Economy, Energy and Fair Work Committee

Meeting date: Tuesday, October 1, 2019

Official Report 722KB pdf

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Pre-budget Scrutiny 2020-21

Item 2 is pre-budget scrutiny. I welcome the Cabinet Secretary for Finance, Economy and Fair Work, Derek Mackay, along with Richard Rollison, the interim director of economic development, and Kathleen Swift, who is a business manager. I understand that Mr Mackay has a brief opening statement, so I will hand over to him before we come to questions from members.

Good morning. The 2019-20 budget sought to strengthen Scotland’s economic prosperity against the backdrop of the United Kingdom’s exit from the European Union. The Scottish Government remains ambitious for our country and the economy.

The 2019-20 budget plan has invested £5 billion to grow and modernise Scotland’s infrastructure. We created the £50 million town centre fund, and provided resources to the Scottish Investment Bank precursor fund and financed its early activities. The programme for government will ensure that we work with partners across our economy to deliver investment, with the transition to net zero carbon emissions as its primary mission. We have invested £8.3 million to further progress the new manufacturing institute for Scotland, and £65 million has been committed overall. We are targeting up to £80 million in European funding to establish an advanced manufacturing fund to ensure that all parts of Scotland benefit from the developments in that field.

Over the next three years, we are investing £20 million to enhance and intensify support to businesses that wish to export, having published our export plan, “A Trading Nation—a plan for growing Scotland’s exports”, on 1 May.

Looking forward to the 2020-21 budget, the UK Government announced a one-year spending round on 4 September; however, without the tax announcements and the economic forecasts of a full UK budget, the spending round does not give us enough clarity on the funding available for Scotland in 2020-21.

The UK Government has not yet announced a date for its autumn budget. Exiting the EU, and a disorderly Brexit in particular, will be the biggest and most economically disruptive challenge that the Scottish Government has had to face. Prioritisation continues to be necessary to focus resource where it will have the biggest impact. That is why it is important to undertake a spending review.

The spending review will focus on outcomes and wellbeing, in line with the national performance framework, and our strategic focus will be on addressing Scotland’s long-term challenges, notably climate change and child poverty. Our economic action plan will be refreshed in the autumn to reflect progress in implementing measures and to reflect the new commitments that are included in this year’s programme for government. Its aim is to help to build a strong, vibrant and diverse economy that promotes wellbeing and attracts investment. It is designed to support a competitive business environment, investing in a highly skilled workforce and nurturing the economy of the future. The actions in that plan will put Scotland at the forefront in transitioning to a carbon-neutral circular economy.

Thank you. The first question is from Jamie Halcro Johnston

I want to look at the regional distribution of regional selective assistance. The objective of RSA is to reduce regional labour inequalities. Only last week, Scottish Enterprise told the committee that it was confident that RSA was achieving that objective. However, it took us three weeks to get the information that we requested from Scottish Enterprise; it arrived just after the committee had met.

In light of the data that we eventually received, can the cabinet secretary tell us whether he believes that RSA is meeting its objective of combating regional inequality?

I believe that it is meeting that overall objective. Incidentally, if there is any issue with a lack of information, I am sure that that will be taken up with the agencies. We have certainly reinforced the point that we expect information to come to committees in a timely fashion.

We believe that RSA is achieving that objective, but it is only one strand of the overall funding that is available to support businesses and jobs. As the budget for RSA, and its application, is demand led, that will partly determine where the resources are deployed. It certainly covers all of Scotland, and we believe that it is meeting that objective.

Thank you—I appreciate your comments. The highest level of RSA grant is available at tier 2 for sparsely populated areas. That designation covers much of the Highlands and Islands region.

The figures that we eventually received from Scottish Enterprise show that there have been no RSA grants in the Highlands and Islands region for three years, in any of the local authority areas. Do you find that surprising? I appreciate that the assistance is demand led, but would you have expected that one of the areas that is most suitable to receive RSA would have had no grants at all in that three-year period?

First, I point out that there is a slight split in responsibility. For clarity, Fergus Ewing, as Cabinet Secretary for the Rural Economy, leads on the rural economy and is the lead minister in relation to Highlands and Islands Enterprise, while RSA is delivered by Scottish Enterprise.

We want to make sure that RSA can be deployed across Scotland but, because it is demand-led in terms of the projects that might come forward, I would not make a value judgment with regard to where projects are being delivered, as long as we are assured that it is being proactively promoted across the country and that the enterprise agencies, where appropriate, are signposting potential investors and companies to RSA in a way that means that companies and projects that meet the criteria will get it. I am assured that that is the case, even though it is fair to say that there has been no delivery in the fashion that you have suggested.

You are confident that there is a demand issue in the Highlands and Islands, rather than businesses not being aware of RSA, or Scottish Enterprise not promoting it, or there being no regional collaboration between Highlands and Islands Enterprise and Scottish Enterprise. Is that correct?

Yes, because of the other grants and investments that are being made in the Highlands and Islands and because I know the level of joint working that goes on between the enterprise agencies.

Would I like to see further distribution of RSA across the country? Of course. I think that we share that goal. However, the issue that you highlight is not down to any systemic failure; it is down to demand and the issue of projects meeting criteria and being delivered on the ground.

To go back to my earlier point, RSA is just one of the tools in the toolbox that can help economic growth in the country.

I appreciate that, but what you say suggests that there is no demand for RSA from the Highlands and Islands. Why is demand not high?

It might be to do with the nature of the criteria for investment. No company has said to me that it tried to pursue RSA and that there was a lack of awareness or effort to try to secure grants for companies in the Highlands and Islands. Again, Fergus Ewing covers this area but there is an expectation that Scottish Enterprise, as the lead agency, would be proactive in trying to ensure that RSA was deployed, if that was the most appropriate financial mechanism to support that business growth.

When you saw the figures that showed that there had been no grants in the Highlands and Islands for three years, did you ask Scottish Enterprise—which is answerable to you—to clarify why that was the case? Have you spoken to it about the demand in the region?

RSA is just one specific funding stream. I look at all the funding streams and ask what their collective efforts are towards growing the economy, sustaining jobs and building new developments.

Surely you would have had concerns that one quite important stream had made no grants in a suitable area in three years, and you would have asked questions about that.

I understand your point, but I am trying to reassure you that I am satisfied by the processes and actions that are in place. If there was a company or a project that met the criteria, I am quite sure that it would get the funding. I am reassured by that and by knowing that there is a range of tools that can be deployed to support our economy.

With regard to RSA, there are possibly issues around scale, around the location of most of the manufacturing base in the country and around where various sectors feature across the geography of our country. For example, tourism is a bigger sector in the Highlands and Islands than elsewhere, so I would expect more support to come from VisitScotland than one strand of the funding stream in the enterprise family.

I understand the point that is being made and I expect the enterprise agencies to be proactive with regard to ensuring that there is a distribution of funds. However, it is not as if there is a formula that involves spending a set amount of funding across the country on a per-head basis. Where the money is spent depends on where the applications come from and involves a consideration of the criteria and the projects. Further, the fact that some items of RSA can involve technology or plant means that it will be more relevant in areas of the country where manufacturing operations are based.

I appreciate that, and I am encouraged that you are reassured about what is happening. However, I am trying to find out why you are reassured, other than the fact that you are confident that Scottish Enterprise is doing its job and that there are various criteria that might impact on the number of applications. Has there been any correspondence with Scottish Enterprise to get its assurances about why this situation has come about?

If the committee feels that it is not satisfied, I encourage it to return to Scottish Enterprise, as the lead agency, and pose those particular questions about what it is doing to ensure awareness and appropriate delivery of RSA. I am reassured that Scottish Enterprise would be proactive. Why would it be in the interests of Scottish Enterprise not to support companies and not to deliver that assistance?

In the context of RSA, bear it in mind that Highlands and Islands Enterprise has provided £89 million of financial assistance to businesses over the past five years. My point is that RSA is just one part of the financial support and it has to be seen within the global context.

10:00  

I am reassured, because I see no reason why SE would not try to encourage companies right across the country to benefit from RSA. It might be down to the nature of the funding or where the manufacturing base is, or it might be that other tools are more appropriate to the Highlands and Islands. We should bear it in mind that many employers in the Highlands and Islands may be of a smaller nature, and that other financial tools might therefore be more appropriate.

As you say, Highlands and Islands Enterprise is the lead enterprise agency, but it does not administer RSA. Are you content that the collaboration between SE and HIE is good enough?

I am.

I will return to the issue of regional imbalances, but in an Ayrshire context. I for one was pleased to hear about the change in direction that Scottish Enterprise told us about last year. Steve Dunlop reminded us last week that there are difficulties in selling investments in the Ayrshire economy, for example, compared with Edinburgh or Glasgow. How do you see us resolving that issue? What are the keys to turning around the Ayrshire economy to allow us to get more on a par with Glasgow and the rest of Scotland?

That goes wider than the interventions of the enterprise agencies. One aspect is infrastructure, whether that is transport or digital. There are growth deals, which we want to cover every part of the country—indeed, there is the Ayrshire growth deal as well as other financial mechanisms. In the fullness of time, the Scottish national investment bank will be able to invest, too. Having a competitive tax regime is good for the entire country, and we are investing in the key strands of the economic strategy around internationalisation, innovation, infrastructure and the inclusive growth agenda. When it comes to enterprise grants and the enterprise family, the agencies can of course try to stimulate demand, focusing on place and saying that different parts of the country should be considered for investment.

In some matters, however, we have to follow the economic opportunity of where businesses want to go. A particular success story at the moment is at scale, with Barclays Bank creating more than 2,000 new jobs in Glasgow. Barclays is now also very much involved in Ayrshire and Kilmarnock, I understand. That is an example of establishing where investment is desirable and where it wants to go, and we can see if we can get more of the economic benefits to spread beyond the big cities—although the cities are important. The economic strategy tries to support the whole country in a range of ways.

I am very mindful of scale. Twenty jobs in a more rural or peripheral community could be massive compared with 20 jobs created in the cities of Edinburgh, Aberdeen or Glasgow. That is why we are trying to target efforts towards towns and rural communities as well as the cities.

Good morning, cabinet secretary. As you say, companies can dip into many funds but, concentrating on RSA, do you believe that the RSA grant appraisal process is fit for purpose, given that some firms that have been in receipt of RSA funds have experienced trading difficulties?

Let us be clear: a company should not be getting RSA if it is distressed, so to speak. There are other things that the Government can do to support a company that is in financial distress. RSA should be about sustaining jobs, securing new jobs or investing in infrastructure. However, some companies have got into difficulty subsequent to receiving RSA. The question is then asked whether the Government was trying to help a company that was in difficulty. There are different levers that can be pulled and different interventions that we can make but, for a company to receive RSA, Scottish Enterprise must be satisfied that the venture has a reasonable chance of success. All the due diligence would be carried out, if that is of assistance.

A company that is applying for RSA should promote the number of jobs that it plans to bring to the area, wherever that might be. For example, I am sure that we would want to encourage people in the Highlands and Islands to apply for it. However, should the RSA system itself be reviewed?

As I said in last week’s debate on the proposed Scottish national investment bank, we will have to look at the range of available financial products, reflect on them and decide whether that range is appropriate or needs rebalancing. I also want to simplify it as much as possible. We might come back to that point in relation to how the Government supports businesses, because I want to talk about how we are also pursuing the idea of having a single portal. It think it right to look at the range of financial products that we have, to decide what the appropriate balance might be for the future. However, we would also have to respond to the economic situation at that time, such as where we might be with Brexit and with demand, and what the banks might be doing. Again, we might return to that point in our discussion on Brexit preparedness.

To go back to the premise of Richard Lyle’s question, RSA should be about protecting and growing jobs and not about bailing out a company that is in difficulty. Due diligence has to be done, and a company has to be viable and its project worthy of support. An appraisal process is in place to deal with those aspects. However, for whatever reason, it is not impossible for a company to get into difficulty after it has received RSA, at which point we would have to return to it and look at grants, potential clawback and, where appropriate, further Government action. Of course, we would have to comply with the law and state aid legislation as it existed at that time.

Should Scottish Enterprise and Highlands and Islands Enterprise review their practice on RSA and consider how they might improve it? As you have said, various firms have promoted and brought jobs, or have improved the prospects of doing so, so we know that RSA has done a lot of good. Sadly, no one can tell what the future—or even tomorrow—will bring. There have been situations in which companies that were doing well at the time have received RSA and then, perhaps a year down the line, have hit a financial wall when no one would have predicted it. Could Scottish Enterprise and HIE do more to review and improve their approaches? What discussions would you have with them?

Let me separate that question into two component parts. First, as I have said, I think that we need to review all our financial products anyway. We will now have to do so because of the economic turbulence that we face and, more positively, because we are developing a national investment bank. We should always be looking at such products and asking what the criteria for each of them should be and how we should respond to the needs of the economy.

My second point is that I do not think that we have to do that because there is an issue with the appraisal mechanism for RSA. Unfortunately, not every company will be a success. Although a risk analysis will always be carried out, some companies will succeed while others will fail. We will never resolve that issue; we should focus instead on what financial products are available and on responding to both the challenges that we will inevitably face and the opportunities that exist in the economy. I am engaging with the family of enterprise bodies on that.

You will have your critics, but do you believe that all the things that we are doing have the potential to improve the economy of Scotland?

Yes, of course. My ministerial colleagues and I have visited many companies that, if it had not been for RSA, would not have grown, kept jobs or indeed invested in Scotland at all. I am sure that committee members share a passion for supporting high-quality jobs and creating new ones, which I believe RSA has been achieving.

Deloitte recently published a report entitled “Power Up: UK-Wide Growth: unlocking productivity across UK regions and nations”. Its main findings on Scotland stated that

“productivity growth in Scotland has outperformed the UK average in recent years, closing a previous gap. The ONS data positions Scotland’s output per hour worked at 99.8% of the UK average”.

What impact has RSA had on the productivity of recipient companies?

We are focusing on productivity. CBI Scotland and KPMG have just launched a new productivity index—I was at the launch—and there has been a real focus on productivity. We have performed better over the period of devolution than the rest of the UK, but we certainly lag in comparison with international standards, so of course we want to improve on that. There are many areas of intervention that will make a difference here, whether they are around innovation, digital or a skilled workforce.

Given the specific criteria of RSA around the safeguarding of jobs, it does not necessarily enhance productivity in itself, although the safeguarding of jobs is a good thing nonetheless. However, if a grant contributes to plant, machinery or technology, that should enhance productivity. If the primary objective is to safeguard jobs and deliver new, high-quality jobs, that is a good thing and it may well help with productivity, but it is important to understand the definitions of productivity. Simply having more people might not in itself help with productivity or output per hour, but some of the other strands of RSA should and may well help with productivity.

Productivity is a wide area and it is not just about RSA. If we focus only on RSA, we miss a hell of a lot more in terms of support for our economy that is supporting the productivity challenge that we face in our country. I should say at this point, though, that it appears that productivity progress is being impeded because of Brexit. Companies are putting more effort into Brexit preparedness and caution around investment than they are putting into the productivity challenge. We should keep a close eye on that.

I think that Jackie Baillie is disagreeing with that point. She might want to ask the chief economist about it when he is here for the next agenda item.

I will be happy to ask you later, cabinet secretary.

Cabinet secretary, could you also watch your language?

What did I say?

I am not going to repeat it.

I am not sure what I said, convener, but I will watch for whatever it was.

I will be careful about what I say, because I have no idea what you said, either.

I think that you said something like “What the hell”. That could be offensive to certain people.

Anyway, to continue, the last time RSA was reviewed, the report stated:

“The most common effects were on productivity and sales growth, improved efficiency of machinery and the introduction of new or significantly improved products and processes.”

That report was on the period 2000 to 2004. When are we likely to see the outcome of the review that is under way? Do you think that it will be similar to the outcome of the previous review?

I ask Richard Rollison to comment.

You are perhaps referring to the review that Scottish Enterprise is doing across a number of grant products. I think that it is due to report on that towards the end of the year. It may have provided some initial findings to the committee already.

You touched on the Scottish productivity index, which was launched recently, and on the need for skills. The launch of the index highlighted the need for prioritisation of investment in management and leadership skills plus a need for everyone in the workforce to be given basic digital training by 2025. Given that the Enterprise and Skills Strategic Board has tasked the enterprise agencies and the skills agencies with collectively improving productivity, working with industry and businesses, what are the enterprise agencies doing to tackle that challenge?

They engage with individual companies and they can come up with bespoke packages for them around management, training or expertise. Sometimes, support for businesses involves bringing in expertise. In the current Brexit preparations, there is particular grant support to bring in expertise for preparations for Brexit. As I said, the enterprise agencies can support companies on training. Research and development is important as well, and we are increasing the support for that.

However, the CBI and KPMG work also projects responsibility on business. A lot of businesses are struggling to get by, but they need to look to the future and invest in quality, management and training. In all that, there is a responsibility for businesses to look at their structure and see what support is available, including from Skills Development Scotland. There is a response around management challenge, quality, skills and reskilling—support is available for that.

10:15  

Given the cabinet secretary’s invitation, I will ask about the productivity challenge. He will remember—it was not his responsibility but that of one of his predecessors—the target that was set to move Scotland’s productivity from the second to the first quartile of the Organisation for Economic Co-operation and Development’s index. However, during the period that the target was in place, Scotland fell to the third quartile. I am sure that the cabinet secretary will confirm that that was during a period when Brexit was not even a twinkle in anyone’s eye. We have not done well with productivity, despite the Scottish Government target, and that has nothing to do with Brexit.

I know that Jackie Baillie is against Brexit, too. The point that I was making is that the current intelligence—I was given the most up-to-date position—says that gains made on productivity will be lost and impeded by Brexit uncertainty. I will talk about the past in a minute, but it is important to say that we can make progress only from here into the future and we cannot change the past. Productivity gains are being lost right now and will continue to be lost because of Brexit uncertainty.

In the past, there was also a financial crash and a downturn in the oil and gas sector that impacted the economy and productivity, so there are reasons for those statistics. However, we have done better than the rest of the UK over the devolution period, but not as well by international standards. The most recent statistics have shown a better performance in relation to the rest of the UK.

Your ambition is pretty low if all you do is compare Scotland to the rest of the UK at a time when its productivity performance has been particularly bad. To inform the future, you need to understand the past and why we failed to increase productivity. Simply blaming it on Brexit will not get us there.

I was trying to express that we cannot change the past. However, the most recent figures say that, in quarter 1 of 2019, productivity growth in Scotland was 0.4 per cent, following growth of 0.2 per cent in quarter 4 of 2018. In the year up to quarter 1 of 2019, productivity in Scotland grew by 1.1 per cent compared with a fall in productivity of 0.2 per cent for the UK as a whole. Over the longer term, between 2017 and 2018, productivity in Scotland grew at the average annual rate of 1 per cent compared to the UK average of 0.2 per cent.

I agree with Jackie Baillie that we do not want to just match the UK; we want to perform like the small, advanced, independent economies around the world that have done much better than the UK and Scotland. That is true, Jackie Baillie—that is what I aspire to.

Convener, I love the cabinet secretary’s ambition, but Scotland remains in the third quartile for the OECD indicators. That does not sound terribly positive.

That is why our economic strategy—with more on innovation, internationalisation, infrastructure, quality, upskilling and reskilling—will make a difference with the productivity challenge. However, the greatest threat to our productivity opportunity and challenge is the one that we face from Brexit.

Earlier this morning, you referred to RSA being demand led. Scottish Enterprise’s written submission highlights its demand stimulation activities with regard to RSA. What are your views on the role of Scottish Enterprise in trying to influence or create demand for its products?

Scottish Enterprise is being proactive through its communication systems. It can respond to individual economic circumstances with bespoke packages of support, and it signposts to the most appropriate financial support or opportunity.

From all that, I am reassured that Scottish Enterprise is promoting what is available. I want to simplify the range of assistance that we have for businesses, which is why I am supportive of the single portal. Businesses come in once, and it is up to the enterprise agencies to organise the appropriate response and package of support for an individual applicant or company. That is why the diagnostics behind front-facing business support will be so important.

If Scottish Enterprise is trying to create or influence demand for its products, is there a risk that there could be a mismatch between the products that it offers and what the market is looking for?

That is not impossible, but it must lead to the ability to be agile and adept in changing the criteria or products—keeping the principles but responding to what the economy and businesses want and need. I have seen that. One example, at scale, is Michelin. As we know, the company decided to cease tyre manufacturing at its plant, but we were able to convince it to stay. We looked at the appropriate package of support that would be right for that investment, even though the company would not necessarily be making the specific product that it had made in the past.

I see that agility in the enterprise family. The same goes for Skills Development Scotland. The biggest challenge for businesses is skills and availability of people, so it is important to align skills and Skills Development Scotland with financial assistance, which is what the committee is focusing on this morning.

You have highlighted specific cases, such as Michelin, where there has been flexibility. However, those are high-profile cases where we would hope there would be flexibility. How do we ensure that there is no mismatch between what an ordinary, Joe Bloggs company is looking for and the off-the-shelf products that Scottish Enterprise, which has its targets, is pushing?

I remind you that, over the past five years, nearly 400 companies have benefited just from RSA. There is a wide range of financial products available to support businesses. However, I am reassured that we can create bespoke packages and engage with companies to design the financial support that is right for them. It can be bespoke; it can be tailored to the needs of a business. If particular funds are not successful, we can look at the criteria or discontinue a fund in order to expand other things. I have seen that approach take place.

Therefore, you are satisfied that, even in the day-to-day activities around RSA, there is flexibility to allow companies to get a product that is tailored for their specific needs and their sector.

If you are asking specifically about RSA, criteria are set for it, but I am talking about the overall package across the system. No company would go into Scottish Enterprise and say, “I am interested only in RSA”. People say, “How can you help us?” Therefore, the full toolbox is appropriate.

With responsibility right across this area, I want to ensure that there is alignment and cohesion and that we make it as easy as possible for companies to get the widest range of support. That goes beyond just one enterprise agency. As I said, it might be skills or it might be VisitScotland. We support a company in ways that are sensitive to its individual needs. We deliver a tailored package to a company. If it is of assistance to the committee, I can come back with individual examples of how we have done that.

That would be of interest.

The strategic direction of Scottish Enterprise is shifting to a broader support role for businesses, to help create quality jobs and tackle inequalities. However, in this month’s Business Insider, Jack Perry, the former chief executive of Scottish Enterprise, revealed what were certainly frustrations, and possibly disagreements, on Scottish Enterprise’s current direction. He stated that he believed that the new strategy is based on

“political rather than economic goals.”

and that Scottish Enterprise is

“creating the conditions for more disappointment in future.”

What are your views on those comments?

Jack Perry is entitled to his opinion. I think that it is good if the enterprise agency is responding to the strategic guidance and to the national performance framework.

I remember attending this committee for the first time after taking on responsibility for the economy portfolio. I said that I wanted to respond to the committee’s report on support for businesses and the economy ,and to the consensus that exists in Parliament. That means ensuring that the enterprise agencies respond to political direction. Every member of the committee is political. We are trying to ensure that we support the economy in an inclusive way. Of course, that has moved on. Clearly, the politics of the climate emergency will feature in our policies going forward. The enterprise agencies have a clear economic function, but they also need to understand the political direction of the country, on which I have tried to act consensually.

The themes that the committee reinforced included support for businesses, no matter what their scale; place, which you have emphasised again this morning; the pursuit not only of what some would describe as inward investment at scale but of businesses that can grow in Scotland; and a focus on jobs. The committee has agreed with that direction of travel, so I will defend Scottish Enterprise’s plans because they reflect what we seek as a country, as a Parliament and as a Government.

In adopting a broader approach to support, is there a danger that the product offer might be diluted?

No. It will be more sensitive to the opportunities that exist. Scottish Enterprise can achieve at both scales; it has helped to attract investment at scale, such as that from Barclays with over 2,500 new jobs in Glasgow, but it can also support smaller business that want to develop.

Bearing in mind that we had the lowest unemployment levels in history at 3.2 per cent—although the level is now increasing because of Brexit—if our focus is on jobs, then that direction and investment have been worth while. I do not think that the offer will be diluted.

I am also mindful of the committee’s work on Business Gateway, and that the committee specifically charged me with ensuring deeper integration between its services and the enterprise agencies, and with focusing more on that agenda. It is hard then to criticise the enterprise agencies for responding to the agenda that the committee put forward in its recommendations, which I have supported.

Again, given the broadening of the approach, one would think that more resources would be needed. Are adequate resources in place?

I believe so. On the internationalisation strand, we have allocated new resources to the export strategy. We have a three-year plan with an allocation of £20 million of additional resource.

It is also important to restructure and reconfigure what the enterprise agencies do, because I want to be as efficient as possible. Resources within the enterprise agencies have been recalibrated, which has redirected them towards our priorities.

The offer is not just broadening—it is deepening; we are doing more on digital, the skills gap and gender. There is additional funding for innovation for initiatives such as the national manufacturing institute for Scotland and the advancing manufacturing challenge fund. There are very specific resources to help us with the key strands of the economy strategy and there is an expectation that the enterprise agencies will be more efficient. I remember giving evidence—I think that it was to the Economy, Energy and Fair Work Committee—that some of the savings in Scottish Enterprise were operational savings that have been made in order to target more resources at the front line.

10:30  

Last week, an Audit Scotland report highlighted that, last year alone, the Scottish Government lost £135 million in failed investments and interventions. That is roughly half the entire Scottish Enterprise budget, and is more than has been paid out under the Scottish growth scheme in the past three years. Does the cabinet secretary recognise the real concerns about the amount of taxpayers’ money that has been lost in those failed investments? What financial return does he expect to receive from that £135 million investment? How will he measure the return on that?

I am not sure how the workers at Ferguson Marine Engineering Ltd—of which there are more than 300—Prestwick Airport Ltd or Burntisland Fabrications would feel about hearing the Conservatives describe them as “failed” ventures.

That is how Audit Scotland referred to them in its report. It also highlighted that £135 million has been written off in the past year alone. I am not second guessing the merits of the individual interventions: I am asking how you will measure the financial returns on that £135 million.

I am sure that, in asking the question, Dean Lockhart understood that it was investment in those companies that the Auditor General was talking about. Incidentally, the money has not been written off, but written down. There is a distinction between the two. Also, it is not impossible that the value of an investment will go back up.

I say again to the Conservatives: know what you are criticising, when you criticise. I have been perfectly clear that the Government has made those investments—having been through due diligence—in companies in order to allow them to have a future. Specifically, those companies are Prestwick Airport Ltd, BiFab and Ferguson. If members say that we should not have invested in those companies, that is their opinion. However, it has been the view of the Scottish Government that the interventions were right at the time. We went through due diligence. Of course I want those interventions to be a success and to give a return to the taxpayer, but if we had not made those interventions many hundreds of jobs would have been lost and could not have been recovered.

The Government is using its fiscal powers to invest in the country and support the economy. There is always risk in such investments. However, I hope that in all those examples, the situation will be turned around. I hope that BiFab will achieve a supply of work, that its employment numbers will go back up and that the company’s finances will be strengthened. I hope that Prestwick has a viable future. My position on Ferguson Marine is well understood: I believe that that Clyde shipyard has a future.

That is the reason for the write-downs. It was right for the Scottish Government to intervene and we are accountable for the resources that we have deployed.

The concern is about the policy approach that has been taken by the Scottish Government in intervening in certain areas. Last week, Audit Scotland said that the Scottish Government

“has not developed a clear framework to outline its overall approach to financial interventions in private companies.”

The committee has heard evidence time and again that “inclusive growth” is ill defined and is not fit to shape policy intervention. The interventions appear to be ad hoc, rather than being part of a coherent economic policy approach. In evidence on the Scottish national investment bank, we heard that inclusive growth as a concept, which is part of the Scottish Government’s overriding strategy, is not defined. In addition, the Fraser of Allander institute has called for more “clarity of focus” in relation to the Scottish Government’s economic policy. On things such as inclusive growth, which means different things to different people, and intervening in the economy, when will we see more clarity in your economic policy?

On whether financial interventions are sometimes ad hoc, I say of course they are, because we do not necessarily know where the economic difficulties will come from, or which companies might get into trouble. That was my point when I was being pressed earlier about whether the Government can tailor an economic intervention to the specific circumstances of a company.

That speaks to the point that we can have an economic strategy that focuses on increased prosperity and greater equality, with strands of internationalisation, innovation, the inclusive growth agenda, fair work and infrastructure. However, for some companies that have required Government support, an ad hoc financial intervention has been the right thing to do.

It is not true to say that there is no framework, or that there is no due diligence or commercial advice. Every financial intervention that we make has to be within the law. Our investments have to consider what is in the “Scottish Public Finance Manual”. They all have to meet due diligence, offer value for money, and meet state aid rules and market economy principles. A range of documents is used to guide investment decisions, so I disagree that there is no framework or context in which decisions are made.

There is also a political decision and determination to be made on whether the Government and its agencies are willing to step in to save jobs and invest in the economy. We choose to say yes when we believe that it is appropriate to do so. That has borne fruit in terms of saving companies, allowing other investments to be made and saving hundreds of jobs across the country, which I think has added to the range of businesses that operate in our country.

We have had the debate about the issue of inclusive growth before, and I think that the definition is clear. Of course, there is an even greater focus on sustainable economic growth. Inclusive growth is defined as

“growth that combines increased prosperity with greater equity, creates opportunities for all, and distributes the dividends of increased prosperity fairly.”

I think that that is evidenced through the fair work agenda—we are focusing on place and we are tackling inequality, as we ensure that there is investment.

The real driving force in our economic strategy is largely to do with jobs and ensuring that they are distributed and remunerated as fairly as possible. I believe that the very strong policy context is the economic strategy and the economic action plan that I published last year, which I will refresh shortly.

I have one brief follow-up question on inclusive growth. Do you have any plans to develop the definition? All the enterprise agencies told the committee that it means different things to different people and that they cannot measure it precisely. If you are telling me that you are finished with the definition, I contend that it is not an economic definition that we can measure, and nor can we measure any changes.

Let me try to find a point of consensus with Dean Lockhart. I think that the definition is fine, and the national performance framework clearly sets out purpose, values, indicators and outcomes. I know that the purpose and definition must be okay because Murdo Fraser sat on the cross-party group that helped us to characterise and define the purpose. All parties were represented on the cross-party group. I therefore think that we have a purpose that achieved a great deal of consensus in Parliament, across the parties.

I think that the definition is clear, but how it is expressed by way of actions is really helpful. That is where the economic action plan comes in, as does the detail on what a fair work agenda looks like, on how we spread the wealth in our country, on how we tackle wellbeing and on the outcomes focus. All of that is covered in more detail through the actions. Maybe the point of consensus is that if we can show further actions that help us to achieve the purpose, that will be helpful for all.

Prestwick was mentioned. I have to speak up for the airport, as an Ayrshire MSP. It is unthinkable what could have happened to the wider Ayrshire economy, had that intervention not taken place. I thought that it had broad support in Parliament—it certainly has the support of John Scott, who is the local member. He has championed the airport for many years and continues to do so.

I have a brief question on the strategic direction issue that Colin Beattie raised. Have the growth deals been the catalyst for the emergence of the new regional economic partnerships? I do not think that there is detriment to the former growth sectors that Scottish Enterprise previously focused on, and I am delighted with the change of approach. Have the growth deals played a key part in rethinking that approach, and do they link in with your overall economic strategy for Scotland?

Growth deals have been an iterative process, with each one developing over and above the previous one, so they have changed in shape. The first deal, which was for Glasgow, was initially a lot about infrastructure, and latterly has been a bit more about inclusive growth. The Edinburgh and Lothians deal has been more about economic opportunity and data, and the Ayrshire deal is a mixture of infrastructure and other job-creating opportunity.

The deals are all quite different. They have been negotiated between the local authorities, the Scottish Government and the UK Government, and the financing package varies from one to the next. The deals have helped us to bring together regional partners to discuss what investments might be right for a region. Of course, as a consequence, there has been financial leverage as well as improved relations with academia and the business community.

Could the approach be better? That is possible. Perhaps a more systematic approach could be taken, but we can address that through regional economic partnerships. Of course, we want growth deals to cover the whole country. A sizeable chunk of money will now feed through the growth deals to help us to stimulate the economy. Partnerships are undoubtedly stronger as a result—partnerships between local authorities as well as those with Government. The growth deals are absolutely part of the economic strategy, in particular in relation to themes such as innovation and infrastructure.

For the avoidance of doubt, I point out that Michael Matheson leads on growth deals.

Last year, the committee noted that the enterprise agencies

“set and mark their own homework.”

In response, you said:

“The Strategic Board’s Analytical Unit is developing a measurement framework”.

Since then, evidence to the committee has suggested that not a lot of progress has been made on that. Can you give us an update on that?

There has been good progress. I can mention some of the indicators, but a more detailed assessment of performance will be provided to the Enterprise and Skills Strategic Board in the annual report, which is due in January next year. I believe that progress has been made on setting the indicators, rather than just allowing the enterprise agencies to do that for themselves. The indicators will include spend on research and development as a percentage of gross domestic product; the value of international exports; workplace learning in the past three months; the percentage of establishments with skills-shortage vacancies; the gender pay gap; employees earning less than the living wage; carbon footprint; school leavers’ qualifications; and high-growth businesses as a percentage of all enterprises.

My understanding is that the strategic board approved the framework in March and that the board has received quarterly updates on performance against those high-level indicators in the framework. As I say, further information should be forthcoming.

The cabinet secretary mentioned our business support inquiry, but I want to press for a bit of detail on Business Gateway as part of the wider enterprise support system. What progress has been made on that? You mentioned the single portal or entry point for enterprise support. When do you expect that to happen?

That is a good question, because those two issues are connected. I looked closely at the committee’s report on Business Gateway and I have engaged with local government, because I recognise that because Business Gateway rests with local government at the moment, whatever I do I should do in partnership. I have met the Convention of Scottish Local Authorities economy spokesperson, Councillor Heddle, and I have raised the issue at my meetings with the resources spokesperson, Gail Macgregor. There has been communication. I understand that COSLA leaders are considering the approach to Business Gateway. Part of the committee’s critique was that the provision feels a bit patchy across the country and could be better connected with the rest of the enterprise family’s operations. There is a lot of merit in that and the best way to address the issue is to connect it with the work on the single portal. That relates to Jackie Baillie’s second question.

10:45  

In bringing together the complexity of financial products and various forms of support for businesses, my aspiration is to make it as easy as possible for businesses, no matter their scale—small or large, start-up, set-up or scale-up—to have one point of entry, with the system working to give back the appropriate support for the organisation or company. That is my ambition for the single portal.

There is complexity out there—we have Skills Development Scotland, the enterprise agencies and the universities, which, through Interface, connect academic and innovation opportunities with business. My ambition is to bring all that together and ensure that Business Gateway is part of it; I want to bring it with me on that journey. My first impression is that it is up for being part of a whole-system approach, which is very welcome.

Scottish Enterprise might be able to say more about the detailed timescales, but my last update was that the ambition should begin with a beta version of the system, which will be ready by the end of this year. That is the first stage of bringing everything together, and it will provide customers with the ability to see and access the most commonly searched products and services that are offered across the main enterprise and skills agencies, and on Business Gateway’s national site. It would be good to bring all that together and to have as much as possible on the system next year.

The engagement with Business Gateway has been positive so far, but because of the nature of that local government function, I am trying to do things in partnership with it rather than instruct it. I am sure that there would be some sympathy for doing that, but that would not be a partnership approach. I will certainly update the committee if Business Gateway is not coming in with us on that national project.

That would certainly be very welcome from the cabinet secretary.

I want to turn to the Scottish-European growth co-investment programme. That was part of the £500 million Scottish growth scheme, which was announced to considerable fanfare by the First Minister and, indeed, welcomed across the chamber. I think that the cabinet secretary would agree that there have been very disappointing numbers accessing funding from the £200 million co-investment programme budget. In the first year, there was one project and in the second year, there were two more companies. The total SE contribution was £3.2 million of the £200 million overall expected budget. That was the case in June 2019.

What is the case now? Are demand stimulation activities in place and bearing fruit? The cabinet secretary will appreciate our concern, because the self-same enterprise agencies are going to stimulate demand for the proposed Scottish national investment bank. If they cannot do that for that programme, how can we be confident that they will do it for the new bank?

I will give the information that I currently have in answer to Jackie Baillie’s first question.

On the overall £500 million from the Scottish growth scheme, the scheme is demand led and, to date, 233 companies have received £149.5 million of investment. There is, of course, a range of support within that.

I am sure that Jackie Baillie appreciates that the current uncertainty in the economy has impacted on demand for the available funds. Many companies will have received support from the Government and our agencies, but not under the umbrella of that particular growth scheme. Just looking at that scheme would therefore be wrong, as there are other strands of financial support out there. Because of the nature of some of this—whether we are talking about scale, co-investment or companies investing for growth—it would be true to say that a lot of investment is not currently taking place because of Brexit uncertainty. Even a critic would agree with that. It has been more difficult for the Government to co-invest where investment has been drying up because of Brexit.

We have tried to simulate demand, and the enterprise agencies have tried to signpost companies towards the Scottish growth scheme. I would like to have seen more support given through that, but we have provided financial support to companies through other Government strands over the past few years.

I accept that, and I note that the cabinet secretary gave us the figures for the Scottish growth scheme. Could he give us the figures for the Scottish-European growth co-investment programme, which is a strand of that overall scheme?

That is specifically support of £17 million for six businesses.

Does that includes the contribution from the business itself, or is that purely £17 million out of the SE budget?

I turn to an official for that detail.

It is the shared investment of the venture fund managers and Scottish Enterprise into the businesses. There is another £6 million on top of that £17 million that is not part of the programme and has come in through other mechanisms.

So, the figure is lower than anticipated. I accept entirely what the cabinet secretary says about uncertainty, but the fund was to help companies deal with Brexit. I therefore wonder, on reflection, whether we think that the product is perhaps the wrong one at this particular point in time.

It is one of many. I go back to the inception of the growth scheme. In its early days, it was considered that it would involve contingent liabilities or guarantees. If members remember, it was understood that it would offer a very useful way of leveraging support into businesses. That was based on advice from companies as to what might have been helpful and from the banks on where there might have been a gap in the available funding.

The scheme was first meant to involve guarantees or contingent liabilities, which would have crystallised only if the resource was called upon. The scheme was then developed so as to have that umbrella of different funds and investments, including the co-investment fund. It has tried to adapt over time. Jackie Baillie is right: it is demand led, and it requires co-investment for some of the funds. Because of the nature of the economy and the current investment position, the figure has not been achieved.

Overall, however, the support to business has still been delivered. There was a view in the early days around contingent liabilities, with the Government using the strength of its balance sheet to support business, and we have done that.

We then turn to the question that Dean Lockhart asked me, on the writing down of investments—equity investments going into companies. I suppose that people could consider that to be what the Scottish growth scheme could have been, but that we have delivered the scheme in a different way.

We have tried to respond to where the demand is and to where the investment could be. Those funds are different tools in the box to support and stimulate the economy, but it was first envisaged that they would be contingent liabilities. We changed that into investment and co-investment funds. The figures speak for themselves, in that there has been some leverage of investment through the scheme, but not as much as we would have hoped. Still, there is plenty of support elsewhere through the different financial products that we have.

I know that you have a great grasp of your remit, cabinet secretary, and I want to ask you a question about Highlands and Islands Enterprise, although I know that the agency falls within the remit of the Cabinet Secretary for the Rural Economy, Fergus Ewing. HIE has done wonders for the Highlands since it was first set up, but a number of financial risks are set out in the agency’s annual report regarding space hub Sutherland, VAT liability, the Cairngorm funicular and the impact of the sale of the centre for health science. Are you satisfied that HIE has the expertise to manage those risks?

I appreciate Richard Lyle starting by complimenting me on my grasp of my remit, but it would be wrong for me to overreach into the remit of other cabinet secretaries. As finance secretary, I am generally satisfied that other cabinet secretaries are looking into those issues.

Judging from my awareness of Highlands and Islands Enterprise, I would expect the agency to deliver value for money, perform due diligence, and operate according to the Scottish public finance manual and other commercial advice, as it receives it, for any investment that it makes. I am satisfied that HIE would do that. As to the detail of any project, I would suggest that you have Fergus Ewing here and grill him in the way that you grill me.

We never grill you. I think—if the convener agrees—that we will write to Mr Ewing regarding my question.

We will discuss that as a committee. I am sure that we will be very happy to write to the appropriate minister to ask the question. We would not want the cabinet secretary here to overreach.

We have a brief follow-up question from Dean Lockhart.

You mentioned the £149 million paid out under the Scottish growth scheme. Perhaps I missed this, but I want to confirm whether that is the total, including private sector co-invested money, or whether it is just the Scottish Enterprise slice.

Can I check with the officials? I want to give an accurate figure.

That is the total investment: both the money that has gone through the fund providers and any public sector money. There is a shared approach on the total sums going in.

What would the public sector contribution to that £149 million be?

I would need to come back to you on that.

Do you have a rough feeling about that? Would it be half?

It is somewhere in my pack here.

Can we answer that in writing?

If you do not have the figure to hand, that is fine.

It would be useful to get it—thank you.

We come to a close on this agenda item. I will suspend the meeting briefly to allow a changeover of officials, but the cabinet secretary is remaining with us.

10:56 Meeting suspended.  

11:00 On resuming—