This is the sixth in a series of essays co-ordinated by the IWA Economy Policy group on the foundational economy and its value to Wales.
In the words of Colonel John “Hannibal” Smith (the main guy off the A Team) “I love it when a plan comes together”. That’s how I feel about the whole debate around the foundational economy. At least in part anyway.
When myself and other co-conspirators at FSB Wales met with Prof Karel Williams for the first time in 2014 to sketch out a programme of research, we had no idea it would find its way into the heart of Welsh Government’s economic strategy.
It was after all an era when sexy sectors such as life sciences and advanced manufacturing were in vogue, when grants to large firms came back with a vengeance and infrastructure plans were best made out of concrete on the Gwent levels.
At even the most optimistic of moments, challenging this orthodoxy felt like a Sisyphean task.
What Wales Could Be
But as a campaigning organisation representing 10,000 SMEs across Wales in every sector and in every town and city, we felt it was a challenge worth making.
The problem was this. Whenever a government minister sat down to commit fingers to keyboard and pen a new economic strategy, the language instantly turned to the parts of the economy that glittered most. Techniums, enterprise zones, anchor companies, life sciences hubs, GDP, GVA … the list goes on.
This was not a particularly new phenomenon. For instance, in 1997 the WDA claimed:
“Attracting over £7 billion of investment through Investors in Wales, the WDA’s inward investment success comprises many of the world’s leading companies including the recently secured, largest inward investment project ever undertaken – the LG investment of £1.7 billion.”
Nor was it even a particularly Welsh problem as countless economic strategies from governments around the world show. But it inadvertently talked out a large chunk of the economy because it wasn’t fashionable politically. Nid aur yw popeth melyn as the old Welsh saying goes. Not all that glitters is gold.
This, we felt, was wrong. Not only because it ignored a large number of businesses doing interesting and socially useful things but also because it turned out lots of people cared deeply about their local GP practice, the nursery they send their children to or the fact that water comes out of their taps when they turn them on.
So in What Wales Could Be we made the case for the foundational economy as part of the economic conversation. By doing so, we hoped to bring what mattered to people in areas traditionally confined to social policy into a discourse around the future of Wales’ economy.
The hope here was not to detract from the other areas of the economy – important things are happening and will continue to happen there – but rather to broaden the flashlight lens to illuminate the entire metaphorical elephant.
After much concerted campaigning by a number of organisations and crucially a core group of Assembly Members across all parties, Ken Skates became the first Cabinet Secretary for the Economy in Welsh, and probably world, history to publish an economic strategy that took into account the foundational economy.
Whatever else is said about devolution, in this instance we can’t ignore how responsive and in many ways radical the Welsh Government and National Assembly can be in delivering new ideas into Welsh public policy. It’s not perfect, but certainly from an FSB Wales perspective, it does count.
Going forward, there’s a need to ensure those AMs continue to scrutinise Welsh Government’s ambitions in this area and help transform the debate into practical policy action.
Economic Action Plan
So the Economic Action Plan has brought the foundational economy into the narrative. However it does so imperfectly. The foundational economy becomes foundation sectors. This is important in many ways.
Firstly, in picking ‘sectors’ there’s enough continuity in the language to allow those involved in sectors previously within the civil service to maintain that frame of reference. But a big question remains about whether simply putting a boundary around a new sector is the same as the radical shift in thinking we envisaged. For instance, is the foundational sector in retail about creating a forum for dialogue with multi-national supermarkets, or is it about securing a better deal for their local suppliers?
Furthermore, the use of foundation instead of foundational seems like semantics but does hint at a broader misunderstanding of the term. In my conversations with policy makers, I often hear about the foundational economy as some sort of policy ghetto for SMEs, an afterthought for when the grant money has been palmed off to the ‘glitterati’.
As fellow contributor to this series Rhys ap Gwilym points out, the foundational economy has been subject to definitional issues as it has made its transition from a paper hatched by CRESC and FSB Wales towards the everyday language of Welsh public policy.
What’s crucial now, is that the action plan currently being created to support each sector produces genuinely different policy prescriptions aimed at building grounded local firms that are able to deliver the sorts of foundational services that people want.
Moreover, if we are to genuinely break with past economic policies, it’s vital that the new action plan is transparent and co-produced and that the budgets are clearly articulated by Welsh Government when it sets out its annual tax and spending plans in the future.
Turning narrative into action
I mentioned at the start of the essay that I was in part happy with the progress of the debate to-date. The reason for this is that while we have succeeded in getting the narrative adopted, we’re yet to turn that narrative into action. We’ve now got to be prescriptive as well as descriptive.
The big challenge then, is how do we take what up until now has been a largely academic exercise and turn it into meaningful action. My contention is that the first step on this process has to be in making it relatable to the hypothetical woman or man on the street.
In order to succeed in this, we have to realise that foundational thinking cannot be about top-down policy interventions, benevolently finding their way into your living rooms from the catacombs of Cathays Park. Instead, we need to flip this paradigm on its head.
So we could start by simply asking people what it is that matters most to them in the foundational economy. Crucially, this needs to be a three-way conversation. It needs to include those using foundational goods and services, the organisations providing them both large and small and the state actors that underpin their success. We also need to develop greater identification with business that they are in a foundational sector, to the point where it’s something to be proud of and not just something that’s ‘mundane’.
The case of childcare
My hunch is that for many of these sectors the policy interventions may not be novel or particularly glamorous but will be no less important. For instance, Welsh Government recently carried out a review of the childcare sector in Wales with a view to making its new childcare offer a success. I doubt that this sort of report is at the front of policy makers’ minds in the economy department at Welsh Government but its consequences are profound if we’re serious about improving the foundational economy.
It found that 25 per cent of childcare providers expected to operate at a loss, with that figure rising to 35 per cent in your conventional ‘mom and pop’ nursery setting. In 2016-17 average profits for nurseries was £10,360 with the median actually much lower at £2,820. In most local family businesses of these types, any profit is used to pay the wage of the owner-manager and doesn’t flow to anonymous shareholders as conventional ‘business’ interpretations would have you believe.
The review concluded that:
“The low profit margins under which most providers operate render them vulnerable to abrupt changes to regulation and funding – and hence it is critical that policy changes are designed and implemented carefully so as not to affect the sector’s long-term sustainability.”
When you ask childcare providers what causes this unsustainability (as the Welsh Government review did) the answers that come back are not likely to be popular with policy makers. First, rising employment costs through increases to the minimum wage and auto-enrolment in pensions, as well as high business rates costs that can’t be avoided because of regulation in the sector, have essentially turned low margin operations into no margin operations.
Second, changes to the amount government is willing to pay towards the childcare offer has a huge impact on profitability. Broadening the scope of the offer at the expense of cost per placement cannot work. Just like in procurement, there is a question about cost versus value here.
And finally, as has been mentioned previously, the foundational economy matters in every community in Wales. For childcare, local wages and employment has a direct bearing on how much parents are willing or able to pay or whether they need childcare at all, which again impacts on profitability.
The sustainability of the childcare sector should be the perfect embodiment of the rationale for legislating into being the Wellbeing of Future Generations Act. It highlights the wicked problem of wanting to expand a foundational service, whilst improving working conditions, progression and wages without costing the government or individual parents too much money. Government alone cannot resolve this and foundational thinking would dictate you start with the actors at the bottom and work up from there. Moreover, the quality of our childcare today has a very real impact on our children’s future, making this a trade off not just on cost or quality but also on people’s life chances.
A question of ownership?
It’s important to note here that while my example above relates to SMEs, the same pressures can easily be brought to bear on social enterprises or the third sector, as has been aptly pointed out by both Sarah Lloyd-Jones and Tamsin Stirling in their contributions to this series.
In many ways, size is a more important issue than ownership. As Prof Karel Williams et al point out in their most recent book Foundational Economy: the infrastructure of everyday life, what really matters is the interaction between ownership and business model and whether this interaction contributes to the sort of foundational economy people want and need. So one action we could take is to use support services like Business Wales to help foundational firms to develop sustainable business models.
It’s clear that as size increases, the amount a provider (be they social enterprise or private sector) is grounded in their local economy decreases. This is particularly true when providers are very large and subject to expectations around excessive returns to shareholders. In that instance, the easiest way to extract returns is to push down wages, push up prices or put pressure on the margins of local suppliers.
In this context, the notion of ‘business friendly’ policy becomes contestable and Welsh Government cannot be blind to the types of firms it wants to work with. To return to the retail sector, if the Welsh Government’s action plan in this particular area is silent on, for instance, the purchasing practices of the supermarket chains, then it would have missed an opportunity to truly think in foundational terms.
Likewise, the recent implosion of Carillion has shown how placing large swathes of public policy into the hands of a small number of too-big-to-fail companies at the expense of economic diversity can end in tears.
To some extent, Welsh Government is stepping slowly towards this with the idea of the Economic Contract. However, as we’ve argued at FSB Wales in the past, the contract needs to be far more than job numbers and corporate social responsibility. It needs to be more explicit in its expectations around developing the capacity and potential of grounded firms in the supply chain, particularly in foundational sectors.
No Silver Bullet
The biggest danger in all of this is succumbing to the usual Welsh mentality of searching for a silver bullet. There is no miraculous fix to Wales’ economic challenges. The foundational economy allows us to redefine these challenges and empowers us to think in new ways, but it alone cannot be the only solution to all our problems.
In this context, what does success look like? That is incredibly hard to say at this point in time. But what’s clear, is that we now need to embark on a journey of policy experimentation, to challenge our conventional ways of thinking and most importantly to build alliances across sectors and backgrounds to deliver practical solutions.
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