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Publication - Report

Scottish National Investment Bank: consultation report

Published: 28 Feb 2018
Directorate:
Chief Economist Directorate
Part of:
Economy
ISBN:
9781788515856

Analysis of the Scottish National Investment Bank consultation.

43 page PDF

481.6 kB

43 page PDF

481.6 kB

Contents
Scottish National Investment Bank: consultation report
4. Areas of intervention with greatest impact (Question 1)

43 page PDF

481.6 kB

4. Areas of intervention with greatest impact (Question 1)

This section discusses the views of respondents in assessing the possible areas interventions of the Bank which might have the greatest impact on the economy. Respondents were asked to consider, "What are the top three areas of intervention where you think the Bank can have the greatest impact on sustainable economic growth?"

Respondents were given a list of possible interventions to choose from, including:

  • Addressing access to finance for SMEs;
  • Providing countercyclical financing during periods of economic and financial crisis;
  • Financing infrastructure projects which support economic growth;
  • Providing long term patient funding for capital projects;
  • Targeting investments in high-risk R&D, innovative start-ups, and lengthy innovations, areas that private capital investment models may not address;
  • Promotion of investments that help address complex societal problems, e.g. the provision of infrastructure in deprived areas or addressing financial constraints in the housing sector;
  • Targeting groups that evidence shows have less access to capital than others, e.g. female and black and minority ethnic ( BME) entrepreneurs;
  • Providing mission-oriented finance, e.g. providing finance for transformational technologies to reduce carbon emissions; and
  • Other.

382 individuals (96%) responded to Question 1, with 119 (31%) of those providing commentary on other areas of other possible interventions. Within those providing commentary 102 (86%) were considered valid. 295 respondents (77%) provided a rationale as to their choices for the closed element of the question, with 254 responses (86%) considered valid.

Areas of intervention with greatest impact

The three areas of the Bank's intervention that were identified as having the greatest impact on sustainable economic growth were the promotion of investments that help address complex societal problems, the financing of infrastructure projects and providing mission-oriented finance. The number of respondents identifying these as one of the top 3 areas of intervention were 225, 202 and 175 respectively.

The responses are illustrated below:

Figure 1: Question 1 Responses
Figure 1: Question 1 Responses

Source: Consultation Hub

Other – Export finance

Respondents were also invited to provide "Other" suggestions on possible interventions and to provide commentary on why they had selected their chosen answers.

Analysis of these identified further discussion of the interventions proposed through the consultation document. The narrative indicated that there was backing for the Bank to offer export finance support. This opinion was cited by individuals rather than organisations responding to the Consultation. It was cited that often SMEs have the commercial potential to compete internationally but are too small to be eligible for the support from UK Export Finance programme, despite the fact that there is no size restriction for eligibility for support. This demonstrates that the perception that export finance support is difficult to obtain persists for individuals but not necessarily from organisations.

The rationale for selection

The review of the commentary on why respondents had selected the suggested interventions identified a number of repeating themes as set out below.

Transformational projects

Several respondents confirmed the importance of access to financing for future technologies such as alternative/renewable energies and digital, e.g. robotics, automation and artificial intelligence. They also remarked that these technologies tend to be overlooked by the private sector which can be driven by a desire for rapid growth and short term shareholder returns. It was also noted that in areas like climate change this investment should be focused on preparing Scotland for the future and progressing Scotland's competitive advantage.

SME/Start-up financing

Some respondents highlighted the difficulty in accessing scale-up financing and specifically, the gap between angel investment levels (£50k-£250k) and typical venture capital investment levels (£2m-£5m+). It was noted that this creates unnecessary pressure in terms of additional financing rounds and diverting founder time away from growing the business. A small number of respondents also indicated that this gap has been exacerbated by the post-recession reluctance of existing banks to provide SME finance and that, ultimately, such finance should help create a new generation of Scottish entrepreneurs.

R&D investment

Some respondents alluded to the Bank's need to focus on high risk Research & Development projects, due to the fact that these have the potential to create new business opportunities and enhance Scotland's future capabilities. However, the risk and lengthy timescales involved before any commercialisation potential can be demonstrated tend to again dissuade private investors bent on quick returns.

Patient capital investment

Patient capital has been highlighted as essential to start-ups and SMEs with the aspiration to scale up their businesses progressively, taking start-ups from pre to post commercialisation stage and growing SMEs into larger enterprises. This scale up requires long term funding, which is unlikely to attract private sector investors. Additionally, the same difficulty was outlined for long term capital projects due to the construction risk involved and long lead times endured before returns are generated.

Countercyclical financing

Some respondents noted the need to provide a source of contingency funds during unexpected economic crises to enable the economy to more easily absorb economic shocks. They noted that countercyclical cash injections would help maintain balance in the economy and sustain employment, aiming to offset the need for benefits and welfare; ultimately safeguarding those most vulnerable in society.

Infrastructure investment

An opinion expressed by several respondents is that current UK infrastructure is underfunded, particularly in rural areas. A small number expressed hope that the Bank's investment could provide a national, joined-up network ( i.e. 100% broadband/mobile connectivity) and encourage higher levels of international, inward investment .

Disadvantaged groups

Many responses remarked that the Bank offered an opportunity to address inequality, by providing financial support to the most vulnerable in society. A small number of individual respondents, as well as organisations such as the Church of Scotland, Women's Enterprise Scotland, Friends of the Earth Scotland, Scottish Independence Advocacy Alliance and RSPB Scotland, identified the investment in social housing as a possible area of intervention. Other respondents, however, were of the opinion that the Bank should not have a fixed mandate for this sort of financing, as it would be difficult to pre-determine what sort or quantum of investment would be required, which could lead to unforeseen policy outcomes.

Summary

This section has highlighted that respondents broadly supported the different areas suggested and that the following areas could have the greatest impact on sustainable economic growth for Scotland:

  • Promotion of investments that help address complex societal problems;
  • Financing infrastructure projects which support economic growth; and
  • Providing mission-orientated finance.

The narrative section of this question indicated the reasons why respondents believed these interventions would be of greatest impact. It emerged that there was a lack of financial support available to the most vulnerable in society, with recognition that more investment was needed for social housing in particular. Further, it was noted that due to the tendency of the private sector to favour short term, returns, areas such as alternative/renewable energies and digital were often overlooked. In addition, it was reported that UK infrastructure is currently significantly underfunded, especially in the rural areas.


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