There is a new vibrancy among all the arts in Scotland, with top names attracting bigger audiences to classical music concerts, more theatre companies than we have ever had and Scottish artists and writers at the top of the prize lists.

There is a new vibrancy among all the arts in Scotland, with top names attracting bigger audiences to classical music concerts, more theatre companies than we have ever had and Scottish artists and writers at the top of the prize lists.

This buzz of creativity poses a problem all too evident in the new announcement of grants from the Scottish Arts Council (SAC): how to fund them all fairly. With over 100 groups bidding for twice as much money as the SAC has in the kitty for its two-year flexible funding grants, there had to be a large number of losers. Forty organisations, including some as well-known and much-loved as the 7:84 theatre company and the Gallery of Modern Art in Glasgow, are disappointed, some of them bitterly so.

The SAC's criteria included excellent artistic vision and engagement with the public plus the sort of good leadership and business practice which attracts funding from other sources. In any system of competing for grants, some of the losers may have strong claims to have fulfilled the criteria.

In today's list, for example, the Glasgow-based Suspect Culture, currently performing to acclaim in London, stands out as a theatre company which could be said to meet the requirements, but is among the rejects.

A new system of funding is needed which will both distribute public funds further and provide longer-term stability. The five national companies providing theatre, opera, ballet and music are now funded directly, which takes them out of the funding competition, and the SAC has already provided five-year funding for 50 companies deemed to provide the foundation of the arts in Scotland. That leaves the many smaller and newer organisations to compete for the two-year "flexible funding" package. It is the vital component of funding for most of them, but the two-year timescale makes even medium-term planning precarious.

The SAC will be replaced by Creative Scotland in April next year and arts organisations are bracing themselves for new ground rules on funding after a cultural summit earlier this year effectively gave notice that the system of publicly-funded grants, which has been in operation since the war, will come to an end.

Other mechanisms, such as low-interest loans, mixed with venture capital and grants from trusts, are all in the melting pot. Arts companies will have to apply some of the creative thinking which is their stock-in-trade to new methods of funding, but a core of grant funding must remain available if, as Culture Minister Linda Fabiani, has undertaken, Creative Scotland "will firmly place creativity at the heart of the nation's life".

Some of our most innovative arts companies are the most fragile, to lose them would be to cut down the new flowering of artistic excellence before it reaches its full potential.