Economy, Energy and Fair Work Committee

Meeting date: Tuesday, September 17, 2019

Official Report 699KB pdf

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Pre-Budget Scrutiny 2020-21

Item 4 is pre-budget scrutiny. I welcome our witnesses: Matt Lancashire is director of policy and public affairs at the Scottish Council for Development and Industry, Helen Martin is assistant general secretary at the Scottish Trades Union Congress, Richard Marsh is director of 4-Consulting, and Tony Mackay is an economist from Mackay Consultants. For witnesses who have not appeared before, I should say that there is no need to press any buttons, because the microphones are operated from the sound desk. If you want to say something, please raise your hand and I will seek to bring you in.

I will start with a fairly general question before I bring in other committee members. The objective of regional selective assistance is to reduce regional labour market inequalities. What are the panel’s views on whether that is being achieved? Who would like to speak on that first? Richard Marsh is not nodding, but at least he is smiling. Do you have a comment to make, Richard?

I was actually looking to Helen Martin to go first on that question.

The general point, which has been made in the written submissions, is that we still have significant regional inequalities in Scotland. RSA is just one tool that we can use to try to tackle such inequality. We need to measure what RSA is doing far better than we do currently. We highlight where RSA is being used to help companies invest and we report the jobs that are going to be safeguarded and created, but we do not measure consistently over time the number of jobs that are sustained over the life of a company in different parts of Scotland.

Does anyone else have a comment on that?

I think what you are asking is whether addressing regional disparities is going fine. The evidence that we found is that the central belt dominates the funding, which continues to be focused there. There are fewer funding applications to the grant fund from businesses from regions in the south of Scotland and further afield. The evidence from our members also shows that there is a regional disparity in how the fund has been awarded in the past.

What can be done to address that regional bias—the focus on the central belt that Matt Lancashire mentioned? More generally, what is business’s awareness of RSA? Are there particular regions, sectors or sizes of business that are perhaps not as aware of RSA and are therefore not able to access it as they should?

Awareness is sporadic depending on the type of business and where it is located. Raising awareness of any type of grant programme, but RSA in particular, would be beneficial, because it would give business leaders the option to suggest whether it is a useful fund to support their future capital expenditure.

There is a little bit of responsibility on the part of businesses to be aware of such things. It takes good leadership and management to understand that those options are available. It goes two ways. Perhaps there is more that we could do to support and educate our business leaders about making the right decisions, whether that is in respect of the grant fund or other aspects of their business, particularly when we are interested in securing jobs or increasing the gross domestic product of a certain region.

In the session that the committee had on RSA with the enterprise agencies, there was a bit of discussion about trying to stimulate the demand for RSA. Previously, the committee has been quite critical of investment funds that have had very low uptake. We have had similar conversations around stimulating demand for the products of the Scottish Investment Bank. Awareness of such products is one thing, but whether we have the right products to fit the needs of businesses is another. We need to give as much attention to that as we do to the question whether businesses are aware of what is available. Perhaps what is on offer is not what they need.

That is a good point. I understand that one of my colleagues is going to cover demand stimulation.

We are looking at which regions and sectors have benefited so far. We have talked about the geographical side—the regions—but have particular sectors benefited from RSA? If we focus on which sectors are successful or will grow in the future—such as automation in manufacturing—can we see how and whether RSA can develop in order to accommodate those changing sectors? I am happy for anyone to answer.

I think that the RSA system has been very successful in Scotland. It is important for the committee to distinguish between RSA and the other selective assistance that Scottish Enterprise and Highlands and Islands Enterprise are providing. From an economic point of view, you could regard the former as being reactive and the latter as being proactive. The biggest disappointment in the past five years has been on the proactive side, rather than RSA. If the economy is doing well, businesses will go to SE and HIE to ask for assistance and they will get it through RSA. The economy has struggled in the past five years for various reasons and it is the proactive activities and expenditure of SE and HIE that I think have been disappointing, rather than the RSA expenditure.

Is RSA funding doing a great deal to support the Government’s policy of fair work and inclusive growth? For example, there has been little change in the eight indicators of the national performance framework business and fair work outcomes over the past years. Maybe the RSA is too small a component of broad Government support to be expected to have any direct impact on those, or is too small to even be measured. Nevertheless, I am interested in the witnesses’ views on that.

RSA has probably not been targeted along fair work lines until fairly recently. The change in approach from Scottish Enterprise, which only came in in April 2019, is welcome, but RSA was not necessarily targeted in a way that was designed to support fair work outcomes. It was perhaps designed to support employment, but there was not much focus on the type or quality of employment, or what the knock-on impacts of benefiting certain employers versus other employers might be on the wider economy.

The focus has changed, but saying whether it amounts to a substantive change that feeds through into the national performance indicators is quite a tall order. We need to focus on fair work in a range of business subsidies and across a range of our work in order to get those indicators moving in a positive fashion. At present, it is true that none of the national performance framework indicators around business and fair work is moving positively—they are either holding steady or declining. We have a lot of work to do and we are very much at the beginning of the journey, and every subsidy has to play its role in that.

Is it even possible that a funding stream such as regional selective assistance can substantially support fair work? Amazon is one of the companies that received RSA, and the arguments that were made to rebut accusations that that was not an appropriate use of RSA were that it is essentially a competitive process. In that process, companies such as Amazon would, in many instances, be looking at a variety of locations in which to expand their existing footprint or develop new facilities, and RSA could—from Scottish Enterprise’s point of view—make the difference between that happening in Scotland, as opposed to, for example, in the north of England.

In those circumstances, in which the dominant driver is essentially a competitive one to try to provide more of an incentive than might be available in other parts of the United Kingdom, it is hard to say how we could do much to promote fair work. Is that fair?

11:30  

The key question is: what values are we trying to promote? Is it appropriate to put Scottish Government funding or public money into bringing to Scotland a company that has unfair work outcomes? That is a challenging question, and there are difficult answers to be given.

A key example is Amazon, which was a company that was in receipt of Government funds, but was clearly not meeting the principles of fair work. However, it is possible to put those principles into funding such as RSA—it might simply mean that we have to change our mindset on what we want to see in our economy and the sorts of conversations that we are prepared to have with businesses. We might find that Amazon is willing to have those conversations.

The STUC has argued quite strongly that there needs to be a greater focus on collective bargaining in the structure, because we can sometimes see perverse outcomes in fair work discussions. Companies might say that they will pay the living wage, but they might then take other things from their employees. I think that Amazon did that in the end. It agreed to pay the living wage, but then removed subsidies for its workforce, so it was a zero-sum game. If there is collective bargaining coverage, the workforce will get more of a say in how the work is organised and run, and that will mean better long-term fair work outcomes.

We see the collective bargaining coverage element of the national performance framework indicators as a key indicator of how well we are pushing out fair work in Scotland, as it gives the workforce the ability to shape the work, and it gives employers and workers in a sector the ability to make tools that fit the sector rather than simply very blunt instruments that we can sometimes see in other ways.

We also have to remember that RSA has had a positive impact on the Scottish economy. That supports Helen Martin’s and Tony Mackay’s points. RSA has been responsible for generating additional jobs in economic downturns, which is important. In a sense, it has emphasised creating jobs. Once the jobs are there, the question is how we shape fair work practices, fair work jobs and fair work roles. I take Helen Martin’s points in particular about how we might go about doing that as part of the RSA process. It is important to point out that additional jobs would not be in Scotland and that our economy and unemployment rate might be worse without RSA.

Helen Martin and Matt Lancashire are right: RSA would have the potential to make more of an impact if we chose to attach different, wider conditions. Matt Lancashire was also quite right to point out that the more conditions that are attached, the less likely companies are to take up the intervention. We have to balance that with providing jobs in an area that needs them, and we have to be much clearer about what kind of development we want. I fully agree that we have to be very clear about that. At present, inclusive growth is ill defined and is not fit to shape those policy discussions in Scotland.

I want to briefly follow up on that, if Mr Wightman is happy with my doing so—I do not want to interrupt his line of questioning.

Putting too many conditions on people was mentioned. However, let us take Amazon as an example. Amazon locates warehouses in places from where goods need to be distributed. The further away from the delivery point the warehouse is, the more there will be an effect on Amazon’s costs. I would have thought that, from its point of view, there is a balancing of cost and profit and that it is not all on one side, as it were.

For example, Amazon gains advantages by being located in and having operations in Scotland, as other companies do. I take the point that has been made, but it is not quite that simple. There are both sides. I see that Helen Martin is nodding in agreement.

What you have said is absolutely true. Sometimes, we take these conversations as being quite blunt, in some ways. We think that employers have a completely blank page for where they can take their business, but that is not entirely true. There are other reasons why they might want to locate in Scotland, because there are other things that Scotland has to offer. We have a highly skilled workforce, good connectivity and a good economy to build on. Companies want to come here to access our market, too. We should not start every conversation by thinking that we cannot ask for fair work conditions to be applied and that such things are not achievable, because they are. Other countries have better social frameworks around employment than we have in the UK, and they are still prosperous and successful. It is possible to work in a way that produces greater social justice outcomes, as well as a good business environment.

I did not mean to take Andy Wightman out of his stride.

I will get straight back into it.

Some witnesses raised the differential rates of support that are available, according to whether businesses are in a tier 1 or tier 2 assisted area or, in effect, the rest of Scotland, which is subject to the general block exemption regulations. In its evidence, Aberdeenshire Council highlighted that the general economic assessment of Aberdeenshire, which is relatively more affluent than other parts of Scotland, can mask inequalities within Aberdeenshire. The council also highlighted that the reassessment of the assisted areas has resulted in a situation whereby Buckie, which is in tier 2, can receive a higher rate of intervention than Macduff, which is just across the river in the Banff and Buchan area of Aberdeenshire.

Do we need to revisit the hard lines on maps, given that the impact of businesses and the choice of where they locate are dependent on factors such as workforce, transport, site and land availability and raw materials? What is needed does not fit neatly into the areas that we have defined on maps as being more or less deserving of support.

I agree with Helen Martin that, in relation to inward investment in particular, companies are unlikely to consider the availability of grants and loans as fairly high priorities. They will look at the available workforce, the strategic location, the source of raw materials and so on.

What makes me nervous about Andy Wightman’s suggestion is that hard lines are quite useful. Sometimes, there can be very good reasons for supporting industries and companies; at other times, the long-term benefits of giving large-scale support to industries and companies are less than clear. There are quite good reasons for allowing the market to decide where the best places to invest will be. Allowing businesses to create their own innovative products and competitiveness is good, and we should assume that that is probably what happens in most cases.

Having been involved in shaping some of the lines in the past, I know that a bit of gamesmanship is involved in trying to remove the lines as much as possible to the benefit of a local economy. If we moved from having hard lines—I accept that there are good reasons for doing so—we might end up with the gerrymandering of where the different assisted areas might be, with people trying to push the lines back as far as they can do, to ensure that they can get investment in areas that might have got it anyway.

Is the RSA grant appraisal process fit for purpose? Some firms that have received RSA funds have subsequently experienced—how can I put it?—trading difficulties. The list includes the Michelin tyre factory in Dundee, Kaiam Europe, the 2 Sisters Food Group poultry business, Havelock Europa, Burntisland Fabrications and, most recently, Ferguson Marine Engineering.

We should accept that bodies such as SE and HIE have to take risks. If they did not invest in risky ventures—I am not necessarily talking about specific firms—anyone could do the job that they are doing. It is inevitable that some of the businesses that they assist will go under. We have to accept that.

There are some exceptions. I think that I have made this point to you before: in my opinion, in the past few years, both SE and HIE have started taking a lot of investment decisions on the basis of politics rather than economics or business reasons. They have become too politically biased. Ferguson Marine is an obvious example, as are Prestwick airport and Burntisland Fabrications. It is unfortunate that, in the past few years, quite a few RSA or other decisions have been taken on more political than economic grounds.

If decisions are taken on economic grounds, I am not particularly worried. Indeed, it is a good sign—“good” is probably not the correct word—that some investments have gone wrong, because it shows that the bodies are taking risks. Okay, the risks might be too high. However, the big problem in the past few years has been the political bias in relation to the likes of Prestwick airport and Ferguson Marine.

Some committee members might disagree with you. I will not invite them to speak.

I take a slightly different view. It is more about shoring up strategic assets in the Scottish economy. It is important that that is done, and it is a role that the Government has to play.

It is important that there remains a strong fair work dimension to such issues. We would like there to be conversations about how the workforce will be treated in future, in particular if new owners come in. That has to be a key element of the conversation, but it does not always happen—coverage is still patchy on that question.

We want the Scottish Government to be ready to defend strategic assets that play an essential role in shoring up elements of the economy that might not fare well if they were left to market forces alone.

I was going to make similar points. Tony Mackay talked about decisions being made on political grounds; I think that it is probably “political” with a small p. Helen Martin’s point about the need to shore up strategic assets is fair. As I said, the letter from Scottish Enterprise to the committee about what it did with Kaiam spoke quite loudly to that kind of approach. Scottish Enterprise was clear that it tried to do everything that it could to save a large employer in an area that desperately needed jobs.

However, if the intention is to shore up strategic assets, is an economic development tool that encourages people to go on a large-scale capital investment programme and expand their workforce the right tool to use? That is my concern. Is that the right thing to do to try to improve the viability of companies that are in distress? I cannot imagine for one minute that it is, so we are not using the right tool to achieve what I think that Scottish Enterprise is trying to do. However, it is not saying so in its correspondence with the committee.

11:45  

I do not disagree with what has been suggested. We need to look more widely than RSA in relation to those businesses that we are calling strategic assets. That plays into Richard Marsh’s point about how—whether it is Prestwick airport or other firms in the future—we go beyond just shoring them up and make them wealth creators. How do we go beyond accepting risk from those types of organisation to look at how they create wealth, perhaps by bidding for other contracts? Perhaps it could involve providing support outwith their current region. Again, that goes back to improved leadership and management in businesses so that they look more broadly and beyond where we are right now. That is critical if we are to get the best out of RSA. It can shore up a business, but what comes next and what are the opportunities to go further?

From my perspective, it is interesting that there was a decline in RSA, particularly around 2014, when there were changes to state aid rules. It has gone up in the past year, but for smaller rather than larger firms. Having spent part of my time yesterday with a small firm that is in receipt of RSA, I know that the volume of material in both the application process and the subsequent monitoring is vast.

Richard Marsh said that RSA is not the right tool and that we need to be brave and move away from it. What would you move to? Should we continue to spend money on RSA or should we direct money into another area?

My suggestion would be to go back to what Jackie Baillie said originally. She spoke about firms receiving RSA and subsequently finding themselves in trouble—she said something along those lines. However, that is not the right timeline. In all the cases that were suggested—and many others, including many large employers—the firms first got into trouble and then received RSA.

If we are trying to find very large employers that are encountering difficulties, we already have tools in Scotland that help us to engage with corporates facing significant challenges in turnaround-type activities. However, that is very different from providing direct funding to produce capital investment and to expand the workforce, which seems to be a very brave decision if a company is possibly facing cash-flow problems.

Are there any other views on whether we should replace RSA with something else or use it differently?

The role of RSA is important. I have some sympathy with what has been said about the timing—when it is used—and about how it is used. In Scotland, we have recently seen moments of crisis in which we have been trying to deal with a company—a whole list of companies was named—that is very much a strategic asset in the economy. For example, Ferguson Marine plays an essential role in shipbuilding, and there is a long list of shipbuilding procurement projects coming from ports all across Scotland. We have a need for that type of company, so it is right to shore it up, and we have seen enterprise agencies and the Scottish Government using every tool in their armoury to do that.

Rather than trying simply to make what there is fit, it might be fair to think about whether we need specific tools for those interventions. Using state intervention to ensure that strategic assets have a life and can be maintained for the value of the Scottish economy is reasonable and responsible government. Therefore, thinking about how we do that and planning for it in a systematic way is perfectly reasonable, rather than considering simply what we can give people access to and what sticking plaster we can put on today. That approach could play a large role in an industrial strategy within Scotland.

Let me give one example that I have been heavily involved with for many years. I do not know how many of the committee were alive in the 1960s and 1970s. [Laughter.]

Some of us were.

We are not going to answer that, convener.

I remember that, at the height of the North Sea oil boom, we had about 15,000 people working in the fabrication industry in the Highlands and Islands, at Nigg, Ardersier and Kishorn, as well as at Methil and Hunterston. Sixty-seven per cent of the fabrication work that was done in the UK was done in Scotland. There was a body called the Offshore Supplies Office, which was very active in those days. Now the share is about 10 per cent; it has collapsed and, instead of 15,000 jobs, we have 500 or 600 jobs in the fabrication industry. Yet there are offshore wind farms. Virtually all the fabrication for the offshore wind farms is being done overseas, even in high-cost countries such as Denmark and Norway. The decommissioning of oil and gas installations is a big industry in Scotland and will be for the next 20 years, but our share of that is about 10 per cent. Most of the equipment that is being removed from the North Sea is being taken overseas. Bodies such as Scottish Enterprise and Highlands and Islands Enterprise should be doing much more to get the 10 per cent share up to what it was in the 1970s and 1980s. They are not doing that. Is RSA the best way? I doubt it, but I would certainly like to see Scottish Enterprise and HIE doing much more to resurrect the fabrication industry in Scotland.

That is a useful example.

It is always easy to critique or criticise things, but what should they be doing specifically to accomplish what you have just set out?

I could give quite a lot of examples. Let us take wave energy. A few years ago, Mr Salmond said that Scotland would be the Saudi Arabia of wave energy, yet it is on a tiny scale here. HIE has lost about £20 million through investing in two companies that went bust. It has set up a body, Wave Energy Scotland, that is doing very little. There needs to be serious changes at the top level in both organisations. We need to be coming up with a development strategy for helping marine energy and for helping the fabrication industry. Possibly, if there is a contract for an offshore wind farm, there should be conditions applied to that that say that there has to be a certain level of Scottish content, although maybe not 70 per cent. If there is a condition and the companies getting the contracts for the offshore wind farms have to abide by it, SE and HIE should be helping local businesses to win those contracts. They are not doing that, unfortunately.

l would like to look at the economic impact of RSA, which seems, according to the information that I have, rather difficult to pin down. What impact has RSA had on the productivity and international exports of the recipient companies?

Everyone is looking at me on that. I do not think there have been many studies on RSA as the only driver of productivity, internationalisation and export trade.

It is one measure.

It is one measure, but many areas focus on and drive productivity, such as inward investment, leadership and management in businesses, digital utilisation and quickening of processes. However, we know for a fact that productivity has not moved over the past 10 years in Scotland, let alone in the UK as a whole. It is not just a Scottish problem; it is also a UK phenomenon.

RSA potentially plays a role in driving productivity, but it depends where it is invested and in what type of businesses. RSA involves writing a five-year business plan, but if I was in a new start-up in emerging new sectors, such as artificial intelligence and data, and I wanted funding to locate here, how the hell could I write a five-year business plan for where my business will be when that sector will move significantly over the next few years? The impact of where automation, AI and data are heading will be felt across all sectors.

It is hard to pin down RSA as a key driver of economic productivity in Scotland. It is one of the drivers, and it is linked to and supports productivity. However, in essence, once an RSA grant has been received, how do we ensure that the grant is used effectively by the business? It is not just about being a driver of jobs; it is about being a driver of innovation in businesses to create further work, economic opportunity and productivity. If we could start to measure and evaluate the impact of RSA on those a bit better, we would get the answer to your question.

I will extend what you have said to the What Works Centre for Local Economic Growth case study, which found that RSA policy UK-wide has had positive impacts for small firms but no impacts on large firms. The case study report authors speculated that that was because larger firms could “game” the system and receive the subsidy without complying with the requirement to create jobs. That is an interesting thought.

I cannot comment, because I have not seen the study. I imagine that a small or medium-sized enterprise that has the challenge and wish to grow and support its local community and region will drive it forward. I suspect that larger businesses wish for the same, but I cannot comment until I have read the study.

I agree with all Matt Lancashire’s points. RSA is a relatively small tool for the enterprise agency, and it is difficult to pick out what impact one particular tool has on productivity and international exports.

What jumps out at me is that the reporting on RSA by the enterprise agencies shows how many offers were made to companies, how many were accepted and how many jobs have been promised and safeguarded—I think that we had a report last week. I go back to the communication from Scottish Enterprise to the committee about Kaiam, which seems to lack prioritisation of exactly the things that you have said. What was the turnover of the companies that received RSA? How profitable were they? What was the productivity of the workforce before, during and after completion of the RSA project? Scottish Enterprise has that information; in last week’s committee meeting, it said that it has it, but it does not publish it. I would prefer to have the hard data of baseline information to say how many jobs we are talking about, the turnover and the differences in productivity to show those changes over time—it is fine if it needs to be shown over five or three years to give a more consistent picture. The reporting at the moment focuses on how many jobs were promised, which does not get down to the actual change on the ground.

If we are assessing economic impact, a large part of it is job creation. Why are we not looking backwards to see what was achieved, so that we know whether we are putting the money into the right places?

That is a very good question. The issue is readily solvable, but if we go to an RSA report, it will say, “We promised £30 million or £40 million and the companies have told us that they will create so many jobs.” What we are not so good at reporting is a clear table to say how many jobs were created back in 2005, 2010 and 2015 and whether the companies delivered on their plans.

12:00  

It seems a very basic question to ask.

It does.

I cannot understand why there is no answer to it.

Does the panel have a view on the economic impact results that are quoted for RSA? Are they realistic? You are saying that the emphasis is solely on the jobs that are promised. Can we accept that the results that are put forward are realistic?

I would like to make a case for the defence. There are plenty of reasons to criticise the information that is put forward, but appraisal and evaluation are difficult. It is extremely hard to get precise numbers; it is necessary to do the best you can and to hope that any errors you make cancel themselves out and do not all point in one direction.

The problem that we have with RSA is that we are talking about helping companies that face challenges in areas that the market has found it more difficult to invest in. I think that a witness that the committee heard from a couple of weeks ago said that the creation of employment in South Uist in the Highlands is worth more than employment that is created in a big urban centre, and they were absolutely right.

When it comes to the economic impact, the only thing that you are trying to do, whether through sophisticated econometric analysis or business surveys, is to provide the context in which the outcomes can be achieved. The creation of a small number of jobs in a deprived area that is in desperate need of jobs is probably worth a lot more than an intervention that creates jobs in the centre of Glasgow or Edinburgh. That is what you are trying to do as regards impact, but what is being missed is what Mr Beattie identified in his question. It is not really possible to do such detailed analysis without having a good-quality baseline. There might be good reasons why a particular area has been given a bit more money to create a smaller number of jobs but, rather than jumping into the context, we need to be told how many jobs were created and sustained over a 10-year period in that area.

Given the limited size of the funds that are available through RSA, it seems from what you are saying that it would be better to invest in smaller rather than larger companies. I do not necessarily want to take Uist as an example, but are you saying that putting money into a small company in a rural area, for example, has a greater economic impact than giving it to one of the big multinationals?

I think that the answer to that is yes. That was the main reason for setting up the Highlands and Islands Development Board in 1965. Certain areas were disadvantaged compared with the central belt—Glasgow and Edinburgh—and it was felt necessary to give additional assistance to those areas. That is still the case. That was the reasoning behind setting up the south of Scotland development agency, whatever it is called. It is thought that, while many businesses in central Scotland do not need assistance and can get on on their own, in rural areas, because of the disadvantages of lack of labour and additional transport costs, subsidies are needed.

In many other countries, it is simply the case that specific grants are provided—a business in a rural area might get 25 per cent. In countries such as Denmark and Norway, there is no selective assistance; it is an automatic grant. Here in Scotland, we have gone through the selective assistance approach, which involves account managers in Scottish Enterprise and Highlands and Islands Enterprise.

I think that the principle of rural areas requiring more assistance than Glasgow and Edinburgh is still very valid.

Given everything that has been said, does RSA offer value for money in terms of the investment that is made?

I think so but, as I said earlier, RSA accounts for about 20 to 25 per cent of the expenditure of SE and HIE, administration accounts for about 20 per cent and the rest goes on other expenditures. I am much more disappointed with what those bodies have been doing with the other expenditures than with what they have been doing on RSA. Basically, RSA has been effective, but the other assistance from those bodies has been much less effective.

I think that our members believe that RSA has been effective—I agree completely with Tony Mackay on that. However, there is an element of job creation and productivity that we are not understanding. We need to consider whether we are creating jobs for jobs’ sake or creating productivity in firms that will evolve and create higher-value jobs over time, which will make our economy more competitive. RSA could be improved—it would be a continuous improvement rather than a complete rewrite—if the productivity of firms was considered. That would directly lead to better-paid jobs and probably more fair work jobs in the long term. If we just say that we are going to create 200 jobs in two years’ time at all costs, that is a bit perverse as a challenge; the challenge should be about increasing profit, productivity, exporting and efficiency of the business, which will lead to more direct investment, and that will lead to better jobs, increased living standards and increased wages in the region. If we can add that into the mix in RSA as a continuous improvement, we will succeed.

I take a slightly different view. I think that fair work is the key to improvement. We need a focus on true fair work outcomes for workers across the economy. That should be overlaid with a focus on the foundational economy and on investment that stays in the community and supports workers there. We should focus on areas that are foundational and that need to be in a certain location and cannot be stripped away particularly easily. All that would unlock economies of scale in local communities, including rural communities. If there is a strong fair work focus, we will see improvements in how the money is used and improvements in the outcomes for people’s living standards, which fundamentally is what we are trying to achieve.

Again, I agree with most of what Helen Martin and Matt Lancashire have said, although I have slightly contrasting views. The overall point is that we do not know fully the answer to Colin Beattie’s question—we do not have the evidence to answer it, even though that evidence is held by the enterprise agencies. They will have databases that show how all the companies that have been supported have performed over the past 10 or 15 years. Helen Martin is right that we should measure how much the companies pay their workers, whether that has increased, whether it matches the living wage and whether we are pushing up productivity in those companies. Mr Beattie also asked whether the effect is larger or smaller for larger companies or for companies in rural or remote areas and so on. We do not know, because that information is not published.

The criticism that I would level at the current reporting mechanisms is that the enterprise agencies have confused reporting on the success of an administration system with reporting on measures of success. As Matt Lancashire mentioned, it is about the viability and profitability of companies in the long term and how the workforce is treated—those are the things that should be measured. To come back to an earlier point, when the committee pressed Scottish Enterprise on Kaiam, the agency reported a fourfold return on investment and a 10:1 capital investment leverage. It did not mention the things that should be measured. That company died on the operating table, and that should be the sort of thing that is measured in the monitoring frameworks.

We have a few follow-up questions on that.

First, I must come back to Tony Mackay’s point about Prestwick airport. I hardly think that what happened with the airport is an example of political bias, given that it is such a strategic asset and given that the constituency is represented by a member who is not a member of the Government party. I do not think that it can be described as that, but thank you for the comment.

To follow up on Colin Beattie’s line of questioning, RSA has been with us for 47 years, since 1972. Why are we saying 47 years later that we have to measure what we are doing better? What on earth is going on? I am keen to get panel members’ views on whether the interventions through RSA over those years have led to sustainability in either the businesses or the communities involved. Do they no longer need to rely on further RSA investment to sustain them or is RSA the only mechanism that will sustain jobs and employment in our communities in Scotland?

I will make some quick points before everyone else jumps in. We are still measuring what we are doing nearly 50 years later because the things that we are trying to measure have changed. In 2015, we decided to put our shoulder to the wheel to ensure inclusive growth. However, over the past 50 years, different Governments of different stripes have changed what we are trying to get out of public interventions.

You can go back a little further and say that, at some point, we started to look at environmental sustainability as well. It is perfectly natural that how we measure these things changes and will need to change again in the future as we decide on different priorities.

I have discussed this next point with Tony Mackay. Having been involved in economic development not quite for 50 years but certainly for some time, I know that, back in 2010, Scottish Enterprise stated that every pound it was going to invest would return £8.80 to the Scottish economy by 2020. Last year, the committee heard a similar figure—it was up to about £9 for every pound invested. That is not true—it cannot possibly be true. Scottish Enterprise said that we would get that return by 2020. If that were true, we would be sitting on something the size of Norway’s oil wealth fund, but we are not.

Occasionally, we get things wrong—occasionally, there is a bit of optimism bias. You hope that these things work out. If they do not, it is important to understand why. Rather than placing the emphasis on saying, “This could have been brilliant,” or, “We hoped that it would work,” we should be like fiscal ferrets, asking, “Why did it go wrong? What could we have done differently? How can we shape interventions in the future?”. However, for 50-odd years, for a very understandable reason, we have not been terribly good at that.

Where are the success stories, then? Surely RSA has been a success in some areas—what communities or companies in Scotland are now successful as a result of the RSA intervention and do not need that intervention any longer? Are there any?

I think so. Over the past 10 years, we have had a big boom in the North Sea oil industry, not just in the Aberdeen area but elsewhere too, but that has been followed by a collapse in oil prices and a recession, which the enterprise agencies could not have predicted, and they have had to cope with that.

Over the past few years, Brexit has caused a lot of problems and uncertainties, with reduced investment. However, one beneficial effect is that, because of the collapse in the value of the pound, the tourism industry in Scotland has been booming. Two years ago, it would have been difficult for anybody in the agency to predict that tourism boom.

I can remember doing various studies for the Scotch whisky industry in the 1970s and 1980s. The industry was struggling then, but now it is booming. The digital companies in Dundee have done extremely well out of RSA. There are quite a few examples of industries that have done well in the long run. However, you have to counter those examples with the collapse in North Sea oil and the current problems with Brexit.

12:15  

Is RSA the only means of providing sustainable jobs?

The problem is that the system is often not well joined up. A business might receive RSA, but that does not mean that it is receiving all the assistance that it could receive from the Government or from other public agencies. We heard the example of the wind turbines, where it was clear that the UK Government could have put into its contracts a condition that a certain proportion of the work had to be done in Scotland. The Government chose not to do that and, because of that choice, that work is now going offshore and the trade union movement is having to run a strong campaign against EDF—which is using the clauses that it has in its contracts, which are absent from the UK Government contracts—to put work into the BiFab yards.

We have managed to leverage that, but we should not have to work so hard at it. We should be able to see those things coming through from the UK Government, the Scottish Government and all the systems that we have, to support the companies that ultimately receive public support in other ways. Why did we not close the system and finish the support in order to secure the work in the long term? It is a fundamental weakness in the system that it is divided up and there is a lack of strategy and a lack of priority given to supporting our strategic assets in the long term.

I agree in the main with what Tony Mackay has suggested. RSA has supported the digital industry in Dundee in recent times and it is now a world leader and is bringing world-leading jobs to Scotland as a result.

I want to focus on what is coming down the river with Brexit, how it will impact on RSA and how we may be required to consider the process of RSA to continue to support and sustain certain industries and communities at that point. It will have an impact.

I remind members that we are running out of time.

I will try to brief. I will continue with the question of economic impact. None of the Scottish Government’s eight performance targets on the economy is being met. Why might that be the case given the significant sums that have been invested by the agencies through RSA and otherwise? Is confusion over what inclusive growth means as the overall strategy a factor in that economic underperformance? Last week, we heard from the agencies that inclusive growth means different things to different people.

Richard Marsh is laughing.

I have got to stop doing that.

We do not have to critique the performance of Scotland’s economy. The point that I am trying to draw out is that, way back in 2015, we decided to have a strategy that focused on inclusive growth. At the committee last week, members asked the enterprise agencies what they mean by inclusive growth and how it shapes their policy decisions. The answers were along the lines of, “It’s a basket of things.” No one actually described what inclusive growth means, how it shapes their interventions and what they do as a result.

The agencies pointed the committee towards a diagnostic tool. The diagnostic tool has the five Ps—productivity, population, participation, people and place. The first line on productivity for inclusive growth says:

“growth is resilient, sustainable, and inclusive.”

It is four years since we decided the strategy, yet we have a statement at the top of the diagnostic tool that says that inclusive growth means inclusive growth. That approach has not worked too well in describing policy over the last few years. We do not have a firm handle on it.

The Highlands and Islands Enterprise representative who came to the committee last week did a pretty good job of saying that it meant taking place-based approaches, which sounds entirely reasonable.

We have heard today that there are things that we can measure—the living wage, how the workforce is treated and so on. That seems entirely reasonable. However, what we have in the diagnostic is something that, if it is really important, we should be able to describe succinctly. We should not need to take 15 or 20 pages to describe the broad vision and then have nothing to measure, because that would mean that the agency that is tasked with delivering this would not know what it is supposed to be doing.

I can give two brief answers. First, a lot of the targets have been far too ambitious. When you apply for a grant, you are likely to give the most optimistic answers. That means that, later, things will be less successful. It is a bit like listening to what Craig Levein and the manager of Hibernian are saying about this football season—do you really believe them?

The second point is that we need to take into account issues such as the recession in the North Sea oil industry and the problems that are being caused by Brexit. Over the past five years, those issues have had a negative impact on many businesses. Because of that, the targets are not being met.

There is a strategic understanding, at a ministerial level, of the relationship between inclusive growth and fair work. However, I do not think that, even by this point, that has filtered down to all agencies to the degree that it should have.

We are seeing signs that the situation is starting to improve, and we are having discussions with various agencies in different areas about fair work and what their contribution to fair work can be. However, we are still in the early stages of ensuring that that is built in across all the activities of Government in a systematic way.

In some ways, the situation is disappointing. Our target is for Scotland to be a fair work society by 2025. That seems a close date and a daunting task. Workers on the ground hear fair work being talked about but they do not see it in their workplace and work life—there has been a change in policy speak, but there has not been any visible change. At some point, if people are to have genuine faith in the agenda and the approach of Government, we are going to have to see some measurable movement. There is a lot of activity and emphasis, and there is strategic leadership, but we are still trying to embed the approach in the system. Confusion about what fair work really means is not helping that process.

As I said before, increasing Scotland’s productivity involves increasing living standards and wages for all and becoming more competitive in an international space in terms of driving foreign direct investment and inward investment into the country, which should translate into more fair work jobs with higher pay, with better industries and sectors coming to Scotland that already have fair work practices embedded in their psyche when they land here. If we add all that up, we get back to the question of how we can increase productivity. RSA is one tool in that regard.

As Tony Mackay said, over the past 10 years since the financial crash, it has been hard to increase productivity because the cost of North Sea oil is down and because issues around Brexit are reducing confidence in our economy. Another issue is the fact that we in Scotland have not grasped the AI and data challenge, which involves how we can best support our companies to use that technology to become more productive. I welcome the announcement in the programme for government about an AI and data strategy for Scotland. I think that that should support us to deliver more in those areas.

The issue comes back to increasing productivity. That is how you create an economy for all. How we do that is critically important to the success of RSA and its continuous improvement over the next few years.

I return to the question of value for money. The Scottish Enterprise RSA 2018/19 annual summary says that 86 per cent of the RSA offers that were accepted were from Scottish-owned companies but that only 61 per cent of the funding went to Scottish-owned companies. A 2008 evaluation report of RSA from 2000 to 2004 found that Scottish-owned businesses received substantially

“lower levels of financial assistance compared to ... foreign-owned businesses”

and UK-owned businesses.

Clearly, that has been a long-term trend. Even taking out the one-off, large payments of financial assistance, such as the £6.6 million that was paid to Barclays in 2018-19, Scottish-owned companies got, on average, a lower level of grant, and they have done over the past 20 years. Is there an underlying reason why that is the case?

A lot of the successful companies have been export companies, and many of the successful exporters in Scotland are now internationally owned. Again, let us take the whisky industry as an example. Twenty or 30 years ago, the sector was largely in Scottish hands; now it has been taken over by international companies such as Diageo. They have been successful because they can get into the export markets much more successfully. The same is true for the energy and oil sectors—the more successful companies have been the exporters, and they have tended to be taken over by foreign-owned companies.

Does anyone else have a view? I asked the question because of Helen Martin’s comment about the importance of investment staying in the community. Obviously, companies are coming to Scotland to invest because they want to improve their profitability. If we encourage more foreign investment, whether that is from the UK or overseas, the profits will effectively be flowing out of the country. In addition, many of the suppliers and services that they use will be outwith this country. We are not getting the multiplier effect that we should get. How do we address that?

It is important that we think about ownership models when considering whom we are investing in. It is also important that we consider supporting smaller companies that are rooted in the economy and those that are in the foundational economy. Those might be large multinational companies, but they are still rooted in the community. If we consider those place-based elements in the grant-making procedure, that will help the money to be retained in the community and have the multiplier effect that you mentioned. Ultimately, this is about getting the most community impact out of the grants.

We have to remember that companies—particularly large companies—will always seek assistance, but that does not mean that they need that assistance to come to Scotland. We are trying to focus on who needs the assistance, how that assistance will multiply and support the community and how it will support workers in that community to have a sustainable livelihood. If we could do those things just a little bit better, that could pay dividends in relation to how the economy functions, particularly for Scottish people.

I keep saying this, but I agree with everything that Helen Martin has said. The point was made that foreign-owned companies get more money. Such companies in Scotland tend to be bigger than Scottish-owned companies. We have been particularly poor at growing companies. We have not really produced significant companies of any scale for a long time, and we need to get better at doing that. That is not necessarily the fault of the RSA; it is a much wider system issue.

12:30  

I fully agree with the point about ownership. Gordon MacDonald is absolutely right about large companies that are owned overseas or elsewhere in the UK. In a company that has a public shareholding, the profits are distributed to shareholders. However, if a company is a co-operative, for example, the earnings are retained in the local community and can be distributed, so there is a multiplier effect, with more wealth retained and a more sustainable community in the long run.

I take the point. Do you know how many co-operatives have had RSA support?

Co-operative Development Scotland is probably the place to go to find that out.

I very much agree with what the panel has said.

In relation to indigenous Scottish businesses, there is an opportunity to do a bit more in the context of where the RSA grant’s focus might be, for all the reasons that Helen Martin set out, which I will not go into in detail. We also need to consider in a bit more detail how we de-risk—or use RSA as a de-risk for—indigenous Scottish businesses that want to grow. Some of that is about the company’s business model, who the directors on the board are and how the company is set up. Is the company a strategic asset, such as we talked about earlier? How do we start to look at these things differently, so that we de-risk companies’ opportunities to grow? Risk is part of why our indigenous Scottish businesses are not taking their companies to the next challenge, new market or opportunity.

On the point about de-risking, when we look at the level of grant in relation to the jobs that are planned—accepting all the caveats about there being no proper measure in place—we find that, in Scotland, average support per job is lower than it is in UK or foreign companies. Does that mean that we are getting better value for money because it takes less RSA money to support a job in Scotland?

I will not read as much into that as you are reading, for obvious reasons. I hear what you are saying and I understand where you are going on that. It is an argument that can be presented, yes.

I would be cautious about making that interpretation. It could be that more capital is involved elsewhere, or it could be about higher pay. There might be a smaller number of jobs among foreign companies but with higher wages, or vice versa. Members should not read too much into a fairly blunt statistic.

I will take your advice.

We are nearing the end of our discussion and we are running out of time, so I will curtail my questions. We are—or were—a country that developed many inventions over the years. Yes, Mr Mackay, I remember the 1960s and the 1970s, but in the 1960s we had the “I’m backing Britain” campaign, and in the 1970s we had the winter of discontent. Those decades were not as great as you think they were.

We talked about Prestwick, which put me in mind of a song. I will certainly not be singing, “Prestwick no more”. As far as I am concerned, we are going to safeguard Prestwick, as my colleague said.

Regional selective assistance was used to retain, improve, encourage and promote jobs. Have we lost all that?

To come back to a point that Helen Martin made: we are not buying locally; we are buying where we should not be buying, and our carbon footprint is increasing because we go so far away. That is the problem.

However, we have higher employment, as another committee member said. We are not doing as badly as some members make out.

Can the panel suggest changes to RSA or wider enterprise agency support for business? Should we change things? Should we invent more things? Should we get ourselves back to the powerhouse of the 1960s, which Tony Mackay talked about?

It is very positive that RSA will look more strongly at fair work outcomes and consider only jobs that are paid above the living wage. That is a good start, but it is not quite good enough. I would like it to look at fair work in a much broader sense.

I would also like to see much more of an industrial strategy from the Scottish Government, and the UK Government, too—those need to link together. Industries need to be supported through a range of procurement options. For example, we should have a procurement strategy for ferries and a strategic overview of how ports will be developed to support island communities to grow. We desperately need those things, and we are not really seeing as much of a drive for them as there could be. With the tools that are being put in place around inclusive growth and fair work, there is a lot of potential, but we need to maximise that as much as possible.

There are two clear opportunities for RSA, which relate to our focus on new, emerging sectors. Artificial intelligence and digital, which I discussed before, will impact every sector in Scotland over the next 10 to 20 years, and how RSA responds to that will be critical to the success of our industries. There is an opportunity for us to be world leading and to get back to those halcyon days of the 1960s that I can only watch on historical programmes on television—I do not know whether that is a good or a bad thing.

The other opportunity relates to the climate emergency that the First Minister announced a few months ago. Clean growth is a great sector to be in, and the expertise in Scotland, in the north-east and beyond is critical to how RSA will support industries in that sector in the future. There are great opportunities to be world leading in those two areas.

Tony, what is your view on where we are now?

We have been very innovative in some industries, of which one of my favourites is the alcohol industry. If you look at what is happening with whisky, gin and beer—

And India pale ales.

There has been a huge increase in that sector in Scotland—not just involving big firms, because there are a lot of small firms in Orkney and elsewhere.

We have talked before about the successful IT firms in Dundee.

Dundee is a world leader in games. There is also a world leader in games just across the road from here.

Yes. However, the big disappointment for me, which I mentioned before, is marine energy—wave and tidal energy. We have got the coastline and natural resources to do more in that area, but we are letting that opportunity disappear.

That concludes that agenda item. I thank the panel for their evidence. We will now move into private session.

12:38 Meeting continued in private until 13:07.