The 2017 Programme for Government included a commitment to establish a Scottish National Investment Bank (SNIB). Its mission was described as:
“…to provide and catalyse investment in order to create opportunities for Scotland, by powering innovation and accelerating the transformation to a low carbon, high-tech, connected, globally competitive and inclusive economy”
This has been an idea that has been under consideration for some while and has attracted wider support (see, for example ‘Blueprint for a Scottish National Investment Bank’ from the New Economics Foundation).
So, what does this mean and how will it differ from other investment initiatives already in place?
What will the SNIB do?
A national investment bank differs from a high street bank in that:
- it is state owned, rather than privately owned, with the capacity to raise its own finance
- it deals with businesses and larger organisations (both public and private), rather than individuals.
Following a public consultation exercise, Benny Higgins (CEO of Tesco Bank) was tasked with developing an Implementation Plan for the SNIB. He was asked to provide the Scottish Government with recommendations on the role, remit, governance and capitalisation of the Bank.
The Implementation Plan and related research was published in February 2018. The Plan recommended that the SNIB should:
- provide investment at the early and growth stages of firms’ development “so that they are able to accelerate innovation and make a stronger contribution to the Scottish economy”
- finance large scale infrastructure projects and initiatives aimed at transforming the economy and supporting Scottish Government priorities.
Where will it get its money from?
The intention is that the SNIB will generate funds through the investments it makes which, in turn, will enable it to make further investments and become self-sustaining. However, it will need some initial upfront capital in order to make the first round of investments and until it starts realising returns from these investments.
The Scottish Government’s 2018-19 Draft Budget outlined that the SNIB would be supported by an initial capitalisation of £340m over 2019-20 and 2020-21. This would provide upfront funding to enable the SNIB to undertake initial investments. The Draft Budget also referred to using Financial Transactions money to provide this initial capitalisation (see separate blog for background on Financial Transactions). It is also proposed that any investments that form part of the newly established £150m Building Scotland Fund will be transferred to the SNIB once it becomes operational. The Building Scotland Fund is described in the 2018-19 Draft Budget as a “precursor” to the SNIB and will support the development of public and private sector housing, industrial and commercial space and industry-led research and development.
The Implementation Plan proposes a target of at least £1bn Scottish Government investment in the SNIB over the first 5 years and a further £1bn target for the next 5 years. According to the research supporting the Plan, this scale of public capitalisation is in line with other international equivalent organisations, where public sector capitalisation typically equates to between 0.5% and 1.5% of GDP. The Scottish Government has not yet committed to this level of funding, which would represent a significant investment over a prolonged period (and beyond this Parliamentary term).
Over time, it is envisaged that the SNIB will issue its own bonds in order to raise additional finance. However, the Implementation Plan recognises that this will not be possible immediately as the SNIB will need to establish a track record before issuing bonds. This will also be subject to HM Treasury approval.
How does it differ from other investment initiatives?
There are a number of investment initiatives already in place in Scotland, but each with a different scope and remit and none identical to what is proposed in the SNIB.
The one most similar to the proposed SNIB is the similarly-titled Scottish Investment Bank, which is the investment arm of Scottish Enterprise. This undertakes similar investment activities to those envisaged for the SNIB, but on a smaller scale and without the same level of capitalisation or scope to issue bonds. Other related initiatives include the SME Holding Fund and the Scottish Growth Scheme. The intention is that, once the SNIB is established, these other initiatives would be integrated within the new organisation. The Implementation Plan states that the aim is to “simplify, not complicate, the existing financing landscape creating a coherent setting for those firms looking for finance.”
Who else has one?
Many other countries have state-owned investment banks, although the exact scope, remit and operating arrangements differ between countries. A review of international comparators was undertaken as part of the research underpinning the Implementation Plan.
At a UK level, there is the British Business Bank, providing support to smaller businesses, but as yet there is no national investment bank. At EU level, there is the European Investment Bank, which is owned by the EU member states, provides financing for infrastructure projects and raises resources through bond issues.
There will be a Scottish Government debate in the Scottish Parliament on 8 May 2018 and the Scottish Government will respond formally to the proposals set out in the Implementation Plan. Formally establishing a national investment bank will require legislation in the Scottish Parliament. However, prior to this, the Scottish Government has indicated its intention to have the bank operating on a non-statutory basis during 2019. The physical location of the bank has not yet been decided.
Nicola Hudson, Senior Analyst, Financial Scrutiny Unit