Public Banking in a Just Transition

Rory Hamilton

Last week I filled in for Craig at a workshop at the University of Glasgow on public banks, sustainable finance and a just transition. I was delighted to be on a panel alongside Miriam Brett of Future Economy Scotland and Francis Stuart of the STUC. Many thanks to Dr Franziska Paul for facilitating, and for joining me on the podcast this week as well. Here is an excerpt from my contribution to the panel.

Common Weal describe ourselves as a people-powered think and do tank; we are a governed by a Board drawn from a diverse range of activist circles and funded in most part by small regular donations from members of the public. We were founded in 2013/14 initially as a project of the Jimmy Reid Foundation, but the project took on a life of its own and we expanded our operations particularly during the 2014 Scottish independence referendum.

Since then, our work has been focused on creating a policy platform, building ideas for a better, more progressive and socially just Scotland. In 2019, we published the world’s first fully costed Green New Deal, our answer to tackling the climate crisis, and our blueprint for that vision of a socially just Scotland. A number of our biggest successes have been based around the policies in this Green New Deal package, called The Common Home Plan: the two most relevant to today’s workshop are the Scottish National Investment Bank, the policy plan for which was written in part by Miriam’s co-director at FES, Laurie MacFarlane, and became a reality under the Scottish Government in 2020, and the blueprint for a National Energy Company, which served as the basis for which the Welsh Government began steps to created a publicly-owned energy company in 2021.

I start with the Green New Deal because it is the most comprehensive plan which provides answers to questions about a just transition. Whilst much of it is about social engineering and changing our behaviours to live within the social foundation and our ecological ceiling, as Kate Raworth might put it, in reality this needs to be accompanied by substantial investment and major infrastructure works. Everything from replacing gas heating, to insulating buildings, to moving to all renewable electricity will require work on a Victorian scale.

Our plan will take 25 years to complete, and over that time period will cost around £170bn (2019 figures; we are working on an updated figure, but it is likely not miles away from £170bn). It sounds like a lot, but really, it’s a small price to pay for saving our planet and keeping our population safe. After all, it isn’t all that much more than Scotland’s share of the 2009 bank bail-out.

So how do we pay for it? 

Here is where our first policy comes in: the Scottish National Investment Bank. Our banking system is structurally unable to fund “patient capital”, i.e. low-return but potentially risky investments, like those which are needed to stimulate the transition to a low-carbon, sustainable economy.

The proposal we designed for SNIB was all about banking in the public interest, using patient capital to redress the inadequate flows of socially useful investment in Scotland and invest in large-scale infrastructure projects, support small and medium enterprises through long-term investment and encourage strategic innovation. It would 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 or being underserved by the private sector.

Rather than focusing on short-term shareholder returns as the commercial banks which dominate the UK banking sector do, SNIB would prioritise the public good. Furthermore, deliberative mechanisms such as citizens assemblies and participatory budgeting were mooted as means to support a democratic element, in addition to a tripartite management structure which would enable the views of the public and organisations in the public sector, such as the STUC, to play a substantial role in its development.

As I’m sure many of you will be aware, the UK is something on an outlier in not having a national investment bank, and in drafting our proposal we drew best practice from examples such as the Nordic Investment Bank, and the Kreditanstall fur Wiederaufbau (KfW) in Germany.

Following these, successful national investment banks tend to rely on a vibrant local, regional or municipal banking sector to distribute loans. This is particularly important in ensuring that capital is spread evenly throughout the country, or targeted particularly at regions that suffer from under-investment or deprivation.

As such the proposal included a call for a people’s banking network to underpin the SNIB. So in its delivery public banking in Scotland would be a two pronged approach – almost a bottom up network which laid the foundations and provided core banking services to people but with the public interest as priority, not profit maximisation; and secondly almost a top-down approach to financing parts of a Green New Deal plan which would boost the economy, jobs, and decarbonise the economy, all within a democratic framework, and all the while making public finance more cost effective by raising cheap capital to build assets which can be retained in public ownership, sold or leased to the private sector, not the other way round (as PPPs have us do at enormous cost).

So £170bn is what the Green New Deal would cost, and whilst investment of this kind is far larger than SNIB would be able to provide, SNIB would be able to utilise its borrowing and lending powers to support initiatives that the private sector would not invest in because of their slow realisation and low yield in comparison to quick hits, and SNIB could also bear the risk on investments which are needed to support a just transition. It also offers the opportunity to start work on aspects of a Green New Deal whilst Scotland is constrained by the devolution settlement and does not have the full borrowing powers of an independent state.

This money would be spent over the course of 25 years and if we do it right it will serve many, many generations of Scots to come – so we don’t need to pay for it all in one go. If we borrow to invest this money, we can then pay it off over 50 years because we’re only going to do this once. That would leave us with a bill of about £5 billion a year. And whilst the private sector may have to play a role – ideally not a leading one – this isn’t exactly the sort of appealing investment opportunity for shareholders as they wouldn’t see the immediate returns they would through other projects. Hence, SNIB is ideally placed to play a role in financing work that is underserved by the private sector, as well as in financing innovative creative solutions.

But when you spend that kind of money it creates an awful lot of jobs and causes an awful lot of prosperity to flow through the Scottish economy. The Common Home Plan will create at least 100,000 jobs and would increase the amount of tax collected in Scotland by at least £4 billion – which is most of the bill paid for. But that’s not all because it also earns public money in other ways. For example, under policy number two, the Common Home Plan would mean that Scotland’s energy system would be in public ownership so the public would make the profits. That alone is worth £2.5 billion every year. Not only does that mean the bill is paid for, it leaves billions of pounds of extra income to spend on public services.

Contrast that scenario to the one we are left with, where SNIB didn’t play a role. About 2 years ago, the Scottish Government auctioned its offshore wind assets, the ScotWind estate, and in doing so set a price ceiling on the auction, selling stakes to private companies and foreign state-owned energy companies, without any Scottish government equity stake. There were some promises made to invest in Scottish supply chains, but in early analysis it appears this hasn’t necessarily been kept. Thus, as we published in a recent report, vast sums of profit – not only in term of the sale, but also the revenue that will be generated – is being extracted from the Scottish economy.

Investment in a national energy company (there are multiple models that work in the devolution settlement) could have enabled greater ownership of energy, self-sufficient energy supplies and lower bills for the people, as well as a transition to clean renewable energy with a supply chain rooted in Scottish businesses, supporting workers in the process.

Common Weal has argued strongly that making finance work for the public good is key to a just transition, and a Green New Deal provides the template within which to do it. Not only this, but it creates whole new industries, because the mission-led remit of lending institutions like SNIB enable it to take risks where the private sector will not.

And at its heart is a people-led democratic vision of public banking, from what we view as everyday banking to public ownership of institutions. Policymaking in the round such as this creates more benefits than just those material ones I have laid out. It also highlights to ordinary people the links between what they view as ordinary, to what makes the economy work – it enhances our democratic knowledge and engagement.

I like to think that at Common Weal we are idealists; we make big ideas in the hope of building a better Scotland, and if we fall short, we’ll work to fix it. That has been the core of our work for a long time. Indeed, SNIB becoming a reality was probably the achievement we are proudest of, however it hasn’t played out in reality in the way we hoped, largely because the culture was based in old financial and banking cultures with commercial interests put first, and I could waste my time boring you with the web of who worked where, who was a director where, and which of those companies then received investment from SNIB, and does that meet the criteria of what public banking should be about. But instead of looking at where things went wrong, I believe it would be more fruitful to offer the positive vision, of how things can be better of where we can go right, and you can all quiz me on the interconnected web of Scotland’s financial class afterwards.