Allow market forces to redress regulatory failure - A budget for IT enabled recovery Part 2

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There has been a chorus of complaints that the government does not have an industry strategy - as though this were to be deplored. I happen to be a Historian by original discipline and wanted to do research into the causes of growth, comparing economic theory with reality. My tutor, Maurice Cowling, set about dissuading me. He said I would find the answers in the real world and come back to Cambridge when I had found them. The attitudes of those who were happy to offer me immediate post-graduate places persuaded me he was correct.

I was then lucky enough to have three challenging years of systems engineering "apprenticeship" with STC and ICL followed by two years at the London Business School and the opportunity to lead the most successful of the industry strategy exercises that was the legacy of Tony Benn's Ministry of Technology. Later I had five years as Corporate Planner for a UK-owned multi-national, including helping organise inputs to the "industrial strategies" of nations around the world. Comparing their approaches to that of the UK did indeed lead me to some firm conclusions.

The most important is that British industry nearly always does best when Whitehall does least. "Planning" is all-too-often a euphemism for protecting the past from the future. An "industry strategy" is a euphemism for giving jobs to economics graduates not wanted by the private sector as investment analysts or corporate planners assisted by consultants touting for future business and lobbyists seeking grants to position their employers. The failure of UK government attempts to pick winners (over the past century !!!) gives no confidence that the Coalition Government can do any better. Even when ministers and officials pick the right race course they choose the wrong horses, train them the wrong way and enter them in the wrong races.

In 1978 - 9, I was part of the policy team (reporting via Ian Lloyd to Sir Keith Joseph) that looked to IT and Communications as the drivers of UK economic recovery. We called for Telecoms Liberalisation and Privatisation, a major government supported awareness campaign (it became IT 82) and a Micro in every school by 1982. I then watched as DTI turned low-cost success into expensive failure, draining enthusiasm with "challenge programmes" and initiatives while hobbling indigenous growth with:

- "investment protection" regulation that routed funding via remote pension funds and trusts while excluding the hands-on "angels" and informed local investors who are at the heart US success,

- "tax avoidance" measures which make growth companies pay tax before they have positive cash flows and reinvestment for growth, let alone to give a return to equity investors

- government procurement routines which actively discriminate against innovative new UK businesses in favour of overseas competitors which can quote their own governments as lead customers.  

Then came the Labour Government destruction of the enthusiasm inspired by the Micros in Schools programme, with mandated teaching on how to use an imported suite of proprietary office software. Finally, DTI and Ofcom set about reversing the Conservative policy of liberalisation leading to an open and competitive market. They may not have talked about reversing privatisation but, unless Ministers take action soon, current BDUK policy will re-create a BT-led cartel akin to that of AT&T and the baby Bells which the OFTEL regime was designed to avoid. 

The time has come to look back at what has worked in the past, (as well as what has never previously worked and is unlikely to do so this time round) and allow market forces to redress the failures of planning and regulation.

The four areas where I would most like to see a commitment to action in the Budget in order to help bring about a market driven, investment led economic recovery without calling for spend that HMG cannot afford are: 

1)     BIS to be tasked to look at replacing all technology subsidy and "challenge" programmes by "smart procurements": akin to the Victorian Admiralty and Royal Mail contracts which pulled through the development of fast reliable steam engines and ships and the telegraph system.

The consequent procurement exercises might include dual-supplier (at least) contracts for high reliability, sustainable, 24 by 7 power supplies for the data centres that will underpin the G-Cloud and also for the ubiquitous broadband (both fibre and mobile) networks (and ancillary services) that will be needed to provide secure local and national access to the services running on them: including from local authority staff on the move, from those working from community centres, post offices, doctors surgeries and care homes and, of course, from those who are able to look after their own affairs.

Net cost to taxpayers: zero - it is a redeployment of existing funds. e.g. from subsidies for windmills to contracts for mixed sources (e.g. recycling, tide-power and pumped storage) or from BDUK deficit funding to PSN delivery contracts.

2)     100% Capital allowances for investment in communications and energy infrastructures that are fit for the 21st century: upgradeable and sustainable in line with international inter-operability standards. These need to be linked to a streamlining of regulation that will allow current and would-be customers (business and domestic) to invest direct in return for discounts on future services

100% allowances were used successfully by Geoffrey Howe to help restart the economy when he was Chancellor. They were then killed off for fear of abuse - thus crippling the attempt to use indigenous private sector investment to fund the cable franchises the UK.

An exercise in 2001 indicated that the net cost to Treasury of using `100% allowances to fund broadband roll-out would be zero (i.e. any temporary lowering of taxes was more than covered by the taxable revenues generated in the course of construction) provided the work in done by UK companies, UK labour, mainly using equipment manufactured in the UK.

Confining the allowances to Victorian style co-partnerships, like the Metropolitan Gas Light and Coke and the others which built and operated most of our utilities infrastructures in the days before nationalisation, may provide an elegant way of achieving such ring-fencing, especially if the co-partnerships also had Victorian style links to municipal enterprise and local skills and employment objectives. It would be good if the conditions for the allowances could be used to also link the Communications (fixed and mobile broadband), Network Resilience and Green Agendas.

Massive sums are quoted for new smart metering, smart grid and fibre networks as our fixed and mobile communications and other utility networks come under increasing pressure but 80% of the cost is for physical infrastructure that could be shared. The current BDUK targets for 2015 are modest compared to what could be achieved if currently agreed public funding and that available from industry were joined up, regulatory and planning obstacles removed and 4G spectrum made available at the same time as the rest of Europe. We need to look at what can and should be shared, what cannot and the obstacles to drawing in funding from those investing overseas rather than in the UK. But this is almost certainly better driven by Market Forces than by officials in Whitehall and those they contract to advise them.

3)     Tax free training: those following professionally accredited programmes (including those to  maintain and update the skills of those already in the workforce) and/or covered by apprenticeship and other contracts for supervised and structure work experience, to be taxed in the same way as students (i.e. not liable to tax on scholarships, grants, subsidised loans etc.). Those paying for their own training, whether full or part time, to be similarly able to offset the full cost against income tax.

The UK is unique in not allowing all spend on acquiring new skills to be offset against tax. I summarised the consequences in section 3 of the 1996 IT Skills Trends Report. Section 8.5 of the report was written to address questions raised by the then Shadow Chancellor on how to implement tax incentives without a net cost to Treasury. That policy was firmly opposed by Education officials who subsequently sabotaged attempts to pilot the approach.


The legal position with regard to the enforceability of training contracts was summarised in the Judgement in Strathclyde Regional Council  v. Neil (1984) the only Google reference does not do justice to a surprisingly clear, but also comprehensive, judgement. The reasons for not publicising the law appear to do with ideological opposition to the idea of enforceable apprentice contracts, including because these may place obligations on the training provider as well as on the employer and employee. The current situation with UK contractors unable to fully offset their skills updating costs against tax (IR35), while being undercut by imported contractors who can, is also doubly disastrous.

 Net cost to taxpayers:  zero, even in the short term - unless the rise in claims from those UK trainees who are already going off-shore to acquire the skills of the future is greater than the rise in taxable revenues from an expended UK training industry. 

 4)     A cross-cutting programme to rationalise the regulatory complexity and compliance overheads that are driving on-line businesses off-shore, with a rolling programme to merge regulators with overlapping and conflicting responsibilities.

 Organisations face conflicting requirements to keep information confidential, (deleting it when no longer required for the original purpose) and to retain it, in case a regulatory or law enforcement agency might want it. The sharing of information is mandated or forbidden according to circumstances that require judgements on which few can agree, and where the consequences of a wrong decision by an over-worked and under-trained junior member of staff can lead to personal tragedy or corporate bankruptcy.

 I am told that there is an estimate, (whose source and provenance I have been unable to establish), that the muddle costs over 2% of EU GDP - including because of the way it encourages on-line transactions to be routed via the USA (with the players concerned taking up to 70% of revenue, let alone profit, in areas such as on-line advertising and publishing). Whether or not that is accurate, we need urgently need regulatory regimes that attract and foster reputable, wealth-creating and tax-paying businesses to base operations in the UK, by supporting and encourage good practice, including secure interoperability with trusted partners in other parts of the world under different legislative and regulatory regimes.

 Net cost to taxpayers: zero - indeed we should see a rise in taxable revenues as players move operations from the US and Ireland to the UK instead of threatening to move what is still here to Zurich or Hong Kong.  

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About this Entry

This page contains a single entry by Philip Virgo published on March 11, 2012 10:51 AM.

Stop the bleeding - think BIG, but start small and build on success. was the previous entry in this blog.

A genuinely transformative budget measure: hands-on ministerial acceptance tests is the next entry in this blog.

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