Bill Jamieson: Where’s focus of bank in ministers’ pockets?

On Tuesday of this week, the Scottish Parliament’s Economy, Energy and Fair Work Committee starts Stage 1 scrutiny of the Bill to establish a Scottish National Investment Bank.

Funds are vital for company growth  but will a new investment bank really be the answer?

“What – another one?” may be the response of many. Such a bank has long been the ambition of successive SNP leaders, Alex Salmond in particular. But one such bank already exists, in the form of the Scottish Investment Bank (SIB) established in 2010 as an expansion of Scottish Enterprise’s investment function. Its remit is to grow Scotland’s risk capital market and support early stage and expanding SMEs with growth and export potential to raise finance.

What possible need could there be for another one? After all, SIB has been far from idle. In 2017-2018 it invested £43.5 million in 147 Scottish companies, leveraged over £206m of investment, supported over 500 companies through SIB’s Financial Readiness Service and generated £17.6m of income from SIB investments. Why re-invent the wheel when one’s already rolling?

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But the envisaged rationale for the new bank is far from mere duplication. It is set out in an exhaustive paper by the Scottish Parliament’s Information Centre (Spice). It runs to 55 pages with much additional research material recommended.

The proposed activities of the new bank, “go beyond a classic market failure correcting role to include a mission-orientated role to make strategic investments, which focus on solving Scottish societal challenges”.

It is not long before the head spins with all the purposes, goals, priorities and “missions”. These cover macro-economic aims, guiding principles on climate change, productivity, sustainability, socio-economic cohesion, diversity, ethics, and enough “missions” to fuel an evangelical church. It details its role as funding catalyst, priorities in stimulating economic growth, relationships with other institutions such as the enterprise agencies and Scottish Futures Trust, governance and accountability.

According to the Financial Memorandum, the total costs of the new bank will be £2.05 billion and the running costs between £20m and £30m a year. This allows for a staff of 100 to 150. The bank’s board will comprise a chair and between nine and 13 directors, with the chair and non-executive directors appointed by Scottish ministers.

And that, sceptics may surmise, is really why a spanking new separate bank is being set up. Unlike the existing bank, this one will be under the direct control of ministers and subject to the broader agenda of government policy and changes in political priorities. These will be set by Scottish ministers sending a document to the bank “setting out the socio-economic challenges it wants the bank to address. Scottish ministers may set, modify and bring missions to an end by the sending of such a document”.

And amid all the requirements for ethical and social investing, together with meeting established rates of return, arguably the biggest mission of all is to finance projects that will transform the economy. To achieve this, “there will be a need for investment in projects that will help Scotland exploit and accelerate new innovation – such as the transition to a low carbon economy. Such projects may require the bank to play a catalytic role in infrastructure investment (across transport, low carbon, housing, real estate, etc) providing finance that addresses the reasons why the private sector is not investing.”

Thus, despite the fact that R&D spending is still buoyant and private investment has brought ever more energy efficient homes and dramatic innovations such as the electric car, the problem here is not that the bank will be starved of functions but rather that it will overlap existing ones. Where, one wonders, is the focus of the bank’s unique and complementary remit, the set of outcomes that can be empirically measured so that we can determine whether it is a success or failure?

The philosophical rationale for all this draws on work by the New Economics Foundation, together with input from Professor Mariana Mazzucato, a member of the First Minister’s Council of Economic Advisers and the Bank Advisory Group. The broad purpose is to help the economy achieve its full potential through greater long-term investment in small to medium-size enterprises (SMEs) and to improve Scotland’s innovation performance which lags comparator countries.

The bank is also charged with addressing the fall in business investment in recent years, this following a significant decline in the late 1990s/early 2000s. Barriers to investment are said to include the concentration in London of financing, making it difficult for businesses outside the capital to access funds. In addition, the change in UK bank business models in the wake of the lending excesses that led to the financial crisis has seen the share of bank lending going to business falling below 10 per cent of the total.

There is also a later stage venture capital funding gap in the UK, holding back growth companies. Data from the Enterprise and Skills Review highlighted weaknesses including enterprise, business investment and business R&D.

But to what extent is this weakness in business investment due to lack of available finance, or lack of lending institutions? Such investment can be weak for all manner of reasons including lack of confidence in the economic outlook or uncertainty over government policy – as dramatically shown to result from the political debacle over Brexit. High business rates may also be a factor, while conventional GDP measures may be failing to capture the investment and productivity gains of an increasingly digital economy.

And at the time of writing, the Spice briefing notes, “it is not clear what range of output and outcome indicators will be monitored in relation to the impact of the bank’s performance”.

Meanwhile the Bank’s proposed activities go beyond a classic market failure correcting role to include a “mission-orientated role to make strategic investments, which focus on solving Scottish societal challenges”. Wow! But here, too, the Spice paper comments that “it is valid to question from the outset how the Scottish Government will be adapting appraisal, evaluation, and monitoring tools in relation to the bank.”

The Economy Committee would do well to bring out the red pencil and provide a far shorter report with a far clearer focus on uncluttered activities that can be more widely understood and objectively measured.