By Suzannah.Brecknell

28 Feb 2013

The business department’s permanent secretary Martin Donnelly tells Suzannah Brecknell how his department is working to bring businesses and government together, creating strategies designed to kick start Britain's economic growth

Visitors to the business department’s headquarters are currently being welcomed by some pot plants, a selection of cleaning products, and a saucepan wrapped in what appears to be plasticine. It’s not some sort of protest by the country’s facilities management firms, but an exhibition about the work of the Design Council – one in a programme of displays in the department’s foyer designed to showcase the best of British design and business. Around the reception, bright wall stickers outline the department’s recent achievements, such as reducing regulation or funding apprenticeships, and the building is also adorned – inside and out – with posters from the “Britain is Great” advertising campaign.

Is this all a bit frivolous and self-congratulatory for a department which has seen head count fall by 20 per cent in the last two years; and at a time when business confidence is at its lowest ebb since 1992, according to accountancy firm BDO? Martin Donnelly, the department’s perennially positive permanent secretary, says it isn’t mere frippery. Spending money on all this decoration was, says Donnelly, a “hard-nosed decision about how we add value. That space at 1 Victoria Street is a shop window to people from all around the world”, and the exhibitions not only showcase what Britain does well, but what his staff are achieving. “A very important function of this department is to communicate what [government does] for and with business,” he says, “and our entrance hall is where that starts.”

Getting behind business
Inspiring business confidence, even as the economy stubbornly refuses to grow, is a key challenge across government. Donnelly argues that his department’s work is crucial here: it may not be able to change global conditions, nor does he claim to have the short-term answer to growth (that lies in the Treasury’s “fiscal framework, which provides confidence and macro-economic stability”), but he is “convinced we have a key medium-term role in making sure that businesses have confidence that the government is behind them.”

The chief way in which his department is doing this, at present, is by leading work on an industrial strategy: announced last September by business secretary Vince Cable, it comprises several sector-specific strategies focusing on key areas where government and business can work most effectively together. One strategy,  covering life sciences, has already been published, and ten more will be published by the summer. The strategies range from agri-business to business services via offshore wind and construction, and Donnelly says there’s no “one size fits all” template; though some themes, such as skills or financing challenges, are emerging in all of them. Their importance, he says, lies in the very act of government and business discussing these challenges and considering how to meet them: developing a “dual approach over a significant – five, six, seven-year – timescale both encourages confidence that we are all facing in the same direction, and gives us time to develop and implement a real strategy [for growth].”

How can civil servants ensure these plans actually do inspire the confidence of business, given that there will be changes in political leadership – new ministers, if not a new government – within that five-to-seven-year timeframe? They must ensure that their strategies are supported by evidence which “makes clear that the approach is business-led and is adding a lot of value,” says Donnelly. “The more we convince everyone that this is really helping UK plc compete in the global race, the more confidence there will be that these strategies are going to continue.”

Whitehall working
Around 100 staff from across the Department for Business, Innovation and Skills (BIS) have worked on the strategies so far – a core team of 40 people, with support from other internal teams such as information management – but Donnelly is keen to emphasise that these are “cross-government policies. It’s not BIS persuading other departments to do something; it’s [all of us] doing it together.” The environment department, for example, will need to be closely involved with the agri-business strategy, while the transport department has a key role in infrastructure planning. Donnelly is currently working with the Treasury to consider how the top 200 cadre of officials across government can be engaged to bring new “ideas and challenge in for the next stage of the industrial strategy and growth agenda” and to “broaden the team who are delivering this.”

In some areas there are already formal arrangements to ensure departments work closely together; in others, Donnelly and his senior team get involved to facilitate a shared approach. He has, for example, a weekly meeting with his counterpart from the Department of Energy and Climate Change (DECC), plus their respective secretaries of state, “just to check we’re on course; we’re really driving this jointly”. With four energy strategies to roll out (oil, gas, and offshore wind and nuclear), DECC is a particularly important partner, and Donnelly describes the project as an example of “seamless” cross-departmental working.

Such collaboration is not something Whitehall is traditionally thought to be good at: have there been particular challenges in bringing departments together? “Sometimes it’s a well-kept secret how well we do work together,” says Donnelly, with his usual positive slant. “The real challenge was making sure that everybody knew what was involved with [creating the] industrial strategy; because it’s not a BIS strategy, it’s a government strategy.” Permanent secretaries have been helpful in spreading this message, he says, and ministerial speeches are another way to ensure “alignment” in priorities and expectations. Chancellor George Osborne focused on the strategies in his Autumn Statement last year, and Donnelly hints: “I expect there will be more in the Budget”. The cabinet secretary has also thrown his weight behind the plans: “Jeremy Heywood is very close to this agenda,” says Donnelly, and “where necessary we can meet at central level to make sure we’re co-ordinating.”

Beyond this pressure from above, Donnelly believes that successful cross-government working is “about building the right relationships”, keeping key people informed, and heading off potential conflicts before they arise. Each week, he meets the BIS team leading industrial strategy work “to check whether there’s any more that I or ministers have to do across government to make sure that we’re delivering. So far, it’s all working really well”.

Working with external partners
While cross-Whitehall collaboration will be important, the real crux of an industry strategy is the relationships which departments build with partners outside government. Key to success here, says Donnelly, is making sure that the right people are involved in discussions: he holds up the Automotive Council, a public-private body established in 2010, as a good example. It started with a medium-term perspective; allowed business to set the agenda; and its members are both high-level and diverse, including business secretary Vince Cable, senior leaders from big companies in the sector, and representatives from research councils, trade unions and finance companies.

Once these key players are in the room, says Donnelly, they begin to spot common problems and joint solutions. For example, if manufacturers are facing problems in their supply chains, they may be able to aggregate purchasing power and present a joint pipeline of needs which helps suppliers to respond more effectively to market demand. Or they might identify common skills shortages, he suggests – an issue which is common to many of the sector strategies. “You can’t discuss industrial strategy with anyone for too long without talking about skills,” he says, adding that “it’s very helpful that BIS covers skills, apprenticeships, higher education. Our reforms to make apprenticeships more business friendly, to ensure that funding follows students, all help here”.

Other common issues emerging in the sector strategies include how businesses can respond to and make the most of innovative technologies and new developments in their sector; and “the importance of financing, particularly for supply chains”. The question of getting finance to businesses across the UK is clearly a priority for both BIS and the Treasury: there are a number of schemes in place to funnel money into markets as well as to encourage banks to start lending more freely. They are not, however working as the government wants them to. The Bank of England-run Funding for Lending scheme is getting money into markets but this is being used to fund mortgages and other investments while, as Cable noted in a speech to Bloomberg earlier this month, “there has been a remorseless decline in lending to SMEs – by £7.8bn over the last 18 months, with no sign of a turning point.”

As a result there is, says Donnelly, a particular focus on securing long-term finance for SMEs – through new banks as well as the established ones – and this year the department is working on the ‘business bank’: a scheme, launched last December, under which government will lend money directly to small businesses through internet-based lenders. Four lenders will be given around £55m of public money, which they’ll be expected to match with private funding. This “should help with some of the wholesale financing challenges,” says Donnelly, and also “allow us to pull together all of those varying business support and financing schemes which the government run, making them easier for businesses to access in a one-stop shop”.

To make the bank a success, he says, the department will learn from work on the Green Investment Bank (GIB); this was formally established last November, having cleared “the state aid hurdles” to start “delivering on the ground,” as he puts it. The GIB has been successful so far, he says, thanks to “the quality of people working on the initial planning” and the clarity of its objectives. Whilst the GIB has a fairly narrow focus, the business bank has a wider range of aims, so the Shareholder Executive – a BIS unit staff by people with public and private sector expertise who “have the confidence of stakeholders” – is, says Donnelly, “working hard now to make sure that we’re very clear which areas we can add most value in”.

Managing the messages
Mentioning the GIB brings us back to that all-important relationship with the energy department. Donnelly may see it as an area of seamless joint working, but it’s also an area in which uncertainty over government policy has clearly had a negative effect on business: a report published last December by consultancy firm Ernst & Young said that the “UK renewable energy market has been hit by mixed and inconsistent messages by policymakers”.

Given Donnelly’s insistence on the need for a clear, medium-term strategy to inspire business confidence, how far does he feel his department can influence others across Whitehall to secure the policies – or at least the stable policy environments – which businesses need? Donnelly replies with a sidestep: “Part of our core job in BIS is to understand where all sorts of businesses are coming from, large and small, and to make sure that we have the evidence to make the case [for them] effectively inside government, obviously approved by our ministers.”

He goes on to list a number of areas where his department has “close dialogues” with others across Whitehall – energy is one; immigration is another – and says that in these areas it’s not just policy which is important, but also how you communicate that policy. “It’s very important that we have a shared set of messages which are targeted at the different audiences,” he says – from “bright students who might want to study here and then carry on a career in life sciences in the UK, to those who might be thinking of investing in advanced materials.”

On the topic of communicating with students, I wonder whether Donnelly feels that government has been successful in explaining the policy of tuition fees to prospective undergraduates – something he spoke about when CSW last interviewed him in 2011. “I believe we’ve made real progress in this area, yes,” he says. The work has been “focused, imaginative and effective,” and “the evidence from the number of applications – including [by people] from the least advantaged backgrounds, which are holding up well – suggest that we have been succeeding. But I don’t underestimate the continued need to [keep communicating]”.

So what does he make of the fact that admissions numbers fell last summer? “We haven’t fully come to the end of the year,” he says, “and there are a series of factors [to consider], including the overall size of the cohort, but broadly it looks as though numbers have held up fairly well, particularly [among] the least advantaged students – so those messages are getting through.”

Reducing regulation
As well as trying to ensure government communicates the right messages to business, BIS must relay industries’ messages back to Whitehall. One consistent message is that businesses want less regulation – a message this administration has enthusiastically embraced, introducing the Red Tape Challenge and One-In-One-Out rule. The latter programme, which insists that the introduction of each new regulation be matched by the abolition of an existing one, had reduced the cost of regulation to business by nearly £850m by December 2012, according to BIS figures, and is about to be expanded. Departments will now have to remove two regulations for every one they introduce – a move which the department estimates will push the total savings for business to £919m by July this year.

“It is a big challenge, including for this department,” says Donnelly, “ but ministers decided that it was important to go on raising the bar because this is such a key issue for business, particularly small business.” Companies “are starting to see a real impact” from this work, he says, but often the perception of regulation – even where it doesn’t match reality – can  be a problem in itself, so “giving the signal that we are pushing even harder on regulation” is important.

Has the focus on reducing regulation helped civil servants to think more carefully about non-legislative policy tools? Donnelly responds with the sort of drawn-out “ye-es” which suggests he is not entirely convinced. Nonetheless, he does think there has been a change. “The fact that you now have to think about what you’re stopping regulating if you want to start regulating is a very good discipline, because in some areas people naturally reached for regulations [when] there would be other answers you could find if you looked hard enough,” he says. This is an area in which people are still learning from experiences across government, he adds; through sharing best practice – via both BIS’s own Better Regulation Executive, and central committees such as the Reducing Regulation Committee – the civil service is becoming “more skilled as well as more aware” of non-regulatory options.

A stable platform?
BIS went through its restructuring and downsizing exercise quickly, and has already achieved more than 70 per cent of the required administrative savings, says Donnelly. With the changes completed, staff morale has begun to rise (though it remains lower than the civil service average) and the teams within the department – now working in a flexible, project-based way – are free to be much more “single-minded” in their focus on policy delivery. There is, says Donnelly, a “buzz of delivery” in the organisation.

But the next spending review is around the corner, with reports of even deeper cuts to come. And the ministerial positioning has already begun: last week business secretary Vince Cable was quoted in the Financial Times setting out his stall in a bid to avoid cuts for his department. Donnelly is aware that he may yet have to reconsider his budgets. “There’s never absolute stability, of course, but we have got enough stability and space to get on with our job now – and part of that job is to make the case for what we can do with resources going forward to support growth,” he says. Then he adds: “Ultimately we will make the best of what we get, that’s part of our job.” It is the first, and only, time that his voice betrays anything other than on-message optimism about the tasks facing his department. For a second there’s a slight hint of resignation – but immediately the relentless confidence is back. Like the exhibitions in the foyer below his office, Donnelly tells a positive story about the partnership between business and government. And he does so not only because he believes that his team is succeeding, but also in the knowledge that sending the right message is half the battle in a world where confidence and growth – or insecurity and stagnation – go hand in hand.

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