The price of uncertainty

By John Denham MP

Over the past few months Ed Miliband has set out the immediate challenges facing our country. A squeezed middle that feel the rewards of hard work and paying taxes are too little. Securing the British promise that we can offer our children a better country than we had by being able to pay our way in the world. And a sense that strong communities, social institutions and common bonds are being eroded.

Our election demands credible responses to those challenges; and that means an economy the looks and feels very different to todays. Stronger in more sectors. Globally competitive to pay our way in the world; offering fair rewards and creating shared prosperity; underpinning not undermining a strong society.

What we are seeing across all sectors is the result of a badly managed retreat from government industrial activism. While the Conservative-Liberal notion is that support for market-led growth means that the ideal state is one in which government does as little as possible, in truth, markets are inevitably and unavoidably shaped by what governments do, and by what government doesn’t do. The Tory-led government is providing a master class in deterring investment through uncertainty.

It may be obvious that confidence and certainty attract investment. Uncertainty about public policy; confusion about what Britain’s economy will look like in the future; fear that policy will change arbitrarily and unpredictably: all these deter investment or make it more expensive. Countries with clear public policy, clear economic goals, and reliable policy are attractive places to invest. So investment is either more expensive here; or goes elsewhere.

The decision not to award the Thameslink contract to Bombardier in Derby is a huge blow to the UK rail industry. The government let it happen. We must make this a turning point in industrial policy. No longer should good jobs and skills be lost because our government doesn’t have the procurement policies, the industrial policies or the leadership to enable UK companies win orders in fair competition.

One area in which uncertainty has thrown the sector into disarray is green technology. To encourage investment in new low carbon electricity generation requires policy certainty. Labour encouraged investment, helping energy intensive industries towards a lower carbon future. In 2009 the UK was ranked 5th globally in low-carbon technology investment and development. Since the election, we have slipped to 13th. The Pew Environment Group ranking blamed the fall on ‘a sharp decline in offshore wind energy investments and uncertainty surrounding [government] policy’.

From January 2009 to December 2010, employment in the Solar PV industry rose from 3,000 to 10,000. This was expected to grow to 30,000 during 2012, establishing a solid innovative base for the development of a world-class green research and development industry.

But the review published in February this year effectively decimated the PV market. The Tory-led government first cut the money available then dramatically changed the policy to make solar photo-voltaic installations generating above 50kW largely unviable. The Renewable Energy Association described this as a ‘horrendous strategic mistake.’ Now investors are backing off. Senior lenders – West LB, RBS, the Cooperative Bank, Rabobank – are now unwilling to lend capital to UK solar power projects.

Triplepoint has shelved its interest in solar projects, including its planned £100m Solar Income Fund until there is ‘greater clarity’ over policy. The transition to a low carbon economy will be central to any vision of Britain’s future; sustainability and jobs at home; environmental justice abroad; paying our way in the world. Instead, the Tory-led government has made it an object lesson in investment deterrence.
As we go forward with our business and enterprise policy review, one thing is abundantly clear. There will have to be fundamental changes to the way government works – the current Whitehall machinery is not fit for purpose in a modern economy. The government machine makes little effort even to understand the costs of uncertainty in public policy. It has too little understanding of the business implications of its decision making. It can be too slow to decide. Too wedded to dogma. Too weak to ensure that ministers understand the implications of decisions they are about to take.

While better policy is important to the policy review, no less important is a long, hard look – with business – at how government can be redesigned to meet the needs of business.

We were not immune from the sudden politically determined policy change, or the political but investment deterring delay in decision making. This will have to change. We must put creating a climate for confident investment at the heart of government decision making, making the best use of the tools we have to offer a secure and long term investment environment. We must set out a vision of the future economy that fulfils the British promise that the next generation should enjoy better lives because we can pay our way in the world.

It’s making the vision a reality which can renew the British promise. If the Tory coalition won’t deliver that vision, then we must.