How to break an investment bank
Losses continue to mount at the Scottish National Investment Bank. This would not have been an existential problem had the Scottish Government followed our blueprint for the bank.
The Scottish National Investment Bank is back in the news this week with its annual accounts showing that annual losses have been mounting again. A series of high profile failures of companies that it was exposed to (such EV charging infrastructure company Trojan, the laser company I used to work at M Squared Lasers, and satellite company Orbex) have contributed to an annual loss of £138 million and the fifth consecutive year of losses for the state-owned company. There are serious questions looming over the survival of the bank if many more of these losses undermine its financial foundations.
This is really bitter news for us at Common Weal as SNIB is very much our baby. We were the ones who first made the case for patient investment financing in Scotland and we were the ones who wrote the first comprehensive blueprint for how the bank could operate. We were also the ones who led the campaign for the bank against opposition from the Scottish Government that was so firm that we redesigned the way we fight political campaigns to get it pushed through.
We were, of course, cut out of a lot of the development work after that point. We responded the consultations and we attended the parliamentary evidence sessions but the SNIB that came out the other end of the whole process did so with substantial deviations from our original blueprint. We believe that those deviations are at the heart of why the bank is in trouble today.
One of the first big changes was to the governance structure of the bank. We envisaged a tripartite structure. The first would be the actual governors of the bank who would manage the day-to-day operations. The second would be Scottish Government Ministers who would own the bank, would be the people the governors reported to for reasons of democratic accountability and who would set the Missions that the bank would have to meet with its investments.
The third would be an Advisory Council made up of trade unionists, industry specialists, staff representatives, members of non-government political parties and other civic representatives who would monitor progress towards the Missions and would recommend changes to them if required. The stakeholders would also be able to make recommendations about the level of funding the SNIB was receiving from Government and about how much the SNIB could loan out at any one time.
The change came with the third part, the Advisory Council. Essentially, the Government didn’t want anyone other than themselves to be able to tell the bank what to do so when the SNIB was founded, the Council was dropped entirely as a part of the governance model. After several years of our campaigning, Government eventually relented and set up a Ministerial Advisory Group but ensured that it couldn’t talk to the bank directly – it would report only to Ministers.
It took years again for the Board to be formally launched at the tail end of 2024. It has met together only five times since, the last time being in February of this year. It’s also worth noting that Common Weal was not invited to join the Advisory Board.
The second change came in the Missions. The Missions of the Bank, as developed by Ministers without the guidance of an Advisory Council, are brief, vague and don’t have specific targets associated with them and some seem to run contrary to the bank’s core purpose of patient, long-term finance. This is particularly true with their Innovation mission that drives so much of their funding.
The problem with the bank’s focus on start-ups is that they are hugely risky. You can’t pick winners without also picking losers and so losses have to be expected. The bank shouldn’t be getting attention for seeing some of its investments not pay off but because those failures are risking the integrity of the bank. This is the most important change that the government made to the bank that deviated from our blueprint and it’s the one that may well cause it to fail.
We recognised the risks of this kind of lending and so our plan was to ensure that the bank could afford to fail. We said that there should be three tiers of lending in the bank.
The first should be in social housing. This is extremely long term funding, not expected to make a profit for the bank for decades, but it would do much for the fundamentals of the Scottish economy and for the bank itself. In our paper Good Houses For All, we called for the SNIB to fund essentially unlimited social housing on a demand-led basis and in a way that would disrupt and outcompete the rest of the housing sector on both quality on price (meaning that developers of private rented and private owned houses would have to up their game to keep sales).
There are other ways to fund this kind of housing – like Local Authorities borrowing from the Public Works Loan Board – and these can and should be used too, but a Mission for the bank should have been to receive enough rental income from its share of social housing investments that it could cover all of its day-to-day running costs. The bank would never be able to go bankrupt so long as people in Scotland needed a roof over their heads.
“As it stands, the bank is just about “all-in” on tech and has invested little in energy and essentially nothing in social housing.”
The second tier of funding would be into public energy. This is more capital intensive than housing and it’s a bit riskier, but investing in public-owned or community-owned energy would also bring in larger returns than housing. The goal of this tier would be to bring in enough relatively stable revenue to expand the bank as well as to reshape the Scottish economy to bring down energy costs and free up our own money to be used elsewhere (not only has growth in our wages stagnated in recent decades, the share of our household income that is being absorbed by housing and energy costs is rising, meaning we have less to spend elsewhere even if our wages are keeping up with inflation).
Only at the third tier of funding should we be looking at investing in the innovative tech sector. This is important for the future of the Scottish economy but the bank must be resilient if some or even all of these investments fail. It wouldn’t be so bad if the “investment” mission was linked to the Scottish Government’s industrial and economic strategy but because we don’t even have one of those, the bank is effectively just taking random punts based on potential short term gains or which ever company can charm them with the juiciest story about their cut of the “next big” tech IP (this is probably how my former laser company got their money, their pitch at the time would have involved words like “laser”, “space-based”, “quantum” and “nanotechnology”).
As it stands, the bank is just about “all-in” on tech and has invested little in energy and essentially nothing in social housing. It doesn’t look like a patient finance investment bank. It looks like a business accelerator fund with less of an idea of what it wants to be than, say, Scottish Enterprise which is essentially being forced to compete with a SNIB that appears to be actively working against them. Without the energy and housing tiers supporting the fundamentals of the bank’s portfolio, it might only take a few more high profile tech sector collapses (perhaps due to the AI data centre bubble popping) to bring it down entirely.
The truth is that the Scottish Government never believed in the potential of the Scottish National Investment Bank. They formed it because they were pushed into a corner by our successful campaign but that didn’t mean that they were forced to make the bank become a success. So instead of following the vision given to them, they designed the bank to be captured by the same banking elite that caused the problems in our investment landscape that the bank was supposed to solve.
This could be fixed before the next big crash. It’ll involve redeveloping the Advisory Board to let it do its job, revamping the missions along the lines we’ve suggested here and probably replacing a good chunk of the governance board of the bank where those currently in can’t or won’t adapt to the changes demanded. The bank has to re-focus its investments to secure its own foundations through housing and give itself a stable expansion platform through energy. Once and only once this has happened can it start aligning itself to Ministerial investment strategy and resume investing in the industries that would take us towards those objectives.
We’ve never complained that the bank is investing in things that might fail. Failure is inevitable in investments. The bank should be resilient in the face of those failures. It should be a bank not chasing headlines due to its annual statements but focused on what it will help Scotland become in the next decade or even in the next century. Failure in investments is inevitable. The failure of the Scottish National Investment Bank should not be.
