Scottish National Investment Bank

The purposes and objectives reflect the strongest approach to support the increase of sustainable growth but may leave the SNIB caught short across the economic cycle, when conditions may undermine the functioning of markets and make the growth orientated investment approach less practical. The addition of two secondary objectives: firstly to be mindful of the potential need in time to play a counter cyclical role in ensuring the continued supply of finance to industry for investment during difficult economic times and secondly to retain the capability to step in and address serious market failures as required, would help to address this gap.

These activities may be confined to a subsidiary if they are seen to complicate the management of the core mission oriented investment portfolio. They will also be very valuable in supporting SMEs, who generally have a hard time accessing funds and for whom the regulatory reaction to the financial crisis has meant the ongoing withdrawal of support from banks. To the extent these are covered by the British Business Bank, then there will be less need to develop them now but the capability should be retained in case circumstances change. For example the withdrawal of the EIF may mean there is a role for the SNIB to provide some counter guarantees to BBB to enable its SME activity to continue in Scotland, especially with non-bank lenders.

Given the wide range of unknowns in the context of the UK’s decision to leave the European Union and the potential for a further Scottish Independence Referendums, adding these secondary objectives, would seem like a prudent step.

The vision is limited to the activities of the organisation and is separate from the organisation itself, which leaves it unfit for purpose as a guide to the Board, Management Team and other stakeholders working to create the organisation. The nature of the organisation is then determined by all of the other requirements outlined as either required or desirable in the balance of the paper, which are in many cases conflicting or reflect polarities to be managed.

Something along the lines of the following would begin to address this.

The vision for the SNIB is to be an effective, strong, stable and values driven promotional financial institution that provides finance and acts to catalyse private investment to achieve a step change in growth for the Scottish economy. It will do this by attracting a talented team, developing a robust, transparent and ethical institution with a strong commercial orientation that works and invests to power innovation and accelerate the move to a low carbon, high-tech, connected, globally competitive and inclusive economy.

Yes in part. The setting of missions as a route to guide the activities of the bank as long as they are defined in simple terms, should be undertaken by the core political stakeholders.

However, the complexity of the strategy setting process, mandate and constraints will directly impact on the success of the institution and the myriad variety of these already included in the consultation document raise the risk that indicate this battle may be lost before it is fought.

The setting of a target return should be a matter for the board in the management of its fiduciary responsibilities as it seeks to manage risk and sustain the organisation using the resources provided. The setting of a target rate of return by an external party removes the flexibility that an organisation like this requires to succeed and is unrealistic in the short term. At the most, the board should be asked to study this matter and in time (2-5 years) deliver its recommended target return for review by the SG.

The SNIB will have a hard enough time just trying to establish an appropriate risk adjusted return on an investment by investment basis to start with let alone at a portfolio level.

There is no precedent for how 'placemaking' or regeneration can provide any realistic or commercial return on investment unless parks are to start charging admission. Commercial Real Estate development of any kind should be left to the marketplace and state development should be kept as a public sector activity. PPPs offer an alternative but require a whole different architecture.

However, support for start ups and growing companies in locations and areas that are undergoing regeneration may offer a way to address this. This may not generate a commercial risk adjusted return though.

A mission to support innovation and increased productivity that generates the economic activity and tax income to pay for placemaking, regeneration and inclusive growth would seem to have a greater chance of success.

The SNIB management team and board should identify and implement an investment strategy that is informed by its strategic priorities and framework as well as market conditions and opportunities. It should not be dictated in advance based on a desktop assessment and unfiltered stakeholder input as the management team and board will have no sense of ownership and will avoid any accountability in this regard. It should also not be driven by a wide range of undefined ethical and moral principles.

Seeking to set a culture in advance will have serious unintended consequences. See Harris, L.C. & Ogbonna, E. (2002) ‘The unintended consequences of culture interventions: A study of unexpected outcomes’, British Journal of Management, 13(1), pp.31-49.

The SNIB should have full flexibility to undertake any form of investment and use any form of financial instrument, guarantees, derivative, fund structure or otherwise that the board sees fit to use based on its own assessment of the risk and reward. There will be plenty of other aspects such as state aid or regulation that will limit this without putting it in the strategy framework.

The geographic element should dictate that investees must have a substantive presence in Scotland and or generate some economic impact as a result of the investment. Leaving the details flexible will allow for the greatest opportunity set. Required transparency on investments made and their expected economic impact will automatically enforce this.

Long term investing is key to the success of the venture. To enable this the SNIB will need full flexibility over the management of its liquid resources. This will also be important in helping to pay for the operation.

See above re objectives around counter cyclicality and market failure.

Another consideration that is not mentioned is that of taking control, when making investments or the risk that this happens later through restructuring. It is not a good idea for the state to take a controlling interest in any investee companies, funds or other vehicles as these then become the state’s problem and not the respective managers’. The bank should (in combination with any other state entities) restrict its ownership to less than 50%. The only exception to this would be seed capital funds, which are not really commercial, due to the high level of expected losses.

Any ethics statement should be informed by the early lessons and activities of the institution and should not be established fully upfront. Instead the stakeholder working group should serve as a sounding board in the initial period.

The principles listed have never been applied to a financial institution before. An alternative would be to sign the SNIB up to the UN Principles on Responsible Investment and possibly the Sustainable Development Goals as a starting point and building from there. See: https://www.unpri.org/ and https://www.un.org/sustainabledevelopment/sustainable-development-goals/

The law of unintended consequences applies here and introducing five imprecise and quite possibly conflicting principles alongside the need for commercial investment and the existing governance codes for public bodies may well prevent the institution from ever making an investment, while it tries to work out how to meet all these different parameters.

Transparency has to be balanced by the need to respect commercial sensitivity, especially in the context of Freedom of Information or no commercial entity will ever wish to work with or invest alongside the new institution.

It is not clear what the value is of making the SNIB public, if there is no immediate need for fund raising?

The public is unlikely to read the small print and may assume an intention to list or privatise the institution at some point, so undermining trust at the start, when it is badly needed. It is important to be clear as to the public value orientation of the institution in order to keep its implicit stakeholders such as the business and investing community and general public on side. Making it a private company owned by a Minister would leave no room for speculation in this respect. For an example of this look to Scottish Water, where there is no question as to its eventual sale to the private markets and there is a high level of public trust. A counter point was the setup of Irish Water, where debates and doubts as to its eventual sale undermined public trust and contributed to the failure of the effort to have it work in the way initially envisaged as a charging and off balance sheet entity.

A private company can still borrow and would also have the opportunity in time to approach multilateral institutions for finance such as the EBRD, Council of Europe Bank, World Bank, IFC etc… , especially if operating under a Scottish Government guarantee.

This is a good start but it would also be helpful for the institution to have callable capital to strengthen the balance sheet. The European Investment Bank is the best example of this.

This is where the government is committed to provide a further tranche of capital on request from the board, with discretion only as to how this is funded rather than as to whether it is payable. This would support commitments to venture funds and private equity fund structures without requiring as much exchequer cash to be funded up front.

The determination of the classification of the bank may prove critical in the future. The variety of activities it is set to undertake will help in this context as will a high degree of operational independence at board level.

Yes in part. The proposed board size is too large and unwieldy and should be limited to 8 or 9 at the most. Board members should be selected to have a mix of financial and development expertise with some representation from key stakeholder groups. This would remove the need for the advisory board until such time as the institution is of a size and level of activity to justify this.

The bank should have full delegated powers in order to have any chance of fulfilling its mandate. Certain high level parameters may operate like training wheels to keep risk under control to start with but ideally these should be set in conjunction with the board and management team.

The creation of an Advisory Group is a step too far for the time being. An advisory group should be considered at the four or five year point only if the Institution is clearly failing in its task of engaging directly with stakeholders. Otherwise it will create a separate and costly industry within the bank and a lot of very frustrated stakeholders.

The costs look to be underestimated given the need to build the full apparatus of a state entity as well as high quality investment management and operational teams worthy of a state owned entity, which should operate as if it is already regulated.

The bank should be given the power to negotiate individual contracts with all its employees, while operating with a small team that is built out over time as the transaction flow demands. Having two tiers of staff with public servants on civil servants pay scales along side private sector style contracts for those with key skill risks creating a toxic 'them and us' culture. If most of the team, both back office and front, are recruited from the private sector with a commercial financial services outlook then less staff will be needed overall balancing out the cost differential.

This will not work. Look at the National Treasury Management Agency in Ireland for an effective model. Other Scottish state owned businesses employ staff on non-state contracts, the example given was Scottish Water. It is not clear why the proposed approach is required, given the setup of a new institution is a chance to do things differently.