No Growth and Bad Procurement Bids

The UK government spends more on furniture than green technology. If the country is to grow, and if UK companies are to win future procurement bids for greener products, the UK economy must start to spend and send the right signals to business. Until then, the procurement issue is just an isolated drop in the ocean. And another reason for hypocritical requests for ‘protection’ by the state by the same companies that usually call for it to be withdrawn. It is the most innovative companies and nations that are growing, and not living in fear of EU procurement rules.

Today (26 July) we are told that the UK economy has grown only .2% in the second quarter. Earlier this month Siemens, a German company, won the UK government’s Thames-Link procurement contract. Winning over Bombardier, a Canadian company operating in Derby, which will be forced to cut its workforce by 50% to 1,500.

This is obviously a huge loss. A failure, for UK workers. But whose failure?

We have been hearing that the UK government made a mistake, and that it should have chosen Bombardier in order to protect UK workers. But given EU procurement rules which require European countries to choose the bids that are best on price-quality grounds, is it so surprising that Siemens, a company that has won many awards for its green technologies and based in a country that has one of the most activist and dynamic industrial policy, has won the £3billion Thames-Link procurement contract to build modern, faster and greener trains? Siemens have probably won based on their more innovative technology, which promises to provide better quality for money, notwithstanding the fact that German labour is more expensive than UK labour.

Geography matters since proximity to high skilled productive workers is very important, as is proximity to good science. This is similar to the reason that Pfizer recently left Kent, UK and went to Boston, USA not exactly a low wage haven. Pfizer went to Boston due to the better science-industry links, and the proximity to the US publicly funded National Institute of Health (NIH) laboratories which have been lavishly funded and responsible for producing most of pharma’s research that has resulted in actual new molecular entities rather than variations of existing drugs (most of what pharma does).

Bombardier after all is a Canadian company. But we are not judging Canadian industrial policy for failing to get the contract. Unions, politicians and journalists should not be blaming the UK government for choosing Siemens. It was based on good economics. The blame, if any, should be cast on the previous and current UK governments and UK business for not producing the type of Green investments that Germany has made, both public and private, during the last decade which allows its companies, like Siemens, to be some of the greenest ever. The UK is living under the dream that everything can be done through the private sector, with a simple nudge from the state to get it moving. The green investment bank is one such dream.

Germany itself is an award winning innovation nation—often ahead of the game when it comes to new technologies. It, like China, Korea and Japan, understands that spending on green technology today, when the technology is still in the early highly uncertain stage, is of course risky but will allow it to be one of the ‘first’ in the green technology race. And being first matters.

Germany, a nation similar to the UK in many ways, has been forced to institute its own austerity budget as a result of the banking crisis. Overall federal expenditure is being cut from €319.5bn last year to €307.4bn this year, yet funding at the Ministry of Education and Research is rising by 7.2%, which includes €327m for university research excellence, and support for research and development (R&D) at the Federal Economics Ministry is also increasing. This is congruent with Chancellor Angela Merkel’s past argument that “the prosperity of a country such as Germany, with its scarce mineral resources, must be sought through investment in research, education and science, and this to a disproportionate degree”.

The table below illustrates that after the crisis Germany has spent more not less on R&D, precisely as part of their recovery strategy. And the confidence this has given to business is currently reflected in their high (compared to the rest of Europe) growth rate. Today’s low growth rate for the UK economy, a mere .2%, is a direct reflection of its growth through cuts rather than grow through spending (on green and other high growth areas) philosophy.

With projections rising significantly into 2014:

Source for both figures: Delivering Europe 2020, German Ministry of Research data

The UK instead believes that winning the globalisation game can be done via ad-hoc policies. Procurement needs to be part of a more systematic approach to industrial policy. It is not about protectionism but about having a system that opens up new opportunities, brokers the interaction between public and private agents, and facilitates commercialisation. This is not just about R&D, though the R&D spend is a strong message about the course of a nation’s post-crisis strategy.

But most importantly, if it wants to compete with countries like the US, the UK needs more state not less. In my Entrepreneurial State pamphlet, released by DEMOS on 11 July 2011, I argued that Silicon Valley was a result of an activist, albeit decentralised, state, engaging through various agencies (DARPA, SBIR, NIH, NSF, etc) in the most risky technology, with no dream that the private sector could be simply nudged. From pharma, to computers to the internet to today’s nanotech, the US state is making large investments in early stage high risk technologies, and engaging actively with commercialisation though its public investments in new early stage firms and contracts for small firms.

In the US, Government funding for early stage technology firms is equal to the total investments of ‘business angels’ and about two to eight times the amount invested by private venture capital. And the most important part of the story is that SBIR and most public funds is on early stage very high risk finance, virtually ignored by private venture capital. Some of the most innovative American companies received early stage finance from SBIR, including Apple Computer, Chiron, Compaq and Intel. This is not the case in the UK, and it is this which should be attacked not the fact that government then chooses the most innovative companies in its procurement.

So, the UK government should be blamed, not for choosing Siemens’ greener trains, but for not having the industrial policy that is currently guiding Germany into high growth territory, and driving the UK downhill—as evidenced by today’s dismal growth figures, and even more dismal projections in the future. A green oriented Plan B is screaming out.