Scottish National Investment Bank: consultation report

5. Financial instruments with greatest impact (Question 2)

This section provides an analysis of respondents' views on which financial instruments the Bank could offer that might have the greatest impact.

Respondents were asked to consider "Which of these financial instruments might have the greatest impact in addressing your chosen areas of intervention":

• Later stage (patient/long term) equity
• Early stage capital equity
• Seed/start up equity solutions
• Providing patient/long term finance
• Guarantee solutions
• Helping access to finance by SMEs
• Providing microfinance
• Other.

Respondents were asked to rate each possible intervention on a scale of No Impact, Low, Medium and High Impacts. In addition, respondents were also asked to share their thoughts on other possible financial instruments that the Bank could offer.

A total of 367 individuals, 92% of all respondents, answered this question, however a small number of respondents did indicate that they did not feel they properly understood the terms sufficiently to be able to provide a fully informed response. 98 respondents, 27% of those responding to the question, provided commentary against the "Other" category, with 80% of those responses considered valid.

Financial instruments with potential for greatest impact

"Providing long term/patient finance" and helping "access to finance by SMEs" were identified as the two most high impact interventions that the Bank could make, with respective scores of 970 and 933 out of a maximum of 1,468. However all of the available options were considered to have the potential to make an impact in the Scottish economy. It should be noted that the other responses submitted did not provide relevant alternative instruments worth consideration.

For the purposes of demonstrating the results of this question, the following methodology was adopted. For each rating a score between 1 and 4 was awarded, e.g. No Impact received a score of 1 while High Impact received a score of 4. The ratings for each individual intervention were then combined to give a total score. These were then compared, as detailed in Figure 2, to identify the interventions with the greatest impact.

The responses are illustrated below:

Figure 2: Question 2 Responses

Source: Consultation Hub

The rationale for SME finance and long term patient capital being identified as the two most high impact interventions is outlined below:

Long term patient capital

Some respondents provided further commentary on their views of the Bank's long term finance role. Where respondents agreed the Bank had a role to play in providing long term patient finance it was noted that local authorities and larger capital projects, including renewable energy projects, could be beneficiaries of such a facility.

SME finance and mid-market funding gap

Concerning SME finance, a small number of respondents identified a gap in the finance market for businesses, coined by one respondent as "the missing middle". While estimates of the funding requirement for this market ranged, it was generally agreed that it applied to growth businesses seeking funding in excess of £1m and under £10m, above which level, it was remarked, commercial lenders demonstrated more interest.

Other relevant issues raised by respondents

Respondents were also offered the space to suggest other instruments the Bank could use. 98 respondents used the "Other" commentary box to provide a broader opinion on the scope of the Bank and its investments, with 72 responses considered valid. Several key themes emerged from this discussion.

Flexibility

Some noted that the Bank should have the necessary flexibility in the financial instruments it offers, in order to intervene as appropriate in the economy. It was reported that the Bank should be able to invest in ways that allow it to advance its vision, and that this would require it to be able to flex its approach based on which sector it is engaging with, or what financial instrument it is implementing.

Scope of Investments

Where respondents were supportive of the proposed Bank, many, including the campaign response for Friends of the Earth Scotland, provided thoughts on what areas it should invest in, with a number supporting the idea that the Bank should focus on ethical investments. Environmental concerns were the most prominent, with a number of respondents urging the Bank not to invest in fossil fuel companies, and to ensure support is provided for Scotland's renewables sector. New technologies and housing were also areas that respondents wanted to see supported. Within the technology sector, one respondent recognised the financing of feasibility studies and financing the development of pilot projects as two gaps in funding that the Bank could support.

Advice and support

A small number of respondents expressed the view that the Bank had a role in providing advice and support to the businesses it was investing in, particularly the SME sector and communities which may not otherwise have such support. Specific support around financial readiness and supporting credit enhancement of businesses. This is a theme that will be considered further in section 9.

Co-investment

There was a range of views on the way in which the Bank should interface with the private sector and lenders. Many respondents, including Friends of the Earth Scotland, were clear that the Bank should not support any PPP/ PFI style financing models. Others were of the opinion that equity partnership models could be pursued with financial partners who have a track record of disrupting the status quo, or through co-investment with local joint venture partners in various regions.

Opposing Views

A small number of respondents were not supportive of the proposed bank. Some remarked that the government should not intervene in this way, and that it would destroy economic incentives to create wealth by stifling competition and innovation. Other respondents noted that a similar offering was already in place, through the Bank of England or the British Business Bank.

Summary

This section provides an analysis of respondents' views on specific financial instruments which might have the greatest impact. In general, there was broad support for all of the identified interventions but those most popular proved to be "providing patient/long term finance" and "helping access to finance by SMEs". In addition, from the narrative section of this question, it emerged that some respondents considered it important for the Bank to be flexible, have a broad investment scope with focus on ethical and environmental investments, provide an advice and support function and have the ability to co-invest with the private sector.