A Report On The DTI's Last Twelve Months

Written by Dr. Vincent Cable MP and published in The Parliamentary Monitor magazine on Sun 21st Sep 2003

Vincent Cable MP, Liberal Democrat Shadow Secretary of State for Trade & Industry

In some key areas the DTI has had a good year. The biggest issue on the agenda is the future of world trade, which reaches a significant juncture in Cancun. Ministers have been deservedly praised for their sanity in defending an open, liberal trading system against the vociferous voices of protectionist interest groups and anti-globalisation opponents who want to undermine the multilateral system.

In some other aspects, too, the DTI ministers have had a positive impact. Their response to the debate on corporate governance, post-Enron, was broadly sensible and new legislation dealing with the workforce - notably flexible working - was well balanced. The Energy White Paper made a refreshingly clear commitment to new renewables, energy conservation and efficiency. There have been stronger legislative measures to promote competition through the Enterprise Act and to give firmer consumer protection, all of which is welcome.

Unfortunately there have also been signs of a regression in terms of a more interventionist industrial policy, with some element of the "picking winners" and bailing out "losers" approach reminiscent of Labour Governments of the 1970's.

One of the biggest decisions of this Government has been the bailout of British Energy through the Electricity (Miscellaneous Provisions) Act. British Energy has proved to be uncompetitive as well as generating vast long term liabilities for decommissioning. It failed to develop a commercial strategy to deal with changes to the electricity generating market and the fall in the wholesale electricity price.

It could and should have been allowed to become insolvent followed by restructuring and an orderly phasing out of uneconomic capacity, subject to overriding safety concerns. But the taxpayer has now made an expensive commitment to solvent restructuring. Other generators, including those producing power in an environmentally friendly manner, have been allowed to go to the wall. The subsidy to British Energy continues to undermine those generating firms who remain. It is interesting to note that this issue has not yet cleared the European Commission's scrutiny, which is considering whether the bail out constitutes illegal state aid.

The DTI further increased its abilities to intervene in industry with the introduction of the Industrial Development (Financial Assistance) Act, allowing Ministers to give future financial assistance to industry up to an amount of £6.1 billion. What the DTI has created, in effect, is a huge slush fund from which they can bail out and subsidise businesses.

There is no indication of where this money will be spent and accountability mechanisms are weak. Some idea of the DTI' priorities can be gleaned from the recent £50 million crutch provided to Ineos Chlor. The DTI's commitment to promoting "national champions" over wider policy concerns is illustrated by the almost slavish commitment to promoting the products of BAE Systems including such dubious ventures as the air traffic control contract in Tanzania.

The DTI justifies its interventions in terms of "saving jobs". But it is economically nonsensical to argue that jobs can be saved by simply injecting more and more Government money into enterprises. Bail out and promotional funds are drawn from other public spending priorities or else through higher taxes, which destroys jobs in other areas of the economy.

There are other areas where the DTI has been ineffective.

One example is that of rewards for corporate failure. There is widespread revulsion when businesses lose millions of pounds a year, jobs and pensions are at serious risk and the executives responsible for the mess can walk out of the chaos around them with generous pay-offs. The Government's response has been to issue yet another in a series of consultations on the matter. One straightforward step would be to give more impetus to shareholder activism. The Government has already legislated to give shareholders a say on executive pay, but shareholders should have a binding vote. Another reporting season has slipped by and another opportunity to tackle the issue has been missed.

Its failure to tackle the regulatory burden on business is equally frustrating. Earlier this year the Institute of Directors estimated that "Red Tape" is costing UK business £6bn a year and adds six hours to the working week of small business owners. Red Tape consistently tops the list of concerns of all businesses. Growing businesses are often suffocated by bureaucracy. Much of the problem lies in the growing complexity of the tax system and the total lack of sensitivity to business concerns in departments like the Home Office. The DTI should be taking the lead in efforts to roll back excessive regulations.

The DTI's growing, and expansive, industrial activism contrasts markedly with its supine behaviour faced with the threat to the Post Office network - the thousands of sub-post offices which are at the heart of every urban and rural community - caused by the introduction of automated benefit and pension payments. The consequent loss of income to post offices will be 40% and a third of urban post offices will close (rural post offices survive temporarily with subsidies). The impact could be greatly lessened if the Government (the leading shareholder) actively encourages alternative income generation as recommended in the report of the Cabinet Office (PIU), also ensuring that all those pensioners who want the new post office card have easy access to it and pressing some of the leading banks to follow the example of Barclay's and LloydsTSB in allowing cheque cashing at post office counters. But this vital network is being allowed to flounder.

The DTI has a contradictory remit. It is responsible both for promoting industry and for regulating it in the interests of consumers, the work force and the environment. These roles have inherent contradictions. It has to be in the interests both of business and the consumer that the functions of are separated. Even the Chancellor, who on a number of occasions has chastised his Cabinet colleagues for their protectionist tendencies, seems to acknowledge the outdated nature of the DTI's increasingly interventionist nature (though his own proclivity for endless tinkering with the tax system has, as much as any other factor, added to red tape burdens).

Many of the DTI's functions work in parallel with the responsibilities of other departments. This leads to unnecessary duplication of resources and the need for inter-departmental liaison when it would be far more efficient if the matter were dealt with by one department. It also results in additional reporting burdens on businesses when they have to report essentially the same information to two different government departments. Competition and consumer protection functions remain important, though these are now largely dealt with outside of Whitehall.

It is time to consider the abolition of the DTI; to devolve its small business support currently provided by the DTI to regional development agencies; to reallocate its responsibilities and to cut quite drastically the annual spend in industrial support and DTI bureaucracy. The money would be better spent elsewhere; for example, business would welcome a serious attack on adult illiteracy and improved transport links. The key point, however, is that the need for a major Whitehall department to represent producer interests in industry is past.