Economy, Energy and Tourism Committee

Meeting date: Wednesday, April 21, 2010

Official Report 458KB pdf

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Budget Strategy 2011-12

The next item on the agenda is consideration of the budget strategy for 2011-12. We are beginning our scrutiny of strategies and plans in the Scottish Government and key public bodies to respond to the tighter financial climate over the coming years. I am pleased to welcome to today’s meeting senior representatives from Scottish Enterprise, Highlands and Islands Enterprise and Scottish Development International. We record apologies from Lena Wilson, the chief executive of Scottish Enterprise, who has been stranded by volcanic ash on the volcanic island of Lanzarote; obviously, the ash is from a different island. We wish her a speedy return to the country. I invite Crawford Gillies from Scottish Enterprise, Sandy Brady from Highlands and Islands Enterprise and David Smith to introduce their teams and themselves and to make some brief opening remarks, before we move to questions.

Good morning. This morning I am joined by David Smith, the acting chief executive of SDI, and, in Lena Wilson’s absence, by Douglas Colquhoun, the director of corporate planning and performance at Scottish Enterprise, and also by Julian Taylor, the director of research and policy. We are all delighted to be here with you today. As the convener said, Lena Wilson sends her apologies.

When Lena Wilson and I met the committee back in December, we made a commitment to make every effort to ensure that we kept you properly informed of the activities of Scottish Enterprise and, in particular, of our priorities, budget plans and so on. We also listened to what you said about how we presented our evidence and some of the language that we used. I hope that you will agree that we have responded and delivered on our commitment to greater clarity and transparency, and that you see that in our new business plan.

Economic growth will come from Scotland’s businesses growing their markets, increasing their productivity and taking advantage of global opportunities. Scottish Enterprise wants to help to create a business environment that will let them do just that and result in our having more globally competitive Scottish businesses and globally competitive sectors, in which Scotland has real competitive advantage and world-class expertise.

The business plan that we have submitted to you and that will be published tomorrow is designed to ensure that we invest where we see clear opportunity and maximum economic benefit for Scotland. In delivering the plan, we will face key difficult choices; I know that today you will want to explore the key strategic drivers behind the decisions that we have made about what we do and do not do. In short, we will focus on the areas in which we have the greatest economic impact, whether by working more intensively with companies that can have a disproportionate impact on the economy or by making step changes in the opportunities in Scotland’s key sectors, such as energy, life sciences and food and drink.

We want to get the best return on our investment, so we need to be as flexible and opportunistic as possible, just like our best businesses. Over the past 18 months, we have shown how we have responded to the rapidly changing economic circumstances, modifying and tailoring our support to companies as the recession has unfolded. We intend to remain fleet of foot, guided by both macroeconomic analysis and direct, real-time feedback from the businesses with which we are working.

We want to raise the bar for Scotland’s productivity performance by helping our companies to reduce costs, to improve processes, to increase efficiencies and to look at opportunities to target new markets, both domestically and internationally. To do that, we also need to look at the leadership in the Scottish business base. As I travel around visiting businesses, it strikes me that, typically, those businesses that are doing best have leaders with ambition and vision. We need more Scottish businesses with those characteristics.

In approving the plan, the Scottish Enterprise board is well aware that trading conditions are likely to continue to be tough for many businesses for some time to come. In addition, we have and are likely to have a tight budget going forward. Consequently, we must focus on where we can have the greatest impact with the budget that is available, while at the same time demonstrating value for money and protecting the public purse. For that reason, we will continue to build on recent successes in improving our operating efficiencies. That work has been under way for some years.

We are committed to greater public sector alignment, primarily because it leads to greater economic impact. However, the budget pressures that all of us face will provide additional impetus for greater joined-up working. Working with Lena Wilson’s team, Scottish Government colleagues and other agencies, we can achieve new levels of collaboration behind a common purpose of economic growth. As our submission states, the board has been closely engaged in approving the budget plans. As an organisation, we benefit hugely from the wide expertise and experience that our board members and partner organisations bring from across the private and public sectors.

We have been robust and direct in our discussions with the Government, but we have also been realistic. We have an ambitious plan with a strong pipeline of projects. We have also given careful consideration to how we will respond if we have fewer resources. I hope that our written submission and our business plan, which you have received, have provided the information that you seek. We are happy to take any questions that you have.

Good morning, convener and committee members. I shall keep my remarks brief. My colleague Alastair Nicolson, who is the head of planning and economics at Highlands and Islands Enterprise, joins me. I am still the organisation’s acting chief executive.

We welcome the opportunity to participate in the budget strategy phase of the Parliament’s and the committee’s consideration of the budget. The committee invited us to provide information on the deployment of HIE’s budget so, like Scottish Enterprise, we submitted our recently completed operating plan with our submission. The plan sets out our proposals for the current financial year in detail and for the following two years in outline. Alastair Nicolson and I are happy to answer any questions on the plan.

We recognise that the committee has a particular interest in examining how we will approach the challenges that are likely in later years and which are associated with significantly tighter budget settlements. As an agency with wide powers to assist economic and community development, we continually make choices about what we support, so the principles of discretionary decision making are well established. Our discussions about 2011-12 and the years beyond are at an early stage, but we are happy to describe how HIE will approach the policy issues and the practicalities that are involved in making the tough choices that are ahead.

Thank you for inviting me to participate in the session along with Crawford Gillies, Sandy Brady and other colleagues from Scottish Enterprise and Highlands and Islands Enterprise. As I said at the committee’s round-table discussion on international trade on 24 March, international trade and investment are critical to the economy’s future—our submission, our operating plan and the business plans of our partners demonstrate that.

The work of SDI—Scottish Enterprise’s joint venture with the Scottish Government and HIE—and of the globalscot network is vital in helping to capitalise on the potential that trade and investment offer. Our focus will be on supporting Scottish companies to capitalise on global market opportunities, particularly in high-growth sectors and markets. That provides the opportunity for more companies to develop the skills and expertise that are required to succeed in growing exports, which is extremely important, and to secure high value investment, which will enhance the Scottish economy’s competitiveness and provide new job opportunities.

I am happy to answer questions.

A large part of the income for Scottish Enterprise and Highlands and Islands Enterprise—other than grant in aid—was assumed to come from property disposals. How well did you meet the target for property disposals in the financial year that has just passed? Do you expect difficulties in achieving that budget for this year? What is Scottish Enterprise’s budget for property disposals this year?

We had a modest capital receipt in the financial year that has just finished. We recognised that the appetite for purchasing properties would be diminished by economic conditions and that proved to be the case, although we met the target that we set.

As you see from the operating plan, we have revised that target for this financial year to £3.1 million. We are anticipating a gentle growth within that over the two planning years. That is probably a little optimistic, but we think that we might see some sort of rebound after the depression in sales over the past 18 months to two years.

12:00

I have a couple of questions about the projections that Scottish Enterprise has presented to us. The money made available by the UK Government through the strategic investment fund is clearly a welcome boost. Might additional projects attract such funding, through the same route as the BioQuarter? I am thinking for example of energetics and similar projects that Scottish Enterprise will run.

It depends on the schemes as they come forward from the UK Government. There is a three-way conversation involving ourselves and colleagues in the Scottish Government and the UK Government. We are very close to appropriate representatives in the relevant departments in both organisations. Equally, we ensure that we stay close to organisations such as the Technology Strategy Board, which has other related investments that could be made, to ensure that we get a fair share. Individual programmes have different eligibility criteria, but we feel that we are well placed to capitalise on other sources of income.

I will digress and talk about the Technology Strategy Board. We welcomed it to Scotland recently and were able to demonstrate Scotland’s assets. I hope that we changed its perception, so that it saw more opportunity for its investment in Scotland. There is very much an active relationship.

That is helpful. The other heading that I wanted to check with you was commercialisation and the development and exploitation of intellectual assets. Clearly, that is one of the lines that has continued to go down. Am I right in thinking that the reduction in spend for 2010-11 of £3.2 million is in addition to the reductions already presented to us in previous spending plans? Is that an accurate summary?

I would not necessarily say that that is the case. As we rebalance and focus more on entrepreneurial support, we must evaluate over the next year or so how effective we are being. If we are being effective, I see no reason why we should not increase our support in that area. On the other hand, if we find that we are not getting the returns in spite of more focus on entrepreneurial support, the decline that you recognise will continue.

We have spent a number of years defining an evaluation methodology that withstands testing by academics and commercial independent evaluators. We apply that methodology, which is robust, to all individual projects and, increasingly, to the programmes of support that we provide. Most of the activity that we have undertaken has been robustly evaluated in the past two or three years. We have covered all our account-managed activity, for example, and understand the input-output relationship—what we get out for the pound that we put in. We have just finished a piece of work on our internationalisation activity, and we have undertaken significant evaluations of a range of other activities, such as our research and development grant support. Such evaluations are done on a comparative basis. We can then build a model that shows the overall impact of Scottish Enterprise’s investment. It is not an exact science, but we expect our investment in one year to accumulate over a 10-year period, so that there is an additional impact of around £2 billion on the economy. In other words, around £2 billion will be in the economy that would not be in it if it was not for the investment that Scottish Enterprise, alongside others, made. That is a net additional impact. We think that we have a robust methodology.

That takes us into the realms of prioritisation. As far as possible, we ensure that we support activities that will have a higher impact. As I said, however, it is not an exact science. In addition, we need a blend of activity.

We have worked with Scottish Government economists to ensure that our work is robust and that we have not just invented something that makes us look good. We genuinely believe that we have an independent and robust evaluation methodology.

In recent years, we have invested heavily in our staff and in project appraisal to ensure that our staff clearly understand the strategy that we are delivering and to help to determine the most important interventions that we can make to deliver on that strategy. We have been working closely with Scottish Enterprise, the Scottish Government and VisitScotland to ensure that, at the other end of the process, we can assess the outcomes that we are trying to deliver and quantify their impact on the national performance framework and the strategic targets that were set in the Government’s economic strategy.

Julian Taylor talked about an extra £2 billion in the economy on the basis of a 10-year projection, whereas Sandy Brady talked about a five-year projection. Is that your thinking when you talk about gross value added?

At present, we are trying to get good value. Do you have the right staff and the right numbers of staff to achieve that goal?

We operate in an integrated way with partners, particularly Scottish Enterprise. When it comes to the overall measurement or evaluation framework, we work in a highly aligned fashion with Julian Taylor and his team, and we share our thoughts and our approach with colleagues from Highlands and Islands Enterprise and the Scottish Government. In other words, we use the same framework for and the same approach to evaluating the impact of our activities.

On staff numbers and resources, we think that we have an appropriate balance at this point in time. We are essentially a sales force or business development team. Just as Crawford Gillies said, we could put additional resources to good use, were they available.

I preface my remarks by saying to Scottish Enterprise that it has done extremely useful work over the past six months to provide us with some of the data that we had been looking for.

The Government’s economic strategy says in its first paragraph:

“sustainable economic growth is the one central Purpose to which all else in government is directed and contributes.”

It goes on to define that goal by saying:

“Our immediate growth target is to raise Scotland’s GDP growth rate to the UK level by 2011.”

My first question to Crawford Gillies, as the chair of Scottish Enterprise, is whether he and the board are convinced that we are on track to deliver that objective of the operating plan nine months hence.

Our focus is to maximise the impact that we can have on economic growth. At this stage, as we come out of recession—I understand that new numbers have been published this morning—it is extremely difficult to say, frankly, what the trajectory will be over the next year. There are definite signs of recovery, but the recovery is somewhat fragile, so it is difficult to say whether we are on track at this point.

I want to pursue the policy changes that might be helpful in trying to meet the target of matching UK growth next year. The second paragraph of the Government’s economic strategy reads:

“This Government Economic Strategy sets out how we will achieve such success through an entirely fresh approach.”

I have to confess that, as I read the Scottish Enterprise business plan that is to be published tomorrow, I was genuinely struggling to establish the “entirely fresh approach”. I will not invite you to comment on whether that was simply overheated rhetoric. At a more practical level, I struggled to identify the ways in which you as the new chair, the board and a new chief executive have measurably changed direction in the past three years since that commitment to “an entirely fresh approach” was given. Can you give us a sense of how the organisation’s strategic direction is shifting to accommodate circumstances?

My final question is on the crowded landscape of the Scottish Enterprise board and chairman, the international advisory board and the Council of Economic Advisers. In that context, can we expect you and your board or the international advisory board to have anything to say on the wider issues of economic development, or will you limit your public pronouncements exclusively to the areas for which you have operational responsibility? For example, I am thinking about what you or the board believe might be helpful on skills, planning, transport or other issues from the vast array of policy areas that impact on economic development in Scotland.

I am pushing you to define for us whether you think that you have a strategic role or an operational role. There is genuinely some confusion about the appropriateness of the Scottish Enterprise board, chairman and international advisory board having a view on areas of economic development that go beyond those of your own narrow remit but which are critical to delivering the objective of matching the UK’s GDP level by nine months hence. What is a fair expectation for the public policy community and the Parliament to have of you, the board and the international advisory board?

My questions are for Scottish Enterprise. I was pleased to hear Crawford Gillies talk about the need to remain opportunistic, but how does that fit in with supporting only the six key sectors? How do you support other businesses that show entrepreneurial activity? How does your support policy fit in with opportunity?

Could that information be made public? It would be interesting for us as a committee to see it, because what you have described is not the picture as it has been painted to us.

There is some information that we can provide you now—the number of companies that we are working with in different ways, for example through smart exporter and other initiatives, and the back-up to the 6,000 or 7,000 that I mentioned. We are not yet ready to describe the overall segmented approach in detail, but we would be happy to do that in six to 12 months’ time. It is work in process.

12:30

I want to ask about regional support since the demise of the local enterprise agencies. You have talked about collaboration. I represent a Fife constituency and I am concerned because, in Fife, there was a lot of collaboration with the local enterprise agency but that has now gone. How are regions such as Fife being supported now?

That is really important. Scottish Enterprise delivers on local, regional and national bases. All are important and we need to continue to do that. Nevertheless, I hear the view from some quarters—I am not suggesting that you are putting it forward—that the choice is between a large, monolithic, centralised organisation and one that is decentralised, local and responsive. It is possible to have one organisation operating across Scotland that brings the best resources to bear region by region so that, for example, the Fife operation is not limited to the people in the Glenrothes office. If the right people to work on the Fife energy park are in Glasgow, Aberdeen or Edinburgh, we should bring them to that opportunity, and that is what we do. Our organisational model attempts to secure the benefit of our being one organisation across Scotland, which is able to transfer the best resources and best practices, while, at the same time, recognising that a lot of economic development is delivered on a local basis.

I commend Linda McPherson. She provides a lot of excellent support, but she does so now with a limited resource. There are no longer the same bodies to collaborate on projects on the ground. A lot of local expertise was lost with the demise of the local enterprise companies, and I do not think that that ground has been made up. That is a comment rather than a question, but I genuinely think that that is a concern of MSPs across the piece. Do you want to comment on that?

We are actively involved with the construction industry. I forget the name of the construction industry advisory board, but I met it two months back and it told me that the level of engagement and support from Scottish Enterprise for the construction industry is significantly better than it was a few years back. That support is provided on issues such as innovation—a big issue in the construction industry—leadership and working closely with Skills Development Scotland on the skills agenda, which is also crucial in the construction sector.

Has the skills sector had the support that it needs since the split? My concern, for example, is that we have lost 67 apprentices in the last year in Fife, all in the key sectors. We hope to build a new road bridge, but representatives of the construction industry tell me that we are losing skills from the sector that are irreplaceable and that we will face skill shortages. I am interested to learn what dialogue there is. You say that you have strategic involvement. What influence do you have over those other agencies in helping to develop the skills that we need for the future?

How has Highlands and Islands Enterprise addressed the issue?

I will examine some of the budgetary aspects for Scottish Enterprise, in particular the figures in appendix 1 on page 9 of Scottish Enterprise’s submission. One item of income that has been touched on is property disposals, for which there is a figure of £20 million for this year, for next year and for the year after. In the longer term, property disposals will cease to be an option because the bulk of what it is feasible to sell will have been sold. At what point will property disposals cease to appear in the income statement?

Those are two rather huge imponderables being placed in our way over the next five years. I rest my case.

Tourism is highlighted as a key area both in the submissions and in the Government’s economic strategy. Highlands and Islands Enterprise’s operating plan refers to marine tourism, but I see no such reference—perhaps I have missed it—in the Scottish Enterprise submission. How important will marine tourism be for the future? How much support will Scottish Enterprise and HIE commit to trying to increase the income from marine tourism?

Scottish Enterprise’s tourism strategy has two clear elements: destinations and products. We have been investigating products that have the greatest effect on the economy—by “products”, I mean things such as golf, mountain biking and other such experiential holidays—and we are still in the process of doing that. Marine tourism looks like it could have potential, but that needs to be weighed against other areas in which we could make significant investment. As Crawford Gillies said on return on investment, if we feel that Scottish Enterprise input could lever additional advantage for the economy, we will pursue it. To be blunt, if it cannot do that, we cannot make the case for investment.

We would be happy to follow that up with you directly.

I do not think that anyone is in a position to give any assurances at the present time, and our plan is based on that for a number of reasons. The first is Government guidance—that is how the Government wants things to be done at this stage. Secondly, any other number would be pure guesswork at the present time. Thirdly, there is a danger that any other number could become a self-fulfilling prophecy or, which would be worse, it could be the starting point for any future discussions and negotiations. Although we do not necessarily expect flatlining to be the outcome, it is the best way of communicating the plan at this stage.

HIE’s plan has been prepared on that same basis.

Similarly, SDI is heavily dependent on the board of Scottish Enterprise for the bulk of our budget, so Crawford Gillies’s comments are relevant to that.

That is very helpful. Thank you.

The latest version of the Government’s economic recovery plan emphasises the international aspect of getting out of recession, but the budget for SDI is flatlining year on year, looking back as well as looking forward, potentially. If we are looking at international issues as a key way of getting out of recession, is that the most effective way? Should we be considering investing more in international operations?

I have one specific question that relates to previous budgets, to an extent. This year a sum was moved from support for the expo in Shanghai to support for more Scotland houses. Was the money spent? Were any Scotland houses established as a result?

My final question is about how you evaluate success, which you discussed earlier. I presume that we are not allowed to talk in detail about the draft business plan, but on page 34 you state in big letters:

“every £1 we spend in 2010/11 ... will generate an additional £8.80 in economic impact for Scotland”.

If we drill down into that, it is a cumulative £8.80 over a 10-year period, so it amounts to an average of 88p a year. How do you establish that you will achieve that cumulative net value over the period? I accept that the average of 88p a year for every pound spent is additional, but is the target good enough? Should not we try to achieve more than 88p for every pound spent?

Have you carried out a backward analysis and looked at what we have generated from investment that we have made in previous years, to see whether the figures stack up?

That concludes questions. I thank Crawford Gillies, David Smith, Sandy Brady and their respective teams for coming along this morning, which is now this afternoon.

Meeting closed at 12:58.

Page 4 of Scottish Enterprise’s submission refers to the budget plans and commentary in relation to 2010-11. The changes between your previous submission and the final plan show a bottom-line increase in cash investment of £25.9 million. You explain that the increase comes from a one-off grant of £12 million from the UK strategic investment fund, from £12.5 million that is shown in your budget for the first time but which is not new money and from £1.4 million of minor adjustments to income assumptions. Is that correct? If so, what are the changes in income assumptions?

That is correct. The £1.4 million is the net result of several changes that are laid out on page 5 of the submission.

The budgeted income for this financial year from property disposals is £20 million. That is set out on page 9.

In general terms, yes. We will continue to make the case for that funding because we feel that we have a strong pipeline of projects that could come forward.

What is the engagement process? What criteria do you need to satisfy in order to attract that kind of funding?

Does the logic of that approach mean that that line will continue to decline because you will continue to reduce your commitment to innovative developments at the cutting edge of the intellectual assets that currently exist?

Julian Taylor’s job is to evaluate such programmes.

That is a notoriously difficult question. We have introduced more specific criteria relating to the success that we would expect to see from such research programmes. We call such companies 5-by-5 companies for shorthand—that is, they are companies that can generate a turnover of £5 million within five years or investment of £10 million. The criteria are specific, hard and relatively short term. Equally, we need to monitor the sector strategies to ensure that there is a pipeline of good ideas in areas in which Scotland has global competitive advantage—for example, in stem cells rather than in life sciences in general. However, there is no crystal-ball answer to your question. It is about monitoring the flow of ideas and ensuring that companies are formed as a result or that technological intellectual property is applied in existing companies.

If the investment that you still apply at the cutting edge is productive, you might have to look again at what the priorities are in the area.

Before I ask HIE the same question, do you use the same methodology that it uses?

We certainly collaborate on the broad principles of project appraisal.

The overall measurement framework comes out of the Government’s performance framework. In that sense, we have aligned our activity to the overall performance framework.

We can make relatively short to medium-term assessments of individual interventions with businesses and social enterprises, although some assessments will be made over a longer period as the benefits will not flow through until seven to 10 years down the track. The projects on which we are more challenged are the longer-term ones. EMEC will bring returns to the Scottish economy over a very long period, and we are involved in investment in the UHI Millennium Institute for the long haul. The GVA impact of that project will stretch into the very long term—20, 25 or 30 years into the future.

From our point of view, we have an adequate number of staff. In fact, we continue to drive down our staff numbers and to seek efficiency savings. Could we make good use of more resources, were they available? Absolutely; we most definitely could.

12:15

The point is well made.

Does David Smith have anything to add on that?

I would certainly not describe us as a large and amorphous organisation; I would say that we are highly focused. In the context of the global marketplace that we operate in and the global opportunities that exist, I would say that we have quite modest staffing numbers and resources.

Currently, we do very little by way of loans. We do more by way of equity investment through the various co-investment funds that exist.

No bottom line has been set by the board or shared with the Government. On the budget, we have three jobs. The first is to make as robust a case as possible for the resources that we think that we can put to good use. Having done that, the second is to take the resources and maximise our impact. The third job is to remain opportunistic. One characteristic of an economic development organisation such as ours is that we cannot always at the beginning of the year plan exactly where the resources will go, because new opportunities will arise. We have all three of those roles and we try to fulfil all three.

I cannot comment on what happened three or four years ago, but I can comment on what is happening today and on the changes in the past 12 months. A really important change relates to collaboration. It is not appropriate for us or anyone else to consider the investment in the enterprise agencies to be the only investment in economic development. I have seen significant improvement and change in collaboration in the past 12 months, not only with the strategic forum partners—HIE, the funding council, Skills Development Scotland and VisitScotland—but with other Government agencies. However, I do not think that we have gone as far as we can. There is further to go and greater impact will be achieved for the public purse as we enhance that collaboration. That is a tangible change.

I would make a distinction between the role and how it is delivered, if I can put it that way. I think that Scottish Enterprise and our board have a strategic role. To be frank, if our board and I can see opportunities that may not fall within a narrow definition of our remit, I think that we have an obligation to raise them. I do not think that we should necessarily raise those opportunities publicly, because it is not the role of a Government agency to stand up publicly and criticise the Government. That is not to say that we should not have such discussions behind closed doors.

The reality on the ground is that the companies that have access to the support are the account-managed companies. How do you square that circle?

Again, that question brings us back to something that we need to do a better job of communicating. Historically, there has been talk of Scottish Enterprise working with 2,000 companies. Yes, we work most intensively with 2,000 companies, but the statistics over the past 12 months show that we have had one-on-one interaction with—and have therefore supported in one form or another—6,000 to 7,000 companies across Scotland.

It is wholly appropriate that we do not give all 6,000 or 7,000 the same level of support. We have a segmentation approach in which 2,000 companies receive more support than the 5,000 below them. Indeed, even within the 2,000, the support is not homogeneous, and some companies—those that have the potential to have the biggest impact on the economy—receive even more support. We need to communicate that segmented approach more clearly that we have done in the past.

There are some excellent examples of partnership working. One of the best examples, ironically, is the Fife energy park. We systematically assess the relationships that we have with every key partner—in particular, local authority partners—and ask them directly about our current relationships. We build an assessment and, if there are any challenges, we ensure that they are tackled at the highest level.

On the skills sector, is the educational establishment in the Highlands able to meet that demand?

The university of the Highlands and Islands sees renewable energy as one of its focuses going forward and we are working to build its capacity. Equally, other universities are represented in the Highlands and Islands and a number of those—Heriot-Watt University, for example—are actively involved in the development of the renewables sector.

It is balanced, because we continue to make strategic acquisitions of sites, so there will be a flow of sites that we can sell in later years. At the moment, we think that we have a saleable stock worth around £100 million. That is constantly being refreshed, so it will certainly be several years before property disposals will cease to be included.

From previous evidence, I had the sense that property acquisition was one of the things that Scottish Enterprise would probably do less of. Roughly what level of property acquisitions do you make annually?

The line underneath that—property income—runs at £8 million a year. If, over those three years, you have got rid of £60 million-worth of property, will the property income figure remain the same? Ordinarily, I would expect it to drop.

It is difficult for me to comment because, as I understand it, the First Minister will make an announcement later today on that topic. Therefore, I cannot say much, but I can say that the setting up of the Scottish Investment Bank as currently envisaged would not have a material impact on the co-investment fund’s operation.

Frankly, I think that Skills Development Scotland could provide a better answer to that question. As Julian Taylor mentioned, Skills Development Scotland is integrally involved in the industry groups, including the groups on renewables, defence and marine.

12:45

The contrast between the £5 billion that is being spent on those two items of defence expenditure and the sums that we have discussed so far about long-term investment in the SE and HIE areas seems quite remarkable.

Secondly, as we will hear in this afternoon’s chamber debate, the transmission charges for renewable forms of energy are determined not so much by the Office of Gas and Electricity Markets, despite what it might like to think, but by a large private concern with huge American interests that is called National Grid, which is a long way from being the common provider of infrastructure that the state created in the 1920s. Can we have security for long-term planning given that type of horse trading, which is very much oriented towards the interests of the south-east of England? The arrangements have drawn criticism from practically every business organisation in Scotland.

As I said, I hear you. I am not sure what I can add to your comment, but I understand the point.

Marine tourism is already an important part of the product that the Highlands and Islands offers. Over some time now, investment has been put into that sector to provide the necessary infrastructure, such as pontoons and moorings, so that we can derive economic benefits. That work continues. At the moment, we are investing money in an Interreg programme, along with bodies in the Republic of Ireland and Northern Ireland, to open up further opportunities for marine tourism across the Irish channel. We have seen considerable interest around the coast—I mean that literally—from Shetland to Argyll and volumes are building steadily, so the question is whether we can tap into that.

Another thing that is generating interest in port and harbour infrastructure in the Highlands and Islands is the burgeoning cruise-ship market. Not all cruise ships are giant vessels that require huge amounts of assistance; smaller vessels also cruise around Highlands and Islands waters and they are another important element in exploiting our natural advantages. For us, marine tourism is a growth sector that we will continue to try to stimulate.

I know that Scottish Enterprise and HIE worked together on a report on marine tourism aspects that was put into the public domain about two weeks ago. Although the report has not yet been widely circulated, I certainly think that the work on that report has been excellent. It provides a clearer picture of where we are with marine tourism, and it highlights the potential across the country. I commend your organisations for that, but there is so much more potential there. Marine tourism is not just about sailing or boating; it includes a range of other activities, such as canoeing, kayaking, diving and so on. You will be hearing from me in due course. I just wanted to flag up the point that we are not talking just about boating and sailing.

I presume that your schedules contain contingency plans for what your agencies might do in other circumstances.

We have had and are having discussions about what we would do if our budgets are cut. There are no specific plans to be taken off the shelf. We do not have scenario plans A, B or C, but we most definitely do have discussions and thoughts about what we would do in different situations.

It is not 88p. For every £1 that we spend, we will get 88p every year, so it is cumulative. On that basis, we genuinely believe that it represents good value. We try hard to benchmark ourselves against peer organisations throughout the world. It is difficult to do that, because of the challenges of getting a robust methodology. Where we can get a comparison, we perform well.

Absolutely.

Will you share that with us at some point?

Yes—we publish all of our evaluation activities. We are committed to ensuring that we are open. The more we share, the better we can learn; that is part of improving the methodology. We would be delighted to provide the information that you seek.

Very few organisations in any walk of life deliver an annual 88 per cent return. Could it be higher? I am sure that it could. We would like it to be higher, but it is already significant.

What about Highlands and Islands Enterprise?

In the past year, we achieved the target for supplementing grant in aid with property disposals. We took a couple of tactical decisions at the year end to defer a couple of large disposals, because we did not think that they would be concluded in time for the year end, and we amended our expenditure plans accordingly.

What is the figure for property disposals in this financial year?

I move on to the budgets that you have included for 2011-12 and 2012-13. For Highlands and Islands Enterprise, there is an assumption of a flat line in grant-in-aid funding. In fact, I think that the only increase in the budget is the potential increase in property disposals or income to which you referred. For Scottish Enterprise, an increase of almost 10 per cent in grant-in-aid funding is assumed. Where does that figure come from? In the table on page 9 of the Scottish Enterprise submission, the grant-in-aid figures go up from £201.3 million to £222 million. What is the basis for that assumption?

The indicative resource allocation for 2010-11 is net of the accelerated capital expenditure reduction of £35 million. We are assuming that, for 2011-12 onwards, that £35 million will be reinstated to the Scottish Enterprise baseline budget. As part of the draft budget for 2010-11, the cabinet secretary announced a further reduction in the baseline of £9.5 million, so the net figure is the £35 million less the £9.5 million.

In this context, you are not simply acting as an intermediary; your active engagement secures the funding.

Yes. It is important to recognise that that also reflects a rebalancing within that broad area. We have seen, through investigation and evaluation evidence, that we need to expend more effort on the commercialisation of the intellectual assets, ideas or technology that Scotland has and less on the creation of those ideas. It is about rebalancing, so that we expend more on genuine exploitation and less on the creation and stimulation of ideas.

It is a rebalancing, but is it fair to say that it is also a limiting of ambition? Are you stepping back from blue-sky thinking in relation to the energy industry’s innovation, which you have previously supported through the intermediary technology institute?

I think it is about ensuring that the ideas that are exploited have a realistic chance of commercial exploitation, so that there is a genuine line of sight to market and a route to market. We need to ensure that there is not a complete scattergun approach and that there is a genuine focus on opportunities that are realisable in Scotland.

I suppose that the question behind the question that I asked is how you will know whether the strategy is correct, given that your investment in the brand-new end of innovation is declining quite significantly. It is clear that there is unmet demand for support on the entrepreneurial side and exploiting new intellectual assets that have already been realised. How will you know what you are missing? That question is not easy to answer.

Yes.

We have received evidence from Reform Scotland that suggests that we should consider the real-terms money that has been available, which has, of course, increased by around 60 per cent during the devolution years up to this point. Reform Scotland suggested that the annual increases and additional resources have not led to the expected improvements in public services. I know that the budgets for the enterprise networks have taken a slightly different trajectory—at least, that has happened earlier than is the case with other budgets. How do you measure the value for each pound that is invested? Is there a common method of measuring that and finding out the exact value of each pound that has been put in through the enterprise networks?

No—I mean in relation to measurement, which you said is an inexact science. Given that we are trying to find out what we can do to make best use of the public pound, how much more precise can we get?

We have had good help from Scottish Government economists in the area. We work collaboratively with them and with our colleagues in Scottish Enterprise. We focus particularly on gross value added. In our interventions in individual businesses and social enterprises, we try to estimate the GVA impact of our intervention over the next three to five years of the enterprise’s life. As Julian Taylor said, that is not precise and we have to rely on the ability to capture good data at the point of interaction with each individual business.

You will see that our operating plan includes some estimates of the range of GVA that we might get for our larger transformational projects. Again, they are not precise. Some of the projects are at the business end of things, where we can be clear about what might happen, but others, such as the European Marine Energy Centre and the Inverness campus, are infrastructural investments, the estimates on which come from independent studies of the potential long-term impact that we might have in GVA terms. However, we are clear that that is part and parcel of trying to show the value that we are getting for Scotland. Alastair Nicolson has been leading the work and he might want to add to that.

The balance between our budget and the staff is broadly correct. As you know, we have just gone through a small voluntary severance scheme to try to reduce our numbers and transfer resources from running costs into front-line services. That has been important for us. One of the key things, however, is to ensure that all our staff understand what we are trying to do with our interventions. Not all our people on the front line are economists, so it is important to get them to understand the economic concept of gross value added and how it impacts at the local, regional and national levels. We are on a training track and we have made some good progress, but there is still work to be done.

We are reviewing the results of the past 12 months and looking at the data that we have captured company by company. Some of the information is good and robust, but some of it is less so. We need to go through it and check that we are consistent and fair in what we are trying to claim.

Are you not a large and amorphous organisation, as has been alleged in another context by recent witnesses?

My final questions are on how money is spent and how we allocate it. Is there a greater ability to offer loans to people? Are loans now used to a greater extent than grants, which were the foundation of many of the enterprise network’s activities? I am interested in knowing how we can best use the money, which will be much tighter in future. Can you give any idea of the percentage of moneys that you disburse in that respect? If you offer loans, it is obvious that we will be able to use the money from them in future as they are repaid.

We assist businesses predominantly through a mixture of grants, loans and equity, although we offer loans less often than we did 20 years ago. That is to do with interest rates. At that time, we could offer rates that were slightly below bank rates, but that was when rates were in the mid-teens, when it was clearly advantageous for developers to come to HIE for loan finance. The use of loans dropped to a low level five to 10 years ago, as interest rates fell. We are now actively looking at increasing the use of loans. We have always used equity fairly selectively, but we will look at using that, too. You are correct that grant is money that is given out and does not come back, but it generates benefits, which is what we are pursuing.

A helpful feature of the data that you have provided to the committee is that they demonstrate that, in the three financial years since the Scottish Government set out its one central purpose of sustainable economic growth and since its commitment to sustainable growth as the number 1 target for next year, on a like-for-like basis, HIE’s budget has been cut in real terms by 30 per cent and Scottish Enterprise’s budget has been cut by 14 per cent. We are moving into a more difficult environment, so has the board set a bottom line for the budget that will be required for next year? Has it set a policy objective that will be required to give us the best chance of meeting that target, which is to raise the gross domestic product growth rate to the UK level by 2011? If there is a policy change or budget bottom line in respect of future cuts, it would be helpful if you would share them with the committee.

That is helpful, although your position is in contradistinction to, for example, that of the Council of Economic Advisers, which publishes an annual review across the whole gamut of activities while remaining a Government agency. It sees its role as one of saying publicly what it thinks requires to be done; you are articulating a position in which you say only privately what you think requires to be done.

There is a fundamental difference between Scottish Enterprise and the Council of Economic Advisers. As I understand it, the council was set up to put forward its views in a public forum, giving an annual report of those views. It is independent of Government in a way that Scottish Enterprise is not and never has been.

I am glad that you have raised that point, because there is some confusion about it, for which we have to take responsibility.

Scottish Enterprise has always been and will continue to be opportunity driven. The reality is that, if we have identified seven sectors in which Scotland has particular competitive advantage, the majority of the opportunities will be in those sectors. However, we are in no way limited to finding, addressing and working with opportunities just from those sectors.

One thing I can share with you now is the fact that between 70 and 80 per cent of our account-managed companies are in the key sectors and 20 to 30 per cent are not. There is an open access, depending on the growth potential of the company. It is absolutely not an exclusive approach.

I will, because you have raised the matter before and we take it seriously. After the previous committee meeting that Lena Wilson and I attended, we went back to Fife and talked with the Fife Partnership and its executive group. Frankly, the feedback was that we were properly and appropriately engaged. If anything is missing, please come forward and let us know. We really do want to be involved at the local level, as we were historically. We have no intention of pulling back from that.

My final question is on the influence that Scottish Enterprise has. It goes back to what Wendy Alexander asked you, in that it is about how you work with other agencies. I chair the cross-party group in the Scottish Parliament on construction. The construction industry has been having a difficult time, with apprentices losing their jobs and key skills moving out. What is Scottish Enterprise’s role and what discussions has it had, or is it having, with all the different agencies that are helping to support the construction industry through a difficult time?

Ours is not a strategic role on behalf of all agencies. It is important that the construction industry advisory group has a direct relationship and works with Skills Development Scotland itself. That does not occur through Scottish Enterprise.

I am not suggesting that, but surely Scottish Enterprise, as the development agency, must have an input on what skills we need for the future. I am using the construction industry as an example. Since the split, what influence do you have over what skills Scotland has for the future?

One example is the support that we have provided in establishing Scotland Food and Drink, an industry body for the food and drink industry. We have great collaboration with SDS as part of that overall body and, as a result, a skills action plan or strategy is being developed for food and drink. That model of collaboration is replicated across many of the industry leadership groups: the industry defines a clear strategy and the partners join up to provide the appropriate level of response. The skills response in food and drink will be completely different from the skills response in life science, for example. SDS is represented through the leadership group and, in particular, through a sub-group in all the key sectors.

We are part and parcel of each of the sectoral working groups in Scotland and we play a prominent part, along with Scottish Enterprise and Skills Development Scotland. An example is the renewable energy work that is going on. The renewables sector is of huge importance to the Highlands and Islands and it will be of even more importance in the future, so we are working to ensure that all aspects of developing the sector are taken forward. That includes the physical infrastructure, the growth of the supply chain, businesses and, crucially, the skills sector, because a skills shortage is one of the shortages that we could face.

It is situational and opportunistic, so it is difficult to put a ball-park figure in play. For example, we are acquiring some additional land at the BioQuarter to enable the expansion of that site. That is quite a sizeable acquisition and would distort the figure. It is roughly £10 million per annum.

There are two sources for that. There is an operational aspect. As part of the efficiency agenda, we increasingly co-locate in our own offices with other organisations and an income stream comes from that to Scottish Enterprise. At the moment, we think that the income is a reasonable assumption but, as ever, it and the expenditure are continually monitored and we are always refining our forecasts for them.

The line underneath property income—the co-investment fund—is worth £16.7 million a year. My understanding is that that is one of the funds that will go into the proposed Scottish Investment Bank. What would happen to that figure should the fund cease to exist in its current format? Is the Scottish Investment Bank actually happening and, if so, when? What is the latest position on that?

Today is perhaps apposite for the announcement: I think that it is the first anniversary of the announcement of the Scottish Investment Bank, so I look forward to hearing what is in today’s announcement.

Scottish Enterprise places great emphasis on the renewables industry. Over the past couple of days, we saw the figure of it generating 60,000 jobs, which means requiring the skills of 60,000 trained technicians in a country that produces roughly 2,000 mechanics and electromechanics every year. We have, proportionate to population, one fifth of the output of trained technicians of Baden-Württemberg. What arrangements can be made for acquiring that manpower?

I ask that in the context of the present Government in London committing £5 billion to the building of two giant aircraft carriers at Rosyth. The notion of producing adequate trained manpower for the complex business of bringing to fruition all sorts of new developments in marine technology in particular has a certain incompatibility with devoting such sums to defence technology.

As we have heard, all three agencies have taken significant budget cuts in real terms during the past three years while others have not. Your projections for the next three years are for flatlining, or even for modest increases, while other public sector agencies expect to face cuts. Have you had Government reassurances that lead you to those optimistic expectations?

We have had the same discussions, and they have focused on three broad areas. The first is the balance of our area policy within the Highlands and Islands. Second are the key sectors that are particularly important to us, such as renewable energy and life sciences and third is the balance between regular assistance to businesses and social enterprises and the portfolio of transformational projects that tend to be significant for the region but have a heavy hit on a budget.

In the context of reducing SE and HIE budgets overall, we have been holding flat our support for internationalisation, particularly for SDI’s sales and marketing activities. We have been increasingly working in a more integrated fashion with Scottish Enterprise, Highlands and Islands Enterprise and other partners and stakeholders to leverage more of our resources towards internationalisation efforts.

Internationalisation features even more heavily in the plans of Scottish Enterprise and Highlands and Islands Enterprise, as well as in those of some of the other partners and stakeholders. Our approach has been to raise awareness of the importance of internationalisation going forward, and to leverage in even more support from partner and stakeholder organisations.

I refer you to the three-year period in the SDI financial summary on page 6 of our submission. In spite of the fact that the overall budget is being held flat, at this stage, the SDI indicative allocation is up by almost 10 per cent.

SDI carried out research to evaluate the current pilot models for Scotland houses and looked at competitor best practice. Based on current options, we thought that there would be no immediate value in generating additional overseas presence of that sort. SDI will look to leverage more from our existing overseas presence to extend our networks, especially in recognition of the challenging outlook for public sector finances.

For Highlands and Islands Enterprise, success is seeing progress in every part of the Highlands and Islands. We want a growing population, higher wages, increased productivity in businesses and increased participation in the labour market. We can monitor such statistics on a periodic basis to assess how the region is doing and to quantify our contribution to that.