Pwyllgor yr Economi, Masnach a Materion Gwledig

Economy, Trade, and Rural Affairs Committee

08/06/2023

Aelodau'r Pwyllgor a oedd yn bresennol

Committee Members in Attendance

Hefin David
Luke Fletcher
Paul Davies Cadeirydd y Pwyllgor
Committee Chair
Samuel Kurtz
Sarah Murphy
Vikki Howells

Y rhai eraill a oedd yn bresennol

Others in Attendance

Aine Gawthorpe Llywodraeth Cymru
Welsh Government
David Hoare GE Aerospace
GE Aerospace
Dr Llŷr ap Gareth Ffederasiwn Busnesau Bach Cymru
Federation of Small Businesses Wales
Duncan Hamer Llywodraeth Cymru
Welsh Government
Janis Richards Make UK
Make UK
Mary Williams Unite
Unite
Peter Ryland Llywodraeth Cymru
Welsh Government
Professor David Pickernell Prifysgol Abertawe
Swansea University
Professor Keith Ridgway Industry Wales
Industry Wales
Vaughan Gething Gweinidog yr Economi
Minister for Economy

Swyddogion y Senedd a oedd yn bresennol

Senedd Officials in Attendance

Ben Stokes Ymchwilydd
Researcher
Evan Jones Dirprwy Glerc
Deputy Clerk
Gareth David Thomas Ymchwilydd
Researcher
Lara Date Ail Glerc
Second Clerk
Robert Donovan Clerc
Clerk

Cofnodir y trafodion yn yr iaith y llefarwyd hwy ynddi yn y pwyllgor. Yn ogystal, cynhwysir trawsgrifiad o’r cyfieithu ar y pryd. Lle mae cyfranwyr wedi darparu cywiriadau i’w tystiolaeth, nodir y rheini yn y trawsgrifiad.

The proceedings are reported in the language in which they were spoken in the committee. In addition, a transcription of the simultaneous interpretation is included. Where contributors have supplied corrections to their evidence, these are noted in the transcript.

Cyfarfu’r pwyllgor yn y Senedd a thrwy gynhadledd fideo.

Dechreuodd y cyfarfod am 09:34.

The committee met in the Senedd and by video-conference.

The meeting began at 09:34.

2. Cyflwyniad, ymddiheuriadau, dirprwyon a datgan buddiannau
2. Introductions, apologies, substitutions and declarations of interest

Croeso, bawb, i'r cyfarfod hwn o Bwyllgor yr Economi, Masnach a Materion Gwledig yn y Senedd. Dwi ddim wedi derbyn unrhyw ymddiheuriadau heddiw. A oes yna unrhyw fuddiannau hoffai Aelodau eu datgan o gwbl? Nac oes. 

Welcome, everyone, to this meeting of the Economy, Trade and Rural Affairs Committee here in the Senedd. I haven't received any apologies this morning. Are there any declarations of interest that Members would like to make? No.

3. Papurau i'w nodi
3. Papers to note

Felly, symudwn ni ymlaen i eitem 3 ar ein hagenda, sef papurau i'w nodi. Fel rŷch chi'n gweld, mae yna nifer o bapurau i'w nodi. Dwi ddim yn mynd i fynd trwyddyn nhw i gyd, ond oes yna unrhyw faterion hoffai Aelodau eu codi o gwbl o'r papurau yma? Na. 

So, we'll move on to item 3 on our agenda, which is papers to note. As you can see, there are a number of papers to note. I'm not going to go through each one of them, but are there any issues that Members would like to raise from these papers? No.

4. Cyllid datblygu rhanbarthol wedi’r UE: Gweinidog yr Economi
4. Post-EU regional development funding: Minister for Economy

Symudwn ni ymlaen felly i eitem 4. Dyma'r bedwaredd sesiwn dystiolaeth lafar ar gyfer ein hymchwiliad i gyllid datblygu rhanbarthol wedi'r Undeb Ewropeaidd. Heddiw, rŷn ni'n cymryd tystiolaeth gan Weinidog yr Economi, ac a gaf i groesawu'r Gweinidog a'i dîm i'r sesiwn yma? Cyn ein bod ni yn symud yn syth i gwestiynau, gaf i ofyn iddyn nhw gyflwyno eu hunain i'r record? Gweinidog.

We'll move on, therefore, to item 4. This is the fourth oral evidence session for our inquiry into post-EU regional development funding. Today, we'll be receiving evidence from the Minister for Economy, and may I welcome the Minister and his team to this session? Before we move to questions, can I ask them, please, to introduce themselves for the record? Minister.

09:35

Diolch yn fawr. Bore da, Cadeirydd. I'm Vaughan Gething, I'm Minister for Economy.

Bore da. Duncan Hamer, director of operations.

Bore da. Aine Gawthorpe, deputy director.

Bore da. Peter Ryland. I'm the director of regional investment and borders and the chief executive of the Welsh European Funding Office.

Well, thank you very much indeed for those introductions, and I'll kick off this session with a few questions. Of course, it's no secret that you have a huge difference of opinion with the UK Government on whether Wales will receive the same or less funding under the shared prosperity fund as it did under the EU structural funds. We have had evidence from Professor Steve Fothergill from Sheffield Hallam University, who obviously is an economist by background, and this is what he said to us when he gave evidence to us, and I'll quote. He said:

'By the time you get to the next financial year, the amount that the UK Government is putting into the shared prosperity fund does pretty much match what the EU funds were previously worth, with a tweak for inflation.'

How do you respond to that, Minister?

Well, when it comes to the difference of opinion, yes, it's a difference of opinion, but, actually, there are just facts in this as well, and the fact is that, at the end of the multi-year budget settlement, that final year will be roughly equivalent to the moneys that were going in former EU structural funds. The difficulty is that it's been building up to that period of time, and that means we've had less money in each of the proceeding years. And the way structural funds work—and you'll know this, not just yourself, but the rest of the committee, Chair; you've been in scrutiny on these things before—when you have a new structural funds envelope from the European Union, you don't net that off against previous amounts and you're able to access those funds from the start of the period. So, from January 2021, we would have been able to access structural funds at the full amount per year. Now, if the UK Government really were, over the whole period, going to make sure that we didn't lose out, then, actually, they'd have to top up the money so it's more than the equivalent amount in later years, but there's no plan to do that. So, when the Prime Minister went out and deliberately said, 'We are replacing these in full', as a matter of fact that simply isn't true. I know he wants to do extra maths, but look at the previous years: we don't have the same money, and it's a matter of fact that's been set out repeatedly by myself and the finance Minister. The funds in this part of the Government and, indeed, support for the rural economy—it adds up to £1.1 billion that we don't have.

Yes, but isn't it the reality, though, that you calculate these figures differently to the UK Government? And why don't you think legacy EU funds should be actually included in your own calculations? Why is that?

Because they never have been. If you look at all the periods of EU structural funds that have been delivered, then you get a window for the seven years, you then get some time to run those off. You never get those netted off against the next period of structural funds. So, the UK Government are trying to set an entirely different test, and, when they said that we would not lose a single penny, they did not say, 'That means that we'll actually net off the funds you haven't spent in the normal course of things.' So, it just simply isn't true. And it's not just my view; there are a whole range of other people as well. I mean, the Financial Times is hardly a Welsh Labour cheerleader, but they've recognised that, not just in Wales, but right across the UK, the way that the supposed replacement funds have been managed definitely short-changes all those areas. And here in Wales, the value of that short-changing is £1.1 billion. It's not a matter of opinion; it's a matter of fact.

Now, the Institute for Fiscal Studies said it would agree with the Welsh Government if the shared prosperity fund worked in the same way as structural funds, with many years between allocations and spending. However, it says that the UK Government's position is more reasonable as the shared prosperity fund has annual allocations and therefore can be ramped up as EU funding ends. So, how would you respond to those comments?

Well, I haven't seen the exact comment of those and what they say is or isn't reasonable. What I can tell you is it isn't reasonable to avoid providing Wales with £1.1 billion that we would have had if we were still within the structural funds framework, and that's the point about whether Wales loses out on a single penny or not, and it absolutely—. We absolutely have lost out on £1.1 billion.

The deliberate design of the shared prosperity fund is actually a really big problem for all of us. Structural funds are a seven-year window, with the opportunity to keep running programmes to deliver the end of them afterwards as well. Peter is chief executive of WEFO; I think it's two years you get to run off after the end.

09:40

Three in the current programme, actually, Minister. 

Three? Even better. So, you get to run off that period of time, and that isn't netted off against your next entitlement if you still qualify. The problem with the shared prosperity fund is when it looks at annualised settlements, it avoids the ability to have strategic investments. That means that you can't run a multi-annual programme because you don't have the certainty to do that. And in almost every programme, you know that you need to both design the programme that you want to deliver, make sure you have all your partners in place, often you need to have staff, and then you actually go into the delivery phase. Because of the rather chaotic way in which decisions have and haven't been made, our local authorities have been left in the position where they have less money, but also less time to deliver it as well.  

So, when you're talking about the money, the money doesn't add up. There is just a factual difference. When you talk about the delivery envelopes, I think it's one of the big problems with the shared prosperity fund, and the fact that, when the multiply top slice came off, it wasn't just the challenge about a devolved area of competence again being deliberately taken away from us. But actually, it's not possible to deliver that money in a framework that we would recognise as being strategically useful, and, indeed, reports that you and a previous iteration have been part of agreeing. We should have a more strategic approach about how to use the money with a proper benefit over a period of years, not short-term envelopes. As I've said before, we'll risk money being poorly spent at the end of the year, or worse still, money being returned to the UK Treasury. 

Thank you, Chair. Just on the annual funding point, in particular, it's worth noting that the European funds work over this long period, and there are no restrictions within that; the annual cycle of funding that we have and are familiar with from the United Kingdom structure is actually quite constrictive, and it forces you into decisions about spending money within financial years that—. Those barriers just don't exist within the overall funding programme for EU funds. So, it allows us to deliver the funds over the whole of that period according to what the programmes need, and we actually have a huge amount of flexibility. So, to suggest that the annualisation of it somehow gives you more isn't actually accurate. If anything, it restricts you, and it restricts the options that you have for selecting certain projects, because if you have fears that you won't be able to deliver within the annualised compartment of the spending allocations, then you are narrowing down the range of potential interventions that you could credibly undertake.  

Now, it was reported in the press yesterday that Wales could lose this £500 million of unspent EU funding. Is that true, Minister? 

All of the moneys have been allocated, and so they're earmarked for spend. There's always a risk about projects being able to deliver against that. I think the headline doesn't actually match the reality. There isn't a realistic risk that we're going to lose £0.5 billion, but it is about, in this last stage and the last few years of delivery, those projects doing what they'd said they'd do with the delivery plans they've organised. 

So, there's a possibility that we could lose some money, then, from what you are saying. 

There's always been a possibility that you could lose money in any funding envelope. That depends on delivery, it depends on people being able to use their plans, and the flexibility is narrower now at the end of the funding programme. But I think the idea that £0.5 billion is at risk is not actually what's been said in the report, although I understand it makes a rather easier headline to write. So, I'm more than happy for WEFO or, indeed, Peter now to set out the reality of what's happening in the programme to give some assurance, because I understand why the headline would have been concerning.  

By all means. Thank you, Chair. Of the £500 million or so that was mentioned in the headline, about £446 million of that referred to the structural funds that fall within my area, as opposed to the rural funds. We've made some progress on that even since the report was published. If you allow for the expenditure that we know to have taken place because of claims that we are processing at the moment, that figure is actually down to £320 million still to be spent. And yes, there is a risk. I think it would be fair to summarise what the auditor general is saying to the effect that the programmes have been hit very hard by war and lockdown and consequent inflation and disruption to supply chains, and it has undoubtedly shifted an awful lot of the projects to the right. It's delayed the implementation of a lot of what we'd hoped to see, and the upshot of that is—and I'm kind of running out of options—if people don't deliver what they are now currently committed to deliver, and they don't get their claims in promptly and cleanly, then, yes, we've got a problem, because we've run out of time, and I'm not in a position anymore to be able to reallocate that funding to other candidates who'd be able to make good use of it. So, all of the funding is committed. I've no reason to suppose at the moment that we won't be able to come up with enough audited, eligible, defrayed expenditure to be able to draw down the full amount of money that's earmarked for Wales, but is there a risk? Certainly, yes. 

09:45

But you're confident that most of that money will be spent.

Okay. Now, Minister, you've proposed a different way of allocating the shared prosperity fund to local areas in Wales to the one that the UK Government chose. Can you tell us why you think that model would have worked better than the model that the UK Government is using?

Well, we proposed using the Welsh index of multiple deprivation for the overwhelming majority of how the funds will be allocated. Now, we knew that the UK Government would not agree to allocate all of the money on the basis of that index. We knew that they wanted to have a geographic element, and so we went in with what we thought was a realistic offer and ask.

The significant challenges about this were that the engagement only took place in a two-week window. It took place in a two-week window with both officials and, finally, direct ministerial engagement. It was Neil O’Brien at the time. And so it was a very, very short window. The reason why we proposed using the Welsh index of multiple deprivation is it’s well understood, it’s regularly updated with data that matches and makes sense for Wales, and it covers the whole country. It includes a whole range of factors, socioeconomic, and it also includes access to services. So, there is a factor that deals with how easy it is for you in terms of where you live to get access to those services.

What actually happened was the UK Government decided it would go with just a 30 per cent weighting for the index of multiple deprivation, a 40 per cent population weighting, and a 30 per cent weighting for its own community renewal fund. Now, what that really does is it moves money away from larger population areas. That’s the impact of it. The problem you then have is that, if you do have larger populations with significant socioeconomic challenges, then actually, you’re finding money being moved away from them to other parts of the country. Now, that is the antithesis of levelling up.

So, we wanted to use something that people are familiar with as well; stakeholders in Wales are used to the index of multiple deprivation, they understand how it’s used, how it’s updated, but instead we have an entirely different formula. And all of this, as I say, taking place within a two-week window. And in the end, we had minor movement, but not something that I would describe as satisfactory, and not something that we would have done if not just the Welsh Government had had the opportunity to design how the money was used, but I don’t think the Parliament or this committee would have endorsed the way those funds were being used, as well. So I think it’s part of the problem. It’s far from, as Michael Gove once said, wanting to work with the grain of devolution. This actually cuts directly and deliberately across. It’s not a mistake that we have been taken out of a decision-making role. It’s not a mistake that they have chosen to use an entirely different formula.

Sam Kurtz, you just want to come in very briefly on this.

Thank you. Minister, just on that point, then, of the index, isn't it the case that, under the format that you're suggesting, pockets of deprived areas in more largely affluent areas who've not received funding previously, or not been at the top of lists to require funding, would still miss out under the scheme that you're suggesting—the index-style—rather than one that deliberately takes a geographical look at the picture, rather than purely an index list rating, as you suggested?

But the index covers income, employment, education and distance from services, so actually, those things do matter wherever you live in Wales. And the difficulty is here, Sam, if you think, 'Actually, let's make sure the money goes everywhere', then you're not addressing need. It's not a needs-based formula. The index of multiple deprivation is a needs-based formula. The UK Government were really clear that they wanted to have a factor that was just about population. So it doesn't matter about the need, it was just about population, and that shifted money away. Now, that then means that you are already taking need out of the equation for at least some of the formula. When you then say, 'Actually, the needs-based chunk of the formula will reduce even further', what you are actually doing is taking money away from communities that have the greatest level of need. And I don't see how that's justifiable. If you are really serious about levelling up—

09:50

Are you suggesting then that the need isn't universally spread across areas—that there are parts of my constituency that aren't as deserving of funding as other areas of Wales?

No, it's the concentration of need. So, if you consider this: Merthyr Tydfil, as an area that I don't represent—I'm deliberately choosing somewhere that I don't represent—has a concentration of significant need. It's concentrated in that area. That doesn't mean that there are not people who live in Carmarthenshire or Pembrokeshire who don't have need. But it's the concentration of need and it's whether, actually, you are saying that you just need to give money to a whole population, regardless of need. The population factor defrays the impact of its ability to address real need.

Now, we were really clear. We think that there should be a needs-based formula, and that's what we think should happen. What we have got is an entirely different formula, where a chunk of it sort of goes towards need, but actually, the overall impact is that it takes money away from areas in the greatest need. It very much is what the Prime Minister said in Tunbridge Wells: undoing formulas because the formulas looked at how you address need in the greatest areas of it, and dispersing that money elsewhere. So, it's the concentration of need. It is never saying that there are people who don't have needs to address in different parts of the country, Sam. 

Okay, thank you. I will now bring in Vikki Howells. Vikki.

Thank you, Chair. Good morning, Minister. I have just got some questions around the UK Government's approach to designing and implementing the funds. First, what would you say has been the impact of the UK Government’s decision to work directly with local authorities on the shared prosperity fund and the levelling-up fund on Wales, and primarily, also, on the Welsh Government's ability to develop and deliver regional policy?

The UK Government said that, in bypassing the Welsh Government, they were actually directly devolving greater power and responsibility. Actually, it has not done that. What it has done is it has undermined regional policy in Wales, and it has put local authorities in a position where they have lots of expectation without the resources to deal with that. As I said earlier, the time frames and the design of the fund are a significant problem as well. 

If you are running a local authority and you are then bidding for the levelling-up fund, what you will have found is that you are encouraged to bid for both rounds at the same time, and then some local authorities, for example, have been told, 'Your round 2 bid has not gone forward because you succeeded in round 1'. Well, actually, if they had known that, they wouldn't necessarily have bid for round 2 because it was a wasted exercise.

It's also a problem—and you won't just see this from me, but you'll see this from UK Parliament select committee reports, and the Department for Levelling Up, Housing and Communities select committee recently went through this—. They talked about the lack of strategic oversight from Michael Gove's department. They talked about the reality that it has been poorly designed. It has not sought to work with devolved Governments. And they have recognised that you have got a real difference in approach between different local authorities and different regions—not just in Wales, but actually right across the UK. So, it has taken away what was a strategic way of working and moved to a much more piecemeal one.

It is also the case that, yet again, you are not able to see the principles for delivery of the funds until the scoring exercises have been done. That, again, is the evidence that the House of Commons select committees have found. And if you are then deciding on how you want to allocate money, after you have seen half of the results, that doesn't look like an objective exercise, looking at need. And the levelling-up fund, of course, has not delivered funds for every part of Wales.

I mentioned Merthyr Tydfil in answer to Sam Kurtz earlier. Merthyr Tydfil is one of the five local authorities that hasn't had a levelling-up fund bid. It's hard to describe something as 'levelling-up' if Merthyr Tydfil isn't an area that is successful in a funding round. So, the competitive bidding process has been largely wasteful.

Actually, to be fair, Vikki, I think that the DLUHC department themselves recognise that because they are moving away from everything being a competitive bidding process to becoming a more allocative process in other areas. They are certainly looking at that as one of the things that they might look to do in investment zones, because I don't think that they have got the capacity themselves to run and deliver all of this as well.  

Thanks, Minister. Your paper says that—and I know that you've spoken out on this before—the SPF is designed in a similar way to the 2000-06 European structural funds programme in Wales, which focused on short-term and localised programmes. What discussions did you have with the UK Government about the lessons that the Welsh Government had learned from those different structural funds programmes, and what impact do you think that your discussions had on the UK Government's plans?

09:55

The problem was that we were denied a meaningful role in discussing how the funds would be delivered. We wrote seeking meetings, we raised them when we had other ministerial meetings about needing to have a conversation. I know there were letters saying that there would be engagement with devolved Governments or there had been, and, actually, there was no meaningful engagement on the design of the funds.

So, there wasn't the opportunity there should have been to run through the evidence that existed publicly. Because, as I say, the Chair of this committee was involved in previous scrutiny of those programmes and has given advice to the Welsh Government about taking a more strategic approach than the first series of Objective 1 delivered, and that was advice that the Welsh Government took on board, as well. We don't always take on board the Chair's advice on every issue, but, on this issue, the Welsh Government did. Actually, there was then a choice not to take on board that advice and that experience, that knowledge of how to most effectively use the funds. So, it has been an extraordinarily frustrating period of time.

When we talk about engagement with the UK Government, we regularly talk about this being an example of what not to do, to deliberately take on board devolved responsibilities, to deliberately avoid dealing with the Welsh Government and, indeed, the Welsh Parliament, because the scrutiny role for Members in this committee is entirely different, because the ministerial decisions are taken by DLUHC Ministers in Whitehall, and then local authorities have to implement those. So, there has not been the opportunity there should have been, and in the two-week window we had, we certainly made the case not just on the formula, but on wanting to take a more strategic approach, but we have ended up with something that I do not think any objective observer could describe as a genuinely strategic approach to levelling up and to addressing significant economic and social need.

Thank you. Just to dig down a little deeper there, in relation to the timescales, how would you say that those shorter timescales to deliver the SPF have affected the ability to develop transformational projects in comparison with the timescales under the structural funds?

I think it's very hard to see how transformational change will be delivered. We've gone through before about when the pilot rounds, the community renewal fund, for the SPF was introduced and the levelling-up funds. The levelling-up funds are discrete bids that don't appear to be connected to a wider whole. There's value in doing some of those, but if you're interested in strategic improvement, then, actually, that's not the way to deliver it. Then, having a supposed three-year programme, because of when decisions have been made, you actually need to cease delivery in December 2024, because all the money has to be completed and returns provided by the end of March 2025. That actually means you'll have roughly 18 months of delivery, and it'd be very hard to see how transformational change will take place in that time.

And you've then got all the pressures of having less money, local authorities being under pressure from other stakeholders who've been deliberately designed out, the fact that the third sector don't have a role in the way that they did, the fact that higher and further education don't have the same role, and the fact it's been designed to cut across a range of areas. So, skills being a plainly devolved area, some of the projects are deliberately designed to work in the skills environment; that's unhelpful. So, we've got to look to see to make sure we're not duplicating unhelpfully in those areas, as well. So, the design is poor. I think the value for money will end up being poor, and I doubt very much that 18 months of delivery will deliver the transformational change that I think every Member in this room would want to see. I honestly think that if the Welsh Government had designed a fund like this, then a cross-party committee would not have held back in its view on the problems and the flaws in the design and delivery of it.

Thank you. One final question from me. Given the absence of a formal role for the Welsh Government in developing and delivering these funds, how have you engaged with the local authorities to try and avoid duplication in their bids in areas such as business and skills, and to what extent do you feel that your interventions have been able to minimise any duplication across organisations?

10:00

It’s really hard, because of the deliberate design of the fund, and that’s a problem not just for the Welsh Government but local authorities themselves as well. We’ve tried to maintain a group of stakeholders to understand what’s going on. The strategic forum for regional investment in Wales, chaired by Huw Irranca-Davies, has continued to meet. That’s not a forum to hold local authorities to account; it’s to try to share what is happening, and also to try to reflect and understand if we then had the ability to design regional policy ourselves in the future to take into account what has already happened and what we think could work better in the future, building on our own investment framework that we have produced in the last term with stakeholders.

I think when it comes to our direct work with local authorities, we have regularly tried to have conversations with them at both the official level, and at the political level, with the WLGA leadership. That’s been helpful to a point, but the difficulty is when they’re then required to nevertheless put in bids against a short time frame against a list of areas, and the areas are narrow and they include skills. It’s very hard if you’re running a local authority to say, ‘We’re not going to do anything in that area’, because you also know that money has come out of the skills pot because of the way that the funds have bypassed the Welsh Government. What we’re now trying to do, following the engagement we have had with local authorities and others beforehand, is that, for each of the economic regions of Wales, we’re looking to understand, after two rounds of levelling-up funds, and after the shared prosperity fund decisions that have been made, more clearly and exactly what is happening in each area, what projects are now in delivery, where are the areas of potential duplication, and can we actually look to avoid duplication, or, if we’re going to have people working in broadly the same area, can we deliberately add to what the other is doing, and also to understand the gaps that will have been created as well.

That’s work we’re looking to do with each region. I have talked to leaders in north Wales, and they’re looking to do some of that work. I had a conversation yesterday with the leader of Swansea about the Swansea bay deal area having that conversation, and I’ve had the same conversation with the capital region as well, to try to understand—. Given that this has happened, rather than saying, ‘We think this was wrong’—that will continue to be our view; I think the evidence is on our side—we now need to have a pragmatic look at what is actually happening. It’s not where I’d like to use Welsh Government resources, but we do have to make the best of what we now have.

Thank you, Vikki. I’ll now bring in Sarah Murphy. 

Thank you, Chair. Thank you all for being here this morning. I’m going to ask some questions about research and innovation. We’ve already heard about the UK Government ignoring the preferred formula to take into account local deprivation levels, and, as you called it, Minister, bypassing the Welsh Government, as well as the Senedd steering committee to oversee the process that was chaired by Huw Irranca-Davies and looked into the commitments that Brexit would involve no loss of funding or devolved powers.

But when it comes to research and innovation, they’ve basically completely left it out as being eligible for this fund. In your evidence, you’ve said that that has meant around £380 million of the 2014-20 EU programmes that was invested in research and innovation is now not eligible for this investment. This has been supported by Universities Wales. They gave evidence saying that now, projects that were worth over £350 million with the structural funds will not be able to continue, most likely. They’ve said that they are extremely concerned that it could mean over 1,000 highly skilled jobs leave Wales, but also there is that capacity, and also that talent. The UK Government’s replacement EU funding scheme was announced in 2017, and the Welsh Government had no input into its role or design or development ahead of its launch, then, in 2022.

So, my three questions are: would the Welsh Government, if you had been involved in those discussions and listened to, have made the case that research and innovation should be included? And also, there does seem to be a train of thought now that the Welsh Government is expected to fill this huge funding gap. How realistic is this? And finally, there’s also a train of thought that it’s on the Welsh Government to reach out to the UK Government and explain this, and the detrimental effect that it’s having, but having looked at how they completely ignored the Welsh Government in the whole design of this, how realistic do you think it is that they’re going to listen?

I’ll answer the last question first. We regularly have explained in direct ministerial engagement, in correspondence, and between officials, that there is a gap that is being created, and there is not the budget to fill it in, and we’ve got the fund that we’ve got; we’ve got the design of the funds that we've got. And, so, it isn't that the UK Government aren't aware or haven't heard—it's the choice they've made not to cover off and to find an alternative way for money to go into this area. If we were designing access to the funds, we would definitely have included the ability to design into research, development and innovation—it's there in our regional investment profile of how we'd want to invest. That meant that these funds are just not eligible to go into that sector.

And there's an element of what I'd describe as political malice in deliberately avoiding the Welsh Government. That's a deliberate and clear-sighted political choice. But what is also difficult about all of this is the fact that there's, I think, a genuine lack of competence in some of these things. I don't think they've really thought through not having a multi-annual approach and making sure you’ve got to spend within financial years. The challenges that Peter set out are absolutely correct. And I think they would have helped themselves if they’d had even some element of multi-annual spending. You would have had better spend profiles, less risk of money being spent poorly or not being spent at all and being returned to the Treasury.

But I also think they just didn’t really consider properly the design of what they were doing and the impact of excluding higher and further education and research, development and innovation from the way the funds were used. I’m not at all convinced that was a deliberate policy choice; I think that goes into designing something when you haven’t had to do it before, not thinking through really clearly what the impact would be, and then being left with the consequences. And there are the points about DLUHC not having the capacity to run a whole system like this when they’ve taken out of areas that have been used to dealing with it.

When it comes to the budget, you’ve gone through budget scrutiny and you’ve seen the sums of money that we have. In this committee—and most of you sit on another committee as well—you know that there is not a giant pot of gold that Rebecca Evans is sitting on. She’s not hoarding the gold. That just isn’t what happens. So, the money has gone out, and you’ve seen where it’s gone out, and, in the Chamber and in committees, you’ve made an entirely reasonable case about areas where you think money could be spent and could be spent for a purpose. And actually, the money we have is the money we have. That’s why, when I’ve come to you previously and talked about difficult choices, putting more money into apprenticeships and skills and protecting that has consequences in other parts of my budget as well. I would like to put more money into innovation than I’m able to. But that’s the reality of the budget choice. It makes our innovation strategy even more important when it comes to successfully accessing UK-wide funds for research and development in both our private and research sectors, as well as, of course, in higher and further education.

10:05

Thank you. That brings me to my next question. As you said, unfortunately this is where we are. So, what next? Because I would say that—. I wouldn't want to say it's a level of panic, but hearing from universities and from others who are receiving funds for these things—and you mentioned it's not just universities, it was other projects and pan-Wales projects as well and things that were really meant to be much more forward-looking—. That fact that you could have the longer period, this is where, as a nation, we were able to really plan, wasn't it, for our future generations too.

So, what can be done? The universities in particular though are, I suppose, I got the impression, crying out with, 'What are we going to do now?' Because this has been very sudden. I feel it's been a real shock. So, where is the transition, I suppose, for them? How are you working with them? And I know you've said that the UK Government aren't necessarily willing to change their minds on this, but are they willing, at the very least, to help source alternative funding for research and development? And this must be impacting as well not just Wales, I suppose. So, what do you think is the—? What's the plan here?

I'm not sure there's something you'd describe as a plan. The approach, I think, from the UK Government is that, within some meetings, some Ministers acknowledge that it's a reality that there are jobs that are going to go—the 1,000 jobs at Welsh higher education are certainly going to go. I haven't seen a UK Minister saying, 'That isn't true, that isn't going to happen.' Welsh higher education recently undertook more activity around the UK Parliament, highlighting the case. I actually think that, across party, people recognise that this is the reality of what's happened because of the way that funding has changed. It makes the approach to further engagement with the European Union around Horizon but also around the budgets for innovation and research and development that were set aside previously even more important. So, with Horizon, there should be a deal to be done, but it depends how quickly it's done and the value of it. The difficulty is that having been out of Horizon for a couple of years, if we can't rapidly do a deal, then actually you might be too deep into the programme for it to make sense to bring UK universities into it. Now, that's obviously a problem for us, because actually a lot of Welsh universities have international collaborations and have done very well in previous Horizon rounds. It will make a difference, so it's not just about a deal being done, but how quickly that is done, to make sure there is the opportunity to carry on that collaboration and to access the resource.

When I then talk about the £20-odd billion the UK Government said would be available for research and development in previous budgets over a period of time, that's even more important because Welsh universities have not accessed UK-wide funds as successfully as other parts of the UK. There's broadly an imbalance between London and the south-east of England, and a couple of universities in Scotland that do very well, and the rest of the UK that hasn't done anything like as well. So, when DLUHC said that they had an ambition to level up by a large percentage the amount of research funding that goes into other parts of the UK, the thing is that it's starting from such a low base that it doesn't get us to anything like parity. So, the design of the UK Government is also a challenge here. You've got the levelling-up department, who don't control what's happening on the research, development and innovation budget. You've got the Department for Science, Innovation and Technology, and you've also got, somewhere, business and trade. Most of the budget is not held in the department for levelling-up. So, if they're saying, 'This is what we want to see happen,' they don't actually have a whole-Government remit from the UK Government terms to actually say, 'We now require money to be spent in an area that deals with equity and levelling-up, and at the same time as investing in genuine research excellence', because part of the case we need to make is that there is a point about geographic equity and socioeconomic equity, but you've also got to be able to say you're investing in excellence. You're not levelling down the investment you have. And that's the challenge that we have in making sure that we're able to do that.

Universities gave evidence to the Commons select committee. You'll see the same sort of evidence going into a range of other select committees in UK Parliament. This is a problem that needs an answer at the moment. The churn in the Government has prevented some choices from being made. The reorganisation of Government that Prime Minister Sunak has undertaken has just about bedded in. I had a meeting on international trade a few weeks ago, and at that point it was clear which Ministers were doing which part of the brief. So, it has taken time for things to settle down. We do now need some choices to be made.

10:10

Thank you, Sarah. I'll now bring in Hefin David. Hefin.

Minister, how do you feel about the Multiply programme?

Bore da, Dr David. I think the Multiply programme is a significant problem. It's a deliberate transgression into a plainly devolved area, and I don't think it's going to deliver significant benefits to citizens in Wales. It cuts across and competes with our own essential skills and adult community learning provision. It's been beset by delays in funding and decision making. Money has been held back because the UK Government have recognised that the decision was made so late they can't spend the money usefully this year. If you were in your previous life, where you had a job that people understood and respected, and you were working with colleagues who were delivering community learning, well, actually, how many of those people would say, 'For 18 months, possibly, worth of funding, we're prepared to gear up, to employ more staff and to take on board the opportunities to deliver more,' with no idea of whether you'll then have to make those people redundant in a short period of time? It's poorly designed, poorly thought through. It's unnecessary duplication. And if the UK Government had bothered to talk to us, we could have done something that could have worked in this area with what we're already doing, and to add to it.

CollegesWales had a slightly more nuanced view, where they said it was a prime example of where there could be a common, consistent approach to a strategic national project. Is there any merit in that argument?

10:15

Well, if it had been designed with us, and if you had the ability to not use Multiply for a single purpose, and if it was not just about numeracy but was about essential skills, you could do something with it. But it comes back to the lack of willingness to engage with us and stakeholders in Wales on how to design a fund to make sure it's used effectively. And, frankly, I think it's—. I always thought this was relatively low-hanging fruit from the UK Government's point of view, to give some multi-annual certainty to it and not to require a financial-year spend profile, otherwise you lose the money, because the financial year doesn't always make sense to the delivery of programmes around people and their needs. I still think that would have helped.

Yes. And local authorities that we spoke to reflected the view you expressed about the funding uncertainty. They were less concerned about the jagged edge of devolution and more concerned about receiving money to deliver these projects, and actually would see them expanded. So, is there any way that is programme could be salvaged and delivered in a way that would satisfy the issues that you raised in your first answer?

Well, look, local authorities are pressing the UK Government for clarity on whether they can use this money to address essential skills more broadly. If there was clarity in that, we could look at how best to use the money and how that could be used to deliberately add to or to work alongside programmes the Welsh Government delivers, rather than something that looks competitive and duplicatory.

There are also just practical challenges. So, I guess, if you were able to start again and redesign the fund, then, yes, we could do something that would work. The challenge with now is the money is late and, actually, there's supposed to be an online platform that was supposed to act as the UK national front door to Multiply, with a budget of around £100 million to try and deliver, and that's on hold. So, actually, the ability to deliver programmes is not there from the UK Government's point of view. There are real practical and competence issues about the delivery of the programme as well as the effective design of it.

And have you had any dialogue about the next step and trying to rescue it, with the UK Government?

I've sought a meeting with Dehenna Davison. I read the article that she wrote where she said historians will look back on this as a giant leap forward in levelling up. I don't quite share her view, but I've not actually managed to secure any time in her busy diary to have a direct conversation with me about how these programmes could and should work in Wales. There we are.

It sounds like the apprenticeship levy all over again.

Thank you, Hefin. I'll now bring in Luke Fletcher. Luke.

Diolch, Cadeirydd. Thinking about the levelling-up fund specifically, what impact do you think the fund is going to have on Wales in both the short and long terms?

Short term, areas that have got moneys, I'm sure, will spend them. Local authorities have gone through 13 years of being cash strapped, the reality of austerity, and it's made a really big—. It's been a really significant challenge for every local authority in Wales, regardless of its political leadership. So, you're not going to have a local authority that's going to turn down the potential opportunity to try and acquire more resource to do something, even if they think that the design of that fund is not how they would wish it to be. So, I understand why local authorities have bid in. You'd find it very difficult to explain why you hadn't bid. Local authorities are genuinely annoyed, which I think is a polite term, for the fact they've gone through a giant competitive process and so many of those bids have been turned down. The information about bidding has been confusing and not consistent.

I think you'll find that the levelling-up fund will deliver something that people will look at and say, 'That made a difference.' The challenge is, if you'd used those funds in a more strategic way with a longer time frame, would they have made more difference? I think the answer to that is 'yes'. You also need to understand the cost of the levelling-up fund, because local authorities that are putting their time, money and effort into delivering bids are not putting that time, money and effort into doing other things that they're responsible for. When at least half of that effort is wasted, I don't think that's a great use of resource. Again, I think that point carries regardless of the political leadership of any local authority in Wales, and that's a point they've made. It's also a point that's been made in the levelling-up select committee's recent report, which, I think, has made all these points about the schemes right across the UK and not just here in Wales.

So, in terms of that point of the resources needed to put together the bids, do you think that's potentially a reason to argue why the competitive nature of the bidding process is inherently flawed, especially when we think about looking at long-term strategic thinking? If you've got local authorities competing against each other in the same region, for example, does that put a barrier against actually thinking about the bigger picture rather than just the hyperlocal?

10:20

I think there are three things. The first is the point that you've got a devolved policy context that we've been used to working in, and deliberately having something that cuts across that and deliberately ignores part of devolved policy making is unhelpful, and it doesn't mean you're then in the best position to maximise the value of the money you're getting, regardless of whether it's on a one-year or a multi-annual basis. The competitive bidding process is a challenge because you've got wasted resource going into a bidding process, but also the short-term nature of the bidding process itself. So, it's like every year you're on a treadmill, and more people need to go into writing a bid, and then you don't always understand from the feedback why you haven't been successful, or even what the criteria will be for the next round of bidding that you're going into at the point you put your bid in. And you've then got a challenge about the decision-making time frames as well. 

But, also, a competitive bidding nature doesn't guarantee that you're going to address need. If you're saying, 'Actually, we recognise there's lots of need in a particular local authority', but they write a poor bid, actually, the quality of the bid could determine what's happening, even if the rules were clear. And that's part of the challenge about whether you always have a competitive bidding process or you allocate money for need, but you still need a plan for how that money's going to be used, and you potentially don't put money into areas that do need extra resource to level up, to improve the socioeconomic prospects of that community, regardless of what local authority it's in. So, I think the competitive bidding process that's been used has been wasteful; it's cut across and made it more difficult to achieve strategic objectives, and it certainly does not guarantee you're putting resource into where it's actually needed.

So, there has been a barrier there for partnership working across Wales, and that long-term strategic view of how we're going to, sort of—. We had a statement on the mid Wales economy in the Chamber, for example, but then the amount of local authorities within that region itself competing separately is going to have an impact on the overall regional economy, isn't it?

Yes. Look, those two local authorities still have to go and have entirely separate bidding processes. They both have got something out of the levelling-up funds. The five local authorities that haven't are Flintshire, the Vale of Glamorgan, Monmouthshire, Newport and Merthyr Tydfil. And, again, if you look at need, you'd find it very hard to say that something called a levelling-up fund, that is supposed to address need, does not provide resource into Merthyr. You could make cases for all of the other local authorities as well in terms of the town of Barry, parts of Monmouthshire, and, taking on Sam's point earlier, there will be communities who say, 'Actually, there's a challenge here that you'd want to try to address', but, actually, they've not got anything, and it definitely cuts across the ability to make strategic choices. It's an undoubted barrier. And don't take my word for it; there's a cross-party group of MPs with a majority who are supporting the current Government who say that this has been a problem as well.

So, I take it it's fair to say, then, that you'd agree with the Welsh Local Government Association's assessment of the levelling-up fund, in the sense that is it really levelling up if every area is going to get some funding.

Yes, because that just doesn't address the point about need. It's why having a whole-population effect, so that everywhere gets something—. Not every area has need. When I think about my constituency, part of my constituency, the southern arc of Cardiff, is relatively less well-off. In fact, a few years ago, if it was a local authority, it would have been less well-off than Merthyr. There are real challenges. There are pockets of people within the southern arc who actually have a very good life and they have real resources, but overall, as a community, they have less—they have much more need.

The Penarth end of my constituency has not the same socioeconomic challenges, but there are communities within it where, actually, there is real need within them. If you're saying it's, 'Every area gets something', you're taking money away from those areas with the greatest need, and that's the challenge, isn't it? That's what has been deliberately designed into the way the funds have worked. That's the shared prosperity fund. With the levelling-up fund, you can't actually make much sense of how the money has been allocated. And if you had local authorities in Wales here, they'd tell you that—those that have got money as well as those that haven't. You'd have a much greater sense of grievance from the five local authorities that haven't, but you'd have the same conversation if you had English local authorities here as well.

10:25

And it does make me think of the situation in some of the areas I represent as well—Caerau, for example, in the Llynfi valley is consistently in the top-five areas of multiple deprivation. But, Chair, I'm conscious of time. I saw Hefin David wanted to come in, so I'll hand back to you.

Thank you, Luke. Hefin, you'd just like to come in on this point.

Yes, very, very quickly. The Minister's consistently said that focusing on areas of greatest need should be the focus of additional funding. But, isn't that the opposite in principle to the principle of universal basic income? And I just wonder how he squares that circle.

Well, if you look at the pilot we're running on universal basic income, you're actually looking at a group of people who have very, very poor outcomes in life. We spend lots of money on people through the care system and we don't buy great outcomes for those people. It doesn't mean that, actually, all of the choices to put people into the care system are the wrong choice, but it means that, actually, the way our system is then functioning doesn't then make a big difference to their life and their life outcomes. So, in deliberately choosing to run the pilot in that area, we'll both understand whether a basic income can make a difference, and we'll also understand whether there's more we can do for this particular group of people.

But that's a basic income. A universal basic income would affect everybody and is opposite to the principles of targeting need, so I just feel there's an ideological difference there.

I think, actually, the proponents of a universal basic income—and I appreciate we're straying off not just my ministerial responsibilities, but the subject—actually, a UBI, if you want to run a pilot, I understand the argument that says, if you do that, you're giving people who have the greatest need the ability to go on and to make choices about life and still to engage in areas of improvement, to make sure they're able to access those, whether that's skills or other forms of support, for them to be able to be not just economically active, but socially as well. So, there is, I think, a genuine ideological and theoretical case to engage with around what a universal basic income could do, and it's such that, even over the border in England, they're going to run a pilot on it as well. So, I think the learning from those will be really important, to understand if that's part of what we'll need to do, together with, on a whole community level, how you target resources to best address some of the challenges we've got. And we've done that in Wales: Flying Start is a good example of wanting to design a programme that targets need, where you've got the greatest concentration, but it's available universally within that area.

Yes. I appreciate your indulgence there, Chair. I'm sorry—

Thank you very much, Chair. Thank you, Minister. You've spoken at length of the challenges around post-EU funding. Can you give us something positive from what's been developed so far?

From the post-EU structural funding that the UK Government—. Through shared prosperity funding, any positives that you've seen in the way that it's been rolled out.

I think, positively, it's reinforced what stakeholders here in Wales valued in the sense of having the ability to work with a Government that's got a national view, but wants to share decision making regionally as well. It's reinforced the fact that people really did want the regional investment approach that we've been setting out. So, there's that, and the sense that the contrasts have been positive with stakeholders in Wales. I'm sure some of the projects will deliver value. As an overall programme, though, we still come back to: will it deliver the overall value that it could have done if it had been delivered differently? It isn't my job to stand up and say, 'This poorly designed programme is actually making all these other differences.' And I'm sure that this committee will want to look at the shared prosperity fund and what it's really delivered over time. And, as I say, if the Welsh Government had designed and delivered this programme, I'm sure this committee and, indeed, the Public Accounts and Public Administration Committee would have an awful lot to say about the design and delivery of it.

So, just prior to this evidence session, we had a private session looking at some of the written evidence submissions on this. One of the positive themes was the application process, and a couple of quotes from those, written here in terms of the former EU structural funds:

'The business plans required were incredibly complicated and long'.

Another submission then says that:

'The paperwork requirement to date is far more proportionate and reasonable than that experienced through EU Structural funding'.

So, that's a positive, isn't it? That's something that has been developed through the shared prosperity fund, which allows them, I assume, from these volunteer and third sector organisations, to access that money in a far easier way than was available to them under the EU structural funding, does it not?

10:30

Well, I don't have any problem in actually looking at what you can do to improve the way you make decisions, and the requirement for information, and how that's monitored and audited. In saying that we had a better deal with the previous way that structural funds were delivered, that doesn't mean that you'd say that everything was perfect; you never say that in life. 

I love my family, but they don't always agree with me, and sometimes they'd say that's because I'm wrong. So, it's not about saying that you can't improve what you have, but it is about, overall, whether it makes more sense. And the challenge then is, in that whole design of what you're looking to achieve and why, that's what I'm trying to focus on and saying, 'This is where we are.' So, I don't have any problem in looking at improvements, Sam. I just don't want to give any kind of impression that, actually, everything is wonderful. And the third sector, of course, are one of the sectors that have been largely excluded from the way shared prosperity funding works, and I don't know if you've heard from them directly, but they've got an awful lot to say on this too.  

They have. In the written evidence, they seem to suggest that that's the, not fault, but that that's down to the relationship with the local authorities, more so than the funding itself. But—

Actually, that isn't what they've said to me. They've been very clear that they recognise there's a problem with the money.

Well, I'll have a read of the evidence again, but from a quick scour through this morning prior to this meeting, it looked like it was with regards to the relationship with the local authorities, but I'll take on board what you said with them.

But you're right—what was here before wasn't perfect. What we've got now isn't perfect, but we need to move forward, and post 2025, how would you want to see these funds delivered? An analogy that I always use that Hefin does enjoy is my sliding scale. The sliding scale currently has a UK-local authority link and Welsh Government on the other end of that sliding scale. Where would you pitch that sliding scale from one to zero?

Look, in coming out of the European Union—and that's a choice that's been made—in having a new approach to what were structural funds, I think you'd need to have some overarching approach. And given that we're not in the EU, that would come from a UK Government of any form. But the decision making that we previously undertook and the detail of that, I think, should still be here, and that should work in partnership with our regions and our partners. That's what we've set out in the regional investment framework. So, we want to make sure that we still understand what that approach looks like, how we work with partners, and how this place is still able to properly and effectively scrutinise what we're doing.

So, would you want total control of post-EU funding?

Yes, I think there should be a budget that comes here that we then make choices on with our partners—

The total amount, or are you expecting some form—? You mentioned previously the overarching theme with UK Government. Would you expect them to play a role in how post-EU structural funds are delivered in Wales?

Well, the former EU framework set out a series of themes about where you could spend the money and how you could spend it. The design of the areas in which you can spend that money you'd need to have engagement with the UK Government on, but then it should be up to us to design and deliver how that works. I don't think that's complicated; it was one of the things we did say you could have a conversation about with UK Ministers. They chose an entirely different approach that deliberately designed us out.

Because of the partnership working through the success of the free ports in Wales, I think that's something where I'm landing on is the collaboration element between UK and Welsh Government, because I see no problem with UK taxpayers' money being spent by the UK Government in all four corners of the UK. I think that's a good thing, but, obviously, there needs to be a role for the Welsh Government within that as well, so that's where my sliding scale analogy is, as to where you see that pitching, where that sliding scale of the involvement of the UK Government in the delivery of funds, if you're saying that Welsh Government should be involved as well.

Look, doesn't this come back to what's devolved and what isn't, Sam? So, the UK Government should spend money in every part of the UK; it's got reserved responsibilities for every corner of the United Kingdom. What's been devolved has been determined by people in two referenda and multiple elections—

And then the Welsh Government puts money in reserved matters as well. 

And if you don't want us to spend money on broadband infrastructure, that's fine as well, Sam, but in these areas we think that we are better off in having a conversation, in understanding what's devolved and we're responsible for. And in free ports, we came to a position where some of how a free port works will be reserved responsibilities, and some of them are devolved, rather than the headlines in the wasteful first year of shouting, saying, 'You're going to get it anyway, and if you don't agree with us we'll make you do it', we ended up having a much more sensible conversation around how do we make sure our responsibilities work, what do we want to see from a policy point of view, and how do we then get to deliver it. So, the end of the free port process is a good example of how you can work in areas of reserved and devolved where there always will be a crossover, and then the delivery of it and the functioning of it and who's going to be responsible.

The same thing, I think, in growth deals. There was joint funding from UK and Welsh Governments. The money comes to Welsh Government and we are, if you like, the accountable officers for the spend of that money. But I don’t think it’s complicated, in the sense of you could design, I think, something where you respect devolution and you still recognise the fact there’s a role for how UK funds are actually placed in different parts of the UK as well. I don’t think it’s a complicated area. The choice that’s been made now, though, is to avoid this place and the Welsh Government. 

10:35

I'm not going to test your patience any further, Chair. I'll leave it there. 

I've yet to hear that sliding scale ever answered. [Laughter.]

I'm afraid time has beaten us for this session, so thank you for being with us for this session. I know you'll be staying with us for the next item on our agenda. As usual, a copy of today's transcript will be sent to you in due course, so if there are any issues with that, then please let us know.

5. Gweithgynhyrchu yng Nghymru: Sesiwn dystiolaeth 1 – Gweinidog yr Economi
5. Manufacturing in Wales: Evidence session 1 - Minister for Economy

Felly, symudwn ni ymlaen at eitem 5 ar ein hagenda. Dyma'r sesiwn dystiolaeth gyntaf ar gyfer ein hymchwiliad undydd i weithgynhyrchu yng Nghymru, a gan fod Gweinidog yr Economi gyda ni o hyd, rŷn ni'n mynd i gymryd tystiolaeth ganddo fe a'i dîm. Felly, croeso unwaith eto i chi ac, fel arfer, cyn ein bod ni'n symud yn syth at gwestiynau, gaf i ofyn i chi a'ch tîm i gyflwyno eich hunain i'r record? Gweinidog.

So, we'll move on now to item 5 on our agenda. This is the first evidence session for our one-day inquiry into manufacturing in Wales, and given that the Minister for Economy is still with us, we are going to take evidence from him and his team. So, welcome once again to you, Minister, and before we move on to questions, could I ask you to introduce yourself and your team for the record?Minister.

It's still me, Vaughan Gething, Minister for Economy, and to my left—.

Aine Gawthorpe, deputy director, industrial transformation and foundational economy.

And Duncan Hamer, director of operations. 

Thank you very much indeed. Once again, I'll kick off this session. Now, Minister, in your plan you state, and I quote,

'While there are indeed many challenges, these invariably provide opportunities and the way we address and overcome these together can give Wales a real competitive advantage.'

What do you see Wales's competitive advantage in manufacturing being in the future?

I think our competitive advantage for the future rests on a number of things. It rests on the fact that we already have a base. We have businesses that exist, we have a significant workforce, about 150,000 people, and it's a larger part of our economy than the rest of the UK. So, we have a sector that is already here and you have real strengths in that sector. So, I'm sure we'll talk more about the cluster around Airbus of genuine world-class manufacturing in north-east Wales, but you see high-value, impressive manufacturing in other parts of the country. So, that's the starting point. There is a strength to build on.

The second thing is the fact that you've got a workforce and are committed to invest in that workforce. The challenge, though, is—and we talked a bit about this earlier—about skills, and the ability to carry on investing in the workforce. The other side, I think, is that there are particular areas of strength in what we are already doing and what will definitely happen here in Wales. And if you think about not just the fact that Airbus are committed to being in Wales, you've got the Advanced Manufacturing Research Centre in north-east Wales that has a real value for a group of customers within a radius, and the potential to develop a technology centre there as well. So, you're building on what's there.

We've also got a further advantage in the compound semiconductor cluster. That's an advantage now that we need to see investment in, and that would help manufacturing businesses as well. You've also then got energy as a real factor for the future. So, not just the opportunities to generate power off our coastline, but actually where that power lands, the opportunity to manufacture near there as well. Lots of manufacturing businesses are power hungry, and if we're able to land the power in the right place, you can then develop businesses alongside that, or actually advantage current or existing businesses. And then you also think about, in the energy future, north-west Wales, Traws and Wylfa; I still think there's a significant future there as well, if the rhetoric starts to match reality.

And alongside that you've got the investment in the future of technology—not just artificial intelligence, but how we can equip our sector to take on board things that are happening now as well as in the long-term future, which is why our approach to innovation and working alongside the sector really matters. So, there's a whole range of different things that I think should give us proper confidence and optimism about the future for the sector.

And can you tell us what is the main difference in terms of the overall content and focus of this new, refreshed plan? And what informed the content of this plan?

Well, what informed the content of the plan was discussions with the sector themselves—so, businesses, trade unions, our key stakeholders—and also the reality that the context had changed.

When the manufacturing action plan was originally designed and delivered in 2021, it came from engagement. But, actually, within the last period of time, there has been significant and rapid change: the post-pandemic world and the changes that have taken place; the reality that technology has moved on apace as well; the difference in trading conditions that has crystallised too. And actually, it was right, I think, to refresh the plan to look again at where we are.

So, the six objectives are building on feedback and building on our understanding of how we can best support the sector, to say, 'Here are the things that we think will make a difference with and for the sector.' Some of those are for the Government, but lots of those are for us to work alongside partners, to actually make sure that everyone understands what we are trying to do.

A phrase I've heard used before is 'the power of the pulpit'. So, when you're in the Government and you can say, 'Here's what we want people to do, and here's the approach we're setting,' actually, that's often really useful for people in a whole range of sectors—'I understand what you want to happen. Having a plan and an approach for the future helps me to make choices about what I want to do in my business.' That doesn't mean that everyone necessarily agrees, but it does mean there's clarity about a future direction.

10:40

And what difference will this make to manufacturing businesses? What will they see as a result of this refreshed plan?

Well, I think that it refreshes and makes it clear about what we are looking for from them, and how Welsh Government resources will be used around this as well—clarity in the thinking about what we think is important, and, actually, clarity about investment choices for themselves; as I say, I think clarity in the future about what the plan is, but also clarity that we think that this is a sector with a future.

That's part of what I think businesses are very keen to hear—that Wales is a nation that values manufacturing, and the Government wants to value manufacturing today and in the future as well. I think that those are really important points, because there's a lack of that strategy and plan in other parts of the UK and other parts of the world, and I think it's a definite plus for us. And that does help with businesses investing in themselves, as well as opportunities for other people to invest here in Wales as well. 

Okay, thank you. I'll now bring in Vikki Howells. Vikki.

Thank you, Chair. I'm just trying to find the right page in my papers at the minute. Sorry, there are so many papers this morning. Would you mind moving on to the next Member and I'll—

Not at all. That's okay. I'll come back to you later. I'll bring in Sarah Murphy. Sarah.

Thank you very much, Chair. So, my section is on key activity. I think that some of the key activity is—there has definitely been a flurry of interest in this over the last, I suppose, couple of weeks, really—around artificial intelligence. The phrase 'fourth industrial revolution' was created and first said, really, in 2015. Almost 10 years later, now, we have the Prime Minister, Rishi Sunak, going off to see President Biden to discuss the future of AI.

But I wanted to first of all just ask—. Matt Clifford, who is the interim and probably soon to be actual chair of the AI taskforce for the UK Government—so, a key figure in framing the Government's response to artificial intelligence—went on TND's talk show this week—last week, sorry—and warned that the AI technology will be powerful enough to kill many humans within two years. This was obviously then picked up by a lot of media, and has caused huge worry and concern and alarm, and, 'What does this possibly mean?' So, what are your thoughts on that comment? Is that the way that you and Welsh Government perceive artificial intelligence, especially for our manufacturing and for the future of our economy. 

Look, there are obvious risks in deploying a new technology in any form, actually, but I don't think that it's helpful to have someone conjuring up images of a Terminator-style future. I don't think that that's very helpful at all. The risks also come with potential opportunities as well. So, in machine learning and AI, there are lots of opportunities, not just in manufacturing, but in the fields of health and social care as well. In my previous role, we were looking at lots of those opportunities to improve treatment options and outcomes and the experience for the person, either delivering or taking part in health and social care treatment.

But there is a need to understand what the regulatory framework could and should look like for how the technology is to be used and deployed. You can take a broadly permissive approach that says, 'We'll trust the industry to do the right thing, and they'll help us to write the rules, and that'll be fine,' or you can take, on the other end, an entirely cautious approach, saying, 'You can't do this unless you can prove to me there isn't a risk.' I think, realistically, you've got to try to develop a regulatory framework that looks at what are the benefits, what are the safeguards and expecting people to do that. You do have to talk with the industry about what's being done and why, but you've got to introduce the interests of the citizen in the middle of that as well. 

I think it would be wrong for us to try to say, 'Actually, we should be innately suspicious of anything to do with AI.' But you've got to then listen to how do you deploy benefits to improve what you're doing, and that is already happening within the manufacturing sector. I think lots of people's concerns get into, 'Will choices be taken away from me in my life, will they be made by someone else, and will I not be able to interact with them, and what about my data and what matters to me, as well?' I don't think that's just an issue in manufacturing.

I'm optimistic about what AI and machine learning will be able to help us to do. I think it can help to improve productivity, it can help to make sure that people—where people skills are required, they are of greater value, so you're potentially taking out even more of the more menial tasks that might be used in the sector and others as well. That means you then need to equip people with the right skills to do the things that people could and should do as well. It's always the challenge in looking at the downside in something, rather than actually seeing what is the opportunity, and that's part of what we went through in the tech and cyber statement yesterday. I'd be more than happy to provide not just more information to the Chamber, but to this committee on what we're doing, the growth in those sectors, and the areas where there is real strength.

Going back to the first question: what are the strengths? Well, cyber is one of those, as well. We've got significant strengths in Wales, and I don't think we always recognise the strengths we have within Wales and to talk up not just the fact that they are strengths, but what more we can do about them as well, and that matters for the future workforce as well.

10:45

Thank you. It's also been reported that Britain is already playing catch-up when it comes to AI. After Brexit, UK Government has been locked out of key forums such as the tech and trade council, for example. There is now a grand plan, like an AI summit, which I know that Sam is going to come to later on, but there are also reports, really, that the UK Government AI strategy is already out of date two months later. So, with UK Government, it does appear, really being on the back foot here and this trip to the US being a grand plan to try to have a summit and invite lots of people to it and be seen as leading on this, where does Welsh Government fit into this? I know I've asked this many times this morning, and I'm predicting the answer already, but what conversations are you having with the UK Government around the AI strategy, and, specifically, how that could impact our industries, our jobs, and, as you so rightly said, which has not been said by the UK Government, people and our future and citizenship? How, ultimately, with this fourth industrial revolution, do we not end with what we've had in previous industrial revolutions, which is all the money gets sucked to the top and is not shared amongst the workers and amongst the people? So, how do you think you think that there is a way that we can be involved in these conversations?

Well, there's always politics when you call for a summit and you're going on a trip abroad and you want people to see what you're doing. I accept that; that's the same with people in any party occupying Downing Street. I recognise that. Part of the challenge is, though, about genuinely needing to catch up with developments in other parts of the world. That's both about your first question, about what's the right sort of regulatory framework to have a balance of the needs and interests of the citizen and the opportunities to generate genuine benefit for all of us. But it's also then about wanting to understand what other parts of the world have done to see the risks and benefits of that and to make sure that we're not left in the slow lane, because there's no guarantee that people have to invest in the UK for some of this. Lots of the larger tech companies that exist are doing this already, but there's a range of other people too. You've got research here, not just with the cyber hub on cyber itself—lots of this goes into a whole range of areas, including AI too. So, you've got some of that research and discovery taking place here.

I'm interested, again, with the innovation strategy, in how we apply that for benefit, and how we translate it into something practical and useful. I don't know if Aine wants to talk about conversations with UK officials, but it's all pretty nascent. This hasn't been a subject on a ministerial meeting about how we have a joined-approach, so it's not as strategic as I think you'd want to see it from a UK point of view. But we know there's opportunity, and every part of Wales and the wider world will have to engage in a conversation to decide where do we think we can benefit and how do we then make sure we're making the right investments in people, and setting a framework about the sort of benefit we want to see for citizens. And any time there's progress, and the opportunity to make more money, there's always a challenge about how that is shared and what an equitable share of that return looks like. That's part of the reason we engage with the sector and with both sides of it, those people who are running and leading those businesses, as well as people who represent workers, and the public wider interest as well.

10:50

Absolutely. And my final question on this, then, is: do you think there's any chance that the UK Government might be open to looking at this through a social partnership framework, as we have now in Wales? Is there any way that you might be able to discuss that with them, persuade them to get everybody around the table so that we can see some meaningful engagement on this and planning?

You might see a summit that involves businesses. I don't think you'll see what we would describe as a social partnership summit with the current iteration of the UK Government, so—. I think I am quite charming and persuasive sometimes, but there are limits to what I'm able to do. [Laughter.]

And I know that Hefin David would like to come in on this. Hefin.

Yes. I just wanted to—. Just some of the global issues that were discussed there made me think of the foundational economy, and I'd just like to understand the Minister's commitment to the foundational economy. Is that still part of the Government's strategy, as important as the more global issues today that have been emphasised?

Very much so. So, I've protected not just the budget for foundational economy activity, but we're moving forward in what we're looking to then do. And actually, this area we're discussing, though, will have an impact in the foundational economy too. And I still think it's—. And I understand why the Member asked the question, but I'm really keen that we don't say the foundational economy doesn't matter, or we say that, actually, larger employers and foreign direct investment doesn't matter anymore, because, actually, we only need the foundational economy. We need to have an opportunity to build an economy that takes advantage of each of those areas. We need to make sure that public resources generate the best return for our local economy. We need to make sure that people understand they're able to use the economy that exists in their area and for those businesses to see improvement as well. And for lots of those businesses, actually, it's not just, if you like, the new world that is being created today that will matter; actually, there are things that are mature and exist already that would be innovative for that business to take on board, but a pretty standard practice in what we're doing. So, there's a range of improvements I think that could and should be made for that sector of the economy in what's here and now, and it will certainly be a continuing focus for the Government, and obviously for me as the lead Minister.

Thank you, Hefin. And I know that Sam Kurtz wants to come in on this as well. Sam.

Thank you, Chair. Diolch yn fawr. Sticking on the theme of AI, and Sarah mentioned the industrial revolution—one thing the industrial revolution gave us was increased life expectancy; it gave us the working week; it gave us a whole host of benefits like that. But what it didn't do, or what it also did, was change the types of jobs that individuals were having. And I think that's what AI plays a role in as well, is in changing those jobs. So, it doesn't mean mass unemployment, but it means those employment opportunities will be elsewhere. So, understanding that, and new businesses specifically, and start-up businesses wanting to kick-on in Wales, can you just outline your approach to how you see manufacturing, new manufacturing—it doesn't have to be multinationals coming in and investing in Wales; it could be a self-starter looking to start a cricket bat manufacturer in north Wales, or whatever it might be, but how can they kick on with your outline plan?

I'd be delighted to see a successful cricket bat manufacturer in north Wales. There are challenges around that.

There we are. But I just—. The point about the previous industrial revolution, I think some of those changes—working week, life expectancy—came around through other things as well. Organised labour, I think, was really important in helping to deliver some of those. I'm sure you'll be delighted to recognise the role of the trade unions in doing so.

But when it comes to what we're able to do in the here and now, we are deliberately interested in supporting current businesses and in seeing new businesses grow and be supported and to thrive. So, it's both about the entrepreneurship side that Duncan can talk more about, and it's also about how the business support framework works as well, and it also goes into innovation as well. I'm really keen to see more of the research that comes from further and higher education help current businesses, help new ones, and actually to see businesses come from those ideas as well, to generally translate that knowledge into a purpose and a benefit. And to be fair, I was in Swansea yesterday in the University of Wales Trinity St David with the leader of the council, looking a some of the work they're already doing on what they're calling the innovation matrix, so building their creation, but it's more about how you bring people together to actually make sure you're genuinely translating that. I can see Make UK are in the room—their Wales team watching on—and actually I've seen some of the work they've already done there in supporting new and existing businesses to improve their activities, to improve productivity, to improve profitability. So, there's a story we already have, and our challenge is how we do more of it and how we support new entrants with really good ideas and really good businesses.

10:55

Yes. You've outlined the challenge there, so what are you doing to address that challenge of enticing new entrants into that?

Duncan, do you want to talk about our entrepreneurship and the link to Business Wales and the support they provide, and more about how the innovation strategy links into those as well?

Yes, focusing—. Sorry, Duncan; just focusing on the manufacturing sector.

Yes, on the manufacturing sector. I think what's really interesting about this conversation is that if we were having this four years ago we would be talking about the fourth industrial revolution. All of a sudden, we're arguably in the fifth industrial revolution. I think, to Hefin's point, there's a really interesting tie. If you look at the work of Business Wales and the innovation strategy, we're not making a choice between growth and opportunity alongside the foundation economy. The reality is that you need both in balance to be able to work really effectively, and that's the same for manufacturing.

We're seeing some really exciting developments. The Minister has mentioned the clusters around different parts of Wales, and I think AI plays a really important part in that, and so it's about embracing the opportunity but really being acutely aware of the challenge and the threat as well. I think that point you made around different types of employment is key. Our challenge will be, as with all parts of the UK and the globe, it is moving so quickly. How do we maintain our policy context, aligned and appropriate to those needs? But from where we see it now, I think there is without question a huge opportunity for the manufacturing sector, and we'd like to see that grow, and that's the principle set out in the innovation strategy alongside the manufacturing action plan. We have the steps, so it's really about being able to deploy those correctly.

The final bit I'd add that I think is important about this is that, in Wales, we're seeing really high levels of entrepreneurial attitude, so the role of the Government here in supporting that attitude to be able to become start-ups in manufacturing. It links back to the session this morning. One of our challenges is that if you want to take a manufacturing product from concept to deployment and sale, that is not an annual project; that is a multi-year project. So, there's a real link between these two sections where I think it's important that we're able to do this over the long term.

Fab. I won't press your patience any further, Chair.

I could have another hour on AI. It's incredibly fascinating.

We should talk about—. The Advanced Manufacturing Research Centre is a really big player, and actually they could still do something, for example, with the cricket bat manufacturing. Some of that will be handcrafted. Some of that, actually, you could do it on an automated basis. You've got to think about the different ways to do that and ways to help them improve their product and their process as well. And, you know, we see lots of food businesses in the AMRC as well, in food manufacture, and there's been significant improvement. It's about making sure that people know what's available and then taking advantage of it, and we're looking at what we might be able to do to build on that model in other parts of Wales as well.

Thank you. I'll now bring in Vikki Howells. Vikki.

Thank you, Chair. The 2021 manufacturing action plan was intended to have a 10-year lifespan. What's the intended timescale for delivering all of the actions in the refreshed plan?

In the refreshed plan, I would say that, rather than setting a 10-year time frame—because some of those things we may want to refresh before 10 years. I would, for example, be relatively surprised if someone sat in my position today didn't want to look at the level of achievement and progress that's been delivered within the next Senedd term. I think any economy Minister's going to say, 'Well, what have we done? What progress have we made?' The challenge, then, is—. Part of the reason why we've refreshed the plan now when it wasn't intended is about the pace of change that takes place around you, and actually you help to deliver and accelerate as well, so, understanding whether we're making progress, and that might lead to a relatively light-touch review, or it may lead to a more fundamental review. But I would expect that a future occupant of this role would want to review this within the next term, and I'd have thought that a future committee, a successor committee of this one, would also want to see what's happened and are you going to take account of change and progress that's been made.

11:00

Thank you. And what level of Welsh Government resource would you anticipate is going to be needed to deliver the plan, and will it involve increasing the amount of resource dedicated to supporting the manufacturing sector?

Well, we don't have a specific budget that is only for the manufacturing sector. Our economic future fund support doesn't just say, 'It's only one sector of the economy we're interested in'. It's the challenge, though, of our budgets and what we're able to do with them and how smart we are about deploying them.

It's not just about, if you like, the revenue support or the moneys that the Development Bank for Wales can provide; it is about the fact that there are both other actors and other assets that we support. We've talked about AMRC a bit as well, and if we had a development of that in terms of whether it's a manufacturing institute or whether we actually had greater engagement with the advanced manufacturing catapult in Wales as well, there are different things we can do to try to help support the sector.

And, of course, lots of actions of the plan are for businesses themselves to undertake. You know, this isn't a plan where the Government takes over and runs the whole sector from my department; it's about how we support those businesses to make lots of their own choices. And in the six objectives, some of these are about pointing out and highlighting areas where businesses themselves have choices to make. You know, in some of the points, we were talking about AI and other issues as well, one of the six areas is about what's happening. Have you considered what's happening? Are you doing something about it, or are you not considering it at all? What was really interesting was that lots of businesses haven't really considered the area and whether it's relevant to them as well. So, there are lots of points about not just how that business does that, but how we, collectively—not just the Government, but a range of not just Make UK and others as well—try to make information available for their members and for businesses, and to try to then say, 'How do you adapt and apply this to your business to make the biggest difference?' And, of course, there's a role for equity, there's a role for investments in traditional loan support, as well as what DBW does. And I'm very keen—that's part of the reason that I've deliberately called for engagement with the British Business Bank—to make sure that we do have engagement from the financial assets that are supposed to be deployed and are described as being UK or British assets, to make sure they have a presence and a value being delivered in Wales that works alongside what we have, as opposed to in competition with it. So, I'm pleased to see that, following my meeting and engagement with them, they have directly had conversations with DBW to make sure that they are adding to and not unhelpfully competing in areas where they're active in supporting and helping to grow the economy.

Thank you, Vikki. And finally, I'll bring in Luke Fletcher. Luke.

Diolch, Cadeirydd. To what extent does the refreshed action plan set out what success looks like for the Government? I mean, coming back to the point you made earlier, in answer to Vikki's questions, future committees may want to come back and look at this refreshed action plan, so what does success look like?

I think success looks like whether we can describe the health of the sector, not just in terms of the number of jobs but the value of those jobs as well, and whether we still have a sector that has a strong future. The challenge, I think, is that if I were—and I regularly get this, not just from opposition Members but from Members in my own group who say, 'Set a figure. Set a figure with a target', and the challenge is that it takes a range of people to do that, so setting a target you don't have control of isn't always very smart, and it doesn't necessarily help people to get there. But to then understand, are we making progress, have we got not just more businesses but more jobs, and the value of those jobs, and how are we seeing the potential assets that we describe, whether it's a compound semiconductor, whether it's high-class manufacturing, whether it's opportunities around energy and what happens where that energy lands—are we seeing those opportunities actually realised with new jobs being created as well? And I appreciate that, from a scrutiny point of view, you'd much rather I said, 'Here is a hard target with a number attached to it'. I'm not sure that is always the most helpful thing to do. We look at the assets that we're using to try to do that—not just what Business Wales is doing in helping people; there are other programmes that we support to help businesses to get there.

I've been really impressed by the Toyota Lean Clusters programme. That's helped businesses of a range of sizes, and that, again, helps them to improve their productivity. Now, I wouldn't want to set a target of the number of businesses that deliberately have to go through that, or, indeed, to try to set out the level of productivity gain that I want to see from those businesses from that sector, but we definitely want to point people towards something that we think there's plenty of evidence that it helps your business, helps improve productivity and profitability, and you're more likely to see people in work and in really good work. And the good thing about this sector is it's an area where not every business is one where you'd say, 'I want to champion its cause', because in every sector, there are businesses you are less proud of. But, overall, this is a sector that provides good work, and provides work well above the real living wage as well. So, actually, growing this sector should be good for people, not just Wales plc. 

11:05

But surely, setting some sort of target shows the Government's ambition in this sector, because without those targets, without being able to measure actually how successful the programme is, you could realistically just turn around and say, 'Well, we created 100 jobs, well done, it's a success', whereas, actually, in the long term, surely the ambition would be to expand the sector far more than just creating 100 jobs. 

Yes, but if we try to say that creating 100 extra jobs is successful, I don't think anyone would take that seriously. So, it's about the scale of what we're able to do. So, manufacturing, about 150,000 jobs, about 16 per cent of economic activity here in Wales compared to what takes place—roughly about 9 per cent—in the rest of the UK. It's not just a proportion of the economy but how many jobs and what's the value of the job. So, I'm really interested in how much does manufacturing contribute to the economy overall, what does it mean for individuals employed in that sector, and with those obvious opportunities, have we taken advantage of them, and, if not, to understand why and what we do about that in the future. 

On the point about power, KLA are expanding their business in Wales, and they expect to create 750 jobs with average salaries north of £40,000. So, that's really good news. But, actually, they came here because we helped them to make sure that we could deliver the changes needed to deliver power to the site, because if they didn't have the power they weren't going to go there, and there was a risk that that project wouldn't have gone ahead. And that meant we used our resources to do that. And so, they've got the confidence to invest and there will be lots of jobs coming. That's good news, but you then look at the fact that other businesses require power as well. So, when you see that renewable energy landing, it makes a real difference whether it's landed in west Wales, for the sake of argument, or whether it goes to north Devon, because the opportunity could be lost in power that's generated off our coastline to actually benefit us as well.

So, there's lots and lots here, and it's why the free-ports programme that I know you've had some scepticism on—and that's fair enough—but, actually, if you are going to see real value in that, you've got to see the manufacturing businesses being generated not just in creating the turbines, but other manufacture too as well, and not just saying, 'We've decarbonised the way that power exists', and how we then use it as well.  

In terms of the free-port programme, one of the things I've consistently said is that the monitoring element of it is going to be the important part going forward. And there's another element—. The reason why we're focusing on monitoring here is if we look back on the 2021 manufacturing action plan, there were individual action points within that that were classified as either immediate, medium or longer term ambitions, and it was assigned then to a specific owner within Welsh Government. The refreshed action plan doesn't do this either. Is there a particular reason for this? 

Aine, do you want to run through this, then I might come back to Duncan? 

Yes, absolutely. So, the plan does still have specific owners in terms of lead officials or departments, and what's key is that that is overseen by a delivery group which is chaired by myself. So, we're really keeping an eye on that. The more important part, I think, is that the principle of the plan is about co-ordinating activity, so it is not necessarily about each individual business that wants to engage with this having to come to a specific action lead, but engaging with the overall policy leads on that area who can then put people in contact. That said, if it's helpful, we can provide a list to the committee of the short, medium and longer term timescales included, but there absolutely are lead owners for activities.  

All I was going to add was that I'm the other half of that equation, so Aine leads the plan, so I have a responsibility to deliver against that. So, we've talked about start-up manufacturing, for example. One of the targets that I'll look to maintain through Business Wales is five-year survivability is doubled by supported business versus non-supported business. So, there's a whole—. As Aine said, it's very much orchestrating the overall actions of the Government—that we're held to account by the Minister, ultimately. So, I think there are particular measures that we will have to then deliver on. 

Happy to write to the committee with that, if that's helpful.

11:10

That would be very useful. Thank you very much indeed. 

I won't try your patience, Chair, but there are a couple of questions I wouldn't mind, though, if the committee could submit for a reply.

Yes, certainly. There might be some areas we haven't covered, so we'll certainly write to you then with those, but thank you for—

I always look forward to your follow-up correspondence. I assumed there would be. 

I'm glad to hear it. Obviously, time has beaten us so our session has come to an end. Thank you for being with us for the two sessions this morning. A copy of this session's transcript, of course, will be sent to you as well, so if there are any issues with that, then please let us know. Thank you for being with us today, and we'll now take a short break to prepare for the next session. 

Gohiriwyd y cyfarfod rhwng 11:10 a 11:23.

The meeting adjourned between 11:10 and 11:23.

11:20
6. Gweithgynhyrchu yng Nghymru: Sesiwn dystiolaeth 2
6. Manufacturing in Wales: Evidence session 2

Croeso nôl i gyfarfod o Bwyllgor yr Economi, Masnach a Materion Gwledig. Fe symudwn ni ymlaen nawr at eitem 6 ar ein hagenda. Dyma'r ail sesiwn dystiolaeth ar gyfer ein hymchwiliad undydd i weithgynhyrchu yng Nghymru. Gaf i groesawu'r tystion i'r sesiwn yma? Cyn ein bod ni'n symud yn syth i gwestiynau, gaf i ofyn iddyn nhw gyflwyno eu hunain i'r record? Efallai y gallaf i ddechrau gyda Dr Llŷr ap Gareth. 

Welcome back to this meeting of the Economy, Trade and Rural Affairs Committee. We'll move on now to item 6 on our agenda. This is the second evidence session in our one-day inquiry into manufacturing in Wales. Can I welcome the witnesses to this session? Before we move straight to questions, can I ask them, perhaps, to introduce themselves for the record? And I'll start with Dr Llŷr ap Gareth. 

Helo. Ie, fi ydy Dr Llŷr ap Gareth, pennaeth polisi, Ffederasiwn Busnesau Bach. 

Good morning, I'm Dr Llŷr ap Gareth, head of policy, FSB Wales. 

Janis Richards, Make UK membership director for Wales. 

Professor David Pickernell 11:24:33

David Pickernell, professor of small business and enterprise development policy at Swansea University. 

Hi. As you said, my name's Mary Williams, and I'm the acting political director for Unite the Union. Thank you.

Thank you very much indeed for those introductions. I'll kick off this session just by asking a general question, really. Now, the Minister for Economy has referred to the manufacturing sector facing a perfect storm of major challenges, including global economic shocks, labour shortages, energy price rises and supply chain difficulties. What are your views on the current state of manufacturing here in Wales? Perhaps I can start with Dr Llŷr ap Gareth.

11:25

I think the Minister put it quite accurately there, to be honest. It's been a perfect storm for manufacturing. I think, outside of hospitality and tourism, perhaps they have faced the most difficult time of all. We found that, last summer, for example, on the energy costs, manufacturing was, with tourism and hospitality, among those who are most worried about energy costs, from our surveys. I think it is important to note, perhaps, that our last small business index, for the first quarter of this year, seemed to point towards a rise in confidence. That was across the board for small businesses, but also for manufacturing. For manufacturing, that confidence level from the previous quarter of quarter 4 had risen by 25 points. So, it was now on -14. Now, that doesn't sound great, but it's much, much better than it's been, and, in the whole index, that survey is the best result since a year back, from quarter 1 in 2022. The hope is that we're hopefully turning a corner. There is more focus a little bit on growth, but it's early days to say that, and things are very, very precarious. So, I think it's important to note there is some light beyond just the doom-mongering, but, absolutely, the manufacturing sector in particular has difficulties with energy costs, with utility costs, with all the other issues around supply chains that are happening. 

Just repeating some of what the Minister had mentioned, Wales employs around 150,000 people within manufacturing. We contribute around 16 per cent of national output, which is against the national average of 9 per cent. We are punching above our weight. We export globally from Wales, but we have the highest number of exports to the EU, so we are very dependent—around 60 per cent of exports to the EU—so we're quite dependent on the EU for exports.

Make UK undertake quarterly surveys that we've done for some 30 years. We update—going back a long time. And what we found in the last nine quarters is that manufacturers are having to raise their prices. Now, this is obviously against things like supply chain issues, supply chain costs, wages, the energy crisis and the overall increase in operating costs. But what we are also finding, much like Llŷr has just mentioned, is that confidence is looking strong. It is in a plus not a minus. So, confidence is looking quite strong. The big challenge is, overwhelmingly, skills and labour. I'm not going to say much about that now, because, I dare say, we will be discussing that a little later. But skills and labour are undoubtedly the biggest challenge that is facing Welsh manufacturers at the moment.  

Professor David Pickernell 11:28:38

What I'm going to talk about this morning is based on some research that we're undertaking for the Federation of Small Businesses into the future of—[Interruption.] Sorry, I thought I'd turned that right off—Welsh manufacturing SMEs and looking at the issues and moving forward. The perfect storm is one kind of analogy. You could also see it as being everything, everywhere all at once. The businesses that we have been talking to are businesses that, without exception, are looking to grow, but they are finding so much difficulty from actually looking at it from the day-to-day, being-there-tomorrow scenario. And that is making it very, very difficult for them to actually undertake some of the changes that they'd like to make when it comes to things like sustainability, decarbonisation, circular economy, which, again, they're all very positive about wanting to make changes, but are finding that there are things in the way in terms of the day-to-day situation—energy, infrastructure—but also the economic environment that makes it much more difficult for them to think about how they will make investments, and that, of itself, then means that, to some degree, there's less of a call on finance, but that's not a good thing, because, in a perfect world, they would like to be investing but they're finding that it's quite difficult to look beyond, in some ways, the shorter term for themselves. So, the current environment is not allowing them to actually make those longer term decisions. But, on the other hand, there is very much the positivity of wanting to make those changes, but it's about how that is facilitated over the next couple of years, which is, obviously, where the plan comes into play.

11:30

Thank you. The perfect storm analogy is really correct here. It is about energy, it's about the supply chain issues. It's also about high inflation and high interest rates, and it's also, in terms of our members who work within manufacturing, for some of them it is the cost-of-living crisis and austerity, and it's ongoing. So, even this morning's news of that horrific incident in Ukraine with the dam bursting, in terms of food manufacturing, that's even going to be impacted, because that area that has been flooded is the fertile plains that produce grain. So, this perfect storm isn't just for now; it's ongoing, and, actually, being prepared for it is what I think this plan is about. Thank you.

Thanks, Cadeirydd. Can I ask Janis first of all, and anyone else can come in on this if it's relevant to them, but what was your role in developing the refreshed manufacturing action plan? Is there anything anyone else as well would like to see in the plan that isn't currently there?

We work quite closely with the Minister's team. We provide quarterly updates to them, and we work across various departments, be that high-value manufacturing, trade, skills—we have links into most of the departments within Welsh Government. So, when they started this process of refreshing it, I suppose we were the obvious choice to come to align with.

Our own policy team did provide some feedback on the plan itself. I work quite closely with James Davies at Industry Wales. And then, what we did more towards the end was provide face-to-face round-tables with the Minister. So, I was able to bring along manufacturers so he heard their views, he heard their challenges, and we got their feedback on the plan before it actually went to final print, if you like. So, we did several face to face, we did a few online, and then we were quite instrumental in the launch, where I'd got manufacturers along, so we had their voice there as well. Going forward, I am hopeful that we will also be working alongside the team there in communicating the actions.

Are you satisfied everything's in it that you want in it?

I brought together a few of our manufacturing members to look at the plan, and the one thing that came out from all of them was the lack of a clear communication strategy, going forward. I know that's going to happen, but it's not actually in there. It doesn't say how they will measure the actions as they take place. So, that was one thing, and, talking from a manufacturers' point of view, when they saw the plan, they would have liked to have seen something in there that said, 'This is the communication process.' Whether that's going to be a quarterly e-mail, face to face, I'm happy to facilitate things like that. But what they want is to be able to feed back; it's got to be a two-way conversation. What they don't want is something put in place where they are given feedback on the actions and timescales, et cetera, but are not able to then feed back, because we need to keep that document live and we need to keep it relevant.

Yes. So, in terms of input in, we haven't done so much; we've left it, probably, to people who are better suited for that and keep to what we do ourselves—keep doing what we do well. There's not much we'd necessarily disagree with in there. Everything is right in principle. We largely agree on what we want. I think most people in this room would agree on the ideas of a holistic joined-up approach, developing skills, the mapping and data side of things, which is useful, and there seems to have been some progress there since the previous iteration.

On what's missing, it's perhaps that side of the 'how', as Janis was sort of pointing to there: where are the measures, how are we going to say how we get to this, how do we measure that the partnerships are having an impact, for example, between industry, HE, and businesses, what's the way to get to that. So, I think it sits quite well as a vision, but I'm not sure if we've made the link there with how it's seen on the ground.

On the communication and engagement side, I'd agree as well, and this is key, because in terms of communications, this plan is not how businesses, and small businesses in particular, will understand this plan. SMEs are incredibly busy at the moment; as everybody's noted, they're dealing with everything everywhere at once, and it's unlikely that they'll spend their time trawling through Government documents. So, in terms of the communications plan, it's really important that we understand how this gets out there, who are the people who are going to do that, and what's the method by which we understand what SMEs want, how do you get to the hard-to-reach people.

There are parts in the plan that do discuss some aspects of that, I think. I think the part on the retrofit programme is an interesting one that could possibly be developed and scaled up, whereby they've found a capacity and capability approach, and understood what amount of companies are able within Wales to deliver on the programme, and found 200, I think, companies, and the companies that ended up getting the contracts were companies that were previously unknown to the customer. That's a really useful thing for us to know, and I think it should be spread out further than retrofitting. It not only allows us to measure progress, but also allows us to measure where we have capacity within Wales, and that in itself is really useful, because it gives us an idea where to intervene.

So, I think that's an example of where there is stuff in the plan that needs to be teased out and developed, and I think there should be more around the idea of how do we measure these things. It's a little bit fluffy at the moment, some of it. 

11:35

And Mary Williams, you'd like to come in on this as well.

Yes, just very briefly. In terms of engagements, there was a meeting facilitated by the TUC with some representatives where we talked about the plan and fed into it in that way. But a really practical point about what's not in the plan: I was surprised that there was no reference at all to free ports. At the time, I guess, of the refresh of this plan, with free ports, the application process was open, and by the time it was published, we knew that not one, but two, free ports had approved in Wales. So, in terms of the fact that they're meant to stimulate manufacturing, on a very practical point, I was surprised it wasn't in there. Thanks.

I can't see anyone else indicating. Was there anyone else, Cadeirydd?

Okay. Just to move on fairly quickly, there was an initial plan published in 2021. Is it clear which elements of that initial plan have been kept in the new plan, and what the Welsh Government will be doing differently in the future? I'm happy to direct that to Janis or anyone.

I don't mind.

I'm being a bit brutal. The initial plan was launched, and I think very few manufacturers even knew it existed. When I've mentioned that this is a refreshed plan of an old one, they'd say, 'Well, where's it been since 2021? Sitting in a drawer somewhere?' That's what I'm getting back. But I also think the initial one, as the Minister mentioned earlier, the timing of that was a time when manufacturers were in crisis; we were still wearing masks, we were still socially distancing, we had the Brexit issues at the time. Since then, there's been a lot happened as well. So I think the initial plan has laid good foundations for the new one, but absolutely, the refreshed plan is a lot more precise. Having read the initial plan, the initial plan is quite woolly. It's a lot of words. There are a lot of pillars within it. This one is much easier to understand and be able to maybe get excited about, rather than a document that, for all intents and purposes, became a Welsh Government document that nobody knew about. But yes, the new one, absolutely is—. 'Refreshed' is probably the right word, actually, because it has kind of put—. The old one looks dated now compared to what we've got into the new plan.

11:40

I just want to pick up on the idea of the refresh. I think you can see where there are links from the previous plan and where it's developed, but I think it is important—. I think Janis just used the words 'live document'. Part of the reason for me pushing on the engagement side and how to do that is precisely so it's a living document, but also a living process, so that the feedback loop is there, so we understand, as we go on, what things are working, what things we can learn from, and that doesn't necessitate that we view it as a refresh every two years. It's a constant learning process, and the idea of a refresh tends to make me worry that when Ministers change or whatever, these things also change. I think it's important to note that it's really important that that engagement and reaching hard-to-reach groups is a constant process and we learn from it and learn how to do it well, and we learn what's missing as we go on.

Can I direct a question to Professor Pickernell? I should declare that I'm something of a fan. I've followed his work in my previous occupation—

Professor David Pickernell 11:41:48

I've got one, then. [Laughter.]

I like the work on entrepreneurship and innovation that you've done, and therefore it's a pleasure to meet you. To what extent do you think that the refreshed action plan and Welsh Government innovation strategy support the sector to maximise its contribution to research, development and innovation? Are there further actions the Welsh Government should take?

Professor David Pickernell 11:42:13

I think this is very much a team activity. Certainly, some of the things coming out, again, from the report that we're writing for the FSB were that there is some degree of frustration around the way in which clearly limited resources are distributed when it comes to things like research and development, because of the knock-on effect of things like the dreaded B word, Brexit, in the sense that obviously that then means there are fewer resources, and those will tend to be taken up by those larger companies and universities in terms of what they're doing, sometimes in ways that are further away from market, and then that leaves less available to smaller and medium-sized companies, who don't need great amounts of money to make big differences. But you can see there that if you've got a smaller amount of money, then you've got to make decisions about how to spend it, and there's certainly a feeling that SMEs get squeezed in that situation.

I think, more broadly, there's also an issue around a need to bring the role of universities as anchor institutions and utilise them to a greater extent, in the sense that there's a great—. Universities can be great resources when it comes to things like innovation and the ways in which you can kind of integrate what students are doing with what businesses are doing, which you do see, but I think there's a great deal of potential there that at the moment is untapped. In the document, it talks about anchor institutions, but it's focusing that on anchor large businesses, rather than thinking about the anchors that exist that you can relate in with the foundational economy, in terms of things like the NHS, like councils, like universities, which both provide a lot of demand, but also potential innovation partners, and I think there's a lot of untapped potential there that I think would be useful to explore as well.

Because time is moving on, I just want to ask one additional question. Do you feel that perhaps degree apprenticeships have a role to play as part of that?

Professor David Pickernell 11:44:50