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Address in Reply to Her Majesty's Most Gracious Speech

My Lords, I am pleased to be able to contribute to the debate on Her Majesty's most gracious Speech, particularly following the safe return of the Labour Party to government with a very comfortable majority. I also congratulate my noble friend Lord McKenzie of Luton on being promoted to the Front Bench. He is a charming person and a true professional, and I am sure that he will perform very well. The structural reforms introduced by successive governments over the past 20 years have paid huge dividends. External conditions have been benign. Even so, the monetary and fiscal frameworks that Labour has built in government are impressive. Wherever I travel in the world—in developing or developed nations—the UK economy is the envy of everyone I meet. How refreshing; what a change over the past few years. For the Treasury to get praise from the IMF is a wonderful turnaround. This year it said that the UK's fiscal and monetary policy frameworks remain at the forefront of international best practice. However, today we are living in a world of continuous improvement. We can always do better. So, after the election it is right to take stock and to consider how we can continue that improvement. The Chancellor's iron grip on fiscal and monetary policy has brought greater stability, which is of vital importance when making investment decisions, especially in the sector with which I identify—manufacturing. At around 2.5 per cent per annum, GDP growth is close to the historical long-term trend. Of course, what is important is stability. If we are to increase that trend rate of growth, we have to tackle the productivity gap which still exists between us and our major international competitors. Although measuring productivity is fraught with difficulties—I do not believe in the majority of the statistics about our productivity—there is a consensus that the UK has between 10 and 25 per cent lower output per worker than France, Germany and the USA. In my own sector of manufacturing, we have had some huge increases in productivity—a 30 per cent increase between 1993 and 2003—but the relative gap still exists. Sustainable improvements in productivity are a complex function of the effective utilisation of investment. That, in turn, is a function of market size, skills, technology and the ability to design desirable products and services. Such improvements are also a function of the fiscal and regulatory environment in which the investment takes place. Lower levels of investment and poorer skill levels account for much of the difference with our continental neighbours. The UK still has a significant deficit in intermediate skills compared with France and Germany. Although things are improving, there is no doubt that the effective utilisation of investment can be adversely affected by the lack of skills. However, around the world major changes in productivity have come from technical change. I am delighted that the long-term decline in R&D as a proportion of national income has been arrested. There has been a rise in business R&D since 1997. Although it is too early to tell, the introduction of tax credits for R&D may make a further contribution to this process. There has been a great deal of effort in innovation. That has been underpinned by investment in a strong university science, engineering and technology base. The present Government have made a huge commitment to science, and the funds of the research councils will rise from £1.3 billion in 1997 to more than £3.4 billion a year by 2008. Furthermore, the connection between science spending and business has improved enormously. By any measure, there is a huge increase in science spending. However, science spending should not become like apple pie and motherhood—a universal good thing. It is not an end in itself. As an engineer, I am sometimes puzzled when I hear politicians talk about science and wealth creation. Somehow, engineering and technology disappear from the vocabulary. We should talk of science, engineering and technology together because science alone does not create wealth. The increase in spending means that today the UK is the most prolific of all the OECD countries in terms of papers and citations per capita—a wonderful achievement. But, as well as papers, we need to produce new sustainable industries and improve the quality of life. We are going a long way towards achieving that. I think that a great deal of credit for the increase in spending should go to the science Minister, my noble friend Lord Sainsbury, for his passion and commitment to science and innovation. For the first time, wherever I go, people talk about a science Minister being able to enthuse not just our people but governments all over the world in relation to spending on science and technology. There are 300,000 more businesses today than there were in 1997. If we want them to grow and prosper, we must simplify the bureaucracy with which they have to deal. It is not just a question of regulation but of simplifying the bureaucracy. For small firms, compliance with regulations is a huge task. I am not someone who thinks that all regulations are somehow bad. Quite the opposite—good regulations are essential to the functioning of business and quality of life. You have only to go to some third world countries to realise what happens if you do not have good regulation. However, over-complex regulation is creating many jobs for consultants and accountants in helping firms simply to comply with the regulations. Unfortunately, those jobs add nothing to wealth creation. Noble Lords may have noticed that the public sector has been in the news lately. It is this sector that we are told has a productivity problem. Successive governments have failed to set a clear policy agenda for the public services. The indecision over in which sector—public or private—some services should sit has led to chronic underinvestment and low productivity. This underinvestment is at last being addressed. Personally, I wish that the reform process had begun earlier. But reform in public services is always difficult and productivity improvements take time. Hence, the arguments in the general election about rapid increases in public sector productivity were completely unrealistic. Within the public services there is a great deal of learning to be done. What do we expect them to do in the 21st century and how are those services to be delivered? I refer to implementation. That is where we have had some problems, and we are likely to have some in the future as well. Improving performance in the public services—particularly in health—requires some new thinking. However, even within a short period, the improvements in productivity that we have seen in health are remarkable. It takes a long time to get nurses, doctors, the capital and the training that takes place in the health service. Looking at the improvements in productivity within the past few years, many of our competitors would say that we have achieved a near miracle when it comes to the health service. Of course, there are problems. As such, healthcare is a very complicated system. It is an ensemble of integrated stochastic systems and without clear identification and characterisation of those systems the optimisation of resources is just not possible. Every hospital is different; every town has a different fingerprint and it is difficult to identify those differences quickly. It may take five to 10 years before we see a true increase in the levels of productivity under the current spending. That is very similar to manufacturing. There is not much difference between the analysis of the healthcare system and what has happened in manufacturing systems. Looking at the world itself, the change in the productivity of manufacturing has taken place with a lot of understanding and analysis. Much has now been understood about that and there is a transfer of that understanding to the health service. Simple process analysis leads to contradictory target setting, poor allocation of resources and disillusioned staff. Recently, newspapers have been full of articles about the role of consultants in the economy—much of it far from complimentary. That raised a smile and a feeling of déjà vu in my office. I have spent the past 30 years working around the world turning around many large-scale manufacturing enterprises. I have gone in after the consultants, which can be like calling in the plumber after a botched attempt by a home owner to get a new central heating system fitted by a bloke named Dave. I have witnessed too often the dire consequences of consultant-led unsustainable short-term restructuring. Far too many of our larger businesses have simply been restructured out of existence. Let me remind noble Lords where this process began. In the 1980s, the problem of low productivity in the state-owned enterprises came to a head. The reasons were many and various. The organisations had been run as part of the state and in a culture that existed before the days of a mass higher education system, employees were not trained to make decisions. By and large, there was not the skill-base and they were ill-equipped scientifically and technologically to succeed in the modern world, other than in exceptional cases. Poor management became the shorthand diagnosis. It is easy to see, therefore, why the shorthand prescription was far more management education. There is nothing wrong with that in principle. Of course, it is important for scientists, engineers and technologists to have an understanding of business, which is taking place in our schools and universities, but we should not place a greater emphasis on management than it is able to support. The skills necessary for turning round our industries, especially the private sector, are here, but we must move away from the infatuation with MBA talk and the latest management fad. I shall give the House some statistics. This year, in this country, we shall produce 33,000 MBAs. That figure comes from the Higher Education Statistics Agency. That is almost 6,000 more than all the physical sciences, mathematical sciences, computer sciences, engineering, technology, architecture and building masters level students added together. How on earth do we become a technological nation? How on earth will we be able to exploit the science and technology on which we are spending huge sums of money? One can see what happens. There is a well-trodden formula: have an article published in the Harvard Business Review, pump it into a book, pray for a bestseller, and market the idea for all it is worth through a consulting company and gullible politicians will accept it. Most of the fad business consulting efforts fit that pattern. The best guru in this area is Tom Peters, who, in 1982, wrote a book, In Search of Excellence. It eulogised 43 firms from the Fortune 500, but not one of them is still in existence. In a recent interview reported in Business Week, he admitted that he had made up much of the detail on which the book was based. One has to understand that our competitors—Japan, Germany, France—will be completely taken aback when we say that management consultants have restructured our organisations and developed our strategy. So if one looks at the management consultants, the MBAs coming out of the country, we should have the best productivity figures in the world, but we do not. Politicians and business leaders should understand that. The latest buzz is about leadership. How many genuine leaders, in whatever field, do noble Lords know who have been on a leadership programme? Real leaders are born, not made. As my area is manufacturing, I must say something on it. Recent history in Britain is a tale of two phoenix: one the parent of MG Rover and the other a much healthier bird, the manufacturing sector itself which has demonstrated the true phoenix properties of self-renewal. Manufacturing has renewed itself in this country. Visiting Longbridge regularly from the early 1970s, I have gained an insight into the causes of its decline. In my experience, Longbridge never made any money. A cruel combination of political interference, inept management, lack of technical competence, insufficient capital, and a lack of understanding of the global industry dynamics all contributed to a failure to develop successful new products. Thankfully, MG Rover is not representative of the automotive industry or the wider manufacturing sector. Today we produce 1.6 million cars a year in this country, an increase of 750,000 units per year since 1982. Manufacturing today is a leading source of innovation, creating high value-added products and services with significant spill-over benefits into other sectors—an asset in its own right and an important catalyst for other high-skill, technology-based economic activities. Manufacturing still accounts for 80 per cent of UK business expenditure on R&D and two-thirds of our exports. Output has continued to rise over the long term and it is still worth around £155 billion per annum. So we cannot just ignore it. We cannot talk about manufacturing today without mentioning India and China. I visit those two countries every month. Those two great nations have a population of around 2.5 billion people, almost eight times the size of the enlarged European Union. Their economies are growing at the rate of 8 per cent a year. They produce as many graduates per year as the total working population of England, France and Germany. They invest heavily in their infrastructure. When one looks at the number of vehicles per head, one realises why manufacturers wish to locate in China. The USA has 80 cars for every 100 people, German has 50, but China has only 0.5, so the market is huge. That is the reason why most industrialists invest in China. One last point: I heard the noble Viscount, Lord Trenchard, talking about the reason why things happened between MG Rover and Shanghai, which was because they had to pay the pension fund. That is rubbish. Shanghai never intended to produce cars in the UK. Why would they? Therefore, if we want to do business with those countries, we need a much more sophisticated understanding of the Asian business culture. Take MG Rover, when some of the giants of the car industry struggled to create a future for Longbridge. Was it ever likely—to make the understatement of the year—that the Phoenix four could succeed and the Government started backing them?