Economy, Energy and Tourism Committee, 30 Sep 2009

Meeting date: Wednesday, September 30, 2009

Official Report 325KB pdf

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Budget Process 2010-11

Good morning, colleagues. Welcome to the 25th meeting of the Economy, Energy and Tourism Committee in 2009. David Whitton is here this morning as a substitute for Marilyn Livingstone, whose mother has sadly passed away. I am sure that the committee will join me in offering our sympathies to Marilyn. Our thoughts are with her at this difficult time.

I remind all those present to turn off mobile phones and BlackBerry-type devices, as they can interfere with the sound system even when they are in silent mode.

The first item on our agenda is scrutiny of the draft budget for 2010-11. This is our first evidence-taking session on the draft budget. I am pleased to welcome to the meeting our adviser, Peter Wood, who is here to assist the committee, and our panel of witnesses. I will ask the witnesses to introduce themselves briefly and make some brief opening remarks before I open the floor to questions.

This year, the committee has agreed to focus on two key questions. First, given that the recession is still under way in Scotland, is the proposed budget the right one to help the economy to return to growth and is it consistent with the Scottish Government's economic recovery plan? Secondly, did the various measures that were agreed last year, such as accelerated capital expenditure and increased spending on, for example, modern apprenticeships and energy efficiency, make any substantial difference?

Good morning. I am from Scottish Engineering, which is the employer body for the engineering manufacturing sector in Scotland. We represent 400 member companies in all sectors of manufacturing and engineering. Seventy-three per cent of our members fall into the category of small and medium-sized enterprises, with fewer than 250 employees, and the rest include big companies such as Scottish Power and Weir Group.

Good morning. I am chief executive of the Scottish Building Federation. As an organisation, we are 114 years young and we have 700 members from Orkney to the Borders and from major contractors down to sole traders. I am also the employer secretary of the Scottish Building Apprenticeship and Training Council.

Technically, I am still a member of staff of The Herald, although I am on holiday and will be retired from The Herald as of 19 October. I should declare an interest, because I am about to draw a teacher's pension from many decades ago. I see that the Scottish Public Pensions Agency accounts for the biggest block of the budget for the directorate that the committee oversees.

Fortunately, we do not oversee that part of it.

I work as the executive editor of The Scotsman and I am Alf Young's long-time sparring partner on "Newsnight Scotland". My remit at The Scotsman is to have oversight of business, economic and finance matters.

I am founder and chairman of the Town House Collection, which has four hotels in Edinburgh and is about to open Blythswood Square in Glasgow, a 100-bedroom five-star hotel. I am also the immediate past chairman of the Scottish Tourism Forum. At the moment, the forum represents, directly or indirectly, 19,000 tourism businesses in Scotland.

I thank the panel for their introductory remarks. I will direct my first question at Michael Levack, but others can chip in if they feel like it.

Has the accelerated capital programme that was announced for this year's budget found its way through to assist the building trade? If not, do you expect that it will at some point during this year?

Of course the industry welcomed the accelerated capital expenditure that was announced during the past year, and one would not want to appear ungrateful, but it was never going to be enough, given the drastic times that the construction sector is facing. It has not worked its way through the system quickly enough, which the Scottish Government could take action on, particularly in relation to public sector procurement. The procurement process is very slow and is a drain, not only on the bidders—the people who tender to win the work—but on the parties that put the jobs out to tender.

We are willing to undertake some simple measures to assist the process. I will not go into details here, but we have offered to discuss them with the Scottish Government. It is important that we are efficient—we hear words such as "efficiency" and "greater effectiveness", and we see that the proposed budget has put the squeeze on every department. There is currently a dreadful waste of resource in the procurement process.

With regard to affordable housing, we have found that a lot of the money has been used to buy land and some existing stock, rather than to start new projects, which would protect employment and capacity in the industry. Our fear about the budget proposals is that there might not be the necessary level of expenditure to maintain some assistance for the industry. One important area, on which I would be delighted to give more details later in today's session, is the need to back up the Government's promises on reducing carbon emissions with some hard cash to make a start on the retrofit programme, not only for housing but for all buildings.

I will press you on that slightly. Is your primary concern that the money in the budget is not making its way through because the planning and procurement timescales mean that it cannot be spent quickly enough to make a difference?

Yes. We announced last week that, given the latest findings from research among our members, we estimate that 8,500 jobs have been lost in Scotland this year, on top of the 20,000 that were lost last year. We cannot afford to continue to lose jobs and capacity at that rate.

Before I invite other members to ask questions, I want to ask Peter Taylor about the tourism industry. Have you found the moneys that have supported homecoming Scotland 2009 to be beneficial? What are the implications for next year, when we will not have a homecoming?

There can be little doubt that homecoming Scotland has worked. It has been a brilliant collaboration between the public and private sectors. There are some 300 themed events, and many local people and action groups have been working together. I think that there will be a major legacy element to homecoming, but I have some concerns about a real-terms reduction in the budget—although in the same breath I appreciate that all budgets are being stretched.

This perhaps follows on from Michael Levack's comments: we all need to think and act differently. The public and private sectors need to work together and collaborate more, and try to strip out duplication. The public sector needs to be light-footed and ready to switch its strategies, and it needs to demonstrate added value. In general, if it were not for homecoming Scotland, I am not sure where we would be this year.

I will follow up on the points about public procurement. A lot of civil engineering takes place because of Scottish Water, which undertakes a wide range of projects and is the biggest procurer for the public good in the country. Large parts of the construction industry are involved in that work, which includes renewable energy developments. Are most of your members smaller members of the trade, and are they having difficulty in getting money from the banks to help them to get on with the job?

Our membership covers a cross-section of the construction sector but not civil engineering—I leave that to my colleagues at the Civil Engineering Contractors Association (Scotland).

The great benefit in contractors working for Scottish Water is that, although it goes down the framework procurement route, its funding is allocated over several years and it is constantly trying to improve the process, as it realises that it has not yet got the perfect model. That gives a degree of certainty to businesses.

You also raised the issue of the banks. How does a business in the construction sector—whether a small to medium-sized enterprise or a large contractor—go to the bank with a business plan in the current environment? There is a lack of visibility of projects coming forward, and businesses have to take a stab at what they will succeed in winning.

The banking sector impacts on construction through cash flow, which is essential in the construction industry. We hear the same about many sectors, but even in good times the construction industry operates on profits of 2 to 3 per cent. The word that we are getting—not anecdotal comments, but the real experience of our members—is that cash is not available and banks are trimming overdraft facilities, telling businesses that they will just have to be a bit slower in paying their suppliers. If they do that, however, the problem just goes elsewhere in the economy until it comes full circle, which is not good. We constantly hear that the United Kingdom Government is listening, but we could do with some action on that. Who is responsible for tackling the banks and ensuring that credit is provided in a sensible way?

I am aware that we are dealing with the matter in our banking inquiry as well. The Scottish Government survey that Andrew Goudie presented to us last week showed that small to medium-sized enterprises are having huge problems with the banks. There are particular difficulties in Scotland because of the virtual duopoly in lending to such enterprises. Have those things had a major impact on the problems that we have experienced in getting projects under way or are you saying that it is all down to the Government rather than other things?

No. The impact of the lack of credit in the banking system has been to dry up private sector development. Many of the larger contractors rely on private sector work, public sector work and work that is funded through public-private partnership projects. The latter have just about disappeared at the moment and there is virtually no private sector development, so the contractors are all chasing the public sector work. That is distorting the whole marketplace and it is becoming increasingly difficult for the smaller companies to win work. They have to submit lengthy pre-qualification questionnaires when they may have trimmed their staff back, so they do not have the staff to do that. It is not uncommon for more than 40 companies to submit PQQs and for the client authority to allow 20-plus contractors to bid for the work.

I would like to follow that up with some other members of the panel. Peter Hughes nodded. Perhaps others wish to say something on the subject.

Michael Levack's comments about the banks are extremely valid. A significant number of our member companies are having great difficulties with the banks. They are being charged anything between 4 and 11 per cent on overdrafts, and arrangement fees are suddenly being doubled or trebled. They are being called in for a meeting with the bank manager to be told that their terms and conditions are changing—and that, by the way, the meeting is costing them £3,000. "But you called the meeting," says the businessman. "Tough," says the banker, "Pay it." That is what is happening. The banks are not being particularly clever at the moment. The result is that cash is king and folk are holding on to cash to ensure that they can get by, as Michael Levack has suggested. The situation is extremely difficult and is holding back development significantly.

I want to say something on the original point about the acceleration of programmes and the stimulus. In my spare time, I chair the board of Riverside Inverclyde, which is one of the Government's pathfinder urban regeneration companies, down on the lower Clyde. The challenges for us are significant. Regeneration, as part of economic intervention, is a long-term business. We have, supposedly, 10 years to do what we are doing on the lower Clyde, but we do not know what the budget is going to be a year from now, let alone 10 years from now.

Some of the things that have been done as a stimulus cause their own problems. For example, we were a beneficiary of the town centre regeneration initiative that flowed out of last year's budget. We were chosen as a beneficiary only in July, and the money is just flowing now, so we have five months in which to spend £1.3 million on a town centre regeneration programme, because it is limited to this year. I suspect that you will find that people across Scotland will do very quick interventions and clean up town centres, but the long-term impact on what town centres will look like through the next decade will be limited. That is part of the problem.

Another problem is that if we take capital out of future years and put it into this year or last year, it will not be available to spend next year. That also skews long-term regeneration efforts.

I realise that regeneration is not even part of the enterprise directorate's responsibilities; it is part of health and wellbeing, which I find curious. Bits of economic intervention seem to be scattered across all the directorates, which is another part of the problem: we do not know who we are talking to half the time.

Alf Young made a point about the gamble that is taken when capital spending is accelerated from future years into current years, and the debate about whether we are going to have an L-shaped, W-shaped, or V-shaped recovery. The worry is that we are heading for a double dip, or a bit of slow recovery and then back into recession, and that accelerating capital programmes means that we are stealing from future years for the current year. That causes a problem with sustainable growth, which I believe is the current Government's main purpose.

I also echo Alf Young's concern about what is and is not part of economic development and regeneration. Elements are scattered throughout the draft budget. I looked through the finance and sustainable growth portfolio, and believe that to get clarity and to enable us to drill down to what is economic regeneration and enterprise, it might be helpful to divide the portfolio into two. Items such as the Scottish Public Pensions Agency work could be attached to the finance minister, and a second category could be more focused on what the Government is doing specifically on sustainable growth and promoting enterprise in business.

I want to pin down that point. There has been accelerated spending because of the crisis that we are in, but is this the time to stop it? Should we continue with it? When accelerated spending is the message across the world, why should Scotland suddenly stop having the injection of cash that has been of some help?

I am sure that it has been of help, although quite how we measure that at the macro level is difficult, and we might not be able to measure it for a good year or 18 months.

We are caught between two enormous forces. On one side is the pressure to sustain the economy and the little growth that we have, and on the other is the enormous pressure to bear down on a fiscal deficit that we know is heading for £175 billion gross Government debt this year, and £1.4 trillion by 2014. Now there is a proposal to have an act of Parliament that requires bearing down on the budget deficit.

We can always repeal a law.

Tempting as it is to enter into the debate that Rob Gibson has started about whether it is appropriate or inappropriate at a UK level to bring forward more capital spend next year—I think that there is a powerful case to be made, but I digress—it is clear that we should take the opportunity to focus on the opportunities in the budget.

The intervention of the September weekend, which appears to be a Glasgow-only holiday, may mean that panellists have not had the opportunity to see the work done by the Centre for Public Policy for Regions on the long-term trends in the budget. I invite the panel to comment on the following as we think about budget amendments.

Unarguably, after bringing forward capital spend, the budget changed by a shade under 1 per cent—there was a 0.9 per cent decline. The top-level decision about capital spend and resource spend leads to a proposal to cut capital spending by 17 per cent next year over this year—departmental expenditure limit capital is down 17 per cent. The CPPR paper suggests that the finance and sustainable growth portfolio is to be cut in real terms by 7 per cent. A table in the paper on the largest winners and losers indicates—this alludes to the point that Alf Young made—that expenditure on water quality is down 70 per cent; regeneration spending is down 72 per cent; other transport agency programmes are down 31 per cent; housing is down 30 per cent; other Scottish Government transport directorate programmes are down 18 per cent; enterprise, energy and tourism spending is down 13.6 per cent; and education and training spending is down 6.5 per cent.

That picture does not suggest that the budget in its current form is about putting sustainable economic growth at the centre of everything that we do. I realise that panel members do not have the advantage of having the CPPR work in front of them, but I ask them to reflect on some of the big choices that we face, given that there is uncertainty about whether further capital spending will be brought forward on a UK basis. A 17 per cent cut in DEL capital is being proposed this year along with major cuts in the housing, transport, innovation and enterprise budgets. We would like some input on those matters as we focus our budget amendments.

As I said, it is important for the business community—certainly for construction businesses—that it can plan its business and investment. We hear a lot about apprenticeships from many political parties. An apprenticeship in the construction sector is a commitment to a young person for four years. How can someone possibly make that commitment in the current climate, when there is uncertainty about funding programmes?

Long before the recession started, I maintained that the Scottish construction sector was ready, willing and able to tackle the challenges of reducing CO2 emissions, and that remains the case. That work will keep a generation of people active, whether it be the experienced tradesman or the young apprentice. The Sullivan report, which made recommendations to ministers on tackling building regulation, referred to the cost and to the experiences of other European countries: significant public sector funding is required. The issue is constantly on the agenda and we hear the claim that the legislation recently passed in Scotland is world leading—we must now put the cash against that.

Some tough decisions have to be made. The business community is well aware that public sector finance is restrained and that we cannot please everybody, but we keep having political announcements about carbon reduction, so let us put some cash into front-line action to protect the capacity of the industry and make a difference on energy efficiency rather than spend it on the bureaucracy and administration that goes with that.

I have a couple of points. Obviously, the levels of decrease in some of the areas that Wendy Alexander mentioned are very significant. There is comment in papers about support for infrastructure, yet we have still not sorted out the energy infrastructure. The Beauly to Denny line has been under discussion for eight and a bit years and we are still waiting for an answer. We must sort out such things.

I wonder if politicians have the will or the desire to look at things such as the Scottish Public Pensions Agency—welcome to the real world. In the private business sector, we stopped entrance to our pension fund five years ago. We are dumping our entire final salary pension fund in April next year. Why? Because we cannot afford it. The same thing applies in many ways to the public sector. Frankly, that issue should be looked at very seriously.

The CPPR paper provides a very good analysis. It drew my attention to the reduction in the finance and sustainable growth budget—at the DEL level rather than the overall level—and gives a measure of how badly that portfolio is doing relative to other Government portfolios.

The paper also makes the good point that the office of the finance secretary should be detached from a spending department. In other words, there are some dangers in having someone act as both centre forward and referee.

I have not seen the CPPR report—I have been in transition, as it were—but Wendy Alexander's point about where things are going highlights the kind of longer-term challenges that we face. Politicians of all parties have a huge responsibility to attempt to address the longer term. In the 10 years of the Parliament's existence, responsibility for skills has been transferred into Scottish Enterprise and transferred out again. I have no idea how much that cost, but the gossip circulating suggests that it was significant. Numbers as high as £100 million have been suggested for the cost associated with merging Careers Scotland and Scottish Enterprise. As a consequence of the merger, leases had to be abandoned and people were made redundant. The same things happened again when the two organisations were taken apart. Such significant sums of money flow from the choices that politicians make.

For people like me and my colleagues on the board of the URC who try to do our little bit on the fringes for a community, there is absolutely no certainty about where we will be in two years' time. We are entering into legal obligations, but we have no idea whether we will have a continued flow of money from either the Government or Scottish Enterprise or the local authority to support us. I cannot stress hard enough—having written about the Scottish economy and its constituent parts for 30 years, I have spent a lot of time and shoe leather going in and out of companies all over Scotland—that all companies crave long-term certainty. Many of our competitors have delivered a degree of consistency of approach that simply does not exist either here or in the rest of the United Kingdom. We jump from fashion to fashion and from concept to concept.

Consequences flow from putting an agency into one body and then taking it back out. That just does not work. We need to realise that problems cannot be solved simply by accelerating from year B to year A, as if that was the story over. We need to look at horizons of at least a decade to get the fundamental and sustainable change—sustainable growth is what the budget is supposed to be all about—that we can all sign up to.

I think that Peter Hughes wants to respond, so I will let him do so.

Further to Alf Young's concern about how the handling of skills and training has been transferred back and forth, Skills Development Scotland has existed for more than a year but we are still getting plenty of navel gazing. We are waiting to see the outcome, which I hope will be positive, because business is ready to get in there and support it. One thing that is for sure is that the recession will end, and when it does we will need skills, which are vital. Skilled folk cannot just be taken off the peg and used immediately when they are required; gaining skills takes time. As Michael Levack said, an apprenticeship can take four years, and a degree can take longer, but we will need those highly skilled people. We need to upskill, because that is how we will be successful in manufacturing and exports. That is very important indeed.

As some of the witnesses will be aware, we will look at Scottish Enterprise next spring. We have left it until then because we felt that the changes that the Government has made should be given two years to bed in—although, in the time horizon that Alf Young has given us, that is a remarkably short period.

The witnesses have not had the benefit of seeing the data that have been put in front of us today. We asked the Scottish Parliament information centre to do a bit of work for us on what had happened to the enterprise agency budget in real terms. In 1997-98, it was spending a shade less than £600 million in real terms; as of next year, it will have considerably less than £200 million. That obviously includes the changes in relation to skills—like the witnesses, I have an interest in that area, having been the minister with responsibility for skills. However, leaving that aside, it seems to me extraordinary that we have had no meaningful public debate about the transformation in the agency's budget. Over 10 years, our national economic development agency has arguably gone from having a national economic development mission to a role in supporting medium-sized companies. That may be good or bad, but it is extraordinary to have such a real-terms change to the budget without any meaningful public policy discussion about the organisation's mission.

We will come back to that in the spring, but it would be helpful to have some thoughts on the matter from the witnesses.

It is baffling and confusing to go back into the history of Scottish Enterprise and try to do a timeline of its budget and core function. However, let us not forget that the divestment of the skills agency was approved and desired by the agency's executives. They felt that they did not have the expertise or competence to manage a skills agency as well as it deserved to be managed, and the Scottish Enterprise board fully approved of hiving it off.

The board equally endorsed the hiving off of the local enterprise companies to local authorities. It felt that the LECs were not the priority that they were under Crawford Beveridge. Things change. I have rather lost sight of how effective local authorities are in handling local enterprise companies; I have totally lost the picture and do not know whether we have any assessment of how well or badly we are doing in helping small firms at that level.

Having reduced Scottish Enterprise and Highlands and Islands Enterprise down to a core area of competence—helping middle-sized companies and providing investment in targeted industries and sectors—there might be a case for bringing the two organisations together. Does the rationale for keeping them separate still exist?

The reduction in the budget is significant but, as Bill Jamieson rightly said, it relates to the removal of much of the skills element in particular. We certainly welcome the continuing support for the Scottish manufacturing advisory service and the commitment to double its budget. I am hopeful that that commitment still holds—I gather that the additional staff are being recruited. The return from the Scottish manufacturing advisory service over the past 18 months has been very good. Every £1 of public money that has been spent has generated more than £5 of real benefit. That commitment and support are a positive and welcome aspect of the Scottish Enterprise budget. We look forward to the service succeeding in the future as well.

What has been missing from the recent changes and transitions in Highlands and Islands Enterprise and Scottish Enterprise is, as Wendy Alexander said, any clear public debate about what the agencies are for.

I have been throwing out a lot of stuff from my office, including great runs of Scottish Development Agency annual reports, although I was half tempted to keep them and write something about the long sweep from where we came from in 1975 to where we are now. It seems that any commitment to place making has disappeared from Scottish Enterprise. The agency is now focused not even on small businesses but on medium-sized and large businesses with exceptional growth potential.

The breakdown in its costs in the SPICe paper shows that Scottish Enterprise is now talking about enterprise, innovation and investment. However, Highlands and Islands Enterprise is still talking about strengthening communities. We ought to have had a public, political debate about what these agencies are for. Do they still have a place-making function? Scottish Enterprise still finances my little URC to the tune of £10 million a year. I suspect that it does so rather reluctantly at times, because the budget is ring fenced—the Government has told Scottish Enterprise that that funding must continue. Its general commitment to place making throughout Scotland is almost zilch now, which is a big change that has happened without any public debate or sanction.

I just want to follow up Bill Jamieson's point about the two agencies. From a tourism perspective, although both HIE and Scottish Enterprise have been supportive, they have supported different initiatives, so one has had to present things in a different way. We are a small country. I realise that there are different issues in the north, but I would support there being more coming together, so that we can agree on the same issues, such as skills and training. I would support our having another look at that.

Scottish Enterprise has had very limited positive impact on the construction sector over the past five years. We are almost invisible to Scottish Enterprise at times. Until recently, we were not even listed on its website as a sector. Obviously, construction is not seen as a sector with the potential for high growth—we do not have appeal, because the export opportunities are virtually nil. Scottish Enterprise has had virtually no positive impact on the sector.

The move to transfer skills and learning to Skills Development Scotland has probably not happened at the best time, given that the industry needs assistance. Our members in the Highlands and Islands have concerns about whether their particular needs are being taken into account in that transfer.

People have asked why we still have HIE and Scottish Enterprise. A couple of years ago we had the very successful make it in Scotland programme, which we took around the whole of Scotland. However, Highlands and Islands Enterprise decided that it would not take it and that we should have it only in the Scottish Enterprise region. We are a country of only 5.5 million people for goodness' sake; can we not get together and sort it out? There must be a lot of duplication.

I will start by asking about tourism, so I will focus my questions on Peter Taylor. You said in your opening remarks that you understand that budgets get squeezed and that tourism might not be immune to that. Last year's budget for tourism was £49 million. Next year, the proposed budget is £44 million. That is quite a big cut for tourism. Do you have a feel for what the implications might be for the industry if that were to be the eventual budget in April next year?

I would never support regions spending money to compete with one another, which has started to happen around Scotland. VisitEngland has a major campaign to promote staycations and, given that 63 per cent of our business comes from the south, I am concerned to protect that business.

It is difficult to say what the implications of the budget are, but I am concerned. We are not seeking special treatment for the industry, because we are only as good as the economy generally. I urge that we have another look at the budget and at least have a standstill situation.

Is your concern about staycations the fact that the 63 per cent of our tourists who come from south of the border will simply stay there next year instead of coming up to Scotland?

Yes.

Do you know how much VisitEngland is spending on that campaign?

I do not have the figures with me, but I can supply them to the committee.

Thank you.

Going back to Scottish Enterprise, I would be interested to hear, in particular, Bill Jamieson and Alf Young's views on the following questions. Wendy Alexander talked about the long-term trend of reduction in the Scottish Enterprise budget from about £600 million to £200 million. Of course, some of that can be rationally explained by the fact that Skills Development Scotland is getting £200 million and that local authorities have been given money for the business gateway and local regeneration.

I want to drill down into this year's change, which I think is pretty savage. Perhaps I should say "stark", as someone got into trouble for using the word "savage" a couple of weeks ago. In last year's budget, the planned figure for 2010-11 for Scottish Enterprise was £295 million. However, in this year's draft budget, the agency is to receive £201 million. Last year, the planned figure for 2010-11 for HIE was £73 million, whereas in this year's draft budget it is to receive £54 million. About £35 million of those changes can be explained by the acceleration of capital spend, but that still leaves a gap of about £60 million or £70 million. From April this year to next April, no structural changes have been or are going to be made to the organisations; after all, everything that was going to be given to local authorities has already been given, and Skills Development Scotland has been created. What will a change of that magnitude do to the Scottish economy?

As Bill Jamieson said, we do not have any hard, objective evidence on what a great many of these interventions have achieved. Scottish Enterprise has retreated into territory where it deals with a panel of companies that fit its criteria for growth and for making a significant individual and cumulative impact on Scottish gross domestic product. All the things that it and its predecessor body the SDA used to do are either not done any more or done by local authorities.

Of course, that raises its own difficulties. In a world of single outcome agreements, how do we know that local authorities are doing anything much about economic development? When these announcements were originally made, I actually thought that our little initiative on the lower Clyde was going to be sent back into the local authority that had desperately wanted us to take on the job in the first place because nothing had happened for the past 25 years. It took us a lot of beavering about and asking questions about what local regeneration meant to find out that we were actually of regional, not local, significance and would therefore continue to be funded by Scottish Enterprise. As I say, we are an orphan wean of Scottish Enterprise, because I suspect that in its heart of hearts it does not want us to be part of it because it just does not do place anymore. We have a ring-fenced commitment at least for the next few years, but that does not go beyond the planning phase.

As I say, we simply do not know what effect many of these interventions have had. For example, great effort, energy and resources were poured into the business birth rate, Scottish Enterprise's great initiative of the 1990s, to try to upgrade the number of companies that were being formed in Scotland. However, if you look at the numbers over a long run—since 1991, say, or 1990 when the initiative was launched—you will find it hard to prove that the trend rate of growth in enterprise formation is any greater than it was before Scottish Enterprise started to intervene.

I want to make two points, about the top and the bottom of the enterprise brief. Starting at the bottom, I am concerned that we have lost sight of the big picture of what the Scottish Government is doing—and could do—for the small companies sector. The sector is very significant, certainly as an employer; small firms account for about 52 per cent of jobs in the private sector. Therefore, the support that small firms are given is important. However, I detect among business contacts that there has been an inconsistency of address by local authorities. Some local authorities have been very good—I have heard good reports from business contacts about the positive manner in which Glasgow City Council has responded—but other local authorities seem to be a bit hesitant about whether they have real competence in the area and about how best to help small businesses and small business projects of the type that Alf Young has described. A problem exists that the Government can address.

I miss an economic brainbox function at the top of the enterprise brief. I think that Scottish Enterprise once fulfilled that function, but it does not do so now. We need an economic brainbox at the top of the enterprise agency if we are looking for advice and guidance on achieving long-term sustainable growth for Scotland. I would not necessarily simply leave things to the Government. Somebody independent and slightly apart from the Government is needed to give disinterested, objective advice on how best we can advance an economic programme that looks beyond the immediate crisis over the next three, five and seven years. We do not have that, which is a huge omission. It is also wrong that we have a Council of Economic Advisers attached to the First Minister that somehow seems to ostracise and totally ignore Scottish Enterprise. What are we up to?

We have discussed at length public and semi-state organisations, but we have not discussed the private organisations that are responsible for putting us in the state that we are in. We have not discussed the annexation of what was the Scottish independent banking system. A large number of people have said that, although they had a reasonable relationship with HBOS or the Royal Bank of Scotland for short-term funding, for example, they have suddenly found that the person whom they have phoned has turned out to be not in Reading—that is a rather sensitive place for these matters—but in some other place well to the south and that they have no interest whatsoever in them. Such people have wanted them to put up their houses as security against anything that they might get. I am not talking about anecdotal evidence; I am talking about what is said in letters that turn up in my constituency office.

That element co-exists with Sir Tom Hunter's magnificent orations about rearranging deckchairs on the Titanic. When one looks at the accounts of his various concerns, one realises that he must have had a fairly close acquaintance with icebergs in the past few months. What has happened has carried away a lot of the lending potential of the Scottish banks. There is a difference between what happened when Gordon met Victor and they decided to take over HBOS—I will come to the point in a moment, convener—and what they then discovered after doing so. What are the implications? We are talking about hundreds of billions of pounds for a country whose budget is around a quarter of HBOS's deficit.

Rather than discussing the budget, we seem to have got to our next agenda item, which is on banking.

I will make just one point. There is a view in Scotland, which I do not share, that the fate of at least one of its banks was down to others. I have studied the Bank of Scotland closely and I knew all its leaders for the past 30 years, and I propose to write a book about the decline and fall of the Scottish banks. Therefore, I have a vested interest in the matter. My view is that the Bank of Scotland was largely the author of its own downfall.

I am not denying that.

I wanted to make that absolutely clear. In the 1990s, Bruce Pattullo would regularly say to me in our frequent encounters, "We are not in the risk business, Alf." His successors took the Bank of Scotland heavily into the risk business. They threw themselves at the Halifax, having failed to get NatWest. By that time, they had embarked on a high-risk level and style of corporate lending, which must make Bruce Pattullo tear his hair out if he is still watching events. That largely led to the bank's downfall.

We in Scotland do ourselves no favours when we allege that our ills are other people's fault, and that phenomenon is currently very obvious in the banking sector.

The central concern of the Scottish Government and everyone who is involved in Scottish economic matters is to ensure that competition is restored throughout banking and financial services. We rather lost sight of that with the mergers, which resulted in our having a duopoly. One bank has a 30 per cent share of the small business lending market in Scotland and an equally large share of the mortgage market. That is a worrying outcome of the emergency events of last year. For the customers of the banks, the sooner we start to unwind that, the better.

I remind Alf Young that I was not alleging that there was any kind of kidnap. The banks were the authors of their misfortune.

The RBS's board of directors had a great representation from the high heid yins of the British state—Sir Steven Robson and so on—yet it went down the tubes. HBOS was allied to the biggest mortgage company in England, but it did likewise. In trying to reconstruct banking concerns, should we not go back to the origins of the Scottish banks and think about mutuals, which are comparable, let us say, to a German Kreissparkasse? Should we not go back to having some form of quasi-state bank as a control?

We really are moving away from consideration of the draft budget. I ask Michael Levack to respond very briefly before we move on.

Perhaps I can assist in bringing us back. We keep hearing about the need to be more efficient, effective and innovative in relation to future funding for capital projects. It is clear that the private sector will be looked on to fund developments. We have never been interested in getting embroiled in the politics of the Scottish Futures Trust as opposed to PPP, but we believe that the SFT now has a golden opportunity. We note the significant increase in funding for staffing that organisation and we are desperate for it to get up a real head of steam. Clearly, its success as a facilitator of major infrastructure investment will rely on the availability of funding, wherever it comes from. We heard earlier this week about funding for housing through the European Investment Bank. The question that has not been answered is whether the UK banks are going to be interested in participating in the Scottish Futures Trust. That is a matter of concern to the construction sector.

I have a specific question on the banking sector, while we are on that topic. Following our tourism inquiry, we recommended that a tourism investment bank should be established in Scotland. That call was supported by VisitScotland at the time, but we see VisitScotland's budget continuing to go downwards and, as we heard, the enterprise agencies are in the same position. Do Peter Taylor and the other witnesses have views on whether a tourism investment bank would be a useful approach? Michael Levack mentioned potential uses for the Scottish Futures Trust. Is an appropriate mechanism available? Should the Government resource some sort of tourism investment bank as part of the recovery from recession rather than simply postponing it until economic times are better?

My personal view is that I am not sure it is right or fair for us to ask specifically for a tourism bank. It would be helpful if a way could be found for Scottish Enterprise to have more funding that could be made available—not just on the equity front but on actual debt—to assist where there are projects that can move forward.

I was at a hotel investment conference in London the other day and I heard a senior person in the RBS say that she had on her desk 33 projects that were being actively considered. She was not promising that they would all be funded, but they had got to her desk because they had some real possibility. I do not know whether much is happening with construction and tourism in Scotland, but my sense is that it is not. To be honest, I am not up to speed enough to comment on whether it is right for us to push for a tourism bank or how that would work.

There is an enormous danger in rushing into bespoke banks for this, that or the next function. There is a proposal for a Scottish investment bank, but we have been there before. There is a body in Scotland called Scottish Equity Partners, which was a Scottish investment bank—it was a function of the old SDA and then Scottish Enterprise. It was run by the remarkable Donald Patience, who made more money for the state than any other public servant in many years because a lot of his investments came good. At that time, Scottish Enterprise was ordered to divest itself of the function and it went off as Scottish Equity Partners. It still exists and invests in venture capital projects, yet here we are inventing it again, presumably to float it off again at some future date. I just wonder about that. We have a rich, although rather damaged, banking infrastructure and we can make decisions to ensure that some of the lending priorities that are not being met are met without creating new banks to do that.

That raises a related question. The other body that provided significant capital funding for new technologies in a number of sectors was ITI Scotland, which was wound up earlier this year—again, with no public debate and with significant impacts on energy, information technology and life sciences. Do the panel members have a view on that? Is there a risk, as Alf Young has hinted, that the decline of Scottish Enterprise as a funded organisation has had significant funding implications for private sector businesses that have previously looked to the public sector for support?

The issue is partly to do with the shrinkage of Scottish Enterprise's function back to the core. Successive Governments of all colours have ordered it to get rid of its property portfolio, its investment function and so on. There is a long history of either forced divestment or shrinkage to the core, all of which has had a considerable impact.

You mention the intermediary technology institutes. I was never terribly persuaded by the original initiative. I have a friend who works at a senior level in the IT industry in California, who is an expatriate Scot. He came back full of determination to do something to help over here—a kind of commercial homecoming. He went to the intermediary technology institute to make linkages and do things, but he came away shaking his head and sent me volumes of e-mails saying, "How does this organisation ever deliver anything?" That is only one anecdotal story, but I was never terribly convinced by the model and I am not sorry that it has gone.

I have received mixed reports about the achievements and performance of ITI Scotland; the case for it is not proven. However, I hear a lot of positive signals from the business sector on the work of the Scottish co-investment fund, which seems to be doing relatively well. Although the proposal to establish a Scottish investment bank is mentioned in the draft budget, it seems to be still in the water—it is not advancing at any great pace. I would be concerned if it advanced at the cost of a reduction in the Scottish co-investment fund. That would be another case of one part of Government devouring another part for no good purpose.

Alf Young spoke about the lack of medium to longer-term thinking. At present, public spending rounds last for three years. Is there an argument for longer spending rounds, to try to plan for the medium to longer term?

It is desirable that a mechanism be introduced into financial planning in the public realm that allows for a longer perspective. I do not suggest that all budgets should be projected over 10 years rather than three or that we should scrap the short-term approach. I am conscious of the political pressures and that a Parliament will not last more than five years. Naturally, changes of control take place organically over time, and new parties in power have new priorities and want to change things. I am comfortable with that, but Government and politicians in general must think seriously about how to give an assurance or some comfort to agencies that are charged with a longer perspective that they can continue to plan.

Stuart McMillan knows what is happening in the lower Clyde area better than most, because he represents the area. I have a board of volunteers. We are all volunteers and we do not get paid—we do the job because we love the area. We sometimes talk about what we are letting ourselves in for because, technically, we are directors of a business, although it is a charitable business and there is not a straight commercial exposure. However, as Stuart McMillan knows, we are taking on a joint venture with the landowner in James Watt dock. We have a limited liability partnership agreement to redevelop the sugar sheds and the wider James Watt dock area. That will not happen in one, two or three years. With a fair wind, it will happen over perhaps a 10-year period.

We must begin a debate about how the elements of political initiative that span far beyond normal spending rounds can be given an assurance or commitment that will outlast Parliaments and Governments because they are in the interests of the economy and people of Scotland.

Riverside Inverclyde is a good example. In 2007, the Government changed and measures were taken such as the altering of Scottish Enterprise. If the election result in 2007 had been different and the previous Executive was still in power, would that have changed what you have said, or would the issues still exist?

I do not know what a Government of the same colour as the previous Executive would have done. We were a pathfinder URC, so a different Government might have decided that the path was stony, that it did not want to follow it any further and that it wanted to go somewhere else instead. When people do the kind of thing that we are doing, they have to buy into a degree of political uncertainty about what will happen next, whatever Government is in power.

I must say that I found the initial change in the responsibility for regeneration and the way in which it was announced utterly confusing, because we had no advance warning. No one told us about the decision—it was just put to us that the local regeneration responsibility was to be handed to local authorities. We have a stretch of 10 miles of the waterfront and that is all we do, so we are local in that sense. We thought that we would be handed to a council that, as the committee will know, wanted us to take on not only the waterfront but all economic regeneration in the three-town area.

Being at the end of the feeding chain, we struggled to understand what was going on. I saw, like everyone else, that the budget line for regeneration in the draft budget—which is not in finance and sustainable growth but in health and wellbeing—was going down by almost a half in the next year. Of course, that was because the accelerated spending on the Clyde gateway project was dropping out of the budget, but that was not explained, and we were not told anything in advance. My chief executive and I had to make urgent representations to civil servants to find out what would happen to us—whether we would still have our budget for the next year or whether it would be halved.

That is a simple, short-term problem to solve. To be honest, it happens with whoever is in power, because we are so far away from the centre and so far down the feeding chain. However, the long-term issue is harder to solve. There must be serious debate in Government and the civil service about how to give comfort to initiatives such as ours that cannot be delivered over a year or even two or three.

My final question is on tourism, but it ties in with what is going on at RI and at the Southbank marina development in Kirkintilloch.

I set up a parliamentary cross-party group on recreational boating and marine tourism, which is an area with great potential. The group was informed at its meeting last week that VisitScotland has provided £65,000 to Sail Scotland, which is the first funding that it has received in more than three years, to promote Scotland as a sailing destination. The cross-party group has found that sailing has not had a downturn in the number of customers. In fact, the position is the opposite: despite the recession, sailing businesses are sold out and cannot take any more business. It is wonderful that there are positive stories to tell about some areas of Scottish industry. Is there potential for further development of marinas or sailing activities, particularly on the Clyde and the Scottish canal networks? Would it be viable and worth while in terms of economic benefit for local communities to maintain and expand them?

Absolutely. I am a sailing man, so you are talking to the converted. I think that brilliant things have been happening on the sailing front, and I have a bit of knowledge of Sail Scotland and on where it is going—it faltered a bit in how it was being run a few years ago.

One of the biggest interventions that could work would be to lay down more mooring buoys. Way back when HIE invested money in that, it had a significant impact. Villages and ports that have adopted and maintained those buoys are in a win-win situation. There is therefore real potential. I have not managed any sailing this year, but I have seen, when sailing over the past few years, that people come over from Sweden and Norway to spend the whole summer—or six weeks, let us say—sailing up and down the Clyde and the west coast, all the way to the outer isles. There are great opportunities for developing that. I am not so sure about the canal network, but there are opportunities there as well.

I am not a sailor, but what we do down in Inverclyde is very water focused, because we are in a marine area. The potential is enormous: we have a couple of marina developments planned, and all the advance analysis suggests that the demand is certainly there. We are also bringing the tall ships back to Inverclyde in 2011—the last time that happened, around 150,000 people turned out to see them. There is a great deal of potential for such events; we held a small-scale event a few weeks ago as a forerunner, which brought in significant numbers of people.

The majority of the marinas on the east coast and in the north-east are run by local authorities in some shape or form, whereas on the west coast they are private developments. Considering the budgets for local authorities and the public spend in general, could there be challenges in other parts of the country in comparison with the west?

In terms of our budget for developing the concepts that we are already running with, we have very limited resource to invest permanently in a marina development in Victoria harbour, for example. We have gone out and tested the market, and there is certainly commercial interest. As you point out, places such as Largs and Inverkip, and some others on the west coast, are commercial marinas.

I was speaking at an event at Inverkip marina only a few weeks ago, and there were boats as far as the eye could see—it was extraordinary. One of the extraordinary things is that many of the boats just sit there and are not used very often. I know that Peter Taylor is an active sailor, but there is often a degree of trophy ostentation that surrounds boats. Inverkip and Largs are certainly jam-packed; people come from the midlands of England to sail and moor their boats up here, and more people from overseas are discovering the marinas. Sailing has enormous potential as a leisure activity in Scotland and we could do much more to promote it, whoever it is delivered by.

This is the Economy, Energy and Tourism Committee. We have spent a lot of time on banks, Scottish Enterprise and tourism, but one area that we have not really touched on is energy.

It would be remiss of me not to say that the members of Scottish Engineering are very concerned that we are not having an appropriate public debate on energy and on-going energy supply. It is a contentious issue in many areas, but we firmly believe that we need a balanced, sustainable, affordable and—most important—secure supply of energy that incorporates all the appropriate technologies as we go forward.

There is a great deal of technological wizardry in Scotland that we do not use to its full potential. That includes renewables—some of our members make onshore and offshore wind turbines, and clean coal technology—but the sustainable energy supply should incorporate all the technology, including nuclear. We need to debate that issue, which we are not currently doing, and the danger is that we will lose the skills and abilities in our nuclear engineering sector unless we address it. Although it is starting to happen now, we are also being very slow in adopting the clean coal technology that has been developed by Doosan Babcock in Renfrew, and elsewhere.

Energy is important to us, and we are concerned—given the current demise of fossil fuel power stations as a result of regulation from the European Union and beyond—that if we do not tackle the problem in the longer term, the lights will go out at some stage. One cannot build a new nuclear power station in 12 months—it does not happen.

Thank you for your comments. I point out that this committee spent a year on its energy inquiry and published a report in July, which is being debated this very afternoon. You are welcome to come along to the chamber at 10 minutes to 3 to hear the debate.

It is nice to be back at the Economy, Energy and Tourism Committee, but normally I attend meetings of the Finance Committee. Yesterday we received a report from the committee's adviser, David Bell, which is now available in the Scottish Parliament information centre, so I am not breaking any confidences by talking about it. When he presented us with his paper, I asked him whether the Government's budget was in line with its stated purpose of sustainable economic growth. I did so because the budgets for enterprise, energy and tourism are all going down. He replied that he had raised his eyebrows at that and would like to see the argument for it. Were your eyebrows raised as well?

Yes. We have heard and read in the draft budget that there will be severe reductions in many of the areas that concern our members. We appreciate that there was accelerated expenditure last year, but we will now pay for that. I hope that I have stated clearly my concerns about capacity. If we do not have the required capacity, we will not be ready for recovery. I touched on the need to apply greater funding so that we can meet the targets that the Scottish Government, along with many other Governments, has set. Some people may say that a little lagging and insulation will not keep the whole construction industry busy, but we must make a start. We are not addressing the significant cost to the private sector, the public sector and every household or member of the public of achieving the targets that have been set for 2050 and the years leading up to that. There should be a significant shift of funding towards such measures.

Figures of 30 per cent for housing, 18 per cent for transport and 17 per cent for regeneration have been quoted. Those are significant reductions.

We would like more effort to be put into retaining our skilled workforce. The Germans subsidise labour up to a point to avoid redundancies, which are expensive for everyone, especially the person who is made redundant and the family that suffers as a result. The cost of getting folk back into work is high. I would rather that we concentrated on finding ways and means of keeping them in work, which is preferable to losing them and having to re-recruit them later. The recession will end at some stage and we will have to recruit folk back. The danger is that, if folk leave certain sectors, they will not want to come back to them or will persuade their youngsters not to go into them. That is an alarming thought.

I believe that the Welsh Government has a scheme for subsidising labour.

It has.

Would you like that to be repeated here?

I would like it to be tried, at least.

It is said that we cannot consider wage subsidies. To me, the partnership action for continuing employment funding that Skills Development Scotland administers comes too late in the day, as does the adopt a redundant apprentice scheme. As Peter Hughes said, the construction sector is liable to lose such apprentices. In recent years, we have become a career of choice, and we need to maintain that.

We need to provide support to small businesses in particular, possibly in the form of wage subsidies, when times are tough. The Scottish Government is doing that in another sector, as it has announced funding of £3 million for 100 apprentices in life sciences. The deal, I believe, is that if a life science company takes on one apprentice it gets the wages of a second apprentice paid.

Before I come to the two economic gurus, I ask Mr Taylor to comment.

As you would expect, I will speak in support of tourism, which is the one industry that will be around for many hundreds of years to come.

You mentioned that homecoming Scotland has been a relative success, despite our misgivings about the size of the budget that was allocated to it. What will it mean for your industry if that budget is not there next year and the tourism budget is cut?

One way forward would be to allocate more significant match funding. In the past year, the private sector has put its hands in its pockets quite significantly to support initiatives, and there could be an additional fund that is specifically ring fenced for matched funding, whether it be from individual organisations or a collaboration of three or four businesses. That is already in place, but more could be put into it.

There is a concern. I see what is happening in all the other sectors, and I guess that until we resolve the banking issues we are not going to move forward significantly.

You are just about to open a new large hotel in Glasgow, creating how many jobs?

One hundred and fifty.

How much help have you had to do that?

We had a lot of help from Scottish Enterprise; we were very pleased with that. VisitScotland was also supportive.

The building's CO2 emissions will be 43 per cent less than they would otherwise have been because we are investing approximately £1.5 million in alternative technologies. That was my decision; I made it a long time ago and I have no regrets. We are investing £25 million, and we are confident that it will work.

In the wider industry, there needs to be more collaboration between all parties involved in the public and private sectors.

Mr Jamieson, the headline on your column yesterday was "John Swinney's amazing shrinking draft ‘Budget for Growth'". Will you elaborate on that? I guess that you are not convinced that the budget is for sustainable economic growth.

No, I am not convinced. The problem that I referred to earlier was in going through the finance and sustainable growth portfolio in the draft budget and trying to single out the items that are specifically to do with economic growth, enterprise and supporting the economy. It is difficult to arrive at clear conclusions when the portfolio includes the Scottish Public Pensions Agency, the General Register Office for Scotland expenses, the Registers of Scotland expenses and concessionary bus fares, which, at £191 million, are almost as much as we are now itemising for Scottish Enterprise. We really have to separate the office of the finance minister from what is being done for enterprise.

When I did that, I got a residual figure of £2.3 billion, which is down 8 per cent in real terms. That is a terrific whack when it is compared with other Scottish Government departments. That is my concern for 2010-11, and I have to tell you that, looking beyond that, it is going to be much tougher.

I think that we all accept that it is going to be much tougher.

The witnesses will be interested to know that, when Mr Swinney gave evidence to the Finance Committee, he was asked about separating his portfolio into one finance ministry and one spending ministry. He seemed to think that things were okay because his deputy ministers could argue the case for the spending with him and he could still mastermind it all. There we go; that is up for debate as well.

I do not disagree with what the other witnesses have said. When the objective of increasing Scotland's sustainable growth rate year-on-year is set against the numbers that we have talked about this morning, there is a question mark. I would be tempted to go further and ask whether the sustainable growth rate growth is within the gift of the Parliament, given its powers, or indeed whether it should be a desirable, overarching objective of politics.

There is a lot of talk about getting back to normal after the banking crisis, and I think that it will be a new normal rather than the old normal. There will be a lot of debate in that new normal about whether the entire overarching purpose of politics is about increasing the GDP growth rate. GDP measures something—although even economists are not quite sure what it measures—but there are a lot of things that it does not measure, many of which are of great significance to families and others in society. I just wonder whether it is the right objective for the right Parliament.

Others have touched on last year's capital reprofiling decision to bring forward spending by a year. Is there any evidence of where that money has been spent?

There were significant sums of accelerated expenditure on housing. However, as I said earlier, from speaking to our members—who include major contractors through to sole traders and second or third-generation local businesses, and who have always been active in the affordable housing market—it is clear that they are finding that a lot of the money has been given to registered social landlords to buy sites and completed stock rather than to start new projects.

There is another source of continuing frustration. It has taken a member company that is trying to provide 18 affordable units 18 months to get a section 75 agreement in place. The development now spans three financial years and still the company does not have certainty of funding. That is a major disincentive for a local business that employs local people to invest in housing, which is a big concern. Against that should be balanced the Scottish Government's desire to move to a three-year funding programme for affordable housing, which I think is desperately needed.

Although there is evidence that some of the accelerated funding has found its way through to the areas that Michael Levack referred to, we have a number of member companies that make mechanical equipment for the construction industry and it has certainly not reached them. They are in deep trouble as far as orders for the next six months and beyond are concerned. A few years ago, they were doing extremely well, but orders for mechanical equipment are just not being made because folk are deciding to hang on to what they have and not to replace it. That is what is happening.

If Dr Hughes wants to give me the name of the bank that is holding a gun to the head of the business owner that he mentioned and saying that it costs £3,000 for a meeting, I will be happy to raise the issue with the convener of the Finance Committee.

We would be happy to get information on that for our banking inquiry. We will raise the matter directly with the banks.

I had great difficulty in getting member companies to agree to say things on camera. When I did a piece for "Newsnight Scotland" on the same subject recently, we ended up using a Bob the Builder character and putting figures in a balloon coming out of its mouth because the managing director in question did not want to provide the information in public.

I understand that. We would be happy to discuss with you and other organisations how we can best get direct rather than anecdotal information.

I am afraid that time is against us. Will each of you say, in just one sentence, what changes to the draft budget the committee should recommend to the Government?

As I said, I would welcome continuing support for things such as the Scottish manufacturing advisory service. I would also welcome some real discussion about where we are going on energy. It is all very well to talk about Scotland being the Saudi Arabia of marine energy, but the technology is not there yet and will not generate any electricity for the grid for at least 10 years. We must plan ahead and invest in the areas that we need for the next 10 years.

I repeat that the Government should put its money where its mouth is on the carbon reduction targets. We are talking about long-term financing, and we have set a target for 2050. Everyone recognises that, if we are to get there, we face a serious, challenging profile. Let us make a start.

The Government should take on the issue of longer-term funding for infrastructure and regeneration.

It should have a much sharper definition of what the budget is doing in the area of promoting growth, enterprise and business.

It should reconsider putting the £4 million or £5 million back into the budget to balance it up, given that, as far as we can understand, there was a £44 million bonus from homecoming Scotland.

I thank the panel very much indeed for its valuable evidence. The committee has a lot to reflect on and to take forward to the next stage of its budget inquiry. I suspend the meeting for five minutes.

Meeting suspended.

On resuming—