The Key Ideas

#7 Establish a well capitalised Scottish National Investment Bank

To be able to invest in capital, we need two things: a reliable source of borrowing, and a mechanism for borrowing and investing. Not only the commons would benefit from better borrowing; the private sector in Scotland needs substantial investment of the right kind too (patient, supportive, focussed not on making the maximum profit from those who borrow but on helping achieve the maximum development possible). And with inflation at zero, the interest paid on government debt is at historically low levels.

One solution is to create a Scottish National Investment Bank (SNIB). This would have the purpose of lending to invest, not lending to speculate. It would invest to improve Scotland and it's economy, not to maximise shareholder profits. It would be run with full financial rigour but would be driven by a different ethos: providing long-term, patient funding for projects that meet social and environmental, as well as economic, criteria. It would lend to big national development projects, local authorities, and to large and developing Scottish businesses (smaller businesses would be more likely to borrow from local municipal banks which will be discussed below). It would aim to create real liquidity in Scotland, pumping money into the economy and stimulating transformation. It would of course need to select projects which will return the investment with sufficient interest to maintain the financial health of the bank, guaranteeing that borrowing will not be used to cover revenue.

As the Scottish Government is prohibited from substantial borrowing, the SNIB would need to be established as an independent company and possibly as a National Mutual Company. This just means that it would be a stand-alone 'business' which was not owned by government (and so was no risk to the wider public sector) but which was set up with rules so it worked for all of Scotland. It would not be intended to ever be solely owned by the government, but would rather bring together a wide range of public and voluntary financial institutions under its oversight, acting as a national coordinating body as well as a direct investor. It's role would be to ensure the best possible investment in Scotland and its future. Organisations such as housing associations, credit unions, local authorities and their municipal development banks would buy a stake in SNIB to help support its capitalisation.

The bank would need substantial capitalisation to make it transformational to Scotland's economy. Capitalisation simply means putting money into the bank which it can then lend. This is easier than it sounds because no banks actually have anything like the total money they lend out held in cash. A reasonable rule for SNIB would be that for every £10 it lends it should have £1 held in cash reserves. Treasury rules currently dictate that the Scottish Government can only borrow up to £304 million per year for capital (it also has an amount it can borrow to cover revenue in years of smaller tax returns). If the government put two-thirds of its Capital every year into the SNIB as its main lever for coordinating infrastructure investment, this would enable it to subscribe (promise and underwrite) £2 billion pounds for the bank to lend. In fact it would be hoped that only for the first two or three years would the Scottish Government actually put the £200 million into the bank, since by then the bank could secure sufficient amounts of its own revenue.

Once SNIB was capitalised to £2 billion, it would be able to invest £20 billion pounds in Scotland. It could also create long-term SNIB bonds to get further capitalisation from private and public investors (like local authority pension funds), which would see the SNIB as an attractive and safe option to put their money into. This is clearly a very substantial capitalisation indeed and would stimulate equally substantial economic activity as well as greatly improving the nation's infrastructure.

SNIB would also offer other benefits and services. It could create a common brand and marketing which would promote all local financial institutions (particularly the proposed municipal development banks) at a national level. It would offer technical assistance and capacity-building to create modern online banking services in local areas (including things like crowd-funding capacity and other new tech systems). It would put in place a set of common investment and economic development principles that become widely known and understood, and part of a national coordination structure backed by the Scottish Government, boosting its profile and credibility.

This package will encourage and incentivise the existing local financial institutions to professionalise and to have a municipal development bank in every local area. Support will be given nationally for the establishment of municipal banks where they don't exist, but the bulk of capitalisation of the municipal banks will come locally save for specific projects that require bigger investment money from SNIB.

The SNIB governance structure would be along similar lines to that of other investment bank models in Europe. At the top-level an overall board of governors would be made up of the various stakeholders, with an honorary position for the Scottish Government Finance Minister and Convener of the Scottish Parliament Finance Committee. A control committee, including representatives from the municipal development banks across Scotland, would ensure that the bank is carrying out its mandate, and then a third board works on a day to day level approving loans and making policy decisions.

A powerful SNIB would be a better route for the Scottish Government to invest in major project than relying on its own borrowing powers or revenue because the strict limits put on its capital spending by the Treasury mean that the total amount Scotland is allowed to spend would be gone in no time. The SNIB provides much larger scope for the sort of transformational investment plan that Scotland needs.