Chamber and committees

Response from Highlands and Islands Enterprise

Pre-Budget 2022-23 Scrutiny: Covid-19 Financial - 16 August 2021

Thank you for your letter of the 28 June regarding the Committee’s scrutiny of the draft budget 2022-23. Please find below an update from Highlands and Islands Enterprise (HIE) in response to the Committee’s questions.

1. How has the pandemic impacted the activities Highlands and Islands Enterprise deliver?

From March 2020, we witnessed the some of the most challenging trading conditions our region has encountered for decades with the impact from the pandemic resulting in an unprecedented economic shock. Whilst the macroeconomic picture is largely improving, the extent of the hit and duration of recovery varies greatly between different sectors and regions. GDP contractions were greatest in accommodation and food services, arts, culture and recreation, and transport and storage, sectors which are all disproportionally represented in the Highlands and Islands, accounting for 20.6% of employment in the region, compared to just 15.1% in Scotland [Business Register and Employment Survey, 2019]. Unemployment in the region in June 2021 remained 77% higher than in the same month in 2019, compared to a 67% increase in Scotland overall with large disparities in the increase across the region, with some tourism hotspots in more rural areas (such as parts of Skye, Ullapool and Mull and Islay) experiencing increases greater than 200% over the two years. Economic inactivity also increased at a faster rate in the Highlands and Islands than in Scotland, and the region is more dependent on industries which typically rely on EU migration, such as food and drink and tourism.

The HIE Business Panels undertaken over the past year indicated that businesses in the region put longer-term planning and investment on hold, market access became more problematic, particularly following the end of the EU exit transition period, while increased domestic competition started to impact on smaller, less responsive businesses.

HIE as an organisation

Since March 2020, staff have been working from home and have demonstrated the ability to adapt to remote flexible working and ensure a level of business continuity delivering our priorities as effectively as possible. The requirement to work from home impacted on the timetable for producing and auditing our Annual Report and Accounts for 2019/20. Given that requirement has continued for both HIE and our auditors (Audit Scotland), unfortunately this means that our accounts for 2020/21 will not have been laid in parliament by the time the committee holds its pre-budget scrutiny session. I apologise for any impact this may have on the Committee’s work for 2021. We anticipate having the accounts laid in parliament early in October. 

The “enforced pilot” of remote working has worked well and the majority of staff have welcomed greater flexibility in both how and from where they work, and it has informed our approach for future ways of working and in preparing for a reintroduction to office-based working and the development of an agreed hybrid working model. The current focus of HIE’s organisational change agenda includes: staff communication and engagement, identification of skills gaps, re-alignment of resources, addressing priority development needs, line management support and development, health and wellbeing, and succession planning. The successful introduction of a team of Mental Health First Aiders across the organisation is part of our approach to support the wellbeing of our staff.

The positive outcomes from new approaches including creativity, joint working and increased engagement and inclusion will be built on for the future along with the need to further invest in data and analytics and the digital environment to support both clients and staff more effectively. Over the past few months, we have placed a greater emphasis on digital tools and channels; iterated our Operating Plan as appropriate to the changing economic context; undertaken specific research and intelligence gathering; and provided regular updates to the HIE Board and our Risk and Assurance Committee, including a COVID-19 specific risk register.

HIE’s delivery of services

HIE has focused on delivering two broad work streams - resilience and recovery. The former involved directing substantial funding to sectors and communities disproportionately affected by the pandemic and the exit from the EU. In parallel we have continued to focus on planning and funding strategic investments identified as key regional opportunities such as those to support our transition to Net Zero with investments in renewable energy, and prioritising R&D and innovation across the region, maintaining the balance between ongoing strategic priorities and more reactive measures to the pandemic.

The acceleration of our digital delivery has been fundamental, including collaborations as part of the multi-agency Business Support Partnership and especially the joint development of the shared entry portal (www.findbusinesssupport.gov.scot) providing the initial route for advice, information and funding for businesses and other customers.

During 2020/21 HIE:

• Invested £97.6m in projects with achievements illustrating the strong emphasis on sustaining employment with 1,865 FTEs supported (of which 66% were retained and 34% created) with the majority of these in the most impacted sectors referred to previously.
• Delivered webinars on topics including digital, innovation, tourism, and energy to over 3,300 participants with a further 7,000 participating directly in the 35 seminars delivered through the XpoNorth conference to support the creative industries sector.
• Invested £8.9m in 338 approvals for 237 clients in fragile areas.
• Supported a wider range of both clients and types of projects during the year in response to the pandemic and in recognition of the need to support more fragile areas.
• Supported businesses and social enterprises with innovation to adapt to changing environment and opportunities.
• Increased partnership participation and collaboration through thematic /sectoral groups e.g. the Scottish Tourism Emergency Response Group and the Scottish Food Sector Resilience Group, local and regional fora, and with our enterprise and skills agency partners.
• Invested in communities and social enterprises to respond to local challenges e.g. infrastructure improvements in community tourism facilities such camper van hook-ups and waste disposal facilities; crofting resilience; community leadership in tourism; and rural food and drink pilots to mitigate loss of export markets through the pandemic.
• Maintained our conditionality policy whereby employment creating projects receiving £0.1m or more should meet our Fair Work criteria.

2. What additional activities are Highlands and Islands Enterprise now delivering to:

a) to provide Covid-19 related support to businesses; Whilst the focus is now turning more to Restart and Recovery, during 2021/22 HIE is currently:

• Continuing to provide signposting, advice and information via our digital channels and working collaboratively via the Business Support Partnership on the promotion of the Shared Entry Point and the role of the EFRS
• Continuing to broaden our interactions with businesses and support digital innovation.
• Expanding our graduate placement programme particularly targeting businesses in identified pilot areas with the most significant demographic challenges in Scotland.*
• Supporting tourism businesses to develop Fair Work practices.*
• Providing access to flexible, highly experienced and knowledgeable financial consultancy to support recovery and resilience in targeted enterprises. *
• Developing a regional food groups conference and small grant support scheme to support rural SMEs to recover from the pandemic and take advantage of new opportunities.*
• Establishing a settlement officer pilot in partnership with Highland Council and Comhairle nan Eilean Siar to support newcomers and link with local employers to aid their recruitment and growth ambitions.*
• Developing a programme to deliver £0.685m of revenue funding to community organisations to deliver services to aid recovery in targeted communities.

*These are being delivered through additional revenue funding of £3.0m (Covid Consequentials) from the Scottish Government.

b) support the economic recovery?

Our Operating Plan for 2021/22 - “Action for Jobs and Communities” - is focussed on the transition from safeguarding and resilience to supporting the economic recovery and sets out in detail the actions we will take and how we are monitoring our progress. Our focus is on three key areas:

• Jobs – helping businesses and community organisations retain and create jobs in the economy through advice, information, innovation and investment
• Net Zero Transition and Green Recovery – promoting and supporting business growth and community opportunities from Net Zero, create new green-jobs; supporting community organisations to consider and develop opportunities to decarbonise and from income generating opportunities arising from natural capital, such as peatlands, woodlands or seaweed.
• Population and Place – we will prioritise those areas that have the greatest challenges including those with more severe demographic challenges or whether there are particular opportunities that require place-based approaches e.g. within the Blue Economy.

A cross-cutting theme is Fair Work – promoting and prioritising projects that meet the key principles and planning to extend our conditionality.

The actions in the Operating Plan provide detail of programmes and activities being undertaken/ planned. Examples include:

• the delivery of the green jobs fund of £1.2m this financial year (of a total programme value over 4 years of £6.4m) across the region. The focus is on projects that create new jobs (not retain) and produce goods or provide services that benefit the environment or conserve natural resources; and/or involve making organisational production processes more environmentally friendly.
• Supporting tourism businesses to transition and invest in net zero ambitions via a new £1.25m Net Zero Tourism Fund.
• Support strategic opportunities in the Energy Transition and address barriers to deployment and lead a strategic approach to infrastructure investment to secure integrated manufacturing and build out of offshore renewables within the Highlands and Islands.
• Undertaking business case development for growth deal projects across the region which will support net zero (with a strong focus on energy), tourism and heritage, food and drink, blue economy, skills and innovation projects. These projects will be significant enablers and contributors to economic recovery in the region.
• Build community confidence and capacity to contribute to economic recovery through support to strengthen governance, financial planning, leadership, market opportunities, post-community asset acquisition support and initiatives such as community leadership in tourism.
• Developing pilot projects in identified target areas to address demographic challenges in partnership with local authorities as part of a COHI population working group.

Evaluations are planned to inform the refresh and development of our innovation, digital and community support to ensure we best meet the needs of our regional businesses and communities.

3. What activities have been suspended, deferred, or scaled back?

Inevitably, projects have been postponed by businesses, communities and other organisations as the economic crisis took hold especially in relation to capital and R&D investments. Our position was to be flexible with our customers, and re-profile cashflow towards supported projects as they were delayed. This gave our customers confidence once matters improved.

Some activities were suspended both for practical implementation reasons and to allow resource to be focused on responding to the economic crisis. This included postponing graduate placements in businesses and halting particular research and evaluation activity which would have been inappropriate to proceed with given the need and nature of business engagement required. Some “business as usual” support was suspended e.g. our international trade programme and physical events supporting entrepreneurship and leadership.

Other activities were adapted significantly to maintain support but using increased digital delivery. The most extensive example of this is our Creative Industries event - XpoNorth, historically a series of physical events. Virtual delivery has increased inclusion especially for remoter participants. The event also focused more on the changing circumstances for this highly impacted sector to support recovery e.g. responding to changing technology and routes to market.

4. If activities were suspended, deferred or scaled back, how was this budget used?

Changes to commitment – both from our own projects and from client decisions - allowed for funding to be increased for business and community resilience such as through the COVID support schemes. Examples include:

• Young Company Capital Investment Grant Scheme – delivered with Business Gateway to support SMEs under five years old to focus on sustainability, growth and adaptation/diversification arising from COVID-19. c£1m awarded to 67 SMEs.
• Destination Management Organisations - £3m approved over 3 years to support DMOs to develop place-based tourism recovery plans.
• Community-led Tourism Infrastructure Programme – developed in partnership with SOSE and delivered by Social Enterprise Academy. 55 awards totalling £1.6m to organisations across the region supporting infrastructure improvements to mitigate or create opportunities arising from the impact of the pandemic.
• Digital Enablement Grant Scheme – the £2.2m scheme was initially delivered with HIE funding and enhanced with Scottish Government funding and supported companies to take advantage of digital technologies.
• HIE also exercised flexibility and discretion to support key businesses particularly in remoter areas and impacted sectors to recover

5. How has the Highlands and Islands Enterprise budget been impacted?

HIE’s budget for 2020/21 was significantly impacted by Covid-19. We benefitted from c£40m of additional funding (of which £25m flowed via Scottish Enterprise’s accounts) and in addition we repurposed c£4m of an authorised capital overspend agreed with the Scottish Government.

For the 2021/22 financial year (to date) we have been aided with £3.0m of Covid Consequential funding and anticipate benefitting from £0.685m of Community Recovery funding plus £0.1m in relation to the Scottish Wedding Industry Fund Top Up payment.

6. Was Highlands and Islands Enterprise allocated additional funding by the Scottish Government to cover:

a) Covid-19 related business support; and

b) Covid-19 related economic recovery?

In 2020/21 we received significant additional funding from Scottish Government that funded Covid-19 related to support to businesses and (also communities). HIE was involved in 10 of the funds:

See table in Annex A (65KB, pdf) posted 14 September 2021

In 2021/22 the additional allocations are more targeted towards economic recovery rather than the type of early resilience support offered during 2020/21.

7. How much of any Covid-19 budget has been allocated?

HIE benefitted from Covid-19 budgets totalling £40m in 2020/21 of which £25m flowed through SE’s accounts. Overall HIE recorded a small overspend of £0.2m against these budgets, which was covered from HIE’s day-to-day budget.

For 2021/22, the intention is to allocate all Covid-19 budgets (£3.0m Covid consequentials revenue, which has already been received from SG and £0.685m Community Recovery Fund 2, plus £0.1m in relation to the Scottish Wedding Industry Fund Top Up payment anticipated). Earlier sections provide examples of COVID consequential commitments made with c£0.5m still to be allocated, although proposals are under development.

Has there been any underspend and, if so, what are the details of this?

As noted above, there was a small overspend against Covid-19 budgets.

8. What have been the costs to Highlands and Islands Enterprise of administering Covid-19 related support and how were these costs covered?

The overwhelming majority of the costs of administering Covid-19 related support were in the form of staff time and as such were absorbed by HIE. £0.10m contribution towards the administration costs of the Scottish Wedding Industry Fund in 2020/21 was received, but we repurposed the majority of this to the Fund itself. We anticipate receiving a contribution to administration costs of around £.034m in relation to the Communities Recovery Fund Phase 2 in 2021/22.

9. How has Highlands and Islands Enterprise been engaging and communicating with businesses to understand their business support needs?

HIE continued to engage and communicate with businesses, social enterprises and communities throughout the pandemic, and we have both a Research Strategy and Communications Strategy that supports this. Representatives of the HIE Board, with senior managers, undertook a planned schedule of place-based virtual engagements with businesses to hear directly from businesses their issues and support needs. Further engagement plans have been developed to maintain this approach during the year.

HIE’s Business Panel, a tri-annual survey of around 1000 businesses and social enterprises from across our region (undertaken by Ipsos MORI), was a key source of intelligence throughout the pandemic. This was informed/supplemented by in-house activity gathering real-time insights from account-managed clients into experiences or emerging issues impacting on business operations across the region. We were able to track the broad shift from survival mode, to recovery and planning ahead, back to survival and more sure-footed recovery in recent months. Within this we could identify sectors most at risk, and issues compounding the scale and extent of that risk.

Examples of issues include:

• the pace of innovation intensified with more businesses looking to digital solutions as they adapted – HIE is intending to further evolve our digital support in recognition of this;
• recruitment challenges and skills access impacted partly by the end of free movement of people and workers, but also by lockdown restrictions and changing attitudes. Recruitment challenges were particularly acute in rural and island communities;
• whilst most businesses can access goods, many are having problems in doing so, including inflated prices and delays. The construction sector is particularly impacted, resulting in delayed building projects and negatively impacting in terms of affordability, risk and return. Given that housing is a major constraint to population attraction and retention in the region, and to labour market buoyancy, this is of particular concern.

Our Research and Evaluation strategies provide further opportunities to understand regional and business needs and how our support can better respond and includes a focus on digital and innovation, the Business Panel; developing analytical tools to develop our Inclusive Growth Model; and Blue Economy and Net Zero opportunities in the region and responding to demographic challenges.

10. What engagement has Highlands and Islands Enterprise had with the Scottish National Investment Bank since its launch?

HIE welcomes the creation of the Scottish National Investment Bank and believes there are significant opportunities for businesses to access investment especially for projects supporting the transition to net zero and the blue economy which feature as strong regional opportunities in our operating plan.

Since the launch, HIE has had regular engagement with senior staff and also benefited from a virtual training and awareness raising session on SNIB, delivered and presented by senior SNIB staff. SNIB is speaking with a number of businesses in our region on potential investment opportunities, two of which are receiving HIE funding/support. We are keen to maintain a regular dialogue with SNIB and include their participation in future senior managers meetings to enable HIE to effectively support our clients and ensure SNIB has appropriate and attractive propositions from the region.

I trust that this information is helpful in assisting the Committee in its planning, and I look forward to discussing more fully at our forthcoming session on the 15 September.

Yours sincerely

Carroll Buxton
Interim Chief Executive

We aim to make all of the information we publish fully accessible. However, when documents are provided by external organisations this is not always possible. If you need the document provided in an alternative format, please contact the clerk to the committee. Further information is available in our accessibility statement.