Scottish Government

Recommendation 1: revisits its short-term population growth target in the light of circumstances that are hugely changed since the target was set.

Recommendation 2: commissions research to explore the factors affecting the decisions of both immigrants and emigrants, so that policy design is properly grounded in good evidence.

Recommendation 3: raises the level of competition in markets; and uses competition in public procurement as a means of increasing productivity and innovation. In addition, that it explores the feasibility of devolving competition policies and export guarantees.

Work on priority initiatives to encourage SME access to public procurement opportunities has been taken forward by the Supplier Engagement Working Group (SEWG), which draws its membership from the sectoral Centres of Expertise; individual public bodies; supplier representatives nominated by the Federation for Small Businesses and Scottish Chambers of Commerce; and third sector representatives.

Some of the proposed measures are specifically focussed on assisting innovation and productivity. The use of output based specifications; and guidance on how consortia bidding can allow innovative SMEs to jointly "reach up" to compete for larger public sector contracts are incorporated into the new Procurement Journey guidance for public bodies.

Notable progress has also been made by SEWG in taking forward the development of a standardised prequalification system, which is now due to launch in early 2011, and will allow suppliers (especially SMEs) to more easily evidence previous examples of innovation when competing for public contracts.

Since it was founded in 2008, over 48,000 suppliers have registered on the Public Contracts Scotland (PCS) portal, and some 250 organisations are using the portal to advertise contracts, while almost 14,000 public sector opportunities have been advertised on the portal. Given that the extent to which more SMEs are able to access contract opportunities can have a beneficial effect on market competition, it is worthy of note that over 80 percent of suppliers registered on PCS are SMEs.

Scottish Development International carried out an investigation into the possibility of devolving export guarantee powers early in 2010. The conclusion reached was that, bearing in mind the likely administrative costs and the dominance of European regulatory powers, on balance, the best option was to continue to monitor the situation and to lobby UKTI on behalf of the interests of Scottish exporting companies.

Recommendation 4: requires Scottish Enterprise (and other agencies) to act as cluster managers by supplying shared services, equipment and skills directly in order to create critical mass (external economies of scale). This will involve supporting cooperation between academics and businesses by promoting systems for sharing information and ideas and by establishing a programme to license and guarantee intellectual property rights.

Accepted in part.

While Scottish Enterprise does not directly operate as a "cluster manager", it does adopt a clusters based approach to the development of Scotland's key sectors. This involves bringing together key private and public partners across the sector to establish a collective vision for future competitiveness. This approach includes engaging with industry leadership; sharing economic analysis with key partners; helping to define strategies for each cluster (based on industry leadership and systemic analysis); developing investment proposals / projects as part of coherent action plans; working with partners to develop similar plans (and joining them up).

It can best be illustrated through the following examples of current activity:

• Working with the Life Sciences Industry Advisory Board to facilitate the development of a refreshed industry strategy, to be launched in Spring 2011, to ensure Scotland maintains its competitive offering.
• Recent work to understand Scotland's competitive advantage in Offshore Renewables has led to the recognition of the importance of ITREZ, a joint project between the University of Strathclyde, Scottish and Southern Energy, Scottish Funding Council and Scottish Enterprise, to develop Scotland's full potential in the exploitation of technologies and intellectual assets in the renewable energy industry.

An evaluation of Interface, an organisation that matches businesses with academics, has been carried out since the last CEA report. It concluded that Interface is key in establishing projects between companies, in particular between SMEs and higher education institutions that would either not have taken place, would have been on a much smaller scale or taken place over a longer timescale. The report set out recommendations for incremental growth of Interface through new regional capacity and, possibly, an operational focus on some of the key industry sectors. The Scottish Funding Council are currently the main funders of Interface and are working with the Scottish Government, Scottish Enterprise and Highlands and Islands Enterprise to consider a way forward in the context of what is a financially challenging environment.

Recommendation 5: conducts a review of the scope for innovation in the services sector.

The Scottish Government's Innovation for Scotland and Scottish Enterprise (SE) and Highlands and Islands Enterprise's (HIE) Growing Innovation, both published in 2009, recognise that innovation encompasses a wide range of activities and looks beyond the traditional definition of innovation as solely Research and Development. As a result, the enterprise agencies have reviewed programmes and are working with their sector teams to provide support to companies for the development of new products, processes and services, which are of vital importance in the services sector.

For example, SE has created a new Innovation Support Service which is designed to help businesses use innovation as a driver of competitive advantage in areas such as service innovation and ICT-driven business model innovation to increase revenues and profitability. HIE is trialling new programmes that provide support to regional service-oriented businesses that wish to innovate. One example is supporting Sitekit Solutions (a provider of web content management tools) transition into a web developer in eHealth, providing online health solutions to the NHS throughout the UK.

The Scottish Government is seeking to drive greater innovation in the financial services sector. Through the Financial Services Advisory Board partnership a proposal for a Scottish Financial Services Research Institute is being developed. If successful, this will act as a hub for global research expertise and allow collaboration between all of Scotland's universities, and with Scotland's financial services industry.

The Scottish Funding Council is supporting the Scottish Financial Risk Academy, the first of its kind in the UK, to provide enhanced focus for innovation and collaboration between Scotland's world class university academia and the financial services industry in the specialist area of quantitative risk management, an area that is coming under increased scrutiny by the government, national and international regulators and the general public, following the global financial crisis.

Recommendation 6: reviews, with representatives of the industry, the best means of supporting Scotland's reputation for prudent management of financial services in light of the failure of its principal banks.

Scotland has a long and distinguished history in financial services and the Scottish Government is committed to ensuring that it continues to thrive, not only because of its high levels of employment and the output contributed by the sector, but also because of the significant impact it has in supporting the wider economy and the day to day lives of our people.

The Scottish Government continues to work with the sector in Scotland, both with individual banks and through the collaborative effort of the Financial Services Advisory Board. This partnership is implementing the Strategy for the Financial Services Industry in Scotland which, amongst other things, aims both to enhance Scotland's image and identity as a centre of financial services expertise, and to profile Scotland as a preferred location for financial services investment.

It is clear from recent announcements of investment and expansion, for example, by Tesco Bank, Virgin Money and HSBC, that Scotland's long and distinguished reputation for excellence in banking, while impacted by the financial crisis in the same way as other global financial sectors, is emerging in a strong position.

Competition: following the parliamentary debate, on 2 June, on the Economy, Energy and Tourism Committee's inquiry into banking, etc; Jim Mather, Minister for Enterprise, Energy and Tourism wrote to the Office of Fair Trading (OFT) urging it to go beyond its then plans for a review of barriers to entry, expansion and exit in retail banking and commit to a formal investigation into competition in the banking sector in Scotland. The OFT responded, suggesting that the Scottish Government should contact the Independent Commission on Banking (ICB), which would consider wider competition issues, and advising that any additional investigation by the OFT would only add unnecessary confusion.

Influencing reorganisation of UK Banks: following its establishment by the UK Government in June 2010, the ICB published an Issues Paper, outlining the areas on which it will focus. The Financial Services Advisory Board (FiSAB) set up a Banking Sub Group to provide advice to both the Board and the Scottish Government on a response to the ICB paper. The Sub Group was chaired by Mark Tennant, Chair of Scottish Financial Enterprise (SFE) and FiSAB Industry Deputy Chair, and membership included representatives from the Royal Bank of Scotland, Lloyds Banking Group, HSBC, Clydesdale Bank, Aberdeen Asset Management and the Scottish Government. In formulating its advice, the Sub Group also considered the commitments made by a British Bankers Association (BBA) Taskforce, set up to look at a number of issues to support the UK's recovery. In addition, banks themselves are restructuring in an effort to return to profitability as well as divesting parts of their business to meet EC State Aid rules.

Regulation: the Scottish Government consults appropriate stakeholders when considering the impact of regulatory matters on Scotland's financial services industry. FiSAB is one example of an effective route to consultation with industry experts. Where an issue has the potential to impact negatively on Scotland's financial services industry - a significant contributor to the life and economy of Scotland - the Scottish Government will lobby the relevant UK, EU or other appropriate authority to ensure Scotland's position is fully understood and taken account of.

A good example of this has been work on the draft Alternative Investment Fund Managers Directive where the Scottish Government made its support for the industry view on the Directive very clear. At the last FiSAB meeting on 10 November, Mark Tennant, SFE Chair reported that the Directive had now been agreed in a way with which industry is comfortable. He noted that this result was due mainly to support and lobbying from HM Treasury, the Scottish Government and industry.

While regulation of financial services, as well as responsibility for negotiating with the EU on regulatory matters, lies with the UK Government, the Scottish Government believes that EU decisions on financial services matters are of critical importance to the Scottish economy, and therefore that it has a legitimate right to influence these matters at the heart of the EU decision making centre. In considering these matters, the Scottish Government will take account of a wide range of views, including those of industry and other stakeholders, in terms of defining its own position.

Scotland Europa, part of Scottish Enterprise, provides intelligence, policy analysis and strategic funding advice about the EU and its relevance to Scottish organisations. Scotland Europa has worked closely with SFE over the last year, particularly in relation to helping negotiate the proposed change in EU Financial Services legislation, following the global economic crisis, and in relation to promoting a greater understanding of the specificities of the Scottish sector amongst EU politicians and decision makers.

The Employer Council of the industry-led Financial Services Skills Gateway held its inaugural meeting in June 2010 and a second meeting in November. The Gateway has produced a draft skills demand statement, with key priorities to be taken forward in partnership with the Scottish Government and its public sector agencies. The priorities are:

• collaboration around education issues by both building on best practice to promote career opportunities within the sector and by addressing employability issues vis a vis entry level positions;
• quantifying skills shortages and future needs for specialist roles which will be used to inform educational provision; and
• underpinning work being carried out by Skills Development Scotland to build a web offer specific to the sector which will tackle the issues of talent attraction and simplifying engagement.

Recommendation 9: explores ways to promote niche food products collectively in export markets to help develop the food manufacturing sector. Investigating the strategies of international competitors may help with this research.

Scottish Development International (SDI) is continuing to support the growth of Scotland's food and drink export markets, in partnership with the food and drink industry's leadership body, Scotland Food & Drink. SDI is leading the delivery of Scotland Food & Drink International Strategy. Recent successes include the completion of detailed work in North America and Europe to identify the retail and foodservice categories that provide significant future growth opportunities for Scotland. SDI plans to share this intelligence with individual companies to help inform individual market development plans.

Recommendation 10: continues to support development of skills in the food and drink industry. Particularly skills in leadership and marketing so that: niche food manufacturers can be brought together and promoted collectively overseas; and, those companies that wish to scale up have the skills to do so.

The Scottish Government collaborates with other public bodies and key stakeholders through the Scotland Food and Drink Skills Strategy Group to support skills development in the food and drink sector. Actions this year include:

Food and Drink Skills Strategy Group

The Food and Drink Skills Strategy Group (which includes representatives of the Scottish Government, Skills Development Scotland, SQA, Scottish Enterprise and others) has now been slimmed down into a small steering group, under which a number of sub-groups sit.

The key groups are:

Steering Group: employer led and guided by the evidence produced from the labour Market Intelligence and Insight produced by Improve (UK Sector Skills Council for the Food and Drink Manufacturing Industry), the National Skills Academy (NSA) and Lantra (UK's Sector Skills Council for land-based and environmental industries), as well as the refreshed food and drink industry strategy.

Skills Action Plan: Skills Development Scotland are leading in the development of an Industry Skills Action Plan, supported by the Scottish Government. The Action Plan will identify key priorities and actions for the sector and should be published in early 2011.

Skills Academy Industry Advisory Group: provides key liaison with Scotland Food and Drink Skills Academy management. This includes representatives of Improve/Lantra, as well as employers and stakeholder groups.

Technical Group - provides a forum for discussion and input in the development of specific learning requirements and content from the Action Plan.

The Scotland Food and Drink National Skills Academy

The Academy was launched in November 2010. The development of the Academy was supported by Scottish Government and has been part funded by Scottish Enterprise, the Scottish Funding Council, and Skills Development Scotland, over a three year period. It aims to:

• increase demand for training provision;
• improve communications to companies about existing training provision and identification of training solutions;
• improve information gathering for skills providers about training needs; and
• facilitate the proactive development of training solutions for unmet needs as identified by industry stakeholders and companies.

The Academy is delivered through the University of Abertay, and brings together food and drink manufacturers and training providers to develop and deliver the skills needed to make the Scottish food and drink industry globally competitive.

The academy is already delivering one of its first products, the Scottish Fellowship in Food and Drink Leadership. This course is designed to create an inspirational qualification for food and drink industry leaders of the future. It is an elite course delivering a step change in the calibre of education and training for future industry leaders

Skills Support

The Scotch Whisky Association published a report on the economic impact of the Scotch Whisky industry in Scotland early in 2010. The report concluded that the economic benefits of the industry were significant, with Scotch Whisky contributing £3.9bn a year in Gross Value Added to the Scottish economy, once supply chain spending is taken into account. Over £1.1bn is spent every year with Scottish suppliers, including £200m on Scottish cereals. In terms of social benefits, the industry employs 10,300 people in Scotland with 20 percent of them in the Highlands and Islands. The report also made a number of comparisons with other sectors, most notably that fact that employee productivity was six times the Scottish average and that Scotch Whisky is Scotland's leading export (excluding oil and gas).

The Scottish Government and its Agencies have continued to liaise and work closely with the Scotch Whisky sector to support its growth in global markets and its key role in enhancing Scotland's reputation as a Land of Food and Drink.

Accepted in part.

The Scottish Government has set in train two reviews that will impact on teacher quality.

The first is the Review of Teacher Education in Scotland. The Review's remit was to consider the best arrangements for the full continuum of teacher education in Scotland. This included initial teacher education, induction and professional development, and the interaction between them. The Review reported to Ministers at the end of 2010 and the report " Teaching Scotland's Future" published in January 2011. Ministers are currently considering their response, which they intend to bring forward before the end of the current parliament.

The other review is into teachers pay and conditions of service and is due to report in June 2011. This will consider a wide range of elements of the current teacher contract, including the future of the Chartered Teacher scheme.

The outcome of both these Reviews will help the Scottish Government improve its system of education, with well educated, well trained teachers that are highly motivated.

The Scottish Government, the Scottish Qualifications Authority (SQA) and other national education agencies directly promote and reward academic excellence through a number of routes, while avoiding duplication in the awards provided. For example, SQA's Star awards include awards for Academic Excellence and School Candidate of the Year, and a special award in 2010 for Science Teacher of the Year.

The Scottish Government's Scottish Education Awards take place in June each year and, in 2011, will award excellence across 17 categories. The awards showcase outstanding practice in classrooms across Scotland.

Recommendation 14: considers how to develop a more coherent and fully-integrated schools policy for Scotland, based on strong analysis and good data, building up Scotland's international reputation for high quality in both the public and private school markets. The development of such a policy would benefit from having a highly open and transparent system in place to ensure independent research on, and rigorous evaluation of, education in Scotland.

The Curriculum for Excellence (CfE), the new 3-18 Curriculum was implemented in August 2010 and is now in place in all Scottish schools. The CfE is energising learning and teaching across the length and breadth of Scotland, making learning more relevant, engaging and inspiring.

The Scottish Government has continued to encourage the independent sector to raise standards and the quality of education provided, to ensure that they continue to attract pupils from the EU and beyond.

The Scottish Government recently announced the creation of a new executive agency - the Scottish Education Quality and Improvement Agency, bringing together Her Majesty's Inspectorate of Education and Learning & Teaching Scotland. The new agency will commence on 1 July 2011, providing support for, and challenge to, teachers, schools, colleges, local authorities and others as the CfE is taken forward.

The Scottish Government continues to respond positively to requests for access to data and analysis from partners and colleagues across all parts of the Education, Research and Academic sectors. We will continue with our transparent and structured collection, analysis and publication of key statistical evidence and through our work supporting partners on the CfE Management Board to monitor implementation of CfE, we are supporting the understanding of progress in this important area of policy. In addition, we continue to work with partners to understand the progress being made to deliver National Outcome 4.

Recommendation 15: makes the maximum use of special purpose vehicles and other devices to exploit borrowing opportunities within the present framework of legislation and expenditure control.

The Scottish Government is continuing to make maximum use of alternative funding options for vital infrastructure spending in the face of the rapid and deep reductions in capital spending flowing from decisions in the UK Spending Review. In its draft Budget for 2011-12, the Scottish Government announced proposals to take forward a new, affordable pipeline of revenue financed investment worth up to £2.5 billion, to be delivered through the Non-Profit Distributing (NPD) model, which avoids the excessive profits to the private sector and financing costs to the public sector associated with past PFI projects. These key infrastructure projects in transport, health and education will be delivered by the Scottish Futures Trust in partnership with the Scottish Government, local government, NHS Boards and other public bodies.

Major transport projects include the Borders Railway; upgrades, improvements and extensions to the M8, the M73 and M74 networks; construction of the Aberdeen Western Peripheral Route and construction of a dual carriageway between Balmedie and Tipperty.

On education, Scotland's Schools for the Future programme will deliver up to £500 million of capital investment, subject to the agreement of local authorities. Around £100 million of improvements are planned to the further education college estate at Kilmarnock and Inverness. And around £200 million of investment is earmarked for the modernisation of the Glasgow college estate, subject to the conclusion of a robust and affordable business case.

Within health, the Royal Sick Children's Hospital and Department of Clinical Neurosciences in Edinburgh will see capital investment of around £250 million. The hub initiative will receive around £200 million in project finance for community-based investment, including locally-provided health services. Individual hospital projects, health centres and mental health facilities across Scotland will be receiving up to £300 million in additional capital investment.

Recommendation 16: seeks powers to engage in simple, clear and transparent borrowing, with access to the Local Authority Prudential Scheme, but with the ability to borrow from capital markets where advantageous, and seeks to have the current £500 million short-term limit lifted or revised to a more realistic figure.

The Scottish Government has set out in detail the rationale and benefits additional borrowing autonomy would provide in the November 2009 National Conversation White Paper, and the accompanying report Borrowing Powers.

Since June 2010, as part of discussions on the UK Government's Scotland Bill proposals, and in line with the recommendation of the Council of Economic Advisers, the Scottish Government has made the case for substantial borrowing powers to be an integral part of any package of reform.

The UK Government's Scotland Bill published in November 2010 would give Scottish Ministers access to a capital borrowing facility worth a total of £2.2 billion with annual capital borrowing capped at 10% of the capital budget. The Scottish Government welcomes the principle of borrowing powers, however, we have a number of concerns with the limitations of the specific proposal.

The provisions within the Scotland Bill remain limited, and there are areas where relatively modest changes would deliver real benefits for Scotland.

• Firstly, it is unfortunate that the capital borrowing facility will not be implemented until 2013 at the earliest, with full implementation not until 2015. This means that it will be of only limited benefit in managing the 36% real terms reduction in our capital budget over the next four years.

• Secondly, the proposed facility would be very constrained, granting powers more restrictive than the Prudential scheme already available to local authorities. For example, the Scottish Government could use up the entire cumulative borrowing limit of £2.2 billion simply paying for the Forth Crossing. Further, the proposed fixed annual limit on the amount of borrowing would constrain flexibility and would not encourage responsible capital budgeting. The Bill would also limit borrowing to loans rather than bonds or other instruments.

Finally, although the Scotland Bill would devolve income tax revenues to the Scottish Government's budget, the Bill as it currently stands would not grant the Scottish Parliament the tools required to deal with the cyclical revenue volatility this would bring. Without adequate revenue borrowing powers to smooth expenditure over the course of the economic cycle, the Scottish Government's budget will be exposed to sharp downward adjustments during periods of economic slowdown. This could worsen the impact of future recessions on Scottish unemployment, public services and economic output.

The appropriate remit and scope of an independent Fiscal Policy Commission will depend on the size and nature of borrowing powers and other macroeconomic responsibilities that are devolved to the Scottish Parliament.

The Scottish Government's proposals for Full Financial Responsibility would enable a Fiscal Policy Commission to be established and to have a substantial remit in ensuring fiscal sustainability.