Threat to Scottish industry department

replaced when he retires from the Civil Service in September.

As part of a senior management review of the entire Scottish Office,

the Industry Department -- which oversees the work of the Scottish

Enterprise network and is responsible for regional aid to industry,

skills training, and the roads programme -- could be merged with another

department.

The Scottish Office review is part of the overall effort to hold the

costs of running government to the same cash level in 1997/98 as was

achieved in 1993/94. That means, in effect, a real cut in running costs

of around 10%.

The most likely merger candidates for the Scottish Office Industry

Department appear to be the Agriculture and Fisheries Department or

Environment, which controls local government and housing policy.

The Scottish Office concedes that the departure of Mr Peter Mackay,

55, this summer, ''provides valuable flexibility'' in dealing with a

review which is expected to require reductions in the numbers of the

most senior Scottish Office staff, grades one to five, currently

totalling 200 posts.

But a spokesman described as ''highly speculative'' any inference that

Mr Mackay's department would be merged with either Environment or

Agriculture and Fisheries. Nevertheless, unofficial sources indicate

that that is likely to be the outcome.

The steering committee overseeing the senior management review only

met for the first time last Friday. It consists of the permanent

secretary, Sir Russell Hillhouse; the secretary of the Scottish Office

Education Department, Mr Gerry Wilson; an under-secretary at the

Treasury, Miss Gill Noble; and one outsider, Mr Garth Heron, the

personnel director (operations) at United Distillers.

A consultative process is under way which is likely to be completed in

March. Between April and September the review will focus on the best new

structure both to achieve the necessary cost savings and provide the

necessary service to Ministers.

At the moment the biggest part of the industry portfolio is coupled

with the local government aspects of Environment, in the hands of Mr

Allan Stewart, MP. The rest of industry -- roads, tourism, and other

aspects -- are the responsibility of Lord James Douglas-Hamilton.

Earlier this month the Scottish Office coupled the news of Mr Mackay's

early departure with the announcement that Mr Muir Russell, 46, had been

promoted to the post of secretary of the Agriculture and Fisheries

Department, succeeding Mr Kenneth MacKenzie, now on loan to the Cabinet

Office as head of the Economic and Domestic Secretariat.

After 32 years in the Civil Service, Mr Mackay's decision to leave

five years before the normal retirement age was a personal one, dictated

by a desire to seek a fresh professional challenge.

The January 11 announcement said: ''Mr Mackay's successor will be

announced later in the year.'' But the senior management review process

is likely to render that succession redundant.

* Mr Muir Russell, who moves from head of housing within the

Environment Department, to take over Agriculture and Fisheries, is

expected to resign shortly from the board of Stagecoach Holdings, the

Perth-based private bus operator.

His appointment, in a non-executive capacity, to the Stagecoach board,

under a scheme to give civil servants experience of outside industry,

was condemned by Opposition MPs at the time.