Economy, Energy and Tourism Committee, 29 Oct 2008

Meeting date: Wednesday, October 29, 2008

Official Report 251KB pdf

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Budget Process 2009-10

Good morning and welcome to the 20th meeting this year of the Economy, Energy and Tourism Committee. We have received apologies from the convener, Iain Smith, and I welcome his committee substitute, Jeremy Purvis. I remind everyone to turn off their mobile phones, BlackBerrys and other such devices, which interfere with the public address system.

The committee continues to take evidence as part of our scrutiny of the Scottish Government's draft budget proposals for 2009-10. I remind everyone that we have chosen to focus on the measures that the Scottish Government and others should be taking to help the Scottish economy through these difficult times.

We are joined by a panel of experts from business organisations, trade associations and private sector businesses. I welcome the witnesses and invite them to introduce themselves and make brief opening remarks.

Good morning. I am a partner in Grant Thornton and I run the government and infrastructure advisory team in Scotland, which is a team of some 25 people. I am involved in financial services, the construction industry and public-private partnership and private finance initiative-type transactions.

I am chief executive of Scottish Financial Enterprise, which is the industry body that represents the financial services industry. We are entirely funded by our member companies, which are drawn from the largest financial services companies—banks, building societies and so on—and from the much smaller, more aspirational support companies that are also part of the industry.

I am chief executive of the Scottish Building Federation. We are 113 years young and have some 700 members, from Orkney to the Borders. We are a true federation, with 17 local associations. For my sins, I am also the employers secretary on the Scottish Building Apprenticeship and Training Council, which we administer on behalf of the industry.

The Scottish Council for Development and Industry is the economic development network that intends to lead the debate on economic development in Scotland. Our membership is drawn from large corporations, small businesses, academia, local government, Government agencies and so forth.

I am head of policy and public affairs at Scottish Chambers of Commerce. Our network represents 20 local chambers of commerce throughout Scotland. We have a business membership of some 9,500 businesses, from sole traders to large multinationals. We represent businesses across the sectoral base and geography of Scotland.

I am chief executive of Scottish Engineering, which was formerly known as the Scottish Engineering Employers Association. We have more than 400 member companies, which are scattered round the country, from Thurso in the north to Jedburgh in the south and everywhere in between. We help our member companies with everything from industrial relations and employment tribunals to wellbeing—you name it, we help them, in 101 different ways. We act as the voice of manufacturing engineering in Scotland.

We will move to questions and answers. We want to get through as wide a range of questions as possible, so it may not be necessary for everybody to answer every question.

A few weeks ago, Mike Levack gave evidence to the committee on the importance of introducing capital projects, particularly in construction. One issue that he highlighted was publicly financed projects. Since May last year, we have had a hiatus in the development of public-private partnership projects, in that few additional ones have come through. One has been introduced in my city of Aberdeen using the model that we are led to believe the Scottish Futures Trust will follow, which is that of non-profit distribution. Under that model, the profit accrues to the investors over 30 years, rather than up front. I ask Mr Levack, John Watt—who also has expertise in the matter—and any other witness to comment on the benefit if the Scottish Futures Trust project is accelerated and introduced in line with existing public-private partnership models. Are we at risk of missing an opportunity because of the delay in introducing new school and hospital building programmes?

We must give the Government credit, because businesses, unions, building authorities and the development community are all upset about the delay in the introduction of the Scottish Futures Trust. All those who are involved in the debate are concerned about the delay and about how the trust will work and what it will mean for new schools and hospitals.

I am happy to elaborate on the comments that I made a few weeks ago. I stress that the construction industry is not interested in the politics. We have heard a fair bit in recent weeks about consensus politics at the United Kingdom and Scottish levels. We hope that there can be consensus on introducing these essential infrastructure projects. We need to get projects moving quickly, bearing in mind that the procurement period is always extremely lengthy and fraught with delay. We are already losing significant capacity in the industry by the week. We are concerned that, if we continue to lose capacity at the current rate, in years to come we will be faced with rampant construction inflation, which ultimately will erode any benefit that the Scottish Futures Trust is trying to achieve. I think that the targeted saving is £100 million to £150 million per annum, although the detail on that is yet to come.

On the non-profit distributing model, the question that I continue to ask myself and which I am surprised is not asked more widely is whether banks will wish to participate in the Scottish Futures Trust, given the current state of the financial markets and the banking industry and given that the Scottish Government has used fairly robust language about ensuring that any return for equity providers will be capped and limited.

To give an example, as I said, my team has 25 people working on projects. Approximately 50 per cent of our work is outside Scotland, which is sustainable at present but, ultimately, somebody will ask why we are based in Scotland and why our people are not elsewhere.

With regard to financial services, Michael Levack has just mentioned the banks' position: the HBOS and Royal Bank of Scotland teams were closed down before the current hiatus, so we have lost 20 fairly experienced bankers in Scotland. They have all gone to other posts, but they are not necessarily in the banking industry, so that level of expertise has already disappeared.

If we consider the construction industry—for which Michael Levack is in a better position to speak—I am seeing clients disappear from the marketplace. There are concerns: if I count the projects that are in the market at the present time, I find three live PPP projects with less than £200 million of capital value on the go. That contrasts with the situation at the peak of the school building programme, in which there were about £1 billion-worth of projects in either procurement or delivery at any point in time.

There is a massive change in the pipeline, and a big hiatus at present. People are looking very sceptically at the market, and the international contractors—the likes of Bilfinger Berger, Hochtief and others—who were operating in the marketplace do not view Scotland as a positive environment in which to invest. Something needs to be done quickly. Whether or not that should involve SFT is a debate for another committee.

The point about flight of expertise is important, not only for the companies that John Watt mentioned, but for lawyers, accountants and others. It is a real issue that needs to be dealt with urgently. The appointment of Sir Angus Grossart was a significant step forward; however, from our point of view, it is still work in progress.

Michael Levack makes a good point about the banks but, given the current circumstances, the long-term nature of some of those projects might, perversely, make them more interesting and attractive. I was reading yesterday about the deal that Clare College has done, which runs over 40 years. If anything, perversely that kind of long-term approach to investment is likely to become more interesting.

I want to return to a couple of points that have been made. In particular, I would like to know John Watt's view on Michael Levack's concern about the banks. We have heard Owen Kelly's view that there might be a perverse attraction in projects that do not pay back for a long time.

John, what is your view of the position for people who have invested in public sector projects in recent years? Will a longer delay in returns increase the attractiveness of those projects, or is there a risk that—as Michael Levack said—caps will act as a disincentive to investing in Scotland?

The risk is that they will disincentivise people.

I have a particular interest in that—I mentioned the schools building project in Aberdeen, which borrowed £120 million from an Icelandic bank and which might now have to seek an alternative financier for a project that is already far advanced. What is your assessment of the market for potential investors in projects of the non-profit-distributing type?

There are differing views. I will stay away from speaking specifically about Aberdeen, if you do not mind, as I know a bit more about it than I want to share here.

Clients of ours have said that they do not want to go for the NPD model because, as they see it, the risk reward ratio within that structure does not work for them. People have considered different ways of approaching the issue to try to reach a position with which they are comfortable, because the costs of bidding for such projects are high, and the time frame that is involved in trying to win the contract for a project is pretty lengthy. A lot of money is spent: on some of the larger projects, people were spending £2 million or £4 million and not winning the contract, and they then had to recoup that money from elsewhere. The concern is that capped returns, as there are in the NPD model, will cause real problems.

Nobody is against the idea of the refinancing provisions that have been introduced. In the early stages of PFI, excessive returns were made, but people on both the private and the public sector sides were learning. I have worked for clients in both sectors, so I am confident in saying that. We were getting to the point where the model was better established, the returns that the private sector were likely to make were commensurate with the risks it took, and the public sector could recoup any excessive gains. If resources are scarce and there is an unfamiliar model, it is natural to look for other ways in which to apply your resources and effort in order to get a better return. That is the concern about the NPD model. We see the lack of a pipeline: there are not enough projects out there to interest people.

Mr Levack spoke about the importance of finding consensus in bringing projects forward. Is the finding of consensus hampered in any way by the Government's wish to change the funding model, or do we just have to press on?

It is uncertain; we just do not know what SFT will look like. A number of people in the industry are concerned about what SFT is and what it will mean. Much has been said about what it might look like, but it seems that it will be some time before SFT is realised. The last date that I heard for SFT having its own funding capability was 2010, which is quite a way off. People will not be able to hold on until 2010 in the hope of seeing a pipeline then.

Do others wish to speak about this subject just now? I see that Wendy Alexander, Chris Harvie, Dave Thompson and Marilyn Livingstone do.

I was struck by John Watt's observation that three live projects worth about £200 million are in the marketplace, which contrasts with the good times, when about £1 billion-worth of projects were—I think he said—in procurement or delivery. That obviously suggests a hiatus.

I think that there is a unanimous view that we need to accelerate infrastructure projects. Would any of the witnesses like to hazard a guess on the timescales for gearing up? Owen Kelly suggested that we had a chairman for SFT, but we do not have a board or a chief executive, and the corporate structure of SFT will—rightly—require a memorandum of agreement, between the Government and the board, on how SFT will operate. All of those things are required before there can even begin to be a discussion on how to accelerate the pipeline or on what models are or are not appropriate.

Do you have a question?

My question is on the timescales before we will see a board, a chief executive, a memorandum of agreement and an agreed investment model. How long will it take us to get back from £200 million to £1 billion, before we even think about exceeding £1 billion?

I speak on behalf of the construction sector. John Watt has spoken about high bidding costs. It is not inconceivable that two years could pass between a project coming to the market for bids and a shovel being put in the ground. We are not yet at the point where the SFT is fully established, its governance is clear and projects are coming to the market. That seems to be affecting the decision making of local authorities. They are unclear about how exactly to proceed with their plans for infrastructure.

Financial conditions have been changing practically daily. What appeared to be a set situation a fortnight ago—for instance, a low dollar—has been totally transformed today.

Some of us suspected that a crash along these lines would turn up and would centre on the financial services industry, and we are interested in what will replace, for example, bank saving. When there has to be a drastic reduction in interest rates, putting money into a money market account will not be a reasonably sure earner. Surely that opens up the possibilities of bond finance, in which we are dealing with a return of about 5 per cent. It could attract the people who would have had money in savings accounts and money from people who no longer regard housing—let alone some of the interesting financial products that have been crashing into the sea all around us—as a safe speculation. I would like the witnesses' views on the practicalities of bond finance, which has always been one of the great means of financing public works, because it is unquestionable that we will recover through public infrastructure, if we cannot look to housing or financial services.

Worryingly, everyone is looking at me. I will answer Ms Alexander's question on the timeframe first, if that is all right.

Once projects that will be taken forward have been identified, it could easily be three to four years before the construction industry really starts to gear up and put spades in the ground. It has taken that length of time in the past to sort out the scope of projects and how they will be procured. That ignores any of the other elements of the SFT, such as the memorandum of understanding.

Projects such as the replacement Forth crossing and Glasgow southern general hospital are still a long way into the future. I am aware of a number of projects that people have wanted to bring forward but which are stuck for whatever reason. I do not know the answer for those projects. Even if they were resurrected, by the time the business cases and procurement models were worked through, it would take some time before they came out.

I will try to answer Christopher Harvie's question on bonds, although I am not a personal finance expert—I have one bank account and a pretty boring set of financial investments.

Bonds will potentially be more interesting because people perceive them to be safe. In the past, the rating agencies have typically rated the bonds that were issued on PPP projects as investment grade. There is a caveat there, because the rating agencies are hugely suspect at present. However, investors were quite willing to consider investment-grade projects and, even without the rating agencies, one would expect a public sector infrastructure project to be rated as being an investment-grade transaction.

How we go about selling such bonds to widows and orphans and encouraging them to invest in such projects is a different matter. To be inventive about it, a corporate-type bond that allows money to be distributed into different projects would be necessary. It would not be possible to sell bonds to the general public on a project-by-project basis because they would not go for the cost of that.

Is the £200 million that was mentioned purely PPP projects? Am I correct in saying that it does not take into account capital projects that are funded in other ways?

It is purely the PPP element, as far as I am aware.

Do we have any idea how much is being spent using other methods of raising capital? You mentioned that it was £200 million compared to £1 billion in the past, so I would be interested to know whether other sources of funding have increased. Do you know what the figures are?

I do not have an exact figure, but the M80/M74 extension is proceeding under traditional procurement. That is about it.

The figures are available in the infrastructure investment plan. For example, in transport, there is something like £1 billion of capital investment a year. In health, it is something like £500 million. Hugely more capital investment is being made using traditional means of public spending.

So the fact is that there is still substantial capital spending at the moment within Scotland—you just rhymed off £1.5 billion—so we should not get carried away with thinking that PPP/PFI is the only method.

I think that John Watt mentioned the excessive returns that were made on some PFI projects. I come from the Highlands and Islands, where we are familiar with such returns. The returns on the Inverness airport and Skye bridge projects were not just excessive; they were excessive excessive excessive—they were ridiculous. Perhaps that was symptomatic of the economic madness during the great age of irresponsibility that has brought us into the current situation.

Is it not incumbent on Government to get best value for public money? If banks are not interested in the Scottish Futures Trust, because they are interested only in the PPP/PFI model, which brought them pretty big profits, is John Watt suggesting that we should go back to those profit levels, albeit perhaps not to the excessive profits that were made when the model was first used? You seem to be suggesting that the SFT will not attract the banks; are you suggesting that we return to the old PPP/PFI model, which is costing the public purse and will continue to do so through revenue spend for years to come for all the schools projects and everything else? Is that the only way to attract financiers?

On whether or not the SFT is attractive to the banks, the fundamental point is that we do not know what the SFT is. Nobody fully understands what it will be and what it might look like.

The PPP/PFI model and contract structures have developed in such a way as to severely restrict the opportunity to make the excessive returns that were made on many early projects, and mechanisms for sharing returns with the public sector are much better developed. The Treasury recently issued a new guidance note on refinancing gains, which goes even further towards ensuring public sector benefit. The model is evolving all the time.

It is interesting that you mentioned Inverness airport. I have some knowledge of that very early deal, which was a learning exercise for the people involved. There were counter-indicators in that regard, which created the excessive returns, because the airport was being funded through the route development fund, to encourage passengers to use it, and the PFI contract was paid on a volume basis. Two different levers were working against each other, which is why the costs racked up as much as they did.

I am not saying that we need to go back to PPP/PFI, but the model was delivering and we would not necessarily go back to the model that led to excessive returns. The NPD model is causing concern, SFT is adding another layer of concern and people are saying, "We cannot see a pipeline of projects coming forward." We had built up a good pipeline of schools projects and, if interest and momentum are lost, it will take a long time to recover them. As Wendy Alexander said, what timeframe are we talking about? It will take considerable time to get people back into the market, and in the meantime there could be quite a loss of talent in the construction industry and in legal and financial services.

I am keen to move on to consider what the Government can do to improve the general economy, but first I bring in Marilyn Livingstone.

I think that my question, which is for Michael Levack, will help us in our subsequent discussion. At a previous meeting, the committee discussed timeframes, which Wendy Alexander mentioned, and witnesses have talked today about the flight of expertise. I am concerned that we should protect and develop skills. We have witnessed a big downturn and big job losses in the house building sector, but witnesses from the construction industry have told us that there is a bank of projects to see them through. Can the panel estimate when the work will run dry and the sector will be in crisis? If the committee is to reach a consensus, we need to know when we will reach a crisis situation. The situation for house builders is already bad, but when will crisis hit the entire industry?

We are already there. If we do not take action now, there will be no point in doing so in six months' time when the work dries up. Work is coming through by traditionally funded means, but such work would have come through anyway.

The industry has been criticised wrongly for a lack of training, and we have spoken about skills shortages in recent years, but we recruited almost 5,000 apprentices last year, so we are probably running at capacity for training. Those people need to be able to complete their training and we need to sustain the industry's capacity, to go back to my earlier point, otherwise we will face rampant construction inflation—I use that term very thoughtfully. The time for action is now.

The situation is worst in rural areas such as the Western Isles, Orkney and the Borders, where the industry is facing really serious issues. We are talking about second and third-generation businesses that directly employ a significant number of people that might not see past Christmas. The environment is challenging and we need to take action now rather than in six months when it will be too late.

I am keen to pursue a line that John McLaren raised with the committee last week about several aspects that could help us to kick-start the economy in these difficult times. One of his points was about supporting key sectors or areas. I am keen to bring in other members of the panel as well as the financial experts to consider that point. Are there particular elements of the economy, such as construction, that we could develop in these difficult times to start the economy off again?

We have been surveying our members across sectors throughout this year. In the construction sector, quite some time ago we picked up a drop-off in the number of house building projects. Until now, there has been a buoyancy effect from the public sector contracts. To underline what Michael Levack said, it is essential that whatever mechanism is used, the nation should continue to invest in the public sector construction industry.

No doubt Peter Hughes will talk about manufacturing and engineering, in which businesses have been performing relatively well in comparison with the rest of the economy this year. The Scottish manufacturing advisory service has certainly made a great impact during the past couple of years; perhaps that is an area in which we might benefit from slightly greater investment now.

The tourism sector has had a reasonably poor summer, part of which is down to the economy and part of which is down to the weather. Tourism has not gone well this summer, but there are things that can be done to boost it, such as better marketing. VisitScotland is doing a great job, but perhaps we could market particular regions of Scotland better. I also underline the importance of having an effective transport infrastructure to ensure the free movement of tourists around the country, particularly to the more rural areas.

As has been said, the engineering and manufacturing sector in Scotland has been doing fairly well for the past five years. The results that we published in the first week in September showed the first negative order intake report for five years, which is one quarter out of 20. It is interesting to set it in context.

There is no doubt that those of our members who are involved in the construction sector are having a tough time and have already experienced significant redundancies. There have been 20,000 to 30,000 redundancies across the sector in the past few months.

Our other Scottish engineering member companies are fairly buoyant. The oil and gas sector is going at an amazing pace right now. There are severe skills shortages: we cannot get enough people. Trying to recruit people in Aberdeen is like looking for hen's teeth—so much so, in fact, that a number of companies have established bases in and around the west of Scotland. Wood Group Engineering (North Sea) Ltd is a typical example—it now has 400 engineers at Robroyston—and another is FMC Technologies Ltd of Dunfermline, which has set up bases in Glasgow.

There is some evidence of belts being tightened and redundancies creeping up, but the numbers are relatively small and in our sector are certainly in the minority. Although we are reasonably buoyant, there are still shortages and concerns. The movement in sterling has certainly helped our export market, but those markets have to be sustainable. It is all very well having a good pound to dollar or pound to euro rate, but exporting to those countries becomes very difficult if their economies are struggling. Over the past 10 years, Scotland's manufacturing exports have averaged £15 billion per annum, £9 billion of which has come from engineering and £6 billion from the electronics sector.

I am not a little amazed at the current furore in the financial sector north and south of the border. I should first of all congratulate the Prime Minister and the Chancellor of the Exchequer on leading the country through it, because they do not get enough credit for their actions. However, where has everyone been over the past five years of suffering in the electronics sector? They have been hiding. Nevertheless, the sector is still the biggest single manufacturing export sector in Scotland by a mile and, indeed, is more than twice the size of the whisky industry. I am not understating the importance of whisky—I love the stuff—but engineering is several times more important. According to the Government's own statistics, over the past four years, engineering exports—excluding electronics—have grown by 33 per cent. We are fairly encouraged by such good news, but we are always looking over our shoulder and worrying whether investment will be available and whether, given the state of the economies elsewhere, we can sustain the export markets that have been sustaining us so far.

There are four or five things that we can learn from what happened in Sweden, which experienced a similar financial collapse at the tail-end of the 1990s. First, we need to target overseas trade. Peter Hughes is right to highlight worries about demand from overseas as well as domestic demand. However, given that India and China's annualised economic growth rate is expected to slow only to 7 per cent, there will still be strong demand and strong growth in demand in certain markets. The weak pound should help that position.

Secondly, as Peter Hughes said, the energy sector is very strong. There is still global demand for key Scottish skills and technologies in oil and gas and renewables, but the question is whether we are doing everything that we can to promote Scottish businesses in those overseas markets.

At a time of suppressed private sector demand, we should be doing everything that we can to help Scottish businesses to meet public sector demand. The procurement reforms and today's launch of the Government's portal, which should make it easier for every business to find out about contracts throughout Scotland, can only help.

Similarly, we need an effective regulatory environment that protects the health of consumers and employers while making it easy for businesses to go about their operations. In that respect, the planning reforms announced yesterday will provide help to sectors such as construction and house building that are facing long-term difficulties.

Finally, we have to find ways of embracing the huge opportunity that is presented by homecoming Scotland 2009 and using it to help the tourism market at a difficult time when not just Britain but Europe and North America are experiencing an economic slowdown.

Before we discuss the financial services sector, I want to ask about certain issues that have been highlighted in other committees and are beginning to permeate our economy. What practical steps could the Government take with regard to, for example, the short-term business of retrofitting houses, which can employ many people in the construction industry, and the more long-term business of developing the energy projects that Peter Hughes mentioned, particularly the renewables projects that employ somewhat similar skills?

I am delighted that you have raised that issue because, although the draft budget proposals are littered with comments about climate change, improving energy efficiency and so on, and although I appreciate that the budgets are fixed, I wonder whether some funds could not be redeployed in the manner that you have suggested. Such a move would help to stimulate the construction industry, keep people in jobs, keep the skills in the sector and help those who are suffering most from fuel poverty. The quicker we start on the massive task of reaching the 2050 targets, the better.

I brought the so-called Sullivan report with me, and I wonder whether we have made enough progress in examining the costs that are associated with retrofitting buildings. I must have been very sad last night, because I watched a live House of Commons debate on the Climate Change Bill. An MP for Nottingham was very articulate about his views and said that we need to do what is being done in other countries, such as Germany. We should bear in mind that, although we can tackle public sector buildings, some grant funding may well have to be made available for those in the private sector because, in the current climate, who is going to volunteer to spend several thousand pounds on retrofitting their house?

It has been suggested that there are ways of doing that, such as the concierge system that was set up by the London Assembly, which enables better-off people to get access to the necessary skills and guidance while the public sector invests in the affordable housing stock and so on. Do you think that the construction industry will be able to move in that direction in the near future?

Absolutely. I have talked about the potentially devastating situation that could arise otherwise, particularly in rural communities, many of which have poor housing stock. Although the difficulties that are being experienced with regard to the Scottish Futures Trust and the financial markets are complex, it seems to me that, if we can get expenditure into energy-saving initiatives—even if we start with public sector housing—we can do relatively quick work.

Is there anything that the engineering sector might wish to say about this particular issue?

First, for businesses to invest, there has to be a long-term period of stability and certainty against which we can plan. Within the engineering and manufacturing sector, there is an underlying concern with regard to energy policy. The sector is keen that there be a balanced, long-term, sustainable and affordable policy that will give us security of supply. Scotland is well placed to do that. We have the skills; the key thing is to keep them and develop them. We need to make use of all available technologies to ensure long-term security of supply, particularly of electricity. Those technologies include onshore and offshore wind power, clean coal, carbon capture, biomass energy, wave and tidal power and nuclear power, which currently accounts for between 30 per cent and 40 per cent of Scotland's electricity—we turn our back on nuclear power at our peril.

Scottish Engineering's members include British Energy, Scottish Power and Vestas-Celtic Wind Technology, which has its own problems at the moment. We need a clear message that Scotland is open for business and can use the skills that it undoubtedly has. We have universities that are punching above their weight in terms of research and a great deal of expertise in power systems. We avoid using those advantages at our peril.

The committee is also undertaking an energy inquiry, so I do not want to stray directly into the details of that. Today, we are talking about the budget and the Government's ability to ensure that it is clear. In that regard, you are saying that you need a clear steer about how, for example, the renewables part of the budget will be taken forward.

Not only the renewables part; a clear message must be sent about the entire picture. Renewables cannot be taken in isolation.

As a result of the visit a couple of months ago of Dr Frankenberg, who is the minister for research in Baden-Württemberg, a group from Scotland is going to visit the new Karlsruhe institute of technology to find out about its research into power and housing, in particular its work on passive housing, which is housing in which no energy input is required in order to generate heat. I note that the trip cannot be classed as a freebie, because the group will fly out, be there for a day, and fly right back.

Dr Hughes, you are quite right to emphasise the good research capabilities of Scottish universities, but we also face a problem in the relative lack of apprentices who can become technical assistants, who are the sort of people who can turn a research breakthrough into a production process. Baden-Württemberg is five times more productive than Scotland in that regard.

On the point about choices of sources of power, Germany—even with its coalition Government—is still committed to a non-nuclear policy, so there are various circumstances in which it would be dependent on us to supply it with renewable power, when that becomes exportable. That is one of the major areas of interest that it has.

You have given me an opportunity to get on my favourite hobbyhorse. If the Scottish Government were funding apprentices at the same level as the rest of the UK is, we might have a few more. Scotland gets around £3,000 less, per modern apprentice, than the rest of the UK.

Despite that, I have good news for you. The modern apprentice intake over the past three years is the highest intake in the past 10 to 15 years. The company on the Clyde that is now known as BVT Surface Fleet—it was previously BAE Systems and, before that, Yarrows—has taken on several hundred modern apprentices in the past few years, and the same thing has happened elsewhere in Scotland. There are now around 30,000 modern apprentices.

The other piece of good news is that the youngsters who are applying are of a very high standard. We are delighted with them. For 300 modern apprentice posts, we had around 4,000 applications, and the standard was excellent.

From speaking to various people in industry, I think that it is clear that the economics of renewable energy retrofitting in housing estates and commercial property now makes sense because of high energy prices. The only thing that I would flag up is that I have heard people say that the planning system can cause difficulties in that regard, as it was not designed to cope with developments of that sort. The relationship between the planning authority and the Scottish Environment Protection Agency can often mean that there are long delays in getting work approved, because the planning authority wants to conduct the same checks that SEPA wants to do, which means that people end up getting regulated twice.

The economic case now stacks up, but it has to be made easier for people to do the work.

We have had discussions about public investment in the energy efficiency retrofitting work and about the importance of modern apprenticeships. Do you recognise that the changes that the Government makes to its budget processes need to be coherent and that, according to the advice that we have had, there is a choice of what kind of coherent objective the Government should seek? What would your advice be to us on the relative importance of protecting employment, training and skills and long-term growth? Given that the changes that can be made at the margins cannot protect all those things equally, what should the priorities be?

In terms of energy efficiency, there is a simple hierarchy of what can be tackled. Quite simply, there are basic measures that we should be taking with regard to our public housing and public buildings. That could be done quickly, and—with all due respect—we do not need to go on any more visits to see what our neighbours are doing. People from across Europe participated in the Sullivan report. We know that we need to start work on the basics, and we would do no damage by immediately diverting apprentices and other tradespeople to that work.

To come back to Dave Thompson's earlier point about value for money in terms of public expenditure, the way in which we can get—to use that terrible American phrase—more bang for our buck is to get on with the work now. We have a massive job to do. The construction industry welcomes that, because it will give us a work flow for the next generation.

My point is more general, and not only because I know nothing about energy efficiency. Work that we have been doing with member companies shows that there is perhaps a surprising amount of investment going into skills and workforce development. One thing that Government can use in some circumstances—in economic times such as these, for example—is its ability to invest for the long term. Notwithstanding the difficulties that our industry is currently dealing with, our success over the past hundreds of years has come about not by accident but because of particular concentrations of skills and expertise. You may not turn most naturally to our sector for advice at the moment, but if you are looking for advice on setting priorities, I would say that the general point about skills remains strong. Globalisation and international competition will not go away whatever is going on in the world economy, and investment in skills by Government and industry is absolutely the priority for the long term.

I have a little concern about the term "protecting employment", which suggests protectionism and building walls. That is not the way to protect jobs; rather, the way to do so is by ensuring that businesses are efficient and can compete in the global market. At the end of the day, making profits is not a bad idea. Doing so safeguards jobs and leads to more jobs being developed in the longer term.

A good example of what is happening is, of course, the support that is provided by the Scottish manufacturing advisory service, which has been a great success and has had a very good track record to date. We welcome that and we would certainly welcome further support and the continuation of the good work that it has done in the first couple of years.

A key area for Scotland is, of course, capital investment. That was picked up by the previous incarnation of this committee in the previous session. We have already talked about the importance of capital investment to employment. As Peter Hughes said, the issue is not protecting employment but generating and maintaining jobs. Over the past 40 to 50 years, we have invested around 40 per cent less in transport than our European neighbours have. We should also consider our school and further and higher education estates and the huge need for investment in our energy networks if the Government is to achieve its target of 50 per cent of electricity being produced from renewable sources by 2020. We have discussed that. There are areas in which we clearly need capital investment, which will provide employment.

I want to underline some points that have been made. It is extremely important that the Government does everything possible to bring forward capital projects earlier than expected in order to get us through the next year or so, and that it continues to work hard on procurement and opening up opportunities for small and medium-sized businesses—by which I mean businesses in which 50 or fewer people work—in particular. There are huge potential benefits for those businesses through being able to contract with the public sector. We are making progress on that, but we need to make more progress.

I underline the point that has been made about skills. We need to continue to invest in skills. The issue will not go away. When we emerge from the tunnel that we are in, we need to do so with the skills to compete in a global marketplace.

You may want to clarify a point about procurement for us. Some procurement is becoming more centralised. Is that militating against local firms at a time when they need to be supported?

The Government needs to draw a line between clear efficiency savings for local authorities and other public sector agencies and using procurement as a way of delivering economic benefits to small and medium-sized businesses in Scotland. There is a line to be drawn and a balance to be struck. Given the current economic circumstances, the best value for the country would be delivered if the balance was more towards providing opportunities for small and medium-sized businesses than towards simple money saving for local authorities.

Aside from the acceleration of capital spending, the Government's main response in the past month or so to what has been happening is its six-point plan: maximising tourism, simplifying planning, boosting advice to business, promoting energy efficiency, encouraging the uptake of health benefits and looking at fuel poverty. Let us take the first two of those. The budget for VisitScotland goes down by £1 million this year, and the planning budget goes down from £8 million to £2 million. What do our witnesses have to say about the six-point plan that the Government produced last week? What additional points could be included in the plan?

I would pick one specific point, relating to planning. This comes up on a regular basis. In our discussions with Vestas-Celtic, which announced the closure of its facility at Machrihanish—albeit that discussions are continuing—planning and the delays in getting things done came through loud and clear. We have raised the matter directly with the Cabinet Secretary for Finance and Sustainable Growth, Mr Swinney, who has undertaken that something will be done to streamline the planning process.

However, as you say, it seems that the moneys going into planning are less than they were. Planning departments do not seem to be up to speed when it comes to getting things moving. It is all very well having public consultation, but we are being consulted to death in some areas, instead of things just getting done. One very good example that is often used is the speed with which the Chinese have built their infrastructure. The length of time that it takes them is virtually nothing compared with the time that it takes us here. We have got to get moving much more quickly and efficiently.

To an extent, the changes in the planning budget can be accounted for by the huge activity of central Government in formulating a new way forward. Now, implementation is up to local authorities. On tourism, VisitScotland has an excellent record for return on investment. That industry has always argued for more money to be spent on marketing Scotland abroad.

There is a strong case for enhancing the promotion of Scotland's businesses overseas at this time. There is a huge onus on the public sector when it comes to procurement. There are huge threats and opportunities from procurement reform. There is a huge responsibility on the public sector to ensure that all businesses know about and understand the changes and how they can compete in the new environment. It is clear from speaking to SCDI members that an awful lot of small suppliers to the public sector do not understand the changes, and they do not know how to compete in the new environment.

We would add to the six-point list the dropping of the proposed local income tax, because of the uncertainty that it would bring to the economy.

I return to your point about promoting our businesses abroad. How would you go about that? How should they be promoted at this time?

We should seek to work with key sectors such as energy and consider how to promote them in key markets, such as India and China. It is not a matter of doing anything differently compared with how things happen at the moment, but it is simply a case of scaling up our activity.

You represent SCDI rather than Scottish Development International, but I notice that the SDI budget is going from £1.7 million to £0.7 million. There has been a £1 million cut in the budget for the organisation that promotes businesses overseas. I would be keen to know what our witnesses think about that.

I thought that the six points were all quite sensible, but I would have been keen to see a bit more of a relationship between those actions and what the UK Government is doing. All those things are connected. You mentioned SDI, which obviously has an important role. We work closely with it, and it does a very good job. There is also UK Trade and Investment, and UK ministers go overseas all the time, too. It is all part of the larger picture. I agree that the single biggest lever that the devolved Government could pull would be postponing or dropping the local income tax, which would have the most obvious impact on Scotland's competitiveness.

At the end of September, we hosted a lunch at our offices in Glasgow for members of the UK Trade and Investment team working with embassies around the globe, especially those involved in high-value engineering. UK Trade and Investment's centre for high-value engineering is based in Glasgow—it was a spin-off from the former offshore supplies office. The lunch allowed us to get member companies face to face with the folk who represent the UK in various embassies around the globe. We had people coming in from China, India, Korea and all over the place. That was very useful. If we can promote such involvement a bit more, it will ensure that the folk out in the field will know where to come when they need support in skills, and high-value engineering: that place has got to be Scotland.

We will be able to ask the minister about that in due course, but it is a fair point to make just now.

I thank the deputy convener for the opportunity to ask a question, as I am not a member of the committee. I will follow the deputy convener's questions about housing. The issue is capital, because that is a lever that the Scottish Government has at its disposal with its capital budget. We probably all know that the £100 million for the affordable housing investment programme has been taken from other capital budgets, which cannot be accelerated if that money is not available. That includes £20 million from the education sector, £10 million from the budget for modernising private sector housing and £40 million from local government.

In my constituency, the housing grant for housing associations has been reduced by 25 per cent this financial year. They cannot use that grant to retrofit housing stock and bring it up to the housing standard, so that work must be funded through increased rents. The witnesses have expertise in the matter. How will the affordable housing investment programme money be spent? Will that happen through the Communities Scotland-approved plan, which will mean no new investment? Can the money be used differently from how housing associations and councils understand it can be used?

The announcement of £100 million, which preceded the six-point plan, was most welcome. Our concern, which is witnessed on the ground, is about delay. The money has been brought forward to stimulate and assist in provision of much-needed affordable housing, but it takes time to go through the system.

I appreciate that checks and balances must be appropriate when dealing with public funds—that is obvious. However, I am concerned that we almost accepted in recent years—perhaps it was okay when the economy was buoyant—that planning applications would take three to four years, that achieving approval for a scheme through the old Communities Scotland could take a couple of years and that obtaining approval from utilities and the Scottish Environment Protection Agency takes 18 months to two years. We need to go on a war footing to challenge such timescales. If fewer planning applications are processed and fewer applications are being made to the organisations that I mentioned, I hope that the remaining applications will be expedited.

I repeat that we need to get infrastructure moving—the infrastructure investment plan is only a plan at the moment. We need expenditure on the ground to protect ourselves in some respects from construction inflation, which is global. In our manufacturing sector, some organisations operate globally, but in construction, most companies work only in Scotland; few construction companies, apart from one or two specialists, have the opportunity to go abroad. All sectors rely on the construction sector to build factories, offices and facilities to expand their businesses.

I have another question about capital. Mr Brown pointed to published reductions in the budgets of the enterprise networks and of VisitScotland. The pipeline of projects that Scottish Enterprise supported has almost halved. Of Scottish Enterprise's budget of £289 million for the coming financial year, £73 million is for the agency's administration costs—nearly 40 per cent of its costs are for staff and information technology processes. What do you know about the impact of halting of infrastructure projects that Scottish Enterprise had been involved with?

I have received no comments from our member companies about any change in expenditure by Scottish Enterprise on infrastructure. That is not a significant issue that has been brought to my attention.

So projects that are now on ice, such as the Ravenscraig redevelopment, have never come up in any of the representative bodies.

Ravenscraig has been discussed. Lanarkshire Chamber of Commerce is extremely anxious about developments there and has been in contact with Scottish Enterprise's west of Scotland regional team. There is concern that investment in regenerating an area such as Ravenscraig is under threat.

Sorry—I was responding specifically on changes in expenditure by Scottish Enterprise. I will shortly head down to the waterfront in Edinburgh for the opening of a new training facility, which involves an accord to which employers are signing up. Regeneration projects are clearly affected significantly because of the cross-subsidy from, to a large extent, private sector housing and developer contributions to the public purse. I visited a local authority yesterday that is witnessing significant reductions in its capital receipts because of the lack of housing and development projects.

Jeremy Purvis made the good point that if we want to increase capital investment, the money must come from somewhere and that an increase in one area means a reduction in another. There are two ways to deal with the issue. First, we can cut some funding to increase other funding. The witnesses have made many good suggestions on what they would like to be done. I do not expect you to be experts on the Scottish budget, but are there any obvious areas in which money is being spent unnecessarily and could perhaps be pushed aside?

The second way is for the Scottish Government to get more money. The Scottish budget is fixed, but there are ways of increasing it. On renewables, £120 million is sitting with the Office of Gas and Electricity Markets, but Treasury rules say that we cannot use it in Scotland and Westminster will not waive the rules, although it has waived other rules. Should we just accept our budget as it is and cut some funding to increase funding in other areas, or should the Government continue to press Westminster to be a bit more co-operative in these difficult times and to waive rules? That would allow the OFGEM money to come to us and we could get rid of the capital burdens on the councils that have rejected housing stock transfer. Councils such as Highland Council and the City of Edinburgh Council could then spend a lot of money on modernising their houses. However, that is in the hands of Westminster, not the Scottish Government.

Do you have a question?

There have been various arguments about the Barnett consequentials and us not getting our share. I put my question earlier. Are there areas in which the witnesses would like us to reduce spending, or should we spend most of our energy arguing the case for our cash to be released from London?

It is difficult to answer that without straying into politics, which I strictly do not want to do as my organisation is completely politically neutral. I do not want to imply anything by this but, being practical, our members want politicians to take decisions within the existing structures. I absolutely do not want to comment on whether more money should come from the UK Government. Mr Mather talks about playing the ball where it lies, which is what most of our members probably want to happen, rather than there being consideration of all the possibilities. At the end of the day, for industry, public expenditure is public expenditure. Generally speaking, our members are fairly neutral on whether that expenditure should come through budgets that are managed and controlled at the devolved level or the national level.

You asked about priorities. As interviewers often do to politicians, you turned round the question and asked what we would cut. To be honest, we look to politicians to take those decisions on our behalf.

My comments will be in a similar vein to those of Owen Kelly. Scottish Engineering is an apolitical body that does not support any political party. However, our member companies are used to operating to budgets and we play the ball where it lies. The rules are the rules, and the game is the game: we should do what we can within the budget and make it work, instead of wasting time and effort chasing you up and down to London right now. The game is to use the budget to the best of our ability. I certainly agree with Owen Kelly that we should let politicians make hard decisions—that is why I am leaving it to members, and why I am not in politics.

With regard to the housing stock transfer, there were clear rules around the formula for that money coming back. There is general agreement that the money from the fossil fuel levy should be relayed to Scotland without any impact on the block grant. The context is different in relation to the work of the Calman commission and the national conversation, which must now consider how the Scottish Government and the Scottish Parliament respond to a time of economic difficulty, such as that which we are currently experiencing, without borrowing powers or significant tax-raising powers.

I accept that we should play the ball where it lies—there is no doubt about that. However, there are two balls, in a sense: both the Scottish Government and the Westminster Government can help you. Just because you are in a Scottish Parliament committee right now does not mean that you should not take a view on what Westminster should be doing and whether it is doing enough, because it holds all the levers and we do not. If you focus only on what we can do, which is a very minor amount, you are missing the bigger ball.

I will make another non-political comment. If our budget is restricted, are there things that we could do within it to be more efficient and effective? Are there realisable assets that are currently within Government control when they should not be? I spoke yesterday to the asset realisation team in the Treasury and saw a list of things that it is considering for future disposals, which was two pages long—I did not get a copy of it. The team is examining which assets are held across Government in areas in which they do not need to be held. There is potential to be slightly radical in working within the budget by considering different things, although those things might not be palatable.

I want to clarify something in relation to Mr Thompson's point. The fact that we are giving evidence here in Holyrood does not mean that we are silent in Westminster: we are lobbying there as well to ensure that whatever needs to be done in that regard is done.

Although there is a live political debate about the appropriate powers for Scotland and whether we should have more control over the balance between taxation and public spending, we have, unarguably, a very high level of discretion over the mix of public spending in Scotland. The issue that Jeremy Purvis and others have raised about the mix between capital and revenue is what we as a committee are trying to advise the Scottish Government on. The Government will take profound decisions over the coming months in circumstances that have changed fundamentally from the time when the budget was proposed.

I will throw two areas at you for comment, and urge your organisations to think about making submissions to us in advance of our making a submission to the Government.

First, when the £100 million of affordable housing investment was announced, it is fair to say that it was pretty universally assumed that that was a shift into capital investment. It has now transpired that over 60 per cent of that actually comes from existing capital spending, and it is not in any sense a shift towards capital investment—it will have no net economic activity beyond benefiting those who will take up the additional houses. The other residual £40 million is discretionary on local government, and there is no agreement there.

It was assumed that we were accelerating capital expenditure by moving into capital investment, but we have not yet taken that decision. The Government has the opportunity to take that decision in the next three months, and advice from our business organisations on that—either now or later—would be helpful.

Secondly—and on an even larger scale—last year, at the time of the comprehensive spending review, the Scottish Government sought the right to draw down £1 billion, which had accumulated in the UK reserve, and in so doing to shift the mix between capital and revenue significantly towards revenue spending. Because the money is available in the budget next year and the year after, we have a choice about whether the balance that was chosen last year—the shift towards revenue and away from capital—is appropriate as we go forward.

Those are complex issues and I do not necessarily expect a complete answer from witnesses today, but it seems that such issues will crystallise in the report that the committee's budget adviser will draw up on our behalf as we try to speak for Scottish business organisations during the next six to eight weeks. There is no doubt that advice would be helpful.

The report will certainly include such issues. Do witnesses want to comment briefly on the matter, which might affect your sectors?

In the invitation to attend today's meeting it was suggested that we would consider measures to alleviate the current challenges. We are trying to assist our member companies in relation to expenditure of the £100 million—I do not want to get involved in the politics around that. As I said, if we are to get value for the public purse and retain capacity in the construction industry, the speed at which the money goes through the system is critical.

If people do not mind, I will jump back to the question about whether money is being misspent. I have not managed to read all 127 pages of the budget documents, but I was concerned by the table on page 11, according to which £10.8 million has been allocated in each year to advertising and marketing. I appreciate that the Scottish Government must communicate with the people of Scotland, but £10.8 million is a huge percentage of £100 million and I would like that figure to be trimmed slightly.

I take Wendy Alexander's points and I will consider them. In any shift from capital to revenue spend there must be a clear understanding of when that will come to an end—the sunset. Perhaps that is an obvious point.

The difference between the indicative budget for the coming financial year, which was published in the spending review, and the draft budget documents is 0.3 per cent. How does that reflect the Scottish Government's central purpose—purpose with a capital p—which is to grow the Scottish economy, now that the economy is in recession? The witnesses might want to come back to me on that.

The overall level of the budget is perhaps not as important as what the Government—

When I referred to the 0.3 per cent change between the budget that was published in the spending review and the draft budget, I was referring to different choices in the budget and not to the overall growth in the budget.

In essence, you are asking whether the changes in the budget are radical enough to cope with the current circumstances.

Government does many things that are beneficial to business, but ultimately it is up to business and not necessarily the Government to bring the country out of the current circumstances, although Government has an important role to play. It is important that we consider the planning system, because the Government can intervene to speed up the system and introduce some certainty, for example in relation to large infrastructure projects and energy projects. It is not all about what the Government can do to help us; it is about freeing up business so that it can do what it does best. Business will attempt to bring the country out of the current situation.

To re-emphasise a point that was made earlier, the Government must look at all means of supporting business at this time. I agree with the other panel members who have said today that the introduction of a local income tax at this time would not be the best way of supporting business in the current circumstances.

Thank you very much, gentlemen, for such a wide-ranging discussion. You have given us plenty food for thought for our report and I thank you for coming here.

I suspend the meeting for about five minutes so that we can change panels.

Meeting suspended.

On resuming—