 Welcome to the second meeting of the Economy, Energy and Fair Work Committee for 2019. I remind everyone to turn their electrical devices to silent. Item 1 is a decision by the committee to take items 4, 5 and 6 in private. Are we agreed? Yes. Thank you. Now this morning we turned to budget scrutiny with the Minister for Energy, Connectivity and the Islands, Paul Wheelhouse, who is here this morning together with Sukarn's Deputy Director for the Consumer and Low-Carbon Division and Neil Ritchie, Head of Energy Company Services, the Low-Carbon Division and the Scottish Government. Welcome to the three of you. I will invite the minister to make a brief opening statement. Thank you very much, convener, because it is my first appearance in the new year. I wish all committee members a happy new year, if it is not too late to do that. I am pleased to be here today to support the committee's draft budget scrutiny. Clearly, convener, Scotland is an energy rich nation and that wealth of energy resources provides significant opportunities for supporting sustainable economic growth and our national wellbeing. A successful energy system not only provides the means to deliver against the energy trilemma to have secure, reliable and affordable energy, low-carbon energy sources, but it provides important contributions to the Scottish Government's priorities such as economic development, tackling fuel poverty and responding to climate change. We have just passed the first anniversary since we have published the first energy strategy for Scotland. In the spring, we will publish the first annual energy statement showing the progress to date. We intend to publish our electricity and gas networks vision statement later this month, which we will take into account the latest data. The energy strategy sets out our ambitions with regard to both energy generation and use. Not all of the powers are currently devolved to Scottish Parliament, of course, but through financial support, planning policy, our wider influence and a range of devolved policy responsibilities, we have significant scope to champion the energy agenda. I look forward to updating the committee on the delivery of Scotland's energy strategy. One strand of that is the ambition for the establishment of a public energy company. I very much welcome the committee's recent constructive report and can ensure the committee that we will take the committee's views into our thinking as we go forward. The public energy company will be at the centre of the energy strategies delivery. It can be a vehicle for delivering and supporting many of the strategies outcomes such as tackling fuel poverty, supporting economic development and contributing to mitigating the risk of damaging climate change. Through its public sector ethos, it can be a way of positioning the consumer and communities rather than profit maximisation at the centre of our energy transition. We have engaged with local authorities to develop this approach, and I am keen that we develop the concept jointly through partnership and co-design with our local government partners. We intend that the completed outline business case will add substance to our development of next steps and a substantive proposal for consultation. It allows us to assess the commercial financial and economic case and, given the current recent dynamics of the energy supply market, we believe that this is essential. However, I am clear that, given the potential outcomes, we cannot wait until 2021 to see if the current price cap is able to deliver fuel poverty improvements and I have some concerns that it has led to unintended consequences. I am grateful for your positive constructive report. I look forward to working with the committee to deliver the potential from Scotland's considerable energy opportunities. I am aware that there is a range of interest today in the budget, and I am glad to answer questions as best I can. Just a question for me to start off. If members of the public view this or have the impression that this is just going to be another quango that costs taxpayers money, what is your response to that? I am certainly always mindful of those concerns. I know from previous work that the former finance secretary, John Swinney, did to try and rationalise the number of quangos and non-government organisations that we take those steps for to create new bodies. We have great care so that we do not create unnecessarily new bureaucracy. The intention here is to try and deliver on the twin aims that the First Minister set out in October of 2017 around delivering against fuel poverty and delivering something that will add value in that context to how we can deliver on the fuel poverty agenda but also contribute to economic development. I believe that the outline business case will be critical in establishing the role that a public energy company can provide and what is quite a busy landscape in terms of the number of energy providers that we have already available for customers. What different role would that provide? Obviously, being able to take forward our approach, which is not about profit maximisation but is about delivering the best result for those customers as we can and doing the best we can to integrate efforts around energy efficiency and deliver a good service for customers. We, hopefully, could carve out anish, which would be an important one in the market, and could deliver improved services but also internalise any profit margins to deliver lower prices for consumers. Gordon MacDonald I want to ask you about community and locally owned energy targets. The Government had a target of 1 gigawatt by 2020 and 2 gigawatt by 2030. I understand that the next annual report of the energy saving trust is supposed to say that we have hit 706 megawatts at June 2018. Can you tell us if the Government is still on track to hit its targets? The initial point that we would make is that we have already increased the ambition of targets for 2020 and 2030. Originally, we had a target for half a gigawatt and exceeded that, so we actually up the target. At present, Mr MacDonald is absolutely right that we are expecting that we are about 70 per cent of that 2020 target at the moment. I appreciate the point that we have had a 6 per cent increase in last year, which is always welcome, but clearly we need to increase the rate of growth of community renewables against a backdrop where there is a change in the UK-wide regime around feeding tariffs. I am keen to feed into the UK Government's consultation on looking at support for exporting energy from small community generators to the grid to try to ensure that there are adequate support mechanisms in there to stimulate that activity. It is very important to us, it is very important to those communities who have developed it. There are some headwinds that we are operating in at the moment, but we are still optimistic that we are on track to deliver significant growth. We are aware that there are about 882 megawatts of community and locally owned projects in the system. Not all of them will be community projects under the definition, but if we take them together with the 697 megawatts that we know of and hopefully we will exceed 700 megawatts soon, then that takes us up to almost 1.6 gigawatts. We still have work to do to get to the 2 gigawatt target by 2030, and clearly we are up against pressure with the headwinds that are described in reaching the revised 2020 target. Nonetheless, we are pressing on with that and doing the best we can through carers to try to stimulate that because it is very important to us. In terms of the feed-in tariffs that you mentioned, the UK Government announced in 2015 that it was going to end by April 2019. Aberdeenshire Council has certainly said that reductions in feed-in tariffs have meant that it is very difficult to make wind and hydro projects financially viable. What impact has that announcement had on the pipeline of projects? As all such changes in policy, it creates a little bit of uncertainty for those who are pro-planning projects. I know that there was great concern about it. We have fed in on behalf of the smaller and community sector to the UK Government's work around feed-in tariff that we thought would be a mistake to lose feed-in tariffs. We have inquiries about whether there is any scope for a Scottish Parliament or Scottish Government to do something of our own. We will try to discuss that with UK ministers. We have announced plans for a guarantee scheme for revenues for local and community projects to export to the grid. We will feed into that and try to influence it in as positive a way as we can for Scotland. However, there is no doubt that the loss of feed-in tariff, which is a very popular mechanism and is one that is still similar to schemes that are used around Europe, is potentially damaging to the interests of the community sector. We will present a headwind for us. We do not have direct control over that intervention clearly because that is a reserved power. However, we are trying to influence that as best we can and make sure that Scotland's needs are represented in the discussions that the UK Government takes forward with the industry. Given that the feed-in tariffs end in April 2019, has there been any indication of when any new scheme will come in? The trade press on renewable energy has suggested that it might not come in until 2025. It is certainly a concern about any delay for a successor scheme, but if I may, convener, with your indulgence to bring in Sue Currence, who is close to this, to have some negotiation with the Bayes officials and maybe ask Sue just to comment on the detail of the consultation. The consultation is just live now, so it is very young. We will have to take some time to look at that. One thing that you have not spoken about here and is quite important is the opportunity for shared ownership. That is certainly one of the focuses that we have put into the care scheme. That is where we think that there is a huge prize for community ownership in the future, and we are working very hard to encourage developers to allow communities those opportunities. If I may add something briefly to what Sue has said, we certainly have expectations that, by 2020-21, we would be seeing half of all planning applications involved in shared revenue elements. In my discussions with developers, most are looking at shared revenue options for communities at local levels. That may, for example, mean 10 per cent or more of a project being owned by the community. That is something that we would be keen to support through CARES, a community renewable energy scheme, which we fund communities with feasibility work and pre-investment advice. We can access funds through the EIF, potentially to support communities with the capital funding that they need to invest in projects. There is an ability to take a shared revenue element out of a project that increases the sense of ownership literally and in terms of the effect on the community over a project and feels more satisfying from their point of view, but certainly from a policy point of view, be more satisfying for us to see projects where there is a significant community investment and therefore benefit from the revenues from those projects. Discussion with developers is encouraging. It is not always possible to find a local community group who will be willing to take on that role of taking a share in a renewable project, and we can help through CARES and local energy Scotland to try to build up local capacity to take on that role. You can appreciate whether sparse populations or communities already feel overstretched with different groups that they are involved with. Sometimes there could be a reluctance to take on a major capital project of this kind, but we will do everything that we can to support those communities to give them the option. Minister, from figures that we have seen, it shows that community energy at 11 per cent represents a fairly small proportion of the total. What steps are you taking to address that? It is a very important fact, and we need to be open and honest about the figures. I hope that, if the committee has not already got them, we can give a breakdown of the total figure of the 697 that I referred to. Mr Beattie is absolutely right that about 11 per cent of the total is community energy, so it is a relatively small proportion. There are some significant projects in the pipeline, such as Viking in Shetland, which I know is not universally popular, not pretending it is, but it is half-owned by the community. In excess of 300 megawatts of community ownership in that one project alone would be a significant benefit, but we will continue to support communities through CARES to develop their renewable energy projects and to take a stake in commercial projects, whether through shared ownership or overall ownership of the project, where it is economically viable for them to do so. We are mindful of the transitional phase. We are currently experiencing, following the removal of the UK Government subsidies through the feed-in tariff and the likely complexity of projects coming forward. Through CARES and Local Energy Scotland, we will continue to work as closely as we can with the communities involved, tailoring the advice and support accordingly with a view to ensuring that communities remain engaged in our low-carbon transition and meet their long-term needs and aspirations. We very much recognise that. I think that this is beginning to land with UK ministers too, that there is a significant regeneration impact that these projects can have at local level. I am sure that we have all seen good examples of projects where communities are seeing investment in physical infrastructure and in terms of the skills of local young people, for example, who have been supported in some cases. In Tolstown and Western Isles, for example, with additional support of students to go off island to study in the mainland to make that easier for them to do that. There are very practical ways in which those projects help regeneration, social and physical in local communities. Which technologies in particular have the most potential to transform community energy? At this moment in time, it is a combination of the fact that energy sources such as wind are extremely cheap by comparison with other generation sources. Therefore, that is good for the consumer in terms of the buyer of electricity that is getting relatively cheap electricity being generated. It is also a stable known technology that is relatively low risk or regarded as low risk from a finance point of view. Therefore, it is easier to attract finance to community projects where there are onshore wind projects, for example. Solo is also a good technology for communities with relatively good returns on investment on low cost of energy. Therefore, you have a ready market for that energy. It is keeping the overall price down for consumers where you get more expensive technologies, whether they are in some cases new renewable technologies or in case of technologies such as nuclear that are relatively expensive per megawatt hour. We do not expect communities to have a nuclear power station, but onshore wind is a good technology for many projects across the country. We have small hydro projects, where Scotland has almost 80 per cent of the UK total of small-scale hydro projects. In main, because of our topography and our terrain, we are lending ourselves to that, but we also have a strong culture of communities pursuing projects in that sector. That has been a good earner for local communities across the country, particularly in the west and north of Scotland. We are keen to see the UK policy change as not dent that very strong profile that we have in community onshore wind and hydro projects. Do you consider that the resources that are available are being appropriately targeted to ensure the maximum development of those technologies? We are doing our best to ensure that, from our point of view, we target resources to areas where they can have the biggest impact. We are trying to support new and emerging technologies such as Wave and Tidal, because we believe that in the longer term we will have particular resonance for communities in our coastal and island areas. The combination of things such as battery storage could be really transformational, making some of the projects viable through concept of arbitrage. There are projects being taken forward, for example by Nova Innovation, which is a Scottish-based company based in Leith in the Shetland Islands, where they are combining Tesla battery. It is the first one to be installed, I believe, in the UK with a tidal project. That could be demonstrating the concept of a technology like tidal that could make a significant breakthrough in its economics as we get production volumes up that improved Henry Ford's style, improved the economies of scale in the manufacturing process. It will start to see the levelised cost of energy, the cost per megawatt hour, tumble as the capital cost of the equipment drops as more of these machines are made. Where we are at the moment in time, technologies such as wind and solar and hydro are the mainstay of community projects, but in the future I would hope that newer technologies such as tidal in the early stages, Wave and the longer term, may prove to be attractive to communities. We have, with more island wind, significant community interests in the project in Viking, and potential projects in Orkney and the Western Isles as well. It is across a range of technologies, but I am conscious that my colleague Sue Cairns wants to come in that point if I may bring that up. In terms of projects in the future, we should also think about some of the innovation schemes that we are funding, looking at local energy systems, because a lot of community groups are involved in those projects. These can be quite complex, and I will say quite honestly that we have to look for commerciality in these different forms of systems, and we are not fully there yet. However, I think that they hold potential for the future, where communities are looking like ministers mentioned the storage scheme with marine energy. We are looking about combinations of technologies rather than just one single technology, and I think that they are the answer to the future, bringing in local revenue. The other side is about heat and energy efficiency, and we are already seeing quite a lot of appetite from community groups in some cases where they have already got electricity, renewable electricity schemes, but they are looking in the future to get involved in Scotland's energy efficiency programme. They are trying to get involved in heat and energy efficiency, and they want to see what that can bring to their community. I think that that is really important to encourage that interest. I think that that is very helpful. If I may just add one point, which partly answers your first question in this session as well, what could a public energy company do that is different? While we do not have firm plans on that, I would like to think that in the longer term, through the progression of our project jointly with local government, there could be scope for involving local energy generation in selling the electricity through the white label process to our customers if we develop a public energy company. It could be a way in which we can either supplement or substitute for the lack of a feed-in tariff regime to be able to provide a market for that community-owned and local energy provision across Scotland. Let us have a look if there is a possibility that we have not yet got a firm answer on that question as we are early in the process, but it is something that I would like to get answers for as to what a public energy company could add in terms of supporting that. I will come to John Mason now. Thanks, convener. You mentioned the publicly owned energy company, and that is what we wanted to ask you about. Is there anything in the budget for 1920? I realise that we are quite an early process, but is there anything in the budget for next year? At this stage, we are certainly providing support for the development of the business case at this moment in time, but in terms of specifics, it would be wrong to suggest that we have a significant funding stream identified in the budget for that. The information that we present in the budget would suggest that, as we take forward the answers that are developed by the consultants in the business case, we would have to respond to that in terms of providing identified funding streams to implement the outcomes of the study. For 1920, it would be covered by normal administration. We are dealing with the cost of developing the business case, but in terms of investment in a public energy company, that, until we have an answer as to whether it is a viable project for the Government to proceed with on behalf of people of Scotland, we have not identified a specific funding stream and that would probably be in the next year's budget. Probably 2021 and then maybe increasing after that. Is it something that you think there will always be a budgetary input into, or would it be something that is revenue neutral in the longer term? I am very aware that, in my own discussions with other established energy providers, margins are pretty tight, but what we would be seeking to operate is a model that was not an albatross around the neck for the taxpayer, but could cover its costs. By operating differently on a kind of not-for-profit basis, as the First Minister has set out, there are opportunities to, rather than having to see funds leave the business and return to shareholders, we would also be able to retain that resource and channel that back into the company. Through the business cases, first of all, we are looking at a viable proposition. We would not want to land the people of Scotland with something that was a significant drain on public resources. I would hope that it can wash its face, but we can do so in a way that provides additional value for consumers in tackling fuel poverty. It is the point about whether it would impact the budget, so you have answered that. You mentioned that the viability of the energy company is still being reviewed. What timeline are you working towards to establish whether it will be viable or not? In terms of the funding and the timings of that, we are developing the outland business case. I will ask my colleague Neil Ritchie, if I can, who is in charge of that, to give details about the timing when the consultants will come back to the Scottish Government with their initial report and will be our intention to share the findings of that with the chamber. For me, Neil, I will bring Mr Ritchie in. Just to add to what the minister said, the timeline that we are working towards is to receive the consultants' outland business case towards the end of March. In which case, we are publishing that in line with a consultation to seek wider views as to the conclusions of that report and our assessment with local authorities as to questions such as what should the energy company do, what should it not do and clarity on the vision. That is a point that comes back to the committee's report and we need to have a very clear objective for what we are trying to do. I am emphasizing the point that I made to Mr Lockhart and other colleagues that it is not just words, but warm words. We are really keen to work with local government on that, so their view on the attractiveness to local government partners will be critical in our decision on how we progress. Based on the analysis that you have done so far, how comfortable are you that that will be a viable proposition? We will not know that in hard terms until we have the report from the consultants and even then we will need to seek feedback on it, but we do believe that there is an opportunity here to work with local government. Clearly, we have a number of local authorities either in the process of doing so or have voiced an interest in creating their own local energy supply companies, areas like Highland for example, that are now progressing plans. Aberdeen heat and power obviously is something that is already well established. We are aware of other local authorities that have an interest in that. What we are trying to do is to take advantage of the interests that there are around local government to work with local government partners to hopefully have an overarching brand that is bigger than some of its parts. We can use the marketing power of a national brand to help to drive activity at a local level to local energy supply companies and work in partnership with local government to do that. The concept is sound. It seems to be independently determined to your own report that there is potentially an attractive model there to take forward. We will not yet know until the consultants come back to the report. We will have to trust their professional judgment as to the commercial viability of it. It is a very challenging environment at the moment for local energy supply companies. We would have to acknowledge that. We have seen a number of younger companies going to the wall in recent months, as I am sure you are aware. We are concerned with us. We sympathise with why the price cap has been brought in the market and we understand why the UK Government has done that. We are concerned that there may be unintended consequences, although we have raised those issues with Ms Perry and her colleagues, just to be mindful of the impacts of having the market. We will have to take into account the impact of the price cap and other market facts at the time that we make a decision whenever that is what the environment is at that time. As you mentioned, public energy companies elsewhere in the UK have struggled. A Portsmouth local authority recently decided to abandon their plans. I believe that Bristol Energy posted a loss of £8.4 million last year, clearly showing that these companies do come at a cost. What lessons will the Scottish Government take from the challenges faced elsewhere by public energy companies? The first thing to say is that we are certainly trying to learn from that. I know that Neil and other colleagues in the team have been engaging with Robinhood Energy and other companies that are up and running in the UK to try and understand the challenges that we face. We are learning a lot from the interaction with those companies that have entered difficulties that are in Scotland and that we are trying to support. We have recent issues with spark energy and other providers that are finding life pretty tough. It is fair to say that even the big six are finding some of the market conditions tougher than perhaps they have been in recent years because margins are being squeezed. We are very much alive to that. We need to understand, to dress both your point and Mr Mason's point, if we do proceed with the public energy. We will be on the basis that it is not to the detriment of wider public funding commitments. That is a calculated decision that we will have to make once we have the full information before us. I want to reassure Mr Locker and the committee that we are very much mindful of the need to act responsibly here and to make sure that we take sound decisions. We will do all the due diligence that you would expect of us before we take any decision. Andy Wightman Thank you very much, convener. Just a brief question, picking up on what you talked about earlier, about community shares and commercial schemes. Is that to be clear? Is that a new element that you are proposing for CARES or is that an element that already can be supported? It is already active in that space in advising communities, but what we want to see is to see Mr Wightman's right to raise it. We want to see that grow. It would be fair to reflect on the fact that in the current environment where there is no proposed new POT1 auction for onshore wind projects, for example established technologies, including onshore wind from the UK Government, it does mean that we have to be mindful of the fact that the financial environment has changed significantly for onshore wind developers. While there are a number of means by which they can address that in terms of larger wind turbines extending the length of planning consents, we want to give more investor certainty and other measures that that can be taken for. We believe that one area whereby we can continue to see significant community benefit in a broader sense from onshore wind projects would be for the community to take on a shared revenue model as perhaps a more attractive alternative for the developer. There is a sharing of risk, if you like, for the community involved. We have to be careful to give the community the best advice possible so that they do not take on risks unnecessarily that may damage their interests. Assuming that that is a positive position for the community to support them going forward with projects that allow them to co-invest with a developer, hopefully in many cases that will be the community itself doing the entire project. As we have seen some great examples across the country, there will be circumstances where they will be co-investing with a larger developer or landowner in the local area, so we are keen to do that. We should be saying that we are currently consulting on revisions to good practice principles that we have established, which is largely associated with the £5,000 per megawatt figure that you may be familiar with. We have a community register as well so that developers can post what community benefit they are providing to communities. We believe that shared revenue may be an attractive model for developers going forward rather than the traditional means of supporting communities through community benefit payments. I want to ask a question about fuel poverty and energy efficiency in Warmerhorm Scotland, but I am aware that that is not in your portfolio. I get frustrated that energy is split across portfolios, but Warmerhorm Scotland has got a £3 million budget cut from 2017 to 2024. I am just wondering in the context of a broader budget that is increasing why that was. The detail of that would be from Mr Stewart, but we regard energy efficiency as a very high priority. Across the piece, in total, we are spending £0.5 billion on energy efficiency measures. I appreciate that that is not dealing with the specific issue that Mr Wightman raises, but that would be more appropriate as Mr Stewart responds to that. I think that you indicated earlier that the next annual report on carers is due to be published imminently. Is that next month or two months now? Can we ask Sue about the publication date, I believe? I am not sure about that, to be honest. If you are saying that it is imminent, you are probably right that it is imminent. We have certainly got the figures. I want to move on, because I had some difficulty in getting hold of the data from the energy savings trust, but I did get a table of all the recipients of schemes. Will that be routinely published? You probably had difficulty because of data protection, so it is a matter of what has to be redacted in the information that they give you, because some of those schemes are individuals owning them. That would probably be the issue there, but I will look into that before you can be published. In the 2017 report on energy savings trust on the community of local and owned renewable energy, there is a definition of the locally owned under farms and estates. It says that where the personal organisation listed as the applicant in the planning application gives their addresses being in Scotland, it goes on to say that estate ownership is often difficult to establish, but where possible publicly available information has been used to establish whether estate owners are normally resident on the estate where the installation is to be built. Looking at the data, I found a company that is owned by an offshore company, an estate that is owned by a family in the Netherlands, quite a large farm that is owned in Lincolnshire, another estate that is owned by someone who lives in Lancashire, Leicester. How rigorously do you explore whether, in fact, those are locally owned? I do not know the answer to Mr White's question in terms of the definition. I take the point entirely. I know that he has a long track record of being very good at digging into these data, so I trust what he is saying entirely has been accurate. In terms of the farms and estates, there are 288 megawatts in total that is assumed within the 697 megawatts that I quoted. That is as at December of last year on energy saving trust figures, so I am not sure whether that is going to be updated to the 706 megawatts that was referred to earlier. I take the point entirely. The community and locally owned definition is quite broad in the sense that it is not focusing down purely on those who live locally and are in the community on a day-to-day basis. I take the point that Mr Whiteman is raising and, clearly, we need to have a look at breaking that down further if we can to show the extent to which there is maybe a loss of revenues out of the country if that is the point that Mr Whiteman is pointing to. I am just wondering that there is a definition about eligibility, which talks about normally it is the personal organisation listed as the applicant and the planning application, given their addresses being in Scotland. The other thing is that it implies that information is used to establish whether owners are normally resident. I am sure that there is a discrepancy between an apparent definition and some of the recipients, so whether either you will tighten up the process of assessing eligibility or if you will tighten up the definition or both. I am happy to come back on that point to Mr Whiteman. I think that it is important when you raise. We do not want to stay in any way the policy intention being undermined by a poor policing of that point. I am not saying that there is poor policing of it, but we will look into it and see if we can come back to the committee if that is something that is of interest to the committee, as it seems to be. The intent is, obviously, that we are trying to generate projects that benefit the local community and that we see the returns from the investment going into the local community to have the desired impact on economic development in the local community. If that is not happening and if that is being in any way undermined by the point that Mr Whiteman raises, I would certainly be keen to look into any of the points that he raises today and be happy to discuss the detail with him so that we can dig into that. We can raise with energy saving trust about how we record that and how we make sure that we get accurate information. It is not to criticise those who are involved in those projects in any way, shape or form, but we want to ensure that the policy intent is being delivered. To some extent, if the benefits are coming to the community and it happens to be an overseas landowner who has a local agent or whatever, and the local agent is what is appearing to be the local person in this process, as long as the benefits then come back to the community, then obviously that would deliver the policy intent. I am happy to, rather than to come up with an accurate point that we are relying on the high-level statistics that we are using here, but we can drill down into it and try to identify if there is a problem to solve there. On the ones that you have identified, are those care applicants on the EST list as having developed schemes as a farmer or an estate? If they are just on the list as being on the overall register within the 700 megawatts, of course they may not be care recipients of care support. Under cares, that is where they have to show that they are resident in Scotland and farms and estates have to provide a very high level of community benefit in order to qualify for that support under cares. If they are not getting any support under cares and they are just developing their own scheme, then obviously that is up to them where they live in terms that I am not sure that I am just asking for the clarification there, whether that is an issue under cares or not. It is not clear whether they all are at that point. This is our database called Colomap extract, so those would be things that the Energy Saving Trust are collecting. That is the full data. We would have to double check whether those particular schemes also got support under cares because if they did not, then obviously we have no control over whether they are developing schemes and where they live. That is a planning matter, but if they are applying for care support then that is when that will come into effect. I take that point and that is a useful clarification. Nevertheless, the definition of those bodies that the categorisation of each installation, regardless of whether they get care support, that definition seems to be at odds in a few cases with some of the bodies that are on that list. Just as a data capture, they never mind the cares one, but that is a very useful clarification. We will have to look at that to Mr Irwin and Cymru and see if we can come back to the committee on any detail. The final point is that in terms of receiving care support, is there any evaluation of the needs of the applicant? If an applicant is very wealthy, are they assessed to their independent wealth? On that point of detail for me, I refer that to Ms Collins. Again, there is an additionality of section within the application, so they have to say whether, if they do not get the support, are they able to progress the scheme or not. Obviously, they answer that. It is meant to be answering that honestly. I am not sure how much probing goes into that, but the applicant is meant to answer that section to provide the assessment of additionality or not. Jamie Halcro Donson. Minister both yourself and Susan Cairns mentioned innovation. You mentioned the projects in Shetland and, of course, you will be aware of Serf and Turf and Orkney, which I know you visited as well. Is there an increasing importance on the storage aspect? I was wondering whether, within the budget, that importance is represented. Absolutely. As Sue has said, we are keen to promote more integrated projects. Both Serf and Turf and Big Hit are projects that I am familiar with. We have supported projects in Orkney Islands involving storage because of the constraint issue, which we hope will be overcome. There has been an opportunity to explore areas such as hydrogen as a storage option for the development of hydrogen ferries as well, and we continue to do that. It might be a subtle point, but we have rebranded the renewable energy investment fund as EIF instead of renewable. We have moved away from purely renewable so that was to allow for storage to be included in more integrated projects to be supported. EIF is now available for projects that will integrate generation and storage. As Sue has said, under LCITP and other routes, we have been trying to support more integrated projects. There have been examples, not just in Orkney Islands but elsewhere, where we are using heat batteries on a Scottish-based manufacturer. We are taking for a project with Castle Rockhidian Varhiding Association in the Lodians and Midlodian to look at combining solar with heat battery storage and a controlled group just with solar to evaluate the impact of having heat storage batteries. We are conscious of the fact that storage is right to identify it as an important factor. As I said earlier, although it may not have a high profile, some other projects, the investment that Nova Innovation and Tesla are making jointly in their project in the Shetland Islands, is very interesting from the point of view of allowing a relatively high-cost generation technology at this moment because of the manufacturing volumes to sell its electricity through arbitrage at a point when the electricity can be sold in the market at the best price. That allows them to overcome the reliance on the wholesale price. Storage can play a number of different roles, not only in that sense but balancing the grid. We are keen to see it developed. As the energy strategy sets out, we are keen to develop local energy supply and demand relationships. I know that the regulator is looking at that as well in terms of how they can use their influence to try and support the development of a clear local supply and demand relationship across Scotland and the rest of the UK. At the moment, the scheme is part of integrated schemes and projects coming forward. Do you see, either within the budget this year, more focused on dedicated storage standing independently as an area of innovation rather than tied into integrated systems? If I understand the book correctly, yes. I mean, we do support, I should stress, Scottish Enterprise and Highlands Islands Enterprise are also active in supporting R&D in the area around storage. Obviously, we have the PNDC in Cumbernauld, which is a power networks distribution centre, demonstration centre, sorry, which is our search centre, which is trialling battery technology there with support from enterprise companies in the Scottish Government. We look at storage in its own right as well, but where we see its particular value may be where it is integrated as part of a wider solution. Of course, we are looking at low-carbon transport options, where the batteries in the vehicles themselves may also play a role in helping to balance grid at peak, where plug-in vehicles are connected to the grid. I think that there are a number of routes by which storage could play an important role as we develop a more whole system approach for our energy system. Thank you very much minister and to your officials. I will conclude this part of the session and suspend the meeting for a change over witnesses. We turn now to item 3 on our agenda for this morning. This is to deal with the issue of Scottish Enterprise and Cayam. We are joined today by Neil Francis, who is the director of trade and investment operations Scotland for Scottish Enterprise. Jane Pollock, who is the team leader in global accounts. Elaine Morrison, head of partnerships, and Michael Cannon, who is head of innovation enterprise services Scottish Enterprise. I understand, Mr Francis, that you wish to make a brief opening statement. Sorry, I should say that you do not need to press any buttons. I think that some of you are here for the first time. I am not the unprecedented. No need to do anything. The mics and everything will be operated by the sound system. Simply, when you are invited to do so, speak. If you want to come in, simply indicate by raising your hand so that I can bring you in if there is a specific point you want to make. Mr Francis. Thank you, chair. My apologies for not knowing how to operate the system. First of all, I thank you for inviting us here today and we appreciate the opportunity for this discussion. As you will appreciate, the session was arranged at fairly short notice. If we are unable to answer any of your questions to the level that you would like, then of course we will follow up in writing or would welcome the opportunity to return to the committee at a different time. I think it is important before we delve into the detail around Cym. I just spent a couple of minutes on context. Obviously, Scottish Enterprise for us working with companies is a critical part of what we do. As it is the companies at the end of the day that will create the more better jobs that we all wish to do. We wish to see in our economy. As part of this, we can provide grant assistance to companies through programmes such as RSA to support companies to deliver specific outcomes. In the case of RSA, these are outcomes around job creation and investment in capital assets, both of which are important in driving the productivity of our economy forward. When we are working with companies and providing that kind of assistance, there is always an element of risk. At the end of the day, Scottish Enterprise is in the risk business. However, we do always seek to balance risk against the potential outcomes through undertaking appropriate appraisal due diligence and attaching conditions to the assistance we offer companies. However, inevitable, there are sometimes cases where the outcomes generated are not what we all wish to see, as we will discuss later this morning. It is important, though, that this is put into perspective. Over the last five years, through our RSA programme, we have supported 400 companies to make an investment of around £1 billion into the Scottish economy, creating over 40,000 jobs. That is a significant area of performance and investment. In relation to Cayam, our priority, along with our partners, remains to achieve the best possible outcomes for the affected employees and securing a positive future and outcome for the site. As you will be aware, there are a number of sensitivities and commercial aspects to the project that are still current. We will respect these in the way we answer your questions today, and I hope you will appreciate that. The investment support to Cayam came at an important juncture in terms of the west-loving economy. Colleagues and members will recall the closure of the halls of Broxburn facility. The task force that was established to ensure there was additional economic activity brought to west-loving in its aftermath. The investment in Cayam came in part in relation to the work undertaken by the task force. My final point is that I would like to remind the committee that last year, Rona, Alison and myself came to the committee and we had a fairly detailed and productive discussion around how SE works with companies in turnaround situations or in distress situations. I hope that, if members will recall, we will provide some useful background to our discussion this morning. I will turn now to questions from committee members, starting with John Mason. I wonder if you could give us a little bit of the background of when Scottish Enterprise and Cayam first started having a relationship. I understand that, before Cayam, there were at least two previous incarnations under different names. I do not know all the legal issues of that. You mentioned just now that things happened after the halls demise, but was that when the first relationship was, or does it go back further than that? I will ask my colleague Jane to address that question. We started working with the pre-company with Gemfire. Cayam came in and took over that business in 2013. We had been working with Gemfire, and there was a continuity of support with Cayam coming in to take over the business. Overall, with Cayam, we have been working with them for around about five years. To clarify, you had worked with Gemfire before that. Prior to that, yes. When was the very first time that you started with either Gemfire or the other company? That began in around 2008. Just to add to that, the history there is long and complex. I do all the details. It started back with a company called Camarta, which was a Scottish technology startup. That went through a number of incarnations before it even got to Gemfire. Could we go back to the beginning of the incarnations? When was the first time? Obviously, I do not have that detail with me today, but we will clearly follow up in writing. It was before 2008, in other words. That is helpful. Although the company is American-based, most of the employees are in Scotland, or have been. Where were the real decisions made in this company? Were they made in California, or made in Scotland, or somewhere else? The senior management team predominantly were based in Scotland. The CEO has a base. He is originally an Iranian American who is based himself over here. The decisions were made by the senior team led by him. Right. Scottish Enterprise staff were able to meet with the most senior decision makers? Absolutely, yes. That is fine. Thanks very much. Jackie Baillie. You described to me the nature of the support, and I am thinking in people terms rather than in cash terms, that Cayenne received from Scottish Enterprise over the last five years. Yes. We worked with them on an account-managed basis, fully account-managed through a team, with a very highly experienced account manager. Initially, we always had a strategic discussion. The initial stages, looking at all the themes, whether it is innovation, workforce, internationalisation, et cetera, et cetera. The people element of the business throughout that period. The predominant work that we did was through SMAS, which was around about lean principles, helping them to implement efficiencies, and there were around about four projects through SMAS that we implemented over the period. The remaining time was always part of the agenda to discuss what further could we be doing in terms of the people development aspects, given the skills and the talents of the workforce. There was one account manager in place for the company. Typically, how would that account manager operate with the company? Regular meetings. Not meetings for meetings sake, ever. Really looking at having at least once a quarter, having an annual review, but also in between times, because businesses operate in cycles, so they can be just managing day to day. What we are always trying to do is to identify any opportunities further for, you know, training the workforce, new projects, new areas of investment, so we are having an on-going dialogue throughout that full period and it involves the account manager leading and bringing in... It would be fair to say that the account manager would have expertise in that area, be quite embedded with the organisation, know everything that was going on with them. Who was the account manager in this case? A rather not name in a public forum. Can you supply that information to the commission? We could supply that absolutely separately. Can I turn to cash? How much public funding, leaving out regional selective assistance for a moment, but how much public funding, in addition to the regional selective assistance, has Cayenne received from Scottish Enterprise? I'm thinking of other grants or reliefs, or indeed how much it costs to put an account manager in place. The account manager, that's part of Scottish Enterprise policy and remit in terms of placing in an account manager to work with a business like this. It has a cost to it. I'm curious to know what that was. I mean, overall, the cost of implementing or bringing in an account manager, we can provide that back to you separately. In terms of direct financial support for the company, there was around 9,500 through SMAS for a range of SMAS-related efficiency projects, which are always tied into achieving results and productivity improvements. The regional selective assistance, if I'm right, was 850,000 previously, and then there was something like 100,000 more recently. Good morning. No, the 100,000 was simply an instalment of a grant claim, so the total RSA paid was 850,000. OK. Thank you, convener. May I ask the account manager? Were there a number of account managers over the years from 2008 to date? Yes. Again, we can reply and investigate. So you'll supply us with a list of who these people were. Yes, we can do that. Why do you not wish to name the person in a public hearing? I think that it's really just in terms of the work that's been done. I mean, we're here to represent Scottish Enterprise as a group, so I think that we can name that and provide those names on a separate basis. I'm not sure that I understand that answer. I mean, the four of you are here, you're named, you're representing a public body, presumably the accounts manager works for Scottish Enterprise, is that right? Yes indeed. It hasn't been something we've really considered, but our policy hasn't been to release the names of individuals doing individual things, but we can reflect on that and revert you in writing check. So that's a general policy you have in terms of the different companies you deal with. Perhaps you can clarify that as well when you provide the list of names. Thank you, Dean Lockhart. Thank you, convener. What's your understanding of what went wrong with Cayam in recent years? Essentially, as a technology company, they were continuously being invested in throughout that period. I think that most recently in terms of the downward price per pressures in the market, there were a lot of larger players coming in, and ultimately, they began to more recently experience cash flow issues, but through that period of their existence, they had continuously been invested in, in terms of a viable investment from the private sector. More recently, the greatest pressure on them was market conditions changing very, very rapidly. When did you see the first signs of distress with the business and cash flows? In terms of the cash flow, that was towards the end of the year when we initially provided the briefings in terms of during November, because since then they had all the support that we'd given, they'd met every target, they were continuing to invest. We were also at that time talking to them about other potential opportunities, in terms of investing, because they were planning ahead, the technology that they're involved in is highly, it moves in really, really quickly in terms of end-to-end data processing, so they were constantly looking to invest and stay ahead of the market in terms of their products. So it was really more recently, the 60th of November, was the first sign that we had of the distress that they shared with us. More generally, does Scottish Enterprise have a system of early warning, signals, flags that might show early signs of a company being in distress, for example not filing accounts on time? Filing accounts in terms of the timing of that, it's quite common in terms of companies maybe not filing absolutely on time, there can be various reasons for that, it's not unusual to do that. The early warning signs we might have are obviously in terms of reviewing finances but also behaviours, so if companies aren't engaging or there's a bit of radio silence or particularly if there's something that's live, a project that's live, and we're looking for additional information or updates and it goes very quiet, so there's certainly, through the instincts and the experience of the teams that are involved and the networks that we have that often engage with companies, that's where we're always open to any sort of alerts that we might be looking at on the companies that we're working with. I think just to add to that, I think it's through our process of engagement that we would generally get early signals. Clearly that is dependent on the level of trust and confidence that the senior management of a company has in their relationship with us, so that's really important. I think that will give us much earlier signals than some of the things that are put in the public domain as you mentioned, late filing of accounts. Well that is important and I think we have a commitment to review whether there is a more systemic approach to how we could identify companies that might potentially come under risk in the future. That's an on-going piece of work that we have. The most recent accounts filed show a pre-tax loss of £20 million in 2016 and presumably those accounts also showed some pressure on cash flows. At what point did Cayam enter into your watch list or at what point did you increase scrutiny on how the business was doing? Michael? You're absolutely right to the company that did have a history of loss making, but that in itself is not a reason for us not to continue to support the company. As Jane has said, we were working very closely with the company, meeting them very regularly. At each grant claim, we would look at both the accounts of the entity here, Cayam and Livingston, but also the parent. Not unusually, as a start-up company, they were heavily dependent on the backing of their shareholders and indeed had quite a significant track record there. They'd raised some £45 million since the start of the acquisition of the company and also sold various facilities, particularly one down in Newton, Eichloff and England, to help out with the balance sheet. We were reasonably clear that it wasn't the best set of financials by any means that we'd ever seen, but based on their track record of both the management team and their track record of actually raising cash, the margins in the business were also gradually improving. Sales had risen quite significantly, both from Cayam and Livingston. When the acquisition occurred, they were standing at around £4 million or £5 million. In 2018, that had risen markedly to £30 million. The corporation was even more significant than that. They were doing a lot of good things, the right things, increasing sales and volume. The yields from the machinery and the output of the factory was increasing through the smile's work that we were doing. As I say, gross profit and net profit margins were moving in the right direction. There were forecasting towards the end of 2018 to making a small profit, but perhaps a loss for the year overall. Given that background and the level of jobs, the level of growth and the forecast, everything seemed to be moving in the right direction, albeit slowly. Did you challenge the company or talk to the auditors about the late filing of accounts? Not to the best of my knowledge. Given what's happened, do you think that the systems in place are robust enough, particularly in this company, to capture the early warning signals of companies in distress? My view is probably unbalanced. Total out of the, as Neil said, out of the 408 offers we've made in the last five years, there have been some 30 write-offs. That's about £4.5 million from £128 million of grant. Given that we are in the risk-taking business, there's an argument to be made there that perhaps that's not sufficiently high. We need, we are a funder of last resort. People come to us when they can't raise finance from elsewhere, so we are dealing with companies who, as I say, have found that they can't raise finance in other places. We are in the riskier end of the market. Thank you. Just to add to that comment, it was just a share by way of background that all of our customer-facing staff, our account managers who work with companies, have all gone through training provided by Ernst and Young around about the ways in which you would identify signs of distress within businesses. The reliance upon the individuals who have that relationship is particularly high. There's also a systematic approach whereby, on a periodic timescale, we would go out and ask the company to confirm whether or not they have any concerns about future trading, etc. So there's a two-prong approach in place. Just to ask that and follow-up on the account, would that not be a red flag, a late filing of accounts? Is that not something that would kind of automatically raise concerns? It's a flag. It's not always a concern. It's something that happens more often than some people would possibly imagine. Among companies, sometimes there's very good reasons as to why, but I think that it's always a flag for a conversation. And did that conversation happen? I don't know. Yes, I mean, and the most recent intensive work done around about the claims, the RSA claims, in March this year. I mean, we all will have the conversation, but the company had a very strong track record of continuing to get private sector investment throughout the period of existence. At the point of a claim against the RSA, there's a formal review done of the business and the prospects for the business. So that's always done, and that would be using more recent financial information and statutory accounts. If a company's account is managed, is it not automatically the case that you review certain issues and hygiene issues such as filing accounts? Yes, we will. As Elaine said, it will be a flag, but not necessarily a concern. But certainly we will have the conversation and we had the conversation in this case for last year in particular. We did have that conversation with them. Again, they were all looking at the future, there was continuing investment, there was still a viable business. Final question. What explanation did the company give for the late filing of accounts? There were a number of things that they wanted to attend to before they did that. It was only so far that we could push back but they basically said that there were a number of issues that they wanted to address before they finalised the accounts. That explanation was sufficient for your purpose? At that time it was sufficient, yes. They were on-going and we were having formal reviews throughout the period of the RSA claim. Because we were having those formal reviews, that was an additional assurance at that time. I think that I am drifting into other members' questions. Angela Constance, please. Thank you very much, convener. Good morning to the panel. As you would appreciate, I am the constituency MSP for Amman Valley. With the convener's indulgence, I have a number of questions to ask this morning. I have a particular interest in public investment in a company in my area that has paid off over 300 staff without any warning and without any pay before Christmas. Let me make clear for the record that I want Scottish Enterprise to continue to invest in West Lothian, but given the history of this company and other companies in West Lothian who have benefited from public money and have a later date bailed on the community, it is important that my constituents and others receive maximum assurance about how public investment is used to anchor jobs within a community. Therefore, I want to ask a number of questions around due diligence, given that Scottish Enterprise serves a taxpayer as well as companies and the job creators. Can you just outline what due diligence, the process that you took in deciding to award Cayam £850,000 in RSA and given that they have a history of laying their accounts late, they have done that for a number of years, that they had not made any profit since 2012, so what were the strengths of their application that persuaded you to award £850,000? Primarily, it is about the accounts of factual, if you like, which was that if we hadn't funded this company and the acquisition of Gemfire back in 2013, the plant would have closed. Gemfire were not in a position to sustain the investment and sustain the losses that they were making, so on the back of the halls of Broxburn closure the opportunity for a company to acquire Cayam and Safeguard 65 jobs were not only Safeguard 65, but to add a further 103 was of interest to us, and I'm sure to the constituents in West Lothian. 80 of those jobs were entry-level jobs, which was a further enhancement for us, so those were jobs that would be available to quite a wide range of people with a wide range of skills, not simply technical skills. In terms of the due diligence we undertake, as per all RSA applications, we look at principally five things. We're going to take financial due diligence, looking at the accounts of the applicant and the parent where there is a parent. We're looking obviously for viability and for need for funding there. We look at the management team, are they experienced and skilled in this area? The management team were very much skilled in this area. The three principals there, the chief technology offer, the chief executive and the CFO, the experience of dealing with small companies and small technology companies and raising money. We're a very credible management team. Clearly we look at the business plan, is the business plan and the business, does it have a credible and robust go-to-market plan? Are they taking a new product to a new market? Which would be the highest risk category? Or are they in this case taking an existing product to an existing market? The people involved very much knew the market very well. They had strong roots into it and so that gave us comfort there as well. Finally, we look at the sector, to what extent is the market in which they're hoping to sell into, is that growing? At this particular time and I think still now, data centres for which this particular product is aimed at, those Amazon and Google and Facebook all have these very large data centres growing considerably, so the market was growing. Putting all of these things together, the final piece of due diligence we undertake is an economic impact assessment. Is the return that the economy is going to get is that larger than the grant we are going to put in? In this particular case, they looked for some £850,000 and our economic impact was of the view that, yes, we would get a strong economic return. I think it's also worth saying that we have done a simple and initial economic impact assessment of the position as it is so far, so looking at the employment, there's been some that's been created in the past five years. There's some, I think it's close to 600 people a year's worth of employment from Cayam. If we look at the value that Cayam and that investment has created for Scotland and Westlawden, we've estimated it at about £42 million per year. Just simply based on the tax and national insurance returns, our estimate is that we Scotland, the public taxpayer, has had a return of about £4 for every pound that we've put in. It is very regrettable for the people who've been made redundant, I've been made redundant so I empathise that as well, but there has been a return. Okay, thanks for that detailed answer. I understand fully as someone who's local to Westlawden the context of halls and the potential catastrophic impact that was facing the local economy then, and I understand a bit about the history of Gemfire, although it may add salt and wound for people to think about public money that was put into a rescue package post-halls £29 million for that then to be invested in companies that have behaved dishonorably. Can you tell me how much Scottish Enterprise invested in Gemfire? I don't have those figures. We'll come back to you in writing that out. I would be interested to see the history of investment in the business as well as the individual companies. Can I turn to the history of the business? I'm aware, as you've outlined, that this business began with Caimata. It was sold on to various French interests. When Alcatal, the French company, sold to Avonex, it was described as a process that was selling the loss-making optoelectronics unit. I'm well aware of the history of Gemfire and the discussions that I had with Rick Tompony, the then chief executive when they laid off 170 staff but then bounced back about in 2009. We know that Caimata have not made a profit since 2012 and we've heard about the elite accounts, the habit of the elite accounts. I wonder where the history of this business figured in your due diligence. The new owners would look forward rather than backwards. We always look at what's the option if we don't fund a business. If we hadn't funded and supported the acquisition then there would have been the closure of the factory and a further 65 jobs lost. That is the counterfactual, that's the alternative. I understand the merits of a new broom coming in and I certainly, as someone who would have been in contact with Scottish Enterprise at the time of Gemfire's difficulties, understand the bit about protecting jobs. It's a crucial part of what you do. What I'm particularly interested in is how does the nature of this business inform your due diligence, given that when you look at the history that this has been a site that has employed 65 staff but also at one point employed 450 staff. There was much volatility in Gemfire, paid off 170 staff in the bounce back a bit, soon after when the market picked up. How well do your advisers understand this business? How niche is it? My understanding provides product to big data customers, Google, Facebook, Amazon. How well do you now and then understand the nature of this business? That has to figure that it isn't just about the new broom, the new facies and the new company and the facts as they stand, but there has to be that understanding of the history and the risks associated with this type of business. That is something very much that we take into account. If I can use the expression, the business model, my interpretation of what you're asking is essentially is there a credible business model? Could this industry succeed and flourish in Scotland? I think that, back then, there was, yes, that, if I can go back a little bit further to the NEC days, NEC or in Livingston, this is a similar type of operation, making chips. What was needed was volume, essentially. We had Gemfire and Cayam were both suffering from under-investment in terms of equipment and equipment that could achieve very high volumes that could get to the market. When Cayam came along, we looked at the backgrounds of the chief exec and their plans were to bring back production from China and, laterally, also bring in production from America. That is one of the issues that we took into account was, yes, this is going to be a change in the business model that volumes are needed on the back of the investment and they had both the capability and, by obviously bringing back a business from China to Scotland, that would very much help to drive up the volumes. Likewise, their contacts with customers would also ensure that on the sales side, those volumes could be achieved. Both from a practical and a process perspective, the volumes that underpin this business model and this business were there, but also from a sales perspective, we also thought they could achieve those sales. Just to add to that, I think this is a fast-moving marketplace. It's technology-driven and it's always going to be, there will always be risk inherent in participating in this marketplace. I think we undertake our due diligence to an appropriate level. We cannot always be a fully expert in every field and also we take into account, as Michael has said, the other investors in the business. So, if you look at the level of funding we were providing against the level of funding provided by private investors, then our investment was very small. So, there were others who felt that there was a viable business here and over the piece have invested circa £45 million. So, you take some element of comfort from the fact that others are also willing to invest. I understand that the global market in this area is very competitive and I understand the points that Michael Karen has made about volume, but what the then chief executive is now saying, I have questions about the credibility now of his testimony given his behaviour towards the workforce, but what he is now saying is that Google, Amazon and Facebook required high volume but at very short notice so therefore the business was unpredictable. What I want to know is that did Scottish Enterprise, on behalf of the taxpayer, understand the unpredictable nature of this business, whether you think that the nature of this business is unpredictable and whether you were getting into that level of detail and understanding. So, I think that we understand that it is an unpredictable, fast-changing marketplace and over the piece that those changes can happen very, very quickly and I think to reiterate at the point that we took the decision to offer the RSA grant, we were satisfied on the balance of risk. It was an appropriate investment to make and that the prospects for the company to achieve a viable business in the factory. Is this business just at the mercy of Google, Amazon and Facebook? Well, depending on the customers that they had, the products that they had were very attractive to those operations but the demands in terms of volume was escalating simply because of the needs in advancing technology, the speed of end-to-end in terms of data processing, the increasing technological developments about the cloud. So, those companies were very demanding in terms of the scale and the volume and the price pressures are caused by other entities, maybe not providing as they were able, they were moving into that space and there were larger companies, the price pressure was being driven down. So, it's the demands of technology that the companies are at their mercy of and nobody could predict the speed of that. We've moved from analog to 2G to 3G, 4G, 5G in a very short timescale and the companies like Kiam are constantly trying to stay ahead of that. So, it's the demands of technology and the companies that these large businesses are also competing with each other. Okay, thanks. I want to move on to the conditions of the RAC award. Did the company draw down all of the £850,000? Yes. And the last 100,000 instalment was when? March 2018. March, yes. So, pretty recent. Can you just give us an overview of the conditions of RSA funding? The conditions that Kiam were meant to be complying with, whether they've met those conditions and how legally binding those conditions are? The conditions are fairly standard for all RSA grants that they must maintain the jobs and investment for a period of a number of years after the final payment, the date of the final payment. In this particular case, it's three years after the date of the final payment. So, clearly, Kiam are in breach of those conditions. There was also another condition that we wanted a parental company guarantee and that is in place. So, we have written to the administrator to seek clawback the grant. We can't put a figure on that yet, obviously, as the administrator hasn't finished their job. So, we won't know if we're likely to be paid fully from that or not, but in the event that we're not fully paid, we will also be exercising the calling in the parental company guarantee. Okay. I appreciate that you're saying that they are now in breach of their conditions. The issue that I raised with the Scottish Government ministers last week is I don't understand why they weren't in breach of their conditions much earlier. I think that it's very interesting that you're saying that those conditions are pretty generic to all companies. It cannot possibly be right. I would contend that you may have a view that, for an award to be made of up to £850,000 at the end of 2013, and yet almost a year later, staff are actually being paid off, 20 full-time staff, and, of course, some temporary staff were also paid off, 60 staff in total. Surely that's an early warning sign if not a breach of condition. The contract that we had with Cyan was for the safeguarding of 65 and the creation of 103 jobs. They quickly exceeded that, and I think that the peak were well over 400 jobs. Obviously, combining the 65 and 103, we would get you to 168, but for a number of years they had well exceeded that, and unfortunately at the closure, they were still exceeding that at, I think, 345, 350. In that sense, they were honouring the contract. They had exceeded the job targets and investment, and so they had met the conditions thereafter. That's during the project. Once the project is finished and the project finishes with the final payment, they move into the post-project period where they have to maintain that investment in those jobs. From our perspective, during the build-up of the project, the life of the project, they had exceeded what we had contracted with them for, so they weren't in breach of the contract. It must be true then that Scottish Enterprise, in any award of RSA, will tolerate a level of job losses? In general, yes. That might be something that I'll certainly come back to. Just to clarify that, we set out in terms of the award a number of milestones that have to be met from the start of the project to the end. Then, as Michael has said, the conditions period. Against each of those, you make a payment. For each payment milestone, there is usually a capital investment figure to be achieved by the company that is verified usually by an independent orders certificate and obviously a jobs figure. Throughout the period of the grant, those have to be maintained. I understand the process that you have outlined. I appreciate the information that you have given to the committee, but it appears true that, at any RSA award, a level of job losses can be tolerated. Did Cayam ever sign the Scottish Business Pledge? No, they didn't do that. They met six of the nine characteristics of Scottish Business Pledge in terms of the way in which they operated as a business, but they didn't opt to sign up to Scottish Business Pledge. What consideration have you given to businesses being signed up to the business pledge as part of RSA conditions? Not specific to RSA conditions, but over the course of at least the past two and a half years, we have had quite a strong focus on making sure that we engage with all account managed companies, that they understand why the business pledge and particularly the characteristics that it conveys are particularly important to them being a forward-thinking employer, to being a fair employer, and the benefits that that brings back to their business and operation and market engagement, which is the key bit for them to do that. We have at least one, if not more, conversation specifically relating to business pledge with every account managed company. We have been monitoring engagement with that portfolio over the period of the last two years, and we have seen improvements coming through in most areas. There are some areas that have a lower uptake overall than others, and we have been focusing on that to try to increase that. In terms of actual sign-up, that is down to the individual company. Again, we encourage that we do not dictate that they should do that. We say that it is a welcome thing for them to do, that it presents a positive endorsement of their commitment to Scotland. It can help to attract other staff to come and work with them, but for various different reasons, different companies have chosen not to do so. We have supported Scottish Government during 2017 on the review of business pledge and thinking about how that may play forward. Sounded if more needs to be done to persuade companies of the business case for signing up to the business pledge and how fair work makes good business sense. Can I move on to two slightly different issues? The first one is that the committee has received evidence from a company that supplied Cayam. Much of the focus over Christmas has been on the Cayam workforce, but we should not forget those in the supply chain. We have received evidence from a small company that placed purchase orders that were issued for November and December. The company then, like everybody else, found out that Cayam had contacted Scottish House to advise that it would be stopping trading at the end of December, yet the company was still issued with purchase orders. As a result of those not being ordered, this small company has had to let three members of staff go. I wondered whether you could speak to any role you have in terms of supporting the supply chain, but also the issue about who is alerted and when, given the consequences of lack of information and knowledge? Absolutely. One of the key things when any company faces this situation is to understand the wider impact across the Scottish supply chain base. We then work with the Scottish Enterprise, with the administrators, with the local authority and business gateway to engage with companies who are impacted by any significant hit on that. That comes at different sizes if you have a large employer and you have a neighbouring provision of cafe facilities. For instance, they not having a footfall of 300 or so individuals is hugely significant. We may not always see that on something that would be a supply chain breakdown that would come from the administrators. What we would typically see are the actual purchase order commitments that come through. There is a lot of information from KPMG last week because they were going about the course of understanding the situation that the company was in. We are now working with West Lothian Council to ensure that we make contact with parties who have been affected. If I can finish where I started, I want the Scottish Enterprise to continue to invest wisely in West Lothian. We heard from the minister last week that there are an excess of 20 interested potential buyers. I am interested in knowing more about your role and identifying suitable buyers and what support you would be able to offer any potential buyer. Yes, it is very much a role to do that. We had already provided a summary to KPMG of the types of things that we can do. We have also reached out actively to our networks through SDI in terms of looking at the nature of the business, identifying contacts and names. KPMG are wanting to manage and control that process, which is absolutely right and correct. We are providing and feeding in to that process using our own networks and identifying names of businesses at senior level globally to try and input to that list. We are also actively following up and being open to following up and being involved in any meetings, conversations, calls with any interested parties to identify what their interest is, because that is the priority that is going to concern in some way. We are absolutely applying all of the team approach that we have throughout the situation with Kiam to any other investor that is existing or new to Scotland to encourage them to invest and work with us to do that. We are working with KPMG, engaging with them on a regular basis. We have another call with them this week to talk about that. Sorry, Jane, just to quantify over half of the opportunities that KPMG are now working with have been put forward to them as a result of us reaching out to our networks for potentially interested parties. KPMG also have their own networks and supplement that. When we spoke at the end of last week, they had over 20 interests. There was a further four that we put forward to them today. What they are trying to work through or which of those interests are in relation to a going concern, which are in relation to specific functions of the business and ultimately and only when no other options continue, which of them are in relation to the assets which may be acquired from the business. Their focus is entirely around about the opportunities for a going concern at the current time. They want to conclude that process by the end of January. It is not a finite timescale, but that is the indicative timescale that they are trying to work through. How many of those who have expressed an interest are interested in purchasing the company as a going concern? They have not given us a specific number, but they have said a reasonable number for a going concern, both from UK, US and China, so that is where the interests are coming from. Thank you. Colin Beattie. I am interested in, obviously, the fact that Kiam breached the terms of the grant. I presume that you are trying to recover the full amount of the grant. Is there any additional sums that you would try and... No penalties. It is just the grant itself. Where does Scottish Enterprise stand or, more correctly, rank in terms of the creditors of the company? We are unsecured. Unsecured? Would it not be normal to take some security if it is available, or would the agreement in such a way that you have a certain ranking, as would any other lender? I think that I am not a legal expert, so we may come back and provide some clarification on this, but, of course, the grant is not alone, so it should not, I think, or could be treated the same way as lending. But it carries a legal liability for the company. It carries financial liability to the company until a few years. Yes, it is a conditional liability. I am not sure how it is presented in companies accounts. I think that it is shown as a conditional liability in companies accounts, but I say that I am not an expert on this. Of course, we have to balance our position that we do not want to get in the way of the company using normal lending as part of its funding requirements. You said that you had a parent company guarantee, presumably that is the company in the US. What due diligence was carried out on that parent company in accepting their guarantee? We can come back to you with the details, but basically we ask for confirmation from a lawyer that they have the ability to make that, and we look for board for the parent companies, board to sign an affidavit that they are able to make that guarantee. I can come back to you with the fuller details of the due diligence that we undertake there. Having that guarantee is obviously a comfort, but it is only good as long as the financial health of the parent company is there. What process do you have for following up on that subsequently? In terms of the financial position of the parent company? At every claim stage, we review both the applicants' accounts. We are not talking really at the claim stage here because you have taken a parent guarantee and that parent guarantee clearly was required because you felt that the financial health of the underlying company here was not of a standard, therefore you wanted the comfort of a parent company guarantee. At the time you took that guarantee you would have done a due diligence on the ability of that company to meet that obligation. As we see from the company here, situations change, how do you ensure that where you receive a guarantee, and it is not necessarily just with care, how do you ensure that that guarantee is still what the paper is written on? I think that simple answers we can't in every case. A simple thing like due diligence is looking at their accounts for example, maybe every year that sort of thing. Is there a process? That is what I was saying. At the claim stage, but on an on-going basis, the company guarantee could be there over a number of years. I threw our account management with the company. If Cayam hadn't entered the administration, we would be looking at, on a yearly basis, the accounts of the company that we are account managing and its parent. You have a process for doing that? Part of our regular review. When did the parent company sign the guarantee? I would have to come back to you on that. I would have been interested to know whether it was some years ago and what due diligence had carried out on the interim to try and find out what the prospects are of actually getting that money back. Can I ask, correct me if I'm wrong, but I think the statement was made there about, over the last five years there has been about 30 write-offs, £30 million to £40 million. No, £4.5 million. £4.5 million, okay. How many of these companies failed to meet the conditions of their funding and have there been any instances where you've tried to claw back the grants and either succeeded or failed? We would have to write to you with that, those details. I don't have the figures with me, but I think in all instances we will have attempted to reclaim the money. Okay. Between yourself and Kayam, how much communication have you had with the company in relation to the grant? What period? Since the film went into administration or has all the communication been with the people who are handling the... Administrators, yes, since the administration, yes. So you've had nothing direct with the company? Since the administrators that you know it's this KPMG that we're really using with now. Have you advised the parent company that their guarantee may require to be called? Yes. So you've gone through that legal process. There's obviously some legal costs that are going to be involved in this, especially if you're dealing with the US company. So at the moment we've written to advise that we will seek to call a guarantee, so that's not... That doesn't really have too much of a cost associated to it, but if we were to pursue, then you are absolutely right. Okay. Have you had a response back, whether the parent company is going to honour that guarantee or not? No response has yet, Jim. And when did you write to the parent company? Last week. You've got the conditions for paying out the grant, but your comment that in fact there's... You can't ensure a guarantee is worth more than paper it's written on. That was my understanding, Mr Cannon, of your response to one of the questions. I don't think I quite said that. I said yes. Not in every case can a parent company continue to exist. So in some cases, as we're seeing, subsidiaries enter administration and parent companies enter administration. Where we seek to get a parent company guarantee where we can, but it's not... We don't like to think that it's a magic bullet that will save us. It's a good to have when we can get it. But it might, as I think you've said, not be worth any more than from the company itself in these sorts of circumstances. So do you not seek bank guarantees from such companies? For example, that would be worth whatever they're granted to? We haven't explored that avenue, not to the best of our knowledge. What avenues have you explored then in terms of... Principally, we've used bank, their parent company guarantees. Right. There's a couple of follow-up questions. Gordon MacDonald, Jackie Baillie and Andy Wightman. Very quick question. At the time of Gemfire Corporation being taken over by Cayam, it was owned by GC Holdings. The president and chief executive of GC Holdings then became the chairman of Cayam. Is that an unusual situation? And did that ring alarm bells that somebody that was an investor in one company was then moving on to invest in the second company? At the point of acquisition of any company, it's fairly common to retain someone who knows enough about the history to do that. I couldn't quantify that for you. But from other companies that we've worked with, I certainly have seen that in practice now. What you often see is that that only exists for a defined period of time. And then, as transition takes place, they'll change that arrangement. But I can't give you a specific for it. So it's not unusual. It wouldn't ring any alarm bells. It does happen in other cases. I think what we would look at as Michael alluded to is the overall strength of the new management team for the potential company who's looking for our public sector support to think collectively does that give sufficient confidence in the way in which they want to take the business forward. So it's very barely about one individual. It tends to be about a collective. Okay. Jackie Baillie. In response to a question from Colin Beattie, you said that you always attempted to reclaim money. Is there a standard process for doing this? And I appreciate you might not be able to think back 10 years, but in the last year, have you reclaimed any money? Have you been successful? And how much? Again, I'm sorry. I don't have those figures at the top of my head. You were coming here to a committee meeting that we were going to explore clawback. I think that was self-evident from what we said in public record. And you don't have the figures. You can't remember in the last year what's happened. Well, that's the reclamation side of the business. It's not my part of the business. I'm afraid. So I apologise that we haven't met your expectations on that. And we will write to you following today's meeting. What we would say is the kind of cases, I think fall into a number of different categories. So you have categories such as the one we're talking about today where the company fails or goes into administration and you can understand reclaiming or being able to secure repayment of our grant can be quite challenging in those situations because the company no longer is trading and has limited resources for dispersal. In other cases, you'll have companies that have changed their mind or changed strategic direction and are no longer completing a project, I think. And hopefully when we look at the data we'll confirm our track record of reclaiming in those situations is actually quite good. But we'll come back to you with all that detail. Can I just ask? Leaving aside the detail, have you reclaimed any money this year, the year past, 2018? Any money at all? I don't need pound shillings and pens. I just need to know have you reclaimed any? I'm afraid, Jackie. I do not know the answer to that. I apologise. Andy Wightman. I thank you for coming in at short notice. In a letter of the 31st of December, the minister, Jamie Hepburn, provided us with a timeline, provided all MSPs with a timeline. That indicated that on 16 November Scottish Enterprise were notified during a phone call that the company was in financial difficulty. What exactly was the financial difficulty that was intimated at that stage? Yes, it was that they had been experienced severe price pressures that they had. They were having severe cash flow problems, and as a result of multiple factors that they were seeking a buyer at that time. Those were the major headlines in terms of the call. It had been a very quickly emerging situation and they were doing everything that they possibly could to secure a sale of the business. You mentioned cash flow then. Was any indication given of how much cash flow the company had on 16 November? Not that. It was a call that was obviously notifying us of the situation. Then we started to engage and mobilise and go into greater detail. In terms of the overall losses that they were experiencing, the fact was that they were going through a period of severe cash flow issues and that they were seeking a sale of the business and that they were doing it very urgently. In terms of the scale, it is over the next few days that we worked that through. On 22 November, ministers were briefed for the first time on the difficulties. What are the general criteria that Scottish Enterprise adopts in relation to when, what triggers briefing ministers on a situation like this? As soon as we know in terms of the scale and understand the detail of it, that is when we trigger it. Sometimes we need a few days in terms of to crystallise what the situation was, to mobilise the team, to look at the ask in terms of if there is any support that could be provided. It is as soon as possible when we understand the scale of the issue properly. That is when we will trigger the briefing to ministers. The specific criteria where there is a significant opportunity or loss, something typically in the region of more than 50 FTEs and involved in it, that is the baseline by which it is appropriate. Where that will vary is if you are in a locality which has a specific sector or a tougher regional impact. It does flex, it is not a defined line on the baseline. That is very helpful, thank you very much. On 6 December, in the timeline, there is a note that the Scottish Enterprise also notified ministers that it had declined a request for funding of £6 million to £8 million on risk grounds. What was that request for funding designed to achieve? It was looking at bridging finance to maintain the business towards securing a sale. We were in terms of the whole situation and what the company was looking to do changed substantially over a very short period of time. That figure changed again because they had successfully secured an element of the financing that they were seeking. They were constantly looking to achieve a positive outcome in the scenario. We did not have an investable case on which, given the risk involved in the financial situation, we could apply to support them at that stage. There was no investable case. It was just too risky. At that point, yes. On 7 December, following a call between Scottish Enterprise officials and the chief executive officer and the chief financial officer of Cayam, ministers were advised, that the company had around seven days of cash flow. Ministers were briefed on that. If the cash flow had no more than a week's money, why, in general terms, was that not picked up on earlier? Clearly, that lay behind the phone call of 16 November. Between 16 November and 7 December, three weeks or so, I'd expect cash flow concerns to be being raised in management accounts sometime in the summer. Is the business just not the kind of business that could predict its cash flow? There was constantly a track record of securing investment. It wasn't as much of an issue as it might be in other circumstances because of that. The timescales that you referred to, the company was continuing, and the situation in terms of what they were looking to do and the investment that they were seeking to secure, they were continuing to reach out to investors to address the challenges that they were having in order to ensure a sale. There was no kind of stimulus, if you like, to cause a concern at that time because, as well, we were talking to them about other genuine investment opportunities. There was really no concern to suggest any level of the scale that it turned out to be. Forgive me if I don't manage large companies, but investment wouldn't normally underpin cash flow. It would normally be day-to-day trading, which forecasters made about the market and about sales and about costs and whether you have the cash available. There could be timing issues there in relation to payment and all the rest of it. I don't quite understand why investment is necessarily part of the explanation as to why they ran out of money. I think that the on-going challenges that we are having on the market, the reducing level of sales, the price pressures that they were suffering, it was a very complex and fluid situation. Clearly, the company were making every effort to address themselves before they came to us and we had the more detailed conversation in November. How many meetings has Scottish Enterprise had since 16 November with the chief executive and or other senior staff members of Cayam? There were four or five conference calls because they were travelling globally doing everything. There were four or five conference calls as well as a face-to-face. I think that it was about 19 December with partners as well. They were all with either the chief executive or the chief financial officer during that period of time. Can you characterise the... Did you think that they found this all surprising or was it an indication that they had been anticipating that the circumstances might have arisen now for some time? It definitely was a circumstance of multiple factors that they were understanding. They wanted to address themselves. It was really just the timing and the scale that happened. They were... The behaviour was that they were confident that they would be able to secure what they needed in order to be able to sell the business. That was the message. On the question of the employees and the Scottish business pledge, you said that Cayam had not signed up to the Scottish business pledge. When grant assistance is given in terms of the conditions set, is there a minimum in terms of conditions that you would set regarding how an employer treats the employees and the workforce? I'm not sure that we have that ability to dictate how a company can treat its workforce. We do encourage them to sign the Scottish business pledge and, going forward, we're hoping to incorporate other conditions such as the real living wage into it being an entry criteria for support or condition for support. We need... I wasn't suggesting that you can dictate to any company how they treat their workforce. I was asking whether or not you have a sort of minimum approach a company you would consider would have to take towards its workforce or evidence as to how it conducts itself with its workforce before you give the conditional grant assistance. Can you give me an example of a condition that... Well, work terms and conditions. Whether they have full-time employees, part-time employees, how many, how they approach these sorts of issues. Job security. I think... Not in... Not in particular. We look at the business plan and the sector they're in. It is a competitive market so companies that, essentially, if they want to grow and flourish, they need to be treating their workforce well otherwise the business plan won't be executed. So you assume that? I think we generally have the discussion with them around their workforce and the characteristics that sit behind the business pledge and clearly advocate, as has been said today, the positive business benefits of fair work practices. That would be all part of our normal engagement of working with companies. The question comes is, would you conditional make that conditional off? I think at the moment we're saying we don't make that a condition of our assistance. Our approach is very much to engage and win the argument about the benefits of adopting such practices. With regard to Cayam, did you engage in such discussions, arguments? Yes, certainly on the business pledge. That's part of the on-going agenda of discussing with them. It's part of what we do in terms of the account management approach and the fair work agenda that we're obviously applying in our discussions with companies that we support. You don't look at the detail of how the workforce is made up when you look at the question of grant assistance. We just expand a little bit on that. We have different specialists who focus on areas. I think it was alluded to earlier that Scottish Manufacturing Advisory Service had engaged on four different project activities with Cayam. Now, when they are looking at their activities, it's not just about physical layout, it's also about how you use your people, how you're maximising them, and linked to that we have something called a workplace innovation specialist, who's engaged in those conversations around how you get the best performance, how do you improve productivity through making sure that you're being the best employer that you can be for those employees. It doesn't go as far as to within the conditions of a grant to say that you must do these things, but these are normal conversations that we would have with any company and indeed to have with Cayam. Jackie Baillie. Two very quick questions, if I may convene it. Is it correct then for me to say that prior to 16 November, there were no reports to the Scottish Government about any problems at Cayam because you were effectively blindsided by what they told you? Yes, there was no prior communication with the Scottish Government, certainly. Okay, so you didn't anticipate that these problems were happening and so you were blindsided by them. Did you ask the company at any point or indeed did the Scottish Government to inform the workforce or any contractors because I can't believe that you would knowingly allow workers to work on in the knowledge or in contractors to engage in new contracts in the knowledge that they wouldn't be paid. Did you ask the company to inform their contractors and their workforce? It was really a company decision. We were right up into the wire that were clearly looking to find a positive outcome here. There was just what the company really that was their responsibility to do that and their decision. As I say, because they were looking to find a positive outcome right up to the wire. You were told on 21 December that there may be a delay of a week in paying salaries. Then you were told the following day that the salaries wouldn't be paid at all. Did you tell the company or its contractors because people worked on? We asked the question in terms of what the plans would be. They would just manage through but the intention was to be able to meet their obligations and that was their response. I suppose that knowing that they weren't going to pay people I would have expected you not to ask but demand contractors who were engaging in contracts in good faith knowing that they wouldn't be paid. We really didn't know that they wouldn't be paid. We found it the same as everyone else. 19 December, I think it's 19 December if I've got the dates right, there was a meeting that took place where we invited peace colleagues to come and join a conversation with the company of the support that would be available and to say that if there were difficulties the sooner you can engage the sooner the employees know the sooner that we can widen out the other opportunities that exist. So a conversation did take place with peace on the 19th round about that topic. I wasn't there so I can't see whether it addressed a specific point. I'll leave it at this. On the 22nd they knew for definite that people weren't being paid they still went into their work and what is the Scottish Enterprise role with regard to the several hundreds of workers who have lost their jobs as a result of Kiam? We work with Whistledane Council Skills Development Scotland and Department for Work and Pensions. The key role that we have here is to identify through companies that we work with, vacancies which are there at the moment or business growth opportunities which we can help to accelerate to bring to fruition what we identified in the course leading up to Christmas or on Christmas Eve essentially at over 100 vacancies details of which were passed to SDS and to PACE. We are now working with PACE to support the jobs sphere which has taken place on Thursday of this week in Bathgate and we will continue to engage in that process to see where opportunities can exist. The predominant lead on that now rests with PACE to take that work forward. Are there any other questions from committee members? If not, thank you very much for coming in and I'll suspend the meeting and we'll move into private session.