ECONOMY, ENERGY AND FAIR WORK COMMITTEE SCOTTISH NATIONAL INVESTMENT BANK BRITISH BUSINESS BANK

Background

1.1. The British Business Bank is a government owned economic development Bank. We operate across the United Kingdom: in Scotland, Wales, England and Northern Ireland.

1.2. This paper aims to provide background information on the reasons why, and how, the British Business Bank was established in its current form. We hope that this background briefing will therefore provide a wider context in which to support the Economy, Energy and Fair Work Committee‟s inquiry into the Bill to establish the Scottish National Investment Bank.

1.3. The British Business Bank takes a keen interest in the development of the Scottish National Investment Bank (SNIB). The British Business Bank continues to work constructively with the SNIB development team and other Scottish stakeholders, sharing our experience and insights from setting up the British Business Bank, as part of the process in establishing the SNIB.

2. About the British Business Bank

2.1. The British Business Bank is a government-owned economic development bank. We aim to make finance markets for smaller businesses work more effectively, allowing those businesses to prosper, grow and build UK economic activity. We have a single shareholder, the Secretary of State for Business, Energy and Industrial Strategy.

2.2. The Bank manages the UK Government‟s access to finance programmes for smaller businesses within a single commercially-minded institution, supporting Government initiatives such as the modern Industrial Strategy.

2.3. The Bank does not finance businesses directly, but instead provides funds and guarantees to private sector partners, enabling them to finance a greater number of smaller businesses (either through debt or equity). We use economic evidence to design programmes that address market failures affecting smaller businesses across the economy and aim to improve smaller businesses‟ awareness of the finance options available to them.

2.4. All national British Business Bank programmes are delivered through private intermediaries. Operating through intermediaries has the advantage that credit decisions are left to the private sector using their experience and processes; not having to set up extensive expensive distribution networks,

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and much higher leverage and so a higher Cost Benefit Ratio through private sector contributions.

2.5. The governance of the British Business Bank is also designed to prevent it from crowding out private sector markets, by giving it a clear public policy objective and remit whilst delivering programmes in a commercially minded way. This safeguard is formalised in its constitutional documents; the Articles of Association and the Framework Document and is reinforced by the application of Non-Crowding Out Measures which are required by the terms of the Bank‟s State aid approval. These measures ensure that the Bank will not have an adverse impact on the market by crowding out private investors.

2.6. The Bank is also very clear that once we believe we have stimulated activity in a particular part of the market, we should withdraw to allow the private sector to work. The litmus test of success is how the market functions for SMEs, not the size of the government intervention.

2.7. The Bank operates independently from government and its performance is measured against six core objectives1. The Bank has an overall mission - to make finance markets work better for smaller UK businesses and adheres to the following high-level principles:

 Not crowding out the private sector.  Only intervening, or continuing to intervene, where the Bank can identify a failure in the market.  Working through existing private sector channels and not directly with smaller businesses.

2.8. On 26 June 2014 then Business Secretary, Sir Vince Cable MP provided a written Ministerial Statement to Parliament that launched the British Business Bank‟s Strategic Plan and original Business Finance Guide2. The European Commission granted State Aid clearance to the Bank to operate in October 2014.

3. Operational independence

3.1. The British Business Bank operates as an independent institution at arm‟s length from government. The single shareholder sets the Bank‟s remit and objectives.

3.2. When setting up the British Business Bank, questions were asked on the governance structure and importantly on our operational independence status. The main case for setting up the British Business Bank outlined within

1 https://www.british-business-bank.co.uk/what-the-british-business-bank-does/ 2 https://www.british-business-bank.co.uk/vince-cable-launches-british-business-bank-strategic-plan/

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the original strategic business case from 2014 was that creating an operationally independent entity would:

 attract the right talent;  enable interventions to be managed as a portfolio in a commercially- minded way; and  achieve the best value for money across the overall suite of programmes implemented3.

3.3. The Bank was established as an arm‟s length body (ALB) but operates within a broad policy and financial framework set by Ministers. This allows programmes to be managed in an evidence-based, commercial manner that considers performance and economic conditions, tweaking and innovating where appropriate. In addition, operating independently from Government allows the Bank to develop strategy and capabilities with a longer-term view.

3.4. In deciding on an appropriate operating model the Bank looked at a range of other models, for example KfW in Germany and the SBA in the US. For reasons of speed of delivery, value for money and effectiveness, it was decided the best option was a delivery model that used existing market channels and stimulated new providers.

3.5. Some of the programmes managed by the Bank would be difficult to deliver from within a central government department such as the Department for Business Energy and Industrial Strategy because their delivery requires specialist expertise in both design and implementation.

4. Consolidation of existing schemes

4.1. In January 2014, the then House of Commons Business Innovation and Skills Select Committee published a report following their inquiry in to “improving access to finance for small and medium sized enterprises4”. One of the findings of that report was that management of existing access to finance schemes was ad-hoc and tended not to take a sufficient overview of issues across the SME finance market. The committee recommended that the British Business Bank should therefore manage the various existing schemes as a coherent programme.

4.2. The Breedon Review of 20125 also recommended the creation of a „one-stop- shop‟ under a single institution to ensure more effective delivery of the full range of existing government access to finance programmes. The establishment of such an entity in the British Business Bank was also

3 https://www.british-business-bank.co.uk/wp-content/uploads/2014/06/British-Business-Bank- Strategic-Plan.pdf 4 https://publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/775/775.pdf 5https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/32 230/12-668-boosting-finance-options-for-business.pdf

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intended to ensure that the objectives of each intervention lead to coherent outcomes as a whole6.

4.3. Additionally, by consolidating all schemes into one institution and removing scheme-specific budgets, overall funding for access to finance schemes could be used most efficiently, with transparent trade-offs being made by a single manager of all programmes.

5. Managing taxpayer resources

5.1. The 2014 House of Commons Business Innovation and Skills Select Committee report also read: “…government spends a considerable amount of taxpayer funded money promoting better access to finance for SMEs but [the] departments could not demonstrate that their schemes have successfully addressed the market failures they were designed to correct. Future schemes should be established with a view to what a successful impact on the market will look like and how they intend to evaluate success”.

5.2. To answer this finding, the Bank‟s fourth core objective is to manage taxpayers‟ money efficiently within a robust risk management framework. All our programmes, with the exception of the grant funding and operating costs element for The Start-Up Loans Company, count towards our financial return target. The Bank targets achieving a return on capital at least equivalent to the UK Government‟s medium-term cost of capital. The British Business Bank achieved a 4.7% return on capital employed in 2017/18, which was higher than the 4.1% generated in 2016/17 and our target for the year.

6. Identifying and reducing regional imbalances

6.1. British Business Bank sixth objective is to ”Identify and reduce regional imbalances in access to finance for smaller businesses”. Bank research has clearly demonstrated an imbalance across regions, most markedly in the provision of equity finance.

6.2. The Bank‟s regional funds supported by the European Regional Development Fund- the Northern Powerhouse Investment Fund, Midlands Engine Investment Fund and Cornwall & Isles of Scilly Investment Fund - are dedicated to addressing these regional imbalances in smaller business finance.

6.2.1. The £400m Northern Powerhouse Investment Fund was launched in February 2017. Based in Sheffield, the Northern Powerhouse Investment Fund works with ten Local Enterprise Partnerships (LEPs), combined authorities and Growth Hubs, as well as local accountants, fund

6https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/32 230/12-668-boosting-finance-options-for-business.pdf

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managers and banks, to provide a mixture of debt and equity capital to northern-based SMEs at all stages of their development.

6.2.2. The official launch of the British Business Bank‟s £250m Midlands Engine Investment Fund (MEIF) took place on 22 February, 2018, in Birmingham. The then Secretary of State, Sajid Javid, announced the launch of three funds open for investment, providing up to £100m of equity funding. MEIF, announced at Budget 2016 (March) and confirmed at Autumn Statement 2016 (November), aims to boost the region‟s economy and support the growth ambitions of its 780,000 smaller businesses.

6.2.3. The British Business Bank launched its third regional funding product in summer 2018, working closely with the Cornwall and Isles of Scilly Local Enterprise Partnership. The Cornwall & Isles of Scilly Investment Fund (CIOSIF), provides commercially focused finance from £25,000 up to £2m through a Debt and Equity Fund.

6.3. With a focus on demand side imbalances, the Bank has also established a new UK Network (UKN). This team is spread across every region and nation of the UK and is engaging with business finance stakeholders in each of the English regions and devolved nations, in order to increase small businesses‟ awareness and understanding of the finance options best suited to their needs.

6.4. The UKN‟s objective is to develop a deep understanding of the business finance ecosystems in all parts of the UK sharing where appropriate best practiceso that, ultimately, the British Business Bank can improve its support to SMEs wherever they are located. It will add value to the business finance ecosystems across the UK, by enhancing collaboration and co-ordination within and across each English region and devolved nations.

7. Centre of expertise

7.1. Following a shareholder review in 2018, the Bank was given a new objective to be the centre of expertise on smaller business finance in the UK, providing advice and support to Government.

7.2. Indeed, the intention when setting up the Bank was that Bank expertise would be a source of information and guidance for central government on how the financial environment for SMEs is developing and that this information should inform the policy development process7. To this end, the Bank publishes an annual comprehensive and impartial assessment of

7https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/42 0525/bis-15-278-government-response-to-bis-committee-report-on-government-support-for- business.pdf

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finance markets for small businesses in the UK “Small Business Finance Markets” report8 [add in Equity Tracker]. Our new objective underscores our intention to build on this work to increasingly convene and shape debate on SME finance markets within Government and outside it.

8. Stimulating demand

8.1. The British Business Bank also works to promote the provision of better information in the market to increase smaller businesses‟ understanding of the finance options available to them.

8.1.1. When businesses first identify a need for finance, the most common first port of call is their main bank.9 8.1.2. Around half of small businesses tend to consider just one provider when seeking finance. 8.1.3. Over 70% of smaller businesses would rather forgo growth than use external finance.10 8.1.4. 49% of SMEs are permanent non-borrowers meaning that they are not and will not seek external finance.11 8.1.5. Over half of smaller businesses said they did not know anything about equity finance.12

8.2. The new Demand Development Unit (DDU) has been created specifically to develop the Bank‟s positioning and relationship with smaller businesses across the UK - i.e. the ‟demand‟ side of the Bank‟s business - and help it deliver against its six objectives more effectively. The DDU also aims to raise the Bank‟s profile amongst smaller businesses, and especially those seeking finance.

8.3. The DDU is focused on the following Bank objectives:

8.3.1. Encouraging and enabling SMEs to seek the finance best suited to their needs (Objective 3) 8.3.2. Promoting the Bank as the Government‟s Centre of Expertise for smaller business finance in the UK (Objective 5) 8.3.3. Identifying and helping to reduce imbalances in access to finance for smaller businesses across the UK (Objective 6).

9. Bank engagement in Scotland

8 https://www.british-business-bank.co.uk/wp-content/uploads/2019/02/British_Business_Bank_Small- Business-Finance-Report-2019_v3.pdf 9 Small Business Finance Markets report 18/19 10Small Business Finance Markets report 18/19

11 BVA BDRC, SME Finance Monitor, Q2 2018 12 Small Business Finance Markets report 18/19

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9.1. The Bank continues to take a keen interest in the development of the Scottish National Investment Bank (SNIB). We believe that the approach to its design should be one of working alongside British Business Bank activity in Scotland.

9.2. The British Business Bank and BEIS officials will therefore continue to work constructively with the SNIB development team and other Scottish stakeholders, sharing our experience and insights from setting up the British Business Bank.

9.3. The Bank has existing relationships with the Devolved Administrations and works collaboratively to ensure that its UK-wide access to finance activities are effective.

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