companies about how there is a plethora of information out there, lots of business advice, but it never seems to be focused enough to the particular issue that they need. What they need is nine broad categories, not 900 -----

Mr Davenport: Exactly. One of the problems we have got as well is the amount of grants available. It is mind-boggling the amount of different pieces of paper. Almost 99% of small businesses do not even know they exist because they are busy just doing their job. As an example, we bought a machine tool last year which cost me £70-80,000, and at the end of the day we did not bother with the grant because it was too complicated and too slow - just not worth the candle, really. What is the point of having a grant if you cannot use it?

Q446 Mrs James: So more help to access that?

Mr Cottam: If I could just quickly give an example as to where some of the problems lie with relation to skills, if you look at NVQ there is obviously a framework for NVQ that has to be fulfilled in order for the provider to get the funding from the Assembly Government. One of the problems for a small business is that if you list, for instance, 11 different sets of criteria within that framework it may be that small business can only fulfil six or seven of those criteria. If that is the case then there is no funding; there is no apprentice or there is no candidate forthcoming. What we need to do is look at the areas where they can fulfil to a greater level of strength certain criteria and try and promote flexibility within that framework. The problem comes back to, again, the cultural issue that we have a system that is focused on much larger businesses than the business stock of Wales would actually suggest. So tailoring that kind of support and tailoring those kinds of schemes to the needs of smaller businesses and what they can realistically provide, I think, is very important. There is an assumption - and it is a point we have made time and time again - that informal training is worse than no training. That is simply not the case. That is just the way in which micro businesses tend to train their staff. Just to really show some of the commitment within our membership, one of our members said recently: "I have a responsibility to honour the aspirations of my employees but, unfortunately, the structures that I get to work with when I go to a training provider do not allow me to do that."

Mr Davenport: If you take my case (and I do not want to keep reiterating it) what you have got is a complex piece of machinery. So the person that operates it has to be a skilled engineer, able to comply with all the safety regulations to actually hold the component that needs to be machined. So he is a skilled engineer. That is number one. Number two, he has to be skilled at computer-aided design because he has to be able to transfer the drawings that are supplied to us on to a CAD system so that he can then produce a computer-aided manufacture programme. So he is also skilled at that. These are highly skilled people and yet there is not a single structure within the college system that will give me any paper qualifications for any of my three people, because it is specialised and it is not recognised.

Q447 Mrs James: That is very interesting because my husband is retraining now on the CAD system, because he is a machinist.

Mr Lawson: Just one final issue is the time issue for small firm; the fact that they need to give up the workforce because of the way that college courses are structured; you are usually talking about a day or half-a-day, and it is very difficult for businesses to give that block of time. If you have got a workforce of, say, four, that means you are giving a quarter of your workforce up for one day or half-day each week, regardless of whether you are in, say, a busy summer period, or you have just got a big order in, etc. The cost of courses, from the surveys that we have done, comes way down the list at number four, five or six; the biggest problems are, as Clive says, the recognition and the actual time that their workers are out of the business. That is classed as the biggest problem. So there really is a need for courses to be much more bite-sized so that they can be done in certain slots of the day when time is quiet etc. Those sorts of things can be addressed through e-learning, for example, and through, as colleagues say, beginning through the formalisation of certain learning which takes place in the business itself; you do not have to go to a college to do it when you are actually doing it in a business.

Q448 Mrs James: Thank you. I am quite interested in finding out about how the skills profile of migrant labour is changing. We hear a great deal about migrant labour coming in and being able to undertake jobs.

Mr Cottam: It is not something, I am afraid, that we have a great deal of information about. Our research within our membership indicates that, for instance, a couple of years ago we asked how many people were employing employees from the EU accession states and only 2% had had any dalliance, if you like, into that job market. The only evidence we do hear is anecdotal, which normally comes to us around the same times as any media story about the influx of people from Eastern Europe, for instance. The thing we hear time and time again is: "If I need people to fill those jobs, then I don't really care where they come from. The job needs to be done and the business needs to be profitable." In the longer term, the FSB, obviously, has a responsibility to work with Government, both here in Westminster and in Cardiff Bay, to look more deeply into that. Certainly, at the coalface, or at the business face, they are not charities and they need to get the job done; it does not really matter who is doing it. However, we do not have a great deal of evidence at this point as to the skills profile of migrant labour, I am afraid.

Q449 Mrs James: What links does the FSB have with other international organisations with a similar role to you? Do you get information via that route?

Mr Cottam: We are members of the European Small Business Alliance (ESBA) and so our exchange, if you like, happens at that level. As far as I am aware, at the moment I know that there are (and I only heard this last week, so I am not absolutely sure of the timescale of this) moves to start looking at these issues of the migration of labour across the EU. Certainly, our links revolve around the European institutions, at the moment.

Q450 Hywel Williams: You say in your memorandum that the FSB believes that the infrastructure is unsustainable. You say, very strikingly, that a 21^st Century economy cannot function on an 18^th Century infrastructure. How would you overcome this?

Mr Cottam: One of the single greatest issues of our membership - and I know this is not necessarily reflected among the bigger companies - is that the problems of getting from North to South Wales are really quite substantial. If we expect our businesses to start looking towards global markets, what they have to do is grow their business within their own patch in the first place. That is part of this issue of growing from small to medium businesses; to be able to grown on your own patch. At the moment, we suspect it is probably easier to get to Kendal than it is to get to Anglesey. It is probably quicker to get to Kendal than to Anglesey. I think that is quite damming. We need to look towards developing a proper infrastructure between North and South Wales. As an example, one of our members runs a manufacturing operation and has a site in Pwllheli, I think, and one on the border of Shropshire. He has indicated that at some point he is going to have to face the reality of consolidating his sites. Now, he is minded to consolidate out of Wales, if you like, because of the problems in getting a product around Wales. Another member of ours in Llanrwst has indicated that he really does not bother with markets in South Wales around Cardiff because it is just far too much time to get down there, to get your reps down there and to get your product down there. I think that is one thing we really do have to start to investigate as a matter of urgency. As I say, I have heard much larger businesses and I have heard the evidence of the CBI which suggests they do not see a business case, if you like, for drastic developments in routes between North and South Wales, but certainly from the evidence that has come forth from our membership - we have been undertaking a manifesto exercise with the Assembly elections so we have had a nine-month dialogue with our businesses - this is the most commonly cited problem.

Mr Davenport: The classic situation is that I go to Anglesey regularly and it is 51/4 hours no matter which road you go on. If I went the same distance, say, to the Midlands it would be 2 hours 20 minutes. That is fundamental, not only just in time but it is the fact that because the road is not straight and, therefore, you tend to be accelerating and decelerating in the car, or the lorry, the amount of fuel and, therefore, the carbon footprint you put down is far larger than it would be if you were on a motorway. Motorways are always perceived as being negative but in many ways they can be quite positive, in that you have an even, constant speed.

Mr Lawson: One of the things that was brought up in the last evidence session was the spatial planning example, and this really is fundamental to that principle. This is obviously about looking in terms of space and how space needs to be developed in economic development terms. The problem fundamental to that approach is, obviously, getting different local authorities in order to agree on the same road priorities, for example. That is going to be fundamental right off the bat, whereas different local authorities are going to have different priorities because there are different sections of their local authority area which need upgrading desperately, and there is also the issue that there are local authorities with whom we have to try to agree in principle in England. One of the biggest bugbears that our members have in North Wales is the fact that the A5 is still single carriageway; you go from a dual carriageway, the A43, and then you are stuck on a single carriageway. If you have got your big markets in the Midlands then that becomes a big problem, but of course that road is in England so there is nothing we can do about it. This may be something that we need to be looking at in terms of developing a spatial plan, certainly from the Assembly's point of view; if you are going to apply the holistic approach you have to take that holistic approach.

Q451 Hywel Williams: I am familiar with a company that develops Welsh language software in the north and their main market is in the south, especially with governments, but they have ambition, obviously, especially at the European level, to develop software for other languages as well. That is a particular example where the infrastructure is difficult for them. I think we might be interested to hear if you would have members in similar sorts of situations - perhaps not now but as further evidence - where there is a link from the local, national and then to the international possibilities. Perhaps I can leave that with you.

Mr Lawson: Yes, certainly.

Q452 Hywel Williams: Can I turn to larger companies? Your memorandum points out that the increased mobility of many larger companies is evidenced by the relocation away from Wales. You say that in paragraph 21. What incentives should the UK Government and the Welsh Assembly Government put in place to ensure that increased mobility encourages larger companies to move to Wales? I am aware from your previous answers that you might not think that is a realistic possibility in many situations, but perhaps you could address the points.

Mr Cottam: Despite what I may have inferred earlier (and I know this is the view of the FSB) we think it is essential that there are the larger companies in place to be able to create the supply chains that can grow the smaller businesses. We have in Wales a tendency to look over the water to Ireland and to look to their example. Certainly, there may well be merit in looking at what they have done with Corporation Tax in creating an incentive for businesses to locate into Wales. Certainly if they can get that skills provision right we certainly have the business infrastructure in place to be able to service those larger companies because we have been, certainly for many, many years. We may be experiencing much lower levels of foreign direct investment than previously but we are not in our dying throes yet. So there are incentives that can be put in place and I think it is probably time for a very open debate as to what is the most appropriate incentive that we can offer larger businesses. If that involves looking very closely at the example that Ireland has set then I think that is probably the best place to start.

Mr Lawson: One thing we can do, for example, is make our smaller businesses FDI-ready, if you like. One good test is going to be what is going to happen with the Olympic tenders - all the infrastructure and everything that is going to be built around there. Are our types of businesses, the ones we have in Wales, ready in terms of do they have employment policies up-to-date, health and safety policies up-to-date, and do they have their staff trained in order to handle large volume orders? Can they demonstrate the kind of track record they have got in fulfilling contracts, and all this kind of thing? These are things on which really we could be helping our small and medium-sized sector so that when FDIs do come in we can say: "We have got a ready supply chain all set up; it is all documented and everything; they have got a good track record". That, obviously, is part of the attraction.

Q453 Mr Jones: Mr Davenport, you mentioned your difficulty getting around in Wales. I think you said it was a 51/4-hour journey to Anglesey. I am not sure where you are starting from.

Mr Davenport: Cardiff.

Q454 Mr Jones: Do I take it, therefore, you will be using the Cardiff to Anglesey Air Service when it is up and running?

Mr Davenport: No, that would be difficult because I will be carrying equipment which is heavy and it would not be practical to use the air services. I am not going as a businessman with an attaché case; I have got a large vehicle and pieces of equipment. That is where road systems actually function much better than air bridges, especially small ones like this one.

Q455 Chairman: Could I end this session by referring again to your written submission. In it you note that as SMEs grow "the right infrastructure and skills ... [and] a competitive taxation regime" will be imperative to ensure that the businesses remain in Wales. Earlier you were referring to the possibility of SMEs staying in Wales being more likely than multinational, global companies. So the question is: are SMEs that are successful more likely to stay in Wales if the circumstances are right, and what are those circumstances?

Mr Davenport: I can give you an example of a company, a strange company called Orange Box, but it actually makes that sort of commercial seat in all sorts of different variations. That company is a Welsh company and it has grown from virtually nothing 20 years ago to turning over £33 million a year now. Everything it manufactures with the exception of one die-cast part is made in Wales and will continue to be made in Wales. That is their physical and mental approach; they have no intention at all of moving out of Wales. If we can encourage companies like that to grow from small businesses to larger businesses, to even larger businesses, then that is what we should be doing in Wales. One of the problems you get, the Assembly Government is very keen to show the amount of new start-up businesses, and that is great and just as it should be. However, there is a stage where a start-up business, after, say, three years or four years, needs to be geared up to the next stage. That is not mentioned at all because it is not something that is dynamic; it is not something that is a headline grabber as far as any politician, with all due respect, is concerned; all it wants to do is say: "We have created X-number of jobs because there are X-number of new businesses. We have not kept the existing businesses growing; we have not nurtured them and made them expand into the next generation of businesses". This is the problem.

Mr Lawson: We have to be careful with the headlong rush for high-technology start-ups which try and attract businesses into, say, the technian (?) centres, but attract them from England. Obviously, the reason you can attract them into somewhere like a technian centre is because they are highly mobile and they rely very much on their intellectual property, which is going to make them the money. So they can come into Wales and take advantage of the grants and support and the help, but that also means that they can leave Wales just as easily, which many actually do when they want to set up in, say, a cluster around Cambridge. We have to be careful we are not just trying to grab all businesses just so we can say we have got a big stock of high-growth, high-knowledge businesses, when they will just as easily walk out when the time suits them.

Q456 Chairman: Thank you very much for your evidence. If you feel that there is something you wish to add, please feel free to send in a further memorandum. I was particularly interested in your observations about the skills agenda and the links, or lack of them, between SMEs and further and higher education. If you and your members have anything further to add to that we would be interested. Secondly, we are also interested in migrant labour. You did not seem to think that you had a good deal of information on that but if your members might be able to identify some information developments in their own particular localities we would also be interested in that. Thank you very much.

Mr Davenport: Thank you.