 Fonw, iawn i chi'n ddiwethaf, i gyrddwch ag ledd i gyfrwyd gennymau ac yn ffairwyrdd ymargriffeirul Cymru i 2018. Rydw i nhw rwy'n rydw i'n gael i chi allu eich cychwynol fyddwydau mewn gwneud o'r ystod iawn, rhagorodd anghytg Acrwm yn gyfwetd i'n gydag yma eraf i chi'ch gyfrwyd rydw i'ch cymryd cychydig o'r sgwrn yr olem. Fawr yn cael eu porogysgrifoedd Cymru, Jackie Bailley. The first item on the agenda is a decision with the committee to take items 3 and 4 in private. Are we agreed on that? We now turn to our inquiry into Scotland's economic performance. We have three witnesses this morning. One of whom is delayed slightly in traffic, but I understand he will be with us shortly. At this point, we have Sir Harry Burns and Professor Sarah Carter. Welcome to both of you and, as I say, will be joined shortly by Professor Sir Anton Muscatelli. I will start with a question just to perhaps ask about an update on the Council for Economic Advisers recent activity. I think that perhaps one of you would like to make a short statement on that. Professor Carter. Thank you. The Council of Economic Advisers has met regularly since 2016 in its present incarnation. The focus has been very much on Scotland's economic strategy. In particular, we have focused on inclusive growth and, most recently, on the establishment of the National Investment Bank. We have, of course, also focused on Scotland's economic performance since the financial crisis in 2008-9 and the policy responses that were appropriate and could be considered following the crisis. We have also focused on future risks for the economy, in particular the risks over the next 10 years. Of course, we have also focused specifically on Brexit and the impacts of Brexit. You mentioned just looking at the investment bank. It was first proposed in 2009 in a particular format. That was slightly altered. I am not sure if it is abandoned, as is the correct word, in about 2016. We now have a new Scottish National Investment Bank proposed in 2017. Can you give any comment on what confidence we can have in the new proposal and that it will be progressed? The Council for Economic Advisers specifically discussed the idea of a national investment bank. Of course, one of our colleagues, Marianna Matucato, is a very strong proponent of that. In actual fact, her views are, I believe, shared by all members of the Council for Economic Advisers. We have focused specifically on that in our response to the green paper on the UK industrial strategy, where we focus specifically on the benefits to Scotland of setting up a national investment bank. That process of making that response to the UK green paper really helped to corral and shape a shared vision of what the national investment bank would be across the Council. There are three issues about the current proposal that give me particular comfort. The first is the focus that the national investment bank has to be strategic in its investments. It has to be mission-oriented in its investments. It also has to provide patient capital. It has three dynamics of the national investment bank, which make it a very welcome new addition to Scotland's economic agencies and economic levers. Thank you. Sir Harry Bruns, do you want to add anything to that at this stage? No, not particularly. My interests—I have to bow to the expertise of the economists on the Council of Economic Advisers—are a humble medic. My interest has been in the inclusive growth agenda, the impact of inequalities on potential for economic growth and the impact of the economy on inequalities, the circular argument. I will bow to Sarah's expertise in that area. Fair enough. We will come now to a question from Gordon MacDonald. Thank you very much, convener. General question to start. How do you see the Scottish economy has performed over the last 10 years? If I can give my reflections on that, if you think about the last 10 years, then everything that we see has been shaped by the financial crisis of 2008-09. If you look at the 10 years prior to 2008, you will see pretty strong growth, but everything over the last 10 years has been shaped by the impact of the financial crisis and the policy responses that we, as a nation, were able to focus on. I think that some of the policy responses to that, which have been welcomed, for example infrastructure investment, I think that in terms of the labour market, I think that the apprenticeships growth has been really welcomed. In terms of family policy, I think that even childcare policy, so I think that when we are thinking about the last 10 years, what we are seeing is we are seeing an economy where the labour market has been resilient in terms of employment, high levels of employment, low levels of unemployment, but we are still suffering from perhaps a lack of productivity and we need to focus more on exports. I think that, as part of that, we over-rely on a small number of firms for our productivity and export performance. From my perspective, as an entrepreneurship professor, that is my subject, what I would like to see is a much broader growth of small firms to move not the frontier firms but the firms perhaps in quadrant 2s and 3s, get these current small firms up to a state where they can contribute more to the overall economy in terms of productivity and exporting. For me, I think that we are seeing strengths, but everything that has happened over the past 10 years has been shaped by the financial crisis. Of course, we now have Brexit. You said that there was an over-reliance on a small number of companies. I think that the numbers that I saw were about half a percent of companies that have more than 250 employees looking at the business base in Scotland. As part of the problem that we have is that there is a lack of Scottish-based headquarters. Most companies in Scotland have very few employees, so is that the difficulty that we saw? We saw wholesale takeovers in the 70s and 80s, and we do not have that business base that we once had. I think that there are two different responses that I would give to that. First of all, yes, absolutely, the vast majority of Scotland's enterprises are small, 70 per cent are self-employed, another 28 per cent are in the small categories, so that is one to 49 employees, and of those, most of them are under five employees. In that respect, Scotland is no different from almost any other developed economy around the world where there is a huge reliance and a huge participation of SMEs. How we address those SMEs and how we encourage them and support them is an issue to discuss. In regard to Scottish headquarters, there is an issue there. We have perhaps a very small number of large companies. There is perhaps a very small number of medium-sized companies, and it is that missing middle that perhaps should be of more concern. Of course, the inclusive growth agenda is very much about a bottom-up approach. I would argue that we can perhaps mourn and lament the lack of large companies, but it is also incumbent on us to start addressing how we grow and support our large number of small companies and how we encourage them to be more ambitious and support their ambitions. It is a tougher thing to do, but I think that the prize might be bigger. You have said that everything has got to be viewed through the 2008 financial crisis, but have we seen any improvement in GDP growth, productivity or exports? Has there been improvement during this very difficult period? I think that the data shows modest improvements. Certainly, we have seen a very resilient labour market. As I have already said, we have almost near record levels of employment and very low levels of unemployment, but within the labour market, for example, I think that we have to start thinking about underemployment for women. I think that a large number of women are still employed on part-time contracts. I think that there are definitely signs of progress. We do see companies' exports, we do see tentative increases in productivity. There are signs of recovery, for sure, but I think that that still has to be nurtured. My last question is about inclusive growth and measuring the performance of the economy. Are we measuring the right things? Perhaps I can pass it over to my colleague. I do not think so. GDP is the only game in town in terms of measuring the growth of the economy, and GDP only measures what we produce and what we consume. We have huge inequalities in health and wellbeing, in terms of educational attainment and so on. GDP does not take that into account. It does not take into account the impact of production on the environment or anything like that. There are a number of alternatives to GDP that take that into account. My feeling is that it is only when we begin to look at taking into account educational failure, health failure and so on that we will get a real understanding of opportunities to improve productivity. In the meantime, since Britain Woods in the 1940s, GDP has been the holy grail. Increasingly, it is just not doing it. There is really interesting data emerging from the United States. Everyone here will have heard of the Glasgow effect, which is the increase in mortality due to drugs, alcohol, suicide and violence in younger working-age men in Glasgow since the 1970s. Angus Deaton, the Nobel Prize winning economist in the States, has recently published a similar analysis that shows that white men in their 50s in the United States since 2000 have had a 250% increase in death rate from drugs, alcohol and suicide. He has produced some very elegant maps that show that the counties that were highest in the support for President Trump in the election were the counties that have these high mortalities. He is describing this as deaths of despair when people do not feel secure in terms of their income and so on. That is what has happened in West Central Scotland and, to a certain extent, E as well since the 50s and 60s. We need to begin to start producing incentives in the economy to tackle inequality. Inclusive growth is a long way off the pace at the moment using conventional metrics. A quick follow-up from Gillian Martin and then to Tom Arthur. I am really interested to hear what you are talking about around inclusive growth, in particular the example that you gave around men's health. Recently, we had the minimal alcohol pricing. Do you see things like that that might not look like an economic policy having an impact on that? Yes. The evidence is that minimum pricing will help, but it is a tiny part of that. It is a very complex system with associations all over the place that you are not sure whether they are causally associated or what. The answer in moving a complex system forward is to do lots of things and see what works and scale them up. The whole system begins to move and you might never attribute benefit to one particular action that you have taken, but if we are not measuring the right things to begin with, we will never know if we are moving in the right direction. Being able to measure educational failure, crime, offending behaviour and so on, that will tell us if our society is becoming more cohesive. Social cohesion seems to be at the heart of a lot of those deaths. The breakdown of social cohesion and the things that we might do that would support people who currently feel despairing at their insecurity and the threat that they might feel, the homelessness and so on that is out there, will have an impact on our productivity. I am absolutely sure of that. Welcome Professor Moskotelli, who has just joined us and come to Tom Arthur. Follow-up. How do you speak in reference to men in their 50s and 60s? I wonder what your views are on the impact of insecure and precarious work on those in their 20s and 30s. How that correlates to health inequalities and educational inequalities? For example, a child being raised in a home for both parents or one parent is in insecure work, how that impacts? How do you think we are going to shift to a more holistic look and understanding? How should politicians discuss and how can these broader aspects impinge on things such as growth? Should we be thinking about growth itself? Is that a measurement that is perhaps redundant? No, I do not think that growth is redundant as long as it is the right type of growth. In terms of the 20s, we are currently looking at a wide inequality across Scottish society in mortality in the 40s and 50s. Twenty years ago, that was manifest in the 20s and 30s. We have seen this cohort of young people born in the 60s and so on moving through the population with that wide inequality. It has an impact. There is huge interest now in adverse childhood experiences, so families where there is poverty, where there is insecurity, high levels of domestic violence and there is a big long-running study in the United States that shows that the single biggest determinant of educational failure is witnessing domestic violence in the home. That kind of chaos that occurs as a result of poverty and insecurity is running its way through the whole of society. I believe that we are seeing an intergenerational cycle. The young people who grew up are now having children, and those children are being born into homes where parents do not know how to be parents. They, in turn, will produce the next generation of wide inequality. In terms of growth, the problem with GDP is that it is measuring consumption and production, essentially, of money. It does not measure the impact of production on air quality, on a whole range of environmental things and the use of natural resources, but it does not take into account inequality. There are alternatives that have been developed based on sustainable goals, as enunciated by the World Health Organization and so on, sustainable development goals, in which we could monitor how we were doing. At the moment, there is a belief among many economists that are talking about this that it is in the interests of big business to continue to predict what is going to happen to the stock market on the basis of GDP figures. They are very comfortable with that. There is a vested interest in keeping with GDP, but I think that if we are genuinely going to go for a safer society in which everyone has an equal opportunity to attain their full potential in life, we have to grasp some of those other measures. Specific danger regarding people in their 20s and 30s with the decrease in social mobility. If I think about my parents' generation, my father was born on a single end and a mother born on a prefab and barhead in the early 50s, they were able to go on and have successful careers in the NHS and give my siblings and I a lot of quality of life far better to what they ever had. However, people of my generation are now facing a prospect that they cannot look forward to, in fact, facing a real-time reduction in the kind of spending power and quality of life. What impact do you think that has upon the psychological and mental wellbeing of people in their 20s and 30s? I was brought up quite close to them. I am not sure that social mobility is constrained. I have no figures. I have not seen figures that show that it needs to be. If young people are nurtured appropriately, if they are given support and we are seeing mentoring programmes and MCR pathways for one, which is very active in a number of schools across Scotland, a former medical colleague of mine, who is acting as a mentor there, bumped into him recently and he was cock-a-hoot because a young boy had been mentoring from Possil Park, who was so, family were so poor that he was walking 45 minutes to school and back each day. He's just got into medical school. Folkenbears Den and Lindsay and so on struggle to get into medical school, so it's possible to support young people to be socially mobile and we should build on these kinds of capacities, but there is no doubt that the more we support families in poverty, who feel insecure in their housing, who feel insecure in their futures, the more we're going to get positive outcomes from their children and from themselves. The less domestic violence you have, the more likely you are to have positive outcomes. I think that if we set ourselves a set of measures of economic progress that included measures of inclusiveness and held ourselves to account on those, that would produce a step change in outcome in terms of the economy. I really believe that. We'll move to questions from John Mason. I'm interested in the general area of how the council relates to the government and perhaps we could look at some examples of how there's been interaction. In the first place, can you explain to me, do you come up with new ideas and bounce them off the government or do you come up with new ideas and bounce them off you, or is that not really quite how it works? I think that we could all answer that question, but I think that we'd probably all say the same thing—it's a little bit of both. We have very open discussions, but maybe Anton would like to participate. Let me give you a couple of examples. I think that that's easier to illustrate. Something that the Government has consulted on, as you know, is the issue of raising tax bans and tax rates at the higher end. A lot of the work was done within the office of the chief economist, but we, as is minuted indeed in our deliberations, provided advice on how to look at that. In areas such as inclusive growth or other areas to do with innovation and how to encourage innovation and entrepreneurship, which Sarah has led with, there's been work streams within the council in a very informal way, discussing the issues and putting some input into the office of the chief economic advisor, which then have come to the fore through papers at the meeting of the council itself. That gives you two examples of one that is more led by us with work streams and others, which have been—here's an issue—what do you think about it in the case of tax bans? That's very helpful. If we take innovation, do you feel that the comments or recommendations of the work that the council has done has impacted on Government policy and thinking? Yes, I think so. One of the issues that I'm particularly concerned about—this is something that has been discussed within the council of economic advisors—is the relatively low levels of business investment and, particularly, business investment in R&D. I think that that's an issue that impacts on the economy negatively. I think that there are very important strengths in the Scottish economy within innovation. In particular, if you look at our research intensive universities, I think that there are great strengths in higher education innovation. A relationship between Government and universities through, for example, the innovation centres, through the catapults and, in my own university, very recently the National Manufacturing Institute for Scotland has been set up. That gives us a great basis for discussing innovation and developments in innovation. However, from my own perspective, I'm very concerned about the lack of business R&D and business innovation. The discussions within the council have been around how we increase this and how we get more businesses to invest in R&D and innovation. Have you then made specific recommendations to the Government on that point, or are you not quite there yet? I think that the discussions that we hold in the council for economic advisors are generally within the presence of Government ministers. Therefore, it is more collaborative than rather than us having a discussion and telling Government that it is a collaboration because the discussions take place within the presence of Government ministers. Of course, our minutes are put in the public domain very quickly. If I could come in on that. In particular, in the area of the industrial strategy and innovation, when the UK Government published its green paper, we discussed it in the relevance of Scotland. Actually, out of that came a submission to that particular green paper consultation, which, if you see, trails effectively the creation of the Scottish National Investment Bank, which is exactly the sort of issues that I said that I was talking about, essentially trying to deal with issues of market failure in terms of patient capital, in terms of mission-oriented investment. Many of the themes that you see there, you will find echoed in the presentation that came out a week ago or so on the SNIB and the potential to develop the SNIB as an investment bank. You will see our submission to the UK Government green paper as being essentially trailing some of that. I think that one of my colleagues last more about the bank in due course. Just to take the other example that you gave was tax bans and rates. You said that the Government had asked you for comment on that. Again, did you have much comment to make? Do you think that the Government took that on board? I think that we did. I think that we discussed quite a bit the issues around some of the tax elasticity. Of course, a lot of the technical work was done from within Government, but, of course, the council includes a number of experts around the whole area of economics. We looked at the extent to which some of these elasticities would be relevant in Scotland. Of course, none of us know exactly until you try, because we haven't had any experience in this field. That's a general discussion that was led by an initial paper that came from officials, and then we made our own contribution. I think that it was listened to, because I think that voices around the table were saying, well, if you make a large increase, you're likely to see these behavioural changes. These are the sorts of elasticities that we've seen at UK level in other countries. If you go from more moderate increases, then you're less likely to see behavioural shifts. Maybe just one final question. I don't know how, Harry Burns, you come in on all this, because is there ever attention that one side is looking for economic growth and the other side is looking for a bit more sharing it out? I'm not conscious of any tension at all. We're all in this together, we're all seeing a flourishing future of Scotland, and we have discussions about what flourishing means. As far as I'm concerned, it means that everyone has an equal chance in life of attaining their full potential, and I think that that's agreed. There's certainly no tensions at all between different interest groups in the council. If I can add to that as well, I think that it's really important that the council for economic advisers doesn't view inclusive growth as some kind of trade-off with economic prosperity. I believe that there is consensus across the council members that inclusive growth is very much part and parcel of economic prosperity, and the way that we look at inclusive growth is that economic growth has to include the broadest range, the widest range of people and places. It's about economic success, but also about equality of outcome and equality of opportunity, so it's about increasing the number of people who both contribute towards and benefit from economic prosperity. I think that that's a shared view of the council members. I think that Gordon MacDonald wanted to come in on one of those points. Just a very quick question, and it was a point that Professor Carter raised in relation to business R&D spending that's lower than the rest of the UK. Is there any one thing that the Scottish Government isn't currently doing that it could do to change it, and also bearing in mind that Scottish economy isn't exactly a mirror of the UK economy? Is there anything that the UK Government could do in terms of R&D tax credits or corporation tax system that would improve that situation? I think that there's a range of issues that could improve the situation, and certainly R&D tax credits have been demonstrably helpful within both the United States and also within the UK. When it comes to small firms, I think that the problem actually requires a more hands-on approach. I don't think that small firms respond terribly directly to issues such as, for example, tax advantages. I think that what we need to do with our small firms is to work with them more closely, to get under the skin of the business, to help them to realise people, to get people to realise what their growth ambitions could be and what they could achieve. I think that this has been brought home to me over the last few years. Again, if you don't mind me talking about my own academic department, the Hunter Centre, a few years ago we saw that there was a gap in the support landscape for SMEs, and it was about trying to get businesses to grow. We've got a proliferation of small firms, but we need scaled-up enterprises. A few years ago, we introduced a growth advantage programme, which is that we interviewed 20 companies, their local companies in Glasgow, and over a period of six months they meet one weekend a month. It's very much peer learning and peer support, but it's facilitated by the university. We bring in experts, and it's all about raising not just their ambition but also their sense of efficacy that they can achieve an ambition. At the end of six months, what we've seen is both a 10 per cent growth in employment and a 13 per cent growth in sales. That's just over six months, and then, of course, to annualise growth over a three-year period is much greater than that. Those kinds of initiatives where you're actually working with small firms are really important in terms of changing them and also adding dynamism to the economy, but, of course, that takes hands on work. It's a harder ask, but I think that the effects are more profound and the prize is greater if we can do that, if we can work directly with small firms to allow them to scale-up. Scottish Enterprise do through their account-managed companies? Yes. Out of, I think, 360,000 enterprises, as we have in Scotland, there are only 2,000 of those that are account-managed by Scottish Enterprise, but we can't possibly rely on Scottish Enterprise to do it all. Traditionally, there's been an issue with Scottish Enterprise in terms of the thresholds that companies have to achieve in order to get on to the account-managed programme in the first place. What we're trying to do is plug that gap between ordinary small firms and those firms that have reached those thresholds to get on to Scottish Enterprise account management, and that's where the gap is in terms of support. Andy Wightman Thank you very much, convener. I just want to ask a question about the council, but before I do, I just want to pick up a couple of points that are made by the panel. The Finance Committee, when it was doing work on preventative spend in 2010, cited evidence that 40 to 45 per cent of public spending was focused on failure demand. We've got a situation where, among 16 to 34-year-olds, 13 per cent of them were living in private rented accommodation in 1999. Now it's 41 per cent. Folk living in private rented housing, living in poverty, has doubled since 2000, but in social housing it's halved. The work-stent is the council across the fact that, unless people have decent housing and afford to live at the basic level, all the talk about economic performance and growth is really a bit of a distraction. The issue of failure demand is something that I've been particularly concerned about, particularly within healthcare, where people chase targets and so on. The issue of four-hour waits in A and E is one thing, but why are so many people coming into A and E in the first place? To tackle that requires us to stand back and look at the whole system, the system that leads to people to fail, to be living in inadequate housing and so on. That's really difficult. People struggle to get their heads round that and we try to oversimplify it. Here is a solution to that problem and we try it and it doesn't work and it doesn't work because you need to try 10 or 15 different things and do them all consistently. I have been certainly arguing not just within the council but with other colleagues within the Scottish Government that we need a whole systems approach to that kind of issue. That means being courageous in terms of what we try to stick our necks out and getting the public sector to work differently. If you remember, the Christie commission talked very much about prevention, but the Christie commission recommendations have never really been put into effect because the method for delivering those recommendations is just so difficult. We've been talking about how we start doing that and we start identification of people living in chaotic circumstances and we start looking very closely at how they might be helped to begin to take control of their lives. I've been gathering evidence from a range of projects that have been carried out in other places and I'll just give you one example. I was giving a talk in the United States recently and one of those interventions was being trialled. This American had picked the sort of intervention that I think would be quite important. He was doing a randomised controlled trial of this intervention and what he was doing he was using a concept from medical trials called number needed to treat. If you want to prevent a heart attack or stroke by giving someone lodos aspirin, the number that you need to treat to prevent one adverse outcome like a heart attack or stroke is 1,600 people. He said that so far in the course of this study, the number of people living in difficulty that you needed to treat with this intervention to prevent a suicide attempt or an arrest was 10. You're being to think that it's a bit of a no-brainer here. We really need to try this kind of approach. There are approaches. Certainly, we're in discussion with Scottish Government colleagues about these approaches and it's about giving people a decent, secure life that gives them a sense of purpose and meaning that allows them to feel in control of their lives and that helps them move on. I'm right up for that. Do those discussions include the thorny question that you've just put your finger on about how to, if I could say, account for this? We have plenty of debates in this place about please don't cut the spending of £100,000 on a yellow bus at the top of Leith Walk that's out there on a Friday and Saturday night because it's helping folk to get home who are otherwise end up in A&E or prisons. However, it seems that it's very difficult to have an accounting system that allows the alleged benefits of interventions like that to be paid for out of savings in other places. The current Government's got an ambition to spend £500 million over the life of this Parliament over the rate of inflation on the health service. We should be aiming to reduce spending on the health service and we should do that by making sure that people don't need to end up in the health service. Of course, people will always get sick and stuff. Is there any work being done in the council on how you do that accounting? That seems fundamental to us in all the subject committees in this Parliament. One example, one discussion that we had was around the interconnectedness of different types of spending interventions around the diagnostic and the north-eastern diagnostic. That is an attempt to try and see if you want to understand how inclusive growth can be put in practice, given the fact that different economic interventions impact in different ways. You need to understand all the connections. It is difficult, as Harry was saying, partly because, as you pointed out in the example that you gave, a lot of the spending competencies are cut across different local authorities. Therefore, there is not a single level of control. The work that was done, of course, internally in the Government, but we were exposed to that and contributed to that discussion. It was a very good discussion because it begins to scope out where you might have to say to different local authorities that you need to work together. Here are two or three areas where one is having an impact, one element of spending in one area is having an impact on another, and there are non-overlapping competencies. That is just one example of studies that can help. Wearing a different hat, I chair the Commission on Economic Growth, which evaluates the Glasgow City Deal, and we are beginning to try to do an evaluation of one of the first projects around Sight Hill, which is an infrastructure project, but it has potential on multiple impacts on a really deprived area of Glasgow. We are beginning to scope out there and say, well, let's do a pilot here. Let's see how it is impacting on different elements, not just on the infrastructure itself and the evaluation of the GVA from that, but the impact on what is happening to people's lives, to their work patterns, etc. I will come back and give you a statistic that might cause some eyebrows to raise. The American study of adverse childhood experiences, which has been running for a long time, has very robust data. It has calculated that one year's worth of child neglect, the cohort of children in that year who have been neglected, will cost throughout their lifetime the American economy $124 billion in terms of costs of care, costs of healthcare, costs of imprisonment, because a large proportion of them will go to jail, failure to pay taxes because they will never work. ProRata, that one year's worth of children in Scotland should cost about £1.8 billion, so the kids born in 1960s into chaotic homes will be costing in excess of £1 billion over their lifetime and so on. We are ratcheting up significant costs—a failure demand that I was discussing recently was the costs of taking children into care. Some children with difficult behaviour problems can cost £100,000 or £150,000 a year to look after them. How much better would it be to give the parents maybe £50,000 as a salary to look after them and help them and mentor them and so on so that the child is brought up in a home that can support them? It would save money and you get a better outcome at the end of the day. There are a number of things that we really need to get quite courageous about in order to make a change. I have a brief follow-up to a point that Professor Carter made. You said that small firms do not respond to tax advantages. Has the council looked at the small business bonus scheme, which is costing £250 million a year? It was not that small firms do not respond to tax advantages. What I meant to say was that the tax advantages are perhaps less important than direct intervention through, for example, training programmes. Yes, of course, small firms. Just a technical question. You formally met once in 2017 and had four conference calls. You last met in January this year. I think that your last report was 2016. Do you have a report scheduled for 2017-18? Does your programme of meetings add hawk? Do you try and schedule them? Who is in charge of the agenda? First of all, we have not brought out a report, but that is because our minutes are now put online very quickly. They are in the public domain very quickly. I think that that probably removes the need for a big fancy report at the end of the year. In terms of meetings, we try to schedule two meetings a year. We know the months. They are scheduled whenever we can. In addition to the meetings that we had last year, in 2017, we had one meeting, I think that you said, and a number of conference calls. Most of the members of council were very strongly involved in the inclusive growth conference that took place in Glasgow in the autumn. That was another opportunity for us to meet or many of us to meet and discuss and present our work and to listen to other countries' works in the area of inclusive growth. There are formal meetings that are scheduled and minited, of course, but last year the second meeting was almost replaced by the inclusive growth conference that took place. All the members of the council are very prominent in their own fields and have lots of useful interesting things to say and regularly do say interesting things on their own account. I am sure that, if the council ever feels that its job is to advise ministers, but do members ever feel that they need to perhaps come together and put something into the public domain that is helping to inform the public and perhaps provoked to debate around a topic that it feels that it is not getting enough attention? Or would that be going beyond your responsibilities and role? It is the council of economic advisers to the First Minister, so that is our role. I think that it is an interesting one that you have talked about in terms of putting our work and thoughts into the public domain. Of course, we all do that individually, but collectively I think that the council meetings Anton and I both referred to earlier to the council's submission to the UK Green Paper on Industrial Strategy, the conference on inclusive growth that many of us participated in. I do believe that, almost as a council, we do interact together quite a bit, but my colleagues will also want to say something, I am sure. I think that that is exactly right. We did not feel that it would be particularly useful for us to prepare reports that would be just sitting there as discussion papers. Apart from anything else, it would soak up a huge amount of resource from officials who would be better placed trying to implement some of the advice that we are giving in terms of policy, as opposed to simply giving space to write up our musings, if you like. If you give back to the example in the Green Paper, we did not go into that session saying that we shall submit something independently as a group of council economic advisers to the Green Paper. It came out as part of our discussion to say that we think that we should be submitting something to the consultation, and we did. That was a departure, in a sense, because we ended up putting in a submission that was independent of that of government. I would like to get the panel's views on the Scottish Government's economic policy, the 4i policy. We have touched on inclusive growth, but the other elements are investment, increasing investment, internationalisation and innovation. Those are obviously important outcomes, and I think that everyone agrees with those outcomes. However, if you compare it with, for example, the UK industrial strategy or the economic strategy in other countries, like Germany or Singapore, it is quite light on detail. Do you think that we could get more guidance or the economic strategy would benefit from having more detail and more definitions and more guidance as to how to achieve those 4i outcomes? That is an interesting question. To some extent, there is no doubt that what has been happening in the past couple of years, particularly post the Brexit referendum, is that a lot of bandwidth is being taken up to try to understand exactly where we are going to be, and therefore what sort of interventions would you want. I will refer back to something that Sarah said earlier, because I think that it is really important. A question was asked as to whether there is a single intervention that is going to generate innovation investment. The answer is that I am afraid that there is not, because if there was, we would have discovered it many years ago. However, there is a range of interventions that are being put in place, which I think is absolutely critical. One is the alignment of spend around the skills and enterprise agencies. I think that that is absolutely hugely important. If you look at the range of interventions that exist between Scottish Enterprise, SDS, Scottish Funding Council and around innovation centres, unless those are really aligned, unless there is a single mode of spend and there is a sort of double or triple jeopardy that happens between different agencies, we cannot really make progress in terms of developing new industries, because this is what we need at this point in time. We do need a range of new industries developing in Scotland to try and boost that innovation and growth. I think that the other types of interventions, I think that it will be interesting to see how the SNIB develops, and I know that we will get to that. It will have to make some decisions exactly where to put some of that mission-oriented capital, what are the priorities, and that will begin to define what sits beside behind some of these four eyes, what are the sectors in which we are going to focus, what are the areas where genuinely Scotland can be competitive on the world stage, and so on. If I can also reply to that, because I have the privilege of sitting on the strategic board as well, and I know that Nora Senior gave evidence to this committee fairly recently about the committee's work, but to reiterate what Anton has just articulated, this strategic board gives us a real opportunity to align the economic agencies behind Scotland's economic strategy. When you have a situation where all of these agencies are in the same room, given the same priorities, discussing together, looking for hard alignment, not just the alignment of some back-office functions, but a more systematic alignment throughout their work, that gives us the opportunity to start focusing on some real issues. As Anton has said, I think that that is a hugely important development. Thank you. If I could follow up, there has been a lot to talk about inclusive growth, and again, it is an outcome that everyone agrees with. Looking at the concept of hard alignment, do we need a better definition of inclusive growth in terms of how we measure it and how we can track progress against the objective of inclusive growth? The reason for asking is that we have had the enterprise agencies and other panels tell us that they do not have a definition to work towards, and inclusive growth tends to mean different things to different people. If we are to achieve hard alignment across different agencies, do we need a clearer definition of inclusive growth and what people are actually working towards? Come back to the points that we are making earlier on about the failure of GDP to support action on inclusive growth because it does not take into account a lot of the problems that we see in society that are preventing participation in the workforce, innovation and so on. I would certainly support us starting by looking at some of the alternative measures that measure social progress, take into account inequality across life expectancy and so on, take into account burden on the environment and so on. I came across a quote recently from Robert Kennedy, who talked about the fact that GDP measured what it measured, but it does not measure anything that makes life worthwhile, such as good environments, fairness, support for people in difficulty and so on. That is just about sums it up. If we change the metrics that we used around social progress in Scotland to include them in economic progress, at the same time, we would see convergence between the inclusive growth agenda and the other agendas because it would make Scotland a flourishing country that people would want to come and live and work in. That has to be the aim at the end of the day. That is what we want to achieve. We want people to look at Scotland and say, actually, that this is a good place to live. We will come here. I get invited to speak in Scandinavian countries a bit now and tell them that it feels like Scotland when I go to Sweden or Iceland or whatever. The only difference is that we have better weather. It takes hard to believe it, but there is a lot that would sell Scotland if we converged those four eyes, particularly the inclusive bit of it. Members want to come in on that point. If I can, please. It is quite an interesting question because I am so clear in my own mind what inclusive growth means. I am sure that everybody has their own definition. I think that there is an issue about definition, which perhaps we can clarify. What the agencies face—I also think that there is an issue about measurements that Harry has just alluded to—from the agency's perspective, the challenge is operationalisation. Once we have defined it and we have the measures, how do they go about operationalising it? I think that that kind of road map is probably what would also be helpful in helping the agencies to achieve that particular goal. Your initial question asked about the four eyes. It strikes me that one of the eyes that we have not spoken about too much in this meeting is internationalisation. Internationalisation is one of the areas where the strategic board would be of help to Scotland's economic strategy simply by aligning some of the agencies. We have a bit of an issue about exporting in Scotland. We do not do enough of it, and the companies that do do exporting are relatively few. How do we go about getting more companies to export more product or more services overseas? In actual fact, some of the establishments in Scotland that are the most international are universities. I believe that universities have an important role in helping businesses to internationalise. The alignment of the agencies is not simply the front-facing economic agencies but the skills agencies and education agencies. I think that there is a promise of quite important developments there. I can clarify one point. In terms of taking forward the definition of inclusive growth and putting guidance around it, which agency will take the lead on that piece of work? The discussions that we have been having at the strategic board have included all of the agencies, and we have all been discussing inclusive growth. It is my understanding that we have a common definition and a common understanding of inclusive growth. Maybe we need to articulate a common understanding and a common definition. I think that that might provide more comfort and clarity for everybody. I have far too many questions, but I will start with picking up on some of the things that Sarah Carter has said about growth and the expectations of fast growth by the enterprise agencies versus sustainable growth. Do you think that we have got the levers to encourage businesses to grow in a sustained way? It is not just about the bottom lines, it is not just about turnover that looks at some of the issues that we are talking about today about fair work, about work practices that are going to release the potential of people? That seems to me to be something that is often missed by perhaps the account management process of Scottish Enterprise. I think that that is a very interesting question. The problem with the account management of Scottish Enterprise is that it can only include a relatively few firms. 2,000 out of 360,000 is not much. Those firms that are account managed are rewarded by very important support from the agency. By contrast, I think that we need to grow a much larger proportion of small firms. I think almost by definition that small firms grow in a sustainable way. We do rely on some fast growth firms and we have seen the importance of some fast growth firms, but they are rare examples. The majority of small firms are steady, sustainable growers. It is also my belief, which is backed up by the evidence that small firms also have a strong interest in promoting fair work and community orientation and are very much embedded in their local communities. One of the levers that we have that has been developed most recently has been the business pledge. We have seen very important companies signing up to the business pledge. One of the reasons why small firms have typically not signed up to the business pledge is that they are not against fair work in any way, but the vast majority of small firms rely on either self-employment or family labour. It is not that they do not want to pay anybody a living wage, but they do not pay themselves a living wage. They take drawings, which are more like pocket money, and benefit from the business in other ways through dividends or lifestyle or whatever. However, having the issue of the living wage as being a major plank in the business pledge possibly puts off many small firms simply because it is not relevant for them. Centrifying enough the signing up to the business pledge, for example, will making business support be reliant on actually signing up to those? We could use it more—I think that we could be a little bit more muscular about it—but one of the ways that we could do it, for example, is in procurement. Having the business pledges is almost a pre-qualifier for procurement and business advice and support. If we are doing that, we have to recognise that for many small firms—it is not because they do not agree with the principles—they simply cannot or in some way are hindered by, for example, they are self-employed or they work with their family members, their partners or domestic partners, children and parents. There is an informality about the labour that goes on in many small firms. By no means all small firms, but many small firms rely on family labour. The living wage is a big issue for them. Skills has been not mentioned as such today, but there are skills gaps and access to acquiring skills is an issue. It is something that other panels that we have had in front of us have identified as having an impact on Scotland's economic future, potentially, if we do not address them. I just want to open that out as a statement and get your feedback on that. It is absolutely key to—if we are hard to have that sort of virtuous cycle of innovation and new industry creation—it is going to be absolutely key to that. If you go back actually to the 1980s and you look at why Scotland built up, although it did not buzz as long-lasting as we might have hoped, to strengthen microelectronics, which did not last, of course, because it was largely manufacturing as opposed to R&D. Nevertheless, it gave quite a lot of economic activity over a period of time. The reason that came here was because of the skills factor. That is what attracted many of those industries here. If you look at the industries—I mean, Sarah mentioned advanced manufacturing, you are looking at areas such as quantum technology, you are looking at areas such as life sciences—those are all required levels of very advanced skills. We might normally see as graduate skills as advanced technical skills, so it is an FE as well at a more advanced level and better interface between what is happening in FE and perhaps taking that to the next stage into undergraduate type training. We need to get that absolutely right, because if, say, a life sciences cluster were to develop around Edinburgh, Glasgow, Dundee and really take off, there is no way in which that would demand hundreds and hundreds of highly skilled people in labs. We probably would not be able to supply that from our existing base. It is going to be really important, I think, over the next while to get that joint up between FE and HE absolutely right to try and feed the industries of the future. Can I just say something about the lower end of the talent scale in as much as I have involved in programmes such as developing the Young Workforce in Young Enterprise Scotland and so on that give kids from really difficult backgrounds access to our exposure to opportunities to work and mentorship and so on? As I see it, it is not just the absence of opportunity, but what we have got are a whole cohort of young people who come from difficult homes, who are badly behaved at school, they get excluded from school, a lot of them will end up in employment or something like that. As far as they are concerned, their lives are over because I have spoken to them. What are you going to do when you leave here, while I have got a criminal record, I will never get a job, so I will just sit at home, and drink. I have literally said that to me. Of course, the baby will come along, and there is more perpetuation of this cycle. Therefore, I think that we need to be thinking much more clearly about how we support those kids, excluding them from school is completely the wrong thing to do. I know that the criminal justice system is trying very hard to find alternatives to support, social care and all that, but we need to be thinking at that end, as well as the kids who are getting qualifications at school and are hoping to go on to work. There is an issue of social justice there, but if we are being thoughtful about the costs, they are the ones that are going to cost £1.8 billion over their life course, so we have to do this across the whole of society and particularly pick up the ones who are destined to failure from an early age. Is there a discourse in media and politics around productivity, meaning the bottom line, the GDP, and yet reports come out and it is always the GDP that is looked at? Do you feel that we really need to shake up that discourse and actually talk about how we address this from multiple interventions in a way that it is going to benefit? Just as you used that word productivity there, what pops into my head is the thought that productivity is getting the very best out of our young people. Looking at kids living in chaotic homes, how do we turn them into the physicists of the future? Why not? They have brains as well as anyone else, but they will lose the capacity to learn and so on if we do not pick them up and run with them. Maybe we should set ourselves a target for making sure that no child fails, just not acceptable. I have to say that productivity is incredibly important, but we are starting to think about this as a trade-off. I do not think that we should be seeing productivity growth as a trade and economic equality as a trade-off. For me, as Harry has said, we need to make sure that as many people and places as possible both contribute to and benefit from economic prosperity. For me, productivity growth is dependent on getting more people involved and more equal access to contribute. I just have one final small question. Professor Muscatelli wants to come in. It was also to emphasise that when you look at skills enhancement, that is exactly a way in which certainly both inclusivity and growth go together. The reason why you cannot just say, let's get rid of looking at productivity and GDP—I am an economist after all—is because clearly some of the things that are important to us in terms of that inclusivity are driven from that, are our tax base, for example, matters for public services. The way to approach the problem that you have set out is to look at a balanced scorecard approach. You have to look at GDP and productivity. You cannot ignore it, but you look alongside a number of social indicators to make sure that you are not going in the wrong direction with some at the same time as you are improving the productivity. I have one final question. You all spend a lot of time visiting other countries and looking at what they do in terms of interventions. Is there anything that you would look to in another country that they are doing well that we could adopt in terms of the things that we just talked about? If I can start off by this, one of the issues that we are looking at is obviously the OECD quartiles and the division of countries into OECD quartiles of performance on certain measures. For me, I have found Ireland's performance in recent years to be quite compelling. I think that one of the attractive elements of Ireland, apart from the fact that they are going to benefit from Brexit, where we are handing them economic growth on a plate, but up until Brexit, I think that what Ireland has shown is that there is a more cohesive and a more joined-up approach to a national goal of economic development. I think that Ireland and probably Finland also are two countries that I would look towards in terms of an alignment of agencies and a common goal. Some of the countries that came to the Inclusive Growth Conference, small countries like Slovenia, New Zealand and Costa Rica, a very interesting country, abolished its army by slashing GDP because it was not spending money on an army, but it is beginning to pull away. Some of those countries that are trying all sorts of different approaches, I think that I have been impressed with. Sweden was also involved in the Inclusive Growth Conference, so yes, there are examples out there. New Zealand has just recently changed its government and I am told that its government is beginning to think about different economic models. As I discovered when I was in Sweden in New Zealand last year, they are all Scottish. They are all Scottish. If I could complement my colleagues rather than duplicate them, I think that what is happening in terms of the commitment towards innovation and productivity growth in areas such as Germany and countries such as Germany is also worth looking at. They recognise that some of our continental European neighbours recognise that there is a massive challenge out there with an ageing society that, unless we have managed to boost productivity, actually things could be really quite difficult, especially given the competition globally in Asia. Their commitment to raise R&D, whether that comes from public sources or private sources, but total R&D as a proportion of GDP is really quite staggering. It is not only Germany, of course. Many other countries are looking at that. Many smaller countries as well, some of the Baltic economies, and I think that that is really important. Just going back to the skill side, last week was apprenticeships week, so a lot of my colleagues here will have gone out to visit companies that were taking on apprentices' meeting and talking about the importance. There still seems to be this focus on university, which is the first option, and then colleges, apprenticeships after that. Do you think that we value apprenticeships enough in this country? Do you think that there is too much of a focus on universities, and what are the recommendations that you might be giving the Government on the importance of apprenticeships to be? If I can start with that. First of all, I will never say that there is too much focus on universities. That is not something that I would agree with, but has there not been enough focus on apprenticeships? Absolutely. I think that the undervaluing apprenticeships has been a problem in this country. It is a view that you do not see in Germany, for example, or those technologically competent and developed countries. I find that very interesting. The idea that universities are different from apprenticeships is quite an old-fashioned view. First of all, I see a great deal of college students articulating into universities. Increasingly, the graduate apprenticeships and the apprenticeship levy have enabled universities to offer university degrees at the same time to young people who are working as apprentices and who are able to study simultaneously. What I would see is the ideal of giving equal value to the various different routes that young people pursue, and equal value to vocational and academic pursuits. It is a bit of a false dichotomy, in my view, because universities now teach vocational and vocational is also academic. If I could echo that, I think that we could sometimes get ourselves so hooked up in these definitional issues that sometimes, even if we compare data with other countries, we get into a rut because people say, look what they are doing, and it is totally different. In reality, it is not quite as clear. I was asked a similar question at the House of Lords' Economic Affairs Committee, where I was asked why does Singapore have few people going into higher education? When you look at what Singapore does in their polytechnics, which are now beginning to formalise into more of a higher education system, and we work with them as a University of Glasgow, we articulate, if you like, some of those students into our BSc degrees in engineering and computing science. Their technical and mathematical skills in a polytechnic system are frankly as good as what we have in our higher education system, so it is a matter of definition. We have to look at the whole school FEHE continuum and make sure that we have the right skills pipeline. Otherwise, we get ourselves into a rut and say, it is about pulling this lever and not that one, it is about getting the whole continuum right. That is what Germany is right, that is what Singapore is right, that is what Austria is right. I ask then what discussions you have had with the Government on this and what advice you are giving them in terms of ensuring that process from schools throughout the education system is working in alignment. We have certainly commented on the apprenticeship levy and the very positive benefits that that might bring. Our discussions have also focused on the learner journeys and following young people through school and the different pathways into the labour market. When we have taken a focus on inclusive growth, innovation and skills, that kind of conversation infuses all of our work. Can I also just very quickly ask—obviously, there has been a lot of talk recently about jobs that people are going to do one career necessary throughout their lifetime. They are going to find themselves maybe one, two, three careers. How important it is that we are able to meet those requirements of reskilling, retraining and going forward for people maybe later in life, certainly over 24s but even up to 40-50 going forward? Just one point that I would make on that is that there are two sides to that coin. You need to be the opportunity to retrain but you need to have the resilience to cope with moving from one job to another and being tested like this. Resilience is precisely what is often missing in young people who have come from difficult backgrounds. Time and again, we come back to this thing about supporting families, supporting young people through this journey to feel a sense of control and a sense of purpose and meaning. At the moment, I think that we are making some progress but we have a long way to go. Colin Beattie If we look across the world, I do not think that there are many countries where Governments do not believe that they are in there supporting their local economy, businesses and so on. If we look at the Scottish Government, what should we actually be doing either differently or more of directly from the Government or through its agencies to directly support business in Scotland? I think that the strategic board is addressing just those issues. If I were to say one thing about the provision of support in Scotland, I think that there is some high quality support. I am not sure that I would say that the landscape is too cluttered because that implies that there is too much and I do not think that there is. I think that there are still many businesses that do not benefit from support. What I would probably say is that the customer journey and helping people find their way through the landscape is actually quite hard. If we can simplify and clarify the customer journey, I think that that would help enormously. I think that we are doing a number of things that we discussed before. I think that one thing that we need to pay quite a bit of attention to is simply because it is quite a big investment on our doorstep on the UK industrial strategy. It is partly about leveraging and making sure that we can leverage enough money for Scotland because these are significant amounts. It is also partly about trying to avoid duplicating what is happening elsewhere. This is what most small economies do quite well in Europe. If you look at Denmark or some of the Baltic economies, they look at what is happening around them. If the UK industrial strategy, for instance—this is just an example—was to put a huge amount in a particular sector X in a particular regional economy of England, you might say that there is no point in duplicating that. We also have to be aware about how all that evolves. It is absolutely critical to co-ordinate what we do in that sense with what happens in other parts and other UK regions because, frankly, that is what other small economies do around Europe. Back to the question of clotted landscape. We have heard from other witnesses giving evidence exactly the same terminology. How big a problem is that? Are there too many initiatives? Are they not joined up the way they should be? What should we be doing? I think that paying attention to the customer journey will reveal how easy it is to navigate your way through the landscape. I think that the strategic board knows that it has to pay quite a lot of attention to this. In fact, that is the whole point of the strategic board. The alignment is to clarify, simplify and improve the customer journey and also the learner journey. I am hesitant to say this too much. I know that other people have that opinion because what I am very aware of is businesses that do not qualify, that have not benefited, that do not know how to access. I think that there is a disconnect there, which I think is probably more important. I would talk about the disconnects and how we help small firms to access the help and support that is available because we know that there are many small firms that could benefit that currently do not. In fact, I will comment on one aspect of the clotted landscape. One of the things that we have to continuously do as new initiatives have started is to try to make them coherent. I was very pleased, for instance, to see in the implementation plan for the Scottish National Investment Bank that they are talking about creating clear alignment. For instance, they are bringing into the bank the SME holding fund, the Scottish growth scheme, so that they are not yet putting another element, not proliferation. It is actually saying, okay, we are bringing in this SNIB, let us now agglomerate everything else. We need to do that, I think, systematically whenever new initiatives start. I think that it was also good to see in the implementation for the bank also the fact that they are going to look at whether there are, how it relates to other lending institutions, because again, you do not want to crowd out other initiatives. You want to make sure that what you do is genuinely complementary and different from what banks do, or the British Business Bank. Are there any specific areas where we should be doing more? I personally believe that there is a gap between startup and the account-managed growth. That is where the vast majority of Scotland's enterprises exist, and that is exactly where the gap is. Gateway is supposed to help fill that gap. I think that business gateway is excellent at startups, but I think that having, I am not sure that they are able to provide the kind of support that these businesses need in order to grow, to aspire to grow and to achieve those ambitions, and also to export as well, which is a really important part of their growth trajectory, or should be. I am not trying to play too much burden on the SNIB, but that scale-up finance of the order of 2 million to 10 million is exactly what you need for those companies. If there are ones that could really be promising in terms of acceleration, that is the sort of level of investment and patient investment that you need, which often is very difficult to get. No bank is going to lend you that amount. That is a part of the lending spectrum, which is actually quite difficult to access. I think that Professor Cartlett said earlier that, realistically, the account-managed companies in Scotland are about 2,000. I understand that there are about 2,000. Out of 350,000? 60,000 enterprises in Scotland. How many companies are we talking about that fall into that gap that you were describing? That is an interesting one. I also said that 70 per cent of those enterprises were self-employed people and 28 per cent of those enterprises employed between 1 and 49. What we are really talking about is the SMEs, the small firms, between 1 and 49. We then have a missing middle. Very few companies occupy that sort of medium-sized scale. We also noted earlier relatively few large corporations in Scotland. It is the small firms with a few employees who have the aspiration to grow, who have not perhaps achieved the growth trajectory and the growth thresholds that are required in order to get them on to account management. However, I understand that Scottish Enterprise has modified some of those thresholds because they understand that growth is not linear. It is not a step change. It happens quite in what sometimes looks like quite random fashion, and it also is not always sustained. As I said earlier in terms of the growth advantage programme that we have developed at Strathclyde, you have to get on to the skin of the companies to help to support them to achieve those thresholds and achieve their ambitions. I can see what you are coming from. What I am trying to get to understand is what sort of resources we would have to be deployed to be able to provide the support for this missing section. Is it 500 companies? Is it 10,000 companies? I am not sure. I could not put a number on it, but if we are talking about small firms in Scotland with a few employees, we are talking about 28 per cent of our business base. Some of those will have received help, some of them will not want support or help, some of them receive help—in fact, most of them receive help from the private sector. Typically, they rely on accountants and their professional advisers. The public sector has a really important role, but for businesses it will not be the be-all and end-all. You will not be able to support all of them. If you look at the levels of investment that might be required, even if it is the order of £1 million or £2 million, you are not going to need to talk about several hundreds or a few hundreds. However, 70 companies in Scotland account for most of our exports. If Scotland could double those numbers, you would be doing much better—the same on investment and innovation. Even if we could transform 200 of those companies in that interval to growth companies, that would make a huge difference. That is the panel for sharing their vision for the future of Scotland's economy and laying out some of the steps that need to be taken to get us there. Can I ask the panel to comment on to what degree Brexit is going to make that more difficult and, in particular, the difference between being in and out with a single market? I think that people know my view. I do think that that is absolutely critical. Being part of a single market is critical to the whole of the UK economy, but particularly I think that there are certain sectors in Scotland. The difficulty is that, with the exception of those sectors that can genuinely sell directly into a world market and can cope with tariffs and cope with them. Most sectors in the UK are part of a value chain, and manufacturing and engineering are part of a European value chain. Not being part of a single market is a disaster, because most of those value chains will realign. Services, as you well know, are not covered by any free trade agreement that we know—not CTA for Canada or any other agreement. Unless we are members of a single market, I think that most of the analysis that I have seen suggests that that would be pretty disastrous in terms of GDP loss. We did, as part of the Standing Council for Europe, see some research that was published as part of Scotland's place in Europe's people jobs and investment, which showed clearly that you could lose between 6.1 per cent of GDP to 8.5 per cent of GDP by 2030, if we are not part of that single market. That was validated by the evidence that was internal evidence to the UK Government, which has leaked the buzz feed, which showed very similar numbers for the UK and for Scotland. I think that most people are agreed. I always tend to put a figure that about 99.5 per cent of economists agree that being part of a single market is absolutely critical to the economic future of Scotland. I agree. It is nothing short of a disaster. Brexit was a disaster. The idea that we could even contemplate leaving a single market is similarly disastrous. To the range of industries that Anton has outlined, I would also add agriculture and food and the whole idea of food security. Britain cannot feed itself. We have relied on international trade to feed ourselves for 200 years. The whole idea of coming out of a single market puts us in an extremely vulnerable position. It is, in my view, a disaster. I would like to hear from Harry too, but if I could offer one more question before you comment. Harry, we often talk about the single market in the context of economic growth and trade, but it also has huge implications for the social chapter rights and the security of work. Harry, I am sure that you have something to say about that. What I was going to say is a real worry. Housing insecurity, income insecurity and so on is now very clear. It drives bad outcomes. It drives bad health outcomes. It drives its failure demand. It drives people into hospitals. It drives people into offending behaviour and so on. The social protection elements that we have seen over the past 40 odd years, if we lose those, it is a real problem. The other thing that worries me, and it has worried me since about 2000, when I was asked to go to a conference on the future of the American healthcare system at Stanford Business School, and I sat and listened for two days, and the future of the American healthcare system, as far as those guys saw it, was to get the one-trade organisation to deregulate healthcare so that they could bid to run other healthcare systems. That was, in essence, what this was about, and it took me a while for the penny to drop. So privatisation of healthcare and so on, that becomes, and indeed the Prime Minister has said that she would not rule out healthcare privatisation as a discussion point in any trade deal with the United States, which is really worrying. So there are a whole range of social issues that I think we need to worry about, and they might well make employment more precarious. Just finally, convener, another aspect of the single market is, of course, the free movement of workers across the European Union and the impact it has on immigration. Could you comment on what that might mean for Scotland, for good or for ill? Sometime in the next decade, there will be more deaths in Scotland and births, and therefore the indigenous population, the demographics will become much more difficult, and so far, immigration, particularly from the EU, has been an important source of young talent. There is no evidence that there is undercut wages. If you look at the best paper that has been written on this in terms of the impact on UK workers of EU immigration as a paper that was produced by London School of Economics about two years ago, looking at different local authority areas in the UK, looking at whether there was any correlation between the number of EU migrants coming in and unskilled UK workers—zero correlation. There is absolutely no evidence, and anybody to suggest that there is an impact, frankly, flies in the face of the evidence. There was one study that seemed to show some effect, and that was negated by this study from the LAC because what they did was to strip out all non-UK workers, and the impact was zero. Just to bring a different slight angle to this, Germany has increased massively in its exports to China, which has not been a single market over the past five years. In fact, it has become China's largest trading partner. What is it that prevents the United Kingdom from taking such steps in the world markets when other countries can do so? I think that that is a perfect example of why any suggestion that it is being inside the single market that has held us back is furious. You see other countries in Europe that have been very capable of growing. Some of that is essentially to the sort of products that Germany offers, especially the automotive sector and the advanced industrial sector, which China needs to tool up. There is absolutely no—let me put it another way—the number of trade deals that the EU has done over the past few years with third countries is huge, and those are ones that we benefit from by being inside the EU. We potentially lose those if we decide to go for a free-standing FDA. That would be a huge loss, frankly, because the sort of deal that we could negotiate with China would be not in the same terms that the EU could negotiate with China. You accept that it is possible to increase safe sports whether you are with or without the EU? I think that it is much easier to do it if you are part of the EU trade bloc, frankly, with third countries, including in Asia. If you look at the deal that the EU has struck with Japan, South Korea and that is likely to strike in future with other countries, it is much better than anything that any single country can do. We are a country of 60 million people. If you are a trading bloc of several hundred million people, you generally strike much better deals, and that is, again, a pretty much a given. We will have to leave that discussion there. Thank you very much to our guests for coming in. I will suspend the meeting and move to the next panel. We will resume our session there and welcome our next panel witnesses in our inquiry into Scotland's economic performance. We have first of all Laurie McFarlane, who is a research associate at the UCL Institute for Innovation and Public Purpose. Kerry Sharp is a director at the Scottish Investment Bank, or perhaps the director at the Scottish Investment Bank, I do not know. David Evans, chief operating officer, Archangels, and Peter Rickey, who is chief executive at the Scottish Futures Trust. Welcome to all of you this morning. If I might start off with a question about the level of investment in Scotland, and I think that it applies to the UK as well, that the level of investment is lower than in other countries, could our panel perhaps comment on why that is and how that applies to different areas? Kerry Sharp. The challenge that we have in data is that we do not have very many international comparators that we can look towards, the way people collect their data and how they publish it is very different across the world, so it becomes difficult for us to look at what we do in Scotland versus what is carried out elsewhere. Within Scotland over the past 10 years, there has been a massive increase in the funding market and the risk capital side, which is the side that I am most focused on. If we go back maybe 10 years or just shy of 10 years, there was around 100 million of risk capital investment in Scotland. Now it is around about the 400 mark that could give or take, so there has been quite a rapid increase in that area and there are lots of different elements to it around smaller businesses. I am getting more funding at the sub-million level. There is quite a lot of additional funding flowing into companies, and there are a number of larger investment deals as well. The last three years or so have sought more of the 20 million plus deal size, which is quite unusual. In Scotland it is always feared that it is slightly less on the bigger deal sizes. There has not been a proper analysis done, but about two or three years ago we looked at what we would see as our comparators and looked at where we played in that market, and we needed more of those bigger deals. We started to see that coming through over the last three years, so we feel now that we are being a better player in that overall international scale. Laurie McFarland, do you want to come in? Certainly, if you look at the available international data comparing at an aggregate level and levels of investment in Scotland and the UK, overall, that level of investment has, for a long time, been lower than perhaps other comparable advanced economies. In the UK and in Scotland it is roughly about 17 per cent of GDP. The UK is 118th in the world according to the World Bank, which is right down the lower end of the scale. Within that, of course, that is overall investment in public and business. Within that level of business investment are, again, in Scotland and the UK, relatively low, Scotland is slightly lower than the rest of the UK. One of the things that I think is particularly concerning, if you look over the past 10 years, for example, again, this is the UK level because the data only exists there, but the level of, if you look at the level of the capital stock minus depreciation, which is what you basically need to stand still, on a per person basis, the growth of that has been negative since 2012, which means that it has not been investing enough to maintain the level of the capital stock at that level, which I think is concerning and has links to other issues like productivity, etc. I also think that within that level of investment, again, just looking internationally, one thing that stands out is particularly the low level of R&D level investment, which I think we have heard about in previous panel sessions, where, again, the UK stands out as being low, it has been falling for the past 30 years, and Scotland within the UK lower within that. Obviously, there is lots of evidence that R&D investment is important for a whole range of things from innovation, productivity, etc. I think that, overall, when you look just at the broad brush picture, there is the case that Scotland's level investment is perhaps lower than other countries. I think that it is important to ask why that is, and if it is an issue and if it is, what we should be doing about that. And do you have any ideas why that is? So, I think that there are a whole range of contributing factors. One that is often pointed out is the industrial structure of Scotland's economy and the UK's economy being very different to other countries. So, for example, people will point to Germany and look at there, which is much higher level of manufacturing, tends to have much higher levels of investment in capital equipment than a services-based economy does. Even when you look at that and you adjust for that, it still stands out as being perhaps a bit lower than other countries. Other issues might come on to talk about as well, issues with finance and the availability of finance and the type of finance available. There is also some evidence to suggest that the corporate governance arrangements, particularly in the UK and the US, has incentivised the focus on the short-term rather than longer-term investment, which has incentivised companies to put off perhaps longer investment decisions in favour of doing things like share buybacks and things like that. I think that there is also just the issue that companies and businesses will invest on the basis of future growth opportunities, if they feel that they are excited about opportunities and identify areas to make investments that they think they can make profits out of. It is about that kind of animal spirits of business. In Scotland and the UK, in some cases, it has got better at this over the recent years by some of the interventions that have taken place, but getting that animal spirits of firms that are willing to enable to grow and expand and innovate is something that perhaps we do not do quite as well to do in other countries. I can speak more for infrastructure investment and public investment than anything else. Similar to the panel earlier this morning, that has obviously been hit very significantly since the global economic crisis in 2007-08. Since that point in time, the public budgets for spending on infrastructure dropped very significantly. We have been using in Scotland all the available levers that we have to try and maximise infrastructure investment because of the impact it can have on the economy both in the short run and in the medium to longer term, although the short run impact is supported by a lot more people than the longer run impact, which is questioned by some people. We can maybe come back to that if you wish, but things like tax increment financing and the non-profit distribution programme have been put in place to try and, as I say, use all available levers to maximise investment during that period. Scotland has got a reasonably good regional performance The OECD report on transport said that in 2016 it was the region outside London that had the most investment. Graham's own Fraser commentary showed that in 1415 the construction industry in Scotland was particularly strong and that was driven by public sector infrastructure investment. Across all of the areas where the public sector spends on investment, it has a particularly high multiplier effect, so it is a good thing to invest and spend money on to get that short-term economic effect. The longer-term impact of that investment is much more particularly characterised by the need to make the investment in the right thing. The short-run economic impact of investment in infrastructure activity, the Keynesian effect, if you like, is much the same whether you are digging holes and filling them back in again or whether you are rolling out broadband infrastructure across the country. The medium and longer-term impact is massively greater, I would suggest, if we make great investment decisions about where to focus that infrastructure investment and things like decarbalising to transform the economy and on our digital connectivity, where there are some very strong links in the, for example, the information that the OECD gave you on the correlation between broadband and mobile connectivity and productivity. We can definitely make the best of that investment by a doctor in the right place. Finally, I would say that that is not just to say that connectivity is everything in that investment. Affordable housing can be a big barrier to an economy in a particular place. The social infrastructure is really important for the inclusive growth that we have talked about and particularly for young people in creating aspirations through having great places to learn. Across all those different areas, infrastructure investment can do a lot for the economy and for inclusive growth, but targeting it in the right place is what SFTs are particularly engaged in and a lot of other people are as well. That will give maximum benefit over the medium to longer-term as well as just the short-term impact. David Owens Can I just pick up on Laurie's point on R&D? I think that one of the things that we do really well in Scotland is R&D to the universities. We have got some world-class universities there. The problem is, though, that R&D can take a long time to commercialise. Therefore, for conventional providers of capital—I think private equity, I think venture capital, I think corporates—it is not an area that they necessarily want to invest in because they require a return on their investment. From our own track record, as investors in early-stage R&D companies, it can take 10 years plus to get a company from the stage where it is developing an interesting piece of disruptive technology to the point where that technology reaches maturity or the company in which we are investing reaches commercial maturity. Our deco carries points about levels of investment within the early-stage risk capital market, which is where we operate. Over the past 10 years or so, we have seen an increase in investment capital in that area. Partly that is driven by the establishment of the Scottish Co-investment Fund back in 2003. What we have seen is that that has leveraged in, crowded in an additional number of private sector players. If you go back to 2003, there were half a dozen or so business angel syndicates operating in the market, and those are the people who invest in early-stage technology businesses. This year, there are around 20 or so. With my Link Scotland's umbrella organisation for business angel syndicates in Scotland, if you go back to the point where the Scottish Co-investment Fund was established, Link, which probably accounts for about a third of the investment activity in the sector, was doing around £10 million of investment activity in the sector. In 2017, it was doing £50 million, so you can see that this policy intervention has had quite a significant impact. The fundamental problem is that R&D takes a long time to commercialise, and therefore, if you are going to encourage investment into the sector, you do need policy intervention in the sector. I think that following on from the convener's questions, maybe I can just seek a little bit clarification, because I feel that I am getting a little bit of a mixed message here. I was especially thinking, did the financial crisis have a big impact, and Peter Reakey specifically said that it did, and that things have been bad since then. But Kerry Sharp, you were saying that over the last 10 years, there has been this increase from 100 million to 400 million investment. And then, David ovens, you said that since 2003, there has been a kind of increase. Was that dented by the financial crisis, or was that—I will just try to get a picture for the whole thing over the last 10 years? I think that you have got to look at the stages of company evolution. We invest at a very early stage in a company's evolution, so typically for us it will take about 10 million investment capital to get a company to the point where the technology is mature enough, the company is commercially mature enough for other sources of more conventional capital to be interested in that company. It is within that specific context, with that specific space, where we have seen an increase. I think that undoubtedly we have seen a decrease overall in the level of capital investment into businesses, specifically into more mature businesses. I would just add to that that the financial crisis has a huge impact on banks and the debt market. It did have an impact on the equity market but not as much. Of course, equity is at a high risk, so you are taking on board the risks that exist in the market to invest through equity. We are talking about slightly different things there as well. I am sure that you are all aware of the impacts on public budgets of the global financial crisis and the time that is taken to recover. Just last year or so, there have been some more significant increases in capital budgets, but until then there has been an impact on public and the capacity to invest. It has had an impact as well. I understand that a lot of PFI, all of those schemes were to get things off the public balance sheet and I think that that has affected Scottish Futures Trust as well in PDs and so on. Has that had an overall effect or has that just worked its way through the system? The programmes of activity of the MPD and the Hub Design Bill for Finance and Maintain were designed to deliver additional investment. The rules changed in respect of MPD has stopped that being the case. Yes, there is an impact on the additionality and the capacity to invest over and above capital budgets, but we also need to be mindful of affordability as well. It is not something that you can just keep on doing forever in that way. The Scottish Government, as you may know, has set the long-term cap on repayments of 5 per cent for that sort of capital investment pay-through for the long-term revenue budget, so it is a balance between those two things. One of the suggestions that we have had is that there seem to be so many schemes and so many ways of additionality as well as your traditional funding that, especially small businesses, may be confused by the whole landscape. Nora Sr touched on that when she was here. Is it your feeling then that the whole marketplace is too complicated? Is that being overstated, or does it affect different companies differently? Certainly, from a small company point of view, it can be challenging to understand the landscape, and we are very aware of that. Companies range from very little knowledge of finance at all through to quite a lot of experience, but even when you know a lot about it, the difference has been net and equity in the light, it can still be difficult for companies to understand where to go. Across the public sector, in particular, we have tried to take a lot of action in making it more streamlined, making it easier for customers to understand. We have taken a lot of digital approaches forward to try and allow that customer journey that was talked to early, so that companies can see where they need to go, but there is no doubt that there is complexity there. Ultimately, it is about trying to provide as many different products and interventions to support as many different companies as possible, so by nature of that, there is a lot out there. Certainly in the public sector, and we try to work closely with the private sector on that as well, the need is to co-ordinate and align what we do rather than take things away, because ultimately there are going to be companies that will lose out if that is the case. Is that your view, Mr Evans, as well? Yes, absolutely. What I would say is that there are lots of effective interventions out there, so the Scottish Co-Investment Fund, from an investment perspective, is certainly one of those. The account management system within SE is definitely one of those two, but I think that the dots could be joined up a bit better and I think that the whole thing could be simplified from a company perspective. Certainly the interventions that are there are largely effective. No, I would add too. A number of witnesses have felt that Scotland lacks ambition. Do you agree with that? If so, why? Does Scotland lack ambition? No, in terms of the entrepreneurs that we back and the business plans that we see, there is certainly a lot of ambition there. I think that entrepreneurs needed the support to get there. If I can take a step back, we are talking about GDP growth and how you get GDP growth. Effectively, we are looking to expand the productive capacity of the economy in Scotland. That means increasing the number of companies that are exporting and increasing the number of well-paid jobs. Adding to the pool of people who are in that higher and additional tax band, the way that you do that—I think that Dean touched on this earlier—was that we need an industrial strategy within Scotland that links into the UK context, but we need to look at the specific sectors in Scotland that have the capacity and ability to provide those additional high-pay jobs and to produce those companies that are exporting. We need a specific strategy within all those. We need intervention from the public sector to help to address the deficiencies within the specific sectors. In technology, I think that there is a lot of ambition, but there are specific market failures that need to be addressed. The biggest challenge is in the provision of scale-up capital. I am encouraged by the ambition of what Ben Higgins set out in his implementation paper for SNP. If that is implemented with the ambition that he set out, it could be a useful intervention. I do not think that there is a lack of ambition in Scotland, but we need to be better in encouraging and facilitating the people with ambition to grow their companies. To add to that, certainly the companies that Arkangel and ourselves invest into are ambitious companies, but there are, outside that, a number of challenges that exist as well. We can get frustrated sometimes when products that are put to the market and the demand for them is not as much as we would like it to be. Certainly one of the big discussions as part of the national investment bank discussion was around that supply of finance is very important, but as is the demand. Having ambition behind the companies and also their investor readiness to be able to access the capital. There was a report a couple of weeks ago from the British Business Bank that looked at smaller companies and their financing needs. One of the stats that jumped out to me was that 70 per cent of companies do not want to take on any funding to grow their business, and they are happy to take less growth in their business rather than take on external funding. That is not good. Is that lack of ambition? Is that discourage borrowers? Is that issues with how they think they will be treated in the market? It is difficult to know, but there is something that we need to look at around that demand side and making sure that we can create that and deal with that in a way that when there are supply interventions there, the companies can get the funding and grow to the success of the economy. I am pleased that there is a bit more optimism about the ambitions of Scottish companies, but, leading on from what you both said there, presumably there is a reasonable supply of funding for those companies. No? That is where we need to look at the specific industry sectors and drill down and understand where the market failures are. If you look at the technology sector, one of the things that we have done really well in Scotland is to develop an ecosystem where somebody who wants to commercialise R&D can get the first chunk of funding. We have a really good ecosystem. Scottish Enterprise plays a large part in that. If you want to raise the first £2 million of capital, you can do it relatively easily in the Scottish context. However, we have invested for 25 years in innovative companies, and it takes more than £2 million to get a company that has interesting technology to the point where it is commercialising that interesting technology. It can take up to £10 million. I will give you two specific examples from within our portfolio. Touch by Onyx, we invested in 2003, and that was literally an idea, a concept. It was a spin-out from the Scottish Health Service in 2003. They do upper prosthetic limbs, bionic arms and hands. We put £12.5 million of investment capital into that company over a 13-year period to get that to the point where it was of interest to a purchaser. Optos PLC, which created a retinal scanning device, again was a piece of paper and an idea back in 1992. That took £38 million of investment capital over a 14-year period before it listed on the London Stock Exchange. It is now employing 400 people worldwide, 200 of those in Dunfermline. The problem is that, as we talked about earlier, investors in this early stage technology space are largely high net worth individuals. It is business angels and syndicates effectively. The problem is that these individuals can only go so far. Without policy intervention that allows them to go further, you have a real issue in companies that are innovative, which have high growth potential and could be the exporting companies of the future. They are just not able to access the capital that they need to do that. The specific gap in the market now, which has been identified through the SNP implementation report, is really that £2 million to £10 million of investment capital. There is not enough of that in the market in Scotland just now. Are you saying that the Government should be providing that? I think that the Government should encourage the private sector to provide that. If you look at how that is done in terms of policy intervention currently, at the UK level, our investors are incentivised, if you like, through tax incentives. The main one of those is the EIS scheme, the enterprise investment scheme, but there are other VCT rules. At the local level, the investment that we make is leveraged by Kerry and her colleagues through the Scottish Investment Bank. Where I am encouraged by Benny's report and SNP is that we are now looking at that or £2 million to £10 million gap. We are saying that we can leverage further and try to crowd in the private sector to address that specific market failure. Based on what you are saying now, would you say that there is a disconnect between supply of finance and demand for finance? Is that universal or is it just sectoral? I can talk for the technology sector. That is my area of expertise. In the early stage technology sector in Scotland, the supply of capital does not meet the demand for that capital. I think that it is important to make the distinction between quantity of finance and quality of finance. Generally speaking, in Scotland and the UK, there are lots of finance sectors. We have one of the largest financial sectors in the world relative to the size of our economy. Much of that is doing things such as mortgage lending or intrafinancial lending or other things. What we really do not have much of is the kind of finance that has been identified by David, which is the kind of long-term patient committed finance that is needed. It is particularly important for innovation. If you look across countries and other places that have been particularly successful at that, regularly you see that there has been a really important role for public policy and early stage public funding—the places that have flourished in terms of having smart innovation-led economies. Whether that has been through research and development agencies in the United States, whether it has been through public venture capital funds such as YOsma in Israel, whether it has been through state investment banks such as many European countries, institutions have been critical in fostering that kind of catalyzing that kind of innovation. We should be focusing on the quality as it applies to specific areas of the economy rather than the overall quantity of finance that we see in the economy. You made reference to patient finance. Previous witnesses have talked about the distinction between providing equity capital and providing debt. Is that an important factor for you as well? Certainly, equity and debt are very different for different purposes, but both of them can be patient in their own right or either of them can be patient in their own right. When we talk about patient capital, equity is the main thing that we are referring to at that later stage. The challenge that we have in the market and back to some of the earlier points is that a lot of the funding that is provided when it is provided is through closed-end funds. There is always a timeline for funding to come out, because investors need to make their money, otherwise they would not be doing the first place. A lot of funds are around 10 years, sometimes a little longer, but it can take longer than that. The examples that David News used earlier, just now and again in the British Business Bank report, talked about exits that are 10 years plus. We used to talk about five to six to seven years and the last number of years it has been 10 years plus. That does not suit a lot of funds. There is a need to have capital that does not need to follow that life cycle that can be there longer to support the companies through the growth trajectory. Ultimately, companies need to have choices for growth. If the equity funding is taken away, they have limited choices. Either they need to sell or they need to IPO, which might not be right for the business if they want to grow. Ultimately, what we need in Scotland is a number of different players with different types of instruments, different types of capability, when it comes to how patiently they are able to be, and to ensure that our companies can pick and choose rather than go on with whatever is available in the market. Will SNIB be providing equity capital? That is certainly what was recommended in the implementation plan. Clearly, that is Benny's plan to government, to decide what to do, but if that is implemented in the form set out, that is definitely something that we will be doing. We have had a few witnesses in front of us that have said that, because of the financial crash, high street banks are not fulfilling the role that they used to anymore in supporting small businesses in particular, startups in particular. Other countries have been mentioned as doing things a little bit better than us, for example Germany. Of course, Germany still had the Sparcastle model, which provides locally-focused, not-for-profit-type assistance loans, not just in the domestic market but for businesses. Ireland is looking at adopting the Sparcastle model, should we? It is an interesting question. First, you mentioned a shift in the banking sector in the UK since the French crisis. There is a longer trajectory of shifts that precede the French crisis, where the shift and consolidation in the UK banking sector, whereas previously we had quite a lot of different players, regionally, locally focused, different models, more building societies, savings banks, trusts, etc. A lot of that has consolidated, and we are now in a position where it is quite a consolidated sector dominated by a few high street banks. Again, you mentioned that that is very different to what is the case in other countries. Germany is perhaps the biggest example on the other end, where you have a large proportion of the banking sector that is focused with public savings banks, the Sparcastle, which are a network, a decentralized network, of publicly owned institutions. They provide the backbone of SME lending in the German Mittelstand, which is the heartland of SMEs, the industrial heartland of Germany. There is also quite a vibrant cooperative banking sector in Germany, as well as your commercial banking sector. I think that it is important to highlight the shift in the UK away from what used to be relationship-based lending, if you like, where you could have a relationship with your branch manager who would have the power to make decisions and would make decisions based on the relationship with the business. A lot of that has shifted in favour of centralised credit scoring. There is evidence that it suggests that that shift amplifies the market failure, which has long been identified with SME lending, with information asymmetry between firms and lenders, by doing away with that softer information exchange that you have in banks. Today, if you look at what banks do in the UK, high street retail banks, very little of their lending is for business. According to the Bank of England, 4 per cent of all bank lending is for SMEs and less than 10 per cent for what you might call real economy business. So, non-real estate-related, non-financial sector-related lending is a very small part of what banks do. There has been quite a big shift. Indeed, a lot of that does precede the financial crisis. Since the financial crisis has been, there was the credit crunch, a real pulling back from lending of all kinds, including to business and mortgage lending and other kinds. That has started to recover somewhat now. Lending to non-financial corporations has turned positive again in the past few years. However, I think that it is interesting to look at how different types of institutions, perhaps of different types of customers, are better and what we can learn from other countries in doing that. We have a situation where, of course, we are having high street banks closing their branches on the one hand, so it is affecting domestic customers. There is also the gap that has been identified by ourselves but also by people in previous banks, where there is a gap in terms of the financial support and lending given to SMEs. I would be interested to hear from other panel members whether you think that there is a gap in the market in both sides that could be filled by something that is not-for-profit model and regional lending that the SPARCASA gives Germany. One thing that I would say is that, certainly, the evidence that we have got suggests that companies looking to borrow less than a million pounds is certainly at a challenge. It is the most difficult area of lending to get, so there is no doubt that that is a bit of a challenge. One of the things behind that that we need to be in mind is that companies should be viable to be able to get funding in the first place. One of the questions is always if that is the case for a lot of the companies that are unsuccessful. However, the other point is that loans need to be paid back. That is just the nature of them. It is not always appropriate, particularly for early stage and start-up companies, for loans to be the right instrument. Equity, which we have mentioned a lot already, is clearly a product or an instrument that is there that could be more appropriate for companies than lending. There is also a number of grant interventions from Scottish Enterprise and others that could also support. Whether there is a particular need for non-profit making intervention, I do not know the answer to that. However, as it is a public sector, we would always start in non-profit making, given that there is a need for public sector resources to be returned and to be recycled into other areas. However, we recognise that area and the debt market are something that needs to be looked at. Again, it is mentioned in the Scottish National Investment Bank implementation plan that there is a lower level of debt. We want to look at that and see what can be done. The Scottish Enterprise and Account Management has already heard from many other panels that there are often barriers in place. In particular, women-led businesses are not getting the same kind of equity in terms of access to business support from these larger agencies. Do you not think that there is a real gap in support of that type? Of financial assistance for women-led businesses that could be filled by something like a non-profit bank? I am going to come back to it. If we are talking about policy intervention, I think that policy should intervene where there is a market failure. Kerry made the point that debt is an appropriate funding instrument for companies that are mature and can service that debt. Therefore, we have big banks in the UK who should be capable of filling that gap. The real market failure is in the equity capital space. For R&D companies, they are not generating turnover for the first few years, but even then, when they start to generate turnover, they tend not to be profitable for a long period of time. Therefore, the appropriate financial instrument for those companies is equity rather than debt. The focus of SNP should be on equity rather than debt. On your point to women entrepreneurs, a quarter of our portfolio is led by female CEOs, so we see ambition across the spectrum. The SNP has been launched, and quite a lot of publicity surrounding the launch of the SNP panel members have discussed it. It is committing to invest hundreds of millions of pounds in the Scottish economy and Scottish business. 18 months ago, we saw the Scottish growth scheme being launched with a similar commitment to invest up to £500 million in the Scottish business community, but so far it has only invested, I believe, £25 million of the £1.5 billion commitment. Can I ask the panel for views or insights as to what reasons are behind that very limited investment from the Scottish growth scheme into expanding businesses? It is fair to say that, with any new initiative, it takes time for funding to be invested. I am sure that the scheme that is launched will be subject to that. We have benefited twice now from funding through the Scottish growth scheme. One of the things was for our Scottish European growth co-investment programme, which so far has not invested any of the funding that the Scottish Government has committed to it, but that is just the nature of the programme. It is a new programme, alongside the EIF. It is in that scale-up capital space, so it is particularly relevant at the moment, but there is nervousness from companies and investors with Brexit and other things. By the nature of the programmes, it is new. It is first in class. It has never been done before with the first in Europe to do it. It is just taking time to educate the companies and to speak to the investors. There have been a lot of inquiries and a lot of discussions with investors, and we are very hopeful that we will start to spend some of that Scottish growth scheme money soon. Would there not be similar concerns around the Scottish national and bank? We understand that the Scottish growth scheme is going to be taken under the umbrella of the Scottish national investment bank, so what can we do to prevent similar issues arising when the SNP is implemented? I guess that the supplementary question is, is it a lack of demand from expanding businesses that we are seeing? Is that part of the reason why there wasn't a stronger uptake on money available under the growth scheme? I do not think that there is anything that we need to prevent as such. It is just the nature of funding being available that it takes a while for companies to understand that it is there, to understand what it is, to make sure that their investors are ready to be able to access it. The nature of any new funding instrument means that demand needs to be either upskilled or set alongside it from the point of view of being ready to access it. I am not seeing it as an issue to be avoided with the new national investment bank, but it is certainly something to be very aware of that things do not happen overnight. It takes time. I move on to another discussion about expanding business. A lot of the discussion so far has understandably been about finance. What other challenges do expanding business face in Scotland? What do you typically see as the barriers to companies moving from where they are right now to expanding their business or moving into the export market? If I could ask what policy responses work best to address those challenges? When we look to investing companies, the three aspects for us are the product and the market need that that product is addressing. It needs to address a specific market need. We are not particularly interested in things that are trying to create a new market. We then look at the quality of the management team. That access to capital is a given because if we make a decision to invest, we will support that company for the duration. However, the biggest challenge that companies typically have is that if they are moving from that R&D phase through to commercialisation phase, the skillset that the individuals running the business need to do that changes over time. Access to talent is therefore one of the key challenges that companies face. As we breed success with an ecosystem, companies like Sky Scanner, we are certainly seeing that talent re-emerging in different guises within the sector. We have significant support from SE in that regard, too. Given that, certainly through our module, we work alongside private sector investors like David, so I will not surprise you that I agree with all that he said. Certainly the funding that we always see is absolutely critical, but alongside that is the skills and that includes the skills within the company itself, but leadership skills as well. Obviously growing a company, particularly a global company, takes a lot of skills and expertise and being able to either locate them in Scotland or being able to bring skills in and to be able to recycle those skills within our company base and the new opportunities is really important. Certainly within Scottish Enterprise and Highlands and Islands, there are a number of leadership support schemes that are critical to enable companies to grow and to start to export and to become global companies in due course. The use of digital technology with companies, David, you said that you focus on technology companies, but I guess that this is not a sector question. It is more the use of e-commerce in companies. Do you think that Scotland has the right policies in place and are you seeing businesses using e-commerce enough, both for the domestic market and for the export markets, or do you think that there is much more that could be done when it comes to companies and the business community using e-commerce? I think that e-commerce is fundamental to growing companies. If you looked at the patient capital review that the UK Government initiated, you looked at a cohort of 1998 companies and looked at which of those companies had grown over a 15-year period. It was a very small number, but the key driver there was adoption of new technologies and adoption of digital processes within the business. As a driver for growth, it is really important. I am probably not qualified to comment on the policy position, but access to broadband is critical to that connectivity. On the question over, are we doing enough? I do not think that we are. There is a long way to go. I agree with David Taylor that the future is very much digital based. Within Scottish Enterprise, we are seeking to support a number of companies in that move. Digital First is what we name it, both within Scottish Enterprise itself and also in support of our companies. There is definitely a need for us across the economy to embrace digital and what it can do for us. When we do that, the benefits we will get from will be dramatic as the economy starts to grow. The focus of the inquiry includes identifying challenges and opportunities facing the Scottish economy over the next 10 years and what actions are required to make the economy more inclusive, innovative and international. We want to take a view on what we see as the role being played by the Scottish National Investment Bank. In that respect, Laurie McFarlane would be interested in your views, having looked at those institutions, what lessons we can learn from other state investment banks and what we, as parliamentarians on this economy committee, should be looking most particularly at as the Scottish National Investment Bank develops. Part of the work that we have been doing at IIPP has been around looking at the role of state investment banks as they exist in other countries around the world and what we can learn from that. One of the key things straight away that you notice a difference between is institutions that are sometimes called mission-led, which are focused on specific challenges or problems that have been identified in that country, which drive the activity of the institutions. On the one hand, other institutions that have a more static mandate, such as focusing on things such as competitiveness or growth, the difference is in institutions that have directionality built into them. They are not just about fostering growth or innovation, it is about having a directionality to that growth and innovation. What kind of growth and what kind of innovation? Just to give one example, one of the most successful banks is the German KFW. They have three mega-trends grand challenges that steer the activity of that bank, one being climate change. About 35 per cent of all the investment done by the KFW is orientated around that mission. That does not just mean investing in green sectors or traditionally renewable energy. It also means working with firms such as Steel and other industries in order to green their activities. The other mega-trend that we focus on is demographic pressures, ageing population and how the German economy can adapt to different demographic pressures. The other mega-trend is about technological progress and international competitiveness as well. The approach of being mission-led rather than either being static focused on growth of competitiveness or picking specific sectors can be very successful in fostering growth and innovation, while avoiding some of the pitfalls that banks and other institutions have succumbed to if they focus on a purely sector of focus. We are going to pick a specific sector and that is what we are going to support, which can have its drawbacks in particular. That is really important. Other things to bear in mind, we already talked about having different types of instruments available at the disposal of the bank. If you are going to have a wide remit and play a significant role in the economy, it is important to have different types of instruments to match different types of projects in different areas of the risk landscape. The implementation plan, published by Benny Higgins, set out the ambition of being able to offer a wide range of different instruments in order to support investments in line with the different missions of the bank. It is clear in the implementation plan that the ultimate remit and missions of the bank will be set by the Scottish Government. There were some recommendations in the report around low-carbon economy, around demographic things, about local regeneration and placemaking as being potential candidates for that. The process by which the missions of the bank are set and how they are monitored, evaluated and assessed over time is an issue that will need to be considered. There is a recommendation in the implementation plan that the Government should set up an advisory, stakeholder advisory group to feed into that process, which is an interesting development. How do you engage wider civic society in the discussion around what a bank like that should be focusing on as its priorities? That is something that will be interesting and something to think about. Other observations are content with that answer. I am particularly interested in the extent to which we build in flexibility for such an institution and the extent to which we build in some kind of democratic parliamentary oversight of such an institution. Have you got any thoughts on that? Certainly from a flexibility point of view, I think that it is fundamental. One of the things that we all try to do in this area is to work at where the gap is. We like it to be something and have a start and an end and be able to describe it. The reality is that it does not work like that at all. The gaps are evolving all the time and the parameters are changing all the time. It is very important to have a support mechanism that should adapt either to that evolving nature of the gaps or when something happens from left field that is not expected to be able to get around about it very quickly and provide some to support companies rather than go through a whole process of identifying the gap and being able to take it to support. For me, flexibility within the model is going to be a huge thing to make it successful. I just wanted to ask a question. We heard witnesses this morning tell us that there is a lack of medium-sized companies in Scotland. We have got about half a percent of large companies over 250, but there is a big gap between small companies and large companies. There are no medium-sized companies. If I understood David Evans' research and development startups to commercialisation takes about 10 years, there comes a point when investors want to return their money. The quote was when it is attractive to a buyer. Can you say something about what the benefit to the economy is of having long-term equity financing in place for those growth companies and the benefit to the economy in terms of quality in jobs and job creation in supply chain if we have that in place? Secondly, is there any country in Europe or wherever that has got this right so that we are not forced to sell out companies when we reach a certain scale? In relation to the first point, we have the Hunter's Centre for Entrepreneurship to look at the economic impact of what we do. For every pound that we invest into those companies, we are generating up to £14 of turnover. Turnover is important because that adds into GVA within the economy, and for every pound that we invest, we are creating up to £9 of GVA within the economy. That is really important. If you look at our portfolio, those are very high-risk companies, and up to half of the portfolio will ultimately fail, but even those companies that have failed were still adding economic impact there through our investment because they are paying suppliers and they are employing people. However, in terms of sustainable growth, it is important that we get some of those companies through to becoming sustainable standalone companies. Apologies if I gave the impression that all of our companies are bought. That is not the case. What we are trying to do is to take companies to the point where their options are open. In a large number of cases, that will be a trade purchaser, but equally it could be private equity or it could be access to corporate VCs or IPOs or whatever. I would also say that if you look at the two examples that I provided earlier—Optos and TouchBionics, bear in mind that we invested at the point where those were nothing more than really an idea on a piece of paper. When we exited Optos, it was employing 400 people. It is now owned by Nikon Corporation, but it still employs 200 people in Dunfermline. There is a real economic impact there. TouchBionics equally was a concept when we invested. At the point where we exited, it was employing 125 people, so there is a clear economic impact there if you can get that right. I think that it is important to recognise that the acquisition of a company can be a good thing for its growth. As David Leary said, the important aspect is having choices for companies, and they can choose which route they want to go down for the growth that they are looking for. SkyScan, which I know that some of the committee has been out to see, had every option in front of them a very successful company, and they chose to do the deal that they did, because that was right for their growth. I do not think that we should look at acquisitions as necessarily a bad thing, although, obviously, sometimes it can be. Within Scottish Enterprise, we did some research recently, which has followed up research to, I think, 2015 on acquisitions and the impact that they can have. One of the things that we looked at was how Scotland compares to other comparator nations and within the wider UK on acquisitions. We compare very similar to other comparators to inward acquisitions, so the amount of companies buying one of our companies, but we compared much more favourably to those that still exist within Scotland and still have a big presence in Scotland. That is a very positive thing for us. Our mechanism allowed us to anchor the companies here, so when they are bought by another company, they still see the benefit of the company being based in Scotland. However, where we did fear worse, was outward acquisitions, so Scottish companies buying companies from elsewhere. That is one of the things that we want to look at to try and work out why that is. Is that another option for growth for companies to get more support for those acquisitions? Are there any further questions from committee members? One is from Andy Wightman and then John Mason. Yes. What is going to happen to the Scottish Investment Bank once the Scottish National Investment Bank is set up? Can you say something about the involving governance relations about the SNIB in relationship, not just to the Scottish Investment Bank, because it is currently established within Scottish Enterprise but in relationship to the point that Dean Lockhart made on the growth fund? The implementation plans have been published and the recommendations in there are quite clear that there is a need to build on what exists in the market just now and where success is, and to do much more. Part of that recommendation is to bring in other things in the public sector within the National Investment Bank. The Scottish Investment Bank is one, the Scottish growth scheme and the holding fund, as mentioned earlier, are others. That is Benny's recommendation to ministers, ministers need time to digest that and discuss the cabinet, etc., and with the Scottish Enterprise and others to work out the way to take it forward. Part of those discussions will very much look at how that could happen and the governance and everything else round about that. That is still some way to go. I will suggest until it is very clear what it will look like in due course, but, as you can see from the recommendations, there is a real desire to do much more than exists just now but to build on what exists and success is there. Following up, those recommendations for ministers decide how to proceed, but do you feel that there should be some further public consultation around that to allow for a broader discussion about how that should be structured? There has been significant consultation already, and that is certainly available publicly, I think, all the different consultation documents and the discussions that Benny and the advisory board had. I guess that is for Government to decide if it feels the need any more, but, certainly from what I have been involved in, there has been significant input into that process. Would any of the other panel members like to make a final comment before we close the session? We will very well thank you very much all for coming in. I will suspend the session. We will move into private meeting. Thank you.