This article was written by Laurie Macfarlane from New Economics Foundation.
Investment – both by the private sector and by government – is crucial to the long term economic, social and environmental health of any economy. As part of the UK, Scotland has a longstanding problem of underinvestment relative to other countries.
The percentage of GDP invested in 2014, at 17.8 per cent, was the fifth lowest of the EU countries. Only Cyprus, Italy, Portugal and Greece were lower – all countries which have been through a period of severe economic distress.
Of the comparatively small amount of investment that does occur in the UK, most is heavily concentrated in London and surrounding areas. As an example, in 2015-16 public infrastructure expenditure on transport per head was £2,604 in London, compared with only £170 in Scotland.
The problem has its roots in a combination of both lower public sector support in the provision of long-term “patient capital”, and a banking sector that is focused more on short-term shareholder returns than its foreign counterparts.
Extensive use of private finance initiative (PFI) (or its cousin the non-profit distributing model), has seen taxpayers pay through the nose for often poor quality infrastructure projects. Data published by the Scottish Government shows that since 1998 there have been over £8 billion worth of projects financed through PFI or NPD. Under the current payment arrangements these will cost the public purse a cumulative total of nearly £40 billion by 2047-48 – five times the original capital outlay.
Meanwhile, the Scottish banking sector channels billions into the economy each year, but most of this flows into property and financial markets, inflating asset prices and destabilising the economy. Today less than 10% of bank lending goes towards productive business investment. The result is a lack of funding in crucial areas such as housing, energy and transport infrastructure as well as continued under-investment in small and medium enterprises (SMEs).
If Scotland is to successfully address the key challenges of the twenty first century – climate change, demographic change and economic inequality – then new mechanisms are needed to finance and direct investment in a smart, inclusive and sustainable direction.
In a recent paper published by the New Economics Foundation and Common Weal, we set out how establishing a Scottish National Investment Bank would be the first step towards fixing this problem. National investment banks leverage relatively small amounts of public capital into a significant source of strategic and long-term finance that can be channelled into areas of the economy in most need. They are widely recognised as having played a crucial role in the economic development of many advanced economies throughout the twentieth century and continue to do so today in countries such as Germany, Japan and the Nordic nations.
In the paper we set out what a Scottish National Investment Bank might look like and how it could be established the Scottish political, legal and economic context. Our vision for the bank is summarised as follows:
• Mandate: The bank’s overarching mandate should reflect a broader economic strategy developed in a democratic process, controlled by the Scottish Government, and reviewed periodically.
• Activities: The core activities of the bank should be to support investment in infrastructure and SMEs and to direct investment towards innovation for social and environmental objectives, such as accelerating the transition to a post-fossil fuel economy.
• Ownership: The bank should be publicly owned but operated independently as a fully commercial entity, free of day-to-day political interference.
• Governance: Robust ownership and governance structures should be put in place which promote the highest levels of transparency and accountability, and provide a clear dividing line between the government and lending decisions.
• Capitalisation: The Scottish Government should inject £225m of ‘paid-in’ capital with that accumulated figure over six years being ‘subscribed’, giving a total subscribed capital of £1.35 billion from year one.
• Funding: The bank should be allowed to raise funds on capital markets by issuing bonds up to a leverage ratio of 2.5 times the amount of subscribed capital, meaning it could raise £3.37 billion that would be available for investment from year one.
By providing long-term “patient” capital to areas of the economy most in need, a Scottish National Investment Bank along these lines would help narrow the gap in Scotland’s productivity performance, boost export activity, diversify and expand the business base and speed up the transition to a low carbon economy. In doing so, it would support the creation of over 50,000 new jobs.
It would also generate billions of pounds of savings for the public purse. To illustrate the scale of the potential benefit to the public finances, we estimate that the Scottish Government would have saved a total of £26 billion if the projects financed through Private Finance Initiative (PFI) and Non-Profit Dividend (NPD) schemes had instead been financed by a National Investment Bank.
By positioning Scotland at the forefront of innovative banking reform that learns from best practice around the world, it would begin the process of reasserting the country’s once proud banking tradition. It’s time to see the Scottish Government act.