The Scottish National INvestment bank desperately need reform

Robin McAlpine

Can someone explain to me the total lack of interest from the Scottish Government over concerning things happening at what it itself considers one of its biggest achievements – the Scottish National Investment Bank? There is now so much murk around this organisation that it is genuinely surprising that the government seems so sanguine.

This was Common Weal's baby – we devised it, developed it and lobbied for it (often in partnership with Friends of the Earth Scotland). It was designed to address the big gap in the private finance world for investments with major public benefit but with either higher risk or longer repayment timeframes.

So to protect the public good nature of our proposal it had a tripartite model for the Board which governs SNIB which would grant a third of the places to people with financial sector experience, a third representing different layers of government in Scotland as well as geographical spread, and a third representing the public good, such as the STUC or environmental experts.

It took us years of pushing before the proposal got momentum, but everything that has happened since makes me feel like I was a fool for trying to change Scotland in the first place. This bank is failing and the reasons it's failing are unacceptable. Action is needed.

I'd like to start with a quick recap but that is difficult. What is going on in SNIB does not appear to be of the 'Colonel Mustard in the Library with the Loan Application' sort, more the 'Colonel Mustard is part of a close network of wealthy equity investors...' sort. (I'm writing about powerful people with a lot of money so I probably have to emphasise that I'm not alleging criminality.)

I could draw you a kind of map of what's going on – in fact I had such a map – but it is a map with new territory added all the time. It can be hard to keep up. If you want the slightly longer version of what is going on you could read this and then this, but if you want a short version (all references in the two linked articles) it goes as follows:

SNIB is governed almost entirely by a group of private finance insiders. Many of them have multiple interests in or links with major investment funds in Scotland or are connected to a small insider group of favoured businesses (think of it as a VIP lane if you will). The names 'Scottish Equity Partners' and 'Par Equity' come up a lot.

Then again, the Bank's Chairman (who was just reappointed for another four years so will be the top dog for a decade) is also on the advisory board of Scottish Equity Partners. To understand the problems with this it is worth being clear that all three (Par Equity, Scottish Equity Partners and SNIB) are effectively equity funds. They exist to invest in ventures which are good economic prospects.

But two of them exist to make their rich investors richer and the other exists to cover the gap in between, ventures which are fundamentally valuable to the public interests in Scotland but which are failing to find the kind of supportive investment they need from the private sector.

For that reason it ought to be a red flag if they are all investing in the same thing all the time. For one, it implies SNIB doesn't need to invest because the venture is gaining private sector capital investment. And for two, its a screaming conflict of interests. Co-investment takes the risk out of the deal for the private equity firms – the public are shouldering half the risk for them.

And again and again SNIB has been co-investing with these equity funds. In fact is is quite rare to see a bank loan made to anyone who doesn't have some kind of connection to the financial insiders running the place.

At the weekend we discovered that the pretence isn't even worth making – because SNIB has just started giving public money directly to Par Equity itself. The media furore was over the fact that one of the Directors of Par Equity was part of the group of big businessmen who screwed poor people out of their Christmas through the Farepak scandal.

But that's just Britain – you can tank the entire savings of a granny scraping by on the state pension and it will have next to no impact on your career or prospects. We should be outraged by this, but it disguises the bigger problem. That bigger problem is the investment itself.

I mean, what is the point of SNIB at all if what it is doing is not intervening in the finance market to fill in public-interest gaps in the finance landscape but instead handing some of Scotland's richest people large sums of public money to play with as they see fit.

This is a 180 degrees perversion of everything that SNIB was meant to be about. It is then with grinding inevitability that we find out the next day that they've also given Charlotte Street Partners a £360k contract. For what? SNIB is an agency of government – why is it paying a lobbying firm?

The answer is that Charlotte Street Parters is a good indicator of Scotland's financial establishment screwing over the public. CSP does not exist to change government decisions and actions for the public good but I the other direction. Yet public money flows endlessly towards it.

Now of course the bank is likely to invest in some ventures which already have some private finance attached so I'm not suggesting that SNIB should only ever act as sole investor, but that puts a lot of weight on the public interest aspect of the individual investment.

On that the game should have been up from the point at which SNIB invested in a consultancy in London which offers advice for super-wealthy land owners on how to squeeze the maximum amount of cash out of Lorna Slater's PFI for Trees scheme, a company which was then sold to a US equity firm.

[ADDENDUM: Since publication I've discovered that Gresham House, the consultancy concerned, has become the fifth largest landowner in Scotland, thanks to the generous support of our 'public interest' National Investment Bank. Words fail me.]

So the bank is investing in rich people games with the inevitable outcome of inflating Scottish land prices and so draining the life from rural communities all over Scotland. That is impossible to justify as public interest, and it is way worse when you realise that both Scottish Equity Partners and Par Equity were also invested.

Perhaps SNIB's investment didn't have the impact of inflating the value of the consultancy so that Scottish Equity Partners and Par Equity would gain a sharply-higher value for their investment when the consultancy was sold to another venture capital firm. And maybe Willie Watt, Chairing the bank and advising Scottish Equity Partners on strategy, recused himself from everything.

I don't know, because I've got work to do and I can't dedicate enough time to do the kind of investigation that is needed here. I'm already gathering material for another future piece on another decidedly concerning pattern of behaviour in Scotland's economic support infrastructure which a number of senior business figures have alerted me to.

My question is this – I keep hearing how the Scottish Government is left-of-centre and fighting for the people of Scotland. So why was it so, so adamant that a bank set up to serve the public interest would have absolutely no governance representation from anything that might be mistaken as an organisation interested in the public good?

The ferocity with which the Scottish Government pushed back on Common Weal's public interest governance model surprised me. They were adamant that this bank would have no public good representation in its governance structure. Why? The only reason I can come up with is yet again that Cabinet Secretaries simply sign bits of paper while a civil service elite works with the financial elite to gerrymander government in Scotland in the interests of the wealthy.

And we can easily tell if the Scottish Government gives a monkeys about any of this because it could reform the bank's governance tomorrow. There is no excuse for 'we didn't know' or 'there was nothing we could do' because neither has any basis in truth. They could have set up a bank insulated from the venal interests of the finance sector and they could have put in place a governance structure which would not have allowed any of the above.

It's not only that they didn't do it, it's that they were so adamant in their view that it shouldn't be done. And it's not like they have any excuse for not doing so now. To give one person with a conflict of interests control over this bank for basically a decade is unacceptable.

Unless the Scottish Government acts, this bank is going to be a running sore, generating justifiably negative headlines and further undermining public faith in Scotland's institutions. If that is what happens then the Scottish Government deserves it.

Or it could take the 'radical' step of building public-interest governance into a public-interest bank and then hold an inquiry into how all of this happened in the first place.