National Strategy for Economic Transformation Delivery Board minutes: January 2023

Attendees and apologies

Present

• John Swinney, Deputy First Minister and Cabinet Secretary for Covid Recovery, Interim Co-Chair
• Barry White, Co-Chair, Former Chief Executive, Scottish Futures Trust
• Colette Cohen, CEO, The Net Zero Technology Centre
• Audrey Cumberford, Principal and Chief Executive, Edinburgh College
• Gillian Docherty, Chief Commercial Officer, University of Strathclyde
• Roz Foyer, General Secretary, Scottish Trade Union Congress
• Uzma Khan, Vice Principal Economic Development and Innovation, and Deputy Chief Operating Officer, University of Glasgow
• Sir Simon Lister, Managing Director, BAE Systems Naval Ships
• Jamie McGowan, Managing Director, Essence of Harris
• Douglas Millican, CEO, Scottish Water
• Nora Senior, Former Executive Group Chair, Weber Shandwick and past Chair, Enterprise and Skills Strategic Board
• Ellis Watson, Former Chief Executive, DC Thomson Media Group

Apologies

• Ewan Aitken, Chief Executive, Cyrenians

Supporting officials

• Monica Patterson, Society of Local Authority Chief Executives and Senior Managers (SOLACE)
• Louise Macdonald, Director General Economy, Scottish Government
• Aidan Grisewood, Director for Economic Strategy, Scottish Government
• Gary Gillespie, Chief Economist, Scottish Government
• Stephen O'Neill, Head of Digital Economy and Data Driven Business, Scottish Government (Programme focus - entrepreneurial people and culture item)
• Sean Neill, Director for Local Government and Communities, Scottish Government
• Fiona Simpson, Chief Planner for Planning, Architecture and Regeneration Division in the Directorate For Local Government and Housing, Scottish Government (Deep dive on housing item)
• Colin MacBean, Deputy Director for More Homes Division, Directorate for Local Government and Housing, Scottish Government (Deep dive on housing item)

Items and actions

Introductions

Barry welcomed everyone to the fourth meeting of the NSET Delivery Board. Barry congratulated Ellis on his appointment as business adviser to the First Minister, and Louise Macdonald on her permanent appointment to the Scottish Government (SG) Executive Team. Barry noted that Gregor Irwin would take over the DG Economy role from Louise in March 2023, as she moves on to take up the role of DG Communities.

Ellis outlined that he has been asked by the First Minister to bridge the gap between the private sector and government. Ellis will provide constructive challenge and was encouraged that the private sector was already reaching out to him.

Barry reflected on the recent NSET Portfolio Board awayday, 16 January 2023, that he spoke at, together with Mark Logan, the Scottish Government’s Chief Entrepreneur. The session brought together SG officials and NSET delivery partners to take stock, learn lessons and focus on future priorities for enhancing the impact of NSET. It was a very positive day with three key take aways:

• the breadth of NSET

• the tightness of budgets bringing a need to prioritise

• the need to minimise bureaucracy in overseeing the successful delivery of NSET

High level overview of performance of NSET programmes

Gary provided an overview of the state of the Scottish economy, which is currently under real pressure. He reflected that last year inflation was only 2.0% and pent-up demand from coronavirus (COVID-19) was strong. Now inflation is 10.5% and both the Office for Budget Responsibility (OBR) and the Scottish Fiscal Commission are reporting that output is already falling, and that Scotland will face a shallow recession until 2024.

Demand is currently contracting while the labour market remains tight, with 40% of businesses struggling to recruit people. We have also seen nine increases in the interest rate, which now stands at 4.0%. However, inflation is expected to be back down to around 2.0% next year (2024) and growth in output is expected to return. Consequently, this can be viewed as a transitional year for business in dealing with high inflation.

Deputy First Minister (DFM) welcomed the employment position and noted that inactivity levels had dropped by nearly one percentage point in the past 12 months. However, there was the pressure of the availability of staff in all sectors, with the need to ensure we have the right skills profile to make the most of opportunities. Progress is needed quickly to ensure we have the right skills needed in 5/10/20 years’ time.

Aidan led the discussion on NSET performance, commenting on the significant activity since the Board last met. For example: the tech scalers were launched on 30 November 2022; the target of £3 billion for the Green Investment Portfolio had been exceeded with potential projects totalling £3.7 billion; good progress in the space sector with the new Mangata site at Prestwick; the first work package on Regional Pathfinders was complete and would be rolled out shortly; the Fair Work Action Plan was published; and there was fair work conditionality on grants.

On confidence, Senior Responsible Owners (SROs) have mostly rated their programme green. Fair Work was amber due to the economic situation, as was the New Culture of Delivery.

In the discussion the following points were made:

• DFM agreed on the need to focus given the tightness of the budget, with the SG prioritising action on child poverty, transitioning our economy to net zero and sustainable public services.  Scope to utilise available private finance to support these ambitions
• it was also noted that while it is important for plans like the Hydrogen Action Plan to be published, setting out the SG’s ambitions and priority actions, the Board is specifically interested in delivery of the projects within the plan
• there was a question mark over the green rating for the NSET Skilled Workforce Programme given the immediate need for more skilled workers in different parts of the economy. The Regional Pathfinder project is extremely important and its implementation needs to be accelerated
• there is a risk that looking at skills shortages is backward looking, with opportunity to focus on more forward-looking metrics on the skills needed to support industries in the future
• scope to consider lessons from other Organisation for Economic Cooperation and Development (OCED) countries where there is a general shift in funding models for further and higher education from input-based, as is the case in Scotland, towards more output and outcome focused
• the Board, through Simon, has been feeding into the skills delivery landscape independent review led by James Withers. This engagement will continue, with input from Nora and Audrey
• given the breadth of NSET, there is real benefit in focussing on the five key things to deliver per programme
• while the forecast decline in inflation over the coming year is positive, it is important to recognise that the level of prices within the economy will remain significantly higher than prior to the cost crisis. This will continue to affect household and business income
• NSET is about transforming the economy over the next ten years. The economy needed to transform so there is an opportunity to accelerate this over the coming year
• following the Board’s deep dive in November 2022 on the Regional Economic Policy Review, further discussions have taken place to help prioritise the key recommendations to be taken forward

Programme focus - entrepreneurial people and culture

Barry welcomed Stephen O’Neill, noting that this item was a chance to take stock of the considerable progress on this programme ahead of the deep dive in March 2023. It was also a chance for the Board to input to the key challenges facing the programme and the opportunities for enhancing its impact. Barry highlighted the need to significantly increase the number of entrepreneurs in Scotland, particularly female entrepreneurs.

Stephen highlighted that the central focus on start-ups is because they account for 1% of businesses but £1 trillion in output for the UK economy and covered 50% of the value generated by all other small and medium-sized enterprises (SMEs) combined. They are more innovative, and this innovation permeates the supply chain. New firms create the majority of new jobs. There is also the challenge that start-ups in Scotland tend not to scale up.

A range of action is underway within the programme to address these challenges, with the tech scaler network being the primary focus where £42 million will be invested over the next seven years.

Barry opened up the discussion noting this was a crucial area where government can make a real impact.

• it was clarified that the tech scaler network goes beyond the digital sector, supporting start-ups in all sectors of the economy
• there is a strategic emphasis on entrepreneurialism in Scottish universities and colleges. They provide a safe space or testbed for entrepreneurial activity
• however there is a significant gap in terms of the sector supporting start-ups compared with other countries. This would not only provide a huge source of revenue, but also help attract staff and students
• there are clear lessons from other countries, such as in the United States of America (USA) where Massachusetts Institute of Technology (MIT) provides an inspiring and supportive environment for entrepreneurs
• recognised the connection to the forthcoming Innovation Strategy, which Gillian has been involved in, and the forthcoming announcement on Innovation Accelerators where the Glasgow City Region has been selected as one of three pilot areas across the UK

Deep dive on housing

Barry welcomed Sean, Fiona, Colin and Monica. He reported that Uzma and Jamie had joined him in preliminary discussions with SG colleagues, Housing Associations and private sector providers before Christmas 2022. Housing was a foundation for NSET and is frequently cited as a key issue holding back economic development in both rural and urban parts of Scotland. The Convention of the South of Scotland will focus on housing next month.

The latest statistics show that Scotland is doing better on social affordable housing than the rest of the UK, but key challenges remain on the overall supply of housing in Scotland.

Colin presented to the Board and informed them that the aggregate level of housing was now more than in the past 14 years. COVID-19 had hit at a time when housing was just coming back from the 2008-2010 financial crisis. Housing costs are tenure driven with housing costs in the private and social sectors being around one quarter of household income. On affordability there were significant differences in regions and sub-regions. The loan to value ratio was rising steeply. Sixty percent of households in social housing have an annual income of under £20,000.  Glasgow, Lothian, Forth Valley and Fife have all seen rental increases above the Consumer Price Index (CPI) with the rest of Scotland below it.  Inflation has caused a pause in building as restart increases construction price inflation.  There were a number of actions underway including in relation to new supply, use of existing stock and innovation.

Fiona highlighted that the National Planning Framework 4, which was approved by the Scottish Parliament earlier this month, marks a different approach to housing. It sets out for each local authority the minimum number of houses the SG expects them to provide land for (Minimum All-Tenure Housing Land Requirement). This recognises that the current planning policy approach for housing is not working well. Resource issues in planning departments are also recognised as a challenge and a priority to address to improve performance. 

The discussion raised the following points:

• East Lothian is one of the fastest growing regions in Scotland, with housing fuelling this growth. This has brought real challenges in terms of infrastructure such as roads and schools, with Section 75s only going so far in supporting this. The council has been innovative in funding mid-market developments
• East Lothian is part of the Edinburgh and south-east Scotland City Region Deal which offers huge economic growth potential but also real challenges in terms of labour supply and the knock-on impact this has on housing
• with regard to the green economy, there was a need for focus and clarity on what we are doing – what is needed by way of new build and what was retrofitting, including the skills required to support this
• the feedback from developers is that local authorities do not factor in future economic growth when considering future housing plans. Furthermore, the planning process varies across local authorities and can be a particular barrier for SMEs, with more firms focusing on renovations rather than new housing building
• it was reflected that the Scottish housing sector is more fragmented than elsewhere in the UK which impacts its attractiveness for investors
• some developers reported that the rental freeze and Passivhaus building standards for new housing has affected market confidence, with signs that investment is being paused
• recognised the financial constraints facing the SG but there is scope for local authorities to play a greater role, using their borrowing powers more to support investment in the housing stock. Similarly, local authorities can take the lead in driving green retrofitting of the existing housing stock
• stronger engagement between businesses and local authorities is needed, especially in the remote and rural areas where a lack of affordable housing is particularly acute. Small scale developments of 5-10 houses could make a huge difference  
• there are significant pressures in urban areas like Edinburgh where more affordable housing is needed
• it was highlighted that the Built Environment – Smarter Transformation Scotland (BE-ST) showcased excellent collaboration with the construction industry and real innovation, especially around low carbon  
• tension exists with the tourism and hospitality sectors in rural areas regarding the legislation for second homes which is resulting in smaller landlords withdrawing from the market

In summing up, DFM noted the complexity of housing and the legitimate challenges posed by the Board. The last Convention of the Highlands and Islands (CoHI) reported significant optimism over future economic opportunities in the region but stressed that these can only be realised if housing shortages were addressed. This comes back to the key challenge on whether the planning process for small-scale housing developments is easy enough for construction firms to navigate.

Barry set the challenge of whether local authorities can do more to boost local supply, the extent to which measures to achieve broader social outcomes are harming private sector supply, and if more could be done to boost private sector supply (including attracting more skilled workers).

Forward look

The next Board meeting is scheduled to take place on the 29th March 2023.

Barry outlined the intention to hold a longer, in-person half-day session, 24 May 2023, which would provide the opportunity to review the progress made delivering NSET and reflect on the Board’s role overseeing the implementation of it.

Actions

• Simon, Audrey and Nora to work with the Skilled Workforce Programme to identify the five key actions which should be prioritised
• officials to engage with the respective Board champions to come forward with similar top five actions for the other NSET programmes
• officials to identify key shorter-term milestones/measure of success that are on the critical path for transformation for key projects in each of the programmes
• Secretariat to arrange for female participation statistics to be shared with the board
• the board’s entrepreneurial champions to feed into the planning for Mark Logan’s deep dive at the next NSET Delivery Board meeting, due to take place 29 March 2023
• SROs to consider how their programmes support the Scottish housing sector
• Colin to provide a future update to the board on the impact of action taken by the Scottish Government and partners to boost housing supply
• Barry, Jamie and Uzma to follow up on the role of local authorities with Monica
• Secretariat to secure meeting dates for the second half of this year