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Official Report (Hansard)

Session: 2007/2008

Date: 11 June 2008

COMMITTEE FOR 
FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Varney Report on Competitiveness/Progress on Regional Economic Strategy

11 June 2008

Members present for all or part of the proceedings: 
Mr Mitchel McLaughlin (Chairperson) 
Mr Simon Hamilton (Deputy Chairperson) 
Mr Roy Beggs 
Dr Stephen Farry 
Mr Fra McCann 
Ms Jennifer McCann 
Mr Adrian McQuillan 
Mr Declan O’Loan

Witnesses: 
Mr Michael Brennan, Head of Strategic Policy Division ) Department of Finance and Personnel 
Mr Peter Jakobsen, Principal Economist )

The Chairperson (Mr McLaughlin):
I welcome Michael Brennan, head of strategic policy division, and Peter Jakobsen, principal economist from the Department of Finance and Personnel. Please give us your preliminary comments, then I will open up the meeting to the Committee.

Mr Michael Brennan (Department of Finance and Personnel):
Thank you Chairperson. I shall make a few observations on the Varney II report, before explaining how we envisage the progression of a regional economic strategy for Northern Ireland.

The Varney II report outlines positive and negative aspects. The positive aspects include the fact that Varney warmly supports the tone of the Programme for Government: its placing of economic development at the centre of the devolved Administration’s way forward. Varney also went to great lengths to emphasise the potential of the Northern Ireland economy, and, in his meetings with officials, he stressed that he had been surprised that people and stakeholders whom he met were quite pessimistic, and tended to downplay the opportunities that existed in the Northern Ireland economy.

Sir David Varney emphasised several issues: the fact that the Northern Ireland economy exists in a well-established regulatory and legal framework of the UK economy; the importance of the English language; the geographical positioning, and the fact that it exists inside the EU single market. Furthermore, the available skills and the demographics were included in the many positive attributes for the local economy, and for its potential.

The most challenging — some would say negative — observations and comments in Sir David Varney’s second report concern the role of the public sector. He is keen to emphasise the need for further public-sector reform. In my view, he did not fully appreciate the extent to which the Executive and the Assembly are already committed to a challenging efficiency agenda over the next three years of the Programme for Government, given our efficiency baselines and our commitment to the public-sector reform agenda. He did not seem to take that fully on board.

Furthermore, Sir David sets out strongly his view of the need to transfer public-sector functions and assets to the private sector. That ranges from a privatisation agenda, for bodies such as the Driver and Vehicle Agency and the Port of Belfast, to the other extreme, which is the transfer of publicly held assets to the private sector. As an economist, one could acknowledge that what he says is right in theory. However, it does not reflect or acknowledge the realpolitik of Northern Ireland. What is best for Northern Ireland may not be best for the UK economy, and vice versa. His comments on public-sector reform were, in some cases, slightly naïve and unrealistic or, shall we say, undeliverable.

On the whole, Varney II was a very useful critique of the current position of the Northern Ireland economy. It highlighted several positive aspects and set out a road map for progress. The underlying analysis was robust, and the report shone a spotlight on the wide areas on which the Assembly and the Executive must focus their economic policy.

Some of his specific recommendations are quite useful. For example, the proposed creation of a competition analysis board would be very helpful. He made that suggestion in light of his observations on how the National Competitiveness Council works in Dublin. An annual report from such a board would provide a useful steer on which sections of the economy were under- or overperforming, and would allow the Executive and the Assembly to take remedial action.

In past years, the Economic Research Institute of Northern Ireland (ERINI) was asked to produce a paper, ‘Measurement and Benchmarking of Competitiveness — The Cost of Doing Business in Northern Ireland’. As officials, we found that very helpful, because it showed the areas of Northern Ireland in which business was more, or less, costly to operate compared to the UK average. The Varney proposal for a competition analysis board would take that a step further. It is a positive suggestion, and we would like to follow up on it.

Sir David’s observations on planning regulation were also interesting. They reflect a many observations made to him by stakeholders in his meetings. The gist of those observations was that Northern Ireland was not very quick to react or adapt to proposals put to it by the business community. The John Lewis situation is the obvious one that comes to mind. It was an example of how business proposals can be constrained, or tied up, in perceived red tape. Sir David thought that the devolved Administration could go a long way very quickly to simplify the business regulation process.

Some of the other specific recommendations in Varney II are helpful, such as the suggested review of Invest Northern Ireland. Given that the global marketplace for foreign direct investment has changed dramatically in the last year or two, it would be useful to carry out an assessment of Invest Northern Ireland’s remit to determine whether it is appropriate for the current marketplace. Those specific recommendations are very helpful.

Varney II provides a useful policy road map to progress. It is sound, as is its underlying economic analysis. We would like to use it as the starting point for developing a new regional economic strategy for Northern Ireland.

The draft regional economic strategy (RES) — on which consultation concluded just over a year ago — was really a creature of direct rule. It reflected the limited aspirations of the direct rule Administration where radical policy changes could not be made, and the emphasis was on not rocking the boat. Under devolution, the regional economic strategy that emerges will be radically different and will reflect the aspirations of the Executive and the Assembly.

We are in the process of kicking off that work; we have established an interdepartmental steering group, made up of officials from all Departments, to take that work forward. We will engage more widely with key stakeholders, such as the Economic Development Forum, to ensure that, as RES progresses in its development over the coming weeks and months, everyone knows where we are, everyone is engaged, and that there will be a focused debated with no surprises emerging at the end of it.

Mr Hamilton:
Thank you for that presentation. I want to pick up on one of your latter comments. We heard before that the previous draft regional economic strategy represented the limited aspirations of direct rule Ministers — probably all of us agree with that. Is it therefore correct for us to assume that the new regional economic strategy will be much more challenging than the previous one? Will that strategy point the way to achieving those economic targets in the Programme for Government, including increasing productivity and closing the gross value added (GVA) gap with the rest of the UK, excluding the greater south-east?

Will there be a cross-departmental implementation plan given that economic development — although focused on a couple of particular Departments — affects almost every Department in one way or another? You mentioned Varney II and the suggestion made in that report for the speedier implementation of reviews and existing policies. A good example of that is planning — as you mentioned — where a marked change could be made in delivery if the economic aspects could be speeded up. What consideration has been given to the need for additional resources in areas like that?

Mr Brennan:
The previous draft of RES, the direct rule version, was quite frustrating as officials had to draw it up from the centre, because it was clear that public expenditure resources were allocated to areas that did not actually contribute to economic development. The underlying rule was not to change significantly resources from one area to another — do not rock the boat. Radical economic development policy proposals could not be put forward, because, by necessity, that meant that other areas of the block would have to fund that. There was always a tension that had to be managed.

This time around we have the Programme for Government, which has incredibly ambitious targets for economic development. If you remember, the target last time was to bring about economic conversions going from 80% of the UK average to 80·5% by 2015 — a half-per cent conversion was envisioned.

The Chairperson:
A big conversion was not envisioned then.

Mr Brennan:
That highlights those limited aspirations, in that it did not significantly secure resources toward the economy. Under devolution, the Programme for Government has a target of halving the productivity gap with the UK, minus London and the South East: that means going from 94% to 97%. It is incredibly ambitious to hope to achieve that, and to do so meaningful changes must be made around economic development policy. No one Department — neither DETI nor Invest NI — alone can deliver that.

The only way that that will be delivered is with a co-ordinated effort at improving regional productivity in Northern Ireland. That means, for example, interdepartmental collaboration on the skills agenda. Skills are a key driver of productivity, and Northern Ireland’s performance is quite poor on that front. There must be a co-ordinated assessment of what can be done to improve regional productivity. Obviously there are key players like DETI, DEL, Invest NI, and DE, but it is not just a matter for them; all other Departments have a lesser role to play.

The key to taking forward a devolved RES is focused debate on what can be done to improve regional productivity. That involves building roads in the right places; it involves infrastructure, IT networks, and making sure that everyone understands what productivity is, and how it can be improved. It is not just about throwing money at each Department that supposedly has a remit.

Another specific example is that we now have a regional innovation strategy (RIS) for Northern Ireland — I regard it as a subset of the regional economic strategy. The functions in the regional innovation strategy are, in the main, joint-departmental projects. For example, the £90 million package for the innovation fund, and North/South co-operation, are both directly related to improving regional productivity. Over the coming months, the debate on the RES will concern that. It will involve Departments getting out of their silos and realising how to actually deliver that bigger picture.

Getting to 97% of the UK average GVA is not going to be easy, and it will certainly not be done by people working in their own departmental silos. There needs to be a clear vision of how we get there, together with a policy roadmap. Planning is a classic example: Sir David Varney said that he was increasingly frustrated at comparisons with what was happening in the Irish Republic, where things were promised that could not be delivered. Delegates were coming back from trade missions and saying that they had promised that a plant would be built in six months. The specific example quoted by Sir David was in Kildare, where within six weeks the planning and other issues for a specific project had been sorted out; however, to be honest, that would not happen under the current processes in Northern Ireland.

The way in which businesses who wish to set up in Northern Ireland are dealt with and facilitated must be streamlined. There must be a debate on how that can be done. Some of the messages that will emerge in the RES will not be welcomed. There are clear tensions, for example, between sustainability and economic development, and between the spatial strategy and economic development. Those things must be flushed into the open; they cannot be ignored, otherwise we will end up with another document with limited aspirations. If we set out from the start with the intention of creating a document that keeps everyone happy, to be honest, I think that we have failed.

As for the Executive’s response to Varney II and how it is to be taken forward, Ministers have made several observations to the Minister of Finance and Personnel, so a co-ordinated Executive response will be pulled together, which will highlight what are considered to be the flaws in the review’s policy analysis, and the political naivety of some of Sir David Varney’s comments. The intention is for that to be compiled over the next few weeks. The bottom line is that the Executive will acknowledge the review’s suggestion that our economic fate is largely in our own hands. The fiscal instruments seem to have been removed from the policy debate. Varney has welcomed the Programme for Government. That effectively means that the economic development of Northern Ireland resides, to a large extent, with the devolved Administration.

Ms J McCann:
Thank you for your presentation. What are your views on the recommended competition analysis board, given that Varney’s acceptance of the differential corporation tax here was the one area in which the North could have made a difference? Do you not feel that the remit of that board will be very narrow, and there will not be an awful lot for it to examine, given that that has been ruled out?

A second point concerns the recommendation for a review into Invest NI. There are issues about the allocation of the resources of Invest NI to small and medium-sized enterprises (SMEs) and existing indigenous businesses. The emphasis seems to be more on bringing in foreign direct investment (FDIs). Should that be part of the review?

In a statement released just before the US NI economic investment conference, the Taoiseach said that he was going to recommend that some financial services in Dublin set up satellite services in the North and pay the same amount of corporation tax as they do in Dublin. How far has that been carried forward in the economy? That would be a good initiative.

Mr Brennan:
I shall work backwards, and address the last issue first.

The financial services initiative looked at a specific area, known as managed, or hedged, funds. The International Financial Services Centre (IFSC)in Dublin is the international leader in the construction of financial instruments, which it sells around the world. It is a highly profitable activity.

In April, the proposal announced by the then Minister of Finance and Personnel, Peter Robinson, and the then Tanaiste, Brian Cowen, did not relate to corporation tax. It did not allow a 12·5% rate of corporation tax to apply in Northern Ireland. The proposal was about facilitating the establishment of satellite functions in Belfast; it was not about profits and the payment of tax on profits.

The key, and strategically important, issue in the statement related to the significant difficulties the IFSC in Dublin has with recruitment. The financial industry in Dublin is worried about losing those functions and competitiveness, particularly to eastern Europe.

The IFSC asked the Irish Government to re-interpret the situation and take a lenient view of its regulations relating to an area known as minimum activities. It’s a bit of an area for anoraks; the regulations ensure that companies that want to operate financial services in the Irish Republic adhere to a minimum level of employment to qualify as an Irish-based financial institution.

It is a throwback to the 1980s, when there was concern that US companies would use Dublin as a brass-plate location for sourcing projects, but would not deliver jobs. The minimum activity rule, which was introduced 20-odd years ago, says that if companies set up in Dublin, not only do they have to base their profits there, but they have to have a minimum level of employment. The benefit of that was evident 20 to 30 years ago — it brought employment into the IFSC in Dublin. That situation exists no longer; the opposite is the case, and the IFSC cannot find employees.

Worried about losing its competitiveness, the industry in Dublin wanted to draw on the large pool of skilled and well-educated workers who lived two hours up the road. Therefore, representatives from the IFSC in Dublin asked the Irish regulator and the Tanaiste to waive the minimum-activity rule to allow them to employ people from Northern Ireland, without being in breach of the Irish legislation. That is what the announcement was about. A bank cannot relocate from Dublin to Belfast and pay 12·5% corporation tax on its activities in Belfast; it will continue to pay all UK-based taxes, including corporation tax, National Insurance and PAYE.

Ms J McCann:
My concern is building the economy and creating employment for local people. I just want to know where that idea is at present. Is anyone driving that forward? Who has a responsibility for building the economy and creating employment opportunities for people? Why has that not happened? It was a very practical initiative that could have been built upon and taken forward.

I know what you say about the tax differentials. However, my concern is building the economy and creating jobs for people here.

Mr Brennan:
As everyone has said, it is a win-win for both jurisdictions. It is delivering high-quality, well-paid employment to Northern Ireland. Invest NI is charged with taking that forward. I am aware that it has had representations from, and is engaged with, companies presently based in Dublin that want to take up the offer.

They were never going to appear by magic on our doorstep the next day. It will take time to deliver that and grow. One or two companies have already relocated from Dublin and set up satellite functions in Northern Ireland. The key rule was to get the legislative framework right, to which both Governments have now agreed. That is a significant positive. Invest NI’s challenge now is to hook financial service companies that want to set up in Northern Ireland, and help them to do that.

Varney signalled the financial service initiative as a clear positive that is aimed at exploiting the opportunities of economic co-operation on the island of Ireland; however, there is no clear win-win situation. We have said for some time that we do not need more jobs; rather, we need better jobs. That is what the financial services initiative is about.

The Chairperson:
In theory, those companies — in response to labour pressures — could come right up to the border on the southern side to take advantage not only of the fiscal policies, but of the expedited planning policies and so on.

We are told that, with a bit of political goodwill, such companies could locate further into this region. Jennifer was asking whether anyone is in charge of pursuing that agenda. Furthermore, when will there be some tangible outcome?

Mr Brennan:
Policy responsibility for hooking the client companies resides with Invest NI, which is why Varney called for a review of Invest NI. His point was that the global market for FDI is changing quickly and dramatically, and, in some ways, we are witnessing a heck of a downturn. He said that we should ensure that the focus is right to exploit the opportunities on the island of Ireland, such as the financial-services sector.

A point was made about SMEs. The bulk of the funding tends to go to large-plant FDI planning activity. Therefore, now is the optimum time to conduct a review of Invest NI to ensure that its policies are fit for purpose as we move into a more constrained global economy.

The minimum activities rule of the financial services initiative creates a clear win-win situation, and we must ensure that Invest NI is focused on delivering that. Anecdotally, from meeting some of the players from the industry in Dublin, we know that significant numbers of vacancies exist.

The Chairperson:
We must be conscious of the demarcation between this Committee and the Committee for Enterprise, Trade and Investment. Do we have to wait until after the review of INI, the review of the planning process and the emergence of the RES before such measures can be progressed?

Mr Brennan:
No, I would like to think that the process is already under way. The two Finance Ministers made their announcement. There is no legislative hurdle to companies coming across the border tomorrow, for example. I presume that whoever has responsibility for Invest NI is pushing ahead with the initiative. We definitely should not wait until a review process is concluded. I am in the dark on that issue.

The Chairperson:
I appreciate that you have addressed the issue.

Dr Farry:
I apologise for missing the start of the presentation.

The Chairperson:
You missed the good part.

Dr Farry:
A point was made about the Executive formulating a response to Varney II. I was disappointed and concerned that there was no formal statement on the Floor of the Assembly from a Minister about the first Varney Review, never mind the publication of a formal rebuttal to it. Can we expect a formal statement to the Assembly from a Minister about Varney II?

Mr Brennan:
The Minister of Finance and Personnel will consult with his Executive colleagues, and a formal response to the Varney Reviews will be given to the Chief Secretary to the Treasury. I do not know whether there will be a formal debate in the Assembly.

Dr Farry:
Both reports are fundamental, given that the Executive have, naturally, highlighted the importance of the economy. It seems strange that there is a certain reticence about debating the Varney Reviews. Perhaps Ministers do not want to expose themselves to questions about the issue on the Floor of the Assembly.

Jennifer talked about the all-island dimension. The Varney Reviews focused on the comparisons between Northern Ireland and the Republic of Ireland and the potential for co-operation between the two jurisdictions. You also made comments in that vein. However, there has been no appreciation of the realities of all-island competition, particularly for investment. We can talk to representatives from the South of Ireland as much as we want, but it is effectively about the North getting the surplus capacity, or the scraps from the Republic’s table, as opposed to a situation in which Northern Ireland competes for investment on a level playing field with the Republic of Ireland.

How can that type of all-island dimension be fed into our discussions, as opposed to simply having a discussion on co-operation and talking to our counterparts in the South about what they have spare to give us?

Mr Brennan:
You have highlighted one of the areas that exposes, so to speak, the tensions and the political naivety in Varney. One of his recommendations was that Invest NI should co-operate closely with IDA Ireland. That is great in theory, and there may be cases in which a foreign direct investment (FDI) project offers the potential, for example, to exploit the all-island economy through dual locations, or through being close enough to one part of the border to hive off skills from the other side. In theory, yes; in practice, however, I would love to see exactly what Varney wants to happens in that area.

With regard to all-island co-operation, Varney clearly takes the view that corporation tax is not the all-important trigger when making decisions on location. He highlighted several positive attributes of the Northern Ireland economy which he thinks could be sold to FDI clients, such as the UK legal and regulatory framework, the English language, financial stability and skills. Potential FDI clients could be told that these are what Northern Ireland has to offer, and that, although there is a difference in corporation tax, it is minor.

Therefore, Varney flagged up the minimum activities rule as a positive and said that there were others where Northern Ireland had something to sell, over and above the RoI package. He also flagged up co-operation, and I would love to see how co-operation worked in reality.

Dr Farry:
Is corporation tax still on the agenda for the Department of Finance and Personnel (DFP), or it is effectively off the table?

Mr Brennan:
The Treasury has taken it off the table. It said that that is not an option and that it is finished.

Dr Farry:
Is DFP settling for that, and saying that it is off the table and that is that, or are there plans to continue to fight for that issue? The local business community, academics and economists, in evidence to the Committee on the basis of Varney II, continue to push corporation tax as a fundamental issue. Is DFP giving up the fight on corporation tax?

Mr Brennan:
If Northern Ireland had corporation tax of 12·5%, would that be a good thing? The answer is, yes, it would be a great thing to have, but it is second-order issues that cause grave concern. There has been all the analysis from ERINI, the Industrial Task Force and the Ulster Society of Chartered Accountants. From a DFP perspective, however, it is the consequences that concern us. For example, the impact of the Azores judgement would have significant financial implications for the Northern Ireland block grant, cutting it by many hundreds of millions of pounds, for a start.

There are also consequences for the Treasury with regard to the wider UK repercussions. Therefore, DFP is not giving up the fight —

Dr Farry:
With all due respect, when we made our pitch on Varney I last year, we did not say “on the one hand and on the other hand”. Rather, we said “this is what we want, and we will make it work if we have to find our resources.” We did not say that it was a balanced approach. We now shift the goalposts on this issue and say that it is not that important. It is a double-edged sword. That was not the message that we sent out last year.

Mr Brennan:
The message last year was whether a lower rate of corporation tax was good for Northern Ireland — and the answer was yes. After the publication of Varney I, however, there was a clear, definitive interpretation on issues such as the Azores judgement. In response to Varney I, that was the first time that Treasury Ministers were definitive with regard to the Northern Ireland block grant having to take the hit. Moreover, that was the first time that Treasury Ministers clearly acknowledged that the political considerations in the UK were important. Those reactions were forced out of the Treasury only in response to Varney I.

Dr Farry:
When my party discussed Varney I last year, the Azores ruling was in the back of our minds. When I advocated lowering the rate of corporation tax last year, I was under no illusion that the Azores ruling would mean that the shortfall would have to be met elsewhere in Northern Ireland.

I have difficulty with GVA convergence in that a great deal of the analysis from the local business community does not suggest from where any meaningful convergence will come on the back of Varney II recommendations. Indeed, when Varney himself was pushed on the issue at the Committee meeting last week— I believe that Peter Weir asked him about it — he said that he did not foresee the creation of any meaningful GVA convergence.

The Executive have set their own targets. I am sceptical about shifting the benchmark by removing the greater south-east of England from the equation, but that is a secondary issue. However, Varney does not see any major change.

The regional economic strategy (RES) may be more radical than the direct rule version, but it can only be radical within a framework that has been set by the UK Treasury. We are not doing this on a blank sheet of paper; we must work within parameters that have been set by the Treasury. Essentially, we are talking about the same economic drivers behind the previous RES. Varney talked about those drivers, and they have been have talked about for the past 10 or 15 years. Varney analysis has taken those drivers to the nth degree in the advice that he has given to the Executive.

Even within that framework, however, Varney told the Committee last week that he did not see any meaningful GVA convergence and that we should be happy that the overall UK economy is booming through London and the south-east and that we should do our best. Effectively, he was telling us that if we can compete on the basis of low costs, good luck to us.

Mr Brennan:
First, addressing the issue of excluding London and the south-east, if their inclusion had been retained and the forecasts made by the doomsayers for the financial services industry in London proved correct, Northern Ireland would converge very rapidly with the UK average. That would not be for any good reason, but because the UK average had been pulled down and you would achieve convergence —

The Chairperson:
Is that because we are leading the race and they would catch up with us?

Mr Brennan:
Yes, they would catch up with us. That was the logic for excluding London and the south-east. We wanted to benchmark ourselves against the other UK regions to ascertain our relative performance.

Dr Farry:
That is in the context of nine out of 12 UK regions being dependent. We are not benchmarking Northern Ireland to regions of the UK that are doing well compared with the south-east; every region is in that dependency culture.

Mr Brennan:
Yes, but we are all effectively running to standstill against each other. We must change the policy and the policy focus in some way so that we run faster and start to overtake the other eight regions.

Varney said correctly that the key is productivity, and for me, improving skills is an obvious area. The average salary in Northern is between £21,000 and £22,000. Currently, we have record levels of employment, yet we have not had any productivity convergence. The reason for that is that we have been creating the wrong type of jobs and we have been creating jobs that pay less than the Northern Ireland average. At best, we are staying at the same level, but the fact is that we are falling further behind.

If financial services jobs that are paid between £40,000 and £60,000 came to Belfast, there would be a significant improvement in regional GVA convergence. We simply need to create the right type of jobs. That is how you bring about convergence.

Therefore, in order to make meaningful inroads into regional GVA, we need to create the right types of jobs and address the skills deficits where they exist — Varney suggested bringing everyone up to NVQ level 2, for example — while addressing economic inactivity. If we do those things better and in a more focused way than the other UK regions, we will start to converge. I agree with Varney’s analysis on that, but it requires the Executive and the Assembly to make some difficult decisions.

Mr O’Loan:
I found the Varney II report disappointing. The Committee received responses from several outside bodies, the general tenor of which was that those organisations also found it disappointing. We were looking for a significant economic message that would indicate directional change and a sense that we would see important differences. However, that is not the case.

The report says that there is no “silver bullet”. The First Minister, in his introductory words, said that there is a staircase to economic growth, rather than an escalator. One can accept that, and there is more than one staircase to climb because several different measures must be taken. However, everyone is looking for clear indications on how fast the staircase can be climbed and what mechanisms are required to do so.

There is, undoubtedly, value in much of the report’s technical analysis of the state of the economy. However, as I expressed at previous Committee meetings, I am greatly concerned about the basic concept of the report; it is based on going to London and asking the Treasury to do our job for us. It is psychologically weakening to search for solutions from the Treasury on issues over which we now have control. Incidentally, I want to repeat what Stephen Farry said: although we talk about there being no silver bullet, we must not lose sight of corporation tax. Many serious commentators regard it as too crucial an issue to ignore, therefore we must keep returning to the rate of corporation tax.

In the Chamber yesterday, I debated with the Minister the extent to which the report is independent and external. I debated that point because DFP officials were involved in its production, and you also gave an interesting critique of it this morning. What was the role of DFP officials in the production of the report? Do you regard it, to some degree, as a DFP report that constitutes the preliminary step towards the RES, or did you simply offer evidence, after which Varney and his team wrote up their conclusions, based only in part on your evidence?

Mr Brennan:
Varney II is certainly not a DFP report; it is not even a Treasury report. A team of Treasury officials worked for Varney, but he guarded his independence jealously. At the earliest stage of the Varney II process, it was clear that the officials working for Varney were struggling to understand a range of matters: the economic data for Northern Ireland; from where they could source data; and the different policy responsibilities of each Department. Therefore, a DFP economist was based in the Treasury to help and facilitate the officials. That was to ensure that the Treasury officials were examining material that was factually correct and that their understanding of policy responsibilities — for example, how the Northern Ireland Budget was constructed — was correct.

Several of the officials’ observations were naive and displayed a lack of understanding of how devolved Government works in Northern Ireland. Had there not been a DFP official based in the Treasury, the situation would have been much worse. The officials did not recognise the difference between the UK and Northern Ireland data sources, and only by having a DFP official involved was the Department able to correct that.

The Department was also able to make Treasury officials aware that, for example, Departments such as the Department for Employment and Learning (DEL) have significant databanks on the skills agenda in Northern Ireland. The role of the DFP official in the Treasury was to ensure that its officials had the most up-to-date and factually correct data. However, in no way did his presence put a DFP stamp on the cover of the report.

Mr O’Loan:
I hope that the Assembly will take charge of its own affairs in future. We should use what we can from the report, but we must move on ourselves.

Recently, I heard strong anecdotal evidence on the planning system from someone who is highly placed in the business sector. He told me that he advises major investors, such as those in the hotel, tourism and leisure sector, to invest their money elsewhere, for instance, in eastern Europe, because they would simply get bogged down in Northern Ireland’s bureaucratic system.

That is an appalling message, and it is an appalling state of affairs. We cannot afford to say that. We have to say the things that are possibly too painful to say in public. If we do not address the problem and acknowledge that there is an illness, we will not get a remedy.

I have heard people ask what there is to show after one year of devolution. People do not know the answer to that, and they do not see any clear indications that we are moving towards finding out. There is no question that it is time for the answer. Our administrative system is very cautious and conservative, but I do not want to throw all the stones of blame at officials. The fact must be addressed that our political system is not coming up with the necessary policy changes. That means digging deep and accepting significant changes in the administrative and political systems. A significant debate is to be had into how those two systems interact. You may wish to respond to that, or we can leave it as a comment.

Mr Brennan:
During his consultation process, Varney met in excess of 30 groups and individuals. Virtually everyone flagged up planning as a major concern. When making a business decision, potential investors consider first the rate of return that they will earn from an investment. When they are determining the rate of return, they will factor in what is known as a risk premium for regulation and over-regulation. Planning costs in Northern Ireland will increase the cost of capital, but I am aware that the issue of commercial planning will be considered by the work of the new performance and efficiency delivery unit (PEDU).

Mr O’Loan:
Tourism is one of the business sectors that has been held back dramatically by 30 or 40 years of intense violence. I do not recall reading much in the report that is specifically about tourism. I understand that, in the South, a specific tax system was used as a particular driver for tourism. Given that we do not have control over such measures, is that likely to be a significant barrier to us? Are there other ways in which the tourism sector can be pushed forward?

Mr Brennan:
You are right; the report does not say much about tourism. In several interviews and other forums, Varney highlighted the potential of tourism. It is an area of the Northern Ireland economy that is underdeveloped, and, if the policies were right, it could generate significant wealth for the region. However, tourism employment in Northern Ireland is generally low value-added and low skilled, so we must be careful about which tourism products are worked on. The jobs need to be at the high-quality end in niche markets. Hotels that are built for the sake of it will not create any meaningful high-value employment or do anything for regional productivity.

In the coming years, careful thought must be given to the markets that are to be exploited and to the returns that are to be generated from tourism in Northern Ireland. There is an upside and a downside to developing tourism. If we get it wrong, we will get it badly wrong and resources will be squandered.

Mr O’Loan:
Many other issues could be raised, but I want to explore the discussion and agenda on North/South and east-west relationships. This is a de jure part of the United Kingdom, and we are on the island of Ireland. Some people might say that that provides an opportunity to get the best of both worlds, although I do not like that way of thinking. There are real difficulties and tensions in the debate on corporation tax. For example, the tax advantages that are available in the South show that there is not a best-of-both-worlds solution.

We should be pragmatic and ask how we can best use to our advantage the fact that we are part of the UK and part of the island of Ireland. The report refers to the comprehensive study of the all-island economy, which was produced a few years ago. That study argued for progress to be made in that area. It also suggested that that document should be reviewed.

Earlier, you referred to the link between IDA and INI and their equivalent British, London-based body. More serious talk is needed about what the all-island economy is and how it could be best used to our advantage. It opens up political issues, and we need to be very grown up about it. Are we going to leave ourselves in a backwater just because we cannot reach political agreement on this sort of issue? What is the scope and reality of that debate, and what contribution could the all-island economy make to it?

Mr Brennan:
You are right to say that Varney had a simplistic view of all-island co-operation. Last week he told the Committee that Northern Ireland gets “the best of both worlds”, but he did not elaborate on what he meant.

The October 2006 report that referred to the all-island economic co-operation report was quite insightful because it made clear that a great deal of benefit would accrue through public-service co-operation. That is unique to Northern Ireland. The report highlighted the opportunities and benefits that are accrued through co-operation on the cross-border provision of health services. That seems to be a no-brainer; there are significant economies of scale in the provisions of health and education, and they should be considered on that basis. For example, a border should not constrain the services that the Daisy Hill Hospital or Altnagelvin Hospital provide to their hinterlands. The provision of public services contains benefits that work both ways.

Earlier, we talked about the fact that financial services create a key win-win situation for the economies of both jurisdictions. Opportunities such as those should be identified and exploited. Skills provision is another area that should be exploited to a greater extent. The National Development Plan (NDP) in the Republic of Ireland will invest significantly in skills over the next six years. The aim is to improve every individual’s skills base by one tier. That is consistent with what Varney said should be the case in Northern Ireland; he argued that everyone should be at least the standard of NVQ level 2. The provision of skills on the island should be synchronised through regional technical colleges (RTCs) and further education (FE) colleges.

The other area in which co-operation between the private sector and public sector could benefit productivity in both economies is through what I refer to as industrial co-operation, although it is more properly academic institutional qualification. The investment fund for Northern Ireland is allocated £90 million for innovation projects. The vast majority of those are North/South projects that are run through co-operation between universities or hospitals. That is a clear win-win situation.

Varney could have better highlighted the benefits of those projects. Investing in science or R&D have scale effects, so having two universities working together — such as Queen’s University, Belfast or University College Cork — would benefit both. Varney could have gone into more detail on such key issues, rather than just saying that Northern Ireland gets “the best of both worlds”.

The Chairperson:
Would the public consultation on the regional economic strategy take in spatial awareness, if that is a good way to put it? Would that be a headline consideration for contributions to the development of the strategy to avoid wasteful competition as well as wasteful duplication or replication?

Mr Brennan:
From a public expenditure viewpoint, that is a key issue and there is an opportunity cost. For example, it would be great if a regional cancer centre were built in Altnagelvin to serve the north-west. The same would apply if the RTC in Dundalk were to provide courses in the Newry area.

The Chairperson:
As you said, the NDP in the South has started to demonstrate that necessity.

Mr Brennan:
Yes, it has. Large elements of all-island economic co-operation are already highlighted in the NDP. For example, the Dublin Government’s contribution to the innovation fund is formally part of the NDP, and their contribution to the roads network is embedded in that. The RES will flag up the extent to which Northern Ireland can exploit the opportunities in the promotion of the all-island economy.

The Chairperson:
I recall that in what is now called the first mandate, there was a difficulty in getting co-operation and information from the South when the location of the new hospital was being considered. There was a major debate about the benefits of Tyrone and Fermanagh as the location of that hospital, but we could not find out the futures of Cavan General Hospital or Monaghan General Hospital. That information would have informed our discussion. However, there is a different attitude from the South, possibly because of that experience, and we must connect with that in any review of Invest NI.

Mr Beggs:
Thank you for your analysis and comments on Varney II. I concur with Declan’s comment on planning. I have encountered a local businessman in Northern Ireland who has been successful in developing businesses in the UK. However, he is frustrated with his investment in Northern Ireland, because the planning process has caused him difficulties that have discouraged him from making further investment. It is an indictment of our process that local people who want to invest here are put off by the planning process. I emphasise that problem and hope that you and your officials ensure that the necessary resources are available to make sure that planning reforms are carried out concisely and within a reasonable time frame.

Considerable time and effort have been put into the development of the draft regional economic strategy, which you say will be changed — I do not know whether you will start from scratch or rejig the existing strategy. What is the time frame for the new strategy? The issue is not just about giving the strategy direction and purpose; it is about taking action and making a difference. We do not want another long period for the development of the strategy before the necessary actions are taken. Therefore, I am interested to know the time frame for the new strategy.

The Chairperson:
That is particularly true after Varney said that it is time for action rather than analysis.

Mr Beggs:
The Varney reports and the Chancellor have stated that asset sales could be increased significantly over the three-year period. When will we have the real and mature discussion on what we are dealing with and on what assets the realisation taskforce identified? Choices must be discussed in the public domain so that we know what assets have been identified. Why does Translink own car parks when it is an authority that is deemed responsible for encouraging the use of public transport? Why are those car parks not sold, and the money not invested in public transport? There are some no-brainers in this. When will we get a list of the assets so that a proper discussion can be held?

Last week, I asked Varney whether it was the right time in the economic cycle to sell considerable amounts of public assets to reinvest them for better public use. He was unconcerned about the stage in the economic cycle we had reached. What is the Department’s view on that?

Mr F McCann:
Last week, I asked about the assets that were considered, with a view to selling them off. I want to find out what weight was given to those assets. The Port of Belfast was one such asset. Not only is it a substantial profit-making port, but it has invested heavily in recent years, especially in ferry services and so on. However, I am surprised and concerned at the suggestion that the Housing Executive should be handed over to another social landlord. What weight will be given to the suggestion to sell those two assets?

Mr Brennan:
Varney called explicitly for the privatisation of the Port of Belfast. That was an easy call for him to make. As you said, it is profitable and a significant public-sector asset here. I noticed that Varney glossed over the point that was made during last week’s Committee meeting about the valuation of assets. The valuation of land and assets has decreased dramatically in recent months. It is a material issue; an asset that was worth £45 million in last year’s Budget might now be worth only a proportion of that amount as a public-expenditure consequence. That would obviously be a significant concern to DFP. Therefore, I do not agree with Varney that the timing of disposal of assets in the economic cycle is irrelevant; from a public-expenditure point of view, it is extremely relevant.

The Programme for Government has a target to dispose of £1·1 billion of assets built into the departmental baselines. That £1·1 billion target was determined before the credit crunch and before valuations began to diminish. Therefore, if delivering £1·1 billion was challenging for Departments last year, it is more challenging now. If one accepts the principle of selling, for example, the Port of Belfast or public-housing stock, one must ask another question: is it the right time to sell? Now would be the wrong time to sell.

Varney seems to advocate a similar model to that established in Glasgow, where housing stock was held by a public body and, with the agreement of tenants, was transferred to a public-sector landlord. The Scottish Executive benefited in that the Treasury eradicated all loans and debt that were associated with that stock of public housing. Therefore, that was the incentive offered to the Scottish Executive by the Treasury; it effectively wrote off the debt in exchange for the transfer of public-housing stock to social landlords. Varney seems to advocate the transfer of Housing Executive assets to another agency in order to, theoretically, wipe associated debts. That seems to be the carrot that the Treasury would offer to the Executive and the Assembly.

Furthermore, the issue of valuation is relevant because the valuation of housing stock is, perhaps, radically lower now than at this time last year. Asset valuations vary over time, and the market has experienced a significant downturn. Targets that were agreed in the Programme for Government last year were ambitious, and they are even more ambitious now. There is logic in the argument that it is not the time to consider selling assets such as the Port of Belfast and housing stock.

The Chairperson:
Roy’s point still needs to be addressed. However, given that it was flagged up, is anyone crunching the numbers on the Housing Executive issue? Positions might be ideological, knee-jerk, supportive and dismissive; however, is anyone taking a hard forensic look at the matter?

Mr Brennan:
I know that the Department for Social Development is examining the issue. When we receive the ministerial responses, we will be able to consolidate and produce the Executive response to Varney, which will highlight that issue.

The Department will not bin what I call the direct rule regional economic strategy in its entirety.

However, we can update some of the sections.

The Chairperson:
I am disappointed to hear that. — [Laughter.]

Mr Brennan:
It will be a question of updating the economic statistics in the analysis section, because it sets out the context of the Northern Ireland economy. That will be relatively easy to do.

The report contains a section that sets out the principles for economic development in Northern Ireland, and that section still stands. It sets out the parameters to Executive involvement; for instance, it sets out rules about when the Executive and Assembly should intervene in the economy. It also sets out rules on the prioritising of investment and on ensuring that the opportunity costs from public-sector investments are minimised. That means that if, for instance, a Minister is confronted with two options — one with a rate of return of 10% and one with a 7% rate — he or she will choose automatically the option with the higher rate of return. However, that does not happen all the time. Furthermore, if there is no economic rationale for investing in an activity, no investment should be made.

Therefore robust frameworks will have to be set in place to define economic development policy. It tends to highlight the tensions that exist between social, environmental and economic interventions. The new RES will still have to contain those parameters, which will set out the framework in which Ministers can engage in the economic development policy.

We have set up a new interdepartmental working group to develop the new RES. The first meeting is scheduled to take place before the end of June. In July and August, we will begin to update the analysis section, and we will begin the heart of the policy analysis in the autumn. At that stage, we will commence engagement with stakeholders on prioritising issues for the economy and setting out the framework for departmental contributions.

The critical part of the process will arise when discussions commence on moving resources into economic development. That is where tensions will be highlighted, because —

The Chairperson:
The resources have to be taken from somewhere.

Mr Brennan:
That is correct. That is where the task becomes difficult, because one Minister is, in effect, being told that he or she is lower down the pecking order than someone else with regard to economic development policy. That is when tensions will emerge.

We are fortunate that there will not be a national spending review this year, so there will be no additional resources to hand out. There is no Budget either, because the Northern Ireland Budget for the next three years has been agreed. It is not as if we have to rush this thing through frantically so that it is available to shape the minds and intentions of Ministers. We can take our time, ensure that we get it right, and engage and consult as widely as possible. The bulk of the work will be done in the early autumn, and, at that stage, we will start to break it out and engage more widely.

The Chairperson:
You referred to the difficult choices and decisions that have to be made in the process. It will go out to public consultation, and that will involve consulting with the Statutory Committees. It appears that you intend to do that as a priority. Can you ensure the Committee that we will be consulted on the outcomes?

Mr Brennan:
There will be two stages of consultation. There will be wider engagement with all key stakeholders, the Committees and the efficiency development unit, among others, before the formal public consultation is held. We want to tap the minds of as many people as possible before we start to construct the RES. That will happen before we get anywhere near a formal consultation process. It is hoped that there will be full engagement with the Statutory Committees.

The Chairperson:
We must insist that there be full engagement with the Committees. You talked about some of the important milestones. When will the process be finalised to allow the Assembly to deal with a regional economic strategy?

Mr Brennan:
No discrete date has been set, but it is hoped that the bulk of the work, the analysis and the policy emphasis — I will not say policy recommendations, because they will not be recommendations at that stage — will be available by late autumn.

That is the stage at which I would like to circulate document drafts. Those will not go out for formal public consultation. I want to send the information to the relevant people with an interest in economic development policy. Doing so would be a method of seeking their approval for the emphasis, frameworks, and the consequences of reprioritising resource allocations. That process takes us to October, after which we will take a ministerial decision about embarking on public consultation.

The Chairperson:
Planners are not the only people with difficulties about the process. Perhaps the discipline of working towards a specific, realistic and sensible date should be considered. The hard decisions that must be taken invite procrastination, delay and avoidance.

Mr McQuillan:
Do you believe that we are much further on after Varney, because I have my doubts?

Mr Brennan:
I had limited expectations about what Varney would deliver. It is helpful that his analysis confirms how the Northern Ireland economy works. He presented nothing that surprised me.

He has highlighted key concerns about the role of the public sector, and the retention of public sector assets.

Mr McQuillan:
Which we knew beforehand.

Mr Brennan:
I accept that we knew, but it is helpful to be presented with an external perspective. He had a lot of support from Treasury officials, whose expertise is considerable. Varney II is a comfort blanket with regard to taking forward our regional economic strategy.

However, people in this building have been considering the Northern Ireland economy for so long that we tend to focus on negatives. I think that Varney was right to set out the many positives that this region offers in terms of economic development. It is the first time in a long time that I have heard the case stated by someone from outside Northern Ireland.

Varney is right to say that corporation tax is not the be-all and end-all of everything. We have to ensure that we present the other positives in a favourable light — things like skills and infrastructure. We have taken for granted a range of measures involved in constructing economic policy, and having them highlighted was helpful, as was the policy roadmap set out by Varney. We would have plotted that course anyway, under our RES, however, it is helpful.

The Chairperson:
Thank you both very much. That went on longer than we intended and than you expected, but it was useful. We may come back to you in writing to put down a marker in relation to dealing with the outcomes. From the range of issues addressed here, you can see that we are considerably ahead of the process itself. However, I am confident there are issues that Members will want to tease out further.

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