Manufacturing Industry

HL Deb 07 December 1994 vol 559 cc944-71

4.22 p.m.

Debate resumed.

Lord Skelmersdale

My Lords, it seems to me that the time has come to move on. I am most grateful to my noble friend Lord Trefgarne for giving me the opportunity to speak on a subject that I have slept with for over 20 years now. Being a director of a micro family business is something that constantly engages your thoughts, even if, like myself, you no longer run it on a daily basis.

So far we have heard of the best in the small and medium-sized business sector, but I would like just briefly to paint a rather different picture. My picture is of a small, cluttered, sometimes smoke-filled room with a desk, two telephones ringing loudly, a filing cabinet, an in-tray, a pending tray, a boiling kettle, two shelves and a man with tears rolling down his face. He sits at the desk answering one telephone with one hand, picking up stamps with the other and sticking them on envelopes in front of the overflowing in-tray. With one foot he is trying to turn off the kettle, with the other he is trying, unsuccessfully, to shut an overstuffed filing cabinet. The pending tray overflows on to the floor. On the wall behind him are the two shelves. On the bottom one are four box files. The first is marked "Tax", the second "VAT", the third "Invoices" and the fourth "Receipts". On the shelf above are four bowler hats marked "Development Manager", "Marketing Manager", "Finance Director" and "Personnel Manager", and last but not least a white helmet marked "Safety".

This cartoon, which still hangs in the office at home, shows the very model of an embryonic small businessman, and something that small businessmen try very hard to get out of at the earliest opportunity. Governments and civil servants, it seems, often forget what it is like out there in what we sometimes refer to as the real world. That causes them to pile on the regulations, change the rate of VAT overnight; in a word, doing things without warning. They give the impression that businessmen and women are well-educated and well-organised from the time they get up in the morning till they sink, overtired, under the duvet at night. Life is not like that. From the smile on his face I anticipate that the noble Lord, Lord Weatherill, for one, will acknowledge and understand exactly what I am talking about.

Over the years I have identified four types of small business, which the noble Lord, Lord Haskel, touched on, one of which has, I believe, all but disappeared. When I was doing my vocational education in horticulture it was still quite common for there to be businesses that were designed to make a tax loss in order to mop up excess profits made in another trade or profession. Then there is the hobby business designed to break even financially but most definitely not to pay tax. There is the business which sets out from the beginning to make money, to pay fair taxes and to grow into what my noble friend's Motion calls a "medium sized" business, and eventually a corporation. The Body Shop for example would fit this description. I believe that the conglomerate chaired by my noble friend Lord Hanson also fits that description, although obviously over a very much longer timescale. Then—this is something we sometimes forget—there are the charities in which many of your Lordships are involved in one way or another. Arguably they could be said to be slightly different but there is more than one that I could think of running an obvious business which covenants its profits back to the parent charity.

Yet we are sometimes given the impression that the DTI believes that it is invariable that from little acorns mighty oaks do grow. In that well-worn phrase from the musical, "It ain't necessarily so". Horticulturally speaking, it is comparatively few acorns that grow at all. They must be given the right conditions either in the nursery, where their chances are better—or they should be if it is a decently run nursery—or in the wild. As oily seeds they must not dry out before putting down their first root.

In fact that is not a bad analogy. Experience has taught us that of those small businesses that fail, a high proportion fail in the first year. Another dangerous time is that of expansion when the embryonic businessman delegates one or more of the hats I spoke about earlier, or when, later, he tries to execute a major expansion plan. It is small wonder that there are not many Hansons or Roddicks about.

I think that the department would do well to ponder upon this, and my right honourable friend the Chancellor too. I believe that over the past 10 years or so they have become better at this and realise that they can make life easier for business. What small and medium-sized business needs is well known. The noble Lord, Lord Haskel, summed it up in two words—economic stability. They need low real interest rates so that they can afford to reinvest; a planned pay-back time that the banks do not suddenly change; a steady rate of inflation, preferably a low one, so that their customers are not put off by sudden swings in prices; the minimum of regulation; easily accessible information; low taxes and achievable training as my noble friend Lord Trefgarne pointed out. They also need a constant rate of VAT. Twice now I have had a catalogue just despatched to my customers when the VAT rate changed. The hidden cost of chasing up small amounts of extra money is high and one must make a difficult assessment as to whether the business can or should bear the rise in VAT from its profits. I only hope that my right honourable friend the Chancellor will not try to recoup his missing billion pounds by a small but general hike in value added tax. I am prepared to bet that if that is the case, the rate of first year failures will increase.

That said, the Government have much to be proud of: the introduction of the single market has done wonders for exports at little cost to business; the introduction of one-stop shops which save time and effort for a busy person; the reduction of corporation tax from 42 to 25 per cent., so pegging it to the basic rate of income tax; keeping VAT stable; managing to reduce interest rates to affordable levels; and, most important of all, a low rate of inflation. I believe that when the figures come out for new businesses in 1994–95 we shall see an upturn in start-ups and a drop in failures. We all have high hopes for deregulation. I look forward to the first fruits of this policy after Christmas.

The corollary of deregulation is, of course, more regulation. Small businesses are great employers of part-time labour, sometimes throughout the year and sometimes on a seasonal basis. Many of those employees are women who are prepared to work for a lower income than men to top up the general pool of the family income. Some are semi-retired men who have taken early retirement—those whom the noble Lord, Lord Desai, might call potentially economically semi-active. Those workers represent a major part of the workforce of this country. The party opposite sneers that they are not real jobs. But they are very real for the people holding them and for the businesses who employ those workers. However, the Opposition seem to wish to damage that sector of the employment market by introducing not only a minimum wage but the social chapter, giving those workers the same rights as full-time employees. I can think of no policy more damaging to small businesses and their employees.

That brings me to charities. There are 170,000 charities registered with the charity commissioners, employing 482,000 people. That represents 2 per cent. of the total workforce, 8 per cent. more than the motor industry employs today and as many as the combined water and energy industries employ. Of the top 500 fund-raising charities, 200 are in the medical field supporting the salaries of well over 500 people in British universities. The House will be as amazed as I was to learn that the 21 cancer charities provide £120 million for research. That amounts to 70 per cent. of the total spent on cancer research in this country. If that is not a business activity, I do not know what is.

Over and above that, we increasingly expect charities to take on work in social services and in environmental protection, and government and quangos pay them to do so. More and more of that work is by contract. It makes for enormous pressures on the charities' income because the overheads cannot normally be allocated. According to the Charities Aid Foundation, the top 200 fund-raising charities raised their income by 4 per cent. in 1992 and increased their expenditure by the same amount. The second 200 charities show a different picture: a drop of 9 per cent. in income matched by an 8 per cent. drop in expenditure. From that we can see that the smaller charities are being squeezed. Why, my Lords? I believe that, as with any other small business, charities suffer from the problems of employing part-time female labour. Increases in maternity leave and the reduction in statutory maternity pay have hit them hard. So, too, would compulsory occupational pension schemes if they were introduced.

However, I wish to congratulate the Government on two fronts; on making covenant forms both shorter and easier, and on the introduction of gift aid. Alas, the figures show that only 10 per cent. of donations are made tax effectively. However, it is as much for the charities themselves as for the Government to increase that figure. What is in the Government's hands is the ability to do something about the £350 million a year which charities pay in VAT. The amount is worked out by a very complicated formula. Essentially, it means that the charities can only claim back the input tax in the ratio provided by the proportion of VAT attracting income to their total income. In other words, if 20 per cent. of their income arises from contracts or subscriptions, or a mixture of both, and the remainder from donations, charities can claim back only 20 per cent. of the tax they have paid out. The charities tax reform group has been told by Customs and Excise that there is no technical reason why that cannot be changed. It seems that the political will is lacking.

My conclusion is that with that one exception the problems of charities are identical with the problems besetting small businesses. The Government should recognise the great value that small businesses bring to this country, whether or not in the charitable sector. I believe that the Government recognise that, but they could do more in the ways already proposed and, I am sure, still to be suggested in the debate. Above all, they should always bend over backwards not to kill the goose that just sometimes lays the golden egg.

4.35 p.m.

Lord Desai

My Lords, we are grateful to the noble Lord, Lord Trefgarne, for giving us the opportunity for this debate. Like the noble Lord, Lord Weatherill, I made my maiden speech on this very question about three years ago. I shall confine my attention to the first part of the Motion—the importance of increased output from the United Kingdom manufacturing industry.

I do not know much about actual business. I am an economist and economists have a fond relationship with the real world: they know about it but do not want to be anywhere near it if they can help it. I wish my life to be comfortable. After what the noble Lord, Lord Skelmersdale, said, I am glad that I am not in the real world; I am in academia. It is hard work in the real world.

I wish to talk about the general state of manufacturing industry. My points are not made in a partisan spirit. Manufacturing industry is an important part of the economy. But increasingly there is a contrast between the ability of the manufacturing sector to generate wealth and its ability to generate jobs. Increasingly, because productivity increases have had to be rather fast in this competitive world, manufacturing industry can generate wealth but cannot always generate jobs at the rate it once did.

Virtually everything that I say arises from Economic Trends. It is an excellent publication; I recommend everyone to study it. Since 1970 production industries—manufacturing and other aspects such as North Sea oil—have grown but more slowly than any other sector of the British economy. Since 1970 there has been growth of approximately a third, from 73 to 98 in index number form. The recession has meant that we have not caught up with the previous peak in output in 1989. But there has been growth in manufacturing industry.

By the same token we have to be aware that as employers of people manufacturing industry has shrunk quite remarkably. In 1970 about 8 million people were employed. About 4 million people are now employed. That means that while output has grown by about a third, employment has declined by about a half. Of course, the balance lies in increased productivity.

When considering productivity, one achievement has been noticeable—a good rate of productivity growth in manufacturing industry. I believe that increasingly that will be so. Another good feature is that since 1980 productivity growth has been very rapid. We had slow productivity growth in the 1970s and good, rapid productivity growth in the 1980s. That means that productivity growth has to be kept up. We cannot look benignly to the manufacturing sector to provide us with jobs. We have to be sure that manufacturing industry stays competitive and generates wealth, especially manufacturing exports which are absolutely vital for the national economy.

I have to point out a disturbing trend. The rate of investment in our manufacturing industry is no longer as high as it was. With proper allowance for inflation, in real terms investment in our manufacturing industry is lower today than it was in 1970. I have to admit that it reached a peak in 1989 when about £15 billion was invested. Today the figure is only about £11 billion, compared with £13 billion in 1970.

We should approach the problem of manufacturing investment much more seriously. We may differ across party lines as to methods but encouraging manufacturing investment is urgent and central for our economic future. Whether we do that by inviting foreign investment or by encouraging domestic investment, or whether it takes place in small or large firms, are matters of choice. Indeed, I believe that one should do everything across the board.

Encouraging manufacturing investment in every way we can is central to the problem of British manufacturing industry. Our outward growth is slowed to the extent that our manufacturing investment is not rapid. Of course, by the same token, we get more out of our investment than other countries. We are very efficient at getting more out of the pound than others. That has to be said. However, it is true that we are not investing enough. It is a matter of diverting resources from other uses—consumption, government spending or whatever it is—to manufacturing investment. Perhaps on another occasion we should debate the best ways of encouraging manufacturing investment in the British economy.

What I think is happening, not just in the UK but throughout the world in the modern context of the global economy, is that countries who wish to survive as manufacturing nations must continue innovating at a rapid rate. They must put a great deal of money into research and development. They must move along the product front because the products we used to make can be made much more cheaply and better elsewhere in the world. We shall not be able to resist the tide of free trade. It is a delusion to think that we could. I would not even advocate it.

We live in a climate of growing free trade; we face global competition. Unless we invest a lot of money in manufacturing industry, unless we research and develop new products rapidly, we shall fall behind. It is a matter of vital national policy that we concentrate on quality output in manufacturing industry. Through debates like this we can draw the attention of our policy makers to the matter. Therefore, I am doubly grateful to the noble Lord, Lord Trefgarne, for having introduced this subject.

4.43 p.m.

The Viscount of Oxfuird

My Lords, there are few in your Lordships' House who are so eminently qualified as my noble friend Lord Trefgarne to speak on this subject, an area in which he made such a significant contribution in his days as a Minister of State at the Department of Trade and Industry. He is still so much involved with manufacturing industry by virtue of his presidency of the Mechanical and Metal Trades Confederation, METCOM, which numbers many small and medium-sized enterprises within its membership.

It has been obvious from the contributions from all parts of the House this afternoon that there are few of us who have not grieved at the decline of some sectors of the United Kingdom's manufacturing infrastructure over the past decades or alternatively have been heartened by the reversal of that trend in recent years. That reversal has been seriously spearheaded by our small and medium-sized enterprises—the SMEs.

There is growing evidence—and it has been highlighted by a number of noble Lords already—that we have turned the corner. In the three months to September 1994, manufacturing productivity was up 6 per cent. on the previous year, a level of growth not seen since the mid-1980s, but against a backdrop of the lowest inflation for generations. Manufactured exports are at record levels, having grown by 80 per cent. since 1981 and by over 10 per cent. in the past year.

However, encouraging as these statistics are, they are frankly not good enough. In the British manufacturing company with which I was so closely involved for many years, the introduction of the principles of total quality management became one of the prime philosophies. That experience taught me that constant vigilance was needed for continuous improvement. No enterprise or institution, of whatever size, should forget this constant requirement for continuous improvement. Those who do will in the end decline and perish.

So what factors do we need to study and address in looking for greater improvements in output within our manufacturing enterprises? It was, as some noble Lords may recall, Rudyard Kipling who referred to the, Dear hearts across the seas". Perhaps I could, first of all, recall the thinking of some of the industrial leaders from beyond our shores. I think, first, of some points I made in a debate back in 1988 proposed by my noble friend Lord Joseph, recorded in the Official Report of 4th May, vol. 496, col. 620. I spoke of the research of the learned American, Professor Birch of the Massachusetts Institute of Technology and of his emphasis on the importance of training our manufacturing workforce in the new technologies. He also emphasised how important the small business was in reducing unemployment. This business is by nature dynamic; it has young entrepreneurs and a very high percentage effect on the unemployment figures.

However, it is equally important to consider the training of people. How heartening it is that we are beginning to see the fruits of some of the investments that the Government have made in this field since that time.

I confess that I have also been somewhat influenced by the works of the American writer, Tom Peters, and I was reading one of his books this weekend, Thriving on Chaos. In it, he contrasts the American penchant for what he describes as "giantism" with the Japanese passion for smallness. He argues that part of the Japanese economic miracle since the Second World War can be explained by their exploitation of the "smaller is better" strategy. He quotes from the book: Smaller is better: Japan's Mastery of the Miniature by the Korean writer O-Young Lee who emphasises the "smaller is better" philosophy. He argues that this is a major factor in explaining the reasons for Japan's economic success since the Second World War.

He is thinking in part, of course, of the success that the miniaturisation of consumer electronic products has brought to the Japanese electronics industry, but he also highlights that the small business sector in Japan is more vital than that in the West and that even the largest Japanese corporations are less vertically integrated and count upon a network of smaller subcontractors for a significant part of their innovation. This helps to foster their commitment to continuous improvement.

This theme is taken up most positively in the recent White Paper to which some noble Lords have already referred, Competitiveness—Helping Business to Win.

The White Paper emphasises that to become more competitive companies need to change the climate within their organisations to stimulate innovation, to train their people, to invest in new technology, to take advantage of external skills and knowhow and to use, adapt and develop novel processes.

It is often in these very areas that our small and medium-sized enterprises tend to be more responsive and faster on their feet. That is why a significant and growing proportion of total employment, not just in the United Kingdom but in most of the developed economies of the world, is in small and medium-sized enterprises.

The White Paper on competitiveness highlights the need to improve the effectiveness of our financial institutions in supplying funds to SMEs. It seems that there is an over-reliance in the United Kingdom on the part of small firms on the use of overdraft facilities to provide the funding to sustain growth. In the United Kingdom, overdrafts account for 56 per cent. of small firms debt, compared with 14 per cent. in Germany. It seems that there is a need for both the banks and the SMEs to place greater emphasis on longer term finance.

It is encouraging that the Chancellor took heed of that need in last week's Budget in his plan to create venture capital trusts (VCTs). These are investment trusts which will be owned by individual shareholders and which will attract generous tax relief. They are designed to encourage investors to put their money into equity for small businesses. The trusts will be able to make investments up to £1 million in companies whose net assets cannot exceed £10 million. As an inducement, investors will be able to claim tax relief at 20 per cent. on the investment and to defer capital gains tax that is due on other asset sales if the proceeds are invested in such a trust. Profits and dividends from the trusts will be tax free.

There were also measures to shelter the small and medium-sized enterprises from some of the more onerous requirements of government regulation until they are strong enough to cope with them. The proposal to extend the number of businesses which can pay their PAYE and national insurance contributions quarterly rather than monthly will help an estimated 100,000 employers. The gradual rise in the VAT threshold to £46,000 will also help, as will the proposal to move to annual simplified VAT accounting for small businesses.

I spoke of a Korean observation earlier which asserted confidently with respect to Japanese economic success that "smaller is better". Let me be extremely careful to make it clear that I do not believe that smallness should be an end in itself. Smallness is at its best when it acts as a precursor for growth—a fact that was excellently illustrated by the Financial Times a couple of years ago when it changed the name of its regular "Small Businesses Column" to the "Growing Businesses Column".

A very real example of what I am trying to say is provided by the common agricultural policy of the European Community. The CAP insulates European farmers from market forces and encourages uneconomic farmers to stay in business. Most British farms would still fall within the DTI's definition of small and medium-sized enterprises; but the size of farms in the United Kingdom tends to be larger than elsewhere in the Community. They are hindered from exploiting their competitive advantage by the millstone of the CAP.

Smallness is not an advantage in itself if it encourages the Luddite forces of reactionism to resist change and shun improvement. The farming community in parts of our European Union should take note, and the Government should continue to press for further reforms of the CAP and seek further reductions in support prices.

Our British farms are successful medium-sized enterprises and might well be described in the phrase that was immortalised by William Cowper in the late 18th century in his Tirocinium, Tenants of life's middle state, Securely plac'd between the small and great". I conclude on a note of optimism. Our debate this afternoon has emphasised the need for improved manufacturing output and has given us all a number of valuable indicators of the direction that we should take. The outlook is improving. About 226,000 new businesses were started in the first half of 1994, an increase of 10 per cent. over the first half of 1993. The DTI's Business Link initiative is beginning to provide a most effective support network for our businesses, particularly our small and medium-sized enterprises. With hard work and a commitment to continuous improvement, I believe that we can succeed.

4.54 p.m.

The Earl of Kintore

My Lords, I also thank the noble Lord, Lord Trefgarne, for introducing this important debate. I should like to address a few points about small and medium-sized businesses which not only do not increase their output but actually cease trading, not because they are making the wrong product at the wrong price but because their internal financial procedures are poor or even non-existent.

I must immediately declare an interest as president of the International Association of Bookkeepers. The association, founded over 20 years ago, offers a professional qualification in manual bookkeeping. It also offers diploma courses in computerised bookkeeping, small business financial management and payroll administration. I am delighted to learn that my noble friend Lord Weatherill still has the office bike. I hope that the noble Lord also has good internal financial procedures, as many small and medium-sized companies do. But, sadly, far too many businesses are going into liquidation. Many will have gone under from lack of financial control. Very basic mistakes are made, such as failing to send out invoices; taking too long to chase up moneys that are owing; and taking too much cash out of the business too early.

I believe that some companies really do still put all their paperwork into a box and present the box to their accountants at the end of the year. Apart from considerable expense, it means—unless the accountants work considerably more sharply than many whom I know—that the financial state of the business will not be known for 10 to 12 months after the year end, and vital information that the chairman's Rolls costs more to run per month than the company is making may not be available until it is too late. The Inland Revenue and Customs and Excise—and, I imagine, the banks—feel rather unloved over this period as they do not receive the returns that are required. I know that the Inland Revenue starts with blue-coloured demands, and then, round about Easter, the demands change to a rather fetching shade of red. I imagine that, red being the final colour, once it is ignored the game is up. It probably comes as no surprise that, in desperation, both the Inland Revenue and Customs and Excise institute insolvency proceedings.

I was pleased to read in the Budget snapshot, HMT1, published on 29th November, that there are to be consultations on the reform of the insolvency law to help firms in difficulty and to help avoid wasteful liquidations. But surely problems must be identified at a much earlier stage. I therefore welcome the Government's initiative which appears on page 2 of the Budget Day press release, HMT5, under the heading, "To Widen Small Firms' Access to External Finance". I quote: Representatives of small business and others will shortly be consulted on the development of a financial management certificate. The aim would be to devise a certificate that provided a clear signal of a firm's financial competence, thus providing an additional incentive for firms to improve and implement their financial management skills". I appreciate that the Government are to consult, but I should like to ask the noble Earl the Minister two questions, of which I have tried to give him prior notification. The first is: can he give any more details about the financial management certificate than appeared in the press release? Secondly: can he say whom the "others" who are to be consulted are likely to be?

5 p.m.

Viscount Caldecote

My Lords, in the welter of discussion on the economy—inflation, interest rates, PSBR, competitiveness, productivity and a stable currency to encourage growth in the GDP—I believe that, important though they are, we are in danger of failing to see the wood for the trees. We need to remember that the ultimate objective of all economic policy is to give everyone the opportunity to lead a full and satisfying life. Unemployment is a major obstacle to achieving that. So I very much welcome the subject of today's debate, so ably introduced by my noble friend Lord Trefgarne, with its emphasis on increased output and on SMEs (small and medium-sized enterprises), both of which create jobs.

Everywhere, increased output is largely dependent on investment. Recent OECD and IMF data show the connection clearly in the figures averaged over the past 30 years—which may account for the slight difference from the figures given by the noble Lord, Lord Haskel. The United Kingdom's GDP growth averaged 2¼ per cent. per annum. With fixed investment at 18 per cent. of GDP, we were at the bottom of the league, compared with Japanese growth of 6 per cent. and investment of over 30 per cent. of GDP. Other competitors were between those two limits. Nevertheless, the UK has made huge improvements in productivity and competitiveness, particularly over the past 15 years. But others have improved, too.

The figures quoted earlier are for fixed investment. Of equal importance—as the noble Lord, Lord Desai, so clearly said—is investment in innovation in competitive products which will sell all over the world. For price is not the only factor which affects sales. Quality and value for money are just as relevant. Switzerland is a good example. The products that they make are usually very expensive but of the highest quality, and they have a very good record in the export field.

Those considerations apply to every company, from the biggest to the smallest. Among them are many world-class companies which make a full contribution to output growth. But there are too few of them. There are many reasons for inadequate investment—for example, short termism; bias of taxation in favour of earnings distribution rather than investment, which means that more of the earnings are used in consumption rather than being reinvested in the company for innovation and the like; and a lack of confidence in demand in the future and in a stable value for sterling.

We have often discussed this topic in this Chamber. I shall not go into the issues today because there is not the time. They have been well covered in the past. I should like to emphasise the enormous progress that has been made under this Government in creating the right climate for investment. But the fact is that, overall, industry has not taken full advantage of it. So there is much more to do.

SMEs can make a major contribution. Many of them—probably the great majority—are owner-managed. That gives them greater flexibility to react to market conditions and invest for the future. There is no short-termism there. Just as important is that investment in SMEs is almost always investment for expansion of both output and employment, whereas in larger companies the objective of investment is frequently to produce the same output with fewer people employed.

What then are the main obstacles to even greater growth in the sector? They are, I believe, largely financial. Adequate cash flow is vital to the success of SMEs or even their existence. In that connection I hope that the Government, the CBI and others will continue to press for measures to deal with the great problem of late payment of bills to small companies. It is a very important issue which must be dealt with.

Also, funding for smaller companies is a major problem. I regret that the Budget did little to help SMEs by, for instance, granting 100 per cent. capital allowances for the purchase of plant and equipment up to a limit, say, of £250,000, as was widely recommended. Similar allowances to encourage investment in innovation should also receive high priority. But much more can be done by the financial institutions and industry itself, without waiting for government action. There is genuine difficulty in raising relatively small amounts of risk capital. Owing to the setting up and administration charges, no venture capitalist will consider investing less than £250,000 and more often less than £1 million. There is a major problem for fledgling SMEs and it is important to find a solution.

The noble Lord, Lord Weatherill, mentioned the Prince's Youth Business Trust, of which I once had the privilege of being a trustee. That is an example of how the problem is overcome at the lowest level of investment—probably under £5,000, unless it has changed very much since my day. The administration costs, advice given and so on are either undertaken by voluntary workers or paid for by money subscribed on a charitable basis. Perhaps for larger companies—those that are not dealt with through the Prince's Youth Business Trust—there could be a fund contributed to by banks and other big financial institutions which would facilitate smaller investments to SMEs by contributing to the administrative costs. Thereby, they would benefit from the resulting growth in the longer term future.

But, as has been said, many SMEs depend heavily on overdraft and other forms of bank lending. That makes them very vulnerable to a recession, when cash flow comes under pressure. Banks should be more flexible and not too greedy in providing fixed term loans. That gives great confidence to a smaller company that the overdraft facility or other type of loan will not be withdrawn at a difficult moment. Above all, it should be made absolutely clear by bank managers at the start of negotiations when dealing with SMEs whether they are acting as principals with power to make a binding agreement or simply as messengers making recommendations to some higher authority.

A few years ago I was chairman of a very small company. At a difficult time, we thought that we had made a satisfactory and firm agreement with the bank manager with whom we had dealt for several years, only to find some three weeks later that a higher authority had vetoed the agreement. That was certainly a factor in the ultimate collapse of the company.

Lastly, I should like to see more SMEs prepared to fund their growth by selling, say, 20 per cent. of their equity, as an alternative to more bank loan finance of whatever kind. It is better to own 80 per cent. of a successful company than 100 per cent. of a failure. I hope that investors, especially those taking advantage of investment through the new venture capital trusts, which my noble friend Lord Oxfuird mentioned, will make a real contribution to solving the problem and will not be too greedy in the terms of the agreements that they make with SMEs.

I emphasise again that much has already been achieved in the past 15 years in encouraging enterprise and investment. But we must always remember that our competitors too are improving all the time. We have to get and remain ahead of them. Greater investment is essential to achieve that.

5.10 p.m.

Lord Cochrane of Cults

My Lords, I start by thanking my noble friend Lord Trefgarne for introducing this subject today. It is right, as said by others, that he plays an important part in the engineering training organisations. I should mention also that he is a non-executive director of an interesting SME which has perhaps become more large than small, as I shall relate in a moment. I refer to Siebe, a company with a history extending back 170 years. It was founded by an Austrian artillery man by the name of Augustus Siebe who came to this country in 1816. In due time he invented, among other things, a better method for making screws—a vital engineering component—but is now predominantly remembered for the invention of the first serviceable and durable method of working underwater, the traditional hard-hat diver as it later became known.

Siebe is an interesting company. For a long time, it remained quite small, describing its activities as those of submarine engineers. It remained with the descendants of Siebe for a long time and came to the market in the 1950s. I should perhaps declare an interest. I have been a shareholder fairly continuously ever since. The vicissitudes of school fees and so forth perhaps led me to reduce my shareholding; otherwise I might not feel quite so poor as I sometimes do.

Siebe is now an immense company. It has a huge turnover. The profits published today are a great improvement. It is not particularly highly geared. That has all taken place due to a change of ethos in the company and the arrival of determined and skilful managers on the board of directors. At one stage it looked as though they had slightly overdone it but in fact they got it exactly right. The results we see today illustrate how growth is possible if it is well aimed and well controlled. The traditional manufacturer is often described as a maker of "widgets". I gather that that word is now obsolete because widgets are those things which cause beer to shoot out of tins. While useful that is not quite what was originally intended.

As the last Back Bench speaker I do not want to bore your Lordships with a multitude of figures or anything else. But I shall make one or two points and reiterate what was said earlier, particularly by my noble friend Lord Caldecote, on the role of banks. In this country small businesses rely immensely—as I know personally—on bank finance. Banks get cold feet at intervals. I mentioned that the other day in another context. A bank manager was overplaying his hand; he received a rude answer from me; eventually he lost the account and lost a good many other people's accounts too. That merely shows that not all bank managers are wise. We know that, but there was a chap determined that a certain class of business within his branch was unacceptable.

The role of the banks must be continually supportive. They must support us from the word go. In order to do that they need information. In order to give them the information, as my noble friend Lord Caldecote said, we need a decent financial system. That is of prime importance. Again, it tells us whether or not we are actually making money. There was a famous case many years ago of Crittall Engineering which could not get stuff out of the factory quick enough. Yet, mysteriously, it never seemed to have more money in the bank. It was during the period of Nye Bevan's housing boom. The company made steel windows. Unfortunately, it was receiving five shillings a window less than the cost of making them; so gradually it went down and down.

I saw something similar in my father's time with his mineral supply business. When my brother and I picked it up after his death we discovered that we were popping a 10 shilling note into every lorry-load of stuff we sold. Nobody realised that. Therefore, if one can persuade the banks to be more supportive on a continuing basis they will lose less money, feel less endangered and will not ultimately find themselves in the situation which was put to me by an experienced bank manager who said, "It is all very well having security of this factory and that factory, but they are worthless when the whole industrial estate is empty."

Another role which could be played by the banks in relation to companies is to put in a part-time, non-executive director who acts as liaison. He can say, "I do not think that that is a good idea; perhaps we should go this way rather than that way". That happened to my grandfather. The Royal Bank put him as signatory and director into a privately-owned coal company many years ago. Following the death of the head of that family, the coal company was discovered to be immensely in debt. I believe the personal guarantee of the executors was well over £7 million at the turn of the century. Through the energy of the next generation and possibly the wise guidance given by my grandfather and the bank, they all lived happily ever after, although they did have to mine under the castle gardens. I am sure that the noble Lord, Lord Ezra, appreciates the risks of mining, especially when one already has a huge bank overdraft.

I shall not continue except to say that in relation to part-time expertise in finance—picking up a point made by the noble Earl, Lord Kintore—there are plenty of retired executives with good financial experience who could be obtained to attend one day a week to keep control of a company's finances. That is particularly important when it is at the dangerous stage when, the idea having taken off, capacity needs to be expanded. The question is: more money is needed but how will it be obtained?

In a recent speech the Chancellor of the Exchequer eased the climate. But if those running small businesses think more carefully about the financial implications of what they are doing, they are more likely to prosper in the way we all want.

5.17 p.m.

Lord Ezra

My Lords, although there have been a number of debates in this House on manufacturing in recent years, the noble Lord, Lord Trefgarne, was right to introduce this debate today. Manufacturing remains a vital ingredient in the future economic development of the country. That is shown by the large number of important reports recently published on the subject. They include the Government's White Paper on competitiveness, the European Commission's White Paper on growth, competitiveness and employment, the House of Commons Trade and Industry Committee report on the competitiveness of the UK manufacturing industry, the CBI series of reports issued by the National Manufacturing Council and the report by UNICEE (the European equivalent of the CBI) on making Europe more competitive. All those centred on the vital role of manufacturing.

I have participated in most of the debates on manufacturing in this House over the past 10 years. I believe that the most significant development has been the changing attitude of the Government. In the 1980s the Government's attitude was that manufacturing represented only one element in the economy and it did not really matter how wealth was created so long as that was achieved. As we moved into the 1990s, however, the Government have increasingly recognised the importance of manufacturing, and they are right to do so. Fifty per cent. of consumer spending and 70 per cent. of exports of goods and related services are accounted for by manufacturing. In spite of the diminution in the industrial base, to which the noble Lord, Lord Desai, referred, there are still 4 million people employed in manufacturing with at least as many more supplying supporting services. There is therefore little doubt that manufacturing remains a crucial element in the economy.

The Government repeatedly draw our attention, and I am sure will do so again today, to the various positive signs in the economy, such as improved growth, better exports and reduced inflation. It is perfectly true that those developments have taken place. However, the impression created by the repetition of these positive developments is one of complacency. That is regrettable.

While the present indicators may be positive, the underlying trends are not. As the CBI and others have shown, we are still lagging some 20 per cent. to 40 per cent. in average levels of productivity below our principal competitors, even though there has been a narrowing of the gap in recent times. Our investment in manufacturing and related activities has been sluggish to say the least and leads to capacity restraints even at an early stage of economic recovery, such as we are beginning to witness at the present time. We have noticeably lower levels of skills than our main competitors. The noble Lord, Lord Trefgarne, and others referred to that. Finally, our inadequate capacity shows up in terms of a major trade deficit in manufactured goods, which is still running at the level of £10 billion a year, in spite of recent improvements in export performance. It is to these long-term problems, particularly the role of the smaller firms in overcoming them, that we should be addressing ourselves.

If we were asked to encapsulate in a very few words the major weakness which has developed in the British economy for several years past, I believe the answer must be lack of adequate investment, both of a physical nature and in people. Let us look for a moment at physical investment in the public sector, which is very necessary to create the conditions under which private enterprise can thrive. In spite of repeated pleas that the last thing that should be cut is investment in capital projects which are intended to provide an improved infrastructure, this seems to be the first thing the Government turn to when they wish to reduce the public sector borrowing requirement. I am afraid that we saw evidence of that in the recent Budget, when expenditure on transport infrastructure was cut from £10.8 billion to £8.8 billion. The main argument for doing that, according to the Chancellor, was that the private finance initiative would close the gap. All I can say is that that is by no means certain. In the meantime, industry, and in particular manufacturing industry, will go on suffering from continued congestion and delays.

Much reference has been made to the inadequacy of investment in manufacturing industry, a point made by the noble Lord, Lord Desai, the noble Viscount, Lord Caldecote, and others. One of the reasons for this inadequacy has been the uncertainty about demand caused by macro-economic volatility. We have just lived through a classic example of this, with the major stimulus to consumption in the late 1980s leading to overheating and then a massive cutback. It is no wonder, with these memories of not so long ago, that manufacturers are cautious about moving ahead too fast with investment and are insisting on high rates of return, to which the CBI, the Governor of the Bank and others have recently drawn attention, in spite of the current low level of inflation. I believe that there is a major role for the Government at the present time to try to put this right.

Of course the Government must continue to take the necessary measures—we saw one of them today—to keep inflation under control. But in addition—this is what is lacking so far—they must take complementary measures to stimulate investment. In this connection, I share with the noble Viscount, Lord Caldecote, the regret that the Government did not follow the advice of the CBI, the Engineering Employers Federation and many others in introducing fiscal measures in the recent Budget to stimulate investment. One of the measures proposed, as the noble Viscount pointed out, was for a 100 per cent. capital allowance on the first £200,000 of investment in any one year. That would have been particularly helpful to small firms.

As many other speakers have emphasised in the debate today, small firms play a crucial role in the economy. Within manufacturing industry almost a third of employment and a quarter of output are accounted for by such firms. Access to finance and the cost of finance are crucial elements in their success. In addition to capital allowances directed at small firms, to which I have referred, there is a strong case for considering an investment bank on lines which have existed for many years in France and Germany, and which are now being looked at in many quarters, to offer debt finance to small firms on terms which are at the very least no worse than those obtainable by larger firms. To get bank money these days small firms have to pay 3, 4, 5 or 6 per cent. above bank rate, whereas a large firm, with all its connections and its ability to go anywhere in the world to raise its money, can usually achieve a rate of between I and 2 per cent. That is a big impediment to the small firm.

What is required is a long-term strategy for stimulating investment in essential public infrastructure and in manufacturing to offset the uncertainties which have been created by past policies. No one can be certain that those policies will be avoided in the future. The upturn through which we are now going is being seen in many other countries. As we noted in the recent debate on the economy, while we have done very well in containing inflation, some of our neighbours have done even better, such as France which has inflation at only 1.6 per cent.

There is a need, agreed on all sides, in addition to a stimulus to investment, for greater resources and efforts to be devoted to training. Differences in skill levels are a significant factor contributing to the UK's lower productivity compared with its main trading partners. The noble Lord, Lord Trefgarne, referred to that point in his opening speech and the noble Lord, Lord Weatherill, gave us good examples of voluntary efforts to try to deal with this matter. More than 60 per cent. of the UK's manufacturing labourforce have no vocational qualifications compared with 50 per cent. in France, 40 per cent. in Holland and 25 per cent. in Germany. The gap is most pronounced in people with intermediate skills. This is therefore the area where the greatest efforts need to be made.

The Government repeatedly state that the economy is set on a virtuous path of sustained growth with minimum inflation. Well, that has yet to be proved. The recovery in Britain has been mirrored elsewhere. The test will come when a cyclical downturn sets in. In such circumstances, will the British economy suffer less than it has in the past? If manufacturing is to thrive in spite of future possible cyclical recession, the Government will need to set a framework within which there is a consistent macro-economic policy, a point made by many noble Lords. A major impetus on a continuing basis must be given to investment in physical assets in the public and private sectors and to the development of the necessary skills to make the best use of those assets.

5.29 p.m.

Lord Peston

My Lords, the noble Lord, Lord Trefgarne, introduced this important debate in an interesting and effective way. Indeed, he was no help to me because most of what he said made perfectly good sense and I agreed with him, which does not make for much of a debate. Happily, he will soon know that there are at least one or two things with which I disagree with him and that, at least, might enable me to add a certain amount of life to what would otherwise be an extremely boring progression of, "Yes, he said that and I agree with him".

Certainly, all of us now agree about the importance of manufacturing and there is no argument there. There is no argument about the importance of small and medium-sized firms. In that regard one should not forget that every year large numbers of firms start up but, regretfully, within about three years most of them have gone. I was extremely interested in the intervention of the noble Lord, Lord Weatherill. He referred to an institutional arrangement which not only helped firms to start but to survive. I believe that he is aware, as all noble Lords are, that going into business as a small firm is highly risky. As I say, the odds are overwhelmingly that the firm will not be there for very long. It is very hard to start a surviving business. I believe that the noble Lord, Lord Skelmersdale, also pointed that out.

In a way, of course, that is the basis of a free market economy. Essentially, entrepreneurship is risk taking. If it were a stone cold certainty it would not be entrepreneurship. Risks are taken and some firms survive and some do not. What is important is to create an environment in which it is easier to survive, particularly if one has products which consumers want. Again, we have to remind ourselves that the ultimate test is: are you producing goods and services which can meet the test of the market? Are you producing things which people want? I hope we all agree—I have said this several times—that firms do not exist for their own sake but in order ultimately to meet demand.

In that regard we have to ask ourselves this question: what is it that the small and medium-sized firm wants? Again, I believe that we all agree that what they want is a stable economic environment. They want an environment in which markets are growing, but what they do not particularly want is a highly fluctuating economy. Given that when this Government first came into power they intended to produce a serious change in economic policy-making, the puzzle is that the economy has fluctuated just as much under this Government as it ever did before. I say it is a puzzle because I thought that perhaps some of the things they were doing might lead to more stability, but they have not.

The manufacturing sector in particular has shown wild swings. Manufacturing output did fall between 1989 to 1992. It has only just risen, almost this very month, to its previous peak. That means that over the whole of the period there has been no growth, although over the longer period there has been growth. Manufacturing investment has not yet got back to its previous peak. We all agree about the importance of investment, as the noble Viscount, Lord Caldecote, emphasised. We have to ask: what is conducive to investment? My own judgment of what is most conducive to investment is that the market should be there when one has the new capital equipment. It is a commonplace to say that it takes time to get the new equipment in. What one does not want is to bring it in during the good times and to find that it is fully operational when the market has gone. That is why economic stability and growth are so tremendously important.

I said that I would introduce an occasional remark of a controversial kind. I certainly do not believe that what the Chancellor of the Exchequer did today in raising the bank rate is remotely of any help to small businesses. We may have a chance to discuss that, I am told, tomorrow, but since I may not be speaking tomorrow I must say that raising the bank rate today makes no economic sense to me whatever. I say to noble Lords opposite that it does not make any political sense to behave in such a panicky way either, but that is for them to reflect on.

I turn to the whole question of finance which other noble Lords have mentioned. I am with them all the way. What a small business wants is a helpful financial environment, but in particular it wants help on a rainy day. To offer a small business funds when times are good is not bad, but what it really wants is that when things are going wrong help will be available from the financial institutions, which we all agree are, for the most part, the banks. Help is wanted at that time. It does not seem to me that within recent years the banking system has been as helpful to business as it might have been and as I hope it will become again.

In fact, the noble Lord, Lord Trefgarne, said—and I nearly decided to agree with him on the point—that we should discuss this matter on another day. I am not sure when the next day is to be so I thought that I should at least mention the importance of financial arrangements and liquidity to small businesses. I agree with the point made by the noble Lord, Lord Ezra, about interest rates. There must be some loading of interest rates because small business is riskier than big business, but the difference does not seem to me to be justified by market forces. We should consider changed institutional arrangements that might help us.

I believe that there is no difference between us as regards education and vocational training. We simply have to do more, but what we do has to be more effective. One of the matters which concerns me is that there are far too many courses which are not very good. I am delighted that the noble Lord, Lord Trefgarne, has been appointed chairman of the engineering training board. I am sure he will ensure that from now on training is effective and produces the kind of people we want. I am not saying that if I were chairman I could not do the job better. That may well happen within the not too distant future.

There is another point as regards finance which we should bear in mind. The small businessman wants to engage in his business. He or she wants to make the goods or provide the services. Very often finance is not of great interest and the small businessman does not want to get involved. That is why such businesses need a sympathetic financial environment. That is why in the old days the bank manager was a help. He coaxed them along and would say, "Do it this way and it will work out, while you do what you know how to do". As I say, I believe that the problem today is that the sympathetic bank manager has gone. I cannot remember the last time I had an opportunity to see a bank manager. I see either a computer screen or a person who is clearly not a manager with any authority.

I found the contribution of the noble Earl, Lord Kintore, absolutely fascinating. I did not know that there was an international body concerned with bookkeepers, so I have learned something definite today. I have a very sophisticated computer package which I am supposed to use in order to manage my finances. But my experience is that you cannot beat the old box in which you put all the papers. It is the only system I have ever come across which does not fail. All the stuff is in the box and when the time comes you can work through it. I am as much a modernist in these areas as anybody and I am a great believer in optimal information flows, and all that. I keep a box and I always put every piece of paper in it. If any noble Lord wants to know how to run his finances my advice is, first, to get a box and, secondly, put every piece of paper in it and never throw anything away. That is the secret of first-class financial management.

One topic which arose in the debate was our old friend deregulation. Of course one wants to create an environment in which small firms are not over-regulated so that they can get on with what they want to do. The noble Lord, Lord Trefgarne, made a point which is not exactly apposite. He referred to the plethora of directions from Brussels. As I pointed out several times during the passage of the deregulation Bill, we cannot do anything about Brussels. The Brussels directives cannot be overcome via the deregulation procedure. Noble Lords may not like it, but that, I am afraid, is the world in which we now live. The way to deal with directives from Brussels is to try to stop them at source before they get here, as we discussed at Question Time today in relation to buses. So we do not disagree on certain aspects of deregulation, but I do not think that we should be too optimistic.

Reference has been made to the social chapter and the minimum wage. The noble Lord, Lord Skelmersdale, mentioned the latter. I suppose that we just have to disagree on that. A minimum wage policy raises the average cost per employee, but it lowers the marginal cost of an employee. Putting on my old teaching hat, perhaps I may say that what matters is the marginal cost, not the average cost. If I had a blackboard I could demonstrate as part of elementary economic theory that a minimum wage may just as likely be employment-creating as employment-destroying. Therefore, one needs to look at the evidence. And looking at the evidence—without boasting I think that I can say that I have read all of it—the evidence does not tell us one way or the other. There are studies showing that a minimum wage can lose jobs and other studies, interestingly enough, showing that such a policy can create jobs. Therefore, I am a bit puzzled by the strength of some noble Lords' opposition to a minimum wage. To put it at its mildest, which is all that I want to do today, the point is arguable.

I am also puzzled by the attitude that is sometimes taken even now towards the social chapter. I refer particularly to the attitude of the Confederation of British Industry. I know that I shall offend one or two noble Lords by saying this, but I do not expect rationality and good sense from the Institute of Directors. However, although the CBI tends mostly to support the party of noble Lords opposite, it occasionally gives the impression that it is interested in serious argument. Therefore, I simply do not understand why the CBI fails to see that the social chapter is part of good industrial relations which, if appropriately applied, will raise productivity and lower costs.

I reiterate the main point, which we have argued before. There is no possibility of this country being able to compete with, say, the Pacific Rim countries on low wages. There is no way in which we can ever get our wages low enough to become competitive with such countries. Therefore, returning to a point on which we agree, we need high levels of skills, flexibility, worker co-operation and excellent management. I believe that the social chapter provides the economic environment for that. Old-fashioned distant management, which simply wants to give orders to a poorly paid, supine labour force, cannot deliver the hyper-efficiency that we need. Low wages are like devaluation; they are the easy way out for a management that cannot do its job properly. That is not what we want.

In conclusion, I am extremely pleased that at long last we are having a meeting of minds in this area. When I first became a Member of your Lordships' House, noble Lords opposite could see little or no role for government except perhaps to deal with inflation, and my noble friends and I seemed to be saying that every problem was to be solved by government intervention. As today's debate shows, we have now moved closer together. Noble Lords opposite now see a more positive role for government—they have said so today —and I hope that I have made it clear on this occasion and others that we recognise the limits of government intervention. That does not mean that we agree—I hasten to add, in case any of your Lordships end up in a state of shock—but it does mean that we can argue more constructively and rationally on economic and industrial subjects. I hope that we continue to do that.

5.43 p.m.

The Minister of State, Department of Trade and Industry (Earl Ferrers)

My Lords, we have had a most interesting debate, initiated by my noble friend Lord Trefgarne. I should like to repeat what others have said and thank my noble friend for having given the House the opportunity of discussing the important subject of manufacturing industry.

A thriving manufacturing industry means a healthy small firms sector. There are nearly 3 million firms in the country, and 96 per cent. of them employ fewer than 20 people. Therefore, a thriving manufacturing industry implies, and is dependent on, a thriving small firms sector.

I agree with my noble friend Lord Skelmersdale that small firms are important. My noble friend also referred to charities which are important too. He raised some specific points about charities which I should like to look into before writing to him. I am unable to give him an answer immediately on what is obviously an important matter.

The Motion brings together the two strands that are at the very heart of the Government's industrial policy. I refer to the small firms sector and the need for a thriving manufacturing sector. I would want to leave your Lordships in no doubt as to the Government's commitment to a strong and vibrant manufacturing sector. Manufacturing has traditionally been the way by which a country can increase its growth, whether it is a third world country or a developed country. After decades of decline, the 1980s saw a significant improvement in the competitiveness of our own manufacturing industries.

Since 1981 manufacturing output in the UK has risen by 25 per cent.; productivity has risen by over 75 per cent.; and exports are up by well over 80 per cent. That is a good performance, particularly when we bear in mind that it has taken place over a period when we have witnessed a world recession of almost unparallelled severity. But this strong performance is continuing. Manufacturing output is 5 per cent. higher now than it was a year ago—and that is the strongest growth since 1989.

I know that in making these remarks I shall upset the noble Lord, Lord Ezra. He says that the fact that we always mention the good points shows that we are complacent. I do not think that that is the case. I make no apology for mentioning the good points. I believe that as a country all too often we denigrate ourselves and mention only the bad points. Yet when we do well and say so, the noble Lord, Lord Ezra, says, "You're complacent". The noble Lord's speech was, as always, fascinating. But it was also a bit depressing. The noble Lord said, "We'll have to wait and see what happens to firms when we have the next economic cyclical downturn". That reminded me of the lovely song that Stanley Holloway used to sing, "Oh my word, you do look ill". That almost encapsulates the otherwise fascinating speech of the noble Lord, Lord Ezra.

Manufacturing is important, but so also is the service sector. The two are vital. It is not a matter of trading one off against the other. We need both to be competitive. What is more, they need each other. The Government also recognise the true value of small firms. Many of your Lordships have referred to their importance. They are a vital source of new ideas and new products. They also provide services and, very importantly, new jobs. They stimulate competition and they help individuals to realise their personal ambitions. That is no bad thing. From among their ranks some of the great names of tomorrow will emerge.

Small businesses are built up by hard work, by dedication, and, very often, by personal sacrifice. I welcome this opportunity to applaud the success of those who are involved in small businesses and to assure your Lordships that the Government are determined to see that their well being continues.

Taken as a whole, the role of the small firms sector in creating jobs has been particularly impressive. It is worth reminding ourselves that in just two years, between 1989 and 1991, firms with fewer than 20 employees created an additional 350,000 jobs. When one looks at the number of extra jobs created and the number of small firms that have started up, it is interesting to note that six out of 10 were initiated by people with no prior business experience. I do not think that that is something to be ashamed of; I think we can take great pride in the fact that there is an entrepreneurial spirit in our people and a determination to try to do their bit for their families and their country.

Taken as a whole, the role of the small firms sector in creating jobs has been particularly impressive. The number of business start-ups remains buoyant at about 400,000 a year. There is every indication that firms of that nature will remain a crucial and vital source of new jobs. Small firms have a powerful influence on the economy. They are at the forefront of economic recovery. We have only to look at the survey of smaller manufacturing firms carried out in the summer by the CBI in conjunction with Panell Kerr Forster. It shows that output and new orders, particularly export orders, have increased strongly. No less importantly, but rather less tangibly, the survey shows an increase in business optimism, in employment, and in export confidence. I hope that that will encourage the noble Lord, Lord Ezra.

There is further evidence of the prospects for small manufacturing firms. The last Quarterly Survey of Small Businesses in Britain undertaken by the NatWest and the Small Business Research Trust shows that throughout 1994 manufacturing was one of the most optimistic sectors in terms of expected sales and that it remains the single most optimistic sector for growth in employment. Those are encouraging facts.

The objective of the Government's policies for all businesses, small and large, can be summed up in one word. I make no apology for using it. That word is "competitiveness". Competitiveness means having what it takes to obtain business in world markets against the competition of others. It is the only way to guarantee our future prosperity. It does not necessarily mean producing the cheapest item, although cheapness is of course important. It means providing the best value for money; it means producing goods of the right type, at the right time and in the right place; and it means creating confidence in the purchaser. People will often buy something which is not the cheapest, merely because they have confidence in the product and, in particular, in the manufacturer.

Markets are increasingly global rather than national. The pace of change is accelerating. It is not slowing down. When I was a young man I went to Singapore. The journey took four weeks. I went there two months ago; it took 13 hours. Everyone said what a terribly long journey it was. But, of course, it is not. It is, relatively speaking, around the corner. So are all the other places in that part of the world. There are tremendous opportunities there for us. But there are threats too. I agree only marginally with the noble Lord, Lord Peston, when he says that countries in the Far East are producing goods at a rate we cannot possibly match. To some extent, that is true. However, I was surprised to be told the other day that women's wages in Korea are higher than those in Northern Ireland. That was as much a surprise to me as I dare say it is to the noble Lord.

Lord Peston

It is indeed.

Earl Ferrers

What all this means is that our companies are operating in an increasingly competitive world, especially with the emergence of the fast-growing nations of the Far East and the new markets in eastern Europe. Those changes bring tremendous opportunities but they also bring threats. Improving competitiveness is essential; it is fundamentally down to individual companies and their managers to achieve it.

I agree with my noble friend Lord Caldecote that governments have to set the conditions. On the whole he felt that industry had not made the best use of them in the past. He said that much has been done, and he is right. Much has been done. But it is also, as he said, being done by our competitors too. We cannot stop the search for increasing competitiveness. That is something which will go on and on.

Earlier this year the Government published a White Paper. It was not a DTI White Paper. It was a White Paper which articulated, for the first time, policies across all government departments which have a bearing on the competitiveness of industry. It is, I suppose, the first time that any government have said, as a matter of policy, that before they bring forward any legislation they must first ask the question, "How will this affect the competitiveness of industry?".

Enhancing competitiveness is not something one can achieve by turning a knob, issuing a diktat, or passing a law. Competitiveness is a culture of continuous improvement. Everyone has to play his part in that, including smaller companies. They have a crucial role to play.

New regulations are framed with small businesses in mind. We require that all legislative proposals brought before Parliament, which impact on business, must have an assessment of their compliance costs. That must include a small business test to show how the regulation will impact on small businesses. My noble friend Lord Skelmersdale said that he wanted the climate to be right. He wanted low inflation, low interest rates, more deregulation, and less tax. I agree. In some ways he asks for Utopia. We have already done a great deal. The policies the Government have been pursuing have resulted in inflation running at its lowest level now for over a quarter of a century; interest rates being brought down to their lowest level for 17 years; and unemployment dropping by 400,000 since the beginning of 1993. That means that more people are employed.

An essential ingredient in getting the climate right, particularly for smaller enterprises, is to minimise the burden of bureaucracy. Industry cannot get on with its job of producing and selling if it is perpetually strapped around with red tape. Deregulation is an essential part of the Government's strategy for improving competitiveness. Our aim is not just to strike out regulations which are unnecessarily burdensome on industry but to ensure that regulation which is necessary is thought out properly and soundly and properly based. The new powers available to us under the Deregulation and Contracting Out Act are a major advance in the deregulation campaign.

My noble friend Lord Trefgarne was right when he said that industry must become more efficient. I agree. It must. Much of it is, but a great deal of it has a long way to go. My noble friend was also right to applaud the fact that we are not part of the social chapter. The noble Lord, Lord Peston, said that he could not see that being out of the social chapter could be good for staff relationships. The noble Lord looks worried. I am paraphrasing what he said. He looks less worried now, so perhaps I have it right. I can tell him why it is good for staff relationships. It means that other people invest in this country. Forty per cent. of investment from Japan into the EU comes to this country; 43 per cent. of all investment from America into the EU comes to this country. Why does it come to this country? It is because we have a better climate; our labour costs are more competitive than those of other countries. That produces good jobs, and that is good labour relations.

Lord Peston

My Lords, perhaps I may interrupt the Minister. Will he say why so much of British capital is invested in the rest of the EU where they do have the social chapter? The argument should work both ways, but it does not. We invest enormously over there where the social chapter is in operation and will continue. It is more complicated than the Minister suggests.

Earl Ferrers

My Lords, I should not try to make things too complicated. The answer to that question is simple. British firms invest their money where they find it attractive and important to do so. That does not rely only on the social chapter. It may well be that in order to supply what they want to supply in France and Germany they find that they have to have their own firms in those countries. It is not as simple as the noble Lord, Lord Peston, makes out either.

My noble friends Lord Skelmersdale and Lord Oxfuird, and the noble Lords, Lord Haskel and Lord Weatherill, referred to small and medium-sized enterprises. They were right in what they said. My noble friend Lord Skelmersdale said that some businesses stay small and have only one or two employees. The businesses with one or two people do not get bigger because they do not want to or they cannot. Often those who run such firms are the ones producing and selling the goods; keeping the books; going to the bank manager; doing everything. They want advice. That is why we have set up the Business Link system. It will enable people to have business advisers who will be friends and who will ask, "Can we help you over this?". The man may say, "Yes, this is the trouble that I have", and be told, "Yes, I have seen someone else down the road and he has got out of it this way". The business advisers will be able to help such people. Business Link will include advisers on design and export promotion. It is an essential part of what the Government are trying to achieve, referred to by several noble Lords as a partnership between government and industry. I agree with my noble friend that the future depends not on Ministers but on companies themselves.

The noble Lord, Lord Haskel, said that there was inward investment in a weak manufacturing industry. The noble Lord, Lord Preston, made a similar point. The noble Lord, Lord Haskel, said that we have £9.2 billion of inward investment and £17.2 billion of investment outside this country. That is good both ways. Traditionally, Britain has been an investor in the outside world, which is good for this country and good for business. Often companies, for the reason that I gave to the noble Lord, Lord Desai, have to locate themselves in other countries in order to carry out their business. Equally, it is good for other countries to invest in this country. That stimulates work, business and employment and often it stimulates other companies in this country to supply the new companies with products.

The noble Lord, Lord Desai, gave his views on these matters. I agree with his comments on investment from abroad. He said that he was an economist and he did not want to go anywhere near the real world. I understand that feeling but say to him that sometimes those who are in the real world say that they do not want to go anywhere near an economist. They certainly do not want to go anywhere near three economists because they will receive four answers, which is not particularly helpful.

We had a lovely speech from the noble Lord, Lord Weatherill. I was intrigued to hear that his father led a strike of tailors. I did not realise that but I am sure that it must have been in a good cause. Whatever the cause, it is good to learn that his small family firm has prospered and that it now exports two-thirds of its product. Perhaps I may say, without being too platitudinous, that the noble Lord's father would have been as proud of his son as he was of his business.

The noble Lord, Lord Weatherill, reminded us that Napoleon did not say that we were a nation of shopkeepers but that we were a nation of merchants and adventurers. He regaled us with a story about his family; perhaps I may say that my family also played a part by being adventurers. One member went abroad and taught the Persians how to use gunpowder. I am not sure whether that was a good form of trading but he was so successful that he returned as the Persian Ambassador to the Court of St. James's. That was a glittering career.

The noble Lord mentioned the Prince's Youth Business Trust. It is an important trust and has undertaken remarkable work, as I have been lucky enough to be told. He was also concerned about the Croydon Business Venture which resulted in his writing to 12 people asking them for £1,000 each and getting it. I am glad that he did not write to me.

A certain amount of money has been available for business start-up. The noble Lord was fearful that that will not be specifically available in the future because it forms a part of the single regeneration budget. I know that the fragmentation of start-up support has been the cause of anxiety in a number of organisations, in particular the local enterprise agency network. I realise too that there may be some short-term difficulties. Real opportunities exist in the longer term for local partners to bid for the funds that will be available through the single regeneration budget. In looking to the future, we consider that local enterprise agencies will be important partners in the Business Link. I hope that the individual enterprise agencies will work closely with their local Business Link partnerships. Businesses are starting up effectively and I hope that that will continue.

A number of noble Lords referred to the financial arrangements. My noble friend Lord Trefgarne referred to finance for industry, as did my noble friends Lord Oxfuird, Lord Caldecote and Lord Cochrane of Cults. The noble Lord, Lord Ezra, said that businesses fail too and the noble Lord, Lord Peston, said that banks have not always been helpful. In some respects, people have found that to be the case. However, a recession scythes through everything. Both banks and small businesses are vulnerable but I agree with the noble Lord, Lord Peston, that within prudent guidelines there should be a relatively long-term commitment. If that can be done by medium-term loans that the banks are prepared to make that would be good.

Small businesses are reliant on short-term finance and overdrafts. The Government encourage small firms to consider alternative forms of finance. Informal investment by the Business Angels is one of them. There is access to the right kind of finance at the right time. That is vital if businesses are to succeed and prosper. It is true that banks are likely to remain the main providers of finance for small businesses. Currently they are providing approximately £40 billion to small firms, mainly as loans and overdrafts. It is vital that there should be a relationship of trust and mutual understanding between the banks and small businesses. There is also in existence the small firms loan guarantee scheme. That was changed last year; the maximum loan was increased from £100,000 to £250,000 to firms which have been trading for two years or more and for some firms the guarantee level was increased from 75 per cent. to 85 per cent. There has been a reduction in premium for all firms.

The noble Lord, Lord Ezra, referred to the commercial investment bank. In some parts of government there is not too much enthusiasm for that but my department is to undertake a review of the issue in order to establish whether small firms and enterprises in the United Kingdom are disadvantaged and what role the banks should play. I should have liked to have referred to many other issues but time runs out. Perhaps I may write to noble Lords.

The noble Lord, Lord Desai, referred to manufacturing investment. Business investment is estimated to have risen by 1.25 per cent. in the year to the third quarter. The Treasury forecasts this to rise to 2 per cent. for the year as a whole and to 10.75 per cent. for 1995. Manufacturing investment accounts for about one-fifth of the total business investment and is expected to increase strongly next year. The CBI has forecast a growth of more than 11 per cent. Those are encouraging facts.

I return to the point made by my noble friend Lord Trefgarne at the end of his speech. On the whole, government's contribution to industry can best be made by supporting and helping businesses but as far as possible by getting out of their hair. We can help by providing information and advice, by making available specific schemes and special initiatives and by providing all kinds of statistics. But it is not the Government who create wealth; it is individuals and the businesses. That is what we want to encourage.

It is always tempting to think that the past was easier than the present. That is nonsense. Many years ago my noble friend Lord Waldegrave said something that I have never forgotten. He said, "Always remember that there is a better opportunity tomorrow". So there is. We are leading Europe out of recession. There are stacks of opportunities and it is our business, whether as government playing their part or businessmen playing their part, to grab those opportunities and to make the best of them that we can.

6.10 p.m.

Lord Trefgarne

My Lords, at this stage in the evening, with an important debate to follow, it is not for me to do more than thank every noble Lord who has taken part in the debate. The speeches were uniformly interesting and informative and I am grateful to each and every noble Lord.

I am particularly grateful to my noble friend Lord Ferrers for replying to the debate today. I know that being here today has caused difficulties for him with regard to commitments in his diary and therefore I am doubly grateful to him. With that, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.