SUBMISSION FROM HBOS Introduction 1.1 HBOS plc is a major Scottish growth story. The company has more than doubled its profits since merger in 2001 from £2,292m to £4,592 million. We have created 2,300 new jobs in the past four years and now employ 17,636 people in Scotland making up 27% of the company’s UK workforce. Bank of Scotland Corporate is a major and long-standing banker to the business community in Scotland with a market share of around 32%. Since merger we have trebled our share of the UK market with a twin-track strategy based on best value products and relationship banking. HBOS plc issues a portfolio of economic data to chart and assist analysis and understanding of the Scottish economy. The Bank of Scotland Scottish House Price Index, Scottish Labour Market Report and Index of Leading Economic Indicators all make important contributions to economic debate in Scotland.
2. Why is business growth in Scotland lower than other parts of the UK and other regions and countries worldwide? 2.1 The trend in Scotland has been for job creation in service industries and job losses in traditional industries. Over the past 10 years there has been a 175,000 increase in the number of people employed in Scotland. The largest increase was in finance and business services employment, 98,000. Government services created 67,000 jobs. On the downside, manufacturing employment fell by 83,000 over this period while agriculture employment fell by 7,000. Although business services has seen the fastest growth in employment of any industry in Scotland it has still lagged behind growth across Great Britain for this sector. 14% of Scottish employees work in this sector versus 16% across Great Britain. 27% of Scottish workers are employed in government services. 18% are in employment in finance and business services, 16% in wholesale and retail, 10% in manufacturing and 2% in mining and 1% in agriculture. By international comparison the Scottish economy is more heavily weighted to the government sector than the UK as a whole and also to comparable sized economies. The government sector comprises 28% of GDP in Scotland versus 23% in the UK and only 13% in smaller European economies like Denmark and the Netherlands. The dominance of the government sector in Scotland is reflected in employment trends with 27% of workers employed in the sector. This could place a limit on economic and business growth trends over the next few years. Scotland has fewer large businesses than the UK average. 31.9% of Scottish businesses have more than 500 employees versus an average for England of 38.4%. Business density in Scotland is amongst the lowest in the UK i.e. there are proportionately less businesses in Scotland than in other parts of the UK. In Scotland there are 651 businesses per 10,000 adults against an average across the UK of 846 business per 10,000 adults. To bring
business density inline with UK averages nearly 80,000 new businesses would need to be created in Scotland.
3. What challenges will we face as we seek to stimulate long-term, sustainable business growth in Scotland? 3.1 By industry more than half of all new businesses formed in 2004 were in business and services*, 51% or 10,536 jobs. 15% were in wholesales & retailing (3,066 jobs) and 8% were in construction (1,656 jobs). Only 5% of new business formations were in traditional industries of manufacturing, mining and agriculture versus 8% in 2003. With the housing market now starting to slow it is anticipated that new business formation in construction and property related business services will slow and this constrain overall business formation in Scotland. *Business services includes real estate services, information technology, accountancy, legal services, architecture and advertising. The number of new businesses formed in Scotland fell by 3% in 2004 to 20,808, according to the Committee of Scottish Clearing Banks. This was despite a slight strengthening in Scottish economic growth over 2004. While there was a 5% increase in new businesses formed in property services and an 8% rise in wholesale and retail business formation, business formation fell in all other industry sectors, including manufacturing, construction and agriculture. Business survival rates in Scotland are below UK averages. According to the DTI 65.3% of VAT registered businesses in Scotland were still trading three years later versus 66.5% across the UK. Scotland has a higher proportion of businesses in traditional industries, which tend to have lower growth rates. 17% of Scottish business are in manufacturing, mining and agriculture against 12% across the UK. Conversely there are less Scottish businesses in high growth industries. 21% of Scottish businesses are in financial and business services against a UK average of 25%.
4. What are we currently doing to tackle these challenges, how effective are our efforts and what should we be doing both in the public and the private sectors to increase their effectiveness? 4.1 A growing economy demands a growing population to support it. The decline in Scotland’s population is well documented and so initiatives to encourage skilled workers come to Scotland and graduates to remain here are welcome and necessary. It is too early to judge the effectiveness of initiatives such as Fresh Talent but they are essential to Scotland’s business growth capacity. Scotland has more people employed in financial services than other parts of Great Britain - 107,000 people or 5% of the total Scottish workforce. Scotland has delivered the strongest growth in financial services employment in Great Britain over the past five years – 20,000 jobs or a 23% increase. Scotland also recorded the strongest performance over ten years, a 24% increase or 21,000 jobs and the strongest on a twentyyear view with a 65% increase or 42,000 jobs. HBOS plc chose to locate its headquarters in Edinburgh in 2001 as Scotland already offers a number of key factors which attract business. Transport links are good. The education sector provides a good supply of
skilled labour for the financial services industry. The fact that Edinburgh is one of the country’s leading financial services hubs is a very important consideration as well – skilled workers are in good supply and prospective employees are willing to relocate from elsewhere in the UK to Scotland. Affordable housing, a high-quality education system and a vibrant cultural scene all contribute to making Scotland an attractive place to live and work. The Scottish Executive’s Financial Services Strategy Group is a welcome development recognising the important role of this sector in the Scottish economy. While financial services legislation continues to be a reserved matter, the FSSG is able to focus on the ancillary issues within devolved legislation which combine to make Scotland an attractive location for financial services companies. Scotland has a growing number of funding sources for businesses including the Scottish Co-Investment Fund, the Small Firms Loan Guarantee Scheme, LINC Scotland and venture capital funds which have all secured support from Bank of Scotland.
5. Can we learn from others and can we identify best practice that can be replicated in Scotland? 5.1 Business investment is the key to securing higher growth in Scotland. To achieve this the Scottish Executive needs to provide an economic and political landscape which makes business confident about the short and long term prospects for the country. The Executive is clearly committed to doing so. Supporting start-up businesses is important, but it is also essential to focus on supporting mid-value businesses as they look to expand. Through supporting proven business models and management teams BoS helps mid-value companies to deliver growth and increased employment, diversification into new markets, development of new products and services. BoS Corporate believes Joint Ventures (JVs) are a very effective way to help small and medium-sized businesses to expand and grow by securing larger scale business. BoS works with a number of growing Scottish companies, particularly in the construction sector, where our capital, reputation and experiences are allied with our customers professional expertise and vision to win and deliver large-scale projects previously outwith their capacity. The success of BoS Corporate is built on relationship banking where a business enjoys the services and support of a supportive team which understands its business and requirements then applies its knowledge and products to help deliver growth. Investing in good ideas and talented management teams is a proven formula to overcome tough market conditions. In turn these management teams must build, deliver and present solid and achievable growth plans to continue securing support from funders. BoS Corporate experience gained from working with customers across all sectors and from sole traders to major corporates is gathered and shared within the business to enable other customers to benefit from this pool of knowledge and experience. The value of this experience is becoming more recognised in a knowledge economy but more needs to be done to harness the knowledge potential of businesses. Sharing of knowledge and experience is also increasing through organisations such as the Entrepreneurial Exchange which offer mentoring and advice from established entrepreneurs to growing businesses. Again Bank of Scotland recognises and supports the work of such groups as it contributes to business growth. Promoting and supporting entrepreneurship in education is an important foundation for future growth. Scotland has a growing track record in this field with the recent success of scheme as such as Schools Enterprise Scotland and Young Enterprise Scotland. The Scottish Executive’s Determined to Succeed strategy will, like efforts to reverse population decline, need to play a key role in future growth.
6. What is our vision for the next decade in terms of business growth and how are we going to get there? 6.1 The Bank of Scotland Leading Indicator suggests that Scottish economic growth is likely to move to an above average growth rate of 2.5% in early 2005 before slowing to more average rates of growth of 2.0% in mid 2005. The Bank of Scotland UK leading economic indicator suggests UK economic growth is likely to remain above its long-term trend of 2.5% in 2005. Given these emerging trends it seems likely that Scottish business growth will lag behind UK wide business growth in 2005. The Bank of Scotland Labour market barometer, a survey of Scottish recruitment firms, indicates the Scottish labour market is now starting to settle after a period of strong growth in 2004. The index was at 57.3 in February 2005, above the 50 level which indicates employment growth but down from the peak of 60.9 in October 2004. One worrying result from the survey is that the availability of qualified staff in Scotland is close to two-year lows. A lack of qualified staff could clearly constrain Scottish business growth in coming months and years. Over the longer term Scotland has grown around 0.5%pa slower than the UK average at around 2%pa. A realistic goal on a five year view would be for Scotland to grow in line with the UK average and on a ten year perspective for growth to trend above the UK average.