Economy, Energy and Tourism Committee, 16 Dec 2009

Meeting date: Wednesday, December 16, 2009

Official Report 301KB pdf

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Council of Economic Advisers (Annual Report)

Good morning and welcome to the 34th and final meeting in 2009 of the Economy, Energy and Tourism Committee.

I welcome Nigel Don to the committee—he is substituting for Rob Gibson. We have apologies from Gavin Brown, who is unwell, and Wendy Alexander, who will be a little late, for family reasons. I apologise for our slightly depleted numbers. We will go for quality rather than quantity.

With us for our first agenda item we have members of the Council of Economic Advisers, who are here to discuss the council's second annual report. I welcome Sir George Mathewson, the chair of the council, Jim McColl and Professor Alexander Kemp. I invite Sir George to make some opening comments and introduce some of the report's key features.

It is nice to be here again. I am pleased to speak to the committee about the contents of the second annual report of the Scottish Council of Economic Advisers. I am delighted to be joined by Professor Alex Kemp and Mr Jim McColl.

The council's remit is simple: to advise the First Minister directly on increasing sustainable economic growth in Scotland. We met for the first time in September 2007 and we have met a further six times since then.

Over the past year, Scotland's economy, like the rest of the global economy, has been through a recession, and Scottish gross domestic product has fallen substantially. There are now some signs that the recession has passed its worst, with an encouraging improvement in the latest labour market statistics in Scotland, which I believe are being announced this morning.

Obviously, what will happen in Scotland in the near future depends on what happens to the global demand for goods and services and the fiscal stance of Governments, particularly the United Kingdom. We face challenging times ahead due to the tight financial settlement for the Scottish Government from 2011-12.

I should make it clear that, although the council has offered the Government advice on navigating recent events, most of our work has focused on the longer-term strategic thinking that is required to put Scotland on a higher growth path.

Over the past year we have focused on the following areas. First, to promote sustainable economic growth, we have advised the Scottish Government on how best to achieve Scotland's 2017 population and productivity targets set out in "The Government Economic Strategy". Secondly, we have provided advice on developing Scotland's key sectors. We have looked at two of the seven key sectors set out in "The Government Economic Strategy"—financial and business services, and food and drink. We have also considered the contribution that schools can make to economic growth and advised on how the Scottish Government can maximise borrowing opportunities within the current devolution settlement. We have said in clear terms that the Scottish Government should have the ability to borrow that virtually all comparable Governments have in the Organisation for Economic Co-operation and Development.

Our discussions on those topics are reflected throughout our second annual report, which represents an overview of our thinking and conversation during the three meetings that we had over the past year. Our report makes 17 recommendations to the Scottish Government on six areas of discussion. I draw the committee's attention to four key areas that we feel to be particularly important.

Following our initial discussion on productivity last year, we have had two further discussions this year on productivity and innovation. Productivity is a significant component of economic growth as it leads to an increase in added value and a reduction in unit cost. That helps economic growth by raising earnings and increasing the competitiveness of the Scottish economy and its capacity to expand. Labour, capital and total productivity in Scotland are still some way behind that of the rest of the UK, the US and our competitors in Europe. Research and development and innovation are relatively high in the public sector; business R and D spending and innovation is at half the UK rate and less than the European average. However, Scotland performs comparatively well in process and services innovation and the council recommends that the Scottish Government conduct a review of the scope for further innovation in that sector.

The council has identified the need in Scotland to encourage co-operation between universities, commercial firms and supporting agencies to combine the source of innovation ideas with those who can implement and commercialise them. In chapter 3, we offer some ideas about how to develop that co-operation. The Scottish Government could induce greater innovation through its procurement process, influencing competition and regulatory policy and encouraging engagement with foreign markets and foreign capital. We have presented three recommendations to the Scottish Government to develop in those areas to promote innovation and increase productivity.

The key sectors are those that are identified as having high growth potential and the capacity to boost productivity. The first of the key sectors that we discussed is financial and business services. Given the rapidly changing nature of the sector over the past year, our chapter offers a high-level overview that looks broadly at the state of the three components of the sector in Scotland, which are banking, fund management and insurance. We recommend that the Scottish Government ensures that it has the knowledge and influence to enable Scotland to obtain the best possible result from the reorganisation of the UK banks. Related to that, the Scottish Government should ensure that financial services are represented in education and lifelong learning to build strong foundations for the sector in the future. The council will return to look at specific areas of the financial and business services sector at future meetings.

In last year's annual report, we made recommendations on the Scottish universities sector. In this year's report, we have turned our attention to the schools sector and the contribution that schools can make to Scotland's economic growth through improving the stock of human capital. Despite its international reputation and the emphasis that it places on education, Scotland holds only the middle ground across the range of OECD countries when performance indicators are compared. It is interesting that the OECD data also suggest that average spend per pupil is above the OECD average for both primary and secondary schools. Therefore, the long-term shortcomings of Scotland's education are not the result of underspending on teachers and schools per se. The challenge that Scotland faces relates to the effectiveness of resource use in education over recent decades, rather than to the volume of spending. For Scotland to achieve its potential and become an international centre for education, a more fully integrated schools policy that is based on strong analysis and good data should be developed. A highly open and transparent system is required to ensure that independent research on, and rigorous evaluation of, Scottish education are carried out.

One of our key recommendations in chapter 6 focuses on the need to prioritise teacher quality. The development of the chartered teacher system is one step towards that. We also recommend that academic excellence be promoted and rewarded to ensure that students and their families commit to educational attainment.

Finally, I turn to borrowing. Last year, the council began a review of the economic role, current condition and means of provision of infrastructure in Scotland, and emphasised its concern about the long-term underinvestment in Scottish infrastructure. In this year's annual report, we have set out why the Scottish Government needs to borrow and what limited borrowing opportunities exist under the current legislative framework. Any borrowing that is carried out by the Scottish Government should be independently reviewed to ensure that it is sustainable and presented transparently.

Therefore, we have recommended that, when Scotland's borrowing powers are extended, a fiscal policy commission should be established to review the future fiscal position and outlook. In addition, public accounts will need to present a clear and fair view of such borrowing. In the meantime, the Scottish Government should make the maximum use of current borrowing opportunities and should seek to have the ability to deploy accumulated year-end funds without discussion with the UK Treasury. The Government should also seek access to the local authority prudential scheme and to have the current £500 million borrowing limit increased. The council will return to borrowing at future meetings to provide further recommendations to the Government.

In the coming year we will keep exploring how to secure greater comparative advantage for the Scottish economy in order to boost sustainable economic growth. We will advise the Government on how to achieve some of the remaining longer-term purpose targets, and further work is planned on the key sectors that are set out in the Government's economic strategy. We will highlight future challenges and identify how Government policies can be more supportive.

In our second annual report we have set out 17 recommendations for the Scottish Government that we believe will help to deliver increased sustainable economic growth for Scotland. It is now up to the Scottish Government to consider them, and we look forward to receiving the Government's response in the new year.

Are there any questions? My remarks were rather longer than I thought that they would be.

Thank you very much for that useful introduction.

I will start by looking back at last year's annual report. This year's report gives no indication of how you feel that the Government has responded to the 22 recommendations in last year's report. Does the council have any views on the progress that has been made on those recommendations?

First, it is important to say that we do not regard it as our job to audit Government against our advice. We advise Government on what we think is right for the economy. Other factors, such as political implications, are outwith our remit. We do not regard it as for us to give the Government nine out of 10 or whatever on the extent to which it has accepted our advice. However, in general, I think that it has accepted, and has attempted to go along with, our advice.

That was not exactly the question that I asked. I asked what progress the Government had made on implementing last year's recommendations, rather than whether it had accepted them. As well as accepting your advice, has the Government taken action to implement it? Are there are areas in which it needs to do more? Are there others in which you are happy with its efforts?

I think that the Government has taken action to implement our advice. The most immediately relevant example is planning, on which the Government has taken action that has resulted in more activity. There are figures available on the time that it takes to get planning approval. I cannot remember them off the top of my head, but they have improved dramatically over the most recent period. That is one example.

You indicated at the outset that your focus is more on the longer term than the immediate term. You also said that you had discussed with the Government its handling of the immediate economic situation. What was the nature of your discussions with the Government on issues such as its economic recovery plan and how the Scottish Government's budget is being utilised to get Scotland into recovery?

In general, we approve of what the Government is doing on the recovery plan. Obviously, there are limits to what it can do. We are not the Government. We give the Government ideas and advice. It is up to ministers to decide—politically—what to do.

I accept that point, but given that you were set up as a council of economic advisers, part of your role is to advise the Government on how it handles the economy. I am trying to get a feel for the extent to which you are involved in discussions with the Government on how to see Scotland through the current economic crisis.

We have discusssed, for example, how we could accelerate infrastructure projects. My colleagues may remember other examples.

The discussion on accelerating infrastructure projects is linked to the on-going work on borrowing.

You said that you have witnessed some improvement in planning. Do you accept that such improvement as there has been is the result of legislation that was on the statute book prior to 2007 and that has been implemented over the recent period?

No, I do not accept that it is just that; it is an attitudinal thing.

What is the added value? What specifically has Government done in response to your recommendations? That is what we are keen to find out. We want to know how far that can be measured.

As I understand it—again, you are probably in just as good a position as I am to make these judgments—John Swinney has been very strong with the councils in emphasising that planning is a development process, not just a control process.

That is fine. It is one thing for ministers to express a view, but have they taken any action?

They have. I look at the results. The results appear to indicate that they have.

I am keen to establish whether there is any way at all in which you measure actions. You have described attitudes and outcomes, but the bit in the middle is missing. Did your advice on planning produce any actions that you can demonstrate are a causative link between attitudes and outcomes?

I think it did. The Government communicated with the local authorities. It acted to change attitudes within the local authorities to the whole planning concept. Our advice was very much to remember that planning should be a creative exercise and not merely a control exercise. The Government took that on board. What matters are outcomes.

That is right. I am interested that you picked that example. I think that all parties and governments would agree with the principle and the attitude and would seek to achieve the outcomes, but we are interested in understanding whether—if at all—the advice of the Council of Economic Advisers has had consequences. Has the Government taken actions as a result of that advice that it would not otherwise have taken?

I cannot define that absolutely other than to say that our advice appears to have got a lot of sympathy from Government in moving this forward. It is all very well to say that everyone would agree about how planning should happen, but the reality is that it was not happening and now it is happening. That is important.

It is interesting that you are as positive and optimistic as you are. I have seen the targets that the Government set for Electricity Act 1989 consents for renewable energy. The targets are admirable, but the Government is missing them by a mile. I am sure that you are aware that the Government is nowhere near achieving them.

All I am saying is that, in general, the planning environment has improved. The time needed to get standard approvals has shortened dramatically.

You made recommendations last year about universities and this year about schools. Some of the measurables that you and we are interested in concern Government investment and engagement with the process. Have you seen any measurable outcome in relation to the recommendations that you made last year on universities?

The role of universities in the economy has been fully acknowledged. What we said about universities and the higher education sector being among the drivers of economic growth has been accepted by the Government. The idea, for example, that we should be encouraged to take on more foreign students, who provide income for all the economies in which higher education is based, is perfectly well understood. The idea that university research should be encouraged has been acknowledged. My own institution did quite well in the research assessment exercise, and it was duly rewarded for that. That sort of evidence is positive.

It is, but that reflects the quality of the university, rather than the engagement of Government. Are the two being confused a little?

I presume that, if you are advising Government this year that it ought to emphasise quality in schools, you are seeking additional investment in continuing professional development.

You are thinking of it in terms of spend.

No, I am talking about investment. If you want to improve quality, you presumably have to invest in continuing professional development. You cannot improve quality without it. It is not necessarily a question of additional spending; it is a matter of where the spending is put. Would you expect the Government to increase investment in CPD or teacher training at universities?

Yes, but we must consider the philosophy behind education. Our council is saying that we need more emphasis on academic attainment in order to compete. That is achieved by having teachers who are committed to academic attainment and by having families and a culture that is committed to academic attainment. We do not achieve that just by investing money. The council has strongly emphasised the need to base education policy on hard evidence, on the results that you want and on the results as they are. There is a lack of evidence about the right measures to take now, and more work is required.

You will be aware that, a number of months ago, the literacy commission published evidence that demonstrated that about 18.5 per cent of children leaving primary school are functionally illiterate. Some of the priorities in education might not be at the elite end of the business; they might be at the basic end of the business. Do you accept that? Do you acknowledge that Government has to make choices, and that sometimes the investment in academic excellence might have to follow the achievement of a higher standard across the board?

That figure is absolutely appalling. My idea of attainment is not focused just on the elite. We are failing some children very badly. We must think about our whole philosophy of education, based on evidence, rather than theory.

I am asking about priorities. You said that you do not consider it your job to measure how far the Government accepts your advice but, nonetheless, if you make recommendations, you look to it to act on them. For you, what would be the evidence that it had listened to what you had to say on schools?

It would take time for schools, obviously. It is extremely difficult to change education policy. It has become ingrained into the system over the past however many years and changing it is a real challenge for any Government. Some years down the road, I would like to see a radical difference in the numbers that you cited. Our present place in the international leagues is terrible. It is simply not satisfactory.

I will ask a follow-up question to Lewis Macdonald's question on planning. There was an article in The Herald on 13 December with the headline "University funding cuts ‘will ruin Scotland's architectural prowess'". Interestingly, it also discusses planning. It says that there are

"plans to cut funding for architecture courses at Scottish universities by nearly a quarter."

I will read you some other quotations from the article, which fly in the face of some of what has been said. It says:

"heavyweight groups—including ... the Royal Institute of British Architects (RIBA) ... and the Royal Town Planning Institute (RTPI)—warned they might not accredit students at Scottish institutions as architects or town planners."

There is a move to cut the funding from £6,700 a year per university graduate to £5,000 a year. According to the article,

"Veronica Burbridge, national director of the RTPI in Scotland, said the cuts would be ‘at best short-sighted, and at worst a severe dereliction of duty by the'"

Scottish Further and Higher Education Funding Council.

"‘These cuts, if implemented, could mean the end of planning education in Scotland as we know it, which would be a terrible end to a proud history of innovation'".

There are two pages of all the different institutions discussing the impact that the proposed cuts would have on town planners in Scotland. In light of what you said about planning and education being the key, what is the basis for cutting the funding to planning and architecture courses in Scotland?

That is way outwith our remit. I cannot possibly comment on it, as I do not know the numbers or the demand for planners. The council has not considered that matter.

Week after week, the committee heard in evidence for its previous inquiry that there were not enough planners and that councils were struggling to get suitably qualified planners. Then we read this two-page article, which says that the decrease in funding will hit town planners. There is a whole page of quotations from people who are outraged about the cut and who say that they will not be able to accredit town planners in Scotland, which is serious. The matter needs to be raised and I will raise it through my cross-party group on construction, which will meet to discuss it today. However, it is an issue for the Council of Economic Advisers because, if one of the biggest barriers to economic development is planning—we all see that in our constituencies—it surely does not make sense to cut funding. It does not add up and is not joined up.

It is outwith my remit to comment on that except to say that we have to examine the system and decide how many planners we really need. Is the system optimum for the number of people and is what they are asked to do all necessary? I am sorry that I cannot really assist you on the matter, but I am sure that you will make representations to the people who can.

It is well worth bringing the matter to your attention.

I will ask about further and higher education. Throughout the report, you raise issues to do with technical education. What consideration did the council give to the policy for further and higher education in Scotland's colleges, which are a big contributor to our economic recovery?

As an employer, we have been working with the Government on building better links between the universities and business and industry; there is a push towards that in general. We are trying to link the research that has been done in the universities with the areas of interest that businesses are currently exploring.

Work is currently going on to develop a Wikipedia-type search engine so that those matches can be made. For example, if people are interested in carbon capture, they could use the search engine to find out which universities in Scotland offer relevant courses. A great deal of that type of work is currently taking place, and the Government has been pushing to bring the universities and industry closer together. My business colleagues and I have been involved in a number of events that are encouraging the development of those links, and some positive programmes are in place that will help greatly.

The further education colleges are an important area. I have seen the universities working more flexibly. The universities that are former polytechnics are working more closely with companies to accredit some of the work that staff are doing internally. For example, we are currently running three masters degree courses in our pumps business in Cathcart. We take on students who have a general degree, and provide them with an honours degree through working with one of the universities in Glasgow, which enables us to let staff attend on a part-time basis or to have lecturers come to our company.

We are working with universities on honours degrees for mechanical engineering students, which will allow them to achieve chartered engineer status, and on three masters degrees. We work with universities such as Glasgow Caledonian University, the University of the West of Scotland and the University of Strathclyde, and we are currently discussing another possible course with the University of Glasgow.

With respect, there is quite a bit in the report about the work that you are doing with universities, but Sir George Mathewson spoke about the need to consider schools and disadvantaged young people. It is the further and higher education colleges that are developing the inclusion agenda and bringing people back into education. The two-plus-two approach has been developed, in which the first two years of a university course are undertaken at a further education college. That helps to encourage adult returners who do not live in a city to take a degree course.

I have read a lot about your views on the university sector, but I would like to hear your views on the further and higher education sector and getting people back into education. Many 16-year-olds who are dissatisfied with school are going into the further and higher education colleges. What are your views on the current funding issues and the impact of that sector on the economy?

A good bit of activity is currently going on to increase the number of apprenticeships. One of the challenges in that respect, which was mentioned earlier, is that many people who leave school are not fit even to begin apprenticeships. Pre-apprenticeship courses are being run in response to that challenge, and we and other companies are being asked whether we can work with schools to give pupils some work experience.

We are currently developing a project that was initiated through discussions with the Government and Glasgow City Council, which looks at secondary schools, in which some kids just switch off at age 14. There may be a way that we can get pupils to work with the further education colleges—for example, there are programmes that allow them to attend for a day or a week.

However, there are mixed feelings among teachers about whether it is better to take such kids out of school—the course might be just a way for them to get out of school—or whether that kind of education should be taken into schools. Talks are currently going on with secondary headteachers to establish what the best way would be to intervene with 14-year-olds to link them up with some sort of learning-by-doing activity so that we can catch those who are not suited to academic instruction. There is certainly a swell of activity just now to see whether more of that can be pieced together in a structured way.

I can add a little bit from the university side, which has acknowledged the problem that the question raises. For a long time, my university—like most other universities, I am sure—has had access programmes that allow young, or not so young, people who do not have the normal qualifications to attend summer schools where they can sit exams and, if they pass, then be accepted into the university system. We have done that for a long time, usually with relatively mature people who left school at an early age without highers but who have, as Jim McColl said, learned by doing. When such people come back, they often do well. We can do a little bit. My institution has certainly done that for a long time, but I am sure that others have as well.

I was interested to hear about the technical training work in which Jim McColl is involved. I have two questions, the first of which deals broadly with education and the second of which is about the implications for borrowing and about possible international collaboration.

First, on education, my university department has had a couple of visits from Professor Frankenberg, who is the research minister of the German state of Baden-Württemberg, which has an economy that is the size of Sweden's. Manufacturing accounts for 35 per cent of the state's GDP—an increase of five percentage points since 1999—and most of that is in the energy and low-carbon sector. What emerged from those visits and from the visit to Stuttgart that my assistant, Stefan Büttner, and I undertook to talk to departmental heads, was that, rather as Jim McColl hinted at, 75 per cent of the training of qualified non-university-level technologists is carried out in firms rather than in technical colleges. It was pointed out, however, that the colleges largely provided such training in the former East Germany, where so many firms have closed down. Of course, in Baden-Württemberg, which has firms such as Voith and Siemens, which now jointly own Wavegen, firms have their own academies in house.

It seems to me that, if we are to generate the technical back-up that will pick up our very considerable university advances—the Germans have the great disadvantage of having no sea, whereas we have marine and offshore capability—we will be dependent both on firms such as Jim McColl's and on advanced educational means, such as perhaps a technical adaptation of the Open University and the use of high-definition television to replicate laboratories. We will also be absolutely dependent on co-operation with continental regions, which are in advance of us.

As a former lecturer in engineering pointed out to me, Motherwell College had 170 people studying engineering in the 1970s, but the number now is not even in double figures. That is an example of the ground that we need to make up. How do we arrange that? What role does educational innovation play in that? What role does co-operation with the European regions that already own a lot of our productive capacity in that area play? That picks up Sir George Mathewson's point about the criteria by which we want to evaluate our education.

You are absolutely right. It is key to do a lot of this training in the workplace. We have an academy at our pumps business. Babcock has an academy—it has a training centre and it is offering a masters degree—as does Howden's. Some of their people will come to do our modules and some of ours will go to do theirs. Quite a bit of activity is going on there. That includes the further education colleges. There is good co-operation and a willingness by universities and further education colleges to engage in that type of more tailored education for these kids.

I can add a bit to that, which might give you some ideas. Over the years, the oil and gas sector in the north-east of Scotland has had a problem getting well-qualified technicians—it has had that problem for a long time. OPITO was set up by the employers as an independent organisation whose job it is to facilitate training for technicians and apprenticeship schemes. It does not do the training itself; it facilitates and validates training programmes that are run by Aberdeen College—I am talking only about my area—which deals with apprenticeships; by the company that used to be the Robert Gordon University training company but is now part of Petrofac in the private sector; and by a whole lot of others. OPITO is a kind of umbrella organisation. It is not Government owned at all, but the Government is fully supportive of the idea. It has brought together trainers and the needs of the industry in what is proving to be quite an effective way. That might provide ideas for industries such as engineering.

We looked at schools in the report and took international advice. Schools have to do the job of producing literate and numerate pupils at all levels. As Lewis Macdonald pointed out, they are failing to do that at the moment.

There is a size factor. Baden-Württemberg, which has the background of big companies such as Daimler-Benz and Bosch, produces, every year, five times the number of trained technicians that we produce—even allowing for population differences. That means that the existence of industry is a crucial factor. Not every place is as fortunate as Jim McColl's area in having several big firms in situ.

The second point is one of culture. The Baden-Württemberg worker, coming out of his work and taking the daily paper will read the Südwest Presse, which is roughly on the level of The Scotsman or The Herald. The equivalent Scottish worker would read the Daily Record or The Sun, which is a sobering notion. What is literacy worth if that is what you get at the end of it? That has to be said bluntly. Some 19 per cent of the German population read Bild, which is roughly on the level of the tabloids, whereas something like 50 per cent of people in this country read our tabloids.

I think that you are just saying in a different way what the committee was saying about the education system.

Following on from that point is one about finance. In all our discussions with bank chiefs, the inflexibility of the banking model and the problems that have to be contended with have been very much to the fore. I have heard the point echoed in discussions in Fife and elsewhere with local chambers of commerce, whose members have talked about difficulties of access for small and medium-sized enterprises.

Would it be advisable to explore what sort of partnerships we could develop with the Landesbank system and the system of local, mutual banks in Germany? There is not a totally unspeckled page in that regard, because some of the banks have speculated badly, although on the whole their losses have been much less than has been the case in this country. The banks have a proven record of established lending to industry and involvement in the creation of industrial policy, and they are willing to think in terms of joint participation, as far as I understand from discussions in Stuttgart. Given that Voith Siemens and other companies are heavily involved in the North Sea, is it logical to explore such a means of facilitating borrowing, particularly for the purpose of getting renewables up and running?

Your question is difficult to answer. We are going through a period that is atypical in bank lending and I know from personal experience and feedback that the situation is difficult for companies. I do not expect that to last for ever. I am not sure what the Landesbank system could bring to the party that is not already there, but I am always open to ideas.

We are not the only renewable energy option on the menu as far as big German finance is concerned. You might have come across the Desertec industrial initiative, which envisages the creation of large solar-powered units in the Sahara desert, which will pump electricity into south Europe—and help to overcome certain in-migration problems at the same time. It will cost £500 billion to set up, but Munich Re, the very large reinsurance concern that heads the initiative, is thinking in terms of a five-year programme to set it up. The initiative could offer alternative investment opportunities for German financiers, who, after all, have a proven track record of working with a highly sophisticated industrial economy.

We might not be the only option, but I think that we can offer something better. A combination of wave and wind power, along with carbon capture, should be extremely attractive to Germany, but we might lose out if we are not fast enough off the mark, particularly in arranging borrowing powers. That was a statement, rather than a question.

Do you want to comment on that, Sir George?

No.

On page 13 of your annual report, you refer to the 43 per cent growth in Ireland's population. When the population was increasing, not just because more Irish people were being born but because people were being encouraged to come to the country, was more money being invested in training and retraining?

I cannot tell you the details, but I know that Ireland has invested a lot in education and training during the past few years. Our recommendation is that we re-evaluate the targets for population and try to understand better the reasons for migration and who is migrating and so on. We have used instruments that are too blunt so far.

In paragraph 1.14, on page 9, you said:

"Looking forward, the UK economy has tended to bounce back more quickly from recessions than Scotland has and forecasts indicate that this may be the case again this time round."

What can we learn from the past, to help Scotland to come out of recession more quickly, and—if it is legitimate to ask this—what would have helped in the past?

There is no magic answer or we would all have done it. The latest unemployment figures in Scotland are quite encouraging—we are perhaps not going to be so negative with regard to the rest of the UK as we might have thought, going on past figures.

Last week, the pre-budget report was published, and we heard about the chancellor's decision not to accelerate additional capital spending. When you were here last year, the issue of accelerating quality investment was commented on. Would accelerated capital expenditure, have benefited the Scottish economy?

Yes. We make the point that there has been underinvestment in infrastructure. That is one of the reasons why we have discussed borrowing powers.

In paragraph 3.8 on page 19 of the report, you refer to how people can develop a management career. I have studied in France, Germany and Sweden, and I was in Sweden at a time when the country was a test bed for American companies when they were investing in Europe and introducing products and service here. I found that fascinating—it was a tremendous incentive for people to stay in Sweden. Does Scotland have the capacity to do likewise, and to compete against Sweden to become a test bed? Is that legitimate?

I am not quite sure what you mean by a test bed. For management or—

If Scotland were used to try out products and services, it would create management and marketing opportunities here. If companies tried to get products and services operational and used fully in Scotland, it would create opportunities here. It created opportunities in Sweden; it certainly ensured that people stayed there. Because the Swedes have technical expertise and are good at learning languages, they are very mobile, but the test bed gave them the incentive to stay in Sweden to progress their careers.

Inward investment has done that in Scotland over the years, although perhaps not so much now because there is more competition.

Sweden was used as a test bed—it formed quite a niche market for itself. Do you see that as an opportunity for Scotland? Could Scotland do something similar?

You would have to be more specific. It is possible.

Good morning, gentlemen. I start by progressing thoughts on borrowing. I am not sure that I have read every word that you have written on the subject, but I get the impression that the Scottish Government has the ability to borrow £500 million as a sort of rolling debt. Would that be a fair way of looking at it?

That is the amount that the Government is allowed to be out—

On a year-by-year basis. Not allowing that would be terrifically harsh if the Government had just miscalculated slightly from one year to the next, but it is not to be used consistently.

So, in effect, it is a rolling overdraft facility, which is not really a borrowing facility; it is more a way of getting over the end of the financial year.

Yes.

I just wanted to clarify that because, realistically, that is money that no business would normally use for funding. Again, if I have read the words correctly, I think that you are suggesting that local authorities can borrow by using prudential borrowing in the conventional way—essentially, borrowing against expected revenue, which I am sure that local authorities are happy to do. However, I failed to pick up where you thought that the Government could make real sums of money available, if we are going to have to live with the consequences of not having accelerated capital expenditure. We have all identified that we would like to spend money on infrastructure, as it ticks all the economic boxes. What options does the Scottish Government have?

The reality is that, currently, we do not have many options. We are suggesting that we should have such powers. If not, we will be forced back on financial initiatives such as—help me, Jim.

Special purpose vehicles.

Yes, special purpose vehicles and so on. If that is all that we can use, perhaps we will have to go that way. However, that is expensive and, in a way, dishonest, because it is still debt, even though it is off the balance sheet.

And the only way of getting those borrowing powers is to go down to Westminster and ask for them.

Yes, at the moment.

I simply wanted to put that on the record.

To pick up on some points of detail in the report, bouncing around almost at random, I read what it says about food businesses taking advantage of niche markets and export opportunities, which makes good sense to me, particularly as I represent North East Scotland. However, I am left with the impression that the marketing skills have traditionally come with people who have been trained by larger businesses before migrating into other businesses. Is that the case? Your body language suggests that it is not. That seems to be the bit that we are missing. We are good at innovation and production but not so good at marketing.

We found that there was a lack of innovation in the marketing of food. We saw some success in cases in which a range of food was grouped around an area such as Arran, but there is probably a lot more mileage in innovative marketing than has been exploited so far. There are many small companies in the food industry, and they are not focused on exporting, except down south. In some of the mid-sized companies, there are opportunities to be more innovative and to grow exports.

There are some successful companies. For example, even in remote parts of India, you can get Walker's shortbread.

Is the problem to do with a lack of imagination with regard to the opportunities that are available to businesses, or—as I suspect—is it to do with a lack of marketing skill?

I think that it is to do with a lack of marketing skill.

How do we address that issue?

It was not obvious to us that Government could do much about it. Ireland, Norway and Finland have been exceptionally successful in developing differentiated brands and marketing them worldwide. Our suggestion was that we should investigate what they did and how they did it. There is no reason why we should not be able to do the kind of thing that they have done, but we have not investigated the matter; we recommended that the Government should do so in order to see whether a more coherent policy could be put together.

I turn to research partnerships and start-ups. Paragraph 3.13 on page 22 of the report makes good sense—I buy everything that you say—but the issue sounds incredibly complicated. I wonder whether your answer to this question will be the same as the one that you gave to my previous question. Are you suggesting merely that the Government should consider the issue, or can you point it to models of success and offer specific suggestions on how to proceed?

There is no rational reason why things should necessarily be manufactured in the places where people invented, developed and researched them. In today's world, knowledge flows to where it can be put to use more cheaply. The real added value in development and research is in that development and research. That point is important. Over the years, I have asked continually how we can commercialise research. In reality, research is commercialised in the places in the world where that can best be done.

Universities in Scotland punch above their weight in research output and Scottish Enterprise has been fairly successful with its proof-of-concept initiatives, but we seem to fall down on commercialisation, after concepts have been proved.

Discussion has been initiated and followed up in one area that I have mentioned. If a company is interested in a subject such as carbon capture or biomedical sciences, how does it find out what is happening in the universities? It is easy to capture those data, but that is not done. Efforts are now being made to join up the system, so that companies can enter a key word in a database or website—whatever the term is for sites such as Friends Reunited—and find out which universities are doing research in the area.

Often people in universities want to keep their research secret and to tell no one about it. In my view—this is not the Council of Economic Advisers' position—those who have received research grants or proof-of-concept money should be required to record information about their work on a database. That would make things easy for companies that are looking for research to commercialise. A commercial entity may see that two or three separate pieces of research that are under way can be brought together, which may not be evident to the independent researchers. It is all about making information more visible and accessible to companies. Action is being taken to move matters forward.

What you suggest does not seem to be unreasonable, if the innovations are supported by public funding.

Absolutely.

If they are supported by private funding, people will want others to know about them. Your proposal seems to tick all the boxes.

You mentioned intellectual property. I suspect that it causes real difficulties because many people run away as soon as patents and lawyers—which tend to go together—are suggested. Is the issue causing difficulties, or do we have structures to deal with it?

I do not know whether it is causing difficulties.

I can add something from the university side. We are aware that our research is not fully commercialised. Often there are no incentives for academics to commercialise research. Their reward is to publish a good paper in a good journal.

More and more, we are being encouraged to do knowledge transfer, which is one of the in things at the moment in the research councils. Many academics are not good entrepreneurs, so how to commercialise and, even, their being willing to do so, are issues. Scottish Enterprise, which is already knowledgeable on the issue, should play a greater facilitating role in getting more widespread commercialisation.

Universities are, of course, keen to protect their IP, but that does not mean that it cannot be commercialised, as long as the rights are protected. That is not necessarily a hurdle. If the incentive to commercialise exists, spin-out companies—which are prevalent in my organisation—can do it. To get over the capital cost barrier, universities can spin out to bigger companies and make profits as a consequence. That is all fine: everybody gains at the end of the day.

One other point to make about IP at the commercial stage is that, in the oil and gas sector, we have the Industry Technology Facilitator, which facilitates joint industry projects. It was formed by a group of companies to finance projects for the general benefit of all. When the organisation started about 10 years ago, it was agreed that the IP rights had to be given to the SMEs, university engineering departments or whatever that had developed the technology, but they were encouraged to put in place a commercialisation process from the research—indeed, there is a clause in the contracts on that. In other words, the departments cannot just do the research, write a nice paper and then go on to the next subject, because it is a condition of their getting the funding that they put in place a commercialisation programme.

I presume that that model does not exist in all areas of activity.

I do not think that it does. After a lot of painstaking work, that is the model in the oil and gas cluster.

I take it that it would be a good model for the rest of the nation.

I think that there is merit in it.

The annual report mentions the procurement process as a route to productivity. Why are public services not procured properly at the moment? Given that we have arguments about best value, that everyone is looking at their budgets and that nobody actually wants to waste money, how can we make money from better procurement?

We suggest in our annual report that, under European Union law, things can be procured that are perhaps not the cheapest if doing so fulfils other valuable functions. Government could use more discretion on that.

To interpret that, and possibly to put words in your mouth, that means that it might be sensible to buy something in Scotland rather than from outside Scotland, even if it costs 2 per cent more, because it achieves other economic benefits.

Yes—it might achieve economic benefits or advantages for R and D or whatever.

I know a bit about that, because EU law was a big issue when it was applied to the oil and gas sector. The term "most economically advantageous" is not as vague as it might seem. It has to be clarified that the process will be timely and will bring wider knowledge benefits—that kind of thing. That approach is certainly not protectionist, which the EU directorate is dead against. It acknowledges that quality, timeliness and wider external benefits could be part of what constitutes "most … advantageous".

Are we failing to make use of that opportunity because we do not know about it, because we are scared of it, or just because it is easier to go for the bottom line?

It is probably the last suggestion.

I would like to ask about a couple of things that are not covered in the report but which are clearly relevant to the advice that you may or may not choose to offer now or in the future.

Sir George Mathewson in particular has emphasised the importance of investment in infrastructure and the lack of investment in it. It is clear that the chapter in the report on borrowing is designed to offer a way of dealing with that matter in the future. In the context of the current recession, the public-private partnership model is tried and tested, but the Government has not used it. Many people think that to have stopped PPP projects two and a half years ago but to have not put something else in their place was recklessly negligent. What is the view of the Council of Economic Advisers on that?

Special purpose vehicles are mentioned in the report. We reluctantly believe that the PPP approach that you mention should be taken if that is all that is available to us and we have no option. However, we disapprove of it. We think that it is expensive, and I think that it is dishonest.

Do you recognise that, in a time of recession, the pipeline of projects has ended, that it has been estimated that £2 billion of spend and 20,000 jobs have been jeopardised as a consequence and that, most significantly, the infrastructure investment that the economy has needed has simply not been made or initiated in the past two and a half years?

I am not sure that I agree with your numbers. I will put it like that.

The way in which public-private partnerships were constructed was not good. It means that we are left with massive annual payments—the payments would have been substantially less if there had been straightforward borrowing—so it is not a good idea to move forward on that basis. However, we reluctantly reached the conclusion that we might have to use public-private partnerships.

Do you realise that there is huge concern that reluctantly reaching the conclusion that action is needed two and a half years after work stopped is a source of loss of employment and business during a recession? You and ministers have sat and not made any decisions on the matter for two and a half years.

We do not make decisions.

You give advice. You must be concerned about the hiatus.

We have just given advice.

Two and a half years without any movement is a long time.

Your advice on special purpose vehicles is interesting in the context of the Scottish Futures Trust which, as you all know, has finally emerged from the cobwebs. As far as I can see, it proposes to proceed entirely based on the use of special purpose vehicles. Last year, John Kay told us that that is not a good idea. Is it your understanding that there will be non-profit-distributing PPPs?

Yes. We can only do what we can within the current Government system.

By finally bringing forward that PPP model as its alternative to conventional PPP, has the Scottish Futures Trust responded to your advice? Has it responded to concerns that the Council of Economic Advisers has raised with it about the lack of movement in the area?

I think so.

That is helpful.

The other issue that I am keen to explore is energy. You will be familiar with the "Scotland's Generation Advantage" report, which is dated September 2009, but was published only last week. It was commissioned from Wood Mackenzie by the Scottish Government. I understand that it was commissioned to inform your considerations. It was not published in September, when it might have been published; it was published last week, as I said. You have not published the report that you commissioned.

We have not yet considered it. We simply did not have the time available at our previous meeting to study and consider it. The consideration of its implications is on the schedule for our next meeting.

So, the report is complete and has been submitted to you.

It is complete and it has been submitted.

Is there any reason why you cannot publish it in advance of your consideration of it? Can you publish it and then publish your response to it in due course?

The report is in the public domain now.

Was it not published a few days ago?

So "Scotland's Generation Advantage" is all that there is. I understood that you were commissioning a report on the comparative costs and advantages of different generation methods, but "Scotland's Generation Advantage" does not appear to be that.

This report focuses on the energy production methods in which it is felt that Scotland has a comparative advantage.

The work is in progress in the council; the report is an input to our work. We have to think more and do our work on the subject. The report gave us some background information, which is helpful. We are now doing our preparatory work using the report and other information. As Sir George said, we will have a full discussion on the subject at our meeting in February.

I understand that Scottish Government officials indicated that the council had commissioned a further report on energy matters that was still to be published, but you are telling us that there is no report other than your conclusions on this Scottish Government commissioned report.

We will publish our conclusions on energy. They will not be limited to the report.

We are doing our own thinking and investigation. The report is part of the input to our knowledge.

As you will be aware—I guess that Alex Kemp is particularly aware of this—Ian Wood said at the weekend that Scottish ministers were "in denial" in terms of their reluctance to consider nuclear generation as part of the future picture, but the report appears to disregard nuclear power as a possibility. Is that a fair analysis of the contents of the report?

The report is focused on particular methods of power generation. It does not analyse the nuclear power option. It says that the lights will not go out in Scotland without the nuclear power option.

Why did the remit to which Wood Mackenzie worked not include the nuclear option?

I understand that the consultants were given the title and then interpreted things in the way that they have done. That is all we can say.

One of your colleagues—Lord Smith—said on the public record that some issues that existed for nuclear power in the past do not exist for the current generation. Scotland clearly stands to miss out entirely on the next generation of nuclear technology. Are you "in denial"? Do you deny that nuclear power could have a role to play?

That debate has still to come.

That is a debate that you anticipate having at your meeting in February.

Yes.

Will you consider options other than the narrow options that are laid out in the report.

The options that are laid out are not narrow.

They are not entirely narrow, but they omit the largest single generation source we have at the moment.

That is correct.

You will consider all the options in February.

Yes.

I turn to the banking and financial services section of the report. You suggest that there has been some success in retaining head office and corporate functions in Scotland. However, the evidence that we have heard in our banking inquiry suggests that many of the key decisions—for example, on lending to businesses—are being taken not in Scotland but in London, Birmingham and elsewhere. Does Scotland have a banking sector to call its own at the moment?

To call its own?

Members may have read at the weekend that Lloyds Banking Group has set up a new division in Scotland. From experience, I know that decision-making in its credit operations is also based in Scotland. Lloyds is making efforts to base its decision making in Scotland.

In the report, we make the point that the Government should exercise what influence it has in getting the best solution from the restructuring of the banking business as we look forward within the United Kingdom. That is where we are at. Obviously, there are a lot of difficult pressures at the moment because of what has happened. Our recommendations to the Government are exactly right.

One issue that has arisen is the lack of competition in the banking sector as a result of the various mergers that have happened over the years. Given the current situation and the divestments that the European Commission requires, could a Scotland-based bank take over some operations?

I do not wish to comment on that.

Would it be in Scotland's interests for a Scotland-based bank to take over some of those operations?

It is an obvious benefit to Scotland to have a large head office here—period. The more decision making is located in Scotland, the better. That is a general statement. I am here to represent the council: I should not comment on what could happen in banking.

I raise the issue because your report refers to financial and business services.

The report says that we should watch the situation closely and that we should attempt to maximise—

All I am trying to do is to form an idea of your advice to the Scottish Government about the type of banking sector that it should look for.

We are in a fluid situation.

Given what happened to the Royal Bank of Scotland because of its acquisitions strategy—it is clear that ABN AMRO was one acquisition too far—and what happened to HBOS because of its lending strategy, which led to problems, do we need a different banking system? Should some of the casino banking of which we have heard be split from retail banking and traditional small-business banking?

Scope exists for many types of banks. We should be careful not to throw the baby out with the bath water. We should remember that there are large corporates in the world and in the UK. Large deals will be done and companies will need to borrow large amounts of money. If the UK as a whole were not in that business, that could represent a substantial loss of tax revenue and jobs. I hope that that answers your question.

Christopher Harvie has a question. I ask him to be brief as we are running short of time.

My question will be brief. You talk about deficiencies in secondary education. How high among those deficiencies is the collapse of modern languages teaching? These days, one cannot guarantee that English will be the means of communication among advanced technological countries.

The issue is more basic. We are talking about English and arithmetic—the basics.

To understand how technologies flourish, knowing Chinese and Spanish might now be more important than English, because the United States and Britain have moved over to the service sector in a direct way. When I worked on North Sea oil a long time ago, I could grasp some of the technology only by understanding German. It was common in the Lanarkshire—

Deutsche Bank holds its board meetings in English.

It may do so, but the spare-parts branch of BMW operates completely in German, even in Oxford.

Another point relates to modern languages. We have a modern educational system that is difficult to change. Over the years, French has been the dominant modern language that has been taught in the UK, and in Scotland in particular. French is very much a minor language in comparison with Spanish. My view is that I would like our English teachers to have the same knowledge of grammar as our French teachers have.

As a footnote, I say that the fastest growth in rates of studying English is among people in China who are learning it for business purposes.

I thank Sir George Mathewson, Professor Kemp and Mr McColl for giving us the benefit of their wisdom on the council's annual report. We look forward to next year's report and to the Government's response to this year's report. Thank you for your time.

Thank you all for inviting us.

Meeting suspended.

On resuming—