Financing Scotland's recovery: analysis

Part 4: Beyond Finance – Business Support and Collaboration

1. Introduction

As I have stressed throughout this advice, it is difficult to over-estimate the profound challenges that businesses will face over the next 12-18 months between debt repayment, the pace or otherwise of economic recovery, EU exit and potentially permanent changes in working culture and consumer behaviour. A key objective for banks and for the public sector must therefore be to support businesses, beyond the purely financial, through a period of transition and unprecedented strategic challenge.

While my principal remit was to advise Ministers on financing recovery, it has been difficult to avoid discussions and engagement straying into this wider territory. I have therefore chosen to offer this final, brief section offering the key conclusions from those discussions on topics ranging from collaboration with industry to business support and the need to remember the importance of ‘old’ challenges as we move into a new era. This material is far from an exhaustive treatment of these issues and may therefore be considered best as a short addendum to the related themes addressed in the original AGER report.

2. Engagement with industry

As the original AGER report made clear, it is critical that Government arms itself with the deepest possible understanding of the challenges faced by sectors and businesses both large and small. This will require new and more effective models of collaboration and a pro-active effort to listen to industry in designing future interventions.

It is for Government to co-design those models with the industries concerned and for that reason I have decided not to make additional recommendations here. The important thing is that this engagement takes place.

Due to the membership of the group that supported the development of this advice, I make an exception to this rule in the case of financial services. The pandemic has led to the financial services industry and the Scottish Government working more closely than ever before: sharing intelligence, developing policy and collaborating for the benefit of citizens e.g. through the system established during the summer to escalate individual cases to senior executive level in key banks. Both parties are in agreement that this partnership is valuable and should be deepened as we enter a new, but perhaps even more challenging phase.

The time is therefore right to consider whether we have optimal engagement structures in place. While this should be discussed further between Ministers and SFE, I suggest a three-fold approach:

• Monthly discussions between the Cabinet Secretary for Economy, Fair Work and Culture, and the Chair and Chief Executive of SFE. These discussions should centre on insights yielded from the Banking Barometer, the health of the financial services industry in Scotland and any emerging issues. These discussions will be supplemented by the regular cycle of conversations between officials and industry.
• Quarterly Meetings of FISAB. I suggest that the existing focus on the growth and development of the Scottish financial services industry should be maintained. However the membership should be refreshed and potentially reduced to achieve focus and participation. SFE and officials should work together to produce advice for Ministers on how the work of FISAB could be placed on a more strategic footing, ensuring that meetings are impactful and result in meaningful actions which advance the shared priorities of Ministers and industry. FISAB could, for example, develop and progress several of the recommendations in this advice.
• The Banking and Economy Forum in its current form should be disbanded. Its membership and purpose are similar to FISAB sometimes causing confusion and diluting the impact and strategic value of both groups. In its place SFE should convene a much smaller group of senior industry figures to meet with the Cabinet Secretary on a quarterly basis. This would act as a forum for frank discussion, the discreet testing of policy ideas and for Ministers to commission and receive the economic advice of industry. It could be used to identify future priorities for FISAB and to initiate more bespoke advice or projects where necessary.

3. A new ‘Banking Barometer’

Since the onset of the pandemic, the Scottish banking sector has recognised the importance of supporting Scottish Ministers by more effectively harnessing the sector’s unique access to real-time economic insight. I am pleased to report that seven banks^[32] have agreed to participate in a monthly survey. The results of this survey will be aggregated, anonymised and presented in a monthly report to Scottish Government Ministers.

The report will provide key real-time metrics, including:

• Lending trends
• Access and usage of working capital facilities
• Finance repayment trends
• Liquidity, including deposits and cash holdings
• Status of holdings linked to coronavirus loans (i.e. whether loans are being spent or retained)
• Financial stress related to EU Exit
• Sectoral and regional trends
• Appetite to invest
• Any other emerging trends

This is the first time that real-time banking insight of this kind has been aggregated and shared with Government. It should provide Ministers and officials with a powerful new tool to identify trends early and to tailor policy interventions accordingly. This is a considerable achievement which demonstrates the sector’s appetite to work in partnership with the Scottish Government to support recovery.

4. Improving business advice

It is worth reinforcing that Scottish businesses, especially in sectors such as retail and hospitality, often have very small management teams. As a consequence, even prior to the pandemic, such businesses have little strategic capacity to plot a course towards growth that successfully navigates all of the challenges they currently face.

To provide an example, there is anecdotal evidence that applications for both public and private sector support packages routinely demonstrated a basic lack of expertise in accounting, forecasting and business planning. More than ever, the focus for these businesses will be on pure survival and that approach, writ large across the economy, risks stifling recovery.

For all of these reasons, there has never been a better time to improve the quality, accessibility and intensity of advice and support for businesses.

While I recognise that a great deal of this already exists across the public and private sectors; the feedback from businesses is that it can be passive, patchy, confusing to navigate, too generic to be useful and often misses critical topics where more intensive, personalised support and expertise is required.

Small retailers flagged the example of being frequently advised to invest in e-commerce but with little guidance about the most effective platforms for their market nor where to access credible products or expert consultancy.

Other businesses highlighted that SE’s specialist teams (e.g. on digital and financial readiness) are of significant value, but that these services operate on a limited scale. In relation to the private sector, businesses without relationship managers spoke of having a purely transactional relationships with their bank notwithstanding the availability online resources and training. The public and private sectors must listen to these concerns and combine their resources to democratise access to quality business support.

Recommendation 8: The banks, enterprise agencies and business organisations should collaborate to improve the quality and accessibility of business support. It is essential that this is co-designed with businesses, ensuring that their needs are met. From our engagement, I suggest that the following areas are worthy of consideration:

• A clear outline of public sector financial support.
• Restructuring and diversifying to maintain productive capacity.
• Business planning, debt management and cash flow forecasting.
• Expansion of pro-active, specialist support for acutely impacted sectors and businesses.
• Accessing capital for resilience and growth.

5. Growing through connections - strategic facilitation of new trading relationships

Scotland is a small country with a relatively few key economic institutions and networks. It should be possible to better leverage this to our strategic advantage through more pro-active sharing of intelligence and networks to facilitate businesses’ access to new funding, partners and markets.

The key business organisations, the banks and enterprise agency relationship managers have close, personal knowledge of many thousands of businesses across Scotland. While being mindful of the ethics around breaching confidentiality and competition rules, and the risks of attempting to over-engineer the economy, we should explore whether it is possible to somehow pool this knowledge to make new connections that can drive value for the economy. It should be noted that strategic facilitation of this kind has proved successful in the Scottish Government’s work over the summer to establish new domestic supply chains to support the NHS.

This principle of realising new economic value simply through more intelligent, pro-active customer management can be extended to a range of other circumstances.

For example, in the post-pandemic economy there are likely to be occasions where businesses operating in the same sector and/or locality would increase their resilience and growth capacity by considering a merger or acquisition. Where permission is granted by businesses to act on this information it may be possible to connect them to suitable and willing partners for discussion. This is relatively simple, high impact work capable of preserving businesses and jobs.

Recommendation 9: The Scottish Government should convene the enterprise agencies, business organisations and the banks to explore whether is a way to work across organisations, pooling intelligence and networks to make the strategic connections necessary to facilitate new contracts, business relationships and access to markets.

6. Solving old problems for a new economy

As we have seen, the success of the post-pandemic economy will rest, to a significant extent, on how effectively the business base, with the support of banks and Government, is able to balance the tension between managing coronavirus debt burden and proving access to new capital for growth, innovation and productivity. It is therefore right that much of recovery planning, including this advice, has principally focussed on issues relating to finance and capital. But we should not forget that the economy has for many years been characterised by another set of challenges which have also limited growth, productivity and job creation. Those challenges have not gone away. Indeed their impact will be amplified by a new economic reality and the stretched capacity of SMEs to cope with that reality.

As Government turns its mind to the planning of longer term economic strategy, it is important that these ‘old’ economic challenges are given the attention and prominence that they deserve – they are more critical than ever to realising Scotland’s economic potential. In this section I draw out some of these key issues, all of which will be familiar to Ministers, and recommend that they figure in the future planning of pandemic-related business support.

Innovation and new technologies

The pandemic has underlined the economic importance of digital capability and wider technological integration. The businesses that have coped best are those who have been able to innovate: pivoting quickly to homeworking, adopting cloud computing for speed and collaborative working, diversifying products and services and using digital platforms to access new markets.

Despite this progress, the overall evidence is that Scotland’s SME base has a poor record of adopting new technologies. Despite comparable connectivity and digital infrastructure to similarly advanced EU nations, our SMEs perform poorly on usage compared with top performing countries (e.g. trailing Denmark by a substantial across several key categories identified by the EU).

The latest Scottish Digital Economy Maturity Index found that only 7% of Scottish businesses (often either large corporates or young and innovative firms) were maximising the use of digital technologies while 76% either did not use digital technology at all or did so only at a relatively basic level^[33].

This has a significant economic cost. On a practical level, it means we will fail to maximise the value derived from increased investment in digital infrastructure (as recommended in the AGER report).

More positively, OECD research has consistently found that investment in technology boosts growth, productivity, economic inclusion and the creation of high value jobs.

It is also an effective means of tackling regional income equality, preventing city-based ‘frontier’ firms racing away from community-based SMEs. Recent action by the Scottish Government to increase investment in the digitalisation of SMEs represents welcome progress. However, I understand this investment expires at the end of the financial year.

Leadership and management capacity

There is equally strong evidence that many of the challenges facing the Scottish economy are rooted in the limited management and strategic capacity in our already stretched SME base. In many industries these challenges will be exacerbated by a potentially permanent shift to home working, posing new challenges for the development and integration of innovative, high performance operating models.

In some ways this challenge is ironic since several of our universities operate management schools of international distinction. In this time of unprecedented challenge, this is a national asset that must be deployed for greater impact on the economy. These issues have previously been highlighted by the Enterprise and Skills Board; but an effective solution which operates at scale does not appear to be in place.

Diffusion of best practice

The Chief Economist to the Bank of England, Andy Haldane, has argued that one of the principal reasons for the UK’s sluggish productivity is its failure to establish effective mechanisms for the diffusion of best practice from highly productive ‘frontier firms’ to the wider SME base. His arguments are well-founded: OECD research has consistently highlighted the spill over effects of firms learning and mirroring the practises of more advanced supply chain partners, customers and competitors. Policy initiatives across Europe have further shown that establishing mechanisms for peer-to-peer support and collaboration is an especially effective mechanism for delivering such diffusion.

In Scotland, we understand that a pilot programme for ‘Productivity Clubs’ has shown promise but it is clear that there remains plenty of scope for the development and expansion of this and other policy initiatives.

Recommendation 10: The Scottish Government should take account of these cross-cutting issues in planning any future financial support packages and in designing an improved business support offer in line with recommendation 8. Particular actions worth considering may include:

• Working with universities and business to establish effective diffusion networks; learning from best international practice.
• Incentivising SMEs to adopt new technologies and innovation e.g. through grants to co-fund costs.
• Following the lead of other countries in producing pre-designed ‘off-the-shelf’ packages combining technology, advice and training packages tailored to the needs of businesses in particular sectors and of different sizes. This could include common but impactful themes like e-commerce; cloud computing; use of data and online trading platforms.
• Complementing this offer with similarly packaged ‘off the shelf’ management and operating model solutions, with accompanying access to training and the option to embed specialist graduates for a fixed term to support implementation (programmes of this kind already exist but on a limited scale).
• Subsidising the cost of buying-in specialist skills or training to implement solutions of the kind noted.