The next item is an evidence session with the Scottish National Investment Bank. I welcome Willie Watt, who is the chair, and Carolyn Jameson, a board member, both from the Scottish National Investment Bank. I also welcome Liz Smith MSP, who has asked to attend the session.
As always, I ask members and witnesses to keep their questions and answers concise.
I invite Mr Watt to make an opening statement.
I have a slight problem: I can either see all of you, or I can see my notes. I will concentrate on the notes as I read my opening statement.
Thank you for agreeing to our request to provide evidence to the committee; I appreciate it. I hope that this will be the first of many interactions with the committee. I am pleased to be here to speak about the bank’s work and the progress that we have made since our launch at the end of November 2020. Carolyn and I will be happy to take questions on the work of the bank. She joins me in her capacity as a member of the bank’s board and of its remuneration and nominations committee. She will introduce herself at the end of my comments.
I am sure that we will touch on many areas today, including our investments and the on-going work to establish the bank. I will give the committee a short update.
Since the bank’s launch in November 2020, we have concluded 13 investments, totalling £191 million of committed capital. We have a strong pipeline and are currently considering 50 opportunities, which are spread across all the bank’s missions and a wide geographical area. Those investments speak to all three of the bank’s missions and are divided between direct investments in SMEs, project finance, and investments in externally managed funds.
To recap, the missions that were set for the bank by Scottish ministers are: supporting Scotland’s transition to net zero; investing to improve opportunities for people and communities, which is our place mission; and harnessing future technology and innovation to build a more resilient, productive economy, which is our people mission. I am proud of the progress that we have made in developing the bank’s investment portfolio while building up its operational capacity. The investments will deliver mission impacts across Scotland and form a strong basis for the bank to operate as a key pillar of the Scottish economy.
As well as concluding investments, we have substantially grown our organisational capacity since the launch. We are now a fully functioning organisation with capacity and capability in all aspects of our business. We are well placed to continue the bank’s journey as it becomes a key pillar of the Scottish economy and in broader civic society.
At the point of launch, the bank had a skeleton team that had been recruited predominantly on an interim basis or seconded from the Scottish Government. In the past 16 months, we have recruited a permanent team, which combines private and public sector expertise. The total head count is now 62.
10:45We have created a professional investment process, in line with development bank and private sector impact investment best practice.
Since launch, we have been working hard to establish ourselves in the economic and investment ecosystem in Scotland, and we have made significant progress in building relationships across the public and private sectors, but there is still much that we can do in both those areas. Perhaps we can discuss that later.
I am fully aware that the recent resignation of Eilidh Mactaggart will be of interest to the committee, as will, no doubt, the process for recruiting her successor. As we outlined in the bank’s public statement on the matter, Eilidh Mactaggart decided to resign from her position as chief executive officer at the bank for personal reasons, and she resigned on 27 January. She then made a statement on 5 March confirming that she had stepped down for personal reasons. The board respected her decision, and we are grateful to her for the contribution that she has made to the establishment of the bank. She was significantly involved in many of the achievements that I highlighted in my introduction.
We have not shared further details. As an employer, we respect Eilidh Mactaggart’s decision and her request for privacy. As the committee is aware, she said in her announcement that she would like to spend more time with her young family and that she will go on to consider her future opportunities as and when she feels that it is appropriate. We have a duty of care to all our employees, past and current, and our policy is not to divulge information on confidential and personal employee matters. That is not just in relation to Eilidh Mactaggart. We entirely respect that team members have the right to privacy and that individuals place their trust in us as an employer, and we will not and do not comment on personal, confidential or private matters. We take that principle seriously.
We have confirmed that Sarah Roughead is now acting CEO, which will ensure that the bank continues to run as usual until the appointment of a permanent successor. Sarah is doing an excellent job, and as our chief financial officer she was already involved in all aspects of our business. We have a good team in place, along with robust governance and processes, supported by a strong board, so we believe that we are on the front foot as we move forward.
I will stop there. Before any questions, I will hand over to Carolyn Jameson who can introduce herself.
Good morning, everyone, and thank you for having me here. By way of introduction, as Willie Watt said, I am on the board at the Scottish National Investment Bank and, as part of that, I have a role on the remuneration committee and on the risk committee. In addition—in my day job, if you like—I am the chief trust officer at Trustpilot. Prior to that, I spent many years on the executive team at Skyscanner and then, after the sale of Skyscanner, I worked for Ctrip as its head of mergers and acquisitions. That is a little bit of my background.
Thank you, Ms Jameson and Mr Watt, and welcome to the committee.
Mr Watt, as you set out in your statement, there is a recent resignation issue, which I am sure that some members of the committee will wish to ask about. I understand your role as employer, and you have set out clearly the parameters within which you wish to discuss the issue.
I have some questions about timescales. I am interested in when you, as the chair, were notified of the chief executive’s decision to resign, when the board was informed, and at what stage the shareholder—which is the Scottish Government—was informed.
Eilidh Mactaggart resigned to Willie Watt on 27 January, and the shareholder was made aware on 31 January, which was also the day on which the board was made aware.
Was the chair made aware at the same time as the board, or at a different time?
I was made aware on 27 January.
I will now hand over to the committee’s deputy convener.
Are you confident that you will have a new chief executive in place at the start of the financial year?
No, to be totally honest with you. I think that it will take some time to recruit the right person. We will need to ensure that we have a broad funnel to attract a wide range of potential candidates, and we will then want to go through a diligent process to ensure that we recruit the right person.
We have already started the process, but it will probably take until the second half of this year—potentially the end of the second half—before we have someone in place. That does not overly concern me because I have confidence in Sarah Roughead in her role as acting CEO and the fact that we have a strong team around her.
As a matter of interest, will the recruitment process include the use of headhunters?
We will use external search consultants, who will enable us to broaden the trawl across a much wider range than would be possible just by advertising. It will allow us to target individuals who might have specific experience in other development banks, for example. It would be difficult for us to do that if we just put up an advert on LinkedIn or something like that.
Arising from that, I suppose that there is a certain interest in what the cost of the recruitment will be.
Yes. We are identifying a set of firms that we feel have the right professional capabilities. I am sure that every member of the committee will agree that the role is extremely important, and we absolutely have to make the right choice. We will select a group of potential search firms that we think have the capability. We will then seek proposals from them, and we will evaluate those proposals, based on a combination of cost and capability. Value for money will certainly be a very important criterion in that selection.
Before I bring in Jamie Halcro Johnston, I have a question. Given that the chief executive left with immediate effect, what impact did that have on the bank? You seemed to suggest that there has been no impact, but with such a post there would usually be a handover period, and you would know in advance that somebody was about to leave. What impact did the immediate resignation have on the bank?
The bank has coped remarkably well. Eilidh Mactaggart had built a very strong, high-quality team. Its members were left to pick up the reins, and they have done so very well. The board is pleased with what we have seen, and we have also been providing additional support to, and spending time in, the bank.
Good morning to you both. I have a number of questions, all of which relate to the resignation, so I am happy to have one-word or “Can’t say” answers.
My first question is for Mr Watt. Did the chief executive’s resignation come as a surprise to you?
Yes, I think that it would be true to say that that was the case.
Were there are any efforts by you, or instructions from the board, to see whether there was any way that the chief executive could stay on, perhaps looking at the circumstances?
Eilidh Mactaggart resigned for personal reasons. The board took the position that she was entirely within her rights to do so, and we respected that decision.
You were comfortable that it was for personal reasons. There was nothing relating to the work or her relationships with the board, or anything like that.
No—she resigned for personal reasons.
My next question might be on an area in which you are not able to comment; I am comfortable with that. You said that Eilidh Mactaggart resigned on 27 January. Was an enhanced severance package or anything like that made available?
No. There was no severance package at all.
There was no—I am trying to think of the correct term—non-disclosure agreement, gagging order or anything like that, so she would be quite available to speak.
No, there was nothing.
Moving on a little bit, I think you said that the Scottish Government was made aware on the 31st. How was that done?
There was a telephone call to the relevant civil servant.
Was there any inquiry from them or anybody else about the reason for the resignation, or was it simply said that the chief executive had stepped down? Obviously, that call was made four days later, although I am not sure exactly which days of the week those were.
Thursday and Monday.
Right. Did the Scottish Government inquire about the reasons behind the resignation?
We had a conversation and I relayed the various reasons to the individual.
According to the timeline that you gave us, the chief executive was supposed to have stepped down on the 27th, but a statement was not made until 5 March. Your argument would be that it was a personal issue, but that is quite a long time for a formal response to come. Are you aware whether the Scottish Government or any of its agencies were involved in encouraging the chief executive to come out with something, or was the bank doing so? The cabinet secretary and the First Minister have made the point that you are making now—that the resignation was for personal reasons—but that had not officially been said. There was a kind of suggestion that there was a reason behind it. Do you know why that statement was made, why it was made so late and whether there was any encouragement to make it?
There was no encouragement to make that statement. Eilidh had resigned for personal reasons, and she had requested privacy. She then got in touch and told me that she would make that statement, so that I would know about it in advance. She was feeling uncomfortable about the scrutiny that she was seeing in the discussions that were taking place, so she made the decision independently to make that statement.
It was her choice to make that decision and she was able to do so.
Yes.
Okay. We have talked about the new chief executive. Will the Scottish Government or its agencies be involved in that, or is it just a matter for yourselves?
The recruitment and selection process is a matter for the board of the bank. The final decision to appoint is a matter for Scottish ministers. The cabinet secretary will have to be happy with the appointment, and our job as a board is to bring the best candidate that we can find for the role to the cabinet secretary.
We will be running the process. We will take into account best practice for public bodies in that regard, and we will seek to apply the bank’s equality and diversity parameters to make sure that we do that in the right way. It is a board matter.
It is a board matter, and the board’s final choice will be put before the cabinet secretary for appointment.
Yes.
There will be a number of options.
No. We would not be doing our job if we came up with two or three options. It is our job to make a decision. Of course, the cabinet secretary can decide not to confirm that individual, but I would hope that she would trust our judgment.
You have not had any interaction with regard to—
None whatsoever.
So it will be your process and then that person—
That is correct.
I am conscious of time, so I will stop there.
Thank you. We are essentially repeating the questions that were asked by Mr Beattie. I will go back to Mr Beattie, however, as he has a couple of questions to ask on broader issues.
Moving on to something that is a little less sensitive, I realise that these are early days yet for judging the success or failure of the investments, but I am going to ask you just the same. You indicated that you have £191 million invested in 13 projects or companies. How were those opportunities identified, and what selection criteria were used in the decision to invest?
The first thing to say is that there was pent-up demand. Obviously, the investment bank had not existed previously, and the things that it does are different from what enterprise agencies and other elements of the public infrastructure do, so there is a lot of inbound demand, and we are open to people coming to us with opportunities.
11:00We also get referrals from the enterprise agencies—they are an important source of opportunities—as well as the private sector and their advisers seeking to raise project finance or finance for SMEs. Those have been the prime sources of opportunities.
Going forward, we want to make what we call outbound origination more prevalent than inbound. That means taking the missions and seeking out opportunities that we feel fit with those. For example, we have identified the area of the decarbonisation of heat. It is a massive problem for us in Scotland, it is hugely expensive, and it will require a lot of private sector capital. Having said all that, we need to start to target projects and companies that we think can contribute to that and engage with them directly. We want to do more of that in year 2 of the bank’s existence than we did in year 1.
With regard to how we assess opportunities, we start with a mission fit. When an opportunity comes to us, we ask whether it fits with one of the three missions. Sometimes, it fits with all three, sometimes it fits with two, but it must fit with at least one. We then look at the sort of impact it will make on the mission objectives. The second criterion is whether there is a commercial investment opportunity that makes sense for the bank. The bank is not giving out grants or making sub-commercial investments. It is making investments on which we expect to get our money back and make a positive return that will go into the bank’s coffers for reinvestment. The third element is our state aid compliance. We cannot crowd out the private sector, and we have no wish to do that. Therefore, if the private sector can, should or wants to do something, we will step back. I like to see the process as three rings: the missions, commerciality and state aid, and our landing area is in the centre of those three rings in that overlap space. Every project we do needs to be in that overlap space.
I will not ask you to comment on individual projects or investments, but from the figures that I have, I cannot work out how much of the investments are equity investments in the business and how much is a loan. Of course, the intention always was that the bank would provide patient capital.
Yes. The loan investments tend to be extremely long-term investments, so they are very much in the patient capital space, which will continue. We do some lending on what one might call project finance where there is an element of getting a project off the ground that the private sector will not or cannot provide. Some of those loans can be made on a shorter-term basis, but our equity investments are all made on a long-term basis. We are passionate about scaling up Scottish businesses. A lot of work has been done by Scottish Enterprise and the enterprise agencies generally on the business birth rate and early-stage investment. However, in Scotland, we need more scaling up of businesses. Carolyn Jameson’s previous company, Skyscanner, was a great example of a start-up business that scaled up to employ hundreds of people and create a huge amount of value for the Scottish economy. Scaling up is important and it is a long-term process, so I envisage the bank making multiple investments over a period of three, five or 10 years in some of those companies as they get bigger.
Another issue that this committee will be concerned about is productivity. Scale-up companies make a much bigger impact on productivity, because they are more efficient, they have a greater reach within the economy and they create more high-quality jobs, so more tax is paid. That is very much a patient capital thing.
Finally, in answer to your question, the numbers on the loans and project finance tend to be quite big. For example, we put £30 million into helping to complete the new Aberdeen harbour development, but there are fewer of those big project finance loans. The investments in equity tend to be smaller—between £1 million and £15 million—but there are more of them.
I have one last question, which is about the performance of the investments. As I said at the start, it is fairly early days for the measurement of that, but do you feel that any of those investments are not performing? How are you measuring success? Is it by profitability, jobs or turnover?
At the moment, we feel confident about the performance of all the investments that we have made, but they are recent, so one would expect that to be the case. We will not be doing our job if every investment that we make performs, because we need to take higher risks than the private sector, so we will have losses. Some of the projects in which we invest will not work. Private sector investment firms have losses, so we will have losses and we ought to have more losses than the private sector. There is no doubt that, over time, I will be coming to the committee to talk about investments that do not work but, as we stand at the moment, I am very comfortable with the positioning of the portfolio.
With regard to how we measure success, we use a number of measures that are tailored to a particular investment. In relation to project finance, it is very important to consider whether the project is on time and on budget. In relation to the missions, we put mission covenants into our investments, so whether the mission is net zero, place or people, there will be a commitment from the company to do certain things that relate to the missions, not to the commerciality of the investment, and we measure that twice a year. Of course, it is also important to measure the number of jobs that are created, the revenue that is generated and the profitability. There will be a suite of measures for each company. As the portfolio evolves, we will publish the sum total of all that in our mission report and in the way that we report on the performance of the portfolio from a financial perspective, as well as a mission perspective.
Good morning. You have already talked about the importance of the bank not crowding out private finance, and the fact that the role of the bank is to invest where the private sector is failing to provide sufficient finance. How can the bank ensure that it is investing in a company or project that would not get private investment? Can you give us an indication of where there is greater appetite from the private sector to invest and where there is less appetite? Within your Venn diagram, are there areas that you might look to target?
Our subsidy control team looks at every opportunity through that lens and it operates separately from the investment team, so that there is no pressure on it. We seek written proof from companies that they have tried to raise private finance for that particular component but have not been able to achieve it. We also benchmark that with other banks and investment institutions that we think they might have spoken to. Essentially, we reference the opportunity and apply the framework of our state aid approval, then we compare where that company is with the state aid approval framework that came down to us from the European Union, before we left. Therefore, there is a separate, auditable thread that runs through all the subsidy control and state aid side. Further, we have debates in our investment committee, and members of our investment team ask whether something is commercial and whether there is somebody out there who will invest. We talk about that a lot.
On where the gaps are, it is an evolving picture. A reasonable amount of capital is available at the early stage of scale-up. In later stages, the private sector is capable of financing scale-up. However, there is a bit in the middle where there might be a role for the bank.
In technical terms, there is start-up funding, series A funding and series B funding. The gap between series A and series B is a place where I can see the bank helping companies to achieve the milestones that they will need to achieve in order to be able to raise the next set of capital totally in the private sector.
The private sector will finance most projects without the need for bank capital. We find that, if a project is very innovative or in an unproven technology, perhaps only 70 per cent or 80 per cent of the funding is available from the private sector, so there is a need for us to provide an element of that.
We provide either a foundation that enables a project to get going—the first £1 million is often the hardest to find, so we can provide that—or, when most of the investment is available but there is a gap, we can provide the keystone capital that makes the arch stand up. It is the piece that holds the other pieces of the investment structure together.
Those are some of the areas in which we have found ourselves.
I know that it is early days, but is there any evidence that the bank is attracting domestic and international private investment into Scotland? By its sheer existence, a development bank can provide a mission-led focus. Obviously, the bank is attracting interest but does it give outside investors confidence that there is something interesting going on in Scotland that they want to be part of?
I think so. It is early days but there are projects that would not have got off the ground without our involvement.
The world of investment is global and capital is easily moved around, so it is important that we highlight the kind of projects that we think are investable. That is the reason why it is important that we have a professional investment capability. If we do not have that, we cannot demonstrate a level of professionalism that will attract private sector investors. I am often asked whether there is too much of an investment focus in our team but, if we do not have that, we cannot crowd in. The reason for the bank is to be a catalyst for the creation of more investment in Scotland—more than the £200 million a year that the Scottish Government has allocated to us.
However, we can do more in the future to be a champion of what is available in Scotland. There are good examples of development banks around the world that are good at that. We need to earn the right to be trusted. We are just new. People will not just trust us because we ask them to do it. We need to earn that right, and I like to think that, if we make good investments and demonstrate thoughtfulness and professionalism, we can become that trusted partner that will help to bring in external capital.
11:15
Thank you for expressing your willingness to come back to us. I appreciate that and I know that others on the committee would appreciate regular engagement with you.
Following on from Fiona Hyslop and Colin Beattie’s points earlier, I appreciate that it is early days but I am interested in exploring the challenges that you face in meeting the strategic objectives. There will be a limit to the life of some of those projects, and challenges in relation to them. What do you need to overcome those challenges?
My next question is linked to that, although it deals with a slightly separate matter. Given the overarching purpose of the bank and its strategic objectives, it is clear that good examples of sustainable development are offered by the bank, but those projects—some more notably than others—could have negative social and/or environmental consequences. In your longer-term thinking about the life cycle of a project and the consequences thereafter, do you consider circular economy spin-offs or building in the initial aims across the full lifetime of the project?
Yes. Those are very good points and they are the right things to think about. I will start at the end and go back to the beginning. We try not to invest in projects where we see disbenefits, if you want to call them that, in relation to the missions, but if you are going to renovate a hotel in the Highlands or pour concrete into a harbour in Aberdeen that is going to be a centre for offshore wind, you are in a sense having a negative environmental impact.
Intellectually, it is about the balance between positive and negative impacts, and the balance needs to be skewed dramatically towards the positive. It cannot just be a fine balance, because, as you suggest, we would not then be investing to the purpose.
We could be better at explaining our thinking on some of the investments that we have made, and maybe we were a bit naive about the need for a detailed level of explanation of the issues that might be behind your question. You will see in the future a lot more of that detailed thinking being made public about why an investment has been made and how what our thinking was in relation to those issues.
To be honest with you, we are still learning—we are all learning, are we not? There are unintended consequences of most types of activity and that is certainly true of investment activity, so we need to make sure that we are thoughtful about that. We need to take part in the debate and help to shape that debate. That is how I would respond to the second part of your question.
In relation to the first part of your question, there are lots of challenges around linking investment activity to the missions in the right way and avoiding the problems of competing with the private sector while investing in projects that are viable. That is why, in the future, we want to do more of our own origination and be in more of an outreach mode. We get so many inquiries that it would be quite easy for us just to deal with those. However, if we want to become more thoughtful about how investment can help to solve the problems that underlie the missions, we need to go out and find things in a more positive way. If I were sitting here in a year’s time having this conversation, I would like to be able to give the committee more evidence of where we have done that.
I hope that that answers your question.
That answer is really helpful, and it highlights why I linked those two points. I was thinking about the ability to see the connections between negative or detrimental consequences and supporting those who can mitigate such consequences, thinking about the circular economy in a way that we have not seen previously with this type of strategic investment. I look forward to your update next year.
Good morning, and thank you very much for attending today’s meeting.
I want to pick up on an earlier point about subsidies—Willie Watt referred to it, but then moved on. In your submission, you comment on the new UK subsidy control regime and note that, at this point in time, there is not really any clarity in that regard. Having followed up on that myself, I understand that there are some principles that may ultimately rely on legal challenges leading to precedent. That seems to be a very clumsy way of doing things.
I have two questions. First, have you had any further insights of which the committee might not be aware? Secondly, what impact might that approach have on your investments?
That is a very interesting area for us, as you can imagine. Our approach to it is to say, “What do we know?” We know what our state aid approvals were in the context of European Union membership. The principles on which those were founded were sound, and we feel that they allow us to do pretty much everything that we want to do. That is foundational for us.
It is not unreasonable that there should be a period of uncertainty around what the UK Government’s position on state aid will ultimately be. I suppose that the Government in Westminster left the European Union in part so that it could have more flexibility around things such as state aid, so I do not anticipate—although I could be completely wrong—that the state aid landing zone in a UK context will be more problematic for the bank than the current state aid position. Nonetheless, in this current period of uncertainty, we are sticking with what we know—and that is UK Government guidance, too. I do not think that we are doing anything that would be out of the ordinary in a broader context.
We would all like to have more clarity on that matter, but that is not something that we can directly influence.
I want to pick up on another issue that we touched on earlier: that of risk relative to innovation, which is one of your guiding mantras. It almost seems counterintuitive that, at present, when geopolitics is in a state of flux, there is a requirement for more innovation, including with regard to net zero.
How confident are you that you have landed it just right in the current climate? As you alluded to, if you only ever invested in Government bonds, you would always get a guaranteed return. There is a sweet spot, which I regard as quite challenging, given the nature of how the bank is set up and structured. Not everybody necessarily understands how that translates into risk appetite, and it is not all that common for parliamentarians to understand risk appetite. Do you have any further reflections, in the light of the current state of geopolitics?
The situation is fluid, and there is not one answer that covers a significant amount of time. In the private sector, risk appetite flows in and out. There will be periods when we might look at projects for which there will be no requirement for the bank to act because the private sector’s risk appetite will be higher, and there will be other periods when that risk appetite is lower and we will be active in a particular space. That situation might last for a few years and then change.
The situation is fluid, and it is something that we think about literally every day. It is a matter of judgment, and it will need to evolve over time. We will need to look at the investments that we make, assess those against the risk appetite framework, and decide whether we have been too conservative or too liberal with our risk budget.
With regard to the current geopolitical times, it is interesting, in many respects, to consider the drivers. I think that the missions are quite well thought through—although I claim no authorship of them—because they speak to fundamental issues in our economy. However, they also speak to issues that are highlighted by the geopolitical uncertainty that we currently see. The importance of the move to net zero is highlighted by the current volatility in energy prices. That has a knock-on effect on poverty and on our place mission, because the poorest in our society are least able to deal with that volatility.
The need for an innovative and vibrant business community that creates jobs is really important. The digital world and innovative companies tend to perform best in difficult times; they are more resilient in difficult periods. I would therefore expect a lot of the digital businesses that we back to continue to drive forward, despite all the current uncertainty.
We need to take all those things into account. Overall, that underscores the importance of the missions and the need to make progress on them.
Good morning to the panel. With regard to the bank’s role in investing where the private sector is failing to provide sufficient funds, your biggest investment is £50 million in a forestry fund that is run by the asset manager Gresham House. I have to say that that firm has admitted to owning a management company in Guernsey, which is a well-known tax haven. Forestry is not short of people queuing up to invest, so where did you see a particular market failure in that sector that you needed to fill? I notice that your website says that the forest growth and sustainability fund is going to create rural jobs. How many jobs have been created so far as a result of that investment?
I could not tell you how many jobs have been created so far; it is very early days for the fund. From memory, I think that the figure of 200 jobs, over a broader period, has been mentioned in the past.
With regard to what the market failure was in that sector, you are absolutely right to say that forestry is normally perfectly capable of getting investment from the private sector. The problem with that fund is that it involves a much higher percentage of new planting and a higher percentage of native species than has historically been the case.
11:30The investment managers’ thesis was that, in a period when natural environment regeneration and the planting of trees are becoming more prevalent, there would be demand for a fund that—as its title explains—is based on sustainability. They felt that it was likely to be attractive to investors because sustainability is very much what we should all be doing, but they could not find a cornerstone investor to get the fund up and running. Without that, there was no way that they could raise the rest of the money. The bank’s role, therefore, was to be the cornerstone. As I said earlier, the first money is often the hardest to get.
There is a bit of a misconception about where the capital for that fund comes from. Most of the fund’s capital has come from public sector organisations. The second-largest investor in the fund is a local authority pension scheme, whose members are local authority workers, and the third-largest investor is a state-run pension scheme. It is institutional, responsible capital that is investing on a very long-term basis to create more forested land in the UK and Scotland.
Even since you made that investment, the market has changed significantly. We now see a lot of private companies that—if we are being perfectly honest—want to buy up huge swathes of Scotland to plant trees, including native species, not for commercial planting but to offset their carbon footprint. Given that the market is changing, what mechanisms do you have in place to enable you to say, “Well, actually, we no longer need to have a role there,” because the private sector—including green lairds and all sorts of interesting organisations—is moving in to buy up land for tree planting? Is there a mechanism for the bank to say that it does not need to be there, because the private sector is, rightly or wrongly, filling that gap?
That goes back to Ms Hyslop’s earlier question. We look at every opportunity with regard to whether or not there is a market failure, and we assess each opportunity on its merits. It may well be that we do not invest in another fund like that one, for the reasons that you have mentioned, but—
But you do not have a mechanism by which you can say, “Well, actually, we don’t need to put that money there—somebody else will fill that gap.”
No, because at the time when we invested in the fund, there was a gap. We had identified that gap, and we felt that it was right to fill it. We very much believe in planting more trees in Scotland.
The scale of the requirement if we are to get to net zero by 2045 is huge; it is many billions of pounds. That relates to the forestry sector and to the decarbonisation of housing and transport. The fact that two or three companies have invested in some forestry since we made that investment does not mean that we have got to the end of what is required in terms of tree planting in Scotland.
Scotland and the UK have among the lowest tree cover of European countries. If you go somewhere such as France or Switzerland, you will see that there is far greater forest cover. We really need to think about that, and there is a role for the private sector, the third sector and the public sector in that regard. It is all about balance.
Sticking with the key role of achieving a just transition to net zero, which is one of your main missions, the Government has a fund—the energy investment fund—to support community and commercial renewable energy projects. Are you familiar with it?
Yes, we know about that fund, which has an important role to play.
You say that it has an important role to play, but the Government is ending that fund at the end of the month. It has been £13 million a year over the past 10 years. A market failure was identified when it was set up.
In response to a parliamentary question, the Government said that one of the reasons why it is ending the fund is that
“There are new investment mechanisms in place, through the Scottish National Investment Bank, which supports the Scottish Government’s strategic priorities to achieving our net zero ambitions.”—[Written Answers, 11 March 2022; S6W-06172.]
Given that that £13 million-a-year fund, which is largely spent on community renewables, is being ended in a few weeks’ time, what is the bank doing to support community renewables?
Community renewables would certainly be within the scope of what we could invest in. We would apply exactly the same metrics that I explained earlier: does the project meet subsidy control, is there a good opportunity to get our money back, and does it meet the missions? A community renewables project would clearly meet the missions because it is about renewables.
We certainly support community-based investing, and we would certainly consider projects. We have a minimum project size of £1 million, so any project would need to meet that minimum requirement, but there is no reason why we cannot look at community-based renewables.
However, you are not actively investing in them at the moment. My concern is that the Government has said that the fund is ending and that the matter will land on your desk in a few weeks’ time but, I presume, you do not have plans to invest £13 million in community renewables over the next year, so there is obviously a gap.
I do not know whether there is a gap. You would need to speak to the Government about what it means by the cessation of that fund. If people have projects that they want to talk to us about, we are happy to talk to them. I do not know whether that means that there is £2 million of demand or £20 million of demand in community renewables, but we are certainly open for business with regard to community projects.
That is an important point.
Good morning, Mr Watt. I will ask about the bank’s mission to address innovation. You have already talked about the need to improve productivity. How does the bank assess investment opportunities for innovation and what weighting is given to how an opportunity would improve productivity?
That is a good question. When we think about innovation, we are usually thinking about doing things differently either in the digital world or the world of physical products. We are thinking about companies that are breaking the mould with regard to technology and software as well as hardware. Part of that is analysing the feasibility of those businesses.
Early-stage investment is primarily the home of Scottish Enterprise and the enterprise agencies but, where we invest at an early stage in innovation, it is about how practical what the company is doing is. It is then about the path to revenue growth. The annualised revenue from an innovative company is seen as a more important measure of its viability than its profitability is, because many innovative companies are not profitable or are marginally profitable because they are investing as much as they can in innovation.
There is a measure called economic value add, which tries to translate the value of innovation into pounds, shillings and pence. That is quite a good measure, because, although it is important that we have more early-stage companies, if they only do things that are already done well by existing companies, they are probably not addressing the productivity gap. Therefore, the viability and growth rate of companies in product and revenue terms are really important.
That will be associated with job growth. I have been in the investment world for nearly 40 years and, in my early days, most people in a company were employed by that company. Most companies did pretty much everything in-house, but that is not the case any more. The jobs that an innovative company creates include all the jobs in-house, which will grow, as well as all the jobs through the partnership relationships that the company has with companies and individuals in Scotland, the UK and across Europe. Therefore, we need to think about that ecosystem that surrounds each company.
I go back to the ability to scale up. We are doing this work so that companies can get bigger and make more of an impact, which is just more of everything. We need to figure out how we articulate all that in the way that we communicate with the outside world. We talked a bit about that with regard to the green space, but there is also the innovation space. We are talking to organisations such as the Hunter Foundation and other entrepreneurs who have been thoughtful about that whole space, so that we can help to encapsulate how it works better.
You commented on the need to make good investments. You also spoke about the bank’s risk appetite. How do you balance the need to make good investments with innovation and the bank’s risk appetite?
We need to take more risk than the private sector. With every one of these innovation-type companies, there is the risk that it will not work, or that it will get to £1 million of revenue but will never get to £10 million of revenue. Alternatively, there is the risk that it works but cannot produce the thing at scale. There are all kinds of risks. The private sector wants to invest in such companies, and a lot of capital is available internationally to do that. We need to be earlier and bigger than the private sector—that is another way that we can take more risk—or we need to do the bit of the financing that the private sector does not want to do. That is all within the context of state aid and not crowding out somebody else, so it is complicated.
As I said in my introduction, we should be losing money. We would be nuts to think that we should be losing a lot of money, because we want the fund to compound so that we can invest more in the future, and we cannot do that if the loss rate is too high. However, if there is no loss rate, we are not taking enough risk.
We will be coming to the committee over the years and continuing to debate whether we are taking enough risk. There will be times when we will be criticised because something has gone bust and we are a shower of idiots, and there will be other times when we will be criticised because somebody will say, “Hang on, all your investments are successful. You’re just doing what the private sector could have done and you’re not taking enough risk.” We have to get that balance right.
I have a final point on innovation. You said that you have invested £191 million in 13 projects. We have heard that your biggest investment is in forestry and that your next biggest investment is in housing. Of the 13 projects, which are your innovative projects so far?
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I think that we should send the committee a pie chart of where the capital has been invested, in relation to the three missions, to show the amount of money and the number of projects.
More generally, we have invested in R3-IoT, an innovative internet-of-things company in Glasgow that uses sensors to measure the performance of things from railway tracks all the way up to satellites. We have invested in smart battery technology that is designed to address low-carbon heat, and in a company that is selling innovative tidal turbines in Canada and, we hope, will soon sell into Indonesia. We have also invested in an innovative young business in the Borders that has come up with circular economy green insulation materials for buildings, and in one of the world’s leading laser technology companies, which was a spin-out from Glasgow university. The company’s strapline says that it produces the world’s purest light. Those are some examples of innovations.
A couple of members still have questions. I will take Alexander Burnett first, and then I would like Liz Smith, as a visiting member, to have a chance to come in. It would be helpful if people could be concise in their questions and answers.
I have a couple of questions. Mr Watt, let us hope that we do not see you too often regarding individual investments that do not work. You mentioned the sum total. Does the bank have a benchmark in the banking sector that you measure yourself against? At what point would it be reasonable for the Scottish Government to set a target rate of return?
Those are good questions, and we are working on both of those things at the moment. As I said, the issue of return targets for particular types of investments is a dynamic area, and it is a component part of the broader issue of target rate of return. At the moment, we are working on a paper for ministers on target rate of return. It is quite a technical subject, so we are being very thoughtful about that. We will have recommendations for Scottish ministers by the middle of the year, and we will produce a detailed paper that will deconstruct our thinking on that. The committee will probably find that interesting. The actual decision on target rate of return is for ministers but, as we are the technical experts, we ought to try and advise ministers as to what we think is right.
Thank you—we look forward to that paper.
Your 2021 annual accounts show that just over 80 per cent of the bank’s assets by value are held in investments with no quoted market rate price. Is it just at that point in time that the figure is so high? Obviously, it feeds into how difficult it is to measure your return when there is no market for what you hold. Do you envisage that figure coming down? Is there a target for what the figure should be?
Most of our investments will be unlisted, because that is where the market failure is. In listed markets, there is less evidence of any market failure. However, having said that, there are benchmarks for innovation type investments and infrastructure investment returns, so we can benchmark the individual types of return, both in a development bank context and a private sector context. Those benchmarks should help to guide us on what the ultimate target rate of return should be.
Mr Watt, from having met you before, I know that, when it comes to the very large sums of public money that the bank holds, you agree whole-heartedly that there should be full accountability and transparency about how the money is spent. In particular, you have said publicly and privately that the way that the public are made aware of the objectives of the bank and the direction of policy is extremely important. I want to be absolutely clear about whether, in the past year, the board was made aware of any disagreements between the then chief executive and Scottish Government ministers about the direction of policy or the objectives of the bank. If there were any disagreements, what were they?
I am not aware of any disagreements about policy or the direction of the bank that are relevant to your question.
In the past year, has the board been made aware of any disagreements at all, which are unrelated to policy and the direction of the bank?
No.
Was the board made aware of any concerns between the former chief executive and Scottish Enterprise?
No. The chief executive worked with Scottish Enterprise. As you and I have talked about previously, we need to work out how all the organisations work together. We are the new kid on the block, so we have had lots of discussions to make sure that we are aligned with Scottish Enterprise, but there are no issues that are not covered by the normal discussions that you would expect us to have.
Therefore, for absolute clarity, to the knowledge of the board, there has been no disagreement about any of the bank’s operations or engagement with other stakeholders.
Not that I am aware of.
Thank you very much for that.
When you spoke to the Enterprise and Skills Strategic Board in August 2021, according to the minutes, you said that “part of the role” of the SNIB
“is to solve the lack of private sector investment in certain projects.”
Your responses to Fiona Hyslop’s line of questioning on the same issue were very interesting. Since that meeting, which was six or seven months ago, have your fears been slightly allayed? Is putting the money in becoming more attractive to the private sector?
Do you mean generally putting money into projects in Scotland?
Yes.
It is a matter of degree, so it is difficult to take a point-in-time view of it. At the time of that meeting, the private sector had a high appetite for investment in low carbon, and I do not think that anything that has happened since then has changed that. Therefore, we are going towards projects that are at a very early stage or where there is a specific gap.
More generally, markets tend to be risk averse during times of heightened geopolitical risk, so it is conceivable that there will be a lowering of risk appetite in the private sector because of the events of the past few months. How do we learn about those things? We learn about them from how we experience projects. I am not sure that we have seen a spike in demand. It is probably too early for that. There has probably not been much change since what I said in August last year, but that might change now and going forward.
On that theme, what do you feel that SNIB has to do in order to attract and help the private sector to become more engaged?
We need to demonstrate that projects that the private sector thinks are too risky are not as risky as it thinks. The Green Investment Bank’s investment in offshore wind was a really good example of that. The Green Investment Bank pioneered offshore wind and now it is all done by the private sector. Therefore, I would like us to find areas where we can show that it can be done properly. Ultimately, I expect us to step back and let the private sector get on with it. That is why, as investors, we need to operate at the highest professional level, so that we can demonstrate that.
I would like to find ways in which we could pioneer something in domestic heat. I do not have anything on the stocks that will do that but, if we could pioneer something in domestic heat that was perceived as investable by the private sector, that could be a phenomenal win. However, we are not there at the moment.
That is helpful.
I have a final question. How often does the board meet?
The board has four regular meetings a year. It also meets off site, on an ad hoc basis, whenever we decide that we need to meet, so in total it meets around 10 times a year.
Are those meetings minuted?
A call might not be minuted, but normal board meetings are all minuted.
Thank you.
When will this year’s business plan be published? Can we expect it to be significantly different from the current business plan or will it be much the same?
The business plan should be published before the start of the next financial year, so the plan should be published by the end of March.
That is in the next two weeks, so it will be published quite soon.
Yes. It will not be significantly different, but it will probably have a bigger emphasis on stakeholder engagement and the bank being outward facing. It is time for us to be more outward facing because, now that we have our internal house in order, we should be going out more aggressively into the wider world.
Thank you very much. That brings us to the end of the evidence session. I thank both witnesses for speaking to us this morning.
11:56 Meeting continued in private until 12:10.