July 12th, 2007

THE policy of handing out sweeteners and other incentives to overseas electronics firms to persuade them to locate “screwdriver” plants in Silicon Glen is now totally discredited.

Okay, it had the virtue of persuading dozens of mainly US and Japanese electronics manufacturers to open plants and create jobs in “Silicon Glen” for a few years. The trouble was, as soon as these players realised they could do the same thing in South-East Asia for a fraction of the cost, the jobs melted away like snow off a dyke.

The Scottish Executive now seems determined to allow history to repeat itself in the financial services sector. Sweeteners and other handouts are being liberally proferred to global investment banks, custodians and fund managers who are contemplating shifting their back offices to Scotland. Just a few days ago it emerged that the Scottish Executive has handed a £6m “incentive” to Morgan Stanley, one of the world’s most profitable investment banks, to create a further 600 back office jobs in Glasgow.

Regretably the long-term results of all this largesse are likely to be no less dissappointing than they were in the electronics sector.

As early as 2000, the former first minister Henry McLeish signalled that luring in “back office” financial services jobs was to become a key plank in the Scottish Executive’s economic policy. He said as much when cutting the sod at Crewe Toll – where Deutsche Bank said it wanted to build a European centre of excellence for its global custody and investment administration operations. (see Sunday Herald article, February 2000). Needless to say, Deutsche Bank exited the investment administration market two years later.

Since then millions of pounds of taxpayers money have been handed out by the Executive to players in the asset-servicing area. But the executive seems oblivious to the fact these jobs are likely to be no less transient than the electronics jobs that preceded them.

One contact, who knows the sector well, recently told me the position is “already incredibly fragile.”

The companies involved – which in Scotland include State Street, Bank of New York Mellon, Citigroup, BNP Paribas, HSBC and Morgan Stanley – are a pretty footloose bunch, with no real attachment to any particular geography.

Many are today discovering they can provide exactly the same services cheaper, and to the same quality standards, from other global centres including Central & Eastern Europe and South Africa. Some are already quietly unwinding their Scottish operations and prioritising other locations instead.

as I wrote in Scottish Business Insider in May…

One industry insider warns: “The position in the asset-servicing sector is very fragile. State Street has been growing its operations in Luxembourg and Dublin faster than those in Edinburgh, partly because of levels of corporation tax.

“Citigroup is building up its asset servicing operations in Poland, the Bank of New York has a strategic alliance with Standard Bank of South Africa and Old Mutual could easily shift work from Edinburgh to South Africa. I believe that many of the asset-servicing jobs in Scotland could migrate very quickly.”

Interventionism has clear appeal to the politicians: it gives the impression they can conjure up thousands of relatively attractive white-collar jobs from thin air. Attracting names such as Morgan Stanley to a country such as Scotland is, clearly, a feather in their caps. But first minister Alex Salmond, a former Royal Bank of Scotland economist, ought to know better. Like Henry McLeish and to a less extent Jack McConnell before him, he risks ending up with egg all over his face if he persists with this ill-considered policy.

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