Post-pandemic economic growth: Industrial Strategy

The economic outlook has been fundamentally altered by the Covid-19 pandemic and by Brexit, and today’s circumstances therefore require a revised focus in industrial policy. However, some of the foundations and long-term challenges that the 2017 strategy sought to address are still relevant today and should be carefully considered in the new Plan for Growth.

The Government now has an opportunity via its Plan for Growth to deliver a more narrow and focused set of polices than the 142 that emerged from the 2017 strategy. We note that the Industrial Strategy Council’s analysis suggests the Government has not started well in this regard. The Government should refine a set of prioritised policies which have sufficient scale and scope to make progress against the Government’s strategic objectives. Government should publish the metrics it will measure to show progress in the delivery of these strategic objectives.

Coordinated and strategic industrial policy is required if the Government is to meet its growth, levelling up and net zero ambitions. It appears that many aspects of the Plan for Growth will be overseen by a cross-cabinet committee chaired by the Prime Minister and the Committee welcomes this opportunity to apply the highest levels of political priority to the problems the Industrial Strategy was trying to solve.

Whether labelled Industrial Strategy or Plan for Growth, industrial policy in the UK will require scale and a long-term commitment from Government to be successful. In response to this report the Government should set out: • How it will improve coordination of relevant polices across its Departments and ensure a strategic, long-term approach to industrial policy within Government, including clarifying the respective roles of HM Treasury and the Department for Business, Energy and Industrial Strategy in delivering the Plan for Growth; • The specific features and policies of the 2017 Industrial Strategy that will be retained, including clarity on the future of the Grand Challenges and missions and their applicability to future policy; • The objectives of its revised approach to industrial policy and how delivery against these will be measured and monitored; • How it intends to engage with sectors and seek external expert policy evaluation, to ensure robust future industrial policymaking processes.

Abolition of the Industrial Strategy Council suggests that the Government’s commitment to coordinated industrial policy that can withstand and benefit from independent scrutiny has waned. The Council’s abolition risks expanding the gap between Government and the industries that must deliver productivity improvements, economic growth and achieve the UK’s net zero target, as well as limiting the transparency of the Government’s industrial policy objectives and Post-pandemic economic growth: Industrial policy in the UK 49 progress.

The Secretary of State’s decision to axe the Industrial Strategy Council is difficult to reconcile with his conclusion that the Council did a good job - a conclusion with which we agree. The more challenging context today enhances the necessity of independent oversight. The abolition of the Council is not consistent with the Secretary of State’s wider contention that the Plan for Growth is, in effect, an evolution of the Industrial Strategy.

Abolishing the Industrial Strategy Council was a retrograde step. We are concerned that the Government has disregarded and rejected the benefit of independent long- term analysis and evaluation. Without independent scrutiny implementation of industrial policy will be compromised at best and ineffective at worst. The Council’s analysis and expertise in interpreting the strengths and weaknesses of the Industrial Strategy informed our inquiry, which is just one illustration of how independent oversight can be harnessed for wider scrutiny.

The abolition of the Industrial Strategy Council removes the opportunity to provide independent analysis over industrial policy in the long term. The Government must ensure that effective scrutiny is put in place in another form in order to measure outcomes and constantly evaluate the strategy. The Council’s abolition removes the opportunity to provide independent analysis that allows an iterative approach to optimising industrial policy over the long term. (Paragraph 42) Foundations and missions

Uncertainty about the relevance or content of the Industrial Strategy suggests that, in combination, the strategy’s multiple overlapping features made it overly complex and obscured its purpose. The extent to which the strategy’s Foundations and Grand Challenges shaped the day-to-day experience of the business people who participated in our roundtables was limited, as was their understanding of granular elements of the strategy. Stakeholders in the devolved nations also noted insufficient opportunities for engagement with the Government on these fundamental aspects of the Strategy.

The UK Government should clarify how the devolved Governments will be involved in the design and delivery of future policies and strategies associated with the Plan for Growth. The UK Government should implement lessons from the devolved Governments’ experience of engaging with the UK Government on policies relating to the Industrial Strategy’s Foundations and Grand Challenges.

In addition to co-production with the Devolved Administrations, the Plan for Growth should be developed with regional and local leaders in England with a focus on promoting local engagement with industrial policy, and not merely a strategy document for consumption in Whitehall.

Overall, the Industrial Strategy’s blend of horizontal policies with vertical sector- based interventions and a mission-oriented approach offered significant flexibility for policymakers. The mission-based approach helped to provide direction of travel and focus for both the Government and industry on a set of objectives, though 50 Post-pandemic economic growth: Industrial policy in the UK converting the missions into discrete and specific policy programmes that spanned government departments and delivered meaningful engagement in local economies proved challenging.

When launched in 2017, the fundamental purpose of the Industrial Strategy was to address poor productivity in the UK, particularly outside of the South East. However, improved productivity was not itself a Grand Challenge or mission of the strategy. This may have contributed to a sense of the Strategy’s complexity and lack of clear purpose.

We are concerned that the Plan for Growth lacks mission-based structures (beyond references to net zero and levelling up) or formal mechanisms for strategic sectoral engagement and support. The reduced emphasis on these elements lessens the formal complexity of the Plan for Growth compared to the Industrial Strategy, but risks making it harder to realise the strategic balance of vertical and horizontal interventions witnesses called for, or the benefits of mission-driven policy for academic engagement with industry.

While we recognise it has chosen not to replicate the Industrial Strategy’s formal structure of Sector Deals, Foundations, and Grand Challenges and missions, the Government should clarify what balance it has sought between vertical, horizontal and mission-led policy in the Plan for Growth. Doing this would ensure the Plan for Growth appropriately captures and balances the benefit of each approach. (Paragraph 64) Sector deals

A fundamental flaw of post-2017 industrial policy is that the Industrial Strategy failed to embed itself as touchstone for British industry. Each foundation and mission of the Strategy was appropriate in its own right, but in combination the Industrial Strategy was complex and remote. The ‘opportunistic’ nature of the agreed sector deals and their lack of ‘complementarity’ with the wider Industrial Strategy may have exacerbated this problem, given the role the deals may have played in shaping perceptions of the wider strategy among businesses in those sectors.

While some businesses in some sectors were aware of the strategy’s purpose and objectives, for many it was distant, did not provide clear direction nor influence decision making. We would like Government to ensure that future industrial policy is easily understood at the grassroots of British industry and translatable to the everyday experiences of businesses in the UK.

Sector deals can have a galvanising effect across industries, bringing to bear an industry-wide focus on enhancing skills and advancing research and development. We are mindful, however, that multiple sector deals can spread resources too thinly and that ‘horizontal’ mission focused interventions can be effective across multiple sectors.

The Secretary of State’s commitment to maintain the existing sector deals does not fully address long-term concerns about the Government’s approach to sectoral policy. Whether the Government intends to refocus and prioritise its sectoral Post-pandemic economic growth: Industrial policy in the UK 51 approach, as suggested in its evidence, remains unclear. We are concerned that the Government’s current approach is providing business with neither clarity nor certainty.

Each sector deal is different, some are new whilst some established in 2017 built on cross-sector working already in place. There is value in maintaining the sectoral approach—but clear measures of success and failure are required.

The Government should maintain sector deals, not least to ensure an appropriate and strategic balance between vertical and horizontal policy interventions as described in Chapter 3. However, we are concerned that outside the structure of the Industrial Strategy, sector deals should not lose their strategic purpose—either for pursuing comparative advantage, or as a defensive intervention—and instead become piecemeal solutions to sectoral problems.

In response to this report the Government should set out how it intends to take forward a sectoral approach to industrial policy. The Government should explain how reprioritisation may be consistent with maintaining the existing deals and whether a coordinated process will be established for agreeing new sector deals.

In light of the shocks experienced across the economy and society the Government should establish a plan to review each sector deal to account for the impact Covid-19 has had on employment, pay and productivity.

Government should develop clear ‘defensive’ interventions for sectors going through rapid change, to prepare workers and communities for the loss of jobs and/or businesses that will inevitably occur in their local communities, and to support them in taking advantage of new work and business opportunities. These interventions should be delivered locally so that workers and businesses are aware of the opportunities for support available to them and can therefore effectively engage with industrial policy in their local economy. (Paragraph 88) Local industrial strategies

The process of developing Local Industrial Strategies was a useful exercise for many areas, even where no strategy was ultimately agreed with central Government. However, it is unclear what impact they have had in practice at either increasing local growth and productivity, or contributing to specific aims of the national Industrial Strategy such as the Grand Challenge missions.

We are concerned that so few local strategies were agreed and published, and at evidence which calls into question the varying ability of local institutional structures to take forward industrial policymaking. Regardless of whether the specific Local Industrial Strategy model is continued, Government should consider the lessons that can be learnt from their rollout to support future local industrial policymaking.

The Local Industrial Strategy model faced key limitations, including: a lack of associated long-term funding that could help unlock local investments; variable local institutional capacity to develop, implement and evaluate local strategies; limited priority and capacity within central Government to support the development of 52 Post-pandemic economic growth: Industrial policy in the UK local strategies; and a lack of clarity on how far the national vision could be adapted to local circumstances, or by what criteria the local strategies’ success could be judged. Many of these limitations are related to the powers, funding and support available to local areas to effectively develop and implement strategic local economic policies, appropriately informed by national priorities.

We conclude that Local Industrial Strategies are useful and should be continued in the future, but that the Government should set out how it will ensure that local areas are equipped with the skills, resource and incentives needed to produce and deliver effective local industrial policy. It should make engaging with and supporting local areas to develop such strategies (including in the devolved nations) a higher priority and should publish a national assessment of the opportunities and challenges in each region and potential points of collaboration across the country. Government should confirm whether it sees LEPs as the relevant delivery body for local industrial strategies in England and, if so, provide additional dedicated support for LEPs to build greater analytical, evaluation and policymaking resource.

The Government’s recognition of the value of the insights generated through the process of working with local areas to design, and in some cases agree, Local Industrial Strategies is welcome. However, it does not address the fundamental uncertainty regarding the future status of local strategies which are already published, and those which remain in development.

The process of designing Local Industrial Strategies effectively underpinned strategic conversations about industrial policy at the local level. In particular, the insights and networks they generated among local stakeholders could support the effective use of central Government funding for levelling up and community investment. Discontinuing this underpinning structure could hinder this objective and may be especially disruptive as the Government prepares to launch the Shared Prosperity Fund. It is also unclear through what mechanism coordination and co-creation of industrial policy between local business, local government, and central Government will be achieved in future.

The Government should clarify whether a new structure will replace Local Industrial Strategies, or what form local growth plans will take in future. This would help to ensure a strategic approach can be taken to distributing funding through levelling up and community investment programmes including the Shared Prosperity Fund. Local growth plans should serve as a focal point for future strategic conversations about industrial policy—both at a local level, and between local and national government.

The paucity of agreed Local Industrial Strategies ultimately limited the contribution of local insights and intelligence into national industrial policy. However, co-creation of industrial policy at local and national level is the right approach and was a strength of the Industrial Strategy. We share the Industrial Strategy Council’s concern that mechanisms for such co-creation are absent from the Plan for Growth. The Government’s levelling up agenda will be stronger if local insights and intelligence continue to inform national-level industrial policy, but the move away from the Local Industrial Strategy model will make this more difficult. (Paragraph 116) Post-pandemic economic growth: Industrial policy in the UK 53

The Government should clarify through what mechanism it intends to incorporate local industrial and economic insights and intelligence into future national-level policies—in particular, into the Plans, Strategies and Reviews listed in the Plan for Growth which the Government has said will be published within the next 12 months. (Paragraph 117) Funding the industrial strategy

The growth capital gap is a brake on the ability of small businesses to innovate and accelerate their growth. Venture capital in the UK does not always fill the gap and support the right businesses in the right places at the right time. There remains a sectoral and geographic vacuum which is filled by investors from outside the UK.

International investment in British businesses can support growth and is positive on an individual basis. The flow of businesses and IP out of the UK, however, as a consequence of the international venture capital model is cause for concern. The drift towards foreign investment illustrates that scale ups and innovative businesses require alternative sources of investment to achieve the maximum long-term benefit for the UK economy in addition to short-term rewards for entrepreneurs.

On this basis, we share the concerns of the Public Accounts Committee (PAC), which called into question the extent to which the Industrial Strategy Challenge Fund (ISCF) supports research-orientated small businesses. Given the scale of the funding attached to the ISCF, the fund should represent a realistic source of alternative funding for small businesses seeking to innovate. However, if the ISCF funding becomes ever more concentrated in certain parts of England, and the flow of support trends towards larger businesses, the ISCF will not be regarded as a viable alternative to traditional sources of growth finance.

We are concerned that the ISCF as a source of public finance should not reinforce the trends seen in access to private finance, in particular venture capital. In addition, we are concerned that difficult approval processes and the challenge of providing finance to satisfy the collaborative approach disincentivise small, innovative businesses from engaging with the ISCF.

We recommend that UKRI put in place an action plan which: • sets out how they will ensure that the ISCF stimulates innovation in all the nations and regions of the UK; • details how UKRI will reverse the trend of funding moving sharply away from SMEs to larger businesses; • addresses concerns that the collaborative co-investment bid process is not appropriate for SMEs which are unable to meet co-financing requirements.

The Advanced Research and Invention Agency (ARIA) could provide a mechanism to contract for innovation by driving public-private collaboration and encouraging 54 Post-pandemic economic growth: Industrial policy in the UK competition between commercial organisations to secure alternative sources of investment for growth. We believe that an agency which can take risks and be flexible in the way it supports commercial innovation has the potential to accelerate progress against the Government’s policy objectives.

We note the conclusion of the House of Commons Science and Technology Committee that ARIA is a “brand in search of a product” and share concerns that its function remains uncertain. ARIA’s remit and objectives are very broad and we are concerned that its potential should not be diluted by a lack of clear focus.

The post-pandemic and post-Brexit environment will provide the Government with an opportunity to reshape how public procurement can be used to drive innovation by British businesses. Whilst there was no appetite amongst witnesses for industrial policy to be used to prop-up failing businesses, beyond support for defensive policy to support change, it was clear that there is a desire for the power of government to more effectively harnessed to meet the Grand Challenges established by the 2017 Industrial Strategy.

Whilst the future of the Grand Challenges is uncertain the fundamental issues which underpinned them remain pertinent. A growing R&D budget channelled through the Industrial Strategy Challenge Fund and the Advanced Research and Invention Agency, in combination with a modification of state aid rules and procurement, has significant potential to promote the growth and innovation required to meet the Grand Challenges. However, there remains a pervasive sense of uncertainty regarding the future funding environment and how industrial policy and the Plan for Growth will interact with commercial innovation.

British business should be provided with a clear picture of the landscape in which it will operate in the post-Brexit and post-Covid-19 era. We recommend that the Government publish an overview of the scale and nature of its future relationship with industry to clarify the mechanisms it will use for investing in commercial innovation. This overview should set out principles by which the Government will seek to support businesses, particularly SME’s experiencing rapid growth. Further, the Treasury should set out its plans—as a co-owner of the new Plan for Growth—for modernising government procurement rules in the future. (Paragraph 171) Where now?

To provide clear direction the Government should present to the House an updated industrial policy statement which sets out the Government’s strategic assessment of industrial policy in the UK. The Government should provide:(Paragraph 180) • Confirmation of who is leading industrial policy in the UK—is it the Prime Minister as Chair of the National Economy and Recovery Taskforce, the Chancellor of the Exchequer as author of the Plan for Growth, or the Secretary of State for Business, Energy and Industrial Strategy? • Confirmation that officials in each relevant department will be assigned responsibility to lead on industrial policy in their area. Post-pandemic economic growth: Industrial policy in the UK 55 • A commitment to publishing the dates and minutes of the cross-cabinet National Economy and Recovery Taskforce which will coordinate industrial policy. • A commitment to publish industrial policy metrics and to report on those metrics on an annual basis at local as well as national level. The Government should support relevant departments and national agencies in collecting and publishing this data. • A commitment to co-producing industrial policy with the devolved governments and regional and local leaders. The Government should set out the process and timeframes by which this will be achieved. 56 Post-pandemic economic growth: Industrial policy in the UK