Scottish National Investment Bank: consultation report

Executive summary

The Scottish Government's 2017/18 Programme for Government contained a commitment to establish a Scottish National Investment Bank ("the Bank") to provide mission led, long-term patient capital, help companies grow and support Scotland's economic vision.

To support the work of Benny Higgins (appointed to develop an Implementation Plan for the Bank on behalf of Scottish Ministers), the Scottish Government launched a consultation on the Bank's remit and structure on 20 October 2017. The consultation received 1,108 responses – 44 responses from organisations, a campaign response from Friends of the Earth Scotland with 753 responses, and 311 responses from individuals – before it closed on 20 November 2017.

The Scottish Government engaged Ernst & Young LLP ( EY) to analyse the consultation responses and this document sets out the resulting analysis of the responses.

The consultation contained a mix of open and closed questions so this analysis reflects the mix of quantitative and qualitative responses. Submissions were received through the Scottish Government's Consultation Hub and additional responses, including the Friends of the Earth Scotland campaign response, were directed to the Bank's dedicated mailbox. Where Friends of the Earth is mentioned in this report, this refers to campaign responses.

A change to "business as usual"

The responses received as part of the process were overwhelmingly positive towards the proposition of a National Investment Bank. Several respondents were keen to engage with the development of the Bank's scope and investment strategy. The responses suggested that there was a broad appetite across Scotland for a change to what many termed "business as usual" ( i.e. continuing with the current status quo) in the Scottish investment landscape and a requirement for additional finance. Specifically, Friends of the Earth Scotland and a small number of other respondents, comprising both individuals and organisations, remarked that this was an opportunity for the Scottish Government to adopt a more ethical, socially-just and environmentally-aware investment strategy.

Scope of intervention

Many respondents to the Consultation noted that, in order to support economic growth, any addition to the funding landscape would need to take a different approach to current market incumbents, with scepticism about their motives and capacity to support economic growth in Scotland. Currently, available finance was thought to be too short-term and unable to properly support growth. The following key points emerged from the analysis:

• Many respondents remarked that the Bank should provide additional support for Scotland's small and medium sized enterprises and be able to be a source of 'patient capital' enabling firms to grow;
• Many respondents considered that the Bank should have some capacity to act as an investor in its own right, rather than relying on intermediaries to make investments. The Bank should maintain control of investment decisions that should be separate from Government;
• Some respondents maintained that the Bank should invest through a range of financial instruments and remain flexible and adaptive in terms of the finance that it offered; and
• The Bank should invest in a wide range of areas. Support was strongest for investment in infrastructure and to support social issues such as social housing, but other areas, such as investment in SMEs, were also supported. Friends of the Earth Scotland specifically argued for an increased focus on tackling climate change.

Relationship to the current market

As well as investing in its own right, the Bank should have the capacity to engage with the private sector and other intermediaries through co-investment models to leverage additional private capital. It was deemed important for the Bank to maintain flexibility in its approach to different sectors, industries and regions.

Many respondents wanted to ensure that the Bank's efforts were focused on providing services for which there was a gap in the market and where failures meant that finance was not available, rather than replicating currently available offerings. Several respondents indicated that there are market failures in the provision of finance, particularly in the early and growth stages. Opinions varied as to the exact position of the financing gap – a small number of respondents focused on sub-£1m funding, others noted that larger sums up to £10m should be the focus.

Investment readiness

Many respondents also reported that simply providing finance was not enough. In order to secure the sort of transformational change that is aspired to, many respondents wished to see the Bank take on advisory and supporting roles in addition to its financing role. This would help bring forward projects and businesses that might otherwise be locked out of further financing as a result of a lack of commercial awareness or business planning expertise. Additionally, Friends of the Earth Scotland argued that the Bank should be even more proactive and have the ability to create new markets and supply chain networks for industries, such as renewable heat and offshore floating wind, for which development has been very slow or non-existent to date.

A national Bank with a regional focus

Many respondents supported the Bank having a focus on Scotland's regions in order to address some of the economic imbalances between different parts of the country. Investment should not merely be focused on the 'central belt' and the characteristics of firms in different parts of the country should be taken into account. Many respondents urged the Bank to focus on the needs of the rural economy. Additionally, Friends of the Earth Scotland urged the bank to support the creation of renewable energy jobs in more rural and deprived areas as well as provide financing to schemes benefitting minority groups.

Engagement with existing public bodies, including Scottish Enterprise, Highlands and Islands Enterprise ( HIE) and the new South of Scotland Enterprise Agency, was seen as important in this regard.

A range of models for Scotland to follow

From the responses it was clear that there is no consensus over the agreed model for a development bank, and that Scotland should establish a Bank that is aligned with the long-term economic needs of Scotland. Recommendations for a number of models were provided, from across the UK and internationally. These included the German Investment Bank, the KfW; the Nordic Investment Bank; the Development Bank of Canada and the British Business Bank.

Some international banks offer export support, to encourage SMEs to increase export activity. A small number of respondents remarked that the support offered by UK Export Finance was inadequate, particularly for smaller firms, and the Bank could usefully fulfil a role in Scotland in this regard. Several respondents, including Friends of the Earth Scotland, supported following the example of international banks, specifically the KfW in Germany.

A modern governance structure

Many respondents were of the opinion that the Bank should be classified as a public sector organisation, at arms-length from Government to allow it the independence it needed to carry out its function. Friends of the Earth Scotland also suggested a joint ownership model with local authorities and Scottish Government, thus enabling the Bank to use local authority borrowing powers.

Several respondents noted that the Bank should adopt a governance structure that is distinct from existing financial institutions who are focused on representing the interests of shareholders. This would see a Board composed of representatives from across the public and private sectors, drawn from a range of industries and with a wide range of experiences. Further, respondents expressed the view that it should be gender balanced and have some representation from civic society.

Opposition to the Bank

While many respondents supported the proposal, a small number argued that the Scottish Government should not proceed with developing the Bank. They argued the that the Bank would be likely to simply duplicate services and offerings that were already available through existing public sector bodies or in the private market. Other respondents went further and expressed concern that such a Bank could distort the smooth running of the market, and 'crowd out' private finance to the long term detriment of the Scottish economy. Some respondents were also of the view that as a public sector body, the Bank would be open to political influence, leading it to make poor investment decisions and support unproductive firms.

Continuing engagement

A small number of respondents were interested in remaining involved in the development process and being kept aware of developments. Many respondents expressed positivity about the future of the Bank, and were keen to see it deliver a transformational change for Scotland through its investment strategy.