Thursday, 21 December 2017

UK Launches New Industrial Strategy

Construction gets one of the first Sector Deals

Industry policy has been out of favour for the last couple of decades, especially in countries like the US, UK and Australia. Partly this is ideological, a view that it is about government intervention and picking winners, and partly because some issues traditionally addressed by industry policy (like tariffs and market access) have moved into negotiations around trade policy, at both the global level with the WTO rounds and in the increasing number of bilateral trade agreements. Mainly though it is because few industry policies have really been successful, and many have been expensive failures. Traditionally manufacturing was the focus for industry policy, but these days the approach is more about coordinating a wide range of policy to achieve objectives across the economy and society.

There is also the problem that results take time to happen and thus take longer than the electoral cycle to develop, so there is little benefit to the government of the day even if a policy is working. While it is a fact that governments can have major impacts through regulation, tax, and R&D these policies are spread across departments, and although many inquiries have recommended leveraging purchases of materials, machinery and equipment and buildings and structures to policy outcomes there are significant institutional constraints on government buying power. What history generally does show is that it is hard to get industry strategy right, implementation is difficult and outcomes are uncertain in dynamically evolving economies.

Given this background it was a notable occasion when, on the 27thof November 2017, The UK Government launched their new Industrial Strategy, “setting out a long-term vision for how Britain can build on its economic strengths, address its productivity performance, embrace technological change and boost the earning power of people across the UK.” In the prolix way of such documents there is much talk of innovation, partnerships between industry and academia, preparing for the future, high tech industry clusters and next generation technologies and so on, all of which are well-known elements of a modern economy. Nonetheless, combining them into an overall policy backed with funding and resources as this strategy has done may become something of a template for twenty-first century industry policy, in the same way Australia has followed the UK with PPPs and City Deals for infrastructure.

The industry strategy includes four Grand Challenges, five productivity foundations, and various sector deals. The Grand Challenges of the future are artificial intelligence (AI) and data, low carbon/clean energy growth, health and ageing, and transport and infrastructure. Productivity depends on people, places, ideas, infrastructure and the business environment. No surprises in those lists, and the paper includes a great deal of conventional thinking and hand waving on those topics. There will be more funding available for technology start-ups through the British Business Bank, which gets a £2.5bn fund from money that would have gone to EU investment programmes, and changes to pension fund rules will allow them to invest in small companies.

A proposed national industrial strategy council will have oversight of implementation of the proposals, and theoretically will hold this and subsequent governments accountable for progress. The strategy includes establishing several new councils and offices and renaming others, like the new UK Research and Innovation body, which brings together all the research councils, and Innovate UK, the operating name of the Technology Strategy Board, a non-departmental public body. This plethora of initiatives means the strategy lacks clarity and a meaningful target, with the potential for much energy and money to be spent on process rather than outcomes.

Construction is one of the four Sector Deals (along with AI, the car industry and life sciences) launched in the strategy, and there is a lot of discussion about housing in the context of affordability and energy efficiency: ‘The government and the construction sector, through the Construction Leadership Council, have agreed a Sector Deal to transform the productivity of the sector benefiting the wider economy. The deal will substantially boost the sector’s productivity, through greater investment in innovation and skills, creating new and well-paid jobs and maximising its export potential. This will also reduce the environmental impact, improve the efficiency and reduce whole life cost of new projects and buildings to help build the houses, schools, hospitals and major transport projects we need.’

The Construction Leadership Council is a heavyweight group of senior industry executives that promotes off-site manufacturing and increased digitisation in construction, and appears to have had significant input into the industry strategy. The key points in their 2013 publication Construction 2025 have been included, often using the same language, in the Industrial Strategy paper, and the Council given a leading role in the implementation of the sector deal. There is a recent video of a speech to the Council (16th November, 60 minutes) by Ann Bentley, Chairman of Rider Levett Bucknall, which argues for change and puts her view of industry development (digitisation) and policy options (value based procurement). While the ideas are not particularly original they are cogently argued and very relevant, and probably representative of the viewpoint of management in the UK industry. She discusses industry potential around three ideas:
  • Use outcome-based procurement to drive capital delivery and lifetime performance.
  • Increase transparency on the performance of suppliers and assets.
  • Improve procurement efficiency and get the basics right
 There are some big numbers attached to the industrial strategy, mainly through the Industrial Strategy Challenge Fund which will invest £725 million in a range of new programmes to ‘capture the value of innovation’. (These programmes are not the same as the four Grand Challenges but are obviously linked). This could amount to serious money if it materialises, although the funding included in the strategy is spread thinly and seems low given the scale of the challenges and the ambition of the strategy. The Challenge Fund ‘aims to bring together the UK’s world-leading research with business to meet the major industrial and societal challenges of our time.’ There is a lengthy list of challenges on their page:

Transforming construction is one of the Challenges, and there is potentially £170 million (around AUD$300m) allocated, with the aim to change the way buildings are created. This means manufacturing and will be targeted at off-site and modular construction, which in turn is linked to other Challenges in energy, robotics and manufacturing. It may take some time to see how this works in practice and there are no details on the how or where this investment will happen. In the Challenge Fund at the Transforming Construction link above it says:
The way we create our buildings has not changed substantially in 40 years and needs a drastic overhaul if it is to deliver the buildings that the UK needs. Construction is currently expensive, and too many buildings waste energy.
We need to transform construction so that we can create affordable places to live and work that are, safer, healthier and use less energy.
By taking a lead in the UK, we can also increase our ability to export: global demand for efficient buildings is rising rapidly, due to the pressures of urbanisation, affordability, and the need to cut emissions.
 Export potential is clearly the motivation behind many of the strategy’s ideas, because post-Brexit the UK will be looking to expand into new markets to replace as much as possible of the 43% of trade currently done with the EU. It is worth noting here that UK imports of building and construction products have doubled in the last decade, much of it materials from the EU and wood from Sweden. On the other hand, importing materials and exporting higher-value off-site construction products and methods may turn out to be a great strategy.

The strategy also promises more spending on education and training, infrastructure and urban development, extending a wide range of existing programmes and adding emphasis in areas like STEM teaching, including ‘a £64 million investment for digital and construction training’. There will be a new regulator, the office for students, to address employer and student needs, and a national retraining scheme targeting skills shortages in key sectors: ‘We will provide £34 million (AUD$60m) to expand innovative construction training programs across the country, including a program in the West Midlands, focused on supporting the country’s housing needs and building upon existing good practice’. However, there are no details on what this actually is or how it will be implemented, and this is a criticism that can be levelled at almost every initiative proposed in the strategy. Skills policy, business support and planning are policy areas in the strategy that are devolved, and thus the responsibility of administrations in Scotland, Wales and Northern Ireland. The recent Final Report of the Industrial Strategy Commission argued strongly for ‘further and faster’ devolution in the UK. (This was another major source of the ideas and initiatives in the strategy).

The document presents policy ideas like a prospectus, with breakout boxes of examples and endorsements to support the strategic initiatives, most which are not new and were flagged in the January 2017 Green Paper that led, after the rounds of submissions and discussion, to this November White paper. For example, the strategy links to a previously announced boost to R&D, with a target of 2.4% of GDP by 2027, and an existing teacher recruitment and retention scheme. Proposals like a new office for AI have no funding attached, and any discussion of Brexit is absent.

On the one hand, delivering an ambitious and comprehensive industrial strategy is a laudable achievement and there is no shortage of issues and challenges to be addressed in the UK and elsewhere. If nothing else, developing a comprehensive policy like this focuses minds and involves many participants. Government policy does not have to be original or innovative to be useful and effective, so the lack of new ideas or perspective is not the problem. It is probably better to have a strategy that brings together issues around productivity, innovation, skills and technology, than not have one at all.

However, on the other hand, a policy that lacks credibility or substance is not helpful. There is a lot of rhetoric in the strategy, embellishing the very many ideas and initiatives included. Many of the proposed initiatives are to be implemented through various regulatory and funding bodies, some existing and some new, with much of the thinly spread funding being channelled through current programmes, but details are lacking. There are no firm commitments to invest in any of the challenges, or to any specific investments in the sector deals. Local and regional governments, universities, regulators and industry bodies have all been given significant but generally unspecified roles, and their engagement will be an important determinant of any successes.  

How the UK Government moves into the next phase of their industrial strategy will tell whether this is a serious effort at industry development or a publicity policy, aimed at announcements and PR but lacking support and commitment. At some point next year the challenges and sector deals should lead to expressions of interest and applications for funding of new projects, which will be the litmus test of the substance of the strategy. Establishing the proposed national industrial strategy council and other offices should provide a stream of positive events and announcements in 2018, but achieving the strategy’s goals will require a great deal of coordination, determination and long-term commitment, qualities not always associated with government industry policy.