Scottish Enterprise: stonking losses or hidden gains?

Our editor Bill Jamieson says Scottish Enterprise, the national business support agency, is in trouble - again. The weekend brought reports of record losses of almost £10 million on failed investments and bad loans.

It seems an all-too familiar story of failure – a public sector quango out of its depth in the high-risk business world and squandering taxpayer cash. I’ve lost count of the ‘SE losses shock’ stories I have filed over the years and searching questions should not be spared on this latest one as to what went wrong and how.

But there is another ‘SE shock’ story among the debris. For despite those stonking losses, SE made an overall return on its investments.

The accounts for the year to end March have been laid before parliament but are not yet posted on the SE website. They are not for the faint-hearted.  The 83-page document, obsessed with definition, progress and obligatory knee-bending before the shrines of gender equality, pension entitlements and environmental recycling  is clogged with baffling  jargon on “five key priority areas” across eight industry sectors, and the agency’s work score-carded against no less than 50 national indicators, the scoring indicated by miniature coloured dots and squares.

Not even a St Bernard and a tapping white stick would get the lay reader through this grotesque and impenetrable labyrinth.

It is not until page 71 that we arrive at a summary of losses and amounts written off, a barren tundra by comparison, with nothing by way of narrative still less explanation. Someone at the agency seriously needs to take this in hand.

All told, there were 60 write-offs totalling £9.4 million in the year to end March, more than double the previous corresponding period. The bulk of these losses were incurred by two investments - laser technology concern Intense (£3.3 million) and Livingston-based technology firm Elonics (2.2 million). Six companies are listed in the accounts as having incurred write-off losses in excess of £250,000. The majority of other write-offs related to small balances where tenants have not been able to meet rental obligations – problems faced by any landlord.   

However, the accounts also reveal that SE made a return of £12.6 million from the sale of shares, loan repayments, interest and dividends as well as £260 million of private-sector investment from RSA grants and equity investment funds. As Iain Scott, chief financial officer at Scottish Enterprise, pointed out, “context is important here”.

Well, it would be, if the context wasn’t so impenetrable.

Three points should be made in any assessment of SE’s performance as a provider of equity and/or loan capital to business.

First, the role of SE is to provide financial assistance that may not be available to firms through conventional funding channels. By the nature of the propositions attracted to it, these are inevitably going to be higher risk than those normally considered by a bank.

Second, SE has been operating during a period when net bank lending to non-financial firms has been contracting, not expanding – a source of much angst and frustration for policy-makers. Governments at Westminster and Holyrood have wrestled with the problem of severely depressed bank lending to the business sector. Schemes such as Funding for Lending have so far had limited impact. The stress on the company sector, through blocked loan channels, tighter lending criteria and high fees and charges has been intense.

Third, many of SE’s equity investment and loans – and the £205 million portfolio extends across more than 550 companies - have been to fledgling firms in the innovative technology sector where the rewards of success are considerable – and the risk of failure all the greater. It is not unusual for venture capital firms to suffer a high attrition rate – as a rough rule of thumb guide, for every successful investment pay-off there can be three non-performers of write-offs. This is, and historically has been, universally true.

This does not detract from the obligation on SE to analyse what went wrong and to account publically for the causes and circumstances of failure. For investment and risk-taking is part of the discovery process in business, particularly in fields of cutting edge innovation and technology.

It is essential that the agency continuously improves its investment process to achieve an overall return on capital employed.  Without this, it diminishes the firepower available to it in future years.  

Failure and setback there will certainly be in the provision of support for start-up and fledgling companies. But such help for young businesses can help make possible expansion and future success.

The Scottish EDGE Fund provides a good example.  This entrepreneurial fund, financed by the Scottish government and led by SE, has reached its first year milestone. In this period it has provided 34 Scottish start-ups and fledgling businesses with more than £1.2 million. This has helped to increase turnover across supported firms by more than £600,000 and attract a further £1.3 million of investment.

Last week Finance Secretary John Swinney met with EDGE recipients at Entrepreneurial Spark’s Edinburgh ‘hatchery’ to hear how the award has helped business. The fund, he said, had so far created 59 jobs as well as £600,000 in turnover and £1.4m in further investment, “reinforcing the difference EDGE can make to early stage businesses.

There will inevitably be losses. But they must not obscure the gains.