WELCOME TO WALES

With the Ryder Cup kicking off later this morning and Wales being in the spotlight of the World's press for the next three days, it is worth reminding ourselves what a great country we live in.

Enjoy, even if there is a Queen tribute band playing "Bread of Heaven" !

THE TRUTH IS OUT THERE?

When I got back last night from work, there was a massive package of papers awaiting me, namely the papers sent by the Welsh Assembly Government regarding the public consultation process around the Economic Renewal Programme.

Given that the Welsh Assembly Government has failed to post the results on its website, as it normally does with consultations, I had to unfortunately resort to asking the Government very nicely for copies of the submissions from various business organisations and, more importantly, from the various focus groups held with individual entrepreneurs and companies up and down the country.

You have to wonder why the mainstream press in Wales has not asked the same questions rather than quietly accepting the press line from the Assembly's myriad collection of "press officers".

Hopefully, I will get the opportunity to do some research over the weekend whilst fitting in a trip to the Ryder Cup with two of my best mates from Pwllheli. A cursory glance through the papers suggests that there will be some interesting findings.

For many, the real question is whether, as the Deputy First Minister pointed out after the launch of the ERP, the "new approach should be based on the feedback and concerns of businesses, communities, trades unions and other key organisations".

As he notes in the Western Mail today, "after an extensive process of engagement, we charted a new course ahead in Economic Renewal: a new direction". But did he and his civil servants take any heed of the consultation or, as Valleys Mam noted earlier this summer, had they already decided upon the way forward regardless of what businesses told him?

I am particularly interested to see whether business has called for "repayable grants" and the focusing  of business support to six sectors which are, along with the £240 million broadband programme, the key planks of the ERP.

We all know by now what the CBI want for their members but what about the other businesses which attended the various focus groups up and down the country?

Was there an overwhelming desire to abolish grants for small firms and to scrap the FS4B programme of business advice?

If not, then there are some serious questions that need to be asked as to whether the senior civil service within the Department of Economy and Transport has, rather than responding to business needs, merely imposed its own agenda on the Minister and the Welsh business community.

Watch this space.

POSTCARDS FROM AN ENTREPRENEUR

Following the article on Saturday that examined the role of large firms in the economy, I was unexpectedly sent an email from one of Wales’ leading businesspeople directing me specifically to a recent study by the US entrepreneurship thinktank, the Kauffman Foundation.

Entitled “The Importance of Startups in Job Creation and Job Destruction”, the study bases its findings on the Business Dynamics Statistics data that tracks the annual number of new businesses (startups and new locations) from 1977 to 2005 in the USA. The study defines startups as firms younger than one year old.

The study reveals that, both on average (and for all but seven years between 1977 and 2005), existing firms are net job destroyers, losing 1 million jobs net combined per year.

By contrast, in their first year, new firms add an average of 3 million jobs.

Further, the graph above shows, whilst job growth patterns at both startups and existing firms are pro-cyclical, existing firms have much more cyclical variance. Most notably, job creation at startups remains stable during recessionary years, while net job losses at existing firms are highly sensitive to the business cycle.

 According to the study’s authors,

“These findings imply that America should be thinking differently about the standard employment policy paradigm. Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”

“Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail….such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.”

Given that he is exceptionally busy during this week of all weeks, I am grateful that this entrepreneur, a man I admire enormously, took the time to send me the reference.

It will, along with other data collected, help with constructing an alternative to the current economic strategy.

More importantly, it demonstrates, yet again, the lack of analysis that has gone into the Economic Renewal Programme and the seemingly total reliance of senior civil servants in the Department for Economy and Transport on the CBI, and their penchant for "anchor companies", for any policy direction.

WAG FAILS TO DO ITS HOMEWORK

The real issue for policymakers in economic development is not how many people are employed by different parts of the economy, but where jobs are being created, especially at a time when we have the worst unemployment of any of the nations of the UK.

Given this, one would have expected senior officials within the Department of Economy and Transport, in drawing up its plans for the Economic Renewal Programme (ERP), to have carefully considered all information regarding job creation and then developed their plans accordingly.

However, it would seem that someone forgot to read a statistical article, which is ironically on WAG’s website, which examines changes in employment by business size for the period 2003-2006. Unfortunately, this has not been updated by WAG statisticians but it nevertheless demonstrates the different roles of large and small firms to employment growth within Wales.

According to the data, SMEs (small to medium-sized enterprises) accounted for 56 per cent of the increase in employment during this period. If we examine the impact of large firms on employment growth, what we find is that the so-called “anchor companies”, so beloved by the CBI, accounted for around 13,700 new jobs, which is roughly a third of the job growth within all Welsh-based businesses.

However, nearly 10,000 jobs were also created by large firms not headquartered in Wales, which include multinational banks such as HSBC and retail giants such as Tesco.

Many would argue that the primary aim of economic development policy, at least at a political level, is to encourage wealth and employment across all parts of the nation.

As we all know, two thirds of Wales – West Wales and the Valleys – is classed as being amongst the poorest in Europe and is in receipt of around £2 billion of Convergence funding to close the prosperity gap. Given this, it is worth examining the relative impact of SMEs and large firms on employment growth in both the relatively prosperous parts of Wales, which include Cardiff, Newport, Monmouthshire, Wrexham, Flintshire and the Vale of Glamorgan, with the poorer region of West Wales and the Valleys.

The results are startling.

It demonstrates that within the poorest areas of the Welsh economy, large firms only accounted for 29 per cent of all employment growth between 2003 and 2006. This is despite a grant regime that is more generous than for any other part of Wales. In contrast, for those more prosperous parts of Wales that have a limited ability, due to European regulations, to offer grants and support to business, large firms accounted for 63 per cent of all employment growth.

Simply put, the SME sector has been critical in creating jobs within the poorest parts of our economy whilst the majority of large firm employment has been created within those areas of Wales that have limited provision for grants.

Given such facts, one would have thought that the natural policy implication would be to support and strengthen the SME sector within those more deprived areas, whilst continuing to operate a laissez faire policy towards companies within the more prosperous areas such as Cardiff, focusing on other factors such as the quality of life, access to the university, and relatively good infrastructure.

Yet, for some reason, it would seem that those who have written the ERP have largely abandoned those job creators within our poorer communities and, worst still, will only be providing grants to large companies that seem to create the majority of jobs within our prosperous areas?

Does that make any sense at all when the vast majority of job losses during the recession were in areas such as the South Wales Valleys?

Given that there is a desperate need to create more jobs within such communities, one would have thought that WAG would do everything in its power to ensure that the job creating parts of the economy within those poorer areas are given every support possible to continue this role.

Yet, small business support has been largely abandoned within the ERP and grants limited only to those large companies who have created less than a third of jobs within the Convergence area. For example, the £30 million growth programme to help SMEs expand their operations within the poorest parts of Wales has recently been abolished by WAG officials.

As I have stated time and time again, small and large firms are critically important to the Welsh economy. It is shame that the CBI in Wales have ignored that fact and continue to push the line that it is only anchor companies that can revitalise the Welsh economy. 

More worryingly, senior policymakers within WAG have simply not done their homework in developing a new economic strategy that addresses the different needs of the regions of Wales and, as a result, those areas in desperate need of regeneration will face the consequences, in years to come, of such a limited vision for the Welsh economy.

The Recession is Officially Over... Unless You ask Warren

Warren Buffet (now worth about 45 billion dollars) has said that the recession is not over.

Not but a few days ago the powers that be said that the recession ended in June. Then the next day the Oracle of Omaha confidently stated that the recession is in fact not over.


Now before we all get to excited over the confusion I should mention that the 45 billion dollar man (that pays a low 15% tax rate as the richest man in the world next to bill gates. His secretary pays about 35 - 40%) did correctly disclose that he uses a different definition of a recession and a different definition of when a recession is over. He says measures must return to a level that are equal to the levels that were reached prior to the recession. This differs from the traditional definition which actually is quite subjective in nature but more or less goes like this; a recession is over when the economy starts growing again.

Government folk measure out put growth or GDP. So once the economy starts to expand rather then shrink the recession has ended.

So what should we think of this? 


Well both sides of this contradiction are using different variables and measures. the government sees that the economy has started to expand and more importantly stopped contracting.

Buffet has given numbers from his company Berkshire Hathaway that support this analysis. He also says that the companies are only 1/3 - 2/3 of the way back to levels that they were before the recession.

Is the recession over?

Look I am not buffet and I am certainly not on the government payroll. But I do have a strange and elegant talent to visualize the way large, broad, systems function on the macro level. I assign variables as visual shapes that interact with each other and I play these sort of "mental model - what if scenario experiments" They tend to be more or less accurate for the most part. when they go wrong it is almost always because I have made a very large and fundamental error when visualizing what variables are at play.

So given that I have a good understanding of the economic forces that be, I have a clear idea of where we are.

Here it goes...

We are just beginning to recover from the recession. We are not well. if we were in grade school we would be requesting homework assignments because we are not at school.

If we are able to rest and stay put at home for the next year then we will be able to stabilize this thing with certainty. As of now there is a lot of risk, if we get disrupted (that is if we are to get hit with another economic problem) and are not able to get the rest that we need then you can rest assured that things are going to take a dive for the worst.

We don't have the physical strength to recover from  a fever caused by exhaustion. We have already taken medicine so med's won't help, more stimulus could actually make things worst.

I have painted this picture before but instead we were using a car analogy.

I have to admit that when buffet shared his idea or thoughts on stimulus I was floating on air. It was as if he had read this finance blog, my very words, and my thoughts.

So let us hope that we are not struck with a financial bump, before we are able to get over the hump.

Buffet said that we are, and will recover. He said there was no doubt. I trust him.



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TWEEDLEDUM AND TWEEDLEDEE

"...the assurance that I can give all businesses in Wales is that, in the delivery of the programme that I have announced, size does not matter in the sense that we will give support to businesses whatever their size. So, there is no discrimination against small businesses and, indeed, the benefits will be felt by all businesses".

Ieuan Wyn Jones, response in the Assembly Chamber, September 22nd 2010

"We agreed with the first minister that Wales largest 'anchor' companies are key to economic growth and prosperity. In fact, Wales is more dependent on large companies than England, as Wales' largest 1.8% of companies account for 69% of national turnover. As a result, we stated that only targeted government action to support these 'anchor' companies will deliver real growth and employment".

CBI Wales response to the Economic Renewal Programme

TICK TOCK....

I have just come across an official document that seriously undermines the entire approach by the Welsh Assembly Government to economic regeneration, especially within the poorer areas of Wales.

It demonstrates that officials simply have not done their homework in preparing the Economic Renewal Programme, especially with respect to examining how, and where, jobs are created.

I need to do undertake bit more analysis and then it will appear in the Western Mail on Saturday and, of course, will appear on this blog later that day. 

STANDING UP FOR SMALL BUSINESS....IN SCOTLAND

Today, an inquiry begins, in the Scottish Parliament, to examine the failure to support more businesses during the recession.

The first up at the crease, when the Economy, Energy and Tourism Committee's (EET) begins its review of Scottish Enterprise and the small firms support body Business Gateway (BG), will be the Federation of Small Businesses in Scotland (FSB).

The small business organisation has claimed that the current structure has left a gap in the support of businesses that are struggling in the current economic climate.

In the Scotsman on Sunday, Michael Dixon, the FSB's Edinburgh branch chairman noted that,

"The vast majority of businesses who are not start-ups or are left outside the elite Scottish Enterprise stable of 2,000 account-managed companies feel that there is no place for them in this set up. Now more than ever, the jobs, services and revenue these businesses provide are crucial to our economic growth and should not be excluded from support on the basis of arbitrary targets. What we are not trying to do is say this is all rubbish and start again. We want to see that businesses no matter what their sector, size and growth potential get support."

It is heartening to see that Scottish MSPs are taking an interest in small business support, especially as the Learning and Enterprise Committee has allowed the Economic Renewal Programme to be adopted with comment or criticism.

The FSB in Scotland is also to be congratulated on making a stand for small businesses.

One can only hope, following the CBI’s remarks last week, that the FSB in Wales is about to do the same.

MORE PROBLEMS FOR THE ECONOMIC RENEWAL PROGRAMME

I have just been sent this a copy of this note, which has been circulated to all Assembly Members by someone who works on a daily basis with businesses.

It demonstrates that there are some serious issues related to the process of implementing the Economic Renewal Programme, problems that could seriously affect the economic recovery.

"Following some correspondence with the ERP team in which I pointed out that WAG officials felt forced to meet companies and were even cancelling appointments, ERP issued guidance to WAG staff concerning how they should deal with contacts from industry and commerce. I have attached this note for your information. You will see that it is concerned with staff continuing to maintain the pretence that WAG is still open for business. However, despite this guidance, staff still continue to refuse to meet with promoters of prospective projects, because they have no details of how the new scheme is to operate and what it is to offer. When I recently arranged to meet with an Assembly Member I offered the opportunity to senior officials to feed me with their views on ERP so far. The following is an exact copy of a comment that was received only today from a senior respected official who has many years of experience in grant and economic development roles: "concerns are that no-one knows what is happening with new scheme, where people are going to be and what the objectives are. One scheme has closed and there is no new one; the people designing it have not spoken to those who know about delivering it." This is a comment today that you will find echoed throughout the whole of the WAG economic development functions. May I recommend that you phone up and try it out yourself.


If you compare the guidance note with the original announcement of the launch of ERP you will see massive dilution of the original claim that the "grant culture" was to end and repayable grants would be linked to six target sectors only. If you read the ERP staff guidance carefully you will see that for internationally mobile projects that grants will not be repayable unless the project fails to deliver its objectives. This is identical to the clawback provisions of the previous grant scheme. Secondly, the guidance notes say that: "A Regional Growth Fund will also be established to provide support to regionally important projects outside the key sectors. Further information on this fund and its operation will be made available shortly.". In another section of the notes it also says: "high-quality proposals, outside the key sectors, will continue to be considered if they represent significantly better value than projects identified within our sector pipelines.". These two quotations make it clear that the commitment to the six sectors is no longer rigid, indeed support will be offered in "worthy" cases. Once again, this was a key criteria of the previous grant scheme, which incorporated a formalised Quality Assessment. Of course, these statements are mere rhetoric, for example, no attempt is made to describe how to determine if a project outside the sector represents significantly better value than projects identified within our sector pipelines".


I'm told by ERP and WAG officials that the attached guidance note is all that is available to staff in the operation of the new scheme. In my correspondence with ERP they have told me that the "new" scheme will not be launched and no further guidance will be issued to staff, companies or consultants. I was told that it was thought inappropriate to be seen to launch a new grant scheme when the Minister had announced an end to grants.


There are a number of serious problems with this "flexible" approach:


Any offers of assistance will need to be made within legal powers and if the scheme is not detailed there is a chance it will be ultra vires. For example, repayable grants could be seen by the courts as loans and the government is not a bank. Under what statute may the National Assembly of Wales make loans? Bodies making loans need to be approved by the FSA and staff need to be properly trained and approved. Who may issue the legal challenge? Well any aggrieved (rejected) party or any company that challenges the need to repay in seven years time. Food for thought?


Staff have no detailed guidance that will help them in detailed negotiations with industry and commerce. Staff have had no training in the "new" scheme.


The Department currently has ISO 9001 accreditation, which guarantees quality. However, this accreditation is based upon very detailed guidelines of the operation of the old scheme, highly formalised documentation and detailed desk instructions for all staff. The highly formalised and detailed system is required to ensure consistency and quality in the operation of the appraisal process. From what I read and hear, it seems likely that ISO will be forced to rescind the current accreditation as the previous grant scheme to which it relates has been cancelled and ERP personnel seem disinclined to control or specify the new scheme in any way. I may write to ISO on that one myself.


A detailed reading of the guidance notes will reward you with other interesting bits of rhetorical gobbledygook, eg. it says that the old scheme closed to applications on 5 July and the new arrangements came into place on 1 September but that there has been no break in service! However, the operation of the new scheme is only in place in theory, since staff have not been given the guidelines of the new scheme and no training has been undertaken. October approaches and it seems no applications for grant under the "new" scheme have yet been accepted. In fact there is no new scheme on place and staff continue to refuse to have meaningful meetings with companies. If officials find themselves compelled to meet with companies they merely collect data on the proposal and forward these up the management chain for guidance on what to do next. Since there are no detailed guidelines to underpin the appraisal system, senior members of staff are now being expected to use inconsistent and subjective methods to decide which projects may be allowed to proceed and which are to be rejected at an early stage. You will see in the quotes above, from the guidance notes, that methods for assessing "better value" and "Regional Growth Fund" arrangements have not yet been published.


A few AMs responded to me following my first email on this subject but I had hoped for more interest and some sign of action, given the very serious effects of the lack of a coherent policy is having on Welsh industry and commerce in the worst recession in living memory. You will have noted recently that respected financial bodies are warning of a return to recession by Christmas and the housing market is showing evidence of that evaporation of confidence. Coalition cuts are soon to start impacting on Welsh public sector jobs with knock on effects into support industries. The current gamble on an unproven strategy at such a time may soon be seen as an insane suicidal act."

AN APOLOGY TO THE CBI

I begin this week with various apologies to the CBI in Wales.

I apologise for expecting the CBI to speak up on behalf of small firms in Wales when the list of their new council members show that over three quarters represent large businesses in Wales.

I also apologise for criticising the CBI for supporting grants only to inward investors when 40 per cent of the membership of their council represent businesses which are headquartered outside of Wales.

Finally, I apologise for having an expectation that the CBI would truly be the voice of business in Wales, as their byline suggest.

Even when continuing to push the argument that large firms represent 55 per cent of all turnover in Wales, the fact that it has less than 25 per cent of its council membership emerging from the small firm sector demonstrates that the best it can hope for is to be “the voice of big business” in Wales.

Sorry!

ABERYSTWYTH LOOKS SET TO APPOINT A NON-WELSH SPEAKER AS VICE CHANCELLOR

Having been busy with moving office late last week, I have had little time to catch up with the news around Wales.

On reviewing various articles, one caught my eye more than any other, namely plans by Aberystwyth University which could see a non-Welsh speaker appointed as its new vice-chancellor. 

This follows the decision by Bangor to do the same earlier this year.

Whilst the Welsh Language Society is again objecting to this development, I doubt if the University will take any notice of their objections.

To be fair to Aberystwyth, their response is quite different to what happened in Bangor, stating that "The language requirements for the post (and that of any deputy vice-chancellor) need to be considered in the context of the capacity of the senior management team of the university who must have, and do have, full capacity to be able to deal and communicate fluently and effectively in both Welsh and English". More importantly, it was noted that "a non-Welsh speaker should learn the language to a modest standard before starting work".

This is quite different to the situation in Bangor, where the majority of the senior management team did not speak Welsh, despite some of them having been living in the Bangor area for decades. It will also be interesting to see how Aberystwyth will impose the Welsh language rule prior to appointment. Is a GCSE level sufficient for such a senior post and, more importantly, will the successful candidate be able to achieve this within the normal six months notice period for senior appointments?

Two other points.

Firstly, if, as expected, Aberystwyth appoints a non-Welsh speaker to the post, then that will leave just two fully bilingual Vice-Chancellors in Wales (out of eleven), namely Dr Medwyn Hughes of Trinity St David's and Professor Marc Clement of the University of Wales.

Secondly, I was under the impression that the Minister for Education had stated that his new strategy for higher education in Wales was "likely to mean fewer vice-chancellors".

Given that UWIC has already rebuffed his advances for merger with the University of Glamorgan, is this decision by Aberystwyth to appoint a new Vice Chancellor, rather than beginning talks with Bangor over a potential merger under one leader, yet another blow to the intentions of the Minister to reform higher education in Wales?

A COMPLETE LACK OF....

One of my favourite reads every day is Vaughan Roderick's political blog.

Written in Welsh, the political insights of his articles, peppered with just the right amount of insider gossip, puts it streets ahead of many other similar sites across the UK.

Yesterday's article - a "what if" piece on what would have happened if Plaid Cymru had led a rainbow coalition - was yet another brilliant piece of writing. However, the best discussion was saved until last. Translated, it reads as follows:

"And that brings me to a story that I have heard from various sources. There is now way of knowing whether it is true or not but the fact that so many people from various political colours are relating it. The story is that the first meeting between David Cameron and Carwyn Jones was a total disaster. Carwyn, according to the story, was acting in a passive aggressive manner, as they say in English.  The First Minister was frowning and staring at the new Prime Minister. He also totally ignored the new Secretary of State to the extent that David Cameron had to ask Carwyn whether he understood that he, the Prime Minister, had full faith in Cheryl Gillan and that she was speaking on behalf of his Government. This was complete contrast to the meeting between Alex Salmond and David Cameron was all honey and there are indications (in the field of defence for example) that Westminster is more willing to listen to the government in Edinburgh rather than the one in Cardiff."

If true, not only does it demonstrate the political immaturity which is now at the heart of the Welsh Government but how the Labour Party prefers to put petty point-scoring before the future of this nation.

AN END TO GRANT CULTURE? NOT IF YOU ARE A LARGE FIRM SAY THE CBI

Today, we finally get an admittance from the CBI which supports the claims, made on this blog last week, that the grant culture in Wales has not ended.

In the Western Mail today, its director for Wales, David Rosser suggests that not only will WAG continue to with grant aid for inward investors, but that there is nothing wrong in supporting large firms over small companies in Wales. 

As he notes,

"The inward investment market has its own rules which we cannot rewrite here in Wales. If we wish to participate in this market we have to play by these rules, and that means financial inducements to attract footloose investment. We can certainly decide that if we are moving away from grant aid then this should also apply to inward investors, but we must accept Wales’ intrinsic attractions are not yet sufficient to bring in these companies without inducement. We may get there, but we are not there yet.

And if we opt out of grant aid for inward investors then we had better understand that we will see a steady stream of disinvestment by companies that were attracted here under the old rules. The CBI is certainly not advocating an economic policy based solely on inward investment but to rule ourselves out would leave some parts of Wales highly vulnerable.

Offering grants to foreign companies, but not to indigenous businesses, sounds unfair but it is logical and defensible. And for SMEs they offer a customer base. At the CBI Wales council meeting last Friday the position was summed up nicely by one of my small company members this way: “I can’t build my business only selling to other SMEs, I need big companies so I can grow by gaining larger contracts”.

I have enormous respect for David and his role at the CBI, which has grown more influential under his tenure.  However, in making such a statement today, he has demonstrated that the CBI can no longer call itself the voice of Welsh business.

It is not a matter of big or small companies, indigenous or inward investors. The CBI should be representing all of them equally and yet these comments suggest, as many have suspected, that indigenous Welsh companies are of little interest to a CBI whose council is predominantly made up of large employers.

Overall, the CBI seems to be happy with WAG's approach which places "less emphasis on directly helping individual companies" but clearly only if that company is not an inward investor wanting taxpayers money to relocate or expand in Wales.

But what is fascinating is that this statement, which seems to be defending WAG, destroys the message that has emanated from WAG over the last few months.

Let me remind you of a few:

"The business grant culture of the Welsh economy over the past 30 years is over, the assembly government has said". BBC Wales,  5th July 2010

"First Minister Carwyn Jones criticises foreign firms who locate in Wales to benefit from Government grants" Wales Online, July 15th

“Plaid Cymru has long argued that small businesses are the lifeblood of the Welsh economy and that town centres are the heart of our communities. Now that Wales is coming out of the economic crisis, Plaid leader and Economy Minister, Ieuan Wyn Jones has launched the Economic Renewal Programme which will see significant investment in infrastructure and a move away from the traditional grant culture for big business to a culture of investment . This will benefit all areas and all types and sizes of business."
Nerys Evans AM, Plaid Cymru Director of Policy, 16th July 2010.

Given this, you would have thought we were in for a major radical overhaul of business grants in Wales  and those nasty big companies, such as Bosch, would no longer be getting access to Welsh taxpayers funding. Yet, it would seem that the only thing that hasn't changed in the Economic Renewal Programme is the continuous subservience of WAG to large foreign companies.

If we examine a recent request for statistics on Welsh government grants, we find that four companies have been offered over £50 million of grants since 2008. These were Airbus UK Ltd (£14.8 million), Ford Motor Co Ltd (£13.4 million), Toyoda Gosei (£13 million) and Doncasters Precision Castings (£11 million).

The real irony about Toyoda Gosei was that the offer, yet to be taken up, was made on November 24th 2009, a full month after Ieuan Wyn Jones first indicated that the "grant culture was over"

If Wales is to succeed, then it needs to support both large and small companies and what the CBI and others have failed to appreciate is that a £500,000 grant to 100 small growing Welsh firms can be as effective as a £50 million grant to a four large inward investors.

Indeed, an independent report from the London School of Economics and commissioned by WAG showed that grants were far more effective within smaller firms, which begs the question why WAG will continue to offer grants only to bigger companies?

Clearly, it is not the business grant culture that needs to change in Wales but the mentality of senior civil servants and organisations such as the CBI which are clearly biased against supporting entrepreneurs and developing the small firm sector in Wales.  Unless that changes, then our economy will continue to be the poorest in the UK.

THE TUC - A PUBLIC SECTOR PRESSURE GROUP?

As the TUC conference starts today, there are increasing calls for militant action to stop any job cuts in the public sector. 

Compare this to what happened during the last Labour Government under Gordon Brown.

As a paper from the Office for National Statistics recently demonstrated, over a million jobs were lost in the private sector across the UK between the first quarter of 2008 and the first quarter of 2010.

Given this massive blow to employment within the engine of the UK economy, were there motions for co-ordinated industrial action to stop job losses in the private sector during the TUC Congresses of 2008 and 2009? 

Were there calls for days of protest and national demonstrations against the failure of the UK Government to stop the loss of over 4 per cent of all jobs in the private sector during the last two years?

Of course there weren't.

Rather than lobbying Government to implement policies that will benefit people at work regardless of whether that work is in government or in business, the TUC is in danger of becoming a political movement that focuses only on defending the public sector across the UK.

Indeed, it is one that could alienate the millions of private sector trade unionists who did not receive the same levels of support during the recession and who have seen working conditions, such as pay and pensions, remain relatively unaffected for their counterparts working for government

Given that only 21 per cent of the UK workforce is based within the public sector, that is an exceptionally risky strategy for the TUC to take, one which the vast majority of those working in the UK within the private sector, unionised or not, may have little sympathy with.

TWO QUOTES OF THE DAY

“We have hundreds of thousands of very good small companies in Britain, but they are going to have to grow rapidly in order to absorb people and keep the economy growing. If it doesn’t happen, the economic strategy simply won’t work.”

Vince Cable, Secretary of State for Business

“We need to give the guys who have survived this recession far more support....If you have just got through the last two years, congratulations. You have showed some mettle and will have learned a lot. Why are we not supporting them to get to the next stage?”

Lara Morgan, founder of Pacific Direct

EXPORT PERFORMANCE OF WALES PLC DECLINES AGAIN

The latest statistics on exports do not bode well for the Welsh economy.

According to data released by the Welsh Assembly Government, the value of exports for Wales for the last twelve months fell by £1,602 million compared to the previous four quarters. There were decreases in exports to EU countries and in exports to non-EU countries, down £480 million (9.0 per cent) and £1,122 million (22.8 per cent) respectively.

Wales had the largest percentage decreases in the value of exports over these twelve months (down 15.6 per cent) followed by Northern Ireland and the East Midlands (down 14.5 and 9.1 per cent respectively). The largest increases were in London, the West Midlands and the East of England (up 8.2 per cent, 8.1 per cent and 6.5 per cent respectively).

Given such depressing data. especially in comparison to the rest of the UK, there needs to be a concerted effort to ensure greater support for exporters in Wales. If it is possible for the USA, the free market centre of the World, to have a strong trade and export organisation to support greater internationalisation, then Wales must have the same.

The abolition of International Business Wales (IBW) clearly shows the lack of understanding by politicians and civil servants regarding the importance of exporting to a small nation and, more importantly, the support that government can offer.

IBW was not only about bringing in large inward investors but about supporting the export drive of those businesses already within the Welsh economy.

That impetus has now gone and, as the latest figures show, at a time when there needs to be a greater focus on the exporting front for the Welsh economy.

AN END TO THE GRANT CULTURE? ONLY IF YOU ARE A WELSH BUSINESS

An internal document that is circulating around WAG seems to be suggesting that grants may not be ending after all, although it seems to be bad news if you are an indigenous Welsh business.

Let’s first examine the issue of the provision of growth capital, which will affect Welsh businesses.

Its purpose is to provide growth capital for businesses in Wales and is aimed solely at businesses in key sectors or key-sector supply chain.

The finance offered by WAG, as discussed in the ERP, will be subject to an agreed repayment profile up to seven years (or the minimum term necessary to deliver the project) from completion of project. The offer may include a payment holiday option of up to one year at the beginning of the repayment period.

So, no surprises there. There will be a repayable grant system that was trailed heavily within the ERP.

However, what about those projects that are ‘mobile’ and wish to come to Wales? These are the very projects that Plaid Cymru AMs said we should stop grants to as, in their opinion, large inward investing companies like Bosch have let the Welsh economy down despite taking millions of pounds in grant funding.

Well, guess what. It would seem that Wales is again “open for business” to inward investors (and WAG is at pains to emphasise this). Those who have been lobbying hard for this have obviously struck a chord with the ever increasing sensitive crew inside the Department of the Economy and Transport (DE&T). More relevantly, any projects may not be restricted to key sectors and may not be repayable.

In an ambiguity that would make Sir Humphrey Appleby proud, it has been announced that “mobile projects” (i.e. those from outside of Wales) will be focused in key sectors or key-sector supply chain BUT that projects outside key sectors considered if they provide a better return/value than projects identified within our sector pipelines. In other words, any large inward investor creating jobs is welcome to get grants to come to Wales.

The question is whether they would have to repay the grant, as in the case of indigenous Welsh businesses?

Again, ambiguity is the order of the day with the document stating that whilst repayment terms would be “established during application process”, and that the finance would only be “repayable if agreed targets not met e.g. number and quality of jobs, leverage of investment, longevity of project”.

In other words, this suggests that inward investors get to keep the money if they hit their jobs target, which is exactly the same regime that the current grant system operates under.

However, the lack of consistency over the current grant regime does not end with its position on grants for large companies.

According to the guidance on business finance, this only applies to the DE&T, not those of other department i.e. other Assembly Government departments also provide specialised support to their sector – e.g. tourism, food, farming and social enterprise – and there are no current plans for changes in these areas.

Therefore, there will be support for food businesses from Rural Affairs, including a processing and marketing grant (if small or medium food processor); the administration and funding of Section 4 Tourism Grants will revert to the Department for Heritage on 1 October 2010.

In other words, grants will be made available to Welsh businesses operating in the food and tourism sectors but not in the rest of Wales simply because that funding is administered by another part of WAG.

Whilst the companies operating in those sectors are bound to be heaving a collective sigh of relief, you couldn’t make up the degree of inconsistency and indecision that seems to have infected the highest levels of government policy. In such circumstances, I am sure that a local manufacturing business will wonder why it is not eligible for any support to expand their business whereas the hotel down the road will get a grant to do so or, more relevantly, the large overseas company.

Therefore, the message from WAG is seemingly this.

If you are a Welsh company outside of the six key sectors, you get no access to finance at all, unless you are operating in the food or tourism industry where grants still seem to be available.

If you are a Welsh company inside the key sectors of the economy, you do get a grant but it has to be repaid back over a period of seven years.

However, if you are a non-Welsh company bringing jobs into Wales, you still get a grant that is not repayable.

This seems to suggest that we now evolved where the vast majority of indigenous Welsh companies are treated as inferior as compared to those coming in from outside of Wales.

Is that really a policy that Ieuan Wyn Jones and other Plaid Cymru AMs really believe in? It may be a logical approach that civil servants may be able to justify but what about the Party of Wales?

Indeed, what sort of reaction would the Deputy First Minister get if he put forward such a proposition to the gathered masses at the annual Plaid Cymru conference that starts today?

BROADBAND IN WALES - LETTING COMMUNITIES CHOOSE

Last week, a story emerged that the villagers of Erbistock, near Wrexham, had been informed by British Telecom that it would cost £550,000 to provide them with a broadband internet connection.

Fortunately, they had the good sense to shop around and were subsequently given an estimate of £50,000 by another company, Rutland Telecom, to upgrade the copper wire line from the telephone exchange with fibre optic cable to receive super-fast broadband.

The new broadband scheme for rural Wales, funded by the Welsh Assembly Government (WAG), is aimed at giving each household or business a grant of up to £1,000 to assist with the installation of a broadband. Therefore, if every home in Erbistock comes on board, the cost will be covered and the village will be fully online by October.

With many other rural areas in Wales being in a similar position, this model demonstrates how a demand-led approach can empower communities to find solutions for themselves and supported, on a case by case basis, by WAG

However, it also calls into question the “top down” approach of one of the key initiatives within WAG’s new economic strategy.

As some of you may be aware, Ieuan Wyn Jones announced, back in July, that the vast majority of grants to support small businesses would be abolished. Instead, the funds would be diverted to create a £240 million “next generation” broadband infrastructure for Wales by 2016.

As I have said before, investment into critical new technologies can make a real difference to the productivity of businesses and there is certainly a case for extending the current broadband provision away from the main industrial urban and localities to the more deprived communities and those rural areas which still depend on dial up modems to access the internet.

However, the indications are that WAG has only been in discussions with the major telecom providers in Wales, which suggests that the price tag put forward for their broadband programme may be too high.
Certainly, the case of Erbistock suggests that WAG may be paying over the odds for a new broadband system if it only works with a small number of large telecoms companies.

Hopefully, WAG is currently exploring all the options, including giving direct grants to communities and businesses to access the cheapest broadband option in a competitive process. As the villagers of Erbistock have demonstrated, it could be a more cost-effective alternative to merely giving multi-million pound contracts to a few selected companies to provide expensive broadband solutions across Wales.

EASY HEADLINES, HARD DECISIONS

Interesting to see that Jonathan Edwards, the Plaid Cymru MP for Carmarthen East and Dinefwr, has finally caught up with some of the recent discussions regarding lower corporation taxes for Wales.

In the current political climate of public sector cuts, this makes easy headlines but it seems that Mr Edwards, in his interviews with the Western Mail, always seems to constantly and conveniently forget to ask some key questions, particularly about his own party's role within the Welsh Assembly Government.

For example, if corporation tax was devolved to Wales, would it necessarily be reduced by the Welsh Assembly Government that was dominated by the Labour Party?

Currently, Plaid Cymru is wedded to a Labour Party that, during the last Brown administration, actually raised corporation tax for small firms across the UK.

Given the ambivalent attitude of many Labour members towards wealth creators, there is simply no guarantee that Assembly Government control over corporation tax would reduce taxes for business in Wales. Indeed, given Labour's recent record at a UK level, could it end up increasing corporate taxes as a justification to support increased expenditure in public services?

There is also the question of Plaid's record in Government on the other  main form of business taxation, namely non-domestic rates.

Back in 2007, the Party of Wales promised that 50,000 businesses in Wales would no longer pay business rates.  Yet, despite this being their main economic policy during the Assembly election, the pledge was quietly dropped as part of the One Wales Agreement.

Not surprising really, given that this was an agreement with a Labour Party that, during the previous 2003-2007 WAG administration, had doubled rates within rural parts of Wales when they abolished the rural rate relief scheme.

As a result of the broken promise by Plaid Cymru, Wales is left with a situation when the majority of small firms actually pay higher business rates than their equivalents in England and Scotland. Indeed, one has to ask how a political party that asks for cuts in corporation tax doesn't apply the same principles to business rates.

As three quarters of small businesses in Wales are sole traders or partnerships, it is clear that any reduction in corporation tax would have no impact on the majority of Welsh firms whereas a cut in business rates would help enormously.

Easy headlines for the Western Mail are all well and good but when it comes to actually doing something to help small businesses in Wales through equalising business rates with England and Scotland, Plaid Cymru has simply failed to do anything, despite having the powers to do so.

There is also the question of Plaid Cymru's Economic Renewal Programme, which has withdrawn financial support for the majority of small firms in Wales through focusing it effort on six key sectors. How will a decision to stop small businesses in key sectors such as construction, business services, wholesale and retail, food and drink and other non high technology manufacturing from accessing support help the Welsh economy emerge out of the recession over the next couple of years, especially in rural Wales?

Finally, has anybody bothered to ask the Welsh Assembly Government (in which Plaid holds the economy portfolio) whether it has actually begun any discussions with the UK Government and the other devolved administrations about the feasibility of devolving corporation tax, as suggested by Gerry Holtham in his recent review?

I would suspect, given the current chaos within the Department of Economy and Transport, that the answer is no.

Given such questions, perhaps Mr Edwards would be better off, in the future, discussing such matters of economic policy in Wales with Ieuan Wyn Jones rather than Martin Shipton.

THE MAGIC AND MAVERICK INGREDIENT IN ECONOMIC DEVELOPMENT

During the last decade, a new business phenomenon has emerged which has the potential to change the economic fortunes of many nations.

Known as global start-ups, these are generally defined as new ventures that sell their goods or services in international markets through taking advantage of new technologies and changes in consumer behaviour.

Amazon, the online retailer, is probably the best example of such a business, having been determined, from its first day of trading, to be a major global player.

Not surprisingly, global start-ups are particularly attractive to governments as they grow quickly to create employment and turnover from high value added international activities.
They do so by leveraging their global knowledge of business in their chosen niche market to expand internationally over a short period of time, adapting their business model as they develop.

Some policymakers make the classic mistake that such global businesses are only related to emerging sectors such as IT, biosciences and digital economy.

This is despite increasing evidence that businesses created within other sectors, especially those that are service-based, are also quickly becoming global without being dependent on technology-based advantages.
Instead, they focus on other factors to internationalise quickly, such as improving productivity, introducing new methods of production and focusing on service delivery.

So how can you develop such global start-ups?

Certainly, there is a case for governments to provide more tailor-made policies and programmes to encourage indigenous businesses to fast track their international development from day one.

However, there is also a drive by some policymakers to adapt the traditional foreign direct investment model to develop the phenomenon of global starts.

One such example is the Global Entrepreneur Programme (GEP). This is an initiative established seven years ago by UK Trade and Investment (UKTI), the Westminster Government’s international trade division.
Rather than focusing on large inward investment projects, its aim is to identify the world’s brightest entrepreneurial talent and then get them to use the UK as a strategic headquarters and location for international expansion.

Operating as a high-level dating agency, the GEP’s aim is to go beyond normal business support and act as a catalyst to bring together these entrepreneurs with potential investors, entrepreneurial management and strategic partners in the UK to transform their initial ideas into global success.

To date, GEP has worked with over 85 entrepreneurs, and brought in over £150 million in venture capital investment to help grow the next generation of global firms.

So how has UKTI achieved this success?

Essentially, they have gone outside the civil service straitjacket and developed what many would think is an impossible combination, namely a group of individuals working within a government department who can spot early stage opportunities, introduce entrepreneurs to the right investors and get things done, no matter what the issues.

Of course, these so-called “dealmakers” are not your ordinary civil servants. Instead, they are a group of experienced serial entrepreneurs with extensive technology and global business know-how who have been recruited because of their empathy with other entrepreneurs looking to set up an international venture.

Through their specialist networks in key technology markets and previous experience of raising capital, they are ideally placed to help those businesses looking to set up their base in the UK as a home for their global headquarters.

Their “hands on” approach means that they essentially act as more than just your average public sector client manager. Instead they work closely alongside entrepreneurs to assist them to fully globalise their business opportunities not only when they launch, but also as the business grows.

As the UKTI broadly boasts, such individuals are the “magic and maverick ingredient in the GEP mix”.

The question is why we don’t have such individuals working within Wales and focusing on programmes that combine the potent mix of entrepreneurship and internationalisation?

There is no doubt that the Welsh economy needs to up its game internationally, especially as we currently only have 2.7 per cent of the total number of exporters in the UK and one of the worst export performances of any region.

However, given the bureaucratic nature of the civil service within Wales, especially within the Department of Economy and Transport where form filling rather than supporting businesses seems to be the norm, it would take an enormous leap of faith by the Minister to change the culture of an organisation that encourages an environment which stifles any innovation or personal initiative.

If WAG was really serious about developing a new approach to economic development, then it should establish a group of “magic” and “maverick” business advisers with experience of entrepreneurial management within the heart of economic development, as the UKTI has done. This would enable private sector experience and expertise to be combined with the ability of Government, when it so wishes, to cut through red tape and open doors to the right people.

Who knows what economic success such individuals could bring to the Welsh economy? Perhaps we would then be creating the next Amazon with its headquarters here in Wales rather than merely being the location of one of its many global distribution centres.

America's Banks are Financially Baked - Crispy and Risky

Financially crispy, and unfortunately risky. That is the blunt truth regarding the US banking industry.

The unfortunate and scary reality of the matter is that out of the nearly 8,000 banks that are FDIC insured almost 830 of them are on the "oh crap" list that is kept by the FDIC.

That is a little more then 1 out of every 10 banks, or more specifically 11%.


By "oh crap" I am implying that they have been flagged by the FDIC as a potential credit risk. This does not mean that they have or will fail, nor does this mean that they are even likely to fail. It just means that they are seen as having an unfavorably high level of risk compared to the typical FDIC insured banking firm. If you are one of those that want nothing to do with finance (you must be lost) please note that "risk" always exist. There is a risk that you will find and lose a suitcase full of money today.

They all will continue to be insured by the FDIC. Your money is safe (besides it's just paper we can print as much as we want, what it is, or will be, worth is the only risk) up to the insured limit.


Bank Failures


Almost 120 banks have failed year to date. 140 banks failed last year. if we stay on this pace then we should have 300 bank failures in two years time by Christmas of 2010.

I just love the holidays don't you?

Another big event or lack of event reported by the FDIC is that there have been zero new FDIC insured banking firms over the last quarter. I am not sure but that may very well be a first.

Loan Origination

Though default rates have eased for the first time since 2006 or something crazy like that, banks are still not lending. The only loans that are really being originated are car loans.

This is no good. I have no more to say on that end.

How about some brighter numbers...

One glimmer of hope is that in terms of profitability, things are headed in the right direction. For instance during the second quarter these 7,800 banking institutions collectively profited by 21.6 billion dollars which is 25 billion dollars better then last years second quarter results.

As of now 80% of banks are profitable.

Back to the bad news...

But then again that means that 1 in 5 banks are operating at a loss.

During the first three months of 2010 total assets held by banking institutions decreased by 135 billion dollars.

The bottom line of all this is in line with the a previous and recent post on this finance blog that discussed the current state of the US economy.

Things are kinda... almost... could be improving. However there is room to worry.

The most bothersome notion from all this is that I, and some other folks who know a thing or two about finance and all that other god awful subject matter, see a very close, and very scary ledge, or rather cliff, running parallel to the narrow road of recovery that are hybrid economy car is traveling.

All we can do is pray that it is not a Toyota.

(I made a funny)

(I like Toyota)

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