The Catch 22 For Uk Manufacturing
- Whitehall policy is reinforcing Britain’s competitive disadvantage
- An active industrial policy is the only way to ensure survival of key industries
- Osborne has failed to live up to his rhetoric on rebalancing the economy
Once-proud British industries are stuck in a spiral of decline because the government is unwilling to support domestic firms through the award of public contracts, a report published by the independent think tank Civitas argues today.
Manufacturing is stuck in a “Catch 22” whereby UK companies are unable to win tenders because the domestic supply chain is uncompetitive – but without those contracts the supply chain will weaken further.
The problem is exacerbated by the support many of our overseas rivals, from Germany to South Korea, receive from their respective governments.
Civitas research fellow Kaveh Pourvand urges the government to adopt a more interventionist approach to manufacturing and, when awarding contracts, take into greater account the impact on the UK of giving work to foreign firms.
In Economic Rebalancing and the Limits of Laissez-Faire, he shows how decisions taken by the current government have impacted train-building, ship-building and civil nuclear industries in the UK.
He also demonstrates how, contrary to the protestations of ministers, much more can be done in support of British firms.
“Large parts of British industry are caught in a Catch 22 – they cannot obtain government contracts because they lack the domestic capacity to be cost-competitive, but that domestic capacity cannot be built without government contracts,” Mr Pourvand says.
“By contrast, overseas firms that beat British companies to contracts operate in industries where capacity has been built up through careful government intervention.”
His findings are based on an in-depth analysis of three key decisions made since 2010:
- The award of the Thameslink contract of 1,200 new train carriages to German-based Siemens rather than Derby-based Bombardier
- The award of the £452 million ship-building contract for four new Royal Navy transport vessels (the ‘MARS’ contract) to Korean-based shipbuilder DSME
- The decision to rescind a state loan to Sheffield Forgemasters that would have given the firm civil nuclear production capabilities that few other countries in the world have
Taken together, these decisions show that Chancellor George Osborne has failed to live up to his rhetoric on manufacturing.
“The coalition has frequently talked of rebalancing the economy. George Osborne said he wanted a Britain ‘held aloft by the march of the makers’ and has even resurrected the idea of an ‘industrial policy’,” Mr Pourvand says.
“Rhetoric aside, however, ministers are still wedded to a laissez faire ethos when making key decisions and so have missed opportunities to strengthen UK manufacturing.”
Mr Pourvand calls for a more “multi-dimensional” approach to public contract decisions that takes into account not only the bid price but wider considerations like the impact on the local economy and the long-term impact on the capabilities of the sector.
Whitehall’s narrow consideration of taxpayer value is damaging because it fails to take into account the taxpayer costs of not supporting domestic firms – such as increased welfare payments and lost corporate tax revenue.
It also puts British industries at a disadvantage as, without government support in the form of regular, reliable procurement contracts, they cannot sustain the investments in skills and capacity to become cost-competitive.
Meanwhile, Siemens has benefited from regular procurement contracts from the German government that have given it the chance to invest in skills and capacity as British capacity has hollowed out.
South Korea has built up its shipping industry through very substantial government intervention from scratch in the 1970s. Without that support, DSME would almost certainly not have been in a position to win the MARS contract.
The British government has appeared oblivious to the importance of providing stable and predictable procurement contracts to domestic firms.
It was even reluctant to forward a modest loan to Sheffield Forgemasters, even though eight of Britain’s nine nuclear power stations are run by EDF energy, a subsidiary of the French state.
“There should be more recognition of the trade-offs involved in procurement decisions – between securing taxpayer value and avoiding inefficiency on the one hand, and maintaining domestic capability in key sectors on the other,” Mr Pourvand says.
“In the case of the Thameslink contract, the strength of the German supply chain was a key factor behind Siemens’ cost competitiveness.
“British capability has been damaged by a weak industrial policy and a lack of consistency in procurement flows – but this has only been exacerbated by awarding Siemens the Thameslink contract.”
Mr Pourvand urges a change of ethos and a re-appraisal of the lessons learned from 1970s industrial strategy.
“The right lesson from the 1970s is not to abandon industrial policy altogether, but to abandon bad industrial policy. While some judgment calls may turn out wrong, it is very difficult to succeed without being prepared to take some risks,” he says.
A PDF of Economic Rebalancing and the Limits of Laissez-Faire can be accessed below. It is the fifth in a series of research papers, entitled Ideas for Economic Growth, which Civitas is publishing. Previous publications in the series can be found in Economy .