Regional economic policy review: paper 1 – the national perspective

5. Delivery of Economic Development in Scotland: External Partners

5.1 Local Government

5.1.1 Scotland's 32 Local Authorities main functions include: education; environmental protection; social care; roads and transport; economic development; housing and planning; and cultural and leisure services.

5.1.2 Their statutory remit for Economic Development requires regulating certain business activities within the area such as the granting of licenses and permits. Local authorities are also active in supporting local businesses, employability activities and the promotion of investment, and took up an essential, and highly demanding, role in delivering support to businesses during Covid.

5.1.3 Historically, Scotland's Local Authorities delivered smaller-scale business support grants, often match funded with financial support from EU structural funds. These funds tended to complement rather than duplicate other larger scale financial support typically provided by the Enterprise Agencies. More recently, in conjunction with the Enterprise Agencies, local authorities have taken responsibility for delivery of the Business Gateway^[36] programme which offers professional resources and support to help start-ups and growing businesses, including workshops, events, news and advice.

Community Planning Partnerships

5.1.4 Community Planning Partnership (CPP) includes those services that take part in community planning. There are 32 CPPs across Scotland, one for each council area. Each CPP focuses on where partners' collective efforts and resources can add the most value to their local communities, with particular emphasis on reducing inequality^[37].

5.1.5 In terms of economic development, this is largely around reducing poverty by helping to create a local economy where people can access good jobs with fair pay and conditions. We have seen within some local plans^[38] a very deliberate approach to increase the number of people in particular groups employed by CPP partner and other local organisations (e.g., long-term unemployed, low-income families, people with convictions and those living in 0-15% SIMD ares).^{[39] [40]}

5.1.6 There are parallel and complementary ambitions between the local CPPs and REPs, with the obvious difference being in terms of scale. REPAG note that there is value in considering in more detail how CPPs can feed into the work of REPs offering a link between local communities and the regions they are a part of, and ensuring local communities are a part of strategic planning and decision making.

Local Employability Partnerships

5.1.7 With local partners recognising the collective role played by a range of organisations across the employability landscape through their commitment to protecting a diverse range of provision, a framework of Local Employability Partnerships was set up to 'build on the strengths of existing national and local services, to better align funding and to improve the integration of employability services'. The Partnerships implement at a local level the actions from the No One Left Behind delivery plan^[41] and Covid – 19 responses.

5.1.8 The framework was developed following joint discussions with SLAED and SCVO and aims to provide a starting point in developing enhanced local partnership working for both strategic and delivery partners. As with CPPs, there is good reason to ensure positive links between REPs and LEPs, noting a sensible interrelatedness to regional skills strategies.

5.2 Scotland's Enterprise Agencies

5.2.1 The remit and scope of the Enterprise Agencies^[42] (EAs) has altered since their inception, enhancing the economic development role to focus on new market opportunities at a national level^[43], and including business support. Highlands and Islands Enterprise (HIE) and South of Scotland Enterprise (SOSE) have by definition always had a regional focus, containing within it a specific community focus. Although there is emphasis on national strengths, given the geographical spread on the three EAs, there are opportunities to ascertain how different regions manifest these strengths, and how the EAs can focus their efforts to support.

5.2.2 REPAG believe there would be merit in the Scottish Government and EAs working together to map regions' self-identified priorities to where the EAs are working with the REPs. This would build on existing regional focus from SOSE and H&IE, and use SE's National Opportunities and Place teams to identify gaps. For example, a significant amount of manufacturing work SE does is in Glasgow, renewables in the north east and Fife (via Edinburgh and South East region), and in Tayside there is a focus on healthcare. It would be useful to see how much focus is on the regional priorities and where national agencies play a role comparatively.

5.2.3 In NSET the Scottish Government sees EAs playing a critical role in helping to build Scotland's future economy. Their focus will continue to be on building upon the close partnership working and collaboration they've fostered and their aims will be to widen this further to optimise regional strengths and opportunities. This, alongside addressing barriers to growth, will be key to unlocking the full economic potential of Scotland's regions.

5.2.4 Scottish Enterprise (SE) has complemented the Scottish Government's growing emphasis on a regionally-focussed, place-based model for economic development by establishing a Place Directorate.

5.2.5 There is a willingness to flex to placed based working through SE's response to the recommendations from the Scottish Government's 2020 Advisory Group Report on Economic Recovery^[44] (established to provide advice on Scotland's economic recovery following Covid). SE has worked intensively with partners in three regional economies (Glasgow, Ayrshire and the North East), collaborating with the aim of promoting recovery. There is clear evidence of this through SE's involvement with the Glasgow REP, Ayrshire's transformative Spaceport cluster at Prestwick and projects within the Energy Transition Fund in the north east.

5.2.6 However, it's fair to say that the definition of focus remains about place-innovation/place-contribution to National Opportunities (Scotland in Space, Future Healthcare Manufacturing, Health for Wealth, Digital Scaling Up, Levelling Up Core Team, Zero Emissions Heavy Duty Vehicles, Decarbonising Heat, Hydrogen Economy), rather than regions per se.

5.2.7 In addition to the business support activities delivered by Highlands and Islands Enterprise (HIE) is a prominent community development remit. These dual remits are of great value in a rural context as businesses are more likely to thrive in a vibrant community and vice versa. SOSE consulted with HIE on this specific approach, recognising its worth by making it one if its own USPs.

Enterprise Agencies and Regional Working

5.2.8 The Enterprise Agencies have been core partners in the Deals Programme across Scotland, supporting local authorities with project delivery and business case development. This has been essential to progress, particularly for smaller local authorities with less resource or expertise to carry out this work to the expected level.

5.2.9 With the geographical split, and experience of supporting regional partners within the Deals and wider strategically important projects such as the Energy Transition Zone in the north east^[45], there are clear links to the wider remit of the REPs. Each of the Enterprise Agencies have been keen to be members of REPs, making the most appropriate links between strategy and delivery across any given region. Given this, it's clear that the Scottish Government should continue to encourage and nurture these relationships to ensure the continuation of their membership and long-term involvement in developing and delivering Regional Economic Strategies, linking this work with NSET activity.

5.2.10 Linking back to prior comments made regarding understanding regional structural barriers to growth, in order to understand where further support is required REPAG believe it would also be valuable to assess where there are gaps between regional priorities and place-innovation priorities, ambitions, and research capability.

5.3 The Third Sector

5.3.1 The Third Sector has long played a key role in economic development through a multifaceted range of activity such as through the delivery of employability training or the running of social enterprises. The third sector is a significant economic, environmental and social actor. According to the Scottish Council for Voluntary Organisations (SCVO) 2022 State of the Sector^[46] research, there are over 46,500 voluntary organisations, employing over 135,000 FTE staff, with an annual turnover of £8.5 billion and working with over a million volunteers.

5.3.2 The Covid-19 pandemic brought to the fore the importance the Third Sector plays in Scotland's economy. The sector provides care allowing more people to enter employment, and it helps people develop their own capacity to become economically active which helps tackle the inequality and poverty that was worsened by the pandemic. Many recognised the ecosystem of support that characterises the sector and the role played as a major social, environmental and economic actor in recovery and beyond.

5.3.3 Scotland has a growing number of social enterprises. There are differing definitions of what constitutes a social enterprise, and not all would regard themselves as part of the "third sector". According to Social Enterprise Scotland^[47], in 2019 the social enterprise sector was worth £2.3 billion GVA to Scotland and supported over 88,000 FTEs. Almost 70% of social enterprises are led by and are accountable to a particular community and 33% are located in rural Scotland.

5.3.4 There are national and local infrastructure organisations that support the third sector. The Scottish Council for Voluntary Organisations is the national membership body for Scotland's charities, voluntary organisations and social enterprises. Social Enterprise Scotland is an independent, membership-led organisation, built and controlled by social enterprises. Third Sector Interfaces (TSIs) are located in each local authority area, representing and supporting the sector. There are also national intermediary bodies for organisations working in specific functions such as social care, sport, the arts, housing and children's services.

Third Sector and Regional Engagement

5.3.5 Given that much of the activity is aligned at a local and national level, the third sector can find it difficult to engage with REPs, or to 'get a seat at the table.' For example, given REPs consist in multiple local authorities, is the expectation that all related TSI's attend, some or only one? REPs need to work with third sector to find the best route in to ensure representation and a role in decision making.

5.3.6 REPAG recognise that the Scottish Government cannot and should not dictate membership of REPs, however, it has always been the stated ambition that REPs have third sector representation to ensure their perspective is included in the development of strategic work. To ensure this happens, the Sottish Government should encourage and support REPs to ensure local third sector parties are able to participate in REPs where they wish to do so.

5.4 Skills Development Scotland, Scottish Funding Council and the role of Further & Higher Education

5.4.1 Skills Development Scotland (SDS) is the national skills body whose purpose is to drive productivity and inclusive growth through investment in skills, enabling businesses and people to achieve their full potential.

5.4.2 From a skills planning perspective SDS already embody a regional approach, engaging with partners on a regional basis across geographies that largely mirror the REPs, stating "Each of Scotland's regions faces its own opportunities and challenges. Taking a regional approach allows for these to be identified and an appropriate response developed that is tailored to the needs of the region."

5.4.3 As with the Enterprise Agencies, SDS are welcome members of REPs and have been active in facilitating the development of Regional Skills Investment Plans and Regional Skills Strategies to support the ambitions of REP's Economic Strategies for a number of years. This is something REPAG are keen to continue to encourage, noting the work taking place in Glasgow City Region of developing a Regional Skills Strategy to complement the Regional Economic Strategy, and similar approaches in the South of Scotland, Aberdeen City and Shire, Tay Cities and the Edinburgh City Region. The Scottish Government ought to stay close to this work, to learn and ascertain whether other REPs would like to replicate this approach in a manner that suits their own region.

5.4.4 Regional Skills Investment Plans (RSIPS) are co-designed and endorsed by regional partners. They seek to embed an evidence-based approach to skills planning, investment and delivery aligned to the needs of employers and the economy. However our consultation has found that even where SDS have led on this there can be tensions where a specific element or intervention within the skills offer is thought to be better delivered at a local level or that a national programme of activity does not fit with the regional requirements

5.4.5 Regional Skills Assessments (RSAs)^[48] underpin the RSIPs to provide an evidence base to inform future investment in skills, built up from existing datasets and forecasts. The evidence base brings together data from published sources organised across three themes:

• Skills supply within the labour market;
• Skills demand within the labour market; and
• Skills mismatches where there is a gap between the demand for skills and the supply of people in the labour market.

5.4.6 The Shared Outcomes Framework^[49], published in March 2022, is the means by which SDS and the Scottish Funding Council (SFC) will monitor and report on collaborative projects that contribute to overarching skills outcomes, set in the National Strategy for Economic Transformation (NSET) and the missions of the Future Skills Action Plan, in particular around the alignment of economic demand with current and future provision.

5.4.7 Our consultation found there is a need to strengthen the regional skills approach, a view supported by Audit Scotland's report Planning for Skills^[50] which concludes that the current arrangements for skills in Scotland, which is intended to create more alignment between SDS, Scottish Government and the Scottish Funding Council (SFC) is not sufficient to achieve the outcomes desired. There is undoubtedly a role for SDS and SFC to work with REPs to further align at a regional level, feeding into and helping to achieve national alignment.

5.4.8 This is echoed in our consultation response, which noted criticism about the appropriateness of the delivery mechanisms for rural Scotland in particular and the ability for public training provision to be sufficiently agile to meet the needs of rural employers now and in the future.

• Agriculture sector: we have the impacts of an aging population, low numbers of new entrants;
• Tourism and Food & Drink sectors: strong dependence on migrant workforces which are vulnerable to EU exit-caused labour shortages;
• Modern Apprenticeships: challenging to take forward given the business base in rural areas which have a disproportionate number of micro-enterprises.

5.4.9 Scottish Government skills policy officials noted the value of using REPs to develop strategies. Given the regional focus of NSET they were in favour of linking skills strategies to regions in terms of labour markets and sectoral strengths. This justifies Scottish Government supporting REPs to take a regional skills approach involving not only SDS and SFC, but also Higher and Further Education institutions, should they wish to do so.

5.4.10 Highlighting the role of Further and Higher Education institutions, it is clear that Colleges and Universities are significant anchors within their regions, rooted in the needs of their local and regional communities, and playing a role as major assets, employers and drivers of growth. Review stakeholders highlighted the importance of regional planning to secure guaranteed pathways through community, vocational and university programmes.

"Our work on the Economic Recovery Group – aligned with that of SFC's Regional Pathfinders – continues to gather strong evidence of the central role of colleges in their regional economies, and is now starting to divine the future shape of tertiary provision in each of our regions. Organisational realignments aren't required, rather that collaboration between different regional anchor institutions and national agencies is welcome.

The parallel point about the lack of strategic capacity in a number of local and indeed regional organisations is a barrier to progress should be seen as a principal constraint on the system's ability to perform."

College Economic Recovery Group

5.4.11 The boundaries and approaches to regional working have evolved significantly over past decades, particularly in terms of the regionalisation of colleges. The number of colleges has reduced from 43 to 26 colleges, clustered into 13 regions

5.4.12 These college regions do not overlap neatly with REPs, but we do not see this as an insurmountable barrier to REPs developing regional skills strategies that complement economic strategies. Having Colleges and Universities, SFC and SDS as members will aid understanding around working across boundaries, with a coordinated view of implications and benefits.^[51]

5.4.13 Finally, it ought to be noted that additional regional data analysis would be required for this, something which may not currently be available to every region. Consequently, this adds to the justification that Scottish Government ought to consider as to how to help regional partners build analytical capacity within regions.

5.5 Wider Contextual Considerations

European Structural and Investment Funding and UK Shared Prosperity Fund

5.5.1 Since the 1970s the availability of funding from the European Union has driven a proxy regional economic development policy in Scotland focused on addressing regional inequality. With over £6 billion of investment spanning four decades, it has provided match funding for a wealth of activities. Based on economic data to drive allocation methodology, EU funds have been targeted at those places in need.

5.5.2 Funds were allocated for a seven year programming period and whilst the overall direction of the Funding Programmes was set by the European Commission, it was the responsibility of the managing authority (the Scottish Government) to set the investment priorities for delivery. Over the years EU funds have provided a catalyst for economic development across Scotland. In the Highlands and Islands, for example, Local Authorities directed investment into transport infrastructure which, in turn, has supported some of the most remote and rural businesses and communities in Europe.

• Comhairle nan Eilean Siar completed construction of the Western Isles Spinal Route which provides transport linkages incorporating road, ferry and bridge infrastructure from the Isle of Lewis to the Isle of Barra.

• Highland Council upgraded single track roads between Inverness and Gairloch and Inverness and Kinlochbervie to enable quicker transportation of landed fish to the markets of the south.

5.5.3 Following the vote to leave the EU, Scotland no longer has access to this investment funding, though the UK Government stated the intention to fully replace EU funds in the form of UKSPF^[52], setting out a new range of investment priorities for local authorities to work to. Rather than devolve the funding to each of the four nations for onward delivery, the UK Government has retained overall control and will deliver directly to local government.

5.5.4 UKSPF may influence the nature of regional economic strategies over time, as this funding could help to deliver the strategic goals, however the fact that the fund has been accessed mostly by single Local Authorities rather than on a regional basis limits the scope of UK Government to work on a regional basis in Scotland.

5.5.5 Whilst there are allocated funds going direct to Local Authorities through UKSPF, there are cases in which the funding is not equal at a regional level. This is because EU funds were also issued directly to both local groups and employability organisations as well as investing in national programmes e.g., SDS Apprenticeships that Local Authorities would have accessed in addition. Consequently, the current UKSPF funding excludes those local/community and national tiers of projects and local authorities are having to decide whether they will use some of their allocation to fill the gap.

"For many areas UKSPF funding allocation is significantly less than previous EU receipts. Together with a delivery route through local authorities and the tight timescales for Investment Plan development, this has meant that a regional approach has been challenging."

5.5.6 Local Authorities, or regional groupings, are required to submit a three year Investment Plan outlining the planned activities which will make use of their allocation. However, where EU funds were considered 'the funding of last resort' and there was the requirement for applicants to evidence a match funding package of at least 40%, the UKSPF has no such requirement. This meant that, in real terms, the value of EU investment was far higher than initial investment, e.g. an initial investment from the EU of £600 million would result in the support of activity valued at over £1.2 billion. The quantum and method of delivery for the UKSPF is disappointing to Scotland from an economic development investment perspective.

5.5.7 The Scottish Government have been strong in their message that the overall quantum of £212 million is far less than their own calculation of a full replacement, which set out that at least £183 million per year would be required to fully replace the funding for current activity.^[53] The message being that this is insufficient funding to retain the same level of economic impact in Scotland.

5.5.8 Given that the UK Government have selected to be the sole decision makers for this fund, the scope of influence for the Scottish Government is limited, however, REPAG would encourage the UK Government to accept the Scottish Government's request to a review of the Governance arrangements, and look to offer parity of esteem to the Devolved Governments, potentially flowing funding through them in future rounds.

5.5.9 A review would also offer an opportunity prior to the next tranche of funding for the UK Government to support the trajectory of regional empowerment in Scotland, and issue funding to REPs to deliver the aspects of their Regional Economic Strategies that would be in line with UK Government's strategic priorities.

UK Government and Levelling Up

5.5.10 In 2021 the UK Government launched the Levelling Up Agenda which sees the implementation of several Funds aimed at reducing regional inequalities and building Pride in Place. These funds include:

• Levelling Up Fund
• Community Ownership Fund
• UK Shared Prosperity Fund

5.5.11 The Agenda was formally launched 12 months later with publication of the Levelling Up White Paper^[54]. Although with little additional funding for policy planning attached, it made clear that the UKSPF would act as a main pillar for achieving levelling up.

5.5.12 A number of organisations and agencies^[55] within Scotland share concerns around the UK Government's approach to where levelling up is required and how this has been addressed. The Levelling Up Fund has split Scotland's local authorities into three levels of need while the UKSPF has allocated the £212 million to each of the local authorities – in both cases with very little engagement with either Scottish Government or relevant agencies on the utilisation of metrics for prioritisation which have not accounted for Scotland's distinctive needs.

5.5.13 Scottish Ministers have debated the impact of the Levelling Up agenda on Scotland. In bypassing the Scottish Government in the delivery of these Funds the UK Government has introduced incoherence and duplication into the devolved system and is failing to ensure their interventions align with the established approaches agreed between Scotland's Local Authorities and the Scottish Government.

5.5.14 Each fund cuts across a range of policy areas many of which are devolved, such as transport, skills and employability, education, health, economic development, and innovation. Using the Internal Market Act, the UK Government is able to make funding decisions regarding devolved policy areas without any consent of Scottish Government Ministers. Indeed, there is no role for Scottish Government or Ministers in these funds.

5.5.15 However, these funds and the overall missions are being applied at a local, rather than regional level, and as such do not play an actively helpful role in Scottish Government's growing emphasis on regional economic development. Where appropriate, there is a role for Scottish Government to work with regional partners to encourage strategic alignment, and where projects are being brought forward for funding from UK Government, this complements and adds value to Scottish Government policies and investment interventions. This may play out in the Deals programme, where additional funding is used to enhance Deal projects. This may indirectly entail regional benefit, notwithstanding the local targeting.

Levelling Up and Regeneration Bill

5.5.16 The Levelling Up Agenda, and the 12 Missions that it is comprised of, is being legislated for by the Levelling Up and Regeneration Bill.

5.5.17 The Levelling Up and Regeneration Bill is currently going through UK Parliament and seeks to make provision for the setting of levelling-up missions and reporting on their progress in Westminster. Part 1 of the Bill introduces statutory provision for the UK Government's "Levelling-up Missions" which cover many areas that are within the devolved responsibility of the Scottish Government and Scottish Parliament including economic development, health, and education.

Scottish Ministers have not given consent to the Bill as it will enable more UK Government activity in devolved policy areas.