The Scottish National Investment Bank is due to launch before the end of 2020. The publication of its proposed missions last week brought us a step closer to the unveiling of the long-awaited development bank. This blog looks at some of the most recent developments around the Bank. The Bank appeared in this week’s Programme for Government emphasising the role it will play in the ambition to achieve net zero carbon emissions.
SPICe has previously published detailed briefings on the legislation underpinning the Bank (briefing on Scottish National Investment Bank Bill, consideration prior to Stage 3).
The timeline of the Scottish National Investment Bank starts in 2017 but the idea of a of development bank for Scotland is not new and goes back to 2013. Key milestones for the Bank include:
- launching an Implementation Plan for the Bank in February 2018
- introduction of the Scottish National Investment Bank Bill to the Scottish Parliament in February 2019 (receiving Royal Assent in February 2020)
- the Scottish Government confirming that the Bank will be operational before the end of 2020.
A ‘mission-oriented’ approach
An innovative aspect of the Bank is the ‘mission-oriented’ approach that will steer its investments. These will be set by Scottish Ministers sending a document to the Bank setting out the socio-economic challenges that the Bank is to seek to address.
The Scottish Government last week published the proposed missions for the Bank, as illustrated here with the associated “grand challenges” and investment guidance.
Proposed challenges, missions, and investment for the Scottish National Investment Bank
What happens next with the missions?
The mission document will be laid in the Scottish Parliament for a 40 day consultation period. However, it will not be subject to any parliamentary procedure, such as a vote.
After this consultation period, the Government will send a finalised mission document to the Bank. As provided for by the Bank’s legislation, this document will explain how the missions relate to the Bank’s objects. Furthermore, the Bank’s Act requires that Ministers lay before Parliament a statement describing how the consultation influenced the content of the document sent to the Bank. According to the Scottish Government:
The Bank will respond to the missions set by Government through the development of its Investment Strategy. The Bank will also report to Scottish Ministers on how it intends to work towards the missions within 3 months of them being set. The missions set for the Bank will provide a direction for its Investment Strategy but will not constrain its activity. Ultimately, the Bank will be required to invest in opportunities in line with its vision, objects, missions, and ethical standards.
Scottish Ministers may modify and bring missions to an end by sending a superseding mission document. The document must also be laid before the Scottish Parliament and made publicly available. However, there is no other parliamentary procedure required, such as a vote.
Role in COVID recovery
The Bank will be launched in late 2020 in a much different environment than was envisaged, with the Scottish economy feeling the effects of the COVID-19 pandemic. What impact has COVID-19 had on the proposed activities of SNIB? And what will be the Bank’s role in the recovery?
A recent interview with SNIB’s chairman and the Government’s proposed missions document highlight that SNIB isn’t intended to be a short-term lender in rescue situations, but will be an important element in financing the recovery. It is envisaged that the Bank will “play a key role in supporting Scotland’s recovery by delivering patient long-term finance and sustained investment”. The Economy Cabinet Secretary confirmed that it remains the intention that the Bank will not be a source of short-term working capital for businesses.
- AGER highlighted both the need for the Bank and support for its intended approach to crowd-in investment to deliver long-term outcomes. Amongst its key findings, it concluded that the “crisis accelerates the need for an investment institution at the heart of the Scottish economic landscape” and that it is imperative that the Bank opens in 2020.
- AGER noted one of the objectives outlined in the Implementation Plan for the Bank was to develop the ability to leverage initial public capital by issuing bonds – thereby increasing the amount of funds available for investment. They recommend “under the original plan, this ability would not be activated for some time: the crisis has made it a more pressing priority, and it should be brought forward”.
State Aid, capitalisation, HM Treasury dispensation, and expectations
As the countdown to the official launch of SNIB gets closer, some other things to monitor in the context of the Bank include State Aid, financing, HM Treasury derogation, and managing expectations. There’re still some final hurdles for the Bank to clear before it can get to ‘go’.
On State Aid the proposed mission document notes that officials are developing and engaging with the European Commission on State Aid approval required for the capitalisation of the Bank. Approval is expected to be in place in the second half of 2020. The Scottish Government state that the scope of State Aid approval granted will inform the Bank’s response to the missions and influence how it will deliver against them. In the context of Brexit, the notification will be considered by the European Commission until the UK has withdrawn from the EU and any Implementation Period is complete. In the event of a no-deal EU Exit, the Competition and Markets Authority will take on responsibility for State Aid approvals within the UK, and they will be the responsible authority post-Brexit.
Financial costings for the Bank were estimated to be £2,050 million. This included £2,000 million for capitalisation over 10 years. The proposed capitalisation of the Bank to March 2021 is to be provided through Financial Transactions (FTs). FTs are a form of capital budget allocated by HM Treasury to the Scottish Government which can only be used for the provision of loans or equity investment beyond the public sector boundary. The Scottish Government’s working assumption is that the remaining capitalisation will be from further financial transactions, subject to future budget settlements. Further information on the Bank’s financials are expected as part of the next draft budget, anticipated in December 2020.
For the Bank to be able to operate in the way intended, the Scottish Government will need to secure a dispensation from HM Treasury to have the flexibility to manage and carry-forward cash balances for the Bank over financial year-ends. The Scottish Government had hoped to reach agreement on the dispensation with HM Treasury prior to the Bank’s launch. However, discussions on how the Bank’s position will be managed now form part of engagement on the Fiscal Framework. The Fiscal Framework will be reviewed following the completion of an independent report by end of 2021. Until there is a dispensation arrangement for the Bank in place its year-end financial position will need to be accommodated as part of the overall Scotland Reserve. In August 2019, the Scottish Government stated that this would mean
“..there would have to be a closer oversight of and engagement with investment plans than is envisaged in the Implementation Plan, which would not be consistent with the degree of independence that the Government would like to put in place for the Bank..”
One of the greatest challenges for the Bank following its launch and in its early years of operation will be managing the weight of expectation to evidence tangible results. Balancing the long-term nature of patient capital with an expectation of returns for the public purse, where the proposed missions have 20-25 year time horizons, won’t be an easy feat.
Alison O’Connor, Senior Analyst, Financial Scrutiny Unit