In Charting a Just and Sustainable Recovery for Scotland: A Plan for Scotland’s Programme for Government, Common Wealth has said the establishment of the SNIB is a considerable achievement. The SNIB will serve as Scotland’s primary public sector debt and equity investment institution.

From its inception, the SNIB has been designed to promote a mission-oriented approach to investment, which aims to catalyse transformational change across a number of socio-economic challenges.

At the time of writing the individual members of the SNIB Board have yet to be appointed, but its composition will initially comprise of the chair and up to eight non-executive directors as well as the chief executive and chief finance officer. While the structure of this board – without any positions reserved for democratically elected representatives, public servants or civil society and union leaders – may be common among private financial institutions, it is relatively unusual for a public investment bank.

While it is crucial that the SNIB is able to make long-term investment decisions, free of day-to-day political interference, Common Wealth said the presence of democratically elected representatives and relevant public servants on the board can help to maintain alignment with policy objectives and maintain a path of democratic accountability.

Therefore, it has recommended that the composition of its board is reviewed to include at least one minister, one trade union representative, one local authority representative and two representatives from civil society – and that the number of board members from the private sector is capped at one-third.

In addition to the SNIB board, the Scottish Government is planning to establish an Advisory Group consisting of up to 20 members to provide the Scottish Ministers with “advice on the Bank’s objectives, conduct and performance”. The Advisory Group will be resourced by the Scottish Government and is expected to meet 1-2 times a year. While the creation of a stakeholder body is a welcome development, in its present form it is unlikely that the Advisory Group will be able to have a meaningful impact on the SNIB’s activities.

In relation to this, Common Wealth has also recommended that the proposed Advisory Group is replaced with three ‘Mission Boards’ corresponding to each of the SNIB’s missions. Each Mission Board should be provided with the resources and powers necessary to scrutinise the alignment of the SNIB’s investments with its missions; review progress towards achieving the missions; and periodically assess whether each mission is still fit for purpose. 

The think-tank has also called for a new holding company arm of the SNIB is established and tasked with purchasing equity stakes in distressed but otherwise viable Scottish businesses that meet defined criteria, helping them to stay solvent throughout the COVID-19 crisis.

The report has also outlined that given Scotland’s relative inexperience in public banking, a key priority must be to invest in the development of in-house capabilities. This will require significant training, which could potentially involve establishing a skills sharing partnership with European public investment banks that have a strong track record of success.

Crucially, Common Wealth has said that the temptation to rely on management consultancies and/or secondments from the private sector should be avoided at all costs, as this ultimately undermines the core goal of building a hub of investment expertise in the public sector, and is far more expensive in the long-run.

The report also revealed that it is critical that the SNIB rapidly develops the capacity to invest directly in the economy, rather than relying on private sector intermediaries. Some public investment banks use the ‘on-lending’ model, which is where they do not lend to end customers directly but instead provide discounted funding to private financial sector intermediaries, such as commercial banks (and in the case of equity investments, to private equity funds), who in turn on-lend money to customers.

This model works by transferring low public financing costs to private financial institutions in order to make lending to certain types of activities more attractive. The main benefit of using the on-lending model is that it enables the public investment bank to utilise the existing branch networks and capacity of private sector intermediaries.

Common Wealth said the SNIB should also support place-based community initiatives, with a focus on an inclusive and green economic recovery. Such investments should not focus solely on picking ‘winners’, but in creating the conditions for local communities to flourish. This could involve, for example, investing in the creation of new local supply chains and providing seed funding for local green investment funds.

The SNIB is also expected to play a key role in Scotland’s emerging economy post-COVID-19. One way to provide a financial lifeline to Scottish SMEs is to establish a state holding company that would purchase equity stakes in distressed but otherwise viable businesses that qualify for support.

This would provide an emergency injection of capital to businesses that cannot access capital elsewhere in exchange for ownership rights, thus sheltering firms from insolvency and ensuring that they can continue to trade until market conditions improve.  

The full report can be found here.