The Industrial Strategy: A Vision for Growth

About Balfour Beatty

Balfour Beatty is a leading international infrastructure group. With 15,000 employees across the UK, Balfour Beatty finances, develops, delivers and maintains the increasingly complex
infrastructure that underpins the UK’s daily life. Delivering projects across transportation, power and utility systems, social and commercial buildings, from Crossrail and the Channel Tunnel Rail link, Heathrow T2b to the M25, M60, M3 and M4/M5, Sellafield and soon Hinkley C nuclear facilities, to the Olympic Aquatics Centre and Olympic Stadium Transformation.

We also have significant experience and understanding of the links between infrastructure investment and regeneration and economic growth. Leo Quinn, Chief Executive of Balfour
Beatty, is a member of the Department for Business, Energy and Industrial Strategy’s Construction Leadership Council (CLC) and leads the work stream on skills. The CLC draws together a
number of senior business people from across the construction supply chain to provide leadership to help transform the UK construction industry and position it as a driver of productivity
across the economy.

Introduction

When Theresa May became Prime Minister, she announced that the UK government would develop an ‘industrial strategy’ to deliver a modern, innovative and competitive economy.

We agree that the time is right to consider a new industrial strategy. Industrial policy is likely to be significantly impacted by the UK’s decision to leave the EU. The impact of ‘Brexit’ will be
felt in a number of key areas such as State Aid, trade policy and the labour market among others. A strong industrial strategy will help the country respond effectively to these changes in a way that benefits the economy over the long term.

Furthermore, a robust industrial strategy could prove particularly important following Brexit in helping the country build on its key national strengths and take advantage of opportunities that emerge during and after the negotiations.

Fundamentally therefore, Balfour Beatty supports the Government’s renewed focus on a long-term industrial strategy and the decision to create, in the new Department for Business, Energy and Industrial Strategy (BEIS), a government department with the industrial strategy at the heart of its activities. We believe
that, designed correctly, a strong industrial strategy can contribute to increasing economic growth and resilience, alongside a more balanced society. The key balance to be struck is between a healthy market economy and the right level of central intervention.

It will be important that industry and other interested parties have the opportunity to input views and ideas as the strategy develops. There are also, however, many lessons that can be learnt from other countries and previous models, relating to what has worked particularly well elsewhere, as well as what has not worked. We encourage those drafting the strategy to look at these examples to ensure that the UK version takes the best of what has gone before.

Key Points

1. The overarching objective guiding the industrial strategy should be sustained and sustainable productivity across the whole economy.

2. The Government’s industrial strategy should seek to establish stability and certainty in the political and policy landscape.

3. Some industries should be used as cross sector enablers in the strategy. Infrastructure is a good candidate for this as it underpins productivity growth in many sectors and across the
whole country. Innovation and skills are two other areas which share the same properties.

4. Effective, reliable infrastructure should underpin Government’s industrial strategy. Infrastructure has the potential to stimulate the economy in the short term, offset uncertainty and support productivity in the long term. Indications from the Prime Minister that delivery of infrastructure projects, increased house-building and devolution of powers to regions and cities
outside London will be a focus of the industrial strategy are very welcome and have Balfour Beatty’s full support.

5. An industrial strategy must support sectors where the UK has genuine expertise and a strong competitive edge, enabling them to take advantage of opportunities as they emerge.

6. An early and integrated policy response to what happens following the vote to leave the EU will be important. A plan to both retain the skills of those who have migrated here and
to ensure that the UK remains an attractive place for talented people to move to should be a key element of Government’s industrial strategy.

7. The industrial strategy should also seek to address the skills shortage in the UK directly, by continuing to support the upskilling of our own workforce. We therefore welcome the
plans to increase the number of apprentices and introduce the Apprenticeship Levy.

8. An industrial strategy should not see government intervene too much in the economy. Policies which ensure that the regulatory and tax systems encourage business to thrive
are welcome for example, but too much state direction and policies which prop up inefficient industries are unlikely to help the economy in the long-term.

9. There must be room for new sectors, especially those industries in which we will be internationally competitive going forward, to be supported by the strategy. These areas
will provide growth in the future.

10. The strategy should respond to the needs of all areas of the economy. This means it has to deliver across a wide range of geographic locations. It has also to support small and medium business opportunities as well as very large enterprises.

What does industry need from Government?

Infrastructure

Indications from the Prime Minister that delivery of infrastructure projects, increased house-building and devolution of powers to regions and cities outside London remain priorities and will be a focus of the industrial strategy are very welcome and have Balfour Beatty’s full support.

In terms of what industry wants more broadly from an industrial strategy, above all, it must ensure confidence in the business environment; this can be done with support for sectors such as infrastructure and its component parts (including construction, architecture, design and engineering for example) where the UK has world-leading expertise and a strong competitive edge. As these sectors are able to thrive, there would be a lasting impact in terms of growth, employment and key skills across the country as well as modernisation and improvements to the robustness of the UK’s infrastructure, helping to achieve the aim of closing the economic and productivity gap between the South and the rest of the UK. Getting this element right is a precondition for the success of the wider strategy.

More specifically, Balfour Beatty believes that the principle of effective, reliable infrastructure should underpin Government’s industrial strategy.

Infrastructure has the potential to stimulate the economy in the short term, offset uncertainty and support productivity in the long term. Infrastructure investment delivers significant benefits, not only in terms of direct employment relating to the build and long term maintenance of a scheme and the spend that goes via the supply chains; there is also a well-documented multiplier effect. Economists estimate that every £1 spent on construction generates £2.84 in total economic activity1 at least 90% of which stays in the UK2. And of course it is to the benefit of the whole economy to make sure we have the 21st century infrastructure the country needs.

Following the vote to leave the EU in June, it is important that Government retains its commitment to infrastructure. The Government’s industrial strategy should seek to establish stability
and certainty in the political and policy landscape. With private finance dominating the UK’s planned infrastructure investment (69% of financing is from the private sector (worth £260 billion), whilst 19% is from the public sector (£73 billion) and 12% is from mixed financing (£46 billion)3) the strategy should ensure the UK is attractive and stable enough to maintain and even improve its position as a place for infrastructure investment.

Skills

Another key focus of the industrial strategy should, in our view, be the labour market and more broadly, providing a coordinated approach across the whole area of skills training.

Skills shortages are a common denominator across several sectors and many companies of all sizes are already finding it difficult to recruit enough skilled staff. For industries such as the
infrastructure industry, success is contingent on is being able to access highly skilled individuals. Approximately 2.2 million EU nationals work in the UK4. For industries such as the infrastructure industry, free movement of labour in the EU has allowed us to find the skilled staff we cannot currently source in the UK. Given the number of major infrastructure projects in the pipeline, uncertainty around the free movement of labour could cause the industry recruitment and staffing difficulties and may increase costs where demand for labour outstrips supply and the subsequent risk of project delays. This will be particularly relevant for mega projects such as High Speed 2 (HS2) and the nuclear new build programme. An early and integrated policy response to both retain the skills of those who have migrated here and to ensure that the UK remains an attractive place for talented people to reside should be a key element of Government’s industrial strategy. It will be important however, that BEIS works closely with the Department for Exiting the European Union and the Department for International Trade in considering this point. To this end, we welcome the establishment of the Cabinet Committee on Industrial Strategy, which aims to ensure that the industrial strategy has input from all the relevant departments, not just the business department.

The Government’s industrial strategy should also seek to address the skills shortage in the UK directly, by continuing to support the upskilling of our own workforce. If we want a successful industrial strategy then we must invest in the people who will deliver it, so skills, the investment in human capital, must be a priority in the industrial strategy. In this vein, we welcome Government’s plans to increase the number of apprentices by 3 million and introduce the Apprenticeship Levy. Balfour Beatty has taken the initiative in this area by being a long standing member of The 5% Club, an employer led organisation set up by our Chief Executive Leo Quinn three years ago, aiming to address the skills gap by getting more young people into earn to learn opportunities, encourage businesses to take the lead on training and promote apprenticeships as a positive career decision. However, we do not believe that the apprenticeship levy alone will be enough to meet the shortfall in skilled workers the infrastructure industry needs.

To effectively resolve these skilling issues, we believe it’s necessary that for a collegiate approach to agree a clearly defined programme, designed through close interaction and genuine dialogue between government, industry and representative bodies, such as the Construction Leadership Council. Most importantly, the strategy should be adhered to over the long-term as we see in other countries such as Germany.

A ‘beneficial’ Government role

Government, merely by existing, has an impact on business. How it regulates, what its tax and planning policies look like, how it spends taxpayers’ money, whether it decides to invest
in infrastructure or not. All of these decisions have an industrial impact and an influence over our competitive position and ability to attract inward investment. The question is, how much should Government intervene and how strategic is it in its intervention.

Different levels of government involvement and support are also needed depending on the industry or sector. For some, government’s role can be restricted to making sure that the UK is a good place to do business. However, others may need more support, for example, future growth sectors may need help, through regulation or assistance in tackling supply chain weakness for instance, to help them to bed in. Our Small and Medium Enterprises (SMEs) may need help to ensure that they can grow and compete on as level a playing field as possible with larger companies.

This is a complex area and the exact balance that should be struck between an interventionist policy and a free market approach should, in our view, be driven by the industrial strategy: which means that any such strategy needs to have pin-pointed “strategic” industries, so that such decisions are made on a case by case basis. However, a policy which is either rigidly free market or recklessly interventionist is unlikely to succeed: a successful strategy is likely to involve a blend of the two. What the UK does not need, in our view, is an industrial strategy
which sees government intervene too much in the economy. Policies which ensure that the regulatory and tax systems encourage business to thrive are welcome for example, but
too much state direction and policies which prop up inefficient industries are unlikely to help the economy in the long-term.

An effective strategy would see the Government adopt an approach where barriers to success are identified and removed, enabling innovation and investment. Where policies to support the development of home-grown engineers and technicians in order to address the skills shortage for example, are given continued priority, and where investment in infrastructure is undertaken strategically to support key geographies and industries and enable them to succeed. Consider for example, the unique competitive advantage in the UK’s universities and education system. The UK has the intellectual property in electronics, bio sciences, software and many other areas, to be world leading.

These unique capabilities should be better mobilised, as they are the foundation to a successful industrial strategy and will make it easier for the next Apple, Uber or Google to come from the UK. Balfour Beatty therefore believes that issues such as potential foreign takeovers should be considered on a case by case basis rather than there being a blanket policy. In our view, the three principles that should guide thinking in this area should be that:

•Successful and important industries should be recognised and supported. We support a sectoral approach. However, it should not be about “picking winners”, but about backing success and ensuring it can continue. The overarching aim should be to create an environment in which all companies and sectors can thrive by supporting those industries where the UK has a genuine competitive advantage;

•There must be room for new sectors, especially those industries in which we will be internationally competitive going forward, to be supported by the strategy. A ‘modern’ industrial
strategy should facilitate the development of a modern economy. These areas will provide growth in the future;

•The approach taken in the industrial strategy should be genuinely strategic: it should not be about propping up failing companies or sectors for the sake of it, but must assess the
long-term requirements of the UK economy. For example, not recognising the value of the domestic supply chain leaves us exposed to higher prices from overseas companies in areas such as steel, where the failure to accurately assess the economic benefit of buying locally produced products contributed to the demise of the structural steel industry in the UK.

A broader objective

We believe that an effective industrial strategy must benefit the whole economy and enable all industries to thrive. It follows, therefore, that there should be an overarching objective  which drives the design of the strategy. But what should that be? In Balfour Beatty’s view, the starting point should be to consider where we want the UK economy to be in ten to twenty years’ time and, taking the ‘strategy’ part of the expression literally, to use the industrial strategy as a blueprint for how to get there. It should set out a vision for the UK economy, building on its current strengths, addressing geographical weaknesses and enabling new, emerging sectors and businesses of all sizes to succeed. The obvious overarching objective would, therefore, be sustained and sustainable productivity across the whole economy. Putting in place measures which benefit future generations, ensuring that they are able to find employment or set up their own businesses and securing long-term prosperity for the country.

The approach

In our view, a sectoral approach must be an element of the industrial strategy, in order to achieve this objective of sustained and sustainable productivity across the whole economy. A sectoral approach would involve key industries being identified for success, in order to maximise the benefits from the levers the Government has available to it. Such an approach would also enable the UK to play to its strengths in supporting those industries where it has a competitive advantage.

The sectoral element should build on and expand the approach the Government set out between 2010-2015, where 11 industries including construction, nuclear and offshore wind were identified for long-term partnerships and a network of “Catapult” centres were set up to support research and development. While there were positive elements to that approach, it was, in our view, limited in scope and ambition since it focussed in large part on the industrial sectors of the future.

In our view, some areas should also be used as cross sector enablers
and dealt with in their own right. Infrastructure is a good candidate for this as it underpins productivity growth in lots of sectors and across the whole country.

Innovation and skills are two other areas which share the same properties. The new industrial strategy will therefore, require a combination of horizontal policies (aimed at benefitting the economy more broadly, for example, measures to support R&D and innovation, or changes to corporate tax policy) and those which support specific sectors (such as funding of certain technologies, or changes to public procurement rules).

In terms of other approaches, a sectoral and a geographical approach are not, in our view, at odds with each other, as areas of the country often have a specific expertise and an established supply chain relating to it. For example: the automotive industry in the Midlands and North East; the East London Tech City; or aerospace in the North West and South West.

An effective industrial strategy must drive economic growth in different areas of the country. In order to ensure that the strategy is genuinely ‘strategic’ geographical impact and ensuring economic growth across the whole country is one of the key issues politicians should consider in designing it.

We recommend therefore:
 
•A strategy with an overarching objective of achieving growth across the economy, enabling all industries – and by inference, individuals and thus society - to share in the benefits.

•The strategy would prioritise certain key sectors for support, ensuring a focus on benefitting the maximum geographic spread across the country by using cross-sector enablers such as the infrastructure industry.

•The strategy would enable new, growth industries to emerge.

Learning lessons

Previous governments have had industrial strategies, both in the UK and elsewhere, from which many lessons can be taken.

Firstly, ongoing engagement and dialogue with industry is key to designing and implementing an effective industrial strategy. It will be of advantage to the new BEIS Department, in our view, that the 2010-2015 Government set up sector councils and other forums in its own approach to an industrial strategy. We recommend that these are maintained and built on rather than reinvented.

In terms of what can be learnt from previous strategies, Balfour Beatty believes it is important to achieve a balance between the future growth sectors (e.g. advanced manufacturing, bio medical, digital) and the core building blocks of industry (e.g. construction, manufacturing). Previous strategies have tended to overlook the less glamorous industries for which there is steady demand. Leaving the EU could be an opportunity for the diversification of the economy away from financial services and back towards industries such as engineering, construction and manufacturing, as the UK may no longer be bound by single market rules which restrict a more active industrial policy. This, in turn, would support the rebalancing of the economy more evenly across the regions and should therefore be supported by the industrial strategy.

There are many countries that can be learnt from, for example, Japan and the US, which have both used industrial policy to promote key sectors and industries with notable success.

Examples include:

•Developments in the US science and innovation sector, which it has achieved largely by strategically supporting its defence industries.

•South Korea developed a strategy based around 17 future sectors as possible high-growth markets. Key capabilities common to these 17 sectors were identified for strategic
support and strategies set for seven of the common capabilities. The strategies include KPI targets and a range of support mechanisms needed to deliver them.

However, we believe the best model is perhaps Germany, which now has the largest share of global trade in manufactures ahead of China, Japan and the US. Germany has an active industrial policy focussing on inter-connected levers such as long-term planning; the emphasis on vocational training; the use of tax incentives to help industries grow; and the strategic management of public procurement rules to encourage the use of key materials or technologies, or adherence to specific standards, which means that certain industries, companies or technologies can be stimulated and supported.

The close relationships between banks and industry are another important element in Germany’s success and indeed, the German model of collaborative public-private partnerships such as those found in Fraunhofer Institutes were recognised and used as models by the UK Coalition when it launched the Catapult Centres. However, rather than being a single, formal document, Germany’s industrial policy is better described as a cross-government framework, embedded in all areas of policy, aimed at creating the right conditions for German businesses to thrive. Most importantly, there is universal support across the political spectrum for the aims of the policy.

Balfour Beatty believes that infrastructure could be better supported by an integrated fiscal approach. Including taxes such as stamp duty for example, along the lines proposed by the City Growth Commission and the London Finance Commission, could enable Combined Authorities to secure further infrastructure funding.

Conclusion

There are a number of ways in which an integrated ‘modern’ industrial strategy can help encourage and sustain long term growth. For example, it could help support successful industries,
promote new sectors and strengthen key areas of our economy, such as our skills base.

We believe that an industrial strategy is an important element of a thriving economy and that now, as the UK looks to leave the EU, is a defining time and therefore a good time to implement one. A robust strategy will help us to ensure the country is in the best possible position to address challenges in areas such as the labour market, to invest strategically in key areas such as innovation, to capitalise on opportunities that emerge and to compete with other economies from as sound a footing as possible. But it is important to manage expectations. There are unlikely to be many immediate ‘quick wins’ from an industrial strategy. The impacts can often take up to a decade to be seen. However, this should not lead to a
change of course: an industrial strategy must be for the long term as other countries, such as Germany, have demonstrated. The UK has a number of world leading businesses and expertise in a range of areas. It also has many other businesses which just need the right business environment to help them become world leading themselves. A modern industrial strategy which provides support for all areas of the economy will not only help them get there, but will send a strong signal to other countries around the world that the UK is very much open for business.

1 LEK Consulting, Construction in the UK Economy, 2010
2 CBI, Construction bridging the gap, June 2012
3 National Infrastructure Pipeline, July 2015
4 UK Labour Market Statistical Bulletin, Office for National Statistics, July 2016