Finance Committee

Meeting date: Wednesday, May 9, 2012

Official Report 566KB pdf

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Sustainable Economic Growth

Item 2 is to take further evidence on increasing sustainable economic growth. We agreed to focus on that issue in our scrutiny of the 2013-14 draft budget.

I welcome to the meeting Dr Lena Wilson, who is the chief executive of Scottish Enterprise; Professor Jim McDonald, who is principal and vice-chancellor of the University of Strathclyde; and Mr Philip Grant, who is chair of the Scottish executive committee of Lloyds Banking Group. Good morning.

The witnesses recently took part in a series of interviews on growing Scotland’s economy with The Scotsman. Members have copies of the contributions that were made.

Before we proceed to questions from me and other committee members subsequently, I ask each witness to start with a two-minute speech. Ladies first, Dr Wilson.

Thank you, convener. Good morning.

I am delighted to be here and to have the chance to give evidence. I thank you for factoring the time for that into your hearings. I will keep my opening remarks brief.

We are talking about fiscal sustainability: I want to make two key points. First, there must be a robust evidence base in order to prioritise all public sector investment, particularly in this very difficult time of tight resources. For us in Scottish Enterprise, a real-time understanding of the economy must lie at the heart of decision making, given the difficult choices that we have to make. Secondly, priority should be given to investment spending that is sustainable and will have the widest possible positive economic impacts. We in Scottish Enterprise are absolutely committed to that.

Members will be aware that last month we published our business plan, which sets out our priorities and focus for the next three years. We have sent all of you individually a copy of that plan and have been in touch with you about it. In developing the plan, we developed a wide range of evidence in which Scotland’s entire company base was looked at. We wanted to understand what works in economic development and where our investment could have the biggest impact on the Scottish economy, which is the bottom line. From that evidence base, I can be as confident as we have ever been in Scottish Enterprise that we are focusing on the right priorities for the growth of Scotland’s economy. It shows that it is absolutely right that we maintain an unrelenting focus on growth in the current economic conditions.

It is easy for us to get caught up in very gloomy economic data. We should not ignore those data entirely, but we need to look at opportunities—of which there are plenty—for turning round the economic figures. We have to remember that three quarters of workers in the Scottish economy are employed by less than 10 per cent of our company base. That group of companies has the biggest potential to grow, so we need to consider how we can help them, as intensively as possible, to outperform the norm by exploiting outstanding opportunities and bucking the trends for their sectors.

That is not to say that we cannot also take short-term measures—such as access to finance—to address the more immediate changes and challenges in our economy. I am sure that Philip Grant will talk about that. However, that needs to be done while we stimulate much greater investment by the Scottish companies that have the biggest growth potential. In doing so, we can increase our exports, improve our research and development performance, get the economy moving again, create much-needed jobs throughout Scotland, and address the current unemployment challenges, especially for our young people.

The evidence base not only helps us to shape our decision making; it helps us in our work with partners right across the public sector to ensure much greater alignment of priorities. By developing that evidence and making it accessible to everyone, we have been able to achieve much greater alignment with our partners in recent years, which is critical, given the challenges across the public sector. We have also been able to develop our role as an adviser on economic issues to ministers and the Scottish Government.

I hope that in sharing the evidence base as widely as possible we can achieve better alignment in Scotland at local level, as well as at national level. I hope that we can continue to work with local authorities and other local partners to address regional inequalities and to exploit Scotland’s economic assets to their full potential.

If we are able to achieve three things—a focus on growth, stimulation of demand, and greater alignment with our partners—we can help to sustain the transformational growth that we are all looking for in the Scottish economy.

Thank you.

Good morning. I will be brief. The committee will be aware that Scotland’s performance during the past several decades has been relatively weak compared with that of our international competitors. We must go beyond comparisons inside the United Kingdom and look much further afield. Growth and—importantly—productivity have been weak, as have the underlying drivers of productivity. I commend the Scottish Government’s recently published report on research and development in Scotland, which will give you an idea of where we are on business expenditure on R and D, as well as other expenditure.

Scotland aspires to be a faster growing and highly knowledge-intensive economy, which is absolutely the right strategy. It seems obvious to me that it follows that higher education and research expenditure are critical in driving higher levels of innovation and new product and systems development. That is what Scotland’s economy badly needs. There are signs of improvement and greater alignment across higher education, agencies including Lena Wilson’s, and industry.

Universities add £6.2 billion per annum gross value added. We have 149,000 full-time-equivalent jobs—we support about 7.6 per cent of Scottish jobs—so higher education contributes about 6 per cent of Scottish GVA. In 2010-11, Scottish universities attracted about 14 per cent of all the external grants and contracts that were awarded to UK universities—Scotland’s population share is just under 9 per cent—and R and D spend in higher education was just under £1 billion.

Universities’ export income—by which I mean international tuition fees and non-UK R and D funding—has doubled during the past six years to £400 million. That gives a sense of the dynamic that is building and our increasing focus on sustainable economic growth, which is good for universities as well as for the nation.

Research quality is fundamental. A good evidenced report from 2009, which was overseen by Anne Glover, who was chief scientific adviser for Scotland at the time, showed Scotland’s citation indices at the top end of international performance. The research assessment exercise demonstrates that the Scottish research-intensive institutions in particular are among the best in the world.

On economic resonance, Scottish Development International noted that in 2008-09 half the 2,000 high-value jobs that were created due to foreign direct investment came as a result of R and D and the high-quality skills that we produce. A key international differentiator in Scotland, of which I hope members are aware, is research pooling, whereby universities work together to position themselves on an international stage in key sector-facing research in engineering, energy, life sciences, physics and chemistry. We are much stronger together, and universities are playing an important part in positioning ourselves in that regard.

An example is the energy technology partnership, which I have the privilege of chairing. The ETP works closely with industry; we currently work with about 40 companies. Two months ago, Mr Swinney announced a £10 million investment in knowledge exchange, whereby we bring together and feed in academic capability, research and skills, to the competitive advantage of our industrial partners. That was a fundamental driver for ETP in the Scottish alignment that led the UK Government to invest £50 million in the offshore renewable energy catapult centre in Glasgow.

I am sure that the academic base and its work with financial and public sector partners had a lot to do with the announcement not long ago that the green investment bank will be located in Edinburgh. There is a real sense of momentum.

What is key—I hope that we will have a chance to talk about this during the meeting—is building the platforms that connect our world-class research strength to the competitive advantage of our industries.

A number of initiatives are growing. In Glasgow, we have ITREZ—the international technology and renewable energy zone—part of which is the University of Strathclyde’s technology and innovation centre, with £100 million of investment. We also have an advanced manufacturing centre near Glasgow airport. Here in Edinburgh, there is the informatics centre at the University of Edinburgh and there is the Edinburgh BioQuarter. We need to build platforms that make our industry competitive.

Employability is important. The post-16 education reforms, which members will be aware of, are giving us better pathways to take our young people from school through college and on to university. Importantly, the reforms are responding to the increasingly articulate demand statement from industry partners. The energy skills action plan, which was published a year ago, gives us pathways and solutions as well as partnership opportunities to create up to 100,000 jobs. With Scottish Enterprise, Highlands and Islands Enterprise and Skills Development Scotland, we are in the throes of doing the same in relation to engineering.

The thing that will make a difference in Scotland is a much more coherent partnership approach among academic, public and private sector partners. I am optimistic that people are following that approach effectively.

I thank the committee for the opportunity to participate. I will split my comments into two parts: the near-term economic situation and the longer-term situation, on which my colleagues’ comments centred.

The Scottish economy is in a fragile position, as are the United Kingdom and global economies. Although we saw gross domestic product grow by 0.5 per cent last year, we all know that the sector breakdowns show that the picture for particular sectors is much more challenging. Our purchasing managers index, which we publish monthly, and our jobs barometer provide hope that underneath that there is positive momentum. We have now seen 15 months of relatively high confidence in our PMI and jobs barometer. Since the beginning of 2010, we have had evidence that there are increasing vacancies in the private sector. Despite a sharp drop in the figure for quarter 4 last year, it is reassuring that this year’s quarter 1 numbers again showed take-up of employment in the private sector.

In the short-term, the situation is fragile and challenging. However, when we focus on activity in Scotland, we see that there is hope that the economy is resilient and is, in a modest way, creating jobs and opportunity. Looking to the longer term I—like many Scots who live and work in Scotland and have children who are developing through education—am concerned about whether there will be real opportunity for my children to live in a prosperous and thriving Scotland. In that context, I welcome the committee’s work on reinforcing the imperative of sustainable economic growth for job creation and to fulfil the social aspirations of the people of Scotland.

As with any strategy, an economic strategy must be grounded on strong priorities and delivered with collective focus, measurement, confidence and a little patience. I welcome the priority that the Scottish Government and Scottish Enterprise have brought to focusing on a supportive business environment and on growth in the key sectors from which future jobs will come. As a representative of one of the largest private sector employers in Scotland, with 20,000 colleagues, I welcome the focus on education and skills and, in particular, the consultative approach to developing initiatives, in recent years.

Scotland has huge potential in particular areas, and real global opportunities. However, sitting alongside that are the data that bring the challenge into stark relief. The Organisation for Economic Co-operation and Development ranks us in the third or fourth quartile for innovation, entrepreneurial activity and investment as a percentage of GDP, as Jim McDonald mentioned. On density of business per 1,000 of population, we are 267th out of 349 European regions.

We could be pessimistic about those indicators, but the definition of an optimist is someone who sees opportunity in every difficulty and challenge. This morning, I am an optimist and I am in like-minded company with my colleagues on the panel. Opportunity can be the scarcest of commodities, but capability can be developed, which is why I am confident about the future of the Scottish economy. We have the opportunity to enhance capability. If we do so, we have a real opportunity to change the realities that I know the committee has on its mind, including the 23 per cent of 18 to 24-year-olds who are unemployed in Scotland today.

Financial services is a significant and valuable part of the Scottish economy that has a critical role to play in realising the economy’s potential. I acknowledge that, as banks in particular rebuild and refocus, we must be seen to take up that role firmly, and that must be experienced in a real way by our customers. That requires us to focus and refocus our activities and improve the capability to support opportunity and growth through working with customers and their enterprise partners in very different ways.

The global economy is an unforgiving place that rarely moves towards us. As it continues to rebalance and reshape, there is little to be gained from spectating, but much to be gained from engaging with confidence and ambition. This is a critical period for people who are in leadership positions across Scotland. Our children are likely to be relatively harsh judges of whether we succeed.

09:45

Thank you for those interesting and stimulating remarks. What I find interesting about each of your interviews in The Scotsman and your comments this morning is your optimism—Mr Grant referred specifically to it in his comments—about the Scottish economy’s tremendous potential.

I will ask each of you a question, but if other witnesses wish to chip in, please feel free to do so. I will then open questions out to my colleagues.

Dr Wilson, as you spoke first, I will ask the first question of you. You talked about the need to focus on market priorities, growth, demand and alignment and about the need to stimulate investment. How can the Scottish Government best work with businesses to stimulate investment at this time? Can you talk a wee bit more about your business plan, which you commented on in your remarks and referred to in your paper, and your proposals to help to create 19,000 new jobs and £7 billion to £9 billion of cash? How will you go about that process?

The first thing is focus. There are many requests for assistance from public agencies and there are finite financial resources, which make the choices that we make even more important. The focus is on understanding global patterns of growth and knowing which sectors in the world are likely to have disproportionate growth. We must remember that the US economy is starting to employ more people and is coming back. We had a very successful time last week at the offshore technology conference in Houston, which 80,000 people attended. We had 50 Scottish companies out there with us. That side of it is moving again. At the Boston seafood show a couple of weeks ago, salmon outperformed many of our food exports, which are topping £1 billion.

It is about our understanding the sectors and markets that are most likely to grow and about deeply understanding Scotland’s strengths. There should not be a “me too” strategy with everybody wanting to be in the same five or six sectors; there should be deep understanding of our academic strengths and capabilities, the talent of our people, our natural resources in renewable energy, our scientific capability, our skills and our business infrastructure. We must ensure that every penny of investment across the public and private sectors is aligned to maximising that.

That means that we must focus deeply on a relatively small number of companies. I think that I have said to the committee before that there are 300,000 businesses in Scotland, of which two thirds are sole traders who do not employ anyone else. We therefore have 100,000 businesses that employ people, of which about 10,000 have growth capability. At any one point in time, about 2,000 to 3,000 of those businesses have the absolute ability to be international businesses or to grow. The whole approach is about focusing deeply on the things that we know are likely to make a difference.

Scottish Enterprise has, with partners, gone as far as any economic development agency in the world in evidence gathering and economic modelling. So far, no one has been able to come up with alternatives; it is an art and definitely not a science. As I think I have said before, there is no manual or “A to Z” for how we should do it. We must gather as much evidence as possible and understand what is happening in the world, then bring that back all the time to the Scottish Government through weekly and monthly intelligence reports. I think that we are the closest agency to businesses and that we deeply understand what is happening to them, which can help to inform our delivery and policy.

The Scottish Enterprise business plan focuses on five key areas that will be transformative for the economy. One aspect is that we must take advantage economically of our transition to a low-carbon economy and all the technology that that involves. Another is the focus on the renewables sector, which is not the most important sector in Scotland but which offers the most opportunity to transform the economy. The plan also focuses on growth businesses, internationalisation and innovation, which speaks to what Philip Grant and Jim McDonald said about R and D. Those five areas must help us in the longer term, and we must in the shorter term be alive to issues such as youth employment, the 100,000 unemployed women, the employability question and helping businesses through difficult financial circumstances.

I know that you were out in Brazil, whose market Scotland has not traditionally tapped into—although quite a few trains that were made in Springburn were sold in Brazil and other places in South America decades ago.

That is right.

How important does Scottish Enterprise feel that it is to tap into such large and growing markets, as opposed to markets in which Scotland has traditionally done well?

That is a good question. The strategy is not either/or. As I said, the US economy is showing signs of resurgence, and the US is still Scotland’s biggest foreign direct investor, followed by France. We must have a strategy that still maximises opportunities in the developed markets but which taps as far as we can into developing markets. For example, through SDI, we have two offices in India, two in mainland China and another three in greater China.

We will open offices in Brazil—in Rio and, possibly, in São Paulo. There are massive opportunities in Brazil, which are not just in the oil and gas sector. Brazil has no shipyards and has to build three shipyards. There is a vast amount of transportation required; Brazil has deep oil reserves that need Scottish expertise.

Some Scottish companies, including the Wood Group and the Weir Group, are trading successfully in Brazil. Doing business in that market is challenging and difficult, and we are hand-holding companies in doing that. We will hold seminars on how to do business with Brazil. A globalscot from Brazil intensively helped Scottish companies out in Houston last week. The burgeoning middle class in Brazil offers huge opportunities for Scottish consumer goods; for example, one of the fastest-growing markets for whisky is Brazil.

The strategy is to maximise the mature markets, to tap into new markets and to get companies that have never exported to think about exporting, which we can hand-hold them through.

Professor McDonald talked rightly about higher education research and development, on which Scotland has 13.6 per cent of the United Kingdom’s expenditure, which is well ahead of Scotland’s population share. Everyone in the committee acknowledges that Scotland is doing well on that. However, a large segment of our population is—shall we say?—undereducated and lacks skills. How should we square that circle? In my part of the world—North Ayrshire—companies want to grow but struggle to find the skills, and particularly the higher-end skills, that they need.

You talked about how problems in connections being made between the public sector, the private sector and the academic base are being overcome, but what bottlenecks still exist? What can the Scottish Government and other partners do to help you to overcome those bottlenecks?

You have asked two key questions. I, too, live in North Ayrshire these days, so I can resonate with some of the concerns about how we help people in our immediate communities, as well as with points about the national strategies.

I will take access to education and success in building skills first. You will be aware of the post-16 education reforms, which are important and will have a major impact on further and higher education and on schools. To be frank, I welcome that. As we move towards outcome agreements in our sector this year, a key area on which principals in universities and colleges will concentrate is widening access. That means ensuring that we create pathways for young people from any background who have the right capability and who have been given the right experience to follow education opportunities through school into college and on to higher education.

The term “articulation” is used, but it is rather two-dimensional. What is emerging—certainly in my university—is the building of new partnership frameworks. For example, Glasgow will have three clusters of three colleges and the Clyde will have another cluster of three, through reorganisation of colleges. That will allow us to review the way in which the strategies in our various sectors are aligned. An obvious example is energy, to which I referred earlier. The idea of creating 100,000 jobs in Scotland in the next decade does not simply involve a number, but layers of significant detail that are led by industry demand.

As Lena Wilson emphasised, industry plays an important and responsible part, not by standing outside college and university gates telling us that we are not producing what it requires, but by joining us and working in an integrated way to help to define and fund programmes, and to offer opportunities to young people who are sometimes displaced from higher education.

Post-16 education reform is an important step forward. Much greater co-operation and partnership between colleges and universities will emerge, and we need to ensure that we take seriously the need to reach out to those who are socioeconomically disadvantaged. To give you a local reference, I chaired the Glasgow economic commission last year, and I know that among the key focal points for chief-executive level industry leaders in Glasgow this year are employability and tackling the problem of worklessness. As an academic institution leader, I take from that that the quality exists, that the academic experience is first class, and that the engagement with social issues is happening. However, that must be driven by a growth agenda, and we must look at building the economy to ensure that such growth is sustainable.

With regard to your point about academic and industrial integration, there are signs of improvement. I have mentioned a few of those, such as ITREZ. We are now clustering: that word was used in connection with economic development a while ago, and I would like to bring it back to the fore. The whole idea is to create key sectoral ecosystems in which large companies de-risk the opportunity for small and medium-sized enterprises to engage in research and innovation by creating a customer base and connecting to the research base.

The Scottish Further and Higher Education Funding Council has done a lot to support that, and Scottish Enterprise has done a tremendous job in the past few years by incentivising and working alongside the universities to encourage indigenous company growth as well as attracting foreign direct investment.

I will mention one more initiative. The Scottish innovation centres are very soon to be launched by the Scottish funding council in partnership with SE. We will spend significant amounts of money on creating ecosystems that will be focused on growth, industry demand and channelling the strong academic base in Scotland. Those challenging and risk-taking investments will make a difference as we compete with the very best in Europe and beyond. There is much to do, but there are good exemplars emerging, which are catching international attention and which are based, thought through and delivered in Scotland.

In your opening remarks, you spoke about how we should compare ourselves more internationally, and about the tendency to focus too much on other parts of the UK. I agree with that.

In terms of international comparisons, Scotland’s productivity has historically not been the highest. Given that our people come out of school with better qualifications than is perhaps the case in other areas of the UK, and given that our universities are at least as good as those elsewhere in the UK, why do we have that productivity gap? Is it simply due to a lack of capital investment over a long period? How can we overcome it?

There is no magic bullet, but the need for business innovation is key. There is a need for work readiness in our school and college leavers, and for leadership in our businesses and public sector agencies. It must be recognised that being innovative, productive and competitive makes a difference.

At the micro level, we must give our schoolchildren and our college and university students access to work experience, so having innovative companies that welcome new thinking and that are open to challenges is key. That requires a certain breed of leadership, and a culture in organisations that welcomes challenge and seeks innovative solutions. That sort of innovation within organisations and the power of human capital can release potential, which often leads to an uplift in productivity.

However, that is heavily dependent on innovation and research, and we have to ensure that we weld those things together. We must not see too many parallel strands because, as members know, parallel lines never connect at the limit. We must get much greater convergence of innovation, the production of high-quality school and college leavers and university graduates, and the leadership that we need in our organisations to see what the opportunities are and take them.

10:00

You hit the nail on the head in talking about getting ready for work. Yesterday, I spoke about work to children in primaries 4 to 7 at Dykesmains primary school in Saltcoats. The headteacher told me that there had been no employment in some families there for two or three generations, and the pupils needed to know about the diversity of the working world, which I spoke to them about. Education about that has often been left very late, and I am glad that things are now progressing much more quickly at an earlier stage.

Mr Grant gave us a very interesting statistic. Out of 349 European regions, Scotland—if we can call it a region; most members of the committee would not do so—came 267th in respect of the density of businesses. What can the banking sector do to help that? Mr Grant gave a very optimistic opening statement and the Scotsman article is excellent, but there are real concerns that the banks are not helping as much as they could in taking Scotland’s businesses forward and allowing access to capital at a reasonable cost.

I recognise that the past few years have been incredibly difficult for the banking sector, and that that has had an impact on the confidence in it to deliver its obligations to its customers.

On lending and the growth of lending, we in Lloyds Banking Group are clear that focusing on supporting SMEs in particular in a real way through supportive lending was one of our overarching priorities last year and going into this year, and that it is one of our overarching priorities going forward. Therefore, there was net lending growth last year in Scotland and nationally, with £12 billion of committed gross lending to SMEs nationally, and a commitment again this year to £12 billion gross, with net lending growth to SMEs. Those are clear, public, measurable commitments at that end.

On our relationship with SMEs—particularly small businesses—there has been a big focus in the past two years on the physical support that we and our relationship managers provide for the development of businesses, particularly through key milestones in the development of a business, as I said in the article in The Scotsman. As Lena Wilson pointed out, by volume of business the Scottish economy is largely focused on sole traders, who are a big part of our business. Therefore, supporting sole traders to employ, develop and give opportunities beyond their own sole trader model is a key part of what our relationship managers are equipped to do. In the past 18 months, we have worked closely with Scottish Enterprise in particular on aligning our relationship managers on the ground with the resources that are available to Scottish Enterprise and the business gateway to ensure that our relationship managers are best equipped to act as advisers as well as bankers to SMEs.

As members are aware, we have a national mentoring scheme for SMEs that is supported by the British Bankers Association. Lloyds Banking Group provides around a third of all the mentors for that scheme. This year, we are launching a new export mentor scheme, and we are working with Scottish Enterprise, which is being very helpful, to hold seminars and support sessions for our relationship managers to increase their knowledge bank on opportunities for exports and, more important, how to support our customers to understand the risks and guide them through the export process.

Last year, we held 60 events across the country for SME customers. We brought together public and private agencies to share best practice, particularly on supporting businesses through difficult times and helping them to manage their cash flow through such periods.

We are doing a huge amount. I recognise that my saying that is one thing and that our customers’ experiencing it every day is another, and that that is what really matters. When we find situations in which customers are not receiving the degree of financial or advisory support that they should expect, I personally respond to that. We set our bar very high. We recognise our roles and responsibilities. Working very closely with our partners, particularly Scottish Enterprise, we recognise that we have an important role to play in the next few years, particularly in the SME segment of the economy.

Your interview in The Scotsman says that you believe that

“the forthcoming independence debate ... is helping to focus peoples’ minds on the economic fundamentals in Scotland”,

which is “positive” and

“is doing no harm to the country’s international profile”,

and that

“There are parts of the world where people are getting interested in Scotland again and there is maybe some advantage in that.”

Can you tell me how we can capitalise on Scotland’s higher international profile?

As Lena Wilson said, Scotland has great strengths and natural opportunities, and, as you heard from Jim McDonald, it has great talent and strength in its university sector. For people to be more aware of Scotland’s brand and our capabilities and opportunities, which I talked about earlier, is no bad thing in a global market where—as I think that you mentioned earlier—the definitions of country, region and economy are irrelevant for businesses and people who are looking for jobs. What is more important to them is whether there are investment opportunities in places and whether markets are opening up for them.

The political debate is something that is for the politicians and the people of Scotland. Leaving it to one side, part of my role in my organisation is to be an advocate and promoter of Scotland’s capability. Some 20 per cent of our colleagues are based in Scotland, which beats the demographic across the UK. Like my colleagues at the table today, I take every opportunity to promote Scotland and its capability.

I now open up the session to colleagues. The witnesses have been very polite so far, but they should feel free to add on comments to other witnesses’ replies.

My question is initially aimed at Lena Wilson. Internationalisation is critical to growing our economy. Where do you think that we are underperforming at the moment in terms of countries that we trade with? You said that there is enormous potential in Brazil. Where else is there such potential, where we are currently underperforming?

I would not necessarily say that we are underperforming, because some of the markets have only recently begun to emerge. It is more about taking advantage of the opportunities. For example, there are massive opportunities across the middle east. There is huge interest from sovereign wealth funds in terms of non-traditional forms of investment, such as airport acquisition or port infrastructure investment. That requires a different kind of conversation beyond foreign direct investment. We have opened an office in Dubai and are actively working across the middle east. Abu Dhabi has rich reserves, but, as part of the move towards a post-carbon society, as it were, it wants to invest in countries that have renewable technology at the top of their agenda. That kind of investment might go towards our marine sector, for example.

There are massive opportunities in China, India and Russia, where we have a presence now. Those countries have growing middle classes with an interest in consumer goods. Some developed countries offer opportunities, too. When I was in the United States last week, I noticed that, as a result of weight issues, there is a desire for health-enhancing foods. In successful economies, people are less healthy and are generally fatter than in other countries. There are opportunities in that regard for health-enhancing food of Scottish provenance, such as salmon.

The approach must feature a mix of tapping into Scotland’s rich resources by the developed markets and consideration of countries such as Indonesia and those in Africa. I am going to be in Africa later this year—even beyond oil and gas, there are more opportunities in Africa, too.

We cannot open offices absolutely everywhere, because the country cannot afford that, so we have to ensure that our limited resources are targeted. Our 100 or so people are split roughly equally between three areas: a third in the Americas; a third in Asia; and a third in the Europe and middle east region.

I see Jim McDonald indicating that he wants to speak, but I just want to say one thing first. Universities often go overseas, and I have been talking to the Royal Scottish National Orchestra about its trip to China. We have to make sure that every single part of Scotland that plays an international role is aligned and not just turning up without telling others. Jim McDonald is very good at doing that when he travels. What is the Scottish proposition for any particular market? We have 800 global Scots all over the world as well as Scottish businesspeople, and I would like to see the message getting out much more to everyone.

Convener, may I respond briefly to Gavin Brown’s point?

Absolutely.

We mentioned Brazil earlier. A year ago, the Brazilian President announced the creation of the science without borders initiative, which involves 100,000 young Brazilians studying in Europe and other parts of the world. Scottish principals have often gone with their teams to Brazil; I had a team there about a month ago. We are educating business partners for the future and making opportunities for Scottish Enterprise and other business partners. Aligning internationalisation, credibility and longevity in universities with what we are trying to do to create sustainable economic growth is absolutely fundamental. Indeed, Iberdrola, with which we have a great relationship, and Scottish Power own a number of utilities in Brazil.

We now seek to leverage the research that we are doing in Scotland to create greater capacity in Scotland and to build operational knowledge and design new products. At my own university, we have 1,000 Chinese students. Many will go straight into industrial positions back in China, but many will stay here to conduct research.

As Lena Wilson said, a fantastic amount of activity is going on in Scotland and going out from Scotland. There is a big challenge but, if I may use a term that Philip Grant used several times, the opportunities are there and we need to seize them. There is a lot of capacity and capability, and it is now about identifying the opportunities and working together to realise them. The important thing for universities is to work increasingly closely with private and public sector partners to leverage the international opportunities.

The smart exporter initiative was set up to get more Scottish companies to trade outwith Scotland. How do you think that it is going? What other initiatives would you like to be set up to try to build on that?

The smart exporter initiative is going increasingly well. Such initiatives are about us lifting our sights. The convener talked earlier about work role models for young people, but it is vital to have role models for companies. It is all well and good for us to talk about markets, but it is really powerful when a company does that. We need to make increasing use of case studies and companies as role models so that others can say, “Look. That company is just about the size of our company and it is doing what we are doing, but it’s out there in China.”

We are hosting a series of events all over the country to raise market awareness, get sectors together and, in particular, use the private sector in our industry leadership groups to raise our sights and horizons. Only about 5 per cent of our company base exports so the challenge for us all is to increase that proportion significantly.

We have to help existing exporters to get into new markets, which will be easier to do, given that the bigger challenge is around new exporters. A lot of that involves setting ambitions, raising confidence and working with the leadership team. We must ensure that we are showing them practically how they can export. We are equipping our staff with export qualifications so that they can give companies technical support, and we are working with the Scottish Council for Development and Industry, and with chambers of commerce and the various industry associations.

I meant what I said in the article in The Scotsman about how it does not matter who gets the credit. We must all work together to get the job done. Our most important opportunity is internationalisation. It is a mindset that we need to get into children, schools, universities and companies.

Internationalisation will also raise productivity. Was it Gavin Brown who raised the question of productivity earlier?

I think that it was the convener.

Companies that operate globally and realise that they have global competition will have to become much more productive and be much more innovative. All those issues are linked.

I think that Mr Grant wanted to comment.

10:15

I just wanted to reinforce Lena Wilson’s comments. We recognise that if 5 per cent of companies are exporting, that means that 5 per cent of our relationship managers are experienced in supporting companies that export. There has been a huge gap in our capability, and we have been investing heavily to ensure that our relationship managers are aware of and have a better understanding of the opportunities that exist in new and emerging sectors so that they can engage more effectively with their customers. More important, we want our relationship managers to understand the products, the techniques and the risks, and to know how to support customers through the export process and how to access all the support that is available from the public sector. Over the next three or four years, I think that customers will test and measure their banks’ ability to offer support in that area. There has been a gap in the past.

Welcome to the committee.

In my maiden speech in the Parliament, I referred to the fact that there was a low skills equilibrium in the south of Scotland. Three of the regions in the south of Scotland are among the five worst-performing NUTS—nomenclature of territorial units for statistics—areas in Scotland. North and East Ayrshire perform worst; they are followed by the Borders and Dumfries and Galloway. As I am sure that you all know, the Scottish Government’s economic strategy refers to the principle of cohesion among regions. It is not simply that growth is good in its own right; greater cohesion is a characteristic of the growth that we are seeing in Scotland.

What is your strategy for raising the economic performance of the weaker-performing regions of Scotland and allowing them to catch up with the rest of Scotland?

The worst-performing areas as far as employment levels are concerned are the urban areas, just because of the nature of the population, but that belies the fact that, in the more rural areas, we have issues with lower wage rates, multiple jobs—particularly in the Borders—and lower productivity. The nature of work in rural areas is such that it does not always offer people the chance to use the higher-level skills that they might get to use in urban areas, even though unemployment is higher in urban areas, because of the nature of the population. People often do not understand that.

Thinking back to the growth agenda, we often see growth as being exclusive, but equity across Scotland is really important. We cannot have a successful Scotland if big chunks of the country are, quite frankly, lagging behind the rest, but we will not address that situation with a needs-based agenda and with supply-type initiatives.

A few months ago, I was delighted to attend a meeting of the North Ayrshire community planning partnership, which involved all the public sector leaders across North Ayrshire. In the conversation that I had with them, I did not say that I could go down there with a bag of cash—I cannot do that. I said that rather than buying good will by spending money in regions and allocating it on a pro rata basis, we wanted to do a lot more to get a deeper understanding of what the economic assets of North Ayrshire are and to help everyone in North Ayrshire to understand what some of the economic opportunities might be. I have seconded staff to help with that—I have a full-time member of staff who is working with East Ayrshire Council post-Diageo. In relation to investment in North Ayrshire, we have been helping with seminars on renewables. I was delighted by the GlaxoSmithKline announcement. On top of that, we have had the announcement about Stevenston from Chemring Energetics. It is not that investment is not happening, but the opportunities for it will be much more limited.

For Scottish Enterprise, the issue is working intensively to properly understand what the economic assets and opportunities are. We would be more likely to work with companies that are just on the cusp of growth in rural areas, because we understand their importance to the economy. We lower the criteria, if you like, in Scotland’s rural areas, because we realise the importance of such employers.

Some amazing things are happening in textiles and knitwear in the Borders. That goes back to what I said about high-level international consumer markets. Believe it or not, Brazilians are interested in high-quality knitwear and Harris tweed, even though it is probably far too hot in Brazil to wear such garments. That is to do with the middle class showing signs of wealth. There are tremendous opportunities for some of the artisan and craft-like capabilities of the rural areas of Scotland. A lot of our best food companies are in Scotland’s rural areas, too. We have Braehead Foods down in Ayrshire and Mackays jams in Arbroath, 60 per cent of the turnover of which comes from exports. It is a case of understanding the assets that we have, but it cannot just be about having a needs-based agenda, because that is not sustainable, and the committee is interested in fiscal sustainability.

I was intrigued by Professor McDonald’s statistic earlier that about 50 per cent of foreign direct investment is attracted to Scotland based on our R and D profile. I should declare an interest—I did some consultancy work for Scottish Enterprise, including a study that looked at commercialisation and research assets across Scotland. The study uncovered the fact that 65 per cent—I think—of all three categories of R and D spend, namely government, business and higher education, was located in a region from Dundee southwards to the Lothians, in the area around the Forth and Tay estuaries.

By comparison, about 4.5 per cent of the workforce was in Dumfries and Galloway and the Borders, but less than 1 per cent of R and D spend across all the different categories was in that area. It is probably unrealistic to expect that R and D on a huge scale would be located in that region. However, what can we do as an economy to build linkages between the R and D that is happening in areas such as Glasgow, Edinburgh, Dundee and St Andrews and businesses in rural regions such as the south of Scotland, to ensure that the businesses innovate and, to pick up on the point that Mr Grant made, to take risks and to not leave it to someone else to develop their products and commercialise them?

I will answer Paul Wheelhouse’s previous question briefly, and then I will take the next point. Lena Wilson may wish to build on my answer. An important development—particularly for Ayrshire—is the new University of the West of Scotland campus. It is important not only as a signal, but also in terms of infrastructure investment and the creation of links between schools, colleges and the UWS campus in Ayrshire. There is tremendous improvement there that will really make a difference in that part of Scotland.

I mentioned the Glasgow economic commission earlier. Glasgow does not have plans to go beyond its borders, but the industrial advisory groups that we have created in partnership with Scottish Enterprise resonate around the key sectors. We see that as a west of Scotland opportunity, alongside the Glasgow requirement to build jobs and deal with worklessness. In life sciences, for example, an emerging proposition, supported by Scottish Enterprise, is the growing notion of a bio corridor from the M8 to the bio city that is in—is it Newarthill?

Yes.

The bio corridor would go through Newarthill, through the Southern general—where there is £1 billion-worth of investment, with a possible new clinical research facility—down to GSK in Irvine. It would create jobs and connect research, taking it out of the big academic hubs. Research will be seated in academia, but we must get it out there, touching the SMEs. We must make sure that innovation is encouraged, with the SMEs sitting alongside their big tier 1 partners. That area is growing.

I give the example of the Glasgow situation and low-carbon technologies. About a year ago, The Economist published an article that recognised from an international perspective that Glasgow was a global hub for innovation in R and D in low-carbon technologies. For Scotland, it is a Scotland-wide opportunity. Glasgow may be where the greatest intensity of research is going on—with expenditure on business R and D as well as academic research—but the academic research spreads across Scotland through the energy technology partnership. The port development that is going on from Nigg to Dundee and Leith is creating jobs in manufacturing and fabrication. The supply chain partners will flow all the way through Ayrshire in terms of specialist engineering companies and companies that produce large, specialist, highly innovative products.

The key thing is that as we develop an industrialisation strategy, as it were, we have to take the whole of Scotland with us and see where the opportunity is—not least around how to bring up the human capital in terms of the skills base and the capability to engage with the opportunity.

I agree entirely with Jim McDonald. It is not surprising that there are high concentrations of R and D around universities, which are largely based in our cities. Around the world—for example in the US, around Palo Alto in Silicon Valley, and Route 128 and all the bio-tech around Boston—there are concentrations of high-level, R and D-type organisations that locate close to universities. The same will happen in Scotland—companies will want to be around ITREZ to take advantage of the advanced forming research centre.

However, in the areas outside the cities and in the more rural areas of Scotland we can take a company-by-company approach. We can align the companies that we intensively account manage—company by company and sector by sector—and match them to universities. We have been doing a lot more of that—I have called up Jim McDonald more than once about an interesting company to ask whether someone from Strathclyde can talk to it or get it more interested, or get it to employ graduates for the first time. It is a company-by-company strategy.

We should be proud of the fact that we have zones that have high concentrations of R and D. Scotland is small enough. I was in a city last week that has a bigger population than Scotland. It is just that our population is geographically spread out. Outside the cities, the company-by-company approach is the way forward.

We had interesting evidence from Lord Smith, who talked about youth employment issues and rural Scotland. You will detect the theme of my questions. Some areas of rural Scotland have been good at producing graduates but poor at retaining them because they tend not to be good at producing employers that recruit and retain graduates. You touched on the issue, but I am intrigued to know what we can do about that. What initiatives do Scottish Enterprise, the Scottish funding council or others have in place to improve the situation? In England, there have been innovation vouchers, and the knowledge transfer partnerships operate there as well. What are we doing to encourage companies outside the urban core to engage in programmes and take on graduates?

I will let Jim McDonald comment on the universities side, but under the TalentScotland umbrella we have a programme to help SMEs, in particular, to take on graduates. They get some financial assistance to do that. The programme was the old graduate placement programme, but it is now much more intensively oriented to companies and their growth and has been working well.

I have been talking to ministers recently about talent. If we take an altruistic approach and ask businesses to take on more graduates or young people because they are unemployed, that will not help those businesses, because that approach is not very sustainable. Instead, we say to them, “You’re missing a key talent pool, and one that’s much more affordable than it has ever been in the past. We’ve got much higher levels of graduates and terrifically skilled young people who are unemployed.” Forty per cent of the companies that we work with intensively say that they plan to take on more people. That takes me back to the focus on growth, and the need to work company by company.

My message to the Minister for Youth Employment is that we should focus on competitiveness and talent, and I would be happy for Scottish Enterprise to lead whatever campaigns are necessary to do that. Recently, we have looked for the first time at tying in regional selective assistance awards and making them as conditional as we can. We have to be careful about that, but we want to encourage businesses to take on young talented people who are unemployed. We need to incentivise that as much as possible, but the aim should be to make the company more competitive. We should not ask businesses to step up just because the country has a problem, as that will not work.

I can share an interesting bit of news with you. The early signs are that graduate-level vacancies are up by 6.4 per cent this year, which is encouraging. Universities cannot make jobs. We can respond to them by producing high-quality graduates, but we need economic growth.

In response to Paul Wheelhouse’s question, I refer to what I said earlier about the UWS and its exciting reach into Ayrshire, and we should also think about the University of the Highlands and Islands. It has a distributed campus and the many high-quality colleges and other specialist organisations reach out to the Western Isles, the Hebrides and the north of Scotland.

The key thing that we can do—universities are now doing it—is ensure that the graduates that we produce have greater exposure to enterprise and more understanding of entrepreneurship, so that as well as working for organisations, they will have the skills and confidence to create their own businesses. Scottish Enterprise and Highlands and Islands Enterprise can play an important role in that regard. Another key dimension is the need to ensure that Scotland is more digital. We need greater connectivity and access to broadband. I am sure that the committee has discussed that.

Nonetheless, there will be high concentrations of R and D in certain areas. We should not be surprised or disappointed about that, as it is a feature of the industrial landscape and the way in which businesses work together and cluster. However, we should remember that we want to give all our graduates the necessary skills and ability to translate their education into business and other commercial opportunities.

I would like to give an employer’s perspective on the talent agenda. About 60 per cent of those who fill our 1,000 vacancies a year are new to the organisation and under 24 years of age, and our graduate intake is a big part of that.

When we do opinion surveys among our most talented colleagues, we find a huge desire for opportunity within our business in Scotland. That is an issue for us. There is a real opportunity for employers, if they can provide real opportunity for talented people so that they can build their families and maintain their careers over time in Scotland. We have developed a Scottish network in our business to ensure that individuals are introduced to opportunity and that we can retain them. The last thing that we want is to become an incubator for talent in Scotland that then evaporates. One aspect is about sustaining and supporting employment beyond intake. That is important for maintaining, over time, a robust base of quality talent through every level of the organisation.

10:30

I fundamentally agree with that, but I will not go into it in any great detail, because other colleagues wish to ask questions.

I have one or two questions on the interviews in The Scotsman. Dr Wilson, I was interested in your comment that

“for too many middle-class families, it is still all about ‘accountancy, medicine or law’”.

My family were a little bit like you, because my father was an engineer and he was disappointed when I became an accountant. Should we be doing something about the issue? For example, should we give grants to engineering students?

I am glad to have the opportunity to declare publicly that I have nothing against accountants, doctors and lawyers—I read some of the letters that were sent to the newspaper after the article was published. The question provides a great segue from the previous one, because my point was that, just as we have to encourage companies to be more ambitious, we have to do as much as we can as early as possible through schools and universities to educate parents, children and teachers about what is happening in the economy and where the opportunities are. I cannot tell you how many companies I meet that tell me that Scotland’s engineers are terrific—even though one of the letter writers disagreed with me, I have it straight from the horse’s mouth that our engineers are terrific. However, we do not always encourage the brightest and best to go into engineering and information technology, which are two areas in which lots of jobs are available.

I made that point in the interview because I do not want us to get into a situation in which we have difficulty filling vacancies in Scotland. The renewables sector is growing and the oil and gas sector is still growing on the engineering side. I am not sure about incentivising people financially, but we need a cultural change and a mindset that there are new opportunities out there in the economy. I cannot guarantee this but, if we increase the number of engineering and IT graduates, I am sure that almost 100 per cent of them will walk into jobs in the next 10 years. That must be incredibly attractive to young people, but they will have to study science, technology, engineering and mathematics.

We must build that in schools and we must do all that we can culturally. The universities need to respond by offering places. That relates to Jim McDonald’s point about the universities’ connections with industry. They need a deep understanding of how to customise degrees. They have done that well in relation to the financial services sector, with risk management degrees and all the rest of it.

I simply took the opportunity to state the point that, although we have graduate and youth unemployment, we have massive opportunity and potential vacancies in engineering, technology, the science base and IT.

I ask the other witnesses whether we should somehow be incentivising, or whether it is just about education in schools and so on.

Of course we should be incentivising. I speak as a father of twin daughters who are both engineers—so no pressure there, then—and a 14-year-old son with whom I sit at night at dinner with the will out and the Tipp-Ex over it saying, “You will be doing engineering at university, son.”

I can give an excellent example that is starting to be replicated across the country. Five years ago, the Institution of Engineering and Technology—for those of you who are in engineering, I say that it used to be called the IEE—responded to the dearth of electrical systems talent. How did it respond? I mentioned that industry has started to play its full role and to take responsibility for building the cadre of talent that it needs. Rather than look at the output from universities and colleges, the IET started to work with universities on the input side to consider how to attract well-motivated and well-qualified young men and women into engineering programmes.

The answer was pretty straightforward—it was to provide a £2,000 per annum bursary, a guaranteed 10 weeks of training during the summer period and a high likelihood of employment, although not a guarantee, at the end of the course. That means that about 200 to 300 students in seven selected universities are coming through the pipeline annually to satisfy utility need.

At the University of Strathclyde and a number of other universities, such as Imperial College London, the University of Manchester and other Scottish universities, we are getting the same demand statement from the oil and gas industry. I know from an informal conversation with Dr Wilson that—as the committee will have seen in the press—the oil and gas industry is concerned about the requirement for higher volumes of even better quality engineers, and I could not agree more.

We must ensure that the quality of science and mathematics teaching in schools is first class and that the curriculum for excellence has that on its agenda. We must also make sure that industry plays a full role in incentivising and in communicating with parents about what a job and a career in engineering and technology mean.

The problem is perennial. I remember chairing a conference in 2000 about engineers for the 21st century that discussed the lack of engineers and of talent and the need for greater quality. That situation remains. There are signs of an improvement, although there may be a little negativity about that, because people are perhaps deselecting certain professions rather than choosing engineering. However, we need to take advantage of that, because that will be a core part of Scotland’s growth.

To respond to John Mason’s question, by all means, we need to incentivise, which may mean industry playing an even more direct role in getting young men and women into relevant degree programmes.

Dr Wilson, I understand why Scottish Enterprise is focusing on high growth in a few industries. However, in doing that, is there a danger of putting all our eggs in one basket? If something bad happens to the whisky industry, will the whole country go down the tubes? Finland has been very attached to Nokia and perhaps has suffered from that. How do we get the balance between concentrating and spreading out growth?

We get the balance because we concentrate on sectors and companies. Many of Scotland’s high-growth companies are not in our key sectors—a high proportion of the 2,000 to 3,000 companies that we work with intensively are not in the key sectors. If we had a strategy that focused only on narrow sectors, we would miss out those companies.

We work across about 13 sectors. The most resource goes into the energy, tourism, financial services, life sciences and food and drink sectors. I am sure that I have forgotten one, because there are six such sectors.

It is the creative industries.

I thank my board member for reminding me. We also work with universities and education. There are other important sectors to Scotland in which, although we might not lead the world, we are an important part of the supply chain, such as the aerospace, marine, defence, textiles and forest industries. The chemicals industry, which has a very strong industry association, is important too.

We work with a lot of high-growth and international companies that sit outwith the key sectors. I hope that I have made Scottish Enterprise much more opportunistic, so that we attempt to be completely open to any opportunity for growth that presents itself and which we have not thought of or researched.

The approach is to balance that as best we can, while being unapologetic about focusing on the opportunities that are most likely to transform the Scottish economy.

Mr Grant, you talked about “glass ceilings” in your Scotsman interview. We seem to grow companies to a certain extent, which then get swallowed up by somebody else. Is that one of the glass ceilings? There are good examples such as Scottish Power, which has links with South America, but I find it disappointing that that is not a Scottish company. Can we do something in that area? Why do Scottish companies get only so big?

There are probably a number of factors. Businesses that reach a certain point become very attractive. There is something about our approach to innovation and the incubation of ideas in businesses—particularly those that come out of the education sector.

Companies reach a point at which significant capital is required. One option that is available at that time is to seek capital by in effect moving the business into another model through being acquired. However, we need to recognise the need to make people much more aware and supportive of the ladder of support.

Last year, we had an access to finance event, at which we brought together all the finance elements. Through its seed funding all the way up to its venture fund, Scottish Enterprise provides the opportunity for equity support. By understanding and leveraging that support, banks help businesses to grow and develop. Part of the wider advisory role that banks should have is about how to manage risks in business, which is about not only financial risk but helping to support the overall management of the risks of growth.

The networks and frameworks are there, and there is private equity and support. Scotland also has a great professional advisory base that is available to companies to support them. The critical issue is working more closely together.

Particularly in the past year, we have been doing work—I know that other banks are doing the same—to ensure that, for an account-managed company under Scottish Enterprise, we as a bank are very aligned, so that the bank’s relationship manager has a relationship with both the company and Scottish Enterprise and they work effectively as a team. That goes back to Lena Wilson’s point about exhausting all opportunities for growth. The case that I described is about ensuring that every opportunity for tangible and intangible support is available to the individual business.

I am keen to see more progress. The banks watched, participated in and benefited from the oil and gas sector growth through the 1970s and 80s. We learned a lot through that. For example, we learned how to get much closer to our customers, to anticipate and support the changes that they would need to make over the 30 years of an industry that has morphed and created value.

We are now reflecting on the lessons that we learned from that for the network and support that we are building up. We are ensuring that, to leverage the opportunities that Jim McDonald is working on today for four or five years out and the opportunities that Lena Wilson’s customers and clients represent today, we have the resources on the ground to provide real-time funding where and when it is required. I would love to see more businesses growing and developing, and it is good for our business as a bank to have a strong and growing indigenous economy and the creation of employment.

On John Mason’s point about global businesses and foreign acquisitions of Scottish businesses, sometimes that is the only way in which a business can grow, as Philip Grant said. It finds a very large organisation with deep pockets that allows the Scottish base to grow, so it is not always a bad thing.

We have a number of Scottish businesses on the cusp of the magic £100 million turnover point, which is when we would regard a business as a global company of scale. It is vital that we grow as many of those companies as possible. However, we are in a global economy, so we must remember that, although Scottish companies will sometimes be acquired, we have Scottish giants such as the Wood Group and the Weir Group acquiring companies in other countries all over the world, which is how those Scottish companies are growing. It is therefore a two-way street, in that those Scottish companies will go all over the world acquiring foreign businesses and Scottish businesses will sometimes be acquired in the same way, which could be the best thing for them at the time, even though we would all like all the big businesses to have Scottish headquarters and Scottish owners.

There sometimes seems to be slightly more traffic going down one side of the street than is coming the other way.

Do you know why?

Is that purely an impression?

I think that it is because we are Scottish and we tell the bad stories and do not tell enough of the good stories. I am absolutely on a mission to bust those myths and tell as much good stuff as possible.

Okay. Good for you on that one.

To go back to Mr Grant, I completely agree that we want people in jobs and we want companies to grow. I noted that one of your comments in The Scotsman was that we have a

“luxurious safety net which people in Britain expect”,

and the question is whether that is “sustainable”, meaning the social benefits model and so on. A lot of my constituents would not feel that there is a “luxurious safety net”. Do you not think that we can have both aspects, in the sense of better benefits that are paid for by companies growing?

I am not sure that I used the word “luxurious”. Perhaps I did, but I will need to check my own words to see whether I chose the phrase “luxurious safety net”. I think that I implied that everyone in the UK values the social model that we have here. I think that the committee recognises—certainly in the presentation of its agenda—that critical to that is a sustainable growing economy. It is also recognised that, as social needs develop and change over time—I know that the committee’s business later involves consideration of that—there is an appreciation, which I know is on the minds of those around this table, of what will be required from the fiscal base to support arrangements and the reasonable aspirations of the people of Scotland for how social need will be provided for.

10:45

If I have created the impression that I think that there is a luxurious safety net, please let me, for the record, take away that impression. However, there is a recognition that we need a healthy, strong economy to provide the social support that many people in Scotland absolutely require. Given the events of the past few years, more people in Scotland now reflect on the demands on our social infrastructure and the need to have a healthy economy—the committee’s business also reflects that. That is the link that I was welcoming, as it makes for a healthy debate not just for politicians but for everyone in Scotland.

One would hope that a healthy, growing economy militates against the need for people to be on benefits.

I was not talking just about benefits.

You were talking about the national health service and so on as well.

The whole social model.

Including the education system—I appreciate that. John Mason did not take the words out of context, did you, John?

It is difficult not to be infected by the positive attitude and the optimism of the witnesses this morning. I wish Dr Wilson good luck with her myth-busting campaign. I hope that I am not going to burst some bubbles with my questions. I like to be positive as well, and I try to be a glass-half-full person, but at some point the reality kicks in. Even if a glass is half full, there is still 50 per cent capacity in the glass.

On the same day in February, I visited both Gamesa and Tata Steel, in my constituency. I heard all the messages, which were talked about earlier, about Gamesa with its R and D tapping into the university sector—it is located in my constituency because my constituency is between Heriot-Watt University and the University of Strathclyde—and the enthusiasm about renewables. It is fantastic to see the work that is going on there, and it is difficult not to be enthused by that company. In the afternoon, I visited Tata Steel, which was concerned that it had lost out on a contract to make a contribution to the Forth road bridge. It was concerned that that sent out a bad signal, because it has invested a huge amount of money in gearing up to make steel for the renewables sector.

What really concerned me was the fact that neither of those two huge European and worldwide companies, sitting 2 miles apart, knew what the other was doing—they had never spoken to each other. Both of them are tapping into the renewables sector, but they are not connected in any way in taking that forward. Does that concern you? It certainly concerns me. How prevalent is that situation? Do you see us taking that forward so that we do not have such a disconnect in our indigenous industries?

That is an important point—I do not take it as negative or as seeing the glass as half empty. We have an opportunity. Gamesa is a fairly new investor in Scotland, so it is perhaps not unreasonable that it has not met everybody that it needs to meet in the region. However, we can think of the relationship that Burntisland Fabrications in Fife has with Steel Engineering in Renfrew. We are also now talking to 600 companies in Scotland that are not in the renewables industry at all about the opportunities in renewables, to help them to be part of the supply chain. Some of them are involved in aerospace and the development of composites; some of them are in different parts of the engineering industry; and some of them are in oil and gas. Another industry in which connectivity is important is the food industry. We are working with about 600 companies and connecting them all together.

We recognised that we were perhaps not doing enough to bring companies together. I am sorry to use jargon, but we have colleagues who are account managers and who work intensively with companies. We have now aligned them along the same sectors so that it is much more likely that an account manager at Scottish Enterprise will work with 20 or so companies that are predominantly in the same sector, precisely in order that—to address the point that you are making—we can connect them up.

I am sure that there are some areas in which we are not connecting companies as we should be and I take your example on board. Nevertheless, we have moved much further, and 70 per cent of all the companies that we work with are in Scotland’s key sectors and are much more aligned than they were.

Your point about connecting companies—particularly in the same sector—because they can probably work together and give business to one another is vital. That is how we will achieve a multiplier effect in the economy from sectors such as renewables. It is also a way for smaller companies to scale up and get contracts that, to be frank, they might not have been able to access on their own because they are too small.

Thank you for the information. I accept the point.

Michael McMahon makes an important point. Gamesa’s entry into Scotland is tremendous. It has plans for 180 R and D jobs in its research centre at Strathclyde business park. It is a great partner.

To emphasise the point that Lena Wilson made earlier, the lack of mutual awareness in certain industry sector partners can be a drain on realising opportunities—I assume that the committee has talked about that before. We should celebrate how SE works with our industry partners. I would go so far as to say that it is envied south of the border.

I commend the committee to learn more about the industry leadership groups, which bring together key leaders in the industry sectors. I co-chair the Scottish Energy Advisory Board with the First Minister. In that board, we have Sir Ian Wood, Jim McColl, leaders from Scottish Power and SSE—such as Ian Marchant—and leaders from oil and gas right through to the demand side. Those people connect with a cluster of other sectorally relevant areas, such as renewables, the grid, oil and gas and carbon capture and storage.

We also have the Financial Services Advisory Board—FiSAB.

Of which I am a member.

We also have the Life Sciences Advisory Board. Each is co-chaired by a senior member of the Government. That is highly unusual and an important plank in Scotland’s opportunity to connect.

Michael McMahon’s point is important. We often find ourselves brokering conversations and relationships that did not previously exist.

I hark back again to the Glasgow economic commission. There are now eight commissioners, but the original ones were Keith Cochrane, who is the chief executive officer of the Weir Group, Benny Higgins, who is the CEO of Tesco bank, and Ian Curle, who is the CEO of the Edrington Group. One of the key pieces of feedback that they gave us as we built the proposition was that they were connecting better with other parts of the business and commercial scene in and around the west of Scotland with which they would not naturally have engaged.

There is an important point in Michael McMahon’s question. Perhaps we need to do more to create the fabric that creates the basis for much stronger industry interaction.

I would be happy to send the committee much more information on the industry leadership groups if that would be useful.

That would be appreciated, thank you.

I am a member of FiSAB as well. In our experience throughout the UK, there is no closer engagement than the engagement that we as a national business have through such bodies in Scotland. My experience is that FiSAB gives an opportunity for interconnectivity and direct engagement with, and challenge back from, the Government. I agree that that should be encouraged and developed in Scotland.

We spoke earlier about the capacity of small businesses to grow. We have repeatedly seen statistics that predict the level of unemployment that we face over the next three to four years. This week, some difficult statistics predicted that unemployment might go back to levels that we have not seen for about 20 years. I think that Dr Wilson said that around one in 10 of our small businesses have capacity to grow—if I picked her up incorrectly, I apologise. It does not appear to me that the small business sector will be the one in which we will get the growth that will take up the slack in the number of unemployed people. If putting money into small businesses will not create the necessary capacity, where should we invest public money to ensure that that capacity is built?

Small businesses are important for the economy. I have become alarmed at suggestions that we should just get every small business to take on one other person. That would cause massive displacement, and many of those small businesses would go out of business because they all compete with one another.

Small businesses grow. We work with a lot of pre-revenue businesses and businesses that have ideas and intellectual property. Within five years, they can be turning over £7 million and employing 100 people. We must look out all the time for the small businesses that have the likelihood of the fastest growth. We are looking for volume of growth.

I think that I said in my opening remarks that 7 per cent of our businesses in the UK employ over half the workforce, and Scotland reflects that figure. A very small part of the business population employs most people. It tends to include the businesses that will grow faster, employ more graduates, invest in innovation and be more likely to internationalise and to invest in R and D. We do not ignore small businesses, which are important and are often very important to local communities—that relates to Paul Wheelhouse’s earlier points—but our fastest and biggest growth opportunities are in the businesses that are in the 7 per cent that invest in innovation and R and D, which are most likely to grow.

The issue is not the size of a business, but the value that it could provide. Some companies with growth potential could be very small or pre-revenue. I want to bust another myth: it is untrue that we are interested only in big businesses. We are interested in businesses of any size that have the propensity and the opportunity for growth, because such businesses will employ more people.

I return to points that Paul Wheelhouse made about regional and rural matters. Our organisation alone supported 6,000 start-up businesses across Scotland last year. As part of a balanced portfolio of initiatives, it is important—particularly in rural economies—to have that capability to support businesses.

We are talking about high growth, but business needs to be sustained as well. Some businesses do not have the opportunity to grow, but support through a small amount of investment to improve productivity and so on can sustain a business and employment over the next five or 10 years. Although that does not produce the large numbers that have a macro impact, that is still an incredibly important part of the economy that is worth supporting.

A huge amount of support is being given through all the start-up initiatives and the new initiatives that are being introduced. A lot of good work is going on through Scottish Business in the Community and so on in relation to community businesses. Such activity must be valued in the broader sense.

I was struck by the discussion about the need to attract talented international students to Scotland. I agree with that and with the point that, even if such people are not retained in the economy in Scotland, they become valuable partners when they return to their countries of origin or go elsewhere, because they have a link that can be developed.

I have discussed with two universities in my region—the Robert Gordon University and the University of Aberdeen—the difficulties that they face with the UK Border Agency in trying to attract international students. Recently, what is in effect accreditation from the UKBA has been removed from colleges. How do we counter those issues? What can we do to make those who are responsible for such decisions see the difficulties that could be created further down the line for attracting talented international students and fostering greater growth for Scotland?

I recognise that security is a reserved issue. We must keep on showing those who make the decisions the opportunity that we might be losing and the consequences of particular policies.

The overseas student recruitment situation has been a little exacerbated by the greater relaxation of rules in North America and Australia, which has allowed many international students who might have come to the UK to choose a more direct and less problematic route to a university education in another part of the world. It is understandable that the UKBA has put in place much stricter requirements, but we must ultimately understand that being an international nation means that we must not create any disincentives to an appropriate flow of people—particularly highly talented individuals.

How do we deal with that? We must keep on communicating. Michael Moore has had conversations with a group of university principals and has been to my university a couple of times in the past few months. We have politely but assertively raised the issue with him. Universities Scotland has done a good job of ensuring that the consequences of the UKBA’s position are well understood.

All such things involve a balance between what is perceived as a national security issue and taking an open and progressive approach to internationalising the nation. In all things, the balance is important.

Of course, it is not only universities that face challenges as a result of the UKBA’s position. Businesses that are international in nature are facing greater challenges—even within organisations—with the flow of talent. We need to keep on letting the consequences play out and I hope that that will ensure that the argument moves forward.

11:00

Jim McDonald is being incredibly diplomatic. We have to provide as much hard evidence as possible, because this could be a really big issue for the Scottish economy. We have an ageing and declining population and we will hit some real problems not so far into the future. We have been talking about employability; we certainly do not want to get to a stage at which we are struggling in terms of employment. My particular concern is about inward investment companies that might have to bring expatriates over for the first few years—there might be issues about visas. Another concern is hard-to-fill vacancies in our life sciences companies.

I have been trying to provide as much evidence as possible to show that, for the sake of the UK’s competitiveness, it is in the UK’s interests that Scotland gets to attract the talent that it needs. We need international talent to come into Scotland to help our economy grow. It is a serious issue, which deserves serious attention. I have raised the issue at Cabinet level.

It is interesting that you talk about future demographics. That, and the need to attract talented working-age immigrants to Scotland, came up during our fiscal sustainability round-table sessions.

I will address the issue about export markets and, in particular, the expansion in the food and drink sector. I regularly go to agricultural shows in the north-east and I see a range of innovative small companies produce high-quality food and drink products. I note that Dr Wilson cited Brewdog as a strong example of a company that now has an international focus. I am obviously familiar with Brewdog, given that it is from the north-east, although I am not necessarily familiar with its product. [Laughter.] Brewdog also has a very good domestic foothold, but some of those other companies are finding it difficult to get a domestic foothold, because it is often easier for some of the larger supermarkets, for example, to buy in conveyer-belt produced bulk product rather than niche products. How can we help those companies gain the domestic foothold that they need so that we can then put their quality produce out there internationally?

I pay testament to the work done by Scotland Food and Drink. It is a fantastic industry association—heavily seed funded by Scottish Enterprise—and we work hand in hand with it. I think that that has been part of the reason for the turnaround in the industry.

I might have to correct my figures when I see the Official Report, but turnover from food and drink is certainly somewhere between £11.5 billion and £12 billion—I think that about half of that is exports and is international. Although domestic markets are important, there are limits to growth in a market of 5 million people in a relatively small country. The big opportunities for growth, even for small companies, lie in international markets. Frankly, such companies will also get a higher premium, because their produce is perceived to be a speciality high-provenance product. We have done a lot of work with speciality producers through meet-the-buyer events with the multiples and supermarkets.

Whole Foods Market in Giffnock, in the south side of Glasgow, is a US high-end retailer. It has committed to large quantities of its meat, fish and speciality products coming from Scotland. The fact that some international high-end retailers have come to Scotland has opened up the domestic market for some of the Scottish producers that are not so suited to the larger multiples. We can do some things to help. If the economy grows, we want to buy better produce, so it all comes back to growing the economy. If the economy grows, we want to buy premium goods. The big opportunity, however, is often in international markets. We should be proud that, for some Scottish companies, 80 per cent of their turnover is from international markets and that that percentage is growing, because 5 million consumers versus billions of consumers is a no-brainer.

I take your point entirely. It is more about enabling such companies to get an initial foothold that would allow them to launch from there. I take on board that it does not necessarily need to happen that way if they can cultivate an international reputation.

I will vindicate Mr Grant. Although the term “luxurious safety net” was used in the article, it was used by Eddie Barnes, the journalist, and not by Mr Grant. I wanted to get that on the record.

Thank you, Mark.

I will ask about support for small to medium-sized enterprises. Professor McDonald’s university is producing talented young graduates, many of whom will start up companies. Dr Wilson, at some stage, will be looking to help those companies grow globally. I see Dr Wilson’s role as helping those companies develop and giving them the foot up that they need to get going.

I appreciate what has been said about the recent difficulty in the banking sector. There has been necessary caution, but also perhaps some unnecessary caution, where there has been reluctance to take a calculated risk on companies. Does the panel think that that is starting to be shed, with some small to medium-sized or one-person companies, which often start up in the teeth of the recession? Will the banking sector now start to take more calculated risks on those companies, to give them the support that they need?

There are two brief points to make on that. Risk is often best understood and managed when we invest in knowledge and awareness. The interesting thing about key growth sectors is that many of them, and many of their business ideas, are new and innovative, and therefore new and innovative to bankers and people who carry out assessments. I was with Lena Wilson’s senior team yesterday, and we talked about some of the challenges that that brings. In my opening comments I reflected on the fact that we as a bank—and banks generally—probably have resources, knowledge and expertise on sectors that are not growing, but that we are sustaining and supporting. We need to invest in awareness and knowledge so that people better understand the risks. We have to invest, with our partners, in developing our understanding and knowledge. That will put us in a much better place to assess risk. I agree with you—the banks have more to do, and knowledge will be the best thing to help us to assess risk.

I return to an earlier point. My optimism and reassurance comes from times when I have watched the oil and gas sector, and other sectors. Banks, working closely in partnership with private and public equity providers, changed the way that we operate. With the oil and gas sector, for instance, we brought a lot of engineers into the bank, because to understand that industry we needed engineers, not bankers.

We are reflecting, and we are working on how we reshape. For instance, our commercial and corporate businesses have been reshaped into sector teams. I said to Lena Wilson yesterday that she could take some credit for the fact that, ironically, banks are adopting more of a public sector approach to future opportunities, rather than the private sector approach that we have taken in the past. That will have a marked effect. We need expertise, knowledge, specialism and focus, so that the right customer with the right idea gets the right person, who can support them and understand the risk.

The test of that, as Lena Wilson and Jim McDonald said, will be the case studies. First, I will be proud to go along to the opening of a facility that is probably supported by Scottish Enterprise funding, probably with some input from an intellectual property source, and then, in two, three or four years’ time there will be maybe 30 or 40 jobs in that company. That partnership approach is why I spoke about sharing optimism. Optimism can be a lonely place if you are the only one that is optimistic. I am reassured, across each of the stages and through the glass ceilings, that if there is real focus and enlightened self-interest from all parties we will see genuine growth from the opportunities that we have talked about today.

First, I apologise to the committee and to witnesses for my inability to read the agenda and for coming in half an hour late. I will read everyone’s contributions with interest.

My first question is for Jim McDonald, and perhaps Lena Wilson. We were talking about the need to attract able people into science and engineering. I agree completely—I would like science to be the first choice for many people, and not just something that they do if they cannot get into another course.

My question is about the qualifications that people need to get into university. At the moment, they are based on academic intelligence—in other words, the ability to absorb information and solve problems—and although other forms of intelligence such as entrepreneurial ability and ability to sell in the market are very important, they are not really captured in the current examination regime in schools. Is curriculum for excellence solving such issues? Are you involved in discussions on the content of the curriculum to ensure that such abilities, which will make Scottish business and, indeed, Scotland itself very successful, are being recognised and nurtured? After all, a certain individual who is not the most academically able could be a heck of a good businessperson if they got the opportunity.

I will try to tackle that on a couple of fronts.

The intention behind curriculum for excellence is to ensure not only a broadening but an appropriate deepening of education, not least in mathematics and science. Let us be frank: those who seek to pursue a science or engineering degree at university should have a very deep grounding in mathematics. I do not buy the dumbing down cliché that is too often used about schools, but we must ensure that teaching quality, the curriculum’s relevance and the connectivity between schools and universities, which at the moment is not what it should be, are enhanced. The higher-quality experience that curriculum for excellence produces for students must be met by universities, and we must ensure that we are much more effective at articulating what we need. If we are producing a chemist, they must have a very good grounding in the basics of chemistry with higher or advanced higher qualifications.

Tomorrow, I will be visited by Colin Stewart, who is the chairman of Scottish Enterprise’s east regional advisory board, and a colleague, Angela Mathis, who is on the Scottish science advisory committee. We will discuss the quality of mathematics teaching and the exposure of the students we are producing, not just at Strathclyde but in the sector itself, to mathematics, with a particular bent towards accountancy, finance and risk modelling. As part of our understanding of the skills required to pursue a university career, we must be absolutely determined to establish an appropriate quality threshold. Over the past three or four years, the grade point average for entry to my institution has increased from around 395 to about 435. I make no apology for that because, alongside that, we are addressing the widening access agenda and ensuring that we put in appropriate finances, provide support, set up summer schools and carry out other work with students to give them pathways to success.

The broadening of studies in curriculum for excellence to include the kind of problem solving and communicating abilities that business needs is also important. I do not know whether you can teach confidence, but we need to get that somehow. I am not saying that Scotland suffers from a pervasive lack of confidence, but we need to ensure that our young people are confident. Of course, given the current circumstances, that will be difficult but if our young people start with their heads down, how are they going to realise their potential? We need to engage with them and give them enough of an opportunity to express themselves and build themselves up. In any case, I make no apologies for insisting on a very solid and deep understanding of maths and science before they pursue such courses at university.

I agree entirely; indeed, I entirely agree with the direction that Elaine Murray took in her remarks and her subsequent question. As the first graduate in my family and the first person to get the chance to go to university, I think that such opportunities are vital. I should also declare an interest: I did my masters at Jim McDonald’s institution and, more important, had a very good experience there.

However, despite my earlier remarks about science, engineering and jobs, we have to remember that some of Scotland’s greatest entrepreneurs and those who run very large businesses did not take the traditional route and go to university. Moreover, when I look across the breadth of businesses, I believe that we can do a lot more to develop what might be called emotional intelligence—by which I mean the ability to relate to people, to communicate and to work in a team—and from what I have seen of curriculum for excellence I think that it offers opportunities in that respect. Of course, I do not profess to be an education specialist.

11:15

Although higher and further education offers a whole range of technical and advanced skills and although I believe in the power of learning and the experience of going to university, we need to remember that it is not the only route to competitiveness. We need to focus not only on wider skills with regard to relationships between human beings in the workplace, but leadership skills; after all, almost everything that I have said comes back to leadership, ambition and the notion of confidence that Jim McDonald highlighted. We want young people to be ambitious, to want to run leading companies and to want to be good leaders either in the public sector, where I am, or in the private sector. I certainly agree that this is important.

I was a physical chemist at one time and, 40 years later, my mother is still disappointed that I did not pursue a career in medicine.

My next question goes back to Mark McDonald’s earlier question about food. I am slightly uneasy about all this good, healthy, Scottish produce being sold to middle-class people in other countries while Scotland’s poorer communities are eating rubbish that might well have been produced elsewhere. Is this not an issue for our health agenda? Should we not be encouraging Scottish people to eat healthy local produce and, in turn, to boost our local industries? I am not saying that that should happen at the expense of exports, but I would not like us to go too far down the road of saying that our quality produce should be only for export simply because the market is out there. We also need to encourage people in Scotland to eat local produce that has not travelled hundreds of carbon miles.

I agree. Thankfully, I am not responsible for education or health policy but I understand the relationship between a healthy economy and a healthy people. I confess that I do not eat meat.

We certainly want Scottish people to eat the healthiest possible produce. Just yesterday, I was talking to someone about the Fife diet, which is all about locally sourced, high-quality produce and I believe that there has been a big movement in that direction in Scotland. We have had a lot of setting the record straight this morning and I want to set the record straight that I am not suggesting that we send all our healthy produce elsewhere in the world.

Do we not also have a huge economic opportunity to tie in the promotion of local produce with the scenery and everything else that Scotland has to offer as a tourist destination?

There is a huge link between rural areas, the food and drink industry and tourism. Food tourism is massively important and covers everything from quality ice cream—I do not know how healthy that is, but it is delicious—to fantastic seafood and the lochs and other such destinations that produce it. I agree that there is an economic opportunity in that respect, but I should point out that not only Scottish people but tourists will be eating that produce.

I am now feeling guilty about that McDonald’s I had for lunch yesterday, but I suppose that I am keeping Jim’s family firm in business. I should say, though, that I am going to David Bann tonight for a vegetarian meal.

It is a great restaurant. I had the vegetarian shepherd’s pie recently.

The committee has exhausted its questions. Usually, I would ask a couple of final questions, but the evidence session has already gone on for almost two hours—and indeed could go on and on. We have had a very interesting, stimulating and thought-provoking discussion and I thank the witnesses for their excellent contributions and my colleagues for their excellent questions.

I point out that this afternoon in the Parliament there will be a debate on fiscal sustainability and, tomorrow, there will be a debate on economic growth. It is a busy time for Finance Committee members, because we will also be having two round tables on employability and will take evidence from Skills Development Scotland and the Minister for Youth Employment. We are very much focused on the issues that we have discussed this morning.

I suspend the meeting to give members a brief natural break and allow them to collect their thoughts for the next evidence session and to allow the witnesses to leave.

11:19 Meeting suspended.

11:28 On resuming—