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Highlands and Islands Scotland: European Regional Development Fund 2007-2013: Structural Funds Operational Programme

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2. SOCIO-ECONOMIC BACKGROUND

The report provides an evidence base to inform the development of the new European Regional Development Fund ( ERDF) Convergence Programme in Highlands & Islands for the period 2007-13. The analysis examines the underlying challenges in the economy in contributing to the achievement of the EU's ambitious targets for jobs and economic growth under the Lisbon Agenda. Key issues facing the region's economic development through the programming period are identified, but inevitably, these may alter over so long a time period. However, these trends are part of more fundamental features of the Highlands & Islands economy which have shaped domestic policy as well as the issues highlighted in the Community Strategic Guidelines as central to improving regional competitiveness. Crucially, these broader perspectives have been set in a Highlands & Islands context to establish priorities and identify optimal arrangements for delivery.

The analysis is not meant to be a comprehensive review of the regional economy, but a focus on a specific set of market features which Structural Funds can help to address. Some important elements of wider economic development have not been examined in detail because Structural Funds cannot provide significant support to address the issues adequately. The analysis focuses on aspects of socio-economic development where limited Structural Funds support can make significant differences. In addition, the analysis takes into consideration the areas of eligible activity set out in the Structural Funds regulations and prioritised in the Community Strategic Guidelines (as discussed in more detail in Chapter 3).

Similarly, there are other analyses that have informed the development of the Programme, not least the Strategic Environmental Assessment and summary of the environmental situation, which provides the key baseline environmental data for the Programme area and recommendations for addressing environmental sustainability issues. Consequently, the following analysis does not cover environmental sustainability issues in detail, as these are covered in annexes.

The socio-economic analysis begins with a context-setting section covering key development characteristics of the region, especially demography, employment and productivity. It then groups the assessment of the region in four categories of issues that reflect both the importance of factors specific to the region's underlying competitiveness as well as the policy themes highlighted in the Structural Funds regulations:

  • challenges to general enterprise development in the region: general issues relating to enterprise development, particularly the overall health and trends in the enterprise base of the region and key obstacles to growth;
  • research and innovation challenges in the region, including the research and innovation infrastructure of the Highlands & Islands as well as the opportunities in key sectors;
  • challenges to communities, especially the challenges of socio-economic deprivation in fragile and peripheral areas, access to services and the challenges this brings to overall regional competitiveness; and
  • access and communication challenges, especially with respect to transport and communication accessibility across the region.

Where specialised sources of data/research are used, these are cited in the text with the references listed in the annex. General sources used in the analysis include: the Scottish Economic Statistics series, the Scottish Economic Report and the General Register Office for Scotland ( GROS).

2.1 General Background

Population

General

The population of the Highlands & Islands area in 2001 rose to 361,625, a slight increase from 1991, compared to a 0.4% decline in Scotland as a whole. However, this hid a degree of variation, with more fragile mainland areas and the islands losing population while areas around relatively prosperous towns and settlements gained population.

Table 1: Population change by area in the Highlands & Islands (1991-2001)

Localities

1991

2001

Change

% change

Argyll & the Islands

71,007

70,156

- 851

-2.4

Caithness & Sutherland

40,235

38,669

-1,566

-3.9

Inverness & Nairn

72,809

77,647

4,838

6.6

Lochaber

19,310

18,740

-570

-3.0

Moray, Badenoch & Strathspey (excl. East Moray)

25,783

26,583

800

3.1

Orkney

19,612

19,245

-367

-1.9

Ross & Cromarty

48,888

49,959

1,071

2.2

Shetland

22,522

21,988

-534

-2.4

Skye & Lochalsh

11,754

12,136

382

3.2

Western Isles

29600

26,502

-3098

-10.5

Highlands & Islands (excl. East Moray)

361,520

361,625

105

0.0

Scotland

5,083,330

5,062,011

-21,319

-0.4

Source: Census results from GROS and ONS. Original 1991 data revisions.

Using ward data, Figure 1 below illustrates that the general pattern of change during the 1990s was one of concentration of population around the larger settlements, while the more remote and fragile areas continued to suffer from out-migration. This pattern is most evident around the Inverness area, which has drawn people in from the surrounding rural areas, but it is also clearly replicated in Orkney, Shetland, the Western Isles and Argyll. The Western Isles experienced significant population loss over this period, with some 18 of the 31 wards witnessing a loss of more than 10%. The changes in the Easter Ross area are dominated by neighbouring Inverness, while in Lochaber the lack of available land for housing around Fort William may have influenced the general decline in population.

Figure 1: Population change in the Highlands & Islands (1991-2001)

Figure 1: Population change in the Highlands & Islands (1991-2001)

Source: Census 2001 wards, GROS.

One of the key challenges for the region is its settlement pattern. The Highlands & Islands has a population density of 9.3 people per km 2 (based on a geographic area of 39,050 km). Excluding the city of Inverness, the population density for the region falls to 7.8 people per km 2, compared to the Scottish average of 64.8 and the UK figure of 242.4. Low population density has produced a settlement pattern of small communities, often distant from each other, key markets and services, resulting in additional costs in the provision of goods and services due to a lack of economies of scale and a corresponding enterprise base - an important development constraint recognised in previous Cohesion policy through Objective 6 where the qualifying threshold was 8.

Peripherality is further exacerbated in the Highlands & Islands by the extent of the island-based population. In 2001, the inhabited islands had a combined population of 99,494 people living on 90 islands, some 23% of the total Highlands & Islands population. The rate of population decline has been more significant on the islands with smaller populations. Thus, while islands with a population of more than 5,000 in 2001 experienced an overall population increase of 3% since 1961, islands with populations of less than 500 experienced an overall fall of 20% in population over the same period. Depopulation, particularly in fragile areas, has been shown to have an adverse effect on community confidence and service sustainability, increasing the vulnerability of communities already experiencing acutely the problems of high-cost service provision and market access.

Age Structure

The population of the Highlands & Islands area is slightly older than the Scottish average, with a trend towards an ageing population. The percentage of the population aged 44 years or less has decreased in the Highlands & Islands from 61.7% in 1991 to 56% in 2001. This is slightly lower than the rate for Scotland, which was 59.7% in 2001 (62.3% in 1991).

The percentage of the population aged 65 years or older in the Highlands & Islands has increased from 15.9% in 1991 to 17.2% in 2001. This compares to 16% for Scotland in 2001 (15.4% in 1991). The pattern of demographic change across the Highlands & Islands, coupled with a trend towards an ageing population, is bringing fresh challenges to the Highlands & Islands area. Out-migration is also a constraint on economic growth with the Highlands & Islands witnessing an under-representation of people aged 18-30 years and out-migrants tending to pursue higher levels of training/qualifications.

Migration

Despite the levels of out-migration, some areas of the Highlands & Islands have experienced growth in the number of in-migrants. Given the relevance of population change to economic, social and cultural development, it is very important to understand the demographics, characteristics and motivations of the migrant population.

Highlands & Islands Enterprise commissioned research to look at the in-migration patterns in remote parts of Highlands & Islands that experienced population growth during the 1980s and 1990s. Of the 600 in-migrants questioned, some 80% had moved from outwith the Highlands and Islands, 48% from England or Wales and 5% originated from outside the UK. The vast majority had strong personal connections to the area, their move driven by quality-of-life features and a long-term aspiration to undertake the move.

Inward migration to the Highlands & Islands from the rest of Scotland shows that on average, some 4,393 people moved each year (2002-04) from the rest of Scotland to the region. Some 65% of these in-migrants were below 35 years and were most likely to be university leavers returning to the area to take up their first job and young families looking for a better quality of life. Analysis of out-migration from the region to the rest of Scotland over this period shows that 72% of out-migrants were aged under 35 years, with a significant number falling in the 15-19 age category, mainly school leavers (of necessity) attending university outwith the area.

Migratory patterns between Local Authorities indicates a high level of movement between the Highland mainland and neighbouring Local Authorities with net gains in the Western Isles, Orkney and Shetland - although they have seen overall demographic decline - and net losses in Perth & Kinross, Aberdeenshire and Moray. In general there was a net outflow to urban authorities, perhaps due to young people attending university and not returning to the area having completed their studies.

The number of overseas inward migrants rose from 225 in 2001/02 to 1,630 in 2004/05, a much greater rate of increase than for the rest of Scotland and the UK overall. The distribution of migrants in the Highland area has been consistent over this time, with the city of Inverness accounting for some 40% of the total.

Most registrations were in the 18-24 (45%) and 25-34 (37%) age groups with slightly more men than women moving to the area. The number of unemployed people in Highland fell steadily during this period at the rate of about 300 per year, providing a possible link that inward migration is meeting shortages in the labour market. Evidence across the Highlands & Islands indicates that overseas in-migrants have flourished in manufacturing jobs, working in fish-processing factories and tourism-related industries.

Employment and unemployment

With the labour market tightening in recent years, employment levels in the Highlands & Islands are high. The Highlands & Islands has an employment rate of 73%, slightly above the Scotland level of 72% and significantly above the rates for the EU-15 and EU-25. The Highlands & Islands has a higher economic activity rate, at 76%, than the EU-15 and EU-25 which are at around 70%. Between 2001 and 2005, the Highlands & Islands' economic activity rate has seen a small decrease while the Scottish and EU rates have increased by slightly more than a percentage point in the same time frame. Lastly, the Highlands & Islands' unemployment rate (3.7%) is well below the levels for EU-15 and EU-25. While unemployment across the EU increased between 2001 and 2005, it decreased in both the Highlands & Islands and Scotland.

Table 2: Headline statistics on employment and unemployment

EU-25

EU-15

UK

Scotland

Highlands & Islands

Employment, 15-64 (000s)

2001

188,756

160,114

26,982

2,322

268

2005

195,034

165,952

27,610

2,378

269

Employment Rate, 15-64 (%)

2001

62.7

63.9

71.4

70.2

71.4

2005

65.1

64.5

71.7

72.0

73.4

Economically Active, 15-64 (000s)

2001

206,728

173,178

28,417

2,477

288

2005

214,680

181,038

28,997

2,513

280

Economic Activity, 15-64 (%)

2001

68.7

69.1

75.2

74.9

76.6

2005

70.1

71.0

75.3

76.1

76.3

Unemployment, 15 and over (000s)

2001

18,039

13,120

1,444

156

19

2005

19,687

15,117

1,399

136

11

Unemployment Rate, 15 and over(%)

2001

8.6

7.5

5.0

6.2

6.7

2005

9.0

8.2

4.7

5.3

3.7

Source: Eurostat.

Despite the already high levels of female economic activity, the Highlands & Islands experienced a one percentage point increase in participation between 2001 and 2005. This increase maintained the Highlands & Islands female economic activity above Scottish, UK and EU rates. The increase in female participation was, however, not enough to compensate for a 1.7% decrease in male participation, which resulted in the 2005 total activity rate being slightly down (0.3) in comparison to 2001. Still, male employment activity rates remained above 80%.

Table 3: Economic activity by gender

Total economic activity

Male economic activity

Female economic activity

2001
(%)

2005
(%)

p.p.
change

2001
(%)

2005
(%)

p.p.
change

2001
(%)

2005
(%)

p.p.
change

EU-25

68.7

70.1

1.4

77.3

77.8

0.5

60.1

62.5

2.4

EU-15

69.1

71.0

1.9

78.2

78.8

0.6

60.1

63.1

3.0

UK

75.2

75.3

0.1

82.6

81.9

-0.7

68.0

68.8

0.8

Scotland

74.9

76.1

1.2

81.4

82.4

1.0

68.6

70.2

1.6

Highlands & Islands

76.6

76.3

-0.3

83.6

81.9

-1.7

69.9

71.0

1.1

Source: NOMIS - Labour Force Survey.

Employment rates in the Highlands & Islands increased roughly in line with Scottish rates between 2001-05. Male employment rates stand presently at 79%, while female rates have risen to 68%. Both rates are higher than the Scottish, UK and EU rates.

Table 4: Employment rates by gender

Total employment rates

Male employment rate

Female employment rate

2001
(%)

2005 (%)

p.p.
change

2001 (%)

2005 (%)

p.p.
change

2001 (%)

2005 (%)

p.p.
change

EU-25

62.7

63.7

1.0

71.2

71.2

0

54.2

56.2

2.0

EU-15

63.9

65.1

1.2

73

72.8

-0.2

54.9

57.3

2.4

UK

71.4

71.7

0.3

78

77.6

-0.4

65

65.9

0.9

Scotland

70.2

72

1.8

75.4

77.5

2.1

65.1

66.8

1.7

Highlands & Islands

71.4

73.4

2.0

77.1

78.9

1.8

66.1

68.1

2.0

Source: NOMIS - Labour Force Survey.

The working-age population of the Highlands & Islands is on average less qualified than that of Scotland as a whole in terms of NVQ4 and above qualifications. The Highlands & Islands have more people with NVQ3 and below qualifications than the Scottish average, as well as less people with no qualifications. In comparison to the rest of the UK the Highlands & Islands fare better in working-age population with no qualifications, and tend to do better in terms of higher qualifications.

Table 5: Qualifications of the working age population (2005)

Qualifications

UK

Scotland

H&I

NVQ4+

26.4

30.6

26.8

NVQ3/trade apprenticeship

20.7

23.4

26.8

NVQ2

15.9

13.8

16.0

NVQ1

14.2

10.7

10.8

Other qualifications

8.3

6.7

7.7

No qualifications

14.5

14.7

11.9

Source: NOMIS - Annual Population Survey.

Earnings

Absolute earnings in the Highlands & Islands have risen over the last 25 years as a result of the general growth and diversification of the economy. However, in relative terms, the region's position has not changed significantly against national averages - incomes levels for 2004 were around 91% of the Scottish average and 85% of the UK average (as illustrated in Table 6).

Table 6: Average earnings in the Highlands & Islands (£)

1998

1999

2000

2001

2002

2003

2004

H&I

232.7

252.4

255.3

266.5

272.4

279.5

293.8

Scotland

262.1

274.8

282.8

294.5

302.8

314.4

321.5

UK

280.2

290.0

299.6

312.5

324.8

334.8

345.5

H&I relative to UK

83%

87%

85%

85%

84%

83%

85%

Source: Annual Survey of Hours and Earnings, ONS, 2005.

Lower earnings are as a result of a range of factors including a low share of national employment in high-paying sectors, a lack of private sector head offices and the out-migration of young people. As Table 7 shows, the relatively large number of employees in agriculture/forestry/fishing and tourism-related activities, typified by low wages, is also a major contributor.

Table 7: Scotland - Gross wages and salaries per employee (£)

2002

2003

2004

Whole economy

15,446

16,156

16,653

Agriculture, forestry and fishing

10,545

13,435

12,605

Tourism-related activities

9,100

9,600

9,800

Source: Inter-Departmental Business Register; Scottish Executive (tourism).

Examining Scottish Government median earnings levels at NUTS 2 level, Table 8 shows variation across the regions, ranging from £383 to £458 for April 2006. Argyll & Bute is the only Local Authority above the Scottish median earning level of £432 - all other areas are significantly less.

Table 8: Median earnings by H&I Local Authority area (£, April 2006)

Argyll & Bute (whole)

458

Eilean Siar

403

Highland

393

Moray (whole)

383

North Ayrshire (whole)

387

Orkney

385

Shetland

419

Productivity

GVA per full-time employee is also lower in the Highlands & Islands than in Scotland. Figures are influenced by small firms dominating the economy, higher production costs and lower value outputs. Table 9 below highlights the decline in Gross Value Added per head in the Highlands & Islands and Scotland relative to the UK average over the six-year period from 1997-2004.

Table 9: Trends in GVA: the Highlands & Islands in context (1997-2004)

1997

1999

2001

2003

2004

£m

H&I

3,243

3,526

3,794

4,206

4,569

Scotland

60,755

65,160

70,210

78,504

82,592

£ per head

H&I

8,711

9,493

10,270

11,400

12,269

Scotland

11,952

12,847

13,864

15,523

16,334

£ per head UK=100

H&I

72

71

70

71

72

Scotland

99

96

95

96

95

Source: ONS, 2006.

Table 10 shows how different sectors contribute to regional GVA. As with Scotland and the UK as a whole, the key sectors are real estate/business activities, manufacturing and trade, though they have smaller shares in the Highlands & Islands. In contrast, sectors such as agriculture/forestry, fishing and hotels/restaurants (as part of tourism activities) are more important.

Table 10: Share of GVA by sector of activity (%, 2004)

UK

Scotland

Highlands & Islands

Agriculture, hunting and forestry

1.0

1.8

4.6

Fishing

0.2

1.1

2.5

Mining and quarrying

0.2

0.2

0.7

Manufacturing

14.5

14.3

12.5

Electricity, gas and water supply

1.7

2.5

2.6

Construction

6.0

6.9

8.5

Wholesale and retail trade

12.1

10.9

11.6

Hotels and restaurants

3.2

3.6

6.7

Transport, storage and communication

7.8

7.5

9.1

Financial intermediation

7.1

6.9

1.3

Real estate, renting and business activities

23.8

17.9

15.0

Public administration, defence, etc

4.9

6.9

5.7

Education

5.9

6.3

4.3

Health and social work

6.6

7.6

9.6

Other services

5.1

5.8

5.3

Source: ONS - Regional Accounts.

As highlighted in Table 11, GVA across the region varies. Concentrations of economic activity in the Inverness region and around the oil/gas industry in Orkney and Shetland have produced productivity figures that are above the Scottish average. The Inverness area has seen rapid growth, reflecting the area's growth-pole activity in the last decade. However, Shetland and Orkney have still declined significantly relative to the UK, reflecting recent changes in the oil industry. Overall, the lowest rates are recorded in the more peripheral parts of the mainland in the region, especially Caithness, Sutherland and Ross & Cromarty. However, Lochaber, Skye & Lochalsh and Argyll & the Islands area also experienced a decline relative to the UK average.

Table 11: Trends in GVA: variation within the Highlands & Islands (1997-2004)

GVA (£ per head)
UK = 100

1997

1999

2001

2003

2004

Caithness & Sutherland/Ross & Cromarty

60

60

61

61

63

Inverness & Nairn/Moray, Badenoch & Strathspey

76

76

78

81

85

Lochaber/Skye & Lochalsh/Argyll & Islands

71

70

68

65

62

Western Isles

66

69

68

68

67

Orkney

89

81

74

74

73

Shetland

96

91

83

79

86

Highlands & Islands

72

71

70

71

72

Source: ONS, 2006.

Relatively low GDP/ GVA across the Highlands & Islands is due to a range of factors, some of which are highlighted below:

  • high share of employment in relatively poorly-paying sectors (including tourism, retailing, food and fish-processing);
  • low share of employment in highly-paying sectors (including higher education, financial and professional services);
  • limited research institutes and business spin-outs from higher education facilities, which are a source of highly-paid jobs;
  • lack of head offices (which provide well paid managerial and other senior jobs and are a source of profits);
  • incidence of low income-generating farms and crofts;
  • self-employment, generating low incomes in tourism accommodation and local services;
  • economies with traditionally low-pay structures (eg. Orkney, despite the presence of the oil/gas industry);
  • high seasonality in employment (increasing the unemployment rate in the winter); and
  • factors relating to peripherality, sparsity of population, high building costs and transport costs.

Access to education, training and research

At the start of this Programme, the Highlands & Islands does not have a university based in the region. Given that there is no successful regional economy in the world without its own university, this lack impacts on so many other factors. Without a designated university, young people have, for generations, left the area to seek higher education and at the same time there has been no benefit of people being attracted into the area to study. Continuing professional development for enterprise has been limited and there has been no central hub around which research could develop. This has changed in recent years with the region's progress towards gaining a fully-designated university.

The UHI Millennium Institute ( UHI) is the only higher education institution ( HEI) based in the Highlands & Islands, having achieved HEI status in 2001 (in comparison to 20 HEIs in the rest of Scotland). It provides access to university-level study through a partnership comprising the further education colleges and research institutions in the region, along with a network of over 50 outreach learning centres. The UHI is playing a large part in the cultural, social and economic development of the Highlands & Islands and is in the process of application for full university status. Scotland has 46 further education colleges, and six of these are based in the Highlands & Islands and are partners in the UHI.

UHI students, lecturers, academic partners and learning centres are part of an advanced high-speed electronic network. Students normally study at a college or learning centre - many take classes at large and busy campuses, while others access their course through one of the network's smaller campuses or learning centres located throughout the region. The UHI takes advantage of blended learning opportunities for students to use web-based learning materials and come together individually or in small groups for video-conference tutorials and seminars, as well as having access to locally based study resources and support. The UHI is the UK leader in using video-conferencing technologies in education - not to create a virtual institution but to bring people together so that they can learn from, and with, each other.

As will be explained in greater detail below, the lack of access to higher education has had a detrimental effect on business development and support. However, the creation of the UHI with Structural Funds support in previous programmes has created new opportunities:

  • to develop research capacity in the region;
  • to distribute the benefits of that research around the region and improve commercialisation; and
  • to address the gaps in the region's learning and teaching capacity through a networked, ICT-based approach to reach the region's more remote communities.

Achieving university title for the UHI is, therefore, a key objective for this Programme (along with the Highlands & Islands ESF Programme) which will underpin much of the enterprise, innovation and sustainable community support as well as education, training and research capacity. The timescale for this is within the first few years of this programme, therefore activities during this time will be of significant importance. The Strategic Delivery Body approach for the UHI, as the only HEI in the region and working through the region's further education colleges and research institutions, will help to achieve this goal, leaving a major lasting legacy from the structural funds.

Key messages

  • While population increased in the region as a whole, there have been significant variations, with some communities having experienced substantial declines (particularly in the islands). There is also a trend towards an ageing population, more so than in other parts of Scotland and the out-migration of young people from the region.
  • Low population density and a dispersed settlement pattern underlines the peripheral and rural nature of much of the region.
  • Unemployment and economic activity rates in the region compare relatively well with Scotland, UK and EU averages.
  • In terms of earnings, while levels have improved over time, the Highlands & Islands continues to perform below Scottish and UK averages.
  • Overall, the region has relatively lower productivity than Scotland and the UK, with some parts of the region displaying particularly low rates.
  • Economic development in the region has been constrained by the lack of an indigenous university.

2.2 Enterprise

General enterprise

With almost 18,000 enterprises registered for VAT, the Highlands & Islands has a significantly higher enterprise stock relative to its population size than Scotland and the UK, though it still has a small stock in a European context.

  • In 2004 there were 389 enterprises per 10,000 population in the Highlands & Islands, well above the Scotland and UK average stock of 250 and 306 respectively. This fits with the Countryside Agency's finding that, in England, there are 8% more enterprises per head of population in rural areas than in urban areas.
  • However, between 2000 and 2004, the Highlands & Islands has seen a small decline in its enterprise stock, while Scotland (1%) and the UK (3%) have both seen increases.
  • By NUTS 3 area, Orkney and Shetland have the highest enterprise stock relative to population. However, the two areas and Eilean Siar have seen the greatest decrease in enterprise stock between 2000 and 2004.

The health of the enterprise stock is dependent on the extent to which it is replenished by new businesses. There are around 33,000 self-employed in the Highlands & Islands, 12.4% of all those in employment.

  • This is lower than the EU-25, EU-15 and UK figures, but above the Scottish average.
  • Between 2001 and 2004, self-employment in the Highlands & Islands decreased by 11.5%. This is a substantial fall relative to the increase in self-employment in the EU, UK and Scotland.

On the basis of VAT registrations, almost 1,280 new enterprises set up in the Highlands & Islands in 2004.

  • The enterprise birth rate at 27.8 per 10,000 population is above the Scotland figure of 23.3 but below the UK average of 30.7.
  • Orkney, Shetland and the Inverness-centred Highland Council area have the highest enterprise birth rates at close to 30. Moray Council area consistently has the lowest at 19.

The enterprise closure rate in the Highlands & Islands mirrors the enterprise birth rate. At 31.4 per 10,000 population it is well above the Scotland figure (23.6).

Although relatively strong compared to Scotland as a whole, the enterprise stock in the Highlands & Islands continues to present challenges for the region. This derives in large part from the poor new firm formation rate which could present difficulties to the region's entrepreneurial development. Evidence suggests that in Scotland as a whole there remains a potential pool of 'would-be' entrepreneurs. A survey by the Small Business Service (2003) found that 10% of the Scottish adult population (compared to 13% in England) are, or have recently been, thinking about setting up their own enterprise. However, the 'problem' is that would-be entrepreneurs are less likely to take action in Scotland than in England. Consequently, if the new firm formation rate is to be improved, the key requirements are to stimulate business start-ups and to ensure the population has the skills and resources to convert their interest into action.

There are many inter-dependent factors which stimulate or constrain the willingness and ability of individuals to set up their own enterprise. At the level of the individual, the main perceived constraints traditionally relate to finance. This has several dimensions:

  • Most enterprises are set up using the founders' personal finance. Many do not have the necessary savings to enable them to set up in enterprise.
  • Raising external finance (ie. from the banks) also requires that 'would-be' founders have access to personal savings or wealth to offer as security or meet bank 'gearing ratio' requirements.
  • There is some fear of taking on debt (presumably aggravated by the need to provide security from personal assets) and there are concerns about security (eg. leaving a job and concerns over potential enterprise failure).

Access to finance, rather than marginal variations in its cost, has been seen as a widespread barrier especially amongst those with few savings such as the young. Fraser (2005) found that the main source of start-up finance was personal savings - used by two-thirds of start-ups. Other sources of finance commonly used are loans from friends and family (used by 13% of start-ups) and bank loans (used by 10%). Just 2% used equity finance. This suggests that access to external start-up finance is limited, with most people using personal savings, mortgaging their home or borrowing from friends or family.

Other critical barriers to business success that are particular high in the Highlands and Islands, from the Small Business Survey, include difficulties recruiting staff and a reported low satisfaction with public transport getting people to work. On the employment side, Highlands & Islands businesses are much more likely to employ workers seasonally (46% versus 24% in Scotland as a whole) and to employ some staff on the minimum wage (22% versus 9%).

In addition, the survival rate of businesses in the region needs to be improved, with a relatively high business closure rate for the Highlands & Islands. Businesses are likely to face distinctive pressures in the region, including the following.

  • Relative lack of access to export markets. Export performance for the region has been limited by the peripheral nature of the region and higher transport costs. Although there are sectors where export performance is strong - such as the food/drink industry, particularly whisky - exports as a whole are limited by the issues discussed above in relation to the regional economy as a whole as well as the lack of exporting and marketing skills within many individual enterprises. According to the Scottish Global Connections Survey in 2002, the region only accounted for 5% of total Scottish exports, although encouragingly, if somewhat predictably, a higher share of this came from the SME base than in Scotland as a whole.
  • Limited e-commerce. Broadband access in the region has been growing, but still only covers 65% of most organisations, according to the Scottish e-Business Survey (Scottish Enterprise, 2007). Strong investment in broadband infrastructure in recent years - not least by the Scottish Government supported by Structural Funds - has improved access, but usage is still relatively stronger in urban rather than rural areas. Across the region, there are areas where organisations believe that broadband speed and access is particularly limited, notably Orkney, Shetland and Lochaber. Coupled with perceptions about access is the extent of e-business usage, which, for Scotland as a whole, has been increasing, but continues to lag key competitor counties in the EU and North America.
  • Limited business community and support infrastructure for business development in rural areas. Peripherality has a further impact through the small and dispersed settlement pattern of the region, so that enterprises in the more isolated and rural parts of the region lack access to key support infrastructure and services. This can include adequate industrial property, access to development finance and start-up and business growth advice.
  • Limited business skills capacity, arising from the weak training and learning infrastructure. Enterprises in the region suffer from a lack of adequate skills and training infrastructure. The historical lack of a university in the region and the distributed nature of the further education network has limited the region's business training capacity, particularly with respect to marketing, exporting, business planning, finance and other key start-up, development and business expansion skills. As seen below with relation to the University of the Highlands & Islands, this is changing, but it remains a significant bottleneck for enterprise development.

Key sectors

Overall employment in the Highlands & Islands is presented in Table 12. Relative to the UK, the region has a high share of employment linked to the public sector, perhaps not surprising given the need for public services to cover such a peripheral and sparsely-populated area. The public services figure masks a relatively stronger dependence on tourism-related sectors as well as primary sectors such as agriculture and fishing, in the Highlands & Islands, while manufacturing is considerably less important than in Scotland in employment terms.

Table 12: Share of employment by sector (2004)

Scotland
(%)

H&I
(%)

Agriculture and fishing

3.0

2.5

Energy and water

2.1

1.3

Manufacturing

13.8

9.9

Construction

7.4

6.7

Distribution, hotels and restaurants

27.7

26.7

Transport and communications

7.2

5.2

Financial intermediation/business services

21.3

9.5

Public administration, health and education

11.3

33.3

Other services

6.1

5.2

Source: ABI.

Within this analysis, it is important to draw attention to key sectors which can underpin future economic growth and regional competitiveness. The sectors comprise those drawing on the competitive advantages of the region and emerging research strengths and have been targeted by Highlands & Islands Enterprise as potential growth sectors for the economy. They are:

  • renewable energy, such as wind, hydrogen, wave, tidal and biomass;
  • sectors based on natural, historical and cultural resources, especially the natural environment, archaeological resources, Gaidhlig and the region's cultural assets - these include food and drink, forestry and cross-cutting sectors such as tourism and creative/cultural industries;
  • other key energy-related activities, notably the nuclear decommissioning especially - and from a Structural Funds perspective, more relevantly - the supply industry to nuclear decommissioning activity (eg. supply of key technologies, products and services in treating nuclear waste and de-constructing irradiated buildings and infrastructure); and
  • life sciences.

Each of these areas are discussed in turn below.

Renewable Energy

Renewable energy technologies are key to achieving the Scottish Government's (2005) Sustainable Development Strategy goal of sustainable development through an innovative and productive economy that delivers high levels of employment and protects while enhancing the physical and natural environment. A thriving renewables sector has the potential to enhance Scotland's manufacturing capacity, to develop new indigenous industries, particularly in the Highlands & Islands, and to provide significant export opportunities. The Scottish Government has set the target of 18% of electricity generated within Scotland by renewable means by 2010. There is also the aspiration of generating 40% of its electricity from renewable sources by 2020. There are currently about 90 applications for licenses for wind farm projects above 50 Megawatts in the Highlands & Islands.

Within the region, there are key areas where the Highlands & Islands has strengths that offer strong opportunities for growth.

  • Marine. The Scottish Government Opportunities for Marine Energy in Scotland report (2002) concluded that Scotland already possesses many of the skills and capabilities required to develop a marine energy industry. The Highlands & Islands leads Scotland in the industry through the European Marine Energy Centre which has a commercial wave energy scheme in Islay and a Marine Energy Test Centre in Orkney.
  • Biomass. Biomass projects hold significant potential for the Highlands & Islands as not only do they provide a flexible and predictable generation source but also provide opportunities for rural regeneration, job creation and the development of sustainable communities.
  • Micro-Renewables. The Scottish Community Regeneration Initiative provides local support through a 'one-stop shop' to encourage local participation in, and awareness of, micro-renewables. The Highlands & Islands Community Energy Company supports community developed and owned renewable energy projects.

Linked to this is the use of renewable energy within the region. Scope exists for supporting local renewable energy projects, particularly micro-generation linked to community energy needs. Increased local use of renewable energy would provide a local market driver for the sector and its technological research. Such activity is eligible under the Scottish Rural Development Programme.

Tourism and Cultural Industries

Tourism is a key sector in the Highlands & Islands as it includes accommodation, visitor attractions, transport, retail, food and drink, and leisure activities. The area's scenery and cultural heritage attracts visitors, providing economic benefits to the region ( HIE, 2004).

  • In 2001, around four million visits were made to the Highlands & Islands by UK residents, accounting for an estimated £792 million spend.
  • Around 500,000 trips were made to the Highlands & Islands by overseas visitors, spending an estimated £110 million.
  • The total output and GVA generated at basic prices from tourism for hotels and restaurants is roughly £410 million and £228 million, respectively. This is equivalent to £12,000 GVA per employee in the hotel and restaurant sector.

Tourism is a significant employer in the Highlands & Islands at 11% of all employees, representing a slightly higher proportion of total employment in this region compared to Scotland as a whole. Tourism also supports a higher proportion of part-time employees and female employees than any other sector in the Highlands & Islands ( HIE, 2004).

Table 13: Headline tourism indicators (2004)

Highlands & Islands

Scotland

Great Britain

No. of employees

17,547

188,929

1,982,443

Employees (% of all)

11.0

8.1

7.6

Female employees (% of all tourism)

61.8

60.8

57.5

Part-time employees (% of all tourism)

53.9

55.3

54.5

Small firms (<25 employees)

1,758

15,313

166,669

Small firms (% of all tourism)

92.0

91.0

91.4

Source: Annual Business Inquiry.

The sector faces a mixture of threats and opportunities. Low earning levels and productivity have been identified already. However, there are strong opportunities in the sector following the sustained investment in key tourism sites and infrastructure over the past decade - not least by past Structural Funds programmes.

The area's natural and cultural heritage is a vital ingredient of local amenity, quality of life, health, community confidence and a sense of place. They are unique assets which offer clear economic opportunities in the creative industries such as music, cultural and environmental and cultural tourism. These activities have potential for considerable community benefit and make a major contribution to sustainable development aims. There is increasing interest in all aspects of arts, culture and heritage at a time when the population is growing and its composition changing.

For example, the creation of Sabhal Mòr Ostaig, the Gaelic College on the Isle of Skye not only brought educational opportunities to people on the island, but created: 76 full-time jobs; 28 part-time jobs; £1.6 million annually to the local economy; and 24,720 bed-nights rented annually in the local community.

The creative/cultural industries sector is diverse and fast-growing, and makes an important contribution to the economy and cultural life in the Highlands and Islands. The sector is dominated by small and micro units and includes a high proportion of semi-professionals, self-employed and voluntary/unpaid workers. The wider sector employs just over 3,500 people in the Highlands and Islands, with some 750 individual business units. The sector has been further boosted in the area by investment in the Scottish Year of Highland Culture 2007 - a celebration of the region's culture and language, marked by a series of linked events that seek to make full use of the key tourism sites, infrastructure and services. It is envisaged that further opportunities will be presented through Scotland's Year of Homecoming in 2009, another national celebration aimed at attracting hundreds of thousands of extra visitors, particularly those with direct Scottish ancestry and links, by showcasing Scotland as an ideal location to visit.

Strengthening the Gaidhlig language through a focus on young people, broadcasting, cultural tourism and the arts are key priorities for action. Pursuing initiatives with the area's Nordic, Scots and Doric language traditions are also important.

Fostering the important role the arts play in regeneration, building the role of sports in our communities and harnessing the value of natural heritage destinations as assets which can create community benefit are all critical for developing the sector.

Food and Drink

The food and drink industry employs 7,000 people across the region, with over a fifth involved in distilling spirits. Sixty percent of businesses are small enterprises (up to 10 employees), demonstrating the dependence on a small business base. It has a strong exporting base and has research strengths in the academic sectors, such as the Agronomy Institute at Orkney College.

The region has a strong reputation for distinctive quality food and drink, of which the most famous, and one of the region's key exports, is whisky. The industry has strengths in the region's natural assets - particularly the environment producing good-quality fish and meat and contributing to whisky production - as well as global brand recognition for its products. Low-cost competition from new competitors in the EU, particularly eastern Europe, has put more pressure on food and drink enterprises in the region to move towards higher value-added products and developing niche markets.

Opportunities for the sector are clearly based on developing more higher value-added products and building on the reputational and export excellence of the sector. However, there are significant weaknesses to be addressed, including the relatively limited earnings level, difficulties in recruitment into the sector in parts of the region (such as Moray) and a high level of the region's primary produce leaving the region with little additional processing and value added.

One particularly important opportunity relates to more effective use of local produce. 46% of visitor spending relates to food and drink, and two-thirds say that they would be prepared to pay more for quality food and drink. This suggests there are opportunities to promote local produce through farm visits and shops, local markets and retailers, visitor centres linked to food and drink processing, restaurants and mail-order business.

Forestry

Overall, the industry employed just over 1,000 individuals in the region in 2005, while the saw-milling sector was responsible for a further 550 jobs and wood product manufacturing, 820 jobs. The Scottish industry as a whole is strong in UK terms - for example, Scottish roundwood timber accounts for 65% of the UK's total harvest. Overall, the Scottish forestry sector accounts for £570 million of total gross value added.

The industry is characterised by relatively low wages and gross value added and a high share of employment in SMEs. However, the industry has been growing in recent years (for example, GVA has increased by 8% since 2002). The region also has a strong set of natural assets in the widespread woodland covering the region. Opportunities lie in the development of higher value-added products and a longer value chain in the indigenous industry. There are also market opportunities in the use of wood fibre for the renewable energy industry.

Other Key Energy-Related Sectors

Nuclear decommissioning activities have become an active economic cluster around the Dounreay site in Caithness. The decommissioning of the Dounreay site is expected to last until 2033, not only generating direct employment through the Dounreay-specific work, but providing the opportunity for suppliers to develop skills and products that can be marketed in decommissioning work elsewhere in the world. Dounreay supports approximately 2,500 jobs directly and indirectly and represents a large share of employment in the Caithness and north Sutherland area. Relatively high wages typify the sector.

From a Structural Funds perspective, nuclear decommissioning per se is not eligible, so what is relevant here is the supply industry that has grown up around the decommissioning. The emergence of Dounreay as an international centre for excellence in skills and research has given local firms an opportunity to develop a global competitive advantage, particularly with respect to developing and commercialising the technologies surrounding the disposal and treatment of waste, 'cleaning' up contaminated land and deconstruction of contaminated buildings and equipment. Reinforcing this advantage will be essential as the decommissioning work in the area tails off and companies will need to find new markets, but given that there some 400 reactors worldwide currently being decommissioned (or due for it soon), exporting opportunities are potentially strong.

Life Sciences

The life/health science sector in the Highlands & Islands has grown significantly in recent years. This growth is built around several key bodies: the location of LifeScan Scotland's facility in Inverness (which employs 1,460 of the total 1,840 employees in the sector as a whole); and the new Centre for Health Science being constructed at Raigmore Hospital in Inverness over the 2006-08 period.

LifeScan dominates the sector, as all the other significant companies in the region are SMEs. The concentration of employment makes the sector vulnerable to the company's fortunes, although marine and environmental sciences are also represented in, for example Dunstaffnage and the Environmental Research Institute attached to North Highland College in Thurso. Nevertheless, the emergence of a strong academic research cluster in the region, based around the new Centre for Health Science, should give the science sector opportunities for diversifying and broadening its enterprise base.

Key messages

  • The region has a relatively high enterprise stock, but one that is still small in absolute terms, particularly in the more remote areas. Existing businesses in the region face a combination of distinctive challenges owing to their peripheral location, cost of access to major markets and limited access to business skills training.
  • A relatively low new firm formation rate also points to long-term issues on the sustainable growth of the enterprise base, although the region does have a healthy supply of self-employed individuals. Finance and entrepreneurial skills are key bottlenecks for the development of new businesses.
  • Many enterprises in the region face acute problems in developing external markets and exporting, arising from the peripherality of the region and distance to major sources of market growth.
  • Despite the challenges facing many of the enterprises in the region, the Highlands & Islands has a number of key industries whose continuing growth are critical to the region's overall competitiveness. These include industries such as renewable energies, tourism, food and drink, forestry, other energy-related sectors and life sciences.

2.3 Research and Innovation

Research and innovation in enterprises

Compared to much of Europe, the absolute level of innovation in the UK and particularly Scotland, is relatively low. The Highlands & Islands differs little from the rest of Scotland in this regard.

  • In terms of existing enterprises, the proportion of companies introducing product and process innovation is low. On the other hand, the firms which do innovate obtain a much higher proportion of income from their new or improved products than most of Europe.
  • Patent applications, while only a partial and indirect measure, are lower in Scotland as a whole at 95 per million population than the EU-25 average at 135.

Gross expenditure on research and technological development ( RTD) in Scotland in 2003 amounted to 1.5% of GDP. This is below the UK average and the figure for the EU-25. Per capita expenditure in Scotland lags both the UK and EU-25 figures. However, there have been substantial increases in Scotland's expenditure (25%) between 2000 and 2003. This is accounted for by growth in both enterprise and higher education RTD.

For RTD, data is available on total employment in RTD-intensive industries, namely computer and related activities, research and experimental development in natural sciences and engineering, and technical testing and analysis. For the sector, the key industries which are research dependent are renewable energy, life sciences and nuclear decommissioning.

The share of Highlands & Islands employment in the selected RTD-intensive industries is low, around half the proportion for Scotland and Great Britain. Employment in knowledge-intensive industries is shown in Table 14 below - as can be seen, the region significantly trails Scotland and Great Britain, reflecting in part the absence of strong research activity in the region, including the lack of a research-intensive university.

Table 14: Knowledge-intensive industrial employment (2004)

Highlands & Islands

Scotland

Great Britain

KII total employment

20,781

521,412

6,588,173

KII employment as % of total

13%

22%

25%

Source: Measuring Progress towards Smart Successful Scotland 2006. Definition of knowledge-intensive industries: the relevant industries are categorised by their Standard Industrial Classifications, specifically SICs 24, 29, 30, 31, 32, 33, 34, 35.2, 35.3, 35.4, 64, 65, 66, 67, 71, 72, 73 and 74.

According to the Annual Business Inquiry, knowledge-intensive employment in 2003 was concentrated in certain areas, particularly the area around Inverness (25% of all Highlands & Islands knowledge-intensive employment), Moray/Badenoch/Strathspey (19%) and Ross & Cromarty (19%). Areas that were particularly low included island areas such as Orkney, Shetland and Skye & Lochalsh. The BERD report for 2003 also concluded that expenditure in business R&D within the region was highest in the Highland area, particularly around Inverness.

An important determinant of innovation is business RTD. Consequently, the relatively low level of corporate RTD in Scotland - and in the Highlands & Islands in particular - is an important factor constraining innovation. The low level of RTD reflects inter alia:

  • Scotland's industrial structure with medium/high-tech manufacturing and high-tech services under-represented (relative to both the UK and EU-15 averages) - this imbalance is even more marked in Highlands & Islands with the relatively higher shares of employment in primary-based manufacturing sectors such as food and drink as well as service sectors such as tourism, which traditionally have lower RTD intensities; and
  • the limited presence of two of the UK's most RTD-intensive industries (ie. aerospace and automotive sectors), again even more marked in Highlands & Islands.

Beyond this, many of the barriers to increased RTD are similar to the barriers to innovation. Scottish and UK companies tend to cite the same constraints on innovation. The most frequently quoted factors, both by innovators and non-innovators, are the cost and risk of investing in innovation, combined with the cost and availability of finance. Given that much innovation is financed from retained earnings, the cost and availability of finance is influenced by both past company performance (ie. profitability) and problems of raising external finance.

Innovation requires expenditure (ie. investment) ahead of the generation of income arising from successful innovation. As such, it creates risk via its initial negative impact on cash flow. The payback period, especially from investment in RTD, can be long term. The risks are most severe for small companies while small, young companies are also more dependent, almost by definition, on raising external finance for innovation (ie. they have fewer retained earnings). Nevertheless, there is a substantial minority of 'potential innovators'. For these, access to finance is a constraint. For those already involved in innovation, access to finance constrains the level of investment in RTD and innovation. These constraints are most severe for small and young enterprises ( DTZ Pieda, 2004).

A second widely-perceived barrier amongst innovators is the recruitment of appropriately-qualified personnel. Nevertheless:

  • the Scottish companies in the Community Innovation Survey employ more science and technology graduates and more graduates in other subjects as a percentage of their total workforce than the UK average; and
  • an above-average proportion of the entire Scottish workforce have degrees (including an above average proportion with science and technology degrees).

Human capital, at least as measured by qualifications, is another significant factor in the Highlands & Islands, where the out-migration of young graduates and the absence of a university-status body to address the research skills need of the region hinders its overall RTD capacity.

These are Scottish-wide problems and while data on RTD capacity in the Highlands & Islands is limited, the region experiences other problems that exacerbate these more common issues. As noted, they include the limited presence of significant research and innovation centres, particularly in the academic sector, which traditionally have acted as catalysts for new technology spin-outs and the wider dissemination of new technologies and innovation. As described in more detail below, the region has only started to develop a set of higher education and integrated further education bodies which can become the focus for industry-specific research and innovation through the UHI Millennium Institute. At the same time, higher and further education bodies based in other parts of Scotland are developing useful links to parts of the region. A high priority has been given to developing the basic infrastructure for research, building up the capacity for future. Similarly, the diffused nature of the enterprise sector and the absence of large firms has reduced the critical mass of businesses that can form industrial clusters or drive industrial research and development.

Higher and further education infrastructure and research and innovation

The region has traditionally lacked a strong infrastructure for research and innovation, although there have been marked improvements in recent years. Whereas in more urban parts of Scotland, there are well-developed higher/further education and research institute centres which have generated strong RTD expertises, such capacity has been absent in the Highlands & Islands until recently. Without a designated university in the region, there has been no focal point around which such research could develop. Particular industrial expertises have developed in individual further education and research institutes, but there has not been sufficient co-ordination and networking between these centres to allow the region as a whole to be benefit from RTD and innovation synergies.

This has changed in recent years with the region's progress towards gaining a fully-designated university. The Highlands & Islands area is different from the rest of Scotland in relation to its higher education infrastructure, due to the historic challenges of geography and sparsity of population; however at the start of this Programme the region still does not have its own university. The UHI is the only higher education institution based in the Highlands & Islands, providing access to university-level study through a partnership comprising the further education colleges and research institutions in the region, along with a network of over 50 outreach learning centres. As noted above, the UHI and its college network is playing a large part in the cultural, social and economic development of the Highlands & Islands and is in the process of application for full university status.

The lack of access to higher education has had a detrimental effect on business development and support. However, the creation of the UHI with Structural Funds support in previous programmes has created new opportunities:

  • to develop industrial research expertises in the region;
  • to distribute the benefits of that research around the region and improve commercialisation; and
  • to address the gaps in the region's learning infrastructure through a networked, ICT-based approach to reach the region's more remote communities.

At the same time, higher and further education institutes based in other parts of Scotland are developing research and training links with particular areas within the region that could supplement the effort to give the region a solid research and training infrastructure.

Key messages

  • The Highlands & Islands has notable deficiencies in its RTD and innovation capacity, exacerbated by the small enterprise base, the few number of key research centres, lack of finance, lack of university and the consequent limited research skills training infrastructure in the region.
  • Further and higher education infrastructure has traditionally been weak in the region, with limited access to training and education opportunities, contributing to the weaknesses identified in other parts of the socio-economic analysis. UHI and the related network in the region presents a strong opportunity for the Highlands & Islands to address this gap.
  • The development of research expertises in the UHI and its college network and their outreach to industry is creating opportunities for the Highlands & Islands to develop world competitiveness in certain sectors.

2.4 Communities

Economic performance and the factors affecting it are mixed across the region. As Table 1 showed, different parts of the Highlands & Islands are experiencing different population trends, with significant increases in the growth-pole area around Inverness and sharp losses in areas such as the Western Isles and Caithness and Sutherland. Earnings level also vary, with low levels in part of the Highland area, Moray and Orkney, as Table 8 emphasised. Consequently, the challenges facing the economy are not simply region-wide, but reflect the operation of local circumstances, often working in tandem to produce pockets of severe economic and social deprivation. If the Highlands & Islands is to make its full contribution to the Lisbon targets, then all parts of the region must be able to make strong contributions.

The region is characterised by a sparsely-distributed settlement pattern, island and insular communities. This can be seen when looking at the index of 'rurality' for the region, as measured by the Scottish Government's six-fold urban-rural classification. When examining population in 'accessible' and 'remote' rural - ie. settlements of less than 3,000 people and within 30 minutes driving of settlements of 10,000 or more - parts of the region have shares that are substantially above the Scottish average - for example, the Western Isles have 78.9%, Orkney 67.8% and Shetland 69.4% of their populations in remote rural areas, well above the Scottish average of 6.4%.

Peripherality and insularity in this context can be reflected in levels of community disadvantage. Statistics to compare community disadvantage across European regions are not readily available. Analysis in Scotland is primarily confined to the Scottish Index of Multiple Deprivation ( SIMD). The index is a combination of six stand-alone indicators: current income; employment; education, skills and training; health; housing; and access to local services. However, while effective at identifying urban disadvantaged communities, including those in the Highlands & Islands, the SIMD does not adequately identify rural disadvantaged communities because:

  • rural disadvantage is less visible due to low population densities; and
  • the SIMD is dominated by the levels of disadvantage in Scotland's urban areas.

The table below gives the Highlands & Islands overview of the six SIMD indicators. The percentages represent the number of the region's 623 data zones that fall within Scotland's most deprived data zones. The benchmark is the 9.6% of all Scotland's data zones that are within the Highlands & Islands.

Table 15: Deprivation in the Highlands & Islands data zones (2004)

% of NUTS 2 area data zones in Scotland's most deprived data zones

5%

10%

15%

Current Income

1.0

2.4

4.0

Employment

0.6

2.1

3.2

Education, Skills and Training

0.3

0.5

0.6

Health

0.8

2.2

3.9

Housing

0.0

0.2

1.9

Access to Services

25.0

36.0

42.7

SIMD

0.5

2.1

2.9

Source: Scottish Index of Multiple Deprivation.

  • Only the access to services indicator would appear to show levels of rural disadvantage. The indicator measures drive time to key services, such as GPs, primary schools and supermarkets. 43% of the Highlands & Islands' data zones are in Scotland's 15% least accessible. Distance and peripherality is a key issue for Highlands & Islands' communities.
  • The five other indicators and the overall SIMD show that disadvantage in the Highlands & Islands cannot be identified using conventional measures. Only 3% of the region's data zones fall in Scotland's 15% most deprived.

Within the region, another measure of disadvantage is the 'fragile area' status applied by Highlands & Islands Enterprise. This recognises that these are particularly disadvantaged areas of the region with long-term structural problems of economic decline, resulting from a self-reinforcing combination of remoteness, poor infrastructure and low or low-earning levels of economic activity. A formula is applied - as described in greater detail in Chapter 4 - which helps to guide resource allocation by HIE. The shares given in Table 16 below give an indication of the weighting of disadvantage as measured by area fragility in different parts of the region. Within this table, fragility is most acute in several island communities - notably the Western Isles and Argyll & the Islands - as well as remote parts of the mainland, such as Caithness & Sutherland.

Table 16: 'Fragile area' status in the Highlands & Islands (2006 formula share)

Shetland

5.6

Orkney

4.7

Eilean Siar

12.9

Skye & Lochalsh

4.3

Caithness & Sutherland

14.3

Ross & Cromarty

11.6

Inverness, Nairn, Badenoch & Strathspey

10.4

Moray

10.1

Lochaber

4.8

Argyll & the Islands

21.4

Total

100.0

These rural disadvantaged communities face many of the same barriers to employment as those living in deprived urban areas but there are some important differences.

  • Deprivation is not as geographically concentrated as in urban areas and, as a consequence, is often less visible.
  • Employment rates are often higher in rural areas but the type of jobs in rural areas can lead to a higher incidence of under-employment where more jobs tend to be:
    • low-paid
    • part-time
    • seasonal
    • limited in their opportunities for progression.
  • Distance and isolation from services and employers, allied to the cost and availability of transport, are key issues. This is particularly acute in the Highlands & Islands where, as will be seen in the following section, the limitations of public transport and the geographical challenges of the terrain (especially for islands) creates substantial transport issues.
  • Lack of other support services for employment, such as training and childcare support, have contributed to out-migration as well as reducing opportunities for progress through the labour market for people living in the more remote communities.
  • The take-up of benefits tends to be lower in rural areas.
  • As earlier sections have shown, some communities have also experienced significant population decreases as well as low levels of productivity, suggesting that there are significant demographic and economic sustainability threats.

Supporting the access to services indicator, the vast majority of Highlands & Islands residents live in small towns or rural locations.

  • The three island NUTS 3 areas have close to 70% of their residents living in 'remote rural' locations (as seen above).
  • Even in the Highland Council area, 37% of the population live in 'remote rural' locations and only 31% in urban areas or 'accessible small towns'.

Overall, rural areas such as the Highlands & Islands are strongly characterised by self-employment, part-time employment and under-employment.

  • Self-employment is much more prevalent in rural areas (Scottish Executive, 2003). This reflects the importance of micro/small enterprises in sectors such as agriculture and tourism and is often associated with low average wages. However, this does not necessarily reflect a strong, thriving enterprise base with vigorous new firm formation rates, but in many cases, the absence of other employment alternatives.
  • Part-time employment is much more common in remote rural areas than in Scotland as a whole, and in comparison with accessible rural communities. This reflects the thinner economic base in more sparsely populated, remote communities and the difficulties in sustaining full-time employment.

The greater prevalence of part-time and self-employment implies lower earnings from employment. Seasonality of employment can also add to under-employment and lower earnings. Futureskills Scotland (2005) found that 28% of workplaces in rural Scotland had a workforce fluctuating seasonally, compared to 23% in the rest of Scotland. Temporary contracting was also much more common in rural areas. It also found that:

  • employees in rural Scotland are more likely to work in agriculture, forestry and fishing, energy, water and construction, hotels and restaurants, and health and social work than those in the rest of Scotland; and
  • rural Scotland is significantly under-represented in financial intermediation and real estate, and is slightly under-represented in transport, storage and communications; public administration and education; and other services.

Similarly, with respect to the distribution of employees by occupation in rural Scotland, rural areas do not perform as well as the rest of Scotland:

  • Employees in rural Scotland are less likely to be in managerial or professional occupations than those in the rest of Scotland…
  • …and more likely to be in personal service, operative and elementary occupations.

Whilst this partly reflects the industrial make-up of rural areas, it is a concerning finding and may go some way to explain the migration of young people away from rural areas when they leave school (and university).

Evidence of the importance of smaller employers in the rural economy shows that 24% of employees in rural Scotland continue to work in workplaces with less than 10 employees, compared to just 16% of employees in the rest of Scotland (Futureskills Scotland, 2005). In contrast, 27% of employees in the rest of Scotland work in workplaces with 250 or more employees, compared to just 11% of employees in rural Scotland.

Research has shown that disadvantaged communities struggle to attract and sustain business activity. This is not easily shown statistically, as areas of deprivation are often highly localised while SME-related data are limited to local authority areas. Additionally, the relative lack of high geographical concentration of disadvantage in the Highlands & Islands makes it even harder to research this issue. Businesses located within rural locations face a number of critical issues (Smallbone et al., 2002), including:

  • small local markets and distance to major urban centres;
  • few chances to do business with and communicate with local firms due to the small number of local companies in actual numbers rather than densities;
  • skills shortages caused by restricted local labour markets and a lack of affordable housing and childcare;
  • a shortage of accessible training schemes/courses; and
  • high levels of specialisation.

The challenges facing such peripheral communities presents several challenges to economic development for the region as a whole. If communities lose the 'critical mass' to be self-sustaining - ie. if the services, infrastructure and employment opportunities become so poor that population loss is accelerated - then there is a risk of regional disparities within the Highlands & Islands widening significantly. As some of these communities serve a wider area, the social and economic prospects of larger areas may be threatened, creating a risk of population and economic activity gravitating towards growth-pole areas like Inverness, which would be unable to sustain such congestion, and a longer-term danger of skilled and young people moving away from the region in numbers. Without a balanced approach to development in the region, the prospects of the Highlands & Islands as a whole become vulnerable.

Sustainability involves a mixture of the social factors underlying community cohesion - such as key community services - and the economic potential of the local area. The key barriers and constraints for the Highlands & Islands with respect to such community sustainability are:

  • In the Highlands & Islands, peripherality and distance to key services coupled with insularity and islands are key barriers to sustaining viable communities, not just in terms of their enterprise base, but with respect to retaining population overall.
  • As has been noted, the region has a very low population density, highly-dispersed settlement patterns and an ageing population though, in recent years, the population size has stabilised. Nevertheless, these features are particularly acute in some parts of the region and population loss is a serious threat to some communities.
  • Overall, there has been net migration into the Highlands & Islands with the major exception of 16-24 year olds, many of whom move out of the region to further their education and often do not return. At present, with the lack of a university, there is limited scope for attracting young people from other regions or countries into the Highlands & Islands to redress the balance.
  • SME activity and self-employment levels are high in some parts of the region, but the small enterprise base in some communities - combined with distance to key sources of finance and skills as well as from major markets - raise issues of long-term sustainability.
  • Supporting infrastructure in remote, rural communities is often insufficient to support the enterprise activity and a thriving labour market. This can include provision of adequate business property sites, common e-commerce/internet centres for the benefit of local enterprises and the wider community, and facilities to support childcare and care of other dependents.

Key messages

  • The region has strong levels of rural disadvantage, particularly with respect to access to key services. Peripherality and distance from major population centres exacerbates the problems most Highlands & Islands communities have in economic and population sustainability, to the exception of Inverness and close surrounding areas.
  • Although employment rates appear to be relatively high, there are significant issues for some rural areas arising from seasonal, part-time and underemployment. According to the Small Business Survey (2004/05) Highlands & Islands businesses are much more likely to employ workers seasonally (46% versus 24% in Scotland as a whole) and to employ some staff on the minimum wage (22% versus 9%). Seasonal employment. Further, underemployment rates, as measured by the number of people that would like to work longer hours for the same rate of pay given the opportunity, are also much higher in the Highlands & Islands than in Scotland as a whole (10.4% versus 6.6%; Annual Population Survey).
  • The economic sustainability of some communities will be weakened by the concentration in low value-added activities and the low rates of new firm formation. Enterprises based in small rural communities can lack access to key services underpinning their development as well as to major markets that would support expansion.
  • Some communities lack key facilities to support enterprise development and social cohesion, such as e-skills/commerce facilities and childcare.

2.5 Access and Communications

Related to challenge of fragile communities noted above is accessibility and communications across the Highlands & Islands. Overall, this has traditionally been relatively weak, despite major advances in infrastructure development in recent years, combating the combined challenges of the region's peripheral nature, diverse and often difficult geographical terrain, small and often declining settlement structures and the high costs associated with providing adequate infrastructure. The two major issues to be examined here are:

  • transport and connectivity across the region; and
  • ICT and communication.

Transport

Transport is a key component of Highlands & Islands development opportunities as the table below shows in relation to the difference in transport provision between the Highlands & Islands and Scotland ( HITRANS, 2007).

  • Car dependency is higher across the Highlands & Islands with around 50% of people aged 17 or over required to drive every day, well above the Scottish average of 42%.
  • Around 75% of households in the Highlands & Islands have at least one car available for private use.
  • A lack of public transport opportunities has placed this additional burden on individuals in the largely rural area and has exacerbated rural social exclusion for those without private cars.
  • Bus services are far less frequent in the region. The ability to run profitable services has been weakened by the dispersed settlement pattern and the high levels of car ownership.

As Table 16 shows, the dependence on cars varies across the region - with the highest shares in Orkney and parts of the Highlands - but nearly all regions are above the Scottish average. Moreover, the road network is characterised by winding single carriageway roads with few passing places, resulting in relatively long journey times, particularly for trips from the central trunk road spine of the region to eastern and western areas. Across the region as a whole, 14% of people are travelling more than 20km to work, as compared to 10% in Scotland as a whole.

Table 17: Access to transport (2003/04)

%
of people aged over 17 who drive every day

% of Households

1 or more cars available for private use

Time taken to walk to nearest bus stop - 14 mins or more

Frequency of most local bus service - 64 mins or over

Argyll & Bute

48

69

5

24

Eilean Siar

46

71

5

37

Highland

49

80

7

19

Moray

55

81

6

8

Orkney

50

77

9

49

Shetland

38

75

10

37

Scotland

42

66

3

4

Source: Scottish Executive (2006) Transport Across Scotland in 2003 and 2004.

The Highlands & Islands has significant deficiencies in different forms of travel.

  • The region's rail network is limited, offering no coverage of the region's north-west and with infrequent services on most lines.
  • For many island communities, ferries are a critical means of transport, with sometimes limited coverage, seasonal fluctuations in frequency (reflecting tourist demand at different points in the year), a relatively high cost of travelling and a lack of integration of timetabling and scheduling between the different services.
  • Air services are also crucial for some parts of the region, especially the islands. Fares are regarded as relatively high - reflecting the more limited market for air travel in the region - and until recently, there has been significant limitations in the region's airport infrastructure. While air traffic has grown in recent years, it lags behind the speed and volume of development in the rest of Scotland.

The issue is a key factor in limiting the region's economic development. Scotland's Transport Strategy, which has promoting social inclusion as a key objective, identified the following issues facing people in rural areas:

  • for drivers, a higher dependency on driving and a high proportion of their income is spent on driving costs. Fuel prices are typically higher in the Highlands & Islands than in the rest of the UK, due to high distribution costs and low throughputs in petrol stations;
  • for non-drivers, the higher levels of car use mean there is less demand for public transport - those without a car, such as older people, disabled people, women and young people, become more socially excluded; and
  • poor access to key services.

The Small Business Survey reports transport issues as a one of the main obstacles to business success in the Highlands & Islands, with 20% of businesses reporting that concern (10% in Scotland as a whole).

Much of the region is also dependent on other forms of key transport, not least the island communities, where ferry services (and supporting port infrastructure) as well as air links (and supporting airport infrastructure) are critical access issues. What is often critical in this regard is the links between these communities and the main transport routes in the region. This reduces the ability of these communities to maintain population and business activity and threatens their sustainability.

ICT and communications

Similar issues relate to telecoms infrastructure. The region has benefited from strong investment in upgrading the region's communications infrastructure to improve coverage to national averages, especially with respect to ISDN and broadband. Indeed, this has been one of the major achievements of previous Structural Funds programmes. Broadband access continues to vary across the region, with the highest share in Shetland (92% of connecting organisations) and Inverness and lowest in Caithness & Sutherland (64%), Lochaber (66%) and the Western Isles (67%) (Scottish Enterprise, 2007).

However, to take full advantage of the investment, critical in an area where distance from major sources of information (eg. RTD and innovation) and markets restricts development, more could be done to improve broadband speed and connectivity and the extent of e-commerce take-up by businesses and individuals (as discussed above). Gaps remain for some communities, unable to make full economic use of the infrastructure investments made to date.

Key messages

  • Transport shortcomings continue to affect the peripherality of much of the region in terms of access. While there are problems facing the region as a whole, there are acute issues for some more fragile and peripheral communities where there are key transport gaps.
  • ICT and broadband have enjoyed strong investment in recent years to produce a strong infrastructure basis for businesses and communities to take advantage of the resulting economic opportunities. However, many businesses still lack the skills required to make full use of e-commerce and some communities do not have the necessary facilities to allow them to connect into the full communications network.

2.6 Summary of Key Challenges

As has been stated, this socio-economic analysis has not set out to be a comprehensive analysis of the strengths and weaknesses of the region's economy. Instead, it has sought to identify the issues that are most pertinent to intervention by the ERDF, as defined within the Community Strategic Guidelines and the Structural Funds regulations. In this final section, on the basis of the statistical evidence presented above, a summary of the key issues to be addressed in the Programme is presented: first, an analysis of the main strengths, weaknesses, opportunities and threats for the region's labour market; and second, a more detailed identification of the key challenges for the Programme.

SWOT analysis

Regional Strengths

  • Employment and economic activity rates across the region are strong with relative low levels of unemployment.
  • Overall, the region's population loss has been limited, with relatively strong levels of in-migration, though there continue to be significant demographic losses for particular parts of the region and among young people.
  • A high-quality environment and cultural heritage which are the basis for much of the economic activity in the region, including renewable energy, tourism, food and drink and other industries.
  • The region has developing research expertises in a number of industries, centred on the emergence of the UHI as a centre for research in the region, such as the life sciences and energy industry research.

Regional Weaknesses

  • Economic growth and gross value added (as a measure of productivity) continues to lag Scottish and UK averages.
  • A rural-based economy with geographical peripherality, sparsity of population and dispersed settlement patterns is a major constraint on long-term economic development.
  • The small size of the Highlands & Islands enterprise base - combined by difficulties in accessing key markets outside the region - suggest that the business base continues to be limited in its ability to expand.
  • New firm formation rates remain relatively low in the region with access to skills training and finance as key bottlenecks.
  • The levels of research and innovation in the region continue to be low in both relative and absolute terms, arising from a combination of lack of business innovation, and the absence of limited key research centres driving industrial and technological RTD and limited research capacity.
  • Some peripheral, fragile communities in the Highlands & Islands are particularly vulnerable to the small enterprise base and suffer from lack of access to key services, market and the community facilities that can underpin both.
  • The historical absence of a strong local further and higher education infrastructure has limited the region's capacity to generate research and innovation centres and supply key skills for the development of the business base and contributed to out-migration of young people. The region still lacks its own university and although UHI has been established as a higher education institution, work is still needed to build up research capacity and ensure access across the region, supporting the attainment of full university status.
  • Despite continuing investment across the years, the transport and parts of the communications infrastructure of the region continues to provide limited and costly access for much of the Highlands & Islands population because of the region's geography, the dispersion of population and the number of island-based communities.

Regional Opportunities

  • The development of the UHI and its network and attainment of university status presents a strong opportunity for the region to gain a local skills and educational anchor for the region through community learning as well as to provide a core of industrial research expertise.
  • The emerging renewable energy sector in the Highlands & Islands - and the region's natural resources to enable a wide range of renewable technologies to be developed - is one of the region's future strengths, particularly with respect to marine, wind, biomass and micro-renewables.
  • Local use of renewable energy is another opportunity that would benefit both the regional sector as well as local community energy needs.
  • The strong natural and cultural heritage of the region provides a set of resources which could underpin a competitive, growing tourism and cultural sector and improvements to the overall productivity and earnings levels of the sectors' workforce.
  • The investments in the region's broadband infrastructure provides a good basis for exploiting e-commerce opportunities and addressing the development bottlenecks arising from distance to major markets.

Regional Threats

  • Historic population decline has resulted in limited levels of unemployment but presented challenges to the sustainability of particular communities, particularly in the islands.
  • The ageing of the population and continued out-migration of young people could present longer-term labour and skills supply problems, given the current tightness of the labour market.
  • Lack of investment in key aspects of the region's RTD and innovation capacity - particularly in developing local nodes of expertise for research and skills generation - could result in the region losing competitive advantage in emerging technologies and industries.
  • Continuing decline in agricultural and rural industries could reduce earnings levels and the employment opportunities for rural workforces throughout the region, exacerbating population loss - particularly among young people - and consequently, the vulnerability of fragile communities in the region.
  • Although improved significantly in recent years, the telecoms infrastructure in the region is limited by the speed, connectivity and extent of usage by businesses and individuals.

Key Programme challenges

The SWOT analysis - and the key messages highlighted in the foregoing sections - suggest that there are a number of key strategic challenges which the Programme should address.

1. Removing the barriers and lack of incentives to entrepreneurs and growing enterprises. To improve the new firm formation and business survival rate, the bottlenecks on new and growing enterprises need to be addressed, arising from lack of finance, support and skills, exacerbated by the spread-out nature of the enterprise community and the peripherality of the region.

2. Enhancing the sustainable use of the region's natural, historical and cultural environment. To maximise the economic and social benefits of the region's environmental and cultural heritage, it is important to continue supporting enterprises that will create products and services with higher added value. This will generate more sustainable enterprises and better quality job opportunities, particularly in sectors related to tourism, food and drink, and cultural heritage.

3. Increasing the low rates of innovation among enterprises. In common with much of Scotland, the region's enterprises have low levels of RTD expenditure and capacity for pursuing innovation in products, services and processes. There is a challenge in creating a culture of enterprises embedding their future competitiveness in a continuing pursuit of innovation.

4. Improving the sources of commercial RTD in the region. Although changing with the creation of the UHI, the region continues to lack strong local centres of research and innovation in the industries and technologies in which it could develop a competitive advantage. To help establish a viable RTD base and support environment for maximising the economic benefits of the region's research capacity, the challenge if for the region to increase the connectivity between the research base and local enterprises.

5. Improving the quality and coverage of further and higher education in the region by supporting the establishment of the UHI. The existing investment in the UHI network has provided a strong basis for addressing the research and teaching deficiencies in the region contributing to out-migration and the weak RTD performance of the Highlands & Islands. However, the challenge is to make full use of that investment by addressing any remaining gaps in the network's capacity and ensuring that it is fully exploited for the economic development of the region through the attainment of full university title.

6. Developing full exploitation of technological developments in key sectors. The opportunity to take advantage of technological developments and opportunities in a number of key sectors and maximise their economic, social and environmental value, could make important contributions to the region's economic development. This is particularly true of the renewable energy, related energy and life science industries.

7. Increasing business development in fragile and peripheral areas. Increases in the capacity of disadvantaged peripheral communities to attract and sustain business activity, more effective mechanisms for encouraging investment in, and service delivery to, the region's fragile communities by the enterprise sector need to be developed. This would help to ensure the survival of such communities in the face of continuing population loss, which is essential in minimising regional disparities across the region and the loss of regional social and economic cohesion.

8. Improving sustainable community infrastructure in fragile and peripheral areas. Linked to the previous challenge is limited access to key services and facilities in some communities, which contributes to population loss and a weakened enterprise and employment base. Although ERDF funding is limited in its scope for providing basic services, the challenge is clear with respect to key communal infrastructure that underpins the economic and social development of fragile communities, especially with respect to infrastructure supporting local enterprise development.

9. Addressing the remaining bottlenecks in 'access' infrastructure across the region where accessibility issues are acute. Despite the legacy of extensive investment, the region's acute peripherality means that there remains considerable scope for improvements in transport and telecommunications infrastructure - critical in enabling access by communities, enterprises and individuals to market, educational and other opportunities.

These challenges will form the basis for the development of the Programme strategy and individual priorities set out in Chapter 4.