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Scottish National Investment Bank Bill

Overview

This Bill aims to set up a Scottish National Investment Bank.

This bank will not be a traditional retail bank that can be used by the public. It will serve businesses that want to innovate and grow, but struggle to get finance in traditional ways. The bank’s aim is to help grow Scotland’s economy in line with Scotland’s Economic Strategy.

Scottish Ministers will set out major priorities for the bank.

The bank will be both a public body and a public limited company (PLC). It’ll be independent from the Scottish Government. The bank’s board will set out how it intends to achieve the priorities set for it.

The bank should be up and running by 2020.

You can find out more in the Scottish Government document that explains the bill.

Why the Bill was created

Businesses in Scotland often find it difficult to borrow money over a longer term (from 10 years). This is called ‘patient finance’. If they find it hard to borrow money, the economy cannot grow as easily.

The First Minister announced plans to set up a Scottish National Investment Bank in the Programme for Government 2017 to 2018. This was partly based on advice from the Council of Economic Advisers.

It said that national investment banks play a big part in supporting economic growth across Europe.

You can find out more in the Scottish Government document that explains the bill.

The Bill at different stages

'Bills' are proposed laws. Members of the Scottish Parliament (MSPs) discuss them to decide if they should become law.

Here are the different versions of the Bill:

The Bill as introduced

Scottish National Investment Bank Bill as Introduced

The Scottish Government sends the Bill and the related documents to the Scottish Parliament.

Bill is at ScottishParliament.SC.Feature.BillComponents.Models.BillStageModel?.DefaultBillStage?.Stage_Name stage.

Stage 2 – Changes to detail

Scottish National Investment Bank Bill with Stage 2 changes

Second version of the proposed law with changes from Members of Scottish Parliament (MSPs).

Bill is at ScottishParliament.SC.Feature.BillComponents.Models.BillStageModel?.DefaultBillStage?.Stage_Name stage.

Where do laws come from?

The Scottish Parliament can make decisions about many things like:

  • agriculture and fisheries
  • education and training
  • environment
  • health and social services
  • housing
  • justice and policing
  • local government
  • some aspects of tax and social security

These are 'devolved matters'.

Laws that are decided by the Scottish Parliament come from:

Government Bills

These are Bills that have been introduced by the Scottish Government. They are sometimes called 'Executive Bills'.

Most of the laws that the Scottish Parliament looks at are Government Bills.

Hybrid Bills

These Bills are suggested by the Scottish Government.

As well as having an impact on a general law, they could also have an impact on organisations' or the public's private interests.

The first Hybrid Bill was the Forth Crossing Bill.

Members' Bill

These are Bills suggested by MSPs. Every MSP can try to get 2 laws passed in the time between elections. This 5-year period is called a 'parliamentary session'.

To do this, they need other MSPs from different political parties to support their Bills.

Committee Bills

These are Bills suggested by a group of MSPs called a committee.

These are Public Bills because they will change general law.

Private Bills

These are Bills suggested by a person, group or company. They usually:

  • add to an existing law
  • change an existing law

A committee would be created to work on a Private Bill.

Introduced

The Scottish Government sends the Bill and related documents to the Parliament.

Scottish National Investment Bank Bill as introduced

Related information from the Scottish Government on the Bill

Scottish Parliament research on the Bill 

Stage 1 - General principles

Committees examine the Bill. Then MSPs vote on whether it should continue to Stage 2.

Have your say

The deadline for sharing your views on this Bill has passed. Read the views that were given.

Who examined the Bill

Each Bill is examined by a 'lead committee'. This is the committee that has the subject of the Bill in its remit.

It looks at everything to do with the Bill.

Other committees may look at certain parts of the Bill if it covers subjects they deal with.

Who spoke to the lead committee about the Bill

Video Thumbnail Preview PNG

First meeting transcript

The Convener

Agenda item 2 is evidence taking from a number of witnesses on the Scottish National Investment Bank Bill. I welcome to the meeting our first panel: Benny Higgins, strategic adviser on the establishment of the Scottish national investment bank; and Paul Brewer and Alan McFarlane, former members of the advisory group on the implementation plan for the SNIB, as I think we will be shortening the name to. Thank you for coming in this morning.

First of all—and I think that these might be questions for Benny Higgins—what went into the development of the implementation plan? Have its 21 key recommendations been adequately reflected in the bill that is before Parliament?

Benny Higgins (Advisory Group on the Implementation Plan for a Scottish National Investment Bank)

On the first of your two questions, our reasonably large advisory group drew skills and experience from various parts of the Scottish economy and business sector. One of our key advisers was Mariana Mazzucato, whose work on mission-related patient capital investment was a key part of what we were pursuing.

More important, we had a very large number of sessions with different participants and actors across the ecosystem in Scotland. I personally sat through many dinners, breakfast meetings and other sessions that attracted a huge number of people and which ensured that we could listen very carefully to what people thought were the issues that needed to be tackled. As we went through the implementation plan process, we were able to start test driving some of our thoughts. That approach proved to be very successful and gave us a good understanding of the issues that people thought had to be tackled, and we have carried much of that process into where we are now.

As for the 21 key recommendations in the plan, all of them have been accepted. However, I am perhaps not best placed to talk about the details of the bill; others are probably more qualified in that respect, and I think that you have already heard from some of them. From my perspective, though, the approach chosen in the bill is relatively light, which means that it will not get in the way of implementing the recommendations. I would just point out that not all of the recommendations are covered in the bill, which is enabling legislation that will allow us to do everything that we need to do.

The Convener

Do the other two witnesses wish to comment?

Paul Brewer (Advisory Group on the Implementation Plan for a Scottish National Investment Bank)

I think that Benny Higgins has covered the matter very fully.

Alan McFarlane (Advisory Group on the Implementation Plan for a Scottish National Investment Bank)

The broad thrust of the group’s discussions is reflected in the bill, but, of course, the detail will be everything. No doubt some aspects of that will be the focus of the committee’s own discussions. Working through that detail will be critical.

The Convener

Thank you.

Dean Lockhart (Mid Scotland and Fife) (Con)

Good morning, panel. Other recent Government initiatives such as the Scottish growth scheme have made a supply of money and capital available to the economy, but uptake of those kinds of financing schemes has been insufficient, because of a lack of demand in the economy itself or an insufficient number of growing businesses to access the supply of finance and capital. Will that lack of demand continue to be an issue and, if so, how will the bank address it?

Paul Brewer

It is difficult to talk about supply and demand across the whole system of investment, because they vary a lot at different levels. You need different interventions at the microfinance level, where businesses are still developing their capacity to raise finance; indeed, often their understanding of what financiers are seeking requires to be developed before the finance can be raised. In comparison, with companies going into their second or third phases of financing, it will be a matter of investors looking very closely at their performance and products, investing larger amounts of money and taking greater risks.

If we can generalise broadly about Scotland, I would say that microfinance, business angels, the Scottish Investment Bank and so on compare very well with activities in any other jurisdiction that has them—Scotland is particularly strong on the angel investment network. However, once companies are getting into their second and third phases of growth, there are far fewer indigenous investors and companies have to look more widely for finance. That is not a bad thing in itself, but it means that those companies are competing in a much more crowded market.

Therefore, there are areas in which we need to stimulate demand or support companies to create demand that financiers will respond to, but there are other areas in which there are gaps, particularly for companies that are growing beyond the Scottish Investment Bank’s capability to invest and which are looking for larger sums.

Alan McFarlane

Your question touches on one of the reasons why it is fundamentally a good idea to form this type of institution. Making funds available for a particular period and expecting demand for those funds automatically to be there is not how life works; instead, we are talking about forming an entity that is here for the long term and which is demonstrably patient, evergreen and continuing.

One of the things that is very striking about the British Business Bank’s website is its recognition of having to make it clear to people what is available. It is great to have a programme at a particular time and hope for uptake, but there are no guarantees in that; having an enduring and continuing entity, which makes it its business to let everybody know that it is available, is a big step forward. Mr Lockhart is right that it would be great if there was more uptake, but I would not say that that damns anything.

Benny Higgins

Your question is very good. Obviously, a supply of capital does not solve anything unless there is sufficient demand.

I see the creation of the bank as doing more than adding an important new piece to the ecosystem in Scotland. There is also an opportunity for Scotland to use the bank as a catalyst for starting to unclutter the landscape and ensure that other parts of the apparatus—specifically Scottish Enterprise, Highlands and Islands Enterprise, the developing south of Scotland enterprise, other Government departments and various other bodies—work together properly. The next couple of years must be the time when we get all the pieces of apparatus working together in an uncluttered way. We have got to stop finding refuge in complexity and look for simplicity. There has got to be more effective collaboration than there has been.

We have a lot of strengths in Scotland—an obvious one is the university sector—but far too many of our great research projects that move into development get trapped at the micro capital level. That is because there is insufficient understanding of and support for how to use different kinds of finance equity and debt. The bank in itself will not solve demand—origination will come from some of the other parties that I mentioned—but we need to use the bank as a catalyst for resolving the issues. We have a great opportunity to do that; it would be a missed chance if we did not.

Dean Lockhart

That brings me on to the next question. You have touched on interaction with other agencies. The question of demand raises another issue. The bank will be a supplier of capital, but its reach can only go so far; getting the underlying stimulus, changing the culture and generating a more enterprising economy will need more than a supply of capital. How do you see that being done in order for the bank’s mission to be successful? How will that interaction with the other agencies work in practice? Will demand and origination still sit with Scottish Enterprise and the enterprise agencies? What part might the bank have in stimulating demand?

Benny Higgins

We are working very closely at project level. To an extent, we are running a shadow bank, using the resources that are available from the building Scotland fund and other pools of resource. The Scottish Investment Bank that exists as part of Scottish Enterprise will come across. Origination will take place, but not in the bank itself.

We need to distinguish between the small and medium-sized enterprise sector and the long-term patient capital projects that will be mission related. The bank will work more on the origination in relation to the mission-related projects, while SMEs will be covered by the existing agencies, principally, and Government departments.

As the committee probably knows, the British Business Bank basically funds funders. That ability will be open to the Scottish national investment bank, so some such funding will take place. However, we also want to ensure that the bank provides direct investment. The origination engine will be other parts of the apparatus, which is why we need to work closely.

We are working hand in glove with Scottish Enterprise, as we will be with HIE for the rest of this year. As Alan McFarlane said, the devil is in the detail. It is easy to say where origination lies and that we need to work hand in glove—that sounds straightforward—but we need to work out precisely how we do that; that is what we are doing. Steve Dunlop, who is the relatively new chief executive of Scottish Enterprise, has shown his commitment to ensuring that our working relationship and collaboration get us to the right place.

Alan McFarlane

I used to work for one of the predecessors of the proposed bank. I hope that the committee will find it useful to hear that this work rests on 40 or 50 years of experience. As some of you will know, we have had the Industrial and Commercial Finance Corporation—it is now called the 3i Group—which was partly owned by the Bank of England. There has also been the Scottish development fund, under the Scottish Development Agency. Before George Mathewson left the SDA, he brought in some people who were specialists in investing in small businesses.

Dean Lockhart mentioned demand. Demand in the early 1980s was affected by the rapidly changing economy, and a lot of it involved management buy-outs. Some people might remember the Carron steelworks at Falkirk, and Scottish Development Agency finance and the private sector were instrumental in helping to buy out at least three divisions. There are not many examples of that today. Demand is changing because of technology, marketing and some of the other industries in which we are active.

I think that Dean Lockhart’s question was how cyclical is the economy and how cyclical is demand, but I am afraid that I cannot help on those points. However, if we have a permanent institution, the likelihood of being able to match supply with demand rises. To this interested layman, it seems that the net effect of having a financial body that, ultimately, is not part of SE and which acts as a serious long-term investor will be good. It is highly likely that the bank will stimulate demand; the extent of that demand is the question.

Dean Lockhart

We can come back to the issue a bit later, because I do not want to hog the meeting, but my question was about structural issues, in relation to the missing middle. The committee has heard evidence that although we have many microbusinesses and a couple of very large businesses in Scotland, we need to scale up our support for the missing middle. The bank might be part of the answer, but it seems that a wider restructuring of the landscape is necessary in order to grow that missing middle. Perhaps we can come back to that issue later.

The Convener

Do any of the panellists want to comment now?

Paul Brewer

I would add only that Benny Higgins’s distinction between investment in the SME sector and the mission-oriented element is very important. In the areas on which the bank will focus in order to make a real difference to our economy, it will need to bring in considerable expertise and to work as part of the whole ecosystem. Whether it is in low carbon or digital and data—in which we have fantastic academic expertise—the bank will need to work with academia, existing businesses and other investors to bring in considerable expertise, so that Scotland is seen as a place with a fertile investment environment. That is a different environment from the environment that supports SMEs, so the bank will need expertise in both areas.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Over its first 10 years, the bank is to be capitalised with about £2 billion. What impact could that have on the Scottish economy?

10:15  



Benny Higgins

I do not know the precise answer but, if we deploy £2 billion in the area of the market that has been referred to a number of times—in supporting the opportunity for SMEs to scale up—that can feed ambition. We need to have SMEs that are prepared to go from being microbusinesses to being more credible small businesses and then bigger businesses.

The hallmarks of successful economies in the 21st century will be focusing on carbon neutrality, automation, artificial intelligence and machine learning and responding to demographic changes. Scotland is well placed on some of that but not as well placed on other aspects. We have a good track record on renewables, but we have not industrialised the impact of what goes on in universities on data, robotics and automation, which is a great basis. As I said, the bank can play a part in opportunities to make such SMEs grow. On the demographic challenge, we start in a difficult place, because our demographic challenge is harder than the average. The bank needs to make contributions so that we are better placed.

The sum of £2 billion represents 1.3 per cent of gross domestic product; that is about in line with the figure for many national investment banks around Europe—particularly in smaller advanced nations, of which we must consider ourselves to be one—and is not unreasonable.

In the longer run, we will look at ways to leverage investment. Direct leverage would require a dispensation from the Treasury, but there are other ways of using the capital for leverage—through co-investment, guarantees and so on.

The impact is difficult to speculate on but, if we can manage to use putting £2 billion into the economy as the catalyst for getting the rest of the framework in place, it will give us a wonderful opportunity to make a big difference.

Gordon MacDonald

Will the £2 billion act as leverage for private investment in companies and other organisations?

Benny Higgins

One thing that is common is co-investment; that is what the Green Investment Bank did. There are many examples that encourage us about what the new bank will do. We have talked to such banks around the world—we visited KfW, we went to see the Irish bank and I will soon go to see the Finnish bank, which does similar things. We must look at and learn from other organisations.

Co-investment is one way in which we can create markets. The private sector’s risk appetite is such that it will not invest in some of the long-term mission-related projects, because of the timelines that are involved. We hope that an anchor investment from the Scottish national investment bank will encourage more investment. That is there to be played out.

Alan McFarlane

The money is not entirely incremental. A report last year from Scottish Enterprise, which I am sure it sent to the committee, showed that £538 million of deals were done in Scotland and that the figure has been on an upward trend since 2012. The sum of £2 billion is £200 million per annum over 10 years. I do not wish to disagree with the chair of the advisory group—Benny Higgins is right—but it could be argued that the denominator is not the £170 billion that is Scotland’s gross national product but 10 times that number.

To return to a question that Mr Lockhart asked, the approach could be significant if it is targeted, but it cannot be a blunderbuss. A key mission for the bank’s board of directors, when constituted, will be to work that out.

To take the point about the middle, let us assume that there is a group of companies in Scotland for which £10 million would be the appropriate financing. I will be clear about the leverage that we are talking about. Traditionally, leverage means borrowing money against your own balance sheet, but that is not intended for the bank—the bill explicitly forswears that. Leverage will therefore mean influencing others to behave differently from how they otherwise would have behaved. There is clear evidence from Scottish Enterprise that the Scottish Investment Bank has been quite good at that already, through the co-investment fund. That is a solid foundation for optimism.

However, if the bank provides only £10 million for each company, it would be supporting only 200 hundred companies and would be ignoring the mission-related stuff. If those companies were the missing middle and were constituted differently, that would represent great success. That is what I mean by the detail in the numbers; it is the ambition measured by the actual funds available.

I add that it is very clear from the bill that the money is committed up to 2021. Bearing in mind that things change in politics, the more of a cross-party parliamentary commitment there is to the £2 billion the better. The commitment is £320 million, plus the £300 million that is coming from the Scottish Investment Bank’s existing portfolio. If we run all of those numbers together, it is a stretch in parts, but they are not damning. There is a real basis for incremental improvement in the middle. Those are the kinds of numbers that I would be delighted for you to take away with you.

Gordon MacDonald

I am sure that some of my colleagues will talk about the mission statement and the focus of the bank. I have a couple of remaining questions. The financial memorandum highlights that in year 1 the operating costs will be £15.6 million, which rises to just over £25 million by 2025-26. Are the proposed levels of operating costs in the bank’s first few years realistic?

Benny Higgins

Yes. We have modelled that on the basis of the nature of the activity and the number of people involved. It is our best guess. We have taken as many readings against similar organisations as we can, so we think that it is realistic.

Gordon MacDonald

Why does the Royal Society of Edinburgh say in its evidence that there could be problems with that level of operating cost?

Benny Higgins

You should ask it.

Gordon MacDonald

I intend to.

Benny Higgins

That is fine. All that I can say is that we have sought to be as realistic as possible about the cost structure. We think that, once established, the bank would have between 85 and a bit more than 100 people in its business and institution. The cost structure has been test driven by various people to ensure that we are in the right ball park. There is a related issue around pay, which we have talked about and which will have to be dealt with before we are done.

Angela Constance (Almond Valley) (SNP)

Good morning, panel. Like my colleague Mr MacDonald, I always like to cut to the chase. I wondered if any projections or modelling had been done on what the Government can expect for £2 billion of investment. Have there been any projections on the number of jobs created or supported, the number of businesses started or supported to grow, or the ratio of capital that can be leveraged?

Benny Higgins

That is another version of the question that was asked earlier: what do you get for your £2 billion and what will the impact be on the economy? I am not sure that I can do much better than the answer we gave earlier. We are working on what the bank’s key performance indicators should be. One has to remember that we have to get back to the national performance framework, which outlines what we are trying to achieve in Scotland. The bank should play its part in delivering that.

Royal assent will probably be received around this time next year. By that point, we will have a chair, a board and an executive team. We still have a lot of work to do and have to start to develop the key performance indicators. However, at this juncture, we are not trying to project the number of jobs or businesses that will be created. We know that we need to create more jobs and businesses in Scotland, and that we need to help the microcap companies to become midcap companies and the midcap companies to become bigger businesses. This is a great chance to make a big impact in that respect.

Angela Constance

To be clear, I am not asking you to look into your crystal ball. Bearing in mind that reasonably solid work has been done that demonstrates, for example, that every £100 million of capital investment can support 1,400 jobs, there must be some sort of modelling, projections or aspirations about the ballpark figures on job creation and supporting businesses.

Benny Higgins

We do not have those projections at the moment.

Paul Brewer

It is really important that our starting point does not put a huge short-term burden of expectation on the deployment of resources, because the bank’s whole purpose is to take a long-term view. When the bank is subject to regular scrutiny from ministers and their teams, and the periodic independent scrutiny that is proposed, it is important that there will be real thought about the balanced set of measures that will be looked at.

For example, with regard to jobs, it would probably be seen as a success if the bank in its early days funded another unicorn, such as a Skyscanner, yet that would lead to relatively few jobs. It would be a big economic success, and it would help the sector in which it operates to have high prominence and pull people into new jobs, but it would not create a lot of new jobs in itself. If the bank supported a more effective approach to care of the elderly through its investment, that would probably be likely to involve a high number of jobs per pound invested, because that sector is very people intensive.

The measures against which the bank will have to be accountable will have to cover quite a wide spread. If you were to start out with an expectation in the early days of such targets as jobs created, incremental GDP that has been generated or taxes put into the economy by the companies that are operating, for example, it would be difficult to target in a way that would be constructive to the bank’s mission for the first few years until you could see how it was delivering. On the other hand, you will have to have robust scrutiny to make sure that it is delivering.

Alan McFarlane

I will start with the annual report of SE and the Scottish Investment Bank, which I presume went through an auditor before it was published. It says that it invested £43.5 million in 2017-18 in 147 Scottish companies. This bank will have a run rate of £200 million per annum, so if we call it £50 million, that is roughly four times more. That is where the demand question will come in. Are the companies there? Patience will be a virtue. Based on the whole book, not that one year, SE claims that a £300 million portfolio—that is the only number that I can extract from its accounts that equates to asset value—led to turnover of £400 million, which would be a factor of 1.25. Therefore, if £2 billion went in and delivered 1.25, Scottish GDP would not be £175 billion but nearer £180 billion.

A significant proportion of that turnover was export, some of which would be export to the rest of the United Kingdom, which is 3,400 jobs. Therefore, SE’s numbers suggest that £88,000 of investment generates a job. I do not know whether that was its investment or leveraged via others, but the baseline must be the existing effort. The working assumption is that more is better, but it must be targeted, a propos the demand point.

Angela Constance

Okay; I thank you for that.

Alan McFarlane

You can thank SE for that.

Angela Constance

I am all for us having the courage to take a long-term view, as long as we are setting our ambitions high enough.

My final question is about something that I am sure the panel is well aware of, which is the good solid business case for getting more women into business. The committee has had a ream of evidence made available to it that addressing the gender balance and the number of women-led companies could have a positive impact, such as adding £13 billion to our gross value added. In the initial thinking about the bank’s strategic purpose, what consideration has been given to targeted endeavours that would see growth in the number of women who participate in business in Scotland?

10:30  



Alan McFarlane

I think that that is just a given these days. It is the best people in the best jobs. There is no notion now that any candidate would be debarred from a job, let alone debarred from entrepreneurial backing, on the grounds of race, creed, colour or gender. I do not want to be dismissive—I completely agree with you—but much has been achieved and only more can be.

I am optimistic that some of the demand will come from all walks of Scotland’s population. If you are suggesting that a key element of the mandate should be that that is taken as a given, that would be a good thing. I am not implying that that notion is redundant but, in my day-to-day life, I do not see those barriers in any way operating any more.

Angela Constance

Organisations such as Scottish Women in Business and Women’s Enterprise Scotland are able to demonstrate that, quite often, women face a lot of additional barriers to accessing finance for their companies, and assumptions about the types of businesses that they lead. Do you think that, in order to increase the number of women in business, consideration should be given to having a strategic focus on women in business, bearing in mind that that should not just be about rebranding what has not already worked?

Alan McFarlane

Since that evidence exists, yes. We all work in different industries. Some are way more integrated than others and there may well be other areas that we wish were up with best practice. Since the evidence is clear, it would be great to put in the bank’s mandate that it should be open to all. Openness in society is one of those things that we hold dear. It would be even greater if the outturn was that way.

If you look at the British Business Bank’s reporting, it is very hot on that area—that is, who it invests with, its staff make-up and so on. All that I am trying to convey is that, in many parts of the economy, why would anyone deny themselves access to the very best talent?

Benny Higgins

I will pick up on that, to reinforce everything that Alan McFarlane has said. There will be a broader question of what ethical code the bank will pursue. As I have said a number of times already, we have the opportunity to use the bank as a catalyst to make a larger change than simply creating a greater supply of capital—that, in itself, is a good thing, but the bank is also a great opportunity for us to change things.

We will be setting out to make sure that the bank embraces diversity in its broadest sense. You need to remember that, apart from all the moral reasons for pursuing diversity, cognitive diversity makes institutions better. It is the right way forward—it has got to be—and we have to lay down some markers about how we want to go forward in Scotland.

Andy Wightman (Lothian) (Green)

Before I ask about governance, I will follow up Gordon MacDonald’s line of questioning on investment. It is my understanding that the capitalisation of the bank up until 2021 will be provided through financial transactions. The rules, which are set by HM Treasury, are that those transactions can be used only for the provision of loans or equity to the private sector. Paragraph 17 of the policy memorandum says:

“The Bank will lend solely to the private sector. It will not lend to public institutions including local authorities, government agencies or arms-length bodies.”

However, there is nothing in the bill to stop the bank doing that, and there are no rules on financial transactions beyond 2021. After that point, resources will be voted on by Parliament. I am just wondering where the statement that banks should lend only to the private sector comes from and whether you agree with it.

Alan McFarlane

To be honest, when we were asking ourselves what the bank should do, we decided that it was to make sure that the bank makes a difference. Therefore, we are trying to address the issues that do not get tackled either well enough or at all at the moment. There are two specific areas in that regard. One is ensuring that, where we can stimulate ambition, businesses can grow from being small and move to a path in which they can become much bigger companies. The other relates to what the bank’s mission should be. We have an opportunity to invest in areas so that we have the hallmarks of an economy that can succeed in the 21st century. That is what we discovered during our implementation plan phase, and the bank’s focus will be to invest in private companies that will participate in those ways.

Andy Wightman

I understand that that will be the bank’s focus. There is nothing in the legislation to prevent it from making such investments. Is it correct to say that nothing on that point is proposed in the draft memorandum and articles either?

Benny Higgins

Yes.

Andy Wightman

For example, if, in two or three years’ time, ministers were to set a mission on infrastructure and housing, it is self-evident that the public sector, co-operatives and mutuals would be well placed to deliver that. If it chose to do so, would the bank be in a position to lend for that purpose?

Benny Higgins

Yes, absolutely.

Andy Wightman

Are we clear on that?

Benny Higgins

Yes.

Andy Wightman

So there is no strict legislative prohibition, and such lending would not be ruled out.

Benny Higgins

Absolutely not.

Andy Wightman

That is helpful. Thank you.

Much of the provision on the bank’s governance is set out in company law, which is overlaid by the statutory provisions in the bill. Parliament will also have a role. I want to ask about ownership. The bill makes it clear that ministers would be the only members of the bank. In Germany, for example, the Länder account for 20 per cent of the membership of that country’s national development bank, KfW. Is there a role for other bits of government—particularly local government—in the national investment bank? Have you thought about that?

Benny Higgins

We considered different models. We believe that the best way to serve the Scottish economy in the long run is to have clear and unequivocal ownership by the Scottish Government. We looked at alternatives, but we concluded that that is the best model.

Andy Wightman

Can you supply us with more information on your evaluation?

Benny Higgins

We can probably come back to the committee on that; we can certainly look out some of the papers that we considered. However, we had extensive conversations about ownership models, and we judged that a bank that is 100 per cent owned by the Scottish Government is the right answer.

Andy Wightman

Okay. Thanks.

Alan McFarlane

The obvious difference is that some Länder have populations of upwards of 5 million: we must look at the economic unit in which the bank will operate. The structure in the UK now is that the British Business Bank can operate in Scotland—it already has on its website a number of examples of Scotland-based companies that it supports. Therefore, I think that diversity—I think that you were implying diversity not only in ownership, but in operation generally—is quite well served.

We must also remember that a lot of the angel investment in Scotland comes, in essence, through the public purse, through tax relief. Therefore, I am content that there is a huge amount of diversity in public sector involvement across the SME sector’s activity in Scotland.

At this stage, an obvious suggestion might be that HIE, SE or others should have stakes. About 20 minutes ago, Benny Higgins commented on the benefits of focus: I consider that, for where we are now, those benefits outweigh the benefits of multiple ownership. I would never say never to multiple ownership, but today the argument is strongly in favour of a single point of ownership and contact.

Andy Wightman

I clarify that I was not suggesting multiple ownership or involvement of bodies such as Scottish Enterprise that are governed by Scottish ministers. My question was purely about local government.

Another part of the bank’s governance would be the so-called advisory group. It has been discussed, but it will not be on a statutory footing—the bill says nothing about it. The Royal Society of Edinburgh has advised against giving the body a significant role, and others have questioned what role it might play and whether there might be a clash with the role of the bank’s board. Will you elaborate on the thinking behind the proposal for an advisory board? If that board is to play a significant role, should it be set out in the bill?

Benny Higgins

I will start and my colleagues can perhaps join in. First, we must be very clear about the advisory group, and just take a step back. There will be a strategic framework, which I see as being an envelope within which the bank will operate; we seek to create an envelope that will allow the bank to be operationally independent. The bank will have a board and an executive team to pursue its aims within a risk appetite that would be set out in that envelope, but some reserved matters would go back to ministers.

The genesis of the advisory group was the belief—as we found when we talked to people—that it is important to have a voice that can advise ministers on the bank’s operation and how it is pursuing its strategy.

However, we have to be very clear about this: if we want the institution to be a bank, we need bankers to run it—there is no alternative to that—and we have to make sure that they can operate independently within the envelope. An advisory board will have a voice to inform ministers, as the owners of the bank, but it will not inhibit the bank’s day-to-day operation.

Paul Brewer

There are advisory boards that have been given quite significant power and say in organisations that have a public sector mission—for example, Network Rail and Welsh Water. However, when very diverse voices contribute to a body that has to make decisions, it can be difficult for the body to be an effective decision maker. Bodies sometimes find themselves being led by a chairman’s view because they cannot get everyone else to agree.

Benny Higgins emphasised the importance of ministers hearing a diverse group of voices advising them on the bank, but if we wire that directly into decision making, or into supervision of decisions, it will be difficult to make things work at the practical level.

I will briefly come back to Mr Wightman’s point about investment in public bodies. Wiser minds than mine on public sector finance will have to verify this, but I suspect that if the bank started investing directly in public sector bodies, that part of the budget would be scored in a different way and would, potentially, come out of capital resources and deplete the finance that would be available for other uses of those resources. The financial transactions budget, however, is clearly delineated for the private sector and is additional to the Government’s other resources. It would therefore be possible that a body could end up in the same place as it would have been if the money had been put in directly by Government, rather than by the bank.

Andy Wightman

I will follow that up later. I am not sure whether the Scottish ministers have the power to provide financial transactions that are not backed by the Treasury.

Paul Brewer

No—

Andy Wightman

So, the money would be resource.

Paul Brewer

Yes—it would be resource money if it were put in directly.

Alan McFarlane

Benny Higgins has continued to be involved in the year since the implementation plan was published. I have not; I have had to go back and refresh everything.

There is clearly a role for an advisory board, but I argue that it should come much later and that it need not be there right up front. The Scottish national investment bank will use the same model as the Development Bank of Wales and the British Business Bank. Its board of directors will have all the responsibilities under the Companies Act 2006 that directors of any company would have. The annual audit will have to address solvency, whether it is a going concern and so on.

The bank will make losses for the first three or four years, so it will be imperative that there is an extremely close and confident relationship between the board of directors and the shareholders, who will be the Scottish ministers. To have an audience of fans baying for the manager to be sacked three games in would be the worst possible outcome.

It seems to me that the time to have an advisory board is once the bank is up and running, has established itself and has answered the very big questions that Benny Higgins addressed about some of the mission-led work. Despite having been involved in the plan, I would want to put in an advisory board further down the track, rather than at the start.

Let me underline this: the responsibilities of directors might have been abrogated in far too many British—nay, Scottish—companies in recent years, but they are serious and onerous obligations. Vesting the bank in the proposed structure brings many things, one of which is infinitely greater clarity about investment making and performance.

I will disagree slightly with the chairman again. I get the point about bankers, but the SNIB will not be a bank in the sense of being a body that borrows money. I argue that we need people with an investment focus—although people might say, “He would say that, given his background”. A combination of credit evaluation for loans and investment capability is exactly what Scottish Development Finance Ltd had under the Scottish Development Agency, so the approach builds on past experience. That structure, with the obligations under the Companies Act 2006, provides powerful bulwarks to the Scottish Government in making investments; it is a different governance regime from that which currently exists through Scottish Enterprise and the SIB.

10:45  



Andy Wightman

Finally, can Mr Higgins clarify that the proposed advisory group will advise ministers but not the bank?

Benny Higgins

The group will have a voice. I think that we have to be very careful about the word “advisory”.

Andy Wightman

Okay. We will set aside “advisory” and accept that the group will have a voice. However, is it the case that it will advise ministers, and not the bank?

Benny Higgins

The group will not advise the bank. That is the way I see it.

Andy Wightman

Right—

Benny Higgins

Can I just say something else? The strength and effectiveness of the institution will inevitably depend on the quality of the people who we get to be the chair, to be on the board and—especially—to take the senior executive positions. If we create an environment in which another board is meddling in decision making or strategic development, we will not get the right kind of people.

Andy Wightman

No one is suggesting that.

Benny Higgins

I know—I am just making that point. I accept Alan McFarlane’s point that the advisory group might not need to be there on day 1, but there is a need to respond to the desire of a broad church of people who would like to have a voice that ministers hear as they go through the strategic cycle. I also agree with Alan McFarlane that although this is not about traditional banking, we need people with investment and banking experience: we need to get the very best people who are committed to making a success of the SNIB.

The Convener

I do not want to spend a lot of time on this, but Alan McFarlane made a point about directors’ duties and so forth. I am not entirely persuaded by that argument. Is it possible for you to provide something in writing following the meeting to give us an idea of how you envisage all that working, in relation to the bank?

Alan McFarlane

If you do not mind, convener, I will not do that. I will just direct you to the Companies Act 2006 page, which is on the United Kingdom Government’s website, in respect of the duties of directors.

The Convener

I am fully aware of the duties of directors, but the question is how effective they will be in terms of what is being set up.

Alan McFarlane

That goes back to the point that was made about the calibre of the folks whom you want to have to implement the project. In a sense, the greatest power is resignation. They must be people who are independent minded to the maximum amount, who agree with the principles that are being promoted, who agree with the work and who take responsibility for carrying it forward. They will receive the mandate from Scottish ministers and then say “We’ll get on with this, but we’re accountable.”

All that we are hearing is that disclosure by public companies now is getting ever bigger: disclosure on gender equality, on economic and environmental impacts and on pay disparity. I presume, but I might be wrong, that the new entity will be expected to report on the companies in which it invests. The best standards of disclosure now are extremely high, so anyone taking on the responsibility of signing that Companies Act document to say, “I will sign the annual report and accounts of this organisation” is—I repeat—undertaking to adhere to a degree of transparency that I understand is not currently available through the accounting models that are applied to Scottish Enterprise and similar public bodies.

The Convener

All right. We will move on from that.

Jamie Halcro Johnston (Highlands and Islands) (Con)

Is the panel confident or satisfied that the Scottish Government’s consultation on the investment bank included enough businesses of all sizes, and enough communities, individuals, trade unions and so on, in development of the bill? Have the key concerns that came up during that consultation been addressed?

Benny Higgins

The consultation was open—it was open to anybody to contribute. We had a very large number of contributions from a wide range of respondents. I am certainly satisfied that anyone who wanted to put forward an opinion or view, or to raise a concern, had the opportunity to do so. As I said, we have also been speaking informally to as many people as possible. I am delighted that there is very broad support for the bank across the political spectrum and the Scottish economy’s ecosystem.

Some issues were raised. There were questions about whether the bank will be big enough, and how we will operate pay policy—whether it will be within public sector pay policy, and how many people will be within that policy and how many will not be. It was asked whether there would be an ethical code and what the approach to missions would be. People wanted to know how many missions there would be and how we would develop more. Those are all legitimate questions that were asked within almost universally strong support for the bank.

Jamie Halcro Johnston

How have those areas of concern been addressed in the development process?

Benny Higgins

We continue to work on each of them, as we speak. An ethical code will be put together and we have started conversations on creating a pay policy.

We have already covered the question of scale. If more money was available to invest in the economy, it would be possible to go further, but I think that £2 billion strikes a decent balance between aspiration and impact. We are working our way through all the issues.

Jamie Halcro Johnston

Colleagues will follow up on ethical investment later on, so I will move on to another area. It was mentioned earlier that there had been engagement with HIE. How has the regional aspect been incorporated into the consultation and development process? Some regions of Scotland might feel that there is a focus on the central belt. Has that been taken into account? How can we ensure that the bank does not focus on the more traditional areas of investment and that Scotland’s regions are included, too?

Benny Higgins

At this juncture, it is important to understand that, fundamentally, the project is about building the capability to do the right thing for the Scottish economy. In about a month, I will visit the HIE board to talk through what we are doing and what opportunities there will be for HIE. We think that it is really important that the bank should have the opportunity to participate in investments across Scotland, so the agenda outside the central belt will be important. We are not yet in a phase in which we are executing that change, but it is clear that it is an important part of what we have to do.

Jamie Halcro Johnston

Angela Constance touched on the role of women and the need to make sure that the structure of the bank is such that it provides opportunities for women. How can you ensure that other aspects of diversity—I am thinking, in particular, of young people, small business owners, ethnic minorities and the third sector—will, as well as having been involved in the consultation, be represented in the bank’s future activities?

Benny Higgins

As Alan McFarlane, Paul Brewer and I said earlier, as we move forward, we have an important chance to make sure that all those areas get appropriate investment. We cannot imagine that the bank will solve every problem, but it will be a critically important additional piece of apparatus.

I come back to the point that the creation of the bank also provides an opportunity for us to ask how HIE, Scottish Enterprise, the new south of Scottish enterprise agency and Government departments can start to pull together in a different way to ensure that we tackle all the issues that have been mentioned.

The Deputy Convener (John Mason)

As you will gather, the convener has had to leave to attend another committee meeting, so I will convene the meeting temporarily. As Angela Constance has already asked her questions, we will move on to Jackie Baillie.

Jackie Baillie (Dumbarton) (Lab)

Evidence that has been given to the committee suggests that the mission approach will be complex to introduce and difficult to operate and evaluate. What is the panel’s view on that?

Benny Higgins

I do not agree with whoever said that.

Jackie Baillie

It was not you, clearly.

Benny Higgins

No, it was not.

There is an argument for us not having very many missions at the start. This might not be the best analogy but, this time next year, we want to give birth to a bank that will develop over the decades ahead of us. There are tectonic shifts taking place in the world economy, and they must be reflected in how we manage the Scottish economy. Carbon neutrality, automation and demographic change are the obvious candidates.

We therefore need to create a process that allows the Government to understand where the mission focus for the bank should be. That mission focus will change over time, and, as I have said, there is an argument for not having too many missions. Carbon neutrality is a very obvious focus and I think that, as we go through the process of deciding which issues to focus on, that will be one of them.

We have to ensure that, with the investments that we make, we find refuge in simplicity, not complexity, and in doing the right thing. The other issues that I have mentioned will be strong candidates, too, alongside, for example, social housing, which is an important part of what needs to be done in the Scottish economy. In all the businesses that I have been part of, we have tried to find simplicity as far as possible; it is easy to have complexity, which can often be a refuge, because it can be a place to hide in. We must not hide in complexity—we have to make big decisions, get them right and move on with a clear strategic focus. It is in our own hands to keep all this simple.

Paul Brewer

You always start with complexity when you are trying to prioritise limited resources in areas where there is huge scope to deploy them, but the determining missions for the bank will be incredibly important from two dimensions. The first is their relevance to achieving the national performance outcomes that you are aiming for, and the second is their effect in that respect. I agree with Benny Higgins that deciding what to prioritise might be difficult, but if you start with too many missions, you will probably underachieve in all of them.

I remember the Green Investment Bank causing great frustration in its early days over the things that it was not investing in. It did not invest in green technologies, for example, and it was very focused on investing in projects that brought technology into reality. That was probably the right decision in light of the effect that the bank had. It made a very significant difference at scale to the flow of finance into offshore wind, whereas many of the technologies that it was being strongly encouraged to support were part of a great span, many of which succeeded and many of which did not, and if it had put resources into those technologies, it would have drawn off a huge amount of its capability. The national investment bank will have only limited resources, and it will be effective only if it prioritises where it places them.

Alan McFarlane

Investment is about choice, but there are a lot of competing options. One difficulty is that the term “mission” is undefined—by which I mean not in the bill but in wider life. We have no common grasp of what we mean by it. Certainly, as Benny Higgins has indicated, there are a few commonly agreed missions without the term “mission” having been agreed.

It is slightly naughty, but I think that the best way of approaching this is to think about what you do not want to do. If there were, say, still a coal mine in Scotland, and it wanted to expand, would SNIB invest in it? If Ineos got the chance to frack, would you fund a community organisation that wanted that to happen? Obviously, some of those questions answer themselves, but then there are the more ticklish issues, such as oil supply. If somebody in Scotland made the best vaping cigarette, would you invest in that? My experience of ethically based investing and working with clients from all religious and philosophical backgrounds on how such an approach might be implemented is that such questions are generally problematic but individually usually much easier to deal with.

The British Business Bank has a very good mission and, when we frame the missions in Scotland, we could take some of the ambitions such as having a less carbon-intensive economy and indicate how those two aspects might interact. However, this matter must be left to the bank’s board and management to decide, because it will be their job to deal with the friction between optimism and the reality of what is available to be done and to turn that into wealth and job-generating businesses. It is the most patronising answer that I can give you, but it is absolutely true as far as day-to-day activity is concerned.

Jackie Baillie

So you would not put anything about the mission on the face of the bill, because you would want to retain the flexibility to deal with that over time. However, you have said that the whole thing needs to be owned by Parliament, too.

11:00  



Alan McFarlane

It is a classic example of where the dialogue will occur through the annual report and accounts of the organisation, and the dialogue between its shareholder and the company that is created by those shares.

As Benny Higgins said, you start with one or two missions—all the consensus of all the consultation indicates that people are broadly behind that—and indicate how friction happens and where tension occurs between the Government will and the practice of the bank in its day-to-day investments. I am a great believer that friction creates heat but also light, and that that is the way to go forward.

You can start with, “If I ruled the world, it would be great if all this happened,” but we both know that it is not like that. Nonetheless, it would be appalling not to have high ambition at the outset. The question is how much ambition in what form, and how it hits the road between the board of directors, the executive and the shareholder.

Jackie Baillie

Let me continue with the theme of ambition. In my head, that is certainly about how the Government ensures that what happens is legitimate and delivers societal value, which is one of the objectives.

I have always believed that assessing social costs and benefits is very much at the heart of economic appraisal. If we consider how that appraisal is currently done for a particular project, for example, we would assess net present value against Her Majesty’s Treasury’s green book. What approach will you take to assessing societal value?

Benny Higgins

We are still to agree precisely how we do that. We recognise that it is an important part of what the bank is being created to achieve. It is work in progress.

Jackie Baillie

But that is key to realising whether this additionality works for the economy of Scotland.

Benny Higgins

It is essential, yes.

Jackie Baillie

But you have not yet done anything with it.

Benny Higgins

We have the national performance framework, which is a very important starting point. We have to address how we measure the bank’s progress against that national performance framework.

Jackie Baillie

Has the green book approach featured in any of the discussions or debate?

Benny Higgins

It has been part of the conversation. However, the national performance framework is the output that we are trying to achieve. We have a national performance framework for a reason. I say very apolitically that I think that it is very progressive.

Jackie Baillie

We also have the green book for a very good reason, which has been there for while and has been updated.

Benny Higgins

It is not being ignored.

Jackie Baillie

You say that it is not being ignored—I would appreciate evidence as to how it is being considered. I do not know whether Alan McFarlane or Paul Brewer has anything to add.

Alan McFarlane

I have nothing to add. Benny Higgins has been carrying the ball. However, I can say that the topic came up in relation to wider impact and wider discussion. Forgive me, but I would put the question back to you: are you content with the SIB’s current reporting? Would you like more?

Jackie Baillie

Indeed.

Alan McFarlane

If that is the baseline, start with what you have and make it better.

Jackie Baillie

We have—

The Deputy Convener

A couple of people want to come in with supplementary questions. Do you want to continue?

Jackie Baillie

No, it is fine. I will let people come in with supplementary questions.

The Deputy Convener

I will let you come back in if we have time.

Andy Wightman

As we are scrutinising the bill, I am curious about how section 2 specifies that the bank’s objects are set out in legislation and shall be subject to resolution of Parliament, meaning that Parliament has to sign off on the objects of the company. However, in section 11, there is no such role for Parliament to approve the strategic missions, which will simply be laid before Parliament.

Alan McFarlane

Do you mean in the bill itself?

Andy Wightman

Yes. Given the potential significance of the strategic missions, should ministers also have to seek a resolution of Parliament to approve those, or is there a good reason for not providing for that?

Benny Higgins

We have to be careful not to assume that the three of us who are sitting here—not even me, who has been the strategic adviser to the project—are experts on the positioning of the bill. Others are probably better qualified to talk about how the bill was put together precisely the way it was. However, it has been put together to ensure that it gives the opportunity for the smoothest and strongest governance and running of the bank. As Andy Wightman said, it would be up to ministers to choose the missions; that is the way the bill has been proposed.

Andy Wightman

Do you have a view on whether Parliament should approve those missions?

Benny Higgins

I agree with the bill as proposed. I think that we could overintellectualise it by having to go through a parliamentary process to address the missions. There are big obvious missions that we need to pursue in this country. Alan McFarlane rightly said that the expression may not be very well—or uniquely—defined. However, we know that we have to aim for carbon neutrality and respond to the other issues that we talked about earlier.

Andy Wightman

You say that we need to do that, but there are different views on what we need to do. A resolution of Parliament is not a complex parliamentary procedure; it is merely a resolution that is debated and voted on. It is not like the procedures today; it is not legislative.

The objects in section 2 are subject to resolution. One would not anticipate the objects—however they end up—changing often, if at all. That is fair enough. The mission will be more flexible, and will be reviewed. Are you clear that that should not be subject to the same process?

Benny Higgins

I have no decision-making power.

Andy Wightman

I am asking for your view.

Benny Higgins

I am expressing my opinion that this makes perfect sense.

Andy Wightman

That is fine.

Alan McFarlane

Paragraph 11 of the financial memorandum, which is what I thought that Mr Wightman was talking about, although I now know that he is not, refers to the “mission-based approach” and highlights the vastness of the aim, which is

“to support transformational change across a number of ‘grand’ socio-economic challenges”

that we can agree exist, although I take the point that we may disagree about how to address them. The financial memorandum then states:

“It is envisioned that the Bank will respond to these missions through its Investment Strategy.”

That is my point about the friction. The wish is expressed, and the means are in part willed in the creation of the bank. The means must respond with what they can achieve.

Andy Wightman

No, my question—

The Deputy Convener

We have another supplementary. Is that a final point?

Andy Wightman

That is fine.

Dean Lockhart

I want to move from the macro to the micro, from the mission investments to investments in private sector business. Will investments in individual companies be purely merit based, or will the bank also have a regional allocation for investment to make sure that each region gets a roughly pro rata share?

Benny Higgins

At the moment, the assumption is that investments will be merit based, but we will have to make sure that we pay due attention to stimulating the right kind of demand across the country. There is no desire for the bank simply to serve the central belt, as was suggested earlier. It will be critical to monitor the levels of investment that are being made in the different regions in Scotland. At this juncture, we are not trying to force-feed certain regions. We are encouraging the right kind of demand and feeding that demand.

Dean Lockhart

Will a return on investment or a hurdle target be established early on to make sure that investments are creative?

Benny Higgins

Yes. For the avoidance of doubt, the bank is being set up to make a return on capital. We have not yet set out the precise numbers associated with that and we have to take into account also the comments made about societal benefit, but the intention is that the bank will make a return on capital. Some of the issues relating to long-term patient capital will be interesting—in some examples, there will not be an existing market with which to make comparisons on returns. Setting out precisely what the returns need to be is work in progress.

Alan McFarlane

The British Business Bank uses clear numbers for its expected returns, which are from the British Venture Capital Association. I want to underline that the bill makes it crystal clear that it is expected that the organisation will not be cash neutral in costs until 2023. There will be red ink spilled in its annual reports and accounts every year until 2023. That is why I said at the beginning that, if you want long-term patient capital, you have to have long-term patient investors.

Paul Brewer

I want to underline that point, which comes back to the gap that we talked about. A lot of venture capital and private equity investors have time horizons on their funds. They have investors standing behind them who want to see a return in five to seven years, sometimes to the point at which a fund has a hard-closed end date and has to realise its investments in that timescale. In the ROI that is set, it is very important that the national investment bank does not have those time pressures, because that would influence investment behaviour in ways that would work against the outcomes sought.

The Deputy Convener

I have a few questions, which will be the final ones. How distinct are the missions? Is it possible that they overlap with one another? The German investment bank has a couple of missions—climate change and the environment, and globalisation and technical progress. I see those as potentially overlapping quite a lot. Do you see the missions as distinct, so that this bit of money will go to this mission and that bit of money will go to that mission, or is it about looking at all the missions and seeing whether the investment fits a number of them?

Benny Higgins

We should not set out to make hard-and-fast rules about that. The point is that the missions are the direction of travel to make sure that we do the right things in the economy. I mentioned earlier that we have been in dialogue with other national investment banks. We must be careful not to try and be like any one of them in particular, because the bank must be bespoke for our needs in Scotland. In particular, KfW is an interesting case study, but it has been around since after the second world war. It is a huge institution and it is probably not the best place for us to look for most of our learnings. There are better comparisons in other, similarly small, advanced economic nations.

It is inevitable that there will be examples of investments that we make that serve different missions, such as a crossover between carbon neutrality and automation. However, the purpose of the missions is to give us guide rails to allow the investment strategy to unfold within the operationally independent bank.

Paul Brewer

On that subject, the bank’s resources come in two forms: one is the capital and the other is the people. We absolutely need people who have the knowledge, experience and capability to have an impact through investing in the missions. I cannot anticipate what the bank will do, but I would be surprised if it makes hard allocations of capital between the missions, because it is about getting the maximum overall outcome. However, the people who bring the expertise to the missions will all speak to one another and, although the missions might overlap, I suspect that overlapping investment is unlikely to be an issue.

John Mason (Glasgow Shettleston) (SNP)

Now that the convener has returned, I will continue. Another word that has been used is “ethical”. That has been mentioned already this morning. The thought is that the bank will invest in an ethical way. However, the word “ethical” is difficult; at least, let us say that people understand different things by it. What do you understand by the bank investing in an ethical way?

Alan McFarlane

A good place to start is the principles for responsible investment, which the United Nations has promulgated across the investment industry. Those principles fit in with the UN sustainable development goals, which I am sure are very familiar to committee members. Then there are the ethics of upholding the law and the questions about openness and society.

To answer your earlier question, it is not possible to have a bank where there is a silo of carbon neutral, a silo of this and a silo of that. It ties in with the shareholder and client making clear the outcomes that they desire and saying, “Evidence your path towards those and evidence the manner in which you are conducting yourself.”

The classic example is that some religious traditions prohibit interest but others do not. Different religious traditions have different attitudes towards some health products. Investment people are familiar with dealing with the client’s mandate. If the Scottish ministers can say that the UN sustainable development goals are a really good, broad framework, plus some other things, that will help a lot to guide the board of the institution as to how to conduct itself.

John Mason

However, you can imagine someone standing up in Parliament and saying that the bank is claiming to be ethical but a particular decision is not ethical. Is the answer just that it will be reviewed at the end of the year?

Alan McFarlane

It is unanswerable, because we are dealing with axiomatic assumptions about ethics, not an investment question.

Benny Higgins

We will document an ethical code for the bank, so that will be documented. That will not prevent arguments about whether that code has been followed.

John Mason

That might be a topic that we will come back to. I will leave it for now.

To wrap up on some practical questions, one or two people have suggested that we have quite a tight timetable to get the legislation passed, get things into effect and get the board in place. Do you have feelings about that? Are you relaxed about where we are?

Benny Higgins

When I speak to all my colleagues who are involved in the project, there is an awareness that it is a tight timetable, but there is also a degree of confidence that we can push through. The first vote will be scheduled for September, the second will probably be in November and the final vote will be in March. In parallel with that voting schedule, state aid consideration will be going through. It is independent but not unrelated, so we are reasonably confident that the bill will get to royal assent by this time next year.

In parallel, we must build a bank, not just get a bill through. We must get the people involved and the business set up. We are going through detailed design authority meetings. The process of looking for a chair is just about to kick off. Finding a chair will unfold into finding the rest of the board, a chief executive and other senior executives. I do not take it for granted that that will be a straightforward process. Let us say that I am hopeful that, if we get going now, we can follow through and get it done in the schedule to which I have just referred. It is not easy. There are some unknowns. My concern is more about getting the right people, because the organisation or institution will ultimately be as good as the people who run it.

John Mason

Thank you very much.

The Convener (Gordon Lindhurst)

Thank you very much to all our panel for coming in today. I will now suspend the session to allow for a change of witnesses.

11:16 Meeting suspended.  



11:22 On resuming—  



The Convener

We move to the second panel on the Scottish National Investment Bank Bill. I ask members to declare any interests that they may have.

Angela Constance

In the interests of transparency, I declare that I am in the process of joining the board of Common Weal. It is a non-financial interest, but given that one of the witnesses is from that organisation, I thought that I should declare it.

The Convener

Thank you. I welcome Robin McAlpine, director of Common Weal; Eilidh Dickson, policy and parliamentary manager at Engender; and Ray Perman, who is a fellow of the Royal Society of Edinburgh.

The rationale of the bank is to improve Scotland’s innovation performance and to enhance the access of small and medium-sized enterprises to finance. What do the panel members think of that rationale? Also, are they satisfied with the objectives of the bank, as set out in section 2 of the bill?

Robin McAlpine (Common Weal)

We are happy with the bill. This project has been close to our hearts for a long time and we have been following it closely. I feel confident about how it has been taken forward.

The most important thing for me is that we avoid looking at it too much from the producer side. For example, the objectives are useful in outlining what the bank is going to do, but it must be demand led and we must encourage people to come forward. The objectives are broadly right; we just have to make sure that there is sufficient demand in Scotland to meet them. That is partly about signalling that the objectives are what the bank is looking to support.

All the way through, I have been quite clear that missions will change and adapt and must be interpreted openly as we go along. I would have liked to see a little more emphasis on lending to the public sector, assisting the finance of public infrastructure and working with local authorities, housing associations and others. In a couple of places, the current wording of the bill implies slightly more than I would have liked that the bank will be just an SME bank.

However, broadly, we are happy with the bill. As I said, the key thing is about stimulating demand, being helpful and flexible and developing the right suite of lending to ensure that demand comes forward and that it signals the kind of projects and work that we hope people will come forward with.

Eilidh Dickson (Engender)

We are slightly more concerned about the objects that are listed in the bill, not necessarily because there is anything wrong with them but because they focus primarily on the core economic aspects of the bank rather than the social wellbeing and environmental impact that the bank is supposed to have. The bank is supposed to be about doing something different and releasing untapped potential, but that does not translate into the objects as they are currently listed. We believe that, without an equality and non-discrimination objective, there will be no radical change in the way that things are currently done in the economic development field.

Ray Perman (Royal Society of Edinburgh)

Our position is set out in our written submission. We are broadly supportive of the bank’s objectives. We think that they should be clear. We disagree with Robin McAlpine on investment in infrastructure, because a decision was taken early on not to incorporate the Scottish Futures Trust, which deals with infrastructure, into the bank, so there should be a clear division between the two. The bank will not do any lending—although it is called a bank, it is an investor rather than a bank.

Broadly, we think that the objectives are clear, although we have reservations about the mission-led side of things. I agree with the point that Alan McFarlane made in the previous evidence session that the bank should start off with a single simple mission and maybe build on that later, rather than start with a weight of expectation that might be difficult to meet.

Dean Lockhart

I asked this question of the previous panel. We have had previous policies and initiatives from the Scottish Government to supply capital and finance to the Scottish economy but, as Robin McAlpine referred to, there has not been sufficient demand. The previous witnesses seemed to think that the bank can play a role in increasing demand, but I am not entirely convinced by that, because the bank will not originate or go out and find business; its job is to supply money to business that is found by other agencies. Overall, how can we stimulate demand for finance? How can other agencies deliver businesses to the bank so that the bank can finance them?

Ray Perman

You are absolutely right that, as Benny Higgins alluded to, the bank will not originate deals and will therefore have to work closely with those agencies and private sector bodies such as the commercial banks to bring people forward and stimulate demand to take up the capital. It is important that the bank makes links between the existing economic agencies and other stakeholders at the beginning.

I will give an example from the UK. I was chair of an advisory group to the department for business in London for eight years. In 2005, we set up an organisation called Capital for Enterprise to do the sort of things that the British Business Bank does now. Capital for Enterprise did not have a particularly grab-me name. It had a pretty high profile in the investment industry but, generally, among companies, it was an unknown quantity. Merely renaming it with a much clearer name as the British Business Bank—although the bank has now expanded its activities—gave it visibility, which was important. Just the publicity around renaming what is currently the Scottish Investment Bank as the Scottish national investment bank and then building on that foundation to expand it could have a positive effect.

11:30  



Eilidh Dickson

I agree that there is some work to be done on awareness raising. There will be a role for the precursor funds in that regard.

I disagree that we should be looking at and building on what we already have, because the current structure of economic development in Scotland does not reach everybody. Ms Constance already referenced the potential GVA of women’s businesses in Scotland, and we know that that will not necessarily come from sectors that are prioritised in the Scottish Government’s economic growth strategy.

It also has to be about looking at other sectors, other ways of doing it and other types of business, and dismantling some of the additional barriers that are in place for people who are looking to access finance but who might not have a traditional business. They might be working in childcare or the care sector in a business without a huge amount of growth potential, so they might be discouraged even from seeking funding in the first place from the private and public actors that already exist.

Robin McAlpine

Early on, we were driven to develop the proposals through conversations with a lot of small and medium-sized businesses. One of the things that we came across again and again was that they were scared of banks—that may or may not be fair, but I think that there is a lot of fairness there—and saw them as predatory. It was a period in which a lot of small businesses had come out the wrong side of lending arrangements with banks. On top of that, we talked to other businesses that, in my eyes, had viable business proposals, but the lending horizons—the terms on which or periods for which the banks were willing to lend—were not conducive to encouraging those businesses to come forward.

It will be important to say, “This bank’s sole purpose is to support you—it is not a profit-generating bank and we are not going to extract profit. Our only purpose in existing is to help your business to grow and become better, and to be long-term partners with you.” Simply sending out that message will have a positive effect on a lot of businesses that are nervous about bank borrowing and are not coming forward for that reason. Those concerns are probably even stronger in the social enterprise and co-operatives sectors, which we should want to grow substantially in Scotland.

An important factor with regard to there being a fund here or a grant or pocket of money there is that the bank should be here in 100 years. It should become to Scotland what Germany’s national investment banks have become, which is a fundamental, permanent part of the German economy that people assume will always be there to support long-term development activity. As well as getting lending terms right, creating the right lending horizons for small businesses and making all those things work, the message that that is how we want the bank to work will build demand.

I genuinely believe that to be the case. We are already talking to people in small businesses and telling them that the bank and its opportunities are coming, and people are showing an interest. One of the most important things that the bank can say is that it will be a place where people can build their business over time, that it can be trusted, that it will work with businesses as a partner and that people should look again at ideas that they had in the past and were perhaps nervous to develop. That is the first and most important thing that the bank can do.

Dean Lockhart

We heard evidence from the previous panel that the bank’s investment policy will be merit based—that investment will be made on an individual, case-by-case basis and that there will not be pro rata distribution of investment around Scotland’s regions. Is that the right approach?

Ray Perman

It is absolutely the right approach. There is a danger in pro rata allocation. We saw that in the UK with the regional venture capital funds that were set up in the early 2000s along the lines that you suggest—that is, regions were given an allocation of money. Some regions ran out of money—they had more demand than supply—while other regions had a shortfall in demand. In one case—I think that it was the south-west of England—the costs of administering the fund were greater than the amount invested. The National Audit Office produced a coruscating report on the running of those funds.

The money should be held centrally, but it should go where the demand is. Stimulating demand in areas that have not traditionally come forward with investment propositions is a very important job, and it should be done, but just to arbitrarily allocate the money in advance of seeing the demand will, I think, be counterproductive.

Robin McAlpine

I agree. A theme that I will probably mention a couple of times is the bank sometimes being seen as a one-stop shop for fixing everything, when it will just be a source of funding. As such, it should be giving the right kinds of packages to the right kinds of projects. It will not invent or direct the projects, and it will not travel around the country saying, “We’re going to invest here.” It has to be demand driven. Getting different regions of Scotland to increase the demand pool is a different task, and it is a task for local authorities and the local arms of Scottish Enterprise.

As for lending, I accept that it is one thing at a time and that this will not happen quite yet, but we really do not want small businesses largely borrowing from a central bank in the centre of the town. We need a local banking network that creates the kind of support that small businesses need. If you are a hairdresser, you will need to cash up and therefore you will need a relationship with a good banking network. We would argue that we should not assume that every microbusiness will go to the Scottish national investment bank for lending purposes and that we could do with a better local banking network. We will be coming forward with proposals for a mutual or public local banking network not only to sustain banking services in the communities in Scotland that are losing such services but for the sole purpose of making it clear that having a long-term relationship with a nearby bank is the best solution for a lot of small businesses. The national investment bank can play a very important role in supporting and capitalising, but it cannot do everything.

I absolutely agree that Scotland has a problem with differentials of investment in different regions—indeed, I see that everywhere I go—and it is important for the bank to monitor in regional terms where its investment goes. However, it must be driven by demand, and if there is demand failure in a region—if people there are just not coming forward—that needs to be addressed by the rest of the public agencies that are supposed to be working in economic development. The bank has to lend on the basis of the business cases that are brought to it, and if they do not come, that will not be a failure on the part of the bank.

Eilidh Dickson

We do not have a position on whether the bank should take a regional approach, but one question that we would ask is: how will merit be assessed?

Gordon MacDonald

Before I ask my own questions, I want to go back to demand. The RSE’s 2014 report “The Supply of Growth Capital for Emerging High-Potential Companies in Scotland” says:

“Banking regulations have introduced more stringent risk criteria

and

”reduced access for small companies to conventional overdraft or term lending arrangements”,

which have

“had a significant effect on the capitalisation of early-stage companies.”

As a result,

“Growth aspirations have had to”

depend on

“equity investment.”

Is that the gap that the Scottish national investment bank is trying to fill? Are the criteria that were highlighted back in 2014 still applicable today, and, if so, are they suppressing demand?

Ray Perman

I think that the criteria are still applicable, and I do not think that the position has eased any. I imagine that that will be one of the gaps that the national investment bank will try to fill.

I should emphasise that the SNIB will generally be an investment bank that will make equity investments. It might do some lending; Scottish Enterprise and the Scottish Investment Bank invest a small amount in lending rather than in equity investment or long-term patient capital. I imagine that the vast bulk of the money invested by the national investment bank will be equity and patient capital; it will not be lending in cases where the lender needs to get the money back, and sometimes quite quickly. It will be patient capital.

Robin McAlpine

It is in relation to exactly those kinds of gaps and barriers in parts of the lending or equity environment where there are problems. We have been working on this for five years now, and we are quite excited by and have quite a clear idea in our heads about the projects that might come forward. What I have found really encouraging is that we keep talking about projects that we did not think would come forward, and I expect to see quite an interesting and diverse range of projects and enterprises.

I think that some of the barriers can be addressed. I will give another example. We talked to a company that was looking to expand. It so happened that its bank had just pulled out of investments in retail properties—the bank had been burned on a couple of things and because it had been stung too much by overpriced commercial property investments, it made a blanket decision not to invest in such properties. The company was looking at a property and had a very strong business case, but the bank, which was a big bank, said that it was not investing in that category at the time, so the company could not get the lending.

What was the company to do? Would it close its account and go to another bank or would it just not bother with the property? There is a wide range of barriers to people coming forward. A lot of it is to do with confidence; other issues involve straightforward strategic decisions by commercial banks at any given moment. There is a range of reasons why there is potential that does not come forward and look for the investment that will help it to grow.

I still come across such examples. We keep coming up against people who say that they did not do something because of such issues. That surprises us, because we would have thought that they would have come forward to get lending. However, there are genuine barriers. I do not think that the committee will talk to a lot of medium-sized enterprises that say that everything about their equity and lending environment is exactly as they would like. The bank will be part of completing that jigsaw.

Gordon MacDonald

What impact do you hope the £2 billion investment over 10 years will have on the Scottish economy?

Robin McAlpine

We would like the investment to be substantially larger. One of the reasons why it is important that it is not just an SME lending bank is that SME lending is quite risky—SMEs across portfolios are quite risky. As far as I am concerned, we should first move as quickly as possible to ensure that the bank’s lending is not counted against Scotland’s public sector borrowing requirement, and we need Treasury dispensation for that. As soon as that happens, we can start to leverage additional capital—for example, from pension funds. I would like to see the bank aiming to have a loan or equity book that involves perhaps 70 per cent going to housing and public sector infrastructure, which are really safe, solid and profitable investments. That would mean that it can take much more of a chance with the 30 per cent that is SME lending.

Even if we get it right, £2 billion over 10 years is not transformative for an economy such as Scotland’s. It should be more than that, but you have to start somewhere. We have been working closely with the team that is developing the bank, and I think that they are right in saying that, as a nation, the first thing that we need to do is demonstrate that there is genuine demand. I hope that we can then go to the Treasury and ask for dispensation, which will enable the bank to capitalise more fully and effectively. We will be able to do that if we have evidence that there is demand and that Scotland has an economy that is capable of absorbing that kind of advanced investment.

Everything has to start somewhere and £2 billion is a good starting point, but we are much more ambitious for the bank’s future than that. We think that there is very large scope to bring in pension funds and a number of other investors, and once you do that you are looking at a scale of 10-plus times what the bank can lend. When we get there, Scotland will start to have a bank that is changing the economy fundamentally.

Eilidh Dickson

We have taken no position on whether the £2 billion is sufficient. More important for women and for gender equality more generally is how and where that £2 billion is utilised. In the past, the committee has recommended that spend on care and childcare should be designated as part of infrastructure spend. That would have a long-term enabling effect on women’s economic participation, as well as being of direct benefit, given their current high prevalence in those industries and their take-home pay. For us, it is not so much about how much investment is made as about where and how investment is made, taking the long-term, wide view on freeing up participation in other parts of the market that you are not necessarily looking at.

Ray Perman

The bank has the capacity to make a substantial difference to the Scottish economy, and not only in new company formation—we do pretty well in Scotland at starting new companies but, as our colleague Benny Higgins said earlier, we have done less well in growing companies to a reasonable size and, importantly, keeping ownership and decision making in Scotland. Part of the reason for that—but not the whole reason—is to do with access to finance. The Scottish national investment bank will most commonly invest alongside the private sector as a co-investor. It will catalyse a lot of private sector funds so that it can make an impact that will be much bigger than the amount of money that the Government puts into it.

11:45  



Gordon MacDonald

I raised the question of operating costs with the earlier panel. The RSE has raised a question over the £25 million, which is the mid-point. What are the RSE’s views on that and how does it justify its criticism?

Ray Perman

We came to that conclusion for a couple of reasons, one of which is purely arithmetic. The bank will have about 100 people and £25 million is £250,000 per person, which seems a very high figure to us. In comparison, the operating costs of the British Business Bank are about 50 per cent higher for a bank that is over twice the size of the proposed bank. The £25 million therefore seemed to be a very high expectation of costs for the proposed bank. In particular, what stood out is the sponsoring department; the implementation plan says that it will have 40 people from the civil service, not from within the bank, with a cost of £4 million a year. That seemed rather excessive for monitoring a bank that will have only 100 people.

Gordon MacDonald

What level of rate of return would the bank require in order to cover its costs?

Ray Perman

I have not done the arithmetic, but I think that the British Business Bank has a target rate of return for its cost of capital of 2.5 per cent or perhaps a bit less and has achieved just more than that. On the rate of return for the Scottish national investment bank, it would be a good discipline in the long term to at least cover its running costs and its cost of capital, but it should not look to earn a commercial rate of return.

Taking the British Business Bank as a model, it invests alongside the private sector at the same level of risk; that is, if an investment fails, both the private sector and the public sector take the same hit, and the public sector does not take more of a loss than the private sector. That lesson was learned from very early investments by the UK Government.

For successful investments, the British Business Bank would expect to earn a return that covers its costs and its cost of capital, but it allows the private sector to make an enhanced return. It therefore cedes part of its commercial return to the private sector as an inducement to bring more private sector funds into the total investment of the British Business Bank.

I imagine that the Scottish national investment bank would want to look at a similar framework, although it might not be exactly the same. However, in the long term—I think that Alan McFarlane said that the expectation was that it would be 2023 before the bank would break even—the bank should look to cover its costs and its cost of capital. Being a patient investor means not maximising the return from investments.

Gordon MacDonald

You said that the Scottish national investment bank should model itself largely on the British Business Bank. That bank has substantially increased its rate of return in recent years. Over the past four years, its rate of return has been an average 3 per cent, but in 2017-18 it was 4.7 per cent and in 2016-17 it was 4.1 per cent. Taking the average of 3 per cent, I calculate that by 2023 the Scottish national investment bank’s costs would be covered.

Ray Perman

I do not think that you can go on individual year figures, because there might have been—

Gordon MacDonald

That is why I am taking the average of 3 per cent over four years.

Ray Perman

However, the two figures that you gave for the higher return may have been impacted by the fact that those particularly successful investments were sold that year. Other years may have a lower rate of return because there were not successful investments in that year.

Taking a longer-term view, the bank should aim to cover its cost of capital and its running costs but not to make an enhanced return, or it would not fulfil the expectations about taking risk or putting capital into areas that are currently undercapitalised.

Andy Wightman

I want to follow up Ray Perman’s point about loans. The bill makes it clear that the bank will be empowered to provide loans, but the question of how much the bank should make loans as opposed to investment is not covered anywhere. Your response to the first question about not making loans was your view, in effect, but do we have any indication of what is expected?

Ray Perman

Making loans is an expensive business if it is done on a micro scale, because the loans need to be processed and monitored and the money needs to be got back. I do not think that the bank will be set up to do that on any big scale. It cannot compete with the commercial banks and should not do so. I wholly take Robin McAlpine’s point that commercial banks have not done themselves any favours by how they have behaved, particularly towards small businesses, and in their activities generally over the past 10 or 20 years. However, expecting the Scottish national investment bank to replace bank lending is unrealistic.

The bank could make a difference in specific areas of lending in which there is deficiency at the moment. I have given the example of the Scottish growth fund, which is essentially a mezzanine fund—it makes loans, but in specific cases for growing companies. That has been quite successful and the Scottish national investment bank might want to build on that example.

Robin McAlpine

May I come in on that point? The world is filled with countries that have large mutual banking networks—the hard private commercial banking model in the UK has done nothing but create risk and massive profits and all sorts of problems. It was said that the banks have not done themselves any favours; some of the commercial banks have acted criminally in the past 15 years.

It is important to have a sense of scale. The bank will not transfer everything straight away. It will have £2 billion over 10 years, which will not change everything. I emphasise that this is the first step in creating an institution that should exist for many generations, as far as I am concerned. We should be more open minded about where it will go to; we may have a quite different lending framework in the future.

On the point about equity versus loans, I agree that microbusinesses and even most small businesses benefit from being near their banking and being close to people. One of the biggest failures in the banking network is the breaking of the long-term relationship between small businesses and the lending managers by a lot of banks. Those supportive and positive relationships helped small businesses to grow, but they are losing trust because of what they have read about how the banks operate.

The first thing to say is that the Scottish national investment bank is a bank, and it must operate like a commercial bank—I have said this over and over. If it starts to subsidise loan rates to below something that looks broadly like a fair market, it will get into trouble with European Union competition laws, so it cannot heavily subsidise interest rates to increase or decrease rates of return.

However, the bank could create a suite of lending and equity investment packages that are tailored to the demand that comes forward. For example, a housing association or a small community housing project might wish to borrow—if it can—mortgage style over 30 years; it would find that quite difficult to do with the existing commercial banks. We have modelled that costing; the Scottish national investment bank could lend over 30 years at rates that would comfortably come in under European competition rule problems but would enable mass public rental house building in Scotland, not by subsiding but by offering different forms of loans.

The bank could give other kinds of loan—there are examples—when it thought that, for example, a medium-sized business had a solid business proposal. If it recognised that the business’s investment was to be heavy and the time that it would take for the business to grow such that it got the returns might be a little longer, the bank could provide a phased package in which loan repayments started a bit lower and climbed over the relationship period.

On gender, the bank might very well give weight to certain public goods—for example, if it wanted more enterprises to be led by women. It might give a slight weighting to enterprises that did certain things that were particularly good for the economy. However, the loans must be commercial and the behaviour must still be roughly in line with the broad market.

The most important thing will be that the bank listens incredibly carefully to its customers and potential customers. It must arrange its lending or its equity into packages that are best suited to the enterprises and projects that it lends to. Once it does that, it will compete not by being cheaper but by being better and more aligned to the businesses’ needs. The bank should be intended to maximise not profit but development; that is where the value will come from.

Andy Wightman

Robin McAlpine touched on a point that I raised with the previous panel. Benny Higgins made it clear that the bank will not be prohibited from lending to the public sector, but it is not expected to do so. That view is probably predicated on the idea of lending to existing public organisations, such as local authorities. However, there are state-owned enterprises, such as Sweden’s Vattenfall, that have been around for 100 years, so the idea that we will not fund enterprises that are designed to transform the energy system, for example, just because of the ownership model seems strange. In the private sector, we have one of the biggest forms of patient capital—pension funds, which play a huge role in investing in housing across Europe. What are the panel’s views on the scope for and role of the bank to invest in public-led enterprise?

Robin McAlpine

I reiterate that there is a big opportunity. The public sector is a reliable and stable repayer of its loans. I promise that I am not applying to run a bank but, if I did, one of the first things that I would look at is the enormous scope for patient lending to public house building in Scotland. I repeat that we have costed that; with borrowing over 30 years, high-specification houses could be built and rented at below market rates, without public subsidy.

The big gap in public house building for rental is that we still have to subsidise every house, because nobody does mortgage-style lending for large public sector housing developments. If that is not a mission that Scotland should be cracking on with, I do not know what is. I genuinely do not know why anybody would be dogmatic about who the bank was lending to. If someone had a proposal to transform Scotland in the way that was wanted, why would the bank not lend to them?

Ray Perman

I have no problem with the Scottish national investment bank lending to public sector organisations if the proposition is good.

Andy Wightman

The RSE’s submission expresses concern about the proposed advisory group’s role, which I discussed with the previous panel. The RSE’s concern is that the group will interfere inappropriately with the bank’s workings, but it is expected to be an advisory panel for ministers. The policy memorandum makes it clear that the advisory group’s chair is intended to be a non-executive member of the board. The RSE drew our attention to its consultation responses in 2017 and 2018, which I have not read, but will you elaborate on your position?

Ray Perman

We raise two problems. One is efficiency—Benny Higgins went into detail about the fact that having two people interfering in the running of the bank will not be an efficient way to run it.

Our larger concern is about accountability. What will be the chain of accountability if there is an advisory group and the bank’s board—both of which will contain at least one common person—as well as the minister and the bank’s executive? The chain of responsibility should go from the executive, through the board, to the shareholders, in the shape of the minister. That should be clear so that we know where responsibility and accountability lie. It will blur things if an advisory group is advising the minister, and one member of that group is also a member of the board.

12:00  



Andy Wightman

I accept that, for the sake of argument, that is probably not a good idea. Earlier, Benny Higgins mentioned missions in relation to carbon neutrality—which is an obvious area—automation, demographics and social housing. If you were the Scottish ministers and had to decide for yourselves, given that the bill does not provide for Parliament having any role in approving any missions, would you not see an advisory group having a role in advising ministers on how they should frame their mission instructions?

Ray Perman

That would be entirely for the minister to decide. If the minister wanted that advice, that would be fine.

Andy Wightman

You have no fundamental objection to an advisory group.

Ray Perman

No. Our objection is not to the group that would advise the minister; the problem is the blurring of the accountability and responsibilities of the board.

Andy Wightman

Okay. It is very helpful that you have clarified your objection.

Eilidh Dickson

Some of the confusion is about what the advisory board is anticipated to do and about how it will be structured differently from the bank’s executive board.

There is a question about expertise, particularly given the underrepresentation of women and others who have multiple characteristics of disadvantage in the finance sector and in economics. There might be a role for an advisory board in picking up some of the different expertise that is not captured within an executive board. As Mariana Mazzucato says in her paper, there might be a role for civil society in building consensus for missions, as the bank will need to have a considerable amount of social licence for it to invest public funds.

Therefore, there is a role for an advisory board, but I agree that we need to crystallise who will be on it, how it will be structured differently and what its role will be.

Robin McAlpine

I am very happy with the bill. It is broadly fine, but it might need a few tweaks. We did not make an awful lot of comments about the bill, and I have a high degree of confidence in the team that is doing the building work. We are very relaxed about the bill, because I think that the work is going well.

However, we would definitely have gone further on governance. When we wrote down our first proposals, the dotted line from the advisory group did not go to the ministers but went straight to the board, and I would still like that change to be made. The group should be advisory, not instructive. Although the ministers will be the shareholders, the bank will be a limited company, so the board will have all the legal responsibility for the successful operation of the company. The minister will be able to fire the board if they are not happy, but they will not be a member of the bank’s governing executive.

We wanted the advisory group to feed straight into the board for a specific purpose. Initially, we proposed that there should be a tripartite advisory group that would pick up the broad missions. A third of the members of the group would be representatives of medium-sized enterprises. That would give the people who approach the bank to borrow a clear voice in how the bank should be run. Another third of the members would represent local authorities, housing associations and public sector bodies, and the final third would represent the public good element; that would include trade unions, and gender and so on would be taken into account. It is about finding a balance.

The bank’s board will have a strong fiduciary duty to operate like a proper bank. It will need to make hard decisions and say that it cannot do something because, lovely though it is, it does not meet the bank’s lending or financial criteria. To balance that out, we wanted there to be an advisory board that focused on customers—the customers being Scotland as a whole, including the private and public sectors. We suggested taking that approach to address the fear that banks can sometimes be a little tin-eared when it comes to their fiduciary duties. Such an advisory board would mean that its members could regularly say to the bank, “We represent the people to whom you are supposed to be lending, and this thing that you’re doing isn’t helping us. It could be done better, and this would be a great thing to try.”

I take the point about conflicts of interest. I am not particularly bothered about who is sitting where, but the board of the bank should have a direct line to a group of people who are saying, “We represent the people you should be serving and we want to give you some advice. It is now for you to take that advice—or not to take that advice, because you are the board of a limited company.”

Andy Wightman

There are various views on that issue, which we will explore further. However, do you think that provision for such an advisory board should be embedded in the bill, or should that be left to the board and ministers to work out?

Robin McAlpine

I always have the concern that long-term initiatives such as this need to be protected from politicians. Do not take that personally. It is just that the point of the bank is 10, 20 or 30-year time horizons, whereas, with the best will in the world, the point of politicians is often four and five-year time horizons. The purpose of the advisory board is to provide a voice that is not based on three or four-year cycles—

Andy Wightman

I understand all that. Do you think that the advisory board should be provided for in the bill?

Robin McAlpine

Again, we would have said that it is tripartite—

Andy Wightman

But do you think that the existence of an advisory board should be provided for in the bill?

Robin McAlpine

Yes, absolutely. I would go further and say that the advisory board should exist—

Andy Wightman

By statute?

Robin McAlpine

By statute. I would also say that its purpose, content and members should be such that we do not drift to a point in the future where, for example, the board gets filled up with appointees from the existing financial services sector. That is what I mean by that.

Eilidh Dickson

The short answer is yes. I think that the advisory board should be in the bill, for the reasons that have been outlined.

Ray Perman

I am relaxed about whether it is in the bill or not, frankly.

The Convener

That is a wide range of views. Jackie Baillie, did you have a follow-up question?

Jackie Baillie

Yes, but I am assuming that my questions are next anyway. I will segue into them, if that helps you, convener.

The Convener

We will let you do that.

Jackie Baillie

Fantastic. First, I should say to Robin McAlpine that I have been a member of the Scottish Parliament for 20 years, so four or five years is not in my timeframe.

I will pick up on something of substance that Andy Wightman raised. You and I will remember about 10 or 11 announcements that the bank was coming. The reason why it is able to be here is largely because of financial transaction money. The strings attached to that money means that it can be lent only to the private sector. The advisory group started off saying that the bank will not fund public projects. Clearly, your ambitions for housing and all the rest of it fall to the wayside unless the funding is opened up. Is that fair?

Robin McAlpine

You need to clarify that with the team. I understand that the team is already talking to housing projects. It is public sector money that is coming in. As I understand it, the team is saying that they are not going into local authority large-scale public infrastructure lending—they are not yet lending for the purposes of building schools, hospitals or roads. Straightforwardly, an awful lot of the initial first demand is coming from housing. I know some people who have been fairly close to this whose biggest worry, because the bank will be demand led, is that it has the potential to turn into a housing bank, which would not be a good thing. Housing is in there, but I do not think that wider public infrastructure is yet.

Jackie Baillie

We will clarify that, because, like you, I think that that is an ambition that the bank should have.

I come to the mission approach. Some of the evidence provided to the committee suggests that a mission-based finance approach will be complex to introduce and difficult to operate and evaluate. Do you share that view?

Ray Perman

We think that the bank should be mission led, but that it should start with one mission, because the suggested missions in the consultative document are big, important areas and they deserve to be done properly. To try to set up a bank from scratch—or very nearly from scratch—to fulfil all those ambitions will set it up to fail. We would prefer the bank to start with a single, simple mission, and to get on top of that mission before it expands into doing other things.

Robin McAlpine

It is almost certainly legally necessary that the bank has a mission. We did the original proposals on this, and one of the most significant barriers that you have got to get over is European Union competition laws. One of the three ways that the bank will get round those competition laws is to be mission driven rather than profit driven. If it is not mission driven, it will appear profit driven, and that will be more problematic in Europe. Saying explicitly that the bank must be mission driven is part of the structural set-up that enables it to take a unique place in the marketplace. As a result, that is essential and necessary.

My key concern is that we do not mistake being mission driven for simply asking, “Have you made Scotland carbon neutral yet?” It should be about things that move us in the direction of the mission, not necessarily about things that achieve it. I absolutely take the point about not loading the bank with missions and expecting it to do everything, but what if it says, “We want to invest in green energy and in women-led enterprises, and we want to anchor businesses in Scotland”? The last is something that I see as a mission, because the fact is that we have too many successful businesses that grow to a certain scale and sell out, and then the intellectual property moves abroad. One mission, therefore, should be to anchor medium-sized and growing enterprises in Scotland.

The point is that the bank can have multiple missions, just as long as no one is pretending that it is supposed to achieve and complete them by some given deadline. I think that it is capable of following more than one mission at a time in its lending decisions, but it is not the Scottish Government—it is not meant to change everything all by itself. I am quite relaxed about how the term “mission” should be interpreted, and the bank should be, too, and I really hope that politicians give it some leeway and do not attack every lending decision when it starts to make them. After all, not every decision will make every person happy.

Eilidh Dickson

We support the mission-driven approach, but we are slightly concerned that that approach has not yet been sufficiently articulated. It is not clear what a mission would look like, how long its lifespan would be, the technicalities of it, what would happen if multiple missions overlapped or contradicted each other and so on. Even the process for recalling them is not set out in the bill or, indeed, in the policy memorandum, and some work needs to be done to ensure that we all know what is being talked about.

The success of any missions specifically for women depends on how gender can be mainstreamed into the process, which is another reason for articulating the process better. We have recommended that the bill include an equality and non-discrimination element and that the mission process refers to the core objects to ensure that everything is singing from the same hymn sheet. If that does not happen, we might, in responding to a mission, end up with the objects falling by the wayside or with a concentration on the SME or lending elements of the bank’s decision making instead of on the large-scale challenges.

Jackie Baillie

I am curious as to whether you think that some of the missions should be set out in the bill, or included in the strategic framework in order to give ministers and the bank flexibility. After all, some of the big, strategic core objects can get lost if they are not fed right through the process. Perhaps the missions are one level removed from that—I do not know—but the issue that we are grappling with is what should or should not be in the bill.

Ray Perman

We would be more comfortable with their being in the strategic framework, rather than in the bill.

Eilidh Dickson

If missions are supposed to be medium to long-term challenges but not permanent aspects of the bank’s development work, they should probably be set out in the strategic framework, but the process needs to be articulated.

Robin McAlpine

If the bank is going to be here 100 years from now, I hope to goodness that we will still not be sitting here, saying, “Let’s try to get women an equal place in the workplace.” I assume that the missions will change, and I do not think that you will want to change them by having to put in place primary legislation that amends the bill. The bill should mention public good very broadly, but what that will mean for any given generation will, I think, change.

Jackie Baillie

It is safe to say that neither you nor I will be here in 100 years’ time.

Finally, to wrap this up, I note that Robin McAlpine has talked about public good. I do not know whether you saw that I explored with our previous panel of witnesses how they would assess that sort of thing. Assessing social costs and benefits is, for me, at the heart of economic appraisal, but I have to say that I was not convinced by the answers that I heard. For example, there has been no discussion of substance about the Treasury’s approach through the green book. How are we going to measure some of this stuff in order to decide where to invest? Have you provided any information to the Government on that?

Robin McAlpine

In our original work, we conceived of this as a bank that would look in many regards like a commercial bank, which would mean that people would come to it with requests for equity investment or loans, and we suggested that each request be assessed against broad mission statements about what the public good was. If, for example, providing more affordable and high-quality public rental housing was in the public good, something that moved in that direction would meet that goal.

We suggested that the bank should be reasonably subtle about it and say that those things would give additional weighting. I absolutely agree that missions will conflict. It would be nice if everything was endlessly neat and tidy, but it is not; there will be occasions on which an encouraging, developing Scottish business will source a product from a place that we would prefer to be a little more ethical.

12:15  



I do not think that the bank should say, “You are a great Scottish business that is growing and creating genuinely high-quality jobs, and broadly you are doing public good, but there’s this one part of your business that isn’t, and until you do X or Y we are not going to lend to you.” That would be a mistake. That is why I say that we need a little bit of leeway, and that in conversations with people that the bank is lending to, it should say, “Okay, we will lend to you but could you look at your procurement of that element of your business, because, in time, we think that that will be seen as a strong negative against your enterprise.” I do not think that the bank should be saying, “Until you source only ethical cotton for whatever you are doing, we will definitely not lend to you.”

That is my view; people need a degree of leeway. We thought that the best option would be to give additional weightings to enterprises that meet certain types of goal. For example, one might say that in an absolute head-to-head, a woman-led enterprise might be given a little more weighting than an alternative bid that looked almost identical in every other way. Rather than being dogmatic about it, the bank says, “We incline more to lend to your enterprise, the more we judge it to be hitting our missions,” rather than “Here’s a tick box. You’ve crossed the threshold. You now qualify.”

Ray Perman

The short answer is that we have not given much thought to that at the moment. The committee will be aware that Scottish Enterprise and the Scottish Investment Bank have a methodology for gauging impact. Social Investment Scotland, which Jackie Baillie set up when she was communities minister 20 years ago, has a different but good and thorough methodology. It is important that the bank consults widely on the methodology that it is going to use and collects and monitors the figures in order to give an indication of the impact of the investments that it makes.

Eilidh Dickson

Part of the success of the bank will be the extent to which it can mainstream gender into all of its activities, not just through the recipients of the finance. I talked about the wider impact that treating care as infrastructure investment could give us. That is not just good practice; that is a legal requirement that the bank will face. Data will be a key part of that, and we know that the current actors are not great at collecting, publishing and disaggregating their data. The bank will have to work on that very quickly, as part of its monitoring criteria.

There is good practice. The Scottish Government is working on a gender index as part of its alignment with the European gender equality index from the European Institute for Gender Equality. It would be good if that piece of work could align with those metrics in some way, and more generally.

The Convener

We have very brief follow-up questions from Andy Wightman and then Angela Constance.

Andy Wightman

On the question of the mission in section 11, it is not intended that the mission-setting process or the mission itself should be subject to a resolution of Parliament. Do you think that Parliament having a role in agreeing those would add to or hinder the process? Should there be parliamentary scrutiny of the mission or should it be left to ministers?

Ray Perman

The RSE has not made a statement on that, but personally, I think that it would enhance the credibility of the missions if there were a resolution of Parliament behind them.

Robin McAlpine

I agree. The missions will not be changed on an annual basis—we are probably looking at five-year time frames. I cannot see that taking the missions through Parliament once every five years would add a lot to the process. The missions would have to align to Government objectives and, inevitably, governments and strategic objectives will change. I am a fan of democracy; if the Parliament gets behind the missions, that would be a good thing.

Andy Wightman

I have a brief question on equalities if there is time, convener.

The Convener

We will move on to Angela Constance and come back to that if we have time.

Angela Constance

I have a few questions for Ms Dickson.

Tapping into all the talents is not just the right thing to do, it is the smart thing to do for businesses and our economy, so I want to pick up on some aspects of Engender’s written submission. You can correct me if I am wrong, but my impression is that you feel that the equality impact assessment was a bit of an afterthought.

Eilidh Dickson

We have pretty major concerns about the equality impact assessment for the bill, not least that it is not formatted like an equality impact assessment. An impact assessment should be a process for gender mainstreaming, as we were discussing earlier. It is not just a bureaucratic, tick-box exercise.

The idea is that the policy is articulated, research is done, and changes are seen as a result of applying the information that has been garnered. We had two consultation processes, an implementation plan and several announcements before the equality impact assessment was even published, and that was alongside the bill as already drafted. There is very little evidence that the equality impact assessment has informed any aspects of the bill. We see no reference to equality or the securing of equality intentions in the bill as it is drafted.

I should also say that the equality impact assessment that was published does not cover all the protected characteristics. It covers only two, and even then, it is in particularly niche strands of the bank’s activities and not the wider economic impact that I have talked about a bit.

We are pretty convinced that, in order to meet even the basic legal requirements set out in Equality and Human Rights Commission guidance, the equality impact assessment will have to be redeveloped. The missing sections will have to be added and the whole process of analysis will have to be redone.

Angela Constance

Obviously this committee’s role is to raise that with the Government, as appropriate. Do you have any on-going involvement with the Government to get the equality impact assessment into shape?

Eilidh Dickson

We are speaking to officials about that.

Angela Constance

Thank you. You also spoke about anchoring in the bill’s core purpose and principles a meaningful commitment to equality, and that being referenced back into the strategic framework and the approach taken by the missions. Where do you think there has been a lack of consideration of that in the work that was done to design the bank and in the bill, which could be improved on?

Eilidh Dickson

We responded to both of the Government’s consultations on the bill—the recent one and the initial consultation, back in 2017, which was before I started working at Engender. However, that work was done across the women’s sector.

As consulted on, the implementation plan had a much broader intention, which seemed to find its way into the consultation on the bank’s social role. It does not speak specifically about gender, but there was a notion that the bank’s vision should be about untapped potential, responding to climate change and some of the other big social issues that Scotland faces at this time. That does not necessarily seem to agree with the bill. As I have already said, the bank’s objects focus narrowly on the economic aspects of the bank’s work. To some extent, that is understandable, but we have lost that wider vision of how all the different policy areas interact and should interact when the bank is in operation.

The bill will be strengthened by having that purpose or vision, and we have recommended how it could be further strengthened. We need something that entrenches why we are doing this, why we need something radically different and why we are not just returning to the same actors and making tweaks around the edges.

I have also made recommendations that relate to the bank’s objects. Equality and non-discrimination are not included in the bill, and that does not translate through to meaningful action. The EQIA is a pretty good example of how the public sector equality duty has worked only so much.

Close the Gap has done some excellent work on compliance with the public sector equality duty. Having a legal duty for the bank will keep it at the top of everyone’s mind and will allow for the underpinning of the development work that will have to straddle all the bank’s different activities in the future.

Angela Constance

You touched on methodology issues such as how assessments and measurements are done and your understanding of merit. Will you say a bit more about how, in a practical sense, diversity and merit are two sides of the same coin that do not necessarily pull apart from one another like polar opposites?

Eilidh Dickson

Sure. If we were to start from the basis that everything is currently merit based, as the previous panel hopes is the case, we would not be in the situation that only 28 per cent of public executive directors are women. The figure should not be as low as that—it is just over a quarter. We have a wealth of evidence, some of which I refer to in our written submission, on the ways in which equality is good for growth, but the reverse is not necessarily always true.

I do not know whether that answers your question. Perhaps I have not picked up on the avenue of thought that you would like me to expand on.

Angela Constance

I was keen to give you the opportunity to pick up on some of the issues that were raised earlier. However, I am conscious of time, convener, and, in the interests of equality, I am also keen to hear from the men on the panel.

Robin McAlpine

I have no disagreement with that, and I defer on the legal aspects.

In the long term, we must use the full power of Government and all its agencies to tackle the issues. What worries me and makes me a little nervous—this coming from a leftie like me—is that people might think that the national investment bank can fix those issues on its own. It cannot—it will be a source of funding. It can fund in a way that is more conducive to addressing the issues, but it cannot fix them on its own. Those are perfectly reasonable suggestions about how it can do it better. The only thing that has worried me in its development is people saying, “Great—now we’ve got a national investment bank, that’s Scotland decarbonised and gender equal.” No—we have a source of finance that is more conducive to making those things happen, but we cannot take our foot off the pedal on any of the other issues.

Ray Perman

I do not dissent from anything that Eilidh Dickson said. I certainly agree with the point that, if something is in legislation, it gets done, and, if it is not in legislation, it often gets overlooked.

John Mason

I would like to press a little bit more on some aspects that we have touched on.

On the balance between the objects and missions, the objects include

“investing in inclusive and sustainable economic growth”,

which is pretty vague. The Conservatives might take that as meaning, “Focus on the economy and throw away the environment,” while the Greens might take it as, “Focus on the environment and throw away the economy.” Do we need something a bit more specific in the bill? We hope that it will go through all the political cycles and remain fairly consistent. Are you convinced that we need no more detail in the bill?

Eilidh Dickson

Inclusive growth is referred to a lot, appearing in the economic strategy and other related policy frameworks, but it has not been defined. There is an Organisation for Economic Co-operation and Development definition that is sometimes relied on, but there is no sense yet that we have a clear direction for what we mean when we talk about inclusive growth. Do we mean “everything”? Do we mean “everything” sometimes? Do we mean “gender” sometimes? Do we mean “placemaking” sometimes? “Inclusive growth” is not sufficient in itself to guide that kind of work.

John Mason

Can we rely on what comes below the bill to look after that, or should we have a bit more about it in the bill?

Eilidh Dickson

We should place the social and environmental impacts that the bank could have in the legislation, otherwise who is to say whether it will still deliver them in 10 years’ time?

John Mason

Mr McAlpine, you seem relaxed about not having too much in the bill.

Robin McAlpine

Yes. The recommendation of the Committee on Climate Change has the word “growth” in it, but, in 100 years, we will not still be growing in the way that we are growing now. I could take up that issue.

I will put it simply: we could have a lengthy national debate about the meaning of the public good now or later, or we could do both. This is an autopilot thing. We will not find a perfect definition that will last for the next 100 years, so we can press the button and go on. I am relaxed about this because—Eilidh Dickson is right—different Governments will have different interpretations, and the definition will change. Such is democracy.

12:30  



With the governance structures and the instruction that the bank is arm’s-length and has a long-term horizon, I am currently reasonably reassured and relaxed that the bank has enough leeway to respond to changing political imperatives while maintaining a more long-term strategy, which the bank itself will set.

I would love to come up with some sort of proposal that would create a set of objectives and missions that would be agreed on by everybody for the next 30 years, but that is not realistic. There will be an on-going negotiation, which I think is healthy.

Personally, I am caught between the fact that putting more on the face of the bill now may restrict what the bank does and the fact that putting less on the face of the bill now may mean that it does less to maintain the public good benefit of the bank that I might like to see. I do not think that there is a final answer to that. As I said, it is a political negotiation for today, tomorrow and the day after that as well.

John Mason

I understand that the Royal Society of Edinburgh is very strong on the idea that there should be just one mission to start with.

I asked the previous panel whether it is the case that the missions are all quite distinct from each other and that we should consider them separately or whether it is more the case that they all overlap with each other. For example, a couple of the German bank’s missions are climate change and environment and globalisation and technological progress, which I see as very much overlapping. How strongly do you feel that there should be only one mission? My fear is that we would concentrate on the low-carbon economy and ignore inclusive growth, thereby getting the balance wrong.

Ray Perman

You are right that all those missions are important and universal, and that there is a tremendous amount of overlap. I go back to your earlier point that the bill should not be prescriptive and that the missions should be set in the strategic framework and reviewed from time to time. The basic mission of getting more investment into companies and more economic growth—however we define that—in Scotland is the right single mission to start with. To overlay on that mission the transition to a low-carbon economy and the amelioration of the effects of an ageing workforce and other missions would be to load too much on to the bank in its early stages. We should start simple and see how we get on.

John Mason

You are arguing not that we should just forget about those issues but that they should be put on the back burner or to the back of our minds, or something like that.

Ray Perman

I am certainly not arguing that we should forget them, because they are very important. I might be arguing that they are so important that we ought to give additional thought to how they could be achieved. However, expecting a new institution to do all of those things from day 1 is probably unrealistic.

John Mason

That is a fair point, and it touches on timescales. My final question is whether the timescales are realistic for setting up the bank, getting people in place and ensuring that the board is properly representative.

Ray Perman

We are not close to the detail in the way that the previous panel was. However, Benny Higgins seemed to be fairly relaxed about the timescale, and we must take the view that he is right and that the bank can be set up in that time.

The Convener

I thank our panel very much for coming in today. We will now move into private session.

12:34 Meeting continued in private until 12:54.  



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Second meeting transcript

The Convener (Gordon Lindhurst)

Good morning and welcome to the 16th meeting in 2019 of the Economy, Energy and Fair Work Committee. I ask everyone to turn electronic devices to silent mode. We have received apologies from committee member Jamie Halcro Johnston.

Agenda item 1 is a videoconference on the Scottish National Investment Bank Bill with Professor Mariana Mazzucato, who is director of the institute for innovation and public purpose at University College London, and is a member of the Scottish Government’s Council of Economic Advisers; and Laurie Macfarlane, who is head of patient finance at the institute. I welcome both of you.

I will start with a question to Professor Mazzucato. You have been involved in the Scottish Government’s Council of Economic Advisers and the implementation plan advisory group. Are you satisfied that all 21 recommendations of the implementation plan have been adequately reflected in the Scottish National Investment Bank Bill?

Professor Mariana Mazzucato (University College London)

To be extremely frank, I am not as familiar with the bill as I probably should be, but I am quite satisfied with the process that has been followed. We have just been in Scotland, where we did a masterclass on the bank. We spoke especially about issues that arise when one has a mission-oriented public bank, as opposed to a normal public bank. There are many public banks in the world, and many of those are part of the problem rather than part of the solution; they end up being just handout machines. We must therefore ask how missions are set and how the full power of Government instruments—from procurement to grants—can be used in fuelling multiple solutions to achieve a mission.

Scotland is very well set to have a mission-oriented bank because things such as the national performance framework are in place, which can be very important in devising the metrics to know whether the bank is doing its job over time. Metrics on additionality are needed to ensure that the bank is making things happen that otherwise would not have happened, as opposed to its simply taking the place of the private sector when that sector is not doing its job.

Laurie Macfarlane (University College London)

Obviously, the implementation plan recommendations cover many areas, including the setting up of the institution and what it will do once it has been set up. Naturally, we would not necessarily expect to see everything that is in the implementation plan included in the bill that will establish the institution.

The Convener

The committee has received submissions on the bill. Andy Wightman has questions about some points that have been raised in them.

Andy Wightman (Lothian) (Green)

Welcome to the meeting.

As Laurie Macfarlane has rightly said, the implementation plan is about establishment and development of the bank, but we are considering the bill. Section 2 of the bill is entitled “The Bank’s objects”. People have said to us that the objects are too vague. For example, section 2 says:

“the Bank’s main object is giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development or employment in Scotland.”

Should that be the bank’s main objective? I refer to the word “commercial”, in particular. I am aware of Professor Mazzucato’s work in the area. A lot of investment by the state has been in things that later became commercial, rather than in commercial things. Do you have any comments on the bank’s objects, as set out in the bill?

Professor Mazzucato

That came up a couple of months ago, when we came to Scotland to talk about the details of how the bank should be set up. We recommended that the objects be worded as they are in our nice little red book, “A mission-oriented framework for the Scottish National Investment Bank”, which says that the bank should provide patient finance to organisations in the public, private and third sectors and in civil society that are willing to engage with the Government missions. I stand by what we have said.

Use of the word “commercial” narrows the scope, because of the reasons to which Andy Wightman alluded and because commercial dynamics mean that investment in one area might turn up in another area. The classic example is Viagra, which was meant to be used for heart problems, not meant for what it is used currently. That is a typical result of innovation and an example of the search for one thing leading to the discovery of something else—although that is more about serendipity.

Also, given the organisational context there is no reason to say that the bank should lend only to the private sector. Of course, the bank should fuel investment in the private sector, which relates to the notion of the crowding-in effect. In general, there are pretty low levels of private investment in the United Kingdom. However, historically, when ambitious commitments to provide long-term and mission-oriented patient finance have been made strategically, that has increased the expectations of the business sector in relation to where future opportunities lie. The key role of the SNIB should be to provide more direct—not indirect—finance in mission-oriented areas in order to create a new landscape in which there is increased business investment afterwards, because the process will have created what Keynes called “animal spirits”.

Andy Wightman

You mentioned your paper, which I have here. I am clear that you are saying that the bank’s objects should focus on the mission, which is great. However, I am not sure on which page of the document you provide text for that. I know that you are a busy person, but I am sure that the committee would be keen to hear your thoughts on how the objects could be framed, in general terms, to improve the bill.

Professor Mazzucato

I am not sure whether you are asking where the missions will be set or the degree to which the loans will go only to private or other forms of organisations. Those are two separate questions.

In our document, we say that the challenges, which are much broader than missions, should be set by Government. You would then need to have a mission board or a mission agency: that relates to our work with Greg Clark at Westminster on the organisational structure under which missions are set. I think that that should be done not inside the bank, but on a cross-departmental basis. For example, if we want to turn a clean-growth challenge into a mission that involves refurbishing new and old buildings, and if we are thinking about the design of sustainable cities, that will require cross-sectoral, cross-actor and cross-disciplinary investment. The role of the bank is to use patient finance to fuel organisations that are willing to engage in the missions. That is why we say that you should pick

“the ‘willing’, not ... the ‘winners’.”

Jackie Baillie (Dumbarton) (Lab)

The policy memorandum that accompanies the bill says clearly that

“The Bank will lend solely to the private sector”,

which you have touched on. My understanding is that that is because the bank will initially be capitalised solely by financial transaction money, which can be used only for private businesses until 2021. Notwithstanding that, given that Government money will be provided thereafter, is limiting lending to the private sector too narrow and restrictive? Would you include social enterprises, co-operatives and the third sector?

Professor Mazzucato

My answer is definitely yes—although I hope that my saying so will not create problems.

Laurie Macfarlane

We raised that issue when we were in Edinburgh. Maybe I am not remembering correctly, but I thought that we had got clarification that “private sector” meant everything—social enterprises, charities and so on—apart from the public sector. That is my understanding, but do not quote me on that.

Professor Mazzucato

Yes—when we were on a panel there were questions on that from the audience, and that was the reply that was given. We encourage that approach: it makes sense that the public sector should not lend to the public sector, because financing can be done through transfers between departments. It is important to use the bank to provide patient, long-term, committed and mission-oriented finance to private sector organisations and to third sector institutions, such as social enterprises.

In the modern age, many global problems, including the energy challenge and the health challenge, are being invested in through philanthropy, by public institutions, by private institutions and by civil society organisations. That is what is needed—fuelling of multiple solutions to problems, by different actors. We call it a cross-sectoral, cross-disciplinary, cross-actor investment process. I encourage the committee to keep provoking on that point.

Jackie Baillie

We can do that.

Dean Lockhart (Mid Scotland and Fife) (Con)

Good morning, and thank you for your time. I want to follow up on the bank’s mission statements, which are obviously top level. How can we ensure that there is sufficient demand in the economy to access the finance to be provided by the bank? We have heard from previous witnesses that there is a question mark over the demand side of the equation in respect of whether there is enough demand in the economy for long-term patient capital. How can the bank stimulate the demand side of that equation?

Professor Mazzucato

You have asked a fundamental question—and a really smart one, if I may say so. In academia, researchers often do not understand that, and pretend that there is a financing gap. The committee might have heard of the financing gap, or what is sometimes called the credit crunch. That is false: there is plenty of finance out there. However, there are often two other problems. First, there is not enough quality finance—the patient, long-term finance that the bank will provide—and secondly, there is not enough demand for finance, which is definitely seen in the small and medium-sized enterprises space. There are not enough SMEs that want to innovate and grow, and there is a lot of status quo behaviour.

I go back to my point about crowding in. The bank alone will not be able to do anything; it has to be seen as an instrument across what we would call investment-led growth strategies. We should not forget that the United Kingdom is a part of the world that continues to grow through consumption-led growth, not through investment-led growth, and so private debt through disposable income is back at the record levels of just before the crisis. If we are to transform from a consumption-led to an investment-led growth strategy, the question is whether there is a desire to invest. Is there a demand-side problem, as Mr Lockhart has said?

We recommend that the bank be structured not just as a machine that hands out money to whatever sector, business or organisation asks for it, but in a way that is targeted much more at solving societal challenges, and is framed in a mission-oriented way. Historical evidence shows that that would crowd in private finance, if the bank were to do it in an ambitious way.

The problem in many countries has been that indirect incentives such as tax incentives, guarantees and subsidies are used, but that approach assumes that the private sector already wants to invest. If it does not want to invest, all that indirect incentives do is increase profits. However, there is no profits problem—there is an investment problem.

Ideally, the SNIB would crowd in business investment by increasing the imagination of the business community and its perception that there is, through the future finance instrument, if it is structured in the ways that we advise, an exciting new future that it can get involved in—in terms of mobility, clean growth and an ageing society—and that there will be long-term profits to be made, and aid for businesses to get into that space.

Laurie Macfarlane

That is why the SNIB has the potential to be very different to other instruments that have been built in Scotland over the years—for example, the Scottish growth scheme, which was, in effect, just a sort of SME-financing instrument. It did not provide the direction that a mission-oriented bank will provide. Also, I understand that there has been a struggle to get take-up. It was just an instrument to give subsidised credit.

The whole point of a mission-oriented bank, however, is to capitalise on the animal spirits that Mariana Mazzucato described, in order that it can work with those who are willing, able and excited to invest in the key areas of the future, rather than it just sitting back and saying, “Here’s this finance instrument—come and take it.”

09:30  



Professor Mazzucato

The bank should be seen in association with a portfolio of instruments, of which it will be but one. We recommend that, to achieve the full effect of the crowding-in process—which is basically what Dean Lockhart asked about—you should think about changes in how procurement policy works, and about instruments that currently stifle innovation and do not nurture the bottom-up solutions that Government needs in building hospitals or schools, for example.

Dean Lockhart

In some respects, the success of the bank will depend on its interaction with other agencies, which will help in stimulating demand. By the sound of it, there will also have to be restructuring of the enterprise landscape.

Professor Mazzucato

Absolutely. For example, we have been talking closely with your organisation CivTech. It is interesting, because it is all about thinking about how the structure of the welfare state can be a funnel through which innovation happens. Currently, there is a myth that the silicon valley part of a country—whether it is a silicon valley, a silicon roundabout or whatever—is where wealth and value are created, and that wealth is then handed out to citizens through the welfare state, redistribution through taxation or just a hand-out to citizens.

The idea is to make Scotland an interesting laboratory for re-imagining healthcare and for thinking about achieving sustainable cities and regions. That would become the funnel through which innovation would happen. There would be no dichotomy between the welfare state and innovation—they would be brought together. My perception is that Scotland is having really interesting conversations about that. I would scale up those conversations so that they become one of the ways in which the missions are set and managed.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

The bank will be funded by investment of £200 million a year by the Scottish Government. How does that level of capitalisation compare with that of other development banks in the UK—the Development Bank of Wales and the British Business Bank?

Professor Mazzucato

The really important issue is not so much the amount of money as it is the level of flexibility with it. With the £2 billion that has been allocated for initial capitalisation, it is absolutely central that the bank can use the so-called dispensation effect, so that it can roll finance over year on year and can do long-term planning. The whole point of having a patient long-term bank is that it can plan in a long-term way. If, every year, the bank is fearful that the unspent funds will disappear and go back to a treasury, it will be impossible for the bank to do its job. That is a critical issue that matters more than the actual amount compared with that of other banks.

Laurie Macfarlane

The capitalisation amount of £200 million a year, up to a total of £2 billion, compares pretty reasonably to the amounts in the institutions that you mentioned in the UK and other European institutions, relative to gross domestic product. We did that analysis in one of our papers, which showed that the amount is broadly similar in terms of scale. What is different in other places is the ability to leverage that capital by borrowing, issuing bonds and so on. That is where the difference might lie, at least in the initial phase.

Gordon MacDonald

Given that level of investment of £2 billion over the 10 years, are you satisfied that we will be able to get the desired impact? Initially, should the bank have a narrow focus until it grows to a reasonable size? We have heard various comments on that. Some have said that there should be only one mission statement and others have said that there should be a range of mission statements. What should be the focus at the beginning to get the desired impact on the economy?

Professor Mazzucato

An important aspect of the missions, for example those that we are currently working on at Westminster with the notion of a mission-oriented industrial strategy, is that the framing of the mission matters more than how many missions there are. Thinking about the cancer mission as just being about the health sector, rather than about bringing in all the preventative areas, will make it much narrower. If you have even one mission in Scotland—one big challenge around, for example, clean growth that, through some sort of process across society, you formulate into a mission, though again, it is not our role to decide the mission for you—that requires lots of different sectors and types of actors, and bottom-up funding for multiple projects, it will have a much bigger effect on the economy than if you have three narrower missions. As long as the mission is cross-sectoral and there is that mission framing, around, say, future mobility, clean growth or health, you can ensure that it involves lots of different sectors. I would advise that the bank takes that—almost experiment of a—first mission really seriously.

Moonshot—the 50th anniversary of which is being celebrated in the world this year—was about going to the moon and back again in a generation, but it required 12 different sectors. It was not just about aeronautics; it involved investments in nutrition, textiles and materials—you cannot eat a hamburger and wear jeans and a T-shirt up on the moon. That is what we mean. Three hundred different projects got us there, most of which failed. That willingness to take risks and to experiment is important, as is the way in which the Scottish national investment bank understands risk and failure and socialises not just risk but rewards. Getting those things right is key. Formulating an initial mission that is cross-sectoral to work out some of those complications would make sense—learning by doing.

Laurie Macfarlane

I would like to add one thing. The benefit of such an institution is not the volume of investment, which is obviously important—the rate of investment—but the direction of investment. Making sure that it is doing things that would not otherwise happen will be key to the success of the bank. The risk in the initial phase is that the bank is set up and thinks, “We just want some quick wins. Let’s just shovel money into this thing here,” which is something that was probably going to happen anyway, because that will not generate the kind of additionality that is the point of the bank. You really want to focus on making sure that the money that is there—as always, it would be much better if there were more—is used in a way that is generating additionality and is not given to things that, if we are honest about it, would have happened anyway.

Professor Mazzucato

Many different policies do that; many failed policies basically take the place of something that would have happened anyway. The example I can give is the patent box policy, for which the pharmaceutical industry lobbied, which reduces government revenue but does not create a net increase in the investment of the pharmaceutical industry; it just raises their profits. SME financing is another example. It might happen for folkloric reasons, but there is little evidence that it increases net job creation, unless that finance is directed to the 6 per cent of SMEs that are trying to innovate and invest more in new areas. How you devise the instruments really matters.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Professor Mazzucato, you have talked about the mission statement of the bank stating that missions must be widely perceived to be legitimate and of high societal importance. That is to ensure that those missions survive the political changes that inevitably happen from time to time. How should the Scottish Government and the bank ensure that the missions are legitimate and of high societal importance?

Professor Mazzucato

Again, that is a really important question. Moonshot was very top down. It might have been inspirational and it might have done all these great things—everything that is in our smart products is basically a spillover from that era—but it was top down; it was the Kennedy machine.

Something that we have often highlighted is that the German Energiewende mission, which is cross sectoral and has led to the steel industry transforming itself and lowering its material content through a repurpose-reuse-recycle approach, would never have happened without the green movement, which fought for 30 years to bring sustainability to the core of political discourse.

Currently, in our missions work across the world, including with the United Nations, we are trying to think through how the public sector can secure the capability, capacity and training that is needed. I call that “empathy 101”. How do we engage with movements? How do we listen? How do we not fear conflict? How do we create safe spaces for debate? That is almost the definition of a public space: a place where people are safe to contest.

For example, Charlie Leadbeater, from UCL’s institute for innovation and public purpose, has written a paper for us entitled, “Movements with missions make markets”. It is about thinking about the movements that are out there, for example in the context of social care or the climate crisis, and bringing those voices around the table in a genuine—not tokenistic—way, so that missions can be set with different voices. That is important.

Those voices include the voices of trade unions. Globally, trade and labour unions are thinking about the just transition—which is all about how we move from a fossil fuel-based economy to one that is based on clean energy and is widely understood as being about not just energy but how we think about production, distribution and consumption—and about how some workers will be left behind. I completely support that way of thinking, but it is coming too late: trade unions should be at the table when we think about the green transition in the first place. Public actors, private actors, social enterprises—you talked about those—and civil-society organisations should be at the table, thinking about the missions.

That is much easier said than done, but it is really important if we are to bring not just legitimacy but resilience to missions, so that they cannot easily be wiped away when a new minister comes on board and wants his or her pet project to be mission X.

Colin Beattie

You are talking about finding a means of engaging civic society in prioritising matters of “high societal importance”. Is the proposed advisory group the right vehicle to do that? Will it and can it be effective in that regard?

Professor Mazzucato

Who is on the advisory group will really matter. You cannot bring hundreds of people around the table, but you can ensure that the people who are around the table genuinely represent different voices—and in a non-idiosyncratic way; it cannot be a question of saying, “Oh, let’s bring together Siemens, a pharmaceutical company, a digital, high-tech SME and some public and civil society actors from here and there.”

Ideally, different types of voice will be represented. For example, if there is a care mission, it is obvious to me that social care workers and nurses should be at the table. However, that is something that must be decided by your political process.

Laurie Macfarlane

It is about ensuring, when the advisory group is set up, that it is not seen as tokenistic. It must not be seen as being there just to provide cover, with no meaningful agency to shape things. The rationale for the advisory group in the implementation plan was the right one; it was about bringing wider voices into the process of setting missions. However, the devil will be in the detail of how the group operates and functions, if it is not to be seen as simply tokenistic.

Professor Mazzucato

Especially in an era of populism, it is important to consider that people feel left behind, not just economically—there are plenty of statistics on that—but by a top-down political process. There is this notion of the elite, whether we are talking about the academic elite, the business elite or the Government elite. This could be an opportunity to rethink how we run democracies, with Scotland at the fore of experimenting in that process.

That is hard, by the way; there is no blueprint for it. However, the opportunity should be seen as something quite exciting. You should be willing to learn from your mistakes. You might mess up along the way, so you must have a process of learning by doing and a process for setting the milestones at which you stop.

One of the most mission-oriented agencies in the history of capitalist countries was the US Defense Advanced Research Projects Agency—or DARPA—which was not only good at funding innovation but very good at knowing when to turn the tap off. Knowing when to turn the tap off—

The Convener

I am conscious of the time, Ms Mazzucato, and we still have a number of members who wish to ask questions. I apologise for interrupting you while you were highlighting that example, but I want to get these other questions in.

09:45  



Tom Mason (North East Scotland) (Con)

You have recommended that investment be made in an ethical way. What do you mean by that?

Professor Mazzucato

As I have said, what is nice about Scotland is that it has the national performance framework, but you need to make sure that you have ways of translating that framework into targets through which you are able to measure the concept of additionality. We have talked about additionality and making sure that things happen that would not have happened anyway; however, the things that you make happen might well be bad things. Just making things happen is not a good thing in and of itself. Trump’s wall is an example of additionality—it was not happening before he came along.

Therefore, you need to make sure that the new things that are being stimulated by the bank’s activity as well as through private finance are also meeting the goals that the country has set itself through the national performance framework. As you will remember, those goals look very much like the sustainable development goals colour chart, but they have been turned into macroeconomic target setting. The more that you can work to make that real, the better.

Investment would be ethical in that sense, but otherwise, what is ethical is down to what someone thinks is ethical. After all, we have different ethics and morals. You need concrete metrics to allow you to judge whether you are achieving your objectives on inclusive and sustainable growth, which will have concrete targets.

John Mason (Glasgow Shettleston) (SNP)

Following on from your point about monitoring frameworks, I understand that you have suggested that such frameworks be dynamic and not too fixed. However, is that possible for the public sector, which likes measuring things that are easy to measure?

Professor Mazzucato

I do not want to blow my own trumpet too much, but one of my reasons for setting up the institute for innovation and public purpose at University College London is that I do not think that, globally, the public sector has those capabilities. The Treasury green book, which is used to evaluate public investments, continues to be determined very much by net present value and cost benefit-type calculations, which really would have stopped any mission right on day 1. Indeed, the moonshot would never have happened if people had done a cost benefit analysis of it. However, that does not mean that there are no metrics, and we are working very closely with the Treasury here on more dynamic efficiency versus allocative efficiency metrics. In fact, coincidentally, we are having a workshop on that tomorrow.

Going back to my point about knowing when to turn the tap off, I would say that, although you want to take a long-term approach, you might realise halfway through that things are just not working and that you are not getting anywhere. Therefore, you should know how to pivot and how to question your behaviour and why things are not succeeding. In that respect, your approach has to be flexible and adaptable. However, those are skills that need to be learned. If you go to any business school, you will find that managers are trained to be flexible and adaptable and to think outside the box. We really need to think through the curriculum and training for civil servants to think and act in a mission-oriented way.

The Convener

The final question is from Angela Constance.

Angela Constance (Almond Valley) (SNP)

Do you have any views on the bank’s remuneration policy? In the evidence that the committee has received, some have argued that terms and conditions should be on a par with the public sector and the civil service, while others have argued that remuneration packages should be on a par with the Edinburgh financial services sector. What are your thoughts on that?

Professor Mazzucato

I think that the answer is somewhere in the middle, but, again, there is no blueprint for this. I have been working on the concept of missions for more than a decade, and one of the things that I used to write about was mission mystique—in other words, that it is an honour to work for a mission-oriented agency. When Barack Obama proposed his post-crisis fiscal stimulus of $800 billion, he said that his mission was going to be to use the money to create a green economy, and he was able to bring in a Nobel prize-winning physicist called Steve Chu to direct the Department of Energy. Mr Chu thought that that was an honour, and he left Stanford University to do it. He was not brought in to create a carbon tax or fix a market failure; he was brought in to help the Government create a new system.

We need to remember that example, because if the bank is mission-oriented, I believe that it will attract people who want to make a difference in the world, but it will not do so if it pays them peanuts. It does not need to match the often absurd salaries in the banking sector, but it will not attract people who have the investment, sectoral and scientific expertise if it underpays. Unfortunately, many public sector workers are underpaid, but I will not go into that, as it would be a whole other conversation.

You do not have to match bankers’ salaries but you have to ensure that the bank’s remit is ambitious and that it will be an honour to work there. Historically, that approach has served well in bringing in high-level expertise to Government organisations.

Earlier, I was talking about having a curriculum for training public servants that is wed to the idea that they are there to fix a market failure. Would you rather take a risk and be a creative actor who is creating value or just facilitate or enable the fixing of market failures? You would probably choose the first option. We need to reframe what the public sector is for to attract the top talents in our societies.

Angela Constance

Thank you.

Professor Mazzucato

The bank is the place where you can do that.

The Convener

I am sorry—do you want to make one last point?

Professor Mazzucato

The bank is a wonderful experiment in Scotland, to see precisely what it would be like to transform our imagination of what the public sector is for.

The Convener

Thank you very much, Professor Mazzucato and Laurie Macfarlane. That concludes the session.

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Third meeting transcript

The Convener

Agenda item 2 is continuation of our stage 1 consideration of the Scottish National Investment Bank Bill. I welcome to the meeting our first panel this morning: Professor Lynne Cadenhead, chair, Women’s Enterprise Scotland; Linda Hanna, managing director, Scottish economic development, Scottish Enterprise; and David Alexander, chief executive and co-founder, Mydex CIC. To those who have not given evidence before, I point out that the microphones are operated by the sound desk, so there is no need to press any buttons. If, as the discussion develops, you wish to come in on a question, please indicate as much by raising your hand.

I will move on to the first question. Some of the submissions that we have received express the view that the broad mandate set out in the bill under the bank’s main and ancillary objects fails to enshrine either the Scottish Government’s vision for the bank, as set out in its implementation plan, or the socioeconomic and environmental objectives that were expected from the consultation process. Do you share that view? Are you satisfied with the objects that are set out in the bill, or do you think that they are somewhat vague and open to interpretation?

David Alexander (Mydex CIC)

We think that an opportunity has been missed as far as the objects are concerned. The vision was set out very clearly but, unfortunately, as we see in so many walks of life, plans and visions are sometimes not implemented, and an opportunity gets missed.

I think that the objects need to be tighter and more explicit about what the intention is. If that does not happen, it might leave the bank open to failing to achieve its mission and vision. I have some thoughts on what the bill should say in that respect, if the committee would be interested in hearing them.

The Convener

Do you want to give us just an indication? Obviously, witnesses can write to the committee after an evidence session if they wish to add to their evidence.

David Alexander

It is very straightforward: the main object of the bank should be to provide capital, including long-term or patient capital, to enterprises that support and enable the achievement of ministers’ mission of achieving sustainable and inclusive social and economic benefits. At the moment, I do not think that the bill says that or supports that aim.

Patient capital means equity investments as well as loans. There is enough of a commercial loans market out there, but we are talking about significant infrastructure investments in both the digital economy and the physical economy. The Scottish national investment bank presents a massive opportunity to underpin and support that work, but that is not set out in the bill at the moment.

The Convener

Do any of the other panel members wish to comment?

Professor Lynne Cadenhead (Women's Enterprise Scotland)

There is a sense in the early-stage investment community that there is a lack of clarity in what it is proposed that the bank should do. We are particularly concerned about the bank’s ability to fund females in business and about there being a focused opportunity to fund female entrepreneurs. We are in discussions with people who are involved with the Scottish national investment bank, and they are very open and willing to having further conversations, but there is still a little bit of work to do in that respect.

Linda Hanna (Scottish Enterprise)

With regard to what the bank is being set up for and what is required in the economy, we can see that the bill adds to what needs to be done. The reference to

“inclusive and sustainable economic growth”

in the objects and the focus on getting more finance into the system are absolutely needed and will help some of our ambitions for the economy. As has been set out, the bill provides clarity, and given the long period of time over which the bank will be set up, there will be some flexibility to attune it to the economy’s needs as required.

Dean Lockhart (Mid Scotland and Fife) (Con)

Good morning, panel. My first question is about the demand for the finance that the bank will provide. As we have seen, there has not been sufficient demand from business in Scotland to take up finance through other policy initiatives such as the Scottish growth scheme. Is there enough underlying demand in the economy for the significant level of finance that will be provided by the bank?

Secondly—and this is perhaps a question for Linda Hanna—what steps or different approach will Scottish Enterprise take to stimulate that additional demand in the economy?

David Alexander

There is overwhelming demand in the market for the finance that will be provided by the Scottish national investment bank; the issue is that, as currently envisaged, it is not the right type of finance. We need patient capital, not five-year loans underpinned by a commercial rate of interest. What we need are long-term equity investment, long-term loans and convertible loan notes that can take equity and deliver significant returns to the bank through dividends.

Mydex CIC is a community interest company, and in the 12 years that we have been around, we have pretty much funded ourselves through social investment. We have tried to raise capital for the sorts of infrastructure projects that we deal with and which try to improve public services, remove form filling, ensure inclusion and work with people, and we have found that incredibly challenging. The Scottish Government has led the way on programmes to try to improve the lot of Scottish citizens as well as public services—CivTech and the Scotland can do forum are really good examples of that and have been really positive initiatives. However, the type of funding that we need to equip the whole of Scotland with the infrastructure necessary to remove form filling and risk from the delivery of public services and thereby strip out 45 to 90 per cent of the operating costs of delivery is just not there. Everybody just wants to lend money for three to five years, and nobody wants to make investments or provide proper patient capital. If you constitute the bank correctly and offer that sort of funding, there will be an overwhelming demand from people who actually want to pay it back.

As a CIC, we want to make returns and deliver dividends. We are not asking for a handout—we are just running infrastructure projects and trying to change the way the economy works.

Professor Cadenhead

I absolutely agree with David Alexander. All our research shows that there is significant demand among female-led businesses for finance, and significant ambition among women to grow their businesses. In fact, the female entrepreneurs we talk to tell us that access to finance is the most significant barrier that they face. The issues are not only the type of finance and the need for patient capital but the need to develop opportunities for funding that are more appropriate for female-led businesses, such as loans that include childcare breaks. We also need to overcome the problem of having to grant security against loans. It is a step too far for a female entrepreneur to put the family home down as security. We need to look at the type of money that is available.

Linda Hanna

Scottish Enterprise sees demand: we run the Scottish Investment Bank and, in our portfolio, we see a fairly healthy pipeline for our different funds, both loans and equity.

The Scottish-European growth co-investment programme that we run has had a slower start, so we know that switching to new things, particularly at such scale, can be challenging. However, the Scottish national investment bank is about patient capital, so we will learn what that looks like. We have done three deals through the SEGCP, which tells us that there is a market for that finance. However, we need to ensure that we switch on that market.

We believe that the Scottish national investment bank is ambitious but achievable, and that it is what the economy needs. As Lynne Cadenhead and David Alexander said, the additional £200 million over 10 years will provide an opportunity to look at different routes to funding. However, we also need to think about how we switch on parts of the market that the current product offering may not be serving in the way that it needs to in future.

On Dean Lockhart’s question about demand, Scottish Enterprise sees the opportunity of the bank as not just being about the £200 million, although I know that that is what is often talked about. We see the bank as a catalyst. There is already work being done on the back of the enterprise and skills review to look at how the system could work more effectively and how the ecosystem works, not just in the public sector but in the private sector, social enterprises and the third sector. The Scottish national investment bank coming on stream is an opportunity to look at how the whole system works, and to drive demand in that way.

If it would be helpful, I would be happy to describe the ways in which we are already looking at stimulating demand and how we will do so in future. I could also send in examples.

Dean Lockhart

You have anticipated my next question. The advisory group told us that the bank will not act as the originator of funding opportunities. It will provide the funding and it will be up to other agencies—largely Scottish Enterprise and others—to stimulate demand and find businesses for financing. What reforms will Scottish Enterprise make to stimulate extra funding? Will you need more staff and a higher budget to achieve that?

Linda Hanna

I should say up front that we are working closely with colleagues in the Government on both the setting up of the Scottish national investment bank and how the transition will work. It is very much a team approach, involving not only the Government and SE but other partners.

We are looking at what it will take to develop that pipeline, and we are already putting some things in place. One example is the work that we are doing in manufacturing. On behalf of the Government, Scottish Enterprise has been leading the work around the manufacturing action plan that the First Minister launched a number of years ago, and the national manufacturing institute will be coming on stream.

We are also in the process of setting up the advanced manufacturing challenge fund, which will help to provide regional facilities and capability so that businesses can take advantage of new manufacturing techniques. As businesses get ready, that will drive demand, either for capital investment or for taking people on, to where the finance will come from. There are things that will be in place that we will invest in, and then we will work with those businesses to drive demand towards the bank and help them to get ready.

The financial readiness scheme that we already operate will stay with Scottish Enterprise. Fifty per cent of the business that comes through that comes from the work that we do with companies, and 50 per cent comes through other routes, such as business gateway and our website.

We want to ensure that our financial readiness work is even more fit for purpose by using online services and providing it in places where businesses are, in regions and cities. In doing that, we will work closely with south of Scotland enterprise and Highlands and Islands Enterprise.

10:00  



We are committed to the demand work, which is about how we work with our current businesses and how we switch on other businesses and ensure that the support is there to help them to get ready. We do not know yet whether that might take more resource; we are working through that. We are also looking at how we ensure that our sales force—the staff who work with partners and businesses—has a commercial mindset about what a good deal looks like so that, as that is driven towards the Scottish national investment bank to do the transaction, we know what the deal looks like.

Therefore, we are doing a number of things; I have other examples, but I do not want to take up too much of the committee’s time.

The Convener

David Alexander wants to come back in briefly.

David Alexander

I completely support what has been said. A fundamental point is that we need to make it clear that when we refer to the private sector, we are including the third sector, community interest companies and social enterprises, which might want to apply for investment funding, notwithstanding the point that I made about patient capital.

The minute that it is made clear that the private sector means not just for-profit commercial companies but mission-led organisations that deliver services and need financing, demand will increase massively. The minute that umpteen bodies, such as Social Enterprise Scotland and the Scottish Council for Voluntary Organisations, realise that the Scottish national investment bank can support their members, demand will increase. I suggest that that will increase the demand for resources to process applications and for information about how to apply.

However, the position is ambiguous at the moment. The talk is about being commercial and about the private sector. In the evidence that was given on 14 May, we heard that there is ambiguity and that people are not sure whether community interest companies such as us, which are asset and mission locked but also limited by shares, will be able to apply. There is a massive opportunity to clarify the bank’s purpose and mission.

Dean Lockhart

I have a final question for Linda Hanna. Thank you for your earlier answer, Linda. Other witnesses have said that the enterprise agencies will have an expanded role to play in delivering funding opportunities to the bank. I was interested in your comment that that might result in a need for more staff. Do you expect Scottish Enterprise’s budget to increase in the years ahead to accommodate the higher workload?

Linda Hanna

We have not looked that far ahead. We are about to launch our strategic framework and business plan for this year, which will set out our plans. We have not yet had conversations about the issue that you ask about; we are still working through what the future will look like. I am happy to come back to the committee to talk about that once we are clearer about those things.

Jamie Halcro Johnston (Highlands and Islands) (Con)

It has been suggested that the new bank could have more of a role in providing business support and advice, which Scottish Enterprise and Highlands and Islands Enterprise currently provide. How will regional knowledge—particularly about my area, which is the Highlands and Islands—be maintained if the bank takes over some of those responsibilities?

Linda Hanna

If the bank is to add benefit to the economy, it must work as part of an ecosystem. The implementation plan and the conversations that we have had with the Government and the SNIB team underline that. The system includes south of Scotland enterprise, Highlands and Islands Enterprise and other actors in that space—it is not just about us. We have talked to colleagues in SNIB about the work in response to the enterprise and skills review to create an additional entry point and enable access to services, which SNIB could take advantage of.

We do not see what is proposed as moving stuff around without adding benefit. The agencies are good at working on the ground with businesses and customers. There is no hand-off process; we must understand companies’ needs and the wraparound support that they require. Part of that will come from SNIB, but that will not be all the support that a business needs. All of our evaluation over the time that the SIB has sat within Scottish Enterprise tells us that it is the package of support, the combination of elements and their sequencing that matter. The customer experience is incredibly important—we all recognise that. I expect that to continue, and for us to be working hand in glove because we have to; the lines around how the customer navigates the system need to be short and seamless.

Therefore, from the conversations that we are having, I am confident. The issue will be joining that up. The implementation plan talks about making sure that business support services are integrated in that way, so that we can use the expertise in the bank on equity, loan and financial instruments and our capability in business support advice, both of which will be deep. It is a matter of how we join those up.

Jamie Halcro Johnston

You are suggesting that you are confident that your support will not be diminished, and that it could even be enhanced. One of the questions in the committee’s business support inquiry was about whether the enterprise body and, for example, the local authority business gateway were co-ordinating. You are saying that you are confident that that co-ordination will be better in this case than in others. I appreciate that the Highlands and Islands is not your area.

Linda Hanna

I am an optimist and I am confident that a combination of important things are going on in Scotland. You are scrutinising the SNIB bill today, but on the back of the enterprise and skills review and the work that has been done with business gateway, Scottish Enterprise, HIE and others, the Enterprise and Skills Strategic Board is looking to rationalise and simplify, so that access is better and digital technology is used in a different way.

That combination will be important. It is about the whole system working and all of us—I do not just mean Scottish Enterprise—are working very hard to make that real. I am confident, because I see that reality in the Scottish Government’s expectation of those things, with people like me and my colleagues in other agencies to make that work. That will ensure that we can deliver the business services that business needs and connect that into new instruments such as the SNIB.

Jamie Halcro Johnston

You are already looking at ways to evaluate that and at how the relationship works.

Linda Hanna

I am not aware that we have put an evaluation in place to do all of that yet.

The Convener

We have a brief point from David Alexander. I am conscious of time and that a number of committee members want to come in.

David Alexander

I can send a lot more information, but I am deeply concerned. From the analysis that we do, working on the front line with 14 clusters across Scotland, we already see at least five or six overlapping initiatives in each local cluster with many of the same organisations involved. That is where the targeted advice and support should be made available and consistently delivered. Yes, it can integrate with the SNIB, but I am very worried about trying to centralise that kind of support. There have to be contact points that join the dots. Otherwise, we will have a Venn diagram on steroids, with everybody trying to provide advice.

That is a real risk, because each of the communities that we work in is different although the themes—the community empowerment act, local implementation plans, health and social care partnerships, integration joint boards—are similar. Constant turmoil and change are the only constants that we find out there. We are trying to transform that, and if another initiative means that the process has to go to the centre, I think that there will be a problem.

Jackie Baillie (Dumbarton) (Lab)

I am going to appropriate the phrase “Venn diagram on steroids”. I quite like that.

I want to turn the discussion back to an issue that David Alexander raised earlier and to the suggestion of lending solely to the private sector that is in the financial memorandum. My view is that that is certainly against the spirit of the implementation plan. Does the panel believe that restricting borrowing in that way, and not opening it up to the third sector or community enterprises, is perhaps a little short-sighted?

David Alexander

I absolutely agree. What is different about a community interest company? We are limited by shares. We decided to be mission and asset locked because we want to deliver transformation and change in how services are delivered and citizens empowered. We need capital to make that happen. We deliver services and work across the public, private and third sectors, but we need funding. Why are we any different? Why should a community interest company that has decided to commit itself to a social purpose be treated differently from somebody who says, “I am only here to make money for my shareholders. That is my profit imperative”? All the time, we see so much money going into start-ups, which look fantastic and then get sold off to big American commercial organisations, so that there is no economic, societal or employment growth.

As much as economic growth is needed, we need to support the third sector, which delivers significant chunks of public services and support to the Scottish population and is growing the economy. Social enterprises, such as community interest companies, are designed specifically to help to deal with intractable, complex issues that need long-term commitment.

Professor Cadenhead

Again, I agree with David Alexander. Women’s Enterprise Scotland is a community interest company and a lot of the enabling and supporting organisations that help our entrepreneurs and companies to grow are social enterprises, such as community interest companies. Strategic funding and investment should be made available to them.

Linda Hanna

The Scottish Investment Bank’s current investments through our range of schemes are not just in private limited companies. What “private” means should be explored, because sometimes it means just that a company is not public sector and could be one of a range of types of company. We already have community-based projects in the schemes that we operate on behalf of the Scottish Government.

Jackie Baillie

However, that is not currently spelled out. My understanding about the reason for the restriction is that the bank will be resourced initially only by financial transaction money. If we were to take that wider approach, the expectation would be that the Government would put in other sources of funding that would not be similarly restricted. Linda Hanna is nodding, so I assume that that is the case.

I will tease out the commercial issue, which David Alexander has already answered. The wording in the financial memorandum and the bill is that the objective is to fund “commercial activities”. Terminology may again be the issue, because many projects have a societal or environmental benefit but are not necessarily for profit, which is what is implied by the term “commercial activities”. David Alexander, do you want to see the language tightened up, so that we can ensure the broadest possible scope?

David Alexander

I ask for a better definition, because “commercial” means one thing in one world, another in another world. A simple example is that removing the need for form filling by Scottish citizens to access public services could save 45 per cent of the transaction cost of the services and therefore release money into front-line staff delivery. That is a commercial business case, because it would mean that the services could do more with less. At the moment, such examples are not even being considered, although the bank’s vision is to help to improve society and the economy.

Our community interest company is committed to removing friction, risk, effort and cost from the provision of transactions and services and to investing 65 per cent of our surplus in the social purpose of empowering the people of Scotland. I ask people to consider that the word “commercial” is about the mission of making things better, faster, cheaper, more efficient and fairer.

Jackie Baillie

That is helpful. I will ask the other witnesses a slightly different question because, if we want that broader scope, the limitation that is imposed on borrowing by financial transaction money becomes unduly restrictive. Should the bank be able to issue bonds or public shares, or should it be able to borrow only from Scottish ministers?

Linda Hanna

How the Scottish national investment bank is set up is a matter for the Scottish Government. There is a broader issue about the system, which I will go back to. The Scottish national investment bank will be part of the system and we need to think about it in that context. There is still an opportunity to look at where the use of financial transactions or loans that might be less commercial in the long term sits best in the system and what will be the best way for Scotland to use them in the future. That will be part of the conversations that we will have with the Scottish national investment bank.

Jackie Baillie

I suppose that this is all a matter for the Scottish Government, ultimately, but I am asking whether your professional advice would be to encourage the Government to leave it open to the bank to offer bonds and public shares.

10:15  



Linda Hanna

That is not a matter on which I would give advice. I do not have deep expertise in that area.

Professor Cadenhead

I do not feel appropriately qualified to comment on that, either.

David Alexander

I would unequivocally say that the Scottish Government should not do so.

Jackie Baillie

Can I ask you why?

David Alexander

Absolutely. It should not do so because the whole mission, vision and purpose of the bank is to improve Scotland. The minute you open it up to publicly traded shares and the issuing of bonds to the private sector market, you end up with the groupthink of the financial services sector, which only wants a return for its shareholders at commercial rates. Companies in that sector have billions of pounds’ worth of opportunity to do that elsewhere. The creation of a national investment bank is an opportunity to set out a vision for how Scotland can be treated. The bill deals with points to do with state aid. There are many exceptions within the state aid rules that allow the bank to exist and operate. The state aid restriction will apply only until 2021; after that, many other choices will be available.

The Scottish national investment bank could be a self-funding bank. If it gets it right—if it does equity investment and long-term loans—it will build up its own asset base. I know that the asset base is only £2 billion at the moment—we say “only £2 billion” as though it is nothing, but it is a vast sum of money that, if applied judiciously, could solve complex issues instead of just funding the private sector. That would be a brilliant mission for the bank to have. “Be different” is the challenge that I would put to it.

John Mason (Glasgow Shettleston) (SNP)

I will begin with a supplementary. Do you not think that a lot of ordinary people in Scotland would like to put some of their savings into the bank, because they would think that that would be good for the economy?

David Alexander

I think that that is a fabulous idea. We have seen many examples of national savings initiatives. If people got a guaranteed rate of return that was not as variable as it is in the private sector, the bank would provide a good opportunity for that.

However, that is different—that is citizens saying, “I want to support the improvement of this country,” and being happy to support a national investment bank that has a clear mission and purpose to do just that.

John Mason

So you are not against all outside finance.

David Alexander

That investment will feed back into people’s communities, improve their infrastructure and remove friction, risk, effort and cost from their lives. Why would they not want to invest in the bank?

John Mason

Thanks for that. I just wanted to clarify that point.

The main thrust of my questioning is about the advisory group, on which various submissions have been made to us. Some people think that, if the link is too close, the advisory group could be too involved in the running of the bank, while other people think that it will be too far away and that it should perhaps have fixed representation on it, whether from trade unions or people from different regions. What are your general feelings about the advisory group? Where do you see that going?

David Alexander

I think that there is a risk of groupthink. I think that it is drawing from too narrow a pool of people, many of whom seem to be money people. I think that there needs to be representation from citizen groups. We work in Glasgow, where there are citizen activists, who are not as terrifying as they might sound. They are incredibly well informed about life in their communities. Each of the clusters has citizen panels. There are organisations such as Social Enterprise Scotland that are doing a great deal of good work that could contribute to the group.

It is not wholly a financial advisory group; it is about mission and purpose, which is the other area where we need transparency and accountability. At the moment, the bank appears to be a bit too arm’s length from the Scottish Government. The goals and objectives must be measurable, and the advisory group could hold the governance committee of the bank to account on that. There should be people on the group to look at outcomes and impact.

John Mason

You said that there is a danger of groupthink and that the advisory group is drawn from too narrow a range of people. Is there something in the bill or the financial memorandum that makes you think that?

David Alexander

I do not think that the mission, the measurements and the accountability are strong enough for the bank to report back to ministers. The fact that the advisory group draws from too narrow a field of people presents a danger.

John Mason

I am sorry—why is that the case?

David Alexander

Because they will look at the bank as a financial institution, not as a much broader institution that is meant to deliver the mission and vision of the bank on behalf of the Scottish ministers and the Scottish people. Someone must hold it to account. Performance must be linked to achievement of the vision and the mission.

Professor Cadenhead

It very much depends on the role and make-up of the group. The bank will have its chair, its chief executive and its non-executive directors, and I would see the advisory group as drawing intelligence from the community and, through its make-up and the people involved, ensuring diversity of thought, not only on a gendered basis but on the basis of social background, age and demography and so on. It all depends on what role you want the group to play and how it is constituted and governed.

John Mason

If, say, the chair of the advisory group was on the board of the bank, would that be too close a relationship? Might it lead to a conflict of interest?

Professor Cadenhead

Probably. After all, it will simply be an advisory group, and it will be there just to give advice. It will be up to the board whether or not it takes it.

John Mason

Did you want to say anything, Ms Hanna?

Linda Hanna

The group will be really important. We are talking about something that is long term—at least 10 years—and the missions have still to be identified. As a result, the group will have a real opportunity to bring diversity of thinking to the matter, with different people going on to and coming out of the group as the bank moves forward over time. The governance will be the governance, but I think that the advisory group will be able to provide some independent thought, real depth of expertise and a knowledge of research and views on the thinking that is happening elsewhere. That approach can flex as the bank decides where it is going and separately from the governance. I therefore think that it is quite an important part of the bank’s construct, as it can reflect not only the progress being made with the strategic framework and what the bank is doing but where the bank wants to go with regard to the economy.

John Mason

Thank you very much—that was helpful.

I want to move on to some of the financial implications. Again, different views have been expressed in the evidence that we have received on how quickly we might expect the bank to break even. If patient capital is involved, it will take quite a long time for that to happen, but the suggestion is that the bank should break even fairly quickly, which is something that the Royal Society of Edinburgh is uneasy about.

There is also the issue of the costs involved. As someone else is going to ask about remuneration, I do not want to touch on that matter, but can you say something about the general costs of the bank? I think that the Scottish Government is going to have a sponsorship unit linked to the bank, which will cost £1 million a year. It has been suggested that that is a bit too much. What is your overall feeling about the projected costs? Are they too high or too low, or are they realistic?

David Alexander

With any new institution that is formed, there is always the risk of duplication of effort and overlap, and I commend to the Parliament a look at the existing service providers that could perform many of the bank’s proposed functions today in Scotland. Instead of creating a whole new institution, we should think of it very much as a virtual organisation, as is the way of the world at this time, and using existing service providers in Scotland, such as Social Enterprise Scotland, to underpin many of the operational delivery components would be a good thing. Any number of bodies could deliver some of the back-office services.

My big worry is that the timescale for making a return on investment and for the bank to be self-sustaining is completely unrealistic and that it will be driven down the path of commercial loan making and competition with the commercial market. The bank is meant to be different. We should be committing ourselves to a long-term programme that ultimately delivers money back into the Scottish economy and the Scottish Government and which becomes self-funding, but that will not happen overnight.

John Mason

Can you put a realistic timescale on that?

David Alexander

I think that you would be happy if the bank broke even in 15 years. That might be blasphemous but, in reality, I think that it should be delivering returns within 15 years.

John Mason

Is it possible for politicians just to sit here and wait for, say, 10 years? That is two parliamentary terms.

David Alexander

I know how terrifying that is in political and economic terms, but this is meant to be the Scottish national investment bank. With the multibillion-pound investments that are made in infrastructure, no one asks, “Is it going to pay the money back in three or five years?” We are talking about a Scottish national investment bank. It is meant to transform the economy and civil society, and that will not happen overnight. We are constantly being faced with people trying to rewire the building with the power still switched on. That is the transformation that is under way, and it is not going to be done in three years.

We see it all the time with our cluster profiles; millions and millions of pounds get put into reports describing the problem, but nothing gets put into implementation, and then we are on to the next plan, the next landscape review or the next project reviewing why the previous approach did not succeed. We just have to change our time horizons here.

John Mason

That is very helpful.

Professor Cadenhead

The projection that the bank will break even within a couple of years is wildly ambitious. In our work with early-stage companies, for example, we usually take their projections and say that it will take them twice as long and cost twice as much and that they will make half as much money. The same kind of sensitivity analysis can be applied to pretty much anything that is new. The average time to exit from a start-up company, when funds will be returned, is probably seven years. If the bank is investing in high-risk, high-innovation companies, it will not start to get returns for a significant period, so to say that it will break even in two years is wildly ambitious. Venture capital funds tend to work on a kind of 2 in 20 arrangement—they get a 2 per cent management fee and a 20 per cent carry.

John Mason

Can you explain what a 20 per cent carry is?

Professor Cadenhead

That is benefit or interest—money that comes back to the people in the fund when they exit from the opportunities. The costs that are involved here are pretty hefty.

John Mason

Does Ms Hanna want to say anything on that?

Linda Hanna

No.

David Alexander

I will add one thing. I run a community interest company limited by shares. We are 12 years into a 30-year mission. Who is helping me on that mission to improve public services and the lives of people?

John Mason

But your board does not wait until after the 30 years to ask whether you have failed or succeeded.

David Alexander

No—we are constantly looking at the progress that we are making. In some years, we do incredibly well and in others we have to fund it. We are working with local authorities, the third sector and the private sector. It is a transformation programme, so we constantly come up against people not facing the reality of what transformation of services looks like. Everybody wants it tomorrow.

John Mason

That is helpful. I will have to draw a halt, because other people want to ask questions.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

We have already touched on whether a plc is the right vehicle for the new Scottish national investment bank. However, we have received evidence from the Scottish Council for Development and Industry that says that being a plc will allow

“the Bank to raise capital from a range of public and private sources”,

and that

“the Articles of Association ... will protect the ... ownership of the Bank.”

The Scottish Trades Union Congress evidence says:

“Being established as a public-limited company wholly owned by Ministers ensures that the Bank is publicly-owned and privatisation would require primary legislation.”

Why do you think that another model would be better than the plc model?

David Alexander

That is a slightly weird question. I believe that a community interest company model would be appropriate for the bank—that is, an asset and mission-locked bank. There is nothing to stop a community interest company from becoming a plc but remaining a CIC.

I have a more fundamental point to make about why what is needed is a CIC structure that is asset and mission locked. The mission of the bank has to be protected. A plc that slides into private ownership, even if Parliament has to vote for that, will be driven down a market forces route, and the idea that we must let market forces survive is an illusion. The bank is meant to be an important lever in the Government’s approach to improving Scotland and its economy and society. If the bank is mission locked, that will protect it for the future. Also, there will be a massive benefit in the bank being a CIC: it will have to reinvest 65 per cent of any surplus that it makes in its mission, which will build up the capital base that it needs to continue investing.

If you intend to sell the bank off to somebody else at some time and you float it off as a CIC—as a plc that is covered by the community interest company regulations—that will protect the mission lock, which means that only people who are committed to the vision will invest in it. The worst thing—the travesty—would be if the Scottish national investment bank ended up as another privately owned bank as it slipped down the side and started being measured by purely commercial measures.

Gordon MacDonald

Is there any evidence that that could happen? We already have development banks in Scotland, and there is the Development Bank of Wales, which has been established for nearly 20 years, and the British Business Bank, both of which are plcs. Why have they not gone down the CIC route?

10:30  



David Alexander

Understanding of a community interest company has been very low and the regulations have not been in place as long as those for a plc. A plc is a legal form that a community interest company can have. Scotland has an opportunity to support the CIC structure and have a plan to move it to a plc. It is double protection for the mission and assets of the bank. That is all that I am advocating. If you want to make it a plc but make it a CIC plc, the terms and conditions and articles of association are all available off the shelf. I am advocating that you think differently about the asset and mission lock.

Linda Hanna

My understanding, although I have not looked at it, is that the team looked deeply at different models. Two have been mentioned, and the team looked at others, particularly in Europe. The team weighed up the factors—what the bank is there to do, what would be the best structure for that—and came up with this model. Fundamentally, the bank is publicly accountable but is also commercial and able to generate an evergreen portfolio. There is a combination of factors. The research that the team did led it to believe that the model is right in that it provides a direct line to ministers.

Professor Cadenhead

I am a big fan of not reinventing the wheel. I am a big fan of looking at what has happened in other countries. As has been said, the model has been adopted in a number of other countries. There are ways and means to write protections into articles and so on to ensure that the bank delivers on what it is supposed to. On balance, we would say that the plc approach is the right one.

Andy Wightman (Lothian) (Green)

To follow up a question that John Mason asked about the advisory group, which is recommended in the implementation plan but is not provided for in the bill, to the extent that you think that an advisory group is a good idea, do you think that it should be enshrined in the bill?

David Alexander

It should be enshrined in the articles of association of the bank. Putting it in the bill seems to separate it from the bank’s existence. The role of the advisory group should be defined as part of the articles of association of the bank.

Andy Wightman

The purpose of the advisory group is to advise ministers.

David Alexander

Yes, but I think that the advisory group has to have a relationship with the bank and therefore the bank has to acknowledge its existence and cannot ignore it. The bank has to support its endeavours and be transparent about supporting it. If the group is included in the bill to make it an official and legal part of the ministers’ support network, it also needs to be embedded in the articles of association. Otherwise, the bank has the opportunity to say, “Well, it is not really anything to do with us.”

Andy Wightman

Are there other views?

Professor Cadenhead

The feedback from people is that the advisory group will be important for the ministers. Because it is of such importance, it probably should be in the bill.

Andy Wightman

On the question of the mission, when Professor Mariana Mazzucato gave the committee evidence last week, she was quite clear that the mission should be more central to the objects of the bank. The objects are set out in section 2 of the bill. The mission is talked about in section 11 and is something that ministers will set. Any changes to the objects would be subject to parliamentary approval, but the setting of the mission or any changes to it is not subject to any parliamentary procedure. First, should the mission be more central to the objects in section 2? Secondly, should the missions that are set be subject to parliamentary scrutiny?

David Alexander

Absolutely, the mission should be more tightly associated with the objects. As I said, it feels as if the mission has been lost. The bill needs to embed the mission of the bank in the objects and make it crystal clear.

Andy Wightman

I am not talking about the mission of the bank. I am talking about mission-oriented finance. The various missions are set from time to time.

David Alexander

I am convinced that the missions should be in the objects as an explicit part of the purpose of the bank.

On the second question, so long as adequate parliamentary time is given to the discussion of the mission, there is an opportunity for real debate about what the mission should be. There will be an opportunity for it to survive Parliament, given John Mason’s point about return on investment and timescales. If the bank is to deal with intractable issues and to support finance, there needs to be proper debate. Once the decisions are made, they need to transcend Parliament. That might not please ministers, but there needs to be accountability for the mission, or it might end up becoming a bit of a political football. The missions need to be debated in Parliament.

Linda Hanna

The operational matters relating to the missions are set out in the bill. The bill sets out what the bank intends to do, and it provides the flexibility to allow the missions to change over time, and for how they will be reported to Parliament.

Andy Wightman

When ministers set a mission, the only obligation on them under section 11 is to

“lay a copy of it before ... Parliament”.

There is no provision for a debate, and Parliament does not have to hold a vote. Should Parliament have a statutory role in scrutinising and improving the missions?

Linda Hanna

I do not have a view on that.

Professor Cadenhead

I do not have one, either.

Andy Wightman

Mr Alexander’s submission says that the bill

“creates no requirement for the Bank to ever report to Ministers on how effective (or efficient) it has been in actually achieving the missions ... The only provision is for the Bank to report to Ministers on how it intends to achieve the Mission ... This omission needs to be rectified.”

Will you elaborate on that?

David Alexander

If you have specified the bank’s mission and how performance should be measured—whether that relates to loans or equity—there will be a set of business plan assumptions. I do not know any public, private or third sector organisation that does not have a scorecard, does not report on its progress against its plans or does not demonstrate accountability for the delivery of what it said that it would deliver. We all know that no plan survives implementation, but there are acceptable tolerances. If the bank’s mission is well laid out, along with the key performance indicators, it should be possible to report against them. The bank’s board and governing body should be held accountable for the performance against those indicators.

Andy Wightman

You make a specific point about the missions. Section 12 provides for reporting on missions, but I grant you that there might be some vagueness. Section 13 is entitled “Report on investment performance” and section 14 is entitled “Review of performance”. The bank will also need to provide annual reports and accounts. Is there a specific thing that needs to be rectified?

David Alexander

Factors such as impact, value, transformation and mission achievement need to be taken into account. Did we get there? Did the assumptions that we made and the money that we invested have an impact? Is the economy better? Those are indirect impacts. It is not purely about the loan book getting us a load of interest and about whether the equity that a business holds should be included; it is about the planning assumptions that were made about improving the Scottish economy and society when support was given to an organisation. The bank will need to take responsibility for looking at those indirect measures, and there needs to be a way of measuring impact and value.

Andy Wightman

Under section 14, a person must be appointed every five years

“to carry out a review”,

which must include a review of performance in relation to the bank’s objects and mission statement. Do you want greater clarity on the performance of certain missions?

David Alexander

Absolutely. The missions need to have a set of key performance indicators, and the bank should be responsible for tracking progress against those indicators. Whatever mission the bank is meant to support—whether it is investment in a particular area to improve the economy or society or investment to remove friction—we should look at the performance against those key indicators over time. It is not acceptable to kick things off by having a review every five years. Such a review should look at the trends, but the measures are not in place.

Andy Wightman

Out of interest, if the panel were tasked with setting a mission for the bank, under section 11, what kind of mission would you set?

Linda Hanna

An obvious one relates to the low-carbon economy and tackling climate change. Collectively in Scotland, we have been doing quite a lot of work in that area. The current global marketplace and policy environment provide us with opportunities, and, given the number of our capabilities—whether it is those of companies or universities—we can build on the work that has been done and accelerate it.

Professor Cadenhead

It will not surprise the committee to hear me mention inclusive growth. We have to look back at some stark statistics on female-led businesses. Business gateway figures show that there is a 50:50 gender balance in respect of women starting up businesses. However, as they move through the growth pipeline, the figure moves down to about 20 per cent. As they move into account managed companies at Scottish Enterprise, the number of female-led businesses is around 3.6 per cent. I know that more work has been done on that and that the figures have improved, but, whatever way we look at them, the statistics that we have for female-led businesses in Scotland are shockingly poor.

In addition, a very harsh statistic is that, in the United Kingdom, only 1p in every £1 of venture capital investment goes to female-led businesses. The bank has a significant opportunity to transform funding opportunities for female-led businesses.

David Alexander

I am sorry, but my suggestion is far more mundane. I completely support the point that Professor Cadenhead makes, but I would like the need for form filling to be removed in Scotland. I would like every citizen in Scotland to be equipped with the ability to prove who they are and what they are entitled to and never to have to fill in a form again.

Andy Wightman

Okay. I think that people in Estonia can do that, can they not?

David Alexander

Not quite. People are dependent on the state, and I would like them to be independent. That is about personal data infrastructure.

Andy Wightman

My second line of questioning is about equalities. Professor Cadenhead raised the issue of women entrepreneurs. Equality is not mentioned in the bill, and we have received evidence from Close the Gap and Engender that the equality impact assessment is not up to scratch. The Government has to produce an equality impact assessment, but it is not formally one of the documents relating to the bill that have to be laid in Parliament. To what extent should the bank have a mission to overcome inequality in its broadest sense in Scotland?

Professor Cadenhead

It is essential to create a balanced society with diversity of thought that allows everybody to participate and contribute to economic growth. Close the Gap and Engender have done a thorough analysis of the EQIA, and I broadly accept all their recommendations. Equality needs to be enshrined in the bill—that is really important.

Andy Wightman

Where would it best be enshrined in the bill: under the bank’s objects, performance or mission? Maybe you could come back with further thoughts on that.

Professor Cadenhead

I will do so, but we certainly need to ensure that relevant KPIs are set.

Going back to what David Alexander talked about, it is all related to an annual impact report and reviewing and looking at trends over time. We desperately need a gendered enterprise index in Scotland, to enable us to look at the data and track the statistics so that we can see on-going trends. The bank could help with that.

David Alexander

I ask the committee to consider the definition of “equality”—equality for whom and for what?

Andy Wightman

I think that that is set out in the Equality Act 2010.

David Alexander

I understand that, but I do not think that there is equality of access. Many people whom we know who work in the third sector are women, and people of all different sorts are trying to set up social enterprises to do good. They will not have equal access through the bill, because the bank will not support the third sector and social enterprises. Assuming that we can clarify that definition, equality of access to what the bank represents would be a good thing. If we broaden access to what the bank can offer, it will support a more diverse population of people. Not everybody is trying to produce a high-tech start-up or a start-up that they want to flip to sell to Google. A lot of people who are more socially driven are trying to transform services in this country, and they need funding and support.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Obviously, the bank will be a public body that will be accountable to taxpayers, and it will have to evidence value for money, but it will also work in the financial sector. Financial sector salaries tend to be fairly good—in some cases, they are fairly extravagant. The opinions in the submissions that the committee received in relation to salary levels and how they are going to be determined varied quite a bit. We have to get the right people or the bank is not going to succeed, but does getting the right people require the payment of high salaries? I am interested to know what the members of the panel think.

10:45  



David Alexander

There is a flawed assumption that everybody is motivated by money. I worked in corporate life and had a very good lifestyle, but I got to a point when I decided that, with a lifetime of experience, I needed to do something more. If you specify the talents, the skills and the attitude of the person that you are looking for, you will find people who have the necessary skills and ability to be part of the bank—they will not need to be dragged out of the financial services sector and treated like gods.

You have to start by setting out the mission and the role and then do a search on that basis. You will find young and old talented people who want more and to do something different, and they will also have the skills that you need. I would counsel against offering eye-watering salaries and bonus schemes. Instead, make a really positive statement about the Scottish national investment bank being run by the people of Scotland for the people of Scotland. You should insist on talent but make it plain that you are not paying eye-watering salaries.

Colin Beattie

Would we be relying on a degree of altruism in the market?

David Alexander

No, it is not altruism; it is personal motivation and what drives people. Not everybody is driven by money. I have done lifetime coaching work with people, and there is a moment when people have just had enough of it—there is only so much that they can take. The “masters of the universe” finance sector model, whereby everyone has to be paid tons of money to turn up, is an illusion. There are fantastic public servants out there—people in the third sector—who are not paid eye-watering amounts of money and who are doing fantastic work. You can find the talent. Scotland has a lot to offer such people, so make your case about coming and doing something important and you will find them.

Colin Beattie

Do the other members of the panel have a view?

Linda Hanna

It is important to lay out exactly what the bank is for and what skills and expertise are required. A lot of change is going on in that regard in all financial services institutions, so the bank will need to employ people with a range of skills, in order to deliver services, products and channels to the market in a way that is different to the way in which banks have traditionally done so. That is already happening in the financial services sector, and the SNIB will be no different. Therefore, it will need a range of people from different backgrounds and with different skill sets. It is important to set out what skill sets are required and what the bank’s values are in order to attract the right people, culturally, for the public good.

From our experience, the people whom we attract to the Scottish Investment Bank have deeply specialist skills but are definitely motivated by working for a legacy in the economy and the difference that they can make, as well as the individual transactions that they do. It is about setting that out in the right way, recruiting in the right way and bringing in such people. We have certainly found a way to do so in the public sector, and, as David Alexander said, there are examples of other areas in which that can be achieved.

Colin Beattie

Given the desire—certainly on the part of the panel members—for lending to incorporate the third sector, do you agree that it is a particular skill that not all financial experts have? On the basis of the balance sheets of most third sector organisations, they are not exactly bankable. Therefore, do we need to identify specialists in that field, who will be able to cope with it adequately?

David Alexander

It is about having people who genuinely understand what patient capital looks like and what the bank’s mission and purpose are.

In the social investment sector—which, in effect, involves recycling dormant bank accounts, largely through big society capital—we have seen that lenders are taking commercial rates of return on short-terms loans of three and five years. They are not performing the role that the Scottish national investment bank could perform. So, even the people in the social investment space do not get what the mission is. You need people who are able to look over the time horizon that extends beyond the Parliament and normal commercial loan rates, who can look at the basic fabric of an organisation—its mission and purpose—and provide it with the patient capital that will let it execute its mission.

Colin Beattie

Ethical investments are important for any bank these days. Many investment banks and large pension funds have lending exclusions, such as any investment in tobacco or investment in anything that increases greenhouse gas emissions or impacts negatively on biodiversity and ecosystem services provision—all sorts of formulas can be used. Do you believe that the SNIB should go down that line and cater for such exclusions?

David Alexander

I cannot answer for Mydex, because that is not my department, but I would use common sense. If the purpose of the Scottish national investment bank is to improve the economy and society, anything that does not do that should not be invested in.

Colin Beattie

Who will decide that?

David Alexander

That is part of the lack of clarity at this point in time. Why would the Government want to support things that harm public health?

Colin Beattie

There would have to be evidence.

David Alexander

Is it not for the Scottish ministers to set the mission and say that they do not want to support anything that harms public health? That is the level at which to do that.

Colin Beattie

They would have to be careful to keep it from becoming a broadly good idea—if they were to go down that line, ministers would have to specify the particular types of investment that would be acceptable or unacceptable. Is that where we should be going?

David Alexander

I know of no investment bank or venture capitalist that does not have some sort of portfolio rulebook that says that they invest only in certain things. For someone in the VC market, that rule would be what makes them the most money in the fastest possible time—the biggest return. The Scottish national investment bank aims to improve society, so it would be entirely within the remit of the Scottish ministers to put a block on certain investments if they wanted to do so.

I do not know whether that should go in the bill; I am just giving the committee my personal opinion. However, why would anyone back something that made things worse?

Colin Beattie

Do the rest of you have a view?

Professor Cadenhead

The ethical approach is the right way to go. Parliament can seek guidance from other organisations, as it will be hard to define that approach closely in the early stages. We all have to accept, right at the start, that we will not be able to do some things and that there will need to be flexibility in relation to how the bank and what it does evolve over time. Ethical investment is the way to go.

Nowadays, different organisations that invest in other funds are also asking for diversity and inclusion plans before they invest. Diversity and inclusion plans are also important.

Linda Hanna

We already run a portfolio in the Scottish Investment Bank, and we already have ethical considerations: we look at diversity, inclusive growth, progressive workplace practices in the companies and organisations that we invest in and, depending on the fund, what the restricted sectors are. We carry out diligence on that basis. That approach already exists. We are part of the economic development landscape—as SNIB will be—and I expect that those investment bank funds will move to SNIB. We anticipate that that practice will continue.

Angela Constance (Almond Valley) (SNP)

There are several important workstreams that need to be carried out well, such as the appointment of board members and the development of the strategic framework, the ethical statement and so on. We know that the timetable is tight, but, if the bill passes, the bank should be fully operational by 2020. Is that achievable? Also, given the tight timescales, can the detailed work be done to a high quality?

David Alexander

As someone who has run many programmes, several of them complex, over many years, I can tell members that co-ordination and communication are the key components of success. The timescales are not unreasonable, but it must be accepted that the bank will be delivering incrementally over that period. That requires very tight tracking. It means that everyone involved must have a common set of objectives: the model is called objectives by key results, and everyone is linked to those objectives.

If that type of model is approved and people are linked directly to those objectives and results, so that nobody is working as an island or a stovepipe, you can get there. However, it will be challenging. A lot of public sector and public service programmes fall by the wayside because we get too involved in the structures and processes but not the outcomes. There needs to be extremely strong programme management by someone who is committed to the mission as opposed to someone who is being paid a large amount of money to be a programme manager. It is all about how you set it up.

Professor Cadenhead

From my perspective, it is tight but doable. The key thing is to get the recruitment of the board under way as fast as you can. If you recruit the right chairman, chief executive and non-executive directors, that team will drive everything else.

Angela Constance

Professor, did you say, “chairman”?

Professor Cadenhead

I did—strike that!

Linda Hanna

I am privileged to see some of the work that is going on behind the scenes, and I would say that a lot of people are working on the issue. I acknowledge what David Alexander said about programme management, but I would say that people are committed to the mission of what we are seeking to do. I think that it is achievable, but we will need to stay focused on delivering those things at the right time.

Angela Constance

Does the bill do enough to ensure the bank’s durability and survival across political cycles?

David Alexander

No. I have already explained that I think that it should be a CIC. It has the ability to fund itself, and the Parliament should be involved in debating specific missions. It is one of those commitments that should last many parliamentary sessions. It is not a science experiment; it involves a fundamental theory of change with regard to how you improve Scotland. It is audacious and exciting, but it needs protecting.

Linda Hanna

We need to ensure that the bill sets out what we are seeking to do, and Parliament will back that or not. We have talked about all the other things that will come back to ministers—the reporting, the strategic framework, what the bank is doing and so on. Those things will demonstrate what is being done on the ground and what will have an enduring effect on Scotland’s economy.

Professor Cadenhead

At the end of the day, the bank will be judged on its results.

The Convener

I suppose that there could be a chairwoman, a chair or a chairman, professor, depending on what the person thinks the position ought to be called or who they are.

Jackie Baillie

Do not go there, convener.

The Convener

I do not think that we prescribe language in that sense.

Andy Wightman

I want to follow up a point that Linda Hanna made about the Scottish Investment Bank. I am unclear about the extent to which the funds that are devoted to that will be rolled into the Scottish national investment bank. It seems to me that they are two separate things.

Your website talks about the companies that the Scottish Investment Bank invests in. It says:

“We’ll invest alongside private sector investors into early-stage and expanding companies with high-growth potential that will deliver economic impact to Scotland.”

Clearly, some companies will meet that definition and the SNIB might fund them. However, I understand that the Scottish Investment Bank has invested in the Isle of Harris distillery, and I do not think that the Scottish national investment bank would invest in the alcohol industry.

An approach that involves long-term, patient capital is different from an approach that involves high-growth companies, which is what the Scottish Investment Bank is concerned with. Do you agree?

Linda Hanna

The Scottish Investment Bank has a range of products that we serve Scotland with. Some of them involve direct investment and some involve co-investment, which you mention. Others involve our supporting things in order to crowd in other funding. All those funds will transfer into the Scottish national investment bank, so those mechanisms will continue to exist.

Andy Wightman

You support an alcohol distillery, and I cannot see alcohol distilleries being central to the mission of the Scottish national investment bank. Is it the case that, if all those funds are rolled into the Scottish national investment bank, there will be some loss of the kind of support that is currently provided to commercial activities?

Linda Hanna

I cannot comment on particular cases. We look at the company—a distillery, in this case—the benefits it brings to the local community, the jobs it creates, the investment that will be required and the funds that have been brought to the table. Once the funds transfer over, it will be for the Scottish national investment bank to decide how it manages the portfolio going forward.

11:00  



Andy Wightman

Do you recognise that an early-start, high-growth distillery and the kind of mission-orientated projects that are envisaged for the Scottish national investment bank are two very different propositions?

Linda Hanna

The Scottish national investment bank will deal with both. It will provide mission-based funding to help companies to do what they seek to do in the economy, and it will provide support to early-stage and later-stage growth companies. It will also work on the scale of the funding that is required as companies seek more funding. We expect the Scottish national investment bank to do more in that space.

Andy Wightman

Is the Scottish Investment Bank doing anything at the moment that could not be done by the Scottish national investment bank?

Linda Hanna

I expect commercial deals to be done by the Scottish national investment bank.

John Mason

Will you confirm that you do not think that alcohol is inherently a bad thing to invest in? It provides a huge number of jobs and exports, so we should absolutely continue to invest in the alcohol industry. Is that your feeling?

Linda Hanna

The distillery industry is important to Scotland. It is a big part of our exports and employment, as well as providing innovation. Scottish Enterprise supports the industry, as does the Scottish Investment Bank. We support the products and companies that we have in Scotland.

John Mason

That is great.

Professor Cadenhead

We need a bit more clarity about what the bank will invest in and the quantum of investment. For example, I hear indications that the bank will not invest anything less than £1 million in a particular company. If we look at the business base in Scotland, we see that 77 per cent of the 98 per cent of businesses that are SMEs are micro-businesses with fewer than 10 employees. They are not looking for £1 million of investment. How are we going to fund the different stages of the business growth journey of earlier-stage businesses? Sometimes, the amount of capital that they need might be £25,000, and that would be transformational for them. They might not be looking for £1 million, so we need a little bit more clarity in that area.

The Convener

Before we get into discussions about whether whisky is good for the health of the nation, we are out of time. I thank our witnesses for coming in today.

11:02 Meeting suspended.  



11:06 On resuming—  



The Convener

Welcome back. We will continue stage 1 of the Scottish National Investment Bank Bill. I welcome Matt Lancashire, who is the director of policy and public affairs at the Scottish Council for Development and Industry; Flora Hamilton, who is the director of financial services at the Confederation of British Industry; and last, but not least, Helen Martin, who is the assistant general secretary of the Scottish Trades Union Congress.

I will start with a question that I put to the previous panel. Many of the submissions that we have received express the view that the broad mandate that is set out in the bill on the bank’s main and ancillary objects fails to enshrine either the Scottish Government’s vision for the bank, as set out in its implementation plan, or the socioeconomic and environmental objectives that were expected—by some—from the consultation process.

Are you satisfied with the objects that are set out in the bill or would you—as some have—characterise them as being a bit vague and open to interpretation? Are they fine as they stand?

Helen Martin (Scottish Trades Union Congress)

We would like to see more of the ethical and social ethos coming through in the objects of the bank. Object 1, for example, is about

“promoting or sustaining economic development or employment in Scotland”.

It does not seem that it would be a big change for it to include the words “or fair work in Scotland”, or “or quality employment in Scotland.” That would give a greater sense of the need for the bank to be not just about jobs, but about the right sorts of jobs, and about the fair work approach that the Scottish Government has been developing and working on.

It would also be right to see the ethical commitment included up front as an end in itself. Otherwise, we could be bogged down in very narrowly defined economic objectives that fail to include the wider social benefit that is required, which was a core reason for the development of the bank, in the first place.

I also wonder about the balance of the mission-oriented approach and where the missions fit into the core ethos of the bank. The status of those missions is not clear to me. Are they additional to the core focus or are they the core focus in and of themselves? The question in my head is this: will the bank be able to invest in things that do not fit the missions but fit wider economic growth priorities, or is it about delivering the missions? That is not clear from what I have looked at.

Flora Hamilton (Confederation of British Industry)

If the vision is for the SNIB to be a catalyst for private investment and achievement of growth in the Scottish economy, it is absolutely crystal clear that the objects need to clarify the roles of the bank, which are investment across early-stage investment for scale-up companies, and the mission-led and long-term patient capital investment that is needed to tackle societal challenges. The objects need to cover all that. We think that that focus, with flexibility and wide scope, is key to delivering growth in the Scottish economy.

Matt Lancashire (Scottish Council for Development and Industry)

I agree with most of what has been said.

The bank’s three objects remain clear and distinct. They are: to remove barriers to patient capital—providing equity finance, in terms of venture capital, has to be one of the purposes of the bank; to support increasing productivity and improve our relatively low levels of innovation; and to support research and development investment.

If R and D investment is connected to ethical, low-carbon and environmental aspects of innovation, that will be fantastic, but we cannot look exclusively at those types of investment. Many organisations out there, across broad industries and sectors, need long-term patient capital if we are to increase our productivity.

Everything has to link back to productivity. People talked about outcomes in the earlier part of the meeting; one of the outcomes has to be an increase in productivity, which is at a low level. Can we sit here and say that that will be done just by investing in low carbon, in healthy ageing and in the bank’s third mission, which I have forgotten?

I would like to add a fourth mission. We will probably come on to talk about the fourth industrial revolution. There could be a fourth mission to invest in data, robotics, software engineering and all the aspects of those that are upon our global economy right now. Could we add a mission to encompass a range of sectors in the fourth industrial revolution in order to lead us to increased productivity, innovation and so on?

Andy Wightman

From Flora Hamilton’s response to the convener, I am a little unclear about what she sees as being the main purpose of the bank. According to the bill, the bank’s

“articles of association must state that the Bank’s main object is giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development or employment in Scotland.”

As things stand, that is proposed to be the bank’s main object, and if the bill passes into law, that will have to be the main object. Do you agree with that object, or should it be phrased differently?

Flora Hamilton

CBI members agree with that object. I was trying to clarify the different roles that will fall from that object and where the bank’s activities could be placed, as laid out in the implementation plan. If we are to tackle the productivity challenges in the Scottish economy, we need to look at three distinct buckets of activity: funding for entrepreneurial businesses at start-up stage; funding for scale-up for the mid-tier businesses, where real economic growth lies; and long-term patient capital to go into projects that sit within the specific missions that are outlined for the bank.

Three missions have been identified. Scotland becoming carbon neutral by 2045 is a distinct mission, and a Government target has been set in that regard, so that is a long-term mission.

However, long-term missions are quite distinct from the investment that needs to go into scale-up growth. In the previous part of the meeting, the example was given of investment in Scottish whisky. That is about funding growth, and that is where jobs and prosperity lie for communities across Scotland. We see distinct differences between the three roles of the bank.

Andy Wightman

Okay. That is of some assistance, I think.

Last week, Mariana Mazzucato stressed that one of the main roles of a national investment bank is to provide patient capital for innovation, which is often not funded by the private sector, although the private sector will often rely on it in years to come. I therefore wonder about use of the word “commercial”. The bill says that the bank’s object is to give

“financial assistance to commercial activities”.

Does that express the full potential of the Scottish national investment bank? In the past, the state has invested in technologies that did not become commercial for years and years, until the private sector began to turn them into commercial opportunities.

11:15  



Helen Martin

That speaks to the tension at the heart of the bill. There is, in the whole project, an element of tension between long-term aspirations about patient capital, and short-term requirements for supporting growth companies and innovation in society. A key concern for us is that that contradiction is being built into the bank’s functions in a variety of ways.

For example, the bill says that the bank must become self-financing in 10 years, but securing that kind of long-term health for the bank to provide patient capital will require growth returns in the medium term—say, five years. My question, therefore, is this: how will it be ensured that the patient-capital elements of the bill get the same kind of attention as the first-order requirement to invest in what produces returns in order to meet the financial requirements that have been laid down for the bank’s operation? That element of how the bank is being set up is a concern for us.

The focus on things that are commercial, that will provide those kinds of returns, and which look promising—and which will give the committee something to write about in your five-year report to Parliament on the bank’s success—will, to a degree, act as a brake on the bank doing what it is supposed to be doing, which is to correct the current market failure and the disincentives that other banks see to supporting long-term and slow-growth projects that are not obviously economically beneficial, but which could, in the long term, unlock greater economic opportunities for the Scottish economy. That is the bank’s purpose.

Unfortunately, as much as we could get behind the aims in the implementation plan, and as much as we support the establishment of the Scottish national investment bank, there are elements of the bill in which those things have not been fully thought through or bottomed out.

Flora Hamilton

The importance of the bank’s ability to crowd in investment must be taken into consideration, because that is how it will tackle the need for long-term patient capital and some of the mission-led investments that are required in the Scottish economy—

Andy Wightman

I am sorry, but what do you mean by “crowd in”?

Flora Hamilton

If the Scottish national investment bank acts as the cornerstone investor in a big long-term project, that will attract private investment. There are parts of the Scottish economy that cannot attract such investment on their own.

Andy Wightman

Can you give examples?

Flora Hamilton

I do not have any to hand, but I can provide some. The point is that cornerstone investment from the Scottish national investment bank will attract private capital.

There are good examples in some of the urban regeneration programmes that have happened across the United Kingdom. UK-headquartered investors such as Legal & General and Hermes Investment Management have gone to Cardiff, Leeds and Kings Cross and have provided cornerstone investment that has attracted Australian and Canadian pension funds. Such private institutional investors will give you long-term growth, because pension funds need long-term investments that provide steady and reliable long-term income. They are not looking to make a return on their investment in the short term.

I come back to the very clear distinction that has been made. It might seem to be complicated, but the bank will have to meet a number of different requirements and service the Scottish economy in the short term, the medium term and the long term. As a result, its objects need to be complex.

Matt Lancashire

I will add to what Flora Hamilton has said. We need to crowd in funding. Germany’s KFW and the Japan Finance Corporation have similar mechanisms and institutions. There are global examples of national investment banks or similar being used as cornerstones to pull not only public finance but private sector investment together as long-term patient capital. Surely the objective of providing long-term capital is to make a return not just for the bank but for the Scottish economy and Scottish society as a whole. Otherwise, what is the point? That is where the bank needs to head in the long term.

I know that the Scottish national investment bank will be nowhere near the KFW in size or what it can do, but the success of such banks has been in supporting and driving innovation through correcting market failures and creating new markets. Surely, the objective of the Scottish national investment bank is to create such new markets for Scotland in order to keep our economy competitive, to keep us exporting through the new trading nation strategy, and to push our economy forward so that we can all enjoy the inclusive growth that we wish for.

There are examples around the globe of investment banks putting long-term patient capital into transformative technologies and inventions in nanotechnology, telecommunications and renewable energy. That is where we need to drive commercial activity.

Andy Wightman

I want to finish with two brief questions. First, under section 11, the bank’s missions will be set by ministers in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

Should those missions be subject to parliamentary scrutiny and approval?

Secondly, should membership of the bank be restricted to Scottish ministers, or should local authorities, too, have a role in membership, as is the case with the KFW?

Matt Lancashire

Could you repeat the question?

Andy Wightman

My first question was about the missions, which Scottish ministers will set in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

There is no provision in the bill for Parliament to scrutinise, debate and approve the missions. I note that, under section 2, the Parliament has to approve any changes in the bank’s objects and articles of association, but there is no provision for Parliament to have any say whatever in what the missions are. Should Parliament have a role in that through, for example, approval by resolution of Parliament? My second question was on the bank’s membership.

Matt Lancashire

It has been stated and emphasised that the Scottish Government will play no role in the bank’s internal governance or day-to-day operational decision making, and we have emphasised the importance of enshrining the bank’s operational independence in legislation—

Andy Wightman

I am talking about the missions of the bank being set by its sole shareholder—that is, the Scottish ministers.

Matt Lancashire

The advisory group will give Scottish ministers advice about those missions—

Andy Wightman

But my question is whether or not Parliament should have a role in debating and approving the missions.

Matt Lancashire

The SCDI does not have a position on that. I am just trying to give you a broader answer to your question.

Andy Wightman

I understand that.

Flora Hamilton

CBI members have expressed no opinion on those matters.

Helen Martin

The STUC has a view. We absolutely agree that Parliament should have a role; after all, this is about £2 billion of public money to support the Scottish economy’s strategic direction and the growth that we want in the economy. That growth should be inclusive, should promote fair work and should deliver a low-carbon future. It is therefore important that there be proper democratic oversight of the missions that will be set for the bank to work on.

Debating the missions is the absolute minimum that the Scottish Parliament should do. Again, there is an issue with the narrow way in which the bank is being set up and the fact that it will invest only in the private sector. With one of the missions being to have a low-carbon future, the bank investing only in the private sector might lead in a certain direction with regard to development and provision of infrastructure across the country. That money could flow only to the private sector in a certain way—Parliament, if it were left to its own devices, might not want it to go that way. I therefore wonder whether we need more oversight of decisions that might flow from the very narrow drawing of what the bank can do.

On the second question, which was about whether there should be a role for local authorities, there absolutely should be. One of the things that we are very interested in is where the community voice is within the bank. The Scottish ministers play a vital role, and it is good to see them as the shareholder, but putting in the wider community perspective of local authorities would be a good start. I do not think that it is the beginning or end of the conversation, but it would help to broaden out the perspective of what the bank would be tasked to do and how the missions would be delivered, which would be useful.

Andy Wightman

Do either of the other witnesses have any views on whether the shareholders should be extended beyond Scottish ministers?

Matt Lancashire

We have supported the idea that Scottish ministers will set the strategic direction of the bank. For me, that answers the question.

Andy Wightman

Are you saying that ministers should be the sole shareholders?

Flora Hamilton

The Scottish Government should be the sole shareholder in the bank.

Andy Wightman

In your view, the Scottish Government should be the sole shareholder.

Flora Hamilton

Yes.

The Convener

Okay. We have clear enough answers to those questions.

Dean Lockhart

I return briefly to the question of stimulating demand in the economy for the additional financing. We see that a much larger scale of financing will be available, but we can also see that there was insufficient demand from business to take up funding from the Scottish growth scheme, for example. We have spoken to the SNIB team, who do not see the bank’s role as being that of originator or as a body that identifies the businesses to finance; it will rely on existing enterprise agencies for that job. Do those agencies therefore have to significantly change the way that they operate in order to find the businesses to access that finance?

Matt Lancashire

That is probably not a question for me to answer; the chief executives and chairs of the enterprise agencies might give a better answer. If there is a case for stimulating demand and there have been issues with other programmes and initiatives, it makes sense that the agencies should work with partners from both business membership organisations and academia, where a lot of innovative thinking and knowledge happens. We should not forget regional approaches and regional economic groups, which can drive that demand and activity. There is an argument for putting more focus on such work, but how the enterprise agencies do it is entirely up to them.

The bank’s success will be based on how many people want to drive through, identify and, ultimately, fund the innovations and provide the patient capital that is needed across the range of business activities. Demand is massively important.

Flora Hamilton

We are at a critical time for demand for growth finance. Business investment is currently at an all-time low, right across the UK, with the uncertainty of Brexit hanging over us. It will be critical for the bank to work with the enterprise agencies to map out their role, to collaborate fully and to understand where the stimulus for demand can come from. It will be important to carry out detailed segmentation analysis of where demand may lie. One of the experts on the previous panel talked about the low level of ambition for growth in SMEs across Scotland—a high percentage of firms have no ambition to grow.

It is critical to have a cluster structure that brings organisations together. As well as attracting in private investment, that sort of structure can help to stimulate demand if organisations share with their peers their experience of a particular type of finance delivery. If entrepreneurs get together and share their success stories through that cluster approach, you can start to stimulate demand. There are distinct ways of doing that. First, you identify ambition for growth and then, where there is opportunity for growth, you try to build the ambition around it to stimulate demand. Given these times of heightened geopolitical risk, we will have to work very hard to collaborate and stimulate demand.

11:30  



Helen Martin

We would agree. One of the missions is place based. A lot of work might be needed to stimulate demand in a coherent and holistic way across the community, which might mean working with a range of partners from the enterprise agencies and local authorities. That again gives weight to the argument that it is important to make local authorities shareholders in the bank. It is also important to work with civic society organisations and trade unions. This is all part of the wider social partnership model that we are trying to create. It is not just about driving growth in SMEs but driving shared prosperity in communities and developing a shared stake in society, which is something that we do not have a lot of. The bank could provide something for all stakeholders to coalesce around in a wider way because it brings money and the opportunity for investment.

Dean Lockhart

Thank you. My other question is about corporate governance. We have heard that Scottish ministers will be able to change the mission of the bank without any parliamentary oversight or discussion and that they will not need to consult or get agreement from the board of directors or the advisory board—there is no qualification. Based on your experience of other forms of corporate governance, is giving Scottish ministers such unfettered power a sensible allocation of responsibility?

Helen Martin

No, it is not. There are other examples of Scottish ministers having oversight, with other layers of governance underneath that, such as in the university sector. There need to be checks and balances in the system. The role of Parliament is crucial; it is a really important democratic institution and should have the right to consider, amend and vote on the bank’s missions. There should also be consultation with the advisory group—why have an advisory group, if the Government is not going to consult it?—and the bank’s governors.

Flora Hamilton

The CBI believes that the role of the advisory group is critical. The board will be accountable to the Scottish Government for what the bank delivers. The advisory group’s membership must cover a broad spectrum, and it must be independent, clear and transparent in its monitoring of the bank’s performance and how it delivers against a set of tangible and measurable KPIs. The advisory group must have representation from a wide spectrum of the Scottish economy and society, including business, financial services, the universities, respected Scottish think tanks and agencies such as Scottish Enterprise. The CBI also advises that the Scottish Government should look for international expertise to tap into in making the advisory board work and deliver for it. There is plenty available, such as from other national investment banks, particularly in the European Union.

Matt Lancashire

I agree about the importance of the advisory board. We are on record as emphasising the need for the bank to have operational independence. It is critical to enshrine that in legislation and for all parties to respect it once the institution is established and operational. If you want the bank to last long term, whoever is in power, that will be critical to its success. It needs to be able to offer loans, make investments, agree joint ventures, create subsidiaries and align with green investment strategies and risk strategies without further approval from ministers. That is how you will make a success of the bank.

Jackie Baillie

I want to explore briefly the financial memorandum, which said that the bank would lend solely to the private sector. Some witnesses have said that that is quite narrow and restrictive. Should the bank take a more open approach and lend to the third sector, community enterprises and so on? Helen Martin is nodding vigorously.

Helen Martin

Yes. It is a very restrictive provision, particularly if we overlay the bank’s missions. The implementation plan talks about transport infrastructure and, specifically, the development of low-carbon infrastructure. The implementation plan gave the example of charge points for electric vehicles, but at present, those are primarily developed by and held in the public sector. Tasking an investment bank with developing low-carbon electric vehicle infrastructure and then saying that it can only do that by investing in the private sector dramatically changes the current model and brings market forces into a key part of the infrastructure that will underpin our economy in the future.

Currently, transport is a very cluttered landscape and there are many different types of providers. The provision would create a situation in which the Scottish national investment bank could support First Bus to develop low-carbon buses, but could not support Lothian Buses to do the same; it could support Serco to develop its ferries in a low-carbon way, but it could not support CalMac Ferries to do that. There is a range of contradictions in the mission and in the limiting of investment to the private sector.

It is also difficult to draw the line between the public and private sectors. For example, Burntisland Fabrications is a strategic asset in the low-carbon economy, but the Scottish Government is a shareholder in that company. Could the Scottish national investment bank invest in BiFab or not? Similarly, the Springburn rail depot is currently under threat and needs investment to electrify the line to secure its future; such investment would probably be done either for ScotRail or Network Rail. The depot is currently in private hands, but it would be for the public benefit if that investment were made. Would the Scottish national investment bank be in a position to make that investment for the benefit of the public sector or not?

Imposing such an investment rule on the bank raises many unnecessary questions about how it can invest, when it can invest, who it can work with and how it can draw in the capital. The CBI submission talks a lot about the need to work with universities, but universities are part of the public sector. They incubate many start-up businesses with high growth potential. Are we saying that the Scottish national investment bank cannot work with those businesses because they are associated with a university? That is not clear to me.

Some of those questions can be sorted out and clearer guidance can be provided. However, the way in which the provision is currently constructed raises serious questions around how the bank will work and how it will achieve the strategic missions that it has been given.

Flora Hamilton

Helen Martin raises some valid points. We are touching on some of the structural issues involved in setting up the bank. There are implications under EU state aid rules and Government fiscal rules. The CBI calls for the SNIB to be given the widest possible scope in order for it to achieve its objectives. We need to look at how we can stretch private investment and the things that touch on that. It is a very complex landscape. Not impinging on those funding rules will be one of the challenges that the bank will face. That will have an impact on how it raises its capital.

Jackie Baillie

I am not sure that that is the case, but I will come back to you on that in a moment.

Matt Lancashire

It goes back to needing further clarity on what the bank can invest in, which sectors it can invest in—whether that is the private sector, the public sector or a range of sectors—and what ethical investment means. On those issues, the bill lacks the clarity that it needs before the bank becomes fully operational.

I do not want to speak about the public sector alone, but it is a massive part of our economy and our society, so we have to take a look at it. Across the public sector, there is plenty of innovation that could be commercialised in different sectors and forms, so it makes sense to take the opportunity to widen out the scope of the bank to public sector organisations. However, we have not yet had the clarity in the bill to make a call on the matter and move the discussion forward.

The universities issue worries me, because they play a massive part in our R and D and innovation structure in Scotland. Where is their involvement? How do they progress with their innovations? We all know that we are great at coming up with ideas, but we are not the best at commercialising them, so where is the connection between the investment bank and the R and D knowledge that is coming out of universities, which are part of the public sector? That part of the bill requires more clarity, so that we can all give a more considered response to the question.

Jackie Baillie

That is very helpful.

I come back to state aid because, to my knowledge, the funding of a community enterprise has never been a state aid matter. The Government is only capitalising the bank with financial transaction money at the beginning. That is a choice that it is making. The Government could choose to provide additional capital, for which it has increased borrowing limits, which would give that wider scope much more prominence and allow funding of the kind of innovation that comes from universities.

Flora Hamilton

It is about how we bring that together and channel the funding in particular ways.

John Mason

The advisory group has been mentioned—some of the witnesses have made comments about it. What should the relationship be between the advisory group and the board of the bank? For example, would it be good or bad for the chair of the advisory group to be on the board as well?

Helen Martin

The governance of the bank is very important, because, as Matt Lancashire rightly said, the bank will be independent of Government. It will be given its missions—hopefully, those will be democratically decided—and it will then go away and work on them. I would like the bank’s governing body to be well designed to ensure that it has good governance principles at its heart. For me, those principles would mean that that structure would include representatives of wider interests. For that purpose, it would be key for us to see a seat for workers on the board, but it would also be appropriate for someone from the wider advisory group to sit on the board. That would give it a broader perspective and would reflect the wider discussions of the advisory group, whose membership would include a mixture of civic society organisations, businesses, universities and the other groups that have been mentioned, such as trade unions in their broader role.

John Mason

You do not think that it would compromise the advisory group to be partly involved in decision making.

Helen Martin

No. That question is put to us a lot in trade union land, and we debate it endlessly. Should trade unionists sit on boards and be involved in the decision making, when they are also potentially challenging the employer’s decisions? At this point, we have pretty much decided that it is worth being involved in that decision making and having that clear ability to shape and truly participate, as an equal, in those decisions. It is a very different relationship from that of simply offering someone advice.

It is not hugely clear whether the advisory group would offer advice to the minister or to the board of governors; actually, the advisory group should advise both. Having a member of the advisory group on the board, along with a seat for workers, would be an important way of bringing in that wider perspective.

John Mason

The previous panel suggested that the articles of association should mention the advisory group. That is not in the bill, but the preference of one witness at least was that the advisory group should be in the articles of association. Do you think that it should be?

11:45  



Flora Hamilton

It would make good sense for the advisory group to sit in the articles of association. We have not debated that in detail at the CBI but, having listened to the previous evidence session, I think that that would make good sense. If the advisory group is to have the role of feeding back and providing independent monitoring and advice to the Scottish Government, it would make sense for it to sit in the articles of association and to be identified as fulfilling that role.

We have not debated at length whether members of the advisory group could also sit on the main board. I advise looking at international practice on that and at what other regulated bodies are doing to see whether that is appropriate and to understand the two distinct roles of the advisory group and the board. The committee could look at how other regulated bodies in the UK tackle that.

Matt Lancashire

I will not comment on whether a member of the group can sit on the board, but I will comment on what the perception of the advisory group is, and that can play a part in greater people than me deciding on that.

I think that the advisory group will be set up to provide intelligence and analysis of emerging and future trends, challenges and opportunities in society, the labour market and the wider economy; to advise on the creation or amending of missions of the bank; and most crucially, to identify growth sectors that require patient capital. The advisory group is meant to be independent.

Members should take from that what they will.

John Mason

Okay.

Matt Lancashire

If a person is advising on where to invest and, all of a sudden, they are making the decision on where to invest, that could—

John Mason

I get that point.

Helen Martin

I want to add a further point about the articles of association. It would be appropriate to put what was discussed into the bill. There are precedents for that. For example, the Scottish Qualifications Authority has a board structure and an advisory group structure that could be looked to as a model. In that example, the member of the board chairs the advisory group. It is seen that way round, but it could potentially be done the other way round.

John Mason

That is a helpful example. Thanks. I see that the convener is chasing me to ask my questions quickly, so I had better move on.

I want to touch on the financial side of things. I think that most of our witnesses have said that they think that £2 billion is a reasonable amount of capitalisation. If any of you think that it is not, please say so.

The other issue is costs and how quickly the bank should break even. The previous panel seemed to think that breaking even by around 2022-23 is a little bit quick, given some of the costs in the financial memorandum. There should be reasonably brief answers on that, if possible.

Flora Hamilton

That looks incredibly tight, but it is doable. It is very important that there is a level of patience and a level of understanding that the bank is for mid to long-term investment to drive growth in the Scottish economy, so it will not be a quick fix, and it will not quickly balance out its costs.

John Mason

I presume that we cannot just keep pouring revenue expenditure into the bank year after year.

Flora Hamilton

Absolutely. How the British Business Bank has been set up is a very good model to look at in the UK. There are good models to consider.

The bank cannot be a burden on Scottish finances, but there needs to be an understanding that it will take some years for it to get up and running and be able to meet its costs, and to deliver a return on investment. Part of its function is the provision of mission-led, long-term patient capital, and it cannot be overreliant on the other two roles, which relate to scale-up and start-up financing. If it is pushed in that direction, that will temper its nature. Patience will be required.

The period that was mentioned is ambitious but doable.

John Mason

Should politicians be more patient, Mr Lancashire?

Matt Lancashire

We can always call for that.

The £2 billion is welcome; it is 1.3 per cent of gross domestic product, which is more than other countries have put into their investment banks, albeit that other countries have bigger economies and so have more money to invest. Our concern is that we will not reach that proportion of GDP until 2030. The economic changes that we want, given our vision to transform the economy over the next couple of years, might therefore be difficult to achieve before 2030. It might be helpful to look at that. Scale and speed are required quickly.

Everyone is saying that the bank covering its operational costs by 2023-24 is tight, so I will say that it is tight. It relies on people, who need to be mission orientated and altruistic towards the mission, as I think that the committee heard in the earlier part of the meeting. However, there is a war for talent in financial services, which is why wages are through the roof and financial services companies in Scotland struggle to get the talent that they need. A close look at the talents and expertise that will be needed up to 2023-24 to make the bank operational and able to move forward is critical, because there is a global war in financial services—

John Mason

I think that another member will ask about remuneration. We can come back to that.

Helen Martin

I echo the point about patient finance, which is important and needs more consideration. Right now, the balance is very much in favour of the shorter-term elements.

The other question is whether there is a way to leverage in more money, primarily to enable the bank to invest in different things. That takes me back to the point about restricting investment to the private sector, because of the transaction costs.

Angela Constance

The panel will have heard in the earlier discussion that Engender and Close the Gap have substantial concerns about the equality impact assessment. Do you have concerns about it?

Helen Martin

The equality impact assessment was not extensive, so perhaps more thinking is required. In some ways, it covered a lot of ground. It started to talk about the fair work agenda and fair work first, which we welcome, because we think that that is essential. It also talked about the need to follow the guiding principles on business and human rights, which is also important, although that raises a lot of questions about where the bank’s expertise will come from in that respect. The guiding principles are quite technical, but they are important and could be used to great effect to follow the ethical mission if there is a good understanding of what following them really means.

Angela Constance

Are you concerned about equality not being written into the bill?

Helen Martin

Yes. That takes me back to my comments about the bank’s objects. The sense of a wider mission around equality, support for communities and ethical investment is a hugely important element, which fits well with and complements the bank’s missions but which could easily be lost if the bank takes a short-termist, high-growth approach to its work.

Angela Constance

Do other panel members have views on whether the equality impact assessment was treated as a tick-box exercise?

Flora Hamilton

We have not engaged with CBI members on that. However, the CBI calls on business to build diversity and inclusion across all areas of its organisation and we have plenty of examples of diversity and inclusion policies delivering economic impact.

Recently, the Rose review considered the lack of access to funding for female entrepreneurs across the United Kingdom. An expert on your earlier panel gave their view on that. The bank could act on some of the recommended initiatives focusing on female entrepreneurs that are coming out of the Rose review, because the amount of funding that reaches female entrepreneurs and growth businesses is shockingly low. The bank could have an important role in addressing that. By addressing it, we will find further growth in the Scottish economy.

Angela Constance

Mr Lancashire, do you have anything to add, or shall we move on?

Matt Lancashire

Similar to the CBI, we champion diversity and inclusivity across all banking governance and operational structures. We support diversity and inclusivity being included as part of the bank’s operational standards and across the make-up of its staff, board and advisory group. That will only lead to better investment decisions, which will lead to a more inclusive society for Scotland.

Angela Constance

The committee has heard mixed views on remuneration policy. Some people point to the fact that the bank will have to operate in the financial services sector, but others point out that it will be a public body that will be accountable to taxpayers for value for money. What are the views of the panel on what the specifics of the remuneration policy should be?

Flora Hamilton

I am happy to say that one of the points that the CBI feels strongly about, for a number of reasons, is that the bank should collaborate closely with the British Business Bank. Remuneration policy is one area in which collaboration could deliver and help the Scottish national investment bank to develop a successful people policy. The British Business Bank has benefited from such a policy and managed to attract the right talent to make it a success, enabling it to deliver back to the UK Government. It would probably be able to give good, tailored advice on that area.

Angela Constance

What are the level of salaries in the British Business Bank? Have there been any accusations of eye-watering salaries, for example?

Flora Hamilton

No, there have been none, as far as we are aware.

Matt Lancashire

Ensuring that the bank is a great place to work and has a strong identity and good sense of mission will support the attraction of talent from within and beyond Scotland. That is critically important. Remuneration for senior leadership staff should be closely linked to the bank’s performance, which is also critical in terms of fair pay for hard work. If someone has achieved their targets, they should be justly rewarded for that, as in any other role or job.

We need to strike a delicate balance between empowering the bank to attract talent through big wages, bonuses and so on, and retaining public trust in the bank. There is a critical line between what is too far and what is not. We want to get the right people and talent, because we want the bank to be successful, but that will take decent remuneration packages, particularly when we are after leading economists and financial experts for the bank. The question is how to achieve that while retaining public trust, given all the discussions over the past 10 years on remuneration, salary packages and bonuses in banking.

Angela Constance

Ms Martin, I am sure that you will have an answer to that question.

Helen Martin

We are clear that the bank will have to apply public sector pay policy, because it will be a public sector institution. It is not reasonable to carve out a special case for the bank as if financiers were somehow more important than other types of civil servants who do excellent work. Every employee, not just the senior leadership team, should get fair remuneration.

However, if there is a problem with applying public sector pay policy and managing to attract talent, that is a wider question for the basis of public sector pay policy as a whole, rather than it simply making a case for the Scottish national investment bank to have a different approach. I think that that would put in jeopardy public trust in the organisation, particularly given the issues in the banking sector more widely.

12:00  



Colin Beattie

A couple of panellists have mentioned ethical investment. Major investment banks and a lot of pension funds have lending exclusions, which can relate to tobacco—that is typical—and perhaps to greenhouse gas emissions or activities that would impact negatively on biodiversity and the ecosystem. Should the bank follow an ethical lending policy? If so, what should it be?

Flora Hamilton

CBI members do not have a list of lending inclusions that they would advise the bank to follow, but the bank’s investments in start-up or scale-up growth activities should not run contrary to the bank’s activities that fall under its mission-led, patient-capital investment work. It is important for the bank to be driven by sustainable growth, which is an emerging area that is coming into the financial services policy landscape from the saver and investment community. That community wants its investments to be in products and parts of the economy that satisfy environmental, social and good governance factors.

In the FS sector, the big push is to find such ESG investments. A lot of work is going on at the UK and European levels on how we can work towards sustainable investments, which will be resilient and will deliver in the long term. The pressure will come from savers and people who want their pensions to go into sustainable investments. That is the wider landscape, so the bank will have to think about its sustainable investment policy.

Matt Lancashire

The question links to ensuring that the bank’s missions are legitimate and of high societal importance. That approach is in the proposals for the three main drivers of the missions to be a low-carbon economy, healthy ageing and inclusive growth. They are all ethical missions and they very much copy KfW’s model, which is about climate change, globalisation and so on. The proposals would move to a similar standard to that which other European countries use for their banks.

The bank lacks an ethical mission in relation to what the fourth industrial revolution means for people, jobs and the economy. All our expertise and knowledge must be brought together so that the fourth industrial revolution creates a giant sector for the Scottish economy that involves automation, robotics, artificial intelligence, big data, nanotechnology and biotechnology. We are missing that crucial mission.

As I said in response to Jackie Baillie, we need further clarity in the bill about what is ethical and what sectors will be excluded before we can comment on how to choose ethical investments. A definition is needed.

Colin Beattie

Should that definition be in the bill?

Matt Lancashire

I do not suggest that, but a definition of what is ethical is needed at some point, so that people can decide whether they agree with that standpoint. Clarity is lacking about what will be ethical and what sectors the bank will be allowed to invest in. A bit of work is needed on that.

Helen Martin

The question is important, as it gets to the heart of the bank’s role. I agree with Flora Hamilton’s comment about the idea that the bank should not invest with its left hand in a way that undermines the missions of its right hand. To a certain degree, particularly around the low-carbon future, those missions give a sense of some of the exclusions that people might have in their investment portfolios. It makes sense for that to be mainstream through the entire ethos of the bank, for the missions to overlap and for some thought to be put into how they work together—for example, how to create a proper place-based approach.

Within the equality impact assessment, there was a commitment to the principles of fair work first. It is important to mainstream that fair work commitment throughout the bank; creating quality employment for workers across the economy should be at the heart of everything that the bank does. The United Nations “Guiding Principles on Business and Human Rights” are another way of thinking about ethical investment; that is already in some of the documentation around the bank. A lot of building blocks are already there. It is about putting the strategy around them and understanding what that means if we are going to do it in a strategic, sustainable, coherent and holistic way.

Matt Lancashire

If, at the moment, an oil and gas company is delivering carbon into the environment, does the bank not invest in it when it comes up with a solution for a technology that reduces carbon in the environment? How do we judge that? What is the ethical approach? Could we exclude that solution from investment because it comes from a big oil and gas company? We need clarity on what that means, because excluding businesses that might be transitioning, or doing different things that need the investment that could push our economy forward, would be a dangerous step to take. Although the ethos of the bank might be to invest in low carbon and net zero emissions, does that mean that we cannot invest in mature industries and sectors that are looking to transition with the technologies and innovations that they have? We must be careful about that aspect of the investment bank’s role.

The Convener

I thank our panel for coming in today. Please feel free to write to the committee if you have further thoughts on some of the issues that have been raised.

12:07 Meeting continued in private until 12:55.  



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Fourth meeting transcript

The Convener

Item 2 is stage 1 of the Scottish National Investment Bank Bill. We have with us five witnesses. Graeme Sands is business banking, corporate and mid-market director at Clydesdale Bank; Andrew Castell is a partner in Par Equity; Jock Millican is investment director at Equity Gap; David Ovens is chief operating officer at Archangel Investors; and David Grahame is chief executive of LINC Scotland. I welcome all five of you.

I will start with a question about supply of capital. It has been suggested in evidence to the committee that the supply of capital in Scotland is increasing, with more funds being available from the private sector. However, there seems to be a lack of demand in the market. Does the panel agree with that? If so, what are the reasons for it? How will the Scottish national investment bank be able to overcome the lack of demand for capital in the Scottish market?

Graeme Sands (Clydesdale Bank)

Good morning, convener and the committee.

Rather than give the committee an anecdote, I will outline some statistics. I recently looked at the “SME Finance Monitor: Q4 2018” report, by the French consulting group BVA BRDC. It looks at statistics for SME borrowing across the whole United Kingdom; there is no reason to think that the outcomes in Scotland would be any different. The report’s conclusions are interesting. Of every 10 applications for finance from small and medium-sized enterprises, seven received precisely what they asked for. One out of 10 took a facility that was not exactly what it had asked for, and two did not get a facility or—as with a small proportion—declined to take the facility that they were offered. In answer to your question about whether there is a lack of supply or of demand, those statistics indicate that there is a little bit of a lack of demand.

On the second part of your question about what is driving the lack of demand, there are many different views. Clydesdale Bank has landed on the view that the nature of the economy is changing. There is an old-fashioned notion that people come forward for finance for things like plant and equipment, or because they are going to put in place a new production line from which they will make a profit. However, as Scotland’s economy in particular gravitates toward services, it is not clear that businesses necessarily have as much demand for finance as they used to have. It is certainly becoming clear that they have a different type of demand from what businesses had 20 or 30 years ago.

Those are my bank’s answers to the two questions that you posed, which are very useful questions in the context of the bill.

David Ovens (Archangel Investors)

I will give a different perspective: I will challenge the premise that there is a lack of demand. I do not think that there is a lack of demand in Scotland—the problem is rather that there is a lack of joined-up supply. Demand is most overt in the market in which Archangel operates, which is businesses that are at the very early stages. That demand emanates from a number of sources—from competitions such as the converge challenge to the great research and development that is coming out of our universities.

Funding and financing in that market is challenging, because it requires great patience to take a business from initial financing through to the point at which it can access alternative forms of conventional finance. Typically, Archangel would invest at a very early stage in a company’s development, but will assume that we will be the lead investor throughout its journey, which might last in excess of 10 years. That journey will take the company to the point at which it can access other forms of capital—perhaps the type of capital that Graeme Sands and his colleagues would be able to provide. The challenge is to address specific market failures along the journey, and to ensure that the SNIB comes in as an institution that will address those market failures.

The Convener

Can you clarify your view on what Graeme Sands said? As I understood it, he said that there is more demand for services, or a drive towards creation of service businesses rather than manufacturing businesses that—for want of a better phrase—create actual things?

David Ovens

The bulk of the companies in the technology sector in which we invest manufacture things—they are product rather than service companies. As I articulated, the challenge is that not enough of those companies make the journey from the earliest stage to more conventional capital demand. We need to address that issue in the market. There is demand for companies that make things and produce innovative technology, but there is currently inability to take those companies from the very early stage, through commercial maturity, to the point at which alternative supply sources are available.

The Convener

I will let Graeme Sands back in briefly, and then bring in David Grahame.

Graeme Sands

I will clarify my earlier comment. In talking about the change in capital requirement, I was referring to a move away from heavy manufacturing and plant equipment. In many cases, the businesses need research and development capital. Ultimately, they make things, but the pathway towards that type of manufacturing is very different to what we might have expected to see 30 or 40 years ago.

David Grahame (LINC Scotland)

We are talking about a really important and complex area. We need first to distinguish between “need” and “demand”. Need is huge, but the ability to convert that need to fundable demand is a big issue, so we need to unlock that if we are going to release economic potential.

Demand can be inhibited by a number of factors. The most basic issue is lack of awareness of what is available and how to go for it. However, confidence can also be a factor, as businesses tend to come and go depending on how uncertain the times are.

In addition, at any point in the cycle the nature of demand can be out of step with available supply. An important requirement of SNIB is that it be well informed and agile in order to enable it to respond. It will also need to be extremely well integrated with all sorts of other agencies in order to manage the demand flow properly.

LINC is currently a major originator source for the Scottish Investment Bank. Over the past three years, our network has taken 255 deals worth £167 million to the SIB. That involved the SIB putting in £44 million while we put in £123 million; leverage and co-investment are very important. However, we know that we are not funding anything like everything that is coming forward.

The Convener

I will bring in Dean Lockhart, while we are on the subject of demand.

Dean Lockhart (Mid Scotland and Fife) (Con)

I have a follow-up question about demand. We have heard from the SNIB itself that it will not originate funding opportunities—it will rely on other entities such as Scottish Enterprise and LINC Scotland to do that, rather than going out and finding businesses to fund. Given the significant additional capital that will be available, do the existing enterprise entities have sufficient resources to deal with such a step up in the amount of available funding? Are they set up to meet that demand?

Jock Millican (Equity Gap)

It is important to be clear about how they will bring businesses forward and whether, from our perspective, those are investable businesses. We would want to see that they are investable rather than just viable; there is quite a difference between the two.

We currently work closely with the Scottish Investment Bank’s Scottish co-investment fund, which works extremely well. We meet most of the demand from investable companies, although some companies are, at that stage, viable but not investable. That is perhaps where some of the funding needs to be looked at separately.

Andrew Castell (Par Equity)

I have two points to make. First, I emphasise the distinction that Jock Millican just made. The committee might benefit from remembering that there is a whole universe of businesses, a relatively small proportion of which are the kind that interest me and my colleagues in equity investment—the very high growth potential, but risky businesses that have the potential to deliver high returns, but also to generate losses.

Within the universe of bankable businesses there is another group: the businesses that can sensibly be lent money, which are more interesting to my banking colleague, Graeme Sands. A large number of them are perfectly viable and sensible, but they will be neither bankable nor of interest in the eyes of venture capitalists.

We talk about whether there is an imbalance in the demand for and supply of capital. There will be potential mismatches: certain types of company are crying out for capital and cannot get it, while other types of company do not really need capital but are being offered it. While there might, in the round, be equilibrium and some demand for capital, there will be isolated pockets of mismatches where there are supply and demand issues.

My second point is on the sufficiency or otherwise of what looks like quite a big number: £2 billion over 10 years. I will outline how we currently work with the Scottish Investment Bank. Par Equity drags a lot of money from south of the border—we are probably an outlier, to a greater or lesser degree, in respect of the proportion of money that we invest that comes from down south—and we put a disproportionate amount of such money to work in Scottish companies. The co-investment money that we get from the Scottish Investment Bank is extremely useful in enabling us to drag that investment capital into Scotland, and to be persistent and patient with the companies in which we invest. One of our key objectives or aspirations for the Scottish national investment bank is that that successful model should not be broken in the transition.

David Ovens

Was Dean Lockhart’s question about the sufficiency of resource related to the personnel, or the capital that has been applied to the new institution?

Dean Lockhart

It was a bit of both. In addition, is it right to have a model that divides origination and lending, with a number of different entities looking at different parts of the supply chain?

David Ovens

On sufficiency of capital resources, the proposal is to capitalise the bank at £2 billion over a period, which is broadly in line with other national promotional banks. On the face of it, that seems to be a sensible level of capitalisation that could go quite a long way if it is applied sensibly to address market failures.

On allocation of resource within the organisation, the Scottish Investment Bank currently works largely on an accredited-partner basis—in a sense, it will back the private sector. There will be a headcount required to manage the portfolio, but a lot of the heavy work will be done by the private partners—such as Archangel—that the bank is backing.

David Grahame

I have a similar comment to make. There is an opportunity to build on the partnership model and to find delivery efficiencies through not building an ever-bigger establishment. That might involve a lot of things that are outwith our space—for example, tapping into peer-to-peer lending as a delivery channel.

Dean Lockhart

Co-investment has been mentioned quite a lot. To what extent should the SNIB follow the co-investment model in leveraging public sector money with private sector money? To what extent should opportunities be identified by the private sector rather than by the bank itself?

David Ovens

If we look at what has happened with the Scottish co-investment fund over the past 15 years, we can see that it is a demonstrably successful model. There will be aspirations arising from the SNIB consultation, but you should not change a model that has been very successful over the past 15 years. You need to build on that model, which very much leverages and crowds in private sector investors. It has been copied around the world, most recently by the British Business Bank. The co-investment model has been very successful, and SNIB should build on that template.

10:15  



Gordon MacDonald (Edinburgh Pentlands) (SNP)

The British Business Bank has four objectives, including to increase the supply of finance and to create a more diverse finance market. What impact has the bank had in Scotland?

Jock Millican

The impact of the British Business Bank has been fairly limited, so far. It has had some involvement in Scotland, and it is increasing its presence here, along with the amount of opportunities that we are able to look at with it. It now understands the Scottish infrastructure model better and is able to work better with us on that front. However, we have still to do a lot more with it.

David Ovens

The British Business Bank is focused more on investing in funds than on core investment capital. As I alluded to a couple of minutes ago, the British Business Investments regional angel programme, for example, which is now competing almost directly in Scotland with the Scottish co-investment fund, is a replica of that fund model, in which co-investment capital is provided alongside funding from the private sector partner.

Graeme Sands

It is useful to remember that, historically, the Scottish co-investment fund has addressed only the equity side of funding. To a degree, that is also true of the British Business Bank’s initial expansion. We should not forget that the British Business Bank also provides the enterprise finance guarantee scheme, which is a tremendously substantial way of crowding in—if we want to use that phrase—debt funding into businesses and ensuring that they get greater access to bank capital.

As we begin to think about how the Scottish national investment bank is established, it is important—certainly from my perspective—to ensure that we think about equity and debt. For example, does the mechanism of something like the Scottish co-investment fund work equally well for debt in the future? It might well do, or we might consider that something like the British Business Bank already substantially addresses that aspect.

Gordon MacDonald

The British Business Bank’s “Annual Report and Accounts 2018” highlights its regional funds in the north of England, the midlands, Cornwall and the Isles of Scilly, and states that they

“are now delivering critically-important debt and equity finance to boost their respective regional economies.”

Is there any particular reason why it has not focused so much on Scotland?

Andrew Castell

I say, based on a conversation that I had with someone from British Business Investments last week, that that is a back-handed compliment. The bank is, essentially, focusing on regions where it sees a real need for its intervention: it does not see Scotland as being in that category because of the success of what has been happening with SIB and Scottish Enterprise.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

The target rate of return for SNIB will be established before it is actually vested. What level of target rate of return would you expect a bank with the characteristics of SNIB to achieve?

We have heard that SNIB will potentially lend to not-for-profit companies and all sorts of different aspects of the third sector, which adds complexity to its position. How would you establish what a reasonable rate of return would be?

Andrew Castell

Much of that will depend on what the portfolio of assets looks like. When the bank is up and running, it will want to achieve a certain mix of lending, equity investment and so on, which will drive its idea of what a reasonable rate of return should be.

Colin Beattie

I take on board what you say: until there is a portfolio, we do not really know.

Andrew Castell

Exactly.

Colin Beattie

Nevertheless, the bank will put in place a target before it is actually vested. In your view, what would be a reasonable target and why?

Andrew Castell

As an accountant, I can tell you about the cost of most things but the value of very little. Much will depend on the missions that are set for the bank, and the non-financial targets around some of the broader social goals that those missions are intended to deliver.

In absolute financial terms, one can look at what might be a reasonable market return on venture capital or on credit activities and come up with a number. The big and very difficult challenge will be to throw into the mix some non-financial returns, which will be necessary in order to deliver on even a relatively small proportion of the great hope and excitement that the project has engendered.

Graeme Sands

First and foremost, Clydesdale and Yorkshire Bank is strongly in favour, in principle, of a Scottish national investment bank. Nonetheless, I point out that, although the “Consultation on the Scottish National Investment Bank Bill” uses words such as “bold” and “ambitious” and states that the bank is designed to address third-sector and other wider socioeconomic concerns—on page 7, it suggests that the bank must look at different types of financing—it also states that the bank must be “commercial”. That is in addition to achieving an ambitious rate of return. It will be incredibly hard for the bank to achieve all those aims in combination if, as we would suggest, its remit keeps it clearly away from existing commercial opportunities.

We are asking SNIB to go to places that the commercial market does not currently go, presumably because of risk or for reasons of patience and long-term capital. However, we are also asking it, as part of a very broad remit, to improve Scotland’s economy. I wonder whether it is necessarily wise to establish an aggressive rate of return, or to establish a rate of return at all, ahead of the establishment of the bank’s missions.

Jock Millican

A key term in the bill is “patient capital”, and that is where the focus needs to be. The bank will be about providing long-term capital—there will be returns from some elements of that, but not from all of it. It would hamstring the bank very badly to set out an ambitious rate of return at an early stage.

Colin Beattie

Did the British Business Bank not set a rate of return of 2.5 per cent, which it has exceeded? It must have had a basis on which to set that target.

David Ovens

For all the reasons that my colleagues have outlined, a positive internal rate of return over a period of a time would be a successful outcome for the bank. In addition, we should not lose sight of the fact that the bank is being set up as an institution that will be a cornerstone of the economic foundations for the nation. Financial return is one measure of success, but the economic impact should be equally important in that regard.

Colin Beattie

The message that I am getting is that the target rate of return should not be too ambitious in the first place. I see that you are all nodding.

Graeme Sands touched on the issue of additionality and the need for SNIB to avoid competing with existing products on the market. Is that achievable, given the mission that SNIB will have? Is it achievable for SNIB to avoid competing with the multitude of financial sources that currently exist in the market?

David Ovens

Yes, and that should be SNIB’s defining mission. To go back to the core objectives of SNIB, the driving mission is to create an institution that will drive economic performance in Scotland. It will do that on the one hand by supporting SMEs through market failure, and on the other hand by driving economic imperatives and missions that are set from time to time by ministers.

I will look at the market failure aspect first. The early-stage equity investment market in which we operate is very much an area of market failure. We are incentivised to invest in that area through various tax breaks from the UK Government, such as the enterprise investment scheme. However, that incentive would not in itself be enough to drive sufficient capital into that area of market failure, and the activities of the Scottish co-investment fund are therefore vital in leveraging our activities in that respect. That fund is additional to private capital—it is bringing in private capital rather than competing with it.

Secondly, I turn to the missions for SNIB. One of its missions, as the implementation plan articulates, concerns the transition to a low-carbon economy; it sets targets on petrol and diesel to be achieved by 2032, which is 13 years off. It would be very difficult to persuade conventional private capital to take a 13-year view on a return, but it is sensible for SNIB to intervene in that area. It is additional in that sense—it is not going to leverage out private capital.

Colin Beattie

Do you envisage that, rather than pursuing entirely different products, SNIB may have a role in supporting some of the existing capital investment into the country?

David Ovens

Where SNIB can crowd or leverage in private capital, that will be vital to its role. What it should not be doing is competing with conventional sources of capital from Graeme Sands and his colleagues at the Clydesdale Bank.

Colin Beattie

It is easy to say that SNIB should not compete with existing products on the market. What kind of products should it go for?

David Ovens

The area in which we operate is very equity driven. We might think about the funding journey for a company: for the first 10 or 15 years of its life, the relevant asset class will, 90 per cent of the time, be equity—that is the instrument that addresses the early market failure. As the company develops, other forms of financing may become relevant. However, with regard to the long-term patient capital that is really the driving mission of SNIB, equity or quasi-equity will be the relevant asset class 90 per cent of the time.

Graeme Sands

Another way to think about it is not just to look at particular financing products but to consider a company’s life cycle and what it needs during different events in that cycle. One important point—I cannot recall if it is referenced in the consultation paper, but it has certainly been referenced in subsequent discussions—is the transition from early-stage equity to later-stage equity and then to debt finance. Those transition points are often quite hard, for a wide variety of reasons that I probably do not have time to go into here. That is an event in a company’s life cycle that it may need support with. It is not about different commercial products per se, but the fact that those products are not necessarily available during those events.

More widely, I think that no one would suggest that, even in relatively efficient capital markets, there are not gaps in certain areas from time to time. The Clydesdale and Yorkshire Bank would simply suggest that the missions that are set out for SNIB should clearly identify what those gaps are, and clear evidence should be provided rather than relying on anecdote. We would be happy to work with SNIB in the future to help it to set out and explore those gaps.

Colin Beattie

Does anyone else on the panel have a view on that?

David Grahame

That has pretty much covered it. There are a lot of gaps—the staircase of finance is not complete. There are certainly issues beyond our level before companies get to conventional funding, and SNIB could provide leadership in that area. By getting that right, the bank would also lever in new finance, quite a lot of it from outside Scotland.

John Mason (Glasgow Shettleston) (SNP)

We have talked about the commercial focus that the bank has to have, but we have also heard about the desire for socioeconomic and environmental returns. Does the public limited company model fit in with that? It is proposed that SNIB should be a plc. The Government looked at other models—Scottish Enterprise is a statutory body, for example, so its missions are set in statute rather than being left to the articles of association and so on. Are you comfortable with the plc model? Can it work?

10:30  



Andrew Castell

I think that it can. On whether SNIB needs to be a plc or simply a private limited company, I point out that people typically go for plc status if they are contemplating raising capital externally. As I understand it, however, the plan for the immediate future is that the bank should be exclusively financed by the Scottish Government.

Essentially, SNIB is an example of that great Scottish invention, the investment trust—it is not really a bank. For that purpose, a plc works well enough. It also provides a degree of flexibility. The point about corporate structuring is that, if you do not like it, you can change it subsequently. Nothing is really set in stone for the institution by the fact that it is starting off as a plc.

John Mason

Do you think that, in some people’s thinking, the very term “plc” suggests that there will be a big emphasis on commercial return, with less emphasis on the social and environmental aspects?

Andrew Castell

If only it were that reliable. There are plenty of plcs that we can think of—even banks—that have not done much by way of returning profits.

John Mason

True.

Jock Millican

The plc model covers the requirements quite well, and I do not think that there is any need for anything different.

John Mason

On the question of return, we have talked about risk and exactly where the bank fits in. The proposal is that it should be breaking even by 2023-24. Is that realistic, given what we have said about risk?

Andrew Castell

Earlier, I whipped out a calculator and considered that point. If we are thinking about it in government cash-accounting terms, I would say that there is not a hope. However, if we examine it at a company level and ask whether the SNIB would be able to turn a profit—in particular, an accounting profit—I would say that it probably would. Much will depend on whether the existing portfolio of Scottish Enterprise investments is transferred over to the bank, because that will, in principle, provide a number of exits and a portfolio whose valuation will, hopefully, continue to tick up. In cash terms, however, absent a strong weighting towards cash-generative assets such as loans, I do not see the bank breaking even.

John Mason

Let me clarify that, because some of it was a little bit technical. You are saying that, by 2023-24, the value of investments might be going up but we would not be able to get the cash out.

Andrew Castell

Yes, precisely.

John Mason

That could be a problem for the public purse, but the process would be understood.

Andrew Castell

Yes.

Jock Millican

I would agree with that.

David Ovens

From an investment perspective, it is difficult to see how the bank will be washing its own face within five years. However, I presume that the bank will have ancillary revenues as a function of facilitating investments, so there will be arrangement fees and perhaps portfolio monitoring fees, which will provide the bank with a recurring revenue source. It will not rely just on investment returns.

John Mason

You have all used the word “patient”. You are not politicians, but politicians are not always very patient. Do you anticipate that, if the bank does not do terribly well for the first two or three years, people will be jumping up and down, wanting the whole system changed? I presume that part of the idea is—as you have suggested yourselves—that we will put money in and see the success of that perhaps 10 years later. Are you optimistic that that can and will happen?

David Grahame

Optimistic politically? The average time to a positive exit for the gentlemen here is nine years, but the whole cycle can easily take 15 years. It is 15 years since the co-investment fund was founded, and it is only now beginning to go where it should be going. It is essential that the institution takes that sort of profile. It is a real challenge for the people who are designing it to make it able to survive through political change.

John Mason

You say that the average exit time is nine years, but some businesses take off amazingly fast, whereas some do not.

David Grahame

Yes. Most of the bad news comes earlier, which is sometimes difficult politically. Things might all go in one direction for three or four years. The lemons ripen before the plums.

John Mason

That is a good quote.

Graeme Sands

That is why the gentle counsel that we are able to give here is on de-emphasising from aggressive rates of return. If you believe, as we do, that the Scottish national investment bank offers something positive for the Scottish economy, de-emphasising away from commerciality and aggressive rates of return is perhaps a way to make the SNIB politically sustainable in the more difficult period of its establishment, which is likely to be the first five years of its existence.

David Grahame

There is a useful piece of background information that you might want to draw on. Archangels did a very long-term study of the economic impact of its investment, which also considered the returns that it made. That study is worth looking at, because it assesses the economic impact in Scotland of a 20-year cycle of investing.

David Ovens

Archangels was established as an investment firm in 1992, and we got the University of Strathclyde to undertake that study in 2015, so it effectively took a 20 to 25-year view of what we had done. That goes back to the point that we have to be patient when it comes to the financial return. For us, a successful financial return comes within about 10 years.

Returning to what the SNIB is all about, we were generating an economic impact along the way without necessarily generating a financial return for ourselves. The output of the University of Strathclyde report was that, for every £1 of investment from Archangels, we were able to generate around £9.50 of gross value added to the Scottish economy. Over that period, we generated around £1.2 billion of economic value added to the Scottish economy through the investing activities of Archangels; our portfolio companies created 4,000 jobs; and every £1 that we invested created £14 of turnover. A lot of the economic activity that has been generated by what we do goes beyond the financial returns that we are hoping to generate in due course.

John Mason

That kind of creates a problem in relation to the whole GVA thing. Basically, everybody who comes to the committee claims that, for every £1 we invest in them, we will get £7, £8, £9 or however much back. Are you convinced that we can measure that kind of figure fairly, reliably and solidly? The return that your business or any business gets can be measured very exactly.

David Ovens

GVA is a recognisable methodology. Companies create jobs and generate turnover and profits. The GVA methodology is subjected to tweaks and subjective views, but it is fairly standard, recognisable methodology that provides at least a baseline of the impact.

Jackie Baillie (Dumbarton) (Lab)

I wish to touch on the vision and objects that are contained in the bill. Some of the witnesses from whom we heard previously suggested that both the main and the ancillary objects do not quite capture the Scottish Government’s vision, which was set out in the implementation plan—nor, indeed, do they capture the expectation that the bank will serve environmental and socioeconomic purposes. Are you satisfied with the objects, or do you think that they may be slightly vague as they stand?

David Ovens

I think that the objects in the bill reflect the fact that, constitutionally, the SNIB is going to be an enduring institution that will drive economic activity in Scotland. There are also various ancillary objects. The missions that go on behind it are going to change over time, and the institution will be subject to whatever Administration is in power and to whatever the macroeconomic position is at the time. It is not necessarily right to enshrine specific missions within the constitutional objectives of what the SNIB is trying to do.

David Grahame

The objects are generally satisfactory if they are taken in conjunction with the ancillary objects, which add a bit more clarification. From what I have seen previously, there will need to be a fuller understanding of what is meant by “commercial”. We certainly do not think that that means just private enterprise.

Jackie Baillie

So, clarification is needed to expand the point that social enterprises and the third sector could be included. You think that that would be helpful in this context.

David Grahame

Yes, provided that the things that are being financed are capable, ultimately, of providing a return on the finance; otherwise, it is just a grant.

The SNIB is very important, but it will be only one public policy instrument for achieving socioeconomic objectives. For it to be effective, it is important to allow it to make that contribution in such a way that it is a good fit for an investment entity. It is one of the few channels for delivering public expenditure that is envisaged as a two-way street financially. That desire for sustainability needs to be borne in mind. The SNIB has attracted a huge amount of interest, ideas and expectations, but those could dissipate if there is a temptation to edge into things that should properly be tackled through departmental spending.

Jackie Baillie

Most social enterprises that I know of generate profits; it is what they do with their profits that is different.

David Grahame

Yes.

Jackie Baillie

There would be a rate of return for any institution.

David Grahame

Absolutely. As a phrase, “non-profit” is fine if it means an institution not distributing profit.

Jackie Baillie

Indeed.

David Grahame

However, it needs to be able to sustain itself.

Jackie Baillie

Absolutely. Do any other members of the panel have a view on that?

Andrew Castell

My view is that the implementation bill that we have before us will lead to the drawing up of the articles of the company of the SNIB, which I think should be fairly general. There is a process around the setting of missions for the bank, which Scottish ministers will come up with and which will be subjected to the scrutiny of the Scottish Parliament, as I understand it. That process will drive the granular detail of what the institution gets up to.

As I have to spend a certain amount of my time guddling around in bits of legislation, my pet hate is legislation that contains highly subjective, undefined terms. One of the particular dangers of trying to cater to the rapidly evolving third sector, not-for-profit organisations and social enterprise is that it is work in progress. There is a lot of jargon involved, and it is inevitably changing over time.

The fundamental point is that, as David Grahame observed, there is a lot of commercial activity among social enterprises and within the third sector, but it is clear, from the preceding evidence sessions, that a number of people have struggled with the objective of investing in commercial opportunities. We could do with some clarification that those are really just anything that is non-state.

Jackie Baillie

You must be older than you look, because the jargon, as you describe it, has been around—at least to my memory—for 20 to 30 years and has not changed much. So, there is clearly something going on there. The approach that you favour involves adopting a model that is sufficiently flexible and that allows ministers to specify missions.

Graeme Sands

To build on Andrew Castell’s point, I suggest that the missions need to be set out very clearly. There needs to be very strong governance around those—tight governance that sets out what the mission is, what the market failure is and what the evidence for that market failure is.

Human nature is a little bit like water: it finds the easiest path. We can already see from the building Scotland fund, which is set out on the website as the precursor to the Scottish national investment bank, that three areas have been identified: housing, commercial property and business-led R and D. I would be interested in seeing where the gap has been identified for those three things. Is it an equity gap, a debt gap or a mezzanine gap? What is the evidence for the gap on those three things? It is probably true that some banks will not lend to business-led R and D, but that is not the case with our bank. On the other hand, we are not a great fan of lending against housing. Hopefully, that level of specialisation indicates some level of professionalisation in the provision of finance.

Perhaps the gap is on the equity side—I do not know. It is not entirely clear that the missions, as they are being set out, are sufficiently supported by evidence of a gap or that that gap is clearly articulated. As we have all said, there will be gaps in the market—we all believe that; we just want to see what they are, what the opportunity is and how the Scottish national investment bank proposes to fill them.

10:45  



Jock Millican

Changing missions and objectives frequently will not help the bank to operate well. It would not be right to make a change to the mission according to each whim that comes along. It needs to be a long-term, patient operation.

Jackie Baillie

When you say “long-term”, you are thinking about 10 years or more.

Jock Millican

Yes. Absolutely.

Gordon MacDonald

I want to ask about the funding of the bank. According to the way in which it has been set up, it will get an average of £200 million a year from the Scottish ministers. I think it was Andrew Castell who mentioned that the SNIB will be more like an investment trust than a bank. Part of the problem lies in the Treasury’s recognition of it as a department, not a bank. Should the Treasury recognise the Scottish national investment bank as a bank, and should the SNIB be allowed to issue bonds or public shares?

Andrew Castell

Graeme Sands will probably mark my homework here, where appropriate, but I would say that you should be careful what you wish for. If you make the SNIB genuinely a bank, it will require capitalising and regulating as a bank, and those things cost money.

There is a related question about diversifying the sources of capital. As soon as you start taking other people’s money, you are in a different place in terms of how the entity is controlled and how its governance works, the question being whether ministers and the Scottish Parliament could control it as they would if they were the sole shareholder and funder.

Nonetheless, those things can be done over time. The Green Investment Bank is an example of a bank that started off state funded and then got spun out and privatised.

Gordon MacDonald

You would not be in favour of the issuing of bonds—putting the shares aspect to one side.

Andrew Castell

I would certainly not do that for as long as there was finance available from the Scottish Government. You could consider securitising loans and selling off those securities, which would allow for the recycling of the capital that the Government is providing. There are a number of financial engineering options that could achieve the aims that you might want to pursue in using external capital that would not involve taking it into the bank itself.

Gordon MacDonald

I note that, if the SNIB remains recognised as a department, it needs to

“secure a dispensation from HM Treasury to have the flexibility to manage, retain and carry-forward cash balances over financial year-ends”—

given the headroom that the Scottish Government has for carrying forward. What impact would it have if the SNIB were not allowed to carry those balances over?

Andrew Castell

I was a non-executive director of Highlands and Islands Airports Ltd for six years, and HIAL built up a reasonably sizeable cash reserve with a view to expanding Inverness airport. Sadly, it had that reserve taken off it—because the Treasury finally noticed it, I think.

I suspect that the bank will turn cash into investments quite quickly as it comes through, so the risk of its being caught with a sizeable cash balance at the end of each fiscal year is probably quite small. However, I suspect that it would make everyone’s lives easier if the bank were to secure that dispensation and be able to hold cash without it being taken away come the beginning of April each year.

Gordon MacDonald

You mentioned the Green Investment Bank. The British Business Bank got a dispensation that was similar to what the SNIB is looking for, did it not?

Andrew Castell

I do not know.

Angela Constance (Almond Valley) (SNP)

Does the panel have any views on the bank’s remuneration policy? The committee has heard a range of views on the matter, as you would expect. On the one hand, some witnesses have said that, as the bank will be operating in the financial services sector, the terms and conditions need to reflect that sector. Other witnesses have put forward the argument that, as the bank is a public body, there needs to be public confidence, and that senior personnel should be paid as public servants, as opposed to private financiers. Who would like first dibs on that one?

Andrew Castell

My views on this are not always very popular. If the employees of the bank are going to enjoy the advantages of being in the public sector, which are no compulsory redundancies and perhaps receiving a defined benefit pension entitlement, I do not see why they need to be paid the kind of salaries and bonuses that people in banks have been and continue to be paid. There is a risk premium associated with that kind of employment, which is quite precarious.

Referring to the pooling of local government pension funds that is happening south of the border and is being discussed north of the border, the asset management firms that have been formed to run the pooled pension institutions are concluding, more often than not, that they do not need to pay the big salaries to attract quality people. There are definitely precedents for having institutions such as SNIB fall within a government pay mandate.

Angela Constance

I would say that that is a very balanced view, as opposed to an unpopular one, but other members of the panel will perhaps wish to add to that.

Jock Millican

It is a matter of ensuring that the rewards come in different forms. As Andrew Castell said, no one in the private sector can even hope for the pension thing these days—it is all gone. It is about balancing these things. You must ensure that you are getting the right people to run the bank. It is no use saying that we will have a certain level of remuneration if we end up with people who are not capable of running the bank.

Angela Constance

I have not heard anybody suggest that we should be recruiting unqualified people. I wonder whether other members of the panel have anything further to add.

Graeme Sands

I will link this to previous comments. I will not comment on whether public or private sector pay is appropriate, as I do not entirely know what we are talking about within those two ranges. However, the mission and purpose of the Scottish national investment bank must be bold, ambitious and clearly set out and embedded within the culture of the organisation. I tend to agree with Andrew Castell and Jock Millican that, if the purpose is clearly embedded and understood in the organisation, it should be possible to attract the right people, who are rewarded by executing that purpose and not just by the pay cheque.

Angela Constance

So high-calibre people have a range of motivations that they wish to see fulfilled in their employment.

Graeme Sands

Yes.

David Grahame

I endorse that. It is not entirely surprising to get that view. The whole of the business angel community is partly driven by putting something back, as well as by investing. We are not at the red-in-tooth-and-claw end of things.

The bank will need quite a wide range of skills, particularly if it gets into dealing with third sector issues and so on, so it is important that it has a breadth of professionalism and credibility for dealing with those bits of the market that it is interacting with.

Angela Constance

Could you give some examples of the breadth of professionalism that would be required?

David Grahame

If we were to ask the personnel to assess a social investment proposal, for example, that would probably not use people with quite the same skills as those who would consider pure VC. We would not want to have the bank compartmentalise, but it looks like it will have to cope with quite a wide range of tasks.

David Ovens

I broadly agree with everybody. The senior management of the bank will not have an easy role, so they will need to be appropriately remunerated. That should be referenced to public sector pay policies, but without necessarily sticking to them.

I caution against a bonus culture. If the work of the bank is all about the long term, any related incentives should be appropriately pegged and longer term in outlook.

Andy Wightman (Lothian) (Green)

It is now common for investment funds, and indeed sovereign wealth funds, to have ethical policies. There is no provision for that in the bill, but I wonder whether you think that the bank should have an ethical policy, for example on things that it will not invest in, such as fossil fuels, tobacco and arms, or is that something that is best avoided?

David Grahame

The whole trend in society is towards ethical finance. That is certainly not something that we have a problem with. Nearly all the public sector sources that we interact with have limitations. Again, it comes back to the clarity of definition, particularly of terms such as “ethical”. That should not be a matter for interpretation by officials. We would have no problem with the bank having a clear ethical policy.

Andrew Castell

Pretty much everyone has an ESG clause in their investment management mandate, in their articles or whatever.

Andy Wightman

Sorry, what is an ESG clause?

Andrew Castell

Ethical, social and something or other—essentially, it is ethical investment. Everyone just calls it “ESG” and it gets lost in the acronym—apologies for that.

Some things are clearly bad: you would not want to be investing in terrorist organisations, drug pushers or whatever else. Then, there is tobacco, which is the next best thing, and so on. As you go along the spectrum, there will be areas of greyness. An example that was cited previously involved an oil and gas company that is trying to transition away from oil and gas and is developing low-carbon technologies. Is that something that should or should not receive some assistance from the bank?

Andy Wightman

We also had an interesting discussion about alcohol last week.

Andrew Castell

Yes. It has always intrigued me that Scotland is fixated on how bad alcohol is, yet it is one of our major exports to the rest of the world—but there we go.

On the specifics of the objects of the bank and how its constitution works, one very good maxim in life is, “Always do the right thing.” Directing the bank to be ethical in its approach, as an overarching objective, would be the way to do it—and then directing the management, at a more specific level, on what industries or activities are considered to be unacceptable for it to concern itself in. The bank could report annually, or however frequently makes sense, on how it is observing the more detailed guidance.

Jock Millican

I agree with Andrew Castell. It is important that the bank is given guidelines to work with on what is deemed to be ethical or not ethical at the time. Things change over time: what was ethical 20 years ago may not be ethical now. It should be down to ministers to give that guidance, I would say.

Andy Wightman

Those were fairly clear answers.

I will move on to another topic that we have been exploring: the proposal that there be a group to advise ministers, who will be the sole shareholder of the bank. The implementation plan, I think, suggests that the chair of the advisory group should be a non-executive board member of the bank.

The bill makes no provision for an advisory group; it is just something that has been suggested. What are your views on such a group? Would it be useful? Should it be incorporated either in a section in the bill or through something in the articles of the bank?

Andrew Castell

When it comes to the governance of any kind of undertaking, the fewer groups whose instructions you are expected to follow, the better. As regards the articles of SNIB and the enabling bill and so on, it should be very clear that the bank answers to ministers. Everyone knows, then, what the line of communication is.

11:00  



As I understand it, the advisory group is as you have just described it, in that it is there to help ministers understand what SNIB is doing, what it might need to do, and so on. That channel of communication should therefore be between ministers and the advisory group. I think that it would confuse matters to enshrine the group’s status in the constitutional documents for the institution. That is simply because it may be that, over time, ministers feel confident enough that they do not need a bunch of people whispering in their ear about X, Y, and Z and can look after the bank themselves.

Andy Wightman

To be clear, if such an advisory group were to be appointed by ministers—no such provision having been made in the bill—you would not wish the chair of that group to be sitting on the bank’s board.

Andrew Castell

There could be very good reasons for that to happen, but that can be dealt with, as the appointment of directors to the board is in the gift of Scottish ministers. If they decide that they would like the chair of the advisory group to be a non-executive director of the bank, it can happen. I do not think that you need to make provision for that in the articles.

Andy Wightman

Are there any other views?

Jock Millican

I concur with those of Andrew Castell. It is very important that the advisory board does not directly influence the bank, but does that through ministers.

David Grahame

There could be an opportunity to get some wider value from an advisory group. If all that it did was channel a variety of opinions to ministers, it could be a sort of rolling consultation medium or focus group. If it were well structured and well led, its bringing together a whole host of people who would not normally sit down together and interact would hopefully lead to some better understanding.

Of course an advisory group would be entitled to feed through independent views. On occasions when the group came to a joint understanding of things that it wished to put to ministers regarding performance or future development, it could give a very powerful message.

Andy Wightman

I will pick up on a few things that were said earlier. Graeme Sands, you said that you thought that we should de-emphasise commerciality in the bank, yet that is at the heart of the main statutory article. Could you clarify that view?

Graeme Sands

In our written consultation response, we emphasised that we do not believe that the bank should compete with existing commercial options. We discussed that at some length. The deputy convener asked a question about the early years of SNIB’s establishment and the commercial expectations for it.

Our view is that, if the Scottish national investment bank is going to step into areas that are already covered by commercial equity or commercial debt finance, that is not desirable. That is not SNIB’s objective, and it would be unlikely to lead to the best outcomes for taxpayers.

It is a matter of the level of emphasis. I fear that, if we emphasise aggressive rates of return, especially in the early years, or if we emphasise a very commercial model, it could be hard to sustain the Scottish national investment bank as an entity. Clydesdale Bank is very supportive of its establishment, for all the long-term reasons that are set out in the consultation document. We see a danger in trying to make the organisation too commercial too quickly.

Andy Wightman

That is helpful.

I will move on to the subject of missions, which are central to the concept of the bank, and to the advice that has been given to ministers by Mariana Mazzucato and others. Provision is made in section 11 of the bill for setting missions. By their nature, missions will be cross-sectoral. As one of you observed, they are reliant on not just what the bank does, but what a lot of other people do.

Some months ago, I visited a business involved in an innovative heating technology that can potentially contribute to rapid reductions in fuel poverty levels. The business was on the point of leaving Scotland and moving to Zürich in Switzerland, until it got a contract from a housing association. That is the kind of example that I have in mind among a portfolio of investments that might help to tackle the big challenges around fuel poverty or indeed low carbon. That is what I have in mind when we talk about missions. Is that the kind of mission that you understand by the term? Do you have others in mind?

David Ovens

Let us consider the transition to a low-carbon economy as a mission, bearing in mind the premise that SNIB is primarily a financing organisation. As Graeme Sands indicated, the missions need to be evidence based. I think that all of us around the table would agree that the transition to a low-carbon economy, based on evidence, is a good thing that SNIB should be supporting.

We then need to recognise that getting from A to B will take a long time for that mission, and it will be a challenge to leverage in private conventional capital. In that sense, we are addressing a market failure. SNIB has to be focused when it comes to the financing.

As David Grahame said, other agencies can be involved in the other aspects. As far as personnel are concerned, there is Scottish Enterprise, and social enterprises could be involved in all aspects. I see SNIB’s role as being at the heart of the financing aspect of that mission-led approach.

Graeme Sands

Building on that, and getting more specific, it might be that the real problem in the example that you outlined, Mr Wightman—I am not saying that it is, but it could be a problem—lies in a lack of confidence in public sector or quasi-public sector procurement. That might be a useful place for the Scottish national investment bank to deploy guarantees.

If it were up to me, I would try to make the missions very precise. For instance, the mission might be to address a lack of public sector procurement confidence in small companies or smaller businesses that are trying to transition from active technologies to a low-carbon economy. I am simply using this as a hypothetical example. Let us say that we have seen a market gap—a lack of guarantees—so one of the bank’s missions would be to provide guarantees that close that market gap and achieve the end aspiration. That is the level of specificity or detail that I would hope to see from the Scottish national investment bank’s management in executing the missions.

Andy Wightman

However, the missions, as they are described in the bill, are to be set down in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

There is no great specificity in that. Are you suggesting that the missions themselves should be quite specific and detailed?

Graeme Sands

At the risk of repeating myself—I have said it a couple of times—I think that the clearer the missions are, the less chance there will be of the bank’s operations straying into things that are not market gaps and, ultimately, the more successful the bank will be in the long run.

Andy Wightman

Andrew Castell, I think you said earlier that the missions would be subject to the scrutiny of the Scottish Parliament. In fact, there is no provision for that whatsoever.

Andrew Castell

Is there not?

Andy Wightman

No.

Andrew Castell

My apologies.

Andy Wightman

Parliamentary approval is required if the bank’s objects are to change, but the missions are to be set by ministers and communicated to the bank, with a copy of the documents to be laid before the Parliament.

Do you see merit in providing Parliament with a role in scrutinising the missions, and possibly even in resolving to agree or disagree with them?

Andrew Castell

Much would depend on the style of government. We have touched on this a few times. One of the challenges around any kind of patient institution is that there are fairly lengthy timescales during which any number of lumps of rotten fruit will be flung from the media or wherever else. If missions are subjected to quality control—considering how they are formulated, the time spent working out how to measure success and what success looks like, and how to communicate clearly to the agencies and entities that are responsible for delivering them—that will increase the chance of each mission being successful rather than ending up as just another initiative that petered out because no one knew what they were supposed to be doing.

If greater involvement by MSPs—rather than just leaving the Executive to it—were to result in better-quality missions in terms of how they are framed, that would seem like a good idea to me.

David Grahame

At the parliamentary level, we suggest scrutiny and comment rather than full approval, which might be too cumbersome a process. Although ministers set down the bank’s missions, there is a flip side. I think that I am right in saying that, under section 12 of the bill, the bank has to come back with proposals for how it will fulfil its missions. In our parlance, that is asking the bank to produce a business plan, so there could be some discussion on how, and by whom, such a plan should be approved.

Andy Wightman

Section 12 is quite interesting. It states:

“The Bank must send a mission report to the Scottish Ministers … within 3 months of receiving a document … explaining how”

it

“intends to respond to the strategic missions”.

Three months is a very short turnaround time; one would hope that the bank would get an advance briefing of a new mission. The provision does not strike me as encapsulating the production of a business plan or anything like that—it seems to require quite a high-level explanation, in very broad terms, of how the bank intends to go about fulfilling the mission.

David Grahame

I think that it would depend on the level of approval that ministers would want. If they want line-by-line approval, the time period may have to be longer.

Andy Wightman

Are there any other thoughts?

Andrew Castell

I would not like to be on the receiving end of a three-month deadline to report on how I am going to implement a mission for a multi-agency project. If I was sitting in the bank and there was a narrow focus on the bank alone being 100 per cent responsible for delivering against the mission, three months might be just about enough. However, if I had to liaise with half a dozen other parties, it would sound like a very short time period indeed.

That brings me back to the point that a high-level approach is better with this type of bill. It would not be helpful to set random—and possibly not very carefully thought out—deadlines and timescales in the bill.

Jamie Halcro Johnston (Highlands and Islands) (Con)

Does the panel feel that existing capital investment is focused more on the central belt and in urban areas? Conversely, what funding mechanisms exist for rural businesses, and how well are such businesses currently catered for?

Jock Millican

It depends. The vast majority of businesses that we are looking at are high-growth businesses that have quite often come out of universities. There is therefore an emphasis on those areas where the universities are, which is where the talent is. We tend to focus on those areas, but we also look at businesses from all over the country to see whether they are appropriate for us. Some businesses come from the universities and set up in regional areas. We have just been looking at a business that came out of a university and is now setting up in Oban; whether we invest in it is another question, but we are looking at it quite seriously. If a business comes forward, I do not think that there are any constraints in what we look at based on region or area.

David Grahame

We have operational groups in the Highlands and in the Borders, both of which were set up locally by people with a view to giving something back. To be fair, they have struggled to find demand in those areas. Support for the stimulation and development of demand is important, but that is a role for other agencies rather than for the bank.

Jamie Halcro Johnston

Is it a role for the enterprise bodies and local authorities?

David Grahame

Yes. Our colleagues in Highland Venture Capital are quite frustrated. They have been there for a long number of years, and they have one investment in the Highlands, with all the rest in the central belt.

Andrew Castell

It brings me back to what I said earlier: there are plenty of viable and perfectly sensible businesses, but they will not always be of interest to people with a venture capital mindset, who really want high-growth and high-value creation potential. Those high-value businesses, by their very nature, generally require highly skilled and highly qualified staff, who are available in great numbers in the central belt but in rather smaller numbers in, say, Fort William.

11:15  



Dean Lockhart

I have a general question. Is there a national investment or development bank model overseas that we should look to as an example of best practice, or should each bank be tailored to the individual needs of each economy?

Jock Millican

As one or two of us mentioned earlier, the Scottish Investment Bank model is viewed with envy across the rest of the world. We have people who have been working with the World Bank to institute that exact model in other parts of the world. From the co-investment perspective, we have a very good model in Scotland. With regard to SNIB’s wider remit, things may be done differently elsewhere, but I am not aware of any specific examples.

David Ovens

I completely echo those comments. Again, I make a plea that you do not change any aspect of the Scottish co-investment fund as it currently operates. However, we should look to the British Business Bank and other institutions and pull out some of their initiatives. The British Business Bank is currently using the enterprise capital funds model for investment in venture capital funds. It invests in the funds, and then sets a target for them to invest geographically. That is a useful initiative to which SNIB could look in the future, particularly in relation to the further stages of a company’s funding journey.

The Convener

As there are no further questions from committee members, I thank the panel members for coming in to provide us with their views and their short forms for various matters, such as the “mezzanine gap”; I had not heard of that before.

11:16 Meeting continued in private until 12:19.  



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Fifth meeting transcript

The Convener

Under agenda item 3, the committee will take evidence on the Scottish National Investment Bank Bill. I welcome our two witnesses: Rob Hunter, director of strategy, Development Bank of Wales; and Kerry Sharp, director, Scottish Investment Bank, Scottish Enterprise.

The British Business Bank has been in operation for around five years. One of its goals was to change the structure of finance markets for smaller businesses in the United Kingdom. What has been the impact of its activity in Scotland and Wales? Are the banks that you represent involved with the British Business Bank, or have they had much interaction or contact with it? Does Kerry Sharp want to comment on that?

Kerry Sharp (Scottish Enterprise)

We have a really good relationship with the British Business Bank, which undertakes quite a number of activities, many of which are focused on Scotland as well as elsewhere in the UK. It is particularly active in Scotland on the start-up loans side and on the enterprise finance guarantee—the bank debt guarantee—scheme.

We often engage with the British Business Bank to try to understand the breadth and scale of its activity, but it records things slightly differently from how we record them, including in capturing all the private sector leverage that it achieves through the deployment of its fund. That makes it quite difficult for us to compare the numbers. However, it is very active on those two instruments in particular and, from the statistics that we see, we think that Scotland gets its fair share.

The British Business Bank is also quite active on the venture capital investment side. It is a limited partner for three of our largest VC funds in Scotland—the Panoramic Growth Equity and Scottish Equity Partners funds are two of them. We continually work with the British Business Bank to see what else we can do and what further funds can be deployed in Scotland.

The Convener

Does Rob Hunter want to comment on that? I should have said that there is no need to press buttons, as the sound desk will operate the microphone system. If you want to say something, you should indicate that by raising your hand.

Rob Hunter (Development Bank of Wales)

The situation is similar in Wales. We have a very good working relationship with the British Business Bank. As banks in devolved nations, we regularly meet the British Business Bank, and it gives us an awful lot of time.

I echo Kerry Sharp’s comment: we have an issue with the transparency of the information, which is more to do with the British Business Bank’s systems than anything else. Things are kind of mixed up. It is very difficult for us to compare apples with apples, because the British Business Bank mixes in the private sector leverage that it achieves on deals with its own investments. It is therefore very difficult to work out what has gone into the region. However, according to the statistics, Wales, like Scotland, receives its fair share.

In addition, the enterprise finance guarantee and the start-up loans are very good. For example, since start-up loans began, the British Business Bank has invested in the order of £20 million across Wales in those loans, which are very low-value ones. That complements the similar amount that the Development Bank of Wales has invested in microfinance. There is very little, if any, overlap between the two, and, between us and the British Business Bank, we have delivered about £40 million of microfinance into businesses across Wales. That being the case, the British Business Bank is definitely a force for good.

John Mason (Glasgow Shettleston) (SNP)

I want to ask about integration and how the Scottish Investment Bank will move over to the new bank. I might also come on to Wales a bit later. Will the whole Scottish Investment Bank move over lock, stock and barrel and become part of the Scottish national investment bank?

Kerry Sharp

The plans for the new bank are very much to build on what exists in the market and integrate interventions and activities that exist across the public sector. Work is on-going on exactly what will go into the bank, but it has been clear since the implementation plan that the Scottish Investment Bank’s activities will form part of the new bank. However, that does not include all of the SIB’s activities. The financial readiness service that we deliver now will stay within Scottish Enterprise, because it is a company support activity that does not deploy any finance and so it fits better with the work of Scottish Enterprise more widely. The activities and functions of the Scottish Investment Bank, the assets that have been invested or lent to and the people are all expected to move into the Scottish national investment bank. A lot of work is under way to try to work out exactly how and when that will happen and what further work we need to do. The plan is that, shortly after vesting, all the items that are expected to go across will move across.

John Mason

Would it be fair to say that the broad split is that advice or grant-making functions will stay with Scottish Enterprise and loan or equity investment functions will move to the SNIB?

Kerry Sharp

That is about right.

John Mason

Will the staff therefore split in reflection of that? Will some stay and some go?

Kerry Sharp

The vast majority of staff in the Scottish Investment Bank are on the financing side or in support services thereof. There is a discrete team in the financial readiness service of about eight or nine people, and the demarcation is clear. Those individuals will stay with Scottish Enterprise. Obviously, a lot of work needs to be done to dot the i’s and cross the t’s, but the working assumption is that all the other staff in the SIB will move across.

John Mason

On governance and accountability, obviously Scottish Enterprise is a kind of independent body, and the SNIB will be too, although they are slightly different models. Do you anticipate any difference in the level of oversight for the Government or Parliament, or will it be much the same whether it is Scottish Enterprise or the SNIB?

Kerry Sharp

Do you mean oversight of the SIB’s activities when they move into the new bank?

John Mason

Yes—that is exactly what I meant.

Kerry Sharp

Obviously, the Government and the bill will determine how the reporting and other elements are delivered by the new bank. However, we have a strong governance and reporting culture, so I struggle to think that we will need to do too much more. There is more to be done on the ethics policy and the like for the bank, in which we will be directed by whatever the requirements are. Our activities and reporting functions will support what is required.

John Mason

My colleagues have supplementary questions, but I have a question for Mr Hunter. Am I right in saying that Finance Wales was the previous body and it moved over entirely into the Development Bank of Wales?

Rob Hunter

Yes, that is exactly the case. We had an advantage in that Finance Wales was a public limited company, so it was set up and had all the governance structures and the funds, and then it transitioned into the Development Bank of Wales.

John Mason

Did that process go smoothly?

Rob Hunter

Yes, but with an awful lot of preparation. We worked towards the launch for two years. When you are changing an entity that already exists into something new, one of the challenges is that you need to deliver something new when the time comes. We had a build-up for about two years, during which we raised new funds, worked to be ready for the launch and the announcements and prepared the staff and the culture of the organisation to be new and different. I think that we achieved that. Across Wales, there has been a fairly significant shift in the perception of what the organisation does and in the expectations on it since we launched as a development bank. However, that took an awful lot of work.

John Mason

You wanted to do something new and therefore a new organisation was set up, but I presume that there were some good things that you wanted to carry on, and those have broadly been okay.

Rob Hunter

They have. A complexity in our case was that the first access to finance review was in 2012, and that led to the feasibility study into the development bank. There were very good ideas in the reviews; we were told that it would be great to launch specific funds, for example, to increase microfinance or seed funding across Wales. Rather than waiting until we launched as a development bank, Finance Wales started that change, probably in 2013. The actual transition to the development bank did not happen at midnight on whatever date it was in October 2017. It was a transition that took place over about four years, which culminated in the change to a development bank. We had already made a significant shift before the launch date.

Andy Wightman (Lothian) (Green)

I have a couple of questions on structures. What is the difference between the Scottish Investment Bank and the Scottish national investment bank, other than the insertion of the word “national”?

Kerry Sharp

There is quite a lot of difference. As you are aware, the SIB is part of Scottish Enterprise at the moment. Our focus is on early-stage risk capital and lending of up to maybe £5 million. We also deliver the energy investment fund, which is a low-carbon focused, mission-led fund for the Scottish Government.

We deliver only an element of what the new Scottish national investment bank will do. It will be a separate legal entity, with all that goes with that—I know that the committee has talked about that at various times. The breadth and scale of the activities are quite significant compared with what the Scottish Investment Bank has done. I see the new bank as one that will build on the success that we have created to date, but do a lot more for the economy, and make a step change in both the capital that is available and the areas that it will be able to look at.

Andy Wightman

Is there anything that the Scottish national investment bank is planned to do that you cannot do?

Kerry Sharp

Certainly, the scale of capital that the bank will deploy would be too significant to be deployed by Scottish Enterprise. Discussions on dispensations from the UK Treasury are under way. The team working on that are hopeful that if those dispensations are forthcoming, it will mean a significant change in the way that the bank operates, meaning that it will be able to make a much more beneficial market impact.

Andy Wightman

Was the Development Bank of Wales or Finance Wales established by statute?

Rob Hunter

Finance Wales was—well, kind of. It dates back to the Welsh Development Agency Act 1975. That was updated by the Government of Wales Act 2006, which had provision for Finance Wales. The formation of the Development Bank of Wales was not done through statute. That was just branding, if you like—a change to the name and focus of the organisation—and a change to the missions.

Andy Wightman

How is the bank capitalised?

Rob Hunter

It is a very different model from the one that is proposed for the Scottish national investment bank. In effect, we cannot say that we are not capitalised; we are. In the 18-month lead-up to the launch in October 2017, we achieved a commitment from the Government of an additional £154 million. Since the launch, we have received commitments of a further £430 million for the bank. Significant sums of money have been committed.

We have about 15 funds and we go to the Government with a business case for each fund, using the Treasury five case model. That is approved by the department, and then the money is released to us through the life of the fund. It is a different operating model. We do not have the autonomy to make the decision as to how to deploy the money on our own; we have to do that through Government departments. I have to say that, for us, it has worked exceptionally well.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Evidence to the committee suggests that despite an increase in private capital in Scotland, investment is still low and there is a lack of demand. If that is the case, what factors can inhibit demand?

10:00  



Kerry Sharp

Demand is always a difficult area. From our understanding of the market, it is clear that it takes different forms, and often the problem is having the right supply to meet particular demand at any point in time. As a result, it will be important for the bank to take a flexible and agile approach. After all, gaps do not stay the same; they change all the time, and the bank’s response to these gaps will be incredibly important.

Moreover, on the mission-led side of things, there will be a need to think far and wide about the different kinds of support, technologies and companies that will achieve the mission that the bank is looking to deliver for the Government. It will not be a case of having a one-size-fits-all approach or saying, “This is the answer. If we invest in it, it’ll all be fine.” Different technologies, responses and types of innovation will be required. The most important thing in that respect is to be close to the market, to be informed, to challenge what is there and to ensure that the bank speaks to the market, that its responses reflect what the market really needs and that the projects, the companies and everybody else involved are supported as we move forward.

Gordon MacDonald

Do you believe that there is a lack of demand for patient capital in Scotland?

Kerry Sharp

I think that we need to make more of the demand viable and interested in raising that sort of funding. There are definitely gaps in the market, some of which we are supporting at the moment, and our evaluation says that our role is fundamental to the market and that if we were to step out the market would reduce. There are gaps, but what we need is more demand to be stimulated and more support mechanisms that will work with the companies to ensure that they are funded to take the next step in their journey. The confidence of the market will be incredibly important, and the very existence of the bank as a trusted and transparent entity with strong ethics and working practices, with the amount of capital that has been earmarked, will create demand among companies, which will be saying, “That’s something that we want to work with.”

Gordon MacDonald

Apart from the things that you have just mentioned, how else will the bank stimulate demand? Will that involve working with the development agencies and so on?

Kerry Sharp

Absolutely. The ecosystem and how the bank works with others will without a doubt be the most important part of its ability to deliver. Coming back to your earlier question, supply itself is not enough—managing demand, too, is incredibly important—and I see the bank leading on the supply side of things and the enterprise agencies, in particular, and others in the market leading on the demand side. Obviously, though, there will be a lot of cross-working.

The system will need to work well to ensure that there are integrated support and services and that there are forums in which we can discuss how we move the market forward. Without a doubt, though, it sits across a number of different parties.

Gordon MacDonald

Mr Hunter, I note that the Development Bank of Wales was established in October 2017 and that, in the last full financial year to March 2019, it had investments of £80 million, which is 18 per cent higher than the previous year, and the number of investments increased by 30 per cent to 420 across Wales. How do you manage and meet demand in Wales?

Rob Hunter

The organisation’s targets were originally set out in a business case produced in 2016. Our aim was to reach around £80 million of investment by 2022, and we have actually achieved that in the bank’s first two years.

In Wales, we have found that demand comes from a number of places. I know that in Scotland the challenge is to invest £200 million a year, and from our experience in Wales, I think that that is probably the right level to aim at. That said, I would echo Kerry Sharp’s point that the Scottish national investment bank will need to remain highly flexible in trying to meet the widest demands of the business. For example, two thirds of all our funds in Wales can give access to the kind of patient capital that Mr MacDonald mentioned, but the remaining third of the funds, which do not involve patient capital but are about short-term, sometimes fast-revolving funds, forms a critical part of the ecosystem in Wales. Those are very important gaps that can deliver quite a lot of economic as well as financial benefit.

We have been fortunate in having a wide remit. It is amazing that once we formed, the simple fact that we had become a bank and were serious about being a bank—that is, we put something genuine behind it—created a lot of demand and interest across Government. We have been speaking to various Government departments. Two years ago, I would not have guessed that one of our key performance indicators would be the number of homes built in Wales, for example. That work is driven through our residential property funds. A lot of the ideas are coming through Government departments, and we are lucky enough that we do not have anything that absolutely restricts us. I suppose that the only piece of advice that I could probably give to Scotland is to leave things as open as you possibly can; do not close things down.

It seems obvious that a development bank should lend only to medium-sized enterprises. However, we administer the help to buy Wales scheme on behalf of the Welsh Government, so we lend to individuals. We are just about to launch a self-build fund for people who want to build their own homes. That is very much aligned to a lot of other Government interventions, to make it easy for people to pick a plot. Local authorities designate a site—they call those plot shops. They put in the services and an individual can go along and choose from a pattern book. They are then put on to a registered builder, so they know that they will be good. We provide the bridging finance for the build, which is then remortgaged out.

Therefore, we can fund the small builder through our small loan funds and we can also fund the purchaser. Working with local authorities and Government across Wales, we can generate an industry that, although it might already flourish abroad, does not really flourish in the United Kingdom. If we were restricted from lending to individuals, we would not be able to intervene in that way.

Until the SNIB is launched, I do not think that you will really know what its capacity is. We are still learning. I am in discussions with literally all Government departments in Wales. There are a lot of things in which the Development Bank of Wales’s involvement would be inappropriate or inefficient, but the fact is that when I walk into those discussions, nothing is off the table. That is really important.

Gordon MacDonald

When it comes to stimulating demand, how important are the microloans that the Development Bank of Wales hands out to the sector?

Rob Hunter

There are a number of reasons that microloans are important. You mentioned the 420 investments that were made last year. You will not be surprised to hear that a lot of those were delivered through microfinance.

There is a thing about connecting the Development Bank of Wales, or the Scottish national investment bank for that matter, to the people and showing that it is making a difference. Rather than making 20 large-scale investments a year, for example, the finance is being spread across the nation and businesses across the region can identify with what is going on and share in that success. That is crucial.

One of the interesting things—I know that the British Business Bank has said this about our rise—is that we are exceeding our target. I am not saying that microfinance is a loss-making area—I am trying to think of a better way of putting it—but you will not get a huge return on investments. In Wales, we have found that the default rates are a lot less than we had originally modelled for, which enables us to revolve the funds and invest more in those activities.

Microfinancing is a crucial part of the bank. That takes us back to the point that there is not a single market gap. Market gaps exist across the spectrum from very small people who need a couple of hundred pounds to buy a sewing machine or whatever it might be to get them into business, right up to the large scale £5 million and £10 million investments. The gap exists across sectors, too.

Jackie Baillie (Dumbarton) (Lab)

Uptake of Scottish-European growth co-investment funding has been slow. I think that the SIB said in a previous submission that that is because the fund is new and different, and it will take time to educate companies and investors. Ms Sharp, will you update us on progress in delivering the programme? Are there lessons that the SNIB can learn from your experience?

Kerry Sharp

The Scottish-European growth co-investment programme—SEGCP for short, which is slightly easier to say—has been slower than we would have liked it to be. We have done three deals, and investment of about £1.53 million has leveraged in £8.5 million. We are about to do two more deals—they are imminent, although I had hoped that they would be done by today’s meeting—that should see us deploy about £1.7 million and will lever in another £5 million.

We nearly did a couple of other deals. In one case, the company managed to raise the funding that it needed, so it did not need our money. In another, the company decided to go into sales mode rather than fundraising mode. We have about 120 inquiries on our books, and we are actively working on 30 or so, for which we are making introductions and supporting companies with their business plans, pitches and the like. Uptake has certainly been slower than we would have liked it to be. However, the SEGCP was always a niche fund—the objective was to support only five, six or seven companies a year.

That said, we have learned that it always takes longer than expected to get a new initiative going, even when we think that we have planned enough for delays. Without a doubt, Brexit has played a negative role in respect of uptake, both from the investor side and the company side. We speak to a lot of investors that are based across Europe that have a relationship with the European Investment Fund, and some are nervous about where they invest their money at the moment. Likewise, we have found that when we encourage companies to speak to European investors, given the role of the EIF in the programme, Brexit is causing them to think a little more.

You asked what lessons the Scottish national investment bank can learn, which probably brings me back to my comments about the need to be clear what the market gap is and about taking a flexible approach. A benefit of the way in which the current system is set up is the relationship with the EIF and its fund managers, but that can also be a downside, because the approach is quite particular and there are deals with investors that are not eligible. More flexibility in the instruments that are used would be useful.

Jackie Baillie

You said that investment is uncertain because of Brexit. That is interesting, because my understanding, from the announcement in the programme for government, was that the fund was being set up to counter some of the impacts of Brexit.

Will you remind us of the amount that you expected to spend? If my memory is right, it was £10 million in year 1 and another £10 million now—and that was just SE’s contribution; the drawdown would have been much more significant. We are well short of that.

Kerry Sharp

That is correct. We had a £50 million commitment from the Government, which we then committed to the programme, so we are, indeed, well short of that.

The fund was not set up to counter Brexit. Our relationship with the EIF allowed us to access funding that will certainly be available until Brexit, but we do not yet know whether it will be available after that. The proposition was that there was a window of opportunity for us to access the funding; the longer we delayed, the smaller the opportunity of the funding being available would be. Through the Brexit negotiations, we will see whether we will be able to continue to access the funding.

Jackie Baillie

My recollection is that the fund was announced in the programme for government as part of a package of measures that were designed to make the Scottish economy more resilient to Brexit. I remember the fund being the centrepiece of the announcement, which is slightly at odds with what you are saying, so perhaps what we heard was a measure of political spin rather than anything else.

Kerry Sharp

I certainly cannot comment on that. I do not recollect the statement at all, so I cannot say anything, I am afraid.

Jackie Baillie

Okay. You talked a little about the need for demand-stimulation activity. What activities need to be delivered on the demand side? Are resources and capacity in the enterprise agencies sufficient to enable you to do that?

10:15  



Kerry Sharp

Earlier, I mentioned the importance of the fact that the bank will exist. There is a need to join together all the players in the ecosystem to ensure that there is a stronger digital approach to allow easy access for companies, projects and communities. The system must be as joined up as possible to ensure that there is no wrong door and that the customer journey is as smooth as possible, so that when someone approaches whatever part of the public sector, they can find their way to wherever the funding might be.

Lots of work is under way as part of the enterprise and skills review, and the strategic board is leading on that. However, there is a need to ensure that those who are involved are engaging with the bank in the same way. I know that there have been initial discussions to make sure that that happens.

Jackie Baillie

One of the outputs from a recent committee inquiry was about the lack of joins between business gateway and Scottish Enterprise in some areas. Is that being actively considered? That might be the first step for a company in accessing funding.

Kerry Sharp

With large organisations, it is difficult to make that process as smooth as we would like. Obviously, the structure of business gateway can also make that slightly more challenging. However, without a doubt, business gateway plays an important role in the ecosystem, as other players do. I absolutely agree that there is a need to ensure that everything in the ecosystem is as joined up as possible.

Our financial readiness team, which will stay within Scottish Enterprise and which provides support to companies, works well with business gateway. Members of the team are often based in business gateway offices so that they can get closer to companies and support business gateway advisers with financial readiness advice, which is growing in importance. That area of specialism is very much the linchpin between the wider enterprise support of the type that is delivered by business gateway and the funding support that the SNIB will provide.

Jackie Baillie

Thank you.

One of the major transitions from Finance Wales to the Development Bank of Wales involved a commitment to work much more closely with public sector business support. Can Rob Hunter update the committee on how that is evolving and whether there are lessons for us to learn? I am conscious that we have a number of different enterprise agencies, all of which have something to give, so I wonder whether we need to join them up more than is currently the case.

Rob Hunter

The main provider of advice and support to businesses in Wales is business Wales. There was a lot of discussion around how the Development Bank of Wales could integrate better with it. We now have board representation: one of our people sits on its board and one of its people—in fact, the person who leads it—sits as an observer on our board. That was the first step.

Secondly, we recognised that we wanted to hide the wiring as far as businesses were concerned. Previously, a business might phone business Wales seeking what turned out to be commercial finance, and would be batted around various departments and individuals before it eventually ended up with us. Now, there is an automatic routing: in effect, one phone call comes in, and the two sides of the business support area have a mutual arrangement to ensure that the service is completely joined up. Business Wales is hugely important to the Development Bank of Wales. Its representatives on the ground are an enormous source of leads for us, and it is important that we work seamlessly with it.

In Wales, as in Scotland, however, there are a lot of other players. For example, the Welsh Government’s business, economy and innovation department co-ordinates other grant schemes and means of support. There has been a significant shift in that area. In about two weeks we will, for the first time, have a full joint strategy session between that department and all the other elements that are involved, so that we can see how the Development Bank of Wales can assist them. Reorganisation of that department this year is driving that effort.

As I said, in growing the process, you do not know what is there until you start to discuss it. However, given the enormous pressure on capital budgets and Government, one thing that we have been able to work on with the Government is how it can stretch its grant schemes and make best use of the Welsh pound, as it were.

If you look at how grants have been administered, you can see that historically binary decisions were made about whether something should be given a grant or be commercially supported. However, I think that the decision is rarely binary. In the vast majority of cases, you do not need to give a 100 per cent grant, because there is a commercial element of whatever the intervention is that should be repaid.

In the past year, we have launched three funds, across two Government departments, that have a commercial element that sits alongside Welsh Government grant schemes. For example, there is the property development grant for commercial premises, which is administered in the department for economy, science and transport. The department has put £15 million of grant into a pot, alongside which we have a £40 million fund, and we work the two together. The department administers the grants under its general block exemption regulation scheme—its state aid cover—and we do the commercial finance element.

The results of that can be incredible. Such a fund revolves quite fast, and you might get two or three revolutions out of it. If we revolve £15 million of grant two or three times, we might get £160 million-worth of delivery across Wales. Such approaches are innovative. It is about genuinely combining things and the bank being seen as a solution right across the Government.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

I would like to explore three areas, one of which is patient capital, on which we have already touched. The DBW extended its loan-repayment time to 10 years, which was viewed as a long-overdue development. I think that it led to quite an increase in demand for patient capital among Welsh businesses. What does the SIB currently do in terms of patient capital?

Kerry Sharp

I would say that everything that we do is patient capital. The largest part of what we deliver is early-stage equity investment: anybody in that area would tell you that you have to be patient if you want to be in that area. The exit-horizon timeline is 10 to 12 years, and we have a number of investments that are older than that. We are not required to force exit; we are there to support the growth of a company, working alongside the private sector investors. It is very much a patient approach.

We launched a new loan scheme last December under the Scottish growth scheme. The repayment terms are normally up to seven years. That is the demand that we have in the market at the moment. We can be flexible in that—it is a pilot—and we will be looking at whether there is a need to make the time longer. If there is, we will certainly consider doing that. We do not see that as not being patient.

I mentioned our energy investment fund, which is focused on low carbon. That fund is very flexible and, as the team would tell you, very patient. The team plays a phenomenal role, from market making and developing the market, to intensive financial readiness with community projects and wider low-carbon projects, right through to structuring and investing or lending. The loans to the community projects are normally over 10 to 15 years, and are sometimes for longer. The benefits that return to the community on the back of those are for 25 years or so. Overall, it is a very patient approach.

Colin Beattie

You seem to be talking mainly about loans. Do you do any equity investment of patient capital?

Kerry Sharp

The first section of my comments was on our equity funds. The majority of our investments are equity investments, and the energy investment fund is debt and equity in equal proportions. We are very focused on equity, as well as now starting to do more on the lending side.

Colin Beattie

Do you believe that you are meeting the current need for patient capital?

Kerry Sharp

We believe that, by providing the level of patient capital that we provide, we are playing a strong and fundamental role in the market. I mentioned earlier the real impact that the bank can make going forward. There is potential for a lot more patient capital to be provided. We have been looking at scale-up capital in particular. The SEGCP, which I mentioned earlier, is our response to that. However, we feel that there is a need to do more in that area.

Colin Beattie

How much of a step change in the market will the SNIB make by providing the patient capital that is envisaged?

Kerry Sharp

The bank’s focus will be on providing the level of capital to change the market dynamics and on identifying evolving gaps, which will, I think, have a transformational effect on the economy. The challenge with the way in which we operate now is in the amount of budget and funding that is available, so the Government’s commitment over such a long time will allow the bank’s team to look forward and to make different choices.

We have certainly identified, from the energy investment fund, the need to be ambitious and very patient, and to take a different approach when we are dealing with new technologies and emerging markets. The bank will be able to focus a lot of its attention and funding on making substantial investments in order to change our economy.

Colin Beattie

Would you say that the SNIB will take the right approach to the market?

Kerry Sharp

Yes—I believe that it will.

Colin Beattie

The target rate of return is always an interesting issue. The financial target rate of return for the bank will be set and finalised prior to the vesting of the company. What is the target rate of return for the SIB and the DBW?

Kerry Sharp

The SIB does not have a target rate of return at the moment, because we have not been required to have one. We act commercially in all our investments and seek to maximise the return, and we do not need to select a portfolio or an approach to achieve a specific target.

Colin Beattie

What is your rate of return?

Kerry Sharp

There are lots of different ways of considering that. The exits that we have made have been very successful, and our overall internal rate of return on the successful exits is about 29 per cent. It is important to look at things in the round, however, so if we include write-offs, the figure is about 9 per cent. If we also include our current portfolio, which is sizeable and valued at more than £300 million, we just about break even.

Colin Beattie

What is your percentage failure on capital and employment?

Kerry Sharp

I will need to double check the figure for you, but I think that it is about 20 per cent. We have had write-offs of £80 million since we started our activities in 2003.

Colin Beattie

Is that figure comparable with figures for similar institutions?

Kerry Sharp

It is very difficult to compare what we do with what other institutions do, given that we fill gaps in the market, and that our equity fund deals are brought to us from the private sector, so we are in the highest-risk category in a very risky area. Therefore, we are not comparable with many other institutions.

We are very comfortable with our level of failure and write-offs, but I know that some people will say that the write-off figure could be higher, if we are making a real difference in the market. Clearly, we are not keen on losing money; we are trying to make money.

Colin Beattie

What about the DBW?

Rob Hunter

The DBW has a very similar story. We do not have a set target return on investment, which I am quite pleased about. We tend to negotiate a projected ROI case by case because, as I said earlier, we create a business case for every one of our funds. We negotiate with the Welsh Government on the sort of return that it is looking for from the fund. Once the fund goes live, we manage the portfolio of investments for that fund in order to deliver the agreed ROI.

I am not sure whether it is critical that an organisation has a positive or negative ROI after aggregating all the figures. We are playing in the very difficult part of the market. If there were very high expectations for the ROI, there would be a great temptation to start to take on less risky and more market-facing investments. That would just displace the market. We want to crowd more funders into Wales rather than to crowd existing funders out of Wales.

My answer to the question is very similar to Kerry Sharp’s. I think that our target ROI is currently forecast to be positive by about 0.7 per cent. However, as I said, the target is not set in stone.

The other important issue from our point of view—which might or might not be a difference—is that our operating costs are covered through the fees that we charge on the funds. We do not have any Government subsidy for our operating costs; we have to stand on our own two feet and fully cover organisational operating costs. That is also factored into the calculations.

10:30  



Colin Beattie

Is it right for the SNIB to have a target rate of return from day 1?

Kerry Sharp

That is probably a question for the Government to answer.

Colin Beattie

I am thinking about the witnesses’ experience, and I am hearing from both of you that you do not have a target rate. I do not know whether that is a good or a bad thing.

Kerry Sharp

We do not have a target rate of return, and we are targeted to do lots of things. One of those targets is to increase the size of the early-stage risk capital market, which we have been successful in doing—it has grown fourfold since 2012 as a result of our investment and the amount of leverage that we achieve in the market. If a body has a target to deliver financial return, that will doubtless have consequences for how it operates.

One of the benefits of the planned scale and breadth of the bank is that there will be different ways to do different things. It will be entirely possible for one part of the bank to have either a different target rate of return or no target rate of return, depending on what it sets out to do. The challenge in the economy is definitely the need for income to flow, and for the Government’s commitment not to be too long into the future. That is clearly why the Government is considering a rate of return that it thinks is reasonable. There are clear examples of such targets—the BBB had one and exceeded it. Such examples can be looked at in working out the best way for the Scottish Government to put the target into place.

Colin Beattie

If you were pushed, what sort of target rate of return should the SNIB be aiming for?

Kerry Sharp

Given that you are pushing me and that I will be part of the bank, I would say that it should aim for a low one, which will make life a little easier. [Laughter.] The bank will have to be realistic. I would certainly consider the example of the BBB to ask why it thought that its target was appropriate and to understand its performance.

I would advise against aiming for a high rate of return, because that would, without a doubt, be challenging to achieve and would change behaviours. Given that the bank is about patient capital and the change that ministers want to see in the economy, ministers need to be careful and conscious of that when setting targets that will determine how people will operate day to day.

Colin Beattie

To continue down that road, the SNIB will have a high risk profile, as—indeed—does the SIB. Given that risk profile, is the expected break-even timeline of 2023-24 realistic?

Kerry Sharp

I do not think that that is the break-even timeline; I think that it is the timeline for covering the operational costs—for the bank to be self-funding rather than self-financing, which is being set at 10 years or so.

Colin Beattie

I was talking about operational costs; I am sorry that I was not clear.

Kerry Sharp

That is no problem.

We have covered our operational costs for a large number of years. It is certainly possible for the SNIB to do that. Clearly, that will depend on what its costs end up being. Given what they are proposed to be at the moment, I think that that timeline is entirely achievable, given our activities alone, plus the activities that we know will move in and all the new things that the bank will do.

Colin Beattie

How long did it take you to become self-funding in relation to operational costs?

Kerry Sharp

I do not have the answer to that. Staffing costs in the SIB are around £3.3 million at the moment. Given that our activities have grown over a number of years, we have obviously grown. Our income over the past five years has been, on average, £20 million. I cannot tell you when we started to cover our costs, but it was quite a long time ago.

Colin Beattie

Rob Hunter said that the DBW covers its running costs from fees. How long did it take to get to the point where the DBW was covering its costs?

Rob Hunter

When I started in the role, one of the first jobs that I had to do was to co-ordinate the production of a financial model for the business, which brought together all the funds and all the costs and projected how much in funds we would need over the five-year period to generate enough fees to cover our costs. The figure came out at £154 million over the first five years. Interestingly, by the time we reached June or July 2017, we had received commitments to all but £23 million of it. Because that figure was relatively small in the grand scheme of things, the minister at the time said, “I’m not signing the bank off until we’ve given you a commitment to the full amount,” so we had a commitment for the final £23 million a week before we launched. In other words, it was at launch that we stopped receiving any Government grant.

On the question of demand, we genuinely could not have predicted that we would raise £430 million of additional commitments to funds in the two years since then. When we produced the first business case, we thought that raising the £154 million would be a tough ask. What has happened is testament to the fact that, if things are done properly and with the gravitas that one would want for such a long-term, national institution, the amount of interest that the bank generates from other players generates its own demand. Looking forward, I would say that our operating costs are probably covered for at least the next seven or eight years, based on our existing funds.

Andy Wightman

On the subject of costs, one of the issues that we have discussed is remuneration. We have had mixed views on the matter. Some people feel that the Scottish national investment bank should operate a remuneration policy that is consistent with what the financial sector does, while other people take the view that, as a public body, its pay levels should reflect public sector pay levels. What is the position in Wales?

Rob Hunter

I know that this will sound strange, but the answer to that question is probably that we do both those things—our approach is to reflect pay in the financial sector and pay in the public sector. I will go through our process for setting our salaries. We are not on civil service salaries. A very small element of the staff of the organisation are on local government pensions, but the figure is now less than 10 per cent, and that scheme has not been open to new people for about seven or eight years.

Our salaries are market tested, independently, every three years. We use two benchmarks: the financial services industry and the non-financial services industry. We have certain specialists, particularly on the equity/deal-doer side. In effect, we are a fund manager. We contract out some funds, but we deliver the vast majority ourselves. The pinchpoints for the higher salaries relate to the equity staff, and we look at those.

I will come back to a comparison with Government shortly, but our salaries are pretty attractive for the non-financial services people and the non-equity/deal-doer people. We have adjusted our salaries for the people who deal with equity, but we recognise that we cannot offer the stellar bonuses that people who work in the private sector can get. It is high risk, but it is high return. We recognise that, in attracting those people into the business, we must have a much wider offering. We are a great place to work. Our mission is to do great things—to improve the economy and the conditions of people who live in Wales—which is a great thing to get up in the morning to come to work to do. We offer a good work-life balance. Our targets are challenging, but they are not impossible to meet. In effect, we are developing an employer brand to get into the harder-to-reach areas.

Our pay is also tempered by Government pay. We have an independent review, but all our pay awards have to be signed off by Welsh ministers, so we must make sure that we pay sensible salary levels.

I was recently involved in a piece of work in which we did a direct comparison between the pay in the bank and the pay in the Government. When you compare pay to pay, there are two big differences. One is that Government employees have a final salary pension scheme. Taking the Welsh Government’s figure, last year, that involved an average employer contribution across the piece of 23.6 per cent, and we know that, this year, the contribution has increased right across the public sector. The figure was being understated by 6 per cent, so the Treasury has put on another 6 per cent. That adds another 30 per cent to a civil service employee’s pay. On average across the piece, our employer contribution is around 10.8 per cent, and we also have an incentive scheme, which is no more than 10 per cent of our total pay bill.

It is spooky but, when we compare like with like and look at the average pay per grade, the salaries are almost identical in real terms. The difference is how we divvy that up and how we put it out there in the sector in order to attract the right people. People in the financial services sector are used to working in an incentive-based environment. When we are trying to deliver the funds, such an environment is a useful tool.

The gap between Government and the private sector is a lot less than most people think. It is about how the money is deployed rather than the quantum.

Andy Wightman

Thank you for that very full answer. Are any of the policies that you have developed in that regard or any of the comparisons that you have done in the public domain, or are they internal?

Rob Hunter

They are internal.

Andy Wightman

If there is anything that you can share with the committee, that would be useful, although I understand that it is probably not much.

Rob Hunter

Sure—yes.

Andy Wightman

On the Scottish Investment Bank, I presume that all the staff are Scottish Enterprise employees who are on public sector pay grades.

Kerry Sharp

That is correct. We comply fully with public sector pay policies. There is a mix of staff in the Scottish Investment Bank directorate, with a number of non-investment specialists as well as investment specialists. A number of years ago, we negotiated an allowance that we can apply to our investment specialists to allow us to attract and retain them. Obviously, a specialist skill set is required—there is no doubt that people need to have the right skills to be able to deploy the instruments. We can deploy that benefit to particular members of staff. It is role, post and individual specific.

Andy Wightman

I will move on to the question of additionality. Mr Hunter talked about the risk of crowding out investors from Wales. How do you ensure that the funds that you deploy are genuinely additional to the investments that are available to businesses?

Rob Hunter

We always ask investee companies whether they have tried to access the market. That simple test comes right at the beginning, and it is driven by the history of the organisation and its deployment of EU funds, in which that is a condition. We are clear that we are not here to compete with the banks or the private sector. Indeed, we have a good working relationship with the banks. Banks often come to us with a deal that they want to do and that they believe has a strong business case but where there is a problem of security—the banks can secure only a certain amount of the loan. Particularly in Wales, that is often a result of property values being low. A bank will come to us and say, “We’ve got a £1 million deal and we’d be happy to lend £600,000,” and then we step in behind the bank with a £400,000 subordinated loan, which gets the deal off the ground. It works both ways. Banks will come to us and we will bring deals to the banks.

Kerry Sharp made an interesting point in that regard. For some of our work, there is no KPI that we can measure, although I wish that we could, but that work is testament to the fact that we are not crowding out investors. Quite often, particularly with the bigger deals—we find this with the patient capital stuff and the large-scale investments that are getting into the £8 million to £10 million area—a company comes to us with a business plan or proposal that is not investor ready. The teams will put enormous effort into getting the thing investor ready, at which stage the people involved will rush off to an investor and do the deal away from the bank.

We get a fair bit of that, and it is a difficult issue. If you look at the Welsh economy, you will see that that is exactly what you want to happen, because it allows us to deploy elsewhere the funds that we have been given in order to grow the economy. However, for those staff who are incentivised or target driven, it can be a little upsetting when it happens.

10:45  



Andy Wightman

I am also interested in the issue of mission-oriented finance, which has been advocated by Mariana Mazzucato, whom we spoke to a few weeks ago, and which is in the bill as a purpose of the Scottish national investment bank. Does the bank in Wales have anything that could be called mission-oriented finance, or is it more of a conventional development bank?

Rob Hunter

I would have to understand what is meant by the term “mission oriented”, but interestingly, what lies at the core of a lot of the funding proposals and the other things that we discuss with the Government is, in fact, the Government’s mission. I have had meetings on pretty much every aspect of government that you can imagine from care homes and domiciliary care to transportation such as buses, trains and taxis; we will not be able to assist with many of those things, but in certain instances, we can. Our position is that we are there to support the delivery of Government priorities, and where there is a commercial element to that delivery, we want to step in and do a good job. However, I am not sure that that is what you mean by mission-oriented finance.

Andy Wightman

It is about the Government setting a long-term mission by, as the bill describes it,

“sending ... a document describing the socio-economic challenges that the Bank is to seek to address.”

Examples of that might be moving to a low-carbon economy or upholding the human right to housing, and it will typically happen over a long period of time. That is what it is about.

Rob Hunter

That is very much the case with our bank. In fact, alongside our standard KPIs, we will by the end of this year be measuring ourselves against a supplementary set of KPIs that includes carbon reduction, assistance to female entrepreneurs and a lot of other such indicators that we have not traditionally captured in the past. Shifting the bank towards the Government’s longer-term vision and goals is absolutely on our agenda.

Andy Wightman

So those are new KPIs that you will be reporting on.

Rob Hunter

Yes, by the end of the year.

Andy Wightman

You are not reporting on them at the moment.

Rob Hunter

We have not done so in the past, but we are developing a set of KPIs that we will be reporting on throughout this financial year.

Andy Wightman

Will that report be available next summer?

Rob Hunter

Yes.

Andy Wightman

I wonder whether Kerry Sharp has anything to say about additionality and the Scottish Investment Bank. I think that you mentioned a client who turned down your money because they got money elsewhere.

Kerry Sharp

Yes, through our SEGCP. We are very much targeted at achieving additionality, and private sector leverage is one of the things that we record and which we try to maximise at every possible point. Our role in the market is to be gap funders, but the issue sometimes is the time when that funding is available. Time can be of the essence, and we can move very quickly with some of the private sector partners that we are close to. It is all about different levels of additionality in the market.

Virtually everything that we do is done with co-investors or co-lenders, so we are not doing things on our own, and the vast majority of those projects are, in the main, brought to us by others who feel that they have a gap that they want us to fund. Just now, we have very strong additionality, and I would expect the Scottish national investment bank to operate in exactly the same way, too.

Andy Wightman

Who identifies the gaps that you mentioned—the lenders or the clients?

Kerry Sharp

Both. If the client cannot raise the funding that they need, they will come to us directly and ask for help from our financial readiness team, which I mentioned earlier. Its number 1 role is to get funding from the private sector, and only when it cannot do that will it look to colleagues to see what other support can be given. However, lenders or investors who want to support businesses but who cannot provide the level of funding that they need will also look to us to co-invest or co-lend with them.

Andy Wightman

Do you recognise Mr Hunter’s point about the private sector perhaps not lending because it does not have enough security? Would that be a typical instance in which you would consider stepping in?

Kerry Sharp

Yes—certainly through our debt fund. The issue could be the level of security, the length of term that is needed, or that they cannot afford to start to repay for a couple of years. We are very flexible in our moratoriums, which will provide interest or capital holidays. The future projections could be racier than some of the banks or others might be interested in.

The vast majority of what we do is on the equity side. There, the gap is usually to do with the level of capital that the investor is willing to put at risk not being enough for the deal to go ahead. We need our businesses to be properly capitalised. There is no point in investing in a business that does not have enough capital to get to the next value inflection point. If there is not sufficient capital to be deployed, our partners or co-investors will come to us and ask us to invest alongside them.

Angela Constance (Almond Valley) (SNP)

Good morning to our guests. The implementation plan for the Scottish national investment bank says that, when investment decisions are being made, the broader approach of taking into account economic, social and environmental factors as well as commercial factors needs to be taken. Does the Scottish Investment Bank take that approach now? What attempts are made to have a balance between commercial factors and other aspects in measuring performance?

Kerry Sharp

We absolutely look at a lot of different levels. As I touched on earlier, we have been looking to grow the market on the risk capital side for a number of years, and that has been done successfully. That is now performing best regionally across the UK, and Scotland is punching at or above its weight on the early-stage side. We monitor closely the size of the overall market and strip out the large deals of over £10 million—the outliers—to see the underlying market and ensure that it is still healthy and growing. That is one element that we look at.

We also carry out evaluations, which is really important from the point of view of the role that we play in the market. The evaluations, which are qualitative and quantitative, try to work out the gross value add, including jobs and various other elements that are obviously important for an economic development agency. They also speak to investors, companies and other market players and ask questions about the role that we have played in the market, whether we have filled gaps, and whether we have been additional, for example. That allows us to consider the success of the fund, whether what we would like to be delivered in the market has been delivered, whether we can make improvements, whether the approach is fit for purpose, and whether any changes need to be made to make the approach more relevant and useful to the market.

The other level is the financial performance, which we touched on earlier. We do not have a target rate of return, but we have to act commercially, so we seek to maximise individual returns. It is therefore important for us to monitor the income that we bring in from our exits and to do all that we can to try to maximise that.

Angela Constance

You have outlined how market factors and financial returns are evaluated. If anyone had to randomly pick any investment decision that the Scottish Investment Bank has made and ask about broader social factors or environmental impacts, for example, would you be able to articulate a response to demonstrate its impact and explain how it was measured?

Kerry Sharp

I would not be able to do that for every single decision. That is work in progress for us. For a number of years, we have worked closely with colleagues to record some of the important factors—for example, women-led businesses and ethnic minorities. We have had a couple of general data protection regulation challenges, which we are just working through, but we are still developing our approach to that.

Overall, that is one of the things that we are strongly focused on as a business. Scottish Enterprise as a whole is very clear about the need to record social factors as well as environmental factors, and we are putting in place the tools to allow us to do that consistently across all our different areas of activities, right down to a company basis or a project basis.

Angela Constance

Do you use anything like a balanced scorecard? If you do not, do you consider that to be a potentially good tool for the Scottish national investment bank to use to measure broader performance?

Kerry Sharp

We do. We do not publish it externally, but we produce it internally. Previously, we have had an annual review that set out the factors on a portfolio and company basis—employee levels and so on. However, with regard to the overall market and the economic and financial performance, we record that internally using what is, essentially, a balanced scorecard approach. I think that it will be important for the bank to do that in future. It would not be sensible to focus on one of the elements and not the others; it is important that there is a focus across all the factors that can make a change to the economy.

Angela Constance

I would be interested to hear about the experience of the Development Bank of Wales with regard to whether broader factors are taken into account in investment decisions and how those are measured.

Rob Hunter

The easiest examples, which I talked about earlier, include our provision of commercial finance alongside Welsh Government grant funding. Generally, the mix might be up to 20 per cent grant funding and 80 per cent commercial finance. Those are two separate elements, but they work in a joined-up way.

In order to receive a Government grant through the ministers’ economic action plan, companies have to sign up to a contract with Government that promotes progress on reducing their carbon footprint; offers fair wages and fair work, as defined by the fair work board; promotes health, including a special emphasis on mental health; and delivers skills and learning in the workplace. Further, they must demonstrate growth potential. Those elements are specifically measured by the Welsh Government and, therefore, our commercial finance flows in behind that.

A separate part of the process involves developing funds that specifically address some of those issues. With regard to decarbonisation, there is a lot that we can do with modern methods of manufacture in order to support businesses in the supply chain to do more of that. Decarbonising the existing housing stock is a massive issue; I assume that it is just as big an issue in Scotland as it is in Wales. I think that something in the order of 85 per cent of all houses that will be built in 50 years’ time have been built now, which means that, if you do not ensure that those houses are decarbonised, there will be a massive drag on efforts to move decarbonisation forward in future. We are in discussions with the department with responsibility for housing to see how we can intervene to create specific funds to accelerate that change across Wales. We are working at a number of different levels.

Angela Constance

Do you recommend taking a balanced scorecard approach?

Rob Hunter

Yes, definitely. Like Kerry Sharp, we operate a balanced scorecard within the business, which we use to look at things from a customer perspective, the finance perspective, the delivery perspective and so on. We operate that on a day-to-day basis.

I think that you are asking about a balanced scorecard approach that involves consideration of not only financial returns but socioeconomic returns. We are developing that this year as part of our KPI measurement, which will be in place this year and will be reported on next year.

Jamie Halcro Johnston (Highlands and Islands) (Con)

I will ask about the regional perspective. The DBW has four offices across Wales, and I know that the Scottish Government has been considering options for a physical location, or physical locations, for the Scottish national investment bank. Consultation on that is under way. Mr Hunter, what are the pros and cons of having those offices spread out across the regions of Wales?

11:00  



Rob Hunter

A few years ago, I produced the pan-Wales strategy for locations across Wales. It is available on our website, if you want to see it. We and the minister were extremely keen that we would be a development bank for the whole of Wales, but we were a Cardiff-centric organisation with a few satellites outside of that area. We have generated a headquarters office in Wrexham, which will have in the order of 52 to 55 members of staff. We are well on track to reach the target earlier than we originally forecast, so that is going well.

Cardiff will still be our biggest office physically, as the majority of the businesses are in the south-east of Wales, but the mix of staff between Wrexham and Cardiff has been designed to ensure that we have a presence that is consistent with the business demography in those regions. That will drive up investment levels, which we are already seeing in north Wales. We have an office in Llanelli, which is in south-west Wales, and we are about to open a small office near Llandudno, which is in north-east Wales, so we will have people on the ground. That is important, because there is a thought that banks retrenching, moving away or closing branches—so that they are no longer as close to the businesses—is a new thing, but actually the business decisions have been removed from those branches for probably a very long time and most of the investment decisions are made remotely in an HQ office somewhere else.

One of the unique selling points of our organisation is that we are a friendly face—we meet our clients face to face and build a relationship with them, and will continue to do so. That is extremely important.

We have 22 unitary authorities in Wales and we noticed that there were pockets of very low investment activity. About three years ago, we set ourselves a specific target to increase the investment in the five lowest-performing local authority areas by 10 per cent in a year. The target changes every year because the unitary authorities that are in the bottom five will change every year. Last year, the combined growth of those five authorities was about 64 or 65 per cent, which was very positive and it raised the bar, so we have to do more next time. From our point of view in Wales, it is crucial that the organisation is not seen as a bank for Cardiff or as Cardiff-centric. It is certainly not that, as we now have very good reach right across Wales.

Jamie Halcro Johnston

You were testing my knowledge of the geography of Wales when you mentioned the different offices.

Rather than necessarily focusing on where the businesses and the demand are, you are looking to target those areas in which there is the lowest demand and in which demand needs to be increased.

Rob Hunter

Yes, absolutely. That is critical, and it is very easy to do. When any target-driven organisation sets targets on anything, there can be good intended consequences and there can be unintended consequences. An unintended consequence might be that the poorest-performing regions are left alone, but we cannot let that happen. The organisation has to reach across all the boundaries. There is a lot of talk about patient capital, but people need to see that such a national institution is real and that it is doing something in their area, which highlights the importance of doing smaller-value deals as well. If we were only doing large-scale patient capital deals, the likelihood is that we would be doing the vast majority of our deals in Cardiff or very close to the border with England, in Wrexham.

Jamie Halcro Johnston

Are you pretty clear that if you only had one office, that would limit the bank’s ability or impact?

Rob Hunter

I genuinely believe that it would. I have been in Wales for 15 years, but when I first went there I allowed myself about three hours to drive from south to north Wales. It is 180 miles, so I thought that it would take three hours, but it is actually quite a journey. It is a strange thing. The M4 runs across the bottom of Wales and the A55 runs across the top, but then there are roads that are quite difficult to navigate to get from north to south. Therefore, if all our staff were in south Wales, the bank would feel very remote to people in the north. We have always had people based in north Wales, but not at the scale that we needed, in order to demonstrate that we are on the ground and we are doing business.

Jamie Halcro Johnston

Having driven from Abergavenny to Betws-y-Coed not that long ago, I appreciate the issue. In that context, will you and Kerry Sharp give me your thoughts about the idea of the SNIB having more than one office, so that there are offices out and about across the regions of Scotland? I represent the Highlands and Islands, which can feel a long way from many parts of Scotland.

Rob Hunter

If you look at our footprint, you will see that we are going to have 14 to 17 people down in Llanelli, in south-west Wales, about 100 to 110 in Cardiff and about 50 to 55 in Wrexham. For areas that are further out—because the bank is not a development bank for the whole of east Wales; it is a development bank for the whole of Wales—we have smaller satellite offices: there is one in Newtown and there will be one in Llandudno, which will cover the areas at the more extreme end of the A55 in north Wales.

Our staff in the Wrexham and Cardiff offices can reach out and get to most businesses in their regions pretty much within an hour and a half, but other offices cover patches where there is a little underrepresentation. The bit that is missing is Aberystwyth, which is between the two, right in the middle. At some point, when we have created enough demand, we will look to base a small office there.

Jamie Halcro Johnston

Your suggestion is that we should make sure that the footprint covers as wide an area as possible.

Rob Hunter

Yes. A hugely important lesson that we have learned is about having telepresence in our offices. The one thing that we do not want is for people to travel for three hours to go to a half-hour meeting, so having a state-of-the-art telepresence—I am not necessarily talking about the gold-plated stuff—and getting everyone to use it is important. Again, it is about carbon footprint and making best use of individuals’ time. We have put pretty much state-of-the-art equipment in all our main offices.

Kerry Sharp

I agree entirely with Rob Hunter. The Scottish Investment Bank is pan-Scotland, so we operate across the whole of Scotland. We have staff based in virtually all SE’s offices—if I remember rightly, there are 12 offices. Most staff are in the three main hubs, in Glasgow, Edinburgh and Bellshill, but there are people far and wide. It is important to be close to the businesses, the advisers, the projects and the communities we work with.

We work closely with Highlands and Islands Enterprise and we will work closely with the south of Scotland enterprise agency when it is up and running. We ensure that we are available, from a finance point of view, to interact with companies, account managers and other colleagues in HIE.

I agree with Rob, too, on the need for technology of a good standard, to enable us to have Webexes, online conference calls and the like, so that we can be available consistently and continually.

Jamie Halcro Johnston

Do you see that improving when the Scottish national investment bank is up and running?

Kerry Sharp

A decision has to be made about where the head office and any other offices will be. There is the potential for co-location with SE, HIE or others. There needs to be a cost-effective way of ensuring that staff get out and about. As Rob Hunter said, there is no point in someone spending all their time—carbon footprint aside—in the car or on a train.

Ideally, staff would be based in different locations. Of course, that brings a staff management dimension, matrix structures and everything else, but it is important to ensure that companies have full access to the bank. Just as Rob said that the Development Bank of Wales is for the whole of Wales, I am sure that the Scottish Government would say that the new Scottish national investment bank is for the whole of Scotland.

Rob Hunter

It is also important to encourage flexible working. The idea that everyone goes to a very big office at 9 o’clock in the morning and leaves at 5 o’clock in the evening is changing dramatically. The Development Bank of Wales encourages people to work from home. We have people based right across Wales who work from home for a reasonable amount of their time, so that is another resource that we can tap into. With excellent Skype connections through laptops, it is much easier to communicate and stay in touch with people as they work remotely.

The Convener

Finally—and very briefly, I hope—Andy Wightman has a question.

Andy Wightman

I want to put our question on governance to Rob Hunter. The Development Bank of Wales is a plc. The bank, or its predecessor, was established in 2000. Have your objects changed since then, or are they as they were in incorporation?

Rob Hunter

They are pretty much as they were when they were incorporated at that time. I know that there is an on-going debate about whether the organisation should be a plc. I think that being a plc works—it is very much a known quantity, it has got a very—

Andy Wightman

Sorry to interrupt, but I am not particularly interested in the plc aspect; I am interested in the objects. Chapter 2 of the Scottish National Investment Bank Bill has the statutory objects for the SNIB. You probably have not had the time to look at that, but I would certainly welcome any comments on those objects if you have any.

Secondly—I am being encouraged to be brief; I apologise, convener—who is the shareholder of the Development Bank of Wales?

Rob Hunter

It is Welsh ministers. I think that one share is with our chief executive officer. The Welsh Government is the majority shareholder.

The Convener

You can submit additional comments in writing after the session, so do not hesitate to do so.

That is all the time that we have this morning. Thank you very much for coming.

11:10 Meeting continued in private until 12:54.  



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Sixth meeting transcript

The Convener

The next item is another evidence session on the Scottish National Investment Bank Bill. I welcome Derek Mackay, the Cabinet Secretary for Finance, Economy and Fair Work; David Wilson, programme director, Scottish national investment bank directorate; Rachel van Kempen, head of finance and resourcing, Scottish national investment bank directorate; and Fraser Gough, parliamentary counsel office, Scottish Government.

I invite the cabinet secretary to make a brief opening statement.

The Cabinet Secretary for Finance, Economy and Fair Work (Derek Mackay)

Good morning. The publication of the draft bill is a significant milestone in the creation of the bank, laying the foundations for it to begin investing in businesses and communities across Scotland from 2020. The bank has the potential to transform Scotland’s economy, as has been shown by the widespread support for the bank and the excitement that it has generated.

The bill gives a clear basis for establishing the bank, ensuring that it is commercially minded and publicly accountable. The work that has been done so far to establish the bank, including developing the bill, is the product of collaboration with stakeholders from across Scotland’s economy and society. Consultation and discussions with stakeholders have been crucial to the progress that has been made towards meeting the ambitions for the bank that are set out in the implementation plan. Certain key decisions are still to be taken before the bank becomes operational, including decisions about the products that it will offer, its structure and the scope of its missions.

Key to success will be the way in which the bank acts and evolves over time when it is operational, and I therefore welcome the committee’s role in furthering public debate on the bank. In the evidence that it has received, the committee has heard a constructive discussion on aspects of our proposals, and we will continue to engage widely, including with this committee, as we finalise our proposals to ensure that the bank can truly transform Scotland’s economy.

The Convener

I will start by asking about the issue of the bank lending solely to the private sector and about the commercial activities of the bank. As you will be aware, the bill team has recently clarified some aspects of that for the committee. Can you add any further clarification on the bank’s approach to private sector lending and commercial activities with reference to the bill?

Derek Mackay

In essence, what we mean by “commercial” is something that does not involve the public sector. That said, I have made it clear that the bank can invest in social enterprises, third sector organisations and co-operatives. It is the nature of the funding, which will come through financial transactions—loans and equity—that is the reason why the bank has a commercial nature. However, because of the environmental and other societal and social burdens that we are applying to the bank, it is clearly not just a commercial entity. Although it is a public limited company, it is also a public body. The commercial element concerns the financial instruments that it can use, and the bank will not invest in the public sector in the way that Government would do through resource or capital grants. Is that helpful?

The Convener

Yes, that is a very helpful clarification.

Where are we on the question of the bank carrying over funds from year to year and having dispensation to do so from Her Majesty’s Treasury?

Derek Mackay

I have raised that matter with Liz Truss, the Chief Secretary to the Treasury, including in writing, and it is still under discussion. If we do not get dispensation, the bank will be constrained in how it can invest and balance its affairs. We want to give the bank as much operational independence as possible, and we would have more control over the bank than people might like if it was not able to carry over resources. What do I mean by that in practice? We are bound by the financial framework agreement, which sets parameters and caps on our resources, the reserve and the carry-over. The bank will be constrained if its resources are part of that whereas, if the bank has dispensation and freedom, it will have more financial independence from Government, within the parameters that we will set out.

I have discussed the matter with the Chief Secretary to the Treasury in person, and I have written to her about it. I have also engaged with the Secretary of State for Scotland on the margins of other events to express how important I think this is. The bank would still be able to manage and operate without dispensation, but having that dispensation would make things easier.

I will give a practical example. Let us say that a big receipt or return came in at the end of the financial year, and that the Government was close to its own parameters. That might be really unhelpful, and we would need to try to manage that accountancy exercise, rather than the bank receiving the money and being able to continue to invest. The British Business Bank receives dispensation to do that. I am sure that the Treasury will be delighted to hear that I am not asking for any extra resource; I am asking only for the flexibility to manage resources for the bank in a way that does not overly constrain the bank or the Government through the fiscal framework agreement, as it stands.

The bank will not be operational until towards the end of this parliamentary session, so, in any event, there will be the opportunity to revisit the matter in the discussions on the fiscal framework agreement. However, it would be better to receive dispensation from the start. Discussions with the Treasury are on-going. Dispensation would be helpful and is necessary. We would manage without it, but that would be far from desirable, so I hope that the Treasury concludes that it is worth giving us the dispensation.

The Convener

Will you provide an update on where we are with state aid rules and securing the permission that might be required from the European Commission?

Derek Mackay

The committee will be aware of the uncertainty around Brexit negotiations. The United Kingdom Government has not been—let us say—enthusiastic about notifying us of progress. In any event, we want to build up the case so that the notifications and pre-notifications are right. Ultimately, we would pass the work to the UK Department for Business, Energy and Industrial Strategy, which would carry out the notification process. We are building up that case.

There was a period when the UK Government was not keen on the notification process, because it did not think that it would be relevant or appropriate in light of the Brexit negotiations and Brexit itself. However, given the extension, the UK Government is now minded to forward our case, so we will pass that on to it for the interest of the European Commission.

Contingency plans are in place if there is a change in circumstances, such as Brexit happening. I will not go into all that, but I understand that the UK Government has arrangements in place for where we would send notification if it was not to the European Commission.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Evidence to the committee has suggested that there is not the level of demand in the economy that was envisaged. Rob Hunter, from the Development Bank of Wales, suggested that the £200 million that is envisaged to be invested each year is about the right level for Scotland. What are your feelings on matching the supply and demand of funds? Would it be right to invest £200 million a year under the current circumstances?

Derek Mackay

Clearly, we will have to consider how we finance the bank and the capitalisation of it from year to year, as resources allow. We have set out the £2 billion capitalisation over the 10-year period, but exactly how we profile that will be determined by the resources that we have available from budget to budget, within that aspiration. We have already announced the building Scotland fund and precursor funds to the bank being established, and those are being administered. Other funds will come from other places, such as the Scottish Investment Bank, which will form part of the finances. I would not set it out as rigidly as £200 million a year because, as I say, the profile may vary naturally from year to year.

We want to ensure that there is demand—folk queueing up at the door, if you like—so that people take advantage of the financial products that will be available. To stimulate that demand, we want to engage the enterprise agencies, the Scottish Futures Trust and the banks as appropriate. The purpose of the new bank is to give additionality rather than to crowd out the financial products that banks currently provide. We recognise that there are gaps in the economy and the market, and we want to focus on those to try to stimulate demand. The attention, coverage and awareness that the bank will, we hope, enjoy and we will encourage and stimulate will ensure that there is demand. The bank will have a transformational nature, as it is about trying to provide patient finance and capital, which is different from the products that banks have traditionally provided.

For all those reasons, there will be demand. We may have to stimulate that by raising awareness, and then success will breed success. I have described the investment pattern, which will vary from year to year, so that we can respond accordingly.

Gordon MacDonald

Again on demand, the committee heard from Rob Hunter that the Development Bank of Wales had an aim of reaching £80 million of investment by 2022 but that it achieved that in the first two years. Is there any reason why the demand profile in Scotland should be any different from that in Wales?

Derek Mackay

No. The economies are clearly different and some of the challenges that we face will be different. How we choose to target the missions will be different; it might be really good for us to target scale-ups or high-growth companies. We are learning from Wales and from the British Business Bank and the Green Investment Bank, but what we are doing is different from all of them and is unique to Scotland’s economic circumstances and landscape. However, I hope that we can have the same type of demand and investment.

With other investment funds that I am familiar with—the committee will be very familiar with them—Brexit uncertainty is having an impact, with investment plans being deferred and people sometimes being unwilling to co-invest. If the Brexit economic uncertainty is resolved and we get beyond the current phase, there will be even more demand for such products. That view is based on the evidence that I have seen that current financial tools are not being deployed and investment is being deferred because of uncertainty and a lack of willingness to co-invest.

Gordon MacDonald

The British Business Bank has recently established a new demand development unit. I know that the Scottish Investment Bank works closely with the British Business Bank. Is there anything that we can learn or copy from that new unit?

Derek Mackay

We will of course take the good practice from that. In my early days as finance secretary, I engaged with the British Business Bank. We do not want to crowd out the BBB, either—we want it to keep investing in Scotland and supporting Scottish business, so we are about additionality. However, we can of course pick up on that practice. We will have missions that are specific to Scotland’s economy, which is how we will achieve additionality and focus. However, if there are practical measures on raising awareness, particularly in relation to targeting small and medium-sized enterprises or scale-ups, that will be useful.

Having convened Scotland’s banking and economy forum, I am trying to ensure that we have good relationships with the banks and that we use an intelligent approach to provide resource or finance where that is not totally there at the moment. We will learn from the British Business Bank and the unit that it has created.

10:00  



Dean Lockhart (Mid Scotland and Fife) (Con)

We have heard from those who are setting up the bank that it will not act as the originator of funding opportunities, but will rely on referrals from the existing enterprise agencies, Scottish Enterprise and Highlands and Islands Enterprise. Given the significant additional funding available from the bank, will the resources, budget and staffing levels of the enterprise agencies increase to cope with the additional work?

Derek Mackay

We have still to fully decide on who and what transfers, and what resource is where. I want to look closely at those issues to avoid duplication—a matter that Dean Lockhart has mentioned in the chamber. We do not want duplication or clutter; we want a potent, targeted, national investment bank that will leave the enterprise agencies and the SFT with their functions. We will look closely at how we align our efforts, organisations and staff. We are also working right now on a single point of entry for business support. It is about decluttering.

Rather than framing the question around whether the bank will bring costs of administration that will add to those of the enterprise agencies, we will look right across the infrastructure and landscape and ask what fits best where and how we can address duplication to ensure that we get maximum output from public finances.

Dean Lockhart

The Enterprise and Skills Strategic Board was set up two years ago to further align the activities of the enterprise agencies. Will that board therefore sit above the bank and oversee its activities to ensure the full alignment that you talked about?

Derek Mackay

That is a good question. As well as a board, the structure and governance of the bank will include ministerial accountability and parliamentary scrutiny, and Audit Scotland and the advisory group for ministers that I am proposing will also be involved. The strategic board provides advice on all enterprise agencies. The proposal is that the bank will be a public body and a plc, so its relationship to the strategic board will be different, but it would be wrong to assume that the strategic board will take no interest in the bank. I am trying to make the lines of accountability for the bank clear and not too cluttered. The strategic board might be able to give advice on the landscape of the agencies, and I will give that further thought. I do not want the bank to have to respond to too many sources of leadership, when the purpose was to declutter and to bring things together. I think that the strategic board will continue to provide recommendations on how to bring the Government’s agencies together. Mr Lockhart is familiar with that issue.

Dean Lockhart

My final question is on demand. The Scottish growth scheme was set up a couple of years ago to invest up to £500 million in the Scottish economy. Can you give the committee an approximation of how much has been funded under that scheme to date?

Derek Mackay

I would rather do that in writing so that I get the figure right. I committed to give the committee an update, and I will give you line-by-line, portfolio-by-portfolio investment figures.

As Mr Lockhart is aware, a number of the schemes took a wee while to set up. Some of that is down to demand, and—as I touched on earlier—some is down to investment plans being put on hold or the lack of co-investment. Am I still confident that the half a billion pounds to which we committed in the programme for government will be allocated over the period? Yes, I am. However, if it is helpful, I will write to the committee so that you have the amounts allocated to date for each portfolio. I know that I committed to giving that update.

The point is fair. I go back to the earlier point about stimulating demand and raising awareness. We want to learn the lessons, so that there is almost a queue at the door as we get ready to go.

Andy Wightman (Lothian) (Green)

I have a technical question. Scottish ministers already own Scottish Water, David MacBrayne Ltd and so on, so why is it necessary to establish the bank via primary legislation? If the Government wished, it could set up a bank without legislation.

Derek Mackay

I am happy to turn to the lawyer to explain why, but civil servants are good at saying, “It is because you have to, minister.” It is more technical than that.

Essentially, legislation gives us the basis to instruct. It also gives the bank its enduring nature if it sets out the parameters and functions, and it gives us the ability to capitalise, by way of resources.

That raises the question of what is different from what we had before. It is about the scale of the bank. If we get the dispensations, the bank will have further financial flexibility, which the agencies that we currently have do not enjoy. There are benefits from establishing the bank in legislation.

Fraser Gough might say more about the legal underpinning.

Fraser Gough (Scottish Government)

Part of the issue is the democratic imprimatur behind the bank. We are talking about an institution that will be vested with large sums of public money. Therefore, in a democracy, it is attractive for the Parliament to have the opportunity to shape the institution. Instead of the Government going away and drawing up the articles, the Parliament has, through the bill process, an opportunity to influence the bank’s structure and operation.

Indeed, beyond the bill process, there is the mechanism for amending the entrenched provisions in the bank’s articles of association, which is subject to a parliamentary scrutiny procedure. The Government has no means of creating such a mechanism but through the vehicle of primary legislation. There is an on-going role for the Parliament, and we need the primary legislation to put that in place.

Andy Wightman

My question was really about the necessity, not the desirability, of having a bill—I understand the desirability and I am grateful that we have a bill. I am advised that the necessity of a bill is to do with elements of section 17, on the ability to finance the bank

“in the form of grants, loans and guarantees”,

which would be prohibited by the Scotland Act 1998.

Fraser Gough

I think that “prohibited” is an overstatement of the position. However, there is a question about how much public money the Scottish Government can expend without direct statutory cover. Budget acts provide that, to some extent, but we are talking about finance on a scale that goes beyond the typical spend.

Derek Mackay

As I think that I said, the power to capitalise the bank is the clearest part of the bill.

Andy Wightman

Okay. If you have further thoughts on the necessity of legislation—

Derek Mackay

The need to capitalise the bank is a pretty good reason to legislate.

Andy Wightman

I suppose that, fundamentally, I am asking whether you could go ahead and do this without legislation and, if so, what is stopping you. Perhaps you can come back to us on that.

David Wilson (Scottish Government)

Let me comment briefly. I think that the assessment is that the Scottish ministers could create an organisation that could take on many of the functions—with both limits and scope—exactly as you describe. However, the decision that has been made, and the advice that we received, was that, in order to capitalise such a company on the scale that ministers intend, legislation would be needed. The central need for the legislation is about giving ministers the power to capitalise the bank—not to create it, as such.

Andy Wightman

Are you saying that ministers do not currently have the power to capitalise such an institution?

David Wilson

Yes.

Andy Wightman

Thank you.

Recommendation 1 in the implementation plan is to establish a national investment bank with a vision to

“provide finance and act to catalyse private investment to achieve a step change in growth for the Scottish economy by powering innovation and accelerating the move to a low carbon, hightech, connected, globally competitive and inclusive economy.”

I do not think that we will find much disagreement with that. However, witnesses questioned whether that bold vision has been translated into the language of section 2, which sets out the objects that will be in the bank’s articles of association.

Questions have been asked about the object of

“investing in inclusive and sustainable economic growth”,

which is in section 2(2)(a). Just this week, the Poverty and Inequality Commission said that the Government needs to define exactly what that means and say how it can be measured.

Have you had further thoughts about the bank’s objects, cabinet secretary? Do you think that they faithfully reflect the vision in the implementation plan?

Derek Mackay

I am content that we will achieve the vision for the bank through the objects and, of course, the missions, which will be crucial. Section 2(2) sets out the ancillary objects, which cover the areas that you mention. They are:

“(a) investing in inclusive and sustainable economic growth,

(b) promoting and developing the activities of enterprises, where lack of financial investment is holding back economically viable commercial activity,

(c) promoting and developing the activities of small and medium-sized enterprises,

(d) creating and shaping markets through the provision of patient capital,”

and

“(e) contributing to the achievement of the Scottish Government’s economic policy objectives”,

which include not just boosting competitiveness but tackling inequality.

I think that the missions, which will be critical, will speak to those areas further, including the move to a low-carbon economy. We might come back to the formulation of the missions. I have some ideas about that that I would like to discuss with the committee, but I believe that the ambitions in the consultation and the implementation plan will feature in the missions.

I am looking at a chart of responsibility in a table on the bank’s governance. Right across the articles of association, the shareholder framework document, the missions, the investment strategy, the business plan and the ethical statement, we will want to direct the bank in a way that Parliament would want us to. Therefore, I do not think that there is any risk of the intentions being lost.

Andy Wightman

Recommendation 1 is quite a visionary statement, whereas the language of section 2 is the dry language of articles of association. I do not doubt that you share the vision that is set out in recommendation 1 but, in 10 or 15 years’ time, that might not be the vision of the Administration at the time. If that vision is important, as we all believe that it is, is there any way of incorporating it in the bill to make it clear what the bank is actually for?

Derek Mackay

I think that the bill does that. It is essentially an enabling bill that builds the structure of the bank. The bank will be an enduring, long-term institution; I think that it will be a permanent feature of our financial landscape. However, the missions need to be adaptable. Some of the articles are entrenched in terms of how we deliver the bank, and there will be parliamentary involvement. We must be agile and able to adapt to circumstances, which is why it is important that the missions are not outlined in the bill. That means that if we were to change or amend the missions, we would not have to return to Parliament with primary legislation. The bill must provide the structure and enable us to get on with setting up the bank.

There are many areas to do with what the bank will do in practice that I do not think it is right to include in legislation, but which should feature in the other devices that I have referred to.

Andy Wightman

You mentioned the missions and the role of Parliament. You rightly drew attention to the fact that the entrenched provisions can be modified only if a resolution has been laid before and approved by Parliament, but that is not the case with the missions. Do you think that the missions should be subject to any parliamentary scrutiny, or approval by resolution, given how central they appear to be to the role of the bank?

Derek Mackay

I do not think that they should be, but I have an idea about that. I think that it is right for the Government to be able to get on with its job as an executive and have a relationship with the bank, whereby the bank will have a degree of independence, but the missions will set out the parameters within which it should operate. The illustrative missions that have been set out include dealing with demographic change and moving to a low-carbon economy.

I led the work on the national performance framework on behalf of the Government. The NPF sets out the Government’s purpose through outcomes and indicators. We tried to make it about the country as well. That did not require an affirmative vote by Parliament; it was a mission for the whole country. We developed the NPF in an inclusive way on a cross-party basis, through engagement, consultation and round-table discussions with stakeholders. I would like to take the same kind of approach with the missions—I commit to taking a round-table approach. Extensive consultation is already under way. Rather than have a parliamentary vote and unnecessary division on the missions, I would like to engage with Parliament on them, in the same way that I did for the national performance framework. I am keen for a cross-party approach to be taken to refining the missions.

Given that I got the likes of Murdo Fraser and Patrick Harvie to agree on the purpose of the Government as set out in the national performance framework, surely we can approach the missions for the bank in the same consensual and constructive way. There are other stakeholders with whom we must engage, too. Although it is ultimately a matter for the Government, I want to take a collaborative approach to the creation of the missions. As I said, we have already published some illustrative missions, but that is not the end of the matter.

10:15  



Andy Wightman

The bill says that you will send a document to the bank when setting, modifying or ending missions. I think that the missions are designed to be fairly long term. Will you give an indication of what proportion of the bank’s resource will be devoted to the pursuit of missions as opposed to other financial products that it may develop routinely?

Derek Mackay

That is a good question. I do not want to set a percentage. I suppose that that issue will feature in the investment strategy and the business plan. I expect the missions to be transformative and to absorb a lot of the bank’s energy and resource. We will direct the bank to engage in missions. That is not to say that every single investment will be exclusively part of the missions, but we will expect the missions to direct the energies of the bank.

We will get further information from the investment strategy and the business plan, which the bank will lead on. It will be for ministers to review that.

Andy Wightman

I am looking not for a specific percentage but for an indication. I am looking at the paper that was produced by Mariana Mazzucato and Laurie Macfarlane for the Government in March 2019. Much importance is being attached to mission-orientated finance. Do you see the mission-based finance as a substantial part of the bank’s activity?

Derek Mackay

I do. I said that I think that the missions will absorb the bank’s energy and resources—I expect that to be a real focus of its work.

Andy Wightman

That is helpful. Thank you.

We have had discussions about ethics. Do there need to be legislative provisions on the bank’s ethics, or are you content to leave that to the board?

Derek Mackay

I do not support either of those options. I do not intend to legislate specifically on defining things as ethical, but there will be an ethical statement. However, I will not just leave that to the board. Although it is appropriate for the board to lead on the ethical statement, ministers should review it. Naturally, ministers will engage in relation to that. I am sure that ministers will want to give a view on the shareholder framework document—and even at an earlier stage—and on what we feel is the spirit of ethical investment in practice. That said, as a public body, the bank will be bound by, for example, the public sector equality duty and the Gender Representation on Public Boards (Scotland) Act 2018—there is existing legislation that is relevant to a public body.

As I said, we will review the ethical statement. I will not just leave it to the bank to compose the statement—I propose to engage beforehand.

Andy Wightman

The ethical statement is not a legislative requirement.

Derek Mackay

No. You asked whether I would legislate for that, and I said no. You then asked whether I would leave it to the board. I said no again, and then gave the appropriate answer.

Andy Wightman

I am very impressed, cabinet secretary—thank you very much. That is all from me, for the moment.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

I want to explore a couple of issues. The first is the target rate of return. The bill’s policy memorandum states that the bank will deliver

“against the target rate of return set by the Scottish Ministers.”

We have taken a fair bit of evidence on that issue. A range of approaches are taken for national development banks. Some banks have target rates of return, others do not. What is the reasoning behind having a target rate of return for the SNIB?

Derek Mackay

I suppose that it is to set a target. Let me frame this very carefully. We must bear in mind that this is not about commercial profit return, although it is good that what is raised will be reinvested—ministers will have the option of a dividend, too. Because we are putting those societal, transformational and environmental burdens on the bank, it is not all just about the rate of return.

Other development banks have a target rate of return, and it is appropriate for the Scottish national investment bank to have one, but that should not give people the impression that the rate of return is more important than other considerations. We have talked about how a move to low carbon, demographic change, scale-ups and support for small and medium-sized enterprises are also important considerations in transforming our economy. It is important to have a target rate of return, and we will engage with the bank on that, but I do not want it to be overly restrictive or to give the impression that that is the matter of primacy. It is not; this is about transforming our economy and adding to it.

Another issue to bear in mind is the very nature of patient finance. There might not be immediate or short-term returns—it could take a long time for investments to return resource. There are a number of considerations. It is appropriate to have a target rate of return, but we will not be beholden to that as the only measure of success.

Colin Beattie

Is there, therefore, any point in having it? You have highlighted a number of issues that indicate that it might not be appropriate to set a target rate.

Derek Mackay

It is important to have one, but we should not be totally beholden to it. We should bear in mind the bank’s other considerations and the missions that we set for it. It is good to set a target rate of return as a benchmark, but we should not be a prisoner to that. I am sure that there will be comparisons with other financial institutions, but we will look at what is reasonable and appropriate. We do not yet have a proposed rate of return, because we are currently only considering the legislation for the bank. When the bank is much closer to operation, we will set down a rate in the relevant document.

Colin Beattie

Has any consideration been given to what the likely target rate of return will be?

Derek Mackay

Not yet, although we are looking closely at it with others.

Colin Beattie

Is there a danger—human nature being what it is—that, if a rate of return is set, everything will be measured against it and it will become a totem that everyone operates against?

Derek Mackay

Mr Beattie asks a fair question. However, I am trying to express the view that, although we should set a target rate as a benchmark and as another metric for success, we must not be beholden to it, given the missions that we are seeking to establish for the bank. It should be there and we should be mindful of it, but it must not be our north star—the only thing that we follow.

Colin Beattie

Leading on from that, I want to talk about the subject of break-even. Given the bank’s operating costs, there is a deadline of 2023-24 for the break-even point. The bank will invest in firms whose needs for capital are not currently serviced adequately by the market; the reasons for that lack of investment are often complex. Is it likely that the bank’s high risk profile will impact on the potential break-even date? If so, what would that mean?

Derek Mackay

It might. It is possible, and even likely, but it will depend on what the bank invests in; when there is a financial return; the state of the economy at the time; where there is success, whether that is around the bank’s missions or around its investment profiles; and what we choose to do around the economic cycle.

That relates to my earlier point about the availability of resources and how quickly we can capitalise the bank. All those determinants will contribute to how soon it achieves break-even. As the finance secretary, I want that to be as soon as possible, but, as long as the bank is stimulating our economy and delivering the necessary investments to enhance and improve it, I will welcome that. We set out in the financial memorandum what we think the costs will be—and certainly what we think the benefits will be—but a lot will depend on the investment profile, the returns and the state of the economy at the time.

Colin Beattie

Would break-even be measured as a book entry or as cash in the bank, so to speak? We have talked previously about patient capital, and it could be years before you are able to crystallise any profit that might be made from the investment, although you would obviously be booking it every year. Would it be a book break-even, or would it actually be cash?

Derek Mackay

I was asked previously by this committee or another committee—I cannot remember which—what would constitute success for the national investment bank, and I said that success would be the bank allowing investments to happen that would not otherwise have happened.

I do not see the national investment bank as a cash cow that will be able to contribute to the fiscal coffers, as nice as that would be. It is more about transforming our economy, stimulating investment and providing financial support where it may not currently be available. It is about transforming the economy to direct more efforts towards demographic and environmental challenges, including the transition to a low-carbon economy and the scale-ups. I want the bank to be self-financing and to be able to reinvest its returns as soon as possible, but I see its contribution to the economy as being of much greater importance than ministers having the ability to take a dividend from it. That is not the bank’s motivation.

Naturally, the sooner that the SNIB can be self-financing, the better, but the bigger prize is what it can do for the economy and business support and what it can do to transform our economy. What I see as success is investments happening that would otherwise not happen.

Colin Beattie

So, the target date for breaking even is more notional than actual.

Derek Mackay

I suppose so, because of the range of determinants that I have set out.

Colin Beattie

I have one last question. Obviously, the SNIB is intended to be a cornerstone of the Scottish economy in the future and, we hope, something that will be with us for a very long time. Are you satisfied that, in the way that it will be set up, it will be free from future political interference, changes of regime and so on?

Derek Mackay

I do not know. I have not yet seen the committee’s report, so I am not sure how much you want to interfere in it.

In all seriousness, I think that the way in which we are structuring the bank and the arrangements around it gets the balance right. It will be a plc but also a public body with all the relevant accountability, transparency and governance arrangements. It will have an advisory board so that it can hear from different parts of society, and ministers will be able to direct and engage as appropriate.

However, it is important to point out that, according to all the advice and evidence that we have heard, the bank will achieve more if it is as independent as possible. Because public money is involved, all the appropriate checks and balances will be in place, but it will have operational independence. Nevertheless, in setting out the missions, we can direct the bank’s efforts and energies, and the shareholder framework document will give us assurances about its operation. We are clear with regard to the articles of association, including the entrenched articles, and ministers will be able to review the other policies that will be involved.

We will, of course, continue to engage with the committee on any suggestions that it might have, but I think that we have struck the right balance to ensure that the bank endures beyond any parliamentary term, any term of a finance secretary or whatever.

Angela Constance (Almond Valley) (SNP)

Cabinet secretary, you are probably aware that Engender and Close the Gap have raised serious concerns about the equality impact assessment, saying, in essence, that it lacks substance and is incomplete and that the analysis is somewhat “cursory”. How do you intend to interfere to rectify that matter?

Derek Mackay

At this stage, ministers and, indeed, Parliament are perfectly entitled to work on creating the bank, so I do not see that sort of thing as interfering at all. I have seen the evidence from Close the Gap and Engender, and officials are meeting organisations to go through their concerns and to ensure that what they have to say shapes and informs future work.

As I touched on earlier, the bank will, as a public body, be duty bound to follow the duties that are set out in the bill. Perhaps some of the elements of equality or of the duties have not been expressed in the bill, simply because those things are de facto required of any bill or any public sector body. It is therefore expected that all of that will be delivered and complied with without any reference being made to it, because it is the legal position as set out in the public sector equality duty and other duties in the Equality Act 2010.

Further work on socioeconomic deprivation will be carried out under the fairer Scotland duty assessment. I understand that the findings of that work will be published at the end of the summer and will also feature in the various strands of work that have yet to begin.

Between our engaging with the organisations to ensure that we get this right and our directing the bank, targeting what it does and pointing it in a certain direction, I will want to ensure that we cover issues such as having an inclusive approach, ensuring inclusive economic growth, sustainability and equality and tackling inequality. I think that those things will feature in the missions and the shareholder framework document, and I also expect them to be set out in the remuneration policy, the investment strategy, the business plan and the ethical statement. It is right that they will feature in those documents, which ministers will review.

If it was felt—as was clearly the case in the evidence that you received—that there were gaps in the assessment, I would want to work on that, including on what we could do with those with protected characteristics. We will meet the individual organisations to see what progress can be made during the passage of the bill, but I point out that what are perhaps even more important than the bill itself, which allows us just to build the bank, are the strategic documents and directions, which are where equalities should feature.

10:30  



Angela Constance

Do you accept that, whenever there is an opportunity to articulate what everybody is required to do to advance equality, it is better to be explicit?

Derek Mackay

Although lawyers might be better placed to argue the point, pieces of legislation cross-referencing other pieces of legislation can get messy. However, for the avoidance of doubt, the legislative drivers, missions and objectives should—absolutely—feature in the other documents that I have suggested. Legislation should not be overly complex, but we all have to be bound by what Parliament states that we should do, and equality must feature in the top-level documents and direction under which the bank will operate. My answer is therefore that, yes, we should be explicit about how we do our business and operate and about what we are trying to achieve.

Angela Constance

The word “equality” is not mentioned in the bill. How does that omission fit with inclusive growth as an outcome and, more importantly, the raison d’être of the bank, which is—as you have said—to transform the economy not just by increasing competitiveness but by reducing inequality?

Derek Mackay

The bill directs people to the Government’s economic strategy, which mentions tackling inequality; the strategy focuses on inclusive economic growth and greater equality.

We have tried to keep the bill as tight as possible—it is about enabling the bank to be created. All the other documents—from the articles of association, the mission and the framework document to all the other policies—should feature the objectives and language that is right and appropriate. However, for the avoidance of doubt, although the word “equality” is not mentioned in the bill, it will be mentioned, where appropriate, in all other documents. The Government’s economic strategy, to which the bill refers the bank, mentions tackling inequality, and that is a key part of the strategy. That means tackling inequality in every sense, not just financial inequality.

Angela Constance

Do you accept, however, that visibility and clarity are important?

Derek Mackay

I absolutely accept that.

Angela Constance

I will now ask about remuneration. The committee has heard mixed evidence—more so in written evidence—about the bank’s remuneration policy. On the one hand, the bank will operate in the financial sector, and some people expect that to be reflected in its terms and conditions of employment. However, other evidence points to the fact that it will be a public body that is accountable to taxpayers, that there will be a need to deliver value for money and that public support for the bank and its policies will be important. What are your views on remuneration policy?

Derek Mackay

Ms Constance has fairly articulated the issues that Government and Parliament will have to wrestle with in relation to what we want the bank to achieve. It will be a plc but also a public body, and we will wrestle with the challenge of attracting the right people to operate the bank while working within the public sector pay policy, as far as possible. However, that will not be possible for every member of staff. I echo the First Minister’s comments in that regard:

“If this bank is to be successful, we will want to attract the top talent to run it and we will need to be able to attract that talent. And equally ... we live in a climate, in a culture where there can be a public concern about salaries that are over-inflated or, in shorthand, a bonus culture. We don’t want to obviously have those kind of concerns in a publicly owned organisation that is there for the public good.”

As the remuneration policy is set out, we need to bear in mind that the bank will work within the fair work principles and that it will be a living wage employer, which I know has been welcomed. To secure the level of staff that we will undoubtedly require, higher remuneration levels will be required for some posts. We will look closely at the pay policy of the British Business Bank, which is similar, in determining what is right for the Scottish national investment bank, which will be commercially minded but publicly accountable. We will give the matter a great deal of thought and we will balance the need for people who have the right skills and experience with respect for the public sector pay policy, which the vast majority of the staff will be under.

It will be for the bank to lead on its remuneration policy and the recruitment of staff, but ministers will set out a view and a direction, if that is appropriate. We will give that further thought on the basis of evidence from equivalent organisations such as the British Business Bank. We are mindful of the public sector pay policy, but we recognise that the Scottish national investment bank will not be just another public body and will need to attract the right staff. A balance will be involved, which Ms Constance articulated.

Angela Constance

What are your views on performance-related pay?

Derek Mackay

I do not want to encourage a bonus culture in the bank, which would be an inappropriate driver. I want the bank to be inspired and energised by its missions. For as long as I have been the finance secretary, I have not encouraged a bonus culture in the civil service or the public sector pay policy, and I would not like to see that in the bank—it would be the wrong culture. The bank will focus on delivery, and remuneration will be appropriate under the structure that I have set out.

Jackie Baillie (Dumbarton) (Lab)

I will pick up two issues that have been covered before I ask my allocated question. I welcome the cabinet secretary’s invitation for the committee to interfere and I view that as positive encouragement to do so. Does he have in mind a role for the committee or do we have a blank sheet to do what we will?

Derek Mackay

I am totally open, accountable and transparent to the committee. As always, it is no holds barred from Jackie Baillie.

Jackie Baillie

You do not let me down; you will therefore be able to look with interest at our report.

In a reply to Gordon MacDonald, you touched on stimulating demand and the challenge that Brexit poses, and you pre-empted my next question. The Scottish-European growth co-investment programme has managed to allocate only £3.25 million out of a total of £200 million. Has Brexit caused the slow take-up of that funding?

Derek Mackay

Businesses have told me that investment plans have been deferred because of Brexit; that is one reason for companies holding off. I have met businesses that are keen to invest in the UK and Scotland but, because it is hard to answer the question about what the Brexit position will be, some companies are holding off on investment. If companies are doing that, it is no surprise that they are not seeking funding to go ahead with investment plans. Brexit is having a material impact on the economy.

Jackie Baillie

I accept that, but I am confused because, when the co-investment programme was announced to great fanfare two and a half to three years ago, it was set up to help businesses to grow in the face of Brexit. Is it the case that you did not do your homework in setting up the fund?

Derek Mackay

Not at all—and there is no need for the pejorative language. It takes time to establish investment funds; due diligence must be done and we must reach out to potential investors.

Jackie Baillie

I understand all that and agree with you, but you said moments ago that part of the problem is that Brexit is preventing people from investing. The Scottish Government set up the fund to deal with the problem of Brexit, so I contend that you did not understand the market when you set up the fund.

Derek Mackay

Not at all. We have committed to financial support of about £500 million. I was asked whether we would fulfil that commitment and I said that we would and that I would provide further information to the committee on the profile of that. We can create a fund and offer loans and equity, but that does not force companies to take the financial products.

I have also been clear to Government agencies that we can be creative in terms of doing our homework. If we have financial products for which there is not enough demand, we can create bespoke products and look at how we can support companies if they want a different kind of financial product.

The financial transactions can only be loans or equity. Companies will, naturally, always take free money before loans or equity—anyone would take a grant first—but we will provide loans and equity. Because of the nature of the economy and risk or financial uncertainty, companies may not be willing to take up specific projects.

With the Scottish-European growth co-investment programme, we have to comply with the rules on what it is appropriate to use those resources for. As finance secretary, it has always been my position not to lose any resources. If people will not take the financial products that we have, we will look at how to amend them so that we can provide further support to the private sector. However, Brexit uncertainty has been raising its head ever since the referendum and having a material impact on the investment decisions of companies and potential investors.

Jackie Baillie

It is just that you introduced that fund in the light of all that.

Picking up on your latter point, which was that if it is not working you will seek to reallocate the money, are we to take it that the Scottish-European growth co-investment programme will come to an end or be altered? Is the money going to be reallocated?

Derek Mackay

No—I am still intending to use it. I am saying that if there is any prospect of Scotland losing out on finance, I will make sure that we adapt so that we never lose a penny that Scotland is entitled to. It is unfortunate that, thanks to the efforts of the UK Government, we might be on track to lose out on substantial sums of money if there is no resolution to the issue of financial guarantees from the UK Government concerning the funds that we have enjoyed from the European Union. I have financial products, but if necessary I will try to make them better so that they can be used in support of the Scottish economy.

Jackie Baillie

Excellent. Your implementation plan states that a balanced scorecard will be developed between the bank and the Scottish Government, which will set out the requirement for and measurement of non-financial returns. Can you point to where that features in the bill or any supporting document?

Derek Mackay

We have not put much detail in the bill. We are still working on it, and it should feature in the stakeholder framework document; we will set financial targets for the bank through the stakeholder agreement. It will also be covered in the missions, in which we will cover key socioeconomic challenges for the bank; both the financial and non-financial returns will be part of that. As a patient stakeholder, we will give time for resources to return to the bank. I also expect reference to that balanced scorecard to feature in the business plan and investment strategy. It will build on the Treasury’s green book guidance and develop a specific approach suited to a mission-orientated development bank.

Jackie Baillie

We can find nothing in the bill or the supporting documents, but I am encouraged by what the cabinet secretary is saying. I am very keen that if we are setting up such an institution, the Government should prioritise the non-financial returns and there should be clear sight and measurement of them. The earlier sight that the committee can have of your intentions as you develop them, whether that is in guidance or the business plan, the more confident we will feel about those returns.

Derek Mackay

That is a fair point, convener. I do not think that Jackie Baillie is saying that it should be in the primary legislation that will create the bank, and we are agreed on that. However, it is clear that what is expected of the relationship between the bank and the Government should feature in the stakeholder framework document. It should also feature elsewhere, as appropriate, to capture those financial and non-financial matters. I will give further thought as to how it features, but, to go back to Angela Constance’s point, I take on board that it should be explicit somewhere.

John Mason (Glasgow Shettleston) (SNP)

The cabinet secretary has mentioned the advisory group, and I want to ask more about that. A variety of witnesses have given us views. Some want the advisory group to be more separate and stand alone, and others want it to be more involved. How do you see the advisory group operating? Am I right that it is intended to advise ministers rather than the bank?

10:45  



Derek Mackay

Yes, that is correct. The intention is for the advisory group to advise ministers. Clearly, we have a relationship with the bank; we would rather that was the case than have the bank looking to too many different places. So, that is correct: it is our view that the advisory group should be advising ministers.

John Mason

Would there be no direct relationship between the advisory group and the bank?

Derek Mackay

We could give that further thought. I am not saying that members of the advisory group should never meet representatives of the bank—I do not know if we would want to be too specific about that, or if that would be overly restrictive. The purpose of the advisory group is ultimately to advise ministers. We will direct the bank through the mission, the shareholder framework and the eventual act. Parliament will create the act, and we will hold the bank to account.

John Mason

The advisory group would not be in the act, however—is that correct?

Derek Mackay

We do not intend it to be. It has an advisory function, so we are not proposing to put it in the act.

John Mason

A further question that has arisen is whether the chair or some other member of the advisory group should also be on the board of the bank. We have heard different views on that. Can you comment on your current thinking on that?

Derek Mackay

We could give you some further thinking on the chair.

Rachel van Kempen (Scottish Government)

The proposal in the consultation paper was that one of the non-executive directors would be the chair of the advisory group, creating a connection between the advisory group’s thinking and the board and its thinking.

John Mason

That would give a connection, but would that compromise the independence of the advisory group?

Derek Mackay

It gives you the link that you were asking about—not from the advisory group into the board, but from the board to the advisory group. The important point about the advisory group is that we want it to be reflective of Scotland and its key economic interests. It cannot be totally comprehensive and cover every sector, but we want the group to be informed, and for it then to inform ministers.

I think that the proposal will provide that direct relationship with ministers. We want the group to act as our advisers on the wider economy. We also have the link from the board through the non-exec director. They would be outnumbered, however, by all the other members on the group. We have been considering a membership of, I think, around 20.

David Wilson

It is about that.

Derek Mackay

We are open to that, and I think that that would be quite representative.

John Mason

We have heard a variety of thoughts and comments regarding membership. It has been suggested, for example, that nurses and social workers might be on the advisory group. That would not be a traditional expectation of or requirement for a financial institution, but that would mean that there would be wide involvement in the advisory group, including from many people who would not have a financial background. Is that your thinking?

Derek Mackay

Yes. I would not want to create representative posts for a sector, but the mission is for the group to be as representative as possible. That goes back to Angela Constance’s point about equality, representation and who populates the group. We will consider how it is formed as we work towards its operation. I can provide the committee with further information. Those matters are obviously not for the proposed legislation before us, but they absolutely relate to the operation of the bank.

John Mason

That is helpful.

On a slightly separate point, you explained earlier that one of the reasons for setting up the bank in the legal way that you have chosen is to give it longevity, so that it can go through political cycles. We have used the word “patient” a lot. You have mentioned being a patient stakeholder, and we have been discussing patient capital. Are you optimistic that the politicians—I am thinking of people such as Jackie Baillie and Dean Lockhart—will be patient, or do you think that, on day 1, they will immediately ask for a high rate of return and criticise you if they do not get it?

Derek Mackay

Those are very unkind comments to other committee members—although the analysis is probably 100 per cent fair: ministers and the bank should be held to account.

That brings us back to an earlier point: that the aim is not necessarily to raise revenue for Government, nice as that would be. It is about helping us to transform the economy and to provide financial support where it does not fully exist at the moment, while targeting some issues where that could really help us out.

Let us take an area such as renewables. If the bank levered in finance to the renewables sector to capitalise on our wonderful natural assets and their ability to create clean, green energy, that is the kind of investment that would be transformational.

We will all be enthusiastic about the bank’s creation and we want to get it right. The bank will be held to a very high standard, and that is admirable.

The Convener

Speaking of Dean Lockhart.

Dean Lockhart

Thank you, convener. I am both patient and enthusiastic, cabinet secretary.

I want to address a couple of issues to do with missions. In previous evidence sessions, there was some confusion about whether all the bank’s lending would be mission based, or whether it can lend outside of its core missions across all sectors, as the Scottish Investment Bank currently does. Will the cabinet secretary please clarify that?

Derek Mackay

We have published the illustrative missions, which, arguably, are quite wide. However, they are also focused, in that they focus on inclusive and sustainable economic growth.

To answer the question directly, the bank will be able to allocate resources outwith the missions, but that will be for the bank to decide. Such lending will need to be within the bank’s ethical statement, investment strategy and all the other considerations and burdens that we will put on it. Because we will not be micromanaging the bank’s individual investments, it is not inconceivable that it will invest outwith the missions, albeit within those other policy parameters.

Dean Lockhart

Let me give you an example that was raised in previous evidence sessions. Would investment in the oil and gas sector be consistent with a low-carbon mission for the bank?

Derek Mackay

It depends what the bid for funding is. Let us say that an oil and gas company wished to diversify from extraction into renewables or emissions reduction. It goes back to my earlier point. As long as the bid meets the other policy requirements, an investment can be made outwith the specific missions. It will be down to the nature of the application and the investment that is sought. The bank will also be looking for a balanced investment profile.

We then come to a wider debate about the bank’s ethical statement and the restricted nature of what the bank may or may not invest in, on which we may have a view. We are talking about the legislation to create the bank, so I do not want to speculate too much about what the bank may or may not invest in. Some of those matters will be for investment strategy or the ethical policy.

Dean Lockhart

Section 11 allows the Scottish ministers to change the bank’s mission statement by sending a document. Concern has been raised that mission statements will be changed too often, for example every year, as part of the annual report. Would it be inappropriate to change the mission statement once a year?

Derek Mackay

Yes. For the purposes of patient finance and a long-term economic strategy, it would be too often if we were to change the mission statement every year. There should be enough flexibility to change it as the economy demands, but every year would be too often, especially when the bank will have a business plan and its own investment strategy. I would imagine that the missions will be more medium term than short term. How can the bank make strategic long-term investments if we change the mission statement every year?

Dean Lockhart

On that point, you mentioned future proofing the bank against changes in Government and so on. To reflect your concerns about long-term thinking, would you consider future proofing the mission statement in the legislation so that ministers could change the statement, say, only every two years?

Derek Mackay

I really do not want to tie the legislation up in formulae or unnecessary parameters. I understand the intention behind the question, but any wise minister knows that it would be counterproductive to constantly or annually change the missions. At the same time, though, we should not necessarily tie our hands for what is clearly common sense, wise and the right thing to do. I do not know whether Dean Lockhart feels an amendment to the bill coming on, but I am sure that he understands the point that I am making. He has asked me a direct question and I have answered it. Do I think that I need to legislate for common sense? I do not think so.

Dean Lockhart

We will leave it at that. Thank you.

Jamie Halcro Johnston (Highlands and Islands) (Con)

The implementation plan notes that the SNIB will have

“a national mandate to realise benefits of investment at scale, while maintaining regional reach to help businesses to realise their full economic potential”.

Last week, we took evidence from Rob Hunter of the Development Bank of Wales, who was clear that it is extremely important to maintain a regional approach. How will you ensure that the new bank takes a regional approach rather than focusing on the central belt or other areas?

Derek Mackay

Let me be clear: I do not want the bank to focus only on the central belt or other places where people might think the economic clusters are, because the bank can deliver for every part of the country. I mentioned the potential around renewables, which clearly involves island, coastal and rural communities. The bank’s financial products can touch every part of Scotland, and there is an expectation that that will happen. Sometimes, what might not seem to be much resource in large urban areas can have a disproportionate positive effect on rural areas.

My expectation is that the bank will cover every part of the country geographically and that its financial products will be open to those in every part of the country. Let us not worry about the physical location in relation to accessibility. The bank will not be like a traditional bank where people rock up to the counter to ask for a loan. It is about making the financial products available intelligently. We want to ensure that the bank has that national locus. I can engage with the business gateway and local authorities to ensure that the bank has national reach. Similarly, we can support the deployment of the resources across the country. The new south of Scotland enterprise agency is a further welcome addition to the economic landscape.

My ambition is to ensure that the bank speaks to the whole country and that its financial products work for the whole country.

Jamie Halcro Johnston

I heard it suggested that you do not envisage the bank having regional or local offices, although that is still being consulted on and considered.

Derek Mackay

It is not that kind of bank. The accommodation is yet to be determined, but that will be an operational matter once we have decided exactly who will do what, what the composition of the bank will be and what will happen with current agency functions, such as those in the enterprise agencies and the SFT. The point is that most people will contact the bank not by physical attendance but by telephone or email, or they will have been referred to the bank as a result of engagement with other agencies. It is not about physical location; it is about how we open up the bank’s financial products. Investments will be merit based but, as I said, the benefits of the bank and the financial tools can reach right across Scotland. Through some of the missions—particularly on low carbon and the delivery of renewables—the bank can reach the parts that other banks cannot. That sounded like an advert strapline, which I did not intend. I should say that I have not paid a consultant for advice on that.

Jamie Halcro Johnston

I think that you would want your money back if you had. [Laughter.]

You mentioned some of the agencies that are involved. Do you see local government as having a defined role in relation to the bank? Obviously, it has a role through business gateway.

Derek Mackay

The committee has paid close attention to business gateway and has recommended that there is a need for it to have national consistency. For that reason and other matters that the committee well understands, I want the bank to have national consistency. I work closely with local authorities on economic development and, following the committee’s consideration of business gateway, I am reaching out to local government to see how we can do local economic development better. However, I do not propose a role for councils in the bank; it is a national investment bank. I want to work with local authorities, but I will not give them a decision-making role. There is of course an expectation that the economic development units, business gateway and others will work with the bank to ensure that it fulfils the potential in every part of the country.

The Convener

To use your earlier language, Andy Wightman would like to rock up with another question.

11:00  



Andy Wightman

It is a question about rocking up to the counter. Is it envisaged that the Scottish bank will have to obtain a banking licence and/or be regulated by the Financial Conduct Authority? There are subsidiaries of the Development Bank of Wales that are so regulated, because of what they do.

Derek Mackay

My lead official is desperate to say something. He has been deprived all morning.

David Wilson

To be clear, the bank will not require a banking licence. That was set out in the implementation plan last year. However, there will be a number of more detailed clearances with the FCA. In particular, its approval will be required for the use of the term, “bank”. We have already been in touch with it in that regard and are not anticipating any particular challenge around that, but it is one of a number of approvals processes that we need to go through. We will also liaise closely with the FCA about the senior managers’ conduct arrangements and other more detailed points. However, to be clear, there is no requirement for a banking licence, given the nature of the activities that the bank will be engaged in.

Derek Mackay

If it had been a retail bank, it would have required a banking licence. You should not underestimate the willingness of people to invest in a national investment bank, thinking that it is a retail bank, but it is not. Its mission, and what we are trying to achieve with the financial products, is specific. Those elements may well grow over time—it would be good if the bank could grow and consider other functions. However, right now, it is what it is and it will do what it says on the tin. If it had been a retail bank, it would have required a licence.

Andy Wightman

Yes, because the Development Bank of Wales is doing things that require a licence, such as running a help-to-buy programme and so on. There is nothing to rule out such activities in the future, if the bank considers that they are necessary, and, obviously, part of that would concern the requirement to get a licence. However, you are saying that you do not envisage that at the moment. Is that the key message?

David Wilson

Given the structure of the legislation, there are opportunities for the bank to change and evolve, but that is not part of the proposals at the moment.

Derek Mackay

Just for completeness, I do not think that it is true to say that we could not do a help-to-buy programme, because we already do that.

Andy Wightman

Yes, but there is a question about whether you could do it through the bank. The help-to-buy programme that the Development Bank of Wales runs requires regulation. However, there is nothing to rule out the plc or the Administration deciding, in 10 years’ time, that the bank should get into fields that require a licence and then going through the due process to obtain one, even though that is not what you envisage at the moment.

Derek Mackay

There are certain changes that would be required, depending on the nature of the change in the bank’s functions. Clearly, what we are doing in statute is to enable the creation of the bank. We are doing much more in policy areas. It might be helpful if the committee had sight of the chart that I commissioned for my briefing for today’s meeting. Has the committee seen that, David?

David Wilson

Not the chart.

Derek Mackay

I will share that with you, as it assisted me. I see that I have got Mr Wightman excited at that prospect.

With regard to the statute, it is what it is. There are changes that we can make in policy and to the mission but, if there were to be a much larger change to the bank, that would require primary legislation and we would have to return to Parliament.

Andy Wightman

I am not particularly excited about you sharing your briefing, although that would be useful; I am more excited about the prospect of—

Derek Mackay

I said that I would share the chart, not the briefing.

Andy Wightman

Yes, although it would be good if you could share briefings with the committee in advance of each of your appearances before us.

Derek Mackay

I suspect that it would make all of our lives much easier.

The Convener

Not necessarily, but thank you for the offer to share a chart with us. I think that that is the first time that we have had that offer from a cabinet secretary.

As there are no other questions, I thank the cabinet secretary and his team for coming to the meeting. We will now move into private session.

11:03 Meeting continued in private until 11:48.  



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7 May 2019

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11 June 2019

Committee Findings

Economy, Energy and Fair Work Committee Committee's Stage 1 report 

This report was published on 4 July 2019.

Find out what else the Economy, Energy and Fair Work Committee is doing.

What is secondary legislation?

Secondary legislation is sometimes called 'subordinate' or 'delegated' legislation. It can be used to:

  • bring a section or sections of a law that’s already been passed, into force
  • give details of how a law will be applied
  • make changes to the law without a new Act having to be passed

An Act is a Bill that’s been approved by Parliament and given Royal Assent (formally approved).

Delegated Powers and Law Reform committee

This committee looks at the powers of this Bill to allow the Scottish Government or others to create 'secondary legislation' or regulations.

Read the Stage 1 report by the Delegated Powers and Law Reform committee published on 27 March 2019.

Debate on the Bill

A debate for MSPs to discuss what the Bill aims to do and how it'll do it.

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Stage 1 debate on the Bill transcript

The Deputy Presiding Officer (Linda Fabiani)

The next item of business is a debate on motion S5M-19061, in the name of Derek Mackay, on the Scottish National Investment Bank Bill.

14:53  



The Cabinet Secretary for Finance, Economy and Fair Work (Derek Mackay)

It is with great pleasure that I open this stage 1 debate on the Scottish National Investment Bank Bill.

The bill being considered today lays the foundation for an institution that will be a cornerstone of Scotland’s economic architecture—one with the capability and commitment to reshape our economy, making it more inclusive, innovative and internationally competitive.

As a mission-oriented lender, the bank will contribute to the major societal challenges that are facing us all today. In particular, as the First Minister has set out, the bank will make a significant contribution to our work on tackling the climate emergency. I will come on to that in more detail later.

We want this bank to be a valuable asset to the Scottish economy for generations to come. For that to be the case, the bank will have to protect and grow its portfolio of investments, recycling one decade of success into the next. The bank will therefore make investments that support sustainable and inclusive growth across Scotland and it will be held to account for its delivery against the missions that are set for it. It will also seek to make a sufficient return on its investments to enable it to cover its operating costs and not be reliant in the long term on the Scottish Government and therefore the Scottish taxpayer.

In 2017, the First Minister asked Benny Higgins to provide a blueprint for the Government on how to establish an institution capable of transforming Scotland’s economy. The implementation plan that he produced articulates a clear, ambitious vision for the bank and provides a detailed road map for creating an institution that can deliver against that vision. I personally thank Benny and his team for their ambition and rigour in producing the implementation plan.

Our proposals for the bank have been strengthened through extensive stakeholder and public engagement. We have run two public consultations over the past few years, and more than 300 people attended a series of eight stakeholder events held across Scotland over the summer. Throughout that engagement I have been struck by the level of excitement about our vision for the bank and its potential to transform Scotland’s economy. I thank those who engaged with us in creating the bill, thereby helping to lay the foundation for a bank that will deliver for businesses and communities across Scotland. We will continue to engage widely as work to establish the bank progresses.

I thank the Economy, Energy and Fair Work Committee for its thoughtful and constructive scrutiny of the bill. The committee recommended that the Parliament agrees to the general principles of the bill—which is a relief—and it made a number of very helpful suggestions. In recognising that the bank must be

“independent but accountable and permanent but adaptable”,

the committee demonstrated a clear appreciation for the type of institution that we collectively wish to create. The Scottish economy enjoys significant strengths in employment, in our proportion of employees in the United Kingdom who are paid the living wage, and in the growing demand for our exports, which all demonstrate our economic resilience.

However, it is important to acknowledge that there remains significant work to do to release the untapped potential in Scotland’s economy. The 2019-20 programme for government sets out ambitious and progressive sets of proposals. The measures include increased investment in skills and in physical and digital infrastructure. Those measures can improve productivity, boost exports and help to make Scotland a globally competitive place to do business.

Business investment levels are low, and their potential for growth has been curbed. Scotland’s business expenditure on research and development and innovation performance is behind that of other European nations. Our productivity growth in key sectors, although outperforming that of the UK, remains modest. Those factors point to the need for a new investor in the Scottish economy—one with patience and the strategic oversight to reinforce and enhance Scotland’s position as a dynamic and innovative economy.

The case for establishing the bank is even stronger today than it was when it was first announced in our 2017 programme for government. Patient and strategic investment will be vital if we are to mitigate some of the damaging impacts that are forecast as a result of the UK exiting the European Union.

Earlier this year, the First Minister acknowledged that Scotland, like the rest of the world, faces a climate emergency. This year’s programme for government set out our response and lays the foundations for a new Scottish green deal. The Scottish national investment bank will also have a role to play, and the First Minister has confirmed that the bank’s primary mission will be securing the transition to a net zero economy.

It is vital that the bank is an institution that complements the existing investment landscape in Scotland—one that crowds in, rather than crowds out, private sector investors. We believe that capitalising the bank to the tune of £2 billion represents an ambitious yet achievable level of funding. It enables the bank to have a transformative impact on the Scottish economy while ensuring that it does not displace the activity of existing private sector lenders.

Dean Lockhart (Mid Scotland and Fife) (Con)

Can the cabinet secretary confirm what percentage of the bank’s initial capitalisation will be in the form of financial transactions money from the UK Treasury?

Derek Mackay

It is well understood that a substantial amount of that will be financial transactions in the early years. We will look at expanding the products. I would object to the language of that being the Treasury’s money; I would argue that it is Scotland’s money—and we will of course be reinvesting it in Scotland. It is true to say that the bank will be largely financed through those financial transactions, which are available to be spent in the private sector, particularly on investments such as those that we have been talking about.

As highlighted by the implementation plan, the £2 billion that is being committed to the bank over the next 10 years equates to 1.3 per cent of Scotland’s gross domestic product and is therefore in line with the level of capitalisation that is committed to comparative institutions across the world. Indeed, in its stage 1 report, the committee has acknowledged that our commitment to capitalise the bank with £2 billion over 10 years represents “a good starting point”.

The bill is an enabling piece of legislation. It places a duty on Scottish ministers to establish the bank as a public limited company, and gives ministers the necessary powers to capitalise the bank. The bill also enshrines a role for Parliament by ensuring that parliamentary approval is needed before making any changes to the provisions of the bank’s articles of association. I am pleased that the committee has been supportive of the general approach that we have taken.

The recommendations set out in the committee’s stage 1 report are welcome and constructive. I have provided a written response to the committee, accepting many of the recommendations. For the benefit of the members who are present, I will briefly set out some key parts of that response.

The Government has accepted the committee’s recommendations that the bank’s role in achieving social and environmental value alongside financial returns be clarified. Consequently, we are considering potential amendments to the ancillary objects that would give effect to the recommendation, and I want to engage with members on that.

We are also considering the committee’s recommendation that the bank not be given a target rate of return for its first years of operation. Although we recognise that the principle behind that recommendation is constructive, its implications need to be fully considered. I have already mentioned the need for the bank to become financially self-sustaining. A commitment to a rate of return may also be necessary to meet the state aid requirements that apply to the bank. However, we will give the matter further consideration.

When giving evidence to the committee on the bill, I committed to engage with the Parliament in the development of the bank’s missions and I am pleased that that proposal has been welcomed. I will engage and work collaboratively with members across the chamber in looking at the missions. I engaged on a similar cross-party basis on the national performance framework, which I know was welcomed by members across the chamber.

We have also accepted the committee’s recommendation to consider potential stage 2 amendments to provide for a process by which Parliament can be formally consulted on future missions.

The committee made recommendations regarding the role and membership of the advisory group. The Government has accepted the recommendation that the chair of the advisory group should not be a member of the bank’s board. I also clarify that the role of the group will be to advise ministers, not the bank itself.

We have, however, concerns about providing for the advisory group in the bill, as doing so may prove overly prescriptive as to the mechanisms by which Scottish ministers seek advice. I am, however, keen to hear members’ views on the matter in the light of the proposals for the advisory group that we have now published.

The establishment of the Scottish national investment bank will be a substantial good for the economy and, therefore, the people of Scotland. Today’s debate is a key staging post along the way to creating a long-standing institution in the Scottish economy, which is capable of driving the positive changes that we all want to see.

I look forward to the debate.

I move,

That the Parliament agrees to the general principles of the Scottish National Investment Bank Bill.

15:04  



Gordon Lindhurst (Lothian) (Con)

What’s in a name? The Scottish national investment bank certainly has “Scottish” in it, and the intention is that its reach will be national and its purpose will be investment. However, it is not a bank; at least, not a retail bank.

As one witness told us:

“Essentially, SNIB is an example of that great Scottish invention, the investment trust—it is not really a bank.”—[Official Report, Economy, Energy and Fair Work Committee, 28 May 2019; c 11.]

The bill to enable the bank that is not really a bank is not quite the whole story either. As the cabinet secretary indicated, much of the detail is to be found elsewhere, in the articles of association and various other supporting materials, strategies, plans, frameworks and charts, and some of those documents are still in draft form or will be left for the bank to devise. I shall not try to cover everything that the committee had to say about the bill and those other component parts; instead, I shall focus on some aspects: patience and purpose, inclusive growth, and missions.

What is it that the bill imposes a duty on the Scottish Government to establish? It is both a public limited company and a non-departmental public body. The bank will be an unusual body, expected to act commercially while at the same time seeking economic, societal and environmental returns. Like the British Business Bank, the plan is for it to become a funder of funders and to crowd-in other investment. The emphasis will be on long-term, or what is called “patient”, capital, informed by a mission-led approach.

Hopes for what the bank can achieve are vertiginously high, but we must look beyond short termism and the limited perspective of the electoral cycle. As one witness put it,

“We are constantly faced with people trying to rewire the building with the power still switched on.”—[Official Report, Economy, Energy and Fair Work Committee, 21 May 2019; c 15.]

That might also be applied to Westminster at the minute.

Another witness cautioned against criticism in the first few years, advising that

“Most of the bad news comes early … The lemons ripen before the plums.”—[Official Report, Economy, Energy and Fair Work Committee, 28 May 2019; c 13.]

If I may add another metaphor to the mix, we were also told that

“There will be red ink spilled in its annual reports and accounts every year until 2023 … if you want long-term patient capital, you have to have long-term patient investors.”—[Official Report, Economy, Energy and Fair Work Committee, 7 May 2019; c 25.]

The economist Mariana Mazzucato underlined the importance of finding the right partners—those who are able to subscribe to the mission-orientated ethos. Rather than “just handout machines”, she favoured public banks that pick

“the ‘willing’, not ... the ‘winners’”,

and she told us that

“The Bank is a wonderful experiment in Scotland to see precisely what it would be like to transform our imagination of what the public sector is for.”—[Official Report, Economy, Energy and Fair Work Committee, 14 May 2019; c 3,13.]

The committee was not convinced the language of the bill matches that aim for the bank to be transformative. We asked the Scottish Government to reflect on the wording of the objects that are set out in section 2—the cabinet secretary has already referred to that. We also invited consideration of how non-financial returns can be anchored in the bill.

How do we measure success? The use of a balanced scorecard was mentioned in an earlier document—the implementation plan—but it does not feature in the bill or anywhere else. The Scottish Government has said that it will lodge amendments at stage 2 to address those points, and the committee welcomes that undertaking.

The bill’s equality impact assessment should also be mentioned, because it was not so well received by some. The Scottish Government has now issued a fully revised assessment—the full detail in the revised assessment can, of course, be read elsewhere.

That brings us to the theme of inclusive growth—a term that is frequently used in policyspeak but is subject to considerable interpretation; the committee has highlighted as much in numerous pieces of work this session.

Research published in June by IPPR Scotland on behalf of the Poverty and Inequality Commission stated:

“The Scottish Government and its agencies could be clearer and more consistent in their definition of inclusive growth and demonstrate how this applied definition translates into practice.”

The Poverty and Inequality Commission concluded that

“inclusive growth appears to be more of a concept than something which results in a tangible outcome.”

It found it “heartening” that inclusive growth was to be built into the bank from the start, but it wanted to ensure that the agenda

“penetrates into the heart of economic policy making”.

The committee recommended that the Scottish Government give careful consideration to those research findings, and, in particular, how it can translate the theory into a clearer vision with tangible delivery. Our concern is that, without clarity, the bank could focus only on financial returns. Therefore, we welcome the positive response in the form of the fairer Scotland duty assessment—yet another document in a crowded field—which recommends that

“the Scottish Government review the ancillary objects contained within the Bill ... utilising its position as a ‘cornerstone in Scotland’s economic architecture’ to shape an economy that is diverse, democratic and which enhances societal wellbeing.”

That is perhaps a slightly long-winded quote, but it is one that is worth sticking with. If one reads the quote carefully, one sees that, in its own circuitous way, the Scottish Government is telling itself that it should listen to the committee—of course, the committee can only heartily agree.

The final issue that I wish to touch on concerns the bank’s vision and the setting of its missions. There will be missions to meet major societal challenges such as carbon reduction and the provision of social care. Such missions will call for multiple solutions from multiple sectors by multiple players. Professor Mazzucato said:

“I encourage the committee to keep provoking on that point.”—[Official Report, Economy, Energy and Fair Work Committee, 14 May 2019; c 4.]

Indeed we shall. We called for the Parliament to have an input to the formulation of the missions. There should be not just a round-table approach—useful as that can be—but a formal consultation process that is akin to the mechanisms that have been devised for climate change and planning legislation. The Scottish Government said that it

“will give consideration to bringing forward amendments to this effect”.

I rather hope that that is a non-committal way of committing, but maybe I am misreading the coded language of bureaucracy.

It was Bob Hope who said:

“A bank is a place that will lend you money if you can prove that you don’t need it.”

What is envisaged for the SNIB runs very much counter to that caricature. The bank is intended to be a public bank that drives transformative change. It is intended to be independent but accountable, and permanent but adaptable, with a long-term patient view. To that end, the committee set out 19 recommendations in our report. Our balanced scorecard reads that roughly half have been accepted, a couple have been declined and the rest are under review, which reminds one, in relation to investment, of the three options that are set out in the parable of the talents.

As I have said, there are several areas in which the Scottish Government has undertaken to lodge stage 2 amendments, and we will study the detail of such amendments in due course. We look forward to further engagement on the Parliament’s role in framing the bank’s missions. On that basis, we recommend that the general principles of the bill be agreed to. I look forward to listening to other contributors to the debate.

15:13  



Dean Lockhart (Mid Scotland and Fife) (Con)

We agree with the objectives underlying the establishment of the bank, and we will support the motion. We agree that Scotland needs more long-term patient capital, that firms that are looking to expand need more support and that we need transformational change in Scotland’s economy.

Just last week, we had confirmation that Scotland’s economy is contracting—the rate of growth is half that in the rest of the UK economy. Productivity continues to lag in the third division, and wages and tax revenues are falling further behind those in the rest of the UK, which is resulting in Scotland having a record fiscal deficit that is higher than that in any other country in Europe.

The need for transformation to reverse Scotland’s decline into a low-growth and low-wage economy is clearer than ever. Development banks can make such transformational change; there are clear examples in Singapore, Germany and elsewhere. However, such change can happen only when the development bank is part of a coherent economic policy framework and when there is absolute clarity on strategy and objectives.

That was recognised in the chamber last year, when we first debated the bank and all members agreed to an all-party motion that said that

“a cluttered policy landscape can lead to confusion, a lack of alignment, duplication and weakened accountability”.

That is our overriding concern with the bill. Rather than being about the bill itself, which is enabling legislation, our concern is about the policy context in which the bank is being introduced and the on-going confusion, clutter, duplication and lack of alignment that characterise the Scottish Government’s approach to the economy and which mean that there is a real risk that the bank will fail to meet its ambitious objectives.

Section 2 of the bill states that the bank must invest in inclusive economic growth but, time and again, evidence that was given to the committee showed that there is fundamental confusion over the policy of inclusive growth. According to Scottish Enterprise, what the concept means to one person is different from what it means to another. It said:

“There is no single measure of inclusive growth”.—[Official Report, Economy, Jobs and Fair Work Committee, 14 November 2017; c 22.]

A representative of Highlands and Islands Enterprise said:

“I agree that inclusive growth is difficult to measure”,—[Official Report, Economy, Energy and Fair Work Committee, 10 September 2019; c 36.]

and a leading economist made the observation that we do not have “a firm handle” on inclusive growth.

If inclusive growth is to be a central part of the bank’s objectives, the Scottish Government must clarify precisely what it means and how it will be measured, not just for the bank, but for other enterprise agencies, so that they are all aligned in their economic targets.

John Mason (Glasgow Shettleston) (SNP)

I wonder whether the member overstates the case slightly. There is broad agreement on a lot of things. For example, Scottish Enterprise and HIE have not been very good at bringing women into growing businesses and encouraging them, and I think that everyone across the chamber agrees that that is part of the inclusive growth that we want to see.

Dean Lockhart

When Mr Mason was a member of the committee, he heard evidence from many witnesses that inclusive growth as a concept means different things to different people. I am a great believer that, if we cannot measure something, we cannot manage it. I think that partly explains why there is confusion about the bank’s objectives.

The guidance that I am talking about does not need to be in the legislation itself; it can be in the form of public guidance to all enterprise agencies. We look forward to the cabinet secretary clarifying what the centrepiece of his economic strategy actually means.

The committee also heard concerns about the costs involved in setting up and running the bank. In its evidence, the Royal Society of Edinburgh said that the £25 million annual running costs were “very high”. That £25 million is in addition to the £120 million operating costs of the other enterprise agencies, which means that the Scottish taxpayer is spending £150 million a year on running costs for those agencies before a single penny is invested in the economy.

We need to ensure that we see a real return on that investment along the lines of the one that the British Business Bank delivers for the UK Treasury. It has a target rate of return of more than 2.5 per cent. Again, that target does not need to be part of the formal legislation, but we need to have clear targets to monitor the medium and long-term performance of the bank once it is up and running. I agree with the cabinet secretary that the targets should apply only once the bank is up and running.

Another fundamental question that the Scottish Government has failed to adequately address is whether there will be sufficient demand in the economy for the additional funding that is offered by the bank. It has also failed to adequately address the related question of whether the existing enterprise agencies are fully resourced to identify the new investment opportunities. We saw those problems arise in the context of the Scottish growth scheme, which has invested only a quarter of the money that was promised, because there was not sufficient demand in the underlying economy to pick up the £500 million that was promised.

The committee also heard evidence that the bank will not act as the originator of funding opportunities. That means that it will have to rely on the existing enterprise agencies, which will be operating under their existing budgetary and resource constraints. That raises the question whether the existing enterprise agencies are properly resourced and fully able to deliver the transformational increase in business investment that is required. We are yet to see convincing evidence from the Scottish Government that it has a delivery plan in place, either through the bank or through the enterprise agencies, to identify that transformation in demand in the economy. The cabinet secretary also needs to confirm whether the enterprise agencies’ budget will be increased to deal with the extra demands that are placed on them. HIE told the committee that, to prepare for the SNIB coming on stream, it has hired one additional person, which does not strike me as a transformational change.

In later stages, we will seek assurances from the Government that it will avoid calls for a series of restricted areas of investment by the bank. We will also seek assurances that the bank will not be used to prop up failing business or declining sectors; that the bank will avoid duplication with the multitude of enterprise agencies and initiatives, which one witness referred to as a “Venn diagram on steroids”; and that the bank will continue and expand the co-investment programmes that the Scottish Investment Bank has successfully pioneered.

I turn to the bank’s strategic missions. The programme for government announced that the bank’s

“primary mission will be securing the transition to net zero”,

and that

“A key element of the Bank’s work will be to help to shape and develop commercially-investable low carbon markets.”

We agree with those missions. Again, however, we need to see the detail on how they will be delivered, given that, over the past 12 years, the Scottish National Party has failed to deliver economic benefits and jobs from low-carbon markets.

The Scottish Trades Union Congress made that point clearly earlier this year when it highlighted Scotland’s negative trade balance in the low-carbon sector. We import £230 million more in the low-carbon economy than we export. I look forward to hearing from the cabinet secretary about how the Government will avoid repeating past mistakes in relation to the development of low-carbon markets.

We will lodge amendments to bring the bill into line with best practice and with the way in which the British Business Bank operates. That will include adding in a requirement in section 12 for the Government to consult and seek agreement with the bank’s board of directors before any change is made to the strategic missions. We believe that the Scottish national investment bank should operate independently and that any change to the missions should be made only following such steps.

We will support the bill to establish the bank at stage 1, but we call on the Government to provide assurances, in the bill and otherwise, to address the concerns that we are outlining today.

15:21  



Richard Leonard (Central Scotland) (Lab)

In this afternoon’s debate, the Scottish Labour Party is making the case for the active state, the innovative state and the developmental state. That is our guiding principle; that is our call to action in considering the bill.

We and the people of this country do not simply want a residual state that is reactive and steps in only at the point of market failure. We need a different allocation of resources than would simply be delivered by the market. That is what the establishment of a Scottish national investment bank should be about.

The purpose of the bank that we must create with this legislation cannot simply be about the best rate of financial return alone. It must be ethical; it must take account of the strategic interests of the wider economy, such as the urgent need to tackle climate change; it must be empowered to help build a more equal and a more democratic economy; and it must be on the side of the people.

We live in an economy that is too often unjust and is in too many areas inefficient—with long hours and low wages, with inequalities and, all too often, discrimination in the labour market and with low rates of capital investment and low rates of productivity.

We will tackle the productivity gap in our economy only if we tackle the production gap in our economy, and we will do that only if we tackle the investment gap. A properly resourced national investment bank is the right way to begin to address that gap.

The Scottish Labour Party wants intervention that is developmental, not defensive, and that is industrially radical, not industrially conservative. We want to lock in the public ownership status of the bank so that there can be no repeat of the Green Investment Bank sell off. This Parliament must learn the lessons of that initiative.

In the bill’s accompanying financial memorandum, the Government claims the bank’s level of capitalisation to be “both ambitious and achievable.” There is little doubt that it is achievable—of course it is—but it lacks ambition. Some £2 billion to capitalise the bank over 10 years might seem like a lot, but it would represent a rise of less than 1.4 per cent per year in overall Scottish business investment. In its plans for a UK-wide national investment bank, Scottish Labour proposes that £20 billion should be made available over 10 years for industrial investment in Scotland. That would make the kind of transformative step change that the Scottish economy needs.

In recent weeks, I have argued that the restrictions on Scottish Government borrowing powers should be lifted. I believe that that rule should also apply to the Scottish national investment bank, as the Scottish Trades Union Congress has called for in its submission.

Scottish Labour welcomes object (c) in the bank’s articles of association as listed in the bill, which is

“promoting and developing the activities of small and medium-sized enterprises”.

However, unless the Government amends its economic policy objectives, object (e), which sets the bank the goal of

“contributing to the achievement of the Scottish Government’s economic policy objectives”

will mean that the bank’s investments will be in pursuit not simply of small and medium-sized enterprise development and the nourishment of indigenous industrial growth, but of mobile foreign direct investment. The inevitable result would be that the Scottish economy would be not less, but even more of a branch plant economy as a result of the new bank’s creation. We must guard against that.

On governance, of course the bank should be answerable to ministers. However, it should be answerable and fully accountable to the Parliament, too. Its strategic framework, the setting of its goals and performance objectives and their monitoring must be subject to parliamentary scrutiny and therefore public as well as ministerial scrutiny.

The main board and the advisory board should be gender balanced and should reflect the diversity of our society. Both boards should contain trade union and industrial voices in significant measure. Those should not be token seats; they should involve meaningful representation.

We need to set clear guidance on maximum salary ratios in the new bank, so that the ratio of the chief executive’s remuneration—not just their salary but their overall remuneration—should be limited, perhaps to no greater than 20 times that of the lowest-paid worker, and arguably significantly less.

In “The General Theory of Employment, Interest and Money”, John Maynard Keynes rightly said:

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

Scottish Labour therefore welcomes an alternative to the model of dispersed ownership and share listings, and an alternative to the model based on financial institutions looking for a quick return and the ever-constant threat of takeover. Everyone is agreed that we need longer time horizons and more patient capital. We need industrial interests to predominate—not the commercial interests of the City of London. We need to rebalance our economy and tackle the highly centralised UK economy.

We will not solve every problem in the Scottish economy with this bill and the establishment of a national investment bank for Scotland. We need to make sure that the bank is not another Government proposal that overflows with spin but underwhelms on substance. Nonetheless, the bill represents a starting point on which we can improve. We can establish a bank that is accountable and that has clear objects, the overarching aim of which is to build the economy from the bottom up. We can establish one that is financing the just transition from a carbon-based economy to a non-carbon based one. Such a bank would promote democratic forms of ownership, including co-operatives and employee ownership. We can establish a bank where the right voices and values sit at the heart of it—not just at the start, but in the long term—by building that into the legislation.

I ask the cabinet secretary to hear those views and to respond to them positively. Listening to Parliament and agreeing to radical reforms and constructive suggestions would be a sign not of weakness, but of strength. I hope that the Government is listening and that it is prepared to act.

15:29  



Andy Wightman (Lothian) (Green)

Greens support the establishment of a Scottish national investment bank. We have an economy that has, over the past 40 years, been run in the interests of private capital rather than in the public interest; an economy where the return to labour over the past 20 years has declined in relation to the return to capital; and an economy where the public sector at a local level has been in retreat and has lost the means, the will and the courage to take its proper role in the economy to advance the public interest. It has therefore been refreshing in recent years to see an increasingly positive case being made for an economy where the public interest is placed more at the heart of economic policy.

I pay tribute to a range of thinkers who have advocated the creation of such a bank. They include the New Economics Foundation, Friends of the Earth Scotland, Common Weal and the move your money campaign, whose 2016 report “Banking for the Common Good” outlined a vision of what a state investment institution could do and the role that it could play in Scotland. In the context of the bill, such thinkers include Mariana Mazzucato, whose 2013 book “The Entrepreneurial State: Debunking Public vs Private Sector Myths” debunked many of the myths around the role that the state can play in the economy. Her evidence to the committee was both refreshing and encouraging.

We know that public investment banks can work. In the debate that we had on the subject in May 2018, the then cabinet secretary Keith Brown noted that countries including China and Germany are confronting key social and environmental challenges in that way. He cited the example of the German KfW bank, which supports small and medium-sized enterprises, export promotion, environmental protection, innovation and international development.

In this context, other countries provide examples of far more sustainable models of banking in general, such as the German Sparkassen, which are 431 locally owned savings banks that own the eight Landesbanken and work with the German state investment bank KfW, which the cabinet secretary mentioned, to make loans. In 2012, the Sparkassen provided 45 per cent of all long-term business lending in Germany, which was more than double what was provided by German commercial banks.

There is a lesson here that we need to learn as a matter of urgency because, as Professor Mazzucato said in The Spectator last year:

“many of the businesses we are told are value creators are actually value extractors”.

In an interview in New Statesman in the same week, she pointed out that the financial services industry was never even included in GDP until the early 1970s because many such services are no more than transactional and they add nothing to economic activity.

In recent weeks, Greens have set out the broad parameters of a Scottish green new deal, and central to that is the need for investment in a new green economy. The role of the Scottish national investment bank should be central to delivering that. With that in mind, we would like to see some changes to the bill, including the following.

We would like a clearer articulation of the bank’s purpose. The Economy, Energy and Fair Work Committee remains to be persuaded that the language of the bill fully matches the ambitions for the bank to be transformative. The original vision for the bank in the implementation plan was a bank that would be responsible for

“a step change in growth for the Scottish economy by powering innovation and accelerating the move to a low carbon, high-tech, connected, globally competitive and inclusive economy.”

Personally, I do not agree with those words, but the point is that no vision is set out in the bill, and that needs to be addressed.

Derek Mackay

Does the member accept that the enabling legislation takes us so far in ensuring that the foundations of the bank are provided for in law, but that there is far more scope for that transformative language, vision and purpose to feature in all the other documentation that will drive the bank? Arguably, its absence from the legislation is due to the nature of legislation, but it must be there in the other associated documents to drive the transformation that Andy Wightman and others seek.

Andy Wightman

There is an important debate, which we can have at stage 2, about how much of that language might be included in the bill. I take the point. The bill is very much a framework bill—it just tells ministers to set up a public limited company—but I think that we can do more in the bill to reflect some of the ambition that, as has been noted, it will deliver.

On climate, as the cabinet secretary noted, the First Minister stated in the programme for government:

“Securing the transition to net zero will be the Bank’s primary mission.”

We agree with that, and it is therefore vital, in our view, that that objective is set out clearly in the bill, both in section 2, on the bank’s articles of association, and in section 11, on missions. I would be grateful if the cabinet secretary or the minister could comment on that in winding up.

Another area in which we would like to discuss some changes is section 1. The bill provides that the sole member of the bank shall be the Scottish ministers. The cabinet secretary will be aware that the German public development bank KfW is 80 per cent owned by the federal Government and 20 per cent owned by the states. Given the vital role that local government plays and will continue to play in tackling climate change and promoting economic development, there is a good argument for local authorities to have a stake in the bank. I would welcome the cabinet secretary’s view on that.

On missions, we of course agree that the transition to net zero should be incorporated, but we also believe that it should be a statutory mission that is in the bill. More generally, it is notable that, although any changes to the bank’s articles of association, which are set out in the bill, can be made only with parliamentary approval, the missions are to be set solely by the Scottish ministers with no parliamentary involvement. The cabinet secretary said that he intends to lodge amendments that would allow Parliament to be consulted on those missions. However, we think that any mission should be subject to parliamentary approval and a vote, just as changes to the memorandum and articles of association will be.

On ethics and equalities, the committee highlighted the poor quality of the equality impact assessment and pointed out that, although an ethical basis for investment was recommended in the implementation plan, there is no such provision in the bill. We suggest that that could be overcome by the incorporation of an ethics and equalities committee in section 9.

Greens support the bank and the bill. There is more work to be done, but we will vote for the motion at decision time.

15:36  



Willie Rennie (North East Fife) (LD)

The impact of Brexit is hitting investment, jobs and living standards. We saw that in the woeful Scottish GDP figures that were released last week, which mirrored the figures for the rest of the United Kingdom—and Brexit has not even happened yet. That shows why, for the sake of our economy, jobs, livelihoods and public services, we need to stop Brexit.

In Scotland, opportunities to invest in the talents of our people through education and mental health services have been missed. Government initiative after Government initiative has failed to deliver a kick-start to the economy. The Scottish national investment bank must be different—not least, for the sake of the planet.

The programme for government rightly committed to putting the transition to net zero emissions at the heart of the bank’s work, but that primary mission must be properly reflected in the legislation that underpins the bank, and in the breadth and depth of its work. As we have heard, the committee concluded that the language of the bill leaves something to be desired. The committee was not persuaded that the bill

“matches the ambitions for SNIB to be transformative.”

As Friends of the Earth Scotland has pointed out, the bill does not mention climate change once. The bank is to focus not just on fixing market failures but on creating and shaping new markets and tackling societal challenges, and there is no bigger challenge than the climate emergency. The bank needs to help to drive the transition away from carbon-dependent industries. It should be able to take a distinct approach to risk management, with an appetite for absorbing some of the risk to which developing green industries are vulnerable.

The promise to begin investing in 2020 needs to be kept. The Scottish growth scheme took forever to pay out a penny, but the climate cannot wait. We know how important it is that we turn the situation round in the next few years. We know that the Scottish Government is going to have to step up a gear after Parliament yesterday agreed to Liam McArthur’s and Claudia Beamish’s bid to strengthen the interim emissions targets.

Other countries are already investing accordingly. We have heard about KfW, the national investment bank in Germany, which once focused on post-war reconstruction and which now includes addressing climate change and environmental issues among its central missions.

Under my party’s plans, the Scottish bank would be complemented by a new UK-wide green investment bank. We set one up before, only for the Conservatives to sell it off. The replacement would channel investment into zero-carbon infrastructure for power, heat, transport and afforestation. I want the UK to be the green finance capital of the world.

The principles of the Scottish national investment bank have been outlined. The bank is expected to pay the living wage. However, I would be grateful if the cabinet secretary could provide reassurance that the bank will not provide finance to companies that do not pay the living wage. I do not want to see a repeat of what happened with Amazon, which was given millions of pounds of public money while a blind eye was turned to the needs of its workers. It is expected that the bank will develop a code of ethics that goes beyond regulatory requirements and adopts a best-practice approach. Will payment of the living wage be incorporated into that code—and not just for the bank’s own workers? Could that be included in the bill? Healthy employment practices lead to a healthier economy.

Derek Mackay

In aiming to be helpful, it is right to propose many things that might not necessarily fit in the primary legislation. Definition of the living wage might be one such matter. However, we should consider including it in other places in order to achieve the desirable outcome of payment of the living wage, although it might not be appropriate to put it in primary legislation.

Willie Rennie

I know that we are due to have a discussion about the bank, during which we can perhaps go into the detail of why it would not be appropriate to put that requirement in the bill. I am grateful to the minister for giving us that guarantee—such as it is.

In the course of promoting inclusive growth, the bank, like the rest of us, will be faced with the challenge of automation and what it means for jobs in the future. The issue has been brought into focus again this week, when Dame Deirdre Hutton, the head of the Civil Aviation Authority, said that Thomas Cook Group was

“operating on brochures whereas everyone else has moved on to barcodes”.

The demise of Thomas Cook will lead to a fresh focus on the future of our high streets. More customer-facing jobs will go and there will be more empty units.

FSB Scotland has suggested that the bank should, under its inclusive growth mission, support efforts to protect the vibrancy of our local communities for the long term. It could focus on areas where there are low levels of entrepreneurship, low economic activity and high unemployment—areas that the FSB says struggle to attract the private investment that could transform their fortunes because it is less certain that they will generate returns. We cannot halt the march of technological progress, but we can take steps to ensure that everyone benefits from it.

We will support the bill at decision time.

The Presiding Officer (Ken Macintosh)

We move to the open debate.

15:42  



Annabelle Ewing (Cowdenbeath) (SNP)

I am pleased to have been called to speak in the stage 1 debate on the Scottish National Investment Bank Bill. It is a landmark bill, because it will see Scotland join the growing number of countries that have set up their own national investment banks. It has been recognised that the drive to do that has, in part, been led by the need, following the financial crash of 2007 and 2008, to re-evaluate how best to fund projects that will be transformative and which will support innovation, given the retreat of many commercial banks from capital investment.

At the same time, there is also a demonstrable need to secure long-term investment in small and medium-sized enterprises in order to promote growth in areas that fall within the mission that has been set forth, given the general disinclination of commercial banks to lend to what are deemed to be less-attractive prospects from a short-term commercial perspective—that is to say, the commercial banks are not prepared to provide so-called patient finance.

The bill will provide for the setting up of a Scottish national investment bank as a public limited company to be established in 2020. It is an enabling bill and hence—as has been said—it will be required that much of the detail be developed outwith the bill. Although I understand that that is frustrating for some of those who have made submissions, as with any enabling framework bill, a balance must nonetheless be struck.

However, it would be helpful if the cabinet secretary could provide some more detail on exactly how the provisions of the articles of association—the key document—are to be developed from here on in, and on how they can be subjected to appropriate scrutiny. Although I understand that the articles of association represent a legal agreement between the bank and the Scottish Government, an appropriate mechanism to ensure meaningful engagement must be found. That should also apply to the general principles that underpin the investment policy.

On the proposed objects of the bank, concerns have been raised that the vision that was set out clearly in the implementation plan is not elaborated on in the bill. I am pleased to note that the cabinet secretary has undertaken to lodge amendments at stage 2 that will ensure alignment between the objects of the bank, the vision that is set out in the implementation plan and the anchoring of non-financial returns in the bill. It must be recognised that although there must be a financial return because it will be a bank, there must also be a so-called balanced scorecard that factors in wider economic, social and environmental returns.

It has been stated that the proposed capitalisation of the bank is £2 billion over 10 years. Again, there are differing views on that, with some people arguing that it is not enough. However, as has been said, it is worth noting that the sum represents about 1.3 per cent of GDP and therefore falls well within the parameters of international practice in that regard, in which there is a range from about 0.5 per cent to 1.5 per cent of GDP. Benny Higgins, who developed the implementation plan, has said that

“£2 billion strikes a decent balance between aspiration and impact.”

Of course, it cannot be overstated that in the current devolved set-up, in which Scotland does not have access to all her resources and we have limits on our borrowing powers, any initiative such as setting up the national investment bank must be affordable within the devolved settlement.

As far as the estimated running costs of the bank are concerned, the Royal Society of Edinburgh has queried whether running costs of about £25 million, in the context of administering an annual fund of £200 million, are of the right order. Perhaps the cabinet secretary could reflect further on that in his summing up.

The debate that has taken place thus far on governance issues has focused to a considerable degree on the make-up and role of the advisory committee. Although the membership of the committee should be drawn widely, it is important that it be clear that the advisory committee is to advise Scottish Government ministers, and not the bank directly. It will not be a bank by committee. Rather, for the bank to be successful, it must have the operational independence that is necessary to ensure that it can function successfully and do the great job that we all hope it will do.

As I said at the outset, the new Scottish national investment bank will be pivotal in securing a transformative impact on Scotland’s economy. It is clearly intended to provide additionality and not to duplicate the existing landscape of enterprise bodies, the Scottish Futures Trust and local government. Although many key issues remain to be developed, it is heartening to note that the Government has engaged widely and is committed to continuing such wide engagement, as the issues are worked through. I very much welcome that approach and I look forward to further detailed information from the finance secretary over the coming weeks and months.

As the finance secretary has said, the new Scottish national investment bank will allow things to happen in our country that otherwise would not happen—for example, the transition to a low-carbon economy; our seeking to tackle the demographic challenges that we face from an ageing workforce and health inequalities; and reflection on Scotland’s challenges that result from our geography and our regional diversity. I find that to be a very exciting prospect, indeed. I am happy to support the bill at stage 1.

15:48  



Tom Mason (North East Scotland) (Con)

A new investment bank, such as that proposed today, has the potential to grow our economy and provide for the economic development of our towns and cities. With that in mind, I am supportive of the bill. I do not just look forward to the opportunities it can provide, but will try to keep one eye on the challenges that should be addressed during its latter stages in order to make the bank as successful as possible.

Since the bill’s introduction earlier this year, the Scottish Government has changed the bank’s remit to focus on environmental issues and, given the salience of such issues, it is easy to understand its reasoning. It is right that we continue to increase our efforts to ensure the highest standards of environmental protection, so the move can be welcomed. However, it is vital that business sectors that invest in renewables, for example, are able to work with the bank even if their original area of practice does not fit within the model.

I am thinking of a number of companies in my region that are involved in the fossil fuel industry but are expanding their investment into greener energy solutions. Such firms, which are not all multinational giants, should not be excluded from working with the bank if they could contribute to reducing emissions over the long term.

Another issue lies in where overall control of the bank’s mission sits. It is currently proposed that ministers can dictate to the bank its objectives, and there is no requirement for any consultation on those with the Economy, Energy and Fair Work Committee, Parliament as a whole or the directors of the bank. It is important to include in the bill the need for such discussions, as it would be unfortunate if, at any point, the bank was obliged to follow the political instruction of ministers rather than economic best practice. I note that the Economy, Energy and Fair Work Committee highlighted that in its stage 1 report on the bill, and I hope that ministers will respond in a constructive fashion.

Another vital consideration is the nature of the current stated mission of the bank. Ministers have indicated that they want the bank to be quite interventionist in certain areas of the economy. That is a valid viewpoint, but I am concerned that it is trying to be all things to all people. Although it is important to consider how we deal with climate change or our ageing population, preferential treatment for certain sectors over others could undermine the fundamentals of the economy. I hope that the minister will give that further thought.

Concerns have been raised about the expectation for the bank to be self-sustaining within five years. The committee has taken a significant amount of evidence on that and it appears that ministers are being quite generous with their predictions. The idea of the cost of a project spiralling out of control will be entirely unfamiliar to the Scottish Government, but I urge ministers to think carefully about how to manage expectations over the next few years.

I worry about a landscape that has been described by Jim McColl as “too cluttered”. In the past few years, there have been a number of arm’s-length organisations trying to provide investment for businesses. Whether through Scottish Enterprise and its Scottish Investment Bank or the Scottish growth scheme, which was the previous idea for a business investment bank, the Scottish Government has taken a number of swings at it, but it has not worked out yet—I hope that it will this time. The growth scheme has not even managed to get close to investing half of the £500 million that was promised in 2017. There is a serious question here and ministers need to have a good answer: what will be different this time around?

The Scottish national investment bank is an idea with merit, but a number of challenges need to be resolved before the bill is passed if the bank is to fulfil its potential to grow our economy, create jobs and boost living standards. I do not doubt ministers’ intentions, but more work is clearly required.

In that spirit, I look forward to seeing amendments lodged at further stages of the bill to address the issues that the SNIB faces. I hope that ministers will be receptive to such changes and I look forward to working together to make them happen.

15:53  



Alex Neil (Airdrie and Shotts) (SNP)

The civilised debate in this Parliament is a great contrast to the pantomime down the road in Westminster.

The success of the Scottish national investment bank will be judged on how it tackles the central challenges of the Scottish economy. We rely far too heavily on a small number of sectors for our entire national wealth, as the food and drink, oil and gas and service industries account for about two thirds of everything that we produce in Scotland. We need to expand our product, service and company base. In many sectors, we rely too heavily on a small number of companies for a high proportion of what is produced.

We now almost have a situation in which we can count on the fingers of two hands how many companies are headquartered in Scotland. As we know, if more companies were headquartered here, that would produce a far bigger spin-out than if we relied on branch activities. All those things are extremely important.

We rely heavily on a small number of products, services and companies for most of our exports from Scotland. The key central challenge is to diversify our economic base. We need more companies, more SMEs and bigger companies, more companies headquartered in Scotland, more companies exporting, and more companies involved in research and development.

It is interesting to compare ourselves with countries such as Finland and Norway, as well as bigger economies such as Germany. They have all had successful national and regional investment banks almost since the war. In Finland, more money is given in the form of credit guarantees and other facilities to their exporters than there is given in the whole of the United Kingdom by the UK Government. That shows the scale of where we have to get to in order to be as competitive as Finnish industry.

A good example is shipbuilding, which we gave up far too easily many years ago, apart from what is left on the Clyde and at Rosyth. Through their national investment bank, the Finns have a vibrant shipbuilding industry and many other such industries. Through their innovation agency, the Norwegians are building up to diversify over time from oil and gas into a range of new, high-tech industries.

Scotland’s record on research and development is appalling. The UK’s record is appalling. The average level of business research and development in the UK is less than 50 per cent, as a percentage of GDP, of what it is in Europe. The level of research and development in the private sector in Scotland is less than half the UK average because of the heavy concentration of industry in London and the south-east.

A key challenge for the national investment bank will be to increase finance to exporters as well as increasing the level of research and development to help us diversify into new jobs and industries. On top of that, there are many other opportunities that we need to pursue.

Let me just say a word about the money. On first looking at the idea, I thought that, although £200 million is not to be scoffed at, against the scale of the challenge, it looks to be fairly modest. However, a key role of a national investment bank is to leverage in funding from elsewhere. The worst thing that can happen is that the investment bank takes on all the risk while other people benefit. We will be able to leverage in many investments from the pension funds and other funds. The whole point is not the £200 million a year. If we manage to at least double that in the early years, and increase that ratio further in the later years, we are talking about an additional £400 million to £500 million a year. Once the bank gets a track record, people will come to it with new ideas and demands for funding. It will grow in the second half of the 10-year period into spending and requiring much more than the original capitalisation plans because there will be opportunities. The return to the Scottish economy could be very high indeed.

I come to the opportunities and looking to the future. Many mentions have been made in the debate so far of the fantastic global opportunities. We should not narrow ourselves down to the European Union, which is the slowest growing part of the global economy. We should go out there and be global and international. That is where the big markets and the market growth are.

Let us look at artificial intelligence, some of which resides in the chamber.

Let us take the health sector. If we develop an expertise and invest heavily in the application of artificial intelligence in diagnostics in the health service, we can be a world leader in that field and, at the same time, help our health service.

If we look at life sciences, particularly animal life sciences, we see that Scotland’s opportunities are transformational.

If we look at information technology, we see that one of the massive, growing industries is the provision of cybersecurity for Governments and businesses. We do not need to be physically in Australia in order to provide cybersecurity services to somebody in Sydney or Melbourne. We can do it from Glasgow or any remote part of Scotland; we can serve a worldwide market. The opportunities are endless.

It is a great pity and tragedy that this Parliament did not do that earlier, because, 20 years down the line, we could have had a booming Scottish economy, which would have topped the European and global leagues. For our country and people, that is what we should aim for.

16:01  



Jackie Baillie (Dumbarton) (Lab)

Tempting as it is to note that Alex Neil was looking in the mirror when he was talking about artificial intelligence, I will, of course, resist.

As an idea, a Scottish national investment bank is not all that new. The Scottish Investment Bank already exists in Scottish Enterprise, and investment in business has existed in different forms for years.

Time after time, intent on a bit of nation building, of which the SNP is so fond, successive ministers and First Ministers have announced the Scottish national investment bank. It has probably been announced at least nine times over the past nine years: first, by John Swinney, then Alex Salmond; Keith Brown had a look in; Nicola Sturgeon followed; and now even Derek Mackay is in on the act. However, it could not be legislated for earlier because, until now, the SNP Government did not have the capital to make it fly.

Now, it is all hail the financial transactions money from the UK Government. At first, the SNP denounced it. Keith Brown talked about it as just “loan funding” and “funny money”. Of course, it is just loan funding, but now it is the welcome money that will capitalise the bank.

However, all £500 million needs to be paid back. Therefore, I want the cabinet secretary to tell us how the repayments are profiled, how much they will be and what their timeframe will be. We need to understand in totality what it will mean to the Scottish budget.

Make no mistake—I am in favour of a national investment bank. As we heard from Richard Leonard, Labour proposes to capitalise the bank with 10 times the resources that the SNP promised. However, I want to know that we are doing it in the most efficient manner possible—getting the biggest bang for the taxpayer’s buck.

The economy committee, of which I am a member, looked at the bill proposal, but the Finance and Constitution Committee considered the financial memorandum. First, I want to follow the money, as my mother always taught me to do. The bank will be capitalised up to 2021 by £500 million of financial transactions money from the UK Government, and £1.5 billion of Scottish Government money will be provided from 2021 to 2028. That is the investment part of the equation, which is straightforward.

Now, let us look at the cost. Here is the headline figure that we have not properly understood. By 2023-24, which is when the Government expects the bank to cover its costs, the taxpayer will have borne a cumulative loss of at least £80 million. Dean Lockhart uses the figure of £150 million. Whichever it is, it is a significant sum. That £80 million is to cover new staff, a chief executive, a chair, the Scottish Government sponsor unit and estate costs, and that is before the bank starts to cover its operating costs. In a time of continuing austerity, that is a sizeable sum of money to lose. Let us think about what that money could buy—almost 3,000 nurses or almost 2,000 teachers. We must think carefully about what we are doing.

The Royal Society of Edinburgh, in a very thoughtful submission, noted that the projected annual running cost of £25 million to oversee an investment fund of £200 million is “very high” and needs to be reviewed.

Let me ask a fundamental question of the cabinet secretary. Money is already distributed through the Scottish Investment Bank, the Scottish Futures Trust and other Government-controlled agencies. What review has taken place of the experience, efficacy and impact of those existing arrangements? Are those arrangements any good? I know that Derek Mackay is dying to answer but I will just finish. Does the cabinet secretary know whether they are any good? That will inform whether what he is about to do with this bill is the right thing. Can he tell us why this approach has been taken in the bill and what additionality the new bank will provide? That information is important for us to know as we go forward.

Derek Mackay

I thank Jackie Baillie for the question. I will make a brief intervention at this stage; I may say more in summing up. I think that there will be a requirement for that on-going review, especially to work out what the final legislation should look like. I have said that I will engage with Parliament, so it is right to have an on-going review of what is provided by other parts of the public sector and by banks elsewhere in Scotland. We need to keep that under review and, to address the point about clutter that colleagues have made, we need to look at what financial products are available and which other parts of the system come together. We will then return with a comprehensive plan on how that will look in a whole-system approach. However, that is a fair challenge.

Jackie Baillie

Although I welcome that recognition from the cabinet secretary, my concern is that we have not done that review in advance of passing legislation and spending taxpayers’ money, and we are not quite sure whether this bill will do the trick. I am happy that he will do the review, but I want it done now rather than some years down the line, because it is important for us to understand whether the bank’s additionality will compensate for the cumulative multimillion-pound loss in the first five years.

A key issue is stimulating demand. Is the cabinet secretary confident that there will be sufficient demand, given that the Scottish growth scheme, which was announced to considerable fanfare, has distributed a fraction of the money intended? These questions all need answers from the cabinet secretary—

Alex Neil

Will the member give way?

Jackie Baillie

No, I do not have enough time.

If there is another more cost-effective way of achieving the same end, we should consider it. I am with Alex Neil when he speaks about the potential return, but we need to be convinced of that rather than just hoping that it will happen.

To turn to some of the other issues that have been raised, I particularly want to focus on the views expressed by Engender and Close the Gap. Both organisations said that the equality impact assessment was limited in scope, lacked analysis and was quite poor. Although the cabinet secretary has revised that equality impact assessment, which is welcome, it is still difficult to retrofit equality into policy that has already been developed.

There is a wealth of international evidence that gender equality is a necessary precursor to economic growth. If we want the bank to deliver for women and women-led businesses in Scotland, that needs to be a core part of the strategy and implementation. It should be on the face of the bill—that view is shared by many—as should the vision and the objectives of equality and non-discrimination, along with socioeconomic and environmental outcomes, so that we influence the bank’s lending policies and governance right from the very start.

There will undoubtedly be many amendments to come and I look forward to challenging the cabinet secretary further during stage 2.

16:08  



John Mason (Glasgow Shettleston) (SNP)

Once again, I find myself speaking in a debate on an issue that came from the economy committee, of which I was a member when the report was prepared. Sadly, I am no longer on the committee, but I am happy to take part in the debate. There was clearly broad agreement on the subject among committee members, which perhaps there was not in last Thursday’s economy committee debate on pre-release access to statistics.

As has been said, this is very much an enabling or framework bill and the question has arisen whether there should be more detail in it. We have faced the question previously with legislation such as the Land Reform (Scotland) Bill and the Islands (Scotland) Bill.

Too much detail in a bill can be difficult to update as circumstances change. On the other hand, too little detail could give ministers or, in this case, the bank itself too much freedom to drift away from the intentions of Parliament. We need to get the balance right as we move to stages 2 and 3.

I think that having a bank such as this is a great opportunity. We heard clear evidence at committee from a number of countries, including Wales, about how it could be a real asset to the economy.

As we noted at paragraph 48 of the report,

“The Bank ... will not take deposits”,

nor will it borrow from anyone other than the Scottish ministers. However, we might wish to revisit that in the longer term. I believe that there are a number of individuals, and possibly also organisations, who would be keen to invest in Scotland’s economic development through a bank such as the national investment bank. In fact, I have had individuals asking me personally whether it will be possible for them to invest in it.

The bank is intended to provide patient finance. That could be by way of loans or equity, but it would not be through grants, and it would not be to bail out struggling companies. I realise that the concept of patience is not always well known to politicians, who usually want to see the whole health or education system turned around between one First Minister’s question time and the next. As in business, there are likely to be failures as well as successes, as the convener has said and as the committee heard—bad news may well come sooner than good news. I hope that we can all commit at this stage to being patient and not jumping to criticise the Government of the day if the first investment were to go belly up.

I will move on to some specific topics that have aroused interest, starting with the matter of setting a target rate of return. The committee said in its report, in paragraphs 201 to 203, that the rate of return should not be the be-all and end-all, and that evaluation of the bank should be wider and include social and environmental impact. We suggested that we should be particularly careful in the early years—say, the first two to three years—and we recommended that a target should not be set or applied in the short term. I was therefore particularly interested in what the Government said about that in paragraph 40 of its response of 26 August.

I think that there is agreement that, as paragraph 43 of that response says, the bank needs

“to cover its operating costs”.

There have to be

“sufficient financial returns”

to repay the Treasury, and there must be

“sufficient returns to grow its asset base ... enabling future rounds of investment in Scottish companies and communities”.

As paragraph 45 of the Government response says, we do not want an unintended consequence involving decision making focused on the short term.

Paragraph 46 of the response makes the extremely important point that if the bank does not have a target rate of return, it might be more susceptible to political pressure to be a lender of last resort to distressed companies. There might also be issues with state aid rules, whether those are decided by the European Commission or by the Competition and Markets Authority.

Moving on to ethics, the economy committee asked the Government to consider including an ethics committee in the bill. In paragraph 61 of its response, the Government says that ethics might be best considered

“as a main Board duty”.

I get the point that ethics should be central to the whole organisation. However, on balance, I would like to see a committee that specifically focused on that topic, which could then take a considered position to the main board. It would not be a particularly bad thing for the respective chairs of, say, the ethics committee and the investment committee to put slightly different arguments before the main board for a decision to be made. However, I am more relaxed about whether that needs to be set out in the bill.

On sustainable growth and the environment, there have been a number of briefings for today’s debate, including from Friends of the Earth, the Scottish Council for Voluntary Organisations and Social Enterprise Scotland, emphasising the importance of the environment and other issues. It seems to me that there is broad agreement on the need for environmental issues to be included, although, as we saw yesterday during the debate on the Climate Change (Emissions Reduction Targets) (Scotland) Bill, there are differences as to how far people want us to go and how quickly.

There are clear concerns about what the term

“inclusive and sustainable economic growth”

might mean. I do not think that many of us want unlimited economic growth with no strings attached. Perhaps the more difficult question is where all of that should be written down. Should it be in the bill itself, as some people suggest? Unlike normal legislation, the bill deals with a company, and there need to be articles of association, which gives us the option of having more detail. Articles of association can be changed only by agreement of Parliament, so they seem to be a good place for laying out what we want.

However, as far as I can see, the wording in the draft articles on the objects of the company is exactly the same as the wording in the bill. I would have thought that there might be an opportunity for the articles to be expanded beyond what the bill states and for them to give more of the detail that many people are seeking. I wonder if the Government is open to that.

Derek Mackay

Will the member take an intervention?

The Deputy Presiding Officer (Christine Grahame)

The member is in the very last few moments of his speech, so probably not. You had better just do a last sentence, Mr Mason.

John Mason

My last few lines are as follows.

I hope that we can all support the bill today and the creation of the bank. I am sure that there will be much more debate over the detail later on.

The Deputy Presiding Officer

Cabinet secretary, I am sure that you will have time to comment in your summing up.

16:14  



Jamie Greene (West Scotland) (Con)

I am very pleased to speak in today’s debate, which has been interesting.

The old adage is that you wait ages for a bus to turn up, then three come along at once. The same has to be said for the Scottish Government’s strategy on supporting business: we have been waiting for something such as the national investment bank since Derek Mackay’s party took office. Going back as far as 2009, John Swinney talked about

“creating a vehicle that would enable us to provide the necessary long-term support and investment in the Scottish economy.”—[Official Report, European and External Relations Committee, 28 April 2009; c 1128.]

That was very admirable of him. In 2014, he said that he had not shelved the proposition of a business development bank but was still searching for a way to develop one.

Five years later, here we are in the chamber debating stage 1 of the Scottish National Investment Bank Bill. I am supportive of the concept of national investment banks, because I think that they have a place in modern economies. We have talked about Germany and some of the successes that other countries have had with such financial vehicles.

To be fair to the Government, this vehicle is probably the right one for the purpose. However, the devil will very much be in the detail. A bank such as the proposed Scottish national investment bank goes against what banks normally do and, probably, what Governments do. Governments are generally asked to step in when markets are failing. I hope that the aim of the new bank will be entirely different, and I hope that it will genuinely shape and steer the markets, rather than simply correct failures.

Derek Mackay

A number of members have raised the point, so I will make the position clear, if that is helpful. The intention is that the bank will be based on an economy-shaping model, as opposed to having the aim of—as it has been described by others—supporting failing businesses. The bank should help businesses that have viable futures, and it should help to shape our future economy. That will be the spirit of the bank.

Jamie Greene

I am pleased to hear that. It is a very positive move.

There is certainly a theme coming through in the stage 1 process about protection of the environment, social inclusion and sustainable development, which we hope will sit at the heart of the bank’s investments.

However, ultimately, we are talking about taxpayers’ money, so the money must still be invested in viable opportunities that will offer some return, even if it is not a direct and obvious pound-for-pound return. There is nothing wrong with the concept, but it is still unclear from the papers that we have how the bank will achieve that. We have seen other schemes: the Scottish growth scheme aimed to provide £500 million in loans by 2020. We are not in 2020 yet, but we know that the amount that the scheme has invested to date is substantially below that figure.

It is true that an investment vehicle such as the investment bank cannot be measured by the conventional tools that are used by Governments or investors. It will be challenging to put a number on the success or otherwise of the bank. As John Mason said, we might need to be patient.

Availability of credit, although it is a tool, is not the only tool. Finance cannot overcome poor market conditions, skills deficits and factors that are way outside our control. We might argue that the Government could already have played a more vital role over the past decade in fostering innovation, growth and skills.

After First Minister’s question time today, I held a timely meeting with members of the Ayrshire Chamber of Commerce. Some of the people whom I met at that round-table meeting are entrepreneurs who run small businesses. They are the sort of people whom the bank should help. I met entrepreneurs including Alix, who runs her own make-up company; Ruth from Ardrossan, who runs a photography business; and Gemma, who runs a wedding and events company.

I was really buoyed up by the enthusiasm in the room for promoting small businesses, taking on people and growing the economy of Ayrshire. I told them that I would be speaking in today’s debate about a new national bank that would promote SMEs, create and shape markets and develop enterprise when clearly commercial models are failing them. They said that that is all very well and good, but asked me to ask the Government where it has been for the past decade, and how much longer they will need to wait for support to be made available to them. I hope that we can work through the process swiftly and get the bank established.

I turn to technical aspects of the bill, in the short time that I have left. I say, meaning no disrespect to the people who have drafted it, that I am pleased that it is just stage 1, because there are many holes in the bill. I hope that members from across the chamber will work constructively to get it to a good place when it comes back.

On page 1 of the bill, the bank’s main object—something that Andy Wightman alluded to—is stated as

“giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development”,

which is okay if we can decipher what that actually means.

The bill also says that

“the Bank may do anything for the purpose of its objects”.

It says that it can borrow only from the Scottish ministers, that the Scottish ministers will appoint the executive and non-executive directors, and that the directors will determine their salaries while the Scottish ministers give direction on all of the above.

The Scottish ministers will set the mission through the ingenious method of sending a document to the bank. The bill goes into great detail about how they might do that. The bill also says that

“The Scottish ministers may capitalise the bank”.

It is only when we get to the very end of the bill that we find the only activity that will require parliamentary approval. That is the

“Procedure for modifying entrenched provisions”—

so it is already looking like a marvellously non-political and independent organisation, is it not? I raise that issue because I think that it is important for the bank to have independence, which it requires in order to make decisions that are right for it as a bank, and that it is not simply under the political will of ministers.

I conclude by saying that there is potential to create, with the bill, something that is very interesting and worth while. However, the ministers who are responsible for it must ensure that it is not just a box-ticking exercise or a half-cooked plan. I support the setting up of the bank and I hope that it succeeds, but my reaction is the same as that of many folk: I will believe it when it delivers.

16:21  



Pauline McNeill (Glasgow) (Lab)

I welcome the proposed new Scottish national investment bank and this stage 1 debate. The bank will not be focused on profit-seeking and will be able to respond quickly to Scotland’s investment needs.

There could, however, be a missed opportunity, as many commentators have said, because it does not have nearly enough capital. Jackie Baillie was right to say that we need to get the equality commitments put up front in the bill.

The Scottish Council for Development and Industry has said that the level of capitalisation—£2 billion over 10 years—does not match the scale of the ambition that is proposed, and that meeting that ambition could be challenging.

I want to talk about why housing should be a key mission for the Scottish national investment bank. I will reference an interesting forthcoming report from the think tank called Common Weal. Let us not forget that it was housing finance that led to the sharp practices in the mortgage market, which led to the crash that deprived many people of their housing options. It is my opinion that we have to steer away from seeing housing purely as a profit-driven and commodity-based part of the economy, and instead look to its primary purpose of creating homes. One of the key missions of the bank should be to build high-quality social housing.

Dr Craig Dalzell from Common Weal has written in his forthcoming report:

“The current approach to housebuilding is deeply flawed and largely revolves around the private housebuilding market whilst the politics of social housebuilding is limited to setting arbitrary targets of houses to build without much thought to quality, location or other infrastructure.”

I agree that one of the bank’s missions should be to build sufficient high-quality publicly owned rented homes—not just as a safety-net for people in need, but to exceed the baseline ambition and to provide homes that are desirable and cheaper than those in the private sector.

I am sure that people who follow the housing debate do not need to be convinced that housing is an important part of the economy because of the skills that it requires and the infrastructure that it brings. By guaranteeing security of supply and legislating to fund only the highest-quality housing, the approach could act to stabilise the private rented sector and raise the quality of housing overall.

In Labour, we want to see a strategic plan for the housing sector that is focused on improvement of quality. It seems obvious to me that, given yesterday’s debate on climate change and emissions reduction, a key infrastructure project for quality homes would be to aim to introduce carbon-neutral housing as standard.

Another reason why I believe that housing should be a key mission of the bank is that the majority of people who are not able, or do not want, to buy a house are almost wholly reliant on the private sector. More families with children are living in the private sector, and they are experiencing dramatic rent increases in many parts of the country, which causes them hardship. In turn, that increases the risk of an increase in the number of adults and children who live in poverty.

There is therefore an excellent case for a mission relating to housing. According to Homes for Scotland, Scotland is building at only 80 per cent of the level that is required to meet housing need and demand. I am sure that we all agree that good housing is central to a healthy population and a vibrant economy. It makes sense that the investment bank’s funding could be used to construct the highest-quality housing in order to ensure that we drive up the quality of housing in the private market as a whole.

We support the Government’s plans to retrofit all buildings, so that they have a C-rated energy performance certificate by 2040. However, retrofitting existing buildings is often extremely costly, so we need to ensure that new buildings are built to the highest standards.

Scottish Labour’s housing commission was tasked with considering whether a national housing agency could be an asset to the economy. The agency could be tasked with, among other things, taking a strategic approach to identifying gaps in provision, having powers to make compulsory purchase orders to create new communities, and co-ordinating provision of the skills that are needed in the sector. We will say more about that when our report is published.

Overall, there is a very strong case for saying that a national approach to house building could identify gaps in the housing sector. Many organisations, including Common Weal, support a form of national agency. More than a year ago, Homes for Scotland identified that such an agency could play a strategic role in ensuring that we retain the necessary skills for infrastructure building, which includes housing.

A move towards high quality and passive carbon-neutral homes, will allow us to tackle several problems—not least, the scourge of fuel poverty. At the same time, that would make serious inroads into decarbonising Scotland and meeting our climate change targets. Making social housing a viable option for more people through investment by the Scottish national investment bank will mean that factors such as high heating costs could be practically eliminated. Although we might not think of housing as part of a national investment bank’s strategic plan, there is a strong case for one of the bank’s missions being about housing.

Derek Mackay

Will the member take an intervention?

The Deputy Presiding Officer

No. The cabinet secretary is always picking the wrong moment; he will just need to deal with the point in his closing speech.

Continue, Ms McNeill—you are in your final minute.

Pauline McNeill

I apologise to the cabinet secretary.

Building high-quality social homes should be part of the mission of the investment bank. I hope that the cabinet secretary would have agreed with that idea, had he been able to intervene. Decisions on where homes are built must be guided by a demand-led strategy.

16:27  



Joan McAlpine (South Scotland) (SNP)

We need not look far for evidence of systemic inequality across the UK. A wealth gap is increasing due to a toxic partnership of discredited economics and Westminster ineptitude. There is geographic inequality as well as social inequality. I will concentrate on the regional divide, on which I hope the Scottish national investment bank will focus in the future.

Southern Scotland has one of the lowest recorded levels of regional economic wealth among comparator regions across northern Europe. Citizens in the inner London west region, where Westminster is situated, are on average 10 times better off than my constituents. Inner London is, of course, the richest region in northern Europe.

Such disparity is not found only in Scotland. Regions across the UK have been starved of investment by a metrocentric financial system that does not work in their interests. Across the world, growth is focused on cities, which, in turn, attract more investment and talent. That is great for people who live in a city, but I represent a region that does not have a city and I feel strongly that no part of Scotland should be left behind.

That is why I welcome the Scottish Government’s attempts to address geographical disparities, particularly through the south of Scotland enterprise agency, which is being set up, and the adoption of place-based inclusive growth as part of Scotland’s economic strategy. My ambition for a national investment bank is that it complements such initiatives.

I do not sit on the Economy, Energy and Fair Work Committee, but I sat on the Economy, Energy and Tourism Committee in session 4. I remember being struck by figures that showed how difficult it is for SMEs in the rural south of Scotland to access capital, either from the private banking sector or through public agencies. I am extremely pleased that the Government is responding to that in a number of ways. It is vital that the bank, like the new agency, helps to dismantle all barriers to sustainable growth in the south of Scotland, which is a region with so much potential and talent. Although the bank has both a national and a regional remit, I am gratified that there is specific recognition that variations in productivity across Scotland must be addressed.

We have heard that the bank has an unusual nature and departs from the status quo, which is a good thing. It will be underpinned by statute and the detail will be contained in articles of association. It will be a uniquely Scottish institution. We already know that greater long-term or patient capital is needed for small and medium-sized enterprises to grow, and that is certainly the case in my region.

I was struck by the wide and thematic approach that the committee took to scrutiny of the bill, reflecting the bank’s mission-orientated approach, which is to not just fix market failures but, in the words of the economic adviser Mariana Mazzucato,

“create and shape new markets aimed at tackling modern societal challenges.”

I note that the bank has gained widespread support among stakeholders. CBI Scotland said:

“The development of the SNIB could be a leap forward for the Scottish economy that boosts global competitiveness, supporting ... innovation and growth.”

Social Enterprise Scotland said that it has “huge potential” to transform our economy.

I am particularly pleased to note that the bank will be open for business in 2020. It cannot come quickly enough.

Scotland has a rich, almost unparalleled history of groundbreaking invention and innovation, and it is currently home to several world-class universities and centres of excellence. There is no shortage of home-grown talent and it is time for Scotland to punch above its weight in developing that talent.

Because so much could be achieved, much is at stake, so it is extremely important that careful scrutiny is given to any weaknesses or deficiencies in the bill or the proposed structure of the bank. I echo the comments that were made earlier about the inadequacy of the equality impact assessment.

The committee has reported on ethical investment and other matters, on some of which we have had further detail today. All of that bears further reflection and consideration.

To critics of a uniquely Scottish solution to address inequality and stimulate growth—of whom there do not seem to have been many in today’s debate—I say that I agree with others that it is extremely important that we work through local knowledge. I very much welcome the establishment of the bank.

The Deputy Presiding Officer

We move to the closing speeches.

16:32  



Rhoda Grant (Highlands and Islands) (Lab)

Scottish Labour welcomes the Scottish National Investment Bank Bill, but it does not go far enough. It lacks a strong objective for the bank and it lacks ambition on the part of the Government.

The bank will not be adequately capitalised: £2 billion over 10 years is not enough to create a step change in our economy. It is a level that is achievable, but not one that is ambitious, as Richard Leonard said. The Scottish Labour Party would look to finance the bank to the tune of £20 billion over the same timeframe, which would bring about a step change in the economy. A sum of £2 billion amounts to only £200 million a year. Given that, as Jackie Baillie pointed out, the set-up costs are likely to be around £80 million, that would leave very little for investment.

The Scottish Council for Development and Industry welcomed the sum but contrasted that level of capitalisation with the scale of ambition that is set out in the vision to transform Scotland’s economy. Unite was not convinced that £2 billion represented a sufficient level of capital investment to deliver significant economic change and cited several examples of projects that would have taken up almost the whole of the bank’s budget.

The Royal Society of Edinburgh was also concerned that the level of capitalisation could restrict the number of potential missions that the bank could have. It suggested that the scale of investment of £200 million a year over the first decade was

“not enough to provide investment across three or four missions—such as demographic issues and/or transition to low carbon economy”.

Pauline McNeill mentioned the need to build more housing for social rent. It would cost more than £3 billion to build 50,000 such homes. That is more than the entire proposed budget for the bank.

Derek Mackay

Does that not speak to the point that all the other figures are excluded when the bank is taken in isolation? In fact, £3 billion has been committed to build 50,000 homes, which target the Government is on track to meet. When considering the totality of the investment in our infrastructure, we must look at the global figures and not just at what is allocated through financial transactions or elsewhere for the purposes of the Scottish national investment bank.

Rhoda Grant

Indeed, but if the investment bank is to fulfil the ambitions set out for it, it requires more capitalisation than that already put forward by the Government. Take the example of climate change and the move to a carbon-neutral economy, which almost all speakers mentioned. That new and growing sector needs to be supported, yet the bill is silent on that, as many speakers pointed out. Currently, too many jobs in the low-carbon sector are going to overseas competitors. In order to make a just transition to a net zero economy, we need to grow the number of jobs in the sector and compete with overseas companies. We also need to innovate and develop new low-carbon industries.

Reaching net zero will mean that traditional high-carbon industries will decline—that will happen—but our economic wellbeing and the wellbeing of the workforce in those sectors depends on workers being retrained and securing jobs in zero carbon sectors, especially where skills are transferable. No one should be left behind if we are to meet the ambitions that the Parliament agreed to yesterday.

Many speakers talked about lending criteria and who the bank should lend to. It must work for all our economic generators, but it will specifically not lend to the public sector. It must, however, include other sectors, such as the third sector, co-ops and community bodies, because those are different businesses, which, it could be argued, provide a much greater economic impact in their local communities. If the bank is not to lend to public institutions, how will it be able to make an impact on areas such as housing, which Pauline McNeill emphasised in her speech?

The challenges of the 21st century cannot be met by the private sector alone. If we are to address climate change, digitisation and the like, we need new models of public ownership and finance. We must support our home-grown industries—Richard Leonard cautioned against chasing foreign investment. Alex Neil made that point, too. Our economy depends on a few large companies and very few of them are headquartered here. They could move away at any time.

The lending criteria must embrace fair work principles. The Scottish national investment bank should ask ethical questions of companies and customers to determine whether they are appropriate to lend to. Willie Rennie talked about the living wage and whether it would be appropriate to include that in the bill. I believe that it would be. The living wage will not change—it will keep step with the times and increase as required. There is no reason why high-level ambitions, such as our climate change targets and the like, cannot be in the bill.

Dean Lockhart talked about inclusive growth. It is important to include that in the bill. He said that inclusive growth cannot be measured, but we can measure what it is not. This week, the Government published a report called “Longitudinal Educational Outcomes (LEO) from Modern Apprenticeships”. It showed that “males earned more than” women “across all occupational groupings”, and that that difference in earnings ranged “from £300 to £9,700”. In addition, people

“from the 20% least deprived areas earned £4,500 more than those from the 20% most deprived areas.”

That is what measures of exclusion look at, so we should be able to identify inclusive growth and do it. As Richard Leonard said, gender balance on boards is a positive step towards addressing that. Gender balance on boards will be reflected in the workforce.

Scottish Labour supports the development of a national investment bank, but work is needed in order to ensure that it is built on a solid foundation, which the bill certainly is not. We will use the amendment stages of the bill to create a Scottish national investment bank worthy of that name.

The Deputy Presiding Officer

Before I call Mr Halcro Johnston, I welcome back to the chamber Mr Rennie and Mr Neil, who were not present for the beginning of the closing speeches. They are old hands, so they should know that that is required.

Jamie Halcro Johnston rose—

The Deputy Presiding Officer

Please sit down just now, Mr Halcro Johnston.

No matter how senior members in here might be, they should note that the rules apply to everybody. I do not see any notes of explanation from Mr Rennie and Mr Neil for why you both came in late. No doubt they will appear later and will corroborate each other. I look forward to reading those and, in particular, your apologies to Ms Grant for failing to hear the beginning of her speech.

I will call you now, Mr Halcro Johnston.

16:40  



Jamie Halcro Johnston (Highlands and Islands) (Con)

Thank you very much, Presiding Officer. I am sure that members in the chamber are united in their disappointment in those scamps. [Laughter.]

The legislation on the Scottish national investment bank has been long awaited. As Jackie Baillie suggested, and as Graeme Roy of the Fraser of Allander institute pointed out, the bill represents about the eighth time that the Scottish Government has tried to establish something of this nature in the past 12 years.

Scottish Conservatives have been consistent in calling for more action to grow the Scottish economy, which has lagged behind the rest of the United Kingdom, so attempting to improve business support in this regard is to be welcomed. Ministers will be aware that there is a good deal of support for many of the bill’s aims. However, much of the detail on the delivery of the bank falls outwith the direct scope of the legislation, so we can only hope that the Scottish Government will continue to consult and engage as we move forward.

The Economy, Energy and Fair Work Committee’s convener, Gordon Lindhurst, highlighted the body of work that it has conducted in the area and, as I am a member of that lead committee, I also feel obliged to do so. In addition to our direct work on the bank, which has led to the stage 1 report, we have touched on many elements of business finance in the course of several inquiries. As part of our current budget scrutiny we have produced work on topics from business support to the role of business gateway, the enterprise bodies and regional selective assistance, a great deal of which I commend to the chamber.

It is vital that any consideration of the Scottish national investment bank looks at our current framework of business support. We know that there are significant issues around the growth scheme, and the committee’s reports have suggested a number of ways in which Scotland’s business support landscape should be improved.

We might also look at the examples—both positive and negative—provided by the Scottish Investment Bank, which was established with similar aims of providing long-term support and investment in the Scottish economy. We do not expect the new bank to be a panacea but, with the right organisation and support, it can be a positive actor in our economy.

In my region of the Highlands and Islands, which has varying local economies and priorities, having the right approach and the right institutions focused on regional development is vital. Organisations such as Highlands and Islands Enterprise have long experience of navigating the business environment there. It would be a loss if such local institutional knowledge were to be diluted by the new bank’s engagement in the area. We have seen examples of a regional focus in the Development Bank of Wales, which has a number of offices around the country. The Scottish Government has rejected that model, and the cabinet secretary gave his reasons in his evidence to the committee. Derek Mackay said:

“the bank can reach the parts that other banks cannot.”—[Official Report, Economy, Energy and Fair Work Committee, 11 June 2019; c 27.]

Despite his appallingly plagiarised slogan, I accept that there are differences between how the two banks will operate.

Derek Mackay

I could come up with another one.

Jamie Halcro Johnston

I am glad that the cabinet secretary has not intervened with a new slogan. However, I ask him to remain open minded to ensuring that the Scottish national investment bank is accessible to and engages with all parts of Scotland—even the more remote parts, as are found in my region.

We will work to get the bill right. In committee, the cabinet secretary indicated his hope that the parliamentary process would lead to further improvements to the Government’s proposals. I welcome that approach and hope that he will honour it.

That leads me to consider some of the other speeches and ideas that we have heard from around the chamber. My colleague Tom Mason set out both the opportunities and the challenges of creating a new institution. He also spoke about the remit, objectives and the mission of the bank, which are areas that will be crucial not only to its success but to its wider role in Scottish society. He echoed points that have been made on the changing remit of the bank and questioned how it would treat businesses that are moving towards more environmentally conscious models. He also covered many of the financial elements that we have explored in committee.

Richard Leonard spoke about the mission of the bank and its make-up—its board and the like. Although I respect his opinion, I think that he is looking to create an idealised bank, which would be unworkable in future.

Jamie Greene pointed to the difference that long-term investment priorities will make to the Government, and to the need to look at what success means in the context of the wider economy. He also explored the lessons of previous development funding models, particularly the Scottish growth scheme, and he made the important point that availability of credit alone cannot make businesses thrive while significant gaps remain in growth and innovation in Scotland. As we have seen, any real progress will depend on the wider business environment, and the Scottish Government has much work to do in that regard.

Alex Neil made a barnstorming speech, promoting global Britain, global Scotland and opportunities outside the EU. He certainly garnered a lot of support from members on the Conservative benches. “The opportunities are endless,” he said, and of course he is right.

Jackie Baillie was also right. She highlighted the important role that financial transactions from the UK Treasury will play in helping to finance the bank. Dean Lockhart also raised that in an intervention, and he outlined the need to manage expectations around the bank. As he said, it must not go too far in yielding to competing ambitions the original objective of providing patient capital into the Scottish economy. We have heard that there needs to be a clear focus as well as work across agencies and other bodies at both the Scottish and UK levels. The risk is that the bank will serve to duplicate work that is currently carried out by other organisations.

As Dean Lockhart noted, none of those concerns is new. They were all raised in the debate in May last year. However, the problem of managing expectations has grown since that time, with the list of ills that the bank is supposed to address getting ever longer.

In committee, we have heard evidence on costs. Time and time again, witnesses questioned the assertion that the bank can be self-financing from 2023-24. There seems to be some tension between the desire for patient capital and the hope of quick and easy returns. There are also real concerns about how the bill’s provisions on the bank’s mission will impact on its operational independence and the timescales that are involved in reporting. With amendments being expected at stage 2, it will be interesting to hear ministers’ responses.

As has been highlighted today on the Herald website, this is a vital time for the bank to be created. I think that £135 million of Scottish Government money, which is taxpayers’ money, has been written off to prop up failing companies, so it is vital that we get this right.

We can all agree on the importance of the organisation that exists behind public sector financial support. I hope that, as the bill moves forward, the Scottish Government will maintain a clear vision around its core objectives. The concept of the bank has potential, and in that regard the bill is welcome. We have raised a number of real and valid concerns this afternoon and the bill will undoubtedly benefit from further scrutiny. It will have our support today, but a willingness to consult must continue beyond the process around the bill. The Scottish Government must ensure that it works with the committee and other members to make the bank a body that can have a real and positive impact in driving forward investment and improvement in those areas where the Scottish economy is underperforming.

The Deputy Presiding Officer

I call Derek Mackay to close for the Government. Cabinet secretary—you have until 5 o’clock.

16:48  



Derek Mackay

Thank you, Presiding Officer—including for that very generous allocation of time, which might be explained by my having not been allowed to intervene on some members earlier. I note that you have rebuked some members about their attendance, although it was a wee bit less of a rebuke than those that we have seen at Westminster of late. The debate that we have had here in the Scottish Parliament is a useful contrast with debates at Westminster. It shows how we are getting on with the day job and trying to deliver the transformational interventions that will support our economy.

It has been a consensual debate, although members were quite right to go through their issues with the bill, of course. I want to respond in a spirit of collaboration and co-operation, as we move on to stages 2 and 3. I will respond to and reflect on as many comments as I can.

It is important to say that many of the considerations that members mentioned might not be for the bill or primary legislation, but can be covered in a range of documents that will be important to the bank. The documents include those on its missions, its articles of association and its mission reports, which will be the bank’s response on the missions that have been set for it. There will also be the shareholder framework document, the business plan, the investment strategy, the ethics statement—many members have commented on its content—the annual report on investment performance and the independent review of performance. I reassure members that there will be many appropriate places in which to set the direction that Parliament wants.

We need to consider fully the appropriate balance between addressing points that many members have made about accountability, direction and transparency and the need for operational independence to ensure that the bank is a success.

Gordon Lindhurst

I trust that the cabinet secretary enjoyed Alex Neil’s pantomime, and that he shares my scepticism about John Mason’s crocodile tears as he said that he is “sadly” no longer a member of the committee when, just last week, he said that he had been “promoted” to another committee.

On a serious point, both those members referred to better organisation in economic terms in relation to national investment banks in European countries. Does the cabinet secretary agree that, although the SNIB is a good start, we will need to do a lot more, because in Scotland—and more widely in the UK—we are not so good at planning for and working on such things as other countries appear to be?

The Deputy Presiding Officer

That was a lengthy intervention, but you have time, cabinet secretary.

Derek Mackay

I will certainly reflect on that point. We are looking around the world at best practice on investment strategies and national investment banks in terms of scale and intervention. As the Economy, Energy and Fair Work Committee’s convener knows well, we have leaned heavily on the work of Professor Mazzucato.

Mention has been made of potential investment in artificial intelligence, and of the intelligence in the chamber. I suggest that, on occasion, some members of the Opposition engage in artificial objections. I am not referring to Jackie Baillie in particular, but I will come back to her comments on the investment bank.

Jamie Greene rightly spoke about current business support. We should not lose sight of the important point that many businesses do not need to wait for the bank’s support and that we should signpost them to the support and products that are available. Right now, the Government’s enterprise family is still attracting investment and new jobs, and is encouraging scale-ups and start-ups in Scotland. Many of those interventions are to be welcomed. The Scottish Investment Bank has been working successfully. However, with the new bank, we want something that is transformational and at scale. As a number of members have said, it is about an all-Scotland approach. We have a supportive business environment that is bearing fruit, but we want to accelerate that through the Scottish national investment bank.

I do not want to get into the debate about one committee being more important than another, because I have to attend both the Economy, Energy and Fair Work Committee and the Finance and Constitution Committee to give evidence. However, points by the economy committee’s convener were well made. I hope that he appreciates the response to the committee: more is to follow. Let us not lose sight of the fact that we are dealing with the legislation to create the bank, and that other operational matters will be dealt with in the fullness of time.

Alex Neil

I will help the cabinet secretary to use up his time. When the Scottish Development Agency was formed, back in 1975, it was given a function that was very similar to that of the proposed national investment bank. However, a number of the agency’s early investments, which were high-risk investments, ended up in failure. As a result of the media and political reaction to that, the agency basically closed in on itself and gave up taking risks. I stress that the bank will not add the value that it can and should add if it is not prepared to take reasonable risks because, if there is no risk, other people will invest anyway.

Derek Mackay

I agree with those comments. Of course, we want every investment to be a success, but with risk, some will not succeed. However, it is right to set out the missions to transform our economy in a way that responds to the agenda that we have set in relation to the economy, the environment and our desire to have a highly skilled workforce.

We will focus on more than just the financial returns—a key point that was made by Gordon Lindhurst. The bank will have the mission focus that several members have emphasised.

Dean Lockhart touched on running costs, as did other members. There will be more to that than what is in the financial memorandum. We will refine the operating costs and ensure that Parliament is made aware of them.

We will also look at the entirety of the enterprise landscape to ensure that it is structured to address concerns about duplication. The bank should provide additional rather than substitute finance. We will ensure that traditional banks in Scotland continue to do their job, too.

Questions were asked about expanding successful programmes. We will also try to look at that. Richard Leonard talked about the scale of ambition for the bank. We have to think about what is affordable as well as what we want the bank to achieve.

Roseanna Cunningham has just joined me on the front bench: I note that the just transition commission will be very helpful in advising us on what the new economy will look like when we are setting out the bank’s missions.

Several members asked whether I intend to engage fully and to refer to Parliament in relation to the missions. Yes—I will. John Mason asked me whether I will engage on the articles of association. Yes—I will engage on that, too. Will I listen to Parliament? Of course I will.

Andy Wightman asked about the sustainable model and how we will grow the green economy. There is much in that respect that we should pursue through the national investment bank.

We have an optimal model to deliver the vision for the bank. I will engage further on the question of parliamentary consultation. I look forward to the cross-party work in which I have committed to participating.

Willie Rennie raised Brexit. We have tried to focus on what we can do here, but Brexit is—of course—the main threat to the economy in Scotland right now. Willie Rennie spoke about the transformational nature of the bank and the scale and pace of delivery, and asked questions about social conditions, such as the living wage, to which I will give further thought.

Annabelle Ewing made a very thoughtful speech that emphasised the strength of patient finance and investment, and the importance of the fact that the bill is enabling legislation. She also raised the importance of the composition and purpose of the advisory group. She quoted my slogan—Jamie Halcro Johnston was worried about me plagiarising other people’s slogans, but this was mine—that success will be allowing things to happen that would not otherwise have happened if this financial institution were not there. Annabelle Ewing was very kind to recall my words on that.

Tom Mason made a very helpful point on diversification and transition to support sectors that want to move to a low-carbon agenda. We should support them using the functions and products of the bank. The bank can make a difference in combining funds and addressing particular needs and demands.

Alex Neil gave a very powerful speech on the ability to transform the economy if we get the bank right. He also spoke about the benefits of bringing more companies to Scotland—their headquarters, domestic bases, skills and talent. There have already been some such success stories and announcements made through our economic strategy.

Jackie Baillie raised legitimate questions on the repayment profile of financial transactions: I will be happy to get back to her with further detail on that. Reviewing the tools that we have is an on-going process in order that we can respond to what business and industry need, as we lead up to operational delivery of the bank. I would not describe the operating costs of the organisation as money lost. If the bank gets it right, it will have a transformational impact on the economy, and that operational cost will be money well spent.

Jackie Baillie

Will the cabinet secretary take an intervention?

Derek Mackay

I have only one minute left, so I have to decline Jackie Baillie’s request, on this occasion.

John Mason spoke about not being overprescriptive in matters such as the committee structure of the bank. I will look for reassurance in relation to matters that members are interested in. To reinforce the point that I made to Jamie Greene, if there are companies that want financial support right now, there are many products that can currently be deployed to support our business community to thrive and succeed.

Pauline McNeill covered housing, which will be absolutely critical. I hope that she welcomes the fact that the precursor funds have been used to support housing. I hope that that will continue.

Joan McAlpine spoke about the widespread support for the bill and the bank, which is appreciated. That support is why we want to take it further.

Many members also spoke about the opportunity that we have to invest resources to achieve our climate change ambitions, which have been discussed recently in Parliament.

We have an ambitious programme: the enabling legislation will allow us to build the bank in the ways that members have described. It is a major intervention, so I look forward to support from across the chamber as we continue to progress it in this cross-party and collaborative fashion, in order to make a success of the Scottish national investment bank.

Vote at Stage 1

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Vote at Stage 1 transcript

The Presiding Officer (Ken Macintosh)

There are two questions to be put as a result of today’s business. The first question is, that motion S5M-19061, in the name of Derek Mackay, on the Scottish National Investment Bank Bill, be agreed to.

Motion agreed to,

That the Parliament agrees to the general principles of the Scottish National Investment Bank Bill.

The Presiding Officer

The final question is, that motion S5M-18780, in the name of Derek Mackay, on a financial resolution for the Scottish National Investment Bank Bill, be agreed to.

Motion agreed to,

That the Parliament, for the purposes of any Act of the Scottish Parliament resulting from the Scottish National Investment Bank Bill, agrees to any expenditure of a kind referred to in Rule 9.12.3(b) of the Parliament’s Standing Orders arising in consequence of the Act.

Meeting closed at 17:00.  



MSPs agreed that this Bill could continue

Stage 2 - Changes to detail 

MSPs can propose changes to the Bill. The changes are considered and then voted on by the committee.

Changes to the Bill

MSPs can propose changes to a Bill  these are called 'amendments'. The changes are considered then voted on by the lead committee.

The lists of proposed changes are known as a 'marshalled list'. There's a separate list for each week that the committee is looking at proposed changes.

The 'groupings' document groups amendments together based on their subject matter. It shows the order in which the amendments will be debated by the committee and in the Chamber. This is to avoid repetition in the debates.

How is it decided whether the changes go into the Bill?

When MSPs want to make a change to a Bill, they propose an 'amendment'. This sets out the changes they want to make to a specific part of the Bill.

The group of MSPs that is examining the Bill (lead committee) votes on whether it thinks each amendment should be accepted or not.

Depending on the number of amendments, this can be done during one or more meetings.

First meeting on changes

Documents with the changes considered at this meeting:

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First meeting on changes transcript

Scottish National Investment Bank Bill with Stage 2 changes