Good morning, and welcome to the 18th meeting of the Economy, Energy and Fair Work Committee for 2019. May I ask everyone in the public gallery to turn their electrical devices to silent if they haven't already? Item 1 on the agenda is a decision by the committee to take items 3, 4 and 5 in private. Are we agreed on that? Yes. Thank you. I now turn to item 2 on the agenda, which is the Scottish National Investment Bank Bill. We have witnesses with us today. First of all, Graham Sands, who is the business banking corporate and mid-market director of Clyde Steel Bank. Then Andrew Castell, who is the partner in power equity. Jock Millican, investment director, equity gap. David Ovens, who is the chief operating officer at Archangel. David Graham, chief executive of Link Scotland. Welcome to all five of you this morning. I might start with a question about the supply of capital, which evidence to this committee suggests is increasing in Scotland, with more funds available from the private sector. There seems however to be a lack of demand in the market. First of all, does the panel agree with that? What are the reasons for that lack of demand, if you agree? There is one, and how will the SNP be able to try to overcome a lack of demand for capital in the Scottish market? Who would like to start off? Graham Sands. Good morning, Mr Convener and committee. Rather than do this by anecdote, I was looking recently at the French Consulting Group BVA. It produced a thing called the SME Finance Monitor. For the 2018, it looked at some statistics around SME borrowing across the whole of the United Kingdom, but there is no reason to think that the outcomes are any different in Scotland. An interesting way to look at what it concluded was that, for every 10 applications for finance from SMEs, seven out of 10 received precisely what they asked for. One out of 10 took a facility, but it was not exactly what they asked for. Two out of 10 did not get a facility or did not take a facility. A small proportion of those declined to take a facility that they were offered. In answer to your question roundabout, is there a lack of supply or is there a lack of demand? Something like that would indicate that there is a little bit of a lack of demand. To answer your second part of your question, what is driving that lack of demand, there are many people with many different views, but one of the views that our bank has landed on is that the nature of the economy is changing. There is an old-fashioned notion that people are coming forward for finance for things like plant and equipment, or they are going to put in place a new production line and that they are going to make profit from that new production line. As the economy, Scotland's economy in particular, gravitates towards services, it is not clear that businesses necessarily have as much demand for finance as they used to. Certainly, if they do not have as much demand, what is becoming clear is that they have a different type of demand from maybe they had 20 or 30 years ago. That would be our answers to the two questions that you posed. I think that they are very useful questions in the context of the Scottish National Investment Bank bill that we are reviewing today. I will ask a different perspective and 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 a lack of joined-up supply. The demand is most overt in the area in which we operate, which is a very early-stage market. That demand emanates from a number of sources, from a conversation challenge, from competitions, but also from the great R&D that is coming out of universities. The challenge is that funding and financing that demand is challenging because it requires a great level of patience to take that through from initial financing to the point where it can access alternative forms of conventional finance. For us, a typical archangels company, we would invest a very early stage in the company's development, but we would assume that we are going to be leading investors through a journey that might last in excess of 10 years. That is a journey that would then take that company to the point where it can access other forms of capital and maybe the type of capital that Graham and his colleagues would be able to provide. The challenge is addressing the specific market failures along the journey and making sure that SNP comes in as an institution that will address those market failures along the journey. Can I clarify what your view is on what I understood Graham Sands to say? There is more of a demand for service or there is more of a drive in terms of creation of business and services rather than, for want of a better word, businesses that create actual things or manufacturing perhaps? The bulk of the companies into which we invest in the technology sector are companies that manufacture things, so product companies rather than service companies. The challenge that I articulated was that not enough of those companies at the early stage are making it right through the journey to that sort of more conventional capital demand, so we need to address the issue, if you like, in the market at that. There is a demand for companies that are making things, technology, innovative companies, but there is an inability at the moment to take those companies from a very early stage through commercial maturity to the point where the alternative sources of supply are available. Perhaps I'll let Graham Sands briefly back in and then come to David Graham. If I may clarify the comment, what I was referring to in the change of capital requirement was a way from heavier manufacturing, heavy plant and equipment, the type of capital those businesses need is, in many cases, research and development type capital. Yes, ultimately they do make things, but the pathway towards that manufacturing is very, very different than we might have expected to see 30 or 40 years ago. David Graham. It was just a comment, a really important area and a complex one, because one of the things we need to do is distinguish between need and demand. Need is huge, but getting it converted to fundable demand is still a big issue. We need to unlock that if we're really going to release some economic potential. Demand can be inhibited by a number of things. The most basic is simply a lack of awareness of what's available and how to go for it, but also it can be about confidence. Businesses tend to come and go depending on how uncertain the times are. Also, the nature of demand at any one particular point in the cycle can be out of step with the supply that's available. One of the really important things for SNP is that it will have to be well-informed and agile to be able to respond, and it will need to be extremely well integrated with all sorts of other agencies to manage that demand flow properly. We are a major originator source for SIB at the moment. Over the past three years, our network has taken 255 deals worth £167 million to SIB, which involves them putting in £44 million, but we put in £123 million. The leverage and the co-investment is very important, but we know that we are not funding anything like all that's coming forward. I'll bring Dean Lockhart here while we're on the subject of demand. It's a follow-up question about demand. We've heard from the bank that it won't originate funding opportunities. It won't go out there and find businesses to fund. It will rely on other entities to do that, including Scottish Enterprise and I guess Link Scotland. Given the significant additional capital that will be available, do you think that the existing enterprise entities have sufficient resource and are set up to meet that step-up in the funding that will be available? I think that it's important to be clear how they're bringing these businesses forward and whether they are investable businesses from our perspective. We would want to see that they are investable businesses and not that they're just viable businesses. I think that there's quite a difference between the two things, but we would see working with the likes of the Scottish Investment Bank or at the moment the co-investment fund that comes there, we work very closely with them and it works extremely well. I think that we meet most of the investable companies' demand, but some of the others will be viable but not investable at that stage. I think that that's perhaps where some of the funding needs to be looked at separately. Thanks. I think that there are two things. One, just to emphasise the distinction that Joq just made, I think that the committee might benefit from remembering that there is a universe of businesses of which a relatively small proportion of businesses are the kind that interests my colleagues and I on the equity investment side of things. Those are the very high-growth potential risky businesses that have the potential to give high returns but also to generate losses. There is another group within that universe of bankable businesses, those who can sensibly be lent money, which is of course more interesting to my banking colleague here. But there's a large number of those businesses that are perfectly viable, perfectly sensible businesses but which will neither be bankable nor of interest to venture capitalists. When you talk about demand for capital and supply of capital and is there an imbalance, you will have potential mismatches where certain kinds of company are crying out for capital and can't get it and other kinds of company don't really need it but are being offered it. Therefore, whilst in the round there may be some equilibrium of capital and demand for capital, you have isolated pockets of mismatch where there is supply and demand issues. The second point is just around the sufficiency or otherwise of what looks like quite a big number, £2 billion over 10 years. How things work for us at the moment with the Scottish Investment Bank is that to greater or lesser degrees probably par as an outlier on this one. We drag quite a lot of money from south of the border in terms of the proportion of the money that we invest and put a disproportionate amount of it to work in Scottish companies. The co-investment money that we get from the Scottish Investment Bank is extremely useful in terms of being able to drag that investment capital into Scotland and to be persistent and patient with the companies that we invest in. One of our key objectives or key aspirations for the Scottish National Investment Bank is that that successful model is not broken in the transition. Was it David Graham or David Ovens who wanted to come in? What is your point about the sufficiency of resources in terms of personnel or in terms of the capital that has been applied to this situation? A bit of both. Is it right to have a model that divides origination and lending because you have two or a number of different entities looking at different parts of the supply chain? In terms of the sufficiency of capital, the proposal is to capitalise the bank at £2 billion over a period of time, which is broadly in line with other national promotional banks and it would seem to be on the face of a sensible level of capitalisation which can go quite a long way if it is applied sensibly to address market failures. In terms of the allocation of resource within the organisation, the way that the Scottish Investment Bank works is largely on a credit partner basis so that they will back the private sector in a sense. So yes, they will be headcount required to manage the portfolio, but a lot of the heavy work is done by a private partner that they are backing, such as Archangel's Good. David Graham, did you want to... It was a very similar comment that there is an opportunity to build on the partnership model and find, if you like, delivery efficiencies which do not involve building a bigger and bigger establishment. There are lots of things out with our space, tapping into peer-to-peer lending, for example, as a delivery channel. One final follow-up question. Co-investment has been mentioned quite a lot in the discussion so far. To what extent do you think the SNP should follow the co-investment model in terms of leveraging public sector money with private sector money and to what extent should opportunities be identified by the private sector as opposed to the bank itself? If you look at what has happened in the last 15 years with the Scottish Co-investment Fund, it is a demonstrably successful model. The one thing that I would say is through the whole SNP consultation will be aspirations but do not change what has been very successful over the past 15 years. You need to build on that. That is very much a model that leverages in, which crowds in private sector investors. It is actually a model that has been copied across the world recently through the British Business Bank. That co-investment model has been very successful. As a template for what SNP should build on, it is very much a successful template. Gordon MacDonald. Thank you very much, convener. Good morning. I wanted to ask you about the British Business Bank. The British Business Bank has four objectives, two of which are to increase the supply of finance and to create a more diverse finance market. What has the impact been in Scotland of the British Business Bank? The British Business Bank so far has been fairly limited. There has been some involvement. It is increasing its presence here and increasing the amount of opportunities that we are able to look at with it. I think that they now understand the Scottish infrastructure model better and are able to work with us better on that front. We have still to do a lot more with them. The British Business Bank is focused more on investing in the funds rather than co-investment capital. What we have seen recently, and what I alluded to a couple of minutes ago, is the British Business Investments regional angel programme, which is now almost directly competing with what the Scottish Co-investment Fund is doing in Scotland. That is very much a replica of that model, which is a private sector partner who is investing and will provide co-investment capital to that private sector partner. It is useful to remember that the Scottish Co-investment Fund has historically only addressed the equity side of funding. That is to agree a little bit true of the British Business Bank's expansion initially. The one thing that the British Business Bank does provide is the Enterprise Finance Guarantee Scheme. We should not forget that. That 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 you begin to think about how the Scottish National Investment Bank is established, it is interesting, certainly from my perspective, to make sure that we think about equity and we think about debt. Does the mechanism of something like the Scottish Co-investment Fund work equally well for debt in the future? It may well do, or we may think that something like the British Business Bank already substantially addresses that. Is there any particular reason why there has not been as much of a focus on Scotland as there has been elsewhere? Looking through their last annual report, they highlight that they have regional funds in the north of England, the midlands and Cornwall and Isles of Silly. It says that we are now delivering critically important debt and equity finance to boost the respect of regional economies. Is there any reason why there has not been so much focus on Scotland?  They are essentially focusing on regions where they see real need for their intervention and they do not see Scotland as being in that category because of the success of what has been happening with SIB and Scottish Enterprise. Okay, thanks very much. Colin Beattie. Thank you, convener. Target rate of return for the bank will be established before it is actually vested, but what level of target rate of return would you anticipate a bank of this type that has the characteristics of SNP actually achieving? I'm thinking here. We've heard that the potential is for the bank to be lending to not-for-profit companies and all sorts of different aspects in the third sector, which adds a complexity to it. How would you establish what a reasonable rate of return would be? Much of that will depend on what the portfolio of assets looks like. When the bank gets up and running, there will be a mix that they all want to achieve in terms of lending and equity investment and so on, and that will drive what is a reasonable rate of return. I'll take on board what you say there because until there's a portfolio, you don't really have... We're nevertheless in a situation where before the bank's actually vested, they're going to be putting in place a target. How would you see that yourselves? What would be a reasonable target and why? 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, you can look at what is a reasonable market return on venture, you can look at what is a reasonable return on credit activities and come up with a number. The big challenge and the very difficult challenge is trying to throw into the mix some non-financial returns that will be necessary in order to deliver on even a relatively small proportion of the great hope and excitement that this project is engendered. Do other witnesses like this, Ben? Yes. I think that Clydeson and Yorkshire Bank would like to suggest the committee. First and foremost, we are strongly in favour of the National Investment Bank, but when we look at the consultation document, it sets out things that are bold and ambitious and are designed to address a third sector and other wider socio-economic concerns. On page 7, the document also suggests that it must look at different types of financing and that it must also be commercial. I think that the combination of all those things and trying to get to an ambitious rate of return does seem incredibly hard. If, as we would suggest, the remit keeps it clearly away from existing commercial opportunities. We are asking the National Investment Bank to go to places that the commercial market does not currently go, presumably for reasons of risk or perhaps reasons of patience and long-term capital. We are also asking it to achieve a very broad remit in terms of improving the economy of Scotland. I wonder whether an aggressive rate of return or an established rate of return ahead of the missions being established is necessarily a wise thing to do. One of the key things that I mentioned in the bill is that it is about patient capital and that is where the focus needs to be on. It is going to be a long-term capital. There will be returns from some elements of it, but not from all of them. Putting an ambitious rate of return at an early stage would be hamstringing the bank very badly. Did the British Business Bank set a rate of return of 2.5 per cent and have exceeded that? They must have had a basis on which to target that. For all the reasons that my colleagues have outlined, a positive rate of return of positive IRRO over a period of time will be a successful outcome for the bank. You also need to not lose sight of the fact that this is an institution that is set up to be a cornerstone for the nations going forward. Financial returns, one measure of success but also the economic impact should be equally as important a measure of success. The message that I am getting here is that the target rate of return should not be too ambitious in the first place. Just moving on to what Graham Sands was talking about, you touched on additionality and the need for SNIB to avoid competing with existing products in the market. Is that achievable given the mission that SNIB is going to have? Is it achievable to avoid competing with the multitude of financial sources that are in the market now? It should be the core defining mission of SNIB. If you go back to the core objectives of SNIB, the driving mission is to create an institution that is going to drive economic performance in Scotland and is going to do that by addressing on the one hand supporting SMEs through market failure but also driving economic imperatives which are set by the ministers so missions which are set from time to time from the ministers. If you look at the market failure aspect firstly, the early stage equity investment market is very much an area of market failure. We are incentivised to invest in that area of the market through various tax breaks which are the IS scheme and other tax breaks which are given by the UK Government. However, that incentive would not be sufficient in itself to drive sufficient capital into that area of market failure and therefore the activities of the Scottish Co-investment Fund are vital in leveraging what we do, our activities in that area of market failure. That is additional too and it is not competing with private capital it is bringing private capital in. If you look at the mission side of what SNIB is trying to do and one of the missions which has been articulated in the implementation paper is this transition to a low carbon economy which sets targets by 2032 for various things on petrol and diesel. That is 13 years off. If you were to ask conventional private capital to take a 13-year view on a return on capital it is going to be a very difficult thing to persuade them to do but it is a very sensible thing for SNIB to be intervening in and therefore it is additional in that sense and it is not going to leverage out private capital. Would you envisage that as opposed to pursuing entirely SNIB would have a role perhaps in supporting some of the existing capital investment into the country? Where it can crowd in or leverage in private capital I think that is vital to SNIB's role going forward. What it should not be doing is competing with a conventional source of capital so it should not be competing with grimness colleagues at the Claisaubank. I think that an important element here is leveraging in and crowding in private capital. It is easy to say that it should not be competing with existing products and so on in the market. What kind of products should it be going for? The area in which we operate is very equity driven so the demand for early... If you think about the funding journey for a company the first 10, 15 years of that company's life the only asset class 90 per cent of the time the relevant asset class there is equity so equity is the instrument which addresses that early market failure. As companies develop then other forms of financing may become relevant but in terms of that long-term patient capital which is the driving mission of SNIB 90 per cent of the time equity is going to be the relevant asset class. I think that another way to think about this is not just which particular type of financing products but to think about a company's life cycle and what it needs at different events in that life cycle. I cannot recall if it is referenced in the consultation paper but it has been referenced in subsequent discussions the transition between early stage equity and later stage equity and later stage equity and debt finance those transition points are often quite hard for a wide variety of reasons to go into here. That is an event in a company's life cycle that perhaps it needs support with. It is not necessarily a different commercial product per se but it is that those products are not necessarily available during those events. I think more widely no one would suggest that even in relatively efficient capital markets there are not gaps in those markets from time to time and in certain areas. The Yorkshire bank would suggest that the missions that are set out should clearly identify what those gaps are and that the evidence for those gaps should be clearly set out as well rather than based on anecdote and we would be very happy to work with the Scottish National Investment Bank to help them to set out and explore what those gaps are in the future. Do any of the rest of the panel have a view on this? That has pretty much covered it. There are always gaps. The staircase of finance is not complete and there are certainly issues beyond our level and before you get to conventional funding. That could be an area for leadership for SNP and by doing that right they would also lever in new finance. Quite a lot of it I think from outside Scotland. John Mason Thank you very much, convener. On continuing where we have been discussing because we have talked about the commercial focus that the bank has to have but there has been mention of the wanting economic, social and environmental returns as well. First of all then specifically does the PLC model fit in with that because the proposal is that it is a PLC and I think the Government did look at other models. For example, Scottish Enterprise is a statutory body so it is much more set in statute rather than leaving it to the articles of association and so on. Are you comfortable with this model? Can it work the PLC model? Mr Castle? I think it can. The question as to whether it needs to be a PLC or whether it could simply be a private limited company the PLC is typically you go for that status or contemplating raising capital externally but as I understand it the plan for the immediate future is this to be exclusively financed by the Scottish Government. Essentially this is that great Scottish invention, an investment trust it's not really a bank and for that purpose a PLC works well enough it also provides a degree of flexibility but the point about corporate structuring is that if you don't like it you can change it subsequently and there's nothing really that is set in stone around this institution by the fact that it starts off as a PLC. Do you think in some people's thinking that just the very term PLC suggests that the big emphasis will be in the commercial return and there'll be less emphasis on the social or environmental things of that? If only it were that reliable but there are plenty of PLCs even banks that we can think of that haven't done much in the way of returning profits. True. Okay, thanks. Anyone else on that? I think that the PLC is quite quite well, it covers the requirements quite well, I don't think there's any need for anything different. Okay, and then the next point was on the question of return, I mean we've already talked about risk and exactly where the bank fits in and the proposal is that it should be breaking even by 2022 or 23 or 24. Is that realistic given what we've said about risk, Mr Castle? I whipped out the calculator and had a look at this one. If you're looking at it in Government cash accounting terms I would say not a hope. However, if you look at it at a company level and would it be able to turn a profit an accounting profit probably much would depend on whether the existing portfolio of Scottish enterprise investments are transferred over into the bank because that will provide you in principle with a number of exits and a portfolio where hopefully the valuation continues to tick up but in cash terms absent a strong weighting towards cash generative assets such as loans I don't see it breaking even in that sense. Just to clarify because some of that was a little bit technical maybe so you're saying that by 23 24 the value of investments might be going up but you wouldn't be able to get the cash out kind of thing. So that could be a problem for the public purse but as long as they understand the process. Okay, everyone else comfortable with that? Agree with that. The thing to add though is that if you look at from an investment perspective the bank would be washing its own face but there are ancillary revenues which I presume the bank will have as a function of facilitating investments so there will be arrangement fees and perhaps portfolio monitoring fees which will provide a recurring revenue source to the bank so it won't just be relying on investment returns. You've all mentioned the word patient and I know you're not politicians but politicians always very patient. I mean would you anticipate that if it doesn't do terribly well for the first two or three years that we'll have people jumping up and down wanting it changed the whole system because presumably part of the idea of this and I think you've suggested that yourself is that we do put money in and then maybe ten years later we see the success of it are you optimistic that that will actually happen The average time to a positive exit for these gentlemen is nine years and the whole cycle can easily take 15 years. It's 15 years since the co-investment fund was founded and it's now beginning to get where it should be going so it is quite essential that it takes that sort of profile and it is a real challenge for the people designing the institution to make it survivable through political change. Presumably when the average is nine years but some businesses take off amazingly fast but then some obviously don't. And certainly most of the bad news comes earlier which is also difficult I think sometimes politically that you have three or four years of it all going in one direction. The lemons ripen before the plums. That's a good quote. Okay, anything else on that one? If not, that's right. Yeah, and I think that's why the sort of gentle council that we're able to give it here is that 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 then de-emphasising away from commerciality, de-emphasising away from aggressive rates of return is perhaps a way to make it politically sustainable in that more difficult period of its establishment which is likely to be over the first five years of its existence. A useful piece of background information you might want to draw on going forward Archangel's data a very long term study of the economic impact of their investment as well as looking at the returns and that is worth looking at because it looked at the economic impact of Scotland of a 20-year cycle of investing. Archangel's was established in 1992 as an investment firm and we got Strathclyde University to undertake this study in 2015 so it was effectively a 22, 25-year view of what we'd done and it goes back to this point that yes, the financial return for us is you know we have to be patient the financial return comes within about 10 years and it's a successful financial return but along the way and this goes back to the point about what is SNIB all about we were generating an economic impact along the way without necessarily generating a financial return to us so the output of that Strathclyde report was that for every £1 of investment from Archangel's we were able to generate around £9.50 of gross value add to the Scottish economy so in terms of Archangel's investing activities over that period that means that we've generated around about £1.2 billion of economic value add to the Scottish economy in that period our portfolio companies created 4,000 jobs and every pound that we invested created 14 pounds of turnover so there's a lot of economic activity which has been generated from what we do which goes beyond just the financial returns that we're hoping to generate in due course that kind of creates a problem because the whole GVA thing basically everybody who comes to this committee claims that for £1 we invest in them we're going to get 7 or 8 or 9 or whatever it is back and are you convinced that we can measure that kind of figure fairly reliably and solidly because we can obviously manage the return that you as a business get or any business gets can be measured very exactly? GVA is a recognisable methodology companies create jobs create turnover, generate profits so the GVA methodology is a recognisable methodology which is subject to tweaks and subjective views but it's a fairly standard methodology which I think provides at least a baseline of what the impact of all of this is doing. Okay, that's helpful, thanks so much. Jackie Baillie. I touch on the vision and objects contained in the bill because some of the witnesses we've heard from previously have suggested that both the main and ancillary objects don't quite capture the Scottish Government's vision which, of course, was set out in the implementation plan or indeed capture the expectation that this will be for environmental purposes or for socio-economic purposes. Are you satisfied with the objects or do you think as they stand that they may be slightly vague? David? Either David. After you. I think that the objects in the bill reflect the fact that constitutionally SNP is going to be an enduring institution which is going to drive economic activity within Scotland and then the various ancillary things. I think that the missions that go behind that are going to change over time and it's going to be subject to whatever administrations and power at the time whatever the macroeconomic position is at the time. I don't think that it's necessarily right to enshrine specific missions within the constitutional objectives of what SNP is trying to do. I think that the objects are generally satisfactory if they're taken in conjunction with the ancillary objects which do add a bit more clarification and I think that from what I've seen previously there need to be a fuller understanding of what is meant by commercial and we certainly don't think that that just means private enterprise. Clarification to expand that it could be the social enterprise as the third sector you think would be helpful in this context? I think that providing the things being financed are capable of ultimately providing a return on that finance otherwise it is just a grant. SNP is very important but it's actually only going to be one public policy instrument for achieving socio-economic objectives and I think it's to be effective it's important that it's allowed to make that contribution in the way that is a good fit for an investment entity. It's one of the few public sector channels for delivering public expenditure that is envisaged to be a two-way street financially. That desire for sustainability needs to be borne in mind. It's attracted a huge amount of interest and ideas and expectations but that could be dissipated if there is temptation to edge into things that should properly be tackled through departmental spending. Most social enterprises I know do generate profits is just what they do with their profits that are different. There would be a rate of return for any institution. Non-profit, as a phrase, is fine if it means not distributing profit but it needs to be able to sustain. Absolutely. Do any of the other panel have a view, Andrew? My view is that keeping the this is an implementation bill it will lead to drawing up the obstacles of the company and I think it will be fairly general because you have a process around the setting of missions for the bank which Scottish ministers will come up with and will be subjected to scrutiny of the Scottish Parliament as I understand it. That's what's going to drive the granular detail of what the institution gets up to. As someone who has to spend a certain amount of their time guddling around in bits of legislation my pet hate legislation that contains highly subjective undefined terms and one of the dangers, particularly around trying to cater to the rapidly evolving third sector, the not-for-profit the social enterprise of it it's a work in progress and there is a lot of jargon involved and that jargon inevitably is changing over time. The fundamental fundamental point there as David observed is that within social enterprises and in the third sector there is a lot of commercial activity and it's clear from the preceding sessions that a number of people have struggled with the objective to invest in commercial opportunities and I think that could do with some clarification that it's really just anything that is non-state. You must be older than you look because the jargon, as you would describe it has been around at least in my memory for 20 to 30 years so there you go there's clearly something going on there so do you think adopting a model that is sufficiently flexible that then allows ministers to then specify as the approach that you favour? May I build on Andrew's point and suggest that the missions need to be set out very very clearly there needs to be very strong governance around about those and there needs to be tight governance that sets out what the mission is what the market failure is and what is the evidence for that market failure because human nature is a little bit like water it finds easiest path and already we can see from the building Scotland fund which is set out to be the precursor to Scottish National Investment Bank on the website three areas identified housing commercial property and business led R&D interested in seeing where has the gap been identified for those three things is it an equity gap is it a debt gap is it a mezzanine gap and what is the evidence for the gap on those three things because simply saying that some banks for example won't lend to business led R&D is probably true not our bank on the other hand we are not a great fan of lending against housing so hopefully that level of specialisation professionalisation and the provision of finance but perhaps the gaps on the equity side I don't know it's not entirely clear that missions as they're being set out are sufficiently supported by evidence of a gap and that that gap is very clearly articulated as I think we've all said there will be gaps in the market I think we all believe that but we just want to see what those are what the opportunity is to fill it the only thing I would add is that changing missions and objectives frequently will not help the bank operate well each whim that comes along would not be the right thing to make a change to the mission it needs to be a long term patient operation so when you say long term you're looking at 10 years or more yes absolutely thank you convener Gordon MacDonald has a further question I was wanting to ask you about the funding of the bank currently the way it's been set up we've touched on this earlier that it's going to get on average £200 million a year from Scottish ministers so I think it was you Andrew that mentioned that it's more like an investment trust than a bank part of the problem is obviously recognised by the treasury that it's not a department bank should the treasury recognise the Scottish National Investment Bank as a bank and should it be allowed to issue bonds of public shares Graham will probably correct my homework where appropriate but if I think you'd be careful what you wish for if you make it genuinely a bank it will require capitalising as a bank and those things cost money it's a related question in terms of diversifying the sources of capital as soon as you start taking other people's money you're in a different place in terms of how the entity is controlled how the governance works whether it is something that ministers and the Scottish Parliament could control it as the sole shareholder and fund it so these things can be done and they can be done over time and I suppose Green Investment Bank is an example of something that starts off state funded and then gets by now privatised if you like okay so you wouldn't be in favour of issuing of bonds put the shares aspect to one side I would certainly not do that for as long as there is available finance from the Scottish Government there are things that you can look at for example, securitising loans and selling off those securities which allows recycling of the capital that the Government is providing so there are a number of options around the financial engineering aspects that can achieve the kinds of aims that you might want in terms of using external capital but that doesn't involve taking it into the bank itself and if it remains recognised as a department I'm being told that where is it the bank needs to secure a dispensation from HM Treasury to have the flexibility to manage, retain and carry forward cash balances over financial years given the headroom that the Scottish Government has got for carrying forward so what impact would that have if they're not allowed to carry those balances over? I was a non-executive director of Highlands and Islands airports for six years and it built up a reasonably sizable cash reserve with a view to expanding in Vanessa airport but sadly had that taken off it because Treasury finally noticed it I think the bank I suspect will turn cash into investments quite quickly as it comes through and therefore the risk of being caught with a sizable cash balance at the end of each fiscal year is probably quite small but it would I suspect make everyone's lives easier if it were to secure that dispensation and be able to hold cash and not have it taken away come the beginning of April each year you mentioned the green investment bank but the British business bank got the similar dispensation that the SNP is looking for, didn't it? I don't know Anybody else want to come in on that? I wanted to ask the panel if they had any views on the bank's remuneration policy committee has had a range of views as you would perhaps expect on this matter and some witnesses have said as the bank will be operating in the financial services sector that terms and conditions need to be reflective of that particular sector whereas other witnesses have put forward the argument that as the bank is a public body that there needs to be public confidence that senior personnel should be paid as public servants as opposed to private financiers so I just wondered who would like to have first dibs at that one Mr Castle My views aren't always very popular on this one If the employees of the bank are going to enjoy the advantages of being in the public sector which are no compulsory redundancies and if they're going to be receiving a defined benefit pension entitlement I don't really see why they need to be paid the kinds of salaries and bonuses that those people in banks have been and continue to be paid there is a risk premium associated with that kind of employment because it's quite precarious and if you look at the for example the pooled pension or asset management with the pooling of local government pension funds which is happening south of the border and is being talked about north of the border the asset management firms that have been formed to run those pooled pension institutions they are more often than not concluding that they don't need to pay the big salaries to attract quality people so there are definitely precedents for having institutions like this fall within a government pay mandate I would say that's a very balanced view as opposed to a popular one but perhaps other members of the panel it's making sure that the rewards are coming in different forms as Andrew said, the pension thing is something that no one in the private sector can even hope for these days it's all gone that so it's balancing these things to make sure but you've even got to make sure that you're getting the right people to run the bank it's no use you know, saying we're going to have a remuneration and end up with people that are not capable of running it I haven't heard anybody suggest that we should be recruiting unqualified people but I just wondered whether other members of the panel had anything further to add than what we've heard Mr Sands I think and I'll link it back to previous comments if the mission and the purpose of Scottish National Investment Bank is bold, is ambitious and it's very, very clearly set out and embedded within the culture of the organisation then I'm not going to comment on whether it's public sector pay or private sector pay that's appropriate because I don't entirely know what we're talking about as two ranges but what I would say is I would tend to agree with Andrew and with Jock that it should be possible if the purpose is very clearly embedded and understood in the organisation that it should be possible to attract the right people who are rewarded by executing that purpose and not just rewarded by the paycheck so people have a high caliber people have a range of motivations if they're filled in their employment but Mr Grahame did you have anything I would endorse that it's not entirely surprising you'd get that because the whole of the business angel community are partly driven by putting something back as well as investing so we're not at the sort of really red and too simple end of this but the bank will also need quite a wide range of skills because particularly if it gets into dealing with third sector issues and so on so it's important it has a breadth of professionalism and credibility for dealing with those bits of the market it's interacting with could you give some examples of that breadth of professionalism that would be required well I think in terms of for example asking the personnel to assess a social investment proposal it probably would not be using people with quite the same skills as those looking at pure VC it wouldn't want to see the bank compartmentalised but it looks like it's going to have to cope with quite a wide range of tasks okay thank you Mr Rovens broadle agree with what everybody said what I would say is the senior management of this bank is not going to be an easy role so they need to be appropriately remunerated that should be a reference to public sector pay policies but not necessarily sticking to public sector pay policies the only additional things I would say would be that at caution against a bonus culture so if this is all about long term then I think any related incentive should be appropriately pegged so there should be longer term in outlook that's all I would add to what everybody else has said thank you convener Andy Wightman it's common now for investment funds and indeed sovereign wealth funds to have ethical policies there's no provision for this in the bill but I'm wondering whether you think that the bank should have an ethical policy around for example things it will not invest in such as fossil fuels and tobacco and arms or if this is something that's best avoided trend in society is towards ethical finance and it's certainly not something we have a problem with nearly all the public sector sources we interact with now have limitations again it comes back to the clarity of definition though particularly on things like ethical that shouldn't be a matter for interpretation by officials but we would have no problem with it having a clear ethical policy everyone has an ESG clause in investment management mandate or in their articles or whatever it is so what's an ESG ethical social and something wrong essentially the ethical investment everyone just calls it ESG and it gets lost in the acronyms so apologies for that but the the devil comes in there are some things which are clearly bad so you wouldn't want to be investing in terrorist organisations or drug pushers or whatever else and then you've got tobacco which is the next best thing and so on and so forth but as you go along the spectrum there'll be areas of greyness and I think this was cited as an example previously which was around there's an oil and gas company that's trying to transition away from oil and gas and is developing low carbon technologies is that something that should or shouldn't receive some assistance from the bank as well as last week? Yes, it's always delighted me that Scotland as a nation is very fixated on how bad alcohol is and yet it's one of our major exports to the rest of the world but there we go so the I think in terms of the specifics of the objects of the bank how the constitution works always do the right thing is a very good maximum in life and having the bank directed to be ethical in its approach as an overarching objective I think would be the way to do it and then again let the management be directed to at a more specific level around what industries or activities are considered to be unacceptable for it to concern itself in and then have it report annually or however frequently makes sense as to how it is observing the more detailed guidance I agree with what I understand there it's important that the bank is given the guidelines to work with on what is deemed to be ethical at the time or not because things change over time as to what has been ethical 20 years ago is not ethical now so I think that is something that they should be down to the ministers to give that guidance as we have said ok fairly clear answers there moving on to another topic that we have been exploring which is the proposal that there be an advisory group this is a group to advise ministers as the sole shareholder of the bank and I think the implementation plan makes reference to this to suggest that the chair be a non-executive board member of the bank now the bill makes no provision for such an advisory group it's just something that's been suggested I'm wondering what your views are on such an advisory group as has been suggested and if you think such an advisory group would be useful whether it should be incorporated either as a section in the bill or something in the articles of the bank I think in terms of any kind of undertaking the fewer groups who are expected to follow the instructions of the better and I think as far as the articles of SNP and the enabling dot bill having it very clear that the bank answers to ministers everyone knows then what the line of communication is the advisory group as I understand it is as you just described it which is there to help ministers understand what it is that SNP is doing and what it might need to be doing and so on and therefore that channel of communication should be between ministers and the advisory group and I think it would confuse matters by enshrining its status and constitutional documents for this institution simply because it may be that over time ministers feel confident enough they don't need a bunch of people whispering in their ear about X, Y and Z and can look after the bank themselves so just to be clear if such an advisory group were to be appointed by ministers no such provision were made in this bill you wouldn't for example want the chair of that advisory group to be sitting on the bank's board they could be very good reasons for it to happen but that can be dealt with because the appointment of directors to the board is in the gift of Scottish ministers and if they decide that they would like the chair of the advisory group to be a non-executive director of the bank well it can happen so again I don't think you need to make provision for it in the articles any other views? I concur with Andrew's I think it's very important that the advisory board are not directly influencing the bank that leads through the ministers that they're doing that There is an opportunity for some wider value from the advisory group I mean if all it does is channel a whole variety of opinions to ministers it becomes a rolling consultation medium or focus group but actually if it can be well structured and well led you're bringing together a whole host of people who wouldn't normally sit down and interact and hopefully lead to some better understanding of course they're entitled to feed through independent views but on occasions when that advisory group can come to a joint understanding of things they wish to put to the ministers in terms of performance or future development that would be a very powerful message Okay, thanks very much Just picking on a few things that were said earlier, Graham Sands you mentioned in an earlier answer that you thought we should de-emphasise commerciality in the bank and yet that's at the heart of the main statutory article John DeFullop Yes, I think a consultation a written consultation we emphasised that we don't believe that the bank should compete with existing commercial options I think we've discussed that at some length and we've also Mr Deputy Convener I think asked a question round about the early years of establishment of SNP and the commercial expectations for it so I think our view is that if the Scottish National Investment Bank is simply going to step into areas that are already covered by commercial equity or commercial debt finance then that's not desirable, it's not objective it's unlikely to lead to best outcomes for taxpayers either so I think it's about a level of emphasis in our view if we emphasise aggressive rates of return especially in the early years if we emphasise a very commercial model I do fear that it will be hard to sustain the Scottish National Investment Bank as an entity and Clydesdale Bank is very supportive of its establishment for all the reasons, the long-term reasons that are set out in the consultation documents so we see a danger with trying to make the organisation too commercial too quickly OK, that's helpful Moving on to the question of missions this is central to the concept of this bank and the advice that's been given to ministers by Mariana Matsukatu and others and provision is made in the bill in section 11 for setting missions missions by their nature will be very cross-sectoral we have observed are not just reliant on what the bank does but reliant on what a lot of other people do as well I was visiting a business some months ago that's involved in quite an innovative technology around heating which can potentially transform or contribute to rapid reductions in fuel poverty levels it was on the point of leaving Scotland and moving to Zurich in Switzerland until it got a contract from a housing association that's a kind of example I have in mind as part of a portfolio of investments that might help tackle big challenges around fuel poverty or indeed low carbons so that's what I have in mind when we talk about missions is that the kind of mission that you understand by the term or do you have others? My understanding would be that the sort of transition to low carbon economy as a mission and SNIB the premise of SNIB is that it's a financing organisation primarily there are certain things that need to be and as Grim pointed towards it needs to be evidence based and I think we'd all agree around this table that transition to low carbon economy based on evidence is a good thing that SNIB should be supporting you then need to recognise that getting from A to B in terms of that mission is going to take a long time and it's going to be a challenge to leverage in private conventional capital so in that sense we're addressing market failure in a sense and that's where SNIB has to be focused in terms of the financing in terms of the other aspects as David said earlier there are other agencies which can be involved so it's in terms of personnel, Scottish Enterprise there are social enterprises which can be involved in all of that but I see SNIB's role in that as being at the heart of the financing aspect of that mission led Bill Dupont you're just making that more specific so it might be in that example that you outlined that the real problem and I'm not saying it is but it could be a problem round about lack of confidence in public sector or quasi public sector procurement that might be a very useful place for Scottish National Investment Bank to deploy guarantees so if it were me I would try and make the missions very very precise so for example that mission might be there's a lack of public sector procurement confidence in small companies or smaller businesses that are trying to transition active technologies trying to transition to low carbon economy we've seen a market gap that market gap is one of lack of guarantees and I'm just simply using this as an example a hypothetical example and therefore one of the missions is to provide guarantees that meets that market gap to achieve that end aspiration and that's the level of specificity if I stumble over that word every time but that's the level of detail I think that I would hope to see from Scottish National Investment Bank's management in terms of executing those missions so the missions as they're described in the Bill however are to be described as sitting down in a document describing the socio-economic challenges that the bank is to seek to address so they're not there's no great specificity in that are you suggesting that the missions themselves should be quite specific and quite detailed I think that I've said it a couple of times at the risk of repeating myself I think that the clearer the missions are then the less chance there is of the bank's operation to reach and not market gaps and therefore I think ultimately the most successful it will be in the long run Okay and Andrew Castelli I think you said earlier that the missions would be subject to the scrutiny of Scottish Parliament in fact there's no provision for that whatsoever that there is parliamentary approval required if the bank's objects are to change but as far as the missions are concerned they're to be established by ministers communicated to the bank and a copy of the documents to be laid in Parliament so do you see there being some merit in providing Parliament with the role of scrutinising these missions and possibly even resolving to agree or disagree with them? I think that much would depend on the style of the Government but I think that we've touched on a few times the one of the challenges around any kind of patient institution is that you have fairly lengthy timescales during which any number of lumps of rotten fruit will be flung from media or wherever else and it seems to me that if missions are subjected to quality control in terms of how they're formulated time spent in working out how to measure success, what success looks like how to communicate clearly to the agencies and entities that are responsible for delivering those missions will increase the chance of their being successful rather than just another initiative that petered out because no one actually knew at the end of the day what they were supposed to be doing and so if greater involvement by MSPs and rather than just leaving the executive to it were to result in better quality missions in terms of how they're framed like a good idea to me I think at that level we would be saying scrutiny and comment rather than full approval I think that might be too cumbersome I think also there's the sort of flip side of this because the ministers set these missions and then I think I'm writing thing under section 12 the bank has to come back with proposing how it's going to tackle them I mean in our parlance we would that's asking it to produce a business plan and there could be some discussion on how and by whom that plan is approved Yes, I mean you mentioned section 12 which is quite interesting, the bank must send a mission report to the Scottish ministers within three months of receiving a document explaining how it intends to respond to the strategic missions this seems a very short turn around I want to hope that the bank has some advanced briefing of the coming of this new mission so it's not it doesn't strike me that that is encapsulating our business plan or anything like that that seems to be quite a high level well here's how we intend to go about it in very broad terms I think it depends on what level of approval ministers are going to want if they want line by line approval it may have to be longer Any other thoughts? receiving end of a three month deadline to report on how I'm going to implement a mission if it's a multi agency project if I was sitting in the bank and it was just very narrowly focused on the bank having 100% responsibility for delivering against that mission three months might just about be enough but if you've got to liais with half a dozen other parties it sounds like a very short time to me which comes back to the point I've made about this kind of bill being high level is better and having random and possibly not carefully thought about deadlines and timescales put into it is possibly not helpful okay, thank you very much Jamie Halcro Johnston thank you very much just a very quick question I was going to ask whether the panel feels that current existing capital investment is more focused at central belt of Scotland or more urban areas of Scotland and also I suppose to converse to that what funding mechanisms or how well you think more rural businesses are catered for currently it depends on what the vast majority of stuff that we're looking at, businesses that we're looking at are high growth businesses that have quite often have come out of universities and such like so there is going to be an emphasis on where the universities are and therefore where the talent is so our focus tends to be on these areas but we do look at others we look at them from all over the country and see whether they're appropriate and sometimes they come from the universities and set up in regional areas we've just been looking at one that has did come out of a university but is setting up an open whether we invest or not is another question but we are looking at it quite seriously at the moment so that happens and I don't think there's any constraints on region or area that we're looking at if the things come forward We have operational groups in the highlands and in the borders both of which were set up locally by people with a view to putting something back there and to be fair they have struggled to find the demand in those areas so support for the stimulation and development of demand is an important role but that's for other agencies I think not for the bank for the enterprise bodies and local authorities I guess I know our colleagues in Highland venture capital in particular have been quite frustrated they've been there a long number of years and I think they have one investment in highlands and all the rest in the central belt Earlier on there are plenty of viable and perfectly sensible businesses that are always going to be of interest to people with a venture capital mindset where you really want the high growth high value creation potential and the nature of those businesses is that they generally require highly skilled, highly qualified staff which are available in numbers in the central belt but in rather smaller numbers in Fort William say Thank you We follow up from Dean Lockhart Thanks, convener It's a general question to the panel Do you have views on a national investment bank model or a development bank model overseas that we should look to as best practice or is it a case that each bank and should be tailored to the individual needs of each economy? One of us mentioned earlier the model that we have been Scotland at the moment particularly with the Scottish investment bank is one that is looked at with envy across the rest of the world actually that go to working with the world bank for example that are helping to institute that exact model in other parts of the world so from our part from the co-investment part of the thing I think we've got a very good model here now the wider remit of SNP I think that perhaps there are things done differently elsewhere but I'm not aware of them up here To completely echo that and again do not change any aspect of the Scottish Co-investment Fund as it currently operates but actually look to British Business Bank and other institutions and pull some of the initiatives that they have so one of the things that British Business Bank is doing is the ECF model the investment into venture capital funds so investing in the fund and then setting a target that that invests geographically I think that's a useful initiative that SNP could look to in the future particularly further down the funding journey for companies Thank you Any further questions from committee members? If not I'll thank the panel very much for coming in today Thank you for providing us with your views and your short forms for various matters such as Mizanine I think a Mizanine gap was one that I myself had not heard of before but thank you very much for coming in and I'll now suspend this session and we'll move into private session