Scottish National Investment Bank Bill

The Convener (Gordon Lindhurst)

Good morning and welcome to the 16th meeting in 2019 of the Economy, Energy and Fair Work Committee. I ask everyone to turn electronic devices to silent mode. We have received apologies from committee member Jamie Halcro Johnston.

Agenda item 1 is a videoconference on the Scottish National Investment Bank Bill with Professor Mariana Mazzucato, who is director of the institute for innovation and public purpose at University College London, and is a member of the Scottish Government’s Council of Economic Advisers; and Laurie Macfarlane, who is head of patient finance at the institute. I welcome both of you.

I will start with a question to Professor Mazzucato. You have been involved in the Scottish Government’s Council of Economic Advisers and the implementation plan advisory group. Are you satisfied that all 21 recommendations of the implementation plan have been adequately reflected in the Scottish National Investment Bank Bill?

Professor Mariana Mazzucato (University College London)

To be extremely frank, I am not as familiar with the bill as I probably should be, but I am quite satisfied with the process that has been followed. We have just been in Scotland, where we did a masterclass on the bank. We spoke especially about issues that arise when one has a mission-oriented public bank, as opposed to a normal public bank. There are many public banks in the world, and many of those are part of the problem rather than part of the solution; they end up being just handout machines. We must therefore ask how missions are set and how the full power of Government instruments—from procurement to grants—can be used in fuelling multiple solutions to achieve a mission.

Scotland is very well set to have a mission-oriented bank because things such as the national performance framework are in place, which can be very important in devising the metrics to know whether the bank is doing its job over time. Metrics on additionality are needed to ensure that the bank is making things happen that otherwise would not have happened, as opposed to its simply taking the place of the private sector when that sector is not doing its job.

Laurie Macfarlane (University College London)

Obviously, the implementation plan recommendations cover many areas, including the setting up of the institution and what it will do once it has been set up. Naturally, we would not necessarily expect to see everything that is in the implementation plan included in the bill that will establish the institution.

The Convener

The committee has received submissions on the bill. Andy Wightman has questions about some points that have been raised in them.

Andy Wightman (Lothian) (Green)

Welcome to the meeting.

As Laurie Macfarlane has rightly said, the implementation plan is about establishment and development of the bank, but we are considering the bill. Section 2 of the bill is entitled “The Bank’s objects”. People have said to us that the objects are too vague. For example, section 2 says:

“the Bank’s main object is giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development or employment in Scotland.”

Should that be the bank’s main objective? I refer to the word “commercial”, in particular. I am aware of Professor Mazzucato’s work in the area. A lot of investment by the state has been in things that later became commercial, rather than in commercial things. Do you have any comments on the bank’s objects, as set out in the bill?

Professor Mazzucato

That came up a couple of months ago, when we came to Scotland to talk about the details of how the bank should be set up. We recommended that the objects be worded as they are in our nice little red book, “A mission-oriented framework for the Scottish National Investment Bank”, which says that the bank should provide patient finance to organisations in the public, private and third sectors and in civil society that are willing to engage with the Government missions. I stand by what we have said.

Use of the word “commercial” narrows the scope, because of the reasons to which Andy Wightman alluded and because commercial dynamics mean that investment in one area might turn up in another area. The classic example is Viagra, which was meant to be used for heart problems, not meant for what it is used currently. That is a typical result of innovation and an example of the search for one thing leading to the discovery of something else—although that is more about serendipity.

Also, given the organisational context there is no reason to say that the bank should lend only to the private sector. Of course, the bank should fuel investment in the private sector, which relates to the notion of the crowding-in effect. In general, there are pretty low levels of private investment in the United Kingdom. However, historically, when ambitious commitments to provide long-term and mission-oriented patient finance have been made strategically, that has increased the expectations of the business sector in relation to where future opportunities lie. The key role of the SNIB should be to provide more direct—not indirect—finance in mission-oriented areas in order to create a new landscape in which there is increased business investment afterwards, because the process will have created what Keynes called “animal spirits”.

Andy Wightman

You mentioned your paper, which I have here. I am clear that you are saying that the bank’s objects should focus on the mission, which is great. However, I am not sure on which page of the document you provide text for that. I know that you are a busy person, but I am sure that the committee would be keen to hear your thoughts on how the objects could be framed, in general terms, to improve the bill.

Professor Mazzucato

I am not sure whether you are asking where the missions will be set or the degree to which the loans will go only to private or other forms of organisations. Those are two separate questions.

In our document, we say that the challenges, which are much broader than missions, should be set by Government. You would then need to have a mission board or a mission agency: that relates to our work with Greg Clark at Westminster on the organisational structure under which missions are set. I think that that should be done not inside the bank, but on a cross-departmental basis. For example, if we want to turn a clean-growth challenge into a mission that involves refurbishing new and old buildings, and if we are thinking about the design of sustainable cities, that will require cross-sectoral, cross-actor and cross-disciplinary investment. The role of the bank is to use patient finance to fuel organisations that are willing to engage in the missions. That is why we say that you should pick

“the ‘willing’, not ... the ‘winners’.”

Jackie Baillie (Dumbarton) (Lab)

The policy memorandum that accompanies the bill says clearly that

“The Bank will lend solely to the private sector”,

which you have touched on. My understanding is that that is because the bank will initially be capitalised solely by financial transaction money, which can be used only for private businesses until 2021. Notwithstanding that, given that Government money will be provided thereafter, is limiting lending to the private sector too narrow and restrictive? Would you include social enterprises, co-operatives and the third sector?

Professor Mazzucato

My answer is definitely yes—although I hope that my saying so will not create problems.

Laurie Macfarlane

We raised that issue when we were in Edinburgh. Maybe I am not remembering correctly, but I thought that we had got clarification that “private sector” meant everything—social enterprises, charities and so on—apart from the public sector. That is my understanding, but do not quote me on that.

Professor Mazzucato

Yes—when we were on a panel there were questions on that from the audience, and that was the reply that was given. We encourage that approach: it makes sense that the public sector should not lend to the public sector, because financing can be done through transfers between departments. It is important to use the bank to provide patient, long-term, committed and mission-oriented finance to private sector organisations and to third sector institutions, such as social enterprises.

In the modern age, many global problems, including the energy challenge and the health challenge, are being invested in through philanthropy, by public institutions, by private institutions and by civil society organisations. That is what is needed—fuelling of multiple solutions to problems, by different actors. We call it a cross-sectoral, cross-disciplinary, cross-actor investment process. I encourage the committee to keep provoking on that point.

Jackie Baillie

We can do that.

Dean Lockhart (Mid Scotland and Fife) (Con)

Good morning, and thank you for your time. I want to follow up on the bank’s mission statements, which are obviously top level. How can we ensure that there is sufficient demand in the economy to access the finance to be provided by the bank? We have heard from previous witnesses that there is a question mark over the demand side of the equation in respect of whether there is enough demand in the economy for long-term patient capital. How can the bank stimulate the demand side of that equation?

Professor Mazzucato

You have asked a fundamental question—and a really smart one, if I may say so. In academia, researchers often do not understand that, and pretend that there is a financing gap. The committee might have heard of the financing gap, or what is sometimes called the credit crunch. That is false: there is plenty of finance out there. However, there are often two other problems. First, there is not enough quality finance—the patient, long-term finance that the bank will provide—and secondly, there is not enough demand for finance, which is definitely seen in the small and medium-sized enterprises space. There are not enough SMEs that want to innovate and grow, and there is a lot of status quo behaviour.

I go back to my point about crowding in. The bank alone will not be able to do anything; it has to be seen as an instrument across what we would call investment-led growth strategies. We should not forget that the United Kingdom is a part of the world that continues to grow through consumption-led growth, not through investment-led growth, and so private debt through disposable income is back at the record levels of just before the crisis. If we are to transform from a consumption-led to an investment-led growth strategy, the question is whether there is a desire to invest. Is there a demand-side problem, as Mr Lockhart has said?

We recommend that the bank be structured not just as a machine that hands out money to whatever sector, business or organisation asks for it, but in a way that is targeted much more at solving societal challenges, and is framed in a mission-oriented way. Historical evidence shows that that would crowd in private finance, if the bank were to do it in an ambitious way.

The problem in many countries has been that indirect incentives such as tax incentives, guarantees and subsidies are used, but that approach assumes that the private sector already wants to invest. If it does not want to invest, all that indirect incentives do is increase profits. However, there is no profits problem—there is an investment problem.

Ideally, the SNIB would crowd in business investment by increasing the imagination of the business community and its perception that there is, through the future finance instrument, if it is structured in the ways that we advise, an exciting new future that it can get involved in—in terms of mobility, clean growth and an ageing society—and that there will be long-term profits to be made, and aid for businesses to get into that space.

Laurie Macfarlane

That is why the SNIB has the potential to be very different to other instruments that have been built in Scotland over the years—for example, the Scottish growth scheme, which was, in effect, just a sort of SME-financing instrument. It did not provide the direction that a mission-oriented bank will provide. Also, I understand that there has been a struggle to get take-up. It was just an instrument to give subsidised credit.

The whole point of a mission-oriented bank, however, is to capitalise on the animal spirits that Mariana Mazzucato described, in order that it can work with those who are willing, able and excited to invest in the key areas of the future, rather than it just sitting back and saying, “Here’s this finance instrument—come and take it.”

Professor Mazzucato

The bank should be seen in association with a portfolio of instruments, of which it will be but one. We recommend that, to achieve the full effect of the crowding-in process—which is basically what Dean Lockhart asked about—you should think about changes in how procurement policy works, and about instruments that currently stifle innovation and do not nurture the bottom-up solutions that Government needs in building hospitals or schools, for example.

Dean Lockhart

In some respects, the success of the bank will depend on its interaction with other agencies, which will help in stimulating demand. By the sound of it, there will also have to be restructuring of the enterprise landscape.

Professor Mazzucato

Absolutely. For example, we have been talking closely with your organisation CivTech. It is interesting, because it is all about thinking about how the structure of the welfare state can be a funnel through which innovation happens. Currently, there is a myth that the silicon valley part of a country—whether it is a silicon valley, a silicon roundabout or whatever—is where wealth and value are created, and that wealth is then handed out to citizens through the welfare state, redistribution through taxation or just a hand-out to citizens.

The idea is to make Scotland an interesting laboratory for re-imagining healthcare and for thinking about achieving sustainable cities and regions. That would become the funnel through which innovation would happen. There would be no dichotomy between the welfare state and innovation—they would be brought together. My perception is that Scotland is having really interesting conversations about that. I would scale up those conversations so that they become one of the ways in which the missions are set and managed.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

The bank will be funded by investment of £200 million a year by the Scottish Government. How does that level of capitalisation compare with that of other development banks in the UK—the Development Bank of Wales and the British Business Bank?

Professor Mazzucato

The really important issue is not so much the amount of money as it is the level of flexibility with it. With the £2 billion that has been allocated for initial capitalisation, it is absolutely central that the bank can use the so-called dispensation effect, so that it can roll finance over year on year and can do long-term planning. The whole point of having a patient long-term bank is that it can plan in a long-term way. If, every year, the bank is fearful that the unspent funds will disappear and go back to a treasury, it will be impossible for the bank to do its job. That is a critical issue that matters more than the actual amount compared with that of other banks.

Laurie Macfarlane

The capitalisation amount of £200 million a year, up to a total of £2 billion, compares pretty reasonably to the amounts in the institutions that you mentioned in the UK and other European institutions, relative to gross domestic product. We did that analysis in one of our papers, which showed that the amount is broadly similar in terms of scale. What is different in other places is the ability to leverage that capital by borrowing, issuing bonds and so on. That is where the difference might lie, at least in the initial phase.

Gordon MacDonald

Given that level of investment of £2 billion over the 10 years, are you satisfied that we will be able to get the desired impact? Initially, should the bank have a narrow focus until it grows to a reasonable size? We have heard various comments on that. Some have said that there should be only one mission statement and others have said that there should be a range of mission statements. What should be the focus at the beginning to get the desired impact on the economy?

Professor Mazzucato

An important aspect of the missions, for example those that we are currently working on at Westminster with the notion of a mission-oriented industrial strategy, is that the framing of the mission matters more than how many missions there are. Thinking about the cancer mission as just being about the health sector, rather than about bringing in all the preventative areas, will make it much narrower. If you have even one mission in Scotland—one big challenge around, for example, clean growth that, through some sort of process across society, you formulate into a mission, though again, it is not our role to decide the mission for you—that requires lots of different sectors and types of actors, and bottom-up funding for multiple projects, it will have a much bigger effect on the economy than if you have three narrower missions. As long as the mission is cross-sectoral and there is that mission framing, around, say, future mobility, clean growth or health, you can ensure that it involves lots of different sectors. I would advise that the bank takes that—almost experiment of a—first mission really seriously.

Moonshot—the 50th anniversary of which is being celebrated in the world this year—was about going to the moon and back again in a generation, but it required 12 different sectors. It was not just about aeronautics; it involved investments in nutrition, textiles and materials—you cannot eat a hamburger and wear jeans and a T-shirt up on the moon. That is what we mean. Three hundred different projects got us there, most of which failed. That willingness to take risks and to experiment is important, as is the way in which the Scottish national investment bank understands risk and failure and socialises not just risk but rewards. Getting those things right is key. Formulating an initial mission that is cross-sectoral to work out some of those complications would make sense—learning by doing.

Laurie Macfarlane

I would like to add one thing. The benefit of such an institution is not the volume of investment, which is obviously important—the rate of investment—but the direction of investment. Making sure that it is doing things that would not otherwise happen will be key to the success of the bank. The risk in the initial phase is that the bank is set up and thinks, “We just want some quick wins. Let’s just shovel money into this thing here,” which is something that was probably going to happen anyway, because that will not generate the kind of additionality that is the point of the bank. You really want to focus on making sure that the money that is there—as always, it would be much better if there were more—is used in a way that is generating additionality and is not given to things that, if we are honest about it, would have happened anyway.

Professor Mazzucato

Many different policies do that; many failed policies basically take the place of something that would have happened anyway. The example I can give is the patent box policy, for which the pharmaceutical industry lobbied, which reduces government revenue but does not create a net increase in the investment of the pharmaceutical industry; it just raises their profits. SME financing is another example. It might happen for folkloric reasons, but there is little evidence that it increases net job creation, unless that finance is directed to the 6 per cent of SMEs that are trying to innovate and invest more in new areas. How you devise the instruments really matters.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Professor Mazzucato, you have talked about the mission statement of the bank stating that missions must be widely perceived to be legitimate and of high societal importance. That is to ensure that those missions survive the political changes that inevitably happen from time to time. How should the Scottish Government and the bank ensure that the missions are legitimate and of high societal importance?

Professor Mazzucato

Again, that is a really important question. Moonshot was very top down. It might have been inspirational and it might have done all these great things—everything that is in our smart products is basically a spillover from that era—but it was top down; it was the Kennedy machine.

Something that we have often highlighted is that the German Energiewende mission, which is cross sectoral and has led to the steel industry transforming itself and lowering its material content through a repurpose-reuse-recycle approach, would never have happened without the green movement, which fought for 30 years to bring sustainability to the core of political discourse.

Currently, in our missions work across the world, including with the United Nations, we are trying to think through how the public sector can secure the capability, capacity and training that is needed. I call that “empathy 101”. How do we engage with movements? How do we listen? How do we not fear conflict? How do we create safe spaces for debate? That is almost the definition of a public space: a place where people are safe to contest.

For example, Charlie Leadbeater, from UCL’s institute for innovation and public purpose, has written a paper for us entitled, “Movements with missions make markets”. It is about thinking about the movements that are out there, for example in the context of social care or the climate crisis, and bringing those voices around the table in a genuine—not tokenistic—way, so that missions can be set with different voices. That is important.

Those voices include the voices of trade unions. Globally, trade and labour unions are thinking about the just transition—which is all about how we move from a fossil fuel-based economy to one that is based on clean energy and is widely understood as being about not just energy but how we think about production, distribution and consumption—and about how some workers will be left behind. I completely support that way of thinking, but it is coming too late: trade unions should be at the table when we think about the green transition in the first place. Public actors, private actors, social enterprises—you talked about those—and civil-society organisations should be at the table, thinking about the missions.

That is much easier said than done, but it is really important if we are to bring not just legitimacy but resilience to missions, so that they cannot easily be wiped away when a new minister comes on board and wants his or her pet project to be mission X.

Colin Beattie

You are talking about finding a means of engaging civic society in prioritising matters of “high societal importance”. Is the proposed advisory group the right vehicle to do that? Will it and can it be effective in that regard?

Professor Mazzucato

Who is on the advisory group will really matter. You cannot bring hundreds of people around the table, but you can ensure that the people who are around the table genuinely represent different voices—and in a non-idiosyncratic way; it cannot be a question of saying, “Oh, let’s bring together Siemens, a pharmaceutical company, a digital, high-tech SME and some public and civil society actors from here and there.”

Ideally, different types of voice will be represented. For example, if there is a care mission, it is obvious to me that social care workers and nurses should be at the table. However, that is something that must be decided by your political process.

Laurie Macfarlane

It is about ensuring, when the advisory group is set up, that it is not seen as tokenistic. It must not be seen as being there just to provide cover, with no meaningful agency to shape things. The rationale for the advisory group in the implementation plan was the right one; it was about bringing wider voices into the process of setting missions. However, the devil will be in the detail of how the group operates and functions, if it is not to be seen as simply tokenistic.

Professor Mazzucato

Especially in an era of populism, it is important to consider that people feel left behind, not just economically—there are plenty of statistics on that—but by a top-down political process. There is this notion of the elite, whether we are talking about the academic elite, the business elite or the Government elite. This could be an opportunity to rethink how we run democracies, with Scotland at the fore of experimenting in that process.

That is hard, by the way; there is no blueprint for it. However, the opportunity should be seen as something quite exciting. You should be willing to learn from your mistakes. You might mess up along the way, so you must have a process of learning by doing and a process for setting the milestones at which you stop.

One of the most mission-oriented agencies in the history of capitalist countries was the US Defense Advanced Research Projects Agency—or DARPA—which was not only good at funding innovation but very good at knowing when to turn the tap off. Knowing when to turn the tap off—

The Convener

I am conscious of the time, Ms Mazzucato, and we still have a number of members who wish to ask questions. I apologise for interrupting you while you were highlighting that example, but I want to get these other questions in.

Tom Mason (North East Scotland) (Con)

You have recommended that investment be made in an ethical way. What do you mean by that?

Professor Mazzucato

As I have said, what is nice about Scotland is that it has the national performance framework, but you need to make sure that you have ways of translating that framework into targets through which you are able to measure the concept of additionality. We have talked about additionality and making sure that things happen that would not have happened anyway; however, the things that you make happen might well be bad things. Just making things happen is not a good thing in and of itself. Trump’s wall is an example of additionality—it was not happening before he came along.

Therefore, you need to make sure that the new things that are being stimulated by the bank’s activity as well as through private finance are also meeting the goals that the country has set itself through the national performance framework. As you will remember, those goals look very much like the sustainable development goals colour chart, but they have been turned into macroeconomic target setting. The more that you can work to make that real, the better.

Investment would be ethical in that sense, but otherwise, what is ethical is down to what someone thinks is ethical. After all, we have different ethics and morals. You need concrete metrics to allow you to judge whether you are achieving your objectives on inclusive and sustainable growth, which will have concrete targets.

John Mason (Glasgow Shettleston) (SNP)

Following on from your point about monitoring frameworks, I understand that you have suggested that such frameworks be dynamic and not too fixed. However, is that possible for the public sector, which likes measuring things that are easy to measure?

Professor Mazzucato

I do not want to blow my own trumpet too much, but one of my reasons for setting up the institute for innovation and public purpose at University College London is that I do not think that, globally, the public sector has those capabilities. The Treasury green book, which is used to evaluate public investments, continues to be determined very much by net present value and cost benefit-type calculations, which really would have stopped any mission right on day 1. Indeed, the moonshot would never have happened if people had done a cost benefit analysis of it. However, that does not mean that there are no metrics, and we are working very closely with the Treasury here on more dynamic efficiency versus allocative efficiency metrics. In fact, coincidentally, we are having a workshop on that tomorrow.

Going back to my point about knowing when to turn the tap off, I would say that, although you want to take a long-term approach, you might realise halfway through that things are just not working and that you are not getting anywhere. Therefore, you should know how to pivot and how to question your behaviour and why things are not succeeding. In that respect, your approach has to be flexible and adaptable. However, those are skills that need to be learned. If you go to any business school, you will find that managers are trained to be flexible and adaptable and to think outside the box. We really need to think through the curriculum and training for civil servants to think and act in a mission-oriented way.

The Convener

The final question is from Angela Constance.

Angela Constance (Almond Valley) (SNP)

Do you have any views on the bank’s remuneration policy? In the evidence that the committee has received, some have argued that terms and conditions should be on a par with the public sector and the civil service, while others have argued that remuneration packages should be on a par with the Edinburgh financial services sector. What are your thoughts on that?

Professor Mazzucato

I think that the answer is somewhere in the middle, but, again, there is no blueprint for this. I have been working on the concept of missions for more than a decade, and one of the things that I used to write about was mission mystique—in other words, that it is an honour to work for a mission-oriented agency. When Barack Obama proposed his post-crisis fiscal stimulus of $800 billion, he said that his mission was going to be to use the money to create a green economy, and he was able to bring in a Nobel prize-winning physicist called Steve Chu to direct the Department of Energy. Mr Chu thought that that was an honour, and he left Stanford University to do it. He was not brought in to create a carbon tax or fix a market failure; he was brought in to help the Government create a new system.

We need to remember that example, because if the bank is mission-oriented, I believe that it will attract people who want to make a difference in the world, but it will not do so if it pays them peanuts. It does not need to match the often absurd salaries in the banking sector, but it will not attract people who have the investment, sectoral and scientific expertise if it underpays. Unfortunately, many public sector workers are underpaid, but I will not go into that, as it would be a whole other conversation.

You do not have to match bankers’ salaries but you have to ensure that the bank’s remit is ambitious and that it will be an honour to work there. Historically, that approach has served well in bringing in high-level expertise to Government organisations.

Earlier, I was talking about having a curriculum for training public servants that is wed to the idea that they are there to fix a market failure. Would you rather take a risk and be a creative actor who is creating value or just facilitate or enable the fixing of market failures? You would probably choose the first option. We need to reframe what the public sector is for to attract the top talents in our societies.

Angela Constance

Thank you.

Professor Mazzucato

The bank is the place where you can do that.

The Convener

I am sorry—do you want to make one last point?

Professor Mazzucato

The bank is a wonderful experiment in Scotland, to see precisely what it would be like to transform our imagination of what the public sector is for.

The Convener

Thank you very much, Professor Mazzucato and Laurie Macfarlane. That concludes the session.

The Convener

Agenda item 2 is continuation of our stage 1 consideration of the Scottish National Investment Bank Bill. I welcome to the meeting our first panel this morning: Professor Lynne Cadenhead, chair, Women’s Enterprise Scotland; Linda Hanna, managing director, Scottish economic development, Scottish Enterprise; and David Alexander, chief executive and co-founder, Mydex CIC. To those who have not given evidence before, I point out that the microphones are operated by the sound desk, so there is no need to press any buttons. If, as the discussion develops, you wish to come in on a question, please indicate as much by raising your hand.

I will move on to the first question. Some of the submissions that we have received express the view that the broad mandate set out in the bill under the bank’s main and ancillary objects fails to enshrine either the Scottish Government’s vision for the bank, as set out in its implementation plan, or the socioeconomic and environmental objectives that were expected from the consultation process. Do you share that view? Are you satisfied with the objects that are set out in the bill, or do you think that they are somewhat vague and open to interpretation?

David Alexander (Mydex CIC)

We think that an opportunity has been missed as far as the objects are concerned. The vision was set out very clearly but, unfortunately, as we see in so many walks of life, plans and visions are sometimes not implemented, and an opportunity gets missed.

I think that the objects need to be tighter and more explicit about what the intention is. If that does not happen, it might leave the bank open to failing to achieve its mission and vision. I have some thoughts on what the bill should say in that respect, if the committee would be interested in hearing them.

The Convener

Do you want to give us just an indication? Obviously, witnesses can write to the committee after an evidence session if they wish to add to their evidence.

David Alexander

It is very straightforward: the main object of the bank should be to provide capital, including long-term or patient capital, to enterprises that support and enable the achievement of ministers’ mission of achieving sustainable and inclusive social and economic benefits. At the moment, I do not think that the bill says that or supports that aim.

Patient capital means equity investments as well as loans. There is enough of a commercial loans market out there, but we are talking about significant infrastructure investments in both the digital economy and the physical economy. The Scottish national investment bank presents a massive opportunity to underpin and support that work, but that is not set out in the bill at the moment.

The Convener

Do any of the other panel members wish to comment?

Professor Lynne Cadenhead (Women's Enterprise Scotland)

There is a sense in the early-stage investment community that there is a lack of clarity in what it is proposed that the bank should do. We are particularly concerned about the bank’s ability to fund females in business and about there being a focused opportunity to fund female entrepreneurs. We are in discussions with people who are involved with the Scottish national investment bank, and they are very open and willing to having further conversations, but there is still a little bit of work to do in that respect.

Linda Hanna (Scottish Enterprise)

With regard to what the bank is being set up for and what is required in the economy, we can see that the bill adds to what needs to be done. The reference to

“inclusive and sustainable economic growth”

in the objects and the focus on getting more finance into the system are absolutely needed and will help some of our ambitions for the economy. As has been set out, the bill provides clarity, and given the long period of time over which the bank will be set up, there will be some flexibility to attune it to the economy’s needs as required.

Dean Lockhart (Mid Scotland and Fife) (Con)

Good morning, panel. My first question is about the demand for the finance that the bank will provide. As we have seen, there has not been sufficient demand from business in Scotland to take up finance through other policy initiatives such as the Scottish growth scheme. Is there enough underlying demand in the economy for the significant level of finance that will be provided by the bank?

Secondly—and this is perhaps a question for Linda Hanna—what steps or different approach will Scottish Enterprise take to stimulate that additional demand in the economy?

David Alexander

There is overwhelming demand in the market for the finance that will be provided by the Scottish national investment bank; the issue is that, as currently envisaged, it is not the right type of finance. We need patient capital, not five-year loans underpinned by a commercial rate of interest. What we need are long-term equity investment, long-term loans and convertible loan notes that can take equity and deliver significant returns to the bank through dividends.

Mydex CIC is a community interest company, and in the 12 years that we have been around, we have pretty much funded ourselves through social investment. We have tried to raise capital for the sorts of infrastructure projects that we deal with and which try to improve public services, remove form filling, ensure inclusion and work with people, and we have found that incredibly challenging. The Scottish Government has led the way on programmes to try to improve the lot of Scottish citizens as well as public services—CivTech and the Scotland can do forum are really good examples of that and have been really positive initiatives. However, the type of funding that we need to equip the whole of Scotland with the infrastructure necessary to remove form filling and risk from the delivery of public services and thereby strip out 45 to 90 per cent of the operating costs of delivery is just not there. Everybody just wants to lend money for three to five years, and nobody wants to make investments or provide proper patient capital. If you constitute the bank correctly and offer that sort of funding, there will be an overwhelming demand from people who actually want to pay it back.

As a CIC, we want to make returns and deliver dividends. We are not asking for a handout—we are just running infrastructure projects and trying to change the way the economy works.

Professor Cadenhead

I absolutely agree with David Alexander. All our research shows that there is significant demand among female-led businesses for finance, and significant ambition among women to grow their businesses. In fact, the female entrepreneurs we talk to tell us that access to finance is the most significant barrier that they face. The issues are not only the type of finance and the need for patient capital but the need to develop opportunities for funding that are more appropriate for female-led businesses, such as loans that include childcare breaks. We also need to overcome the problem of having to grant security against loans. It is a step too far for a female entrepreneur to put the family home down as security. We need to look at the type of money that is available.

Linda Hanna

Scottish Enterprise sees demand: we run the Scottish Investment Bank and, in our portfolio, we see a fairly healthy pipeline for our different funds, both loans and equity.

The Scottish-European growth co-investment programme that we run has had a slower start, so we know that switching to new things, particularly at such scale, can be challenging. However, the Scottish national investment bank is about patient capital, so we will learn what that looks like. We have done three deals through the SEGCP, which tells us that there is a market for that finance. However, we need to ensure that we switch on that market.

We believe that the Scottish national investment bank is ambitious but achievable, and that it is what the economy needs. As Lynne Cadenhead and David Alexander said, the additional £200 million over 10 years will provide an opportunity to look at different routes to funding. However, we also need to think about how we switch on parts of the market that the current product offering may not be serving in the way that it needs to in future.

On Dean Lockhart’s question about demand, Scottish Enterprise sees the opportunity of the bank as not just being about the £200 million, although I know that that is what is often talked about. We see the bank as a catalyst. There is already work being done on the back of the enterprise and skills review to look at how the system could work more effectively and how the ecosystem works, not just in the public sector but in the private sector, social enterprises and the third sector. The Scottish national investment bank coming on stream is an opportunity to look at how the whole system works, and to drive demand in that way.

If it would be helpful, I would be happy to describe the ways in which we are already looking at stimulating demand and how we will do so in future. I could also send in examples.

Dean Lockhart

You have anticipated my next question. The advisory group told us that the bank will not act as the originator of funding opportunities. It will provide the funding and it will be up to other agencies—largely Scottish Enterprise and others—to stimulate demand and find businesses for financing. What reforms will Scottish Enterprise make to stimulate extra funding? Will you need more staff and a higher budget to achieve that?

Linda Hanna

I should say up front that we are working closely with colleagues in the Government on both the setting up of the Scottish national investment bank and how the transition will work. It is very much a team approach, involving not only the Government and SE but other partners.

We are looking at what it will take to develop that pipeline, and we are already putting some things in place. One example is the work that we are doing in manufacturing. On behalf of the Government, Scottish Enterprise has been leading the work around the manufacturing action plan that the First Minister launched a number of years ago, and the national manufacturing institute will be coming on stream.

We are also in the process of setting up the advanced manufacturing challenge fund, which will help to provide regional facilities and capability so that businesses can take advantage of new manufacturing techniques. As businesses get ready, that will drive demand, either for capital investment or for taking people on, to where the finance will come from. There are things that will be in place that we will invest in, and then we will work with those businesses to drive demand towards the bank and help them to get ready.

The financial readiness scheme that we already operate will stay with Scottish Enterprise. Fifty per cent of the business that comes through that comes from the work that we do with companies, and 50 per cent comes through other routes, such as business gateway and our website.

We want to ensure that our financial readiness work is even more fit for purpose by using online services and providing it in places where businesses are, in regions and cities. In doing that, we will work closely with south of Scotland enterprise and Highlands and Islands Enterprise.

We are committed to the demand work, which is about how we work with our current businesses and how we switch on other businesses and ensure that the support is there to help them to get ready. We do not know yet whether that might take more resource; we are working through that. We are also looking at how we ensure that our sales force—the staff who work with partners and businesses—has a commercial mindset about what a good deal looks like so that, as that is driven towards the Scottish national investment bank to do the transaction, we know what the deal looks like.

Therefore, we are doing a number of things; I have other examples, but I do not want to take up too much of the committee’s time.

The Convener

David Alexander wants to come back in briefly.

David Alexander

I completely support what has been said. A fundamental point is that we need to make it clear that when we refer to the private sector, we are including the third sector, community interest companies and social enterprises, which might want to apply for investment funding, notwithstanding the point that I made about patient capital.

The minute that it is made clear that the private sector means not just for-profit commercial companies but mission-led organisations that deliver services and need financing, demand will increase massively. The minute that umpteen bodies, such as Social Enterprise Scotland and the Scottish Council for Voluntary Organisations, realise that the Scottish national investment bank can support their members, demand will increase. I suggest that that will increase the demand for resources to process applications and for information about how to apply.

However, the position is ambiguous at the moment. The talk is about being commercial and about the private sector. In the evidence that was given on 14 May, we heard that there is ambiguity and that people are not sure whether community interest companies such as us, which are asset and mission locked but also limited by shares, will be able to apply. There is a massive opportunity to clarify the bank’s purpose and mission.

Dean Lockhart

I have a final question for Linda Hanna. Thank you for your earlier answer, Linda. Other witnesses have said that the enterprise agencies will have an expanded role to play in delivering funding opportunities to the bank. I was interested in your comment that that might result in a need for more staff. Do you expect Scottish Enterprise’s budget to increase in the years ahead to accommodate the higher workload?

Linda Hanna

We have not looked that far ahead. We are about to launch our strategic framework and business plan for this year, which will set out our plans. We have not yet had conversations about the issue that you ask about; we are still working through what the future will look like. I am happy to come back to the committee to talk about that once we are clearer about those things.

Jamie Halcro Johnston (Highlands and Islands) (Con)

It has been suggested that the new bank could have more of a role in providing business support and advice, which Scottish Enterprise and Highlands and Islands Enterprise currently provide. How will regional knowledge—particularly about my area, which is the Highlands and Islands—be maintained if the bank takes over some of those responsibilities?

Linda Hanna

If the bank is to add benefit to the economy, it must work as part of an ecosystem. The implementation plan and the conversations that we have had with the Government and the SNIB team underline that. The system includes south of Scotland enterprise, Highlands and Islands Enterprise and other actors in that space—it is not just about us. We have talked to colleagues in SNIB about the work in response to the enterprise and skills review to create an additional entry point and enable access to services, which SNIB could take advantage of.

We do not see what is proposed as moving stuff around without adding benefit. The agencies are good at working on the ground with businesses and customers. There is no hand-off process; we must understand companies’ needs and the wraparound support that they require. Part of that will come from SNIB, but that will not be all the support that a business needs. All of our evaluation over the time that the SIB has sat within Scottish Enterprise tells us that it is the package of support, the combination of elements and their sequencing that matter. The customer experience is incredibly important—we all recognise that. I expect that to continue, and for us to be working hand in glove because we have to; the lines around how the customer navigates the system need to be short and seamless.

Therefore, from the conversations that we are having, I am confident. The issue will be joining that up. The implementation plan talks about making sure that business support services are integrated in that way, so that we can use the expertise in the bank on equity, loan and financial instruments and our capability in business support advice, both of which will be deep. It is a matter of how we join those up.

Jamie Halcro Johnston

You are suggesting that you are confident that your support will not be diminished, and that it could even be enhanced. One of the questions in the committee’s business support inquiry was about whether the enterprise body and, for example, the local authority business gateway were co-ordinating. You are saying that you are confident that that co-ordination will be better in this case than in others. I appreciate that the Highlands and Islands is not your area.

Linda Hanna

I am an optimist and I am confident that a combination of important things are going on in Scotland. You are scrutinising the SNIB bill today, but on the back of the enterprise and skills review and the work that has been done with business gateway, Scottish Enterprise, HIE and others, the Enterprise and Skills Strategic Board is looking to rationalise and simplify, so that access is better and digital technology is used in a different way.

That combination will be important. It is about the whole system working and all of us—I do not just mean Scottish Enterprise—are working very hard to make that real. I am confident, because I see that reality in the Scottish Government’s expectation of those things, with people like me and my colleagues in other agencies to make that work. That will ensure that we can deliver the business services that business needs and connect that into new instruments such as the SNIB.

Jamie Halcro Johnston

You are already looking at ways to evaluate that and at how the relationship works.

Linda Hanna

I am not aware that we have put an evaluation in place to do all of that yet.

The Convener

We have a brief point from David Alexander. I am conscious of time and that a number of committee members want to come in.

David Alexander

I can send a lot more information, but I am deeply concerned. From the analysis that we do, working on the front line with 14 clusters across Scotland, we already see at least five or six overlapping initiatives in each local cluster with many of the same organisations involved. That is where the targeted advice and support should be made available and consistently delivered. Yes, it can integrate with the SNIB, but I am very worried about trying to centralise that kind of support. There have to be contact points that join the dots. Otherwise, we will have a Venn diagram on steroids, with everybody trying to provide advice.

That is a real risk, because each of the communities that we work in is different although the themes—the community empowerment act, local implementation plans, health and social care partnerships, integration joint boards—are similar. Constant turmoil and change are the only constants that we find out there. We are trying to transform that, and if another initiative means that the process has to go to the centre, I think that there will be a problem.

Jackie Baillie (Dumbarton) (Lab)

I am going to appropriate the phrase “Venn diagram on steroids”. I quite like that.

I want to turn the discussion back to an issue that David Alexander raised earlier and to the suggestion of lending solely to the private sector that is in the financial memorandum. My view is that that is certainly against the spirit of the implementation plan. Does the panel believe that restricting borrowing in that way, and not opening it up to the third sector or community enterprises, is perhaps a little short-sighted?

David Alexander

I absolutely agree. What is different about a community interest company? We are limited by shares. We decided to be mission and asset locked because we want to deliver transformation and change in how services are delivered and citizens empowered. We need capital to make that happen. We deliver services and work across the public, private and third sectors, but we need funding. Why are we any different? Why should a community interest company that has decided to commit itself to a social purpose be treated differently from somebody who says, “I am only here to make money for my shareholders. That is my profit imperative”? All the time, we see so much money going into start-ups, which look fantastic and then get sold off to big American commercial organisations, so that there is no economic, societal or employment growth.

As much as economic growth is needed, we need to support the third sector, which delivers significant chunks of public services and support to the Scottish population and is growing the economy. Social enterprises, such as community interest companies, are designed specifically to help to deal with intractable, complex issues that need long-term commitment.

Professor Cadenhead

Again, I agree with David Alexander. Women’s Enterprise Scotland is a community interest company and a lot of the enabling and supporting organisations that help our entrepreneurs and companies to grow are social enterprises, such as community interest companies. Strategic funding and investment should be made available to them.

Linda Hanna

The Scottish Investment Bank’s current investments through our range of schemes are not just in private limited companies. What “private” means should be explored, because sometimes it means just that a company is not public sector and could be one of a range of types of company. We already have community-based projects in the schemes that we operate on behalf of the Scottish Government.

Jackie Baillie

However, that is not currently spelled out. My understanding about the reason for the restriction is that the bank will be resourced initially only by financial transaction money. If we were to take that wider approach, the expectation would be that the Government would put in other sources of funding that would not be similarly restricted. Linda Hanna is nodding, so I assume that that is the case.

I will tease out the commercial issue, which David Alexander has already answered. The wording in the financial memorandum and the bill is that the objective is to fund “commercial activities”. Terminology may again be the issue, because many projects have a societal or environmental benefit but are not necessarily for profit, which is what is implied by the term “commercial activities”. David Alexander, do you want to see the language tightened up, so that we can ensure the broadest possible scope?

David Alexander

I ask for a better definition, because “commercial” means one thing in one world, another in another world. A simple example is that removing the need for form filling by Scottish citizens to access public services could save 45 per cent of the transaction cost of the services and therefore release money into front-line staff delivery. That is a commercial business case, because it would mean that the services could do more with less. At the moment, such examples are not even being considered, although the bank’s vision is to help to improve society and the economy.

Our community interest company is committed to removing friction, risk, effort and cost from the provision of transactions and services and to investing 65 per cent of our surplus in the social purpose of empowering the people of Scotland. I ask people to consider that the word “commercial” is about the mission of making things better, faster, cheaper, more efficient and fairer.

Jackie Baillie

That is helpful. I will ask the other witnesses a slightly different question because, if we want that broader scope, the limitation that is imposed on borrowing by financial transaction money becomes unduly restrictive. Should the bank be able to issue bonds or public shares, or should it be able to borrow only from Scottish ministers?

Linda Hanna

How the Scottish national investment bank is set up is a matter for the Scottish Government. There is a broader issue about the system, which I will go back to. The Scottish national investment bank will be part of the system and we need to think about it in that context. There is still an opportunity to look at where the use of financial transactions or loans that might be less commercial in the long term sits best in the system and what will be the best way for Scotland to use them in the future. That will be part of the conversations that we will have with the Scottish national investment bank.

Jackie Baillie

I suppose that this is all a matter for the Scottish Government, ultimately, but I am asking whether your professional advice would be to encourage the Government to leave it open to the bank to offer bonds and public shares.

Linda Hanna

That is not a matter on which I would give advice. I do not have deep expertise in that area.

Professor Cadenhead

I do not feel appropriately qualified to comment on that, either.

David Alexander

I would unequivocally say that the Scottish Government should not do so.

Jackie Baillie

Can I ask you why?

David Alexander

Absolutely. It should not do so because the whole mission, vision and purpose of the bank is to improve Scotland. The minute you open it up to publicly traded shares and the issuing of bonds to the private sector market, you end up with the groupthink of the financial services sector, which only wants a return for its shareholders at commercial rates. Companies in that sector have billions of pounds’ worth of opportunity to do that elsewhere. The creation of a national investment bank is an opportunity to set out a vision for how Scotland can be treated. The bill deals with points to do with state aid. There are many exceptions within the state aid rules that allow the bank to exist and operate. The state aid restriction will apply only until 2021; after that, many other choices will be available.

The Scottish national investment bank could be a self-funding bank. If it gets it right—if it does equity investment and long-term loans—it will build up its own asset base. I know that the asset base is only £2 billion at the moment—we say “only £2 billion” as though it is nothing, but it is a vast sum of money that, if applied judiciously, could solve complex issues instead of just funding the private sector. That would be a brilliant mission for the bank to have. “Be different” is the challenge that I would put to it.

John Mason (Glasgow Shettleston) (SNP)

I will begin with a supplementary. Do you not think that a lot of ordinary people in Scotland would like to put some of their savings into the bank, because they would think that that would be good for the economy?

David Alexander

I think that that is a fabulous idea. We have seen many examples of national savings initiatives. If people got a guaranteed rate of return that was not as variable as it is in the private sector, the bank would provide a good opportunity for that.

However, that is different—that is citizens saying, “I want to support the improvement of this country,” and being happy to support a national investment bank that has a clear mission and purpose to do just that.

John Mason

So you are not against all outside finance.

David Alexander

That investment will feed back into people’s communities, improve their infrastructure and remove friction, risk, effort and cost from their lives. Why would they not want to invest in the bank?

John Mason

Thanks for that. I just wanted to clarify that point.

The main thrust of my questioning is about the advisory group, on which various submissions have been made to us. Some people think that, if the link is too close, the advisory group could be too involved in the running of the bank, while other people think that it will be too far away and that it should perhaps have fixed representation on it, whether from trade unions or people from different regions. What are your general feelings about the advisory group? Where do you see that going?

David Alexander

I think that there is a risk of groupthink. I think that it is drawing from too narrow a pool of people, many of whom seem to be money people. I think that there needs to be representation from citizen groups. We work in Glasgow, where there are citizen activists, who are not as terrifying as they might sound. They are incredibly well informed about life in their communities. Each of the clusters has citizen panels. There are organisations such as Social Enterprise Scotland that are doing a great deal of good work that could contribute to the group.

It is not wholly a financial advisory group; it is about mission and purpose, which is the other area where we need transparency and accountability. At the moment, the bank appears to be a bit too arm’s length from the Scottish Government. The goals and objectives must be measurable, and the advisory group could hold the governance committee of the bank to account on that. There should be people on the group to look at outcomes and impact.

John Mason

You said that there is a danger of groupthink and that the advisory group is drawn from too narrow a range of people. Is there something in the bill or the financial memorandum that makes you think that?

David Alexander

I do not think that the mission, the measurements and the accountability are strong enough for the bank to report back to ministers. The fact that the advisory group draws from too narrow a field of people presents a danger.

John Mason

I am sorry—why is that the case?

David Alexander

Because they will look at the bank as a financial institution, not as a much broader institution that is meant to deliver the mission and vision of the bank on behalf of the Scottish ministers and the Scottish people. Someone must hold it to account. Performance must be linked to achievement of the vision and the mission.

Professor Cadenhead

It very much depends on the role and make-up of the group. The bank will have its chair, its chief executive and its non-executive directors, and I would see the advisory group as drawing intelligence from the community and, through its make-up and the people involved, ensuring diversity of thought, not only on a gendered basis but on the basis of social background, age and demography and so on. It all depends on what role you want the group to play and how it is constituted and governed.

John Mason

If, say, the chair of the advisory group was on the board of the bank, would that be too close a relationship? Might it lead to a conflict of interest?

Professor Cadenhead

Probably. After all, it will simply be an advisory group, and it will be there just to give advice. It will be up to the board whether or not it takes it.

John Mason

Did you want to say anything, Ms Hanna?

Linda Hanna

The group will be really important. We are talking about something that is long term—at least 10 years—and the missions have still to be identified. As a result, the group will have a real opportunity to bring diversity of thinking to the matter, with different people going on to and coming out of the group as the bank moves forward over time. The governance will be the governance, but I think that the advisory group will be able to provide some independent thought, real depth of expertise and a knowledge of research and views on the thinking that is happening elsewhere. That approach can flex as the bank decides where it is going and separately from the governance. I therefore think that it is quite an important part of the bank’s construct, as it can reflect not only the progress being made with the strategic framework and what the bank is doing but where the bank wants to go with regard to the economy.

John Mason

Thank you very much—that was helpful.

I want to move on to some of the financial implications. Again, different views have been expressed in the evidence that we have received on how quickly we might expect the bank to break even. If patient capital is involved, it will take quite a long time for that to happen, but the suggestion is that the bank should break even fairly quickly, which is something that the Royal Society of Edinburgh is uneasy about.

There is also the issue of the costs involved. As someone else is going to ask about remuneration, I do not want to touch on that matter, but can you say something about the general costs of the bank? I think that the Scottish Government is going to have a sponsorship unit linked to the bank, which will cost £1 million a year. It has been suggested that that is a bit too much. What is your overall feeling about the projected costs? Are they too high or too low, or are they realistic?

David Alexander

With any new institution that is formed, there is always the risk of duplication of effort and overlap, and I commend to the Parliament a look at the existing service providers that could perform many of the bank’s proposed functions today in Scotland. Instead of creating a whole new institution, we should think of it very much as a virtual organisation, as is the way of the world at this time, and using existing service providers in Scotland, such as Social Enterprise Scotland, to underpin many of the operational delivery components would be a good thing. Any number of bodies could deliver some of the back-office services.

My big worry is that the timescale for making a return on investment and for the bank to be self-sustaining is completely unrealistic and that it will be driven down the path of commercial loan making and competition with the commercial market. The bank is meant to be different. We should be committing ourselves to a long-term programme that ultimately delivers money back into the Scottish economy and the Scottish Government and which becomes self-funding, but that will not happen overnight.

John Mason

Can you put a realistic timescale on that?

David Alexander

I think that you would be happy if the bank broke even in 15 years. That might be blasphemous but, in reality, I think that it should be delivering returns within 15 years.

John Mason

Is it possible for politicians just to sit here and wait for, say, 10 years? That is two parliamentary terms.

David Alexander

I know how terrifying that is in political and economic terms, but this is meant to be the Scottish national investment bank. With the multibillion-pound investments that are made in infrastructure, no one asks, “Is it going to pay the money back in three or five years?” We are talking about a Scottish national investment bank. It is meant to transform the economy and civil society, and that will not happen overnight. We are constantly being faced with people trying to rewire the building with the power still switched on. That is the transformation that is under way, and it is not going to be done in three years.

We see it all the time with our cluster profiles; millions and millions of pounds get put into reports describing the problem, but nothing gets put into implementation, and then we are on to the next plan, the next landscape review or the next project reviewing why the previous approach did not succeed. We just have to change our time horizons here.

John Mason

That is very helpful.

Professor Cadenhead

The projection that the bank will break even within a couple of years is wildly ambitious. In our work with early-stage companies, for example, we usually take their projections and say that it will take them twice as long and cost twice as much and that they will make half as much money. The same kind of sensitivity analysis can be applied to pretty much anything that is new. The average time to exit from a start-up company, when funds will be returned, is probably seven years. If the bank is investing in high-risk, high-innovation companies, it will not start to get returns for a significant period, so to say that it will break even in two years is wildly ambitious. Venture capital funds tend to work on a kind of 2 in 20 arrangement—they get a 2 per cent management fee and a 20 per cent carry.

John Mason

Can you explain what a 20 per cent carry is?

Professor Cadenhead

That is benefit or interest—money that comes back to the people in the fund when they exit from the opportunities. The costs that are involved here are pretty hefty.

John Mason

Does Ms Hanna want to say anything on that?

Linda Hanna

No.

David Alexander

I will add one thing. I run a community interest company limited by shares. We are 12 years into a 30-year mission. Who is helping me on that mission to improve public services and the lives of people?

John Mason

But your board does not wait until after the 30 years to ask whether you have failed or succeeded.

David Alexander

No—we are constantly looking at the progress that we are making. In some years, we do incredibly well and in others we have to fund it. We are working with local authorities, the third sector and the private sector. It is a transformation programme, so we constantly come up against people not facing the reality of what transformation of services looks like. Everybody wants it tomorrow.

John Mason

That is helpful. I will have to draw a halt, because other people want to ask questions.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

We have already touched on whether a plc is the right vehicle for the new Scottish national investment bank. However, we have received evidence from the Scottish Council for Development and Industry that says that being a plc will allow

“the Bank to raise capital from a range of public and private sources”,

and that

“the Articles of Association ... will protect the ... ownership of the Bank.”

The Scottish Trades Union Congress evidence says:

“Being established as a public-limited company wholly owned by Ministers ensures that the Bank is publicly-owned and privatisation would require primary legislation.”

Why do you think that another model would be better than the plc model?

David Alexander

That is a slightly weird question. I believe that a community interest company model would be appropriate for the bank—that is, an asset and mission-locked bank. There is nothing to stop a community interest company from becoming a plc but remaining a CIC.

I have a more fundamental point to make about why what is needed is a CIC structure that is asset and mission locked. The mission of the bank has to be protected. A plc that slides into private ownership, even if Parliament has to vote for that, will be driven down a market forces route, and the idea that we must let market forces survive is an illusion. The bank is meant to be an important lever in the Government’s approach to improving Scotland and its economy and society. If the bank is mission locked, that will protect it for the future. Also, there will be a massive benefit in the bank being a CIC: it will have to reinvest 65 per cent of any surplus that it makes in its mission, which will build up the capital base that it needs to continue investing.

If you intend to sell the bank off to somebody else at some time and you float it off as a CIC—as a plc that is covered by the community interest company regulations—that will protect the mission lock, which means that only people who are committed to the vision will invest in it. The worst thing—the travesty—would be if the Scottish national investment bank ended up as another privately owned bank as it slipped down the side and started being measured by purely commercial measures.

Gordon MacDonald

Is there any evidence that that could happen? We already have development banks in Scotland, and there is the Development Bank of Wales, which has been established for nearly 20 years, and the British Business Bank, both of which are plcs. Why have they not gone down the CIC route?

David Alexander

Understanding of a community interest company has been very low and the regulations have not been in place as long as those for a plc. A plc is a legal form that a community interest company can have. Scotland has an opportunity to support the CIC structure and have a plan to move it to a plc. It is double protection for the mission and assets of the bank. That is all that I am advocating. If you want to make it a plc but make it a CIC plc, the terms and conditions and articles of association are all available off the shelf. I am advocating that you think differently about the asset and mission lock.

Linda Hanna

My understanding, although I have not looked at it, is that the team looked deeply at different models. Two have been mentioned, and the team looked at others, particularly in Europe. The team weighed up the factors—what the bank is there to do, what would be the best structure for that—and came up with this model. Fundamentally, the bank is publicly accountable but is also commercial and able to generate an evergreen portfolio. There is a combination of factors. The research that the team did led it to believe that the model is right in that it provides a direct line to ministers.

Professor Cadenhead

I am a big fan of not reinventing the wheel. I am a big fan of looking at what has happened in other countries. As has been said, the model has been adopted in a number of other countries. There are ways and means to write protections into articles and so on to ensure that the bank delivers on what it is supposed to. On balance, we would say that the plc approach is the right one.

Andy Wightman (Lothian) (Green)

To follow up a question that John Mason asked about the advisory group, which is recommended in the implementation plan but is not provided for in the bill, to the extent that you think that an advisory group is a good idea, do you think that it should be enshrined in the bill?

David Alexander

It should be enshrined in the articles of association of the bank. Putting it in the bill seems to separate it from the bank’s existence. The role of the advisory group should be defined as part of the articles of association of the bank.

Andy Wightman

The purpose of the advisory group is to advise ministers.

David Alexander

Yes, but I think that the advisory group has to have a relationship with the bank and therefore the bank has to acknowledge its existence and cannot ignore it. The bank has to support its endeavours and be transparent about supporting it. If the group is included in the bill to make it an official and legal part of the ministers’ support network, it also needs to be embedded in the articles of association. Otherwise, the bank has the opportunity to say, “Well, it is not really anything to do with us.”

Andy Wightman

Are there other views?

Professor Cadenhead

The feedback from people is that the advisory group will be important for the ministers. Because it is of such importance, it probably should be in the bill.

Andy Wightman

On the question of the mission, when Professor Mariana Mazzucato gave the committee evidence last week, she was quite clear that the mission should be more central to the objects of the bank. The objects are set out in section 2 of the bill. The mission is talked about in section 11 and is something that ministers will set. Any changes to the objects would be subject to parliamentary approval, but the setting of the mission or any changes to it is not subject to any parliamentary procedure. First, should the mission be more central to the objects in section 2? Secondly, should the missions that are set be subject to parliamentary scrutiny?

David Alexander

Absolutely, the mission should be more tightly associated with the objects. As I said, it feels as if the mission has been lost. The bill needs to embed the mission of the bank in the objects and make it crystal clear.

Andy Wightman

I am not talking about the mission of the bank. I am talking about mission-oriented finance. The various missions are set from time to time.

David Alexander

I am convinced that the missions should be in the objects as an explicit part of the purpose of the bank.

On the second question, so long as adequate parliamentary time is given to the discussion of the mission, there is an opportunity for real debate about what the mission should be. There will be an opportunity for it to survive Parliament, given John Mason’s point about return on investment and timescales. If the bank is to deal with intractable issues and to support finance, there needs to be proper debate. Once the decisions are made, they need to transcend Parliament. That might not please ministers, but there needs to be accountability for the mission, or it might end up becoming a bit of a political football. The missions need to be debated in Parliament.

Linda Hanna

The operational matters relating to the missions are set out in the bill. The bill sets out what the bank intends to do, and it provides the flexibility to allow the missions to change over time, and for how they will be reported to Parliament.

Andy Wightman

When ministers set a mission, the only obligation on them under section 11 is to

“lay a copy of it before ... Parliament”.

There is no provision for a debate, and Parliament does not have to hold a vote. Should Parliament have a statutory role in scrutinising and improving the missions?

Linda Hanna

I do not have a view on that.

Professor Cadenhead

I do not have one, either.

Andy Wightman

Mr Alexander’s submission says that the bill

“creates no requirement for the Bank to ever report to Ministers on how effective (or efficient) it has been in actually achieving the missions ... The only provision is for the Bank to report to Ministers on how it intends to achieve the Mission ... This omission needs to be rectified.”

Will you elaborate on that?

David Alexander

If you have specified the bank’s mission and how performance should be measured—whether that relates to loans or equity—there will be a set of business plan assumptions. I do not know any public, private or third sector organisation that does not have a scorecard, does not report on its progress against its plans or does not demonstrate accountability for the delivery of what it said that it would deliver. We all know that no plan survives implementation, but there are acceptable tolerances. If the bank’s mission is well laid out, along with the key performance indicators, it should be possible to report against them. The bank’s board and governing body should be held accountable for the performance against those indicators.

Andy Wightman

You make a specific point about the missions. Section 12 provides for reporting on missions, but I grant you that there might be some vagueness. Section 13 is entitled “Report on investment performance” and section 14 is entitled “Review of performance”. The bank will also need to provide annual reports and accounts. Is there a specific thing that needs to be rectified?

David Alexander

Factors such as impact, value, transformation and mission achievement need to be taken into account. Did we get there? Did the assumptions that we made and the money that we invested have an impact? Is the economy better? Those are indirect impacts. It is not purely about the loan book getting us a load of interest and about whether the equity that a business holds should be included; it is about the planning assumptions that were made about improving the Scottish economy and society when support was given to an organisation. The bank will need to take responsibility for looking at those indirect measures, and there needs to be a way of measuring impact and value.

Andy Wightman

Under section 14, a person must be appointed every five years

“to carry out a review”,

which must include a review of performance in relation to the bank’s objects and mission statement. Do you want greater clarity on the performance of certain missions?

David Alexander

Absolutely. The missions need to have a set of key performance indicators, and the bank should be responsible for tracking progress against those indicators. Whatever mission the bank is meant to support—whether it is investment in a particular area to improve the economy or society or investment to remove friction—we should look at the performance against those key indicators over time. It is not acceptable to kick things off by having a review every five years. Such a review should look at the trends, but the measures are not in place.

Andy Wightman

Out of interest, if the panel were tasked with setting a mission for the bank, under section 11, what kind of mission would you set?

Linda Hanna

An obvious one relates to the low-carbon economy and tackling climate change. Collectively in Scotland, we have been doing quite a lot of work in that area. The current global marketplace and policy environment provide us with opportunities, and, given the number of our capabilities—whether it is those of companies or universities—we can build on the work that has been done and accelerate it.

Professor Cadenhead

It will not surprise the committee to hear me mention inclusive growth. We have to look back at some stark statistics on female-led businesses. Business gateway figures show that there is a 50:50 gender balance in respect of women starting up businesses. However, as they move through the growth pipeline, the figure moves down to about 20 per cent. As they move into account managed companies at Scottish Enterprise, the number of female-led businesses is around 3.6 per cent. I know that more work has been done on that and that the figures have improved, but, whatever way we look at them, the statistics that we have for female-led businesses in Scotland are shockingly poor.

In addition, a very harsh statistic is that, in the United Kingdom, only 1p in every £1 of venture capital investment goes to female-led businesses. The bank has a significant opportunity to transform funding opportunities for female-led businesses.

David Alexander

I am sorry, but my suggestion is far more mundane. I completely support the point that Professor Cadenhead makes, but I would like the need for form filling to be removed in Scotland. I would like every citizen in Scotland to be equipped with the ability to prove who they are and what they are entitled to and never to have to fill in a form again.

Andy Wightman

Okay. I think that people in Estonia can do that, can they not?

David Alexander

Not quite. People are dependent on the state, and I would like them to be independent. That is about personal data infrastructure.

Andy Wightman

My second line of questioning is about equalities. Professor Cadenhead raised the issue of women entrepreneurs. Equality is not mentioned in the bill, and we have received evidence from Close the Gap and Engender that the equality impact assessment is not up to scratch. The Government has to produce an equality impact assessment, but it is not formally one of the documents relating to the bill that have to be laid in Parliament. To what extent should the bank have a mission to overcome inequality in its broadest sense in Scotland?

Professor Cadenhead

It is essential to create a balanced society with diversity of thought that allows everybody to participate and contribute to economic growth. Close the Gap and Engender have done a thorough analysis of the EQIA, and I broadly accept all their recommendations. Equality needs to be enshrined in the bill—that is really important.

Andy Wightman

Where would it best be enshrined in the bill: under the bank’s objects, performance or mission? Maybe you could come back with further thoughts on that.

Professor Cadenhead

I will do so, but we certainly need to ensure that relevant KPIs are set.

Going back to what David Alexander talked about, it is all related to an annual impact report and reviewing and looking at trends over time. We desperately need a gendered enterprise index in Scotland, to enable us to look at the data and track the statistics so that we can see on-going trends. The bank could help with that.

David Alexander

I ask the committee to consider the definition of “equality”—equality for whom and for what?

Andy Wightman

I think that that is set out in the Equality Act 2010.

David Alexander

I understand that, but I do not think that there is equality of access. Many people whom we know who work in the third sector are women, and people of all different sorts are trying to set up social enterprises to do good. They will not have equal access through the bill, because the bank will not support the third sector and social enterprises. Assuming that we can clarify that definition, equality of access to what the bank represents would be a good thing. If we broaden access to what the bank can offer, it will support a more diverse population of people. Not everybody is trying to produce a high-tech start-up or a start-up that they want to flip to sell to Google. A lot of people who are more socially driven are trying to transform services in this country, and they need funding and support.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

Obviously, the bank will be a public body that will be accountable to taxpayers, and it will have to evidence value for money, but it will also work in the financial sector. Financial sector salaries tend to be fairly good—in some cases, they are fairly extravagant. The opinions in the submissions that the committee received in relation to salary levels and how they are going to be determined varied quite a bit. We have to get the right people or the bank is not going to succeed, but does getting the right people require the payment of high salaries? I am interested to know what the members of the panel think.

David Alexander

There is a flawed assumption that everybody is motivated by money. I worked in corporate life and had a very good lifestyle, but I got to a point when I decided that, with a lifetime of experience, I needed to do something more. If you specify the talents, the skills and the attitude of the person that you are looking for, you will find people who have the necessary skills and ability to be part of the bank—they will not need to be dragged out of the financial services sector and treated like gods.

You have to start by setting out the mission and the role and then do a search on that basis. You will find young and old talented people who want more and to do something different, and they will also have the skills that you need. I would counsel against offering eye-watering salaries and bonus schemes. Instead, make a really positive statement about the Scottish national investment bank being run by the people of Scotland for the people of Scotland. You should insist on talent but make it plain that you are not paying eye-watering salaries.

Colin Beattie

Would we be relying on a degree of altruism in the market?

David Alexander

No, it is not altruism; it is personal motivation and what drives people. Not everybody is driven by money. I have done lifetime coaching work with people, and there is a moment when people have just had enough of it—there is only so much that they can take. The “masters of the universe” finance sector model, whereby everyone has to be paid tons of money to turn up, is an illusion. There are fantastic public servants out there—people in the third sector—who are not paid eye-watering amounts of money and who are doing fantastic work. You can find the talent. Scotland has a lot to offer such people, so make your case about coming and doing something important and you will find them.

Colin Beattie

Do the other members of the panel have a view?

Linda Hanna

It is important to lay out exactly what the bank is for and what skills and expertise are required. A lot of change is going on in that regard in all financial services institutions, so the bank will need to employ people with a range of skills, in order to deliver services, products and channels to the market in a way that is different to the way in which banks have traditionally done so. That is already happening in the financial services sector, and the SNIB will be no different. Therefore, it will need a range of people from different backgrounds and with different skill sets. It is important to set out what skill sets are required and what the bank’s values are in order to attract the right people, culturally, for the public good.

From our experience, the people whom we attract to the Scottish Investment Bank have deeply specialist skills but are definitely motivated by working for a legacy in the economy and the difference that they can make, as well as the individual transactions that they do. It is about setting that out in the right way, recruiting in the right way and bringing in such people. We have certainly found a way to do so in the public sector, and, as David Alexander said, there are examples of other areas in which that can be achieved.

Colin Beattie

Given the desire—certainly on the part of the panel members—for lending to incorporate the third sector, do you agree that it is a particular skill that not all financial experts have? On the basis of the balance sheets of most third sector organisations, they are not exactly bankable. Therefore, do we need to identify specialists in that field, who will be able to cope with it adequately?

David Alexander

It is about having people who genuinely understand what patient capital looks like and what the bank’s mission and purpose are.

In the social investment sector—which, in effect, involves recycling dormant bank accounts, largely through big society capital—we have seen that lenders are taking commercial rates of return on short-terms loans of three and five years. They are not performing the role that the Scottish national investment bank could perform. So, even the people in the social investment space do not get what the mission is. You need people who are able to look over the time horizon that extends beyond the Parliament and normal commercial loan rates, who can look at the basic fabric of an organisation—its mission and purpose—and provide it with the patient capital that will let it execute its mission.

Colin Beattie

Ethical investments are important for any bank these days. Many investment banks and large pension funds have lending exclusions, such as any investment in tobacco or investment in anything that increases greenhouse gas emissions or impacts negatively on biodiversity and ecosystem services provision—all sorts of formulas can be used. Do you believe that the SNIB should go down that line and cater for such exclusions?

David Alexander

I cannot answer for Mydex, because that is not my department, but I would use common sense. If the purpose of the Scottish national investment bank is to improve the economy and society, anything that does not do that should not be invested in.

Colin Beattie

Who will decide that?

David Alexander

That is part of the lack of clarity at this point in time. Why would the Government want to support things that harm public health?

Colin Beattie

There would have to be evidence.

David Alexander

Is it not for the Scottish ministers to set the mission and say that they do not want to support anything that harms public health? That is the level at which to do that.

Colin Beattie

They would have to be careful to keep it from becoming a broadly good idea—if they were to go down that line, ministers would have to specify the particular types of investment that would be acceptable or unacceptable. Is that where we should be going?

David Alexander

I know of no investment bank or venture capitalist that does not have some sort of portfolio rulebook that says that they invest only in certain things. For someone in the VC market, that rule would be what makes them the most money in the fastest possible time—the biggest return. The Scottish national investment bank aims to improve society, so it would be entirely within the remit of the Scottish ministers to put a block on certain investments if they wanted to do so.

I do not know whether that should go in the bill; I am just giving the committee my personal opinion. However, why would anyone back something that made things worse?

Colin Beattie

Do the rest of you have a view?

Professor Cadenhead

The ethical approach is the right way to go. Parliament can seek guidance from other organisations, as it will be hard to define that approach closely in the early stages. We all have to accept, right at the start, that we will not be able to do some things and that there will need to be flexibility in relation to how the bank and what it does evolve over time. Ethical investment is the way to go.

Nowadays, different organisations that invest in other funds are also asking for diversity and inclusion plans before they invest. Diversity and inclusion plans are also important.

Linda Hanna

We already run a portfolio in the Scottish Investment Bank, and we already have ethical considerations: we look at diversity, inclusive growth, progressive workplace practices in the companies and organisations that we invest in and, depending on the fund, what the restricted sectors are. We carry out diligence on that basis. That approach already exists. We are part of the economic development landscape—as SNIB will be—and I expect that those investment bank funds will move to SNIB. We anticipate that that practice will continue.

Angela Constance (Almond Valley) (SNP)

There are several important workstreams that need to be carried out well, such as the appointment of board members and the development of the strategic framework, the ethical statement and so on. We know that the timetable is tight, but, if the bill passes, the bank should be fully operational by 2020. Is that achievable? Also, given the tight timescales, can the detailed work be done to a high quality?

David Alexander

As someone who has run many programmes, several of them complex, over many years, I can tell members that co-ordination and communication are the key components of success. The timescales are not unreasonable, but it must be accepted that the bank will be delivering incrementally over that period. That requires very tight tracking. It means that everyone involved must have a common set of objectives: the model is called objectives by key results, and everyone is linked to those objectives.

If that type of model is approved and people are linked directly to those objectives and results, so that nobody is working as an island or a stovepipe, you can get there. However, it will be challenging. A lot of public sector and public service programmes fall by the wayside because we get too involved in the structures and processes but not the outcomes. There needs to be extremely strong programme management by someone who is committed to the mission as opposed to someone who is being paid a large amount of money to be a programme manager. It is all about how you set it up.

Professor Cadenhead

From my perspective, it is tight but doable. The key thing is to get the recruitment of the board under way as fast as you can. If you recruit the right chairman, chief executive and non-executive directors, that team will drive everything else.

Angela Constance

Professor, did you say, “chairman”?

Professor Cadenhead

I did—strike that!

Linda Hanna

I am privileged to see some of the work that is going on behind the scenes, and I would say that a lot of people are working on the issue. I acknowledge what David Alexander said about programme management, but I would say that people are committed to the mission of what we are seeking to do. I think that it is achievable, but we will need to stay focused on delivering those things at the right time.

Angela Constance

Does the bill do enough to ensure the bank’s durability and survival across political cycles?

David Alexander

No. I have already explained that I think that it should be a CIC. It has the ability to fund itself, and the Parliament should be involved in debating specific missions. It is one of those commitments that should last many parliamentary sessions. It is not a science experiment; it involves a fundamental theory of change with regard to how you improve Scotland. It is audacious and exciting, but it needs protecting.

Linda Hanna

We need to ensure that the bill sets out what we are seeking to do, and Parliament will back that or not. We have talked about all the other things that will come back to ministers—the reporting, the strategic framework, what the bank is doing and so on. Those things will demonstrate what is being done on the ground and what will have an enduring effect on Scotland’s economy.

Professor Cadenhead

At the end of the day, the bank will be judged on its results.

The Convener

I suppose that there could be a chairwoman, a chair or a chairman, professor, depending on what the person thinks the position ought to be called or who they are.

Jackie Baillie

Do not go there, convener.

The Convener

I do not think that we prescribe language in that sense.

Andy Wightman

I want to follow up a point that Linda Hanna made about the Scottish Investment Bank. I am unclear about the extent to which the funds that are devoted to that will be rolled into the Scottish national investment bank. It seems to me that they are two separate things.

Your website talks about the companies that the Scottish Investment Bank invests in. It says:

“We’ll invest alongside private sector investors into early-stage and expanding companies with high-growth potential that will deliver economic impact to Scotland.”

Clearly, some companies will meet that definition and the SNIB might fund them. However, I understand that the Scottish Investment Bank has invested in the Isle of Harris distillery, and I do not think that the Scottish national investment bank would invest in the alcohol industry.

An approach that involves long-term, patient capital is different from an approach that involves high-growth companies, which is what the Scottish Investment Bank is concerned with. Do you agree?

Linda Hanna

The Scottish Investment Bank has a range of products that we serve Scotland with. Some of them involve direct investment and some involve co-investment, which you mention. Others involve our supporting things in order to crowd in other funding. All those funds will transfer into the Scottish national investment bank, so those mechanisms will continue to exist.

Andy Wightman

You support an alcohol distillery, and I cannot see alcohol distilleries being central to the mission of the Scottish national investment bank. Is it the case that, if all those funds are rolled into the Scottish national investment bank, there will be some loss of the kind of support that is currently provided to commercial activities?

Linda Hanna

I cannot comment on particular cases. We look at the company—a distillery, in this case—the benefits it brings to the local community, the jobs it creates, the investment that will be required and the funds that have been brought to the table. Once the funds transfer over, it will be for the Scottish national investment bank to decide how it manages the portfolio going forward.

Andy Wightman

Do you recognise that an early-start, high-growth distillery and the kind of mission-orientated projects that are envisaged for the Scottish national investment bank are two very different propositions?

Linda Hanna

The Scottish national investment bank will deal with both. It will provide mission-based funding to help companies to do what they seek to do in the economy, and it will provide support to early-stage and later-stage growth companies. It will also work on the scale of the funding that is required as companies seek more funding. We expect the Scottish national investment bank to do more in that space.

Andy Wightman

Is the Scottish Investment Bank doing anything at the moment that could not be done by the Scottish national investment bank?

Linda Hanna

I expect commercial deals to be done by the Scottish national investment bank.

John Mason

Will you confirm that you do not think that alcohol is inherently a bad thing to invest in? It provides a huge number of jobs and exports, so we should absolutely continue to invest in the alcohol industry. Is that your feeling?

Linda Hanna

The distillery industry is important to Scotland. It is a big part of our exports and employment, as well as providing innovation. Scottish Enterprise supports the industry, as does the Scottish Investment Bank. We support the products and companies that we have in Scotland.

John Mason

That is great.

Professor Cadenhead

We need a bit more clarity about what the bank will invest in and the quantum of investment. For example, I hear indications that the bank will not invest anything less than £1 million in a particular company. If we look at the business base in Scotland, we see that 77 per cent of the 98 per cent of businesses that are SMEs are micro-businesses with fewer than 10 employees. They are not looking for £1 million of investment. How are we going to fund the different stages of the business growth journey of earlier-stage businesses? Sometimes, the amount of capital that they need might be £25,000, and that would be transformational for them. They might not be looking for £1 million, so we need a little bit more clarity in that area.

The Convener

Before we get into discussions about whether whisky is good for the health of the nation, we are out of time. I thank our witnesses for coming in today.

The Convener

Welcome back. We will continue stage 1 of the Scottish National Investment Bank Bill. I welcome Matt Lancashire, who is the director of policy and public affairs at the Scottish Council for Development and Industry; Flora Hamilton, who is the director of financial services at the Confederation of British Industry; and last, but not least, Helen Martin, who is the assistant general secretary of the Scottish Trades Union Congress.

I will start with a question that I put to the previous panel. Many of the submissions that we have received express the view that the broad mandate that is set out in the bill on the bank’s main and ancillary objects fails to enshrine either the Scottish Government’s vision for the bank, as set out in its implementation plan, or the socioeconomic and environmental objectives that were expected—by some—from the consultation process.

Are you satisfied with the objects that are set out in the bill or would you—as some have—characterise them as being a bit vague and open to interpretation? Are they fine as they stand?

Helen Martin (Scottish Trades Union Congress)

We would like to see more of the ethical and social ethos coming through in the objects of the bank. Object 1, for example, is about

“promoting or sustaining economic development or employment in Scotland”.

It does not seem that it would be a big change for it to include the words “or fair work in Scotland”, or “or quality employment in Scotland.” That would give a greater sense of the need for the bank to be not just about jobs, but about the right sorts of jobs, and about the fair work approach that the Scottish Government has been developing and working on.

It would also be right to see the ethical commitment included up front as an end in itself. Otherwise, we could be bogged down in very narrowly defined economic objectives that fail to include the wider social benefit that is required, which was a core reason for the development of the bank, in the first place.

I also wonder about the balance of the mission-oriented approach and where the missions fit into the core ethos of the bank. The status of those missions is not clear to me. Are they additional to the core focus or are they the core focus in and of themselves? The question in my head is this: will the bank be able to invest in things that do not fit the missions but fit wider economic growth priorities, or is it about delivering the missions? That is not clear from what I have looked at.

Flora Hamilton (Confederation of British Industry)

If the vision is for the SNIB to be a catalyst for private investment and achievement of growth in the Scottish economy, it is absolutely crystal clear that the objects need to clarify the roles of the bank, which are investment across early-stage investment for scale-up companies, and the mission-led and long-term patient capital investment that is needed to tackle societal challenges. The objects need to cover all that. We think that that focus, with flexibility and wide scope, is key to delivering growth in the Scottish economy.

Matt Lancashire (Scottish Council for Development and Industry)

I agree with most of what has been said.

The bank’s three objects remain clear and distinct. They are: to remove barriers to patient capital—providing equity finance, in terms of venture capital, has to be one of the purposes of the bank; to support increasing productivity and improve our relatively low levels of innovation; and to support research and development investment.

If R and D investment is connected to ethical, low-carbon and environmental aspects of innovation, that will be fantastic, but we cannot look exclusively at those types of investment. Many organisations out there, across broad industries and sectors, need long-term patient capital if we are to increase our productivity.

Everything has to link back to productivity. People talked about outcomes in the earlier part of the meeting; one of the outcomes has to be an increase in productivity, which is at a low level. Can we sit here and say that that will be done just by investing in low carbon, in healthy ageing and in the bank’s third mission, which I have forgotten?

I would like to add a fourth mission. We will probably come on to talk about the fourth industrial revolution. There could be a fourth mission to invest in data, robotics, software engineering and all the aspects of those that are upon our global economy right now. Could we add a mission to encompass a range of sectors in the fourth industrial revolution in order to lead us to increased productivity, innovation and so on?

Andy Wightman

From Flora Hamilton’s response to the convener, I am a little unclear about what she sees as being the main purpose of the bank. According to the bill, the bank’s

“articles of association must state that the Bank’s main object is giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development or employment in Scotland.”

As things stand, that is proposed to be the bank’s main object, and if the bill passes into law, that will have to be the main object. Do you agree with that object, or should it be phrased differently?

Flora Hamilton

CBI members agree with that object. I was trying to clarify the different roles that will fall from that object and where the bank’s activities could be placed, as laid out in the implementation plan. If we are to tackle the productivity challenges in the Scottish economy, we need to look at three distinct buckets of activity: funding for entrepreneurial businesses at start-up stage; funding for scale-up for the mid-tier businesses, where real economic growth lies; and long-term patient capital to go into projects that sit within the specific missions that are outlined for the bank.

Three missions have been identified. Scotland becoming carbon neutral by 2045 is a distinct mission, and a Government target has been set in that regard, so that is a long-term mission.

However, long-term missions are quite distinct from the investment that needs to go into scale-up growth. In the previous part of the meeting, the example was given of investment in Scottish whisky. That is about funding growth, and that is where jobs and prosperity lie for communities across Scotland. We see distinct differences between the three roles of the bank.

Andy Wightman

Okay. That is of some assistance, I think.

Last week, Mariana Mazzucato stressed that one of the main roles of a national investment bank is to provide patient capital for innovation, which is often not funded by the private sector, although the private sector will often rely on it in years to come. I therefore wonder about use of the word “commercial”. The bill says that the bank’s object is to give

“financial assistance to commercial activities”.

Does that express the full potential of the Scottish national investment bank? In the past, the state has invested in technologies that did not become commercial for years and years, until the private sector began to turn them into commercial opportunities.

Helen Martin

That speaks to the tension at the heart of the bill. There is, in the whole project, an element of tension between long-term aspirations about patient capital, and short-term requirements for supporting growth companies and innovation in society. A key concern for us is that that contradiction is being built into the bank’s functions in a variety of ways.

For example, the bill says that the bank must become self-financing in 10 years, but securing that kind of long-term health for the bank to provide patient capital will require growth returns in the medium term—say, five years. My question, therefore, is this: how will it be ensured that the patient-capital elements of the bill get the same kind of attention as the first-order requirement to invest in what produces returns in order to meet the financial requirements that have been laid down for the bank’s operation? That element of how the bank is being set up is a concern for us.

The focus on things that are commercial, that will provide those kinds of returns, and which look promising—and which will give the committee something to write about in your five-year report to Parliament on the bank’s success—will, to a degree, act as a brake on the bank doing what it is supposed to be doing, which is to correct the current market failure and the disincentives that other banks see to supporting long-term and slow-growth projects that are not obviously economically beneficial, but which could, in the long term, unlock greater economic opportunities for the Scottish economy. That is the bank’s purpose.

Unfortunately, as much as we could get behind the aims in the implementation plan, and as much as we support the establishment of the Scottish national investment bank, there are elements of the bill in which those things have not been fully thought through or bottomed out.

Flora Hamilton

The importance of the bank’s ability to crowd in investment must be taken into consideration, because that is how it will tackle the need for long-term patient capital and some of the mission-led investments that are required in the Scottish economy—

Andy Wightman

I am sorry, but what do you mean by “crowd in”?

Flora Hamilton

If the Scottish national investment bank acts as the cornerstone investor in a big long-term project, that will attract private investment. There are parts of the Scottish economy that cannot attract such investment on their own.

Andy Wightman

Can you give examples?

Flora Hamilton

I do not have any to hand, but I can provide some. The point is that cornerstone investment from the Scottish national investment bank will attract private capital.

There are good examples in some of the urban regeneration programmes that have happened across the United Kingdom. UK-headquartered investors such as Legal & General and Hermes Investment Management have gone to Cardiff, Leeds and Kings Cross and have provided cornerstone investment that has attracted Australian and Canadian pension funds. Such private institutional investors will give you long-term growth, because pension funds need long-term investments that provide steady and reliable long-term income. They are not looking to make a return on their investment in the short term.

I come back to the very clear distinction that has been made. It might seem to be complicated, but the bank will have to meet a number of different requirements and service the Scottish economy in the short term, the medium term and the long term. As a result, its objects need to be complex.

Matt Lancashire

I will add to what Flora Hamilton has said. We need to crowd in funding. Germany’s KFW and the Japan Finance Corporation have similar mechanisms and institutions. There are global examples of national investment banks or similar being used as cornerstones to pull not only public finance but private sector investment together as long-term patient capital. Surely the objective of providing long-term capital is to make a return not just for the bank but for the Scottish economy and Scottish society as a whole. Otherwise, what is the point? That is where the bank needs to head in the long term.

I know that the Scottish national investment bank will be nowhere near the KFW in size or what it can do, but the success of such banks has been in supporting and driving innovation through correcting market failures and creating new markets. Surely, the objective of the Scottish national investment bank is to create such new markets for Scotland in order to keep our economy competitive, to keep us exporting through the new trading nation strategy, and to push our economy forward so that we can all enjoy the inclusive growth that we wish for.

There are examples around the globe of investment banks putting long-term patient capital into transformative technologies and inventions in nanotechnology, telecommunications and renewable energy. That is where we need to drive commercial activity.

Andy Wightman

I want to finish with two brief questions. First, under section 11, the bank’s missions will be set by ministers in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

Should those missions be subject to parliamentary scrutiny and approval?

Secondly, should membership of the bank be restricted to Scottish ministers, or should local authorities, too, have a role in membership, as is the case with the KFW?

Matt Lancashire

Could you repeat the question?

Andy Wightman

My first question was about the missions, which Scottish ministers will set in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

There is no provision in the bill for Parliament to scrutinise, debate and approve the missions. I note that, under section 2, the Parliament has to approve any changes in the bank’s objects and articles of association, but there is no provision for Parliament to have any say whatever in what the missions are. Should Parliament have a role in that through, for example, approval by resolution of Parliament? My second question was on the bank’s membership.

Matt Lancashire

It has been stated and emphasised that the Scottish Government will play no role in the bank’s internal governance or day-to-day operational decision making, and we have emphasised the importance of enshrining the bank’s operational independence in legislation—

Andy Wightman

I am talking about the missions of the bank being set by its sole shareholder—that is, the Scottish ministers.

Matt Lancashire

The advisory group will give Scottish ministers advice about those missions—

Andy Wightman

But my question is whether or not Parliament should have a role in debating and approving the missions.

Matt Lancashire

The SCDI does not have a position on that. I am just trying to give you a broader answer to your question.

Andy Wightman

I understand that.

Flora Hamilton

CBI members have expressed no opinion on those matters.

Helen Martin

The STUC has a view. We absolutely agree that Parliament should have a role; after all, this is about £2 billion of public money to support the Scottish economy’s strategic direction and the growth that we want in the economy. That growth should be inclusive, should promote fair work and should deliver a low-carbon future. It is therefore important that there be proper democratic oversight of the missions that will be set for the bank to work on.

Debating the missions is the absolute minimum that the Scottish Parliament should do. Again, there is an issue with the narrow way in which the bank is being set up and the fact that it will invest only in the private sector. With one of the missions being to have a low-carbon future, the bank investing only in the private sector might lead in a certain direction with regard to development and provision of infrastructure across the country. That money could flow only to the private sector in a certain way—Parliament, if it were left to its own devices, might not want it to go that way. I therefore wonder whether we need more oversight of decisions that might flow from the very narrow drawing of what the bank can do.

On the second question, which was about whether there should be a role for local authorities, there absolutely should be. One of the things that we are very interested in is where the community voice is within the bank. The Scottish ministers play a vital role, and it is good to see them as the shareholder, but putting in the wider community perspective of local authorities would be a good start. I do not think that it is the beginning or end of the conversation, but it would help to broaden out the perspective of what the bank would be tasked to do and how the missions would be delivered, which would be useful.

Andy Wightman

Do either of the other witnesses have any views on whether the shareholders should be extended beyond Scottish ministers?

Matt Lancashire

We have supported the idea that Scottish ministers will set the strategic direction of the bank. For me, that answers the question.

Andy Wightman

Are you saying that ministers should be the sole shareholders?

Flora Hamilton

The Scottish Government should be the sole shareholder in the bank.

Andy Wightman

In your view, the Scottish Government should be the sole shareholder.

Flora Hamilton

Yes.

The Convener

Okay. We have clear enough answers to those questions.

Dean Lockhart

I return briefly to the question of stimulating demand in the economy for the additional financing. We see that a much larger scale of financing will be available, but we can also see that there was insufficient demand from business to take up funding from the Scottish growth scheme, for example. We have spoken to the SNIB team, who do not see the bank’s role as being that of originator or as a body that identifies the businesses to finance; it will rely on existing enterprise agencies for that job. Do those agencies therefore have to significantly change the way that they operate in order to find the businesses to access that finance?

Matt Lancashire

That is probably not a question for me to answer; the chief executives and chairs of the enterprise agencies might give a better answer. If there is a case for stimulating demand and there have been issues with other programmes and initiatives, it makes sense that the agencies should work with partners from both business membership organisations and academia, where a lot of innovative thinking and knowledge happens. We should not forget regional approaches and regional economic groups, which can drive that demand and activity. There is an argument for putting more focus on such work, but how the enterprise agencies do it is entirely up to them.

The bank’s success will be based on how many people want to drive through, identify and, ultimately, fund the innovations and provide the patient capital that is needed across the range of business activities. Demand is massively important.

Flora Hamilton

We are at a critical time for demand for growth finance. Business investment is currently at an all-time low, right across the UK, with the uncertainty of Brexit hanging over us. It will be critical for the bank to work with the enterprise agencies to map out their role, to collaborate fully and to understand where the stimulus for demand can come from. It will be important to carry out detailed segmentation analysis of where demand may lie. One of the experts on the previous panel talked about the low level of ambition for growth in SMEs across Scotland—a high percentage of firms have no ambition to grow.

It is critical to have a cluster structure that brings organisations together. As well as attracting in private investment, that sort of structure can help to stimulate demand if organisations share with their peers their experience of a particular type of finance delivery. If entrepreneurs get together and share their success stories through that cluster approach, you can start to stimulate demand. There are distinct ways of doing that. First, you identify ambition for growth and then, where there is opportunity for growth, you try to build the ambition around it to stimulate demand. Given these times of heightened geopolitical risk, we will have to work very hard to collaborate and stimulate demand.

Helen Martin

We would agree. One of the missions is place based. A lot of work might be needed to stimulate demand in a coherent and holistic way across the community, which might mean working with a range of partners from the enterprise agencies and local authorities. That again gives weight to the argument that it is important to make local authorities shareholders in the bank. It is also important to work with civic society organisations and trade unions. This is all part of the wider social partnership model that we are trying to create. It is not just about driving growth in SMEs but driving shared prosperity in communities and developing a shared stake in society, which is something that we do not have a lot of. The bank could provide something for all stakeholders to coalesce around in a wider way because it brings money and the opportunity for investment.

Dean Lockhart

Thank you. My other question is about corporate governance. We have heard that Scottish ministers will be able to change the mission of the bank without any parliamentary oversight or discussion and that they will not need to consult or get agreement from the board of directors or the advisory board—there is no qualification. Based on your experience of other forms of corporate governance, is giving Scottish ministers such unfettered power a sensible allocation of responsibility?

Helen Martin

No, it is not. There are other examples of Scottish ministers having oversight, with other layers of governance underneath that, such as in the university sector. There need to be checks and balances in the system. The role of Parliament is crucial; it is a really important democratic institution and should have the right to consider, amend and vote on the bank’s missions. There should also be consultation with the advisory group—why have an advisory group, if the Government is not going to consult it?—and the bank’s governors.

Flora Hamilton

The CBI believes that the role of the advisory group is critical. The board will be accountable to the Scottish Government for what the bank delivers. The advisory group’s membership must cover a broad spectrum, and it must be independent, clear and transparent in its monitoring of the bank’s performance and how it delivers against a set of tangible and measurable KPIs. The advisory group must have representation from a wide spectrum of the Scottish economy and society, including business, financial services, the universities, respected Scottish think tanks and agencies such as Scottish Enterprise. The CBI also advises that the Scottish Government should look for international expertise to tap into in making the advisory board work and deliver for it. There is plenty available, such as from other national investment banks, particularly in the European Union.

Matt Lancashire

I agree about the importance of the advisory board. We are on record as emphasising the need for the bank to have operational independence. It is critical to enshrine that in legislation and for all parties to respect it once the institution is established and operational. If you want the bank to last long term, whoever is in power, that will be critical to its success. It needs to be able to offer loans, make investments, agree joint ventures, create subsidiaries and align with green investment strategies and risk strategies without further approval from ministers. That is how you will make a success of the bank.

Jackie Baillie

I want to explore briefly the financial memorandum, which said that the bank would lend solely to the private sector. Some witnesses have said that that is quite narrow and restrictive. Should the bank take a more open approach and lend to the third sector, community enterprises and so on? Helen Martin is nodding vigorously.

Helen Martin

Yes. It is a very restrictive provision, particularly if we overlay the bank’s missions. The implementation plan talks about transport infrastructure and, specifically, the development of low-carbon infrastructure. The implementation plan gave the example of charge points for electric vehicles, but at present, those are primarily developed by and held in the public sector. Tasking an investment bank with developing low-carbon electric vehicle infrastructure and then saying that it can only do that by investing in the private sector dramatically changes the current model and brings market forces into a key part of the infrastructure that will underpin our economy in the future.

Currently, transport is a very cluttered landscape and there are many different types of providers. The provision would create a situation in which the Scottish national investment bank could support First Bus to develop low-carbon buses, but could not support Lothian Buses to do the same; it could support Serco to develop its ferries in a low-carbon way, but it could not support CalMac Ferries to do that. There is a range of contradictions in the mission and in the limiting of investment to the private sector.

It is also difficult to draw the line between the public and private sectors. For example, Burntisland Fabrications is a strategic asset in the low-carbon economy, but the Scottish Government is a shareholder in that company. Could the Scottish national investment bank invest in BiFab or not? Similarly, the Springburn rail depot is currently under threat and needs investment to electrify the line to secure its future; such investment would probably be done either for ScotRail or Network Rail. The depot is currently in private hands, but it would be for the public benefit if that investment were made. Would the Scottish national investment bank be in a position to make that investment for the benefit of the public sector or not?

Imposing such an investment rule on the bank raises many unnecessary questions about how it can invest, when it can invest, who it can work with and how it can draw in the capital. The CBI submission talks a lot about the need to work with universities, but universities are part of the public sector. They incubate many start-up businesses with high growth potential. Are we saying that the Scottish national investment bank cannot work with those businesses because they are associated with a university? That is not clear to me.

Some of those questions can be sorted out and clearer guidance can be provided. However, the way in which the provision is currently constructed raises serious questions around how the bank will work and how it will achieve the strategic missions that it has been given.

Flora Hamilton

Helen Martin raises some valid points. We are touching on some of the structural issues involved in setting up the bank. There are implications under EU state aid rules and Government fiscal rules. The CBI calls for the SNIB to be given the widest possible scope in order for it to achieve its objectives. We need to look at how we can stretch private investment and the things that touch on that. It is a very complex landscape. Not impinging on those funding rules will be one of the challenges that the bank will face. That will have an impact on how it raises its capital.

Jackie Baillie

I am not sure that that is the case, but I will come back to you on that in a moment.

Matt Lancashire

It goes back to needing further clarity on what the bank can invest in, which sectors it can invest in—whether that is the private sector, the public sector or a range of sectors—and what ethical investment means. On those issues, the bill lacks the clarity that it needs before the bank becomes fully operational.

I do not want to speak about the public sector alone, but it is a massive part of our economy and our society, so we have to take a look at it. Across the public sector, there is plenty of innovation that could be commercialised in different sectors and forms, so it makes sense to take the opportunity to widen out the scope of the bank to public sector organisations. However, we have not yet had the clarity in the bill to make a call on the matter and move the discussion forward.

The universities issue worries me, because they play a massive part in our R and D and innovation structure in Scotland. Where is their involvement? How do they progress with their innovations? We all know that we are great at coming up with ideas, but we are not the best at commercialising them, so where is the connection between the investment bank and the R and D knowledge that is coming out of universities, which are part of the public sector? That part of the bill requires more clarity, so that we can all give a more considered response to the question.

Jackie Baillie

That is very helpful.

I come back to state aid because, to my knowledge, the funding of a community enterprise has never been a state aid matter. The Government is only capitalising the bank with financial transaction money at the beginning. That is a choice that it is making. The Government could choose to provide additional capital, for which it has increased borrowing limits, which would give that wider scope much more prominence and allow funding of the kind of innovation that comes from universities.

Flora Hamilton

It is about how we bring that together and channel the funding in particular ways.

John Mason

The advisory group has been mentioned—some of the witnesses have made comments about it. What should the relationship be between the advisory group and the board of the bank? For example, would it be good or bad for the chair of the advisory group to be on the board as well?

Helen Martin

The governance of the bank is very important, because, as Matt Lancashire rightly said, the bank will be independent of Government. It will be given its missions—hopefully, those will be democratically decided—and it will then go away and work on them. I would like the bank’s governing body to be well designed to ensure that it has good governance principles at its heart. For me, those principles would mean that that structure would include representatives of wider interests. For that purpose, it would be key for us to see a seat for workers on the board, but it would also be appropriate for someone from the wider advisory group to sit on the board. That would give it a broader perspective and would reflect the wider discussions of the advisory group, whose membership would include a mixture of civic society organisations, businesses, universities and the other groups that have been mentioned, such as trade unions in their broader role.

John Mason

You do not think that it would compromise the advisory group to be partly involved in decision making.

Helen Martin

No. That question is put to us a lot in trade union land, and we debate it endlessly. Should trade unionists sit on boards and be involved in the decision making, when they are also potentially challenging the employer’s decisions? At this point, we have pretty much decided that it is worth being involved in that decision making and having that clear ability to shape and truly participate, as an equal, in those decisions. It is a very different relationship from that of simply offering someone advice.

It is not hugely clear whether the advisory group would offer advice to the minister or to the board of governors; actually, the advisory group should advise both. Having a member of the advisory group on the board, along with a seat for workers, would be an important way of bringing in that wider perspective.

John Mason

The previous panel suggested that the articles of association should mention the advisory group. That is not in the bill, but the preference of one witness at least was that the advisory group should be in the articles of association. Do you think that it should be?

Flora Hamilton

It would make good sense for the advisory group to sit in the articles of association. We have not debated that in detail at the CBI but, having listened to the previous evidence session, I think that that would make good sense. If the advisory group is to have the role of feeding back and providing independent monitoring and advice to the Scottish Government, it would make sense for it to sit in the articles of association and to be identified as fulfilling that role.

We have not debated at length whether members of the advisory group could also sit on the main board. I advise looking at international practice on that and at what other regulated bodies are doing to see whether that is appropriate and to understand the two distinct roles of the advisory group and the board. The committee could look at how other regulated bodies in the UK tackle that.

Matt Lancashire

I will not comment on whether a member of the group can sit on the board, but I will comment on what the perception of the advisory group is, and that can play a part in greater people than me deciding on that.

I think that the advisory group will be set up to provide intelligence and analysis of emerging and future trends, challenges and opportunities in society, the labour market and the wider economy; to advise on the creation or amending of missions of the bank; and most crucially, to identify growth sectors that require patient capital. The advisory group is meant to be independent.

Members should take from that what they will.

John Mason

Okay.

Matt Lancashire

If a person is advising on where to invest and, all of a sudden, they are making the decision on where to invest, that could—

John Mason

I get that point.

Helen Martin

I want to add a further point about the articles of association. It would be appropriate to put what was discussed into the bill. There are precedents for that. For example, the Scottish Qualifications Authority has a board structure and an advisory group structure that could be looked to as a model. In that example, the member of the board chairs the advisory group. It is seen that way round, but it could potentially be done the other way round.

John Mason

That is a helpful example. Thanks. I see that the convener is chasing me to ask my questions quickly, so I had better move on.

I want to touch on the financial side of things. I think that most of our witnesses have said that they think that £2 billion is a reasonable amount of capitalisation. If any of you think that it is not, please say so.

The other issue is costs and how quickly the bank should break even. The previous panel seemed to think that breaking even by around 2022-23 is a little bit quick, given some of the costs in the financial memorandum. There should be reasonably brief answers on that, if possible.

Flora Hamilton

That looks incredibly tight, but it is doable. It is very important that there is a level of patience and a level of understanding that the bank is for mid to long-term investment to drive growth in the Scottish economy, so it will not be a quick fix, and it will not quickly balance out its costs.

John Mason

I presume that we cannot just keep pouring revenue expenditure into the bank year after year.

Flora Hamilton

Absolutely. How the British Business Bank has been set up is a very good model to look at in the UK. There are good models to consider.

The bank cannot be a burden on Scottish finances, but there needs to be an understanding that it will take some years for it to get up and running and be able to meet its costs, and to deliver a return on investment. Part of its function is the provision of mission-led, long-term patient capital, and it cannot be overreliant on the other two roles, which relate to scale-up and start-up financing. If it is pushed in that direction, that will temper its nature. Patience will be required.

The period that was mentioned is ambitious but doable.

John Mason

Should politicians be more patient, Mr Lancashire?

Matt Lancashire

We can always call for that.

The £2 billion is welcome; it is 1.3 per cent of gross domestic product, which is more than other countries have put into their investment banks, albeit that other countries have bigger economies and so have more money to invest. Our concern is that we will not reach that proportion of GDP until 2030. The economic changes that we want, given our vision to transform the economy over the next couple of years, might therefore be difficult to achieve before 2030. It might be helpful to look at that. Scale and speed are required quickly.

Everyone is saying that the bank covering its operational costs by 2023-24 is tight, so I will say that it is tight. It relies on people, who need to be mission orientated and altruistic towards the mission, as I think that the committee heard in the earlier part of the meeting. However, there is a war for talent in financial services, which is why wages are through the roof and financial services companies in Scotland struggle to get the talent that they need. A close look at the talents and expertise that will be needed up to 2023-24 to make the bank operational and able to move forward is critical, because there is a global war in financial services—

John Mason

I think that another member will ask about remuneration. We can come back to that.

Helen Martin

I echo the point about patient finance, which is important and needs more consideration. Right now, the balance is very much in favour of the shorter-term elements.

The other question is whether there is a way to leverage in more money, primarily to enable the bank to invest in different things. That takes me back to the point about restricting investment to the private sector, because of the transaction costs.

Angela Constance

The panel will have heard in the earlier discussion that Engender and Close the Gap have substantial concerns about the equality impact assessment. Do you have concerns about it?

Helen Martin

The equality impact assessment was not extensive, so perhaps more thinking is required. In some ways, it covered a lot of ground. It started to talk about the fair work agenda and fair work first, which we welcome, because we think that that is essential. It also talked about the need to follow the guiding principles on business and human rights, which is also important, although that raises a lot of questions about where the bank’s expertise will come from in that respect. The guiding principles are quite technical, but they are important and could be used to great effect to follow the ethical mission if there is a good understanding of what following them really means.

Angela Constance

Are you concerned about equality not being written into the bill?

Helen Martin

Yes. That takes me back to my comments about the bank’s objects. The sense of a wider mission around equality, support for communities and ethical investment is a hugely important element, which fits well with and complements the bank’s missions but which could easily be lost if the bank takes a short-termist, high-growth approach to its work.

Angela Constance

Do other panel members have views on whether the equality impact assessment was treated as a tick-box exercise?

Flora Hamilton

We have not engaged with CBI members on that. However, the CBI calls on business to build diversity and inclusion across all areas of its organisation and we have plenty of examples of diversity and inclusion policies delivering economic impact.

Recently, the Rose review considered the lack of access to funding for female entrepreneurs across the United Kingdom. An expert on your earlier panel gave their view on that. The bank could act on some of the recommended initiatives focusing on female entrepreneurs that are coming out of the Rose review, because the amount of funding that reaches female entrepreneurs and growth businesses is shockingly low. The bank could have an important role in addressing that. By addressing it, we will find further growth in the Scottish economy.

Angela Constance

Mr Lancashire, do you have anything to add, or shall we move on?

Matt Lancashire

Similar to the CBI, we champion diversity and inclusivity across all banking governance and operational structures. We support diversity and inclusivity being included as part of the bank’s operational standards and across the make-up of its staff, board and advisory group. That will only lead to better investment decisions, which will lead to a more inclusive society for Scotland.

Angela Constance

The committee has heard mixed views on remuneration policy. Some people point to the fact that the bank will have to operate in the financial services sector, but others point out that it will be a public body that will be accountable to taxpayers for value for money. What are the views of the panel on what the specifics of the remuneration policy should be?

Flora Hamilton

I am happy to say that one of the points that the CBI feels strongly about, for a number of reasons, is that the bank should collaborate closely with the British Business Bank. Remuneration policy is one area in which collaboration could deliver and help the Scottish national investment bank to develop a successful people policy. The British Business Bank has benefited from such a policy and managed to attract the right talent to make it a success, enabling it to deliver back to the UK Government. It would probably be able to give good, tailored advice on that area.

Angela Constance

What are the level of salaries in the British Business Bank? Have there been any accusations of eye-watering salaries, for example?

Flora Hamilton

No, there have been none, as far as we are aware.

Matt Lancashire

Ensuring that the bank is a great place to work and has a strong identity and good sense of mission will support the attraction of talent from within and beyond Scotland. That is critically important. Remuneration for senior leadership staff should be closely linked to the bank’s performance, which is also critical in terms of fair pay for hard work. If someone has achieved their targets, they should be justly rewarded for that, as in any other role or job.

We need to strike a delicate balance between empowering the bank to attract talent through big wages, bonuses and so on, and retaining public trust in the bank. There is a critical line between what is too far and what is not. We want to get the right people and talent, because we want the bank to be successful, but that will take decent remuneration packages, particularly when we are after leading economists and financial experts for the bank. The question is how to achieve that while retaining public trust, given all the discussions over the past 10 years on remuneration, salary packages and bonuses in banking.

Angela Constance

Ms Martin, I am sure that you will have an answer to that question.

Helen Martin

We are clear that the bank will have to apply public sector pay policy, because it will be a public sector institution. It is not reasonable to carve out a special case for the bank as if financiers were somehow more important than other types of civil servants who do excellent work. Every employee, not just the senior leadership team, should get fair remuneration.

However, if there is a problem with applying public sector pay policy and managing to attract talent, that is a wider question for the basis of public sector pay policy as a whole, rather than it simply making a case for the Scottish national investment bank to have a different approach. I think that that would put in jeopardy public trust in the organisation, particularly given the issues in the banking sector more widely.

Colin Beattie

A couple of panellists have mentioned ethical investment. Major investment banks and a lot of pension funds have lending exclusions, which can relate to tobacco—that is typical—and perhaps to greenhouse gas emissions or activities that would impact negatively on biodiversity and the ecosystem. Should the bank follow an ethical lending policy? If so, what should it be?

Flora Hamilton

CBI members do not have a list of lending inclusions that they would advise the bank to follow, but the bank’s investments in start-up or scale-up growth activities should not run contrary to the bank’s activities that fall under its mission-led, patient-capital investment work. It is important for the bank to be driven by sustainable growth, which is an emerging area that is coming into the financial services policy landscape from the saver and investment community. That community wants its investments to be in products and parts of the economy that satisfy environmental, social and good governance factors.

In the FS sector, the big push is to find such ESG investments. A lot of work is going on at the UK and European levels on how we can work towards sustainable investments, which will be resilient and will deliver in the long term. The pressure will come from savers and people who want their pensions to go into sustainable investments. That is the wider landscape, so the bank will have to think about its sustainable investment policy.

Matt Lancashire

The question links to ensuring that the bank’s missions are legitimate and of high societal importance. That approach is in the proposals for the three main drivers of the missions to be a low-carbon economy, healthy ageing and inclusive growth. They are all ethical missions and they very much copy KfW’s model, which is about climate change, globalisation and so on. The proposals would move to a similar standard to that which other European countries use for their banks.

The bank lacks an ethical mission in relation to what the fourth industrial revolution means for people, jobs and the economy. All our expertise and knowledge must be brought together so that the fourth industrial revolution creates a giant sector for the Scottish economy that involves automation, robotics, artificial intelligence, big data, nanotechnology and biotechnology. We are missing that crucial mission.

As I said in response to Jackie Baillie, we need further clarity in the bill about what is ethical and what sectors will be excluded before we can comment on how to choose ethical investments. A definition is needed.

Colin Beattie

Should that definition be in the bill?

Matt Lancashire

I do not suggest that, but a definition of what is ethical is needed at some point, so that people can decide whether they agree with that standpoint. Clarity is lacking about what will be ethical and what sectors the bank will be allowed to invest in. A bit of work is needed on that.

Helen Martin

The question is important, as it gets to the heart of the bank’s role. I agree with Flora Hamilton’s comment about the idea that the bank should not invest with its left hand in a way that undermines the missions of its right hand. To a certain degree, particularly around the low-carbon future, those missions give a sense of some of the exclusions that people might have in their investment portfolios. It makes sense for that to be mainstream through the entire ethos of the bank, for the missions to overlap and for some thought to be put into how they work together—for example, how to create a proper place-based approach.

Within the equality impact assessment, there was a commitment to the principles of fair work first. It is important to mainstream that fair work commitment throughout the bank; creating quality employment for workers across the economy should be at the heart of everything that the bank does. The United Nations “Guiding Principles on Business and Human Rights” are another way of thinking about ethical investment; that is already in some of the documentation around the bank. A lot of building blocks are already there. It is about putting the strategy around them and understanding what that means if we are going to do it in a strategic, sustainable, coherent and holistic way.

Matt Lancashire

If, at the moment, an oil and gas company is delivering carbon into the environment, does the bank not invest in it when it comes up with a solution for a technology that reduces carbon in the environment? How do we judge that? What is the ethical approach? Could we exclude that solution from investment because it comes from a big oil and gas company? We need clarity on what that means, because excluding businesses that might be transitioning, or doing different things that need the investment that could push our economy forward, would be a dangerous step to take. Although the ethos of the bank might be to invest in low carbon and net zero emissions, does that mean that we cannot invest in mature industries and sectors that are looking to transition with the technologies and innovations that they have? We must be careful about that aspect of the investment bank’s role.

The Convener

I thank our panel for coming in today. Please feel free to write to the committee if you have further thoughts on some of the issues that have been raised.

The Convener

Item 2 is stage 1 of the Scottish National Investment Bank Bill. We have with us five witnesses. Graeme Sands is business banking, corporate and mid-market director at Clydesdale Bank; Andrew Castell is a partner in Par Equity; Jock Millican is investment director at Equity Gap; David Ovens is chief operating officer at Archangel Investors; and David Grahame is chief executive of LINC Scotland. I welcome all five of you.

I will start with a question about supply of capital. It has been suggested in evidence to the committee that the supply of capital in Scotland is increasing, with more funds being available from the private sector. However, there seems to be a lack of demand in the market. Does the panel agree with that? If so, what are the reasons for it? How will the Scottish national investment bank be able to overcome the lack of demand for capital in the Scottish market?

Graeme Sands (Clydesdale Bank)

Good morning, convener and the committee.

Rather than give the committee an anecdote, I will outline some statistics. I recently looked at the “SME Finance Monitor: Q4 2018” report, by the French consulting group BVA BRDC. It looks at statistics for SME borrowing across the whole United Kingdom; there is no reason to think that the outcomes in Scotland would be any different. The report’s conclusions are interesting. Of every 10 applications for finance from small and medium-sized enterprises, seven received precisely what they asked for. One out of 10 took a facility that was not exactly what it had asked for, and two did not get a facility or—as with a small proportion—declined to take the facility that they were offered. In answer to your question about whether there is a lack of supply or of demand, those statistics indicate that there is a little bit of a lack of demand.

On the second part of your question about what is driving the lack of demand, there are many different views. Clydesdale Bank has landed on the view that the nature of the economy is changing. There is an old-fashioned notion that people come forward for finance for things like plant and equipment, or because they are going to put in place a new production line from which they will make a profit. However, as Scotland’s economy in particular gravitates toward services, it is not clear that businesses necessarily have as much demand for finance as they used to have. It is certainly becoming clear that they have a different type of demand from what businesses had 20 or 30 years ago.

Those are my bank’s answers to the two questions that you posed, which are very useful questions in the context of the bill.

David Ovens (Archangel Investors)

I will give a different perspective: I will challenge the premise that there is a lack of demand. I do not think that there is a lack of demand in Scotland—the problem is rather that there is a lack of joined-up supply. Demand is most overt in the market in which Archangel operates, which is businesses that are at the very early stages. That demand emanates from a number of sources—from competitions such as the converge challenge to the great research and development that is coming out of our universities.

Funding and financing in that market is challenging, because it requires great patience to take a business from initial financing through to the point at which it can access alternative forms of conventional finance. Typically, Archangel would invest at a very early stage in a company’s development, but will assume that we will be the lead investor throughout its journey, which might last in excess of 10 years. That journey will take the company to the point at which it can access other forms of capital—perhaps the type of capital that Graeme Sands and his colleagues would be able to provide. The challenge is to address specific market failures along the journey, and to ensure that the SNIB comes in as an institution that will address those market failures.

The Convener

Can you clarify your view on what Graeme Sands said? As I understood it, he said that there is more demand for services, or a drive towards creation of service businesses rather than manufacturing businesses that—for want of a better phrase—create actual things?

David Ovens

The bulk of the companies in the technology sector in which we invest manufacture things—they are product rather than service companies. As I articulated, the challenge is that not enough of those companies make the journey from the earliest stage to more conventional capital demand. We need to address that issue in the market. There is demand for companies that make things and produce innovative technology, but there is currently inability to take those companies from the very early stage, through commercial maturity, to the point at which alternative supply sources are available.

The Convener

I will let Graeme Sands back in briefly, and then bring in David Grahame.

Graeme Sands

I will clarify my earlier comment. In talking about the change in capital requirement, I was referring to a move away from heavy manufacturing and plant equipment. In many cases, the businesses need research and development capital. Ultimately, they make things, but the pathway towards that type of manufacturing is very different to what we might have expected to see 30 or 40 years ago.

David Grahame (LINC Scotland)

We are talking about a really important and complex area. We need first to distinguish between “need” and “demand”. Need is huge, but the ability to convert that need to fundable demand is a big issue, so we need to unlock that if we are going to release economic potential.

Demand can be inhibited by a number of factors. The most basic issue is lack of awareness of what is available and how to go for it. However, confidence can also be a factor, as businesses tend to come and go depending on how uncertain the times are.

In addition, at any point in the cycle the nature of demand can be out of step with available supply. An important requirement of SNIB is that it be well informed and agile in order to enable it to respond. It will also need to be extremely well integrated with all sorts of other agencies in order to manage the demand flow properly.

LINC is currently a major originator source for the Scottish Investment Bank. Over the past three years, our network has taken 255 deals worth £167 million to the SIB. That involved the SIB putting in £44 million while we put in £123 million; leverage and co-investment are very important. However, we know that we are not funding anything like everything that is coming forward.

The Convener

I will bring in Dean Lockhart, while we are on the subject of demand.

Dean Lockhart (Mid Scotland and Fife) (Con)

I have a follow-up question about demand. We have heard from the SNIB itself that it will not originate funding opportunities—it will rely on other entities such as Scottish Enterprise and LINC Scotland to do that, rather than going out and finding businesses to fund. Given the significant additional capital that will be available, do the existing enterprise entities have sufficient resources to deal with such a step up in the amount of available funding? Are they set up to meet that demand?

Jock Millican (Equity Gap)

It is important to be clear about how they will bring businesses forward and whether, from our perspective, those are investable businesses. We would want to see that they are investable rather than just viable; there is quite a difference between the two.

We currently work closely with the Scottish Investment Bank’s Scottish co-investment fund, which works extremely well. We meet most of the demand from investable companies, although some companies are, at that stage, viable but not investable. That is perhaps where some of the funding needs to be looked at separately.

Andrew Castell (Par Equity)

I have two points to make. First, I emphasise the distinction that Jock Millican just made. The committee might benefit from remembering that there is a whole universe of businesses, a relatively small proportion of which are the kind that interest me and my colleagues in equity investment—the very high growth potential, but risky businesses that have the potential to deliver high returns, but also to generate losses.

Within the universe of bankable businesses there is another group: the businesses that can sensibly be lent money, which are more interesting to my banking colleague, Graeme Sands. A large number of them are perfectly viable and sensible, but they will be neither bankable nor of interest in the eyes of venture capitalists.

We talk about whether there is an imbalance in the demand for and supply of capital. There will be potential mismatches: certain types of company are crying out for capital and cannot get it, while other types of company do not really need capital but are being offered it. While there might, in the round, be equilibrium and some demand for capital, there will be isolated pockets of mismatches where there are supply and demand issues.

My second point is on the sufficiency or otherwise of what looks like quite a big number: £2 billion over 10 years. I will outline how we currently work with the Scottish Investment Bank. Par Equity drags a lot of money from south of the border—we are probably an outlier, to a greater or lesser degree, in respect of the proportion of money that we invest that comes from down south—and we put a disproportionate amount of such money to work in Scottish companies. The co-investment money that we get from the Scottish Investment Bank is extremely useful in enabling us to drag that investment capital into Scotland, and to be persistent and patient with the companies in which we invest. One of our key objectives or aspirations for the Scottish national investment bank is that that successful model should not be broken in the transition.

David Ovens

Was Dean Lockhart’s question about the sufficiency of resource related to the personnel, or the capital that has been applied to the new institution?

Dean Lockhart

It was a bit of both. In addition, is it right to have a model that divides origination and lending, with a number of different entities looking at different parts of the supply chain?

David Ovens

On sufficiency of capital resources, the proposal is to capitalise the bank at £2 billion over a period, which is broadly in line with other national promotional banks. On the face of it, that seems to be a sensible level of capitalisation that could go quite a long way if it is applied sensibly to address market failures.

On allocation of resource within the organisation, the Scottish Investment Bank currently works largely on an accredited-partner basis—in a sense, it will back the private sector. There will be a headcount required to manage the portfolio, but a lot of the heavy work will be done by the private partners—such as Archangel—that the bank is backing.

David Grahame

I have a similar comment to make. There is an opportunity to build on the partnership model and to find delivery efficiencies through not building an ever-bigger establishment. That might involve a lot of things that are outwith our space—for example, tapping into peer-to-peer lending as a delivery channel.

Dean Lockhart

Co-investment has been mentioned quite a lot. To what extent should the SNIB follow the co-investment model in leveraging public sector money with private sector money? To what extent should opportunities be identified by the private sector rather than by the bank itself?

David Ovens

If we look at what has happened with the Scottish co-investment fund over the past 15 years, we can see that it is a demonstrably successful model. There will be aspirations arising from the SNIB consultation, but you should not change a model that has been very successful over the past 15 years. You need to build on that model, which very much leverages and crowds in private sector investors. It has been copied around the world, most recently by the British Business Bank. The co-investment model has been very successful, and SNIB should build on that template.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

The British Business Bank has four objectives, including to increase the supply of finance and to create a more diverse finance market. What impact has the bank had in Scotland?

Jock Millican

The impact of the British Business Bank has been fairly limited, so far. It has had some involvement in Scotland, and it is increasing its presence here, along with the amount of opportunities that we are able to look at with it. It now understands the Scottish infrastructure model better and is able to work better with us on that front. However, we have still to do a lot more with it.

David Ovens

The British Business Bank is focused more on investing in funds than on core investment capital. As I alluded to a couple of minutes ago, the British Business Investments regional angel programme, for example, which is now competing almost directly in Scotland with the Scottish co-investment fund, is a replica of that fund model, in which co-investment capital is provided alongside funding from the private sector partner.

Graeme Sands

It is useful to remember that, historically, the Scottish co-investment fund has addressed only the equity side of funding. To a degree, that is also true of the British Business Bank’s initial expansion. We should not forget that the British Business Bank also provides the enterprise finance guarantee scheme, which is a tremendously substantial way of crowding in—if we want to use that phrase—debt funding into businesses and ensuring that they get greater access to bank capital.

As we begin to think about how the Scottish national investment bank is established, it is important—certainly from my perspective—to ensure that we think about equity and debt. For example, does the mechanism of something like the Scottish co-investment fund work equally well for debt in the future? It might well do, or we might consider that something like the British Business Bank already substantially addresses that aspect.

Gordon MacDonald

The British Business Bank’s “Annual Report and Accounts 2018” highlights its regional funds in the north of England, the midlands, Cornwall and the Isles of Scilly, and states that they

“are now delivering critically-important debt and equity finance to boost their respective regional economies.”

Is there any particular reason why it has not focused so much on Scotland?

Andrew Castell

I say, based on a conversation that I had with someone from British Business Investments last week, that that is a back-handed compliment. The bank is, essentially, focusing on regions where it sees a real need for its intervention: it does not see Scotland as being in that category because of the success of what has been happening with SIB and Scottish Enterprise.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

The target rate of return for SNIB will be established before it is actually vested. What level of target rate of return would you expect a bank with the characteristics of SNIB to achieve?

We have heard that SNIB will potentially lend to not-for-profit companies and all sorts of different aspects of the third sector, which adds complexity to its position. How would you establish what a reasonable rate of return would be?

Andrew Castell

Much of that will depend on what the portfolio of assets looks like. When the bank is up and running, it will want to achieve a certain mix of lending, equity investment and so on, which will drive its idea of what a reasonable rate of return should be.

Colin Beattie

I take on board what you say: until there is a portfolio, we do not really know.

Andrew Castell

Exactly.

Colin Beattie

Nevertheless, the bank will put in place a target before it is actually vested. In your view, what would be a reasonable target and why?

Andrew Castell

As an accountant, I can tell you about the cost of most things but the value of very little. Much will depend on the missions that are set for the bank, and the non-financial targets around some of the broader social goals that those missions are intended to deliver.

In absolute financial terms, one can look at what might be a reasonable market return on venture capital or on credit activities and come up with a number. The big and very difficult challenge will be to throw into the mix some non-financial returns, which will be necessary in order to deliver on even a relatively small proportion of the great hope and excitement that the project has engendered.

Graeme Sands

First and foremost, Clydesdale and Yorkshire Bank is strongly in favour, in principle, of a Scottish national investment bank. Nonetheless, I point out that, although the “Consultation on the Scottish National Investment Bank Bill” uses words such as “bold” and “ambitious” and states that the bank is designed to address third-sector and other wider socioeconomic concerns—on page 7, it suggests that the bank must look at different types of financing—it also states that the bank must be “commercial”. That is in addition to achieving an ambitious rate of return. It will be incredibly hard for the bank to achieve all those aims in combination if, as we would suggest, its remit keeps it clearly away from existing commercial opportunities.

We are asking SNIB to go to places that the commercial market does not currently go, presumably because of risk or for reasons of patience and long-term capital. However, we are also asking it, as part of a very broad remit, to improve Scotland’s economy. I wonder whether it is necessarily wise to establish an aggressive rate of return, or to establish a rate of return at all, ahead of the establishment of the bank’s missions.

Jock Millican

A key term in the bill is “patient capital”, and that is where the focus needs to be. The bank will be about providing long-term capital—there will be returns from some elements of that, but not from all of it. It would hamstring the bank very badly to set out an ambitious rate of return at an early stage.

Colin Beattie

Did the British Business Bank not set a rate of return of 2.5 per cent, which it has exceeded? It must have had a basis on which to set that target.

David Ovens

For all the reasons that my colleagues have outlined, a positive internal rate of return over a period of a time would be a successful outcome for the bank. In addition, we should not lose sight of the fact that the bank is being set up as an institution that will be a cornerstone of the economic foundations for the nation. Financial return is one measure of success, but the economic impact should be equally important in that regard.

Colin Beattie

The message that I am getting is that the target rate of return should not be too ambitious in the first place. I see that you are all nodding.

Graeme Sands touched on the issue of additionality and the need for SNIB to avoid competing with existing products on the market. Is that achievable, given the mission that SNIB will have? Is it achievable for SNIB to avoid competing with the multitude of financial sources that currently exist in the market?

David Ovens

Yes, and that should be SNIB’s defining mission. To go back to the core objectives of SNIB, the driving mission is to create an institution that will drive economic performance in Scotland. It will do that on the one hand by supporting SMEs through market failure, and on the other hand by driving economic imperatives and missions that are set from time to time by ministers.

I will look at the market failure aspect first. The early-stage equity investment market in which we operate is very much an area of market failure. We are incentivised to invest in that area through various tax breaks from the UK Government, such as the enterprise investment scheme. However, that incentive would not in itself be enough to drive sufficient capital into that area of market failure, and the activities of the Scottish co-investment fund are therefore vital in leveraging our activities in that respect. That fund is additional to private capital—it is bringing in private capital rather than competing with it.

Secondly, I turn to the missions for SNIB. One of its missions, as the implementation plan articulates, concerns the transition to a low-carbon economy; it sets targets on petrol and diesel to be achieved by 2032, which is 13 years off. It would be very difficult to persuade conventional private capital to take a 13-year view on a return, but it is sensible for SNIB to intervene in that area. It is additional in that sense—it is not going to leverage out private capital.

Colin Beattie

Do you envisage that, rather than pursuing entirely different products, SNIB may have a role in supporting some of the existing capital investment into the country?

David Ovens

Where SNIB can crowd or leverage in private capital, that will be vital to its role. What it should not be doing is competing with conventional sources of capital from Graeme Sands and his colleagues at the Clydesdale Bank.

Colin Beattie

It is easy to say that SNIB should not compete with existing products on the market. What kind of products should it go for?

David Ovens

The area in which we operate is very equity driven. We might think about the funding journey for a company: for the first 10 or 15 years of its life, the relevant asset class will, 90 per cent of the time, be equity—that is the instrument that addresses the early market failure. As the company develops, other forms of financing may become relevant. However, with regard to the long-term patient capital that is really the driving mission of SNIB, equity or quasi-equity will be the relevant asset class 90 per cent of the time.

Graeme Sands

Another way to think about it is not just to look at particular financing products but to consider a company’s life cycle and what it needs during different events in that cycle. One important point—I cannot recall if it is referenced in the consultation paper, but it has certainly been referenced in subsequent discussions—is the transition from early-stage equity to later-stage equity and then to debt finance. Those transition points are often quite hard, for a wide variety of reasons that I probably do not have time to go into here. That is an event in a company’s life cycle that it may need support with. It is not about different commercial products per se, but the fact that those products are not necessarily available during those events.

More widely, I think that no one would suggest that, even in relatively efficient capital markets, there are not gaps in certain areas from time to time. The Clydesdale and Yorkshire Bank would simply suggest that the missions that are set out for SNIB should clearly identify what those gaps are, and clear evidence should be provided rather than relying on anecdote. We would be happy to work with SNIB in the future to help it to set out and explore those gaps.

Colin Beattie

Does anyone else on the panel have a view on that?

David Grahame

That has pretty much covered it. There are a lot of gaps—the staircase of finance is not complete. There are certainly issues beyond our level before companies get to conventional funding, and SNIB could provide leadership in that area. By getting that right, the bank would also lever in new finance, quite a lot of it from outside Scotland.

John Mason (Glasgow Shettleston) (SNP)

We have talked about the commercial focus that the bank has to have, but we have also heard about the desire for socioeconomic and environmental returns. Does the public limited company model fit in with that? It is proposed that SNIB should be a plc. The Government looked at other models—Scottish Enterprise is a statutory body, for example, so its missions are set in statute rather than being left to the articles of association and so on. Are you comfortable with the plc model? Can it work?

Andrew Castell

I think that it can. On whether SNIB needs to be a plc or simply a private limited company, I point out that people typically go for plc status if they are contemplating raising capital externally. As I understand it, however, the plan for the immediate future is that the bank should be exclusively financed by the Scottish Government.

Essentially, SNIB is an example of that great Scottish invention, the investment trust—it is not really a bank. For that purpose, a plc works well enough. It also provides a degree of flexibility. The point about corporate structuring is that, if you do not like it, you can change it subsequently. Nothing is really set in stone for the institution by the fact that it is starting off as a plc.

John Mason

Do you think that, in some people’s thinking, the very term “plc” suggests that there will be a big emphasis on commercial return, with less emphasis on the social and environmental aspects?

Andrew Castell

If only it were that reliable. There are plenty of plcs that we can think of—even banks—that have not done much by way of returning profits.

John Mason

True.

Jock Millican

The plc model covers the requirements quite well, and I do not think that there is any need for anything different.

John Mason

On the question of return, we have talked about risk and exactly where the bank fits in. The proposal is that it should be breaking even by 2023-24. Is that realistic, given what we have said about risk?

Andrew Castell

Earlier, I whipped out a calculator and considered that point. If we are thinking about it in government cash-accounting terms, I would say that there is not a hope. However, if we examine it at a company level and ask whether the SNIB would be able to turn a profit—in particular, an accounting profit—I would say that it probably would. Much will depend on whether the existing portfolio of Scottish Enterprise investments is transferred over to the bank, because that will, in principle, provide a number of exits and a portfolio whose valuation will, hopefully, continue to tick up. In cash terms, however, absent a strong weighting towards cash-generative assets such as loans, I do not see the bank breaking even.

John Mason

Let me clarify that, because some of it was a little bit technical. You are saying that, by 2023-24, the value of investments might be going up but we would not be able to get the cash out.

Andrew Castell

Yes, precisely.

John Mason

That could be a problem for the public purse, but the process would be understood.

Andrew Castell

Yes.

Jock Millican

I would agree with that.

David Ovens

From an investment perspective, it is difficult to see how the bank will be washing its own face within five years. However, I presume that the bank will have ancillary revenues as a function of facilitating investments, so there will be arrangement fees and perhaps portfolio monitoring fees, which will provide the bank with a recurring revenue source. It will not rely just on investment returns.

John Mason

You have all used the word “patient”. You are not politicians, but politicians are not always very patient. Do you anticipate that, if the bank does not do terribly well for the first two or three years, people will be jumping up and down, wanting the whole system changed? I presume that part of the idea is—as you have suggested yourselves—that we will put money in and see the success of that perhaps 10 years later. Are you optimistic that that can and will happen?

David Grahame

Optimistic politically? The average time to a positive exit for the gentlemen here is nine years, but the whole cycle can easily take 15 years. It is 15 years since the co-investment fund was founded, and it is only now beginning to go where it should be going. It is essential that the institution takes that sort of profile. It is a real challenge for the people who are designing it to make it able to survive through political change.

John Mason

You say that the average exit time is nine years, but some businesses take off amazingly fast, whereas some do not.

David Grahame

Yes. Most of the bad news comes earlier, which is sometimes difficult politically. Things might all go in one direction for three or four years. The lemons ripen before the plums.

John Mason

That is a good quote.

Graeme Sands

That is why the gentle counsel that we are able to give here is on de-emphasising from aggressive rates of return. If you believe, as we do, that the Scottish national investment bank offers something positive for the Scottish economy, de-emphasising away from commerciality and aggressive rates of return is perhaps a way to make the SNIB politically sustainable in the more difficult period of its establishment, which is likely to be the first five years of its existence.

David Grahame

There is a useful piece of background information that you might want to draw on. Archangels did a very long-term study of the economic impact of its investment, which also considered the returns that it made. That study is worth looking at, because it assesses the economic impact in Scotland of a 20-year cycle of investing.

David Ovens

Archangels was established as an investment firm in 1992, and we got the University of Strathclyde to undertake that study in 2015, so it effectively took a 20 to 25-year view of what we had done. That goes back to the point that we have to be patient when it comes to the financial return. For us, a successful financial return comes within about 10 years.

Returning to what the SNIB is all about, we were generating an economic impact along the way without necessarily generating a financial return for ourselves. The output of the University of Strathclyde report was that, for every £1 of investment from Archangels, we were able to generate around £9.50 of gross value added to the Scottish economy. Over that period, we generated around £1.2 billion of economic value added to the Scottish economy through the investing activities of Archangels; our portfolio companies created 4,000 jobs; and every £1 that we invested created £14 of turnover. A lot of the economic activity that has been generated by what we do goes beyond the financial returns that we are hoping to generate in due course.

John Mason

That kind of creates a problem in relation to the whole GVA thing. Basically, everybody who comes to the committee claims that, for every £1 we invest in them, we will get £7, £8, £9 or however much back. Are you convinced that we can measure that kind of figure fairly, reliably and solidly? The return that your business or any business gets can be measured very exactly.

David Ovens

GVA is a recognisable methodology. Companies create jobs and generate turnover and profits. The GVA methodology is subjected to tweaks and subjective views, but it is fairly standard, recognisable methodology that provides at least a baseline of the impact.

Jackie Baillie (Dumbarton) (Lab)

I wish to touch on the vision and objects that are contained in the bill. Some of the witnesses from whom we heard previously suggested that both the main and the ancillary objects do not quite capture the Scottish Government’s vision, which was set out in the implementation plan—nor, indeed, do they capture the expectation that the bank will serve environmental and socioeconomic purposes. Are you satisfied with the objects, or do you think that they may be slightly vague as they stand?

David Ovens

I think that the objects in the bill reflect the fact that, constitutionally, the SNIB is going to be an enduring institution that will drive economic activity in Scotland. There are also various ancillary objects. The missions that go on behind it are going to change over time, and the institution will be subject to whatever Administration is in power and to whatever the macroeconomic position is at the time. It is not necessarily right to enshrine specific missions within the constitutional objectives of what the SNIB is trying to do.

David Grahame

The objects are generally satisfactory if they are taken in conjunction with the ancillary objects, which add a bit more clarification. From what I have seen previously, there will need to be a fuller understanding of what is meant by “commercial”. We certainly do not think that that means just private enterprise.

Jackie Baillie

So, clarification is needed to expand the point that social enterprises and the third sector could be included. You think that that would be helpful in this context.

David Grahame

Yes, provided that the things that are being financed are capable, ultimately, of providing a return on the finance; otherwise, it is just a grant.

The SNIB is very important, but it will be only one public policy instrument for achieving socioeconomic objectives. For it to be effective, it is important to allow it to make that contribution in such a way that it is a good fit for an investment entity. It is one of the few channels for delivering public expenditure that is envisaged as a two-way street financially. That desire for sustainability needs to be borne in mind. The SNIB has attracted a huge amount of interest, ideas and expectations, but those could dissipate if there is a temptation to edge into things that should properly be tackled through departmental spending.

Jackie Baillie

Most social enterprises that I know of generate profits; it is what they do with their profits that is different.

David Grahame

Yes.

Jackie Baillie

There would be a rate of return for any institution.

David Grahame

Absolutely. As a phrase, “non-profit” is fine if it means an institution not distributing profit.

Jackie Baillie

Indeed.

David Grahame

However, it needs to be able to sustain itself.

Jackie Baillie

Absolutely. Do any other members of the panel have a view on that?

Andrew Castell

My view is that the implementation bill that we have before us will lead to the drawing up of the articles of the company of the SNIB, which I think should be fairly general. There is a process around the setting of missions for the bank, which Scottish ministers will come up with and which will be subjected to the scrutiny of the Scottish Parliament, as I understand it. That process will drive the granular detail of what the institution gets up to.

As I have to spend a certain amount of my time guddling around in bits of legislation, my pet hate is legislation that contains highly subjective, undefined terms. One of the particular dangers of trying to cater to the rapidly evolving third sector, not-for-profit organisations and social enterprise is that it is work in progress. There is a lot of jargon involved, and it is inevitably changing over time.

The fundamental point is that, as David Grahame observed, there is a lot of commercial activity among social enterprises and within the third sector, but it is clear, from the preceding evidence sessions, that a number of people have struggled with the objective of investing in commercial opportunities. We could do with some clarification that those are really just anything that is non-state.

Jackie Baillie

You must be older than you look, because the jargon, as you describe it, has been around—at least to my memory—for 20 to 30 years and has not changed much. So, there is clearly something going on there. The approach that you favour involves adopting a model that is sufficiently flexible and that allows ministers to specify missions.

Graeme Sands

To build on Andrew Castell’s point, I suggest that the missions need to be set out very clearly. There needs to be very strong governance around those—tight governance that sets out what the mission is, what the market failure is and what the evidence for that market failure is.

Human nature is a little bit like water: it finds the easiest path. We can already see from the building Scotland fund, which is set out on the website as the precursor to the Scottish national investment bank, that three areas have been identified: housing, commercial property and business-led R and D. I would be interested in seeing where the gap has been identified for those three things. Is it an equity gap, a debt gap or a mezzanine gap? What is the evidence for the gap on those three things? It is probably true that some banks will not lend to business-led R and D, but that is not the case with our bank. On the other hand, we are not a great fan of lending against housing. Hopefully, that level of specialisation indicates some level of professionalisation in the provision of finance.

Perhaps the gap is on the equity side—I do not know. It is not entirely clear that the missions, as they are being set out, are sufficiently supported by evidence of a gap or that that gap is clearly articulated. As we have all said, there will be gaps in the market—we all believe that; we just want to see what they are, what the opportunity is and how the Scottish national investment bank proposes to fill them.

Jock Millican

Changing missions and objectives frequently will not help the bank to operate well. It would not be right to make a change to the mission according to each whim that comes along. It needs to be a long-term, patient operation.

Jackie Baillie

When you say “long-term”, you are thinking about 10 years or more.

Jock Millican

Yes. Absolutely.

Gordon MacDonald

I want to ask about the funding of the bank. According to the way in which it has been set up, it will get an average of £200 million a year from the Scottish ministers. I think it was Andrew Castell who mentioned that the SNIB will be more like an investment trust than a bank. Part of the problem lies in the Treasury’s recognition of it as a department, not a bank. Should the Treasury recognise the Scottish national investment bank as a bank, and should the SNIB be allowed to issue bonds or public shares?

Andrew Castell

Graeme Sands will probably mark my homework here, where appropriate, but I would say that you should be careful what you wish for. If you make the SNIB genuinely a bank, it will require capitalising and regulating as a bank, and those things cost money.

There is a related question about diversifying the sources of capital. As soon as you start taking other people’s money, you are in a different place in terms of how the entity is controlled and how its governance works, the question being whether ministers and the Scottish Parliament could control it as they would if they were the sole shareholder and funder.

Nonetheless, those things can be done over time. The Green Investment Bank is an example of a bank that started off state funded and then got spun out and privatised.

Gordon MacDonald

You would not be in favour of the issuing of bonds—putting the shares aspect to one side.

Andrew Castell

I would certainly not do that for as long as there was finance available from the Scottish Government. You could consider securitising loans and selling off those securities, which would allow for the recycling of the capital that the Government is providing. There are a number of financial engineering options that could achieve the aims that you might want to pursue in using external capital that would not involve taking it into the bank itself.

Gordon MacDonald

I note that, if the SNIB remains recognised as a department, it needs to

“secure a dispensation from HM Treasury to have the flexibility to manage, retain and carry-forward cash balances over financial year-ends”—

given the headroom that the Scottish Government has for carrying forward. What impact would it have if the SNIB were not allowed to carry those balances over?

Andrew Castell

I was a non-executive director of Highlands and Islands Airports Ltd for six years, and HIAL built up a reasonably sizeable cash reserve with a view to expanding Inverness airport. Sadly, it had that reserve taken off it—because the Treasury finally noticed it, I think.

I suspect that the bank will turn cash into investments quite quickly as it comes through, so the risk of its being caught with a sizeable cash balance at the end of each fiscal year is probably quite small. However, I suspect that it would make everyone’s lives easier if the bank were to secure that dispensation and be able to hold cash without it being taken away come the beginning of April each year.

Gordon MacDonald

You mentioned the Green Investment Bank. The British Business Bank got a dispensation that was similar to what the SNIB is looking for, did it not?

Andrew Castell

I do not know.

Angela Constance (Almond Valley) (SNP)

Does the panel have any views on the bank’s remuneration policy? The committee has heard a range of views on the matter, as you would expect. On the one hand, some witnesses have said that, as the bank will be operating in the financial services sector, the terms and conditions need to reflect that sector. Other witnesses have put forward the argument that, as the bank is a public body, there needs to be public confidence, and that senior personnel should be paid as public servants, as opposed to private financiers. Who would like first dibs on that one?

Andrew Castell

My views on this are not always very popular. If the employees of the bank are going to enjoy the advantages of being in the public sector, which are no compulsory redundancies and perhaps receiving a defined benefit pension entitlement, I do not see why they need to be paid the kind of salaries and bonuses that people in banks have been and continue to be paid. There is a risk premium associated with that kind of employment, which is quite precarious.

Referring to the pooling of local government pension funds that is happening south of the border and is being discussed north of the border, the asset management firms that have been formed to run the pooled pension institutions are concluding, more often than not, that they do not need to pay the big salaries to attract quality people. There are definitely precedents for having institutions such as SNIB fall within a government pay mandate.

Angela Constance

I would say that that is a very balanced view, as opposed to an unpopular one, but other members of the panel will perhaps wish to add to that.

Jock Millican

It is a matter of ensuring that the rewards come in different forms. As Andrew Castell said, no one in the private sector can even hope for the pension thing these days—it is all gone. It is about balancing these things. You must ensure that you are getting the right people to run the bank. It is no use saying that we will have a certain level of remuneration if we end up with people who are not capable of running the bank.

Angela Constance

I have not heard anybody suggest that we should be recruiting unqualified people. I wonder whether other members of the panel have anything further to add.

Graeme Sands

I will link this to previous comments. I will not comment on whether public or private sector pay is appropriate, as I do not entirely know what we are talking about within those two ranges. However, the mission and purpose of the Scottish national investment bank must be bold, ambitious and clearly set out and embedded within the culture of the organisation. I tend to agree with Andrew Castell and Jock Millican that, if the purpose is clearly embedded and understood in the organisation, it should be possible to attract the right people, who are rewarded by executing that purpose and not just by the pay cheque.

Angela Constance

So high-calibre people have a range of motivations that they wish to see fulfilled in their employment.

Graeme Sands

Yes.

David Grahame

I endorse that. It is not entirely surprising to get that view. The whole of the business angel community is partly driven by putting something back, as well as by investing. We are not at the red-in-tooth-and-claw end of things.

The bank will need quite a wide range of skills, particularly if it gets into dealing with third sector issues and so on, so it is important that it has a breadth of professionalism and credibility for dealing with those bits of the market that it is interacting with.

Angela Constance

Could you give some examples of the breadth of professionalism that would be required?

David Grahame

If we were to ask the personnel to assess a social investment proposal, for example, that would probably not use people with quite the same skills as those who would consider pure VC. We would not want to have the bank compartmentalise, but it looks like it will have to cope with quite a wide range of tasks.

David Ovens

I broadly agree with everybody. The senior management of the bank will not have an easy role, so they will need to be appropriately remunerated. That should be referenced to public sector pay policies, but without necessarily sticking to them.

I caution against a bonus culture. If the work of the bank is all about the long term, any related incentives should be appropriately pegged and longer term in outlook.

Andy Wightman (Lothian) (Green)

It is now common for investment funds, and indeed sovereign wealth funds, to have ethical policies. There is no provision for that in the bill, but I wonder whether you think that the bank should have an ethical policy, for example on things that it will not invest in, such as fossil fuels, tobacco and arms, or is that something that is best avoided?

David Grahame

The whole trend in society is towards ethical finance. That is certainly not something that we have a problem with. Nearly all the public sector sources that we interact with have limitations. Again, it comes back to the clarity of definition, particularly of terms such as “ethical”. That should not be a matter for interpretation by officials. We would have no problem with the bank having a clear ethical policy.

Andrew Castell

Pretty much everyone has an ESG clause in their investment management mandate, in their articles or whatever.

Andy Wightman

Sorry, what is an ESG clause?

Andrew Castell

Ethical, social and something or other—essentially, it is ethical investment. Everyone just calls it “ESG” and it gets lost in the acronym—apologies for that.

Some things are clearly bad: you would not want to be investing in terrorist organisations, drug pushers or whatever else. Then, there is tobacco, which is the next best thing, and so on. As you go along the spectrum, there will be areas of greyness. An example that was cited previously involved an oil and gas company that is trying to transition away from oil and gas and is developing low-carbon technologies. Is that something that should or should not receive some assistance from the bank?

Andy Wightman

We also had an interesting discussion about alcohol last week.

Andrew Castell

Yes. It has always intrigued me that Scotland is fixated on how bad alcohol is, yet it is one of our major exports to the rest of the world—but there we go.

On the specifics of the objects of the bank and how its constitution works, one very good maxim in life is, “Always do the right thing.” Directing the bank to be ethical in its approach, as an overarching objective, would be the way to do it—and then directing the management, at a more specific level, on what industries or activities are considered to be unacceptable for it to concern itself in. The bank could report annually, or however frequently makes sense, on how it is observing the more detailed guidance.

Jock Millican

I agree with Andrew Castell. It is important that the bank is given guidelines to work with on what is deemed to be ethical or not ethical at the time. Things change over time: what was ethical 20 years ago may not be ethical now. It should be down to ministers to give that guidance, I would say.

Andy Wightman

Those were fairly clear answers.

I will move on to another topic that we have been exploring: the proposal that there be a group to advise ministers, who will be the sole shareholder of the bank. The implementation plan, I think, suggests that the chair of the advisory group should be a non-executive board member of the bank.

The bill makes no provision for an advisory group; it is just something that has been suggested. What are your views on such a group? Would it be useful? Should it be incorporated either in a section in the bill or through something in the articles of the bank?

Andrew Castell

When it comes to the governance of any kind of undertaking, the fewer groups whose instructions you are expected to follow, the better. As regards the articles of SNIB and the enabling bill and so on, it should be very clear that the bank answers to ministers. Everyone knows, then, what the line of communication is.

As I understand it, the advisory group is as you have just described it, in that it is there to help ministers understand what SNIB is doing, what it might need to do, and so on. That channel of communication should therefore be between ministers and the advisory group. I think that it would confuse matters to enshrine the group’s status in the constitutional documents for the institution. That is simply because it may be that, over time, ministers feel confident enough that they do not need a bunch of people whispering in their ear about X, Y, and Z and can look after the bank themselves.

Andy Wightman

To be clear, if such an advisory group were to be appointed by ministers—no such provision having been made in the bill—you would not wish the chair of that group to be sitting on the bank’s board.

Andrew Castell

There could be very good reasons for that to happen, but that can be dealt with, as the appointment of directors to the board is in the gift of Scottish ministers. If they decide that they would like the chair of the advisory group to be a non-executive director of the bank, it can happen. I do not think that you need to make provision for that in the articles.

Andy Wightman

Are there any other views?

Jock Millican

I concur with those of Andrew Castell. It is very important that the advisory board does not directly influence the bank, but does that through ministers.

David Grahame

There could be an opportunity to get some wider value from an advisory group. If all that it did was channel a variety of opinions to ministers, it could be a sort of rolling consultation medium or focus group. If it were well structured and well led, its bringing together a whole host of people who would not normally sit down together and interact would hopefully lead to some better understanding.

Of course an advisory group would be entitled to feed through independent views. On occasions when the group came to a joint understanding of things that it wished to put to ministers regarding performance or future development, it could give a very powerful message.

Andy Wightman

I will pick up on a few things that were said earlier. Graeme Sands, you said that you thought that we should de-emphasise commerciality in the bank, yet that is at the heart of the main statutory article. Could you clarify that view?

Graeme Sands

In our written consultation response, we emphasised that we do not believe that the bank should compete with existing commercial options. We discussed that at some length. The deputy convener asked a question about the early years of SNIB’s establishment and the commercial expectations for it.

Our view is that, if the Scottish national investment bank is going to step into areas that are already covered by commercial equity or commercial debt finance, that is not desirable. That is not SNIB’s objective, and it would be unlikely to lead to the best outcomes for taxpayers.

It is a matter of the level of emphasis. I fear that, if we emphasise aggressive rates of return, especially in the early years, or if we emphasise a very commercial model, it could be hard to sustain the Scottish national investment bank as an entity. Clydesdale Bank is very supportive of its establishment, for all the long-term reasons that are set out in the consultation document. We see a danger in trying to make the organisation too commercial too quickly.

Andy Wightman

That is helpful.

I will move on to the subject of missions, which are central to the concept of the bank, and to the advice that has been given to ministers by Mariana Mazzucato and others. Provision is made in section 11 of the bill for setting missions. By their nature, missions will be cross-sectoral. As one of you observed, they are reliant on not just what the bank does, but what a lot of other people do.

Some months ago, I visited a business involved in an innovative heating technology that can potentially contribute to rapid reductions in fuel poverty levels. The business was on the point of leaving Scotland and moving to Zürich in Switzerland, until it got a contract from a housing association. That is the kind of example that I have in mind among a portfolio of investments that might help to tackle the big challenges around fuel poverty or indeed low carbon. That is what I have in mind when we talk about missions. Is that the kind of mission that you understand by the term? Do you have others in mind?

David Ovens

Let us consider the transition to a low-carbon economy as a mission, bearing in mind the premise that SNIB is primarily a financing organisation. As Graeme Sands indicated, the missions need to be evidence based. I think that all of us around the table would agree that the transition to a low-carbon economy, based on evidence, is a good thing that SNIB should be supporting.

We then need to recognise that getting from A to B will take a long time for that mission, and it will be a challenge to leverage in private conventional capital. In that sense, we are addressing a market failure. SNIB has to be focused when it comes to the financing.

As David Grahame said, other agencies can be involved in the other aspects. As far as personnel are concerned, there is Scottish Enterprise, and social enterprises could be involved in all aspects. I see SNIB’s role as being at the heart of the financing aspect of that mission-led approach.

Graeme Sands

Building on that, and getting more specific, it might be that the real problem in the example that you outlined, Mr Wightman—I am not saying that it is, but it could be a problem—lies in a lack of confidence in public sector or quasi-public sector procurement. That might be a useful place for the Scottish national investment bank to deploy guarantees.

If it were up to me, I would try to make the missions very precise. For instance, the mission might be to address a lack of public sector procurement confidence in small companies or smaller businesses that are trying to transition from active technologies to a low-carbon economy. I am simply using this as a hypothetical example. Let us say that we have seen a market gap—a lack of guarantees—so one of the bank’s missions would be to provide guarantees that close that market gap and achieve the end aspiration. That is the level of specificity or detail that I would hope to see from the Scottish national investment bank’s management in executing the missions.

Andy Wightman

However, the missions, as they are described in the bill, are to be set down in

“a document describing the socio-economic challenges that the Bank is to seek to address.”

There is no great specificity in that. Are you suggesting that the missions themselves should be quite specific and detailed?

Graeme Sands

At the risk of repeating myself—I have said it a couple of times—I think that the clearer the missions are, the less chance there will be of the bank’s operations straying into things that are not market gaps and, ultimately, the more successful the bank will be in the long run.

Andy Wightman

Andrew Castell, I think you said earlier that the missions would be subject to the scrutiny of the Scottish Parliament. In fact, there is no provision for that whatsoever.

Andrew Castell

Is there not?

Andy Wightman

No.

Andrew Castell

My apologies.

Andy Wightman

Parliamentary approval is required if the bank’s objects are to change, but the missions are to be set by ministers and communicated to the bank, with a copy of the documents to be laid before the Parliament.

Do you see merit in providing Parliament with a role in scrutinising the missions, and possibly even in resolving to agree or disagree with them?

Andrew Castell

Much would depend on the style of government. We have touched on this a few times. One of the challenges around any kind of patient institution is that there are fairly lengthy timescales during which any number of lumps of rotten fruit will be flung from the media or wherever else. If missions are subjected to quality control—considering how they are formulated, the time spent working out how to measure success and what success looks like, and how to communicate clearly to the agencies and entities that are responsible for delivering them—that will increase the chance of each mission being successful rather than ending up as just another initiative that petered out because no one knew what they were supposed to be doing.

If greater involvement by MSPs—rather than just leaving the Executive to it—were to result in better-quality missions in terms of how they are framed, that would seem like a good idea to me.

David Grahame

At the parliamentary level, we suggest scrutiny and comment rather than full approval, which might be too cumbersome a process. Although ministers set down the bank’s missions, there is a flip side. I think that I am right in saying that, under section 12 of the bill, the bank has to come back with proposals for how it will fulfil its missions. In our parlance, that is asking the bank to produce a business plan, so there could be some discussion on how, and by whom, such a plan should be approved.

Andy Wightman

Section 12 is quite interesting. It states:

“The Bank must send a mission report to the Scottish Ministers … within 3 months of receiving a document … explaining how”

it

“intends to respond to the strategic missions”.

Three months is a very short turnaround time; one would hope that the bank would get an advance briefing of a new mission. The provision does not strike me as encapsulating the production of a business plan or anything like that—it seems to require quite a high-level explanation, in very broad terms, of how the bank intends to go about fulfilling the mission.

David Grahame

I think that it would depend on the level of approval that ministers would want. If they want line-by-line approval, the time period may have to be longer.

Andy Wightman

Are there any other thoughts?

Andrew Castell

I would not like to be on the receiving end of a three-month deadline to report on how I am going to implement a mission for a multi-agency project. If I was sitting in the bank and there was a narrow focus on the bank alone being 100 per cent responsible for delivering against the mission, three months might be just about enough. However, if I had to liaise with half a dozen other parties, it would sound like a very short time period indeed.

That brings me back to the point that a high-level approach is better with this type of bill. It would not be helpful to set random—and possibly not very carefully thought out—deadlines and timescales in the bill.

Jamie Halcro Johnston (Highlands and Islands) (Con)

Does the panel feel that existing capital investment is focused more on the central belt and in urban areas? Conversely, what funding mechanisms exist for rural businesses, and how well are such businesses currently catered for?

Jock Millican

It depends. The vast majority of businesses that we are looking at are high-growth businesses that have quite often come out of universities. There is therefore an emphasis on those areas where the universities are, which is where the talent is. We tend to focus on those areas, but we also look at businesses from all over the country to see whether they are appropriate for us. Some businesses come from the universities and set up in regional areas. We have just been looking at a business that came out of a university and is now setting up in Oban; whether we invest in it is another question, but we are looking at it quite seriously. If a business comes forward, I do not think that there are any constraints in what we look at based on region or area.

David Grahame

We have operational groups in the Highlands and in the Borders, both of which were set up locally by people with a view to giving something back. To be fair, they have struggled to find demand in those areas. Support for the stimulation and development of demand is important, but that is a role for other agencies rather than for the bank.

Jamie Halcro Johnston

Is it a role for the enterprise bodies and local authorities?

David Grahame

Yes. Our colleagues in Highland Venture Capital are quite frustrated. They have been there for a long number of years, and they have one investment in the Highlands, with all the rest in the central belt.

Andrew Castell

It brings me back to what I said earlier: there are plenty of viable and perfectly sensible businesses, but they will not always be of interest to people with a venture capital mindset, who really want high-growth and high-value creation potential. Those high-value businesses, by their very nature, generally require highly skilled and highly qualified staff, who are available in great numbers in the central belt but in rather smaller numbers in, say, Fort William.

Dean Lockhart

I have a general question. Is there a national investment or development bank model overseas that we should look to as an example of best practice, or should each bank be tailored to the individual needs of each economy?

Jock Millican

As one or two of us mentioned earlier, the Scottish Investment Bank model is viewed with envy across the rest of the world. We have people who have been working with the World Bank to institute that exact model in other parts of the world. From the co-investment perspective, we have a very good model in Scotland. With regard to SNIB’s wider remit, things may be done differently elsewhere, but I am not aware of any specific examples.

David Ovens

I completely echo those comments. Again, I make a plea that you do not change any aspect of the Scottish co-investment fund as it currently operates. However, we should look to the British Business Bank and other institutions and pull out some of their initiatives. The British Business Bank is currently using the enterprise capital funds model for investment in venture capital funds. It invests in the funds, and then sets a target for them to invest geographically. That is a useful initiative to which SNIB could look in the future, particularly in relation to the further stages of a company’s funding journey.

The Convener

As there are no further questions from committee members, I thank the panel members for coming in to provide us with their views and their short forms for various matters, such as the “mezzanine gap”; I had not heard of that before.

The Convener

Under agenda item 3, the committee will take evidence on the Scottish National Investment Bank Bill. I welcome our two witnesses: Rob Hunter, director of strategy, Development Bank of Wales; and Kerry Sharp, director, Scottish Investment Bank, Scottish Enterprise.

The British Business Bank has been in operation for around five years. One of its goals was to change the structure of finance markets for smaller businesses in the United Kingdom. What has been the impact of its activity in Scotland and Wales? Are the banks that you represent involved with the British Business Bank, or have they had much interaction or contact with it? Does Kerry Sharp want to comment on that?

Kerry Sharp (Scottish Enterprise)

We have a really good relationship with the British Business Bank, which undertakes quite a number of activities, many of which are focused on Scotland as well as elsewhere in the UK. It is particularly active in Scotland on the start-up loans side and on the enterprise finance guarantee—the bank debt guarantee—scheme.

We often engage with the British Business Bank to try to understand the breadth and scale of its activity, but it records things slightly differently from how we record them, including in capturing all the private sector leverage that it achieves through the deployment of its fund. That makes it quite difficult for us to compare the numbers. However, it is very active on those two instruments in particular and, from the statistics that we see, we think that Scotland gets its fair share.

The British Business Bank is also quite active on the venture capital investment side. It is a limited partner for three of our largest VC funds in Scotland—the Panoramic Growth Equity and Scottish Equity Partners funds are two of them. We continually work with the British Business Bank to see what else we can do and what further funds can be deployed in Scotland.

The Convener

Does Rob Hunter want to comment on that? I should have said that there is no need to press buttons, as the sound desk will operate the microphone system. If you want to say something, you should indicate that by raising your hand.

Rob Hunter (Development Bank of Wales)

The situation is similar in Wales. We have a very good working relationship with the British Business Bank. As banks in devolved nations, we regularly meet the British Business Bank, and it gives us an awful lot of time.

I echo Kerry Sharp’s comment: we have an issue with the transparency of the information, which is more to do with the British Business Bank’s systems than anything else. Things are kind of mixed up. It is very difficult for us to compare apples with apples, because the British Business Bank mixes in the private sector leverage that it achieves on deals with its own investments. It is therefore very difficult to work out what has gone into the region. However, according to the statistics, Wales, like Scotland, receives its fair share.

In addition, the enterprise finance guarantee and the start-up loans are very good. For example, since start-up loans began, the British Business Bank has invested in the order of £20 million across Wales in those loans, which are very low-value ones. That complements the similar amount that the Development Bank of Wales has invested in microfinance. There is very little, if any, overlap between the two, and, between us and the British Business Bank, we have delivered about £40 million of microfinance into businesses across Wales. That being the case, the British Business Bank is definitely a force for good.

John Mason (Glasgow Shettleston) (SNP)

I want to ask about integration and how the Scottish Investment Bank will move over to the new bank. I might also come on to Wales a bit later. Will the whole Scottish Investment Bank move over lock, stock and barrel and become part of the Scottish national investment bank?

Kerry Sharp

The plans for the new bank are very much to build on what exists in the market and integrate interventions and activities that exist across the public sector. Work is on-going on exactly what will go into the bank, but it has been clear since the implementation plan that the Scottish Investment Bank’s activities will form part of the new bank. However, that does not include all of the SIB’s activities. The financial readiness service that we deliver now will stay within Scottish Enterprise, because it is a company support activity that does not deploy any finance and so it fits better with the work of Scottish Enterprise more widely. The activities and functions of the Scottish Investment Bank, the assets that have been invested or lent to and the people are all expected to move into the Scottish national investment bank. A lot of work is under way to try to work out exactly how and when that will happen and what further work we need to do. The plan is that, shortly after vesting, all the items that are expected to go across will move across.

John Mason

Would it be fair to say that the broad split is that advice or grant-making functions will stay with Scottish Enterprise and loan or equity investment functions will move to the SNIB?

Kerry Sharp

That is about right.

John Mason

Will the staff therefore split in reflection of that? Will some stay and some go?

Kerry Sharp

The vast majority of staff in the Scottish Investment Bank are on the financing side or in support services thereof. There is a discrete team in the financial readiness service of about eight or nine people, and the demarcation is clear. Those individuals will stay with Scottish Enterprise. Obviously, a lot of work needs to be done to dot the i’s and cross the t’s, but the working assumption is that all the other staff in the SIB will move across.

John Mason

On governance and accountability, obviously Scottish Enterprise is a kind of independent body, and the SNIB will be too, although they are slightly different models. Do you anticipate any difference in the level of oversight for the Government or Parliament, or will it be much the same whether it is Scottish Enterprise or the SNIB?

Kerry Sharp

Do you mean oversight of the SIB’s activities when they move into the new bank?

John Mason

Yes—that is exactly what I meant.

Kerry Sharp

Obviously, the Government and the bill will determine how the reporting and other elements are delivered by the new bank. However, we have a strong governance and reporting culture, so I struggle to think that we will need to do too much more. There is more to be done on the ethics policy and the like for the bank, in which we will be directed by whatever the requirements are. Our activities and reporting functions will support what is required.

John Mason

My colleagues have supplementary questions, but I have a question for Mr Hunter. Am I right in saying that Finance Wales was the previous body and it moved over entirely into the Development Bank of Wales?

Rob Hunter

Yes, that is exactly the case. We had an advantage in that Finance Wales was a public limited company, so it was set up and had all the governance structures and the funds, and then it transitioned into the Development Bank of Wales.

John Mason

Did that process go smoothly?

Rob Hunter

Yes, but with an awful lot of preparation. We worked towards the launch for two years. When you are changing an entity that already exists into something new, one of the challenges is that you need to deliver something new when the time comes. We had a build-up for about two years, during which we raised new funds, worked to be ready for the launch and the announcements and prepared the staff and the culture of the organisation to be new and different. I think that we achieved that. Across Wales, there has been a fairly significant shift in the perception of what the organisation does and in the expectations on it since we launched as a development bank. However, that took an awful lot of work.

John Mason

You wanted to do something new and therefore a new organisation was set up, but I presume that there were some good things that you wanted to carry on, and those have broadly been okay.

Rob Hunter

They have. A complexity in our case was that the first access to finance review was in 2012, and that led to the feasibility study into the development bank. There were very good ideas in the reviews; we were told that it would be great to launch specific funds, for example, to increase microfinance or seed funding across Wales. Rather than waiting until we launched as a development bank, Finance Wales started that change, probably in 2013. The actual transition to the development bank did not happen at midnight on whatever date it was in October 2017. It was a transition that took place over about four years, which culminated in the change to a development bank. We had already made a significant shift before the launch date.

Andy Wightman (Lothian) (Green)

I have a couple of questions on structures. What is the difference between the Scottish Investment Bank and the Scottish national investment bank, other than the insertion of the word “national”?

Kerry Sharp

There is quite a lot of difference. As you are aware, the SIB is part of Scottish Enterprise at the moment. Our focus is on early-stage risk capital and lending of up to maybe £5 million. We also deliver the energy investment fund, which is a low-carbon focused, mission-led fund for the Scottish Government.

We deliver only an element of what the new Scottish national investment bank will do. It will be a separate legal entity, with all that goes with that—I know that the committee has talked about that at various times. The breadth and scale of the activities are quite significant compared with what the Scottish Investment Bank has done. I see the new bank as one that will build on the success that we have created to date, but do a lot more for the economy, and make a step change in both the capital that is available and the areas that it will be able to look at.

Andy Wightman

Is there anything that the Scottish national investment bank is planned to do that you cannot do?

Kerry Sharp

Certainly, the scale of capital that the bank will deploy would be too significant to be deployed by Scottish Enterprise. Discussions on dispensations from the UK Treasury are under way. The team working on that are hopeful that if those dispensations are forthcoming, it will mean a significant change in the way that the bank operates, meaning that it will be able to make a much more beneficial market impact.

Andy Wightman

Was the Development Bank of Wales or Finance Wales established by statute?

Rob Hunter

Finance Wales was—well, kind of. It dates back to the Welsh Development Agency Act 1975. That was updated by the Government of Wales Act 2006, which had provision for Finance Wales. The formation of the Development Bank of Wales was not done through statute. That was just branding, if you like—a change to the name and focus of the organisation—and a change to the missions.

Andy Wightman

How is the bank capitalised?

Rob Hunter

It is a very different model from the one that is proposed for the Scottish national investment bank. In effect, we cannot say that we are not capitalised; we are. In the 18-month lead-up to the launch in October 2017, we achieved a commitment from the Government of an additional £154 million. Since the launch, we have received commitments of a further £430 million for the bank. Significant sums of money have been committed.

We have about 15 funds and we go to the Government with a business case for each fund, using the Treasury five case model. That is approved by the department, and then the money is released to us through the life of the fund. It is a different operating model. We do not have the autonomy to make the decision as to how to deploy the money on our own; we have to do that through Government departments. I have to say that, for us, it has worked exceptionally well.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Evidence to the committee suggests that despite an increase in private capital in Scotland, investment is still low and there is a lack of demand. If that is the case, what factors can inhibit demand?

Kerry Sharp

Demand is always a difficult area. From our understanding of the market, it is clear that it takes different forms, and often the problem is having the right supply to meet particular demand at any point in time. As a result, it will be important for the bank to take a flexible and agile approach. After all, gaps do not stay the same; they change all the time, and the bank’s response to these gaps will be incredibly important.

Moreover, on the mission-led side of things, there will be a need to think far and wide about the different kinds of support, technologies and companies that will achieve the mission that the bank is looking to deliver for the Government. It will not be a case of having a one-size-fits-all approach or saying, “This is the answer. If we invest in it, it’ll all be fine.” Different technologies, responses and types of innovation will be required. The most important thing in that respect is to be close to the market, to be informed, to challenge what is there and to ensure that the bank speaks to the market, that its responses reflect what the market really needs and that the projects, the companies and everybody else involved are supported as we move forward.

Gordon MacDonald

Do you believe that there is a lack of demand for patient capital in Scotland?

Kerry Sharp

I think that we need to make more of the demand viable and interested in raising that sort of funding. There are definitely gaps in the market, some of which we are supporting at the moment, and our evaluation says that our role is fundamental to the market and that if we were to step out the market would reduce. There are gaps, but what we need is more demand to be stimulated and more support mechanisms that will work with the companies to ensure that they are funded to take the next step in their journey. The confidence of the market will be incredibly important, and the very existence of the bank as a trusted and transparent entity with strong ethics and working practices, with the amount of capital that has been earmarked, will create demand among companies, which will be saying, “That’s something that we want to work with.”

Gordon MacDonald

Apart from the things that you have just mentioned, how else will the bank stimulate demand? Will that involve working with the development agencies and so on?

Kerry Sharp

Absolutely. The ecosystem and how the bank works with others will without a doubt be the most important part of its ability to deliver. Coming back to your earlier question, supply itself is not enough—managing demand, too, is incredibly important—and I see the bank leading on the supply side of things and the enterprise agencies, in particular, and others in the market leading on the demand side. Obviously, though, there will be a lot of cross-working.

The system will need to work well to ensure that there are integrated support and services and that there are forums in which we can discuss how we move the market forward. Without a doubt, though, it sits across a number of different parties.

Gordon MacDonald

Mr Hunter, I note that the Development Bank of Wales was established in October 2017 and that, in the last full financial year to March 2019, it had investments of £80 million, which is 18 per cent higher than the previous year, and the number of investments increased by 30 per cent to 420 across Wales. How do you manage and meet demand in Wales?

Rob Hunter

The organisation’s targets were originally set out in a business case produced in 2016. Our aim was to reach around £80 million of investment by 2022, and we have actually achieved that in the bank’s first two years.

In Wales, we have found that demand comes from a number of places. I know that in Scotland the challenge is to invest £200 million a year, and from our experience in Wales, I think that that is probably the right level to aim at. That said, I would echo Kerry Sharp’s point that the Scottish national investment bank will need to remain highly flexible in trying to meet the widest demands of the business. For example, two thirds of all our funds in Wales can give access to the kind of patient capital that Mr MacDonald mentioned, but the remaining third of the funds, which do not involve patient capital but are about short-term, sometimes fast-revolving funds, forms a critical part of the ecosystem in Wales. Those are very important gaps that can deliver quite a lot of economic as well as financial benefit.

We have been fortunate in having a wide remit. It is amazing that once we formed, the simple fact that we had become a bank and were serious about being a bank—that is, we put something genuine behind it—created a lot of demand and interest across Government. We have been speaking to various Government departments. Two years ago, I would not have guessed that one of our key performance indicators would be the number of homes built in Wales, for example. That work is driven through our residential property funds. A lot of the ideas are coming through Government departments, and we are lucky enough that we do not have anything that absolutely restricts us. I suppose that the only piece of advice that I could probably give to Scotland is to leave things as open as you possibly can; do not close things down.

It seems obvious that a development bank should lend only to medium-sized enterprises. However, we administer the help to buy Wales scheme on behalf of the Welsh Government, so we lend to individuals. We are just about to launch a self-build fund for people who want to build their own homes. That is very much aligned to a lot of other Government interventions, to make it easy for people to pick a plot. Local authorities designate a site—they call those plot shops. They put in the services and an individual can go along and choose from a pattern book. They are then put on to a registered builder, so they know that they will be good. We provide the bridging finance for the build, which is then remortgaged out.

Therefore, we can fund the small builder through our small loan funds and we can also fund the purchaser. Working with local authorities and Government across Wales, we can generate an industry that, although it might already flourish abroad, does not really flourish in the United Kingdom. If we were restricted from lending to individuals, we would not be able to intervene in that way.

Until the SNIB is launched, I do not think that you will really know what its capacity is. We are still learning. I am in discussions with literally all Government departments in Wales. There are a lot of things in which the Development Bank of Wales’s involvement would be inappropriate or inefficient, but the fact is that when I walk into those discussions, nothing is off the table. That is really important.

Gordon MacDonald

When it comes to stimulating demand, how important are the microloans that the Development Bank of Wales hands out to the sector?

Rob Hunter

There are a number of reasons that microloans are important. You mentioned the 420 investments that were made last year. You will not be surprised to hear that a lot of those were delivered through microfinance.

There is a thing about connecting the Development Bank of Wales, or the Scottish national investment bank for that matter, to the people and showing that it is making a difference. Rather than making 20 large-scale investments a year, for example, the finance is being spread across the nation and businesses across the region can identify with what is going on and share in that success. That is crucial.

One of the interesting things—I know that the British Business Bank has said this about our rise—is that we are exceeding our target. I am not saying that microfinance is a loss-making area—I am trying to think of a better way of putting it—but you will not get a huge return on investments. In Wales, we have found that the default rates are a lot less than we had originally modelled for, which enables us to revolve the funds and invest more in those activities.

Microfinancing is a crucial part of the bank. That takes us back to the point that there is not a single market gap. Market gaps exist across the spectrum from very small people who need a couple of hundred pounds to buy a sewing machine or whatever it might be to get them into business, right up to the large scale £5 million and £10 million investments. The gap exists across sectors, too.

Jackie Baillie (Dumbarton) (Lab)

Uptake of Scottish-European growth co-investment funding has been slow. I think that the SIB said in a previous submission that that is because the fund is new and different, and it will take time to educate companies and investors. Ms Sharp, will you update us on progress in delivering the programme? Are there lessons that the SNIB can learn from your experience?

Kerry Sharp

The Scottish-European growth co-investment programme—SEGCP for short, which is slightly easier to say—has been slower than we would have liked it to be. We have done three deals, and investment of about £1.53 million has leveraged in £8.5 million. We are about to do two more deals—they are imminent, although I had hoped that they would be done by today’s meeting—that should see us deploy about £1.7 million and will lever in another £5 million.

We nearly did a couple of other deals. In one case, the company managed to raise the funding that it needed, so it did not need our money. In another, the company decided to go into sales mode rather than fundraising mode. We have about 120 inquiries on our books, and we are actively working on 30 or so, for which we are making introductions and supporting companies with their business plans, pitches and the like. Uptake has certainly been slower than we would have liked it to be. However, the SEGCP was always a niche fund—the objective was to support only five, six or seven companies a year.

That said, we have learned that it always takes longer than expected to get a new initiative going, even when we think that we have planned enough for delays. Without a doubt, Brexit has played a negative role in respect of uptake, both from the investor side and the company side. We speak to a lot of investors that are based across Europe that have a relationship with the European Investment Fund, and some are nervous about where they invest their money at the moment. Likewise, we have found that when we encourage companies to speak to European investors, given the role of the EIF in the programme, Brexit is causing them to think a little more.

You asked what lessons the Scottish national investment bank can learn, which probably brings me back to my comments about the need to be clear what the market gap is and about taking a flexible approach. A benefit of the way in which the current system is set up is the relationship with the EIF and its fund managers, but that can also be a downside, because the approach is quite particular and there are deals with investors that are not eligible. More flexibility in the instruments that are used would be useful.

Jackie Baillie

You said that investment is uncertain because of Brexit. That is interesting, because my understanding, from the announcement in the programme for government, was that the fund was being set up to counter some of the impacts of Brexit.

Will you remind us of the amount that you expected to spend? If my memory is right, it was £10 million in year 1 and another £10 million now—and that was just SE’s contribution; the drawdown would have been much more significant. We are well short of that.

Kerry Sharp

That is correct. We had a £50 million commitment from the Government, which we then committed to the programme, so we are, indeed, well short of that.

The fund was not set up to counter Brexit. Our relationship with the EIF allowed us to access funding that will certainly be available until Brexit, but we do not yet know whether it will be available after that. The proposition was that there was a window of opportunity for us to access the funding; the longer we delayed, the smaller the opportunity of the funding being available would be. Through the Brexit negotiations, we will see whether we will be able to continue to access the funding.

Jackie Baillie

My recollection is that the fund was announced in the programme for government as part of a package of measures that were designed to make the Scottish economy more resilient to Brexit. I remember the fund being the centrepiece of the announcement, which is slightly at odds with what you are saying, so perhaps what we heard was a measure of political spin rather than anything else.

Kerry Sharp

I certainly cannot comment on that. I do not recollect the statement at all, so I cannot say anything, I am afraid.

Jackie Baillie

Okay. You talked a little about the need for demand-stimulation activity. What activities need to be delivered on the demand side? Are resources and capacity in the enterprise agencies sufficient to enable you to do that?

Kerry Sharp

Earlier, I mentioned the importance of the fact that the bank will exist. There is a need to join together all the players in the ecosystem to ensure that there is a stronger digital approach to allow easy access for companies, projects and communities. The system must be as joined up as possible to ensure that there is no wrong door and that the customer journey is as smooth as possible, so that when someone approaches whatever part of the public sector, they can find their way to wherever the funding might be.

Lots of work is under way as part of the enterprise and skills review, and the strategic board is leading on that. However, there is a need to ensure that those who are involved are engaging with the bank in the same way. I know that there have been initial discussions to make sure that that happens.

Jackie Baillie

One of the outputs from a recent committee inquiry was about the lack of joins between business gateway and Scottish Enterprise in some areas. Is that being actively considered? That might be the first step for a company in accessing funding.

Kerry Sharp

With large organisations, it is difficult to make that process as smooth as we would like. Obviously, the structure of business gateway can also make that slightly more challenging. However, without a doubt, business gateway plays an important role in the ecosystem, as other players do. I absolutely agree that there is a need to ensure that everything in the ecosystem is as joined up as possible.

Our financial readiness team, which will stay within Scottish Enterprise and which provides support to companies, works well with business gateway. Members of the team are often based in business gateway offices so that they can get closer to companies and support business gateway advisers with financial readiness advice, which is growing in importance. That area of specialism is very much the linchpin between the wider enterprise support of the type that is delivered by business gateway and the funding support that the SNIB will provide.

Jackie Baillie

Thank you.

One of the major transitions from Finance Wales to the Development Bank of Wales involved a commitment to work much more closely with public sector business support. Can Rob Hunter update the committee on how that is evolving and whether there are lessons for us to learn? I am conscious that we have a number of different enterprise agencies, all of which have something to give, so I wonder whether we need to join them up more than is currently the case.

Rob Hunter

The main provider of advice and support to businesses in Wales is business Wales. There was a lot of discussion around how the Development Bank of Wales could integrate better with it. We now have board representation: one of our people sits on its board and one of its people—in fact, the person who leads it—sits as an observer on our board. That was the first step.

Secondly, we recognised that we wanted to hide the wiring as far as businesses were concerned. Previously, a business might phone business Wales seeking what turned out to be commercial finance, and would be batted around various departments and individuals before it eventually ended up with us. Now, there is an automatic routing: in effect, one phone call comes in, and the two sides of the business support area have a mutual arrangement to ensure that the service is completely joined up. Business Wales is hugely important to the Development Bank of Wales. Its representatives on the ground are an enormous source of leads for us, and it is important that we work seamlessly with it.

In Wales, as in Scotland, however, there are a lot of other players. For example, the Welsh Government’s business, economy and innovation department co-ordinates other grant schemes and means of support. There has been a significant shift in that area. In about two weeks we will, for the first time, have a full joint strategy session between that department and all the other elements that are involved, so that we can see how the Development Bank of Wales can assist them. Reorganisation of that department this year is driving that effort.

As I said, in growing the process, you do not know what is there until you start to discuss it. However, given the enormous pressure on capital budgets and Government, one thing that we have been able to work on with the Government is how it can stretch its grant schemes and make best use of the Welsh pound, as it were.

If you look at how grants have been administered, you can see that historically binary decisions were made about whether something should be given a grant or be commercially supported. However, I think that the decision is rarely binary. In the vast majority of cases, you do not need to give a 100 per cent grant, because there is a commercial element of whatever the intervention is that should be repaid.

In the past year, we have launched three funds, across two Government departments, that have a commercial element that sits alongside Welsh Government grant schemes. For example, there is the property development grant for commercial premises, which is administered in the department for economy, science and transport. The department has put £15 million of grant into a pot, alongside which we have a £40 million fund, and we work the two together. The department administers the grants under its general block exemption regulation scheme—its state aid cover—and we do the commercial finance element.

The results of that can be incredible. Such a fund revolves quite fast, and you might get two or three revolutions out of it. If we revolve £15 million of grant two or three times, we might get £160 million-worth of delivery across Wales. Such approaches are innovative. It is about genuinely combining things and the bank being seen as a solution right across the Government.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

I would like to explore three areas, one of which is patient capital, on which we have already touched. The DBW extended its loan-repayment time to 10 years, which was viewed as a long-overdue development. I think that it led to quite an increase in demand for patient capital among Welsh businesses. What does the SIB currently do in terms of patient capital?

Kerry Sharp

I would say that everything that we do is patient capital. The largest part of what we deliver is early-stage equity investment: anybody in that area would tell you that you have to be patient if you want to be in that area. The exit-horizon timeline is 10 to 12 years, and we have a number of investments that are older than that. We are not required to force exit; we are there to support the growth of a company, working alongside the private sector investors. It is very much a patient approach.

We launched a new loan scheme last December under the Scottish growth scheme. The repayment terms are normally up to seven years. That is the demand that we have in the market at the moment. We can be flexible in that—it is a pilot—and we will be looking at whether there is a need to make the time longer. If there is, we will certainly consider doing that. We do not see that as not being patient.

I mentioned our energy investment fund, which is focused on low carbon. That fund is very flexible and, as the team would tell you, very patient. The team plays a phenomenal role, from market making and developing the market, to intensive financial readiness with community projects and wider low-carbon projects, right through to structuring and investing or lending. The loans to the community projects are normally over 10 to 15 years, and are sometimes for longer. The benefits that return to the community on the back of those are for 25 years or so. Overall, it is a very patient approach.

Colin Beattie

You seem to be talking mainly about loans. Do you do any equity investment of patient capital?

Kerry Sharp

The first section of my comments was on our equity funds. The majority of our investments are equity investments, and the energy investment fund is debt and equity in equal proportions. We are very focused on equity, as well as now starting to do more on the lending side.

Colin Beattie

Do you believe that you are meeting the current need for patient capital?

Kerry Sharp

We believe that, by providing the level of patient capital that we provide, we are playing a strong and fundamental role in the market. I mentioned earlier the real impact that the bank can make going forward. There is potential for a lot more patient capital to be provided. We have been looking at scale-up capital in particular. The SEGCP, which I mentioned earlier, is our response to that. However, we feel that there is a need to do more in that area.

Colin Beattie

How much of a step change in the market will the SNIB make by providing the patient capital that is envisaged?

Kerry Sharp

The bank’s focus will be on providing the level of capital to change the market dynamics and on identifying evolving gaps, which will, I think, have a transformational effect on the economy. The challenge with the way in which we operate now is in the amount of budget and funding that is available, so the Government’s commitment over such a long time will allow the bank’s team to look forward and to make different choices.

We have certainly identified, from the energy investment fund, the need to be ambitious and very patient, and to take a different approach when we are dealing with new technologies and emerging markets. The bank will be able to focus a lot of its attention and funding on making substantial investments in order to change our economy.

Colin Beattie

Would you say that the SNIB will take the right approach to the market?

Kerry Sharp

Yes—I believe that it will.

Colin Beattie

The target rate of return is always an interesting issue. The financial target rate of return for the bank will be set and finalised prior to the vesting of the company. What is the target rate of return for the SIB and the DBW?

Kerry Sharp

The SIB does not have a target rate of return at the moment, because we have not been required to have one. We act commercially in all our investments and seek to maximise the return, and we do not need to select a portfolio or an approach to achieve a specific target.

Colin Beattie

What is your rate of return?

Kerry Sharp

There are lots of different ways of considering that. The exits that we have made have been very successful, and our overall internal rate of return on the successful exits is about 29 per cent. It is important to look at things in the round, however, so if we include write-offs, the figure is about 9 per cent. If we also include our current portfolio, which is sizeable and valued at more than £300 million, we just about break even.

Colin Beattie

What is your percentage failure on capital and employment?

Kerry Sharp

I will need to double check the figure for you, but I think that it is about 20 per cent. We have had write-offs of £80 million since we started our activities in 2003.

Colin Beattie

Is that figure comparable with figures for similar institutions?

Kerry Sharp

It is very difficult to compare what we do with what other institutions do, given that we fill gaps in the market, and that our equity fund deals are brought to us from the private sector, so we are in the highest-risk category in a very risky area. Therefore, we are not comparable with many other institutions.

We are very comfortable with our level of failure and write-offs, but I know that some people will say that the write-off figure could be higher, if we are making a real difference in the market. Clearly, we are not keen on losing money; we are trying to make money.

Colin Beattie

What about the DBW?

Rob Hunter

The DBW has a very similar story. We do not have a set target return on investment, which I am quite pleased about. We tend to negotiate a projected ROI case by case because, as I said earlier, we create a business case for every one of our funds. We negotiate with the Welsh Government on the sort of return that it is looking for from the fund. Once the fund goes live, we manage the portfolio of investments for that fund in order to deliver the agreed ROI.

I am not sure whether it is critical that an organisation has a positive or negative ROI after aggregating all the figures. We are playing in the very difficult part of the market. If there were very high expectations for the ROI, there would be a great temptation to start to take on less risky and more market-facing investments. That would just displace the market. We want to crowd more funders into Wales rather than to crowd existing funders out of Wales.

My answer to the question is very similar to Kerry Sharp’s. I think that our target ROI is currently forecast to be positive by about 0.7 per cent. However, as I said, the target is not set in stone.

The other important issue from our point of view—which might or might not be a difference—is that our operating costs are covered through the fees that we charge on the funds. We do not have any Government subsidy for our operating costs; we have to stand on our own two feet and fully cover organisational operating costs. That is also factored into the calculations.

Colin Beattie

Is it right for the SNIB to have a target rate of return from day 1?

Kerry Sharp

That is probably a question for the Government to answer.

Colin Beattie

I am thinking about the witnesses’ experience, and I am hearing from both of you that you do not have a target rate. I do not know whether that is a good or a bad thing.

Kerry Sharp

We do not have a target rate of return, and we are targeted to do lots of things. One of those targets is to increase the size of the early-stage risk capital market, which we have been successful in doing—it has grown fourfold since 2012 as a result of our investment and the amount of leverage that we achieve in the market. If a body has a target to deliver financial return, that will doubtless have consequences for how it operates.

One of the benefits of the planned scale and breadth of the bank is that there will be different ways to do different things. It will be entirely possible for one part of the bank to have either a different target rate of return or no target rate of return, depending on what it sets out to do. The challenge in the economy is definitely the need for income to flow, and for the Government’s commitment not to be too long into the future. That is clearly why the Government is considering a rate of return that it thinks is reasonable. There are clear examples of such targets—the BBB had one and exceeded it. Such examples can be looked at in working out the best way for the Scottish Government to put the target into place.

Colin Beattie

If you were pushed, what sort of target rate of return should the SNIB be aiming for?

Kerry Sharp

Given that you are pushing me and that I will be part of the bank, I would say that it should aim for a low one, which will make life a little easier. [Laughter.] The bank will have to be realistic. I would certainly consider the example of the BBB to ask why it thought that its target was appropriate and to understand its performance.

I would advise against aiming for a high rate of return, because that would, without a doubt, be challenging to achieve and would change behaviours. Given that the bank is about patient capital and the change that ministers want to see in the economy, ministers need to be careful and conscious of that when setting targets that will determine how people will operate day to day.

Colin Beattie

To continue down that road, the SNIB will have a high risk profile, as—indeed—does the SIB. Given that risk profile, is the expected break-even timeline of 2023-24 realistic?

Kerry Sharp

I do not think that that is the break-even timeline; I think that it is the timeline for covering the operational costs—for the bank to be self-funding rather than self-financing, which is being set at 10 years or so.

Colin Beattie

I was talking about operational costs; I am sorry that I was not clear.

Kerry Sharp

That is no problem.

We have covered our operational costs for a large number of years. It is certainly possible for the SNIB to do that. Clearly, that will depend on what its costs end up being. Given what they are proposed to be at the moment, I think that that timeline is entirely achievable, given our activities alone, plus the activities that we know will move in and all the new things that the bank will do.

Colin Beattie

How long did it take you to become self-funding in relation to operational costs?

Kerry Sharp

I do not have the answer to that. Staffing costs in the SIB are around £3.3 million at the moment. Given that our activities have grown over a number of years, we have obviously grown. Our income over the past five years has been, on average, £20 million. I cannot tell you when we started to cover our costs, but it was quite a long time ago.

Colin Beattie

Rob Hunter said that the DBW covers its running costs from fees. How long did it take to get to the point where the DBW was covering its costs?

Rob Hunter

When I started in the role, one of the first jobs that I had to do was to co-ordinate the production of a financial model for the business, which brought together all the funds and all the costs and projected how much in funds we would need over the five-year period to generate enough fees to cover our costs. The figure came out at £154 million over the first five years. Interestingly, by the time we reached June or July 2017, we had received commitments to all but £23 million of it. Because that figure was relatively small in the grand scheme of things, the minister at the time said, “I’m not signing the bank off until we’ve given you a commitment to the full amount,” so we had a commitment for the final £23 million a week before we launched. In other words, it was at launch that we stopped receiving any Government grant.

On the question of demand, we genuinely could not have predicted that we would raise £430 million of additional commitments to funds in the two years since then. When we produced the first business case, we thought that raising the £154 million would be a tough ask. What has happened is testament to the fact that, if things are done properly and with the gravitas that one would want for such a long-term, national institution, the amount of interest that the bank generates from other players generates its own demand. Looking forward, I would say that our operating costs are probably covered for at least the next seven or eight years, based on our existing funds.

Andy Wightman

On the subject of costs, one of the issues that we have discussed is remuneration. We have had mixed views on the matter. Some people feel that the Scottish national investment bank should operate a remuneration policy that is consistent with what the financial sector does, while other people take the view that, as a public body, its pay levels should reflect public sector pay levels. What is the position in Wales?

Rob Hunter

I know that this will sound strange, but the answer to that question is probably that we do both those things—our approach is to reflect pay in the financial sector and pay in the public sector. I will go through our process for setting our salaries. We are not on civil service salaries. A very small element of the staff of the organisation are on local government pensions, but the figure is now less than 10 per cent, and that scheme has not been open to new people for about seven or eight years.

Our salaries are market tested, independently, every three years. We use two benchmarks: the financial services industry and the non-financial services industry. We have certain specialists, particularly on the equity/deal-doer side. In effect, we are a fund manager. We contract out some funds, but we deliver the vast majority ourselves. The pinchpoints for the higher salaries relate to the equity staff, and we look at those.

I will come back to a comparison with Government shortly, but our salaries are pretty attractive for the non-financial services people and the non-equity/deal-doer people. We have adjusted our salaries for the people who deal with equity, but we recognise that we cannot offer the stellar bonuses that people who work in the private sector can get. It is high risk, but it is high return. We recognise that, in attracting those people into the business, we must have a much wider offering. We are a great place to work. Our mission is to do great things—to improve the economy and the conditions of people who live in Wales—which is a great thing to get up in the morning to come to work to do. We offer a good work-life balance. Our targets are challenging, but they are not impossible to meet. In effect, we are developing an employer brand to get into the harder-to-reach areas.

Our pay is also tempered by Government pay. We have an independent review, but all our pay awards have to be signed off by Welsh ministers, so we must make sure that we pay sensible salary levels.

I was recently involved in a piece of work in which we did a direct comparison between the pay in the bank and the pay in the Government. When you compare pay to pay, there are two big differences. One is that Government employees have a final salary pension scheme. Taking the Welsh Government’s figure, last year, that involved an average employer contribution across the piece of 23.6 per cent, and we know that, this year, the contribution has increased right across the public sector. The figure was being understated by 6 per cent, so the Treasury has put on another 6 per cent. That adds another 30 per cent to a civil service employee’s pay. On average across the piece, our employer contribution is around 10.8 per cent, and we also have an incentive scheme, which is no more than 10 per cent of our total pay bill.

It is spooky but, when we compare like with like and look at the average pay per grade, the salaries are almost identical in real terms. The difference is how we divvy that up and how we put it out there in the sector in order to attract the right people. People in the financial services sector are used to working in an incentive-based environment. When we are trying to deliver the funds, such an environment is a useful tool.

The gap between Government and the private sector is a lot less than most people think. It is about how the money is deployed rather than the quantum.

Andy Wightman

Thank you for that very full answer. Are any of the policies that you have developed in that regard or any of the comparisons that you have done in the public domain, or are they internal?

Rob Hunter

They are internal.

Andy Wightman

If there is anything that you can share with the committee, that would be useful, although I understand that it is probably not much.

Rob Hunter

Sure—yes.

Andy Wightman

On the Scottish Investment Bank, I presume that all the staff are Scottish Enterprise employees who are on public sector pay grades.

Kerry Sharp

That is correct. We comply fully with public sector pay policies. There is a mix of staff in the Scottish Investment Bank directorate, with a number of non-investment specialists as well as investment specialists. A number of years ago, we negotiated an allowance that we can apply to our investment specialists to allow us to attract and retain them. Obviously, a specialist skill set is required—there is no doubt that people need to have the right skills to be able to deploy the instruments. We can deploy that benefit to particular members of staff. It is role, post and individual specific.

Andy Wightman

I will move on to the question of additionality. Mr Hunter talked about the risk of crowding out investors from Wales. How do you ensure that the funds that you deploy are genuinely additional to the investments that are available to businesses?

Rob Hunter

We always ask investee companies whether they have tried to access the market. That simple test comes right at the beginning, and it is driven by the history of the organisation and its deployment of EU funds, in which that is a condition. We are clear that we are not here to compete with the banks or the private sector. Indeed, we have a good working relationship with the banks. Banks often come to us with a deal that they want to do and that they believe has a strong business case but where there is a problem of security—the banks can secure only a certain amount of the loan. Particularly in Wales, that is often a result of property values being low. A bank will come to us and say, “We’ve got a £1 million deal and we’d be happy to lend £600,000,” and then we step in behind the bank with a £400,000 subordinated loan, which gets the deal off the ground. It works both ways. Banks will come to us and we will bring deals to the banks.

Kerry Sharp made an interesting point in that regard. For some of our work, there is no KPI that we can measure, although I wish that we could, but that work is testament to the fact that we are not crowding out investors. Quite often, particularly with the bigger deals—we find this with the patient capital stuff and the large-scale investments that are getting into the £8 million to £10 million area—a company comes to us with a business plan or proposal that is not investor ready. The teams will put enormous effort into getting the thing investor ready, at which stage the people involved will rush off to an investor and do the deal away from the bank.

We get a fair bit of that, and it is a difficult issue. If you look at the Welsh economy, you will see that that is exactly what you want to happen, because it allows us to deploy elsewhere the funds that we have been given in order to grow the economy. However, for those staff who are incentivised or target driven, it can be a little upsetting when it happens.

Andy Wightman

I am also interested in the issue of mission-oriented finance, which has been advocated by Mariana Mazzucato, whom we spoke to a few weeks ago, and which is in the bill as a purpose of the Scottish national investment bank. Does the bank in Wales have anything that could be called mission-oriented finance, or is it more of a conventional development bank?

Rob Hunter

I would have to understand what is meant by the term “mission oriented”, but interestingly, what lies at the core of a lot of the funding proposals and the other things that we discuss with the Government is, in fact, the Government’s mission. I have had meetings on pretty much every aspect of government that you can imagine from care homes and domiciliary care to transportation such as buses, trains and taxis; we will not be able to assist with many of those things, but in certain instances, we can. Our position is that we are there to support the delivery of Government priorities, and where there is a commercial element to that delivery, we want to step in and do a good job. However, I am not sure that that is what you mean by mission-oriented finance.

Andy Wightman

It is about the Government setting a long-term mission by, as the bill describes it,

“sending ... a document describing the socio-economic challenges that the Bank is to seek to address.”

Examples of that might be moving to a low-carbon economy or upholding the human right to housing, and it will typically happen over a long period of time. That is what it is about.

Rob Hunter

That is very much the case with our bank. In fact, alongside our standard KPIs, we will by the end of this year be measuring ourselves against a supplementary set of KPIs that includes carbon reduction, assistance to female entrepreneurs and a lot of other such indicators that we have not traditionally captured in the past. Shifting the bank towards the Government’s longer-term vision and goals is absolutely on our agenda.

Andy Wightman

So those are new KPIs that you will be reporting on.

Rob Hunter

Yes, by the end of the year.

Andy Wightman

You are not reporting on them at the moment.

Rob Hunter

We have not done so in the past, but we are developing a set of KPIs that we will be reporting on throughout this financial year.

Andy Wightman

Will that report be available next summer?

Rob Hunter

Yes.

Andy Wightman

I wonder whether Kerry Sharp has anything to say about additionality and the Scottish Investment Bank. I think that you mentioned a client who turned down your money because they got money elsewhere.

Kerry Sharp

Yes, through our SEGCP. We are very much targeted at achieving additionality, and private sector leverage is one of the things that we record and which we try to maximise at every possible point. Our role in the market is to be gap funders, but the issue sometimes is the time when that funding is available. Time can be of the essence, and we can move very quickly with some of the private sector partners that we are close to. It is all about different levels of additionality in the market.

Virtually everything that we do is done with co-investors or co-lenders, so we are not doing things on our own, and the vast majority of those projects are, in the main, brought to us by others who feel that they have a gap that they want us to fund. Just now, we have very strong additionality, and I would expect the Scottish national investment bank to operate in exactly the same way, too.

Andy Wightman

Who identifies the gaps that you mentioned—the lenders or the clients?

Kerry Sharp

Both. If the client cannot raise the funding that they need, they will come to us directly and ask for help from our financial readiness team, which I mentioned earlier. Its number 1 role is to get funding from the private sector, and only when it cannot do that will it look to colleagues to see what other support can be given. However, lenders or investors who want to support businesses but who cannot provide the level of funding that they need will also look to us to co-invest or co-lend with them.

Andy Wightman

Do you recognise Mr Hunter’s point about the private sector perhaps not lending because it does not have enough security? Would that be a typical instance in which you would consider stepping in?

Kerry Sharp

Yes—certainly through our debt fund. The issue could be the level of security, the length of term that is needed, or that they cannot afford to start to repay for a couple of years. We are very flexible in our moratoriums, which will provide interest or capital holidays. The future projections could be racier than some of the banks or others might be interested in.

The vast majority of what we do is on the equity side. There, the gap is usually to do with the level of capital that the investor is willing to put at risk not being enough for the deal to go ahead. We need our businesses to be properly capitalised. There is no point in investing in a business that does not have enough capital to get to the next value inflection point. If there is not sufficient capital to be deployed, our partners or co-investors will come to us and ask us to invest alongside them.

Angela Constance (Almond Valley) (SNP)

Good morning to our guests. The implementation plan for the Scottish national investment bank says that, when investment decisions are being made, the broader approach of taking into account economic, social and environmental factors as well as commercial factors needs to be taken. Does the Scottish Investment Bank take that approach now? What attempts are made to have a balance between commercial factors and other aspects in measuring performance?

Kerry Sharp

We absolutely look at a lot of different levels. As I touched on earlier, we have been looking to grow the market on the risk capital side for a number of years, and that has been done successfully. That is now performing best regionally across the UK, and Scotland is punching at or above its weight on the early-stage side. We monitor closely the size of the overall market and strip out the large deals of over £10 million—the outliers—to see the underlying market and ensure that it is still healthy and growing. That is one element that we look at.

We also carry out evaluations, which is really important from the point of view of the role that we play in the market. The evaluations, which are qualitative and quantitative, try to work out the gross value add, including jobs and various other elements that are obviously important for an economic development agency. They also speak to investors, companies and other market players and ask questions about the role that we have played in the market, whether we have filled gaps, and whether we have been additional, for example. That allows us to consider the success of the fund, whether what we would like to be delivered in the market has been delivered, whether we can make improvements, whether the approach is fit for purpose, and whether any changes need to be made to make the approach more relevant and useful to the market.

The other level is the financial performance, which we touched on earlier. We do not have a target rate of return, but we have to act commercially, so we seek to maximise individual returns. It is therefore important for us to monitor the income that we bring in from our exits and to do all that we can to try to maximise that.

Angela Constance

You have outlined how market factors and financial returns are evaluated. If anyone had to randomly pick any investment decision that the Scottish Investment Bank has made and ask about broader social factors or environmental impacts, for example, would you be able to articulate a response to demonstrate its impact and explain how it was measured?

Kerry Sharp

I would not be able to do that for every single decision. That is work in progress for us. For a number of years, we have worked closely with colleagues to record some of the important factors—for example, women-led businesses and ethnic minorities. We have had a couple of general data protection regulation challenges, which we are just working through, but we are still developing our approach to that.

Overall, that is one of the things that we are strongly focused on as a business. Scottish Enterprise as a whole is very clear about the need to record social factors as well as environmental factors, and we are putting in place the tools to allow us to do that consistently across all our different areas of activities, right down to a company basis or a project basis.

Angela Constance

Do you use anything like a balanced scorecard? If you do not, do you consider that to be a potentially good tool for the Scottish national investment bank to use to measure broader performance?

Kerry Sharp

We do. We do not publish it externally, but we produce it internally. Previously, we have had an annual review that set out the factors on a portfolio and company basis—employee levels and so on. However, with regard to the overall market and the economic and financial performance, we record that internally using what is, essentially, a balanced scorecard approach. I think that it will be important for the bank to do that in future. It would not be sensible to focus on one of the elements and not the others; it is important that there is a focus across all the factors that can make a change to the economy.

Angela Constance

I would be interested to hear about the experience of the Development Bank of Wales with regard to whether broader factors are taken into account in investment decisions and how those are measured.

Rob Hunter

The easiest examples, which I talked about earlier, include our provision of commercial finance alongside Welsh Government grant funding. Generally, the mix might be up to 20 per cent grant funding and 80 per cent commercial finance. Those are two separate elements, but they work in a joined-up way.

In order to receive a Government grant through the ministers’ economic action plan, companies have to sign up to a contract with Government that promotes progress on reducing their carbon footprint; offers fair wages and fair work, as defined by the fair work board; promotes health, including a special emphasis on mental health; and delivers skills and learning in the workplace. Further, they must demonstrate growth potential. Those elements are specifically measured by the Welsh Government and, therefore, our commercial finance flows in behind that.

A separate part of the process involves developing funds that specifically address some of those issues. With regard to decarbonisation, there is a lot that we can do with modern methods of manufacture in order to support businesses in the supply chain to do more of that. Decarbonising the existing housing stock is a massive issue; I assume that it is just as big an issue in Scotland as it is in Wales. I think that something in the order of 85 per cent of all houses that will be built in 50 years’ time have been built now, which means that, if you do not ensure that those houses are decarbonised, there will be a massive drag on efforts to move decarbonisation forward in future. We are in discussions with the department with responsibility for housing to see how we can intervene to create specific funds to accelerate that change across Wales. We are working at a number of different levels.

Angela Constance

Do you recommend taking a balanced scorecard approach?

Rob Hunter

Yes, definitely. Like Kerry Sharp, we operate a balanced scorecard within the business, which we use to look at things from a customer perspective, the finance perspective, the delivery perspective and so on. We operate that on a day-to-day basis.

I think that you are asking about a balanced scorecard approach that involves consideration of not only financial returns but socioeconomic returns. We are developing that this year as part of our KPI measurement, which will be in place this year and will be reported on next year.

Jamie Halcro Johnston (Highlands and Islands) (Con)

I will ask about the regional perspective. The DBW has four offices across Wales, and I know that the Scottish Government has been considering options for a physical location, or physical locations, for the Scottish national investment bank. Consultation on that is under way. Mr Hunter, what are the pros and cons of having those offices spread out across the regions of Wales?

Rob Hunter

A few years ago, I produced the pan-Wales strategy for locations across Wales. It is available on our website, if you want to see it. We and the minister were extremely keen that we would be a development bank for the whole of Wales, but we were a Cardiff-centric organisation with a few satellites outside of that area. We have generated a headquarters office in Wrexham, which will have in the order of 52 to 55 members of staff. We are well on track to reach the target earlier than we originally forecast, so that is going well.

Cardiff will still be our biggest office physically, as the majority of the businesses are in the south-east of Wales, but the mix of staff between Wrexham and Cardiff has been designed to ensure that we have a presence that is consistent with the business demography in those regions. That will drive up investment levels, which we are already seeing in north Wales. We have an office in Llanelli, which is in south-west Wales, and we are about to open a small office near Llandudno, which is in north-east Wales, so we will have people on the ground. That is important, because there is a thought that banks retrenching, moving away or closing branches—so that they are no longer as close to the businesses—is a new thing, but actually the business decisions have been removed from those branches for probably a very long time and most of the investment decisions are made remotely in an HQ office somewhere else.

One of the unique selling points of our organisation is that we are a friendly face—we meet our clients face to face and build a relationship with them, and will continue to do so. That is extremely important.

We have 22 unitary authorities in Wales and we noticed that there were pockets of very low investment activity. About three years ago, we set ourselves a specific target to increase the investment in the five lowest-performing local authority areas by 10 per cent in a year. The target changes every year because the unitary authorities that are in the bottom five will change every year. Last year, the combined growth of those five authorities was about 64 or 65 per cent, which was very positive and it raised the bar, so we have to do more next time. From our point of view in Wales, it is crucial that the organisation is not seen as a bank for Cardiff or as Cardiff-centric. It is certainly not that, as we now have very good reach right across Wales.

Jamie Halcro Johnston

You were testing my knowledge of the geography of Wales when you mentioned the different offices.

Rather than necessarily focusing on where the businesses and the demand are, you are looking to target those areas in which there is the lowest demand and in which demand needs to be increased.

Rob Hunter

Yes, absolutely. That is critical, and it is very easy to do. When any target-driven organisation sets targets on anything, there can be good intended consequences and there can be unintended consequences. An unintended consequence might be that the poorest-performing regions are left alone, but we cannot let that happen. The organisation has to reach across all the boundaries. There is a lot of talk about patient capital, but people need to see that such a national institution is real and that it is doing something in their area, which highlights the importance of doing smaller-value deals as well. If we were only doing large-scale patient capital deals, the likelihood is that we would be doing the vast majority of our deals in Cardiff or very close to the border with England, in Wrexham.

Jamie Halcro Johnston

Are you pretty clear that if you only had one office, that would limit the bank’s ability or impact?

Rob Hunter

I genuinely believe that it would. I have been in Wales for 15 years, but when I first went there I allowed myself about three hours to drive from south to north Wales. It is 180 miles, so I thought that it would take three hours, but it is actually quite a journey. It is a strange thing. The M4 runs across the bottom of Wales and the A55 runs across the top, but then there are roads that are quite difficult to navigate to get from north to south. Therefore, if all our staff were in south Wales, the bank would feel very remote to people in the north. We have always had people based in north Wales, but not at the scale that we needed, in order to demonstrate that we are on the ground and we are doing business.

Jamie Halcro Johnston

Having driven from Abergavenny to Betws-y-Coed not that long ago, I appreciate the issue. In that context, will you and Kerry Sharp give me your thoughts about the idea of the SNIB having more than one office, so that there are offices out and about across the regions of Scotland? I represent the Highlands and Islands, which can feel a long way from many parts of Scotland.

Rob Hunter

If you look at our footprint, you will see that we are going to have 14 to 17 people down in Llanelli, in south-west Wales, about 100 to 110 in Cardiff and about 50 to 55 in Wrexham. For areas that are further out—because the bank is not a development bank for the whole of east Wales; it is a development bank for the whole of Wales—we have smaller satellite offices: there is one in Newtown and there will be one in Llandudno, which will cover the areas at the more extreme end of the A55 in north Wales.

Our staff in the Wrexham and Cardiff offices can reach out and get to most businesses in their regions pretty much within an hour and a half, but other offices cover patches where there is a little underrepresentation. The bit that is missing is Aberystwyth, which is between the two, right in the middle. At some point, when we have created enough demand, we will look to base a small office there.

Jamie Halcro Johnston

Your suggestion is that we should make sure that the footprint covers as wide an area as possible.

Rob Hunter

Yes. A hugely important lesson that we have learned is about having telepresence in our offices. The one thing that we do not want is for people to travel for three hours to go to a half-hour meeting, so having a state-of-the-art telepresence—I am not necessarily talking about the gold-plated stuff—and getting everyone to use it is important. Again, it is about carbon footprint and making best use of individuals’ time. We have put pretty much state-of-the-art equipment in all our main offices.

Kerry Sharp

I agree entirely with Rob Hunter. The Scottish Investment Bank is pan-Scotland, so we operate across the whole of Scotland. We have staff based in virtually all SE’s offices—if I remember rightly, there are 12 offices. Most staff are in the three main hubs, in Glasgow, Edinburgh and Bellshill, but there are people far and wide. It is important to be close to the businesses, the advisers, the projects and the communities we work with.

We work closely with Highlands and Islands Enterprise and we will work closely with the south of Scotland enterprise agency when it is up and running. We ensure that we are available, from a finance point of view, to interact with companies, account managers and other colleagues in HIE.

I agree with Rob, too, on the need for technology of a good standard, to enable us to have Webexes, online conference calls and the like, so that we can be available consistently and continually.

Jamie Halcro Johnston

Do you see that improving when the Scottish national investment bank is up and running?

Kerry Sharp

A decision has to be made about where the head office and any other offices will be. There is the potential for co-location with SE, HIE or others. There needs to be a cost-effective way of ensuring that staff get out and about. As Rob Hunter said, there is no point in someone spending all their time—carbon footprint aside—in the car or on a train.

Ideally, staff would be based in different locations. Of course, that brings a staff management dimension, matrix structures and everything else, but it is important to ensure that companies have full access to the bank. Just as Rob said that the Development Bank of Wales is for the whole of Wales, I am sure that the Scottish Government would say that the new Scottish national investment bank is for the whole of Scotland.

Rob Hunter

It is also important to encourage flexible working. The idea that everyone goes to a very big office at 9 o’clock in the morning and leaves at 5 o’clock in the evening is changing dramatically. The Development Bank of Wales encourages people to work from home. We have people based right across Wales who work from home for a reasonable amount of their time, so that is another resource that we can tap into. With excellent Skype connections through laptops, it is much easier to communicate and stay in touch with people as they work remotely.

The Convener

Finally—and very briefly, I hope—Andy Wightman has a question.

Andy Wightman

I want to put our question on governance to Rob Hunter. The Development Bank of Wales is a plc. The bank, or its predecessor, was established in 2000. Have your objects changed since then, or are they as they were in incorporation?

Rob Hunter

They are pretty much as they were when they were incorporated at that time. I know that there is an on-going debate about whether the organisation should be a plc. I think that being a plc works—it is very much a known quantity, it has got a very—

Andy Wightman

Sorry to interrupt, but I am not particularly interested in the plc aspect; I am interested in the objects. Chapter 2 of the Scottish National Investment Bank Bill has the statutory objects for the SNIB. You probably have not had the time to look at that, but I would certainly welcome any comments on those objects if you have any.

Secondly—I am being encouraged to be brief; I apologise, convener—who is the shareholder of the Development Bank of Wales?

Rob Hunter

It is Welsh ministers. I think that one share is with our chief executive officer. The Welsh Government is the majority shareholder.

The Convener

You can submit additional comments in writing after the session, so do not hesitate to do so.

That is all the time that we have this morning. Thank you very much for coming.

The Convener

The next item is another evidence session on the Scottish National Investment Bank Bill. I welcome Derek Mackay, the Cabinet Secretary for Finance, Economy and Fair Work; David Wilson, programme director, Scottish national investment bank directorate; Rachel van Kempen, head of finance and resourcing, Scottish national investment bank directorate; and Fraser Gough, parliamentary counsel office, Scottish Government.

I invite the cabinet secretary to make a brief opening statement.

The Cabinet Secretary for Finance, Economy and Fair Work (Derek Mackay)

Good morning. The publication of the draft bill is a significant milestone in the creation of the bank, laying the foundations for it to begin investing in businesses and communities across Scotland from 2020. The bank has the potential to transform Scotland’s economy, as has been shown by the widespread support for the bank and the excitement that it has generated.

The bill gives a clear basis for establishing the bank, ensuring that it is commercially minded and publicly accountable. The work that has been done so far to establish the bank, including developing the bill, is the product of collaboration with stakeholders from across Scotland’s economy and society. Consultation and discussions with stakeholders have been crucial to the progress that has been made towards meeting the ambitions for the bank that are set out in the implementation plan. Certain key decisions are still to be taken before the bank becomes operational, including decisions about the products that it will offer, its structure and the scope of its missions.

Key to success will be the way in which the bank acts and evolves over time when it is operational, and I therefore welcome the committee’s role in furthering public debate on the bank. In the evidence that it has received, the committee has heard a constructive discussion on aspects of our proposals, and we will continue to engage widely, including with this committee, as we finalise our proposals to ensure that the bank can truly transform Scotland’s economy.

The Convener

I will start by asking about the issue of the bank lending solely to the private sector and about the commercial activities of the bank. As you will be aware, the bill team has recently clarified some aspects of that for the committee. Can you add any further clarification on the bank’s approach to private sector lending and commercial activities with reference to the bill?

Derek Mackay

In essence, what we mean by “commercial” is something that does not involve the public sector. That said, I have made it clear that the bank can invest in social enterprises, third sector organisations and co-operatives. It is the nature of the funding, which will come through financial transactions—loans and equity—that is the reason why the bank has a commercial nature. However, because of the environmental and other societal and social burdens that we are applying to the bank, it is clearly not just a commercial entity. Although it is a public limited company, it is also a public body. The commercial element concerns the financial instruments that it can use, and the bank will not invest in the public sector in the way that Government would do through resource or capital grants. Is that helpful?

The Convener

Yes, that is a very helpful clarification.

Where are we on the question of the bank carrying over funds from year to year and having dispensation to do so from Her Majesty’s Treasury?

Derek Mackay

I have raised that matter with Liz Truss, the Chief Secretary to the Treasury, including in writing, and it is still under discussion. If we do not get dispensation, the bank will be constrained in how it can invest and balance its affairs. We want to give the bank as much operational independence as possible, and we would have more control over the bank than people might like if it was not able to carry over resources. What do I mean by that in practice? We are bound by the financial framework agreement, which sets parameters and caps on our resources, the reserve and the carry-over. The bank will be constrained if its resources are part of that whereas, if the bank has dispensation and freedom, it will have more financial independence from Government, within the parameters that we will set out.

I have discussed the matter with the Chief Secretary to the Treasury in person, and I have written to her about it. I have also engaged with the Secretary of State for Scotland on the margins of other events to express how important I think this is. The bank would still be able to manage and operate without dispensation, but having that dispensation would make things easier.

I will give a practical example. Let us say that a big receipt or return came in at the end of the financial year, and that the Government was close to its own parameters. That might be really unhelpful, and we would need to try to manage that accountancy exercise, rather than the bank receiving the money and being able to continue to invest. The British Business Bank receives dispensation to do that. I am sure that the Treasury will be delighted to hear that I am not asking for any extra resource; I am asking only for the flexibility to manage resources for the bank in a way that does not overly constrain the bank or the Government through the fiscal framework agreement, as it stands.

The bank will not be operational until towards the end of this parliamentary session, so, in any event, there will be the opportunity to revisit the matter in the discussions on the fiscal framework agreement. However, it would be better to receive dispensation from the start. Discussions with the Treasury are on-going. Dispensation would be helpful and is necessary. We would manage without it, but that would be far from desirable, so I hope that the Treasury concludes that it is worth giving us the dispensation.

The Convener

Will you provide an update on where we are with state aid rules and securing the permission that might be required from the European Commission?

Derek Mackay

The committee will be aware of the uncertainty around Brexit negotiations. The United Kingdom Government has not been—let us say—enthusiastic about notifying us of progress. In any event, we want to build up the case so that the notifications and pre-notifications are right. Ultimately, we would pass the work to the UK Department for Business, Energy and Industrial Strategy, which would carry out the notification process. We are building up that case.

There was a period when the UK Government was not keen on the notification process, because it did not think that it would be relevant or appropriate in light of the Brexit negotiations and Brexit itself. However, given the extension, the UK Government is now minded to forward our case, so we will pass that on to it for the interest of the European Commission.

Contingency plans are in place if there is a change in circumstances, such as Brexit happening. I will not go into all that, but I understand that the UK Government has arrangements in place for where we would send notification if it was not to the European Commission.

Gordon MacDonald (Edinburgh Pentlands) (SNP)

Evidence to the committee has suggested that there is not the level of demand in the economy that was envisaged. Rob Hunter, from the Development Bank of Wales, suggested that the £200 million that is envisaged to be invested each year is about the right level for Scotland. What are your feelings on matching the supply and demand of funds? Would it be right to invest £200 million a year under the current circumstances?

Derek Mackay

Clearly, we will have to consider how we finance the bank and the capitalisation of it from year to year, as resources allow. We have set out the £2 billion capitalisation over the 10-year period, but exactly how we profile that will be determined by the resources that we have available from budget to budget, within that aspiration. We have already announced the building Scotland fund and precursor funds to the bank being established, and those are being administered. Other funds will come from other places, such as the Scottish Investment Bank, which will form part of the finances. I would not set it out as rigidly as £200 million a year because, as I say, the profile may vary naturally from year to year.

We want to ensure that there is demand—folk queueing up at the door, if you like—so that people take advantage of the financial products that will be available. To stimulate that demand, we want to engage the enterprise agencies, the Scottish Futures Trust and the banks as appropriate. The purpose of the new bank is to give additionality rather than to crowd out the financial products that banks currently provide. We recognise that there are gaps in the economy and the market, and we want to focus on those to try to stimulate demand. The attention, coverage and awareness that the bank will, we hope, enjoy and we will encourage and stimulate will ensure that there is demand. The bank will have a transformational nature, as it is about trying to provide patient finance and capital, which is different from the products that banks have traditionally provided.

For all those reasons, there will be demand. We may have to stimulate that by raising awareness, and then success will breed success. I have described the investment pattern, which will vary from year to year, so that we can respond accordingly.

Gordon MacDonald

Again on demand, the committee heard from Rob Hunter that the Development Bank of Wales had an aim of reaching £80 million of investment by 2022 but that it achieved that in the first two years. Is there any reason why the demand profile in Scotland should be any different from that in Wales?

Derek Mackay

No. The economies are clearly different and some of the challenges that we face will be different. How we choose to target the missions will be different; it might be really good for us to target scale-ups or high-growth companies. We are learning from Wales and from the British Business Bank and the Green Investment Bank, but what we are doing is different from all of them and is unique to Scotland’s economic circumstances and landscape. However, I hope that we can have the same type of demand and investment.

With other investment funds that I am familiar with—the committee will be very familiar with them—Brexit uncertainty is having an impact, with investment plans being deferred and people sometimes being unwilling to co-invest. If the Brexit economic uncertainty is resolved and we get beyond the current phase, there will be even more demand for such products. That view is based on the evidence that I have seen that current financial tools are not being deployed and investment is being deferred because of uncertainty and a lack of willingness to co-invest.

Gordon MacDonald

The British Business Bank has recently established a new demand development unit. I know that the Scottish Investment Bank works closely with the British Business Bank. Is there anything that we can learn or copy from that new unit?

Derek Mackay

We will of course take the good practice from that. In my early days as finance secretary, I engaged with the British Business Bank. We do not want to crowd out the BBB, either—we want it to keep investing in Scotland and supporting Scottish business, so we are about additionality. However, we can of course pick up on that practice. We will have missions that are specific to Scotland’s economy, which is how we will achieve additionality and focus. However, if there are practical measures on raising awareness, particularly in relation to targeting small and medium-sized enterprises or scale-ups, that will be useful.

Having convened Scotland’s banking and economy forum, I am trying to ensure that we have good relationships with the banks and that we use an intelligent approach to provide resource or finance where that is not totally there at the moment. We will learn from the British Business Bank and the unit that it has created.

Dean Lockhart (Mid Scotland and Fife) (Con)

We have heard from those who are setting up the bank that it will not act as the originator of funding opportunities, but will rely on referrals from the existing enterprise agencies, Scottish Enterprise and Highlands and Islands Enterprise. Given the significant additional funding available from the bank, will the resources, budget and staffing levels of the enterprise agencies increase to cope with the additional work?

Derek Mackay

We have still to fully decide on who and what transfers, and what resource is where. I want to look closely at those issues to avoid duplication—a matter that Dean Lockhart has mentioned in the chamber. We do not want duplication or clutter; we want a potent, targeted, national investment bank that will leave the enterprise agencies and the SFT with their functions. We will look closely at how we align our efforts, organisations and staff. We are also working right now on a single point of entry for business support. It is about decluttering.

Rather than framing the question around whether the bank will bring costs of administration that will add to those of the enterprise agencies, we will look right across the infrastructure and landscape and ask what fits best where and how we can address duplication to ensure that we get maximum output from public finances.

Dean Lockhart

The Enterprise and Skills Strategic Board was set up two years ago to further align the activities of the enterprise agencies. Will that board therefore sit above the bank and oversee its activities to ensure the full alignment that you talked about?

Derek Mackay

That is a good question. As well as a board, the structure and governance of the bank will include ministerial accountability and parliamentary scrutiny, and Audit Scotland and the advisory group for ministers that I am proposing will also be involved. The strategic board provides advice on all enterprise agencies. The proposal is that the bank will be a public body and a plc, so its relationship to the strategic board will be different, but it would be wrong to assume that the strategic board will take no interest in the bank. I am trying to make the lines of accountability for the bank clear and not too cluttered. The strategic board might be able to give advice on the landscape of the agencies, and I will give that further thought. I do not want the bank to have to respond to too many sources of leadership, when the purpose was to declutter and to bring things together. I think that the strategic board will continue to provide recommendations on how to bring the Government’s agencies together. Mr Lockhart is familiar with that issue.

Dean Lockhart

My final question is on demand. The Scottish growth scheme was set up a couple of years ago to invest up to £500 million in the Scottish economy. Can you give the committee an approximation of how much has been funded under that scheme to date?

Derek Mackay

I would rather do that in writing so that I get the figure right. I committed to give the committee an update, and I will give you line-by-line, portfolio-by-portfolio investment figures.

As Mr Lockhart is aware, a number of the schemes took a wee while to set up. Some of that is down to demand, and—as I touched on earlier—some is down to investment plans being put on hold or the lack of co-investment. Am I still confident that the half a billion pounds to which we committed in the programme for government will be allocated over the period? Yes, I am. However, if it is helpful, I will write to the committee so that you have the amounts allocated to date for each portfolio. I know that I committed to giving that update.

The point is fair. I go back to the earlier point about stimulating demand and raising awareness. We want to learn the lessons, so that there is almost a queue at the door as we get ready to go.

Andy Wightman (Lothian) (Green)

I have a technical question. Scottish ministers already own Scottish Water, David MacBrayne Ltd and so on, so why is it necessary to establish the bank via primary legislation? If the Government wished, it could set up a bank without legislation.

Derek Mackay

I am happy to turn to the lawyer to explain why, but civil servants are good at saying, “It is because you have to, minister.” It is more technical than that.

Essentially, legislation gives us the basis to instruct. It also gives the bank its enduring nature if it sets out the parameters and functions, and it gives us the ability to capitalise, by way of resources.

That raises the question of what is different from what we had before. It is about the scale of the bank. If we get the dispensations, the bank will have further financial flexibility, which the agencies that we currently have do not enjoy. There are benefits from establishing the bank in legislation.

Fraser Gough might say more about the legal underpinning.

Fraser Gough (Scottish Government)

Part of the issue is the democratic imprimatur behind the bank. We are talking about an institution that will be vested with large sums of public money. Therefore, in a democracy, it is attractive for the Parliament to have the opportunity to shape the institution. Instead of the Government going away and drawing up the articles, the Parliament has, through the bill process, an opportunity to influence the bank’s structure and operation.

Indeed, beyond the bill process, there is the mechanism for amending the entrenched provisions in the bank’s articles of association, which is subject to a parliamentary scrutiny procedure. The Government has no means of creating such a mechanism but through the vehicle of primary legislation. There is an on-going role for the Parliament, and we need the primary legislation to put that in place.

Andy Wightman

My question was really about the necessity, not the desirability, of having a bill—I understand the desirability and I am grateful that we have a bill. I am advised that the necessity of a bill is to do with elements of section 17, on the ability to finance the bank

“in the form of grants, loans and guarantees”,

which would be prohibited by the Scotland Act 1998.

Fraser Gough

I think that “prohibited” is an overstatement of the position. However, there is a question about how much public money the Scottish Government can expend without direct statutory cover. Budget acts provide that, to some extent, but we are talking about finance on a scale that goes beyond the typical spend.

Derek Mackay

As I think that I said, the power to capitalise the bank is the clearest part of the bill.

Andy Wightman

Okay. If you have further thoughts on the necessity of legislation—

Derek Mackay

The need to capitalise the bank is a pretty good reason to legislate.

Andy Wightman

I suppose that, fundamentally, I am asking whether you could go ahead and do this without legislation and, if so, what is stopping you. Perhaps you can come back to us on that.

David Wilson (Scottish Government)

Let me comment briefly. I think that the assessment is that the Scottish ministers could create an organisation that could take on many of the functions—with both limits and scope—exactly as you describe. However, the decision that has been made, and the advice that we received, was that, in order to capitalise such a company on the scale that ministers intend, legislation would be needed. The central need for the legislation is about giving ministers the power to capitalise the bank—not to create it, as such.

Andy Wightman

Are you saying that ministers do not currently have the power to capitalise such an institution?

David Wilson

Yes.

Andy Wightman

Thank you.

Recommendation 1 in the implementation plan is to establish a national investment bank with a vision to

“provide finance and act to catalyse private investment to achieve a step change in growth for the Scottish economy by powering innovation and accelerating the move to a low carbon, hightech, connected, globally competitive and inclusive economy.”

I do not think that we will find much disagreement with that. However, witnesses questioned whether that bold vision has been translated into the language of section 2, which sets out the objects that will be in the bank’s articles of association.

Questions have been asked about the object of

“investing in inclusive and sustainable economic growth”,

which is in section 2(2)(a). Just this week, the Poverty and Inequality Commission said that the Government needs to define exactly what that means and say how it can be measured.

Have you had further thoughts about the bank’s objects, cabinet secretary? Do you think that they faithfully reflect the vision in the implementation plan?

Derek Mackay

I am content that we will achieve the vision for the bank through the objects and, of course, the missions, which will be crucial. Section 2(2) sets out the ancillary objects, which cover the areas that you mention. They are:

“(a) investing in inclusive and sustainable economic growth,

(b) promoting and developing the activities of enterprises, where lack of financial investment is holding back economically viable commercial activity,

(c) promoting and developing the activities of small and medium-sized enterprises,

(d) creating and shaping markets through the provision of patient capital,”

and

“(e) contributing to the achievement of the Scottish Government’s economic policy objectives”,

which include not just boosting competitiveness but tackling inequality.

I think that the missions, which will be critical, will speak to those areas further, including the move to a low-carbon economy. We might come back to the formulation of the missions. I have some ideas about that that I would like to discuss with the committee, but I believe that the ambitions in the consultation and the implementation plan will feature in the missions.

I am looking at a chart of responsibility in a table on the bank’s governance. Right across the articles of association, the shareholder framework document, the missions, the investment strategy, the business plan and the ethical statement, we will want to direct the bank in a way that Parliament would want us to. Therefore, I do not think that there is any risk of the intentions being lost.

Andy Wightman

Recommendation 1 is quite a visionary statement, whereas the language of section 2 is the dry language of articles of association. I do not doubt that you share the vision that is set out in recommendation 1 but, in 10 or 15 years’ time, that might not be the vision of the Administration at the time. If that vision is important, as we all believe that it is, is there any way of incorporating it in the bill to make it clear what the bank is actually for?

Derek Mackay

I think that the bill does that. It is essentially an enabling bill that builds the structure of the bank. The bank will be an enduring, long-term institution; I think that it will be a permanent feature of our financial landscape. However, the missions need to be adaptable. Some of the articles are entrenched in terms of how we deliver the bank, and there will be parliamentary involvement. We must be agile and able to adapt to circumstances, which is why it is important that the missions are not outlined in the bill. That means that if we were to change or amend the missions, we would not have to return to Parliament with primary legislation. The bill must provide the structure and enable us to get on with setting up the bank.

There are many areas to do with what the bank will do in practice that I do not think it is right to include in legislation, but which should feature in the other devices that I have referred to.

Andy Wightman

You mentioned the missions and the role of Parliament. You rightly drew attention to the fact that the entrenched provisions can be modified only if a resolution has been laid before and approved by Parliament, but that is not the case with the missions. Do you think that the missions should be subject to any parliamentary scrutiny, or approval by resolution, given how central they appear to be to the role of the bank?

Derek Mackay

I do not think that they should be, but I have an idea about that. I think that it is right for the Government to be able to get on with its job as an executive and have a relationship with the bank, whereby the bank will have a degree of independence, but the missions will set out the parameters within which it should operate. The illustrative missions that have been set out include dealing with demographic change and moving to a low-carbon economy.

I led the work on the national performance framework on behalf of the Government. The NPF sets out the Government’s purpose through outcomes and indicators. We tried to make it about the country as well. That did not require an affirmative vote by Parliament; it was a mission for the whole country. We developed the NPF in an inclusive way on a cross-party basis, through engagement, consultation and round-table discussions with stakeholders. I would like to take the same kind of approach with the missions—I commit to taking a round-table approach. Extensive consultation is already under way. Rather than have a parliamentary vote and unnecessary division on the missions, I would like to engage with Parliament on them, in the same way that I did for the national performance framework. I am keen for a cross-party approach to be taken to refining the missions.

Given that I got the likes of Murdo Fraser and Patrick Harvie to agree on the purpose of the Government as set out in the national performance framework, surely we can approach the missions for the bank in the same consensual and constructive way. There are other stakeholders with whom we must engage, too. Although it is ultimately a matter for the Government, I want to take a collaborative approach to the creation of the missions. As I said, we have already published some illustrative missions, but that is not the end of the matter.

Andy Wightman

The bill says that you will send a document to the bank when setting, modifying or ending missions. I think that the missions are designed to be fairly long term. Will you give an indication of what proportion of the bank’s resource will be devoted to the pursuit of missions as opposed to other financial products that it may develop routinely?

Derek Mackay

That is a good question. I do not want to set a percentage. I suppose that that issue will feature in the investment strategy and the business plan. I expect the missions to be transformative and to absorb a lot of the bank’s energy and resource. We will direct the bank to engage in missions. That is not to say that every single investment will be exclusively part of the missions, but we will expect the missions to direct the energies of the bank.

We will get further information from the investment strategy and the business plan, which the bank will lead on. It will be for ministers to review that.

Andy Wightman

I am looking not for a specific percentage but for an indication. I am looking at the paper that was produced by Mariana Mazzucato and Laurie Macfarlane for the Government in March 2019. Much importance is being attached to mission-orientated finance. Do you see the mission-based finance as a substantial part of the bank’s activity?

Derek Mackay

I do. I said that I think that the missions will absorb the bank’s energy and resources—I expect that to be a real focus of its work.

Andy Wightman

That is helpful. Thank you.

We have had discussions about ethics. Do there need to be legislative provisions on the bank’s ethics, or are you content to leave that to the board?

Derek Mackay

I do not support either of those options. I do not intend to legislate specifically on defining things as ethical, but there will be an ethical statement. However, I will not just leave that to the board. Although it is appropriate for the board to lead on the ethical statement, ministers should review it. Naturally, ministers will engage in relation to that. I am sure that ministers will want to give a view on the shareholder framework document—and even at an earlier stage—and on what we feel is the spirit of ethical investment in practice. That said, as a public body, the bank will be bound by, for example, the public sector equality duty and the Gender Representation on Public Boards (Scotland) Act 2018—there is existing legislation that is relevant to a public body.

As I said, we will review the ethical statement. I will not just leave it to the bank to compose the statement—I propose to engage beforehand.

Andy Wightman

The ethical statement is not a legislative requirement.

Derek Mackay

No. You asked whether I would legislate for that, and I said no. You then asked whether I would leave it to the board. I said no again, and then gave the appropriate answer.

Andy Wightman

I am very impressed, cabinet secretary—thank you very much. That is all from me, for the moment.

Colin Beattie (Midlothian North and Musselburgh) (SNP)

I want to explore a couple of issues. The first is the target rate of return. The bill’s policy memorandum states that the bank will deliver

“against the target rate of return set by the Scottish Ministers.”

We have taken a fair bit of evidence on that issue. A range of approaches are taken for national development banks. Some banks have target rates of return, others do not. What is the reasoning behind having a target rate of return for the SNIB?

Derek Mackay

I suppose that it is to set a target. Let me frame this very carefully. We must bear in mind that this is not about commercial profit return, although it is good that what is raised will be reinvested—ministers will have the option of a dividend, too. Because we are putting those societal, transformational and environmental burdens on the bank, it is not all just about the rate of return.

Other development banks have a target rate of return, and it is appropriate for the Scottish national investment bank to have one, but that should not give people the impression that the rate of return is more important than other considerations. We have talked about how a move to low carbon, demographic change, scale-ups and support for small and medium-sized enterprises are also important considerations in transforming our economy. It is important to have a target rate of return, and we will engage with the bank on that, but I do not want it to be overly restrictive or to give the impression that that is the matter of primacy. It is not; this is about transforming our economy and adding to it.

Another issue to bear in mind is the very nature of patient finance. There might not be immediate or short-term returns—it could take a long time for investments to return resource. There are a number of considerations. It is appropriate to have a target rate of return, but we will not be beholden to that as the only measure of success.

Colin Beattie

Is there, therefore, any point in having it? You have highlighted a number of issues that indicate that it might not be appropriate to set a target rate.

Derek Mackay

It is important to have one, but we should not be totally beholden to it. We should bear in mind the bank’s other considerations and the missions that we set for it. It is good to set a target rate of return as a benchmark, but we should not be a prisoner to that. I am sure that there will be comparisons with other financial institutions, but we will look at what is reasonable and appropriate. We do not yet have a proposed rate of return, because we are currently only considering the legislation for the bank. When the bank is much closer to operation, we will set down a rate in the relevant document.

Colin Beattie

Has any consideration been given to what the likely target rate of return will be?

Derek Mackay

Not yet, although we are looking closely at it with others.

Colin Beattie

Is there a danger—human nature being what it is—that, if a rate of return is set, everything will be measured against it and it will become a totem that everyone operates against?

Derek Mackay

Mr Beattie asks a fair question. However, I am trying to express the view that, although we should set a target rate as a benchmark and as another metric for success, we must not be beholden to it, given the missions that we are seeking to establish for the bank. It should be there and we should be mindful of it, but it must not be our north star—the only thing that we follow.

Colin Beattie

Leading on from that, I want to talk about the subject of break-even. Given the bank’s operating costs, there is a deadline of 2023-24 for the break-even point. The bank will invest in firms whose needs for capital are not currently serviced adequately by the market; the reasons for that lack of investment are often complex. Is it likely that the bank’s high risk profile will impact on the potential break-even date? If so, what would that mean?

Derek Mackay

It might. It is possible, and even likely, but it will depend on what the bank invests in; when there is a financial return; the state of the economy at the time; where there is success, whether that is around the bank’s missions or around its investment profiles; and what we choose to do around the economic cycle.

That relates to my earlier point about the availability of resources and how quickly we can capitalise the bank. All those determinants will contribute to how soon it achieves break-even. As the finance secretary, I want that to be as soon as possible, but, as long as the bank is stimulating our economy and delivering the necessary investments to enhance and improve it, I will welcome that. We set out in the financial memorandum what we think the costs will be—and certainly what we think the benefits will be—but a lot will depend on the investment profile, the returns and the state of the economy at the time.

Colin Beattie

Would break-even be measured as a book entry or as cash in the bank, so to speak? We have talked previously about patient capital, and it could be years before you are able to crystallise any profit that might be made from the investment, although you would obviously be booking it every year. Would it be a book break-even, or would it actually be cash?

Derek Mackay

I was asked previously by this committee or another committee—I cannot remember which—what would constitute success for the national investment bank, and I said that success would be the bank allowing investments to happen that would not otherwise have happened.

I do not see the national investment bank as a cash cow that will be able to contribute to the fiscal coffers, as nice as that would be. It is more about transforming our economy, stimulating investment and providing financial support where it may not currently be available. It is about transforming the economy to direct more efforts towards demographic and environmental challenges, including the transition to a low-carbon economy and the scale-ups. I want the bank to be self-financing and to be able to reinvest its returns as soon as possible, but I see its contribution to the economy as being of much greater importance than ministers having the ability to take a dividend from it. That is not the bank’s motivation.

Naturally, the sooner that the SNIB can be self-financing, the better, but the bigger prize is what it can do for the economy and business support and what it can do to transform our economy. What I see as success is investments happening that would otherwise not happen.

Colin Beattie

So, the target date for breaking even is more notional than actual.

Derek Mackay

I suppose so, because of the range of determinants that I have set out.

Colin Beattie

I have one last question. Obviously, the SNIB is intended to be a cornerstone of the Scottish economy in the future and, we hope, something that will be with us for a very long time. Are you satisfied that, in the way that it will be set up, it will be free from future political interference, changes of regime and so on?

Derek Mackay

I do not know. I have not yet seen the committee’s report, so I am not sure how much you want to interfere in it.

In all seriousness, I think that the way in which we are structuring the bank and the arrangements around it gets the balance right. It will be a plc but also a public body with all the relevant accountability, transparency and governance arrangements. It will have an advisory board so that it can hear from different parts of society, and ministers will be able to direct and engage as appropriate.

However, it is important to point out that, according to all the advice and evidence that we have heard, the bank will achieve more if it is as independent as possible. Because public money is involved, all the appropriate checks and balances will be in place, but it will have operational independence. Nevertheless, in setting out the missions, we can direct the bank’s efforts and energies, and the shareholder framework document will give us assurances about its operation. We are clear with regard to the articles of association, including the entrenched articles, and ministers will be able to review the other policies that will be involved.

We will, of course, continue to engage with the committee on any suggestions that it might have, but I think that we have struck the right balance to ensure that the bank endures beyond any parliamentary term, any term of a finance secretary or whatever.

Angela Constance (Almond Valley) (SNP)

Cabinet secretary, you are probably aware that Engender and Close the Gap have raised serious concerns about the equality impact assessment, saying, in essence, that it lacks substance and is incomplete and that the analysis is somewhat “cursory”. How do you intend to interfere to rectify that matter?

Derek Mackay

At this stage, ministers and, indeed, Parliament are perfectly entitled to work on creating the bank, so I do not see that sort of thing as interfering at all. I have seen the evidence from Close the Gap and Engender, and officials are meeting organisations to go through their concerns and to ensure that what they have to say shapes and informs future work.

As I touched on earlier, the bank will, as a public body, be duty bound to follow the duties that are set out in the bill. Perhaps some of the elements of equality or of the duties have not been expressed in the bill, simply because those things are de facto required of any bill or any public sector body. It is therefore expected that all of that will be delivered and complied with without any reference being made to it, because it is the legal position as set out in the public sector equality duty and other duties in the Equality Act 2010.

Further work on socioeconomic deprivation will be carried out under the fairer Scotland duty assessment. I understand that the findings of that work will be published at the end of the summer and will also feature in the various strands of work that have yet to begin.

Between our engaging with the organisations to ensure that we get this right and our directing the bank, targeting what it does and pointing it in a certain direction, I will want to ensure that we cover issues such as having an inclusive approach, ensuring inclusive economic growth, sustainability and equality and tackling inequality. I think that those things will feature in the missions and the shareholder framework document, and I also expect them to be set out in the remuneration policy, the investment strategy, the business plan and the ethical statement. It is right that they will feature in those documents, which ministers will review.

If it was felt—as was clearly the case in the evidence that you received—that there were gaps in the assessment, I would want to work on that, including on what we could do with those with protected characteristics. We will meet the individual organisations to see what progress can be made during the passage of the bill, but I point out that what are perhaps even more important than the bill itself, which allows us just to build the bank, are the strategic documents and directions, which are where equalities should feature.

Angela Constance

Do you accept that, whenever there is an opportunity to articulate what everybody is required to do to advance equality, it is better to be explicit?

Derek Mackay

Although lawyers might be better placed to argue the point, pieces of legislation cross-referencing other pieces of legislation can get messy. However, for the avoidance of doubt, the legislative drivers, missions and objectives should—absolutely—feature in the other documents that I have suggested. Legislation should not be overly complex, but we all have to be bound by what Parliament states that we should do, and equality must feature in the top-level documents and direction under which the bank will operate. My answer is therefore that, yes, we should be explicit about how we do our business and operate and about what we are trying to achieve.

Angela Constance

The word “equality” is not mentioned in the bill. How does that omission fit with inclusive growth as an outcome and, more importantly, the raison d’être of the bank, which is—as you have said—to transform the economy not just by increasing competitiveness but by reducing inequality?

Derek Mackay

The bill directs people to the Government’s economic strategy, which mentions tackling inequality; the strategy focuses on inclusive economic growth and greater equality.

We have tried to keep the bill as tight as possible—it is about enabling the bank to be created. All the other documents—from the articles of association, the mission and the framework document to all the other policies—should feature the objectives and language that is right and appropriate. However, for the avoidance of doubt, although the word “equality” is not mentioned in the bill, it will be mentioned, where appropriate, in all other documents. The Government’s economic strategy, to which the bill refers the bank, mentions tackling inequality, and that is a key part of the strategy. That means tackling inequality in every sense, not just financial inequality.

Angela Constance

Do you accept, however, that visibility and clarity are important?

Derek Mackay

I absolutely accept that.

Angela Constance

I will now ask about remuneration. The committee has heard mixed evidence—more so in written evidence—about the bank’s remuneration policy. On the one hand, the bank will operate in the financial sector, and some people expect that to be reflected in its terms and conditions of employment. However, other evidence points to the fact that it will be a public body that is accountable to taxpayers, that there will be a need to deliver value for money and that public support for the bank and its policies will be important. What are your views on remuneration policy?

Derek Mackay

Ms Constance has fairly articulated the issues that Government and Parliament will have to wrestle with in relation to what we want the bank to achieve. It will be a plc but also a public body, and we will wrestle with the challenge of attracting the right people to operate the bank while working within the public sector pay policy, as far as possible. However, that will not be possible for every member of staff. I echo the First Minister’s comments in that regard:

“If this bank is to be successful, we will want to attract the top talent to run it and we will need to be able to attract that talent. And equally ... we live in a climate, in a culture where there can be a public concern about salaries that are over-inflated or, in shorthand, a bonus culture. We don’t want to obviously have those kind of concerns in a publicly owned organisation that is there for the public good.”

As the remuneration policy is set out, we need to bear in mind that the bank will work within the fair work principles and that it will be a living wage employer, which I know has been welcomed. To secure the level of staff that we will undoubtedly require, higher remuneration levels will be required for some posts. We will look closely at the pay policy of the British Business Bank, which is similar, in determining what is right for the Scottish national investment bank, which will be commercially minded but publicly accountable. We will give the matter a great deal of thought and we will balance the need for people who have the right skills and experience with respect for the public sector pay policy, which the vast majority of the staff will be under.

It will be for the bank to lead on its remuneration policy and the recruitment of staff, but ministers will set out a view and a direction, if that is appropriate. We will give that further thought on the basis of evidence from equivalent organisations such as the British Business Bank. We are mindful of the public sector pay policy, but we recognise that the Scottish national investment bank will not be just another public body and will need to attract the right staff. A balance will be involved, which Ms Constance articulated.

Angela Constance

What are your views on performance-related pay?

Derek Mackay

I do not want to encourage a bonus culture in the bank, which would be an inappropriate driver. I want the bank to be inspired and energised by its missions. For as long as I have been the finance secretary, I have not encouraged a bonus culture in the civil service or the public sector pay policy, and I would not like to see that in the bank—it would be the wrong culture. The bank will focus on delivery, and remuneration will be appropriate under the structure that I have set out.

Jackie Baillie (Dumbarton) (Lab)

I will pick up two issues that have been covered before I ask my allocated question. I welcome the cabinet secretary’s invitation for the committee to interfere and I view that as positive encouragement to do so. Does he have in mind a role for the committee or do we have a blank sheet to do what we will?

Derek Mackay

I am totally open, accountable and transparent to the committee. As always, it is no holds barred from Jackie Baillie.

Jackie Baillie

You do not let me down; you will therefore be able to look with interest at our report.

In a reply to Gordon MacDonald, you touched on stimulating demand and the challenge that Brexit poses, and you pre-empted my next question. The Scottish-European growth co-investment programme has managed to allocate only £3.25 million out of a total of £200 million. Has Brexit caused the slow take-up of that funding?

Derek Mackay

Businesses have told me that investment plans have been deferred because of Brexit; that is one reason for companies holding off. I have met businesses that are keen to invest in the UK and Scotland but, because it is hard to answer the question about what the Brexit position will be, some companies are holding off on investment. If companies are doing that, it is no surprise that they are not seeking funding to go ahead with investment plans. Brexit is having a material impact on the economy.

Jackie Baillie

I accept that, but I am confused because, when the co-investment programme was announced to great fanfare two and a half to three years ago, it was set up to help businesses to grow in the face of Brexit. Is it the case that you did not do your homework in setting up the fund?

Derek Mackay

Not at all—and there is no need for the pejorative language. It takes time to establish investment funds; due diligence must be done and we must reach out to potential investors.

Jackie Baillie

I understand all that and agree with you, but you said moments ago that part of the problem is that Brexit is preventing people from investing. The Scottish Government set up the fund to deal with the problem of Brexit, so I contend that you did not understand the market when you set up the fund.

Derek Mackay

Not at all. We have committed to financial support of about £500 million. I was asked whether we would fulfil that commitment and I said that we would and that I would provide further information to the committee on the profile of that. We can create a fund and offer loans and equity, but that does not force companies to take the financial products.

I have also been clear to Government agencies that we can be creative in terms of doing our homework. If we have financial products for which there is not enough demand, we can create bespoke products and look at how we can support companies if they want a different kind of financial product.

The financial transactions can only be loans or equity. Companies will, naturally, always take free money before loans or equity—anyone would take a grant first—but we will provide loans and equity. Because of the nature of the economy and risk or financial uncertainty, companies may not be willing to take up specific projects.

With the Scottish-European growth co-investment programme, we have to comply with the rules on what it is appropriate to use those resources for. As finance secretary, it has always been my position not to lose any resources. If people will not take the financial products that we have, we will look at how to amend them so that we can provide further support to the private sector. However, Brexit uncertainty has been raising its head ever since the referendum and having a material impact on the investment decisions of companies and potential investors.

Jackie Baillie

It is just that you introduced that fund in the light of all that.

Picking up on your latter point, which was that if it is not working you will seek to reallocate the money, are we to take it that the Scottish-European growth co-investment programme will come to an end or be altered? Is the money going to be reallocated?

Derek Mackay

No—I am still intending to use it. I am saying that if there is any prospect of Scotland losing out on finance, I will make sure that we adapt so that we never lose a penny that Scotland is entitled to. It is unfortunate that, thanks to the efforts of the UK Government, we might be on track to lose out on substantial sums of money if there is no resolution to the issue of financial guarantees from the UK Government concerning the funds that we have enjoyed from the European Union. I have financial products, but if necessary I will try to make them better so that they can be used in support of the Scottish economy.

Jackie Baillie

Excellent. Your implementation plan states that a balanced scorecard will be developed between the bank and the Scottish Government, which will set out the requirement for and measurement of non-financial returns. Can you point to where that features in the bill or any supporting document?

Derek Mackay

We have not put much detail in the bill. We are still working on it, and it should feature in the stakeholder framework document; we will set financial targets for the bank through the stakeholder agreement. It will also be covered in the missions, in which we will cover key socioeconomic challenges for the bank; both the financial and non-financial returns will be part of that. As a patient stakeholder, we will give time for resources to return to the bank. I also expect reference to that balanced scorecard to feature in the business plan and investment strategy. It will build on the Treasury’s green book guidance and develop a specific approach suited to a mission-orientated development bank.

Jackie Baillie

We can find nothing in the bill or the supporting documents, but I am encouraged by what the cabinet secretary is saying. I am very keen that if we are setting up such an institution, the Government should prioritise the non-financial returns and there should be clear sight and measurement of them. The earlier sight that the committee can have of your intentions as you develop them, whether that is in guidance or the business plan, the more confident we will feel about those returns.

Derek Mackay

That is a fair point, convener. I do not think that Jackie Baillie is saying that it should be in the primary legislation that will create the bank, and we are agreed on that. However, it is clear that what is expected of the relationship between the bank and the Government should feature in the stakeholder framework document. It should also feature elsewhere, as appropriate, to capture those financial and non-financial matters. I will give further thought as to how it features, but, to go back to Angela Constance’s point, I take on board that it should be explicit somewhere.

John Mason (Glasgow Shettleston) (SNP)

The cabinet secretary has mentioned the advisory group, and I want to ask more about that. A variety of witnesses have given us views. Some want the advisory group to be more separate and stand alone, and others want it to be more involved. How do you see the advisory group operating? Am I right that it is intended to advise ministers rather than the bank?

Derek Mackay

Yes, that is correct. The intention is for the advisory group to advise ministers. Clearly, we have a relationship with the bank; we would rather that was the case than have the bank looking to too many different places. So, that is correct: it is our view that the advisory group should be advising ministers.

John Mason

Would there be no direct relationship between the advisory group and the bank?

Derek Mackay

We could give that further thought. I am not saying that members of the advisory group should never meet representatives of the bank—I do not know if we would want to be too specific about that, or if that would be overly restrictive. The purpose of the advisory group is ultimately to advise ministers. We will direct the bank through the mission, the shareholder framework and the eventual act. Parliament will create the act, and we will hold the bank to account.

John Mason

The advisory group would not be in the act, however—is that correct?

Derek Mackay

We do not intend it to be. It has an advisory function, so we are not proposing to put it in the act.

John Mason

A further question that has arisen is whether the chair or some other member of the advisory group should also be on the board of the bank. We have heard different views on that. Can you comment on your current thinking on that?

Derek Mackay

We could give you some further thinking on the chair.

Rachel van Kempen (Scottish Government)

The proposal in the consultation paper was that one of the non-executive directors would be the chair of the advisory group, creating a connection between the advisory group’s thinking and the board and its thinking.

John Mason

That would give a connection, but would that compromise the independence of the advisory group?

Derek Mackay

It gives you the link that you were asking about—not from the advisory group into the board, but from the board to the advisory group. The important point about the advisory group is that we want it to be reflective of Scotland and its key economic interests. It cannot be totally comprehensive and cover every sector, but we want the group to be informed, and for it then to inform ministers.

I think that the proposal will provide that direct relationship with ministers. We want the group to act as our advisers on the wider economy. We also have the link from the board through the non-exec director. They would be outnumbered, however, by all the other members on the group. We have been considering a membership of, I think, around 20.

David Wilson

It is about that.

Derek Mackay

We are open to that, and I think that that would be quite representative.

John Mason

We have heard a variety of thoughts and comments regarding membership. It has been suggested, for example, that nurses and social workers might be on the advisory group. That would not be a traditional expectation of or requirement for a financial institution, but that would mean that there would be wide involvement in the advisory group, including from many people who would not have a financial background. Is that your thinking?

Derek Mackay

Yes. I would not want to create representative posts for a sector, but the mission is for the group to be as representative as possible. That goes back to Angela Constance’s point about equality, representation and who populates the group. We will consider how it is formed as we work towards its operation. I can provide the committee with further information. Those matters are obviously not for the proposed legislation before us, but they absolutely relate to the operation of the bank.

John Mason

That is helpful.

On a slightly separate point, you explained earlier that one of the reasons for setting up the bank in the legal way that you have chosen is to give it longevity, so that it can go through political cycles. We have used the word “patient” a lot. You have mentioned being a patient stakeholder, and we have been discussing patient capital. Are you optimistic that the politicians—I am thinking of people such as Jackie Baillie and Dean Lockhart—will be patient, or do you think that, on day 1, they will immediately ask for a high rate of return and criticise you if they do not get it?

Derek Mackay

Those are very unkind comments to other committee members—although the analysis is probably 100 per cent fair: ministers and the bank should be held to account.

That brings us back to an earlier point: that the aim is not necessarily to raise revenue for Government, nice as that would be. It is about helping us to transform the economy and to provide financial support where it does not fully exist at the moment, while targeting some issues where that could really help us out.

Let us take an area such as renewables. If the bank levered in finance to the renewables sector to capitalise on our wonderful natural assets and their ability to create clean, green energy, that is the kind of investment that would be transformational.

We will all be enthusiastic about the bank’s creation and we want to get it right. The bank will be held to a very high standard, and that is admirable.

The Convener

Speaking of Dean Lockhart.

Dean Lockhart

Thank you, convener. I am both patient and enthusiastic, cabinet secretary.

I want to address a couple of issues to do with missions. In previous evidence sessions, there was some confusion about whether all the bank’s lending would be mission based, or whether it can lend outside of its core missions across all sectors, as the Scottish Investment Bank currently does. Will the cabinet secretary please clarify that?

Derek Mackay

We have published the illustrative missions, which, arguably, are quite wide. However, they are also focused, in that they focus on inclusive and sustainable economic growth.

To answer the question directly, the bank will be able to allocate resources outwith the missions, but that will be for the bank to decide. Such lending will need to be within the bank’s ethical statement, investment strategy and all the other considerations and burdens that we will put on it. Because we will not be micromanaging the bank’s individual investments, it is not inconceivable that it will invest outwith the missions, albeit within those other policy parameters.

Dean Lockhart

Let me give you an example that was raised in previous evidence sessions. Would investment in the oil and gas sector be consistent with a low-carbon mission for the bank?

Derek Mackay

It depends what the bid for funding is. Let us say that an oil and gas company wished to diversify from extraction into renewables or emissions reduction. It goes back to my earlier point. As long as the bid meets the other policy requirements, an investment can be made outwith the specific missions. It will be down to the nature of the application and the investment that is sought. The bank will also be looking for a balanced investment profile.

We then come to a wider debate about the bank’s ethical statement and the restricted nature of what the bank may or may not invest in, on which we may have a view. We are talking about the legislation to create the bank, so I do not want to speculate too much about what the bank may or may not invest in. Some of those matters will be for investment strategy or the ethical policy.

Dean Lockhart

Section 11 allows the Scottish ministers to change the bank’s mission statement by sending a document. Concern has been raised that mission statements will be changed too often, for example every year, as part of the annual report. Would it be inappropriate to change the mission statement once a year?

Derek Mackay

Yes. For the purposes of patient finance and a long-term economic strategy, it would be too often if we were to change the mission statement every year. There should be enough flexibility to change it as the economy demands, but every year would be too often, especially when the bank will have a business plan and its own investment strategy. I would imagine that the missions will be more medium term than short term. How can the bank make strategic long-term investments if we change the mission statement every year?

Dean Lockhart

On that point, you mentioned future proofing the bank against changes in Government and so on. To reflect your concerns about long-term thinking, would you consider future proofing the mission statement in the legislation so that ministers could change the statement, say, only every two years?

Derek Mackay

I really do not want to tie the legislation up in formulae or unnecessary parameters. I understand the intention behind the question, but any wise minister knows that it would be counterproductive to constantly or annually change the missions. At the same time, though, we should not necessarily tie our hands for what is clearly common sense, wise and the right thing to do. I do not know whether Dean Lockhart feels an amendment to the bill coming on, but I am sure that he understands the point that I am making. He has asked me a direct question and I have answered it. Do I think that I need to legislate for common sense? I do not think so.

Dean Lockhart

We will leave it at that. Thank you.

Jamie Halcro Johnston (Highlands and Islands) (Con)

The implementation plan notes that the SNIB will have

“a national mandate to realise benefits of investment at scale, while maintaining regional reach to help businesses to realise their full economic potential”.

Last week, we took evidence from Rob Hunter of the Development Bank of Wales, who was clear that it is extremely important to maintain a regional approach. How will you ensure that the new bank takes a regional approach rather than focusing on the central belt or other areas?

Derek Mackay

Let me be clear: I do not want the bank to focus only on the central belt or other places where people might think the economic clusters are, because the bank can deliver for every part of the country. I mentioned the potential around renewables, which clearly involves island, coastal and rural communities. The bank’s financial products can touch every part of Scotland, and there is an expectation that that will happen. Sometimes, what might not seem to be much resource in large urban areas can have a disproportionate positive effect on rural areas.

My expectation is that the bank will cover every part of the country geographically and that its financial products will be open to those in every part of the country. Let us not worry about the physical location in relation to accessibility. The bank will not be like a traditional bank where people rock up to the counter to ask for a loan. It is about making the financial products available intelligently. We want to ensure that the bank has that national locus. I can engage with the business gateway and local authorities to ensure that the bank has national reach. Similarly, we can support the deployment of the resources across the country. The new south of Scotland enterprise agency is a further welcome addition to the economic landscape.

My ambition is to ensure that the bank speaks to the whole country and that its financial products work for the whole country.

Jamie Halcro Johnston

I heard it suggested that you do not envisage the bank having regional or local offices, although that is still being consulted on and considered.

Derek Mackay

It is not that kind of bank. The accommodation is yet to be determined, but that will be an operational matter once we have decided exactly who will do what, what the composition of the bank will be and what will happen with current agency functions, such as those in the enterprise agencies and the SFT. The point is that most people will contact the bank not by physical attendance but by telephone or email, or they will have been referred to the bank as a result of engagement with other agencies. It is not about physical location; it is about how we open up the bank’s financial products. Investments will be merit based but, as I said, the benefits of the bank and the financial tools can reach right across Scotland. Through some of the missions—particularly on low carbon and the delivery of renewables—the bank can reach the parts that other banks cannot. That sounded like an advert strapline, which I did not intend. I should say that I have not paid a consultant for advice on that.

Jamie Halcro Johnston

I think that you would want your money back if you had. [Laughter.]

You mentioned some of the agencies that are involved. Do you see local government as having a defined role in relation to the bank? Obviously, it has a role through business gateway.

Derek Mackay

The committee has paid close attention to business gateway and has recommended that there is a need for it to have national consistency. For that reason and other matters that the committee well understands, I want the bank to have national consistency. I work closely with local authorities on economic development and, following the committee’s consideration of business gateway, I am reaching out to local government to see how we can do local economic development better. However, I do not propose a role for councils in the bank; it is a national investment bank. I want to work with local authorities, but I will not give them a decision-making role. There is of course an expectation that the economic development units, business gateway and others will work with the bank to ensure that it fulfils the potential in every part of the country.

The Convener

To use your earlier language, Andy Wightman would like to rock up with another question.

Andy Wightman

It is a question about rocking up to the counter. Is it envisaged that the Scottish bank will have to obtain a banking licence and/or be regulated by the Financial Conduct Authority? There are subsidiaries of the Development Bank of Wales that are so regulated, because of what they do.

Derek Mackay

My lead official is desperate to say something. He has been deprived all morning.

David Wilson

To be clear, the bank will not require a banking licence. That was set out in the implementation plan last year. However, there will be a number of more detailed clearances with the FCA. In particular, its approval will be required for the use of the term, “bank”. We have already been in touch with it in that regard and are not anticipating any particular challenge around that, but it is one of a number of approvals processes that we need to go through. We will also liaise closely with the FCA about the senior managers’ conduct arrangements and other more detailed points. However, to be clear, there is no requirement for a banking licence, given the nature of the activities that the bank will be engaged in.

Derek Mackay

If it had been a retail bank, it would have required a banking licence. You should not underestimate the willingness of people to invest in a national investment bank, thinking that it is a retail bank, but it is not. Its mission, and what we are trying to achieve with the financial products, is specific. Those elements may well grow over time—it would be good if the bank could grow and consider other functions. However, right now, it is what it is and it will do what it says on the tin. If it had been a retail bank, it would have required a licence.

Andy Wightman

Yes, because the Development Bank of Wales is doing things that require a licence, such as running a help-to-buy programme and so on. There is nothing to rule out such activities in the future, if the bank considers that they are necessary, and, obviously, part of that would concern the requirement to get a licence. However, you are saying that you do not envisage that at the moment. Is that the key message?

David Wilson

Given the structure of the legislation, there are opportunities for the bank to change and evolve, but that is not part of the proposals at the moment.

Derek Mackay

Just for completeness, I do not think that it is true to say that we could not do a help-to-buy programme, because we already do that.

Andy Wightman

Yes, but there is a question about whether you could do it through the bank. The help-to-buy programme that the Development Bank of Wales runs requires regulation. However, there is nothing to rule out the plc or the Administration deciding, in 10 years’ time, that the bank should get into fields that require a licence and then going through the due process to obtain one, even though that is not what you envisage at the moment.

Derek Mackay

There are certain changes that would be required, depending on the nature of the change in the bank’s functions. Clearly, what we are doing in statute is to enable the creation of the bank. We are doing much more in policy areas. It might be helpful if the committee had sight of the chart that I commissioned for my briefing for today’s meeting. Has the committee seen that, David?

David Wilson

Not the chart.

Derek Mackay

I will share that with you, as it assisted me. I see that I have got Mr Wightman excited at that prospect.

With regard to the statute, it is what it is. There are changes that we can make in policy and to the mission but, if there were to be a much larger change to the bank, that would require primary legislation and we would have to return to Parliament.

Andy Wightman

I am not particularly excited about you sharing your briefing, although that would be useful; I am more excited about the prospect of—

Derek Mackay

I said that I would share the chart, not the briefing.

Andy Wightman

Yes, although it would be good if you could share briefings with the committee in advance of each of your appearances before us.

Derek Mackay

I suspect that it would make all of our lives much easier.

The Convener

Not necessarily, but thank you for the offer to share a chart with us. I think that that is the first time that we have had that offer from a cabinet secretary.

As there are no other questions, I thank the cabinet secretary and his team for coming to the meeting. We will now move into private session.