Critiques Submitted to the Committee

Business Alliance

BA 01 08

A Business Alliance Critique of Sir David Varney’s Review of Competitiveness of Northern Ireland

Introduction

1. The Business Alliance welcomes the invitation from the Assembly’s Finance Committee to provide a short critique of the Sir David Varney’s Review of the Competitiveness of Northern Ireland, published at the end of April. While we have had limited opportunity to digest this report and secure comments from our members we have outlined below our initial reaction to Sir David Varney’s second report (subsequently referred to as Varney 2).
2. The Business Alliance is an informal partnership consisting of CBI Northern Ireland, Centre for Competitiveness, Institute of Directors and Northern Ireland Chamber of Commerce and Industry.

Varney’s findings and key recommendations

3. The Review sets out a fairly well established and increasingly understood position of the Northern Ireland economy, much of which has already been captured in the Executive’s Programme for Government (PfG):

• Existing strengths to build on
• Significant structural change required to move to a private sector driven economy
• Improve productivity on one hand and reduce economic inactivity rates on the other
• Improve skills and realign education/training provision with the needs of the economy
• Reduce the size of the public sector – the Review makes it quite clear that the public sector is disproportionately large, and with wage rates on average 20% higher than private sector (not to mention generous pension arrangements)
• Re-emphasises importance of ramping up asset sales to reinvest in key infrastructure – though pointing out that the priority for investment should be to underpin economic growth
• Encourages an urgency in implementing the Programme for Government and the RPA

4. The Review does stress, importantly that the tools to help develop the economy are largely in the control of the Executive (except fiscal incentives) and that substantial resources are available – though the Review fails to assess the level of need particularly in relation to the 20 year of underinvestment during the Troubles. The Review does stress the urgency in delivering key aspects of the Programme for Government (with which we concur strongly) and the importance of focusing investment on economic development priorities (again, something which we concur).
5. We look forward to the UK government’s response to the Review (in addition to the commitment by the Prime Minister to allow additional asset sales of £1bn to be retained for investment in Northern Ireland). In particular the Review recommends that the UK government set out how it will assist the Executive tackle the stock of people on incapacity benefit – improving economic activity rates is a key goal in the PfG.
6. However the Business Alliance is disappointed that the Review has little to offer in terms of new strategic recommendations which could help create the ‘step change’ required, and fails to recognise the potential of fiscal incentives to help transform the economy, particularly with regard to skills and innovation.
7. The Review does urge additional action in a number of areas:

• Deepening and intensifying public sector reform – which is supported by the Business Alliance
• Ambitious labour market and welfare reforms to help increase the economically active – again strongly supported by Business Alliance (though the Review is weak on how this is to be achieved – specifically we believe the UK government needs to create an incentive mechanism for the NI Executive as at present all reductions in Incapacity and other benefit claims are to the advantage of the Treasury alone)
• More employer led training – strongly supported by Business Alliance
• On FDI more co-operation with IDA and UKTI is recommended – while we see some merit in this we do not believe this will deliver the step change in investment that is required – and clearly the IDA and Invest NI are in competition for investments in key areas (albeit that different projects may be more suitably located in one constitution ie profit centre in ROI, cost centre in NI)
• Enhanced co-operation with the Republic of Ireland in developing the all-island economy – Business Alliance believes there is significant potential here, building on the current good progress which has been achieved.

Critique on specific Varney 2 recommendations

8. In the following Box we have summarised the findings of the Review and provided an initial Business Alliance response.

   Box 1 Summary of Varney 2 findings/recommendations and Business Alliance critique

   Varney Finding/Recommendation

   Business Alliance critique

   Proposal for an Independent Competition Analysis Board and production of Annual Competitiveness report Employment Several recommendations to help tackle high inactivity levels, including implementation of Pathways to Work, integrated delivery, better assessment and delivery of basic skills, and develop the Local Employer Partnerships (LEPs)  The UK government to set out how it will assist this process  Skills  Importance of prioritisation of skills strategy. Importance of improving basic skills by implementation of Bain Review and 14-19 strategy, achieve targets for basic skills and Level 2, review existing strategies and learn from GB and Ireland to ensure they are meeting employer’s needs , and bring all public sector workers up to Level 2 – ‘the pledge’ .  A general recommendation that more funding should be put in the hands of employers and individuals (to increase choice and quality of training)  Also series of recommendations to improve intermediate/higher skills:  Promote apprenticeships, review existing deliver, provide students with better information on demand for skills, explore additional incentives/bursaries, promote partnerships with FDI (ie conversion courses), and seek to attract students back to NI Investment  More urgency is attached to the planning reform agenda Invest NI to work more closely with UKTI to benchmark target markets. Work of Invest NI to be reviewed to include role of Ministers, governance, improved working links with UKTI and IDA, and links to other depts/bodies Innovation The review highlights the importance of innovation and suggests that R&D spend in NI is at levels which one would expect allowing for size/structural differences with the rest of the UK. The Review makes a number of suggestions: Support for clusters, promote take-up of existing R&D tax credits, need for permanent third stream of funding for universities, ensure FE sector supports the Regional Innovation Strategy, introduce Innovation Voucher Scheme, and align mainstream research funding/strategy across NI/UK/ROI  Enterprise A number of further reviews are identified for consideration: Investigate poor take up of Small Firms Loan Guarantee Scheme Ensure financial assistance is not market distorting  Examine barriers to growth and ensure interventions are tailored Minimise regulatory burdens Public Sector reform A number of recommendations focusing at improving efficiency are set out:  Continue with reform agenda incl the review of the number of Departments  Use public sector pay process to reduce differential with private sector  Further asset disposals with proceeds retained in NI for reinvestment  Transfer certain agencies to the private sector  Introduce more contestability in delivery of public services and explore reform of public procurement to benefit SMEs  Investment Strategy should prioritise investment in projects which support economic development  Consider scope for more private sector involvement

   Could make a valuable contribution – however better to build on what we have. As part of it’s Corporate Plan ERINI is planning to produce a regular report which, with some additional resource, could be developed to provide a comparative document Much of this is underway already. While accepting urgency and importance of an integrated approach there is little new here – disappointed that some GB models which have successfully used private and community/voluntary sectors in delivery have not been highlighted as individual support is more likely to be more effectively delivered outside the public sector. We are not aware of what progress has been achieved with the LEPs in NI We look forward to the UK government’s response to the challenge set. The importance that the Review attaches to the skills agenda is welcome – this is at the top of the business agenda. While many of the findings are worthy, the focus is largely on implementation of existing initiatives (we accept delivery is key).  In principle we support more funding through the individual or employer – we accept that DEL should undertake a review of effectiveness of current delivery mechanisms, and that the Review of ‘Success through Skills’ should include an assessment of the approaches/initiatives underway in GB. Business Alliance will be keen to encourage their members to support ‘the pledge’ We strongly endorse the importance of having high quality, independent careers advice, information and guidance – sufficient resources must be allocated to deliver the emerging careers strategy* Queens University has already announced bursaries for STEM subjects from Sept 08 which is very welcome. We support the recommendation that government should consider how it can incentivise an increase in the number of students studying STEM related subjects. We are very disappointed that the Review has ruled out an enhanced ‘training tax credit’ We strongly support the introduction of ‘conversion courses’ to meet current skill needs We understand a strategy to attract back students is already underway as part of a large campaign to encourage talent to come to NI – this is an important short term intervention. Much progress has been made with regard to cross-border mobility though barriers still remain  Strongly supports the planning reform agenda, including the key PfG target relating to the decision time on major planning applications. We welcome the recognition that further reforms and improvements need to be delivered with more urgency. It is critical that NI planning system can deliver speedy decisions. The comment on financial incentives for local authorities does not appear to be appropriate under the existing structures where Local Authorities have only a minor role to play. While there may be merit in some/all of these reviews it is far from clear what will be achieved. There is always room for improvement, but it is not clear to Business Alliance members whether these are the top priority areas for review ie addressing bureaucracy and streamlining appraisal processes, encouraging more risk taking, and having client executives on performance related pay would all appear to be more important (some of these issues are recognised by the Review – para 4.25) Clearly these issues are important, though many are already being addressed ie MATRIX is already undertaking an assessment of NI’s R&D capabilities.  We strongly welcome the first time Innovation Voucher scheme which CBI has been calling for since 2006 – we understand that an all-island scheme will be introduced shortly. Funding for universities to support R&D is vital, as they play a disproportionately large part in the overall market. It is not clear how the aspiration of aligning UK and Irish science funding streams will be achieved.  We are very disappointed that enhanced R&D tax credit has been turned down as it would undermine ‘the principles of simplicity, consistency and certainty that underpin the success of UK’s scheme’ as well as being legally and practically difficult. Overall disappointing with no specific new ideas to create the necessary transformation of the economy and largely recommending a series of further reviews: SFLGS has traditionally had a low take up in NI.  We understand Invest NI appraisals would include an assessment of impact on market Barriers to growth are varied depending on the business. Minimising regulatory burdens are critical – and a major obstacle to small firms in particular – however increasing employment legislation continues to add a significant burden to companies Business Alliance believes there is significant potential to improve the efficiency and effectiveness of public service delivery. Several of these recommendations are welcome.  We support the need for pay constraint within the public sector (as a start could remuneration levels of new recruits be reviewed) and the need for a more flexible pay regime to reflect NI market conditions. We also strongly support the need to reduce the overall size and structure – the review of the number of departments is a key element of this and we would like to see early progress on the review committed to in the PfG and how service delivery could be enhanced through bold redesign We strongly support the need for the increased contestability and believe the Executive should decide at a strategic level which services should be outsourced to deliver more efficient and better services Further asset sales have already been identified through the Executive’s Asset Capitalisation Taskforce – with a significant change in the property market the objective of bringing some £2.2bn of assets to the market place within the next three years will be particularly challenging – indeed it may not be value for money in pressing ahead with these asset sales in this timeframe.

   * Careers advice etc – we welcome the importance attached to this area and the need to provide better information to young people on the career opportunities available. It is essential that the new careers strategy includes an additional aim of ‘ensuring that employers have access to the skills which they require to meet their customers’ needs and improving the efficiency of the labour market’ – without this explicit aim there is danger that the real needs of the economy will not be met.

9. The Business Alliance acknowledges the key messages coming through in the Varney Review, which we would sum up as:

• The resources which can drive the economy and the responsibility for their delivery lie with the NI Executive (the UK government appear to be unwilling to provide the necessary tools to help create the transition required)
• The general direction of the Programme for Government is right, the key is to deliver and implement the strategy with some urgency, and ensuring economic development is prioritised
• In particular it is critical that the Executive focuses and delivers on skills, innovation and infrastructure (which supports the economy) and uses the public sector reform agenda to help transform the economy
• A significant increase in asset sales/privatisation has been suggested – this deserves significant attention and raises a number of issues:
• Can we link further asset sales/privatisations to specific infrastructure investments in order to demonstrate real value to the tax/rate payer
• Can the new PEDU or other Executive subgroup develop in a more sophisticated manner a list of potential candidates for privatisation (or other partnership model) with the objective of ensuring the best model/structure is chosen to ensure the highest level of service and a better return to the NI tax/rate payer – a significant shift of activities to the private sector would be a start towards re-addressing the private/public sector imbalance
• In light of enhanced asset sales with a further £1bn suggested, this raises the issue of whether ISNI 2 needs to be revisited? In light of current property market conditions it also raises some serious questions as to whether such sales will be achievable in the three year timeframe – greater flexibility on this timeframe is essential if value for money is to be achieved.

Business Alliance
27 May 2008

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