What is the background of the Scottish National Investment Bank Bill (the "Bill")?
The original idea of a Scottish national bank was raised a few years ago with the first real movements starting in 2017 when the Scottish Government announced a feasibility study to assess whether a national bank would benefit the Scottish economy.
There has been a decline in public spending over the years and Scottish businesses can face difficulties when trying to raise finance for longer term projects.
The private banking sector has faced its own financial difficulties recently and generally tends to focus on short term shareholder returns. There is a lack of appetite from the private sector to commit to investment in higher risk innovative activities or new technologies particularly for businesses without a proven track record of success. The intention behind the Bill is for a Scottish national bank to be established to fill this gap providing financial investment in longer term projects as well as being a vehicle to drive forward the Scottish Government's environmental objectives.
The Bill was introduced in 2019 and unanimously passed in January 2020. It creates a duty on the Scottish Ministers to establish the Scottish National Investment Bank (the "Bank") as a publicly listed company.
According to the Bill, the Bank's vision will be 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 net-zero emissions, high tech, connected, globally competitive and inclusive economy".
The Bill ensures that any funding provided by the Bank must take into consideration the environmental footprint of the prospective lending as well as any environmental consequences associated with such funding. There will be minimum ethical investment standards which must be adhered to when the Bank is making investment decisions.
The Scottish Government faced pressure to make amendments to the Bill to limit the Bank's ability to invest in "damaging companies" such as those involved in the extraction of fossil fuels. Ultimately, the agreed Bill does not go so far as to legally prevent this, although the Scottish Government's position is that they are committed to green and sustainable investment and the primary aim of the Bank is to support the transition to a low-carbon economy.
When will the legislation come into effect / when will the Scottish National Investment Bank start operating?
At this stage, there is no finalised date for when the Bank will begin to operate. At the time of passing the Bill however it was proposed that the Bank will be up and running by the second half of 2020.
The Scottish Government has committed to investing £2 billion to capitalise the Bank over its first 10 years and the Bank will also initially be supported by public funding via the Building Scotland Fund.
What will the practical implications be?
The aim of the Scottish Ministers is to inject funding into innovative and environmentally friendly markets in order to provide the organisations within these markets with an opportunity to compete and expand. The Bank will therefore need to establish a good working knowledge of these new innovative sectors and keep apace with technological developments to ensure they make sound investment decisions.
From a practical perspective, it will be easier for firms to borrow money over a longer term basis of between 10 and 15 years. There will also be more financial support for small and medium-size enterprises particularly those with an environmental focus.
It is unlikely however that there will be a significant migration from more traditional methods of private lending through debt financing mechanisms such as loan arrangements and overdrafts. It is anticipated that funding will be aimed at breaking down barriers to green investment for innovative companies and encourage more investment in this sector.
The passing of the Bill marks the next step towards establishing the Bank. However, It will inevitably take time for the Bank to reach its full potential. The changes will not occur overnight and will require patience and support from stakeholders across Scotland. The success of the Bank will no doubt be shaped by how quickly the Scottish market embraces the opportunities it provides and how quickly and easily the Bank can deliver on its objectives.
Are there any risks involved with establishing the Bank?
Some of the businesses the Bank will consider funding may be start ups within their markets. Banks and investment bodies generally consider such businesses to be higher risk as there is more uncertainty that they will be able to repay their loan at the end of its term. In striving to achieve it's green objectives, the Bank will seek opportunities to provide funding towards companies with innovative, ethical and environmentally friendly objectives, particularly where funding is preventing such companies from progressing their ideas. Naturally, these companies, may have limited capital and track record and could therefore be more at risk of failure. So from this perspective, there is certainly a financial risk that the investment could fail and we see a loss in public funds.
The Scottish Government will need to have regard to "state aid" legislation when providing funding to particular organisations. Favouring an organisation within a specific market by providing them with state funding runs the risk of being potentially challengeable. State aid is particularly topical as this is an area that has historically been regulated at EU level and therefore it is likely there will be future changes.
Concerns have been raised that the funding which the Scottish Government has committed to providing to establish the Bank may be too limited and lacks the scale to deal with the environmental objectives required to tackle the climate change issues we are now facing.
The question of geography is also one that may need to be considered in establishing which businesses will be eligible for funding from the Bank. Many Scottish businesses will operate across the English border or further afield and there may be uncertainty as to the extent they may qualify as "Scottish" and be eligible for potential investment.