Culture, Media and Sport CommitteeWritten evidence submitted by Creative Scotland

Executive Summary

Creative Scotland welcomes this opportunity to respond to the Commons Culture, Media and Sport Select Committee’s inquiry into Support for the creative economy.1

A report commissioned by Creative Scotland, in partnership with Scottish Enterprise, indicates that the economic performance of the Arts & Creative Industries (A & CI) in Scotland over time has reflected the wider Scottish economy, but has been more cyclical in its performance and more recently has experienced an earlier and steeper recession than the Scottish economy as a whole, with Writing & Publishing and Software a particular influence on this profile.2 Advertising and Architecture have been later exhibitors of this recessionary pattern, as discretionary spending and both public and private sector investment expenditure have declined.3 The report has developed a tailored definition of Scotland’s A & CI based around sixteen industries rather than the thirteen historically used by the Department for Culture, Media and Sport (DCMS). On this basis, Scotland’s A & CI in 2010 accounted for 84,400 directly employed and £3.2 billion GVA.4 Scotland ranks fourth of the twelve UK nations and regions on Creative Industry employment intensity, after London, the South East and Yorkshire.5

Scotland has adopted a cross agency partnership approach in addressing the development needs and opportunities of the creative industries. Creative Scotland leads the coordination of Scotland’s Creative Industries Partnership (SCIP), which sees it work with the Scottish Government, Scottish Enterprise, Highlands and Islands Enterprise, Skills Development Scotland, COSLA, the Scottish Funding Council and Scottish Development International in supporting the creative industries in Scotland.6 Industry needs are identified through a series of industry practitioner reference groups.

These industry groups have helped identify a number of consistent barriers to growth across their constituent creative industries:7

Lack of joined up approach to sector’s growth;

Lack of scale of businesses, business activity and investment;

Inadequate international competitiveness and access to markets;

Inadequate access to appropriate industry skills;

Inadequate access to market intelligence;

Inadequate measurement of success;

Lack of sustainability; and

Lack of access to finance.

Lack of sufficient scale to capitalise fully on the value of their unique IP is one of the main barriers to growth of Scotland’s creative businesses. Effective measures which assist the ability of the sector to identify, maintain and exploit IP rights—and to combat illegal erosion of the value of these intangible assets—are to be welcomed.

Creative Scotland welcomes the UK Government’s current proposals to introduce tax reliefs for animation, high-end television and video games on the lines of current Film Tax Relief (FTR). But the lack of flexibility in Scotland to adapt and customise fiscal incentives for inward creative industries investment is a particular difficulty faced in capitalising on the economic potential of our creative industries. As we noted in our own response to the DCMS Film Policy Review8 earlier this year, film in Scotland is on a much smaller scale—and much more dependent on international co-productions, for example—than its London-based counterparts. And while we understand and support the rationale behind the current UK tax credit system, its limitations in terms of helping the Scottish film industry to compete on a level playing field with our direct international competitors have been documented previously:

The tax credit is valuable, but the smaller scale of the industry in Scotland means that its full cashflow benefit is generally not fully accessible to producers in Scotland, which adds to production costs.

Limited opportunities to enter into co-production arrangements and work outside the UK may compromise the Scottish sector, which is heavily reliant on co-production finance.

Creative Scotland also shares the view of other important stakeholders across the UK that the new tax credit for high-end television could and should benefit production out of London and South East.9

Creative Scotland’s role of coordinating the leadership of support for the creative industries via SCIP (see above) involves us working with the universities and other higher and further education institutions. Our various industry practitioner reference groups10 have also been very helpful in identifying and designing a range of skills support initiatives.

We believe that genuine clustering has a positive role to play in facilitating innovation and growth in the creative sector. However, public sector support for clustering should be facilitating organic development initiated by the creative industries themselves, rather than directive, unless there is a case for capital investment to be the necessary initiation of a development in a mutually identified location with industry.

Whilst the UK generally as a whole benefits from the international perception of London’s worldwide reputation as a leader in creative and cultural industries,11 much more consideration needs to be given to implementing incentives and policy interventions to benefit the rest of the regions and nations of the UK. The cultural benefits of greater diversity across the UK are perhaps more obvious, but the economic case for the UK as a whole is also significant. Looking at the wider UK economy, a recent CBI report12 makes the case that “successive governments have overlooked pockets of private sector potential because economic policy has focused on closing the gap between regions, rather than realising and maximising the potential within them.”13 With respect to Scotland’s creative economy, we would certainly agree with their view that public policy for growth in the nations and regions needs to be more flexible.

It is important to note that by no means all of the important aspects of public policy which affect Scotland’s creative economy are devolved matters. Broadcasting and film and other creative sector tax reliefs are reserved matters for Westminster, for example, where it is important that the frequently quite distinctive impacts in Scotland are included in the assessment of policy proposals.

Context

1. Creative Scotland is Scotland’s national development agency for the arts, culture, film, TV and creative industries. Formed in July 2010, the organisation was born out of the merger of the Scottish Arts Council and Scottish Screen but it presents the opportunity to deliver a new model for cultural investment and advocacy. Our priorities are:

Identifying, supporting and developing quality and excellence in the arts and culture;

Promoting understanding, appreciation and enjoyment of the arts and culture;

Encouraging as many people as possible to access and participate in the arts and culture;

Increasing the diversity of people who access and participate in the arts and culture;

Realising the value and benefits nationally and internationally of arts and culture;

Encouraging artistic and creative work that contributes to an understanding of Scotland’s national culture;

Promoting and supporting industries and commercial activity based on the application of creative skills; and

Providing advice to Scottish Ministers relating to the creative industries specialising in the arts and culture.14

2. Creative Scotland’s role in supporting the creative economy is set out in the Scottish Government’s strategy for the creative industries, our brief being to:

provide research, intelligence and advocacy;

contribute to policy development; and

work in partnership with other bodies delivering support to creative industries.15

3. We note that, according to Oxford Economics, UK wide the creative industries account for 2.55% of GVA, a fall of 0.34% since 2009–10, and that the UK’s international ranking has fallen from 3rd in 2006 to 6th in 2011—although there has been 2% growth in jobs since 2009.16

4. In Scotland, a report was commissioned by Creative Scotland, in partnership with Scottish Enterprise, to carry out an Economic Contribution Study of the Arts and Creative Industries (A & CI). This report indicates that the economic performance of the A & CI in Scotland has reflected the wider Scottish economy, but has been more cyclical in its performance and more recently has experienced an earlier and steeper recession than the Scottish economy as a whole, with Writing & Publishing and Software a particular influence on this profile.17Advertising and Architecture have been later exhibitors of this recessionary pattern, as discretionary spending and both public and private sector investment expenditure have declined.18The report has developed a tailored definition of Scotland’s A & CI based around sixteen industries19 rather than the thirteen historically used by the Department for Culture, Media and Sport (DCMS). On this basis, Scotland’s A & CI in 2010 accounted for 84,400 directly employed and £3.2 billion GVA.20Further adjustments to bring greater consistency of the accounting treatment of the Heritage and Radio & TV sectors with other sectors increases the total GVA to £3.7 billion. However, a health warning needs to be noted in relation to the data, particularly for the Games industry.21Also adding in the indirect (ie supply chain) and induced (ie directly and indirectly employed spending) effects further increases the estimated GVA of the A & CI in Scotland to £6.3 billion and employment to 129,700.22

5. These figures are significantly in excess of the equivalent estimates which would result from adopting the latest DCMS definitions and weightings to Scotland, namely 34,000 employed (1.7% of the Scottish total) and £1.54 billion GVA (1.5% of the Scottish total). However, using these DCMS definitions does allow some comparison with the UK, indicating that in 2010 Scotland accounted for 5.8% of UK Creative Industries’ employment23and 4.5% of UK Creative Industries’ GVA.24

6. In terms of GVA, Publishing is reported to be the industry making the largest contribution to Scotland’s Creative Industries, followed by Advertising, Music and Visual and Performing Arts and Architecture. Compared with the UK as a whole, Architecture and Publishing are reported to be notably above the UK average in terms of their relative importance.25 It is also almost certain that, if correctly classified data for Computer Games were available, then this industry would also be notably above the UK average in terms of its significance to the Scottish creative economy.26 As far as Creative Industry employment intensity27 is concerned, though, Scotland’s rate of 5.9 is below the UK average of 8.2. However, this average is greatly affected by the dominance of London, where the comparable figure of 27.6 is actually the only figure above the UK average. Scotland ranks fourth of the twelve UK nations and regions on Creative Industry employment intensity, after London, the South East and Yorkshire.28

Barriers to Growth in the Creative Industries, Including Access to Finance

Barriers to growth in the creative industries—such as difficulties in accessing private finance—and the ways in which Government policy should address them. Whether lack of co-ordination between government departments inhibits this sector

7. Scotland has adopted a cross agency partnership approach in addressing the development needs and opportunities of the creative industries. Creative Scotland leads the coordination of Scotland’s Creative Industries Partnership (SCIP), which sees it work with the Scottish Government, Scottish Enterprise, Highlands and Islands Enterprise, Skills Development Scotland, COSLA, the Scottish Funding Council and Scottish Development International in supporting the creative industries in Scotland.29 Industry needs are identified through a series of industry practitioner reference groups.

8. These industry groups have helped identify a number of consistent barriers to growth across their constituent creative industries:30

Lack of joined up approach to sector’s growth; a lack of co-ordination within and across sectors puts at risk the many growth opportunities.

Lack of scale of businesses, business activity and investment; sectors are typified by small and micro businesses and sole traders with insufficient scale to capitalise fully on the value of their unique Intellectual Property (IP).

Inadequate international competitiveness and access to markets; most sectors now operate internationally but Scotland needs to be more proactive in positioning itself against a background of intensifying global competition.

Inadequate access to appropriate industry skills; the creative industries are being transformed by the digital revolution, changes in working practices and internationalisation; these changes need improved links between education and industry, continuing re-skilling and up-skilling and leadership in driving the changes through.

Inadequate access to market intelligence; small and micro enterprises often lack the resources to afford the top quality and current market intelligence needed to identify and exploit market opportunities.

Inadequate measurement of success; as noted above (under “Context”), there are widespread problems in obtaining consistent, reliable data on the creative industries; this makes it difficult to present a convincing economic case to itself, government and the public sector in order to justify support.

Lack of sustainability; the highly variable flow of activity—both inward and indigenous—generates a fragility and lack of critical mass which makes it difficult to retain key skills and can undermine the sustainability creative sectors.

Lack of access to finance; a lack of access to necessary investment at key stages of product and business life cycles results in individual enterprises being undercapitalised and without adequate working capital.

9. The last of these barriers, access to finance, is often cited as the main structural obstacle to growth in the creative industries. Specific areas of concern and suggested solutions raised by our Scottish reference groups included:

Scottish public sector investigation of appropriate financial mechanisms to attract and incentivise businesses;

Development of new equity investment models;

Ensuring sector public procurement processes are accessible to SMEs and are driven by quality criteria rather than by process;

Looking for ways in which the public sector can absorb some of the commercial risk faced by businesses in devoting resources to bidding for public sector work;

Creation of “one-stop-shop” facilities for incubation businesses, with access to business advisors and industry mentors; and

More opportunities for associate artists and companies to work with larger and/or commercial producers across the UK and internationally to develop skills, understanding and networks.

10. It is interesting to note that this output from our work in Scotland appears to be quite consistent with the tenor of the six recommendations regarding Access to Finance noted in the DCMS Minutes of the Creative Industries Council Meeting held on 12 June 2012, namely:

“Government and industry to work together to enable new funding solutions and champion investment opportunities in this sector.

The sector and Government to work together to improve existing business financing interventions and make the most of new ones.

Supply side: Sector experts, HEIs, research bodies and financiers to work together to improve investor readiness and understanding of the sector. Much of the work Creative England intended to undertake in this area depended on a successful RGF bid.

Demand side: Sector to work together to improve investment readiness and understanding of finance among creative industries businesses, enabling them to think beyond the banks, and beyond credit.

Data, knowledge and frameworks—Government and the sector to work together to improve the data collection and availability on this sector, with both top down and bottom up measures.

Help the UK’s creative content businesses build assets and scale so that they can leverage existing success and attract a larger share of the international market to the UK.”31

11. Although there is also a substantial body of opinion which argues that the problems of access to finance are primarily on the supply-side, with potential investors demonstrating a level of ignorance of the dynamics of creative businesses and a failure to understand their true risk profiles, the influential 2011 Demos report, Risky Business, argues that the fundamental barriers for creative industries in accessing finance are mainly demand-side. It suggests that the core problems could be resolved if creative practitioners worked harder to acquire business skills and to understand the real needs of financiers, rather than vice versa. The Demos research found that the following “ingredients of success” were evident in all successful businesses and that a creative business which could demonstrate competence in these areas would be treated no differently by financiers from businesses from other sectors:

“a clear intention to make a profit;

a strong performance in businesses planning;

a clear understanding of the risks that face their businesses, how to assess, manage and mitigate against them;

in-depth experience in the business of the sector;

financial and numerical experts working in mutually respectful partnership with creatives;

an understanding of the importance of good relationships to spot and manage creative talent, and to do deals;

an ability to innovate and adapt to changing business environments; and

an ownership stake in the intellectual property the business is creating.”32

12. The Demos report makes the case that the difficulty is one of investor perception rather than reality. Their evidence indicates that—perhaps surprisingly—the creative industries sector does not show notably higher failure rates than other sectors and that creative industries businesses can actually do better in a tough economic climate, as they tend to have fewer fixed assets, more flexibility in cutting their costs and possibly a greater passion for survival.33 The risky perception may be attributable to those creative businesses which do have a higher risk profile than others “because their business model is based on bringing a stream of new and unpredictable products to market, rather than because they are ‘creative’.”34The report does accept that there may be a funding gap for this category of new and unpredictable creative product businesses, especially when they are small or new.35

13. A report produced for the Department for Business Innovation & Skills and the Department for Culture, Media and Sport in 2011 by Dr Stuart Fraser of Warwick Business School and IFF Research36 provides further insight. It found that the Creative Industries need to be split into their different sub-sectors to provide greater understanding. So Software, Publishing, Video, Film and Photography and Radio and TV are more likely to have finance applications rejected than non-Creative businesses with similar risk profiles, but Music and Visual Performing Arts and Creative Service businesses (Advertising and Architecture) had similar rejection rates to non-Creative businesses with similar risk profiles. It is suggested that the higher rejection rates for Software and the Publishing, Video, Film and Photography and Radio and TV categories may be attributable to greater uncertainty about the viability of these businesses and/or a misalignment of interests between their needs and those of the finance providers. The research also indicates that some businesses are discouraged from even making finance applications but that this reluctance reflects risk profiles and/or perceived supply conditions for loans rather than whether businesses are Creative or non-Creative. However, availability of collateral is a greater issue for Creative businesses, who are more likely to turn down loan offers due to the terms of the offer, such as requests for personal security. In the words of one finance provider interviewed during the research:

“‘Banks don’t discriminate against the creative industries, but they do discriminate against people who they think can’t repay. It may just be in our [ie finance providers’] eyes that there are more of them in the creative industries.’”37

14. The Access to Finance report’s view is that the root cause of this greater uncertainty among CIBs is that nobody knows, for example, how well a new book or film will sell.

The Role of Intellectual Property

The impact on the creative industries of the independent Hargreaves Review of Intellectual Property and Growth, and the Government’s Response to it. The impact of the failure, as yet, to implement the Digital Economy Act, which was intended to strengthen copyright enforcement. The impact of proposals to change copyright law without recourse to primary legislation (under the Enterprise and Regulatory Reform Bill currently before Parliament)

15. As noted above, lack of sufficient scale to capitalise fully on the value of their unique IP is one of the main barriers to growth of Scotland’s creative businesses. Effective measures which assist the ability of the sector to identify, maintain and exploit IP rights—and to combat illegal erosion of the value of these intangible assets—are to be welcomed. Creative Scotland’s principal role in relation to the protection of IP is an advisory one. Our main objective in this is to ensure that our creative stakeholders (the creative practitioners, creative organisations and creative industries with which we are engaged by means of support or investment) have access to the appropriate advice and support to allow the value of their IP to be fully recognised and exploited. The service provided by the Intellectual Asset Centre in Scotland is key to this understanding in Scotland. It is important to note that of the various classifications of IP, Creative Scotland’s remit relates almost entirely to copyright only.

16. As an advisory body rather than a practitioner, we defer to the appropriate stakeholder representative bodies’ policy stance on such matters as the implementation, practicality and likely effectiveness of the relevant measures contained in the Digital Economy Act.

17. Our key policies on IP were set out in our response to the UK Government’s Independent Review of Intellectual Property and Growth (Hargreaves Review).38 Our main recommendations were as follows:

We propose that UK copyright law be codified in one single statute that becomes the sole point of reference for all aspects of UK copyright law.

We would propose striving to simplify the existing law in a form that can be easily understood by creative practitioners and creative organisations alike and the parties with whom they engage.

There has been a lack of consistency in the approach of the trade bodies, the courts and successive governments when it comes to prevent unauthorised copying and distribution, which needs to be urgently addressed so that stakeholders can plan accordingly.

We propose that that consideration be given to the inclusion of copyright law within secondary, further and higher education, as a module within existing courses to which an understanding of copyright law would be relevant and complementary.

We suggest that the best interests of stakeholders in the creative economy are served by pursuing initiatives that promote awareness of the value of creative work to society as a whole both financially and culturally.

We recognise the importance of the current debate around whether the new and innovative combined works enabled by digital technology should be automatically regarded as new works under a system along the lines of Creative Commons or whether they should be regarded as unlawful and infringing derivative works in the absence of explicit consent from the owner(s) and author(s) of the original work(s).

We believe that in the digital era, organisations such as Creative Scotland can make a significant contribution to economic growth through effective leveraging of a broad range of relatively small investments in the creative sector.

18. We share the views attributed to some members of the Creative Industries Council that a strong UK IP framework is fundamental to the future growth prospects and international ambitions of the UK’s creative businesses and are pleased to note that it will be a standing item at future meetings.39 We also note the intentions of those elements of Part 6 of the Enterprise and Regulatory Reform Bill which pertain to copyright law and we await its progress through the UK Parliament with interest.40

The Role of Taxation

The extent to which taxation supports the growth of the creative economy, including whether it would be desirable to extend the tax reliefs targeted at certain sectors in the 2012 Budget

19. As the EC cultural derogation recognises, the use of appropriate tax incentives is a vital part of the support structure for many creative industries. In film, for example, it is widely recognised that tailored tax incentives are essential in order to attract talent, production, businesses and investment and to compete on the international—and indeed domestic UK—stage. Creative Scotland also welcomes the UK Government’s current proposals to introduce tax reliefs for animation, high-end television and video games on the lines of current Film Tax Relief (FTR).

20. However, we do believe that more could and should be done to address the different conditions and needs which exist across different parts of the UK. The lack of flexibility (in Scotland) to adapt and customise fiscal incentives for inward creative industries investment has been noted as a particular difficulty faced in capitalising on the economic potential of the creative industries by the Royal Society of Edinburgh, for example.41 And as we noted in our own response to the DCMS Film Policy Review42 earlier this year, film in Scotland is on a much smaller scale—and much more dependent on international co-productions, for example—than its London-based counterparts. And while we understand the rationale behind the current UK tax credit system, its limitations in terms of helping the Scottish film industry to compete on a level playing field with our direct international competitors have been documented previously:

The tax credit is valuable, but the smaller scale of the industry in Scotland means that its full cashflow benefit is generally not fully accessible to producers in Scotland, which adds to production costs.

Limited opportunities to enter into co-production arrangements and work outside the UK may compromise the Scottish sector, which is heavily reliant on co-production finance.

21. We wish to stress that Creative Scotland supports the UK film tax credit and would not wish to see it diluted; rather, we are looking for changes (not a major overhaul) which would help film in Scotland—particularly with regard to co-productions.

22. Creative Scotland also shares the view of other important stakeholders across the UK that the new tax credit for high-end television could and should benefit production out of London and South East.43 We are confident that in Scotland, accompanied by a commensurate investment in infrastructure and skills initiatives, this would additionally attract production and maximise the benefit of the new tax credits.

Skills

Ways to establish a strong skills base to support the creative economy, including the role of further and higher education in this

23. Creative Scotland’s role in coordinating the leadership of support for the creative industries via SCIP (see above) involves us working with the universities and other higher and further education institutions. As Creative Scotland’s Chief Executive, Andrew Dixon, has commented in the foreword to Scotland’s Creative Economy: the Role of Universities,44 universities make a key contribution to the creative economy through nurturing talent and skills as well as providing a steady flow of workers into the creative industries. Specific objectives include the development of a programme of incubation spaces; and addressing skills and other gaps in the ladder of opportunity for creative people.

24. Our various industry reference groups45 have also been very helpful in the formulation of a range of skills support initiatives.

25. We are pleased to note the UK Government’s view that investment in UK skills and talent development is a critical element to sustaining UK production and that, in developing the new creative tax incentives, it will consider how the benefits from the tax reliefs can be used to invest in UK skills and talent development.46 Creative Scotland and Scottish Enterprise have jointly been tasked to conduct an interview based survey of the current state of skills needs in television production in Scotland to inform a bespoke new entrants programme.47 We have suggested that skills investment should be awarded based on this planned survey of skills needs in Scotland we are about to conduct (rather than a central collection dispersed by formula on UK wide priorities) in order that the potential response to the tax credit can be maximised in Scotland.

The Role of Clusters and Hubs

The importance of “clusters” and “hubs” in facilitating innovation and growth in the creative sector. Whether there is too much focus on hubs at the expense of encouraging a greater geographical spread of companies through effective universal communication

26. Within Scotland, Glasgow (21%) and Edinburgh (19%) combined account for 40% of total A & CI employment and also exhibit the highest A & CI employment intensities. The other areas with employment intensities above the Scottish average are the Scottish Borders (where Textiles are important), Aberdeen, Dundee and Orkney and Shetland (where a number of industries, including Heritage and Fashion & Textiles are important).48

27. We believe that genuine clustering has a positive role to play in facilitating innovation and growth in the creative sector. However, public sector support for clustering should be facilitating organic development initiated by the creative industries themselves, rather than directive, unless there is a case for capital investment to be the necessary initiation of a development in a mutually identified location with industry.

28. This is not to say that public policy interventions are not needed. One of the common themes across many of the UK’s creative industries is that of the damaging effects of their over concentration in London and the South East of England.49The benefits from clustering in the creative industries are in the main very different from the economies of scale which may be achieved from mass manufacturing, increasingly so in an era of digital communications. Much more consideration needs to be given to implementing incentives and policy interventions to address this widespread market failure and to counteract the resulting economic and cultural damage to the UK’s creative economy. The BBC’s and Ofcom’s regulatory measures to promote television production outside the M25 illustrate the potential benefits.

29. Criticism of the over concentration of the creative economy in London and the South East should certainly not be viewed as a criticism of or threat to London and the South East itself, but rather as a criticism of policy failure for the rest of the UK. The cultural deficit is perhaps more obvious, but the damaging economic consequences for the UK as a whole are also significant.50 Looking at the wider UK economy, the recent CBI report, The UK’s growth landscape—Harnessing private-sector potential across the country,51 makes the case that “successive governments have overlooked pockets of private sector potential because economic policy has focused on closing the gap between regions, rather than realising and maximising the potential within them.”52 The CBI argue that the scale of the current economic predicament needs every part of the UK to grow and that this will require public policy for regional growth which is flexible rather than a “one-size-fits-all” approach.

The Role of Public Bodies

The work of the Creative Industries Council and other public bodies responsible for supporting the sector

30. We note that the Terms of Reference of the Creative Industries Council clarify that, as the policy areas under consideration are largely devolved, the Council confines its remit to England only, working closely with the Devolved Administrations where appropriate.53

31. As noted above (at “Barriers to growth in the creative industries, including access to finance”), Creative Scotland leads the coordination of Scotland’s Creative Industries Partnership (SCIP), which sees it work with other public bodies to support the creative industries in Scotland.The industries are represented through a series of industry practitioner reference groups, working to identify industry requirements.54

32. It is important to note that by no means all of the important aspects of public policy which affect Scotland’s creative economy are devolved matters, however. Broadcasting and film and other creative sector tax reliefs are reserved matters for Westminster, for example, where it is important that the frequently quite distinctive impacts in Scotland are included in the assessment of policy proposals.

November 2012