Introduction

1. This memorandum is the Scottish Executive's response to the recommendations contained in the Report by the Scottish Affairs Committee to the House of Commons. The Report was published on 30 June 1999, and its recommendations relate primarily to matters for which responsibility was devolved to the Scottish Executive on the following day.

2. The Committee noted that many of the concerns it expressed in its 1980 Report, and the recommendations made at that time, remain relevant in 1999. This is true. Many of the issues remain essentially the same, though in other respects the international environment has altered significantly, requiring changes in working practices by both Scottish and UK trade and inward investment agencies.

3. The Scottish Executive welcomes the Committee's continuing recognition of the importance of inward investment and of trade and exports to the Scottish economy, as well as its broad endorsement of the strategy adopted by its agencies. The Committee's detailed recommendations are dealt with in the following paragraphs, in the order in which they are addressed in the Report.

Transport Issues

All transport infrastructure is critical to the task of improving economic development and we therefore recommend that the relevant bodies both at the UK and Scottish level give these transport issues higher priority (paragraph 12).

4. The Scottish Executive fully acknowledges the importance of good transport infrastructure. Scotland's road, rail, air, sea and other strategic links, within Scotland and between Scotland, England, Continental Europe and the rest of the world, are vital to its economic performance.

5. Following the Strategic Roads Review, work will begin over the next 3 years on 5 new major motorway and trunk road schemes with a total capital cost of £140m, which will reduce journey times significantly and will be of major benefit to industry. Two further major motorway schemes, which are unaffordable in the short to medium-term (the A8 upgrading and the A80 upgrading), are being considered in wide-ranging studies which will identify the best package of transport solutions along these corridors. The appropriate local authorities will have responsibility for taking forward the M74 Northern Extension and the upgrading of the A8000.

6. The Executive wants to get more freight on to rail and off the roads. Over the next three years it will devote £18.3 million to rail freight grants to assist those businesses that want to make the change from road to rail for sound environmental and economic reasons. The Executive's Programme for Government document committed the Executive to taking 15 million lorry miles off the road and transferring them to rail by 2002. Since 1 July rail freight grants awarded will contribute over 2.5 million lorry miles to that target.

7. The regulation of aviation and air transport is of course a reserved matter. But good air links, both with the rest of the UK and abroad, are obviously important for business development. The availability or absence of good international air passenger links can be an important factor weighing with potential inward investors. Present linkages both to Europe and further afield, by direct flight from Edinburgh and Glasgow airports and by links through London and continental hubs, are reasonably good. But it is worth saying that if Scottish business wishes to retain these services, it needs to patronise them.

8. The Scottish Airports and Air Services Study, commissioned by the UK Government in conjunction with the Scottish Executive, is currently considering how best Scottish airports, both large and small, can develop to meet local demand and the economic contribution they can make without unacceptable environmental costs. The aim of the study is to maximise the contribution airports can make to local economies and the Scottish economy in general, and to relieve congested airports in the south east of England. The study report is expected to be presented to UK Government and Scottish Executive Ministers before the end of the year.

9. So far as freight transport is concerned, the Scottish Executive welcomes the recent extension of fifth freedom rights for Prestwick airport. The UK Government's decision recognises Prestwick's emerging role as an economically important air cargo hub. The Executive hopes that these fifth freedom rights will give some additional competitive advantage, particularly to the electronics industry in Central Scotland.

Development of Locate in Scotland's Strategic Knowledge and Partnerships

We believe that in future it will be necessary for Locate in Scotland, while retaining a small, highly-focused core team to develop long-term relationships with potential inward investors and to compete successfully for new greenfield projects, to acquire greater business knowledge and acumen to understand multi-national networks and build projects and alliances, and that it will need to work more closely with private sector teams and consultancies. We recommend that Locate in Scotland concentrate on these aspects of its approach (paragraph 41).

10. We agree. A new organisational structure implemented recently by Locate in Scotland emphasises the importance of sector knowledge and expertise, engagement with the business community, and greater closeness to the corporate strategic thinking of key global clients. A new Strategy and Knowledge Management team supports the acquisition and application of information about key sectors and markets, gathered both through research and by direct contact in the field, where recently increased representation has enabled stronger relationships to be developed with key companies. The new Case Management team uses a sectoral focus to match Scotland's locational strengths to the specific needs of business. This will require continued close links with inter alia the Scottish Enterprise Network, Scottish Trade International, Scottish Universities, and existing investors.

11. LIS is working also with the Scottish Enterprise Network and individual LECs to strengthen and develop support for existing investors. By providing information and contacts, developing leadership skills among managers, encouraging innovations, and bringing organisations together, they aim to make sure the right skills and infrastructure are available for economic growth.

Merger of Locate in Scotland and Scottish Trade International

We recommend that the Scottish Parliament gives serious consideration to merging Locate in Scotland and STI (paragraph 43).

12. We do not agree, though there is certainly room for greater co-operation and synergy between the two organisations. LIS and STI have very different missions, and this calls for different kinds of professional expertise. LIS clients are based outside Scotland and tend to be large; STI clients are based in Scotland and tend to be small and medium sized enterprises (SMEs). LIS is primarily interested in major companies domiciled overseas and targeting the European market through foreign direct investment; STI is interested in the potential in overseas markets for selling Scottish goods and services. Arising from this, the two organisations' main geographical areas of interest abroad are generally different. On the other hand the organisations should collaborate where possible, and in effect they do, exploiting "cross-selling" opportunities, referring opportunities to each other, and sharing information. There is certainly scope for developing a yet more cohesive image of Scotland to potential clients and customers who expect a one-door approach to Scotland. There is also scope for sharing overhead costs, and both of these areas are under review. In a pilot exercise in the United States, the operations of LIS, STI and other parts of Scottish Enterprise are being more closely integrated to pursue more effectively the full range of relevant economic development opportunities available.

Additional Resources for LIS and STI

We received the strong impression from talking to Locate in Scotland and STI staff in post in the USA that additional resources would pay dividends in terms of additional investment into Scotland and more trading opportunities for Scottish firms and we therefore recommend that more funds should be made available to support these bodies, whether or not they are merged (paragraph 44).

13. While the Scottish Executive is pleased to note the Committee's support for LIS and STI, we believe that both organisations are adequately funded for the work they do and plan to do. Both have identified scope for greater efficiency and effectiveness arising from internal reorganisation and a refocusing of existing resources. Proposals for further funding would have to be judged against competing priorities.

Financial Assistance for Projects of High Value

It is clear that the system of financial assistance to industry should be reorganised to put more emphasis on attracting projects of high value and we recommend accordingly (paragraph 57).

14. We agree that some change may be appropriate. An important component of the successful economy of the future will be the production, distribution, and use of knowledge and information. Output and employment are expanding fast in high-technology industries, with knowledge-intensive service sector activities growing even faster. The attraction of knowledge-intensive inward investment remains a key priority for LIS. Inward investment projects involving stand-alone research, design, and development (RD&D) facilities have, however, proved very elusive—and this is an experience which LIS shares with most of its competitors, regardless of financial inducements. All the evidence suggests that there are very few internationally mobile stand-alone RD&D projects and those which do come to Europe come mainly to access particular academic relationships. LIS is therefore working closely with other parts of the SE network and with the Higher Education sector to identify key existing research clusters in Scotland which might attract inward investors.

15. The Competitiveness White Paper, published in December 1998, committed the Government to reviewing the regional selective assistance scheme with a view to refocusing RSA where needed to ensure that it plays an effective role in encouraging sustainable economic growth and in reducing regional disparity in employment opportunities. We hope to make a further announcement in the New Year, setting out the action proposed by the Scottish Executive arising from the review.

Improving the Competitiveness of the Scottish Supply Base

There is great scope for improving the competitiveness of Scottish companies as suppliers to inward investors (paragraph 65).

16. The major supplier companies in Scotland are arguably today as efficient in their manufacturing methods, production processes, and management controls as similar supply companies anywhere else, including the Far East. Scottish Enterprise's Supplier Development Programme contributed to this, and a number of successful Scottish supplier companies have extended their business internationally. It has to be recognised, however, that where labour costs are a significant factor, it is difficult for Scottish and other UK-based suppliers to compete with the Far East and Eastern Europe.

17. We recognise that Scottish companies generally must become more entrepreneurial to be able to tap into the latest ideas and markets and produce innovative products for them. Among the modernising measures through which the Executive will assist Scottish companies to increase their competitiveness are initiatives on entrepreneurship, incentives for research, the setting up of centres of excellence for growth industries and the encouragement of e-commerce. A Knowledge Economy Task Force will produce in 2000 plans which focus on business innovation and skills, while the Making it Work Together document has already set targets for the establishment of a new business mentoring scheme by April 2000 and a Scottish institute of enterprise by 2001.

Greater Transparency in Publishing Financial Assistance

We believe that transparency informs public policy making and recommend that the concordats should ensure that the figures for the total assistance used to attract each project are subsequently published (paragraph 78).

18. We need to strike the right balance. In the case of regional selective assistance, details of the grant offered to individual companies are regarded as commercially confidential at the time of announcement of a project. However brief details of all offers of £75,000 or over are published in Labour Market Trends in the quarter after the first instalment of grant is paid. In the case of Scottish Enterprise and LEC grants, each agency separately publishes a six-monthly report on financial assistance provided in the form of grants, loans, and equity investment. The report is issued six months after the end of the half-year period to which it relates. Many businesses would for sound commercial reasons be reluctant to have financial details revealed during the early stages of development of a project. Linking publication to payment of the grant, when the project will have started, meets this point. It also helps avoid the risk that by publishing details of offers as they are made, a lower limit is effectively set for negotiation with the next firm with a similar project.

19. We believe that current arrangements strike the right balance between right to know and commercial confidentiality coupled with protecting the public purse. No change is currently envisaged as a result of the recent publication of Concordats, although the detail of the implementation of the concordats is still under discussion. The question of openness and accountability will be kept under review.

Measurement of Success of Assisted Projects

We were glad to learn that Scottish Enterprise are already working on more helpful ways of measuring the success of assisted projects and we recommend that this continue (paragraph 81).

20. In his evidence to the Committee, Lord Macdonald endorsed members' view that stronger statistical evidence was required to demonstrate the success of projects. At his request, Locate in Scotland produced a supplementary memorandum which demonstrated that over a 7-year period, and at a conservative estimate, some 73% of forecast jobs had been created, rather than the two-thirds figure usually claimed. A number of other output measures were discussed by the Committee on the basis of submissions by witnesses who considered that more weight should be given to the value of jobs created and their contribution towards moving Scotland "up the value chain". Locate in Scotland now collects data on average salary of jobs in new projects and also on jobs with a research, design, and development component.

Central Service to Indigenous Firms

We recommend that Scottish Enterprise provide a central service to advise indigenous firms seeking advice or assistance (paragraph 92).

21. The Scottish Executive's Programme for Government includes a commitment to take steps to facilitate easy access for businesses to all forms of local advice and funding, and the Executive has been working with Scottish Enterprise on a wide range of measures to improve the quality and consistency of advice across the SE network. This work is predicated upon achieving a proper balance between the need for consistency in the availability and delivery of particular types of support across the country and the importance of providing business support specifically targeted to meet the needs and circumstances of particular LEC areas.

22. As part of this work SE has undertaken an evaluation review of the Business Shop network and is considering how the current role as a 'first stop shop' to the wider enterprise network can be properly enhanced. This will include an assessment of how best to establish a single gateway through which businesses can access directly, or via appropriate signposting, the form of information or advice required—whether available from national or local services. The Programme for Government also includes a commitment to develop a website to provide easier access for business on local and national advice and funding. In this way the potential of IT in offering access to support in a format helpful to the business community can be fully realised. This will help to improve the reach of the network and enable support and assistance to be provided to more firms. It will build on the work recently undertaken in launching the new Business Shop website which encompasses a pilot project to test remote access terminals to enable wider access to SE and other related services.

23. It is hoped to introduce a number of changes and improvements to the existing business support arrangements for the next financial year.

Aftercare

We recommend that the agencies involved will continue to attach the highest importance to Aftercare (paragraph 109).

24. The Committee recognised that Scottish Enterprise, Locate in Scotland, and LECs are already well aware of the need to embed inward investors in the local economy. The Committee endorsed the existing commitment to Aftercare as "increasingly urgent in a world economic climate which encourages mobility".

25. LIS recognises that it is not now helpful to define Aftercare simply as a discrete function delegated to a specific unit in the organisation; it is, instead, an important responsibility of all staff, including in the local enterprise network, who have dealings with existing or potential inward investors. It has therefore developed a network approach, sharing information, services and feedback between LIS and the LEC network, and concentrating on which agency is best placed to add value in particular circumstances. The proposed approach is consistent with the earlier recommendation of the Committee, that Locate in Scotland and its partners acquire greater business and acumen to understand networks and build projects and alliances.

Conclusion

26. We welcome the support given to LIS and STI by the Committee, and by many of those who gave evidence. The qualitative view taken of LIS and STI by other agencies in the UK and overseas is encouraging. But neither organisation is complacent, and each recognises that if Scotland is to retain a competitive edge in a changing world economy, it needs to keep its ways of working under constant review.

December 1999