The Scottish Investment Bank's aim was to help firms survive the recession – so where is it?

WHILE the rest of Glasgow was in party mood in the run-up to Christmas, deep within the corridors of Scottish Enterprise's headquarters in Waterloo Street, an event that had kept Scotland's cash-strapped businesses waiting for 20 months was finally taking place.

Even so, there was little by way of celebration to mark the arrival of a key plank in the Scottish Government's plans for economic recovery: the Scottish Investment Bank.

Given the fanfare that accompanied Alex Salmond's announcement at the STUC's April 2009 conference in Perth, business leaders would have been forgiven for expecting a grand launch event for the SIB - and perhaps even a visit from the First Minister himself. But there were no speeches, no buffet lunch and not even a business owner in attendance.

"I've got to tell you, the fact that it has launched is news to me," said David Watt, head of the Institute of Directors in Scotland.Watt is not the only one in the dark. Last Wednesday, the Scottish Parliament's economy, energy and tourism committee probed Scottish Enterprise's chairman and chief executive, Crawford Gillies and Lena Wilson, on whether, as promised, the SIB would be open for business by the end of this month.

When asked by Conservative MSP Gavin Brown as to whether Scots firms would be able to make an application to the bank before the end of January, the answer was an emphatic "no", creating uproar among those companies and opposition MSPs who have been keeping an eye on its progress.

However, Scottish Enterprise has since insisted to Scotland on Sunday that SIB is in existence. "It is up and running," a spokeswoman said. "The SIB, as a division of Scottish Enterprise, is operating."

Just a few weeks before Christmas, the 27-strong SE investment team headed by Gerard Kelly, which manages the enterprise agency's Scottish Seed, Co-investment and Venture Funds, was transferred, along with its resources, to the SIB - in line with the Scottish Government's original deadline of December 2010.

But SE admits that at present, the SIB only exists in virtual form. No desks have been changed, no physical move has been made and what business groups have described as the "new" part of the bank, a 50 million "Scottish Loan Fund" (SLF), has yet to be set up.

"It's a very subtle change," the SE spokeswoman admitted before adding that the appointment of a fund manager to oversee the SLF was "imminent".

According to Jeremy Purvis, finance spokesman for the Scottish Liberal Democrats, the confusion surrounding the SIB's launch is just the latest in a long line of mysteries surrounding the organisation, which had originally been intended to help Scots firms survive the recession - which began officially in April last year.

Purvis, whose party wants to axe SE altogether in favour of a series of small regional banks, said: "There is a clear need for businesses in the long-term to access debt funding but there are concerns that there has been rather too much spin about the SIB and very little action."

Purvis argues that from the outset, there has been too much confusion surrounding what the SIB would do, what products it would offer, and how much funding its bankers would have at their disposal to help Scottish firms that still struggle to secure finance from high street institutions.

Hopes that it would operate in the same way as a traditional, independent investment bank were soon dashed when it emerged that most of its activities would merely involve the continuation of existing SE funds, and the SIB would operate beneath the SE umbrella. Half of the bank's target 300m funds would also come from SE's existing equity investment resources.

The Scottish Government had hoped to borrow around 70m from the European Investment Bank to bolster the SIB's investment powers, but ministers had to go back to the drawing board at the beginning of last year amid accusations that it had not set up an adequate framework to access European money known as "Jeremie".

At the beginning of last year, Salmond appeared to win critics over when he told the STUC's 2010 conference, held this time in Dundee, that the bank would manage a new 50m loan fund for export-focused companies with high growth potential. All of the 50m pot announced was new money - to come from the Scottish Government's coffers and from the European Regional Development Fund. SE was subsequently charged with trying to make up the rest of the SIB's 300m budget with funds from the private sector - principally the banks and pension funds.

SE insists that the day when the SLF will be open to applications is within sight. But both business leaders and opposition MSPs are growing impatient.

With figures last week showing that 2010 was a record year for business failures in Scotland, and 2011 unlikely to offer any respite, several lobby groups are warning that even when it is fully operational, the SIB will not alone be able to plug the vast funding gap that is hampering Scotland's private sector.

Colin Borland, head of the Federation of Small Businesses in Scotland, is urging the Parliament's economy committee and the financial services sector to examine other ways to solve Scotland's funding crisis - including the setting up of a regional stock exchange.

"The SIB is going to be very specialist: it's a particular type of funding for a particular type of company focused on a particular sector (exports]," Borland says. "It's a very specialist tool which will be very good for the companies that qualify for it but it's not going to be a solution for day-to-day finance problems."

The FSB warns that many small firms in Scotland are financing themselves through "unsustainable" means - such as credit cards and personal savings - as bank lending remains expensive and bureaucratic to obtain.

Watt of the IoD agrees that the SIB will not be the answer to all of corporate Scotland's funding issues. "Business is desperate for money right now, for mergers and acquisitions and for growth. We still get feedback that there's not enough (affordable] bank funding.

"From what I understand, it (the SLF] is not going to be cheap money and yes, it's fairly restricted. I'd like to see it launched as soon as possible and properly - so businesses know that it's there."

The SLF is expected to offer loans of between 250,000 and 2m to "viable firms already demonstrating significant growth" and/or those focused on selling most of their goods and services abroad.

The funding will be made available through so-called "mezzanine" products - a form of financing that sits between bank funding and equity investment. SE admits that mezzanine finance generally involves a "higher cost of borrowing". In addition to regular interest payments, borrowers also have to pay a lump sum in equity or cash at the end of the loan term.

SE says setting up the fund has been a "complex task". "It was always our aim to have the SLF open for business as soon as possible. Establishing the new loan fund has been a very complex task and as well as completing an extensive demand analysis there were a number of significant financial, legal and procurement issues to consider," the SE spokeswoman said.

The agency has refused to reveal details of how much private funding has been pledged to the SIB, but the spokeswoman added: "We are in detailed discussions with a number of private sector investors and hope to be in a position to confirm additional funds in the near future."

While Purvis has slammed the delay as "absolutely unacceptable", the SIB does have some supporters on its side.

Donald MacRae, a former SE board member and chief economist for Scotland at Lloyds Banking Group, recently told parliament that the risk funding that will eventually be available through the SIB is in desperate need given the relative lack of venture capital and private equity finance in Scotland. "I wish the figures would be larger," he said.

David Lonsdale, assistant director at CBI Scotland, said SE needs time to get the SLF right. He added: "CBI Scotland believes that the SIB, building on the existing funding streams and with the new loan fund, could play a useful role in filling a gap in the supply of finance that has been holding back growth-oriented businesses. "In particular, we support the proposed focus on exporters with real growth potential, as it is these companies who will offer our economy the best chance of a return to sustainable growth. We want the SIB to be a success so it is more important to get it right than to rush it."