Department of Trade and Industry

Government’s Financial Support for Training under Formal Agreements Executive Summary Following a decision taken before the last General Election, the Department of Trade and Industry (DTI) has received some concerns regarding the phased withdrawal of financial support for training under formal agreements, i.e. the wages subsidy provided to a number of employers employing apprentices in a range of trades, principally in construction and engineering. This document is intended to explain how this change fits within the broader set of changes to support the DTI’s Vocational Training Strategy, which is intended to raise key skills in the Isle of Man (IOM) workforce, and was prepared by the Department’s Chief Executive, Chris Corlett. Extensive consultation and local business surveys indicate that raising vocational skills at all levels and in most sectors is the most important issue facing the IOM economy. It is vital that funding for vocational training is increased and more training is made available locally. At the same time, Government finances are more constrained, and so the DTI has endeavoured to use its existing funding to increase support for vocational training where possible. After careful consideration, consultation and transition planning, DTI concluded that the significant funding provided to subsidise trainee wages was no longer required and could be better utilised in new and/or expanded training programmes. This is not a cost saving exercise. DTI has committed that all of the savings made from the removal of the wages subsidy will be used to fund expanded vocational training. The section of the economy voicing concerns about the withdrawal of wages subsidy is a number of smaller employers within the construction sector. To minimise the impact of this change, the DTI has consciously planned a long transition period, whereby the current support of £40 per week is reduced annually by £10 over 4 years. Analysis of earnings for trainees indicates that earnings have been rising at approximately this rate, hence it is anticipated that the rate of growth in earnings during the transitional period will decline and hence the change should not add significant costs to the affected employers. Therefore this change should not prevent employers from taking on apprentices. Analysis also indicates that employees’ primary motivation for becoming apprentices is driven by the potential earnings once they are qualified (which have risen significantly in recent years), hence this change should not deter individuals from becoming apprentices. The DTI is conscious that there is a risk that some small employers may be deterred from taking apprentices during the transition period. Equally, the DTI is conscious of the substantial benefits that have been highlighted by a range of sectors if DTI can help to fund increased vocational training. The Minister for Trade and Industry has decided to have further consultation on this matter and would appreciate further views on this important issue from the local community to ensure the optimum way forward is achieved. Further copies of this consultation paper are available from the Department by e-mailing Jan Bujko at jan.bujko@gov.im or from the Department’s website www.gov.im/dti/training/. Any comment you might wish to make on the Department’s proposals should be submitted by the end of May, and addressed to: Hon David Cretney MHK, Minister for Trade and Industry, Hamilton House, Peel Road, Douglas IM1 5EP Tel 682350, email david.cretney@gov.im

1. Introduction In 2004/05, DTI participated in the Economy 2014 Think-tank, examining the needs of the primary sectors of the IOM economy. This resulted in the report ‘Creating the Can-Do Economy’ (April 2005) which secured widespread support from the private sector, including the Chamber of Commerce. One of its key findings was that there is a vital need to increase the vocational skills of the workforce and that significant investment in vocational funding was required. The Department undertook a comprehensive review of all vocational training in order to:

• Identify opportunities for changing/ceasing existing vocational funding in order to deliver better Value For Money

• Identify future vocational training needs as highlighted in the Can-Do Economy report. An extensive consultation exercise took place between April and June 2005 with over 160 copies of the consultation document being circulated to interested organisations and individuals. Almost 50 written responses were received and the subsequent report included 28 recommendations of which the following excerpts are particularly relevant:

• Vocational training should be regarded as including any training which is geared to developing competence in a given job, trade or occupation, whether or not it leads to a professional or academic qualification. It should also encompass more ‘generic’ skills such as health and safety, customer service and team leader/management skills, as these are regarded as highly important across the different Isle of Man business sectors.

• Each ‘case’ for vocational training funding support should be assessed on its own merits with quality, relevance and value for money driving the decision. Where possible, training will be sourced from an Island supplier, but it is accepted that in some cases, especially in technical or specialist areas, individuals may have to train in, or expertise be sought from, other locations.

• Funding will be directed at those training activities which have direct relevance to the economy and which will make most impact first. DTI will establish Sector Skills Groups to ensure training provision and funding is driven by the future needs of the economy. The Groups will comprise of sector leaders, DTI, the Department of Education and other relevant experts. The Sector Skills Groups will identify the skills and training needs for each key sector, identifying both sector-specific and generic skills training which will take priority for funding support.

• All support for vocational training should, in principle, be based on a model of shared costs, hence it is not anticipated in most sectors that DTI will fund more than 50% of the cost of training and in some instance the level of support will be lower, in relation to the benefits to the economy.

• Funding should be concentrated on the key sectors as identified in the Economy 2014 document, and Sector Skills Groups will play a significant role in determining current and future needs in each sector, taking into account actual and anticipated skills shortages. Some of these needs will be in ‘generic’ skills areas, relevant in most, if not all, sectors.

With regard to changing historic funding, several changes were considered to improve Value For Money:

• The Manx Multimedia Centre provided film sector skills to 8 to 10 individuals a year at a cost of c. £300,000 – yet few were able to gain work in the IOM, hence this offered poor value. Hence the Department took the decision to close it.

• The administration of the old schemes was complex and inefficient. By rationalising them into one new scheme (described below) the Department was able to reduce administration and so free up one officer (1 FTE).

• For certain skills, such as construction, engineering and other apprentices, the Department had historically offered wages subsidy to encourage employers to take on apprentices. The cost of this policy was becoming ever greater, as trainee wages have risen rapidly in recent years while the Department’s budget has not. See Appendix 1. Hence a small number of trainees was consuming an ever greater proportion of the total training budget. It was proposed that by ceasing this subsidy the Department would have significant additional funding to support the range of training needed

• The training needs of the economy have changed significantly but DTI’s support had not changed fast enough to match those changes. A means of working with the private sector and others to forecast future needs proactively needed to be devised.

To address the crucial point of forecasting future needs and ensuring funding is directed to the highest priority areas, the DTI established Sector Skills Groups which include representatives from the private sector and DoE. The five Sector Skills Groups which have been formed – Construction, Financial Services, Engineering, Information & Communication Technology (ICT) and Hospitality/Retail – will play a key role in advising the Department on funding priorities. The DTI consulted widely on the proposed changes and subsequently implemented a simplified vocational training support scheme, summarised below. 2. The Vocational Training Financial Support Scheme The Vocational Training Financial Support Scheme (VTFSS) was introduced by the Department on 1st September 2006. The new Scheme replaced five vocational training schemes which provided support to individuals and/or organisations in connection with vocational training. The training Schemes replaced were:

• Scheme for the Further Training of Craftsmen and Technicians 1989 • Agriculture and Horticulture Craft and Technician Scheme 1990 • Sea Fishing Training Scheme 1990 • Scheme for the Training of Merchant Navy Officers 1990 • Craft and Technician Training Scheme (Manufacturing, Construction and Service Industries)

1995. The nature of these former schemes was that they were very prescriptive, some were specific to particular sectors of the economy, and they no longer provided the flexibility or full range of provisions that we would wish to utilise in support of the current vocational training needs of the economy. The Economy 2014 report, ‘Creating the can-do Economy’, clearly identified the need to maximise the value of the workforce by joint public/private funding of vocational training across all key sectors as one of the key issues facing the Isle of Man economy and possibly the largest. This was reinforced by the subsequent consultative exercise undertaken by the Department on a vocational training strategy. Given the inflexibility, inconsistency and administrative burden of the former training schemes, it was decided that a new, simpler, standard scheme was required which focused on the future needs of the individual, the sector and the economy. Hence the new scheme was developed. The VTFSS is a Scheme that offers financial assistance to organisations or individuals for vocational training, with the specific purpose of raising the skills of the Island’s workforce and in turn, the competitiveness of Manx business. Decisions on financial assistance will be based on an ‘aggregated’ value of the training to the individual, the organisation and the economy.

In the past, the Department has heavily supported industries such as construction and manufacturing. The new Vocational Training Strategy which underpins the VTFSS aims to broaden support into those key sectors and skills within the economy, to ensure that funding is directed where it delivers greatest economic benefit, rather than merely following historical precedent which may be out of date. In order to ensure that funding is directed to priority areas, organisations or individuals applying for financial assistance under this new Scheme will be asked to provide ‘business case’ information so that benefits to the individual, organisation and ultimately the economy, can be established It is not intended, nor anticipated, that specific training activities or particular sectors of the economy will experience a sudden, significant change in training support from the Department following the adoption of the VTFSS. Over a period of time, agreed with specific sectors, however, we will move towards changes of emphasis in training support, but this will be by consultation and discussion. The reductions in historic funding have enabled the Department to invest in areas of high economic need:

• Management skills have been widely identified across all sectors as a key issue, both for employers (for whom there is a shortage of suitably qualified workers) and IOM workers (for whom there was a shortage of training available, resulting in them being denied access to more senior positions). Working with both the Department of Education (DoE) and the private sector (private training company TLC), DTI now provides funding assistance for a range of internationally recognised qualifications ranging from team leader level to manager level to executive level. As a result, over 100 IOM workers have qualifications in the last year

• The basic level of training and skills in the retail and hospitality sectors have been criticised widely. Working with DoE and the Department of Tourism and Leisure (DTL), DTI established the Manx Welcome Programme. This provides training in a range of areas including customer service, health and safety and Manx language and heritage. Over 1200 people have received this training

• Marketing skills are crucial to many sectors to promote their products and services more widely around the world. DTI has worked with DoE to establish a marketing programme which commenced in September 2006 and will result in qualifications recognised by the Chartered Marketing Institute.

Some £300,000 was spent in 2005/06 on these and other Vocational Training Strategy initiatives identified as providing assistance in areas of high economic need across all sectors.

3. The Business Case for Apprenticeships and Traineeships A number of recently published reports have all commented positively on the business case for apprenticeships and traineeships, both in terms of their ‘lifelong’ value to individuals and value for money to employers. The final report of the UK Apprenticeships Task Force in 2005 demonstrated that:

• apprentices improve business performance by making contributions to competitiveness, profitability, productivity and quality;

• the net costs of apprenticeships training are frequently lower than those involved in training non-apprentices and the productivity of apprentices enables employers to recover much of the costs involved;

• apprentices more easily adopt company values, are more likely to remain with the employer than non-apprentices, and become part of a wider pool of talent that can be drawn upon by all employers in the sector;

• seeking to increase the diversity of the apprentice workforce will have significant business benefits, as well as providing clear progression routes from apprenticeship to higher levels in the organisation.

A report in the same year by SEMTA (the sector skills council for engineering and Manufacturing) also identified that business leaders felt that:

• Hiring an apprentice is cheaper than trying to retrain an outside worker • Apprentices also are more loyal, often quicker to take on company values and are more

likely to stay longer with their employer. For example, BAE Systems, Europe's biggest defence contractor, reported that it expected to save up to £1m a year by training apprentices rather than retraining outside workers. BT, the telecommunications group, calculated net savings of more than £1,300 per apprentice per year compared with non- apprentice recruitment. A report commissioned by the UK Department for Education and Skills and prepared by the University of Sheffield was published in February this year and showed that:

• Young people taking part in Government funded apprenticeships will enjoy significantly higher wages over their life time than they would have done without their training;

• The value of an apprenticeship is estimated to be significantly above that of other vocational qualifications;

• For the first time researchers looked at the contribution the apprenticeship programme is making to the economy. Cost benefit analysis suggests a large value being put on apprenticeships in the UK;

• Wage returns to apprenticeships have increased significantly over the last ten years. Although these pieces of research refer specifically to the UK, all of the positive outcomes from apprenticeships and traineeships apply equally to the Isle of Man. It could be argued that, in terms of the effect on economic performance, this type of training has an increased positive effect locally. 4. Training Under Formal Agreement with DTI Financial assistance to employers with trainees under formal agreement was previously funded under the Craft and Technician Training Scheme (Manufacturing, Construction and Service Industries) 1995. The Scheme provided an entitlement for employers to receive support for all direct costs and a percentage of the trainees wage costs. These costs, for an apprentice, included all IOM College costs, all site assessment costs, and an average 20% of wages. These are all being met by Government currently. In 2005/06 the budget of the Department of Education for further and higher education through the College and the International Business School was some £8.7 million. As wages have risen across all sectors, so have trainee wages. Also Minimum Wage legislation has impacted in this area, and the expansion of recognised vocational qualification into information technology and other technician level areas has escalated the level of average trainee wages. It is not unusual to receive application for support for trainees on £20-25,000 per year. In 2005/06, across all sectors, DTI vocational training grants were over £1.6 million. £597,000 of this sum was paid to employers as a subsidy on trainee wages. Within that £597,000, £276,000 (46%) went to construction employers, £192,000 (32%) went to manufacturing employers, with the remaining £129,000 (22%) going to all the other economic sectors in total. This means that

43% of DTI’s training support is not being spent on training, but rather on subsidising wages. Given rises in earnings and the lack of any additional funding to DTI, this means each year a greater proportion of grants is consumed by wages subsidy and a smaller proportion by the actual training costs, reducing DTI’s ability to fund vocational training courses. Appendix 2 illustrates some examples of vocational training spend. As part of DTI’s Vocational Training Strategy, 5 Sector Skills Groups have been established to determine future skills needs. To date, these have concluded that there are key skills gaps in a wide range of sectors which Government, the private sector and individuals must work together to address. While the private sector has expressed that they believe Government should help to fund some of the training costs, little comment has been received that there is an expectation for Government to subsidise wages. Therefore the Department concluded that the money currently spent on wages subsidy would be better spent on helping Isle of Man workers to gain skills and qualifications. This has attracted some negative comments from the private sector, including concerns about attracting new apprentices without the wages subsidy. Analysis has indicated that the principal factor in attracting apprentices is the wages available once qualified, not while an apprentice. This can be illustrated by the fact that DTI receives at least 5 applicants for every apprentice place available due principally to the earnings potential of skilled tradesmen. The UK experience is pertinent. The UK Government ceased providing similar wages subsidies a number of years ago. Also, a UK Government report this year found that trainees added significant value to their employer in excess of their wages, hence there was little basis to some employers’ calls for the UK Government to subsidise wages. The Department was also made aware by Treasury that Council of Minister’s provisional budget allocations for 2007/08 did not allow for any rises for DTI. In recent years DTI has delivered c. £1m in efficiency savings and policy changes from a current budget of c. £10m in order to free up funding for policy priorities and thus deliver better value for money. As a result, there is little scope for further efficiency savings within this small department. If additional funding is not available from Treasury and vocational skills is one of – if not the highest – priority for the Isle of Man economy, then funds will need to be diverted from areas which add less value. Therefore, DTI concluded that based on the needs of the economy the current policy of wages subsidy did not offer best value for money. By re-directing this funding to training for a wide range of key skills, DTI would materially aid the development of the economy while not materially affecting the organisations and individuals currently benefiting from the wages subsidies. The withdrawal of trainees’ wages grants was discussed in some detail with the construction and manufacturing sectors, through the IOM Employers Federation, the IOM Construction Forum, and the Chamber of Commerce. The IOM Employers Federation invited all employers that had trained apprentices during the previous 5 years to a briefing meeting on the 30th January. This meeting, attended by Officers of the DTI and IOM College, outlined the impact of proposals but was very poorly attended. See Appendix 3. The proposals for the withdrawal of wages subsidy were also extensively discussed at Sector Skills Group meetings throughout 2006 . Appendix 4 details 22 meetings at which this subject was discussed. At the meetings of the construction and engineering SSGs in particular, these discussions were extensive and detailed with employer representatives providing ‘feedback’ on industry reaction. In order to avoid a sudden impact on employers in these sectors, it was agreed that the grants would be progressively withdrawn over the next four years. See Appendix 5. Whilst the representatives of these organisations were not pleased to see this one area of support withdrawn, there was a general recognition of the need to become more ‘outcome focussed’ on vocational

training support. The incremental reduction of £10 per week over a four year period is intended to afford employers the opportunity to reflect this change progressively in the level of wages paid to trainees. Following this consultation there has been no significant opposition to our proposals brought to our attention. It should also be noted that, once these proposals are implemented, while DTI will cease to subsidise wages, the relevant trainees’ employers will still benefit from Government funding 100% of the cost of the training, which is double the maximum DTI has specified for all new training support, hence vocational training funding will continue to be skewed toward the apprentice places.

Appendix 1

Examples of Wages for Year Two Apprentices Taken From DTI Records

Trade

1997/98 Annual Wage

2006/07 Annual Wage

PercentageIncrease

Percentage Increase in Real Terms Allowing for Inflation

Electrician £6,522 £11,990 84 54

Bricklayer £5,050 £10,878 115 85

Vehicle Mechanic £4,788 £14,976 213 173

Joiner £6,060 £10,956 81 51

Plumber £7,040 £11,176 59 29

Roofer £6,000 £17,102 185 155

Painter £4,250 £12,714 199 169

Caterer £3,954 £10,500 166 136

Appendix 2

Total DTI Training Expenditure - 2005/06 £1.602 million

Agricul & Horticul. (£34,448)Construction (£563,418)Hair & Beauty (£42,412)I.T. (£35,720)Leisure (£15,827)Manuf. / Eng. (£313,114)Motor Vehicle (£25,781)Retail / Wholesale (£14,497)Service Indust. (£11,431)Sea Fishing (£38,462)Hosp. & Catering (£79,010)Office Technology (£95,031)Other (£32,106)Vocational Training Strategy Initiatives (£300,000)

DTI Vocational Training Expenditure 2005/06 £1.602 miilion

15%

37%29%

19%

External Training Costs (short courses, off-Island training, individual support etc - £239,000

Employer Wages Subsidy (grants to employers w hen trainee aw ay from w ork) - £597,000

Training Allow ances (payment to full-time trainees not in employment) - £466,000

Vocational Training Strategy - £300,000

Main Sectoral Use of External Training Costs 2005/06

£0

£10,000

£20,000

£30,000

£40,000

£50,000

£60,000

Sector

Agricul. & Horticul.CareConstructionE-BusinessEducationHair & BeautyHaulageI.T.

LeisureManuf. / EngineeringMotor VehicleTelecommsRetail / WholesaleService Indust.Sea FishingTravel

Main Sectoral Use of Employer Wages Subsidy 2005/06

£0

£50,000

£100,000

£150,000

£200,000

£250,000

£300,000

Sector

Agricul. & Horticul.

Construction

Hair & Beauty

Manuf. / Engineering

Motor Vehicle

Sea Fishing

Hosp. & Catering

Main Sectoral Use of Training Allowances 2005/06

£0

£50,000

£100,000

£150,000

£200,000

£250,000

£300,000

Sector

Construction

Manuf. / Engineering

Hosp. & Catering

Office Technology

Appendix 3

Appendix 4

Summary of Meetings at Which Changes to Trainee Funding Was Discussed

Date of Meeting Discussed Information Communication Technology Sector Skills Group (SSG)

16 March 2006 Background to Vocational Training Strategy (VTS) and consultation, including examples of shared costs as one of the recommendations.

7 September 2006 Explained new Vocational Training Financial support Scheme (VTFSS) and circulated documents.

Financial Services SSG 30 March 2006 Gave background to VTFSS 13 June 2006 Updated Group on progress

with VTFSS 8 August 2006 Overview of VTFSS given and

documents circulated. Flexibility of the Scheme and changes too funding.

Retail/Hospitality SSG 16 May 2006 Overview of VTS and

consultation process, recommendations mentioned including concept of shared costs. Advised new VTFSS being finalised

16 August 2006 Overview of VTFSS given and documents circulated

Engineering SSG 9 May 2006 General discussion on VTS

and VTFSS and specific role of apprentice training. Details of withdrawal of wages subsidy.

6 July 2006 Update on VTFSS. Role of apprentices and technicians in engineering. DTI Induction Course.

Chamber of Commerce Employment & Training Committee

29 March 2006 Chris Corlett attended and discussed the new VTS and role of SSG’s - the need for more dynamic and modern Strategy

3 May 2006 Update on VTFSS – some sectors had little help historically from DTI

6 September 2006 Update on VTS work.

Hospitality Forum 17 January 2006 Update on VTS work and changing role of DTI – geared towards procurement and training strategy

11 July 2006 Update on new VTFSS and changes in funding.

Construction Forum

26 June 2005

Chris Corlett addressed the Forum regarding a strategic review and the VTS. Changes to funding discussed.

24 March 2006 Update on VTSS and changes to wages subsidy.

26 May 2006 Discussion re funding of training including apprentices.

22 September 2006 IOM College presentation including changes to on-site assessment and withdrawal of apprentice wages.

IOM Employers Federation

26th May 2006 Discussed VTFSS and impact on apprentices.

7th September 2006 Review of feedback to IOMEF from members on financial changes in VTFSS and removal of wages subsidy.

10th October 2006 Discussed limited adverse comment on removal of wages subsidy. IOMEF supporting DTI changes.

30th January 2007 DTI/IOM College/IOMEF briefing to construction industry.

Appendix 5

Proposed Phased withdrawal of Weekly Wages Grant

Commencement Year

Study Year 2006/07 2007/08 2008/09 2009/2010

Year 1 £40 £30 £20 £10

Year 2 £30 £20 £10

Year 3 £20 £10