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Scottish National Investment Bank: consultation paper

This consultation paper will focus on the Bank’s objectives, purpose and governance, as well as its relationship with Ministers and stakeholders.


Annex B: Recommendations from the Implementation Plan – 28 February 2018

No. Mr Higgins' recommendation Response Commitment to Implementation
The Opportunity of a Scottish National Investment Bank
1 A national investment bank should be established for Scotland 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, high-tech, connected, globally competitive and inclusive economy." Accept

This recommendation reflects the Government's overall approach to inclusive economic growth, and to the Government's Economic Strategy.

This Vision will form the mandate to be given to the Bank, subject to additional consultation with stakeholders and the Parliament through the Bill process.

The result of which can be reflected in the Strategic Framework to be set for the Bank by Ministers and in the Bank's wider governance arrangements.

2 The Bank's strategic priorities for investment should be centred on a core role of helping to address Scotland's economic priorities in an inclusive and ethical way. Accept

This recommendation reflects the Government's overall approach to inclusive economic growth, and to the Government's Economic Strategy.

The role and remit of the Bank should align closely and transparently with the remits of partner agencies.

This will be ensured through the legislation and building on the response to Recommendation 21.

Focus for Investment Activities
3

This new, mission-led institution will actively create and shape markets. It will intervene in a variety of areas – to supporting early stage and smaller firms and larger scale innovative projects get access to investment, through to financing infrastructure where the private sector will not invest. The initial focus of the Bank should be:

  • Providing growth capital to ambitious and innovative companies – with the capability to support across the lifecycle of a company's need for capital.
  • Providing finance to support the projects and initiatives aimed at realising opportunities to transform the economy.

The Implementation Plan sets out a range of financial products that the Bank should seek to develop to support this initial focus.

Accept

This recommendation reflects the market analysis provided in the supporting documentation and the advice from the Council of Economic Advisers.

Legislation can formalise the mission-based approach and enable Ministers to set the strategic and reporting frameworks for the Bank. While Ministers will set the Bank's strategic direction, it will be for the Board and the senior management team determining how to fulfil the missions.

Further economic analysis will build on the work collected as part of the Implementation Plan to provide assurance around the choice of missions and initial priorities for investment.

4 In addition to the supply of capital, the Bank should coordinate with other entities seeking to stimulate demand for financing. In financing transformational projects, the Bank will need financial structuring and complex transactional skills and consequently an element of demand stimulation will be required in this area, working closely with the enterprise agencies who provide a range of support services to companies, and with the Scottish Futures Trust in relation to its activities on infrastructure. Accept

The need for demand stimulation and the origination of investment proposals is an essential part of the Bank's remit.

This will require active engagement with business based in Scotland and close alignment with partner agencies

See also Recommendation 9.

5

The Bank should aim to focus on, and give priority to, areas of investment that are additional to the finance already provided by the market and by other providers in Scotland, complementing rather than crowding-out existing or potential investment.

Accept

The Government fully endorses this approach. The Bank should avoid "crowding-out" commercial activities, and instead seek to "crowd-in" and complement otherwise commercial activities.

The detailed approach to the focus of the Bank will be covered in the proposed Strategic Framework and the Bank's own Business Plan and Investment Strategy. It will also form the basis for compliance with EU State Aid rules and their successor arrangements.

See Recommendation 14

6

The Bank should adopt a balanced portfolio approach across a range of potential products and asset types. Its target should be to achieve a positive financial return on its individual investments, and at a portfolio level which should be measured over at least a 10-15 year horizon, recognising the focus on investment in patient capital and transformative infrastructure.

Accept

The Government supports the recommendation that the Bank should operate commercially, making rational, market-based investment decisions. This should be built into the Bank's statutory framework, and be outlined in both the Strategic Framework and the Bank's Business Plan.

Ministers will need to set a benchmark (or hurdle rate of return) against which the Bank's performance over time and across its whole portfolio should be judged.

7

Scottish Ministers should determine an appropriate basis for measuring the Bank's performance, taking into account the long-term nature of the investments and mission-orientated approach that's envisaged for the Bank. A balanced scorecard approach is required that reports on the financial performance as well as on economic impact over time, including social, environmental and ethical returns.

Accept

The Government recognises that while operating commercially, the Bank's investment decisions should reflect financial, economic and wider social and ethical interests (inherent in the missions), in order for it to have the societal impact, contribute to inclusive growth and fulfil the missions to be set for it.

The performance framework for the Bank will be outlined as part of the Strategic Framework (see Recommendation 14)

The body will be required to adhere to the Scottish Public Finance Manual which includes reporting requirements. The reporting framework for the Bank (potentially in addition to the SPFM requirements) should ensure that it can demonstrate fulfilment of missions set for it and enhanced benefits for society and the economy.

There will be substantial stakeholder interest in how the Bank will reconcile delivery of missions against operating commercially and being a leader in terms of inclusion, equalities and the environment (Recommendation 21).

8

The Bank should seek to maximise leverage of private capital as appropriate, alongside its own investments. In doing so, it should adopt a flexible approach; it may be appropriate for the Bank to invest or lend directly alongside private sector investors through third party delivery agents or via external funds.

Accept

The Government supports the use of co-investment of the Bank's funds alongside private investment will be essential in order for the Bank to have early impact

Work on this can only substantially commence at the point that there is an interim management team in place, although some work after May to scope out and start off the process will commence.

Choice of investment partners should be aligned to the Bank's ethical ethos and delivery of missions – which will require front-end due diligence, initially by the Bank's transition management team.

To have an early impact, there will need to be early clarity around initial missions so that procurement of partners can begin. Shadow Chair/Board members are also likely to have views to feed into this.

See also Recommendation 6

9

The Bank should build on current skills and experience successfully developed in Scotland, building on the track record of success, and creating a single point of delivery of financing support for business growth and innovation financing for transformational projects.

A detailed review will be required in response to this recommendation in order to achieve the optimal operating model and ensure essential close interaction between the Bank and the enterprise agencies, including how to ensure co-ordination of funding, company relationships and financial readiness activities that will be provided by the agencies.

Accept

The development of the Bank will build on the extensive expertise in other agencies, most notably in Scottish Enterprise, the Scottish Futures Trust and in the business, energy and housing Directorates of the Scottish Government.

Further consideration is underway on the existing landscape and how it might evolve with the creation of the Bank.

10

The Bank's activities should be aligned with the activities of the British Business Bank in Scotland, which may require establishing a strategy for alignment between both institutions.

Accept

The Government supports the general consensus that the objective is to ensure that Scottish business has access to a full range of financing and investment options. Options to consider for achieving this include a Memorandum of Understanding.

Classification and capitalisation of the Bank

11

The Bank should be established as a public body to ensure a continued focus on the Scottish economic strategy and alignment with a mission-based approach to investment. The form of public body should ensure maximum flexibility in how the Bank invests.

Accept

The Government supports the recommendation that the missions and strategic framework for the Bank are aligned with the Government's purpose and objectives.

See Recommendation 14 – there will need to close co-operation between the Bank, the SG sponsor team and the wider SG.

12

Long term, mission-orientated investment requires a long-term capitalisation and funding commitment by the Scottish Government. The target level of initial capitalisation is £1bn for new activity provided over the first five years, followed by a further £1bn over years 6-10.

Accept

The Government supports the proposal for initial capitalisation of £2bn by 2028.

This could include almost £500 million through the Building Scotland Fund and initial capitalisation of £340 million from 2019-20 as set out in the draft budget for 2018-19.

The remaining £1.5 billion equates to around a further £200 million per annum by 2028.

There will need to be sustained and transparent discussions between the SG and the Bank about investment plans and strategies as well as risks and mitigations to ensure that capitalisation is aligned with the investment pipeline and programme. This should be built into the Strategic Framework.

See also recommendation 16.

13

Three essential milestones should be set for implementation and successful operation of the Bank at the scale envisaged:

  • To be set-up with the flexibility to manage, retain and carry-forward cash balances over financial year-ends
  • To become self-funding over the medium term that is; the Bank covers its operating costs from investment returns
  • To be able to raise capital in its own right and no longer be reliant on capital advances from the Scottish Government to fund its investments.

Accept

The Government supports this recommendation and the need to set clear milestones for these three essential outcomes.

The Government's initial thinking is that;

The first milestone to secure a dispensation from the UK Treasury is critical to the project, and must be achieved before the Parliamentary process can commence.

The second milestone for the Bank to cover its operating costs from income receipts lies a few years in the future. It is envisaged that the performance management framework, including the arrangements for funding operating costs, is a key part of a statutory Strategic Framework. See also recommendations 6, 7 and 8.

The third milestone on raising capital lies beyond the initial 5 years of the Bank's existence. It is envisaged that the

14

As sole shareholder and sponsor of the Bank, Scottish Ministers will need to set the parameters within which the Bank should work. To do this Ministers should set a five year Strategic Framework for the Bank to respond to in its Investment Strategy and Business Plan. The reporting framework should ensure the highest standards of transparency and accountability.

Accept

The Government supports the recommendation that the overall Governance framework should be founded on a statutory Strategic Framework and be reflected in the Bank's governance arrangements.

The approach to governance will be the focus for further consultation with stakeholders, and be a key component of the planned legislation.

See also recommendations 2, 3, 7, 8, 10, 15-17, 19 and 21.

15

The Bank should be administratively and operationally independent of Scottish Ministers. The Board should include a Chair and non-Executive members appointed by Scottish Ministers, and two Executive Directors in the shape of the Chief Executive Officer and Finance Director. There should be an appropriately experienced and professional Executive Management Team.

Accept

The Government supports the recommendation that the Bank should be administratively and operationally independent. Appropriate safeguards should be in place to ensure this independence, while maintaining an active engagement in the delivery of the missions and strategic framework set by the Scottish Government.

The lines of accountability to Ministers and to Parliament will be clarified, subject to further engagement with wider stakeholders about the details. The option of including SG membership of the Board in a non-executive capacity will be considered as part of the Consultation. See Recommendation 20.

16

The Scottish Government should consider how best to consult with wider stakeholders on setting the Strategic Framework for the Bank to ensure that there is broad engagement with civic society on how the Bank is operating. This report recommends that an advisory group should be established whose membership comprises representatives from stakeholders and wider civic society. The group should advise Ministers on the Bank's Strategic Framework. The Chair of this advisory group could be on the main Bank Board as a Non-Executive Director.

Accept

The Government is clear that the Bank should follow an open and transparent approach, given the major transformational role which is envisaged for it. This recommendation about the conduct and ethos of the Bank underpins other recommendations.

There are several options for realising wider engagement with civic society. These will inlcude;

  • An initial Stakeholder Working Group during the implementation phase to conduct wider engagement on the legislation, the development of the Strategic Framework and advise Ministers on the implementation of the governance and operation of the Bank; and.
  • An Advisory Group that is part of the Bank's governance arrangements as set out in the statutory Strategic Framework.

Further development of options for stakeholder engagement will build on discussions with key stakeholders which is already underway (eg COSLA, Common Weal, Friends of the Earth, the Royal Society of Edinburgh etc).

17

The Bank should establish and operate to the highest standards of transparency, accountability and management of risk. This should be reflected in the reporting and accountability arrangements to be put in place, and in the formal governance arrangements of the Bank.

Accept

These should be defining characteristic of the Bank – underpins and influences recommendations 2, 7, 15, 16, 18 and 21.

18

In setting up the Bank, Ministers should appoint an independent shadow Chair as soon as possible, to oversee the work of a project team responsible for the transition and set-up of the Bank. A shadow Board and interim Management Team should be put in place prior to the Bank operating in shadow form in 2019.

Accept

The Government supports the recommendation, but is proposing to implement the recommendation in a different way. Following consideration of the options for ensuring continuity and momentum during the Implementation Plan phase. The Government appointed Benny Higgins as a Strategic Adviser on the programme in July 2019.

The appointment of an interim (rather than shadow) chair would normally made around 6 months prior to a new public body being fully established, after the necessary legislation has been introduced to Parliament.

A formal appointments process for the Chair, board and senior management can be actioned during 2019, following consideration of the Stage 1 of the Bill.

19

Scottish Ministers should concurrently confirm the Bank's initial missions and the first Strategic Framework, ensuring that the essential clearances and changes required are obtained from HM Treasury and others.

Accept

The Government supports the two distinct parts to this recommendation.

The initial set of missions suggested in the Implementation Plan – carbon reduction, demographic change and place-making – will be subject to further review and consultation as part of the development of the Strategic Framework. See Recommendations 3, 5, 14 and 16.

The second part of the recommendation is critical to the progress of establishing the Bank. Without HMT agreement to at least allowing the Bank to carry balances between financial years, it will be difficult to set up a Bank which is able to have the impact that is envisaged here.

20

The Bank will need staff with the right mix of skills and experience to ensure its success and sustainability. The Scottish Government should ensure that the Bank can offer employment and remuneration terms which are sufficiently competitive to attract suitably skilled and experienced people.

Accept

The Government acknowledges the need to recruit suitably qualified people to the Bank, and recognises that these skills are not widely available in the public sector and that they can secure high remuneration in comparable roles in the financial services sector. The estimated operating costs of the Bank of between £20-£30 million per annum reflects this recommendation

The terms and conditions for many staff in the Bank may need to reflect market rates and benefits and such salary levels would pose challenges for public sector pay policy.

Such arrangements are however not uncommon, even in the public sector. This is consistent with experience and arrangements put in place for the Green Investment Bank and British Business Bank. The Bank would not be unique in terms of employing staff who are not civil servants with non-standard public-sector pay arrangements
(eg Scottish Water).

However, the business needs for the Bank will need to be balanced with a wider perspective on senior remuneration. The appropriate approach to senior pay will be subject to further evaluation of the options and implications for public pay policy.

21

The Bank should adopt a leadership role with regards to diversity and inclusiveness within its governance, operational arrangements and investment strategy.

Accept

This Recommendation will become a core principle for the Bank's future operation. See also recommendations 2, 7, 16-18 and 20.

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