Scottish National Investment Bank: implementation plan

Focus for investment activities

The scope of the Bank

The Bank should be set-up to be an enduring institution that provides a step change in Scotland’s economic architecture. It should unlock the potential for improved performance by providing the finance to help Scotland’s businesses to realise new economic opportunities at home and abroad. It should do this by developing financial products to help realise growth opportunities across the economy, with a particular focus on areas that have a strong degree of innovation. Critically, it should focus activities on areas which can contribute most to the policy-driven missions identified by SG.

Financing this transformative change in an economy will require an institution that can both take a long-term approach which extends beyond the typical terms for private sector investment, and is prepared to act to make and shape markets in support of missions that define how the economy will develop.

Because innovation is highly uncertain and has long lead times, achieving smart, innovation-led growth requires not just any type of finance, but patient strategic finance. The Bank should, therefore, provide access to long-term patient finance, with a return in the 10-15 year horizon.

The Bank should have the capability to operate across all stages of the capital lifecycle requirement for companies (see Figure 4 in respect of equity investment stages) and by financing products such as senior debt, equity and mezzanine finance. In doing so, it should ensure that a range of financial products – where there are gaps or market-making opportunities – are available to Scottish businesses to support growth and bring clarity and simplicity to the end-user and consequently helping to reinforce demand for finance.

Figure 4: Equity capital lifecycle visual

Source: Scottish Government

The Bank should provide greater depth of access through provision of sufficient scale to enable transformative investments. This greater scale should also increase the demand for finance by acting as clear signal of ambition.

Gaps in the financing markets and mission-based finance

Market gaps

There is longstanding evidence of market gaps in access to finance and particularly in capital that enables firms to grow. Growth is uncertain, so returns dependent on achieving growth can be seen as more uncertain and higher risk. This is especially true where firms are small to begin with as it can be difficult to ascertain which growth plans have the potential to succeed. Not only this, but developing the expertise, analytics and relationships to enable good judgements to be made is expensive, meaning that finance providers such as banks and private equity firms often prefer larger transactions (and in the equity space, leveraged transactions).

These challenges mean that in a number of areas, viable firms with good growth plans can fail to find the finance they need. This has been attested in a number of studies, from the Macmillan study of 1931 onwards – including the Rowlands Review of Growth Capital ^[13] . More detail and analysis on market gaps is contained within the Supporting Analysis report that accompanies this Implementation Plan.

A further issue for growth capital is the time taken for returns to come where markets need to be developed. Time has the effect of lowering the annual rate of return if returns are not made quickly enough, and of increasing the risk of issues arising that reduce returns. This means that ‘patient capital’ can be scarce and this can affect the availability of capital for growth.

The Patient Capital Review ^[14] , commissioned by the UK Government, illustrates there are clear barriers in accessing long-term, patient capital in the UK’s under-developed and fragmented ecosystem. The review identifies several specific barriers to investment in patient capital including that the majority of financing is concentrated in London and, therefore, it is particularly difficult for businesses outside the capital to access the funding they require.

For gaps in the provision of lending to SMEs, it is important to look at specific circumstances and also how finance markets change over time. SG has developed analysis that suggests there are issues that affect the Scottish economy in the following areas:

• Debt gap – Estimated to range between £330m and £750m per year in Scotland ^[15] . Gaps exist from the very smallest levels of finance (microfinance from £500 to £25,000) and from £25,000 to £100,000 and extend up to £1m-£2m.
• Equity finance gap – The British Business Bank (" BBB") highlighted the structural market failures in its 2015 investigation into the provision of equity ^[16] and pointed to the information asymmetry between business and investor which necessitates costly due diligence in advance of any deal which is relatively fixed, meaning it accounts for a greater share of smaller deals, which drives investors towards larger deals and larger, less risk orientated firms. This gives rise to the classic "equity gap" first identified in the Macmillan study as long ago as 1931. As the market is becoming ever more complex and dynamic there are no longer fixed and easily identified gaps to address. Nevertheless, there is agreement ^[17] that there is also now a growing acute gap at the later stages, especially for innovative, growth companies seeking to scale up, at the £2m to £10m level. Within that grouping of companies, the gap particularly applies to pre-revenue and pre-profit companies and for those with delayed cash flows or in need of significant product development time, whereas capital is more likely to be available for those with a proven business model.

Developing a mission-based financing approach

A key benefit of mission oriented banks is that they are able to shape the direction of growth by making strategic investments across many different sectors and nurturing new industrial landscapes ^[18] .

The Bank should, therefore, adopt a wide cross-sectoral perspective on growth opportunities. The missions set for the Bank would provide a focus for its investment strategy, but not constrain the Bank’s activity. The Bank should support innovative, high growth Scottish firms in whatever sector they appear other than those activities that may cause reputational issues or go against the principles of the Bank’s ethical investment code.

SG should be responsible for setting the missions for the Bank on a pre-determined timeframe and aligned to policy priorities. It is beyond the remit of this report to propose such missions, but examples based on existing Scottish economic policy might include:

• Transitioning to a low carbon economy, including decarbonisation of the transport network
• Responding to emerging demographic pressures, including the twin challenges of an ageing population and wider population health
• Promoting inclusive growth through place-making and local regeneration, including site preparation, infrastructure (transport and communication links) housing and related commercial, education and health investment.

Complementary SG policies, regulation and alignment with the enterprise agencies will be necessary to achieve these missions and ensure there are viable firms and projects that can be brought forward for financing by the Bank. Further benefit can be realised where there are supply chain interdependencies and connections between and across relevant missions/sectors which have the potential to be mutually reinforcing. An example of what a mission-based finance approach could look like for the Bank is set out in Figure 5.

Figure 5: Case study – Transition to a low carbon economy: decarbonisation of the transport network

To illustrate the potentially transformative impact that mission-oriented finance could have on the Scottish economy, it is helpful to use an example. Consider the SG’s mission to transition to a low carbon economy. To achieve this, a key priority will be decarbonising the transport network, including a move to electric vehicles, where the SG has set an aim to phase out the sale of new petrol and diesel vehicles by 2032.
To achieve this, significant investment is required to finance the rollout of nationwide infrastructure and to support technology advances to enable such change. There are currently significant challenges in the limited supply of vehicle charging points, underinvestment to date in the technology development required to ensure batteries are able to store energy for longer, as well as capacity issues with the current grid. Therefore, the investment required to support the economy transition would be in the form of nationwide vehicle charging infrastructure, technology development in enhanced battery storage, and increasing the capacity of the current grid system to enable longer energy storage and increased energy mobility. There is therefore an opportunity for Scotland to be an innovation leader in low carbon technologies, including in technology development, manufacturing and supply chain capabilities, which will use these technologies and can in turn be exported.
There are opportunities for the Bank to provide mission-oriented finance in the form of debt and/or equity in this context – from early, market shaping, cornerstone equity financing in infrastructure as part of an SG coordinated infrastructure rollout programme (crowding-in private investors), to providing patient growth and scale up capital to Scottish based companies developing technology solutions and building capabilities to realise the large scale manufacturing and supply chain opportunities presented by the mission. SG will also need to help create the right conditions for investment to get the best from this market in terms of policy and regulation. There is an evident opportunity for the Bank to play a pivotal role in achieving results in this rapidly developing market.

Initial activities of the Bank

The broad role of the Bank should encompass growth capital and mission-based finance.

Growth capital

The evidence of market failure and gaps outlined earlier in this section, and in the supporting evidence base, means the Bank will be directed to supporting companies’ growth ambitions, technology advancement, innovation and commercialisation, including those businesses which are driven by knowledge and ideas rather than operating with a strong base of fixed and tangible assets. The Bank should do this by providing access to long-term patient finance necessary for ambitious firms to invest in order to grow and turn their ideas into revenues, and also seek to address recognised gaps in the current market for lending to SMEs whose need for finance may be over a short to medium-term horizon.

There is evidently an opportunity for the Bank to take an innovative approach when developing its financial products for the Scottish economy, for example, in trying to leverage additional finance from the value of intangible assets. The Bank should also have the resource and capabilities to be able to advise companies to help structure complex deals to increase the volume of successful finance raising activity in Scotland, recognising that there is a need to stimulate greater demand for patient growth capital.

Two case studies are provided in Figure 6 and Figure 7 to illustrate the types of growth capital products the Bank could make available to companies.

Figure 6: Case study – Renewable energy supply chain

A company developing new technology to improve the efficiency and lifespan of mechanical components in wind turbines has been funded to date by a combination of large R&D grants and early stage equity, including co-investment through the Scottish Investment Bank. The company has significant domestic sales opportunities, as well as potential for export activity. To move the business to the next stage of development (including developing a manufacturing base and funding a sales pipeline) a financing package of £10m is required.
The amount of support needed is beyond the scope of SIB’s core funds and a lack of asset backing means securing meaningful traditional debt would be challenging. A package of equity and potentially mezzanine debt could be considered as a solution, involving suitable private sector investment partners as appropriate. The clear links to the low carbon agenda as well as innovation and scale up activity, this type of business, allied to the financing requirement and the contribution to likely missions, make this scenario a potential customer for the Bank, provided that the proposal adhered to prevailing risk parameters.

Figure 7: Case study – SME food and drink business

A family owned SME business with turnover of c£10m is looking to improve its manufacturing facilities to take on new contracts with large retailers and thereafter expansion into new overseas markets. Currently employing 35 people in a semi-rural location, with the expectation of adding a further 10 permanent jobs if the works on the manufacturing improvements go ahead. The planned improvements would involve the purchase of bespoke machinery and improvement to the fabric of the existing factory and would involve total expenditure of around £1.75m. The company can contribute £500k from cash reserves and its existing bank is prepared to provide a loan of £750k in addition to existing working capital facilities. However, due to the bank’s view on asset cover there remains a gap of £500k in the financing package.
As one of the potential areas of activity for the Bank is the provision of debt finance for SMEs to address identified market gaps this financing requirement, this scenario is a potential customer for the Bank, provided that the proposal adhered to prevailing risk parameters. Any agreed financing would probably be provided by way of subordinated/mezzanine debt sitting alongside existing banking facilities.

Mission-based finance

This would encompass the financing of infrastructure, projects and initiatives that will help transform the economy. In doing so the Bank should support the government’s broader policy objectives which, when combined with the appropriate regulatory and other levers, will create new markets for the Bank to finance. To achieve this transformative, mission-based remit of the Bank, there will be a need for investment in projects that will help Scotland exploit and accelerate innovations to meet new economic opportunities and societal challenges.

Clear activities for the Bank are to firstly provide viable companies with finance, where other investors will not invest, to commercialise the innovation and technologies, and secondly to provide finance for investment in new technologies and innovation that can contribute to the market making and acceleration of an economic opportunity. This is with a view to providing market confidence to accelerate the crowding in of private capital. This should create the environment to allow the Bank to consider full or partial exits from transactions once the market is fully established, other investors’ confidence has grown or a new technological innovation has been proven.

Financial products

The initial product range that the Bank should focus on is:

Growth capital

• Provide SMEs with access to micro loan finance of up to £100K by the continuation of the existing activities enabled by SG’s SME Holding Fund
• Expand the offerings of loan finance to SMEs by providing short to medium-term loan finance (senior and mezzanine debt) in the range between £100K and up to £1m-£2m for which there is current unsatisfied demand
• Consider the potential to deliver targeted debt support through the creation of specific loan funds. An example of this being the recently launched Brexit Loan Fund to be established by the Strategic Banking Corporation of Ireland. This fund has an initial value of €300m and will be available to both SMEs and small Midcap companies who are already being or are expected to be impacted by Brexit, particularly in relation to export activity
• Provide early stage risk capital equity up to £2m currently provided by the Scottish Investment Bank via its co-investment funds
• Provide other targeted equity and mezzanine investment models for amounts up to £2m, whilst also providing scale-up investment finance by way of equity and loans up to £10m, and above, where opportunities are identified.

Mission-based finance

• Finance could be both debt and equity depending on the analysis of the gap or market opportunity, but focused on the transformative change agenda set by the Programme for Government
• The initial area of focus recommended for the Bank is to develop products to support the transition to a low carbon economy, including infrastructure where financing can be scarce
• The Bank should also offer investment products that support mission-based investment (equity and debt) that enable and accelerate, at scale, place-making development activities, including housing development, regeneration and new business infrastructure and premises.

Appendix B sets out in broad terms the types of financial products the Bank could offer.

In bringing clarity to the scope of the Bank, it is also helpful to outline those activities that it should not engage in. These include the following, which are excluded due to an inappropriate fit with the Bank’s remit and/or for operation reasons:

• The Bank will not take deposits, offer mortgages or other traditional banking products and services. As such the Bank does not need a network of branches

• The Bank should not undertake funding activities, such as the awarding of capital and revenue grants which are the remit of SG and its enterprise agencies. Instead, its focus should remain on financing activity, with any monies advanced must be repaid and be on commercial terms.

The existing public sector investment landscape

Scotland has well-established public sector support providing funding and financing advice and the provision of funding and financing directly or indirectly to companies seeking to grow, including Scottish Enterprise’s Scottish Investment Bank, the Scottish Government’s SME Holding Fund, the Scottish Growth Scheme and Scottish Futures Trust (" SFT"). SG has also developed several financing vehicles in response to market conditions and need particularly in respect of housing and regeneration activity such as the SPRUCE Fund and the Infrastructure Investment Fund. Appendix C sets out further details of the current public sector financing landscape considered as part of the development of the Implementation Plan.

The report recommends that the new Bank should integrate existing financing activities provided by SG and its agencies into its remit and operating model to build on the success of operations and initiatives underway, offering an opportunity to develop strengths and build on existing skills and align complimentary activity.

This integration should help achieve clarity of purpose and cohesion across the public sector financing landscape, simplifying the interaction with customers.

Scottish Futures Trust

SFT is an organisation owned by, but operating at arms’ length from SG, with responsibility for structuring and delivering important infrastructure programmes and innovating to secure new ways of funding essential infrastructure. SFT works collaboratively with public and private sector bodies to achieve more operationally and financially effective public infrastructure, working on the investment planning, design, financing, delivery, efficient use and disposal of assets across Scotland.

The infrastructure delivery programmes led by SFT support the delivery of publicly funded infrastructure assets (including schools, hospitals and roads) paid for out of general taxation. SFT does not act as a source of finance or investment in the delivery of infrastructure, except via its wholly owned subsidiary Scottish Futures Trust Investments Limited (" SFTi"). This subsidiary invests relatively small sums ^[19] on behalf of SG in specific infrastructure companies, assets and projects across Scotland to support the particular commercial structures where infrastructure is being delivered by programmes that SFT is responsible for, such as, subordinated debt into Design, Build, Finance and Maintain (" DBFM") projects in the hub programme.

The Bank will be a key stakeholder for SFT to work collaboratively alongside, to ensure that the objectives of SG in delivering value for money infrastructure investment are achieved in a joined-up manner by both organisations, albeit operating with separate and distinct remits. Where SFT currently provides advisory support to the public sector in respect of the financing of specific government initiatives, such as low carbon infrastructure (e.g., via the Scottish Energy Efficiency Programme), it is anticipated that SFT would also work with and alongside the Bank to assess the financing need/opportunity for the Bank in supporting such programmes.

British Business Bank

The BBB is a UK Government owned business development bank dedicated to making finance markets work better for small and medium businesses. It has a UK wide mandate. The BBB offers support to delivery partners at a range of levels, by providing the capital required to start a business, grow it to the next level or stay ahead of the competition by providing a greater volume and choice of finance.

The Bank should seek to encourage and facilitate BBB investment in support of SG aims, and its own activities should complement and be aligned with the activities of the BBB to ensure Scottish businesses benefit from the most effective mix of support mechanisms possible. Where there is the potential for overlap the Bank should take the lead in establishing the strategy for alignment.

UK Export Finance

Export finance is a crucial component of the financing landscape, particularly for innovative companies who need to get their products to as wide a market as possible in a short period of time to profit from their innovation and market leadership. Growing firms and firms that are rich in intellectual property, but poor in traditional, physical assets, can find it difficult to support the bond requirements that often come with exporting, and can also find working capital requirements stretched as their balance sheets are used for necessary bond and insurance products.

UK Export Finance (" UKEF") has over the past few years greatly expanded its support for smaller firms in the UK, including in Scotland, and has launched a number of new products aimed at supporting exports. However, it is vital that Scottish exporters have at least as strong support as firms in the rest of the UK, and while export finance will not form part of its initial set of products, the Bank should maintain a watching brief on the export finance market in Scotland and develop interventions if they prove to be necessary.

Investment strategy

The investment and financing market in Scotland currently provides financing across a range of investment products, from early stage and venture capital, to scale-up growth capital and senior, mezzanine and subordinated debt. The Bank should provide economic benefit by augmenting this existing market and where appropriate taking a lead on new financing requirements to catalyse activity from existing market players.

In order to do this, the Bank should focus on financing firms whose needs for capital are inadequately serviced by the market, either because the market feels it is unable to manage the level of risk as part of investors’ remit in more conventional portfolios or because the timescales required for the return to be realised are longer than conventional investors can accept. For example, banks which are constrained by regulatory capital rules and funds with requirements to pay investors in a certain timescale can be averse to illiquid assets that require an unknown exit event for the return to be realised.

By investing or lending differently, and by adopting a potentially alternative appetite for risk and the liquidity of investments, a new and valuable approach to financing can be introduced to the Scottish financing market although in doing so the Bank will adopt a commercial basis for its investments.

The Bank should become an enduring institution whose impact continues to grow over time. In order to achieve this, the key principles that should guide the Bank’s Investment Strategy should cover:

Key principles

• The Bank should seek to ultimately develop into a self-sustaining institution. It is estimated that this could take 10 to 15 years from inception.
• The Bank should increase the impact of its interventions by crowding-in private finance, developing new markets and growing the economy. Leveraging in private capital alongside its own investments can happen through co-investment or through an asset management structure where the Bank and the private sector agree on a specific investment mandate.
• The Bank should act wholly commercially in taking decisions based on the viability of the firms or projects in which it invests (either by itself or with others) and the expectation that it will generate positive returns from all of its investments. In some cases it will invest on full commercial terms and taking the same returns as the private sector. In other areas (e.g., where State Aid rules allow, in response to specific market failures) it may be appropriate to take different risks or different returns to the private sector, but always in expectation of a commercial return.
• The Bank should also take into account economic, social and environmental returns when making its investment decisions. A balanced scorecard will be developed between the Bank and SG to establish the requirement and measurement of non-financial returns.
• The Bank should look to maximise impact by catalysing activity that otherwise would not happen. This would most effectively be achieved by placing the Bank at the centre of the investment process, nurturing knowledge and expertise, coordinating other stakeholders in the investment ecosystem and acting as investor of first resort – not just investor of last resort.
• The Bank should invest at different levels of risk in different areas, and potentially take risks the private sector does not currently have the appetite for without public intervention, or does not have the appetite for in sufficient scale to meet the need. As time progresses, private capital should enter markets once evidence around risks of particular investments is better known and evidenced, such as commercialisation risk for a new technology.
• The Bank should spread its actions across different types of investment activity to achieve a balanced portfolio and generate sufficient returns to enable it to be self-sustaining. This means that the Bank’s activity will be in a range of areas at different levels of risk and over a different set of timeframes.
• The Bank should have a national mandate to realise benefits of investment at scale, while maintaining regional reach to help businesses to realise their full economic potential across Scotland. This will be particularly important since Scotland’s productivity challenges vary significantly across regions.
• The Bank should be open to investing differently to existing available private finance markets should be central to the remit of the Bank, with freedom from regulatory capital constraints being a key differentiator for the Bank in how it assesses opportunities.
• The Bank should invest ethically, developing and implementing its own ethical code for investment.

It is for the Bank’s Executive Management Team to develop a detailed investment strategy and the specific financial products required to deliver the Bank’s investment objectives. We anticipate that those objectives will change over time to meet evolving market circumstances, and the Bank should have capacity to follow gaps in the market as they emerge/dissipate.

Crowding in private capital

The Executive Management Team should ensure private capital is crowded-in wherever possible. Public sector ‘first loss’ positions are not attractive as not only can they result in poor investment returns, but also misalign incentives that can result in a lower quality investment strategy overall.

There are examples of successful interventions which have brought in private funding, including the co-investment activity taking place through the SIB which has leveraged significant private capital and the UK Government’s Enterprise Capital Funds. The success in early stage equity markets provides confidence that Scotland can repeat this in other areas led by the Bank.

The work that the Bank can do in helping to innovate and structure deals, especially where the Bank acts as a cornerstone investor in transformative projects, will be instrumental in enabling a wider range of private capital to invest in projects and programmes they would not normally be able to access. It can be that institutional investors such as pension funds who may wish to invest in an asset class (such as infrastructure) can lack the capability to access those opportunities. The Bank should seek to catalyse this investment and help to bring in those potential providers of finance.

Intangible assets

To reflect the trends within a modern, dynamic and knowledge-driven economy, the Bank should also look at ways to improve the market for finance through leveraging Intellectual Property and intangible asset valuations. By intangible assets, we refer to intellectual property, patents and skills which cannot be easily valued, and are often illiquid.

Many innovative companies are intangible-rich, but tangible asset poor, meaning that traditional lending and investment methodologies fail to recognise the value of the company and finance is hard to access. In this context the Bank could investigate creating a system around valuation of intangibles to provide collateral to lend against. While many private institutions are interested in the valuation of intangibles, the ability of a NIB to co-ordinate and stimulate the use of a potential system or standard could be invaluable to companies seeking finance.

Consultation feedback

Respondents to the consultation process noted that in order to support economic growth, an addition to the financing landscape, which took a different approach, was necessary. Many finance providers were thought to be too short-term and unable to properly support growth. There was criticism of the current market situation and respondents felt 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 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. There was a strong response to indicate that there are market failures in the provision of finance, particularly in early and growth stages. Opinions varied as to the exact shape of the financing gap – some respondents focused on sub-£1m funding, others that larger sums up to £10m should be the focus.

In addition, many respondents also felt that simply providing finance was not enough. In order to secure the sort of transformational change that is aspired to, a large number of respondents wished to see further support, in order to help bring forward projects and businesses who might otherwise be locked out of further financing as a result of a lack of commercial awareness or business planning expertise.

Summary

The Bank should support the following areas of activity:

• Growth capital – providing strategic and patient capital at early and growth stages of firms’ development so that they are able to accelerate innovation and make a stronger contribution to the Scottish economy

• Financing infrastructure, projects and initiatives that will transform the economy, supporting the missions developed by SG.

These investments should come through a variety of instruments, including debt, equity and mezzanine finance, to suit the risk profile of the underlying investment. Over time, the Bank should be able to reinvest capital and the management team should be able to develop a portfolio that balances the risk of the various investments and the timeframes of expected returns.

The Bank should build on the success of existing public sector financing operations utilising the skills and knowledge available, given the clear alignment with the Bank’s agenda. The most significant is Scottish Enterprise’s SIB and SG’s SME Holding Fund and the Scottish Growth Scheme. This will also ensure that the new Bank will simplify, not complicate, the existing financing landscape creating a coherent setting for those firms looking for finance.

The Bank should operate under a clear set of commercial principles aiming to make a positive return on individual investments and over the long-term at a portfolio level and become a self-sustaining institution. It should also commit to maximise additionality to the current market and improve the financing landscape for Scottish firms.

Recommendations

Recommendation 3: This new, mission-led institution will actively create and shape markets. It will intervene in a variety of areas – to supporting early stage and smaller firms and larger scale innovative projects get access to investment, through to financing infrastructure where the private sector will not invest. The initial focus of the Bank should be:

• Providing growth capital to ambitious and innovative companies – with the capability to support across the lifecycle of a company’s need for capital
• Providing finance to support the projects and initiatives aimed at realising opportunities to transform the economy.

The Implementation Plan sets out a range of financial products that the Bank should seek to develop to support this initial focus.

Recommendation 4: In addition to the supply of capital, the Bank should coordinate with other entities seeking to stimulate demand for financing. In financing transformational projects, the Bank will need financial structuring and complex transactional skills and consequently an element of demand stimulation will be required in this area, working closely with the enterprise agencies who provide a range of support services to companies, and with the Scottish Futures Trust in relation to its activities on infrastructure.

Recommendation 5: The Bank should aim to focus on, and give priority to, areas of investment that are additional to the finance already provided by the market and by other providers in Scotland, complementing rather than crowding-out existing or potential investment.

Recommendation 6: The Bank should adopt a balanced portfolio approach across a range of potential products and asset types. Its target should be to achieve a positive financial return on its individual investments, and at a portfolio level which should be measured over at least a 10-15 year horizon, recognising the focus on investment in patient capital and transformative infrastructure.

Recommendation 7: Scottish Ministers should determine an appropriate basis for measuring the Bank’s performance, taking into account the long-term nature of the investments and mission-orientated approach that’s envisaged for the Bank. A balanced scorecard approach is required that reports on the financial performance as well as on economic impact over time, including social, environmental and ethical returns.

Recommendation 8: The Bank should seek to maximise leverage of private capital as appropriate, alongside its own investments. In doing so, it should adopt a flexible approach; it may be appropriate for the Bank to invest or lend directly alongside private sector investors through third party delivery agents or via external funds.

Recommendation 9: The Bank should build on current skills and experience successfully developed in Scotland, building on the track record of success, and creating a single point of delivery of financing support for business growth and innovation financing for transformational projects.

A detailed review will be required in response to this recommendation in order to achieve the optimal operating model and ensure essential close interaction between the Bank and the enterprise agencies, including how to ensure co-ordination of funding, company relationships and financial readiness activities that will be provided by the agencies.

Recommendation 10: The Bank’s activities should be aligned with the activities of the British Business Bank in Scotland, which may require establishing a strategy for alignment between both institutions.