 The 16th meeting of Energy Economy and Fair Work' committee for 2019. Directors without guilty association, members of committee, Temny Halcro Johnstone, but is��요 geitra wкий 차fdereth y Gymraeg, the feature is a video conference on Scottish National investment bank bill with Professor Mariana Mazucato, who is director of the UCL Institute for Innovation and Public Purpose at the University College of London and is also a member of the Scottish Government's Council of Economic Advisers. She is joined by Laurie McFarland, who is the head of patient finance at the UCL Institute at the University College of London. Welcome to both of you this morning by video link. Perhaps I could start with a question to you, Professor Mazucato, and that is, you of course have been involved in the Scottish Government Council, the plan advisory group. Are you satisfied that all 21 recommendations of the implementation plan have been adequately reflected in the bill that this committee is considering? I'm going to be extremely frank. I'm not as familiar with the bill as it probably should be, but I'm quite satisfied in the process that has been in place. We were just in Scotland and we did a master class with the bank. We spoke to them, especially about some of the issues that arise when one has a mission-oriented public bank versus just a normal public bank. There's many public banks in the world and many of them are part of the problem, not the solution. They end up just being handout machines. So the question is, how are these missions set? How can you also really use the full power of government instruments from procurement to grants to be part of the fueling of these multiple solutions to actually achieve a mission? But Scotland is a place that is very well set to have a mission-oriented bank because you actually have certain things in place like the Scottish National Performance Framework, which can be very important for devising the metrics to actually know over a period of time whether the bank is actually doing its job. You need metrics that are about additionality, making sure that it's making things happen that otherwise would not have happened, as opposed to just taking the place of the private sector when it's not doing its job. But maybe, Laurie, do you want to say something about whether you think the bill itself reflects? Yeah, I mean, I think the only thing I would say on that is that obviously I think the implementation plan recommendations covered a lot of different areas, including not just in terms of setting up an institution, but also what we'll be doing once it is set up and then, therefore, naturally, not everything that was in the implementation plan is necessarily something that you would expect to see in a bill establishing the institution necessarily. Submissions to this committee. On it, so I'll turn to Andy Wightman now who has some questions about some of the points raised in those submissions. Thank you very much and welcome. Laurie, as you write to say, the implementation plan is about the establishment and development of the bank, but we are considering the bill and one of the things that's put into statute are the objects of the bank in section 2. We've had people say that those are rather too vague. For example, a main object is giving financial assistance to commercial activities for the purpose of promoting or sustaining economic development or employment in Scotland. I'm just wondering whether you think that that should be the main objective of the bank, particularly referenced to the word commercial. I'm aware of Professor Matsukatu's work in this area where a lot of investment by the state has not been into commercial things, but things that later became commercial. Have you got any comments on the bank's objects as set out in the bill? I'll respond and then you can add to it. When we came up to Scotland a couple months ago to talk about the details of how the bank should actually be set up, that came up and we recommended that it be worded in the way that it's actually worded in our nice little red book, which is to provide patient finance to those organisations in the public, private and third sector, so in civil society, that are willing to engage with the government missions. I think I would stand behind that. I think it really narrows the scope to use the word commercial, both for the reasons that you mentioned, because commercial is also a dynamic. The commercial dynamic is that you might have the process of investing in one area, sometimes turns up in another area. The classic example, by the way, is Viagra, which was not meant to do what it's currently doing. It was actually for HART that is a typical result from innovation. The search for one thing leads to the discovery of something else, but that's more an issue of serendipity. But the other issue is in terms of the organisational context, there's really no reason to say that this is just for private lending for the private sector. Of course, it should fuel investment in the private sector, and this is a whole issue of crowding in, both in the United Kingdom in general. There's pretty low private investment, so having these ambitious forms of patient long-term committed admission oriented finance historically, when it's done by strategically, ends up decreasing the expectations of the business sector of where the future opportunities lie. I think that's the key role of this bank, which is to provide more direct, not indirect finance, in mission oriented areas, which actively create a new landscape that's been an increased business investment afterwards because they actually desire, you know, it gains called animal spirits are created in that process. Okay, thank you very much indeed. You mentioned your paper, which I have here. I wasn't clear. I mean, I'm clear that what you're saying is you think that the objects of the bank should be focused on the mission. That's great. I'm not clear whether in this document you actually give some text on what page it is, but I'm just wondering, I know you're a busy person, but if you have any thoughts about how the objects could be framed in general terms, that might improve in the bill, the committee I'm sure would be very keen to hear that. Well, so I'm not sure if you're asking where the missions are set or the degree to which the loans then go only to private or other forms of organizations. I think there's, those are two separate questions. So what we say in the document is that, you know, the challenges which are much broader than missions are really set by government, then you need something like a mission board or mission agencies. This is exactly what we're currently working with Greg Clark here in Westminster. What is the organizational form where the missions themselves get set? Personally, I don't think that should happen inside the bank. That should really be across the partimental area. So for example, if you have a clean growth mission, sorry, challenge, turning that into a mission that has to do with refurbishing both new and old buildings, but really thinking about also design and sustainable cities, that requires this cross-sectoral, cross-actor, cross-disciplinary investment. And the role of the bank is to fuel that patient finance towards those organizations that are willing to engage in that mission. That's why we say you pick the willing, you don't pick the winners. Okay, thank you. Jackie Baillie. Good morning to both of you. The policy memorandum accompanying the bill says quite clearly that the bank will only lend to the private sector, which is something that you've already touched on. My understanding is that that's because it's solely capitalized initially by financial transaction money, which can only be used for private businesses up until 2021. Notwithstanding that, given that government money will come thereafter, do you think that simply limiting it to the private sector is just too narrow and restrictive? Would you include, for example, social enterprises, co-operatives in the third sector? My answer is definitely yes. Now, hopefully I'm not creating problems there, but Laurie. Yeah, just to clarify that, because we did raise this issue again when we were up never. I understand that maybe we're not remembering correctly, but I thought we got clarification, which was that what that actually meant was everything apart from the public sectors that it did actually include social enterprises and charities, etc. But maybe that, you know, don't coon us completely on that. That was certainly my understanding of the response. So in the panel that we had, there were some questions about that in the audience, and that was the reply that was given by the bank. And we would encourage that. I mean, it does make sense that the public sector doesn't lend to the public sector. That can just be done through a transfer between departments. But to be using the bank to provide patient long-term committed, mission-oriented finance to organizations in both the private and social enterprise and other types of third sector institutions is absolutely important given that today in the modern age, many of the problems that are out there, if you think of both the energy challenge and the health challenge globally, are in fact being invested in by, you know, philanthropies, by public institutions, by private institutions, by civil society organizations. So that's what you want to be doing. You want to be fueling these multiple solutions towards solving problems across different actors. We call it a cross-sectoral, cross-disciplinary, cross-actor investment process. We would encourage you to keep provoking on that. We can do that. Good morning. I appreciate your time this morning. I'd like to follow up on the discussion of the bank's top-level mission statements. Mission statements are obviously in their objectives at the top level, but how can we ensure that there is sufficient demand in the economy to access the finance to be provided by the bank? We've heard from other witnesses that, on the demand side of the equation, there is a question mark over whether there is enough demand in the economy for long-term patient capital. I'd like to get your views on how the bank can stimulate the demand side of the equation. So that is a fundamental question you're asking, and it's a really smart one, if I can say so. In academia, researchers often don't understand that. We often pretend that there's a financing gap. You might have heard that word, financing gap, where sometimes we even talk about a credit crunch. That's false. There's plenty of finance out there. There's just often two other problems. There's not enough quality finance, so patient long-term finance, and that's what the bank will provide, but there's often not enough demand for the finance. You definitely see this in the small-medium enterprise space. There's not enough small-medium enterprises that even want to innovate that want to grow. There's lots of status quo behavior. Coming back to my point before about crowding in, if the bank, but not alone, the bank alone will not be able to do anything, this has to be seen as an instrument across what we would call investment-led growth strategies. We shouldn't forget that the UK is a part of the world that continues to grow through consumption-led growth, not investment-led growth, so that private debt to disposable income is back at record levels to what it was just before the crisis. So transforming a consumption-led to an investment-led growth strategy, the question is, is there that desire to invest, or is there a demand-side problem, as you're saying, and if the bank is structured in the way that we recommend it to be, which is not just a handout machine, just handing out money to whichever sector, business, or any kind of organization that asks for it, but it's much more targeted towards solving what we call societal challenges framed in this mission-oriented way, if it does it an ambitious way, then evidence shows us historically that this crowds in private finance, right, because this has been the problem in many countries that when you use indirect incentives like tax incentives or guarantees and subsidies, that assumes the private sector already wants to invest. And if they don't want to invest, all that does is increase their profits, and there's no profits problem, there's an investment problem. So by increasing the imagination and the perception of the business community that there's an exciting new future mobility, clean growth, aging society kind of mission that they can get involved in, and there will be long-term profits in the area, but they have sort of an aid to get in that space through this patient finance instrument that ideally, if structured in ways that we advise, will crowd in that form of business investment. And if we could maybe just add to that quickly, I think this is why the bank has the potential to be very different to other instruments that have been developed in Scotland over the years. So for example, I think it was the growth scheme, the Scottish growth scheme, which was effectively a kind of XME financing instrument that was just there, and it didn't provide any directionality or that kind of, you know, that directionality that mission-oriented bank will do. And as I understand it, it was struggle to get take-up of it, because, you know, there was just an instrument that was saying, well, yes, you can come, you can get this kind of subsidised credit. Whereas the whole point of a mission-oriented bank is to provide, to catalyse those animal spirits in the way that Marianas was describing, in order to get to work with those out there who are willing and able and excited to invest in the key areas of the future, rather than just sitting back and saying, well, there's this instrument coming to you. But you know, this should be seen in association with the portfolio of different instruments, in which the bank is just one. So we would really recommend that in order to have the full effect of this crowding-end process that you're basically asking about, that we also really think through changes in procurement policy works and other such instruments, which currently actually cycle innovation, don't nurture that kind of bottom-up solutions towards solving, you know, things that government actually needs, whether it's building hospitals or schools. Thank you very much for that. One supplemental question. In some respects, the success of the bank will therefore depend on the interaction with other agencies to which we'll help in stimulating that demand, and we'll also have to be part of a restructuring of the enterprise landscape in Scotland by the sounds of it. Absolutely. So we've been talking closely even with your organisation called SIFTECH, for example, which is very interesting, because it's all about thinking how the welfare state itself, how it's structured, can be a funnel through which innovation happens. Currently, there's this myth that you have the kind of Silicon Valley parts of a country, you know, whether it's actually Silicon Valley or Silicon Roundabout or whatever any country calls it, and that wealth and value that's created gets kind of handed out to citizens through whatever farm, whether it's a welfare state through a redistribution of taxation or just kind of, again, a handout to the citizens. The idea is how can you also make Scotland a really interesting laboratory for reimagining healthcare, thinking about, you know, against a sustainable city, but also regions, which then becomes a funnel through which innovation happens. So you don't have this dichotomy of the welfare state and innovation, you really kind of bring them together. And I think, for my perception, Scotland is having really interesting conversations about that, and I would kind of scale up the sound of those conversations that they become one of the places also where these missions are both set, but also managed. Thank you. Donald. Thank you so much. Good morning. The bank is going to be funded by £200 million a year investment by the Scottish Government. How does that level of capitalisation compare with other development banks in the UK, like the development bank of Wales or the British Banking, a business bank? The really important issue, I think, is not so much right now the amount of money. It's the level of flexibility with it. So the £2 billion, which has actually been allocated in terms of an initial capitalisation, is absolutely central that they have the so-called dispensation effect where you can really turn it over year by year. So you've got to do long-term planning. The whole point of having a patient long-term bank is that it can actually plan in a long-term way. If every year you're fearful that the unspent funds disappear, go back to the Treasury, it could be impossible for the bank to do its job. It's actually a really critical issue, and that, I would say, matters more than how much of the actual amount compared to another bank, but Laurie, do you want to... Yeah, I mean, just on the capitalisation amount, so over the 200 million-year building up to £2 billion, in terms of comparatively across the other institutions you mentioned in the UK, but also internationally, in terms of the capitalisation itself is very, I think, pretty reasonable if you look at the £2 billion total relative to GDP versus other European institutions, which is analysis that we did in one of our papers. It is broadly similar in terms of scale. What is different, of course, in other places is the ability, therefore, to leverage that capital by borrowing an issue of bonds, et cetera, and that's where the difference might lie at least in the initial phase. Given that level of investment of £2 billion over the 10 years, are you satisfied that we will be able to manage and get the desired impact that we require? Initially, should the bank have a narrow focus until it grows to a reasonable size? We've had various comments about there should only be one mission statement, so there should be a whole range of mission statements. What should the focus be at the beginning to get the desired impact on the economy? One of the important aspects of the missions, as we frame them, and how we're currently working, for example, hearing Westminster with the notion of a mission-oriented industrial strategy, is that the framing of the mission, again, matters more than how many missions do you have. Think of a cancer mission if it's just about the health sector, as opposed to bringing in all the preventative areas to be much more narrow. If you had even one mission in Scotland or one big challenge around, say, clean growth, and then you thought through a mission, which, again, we can't, you know, that's not our role to device a mission for you, but some sort of process across society where you formulate a mission that would require lots of different sectors and different types of actors and multiple projects being funded bottom up, that will have a much bigger effect on the economy than if you have maybe three narrow missions. So I would say, as long as it's really a cross-sectoral mission, then a mission framing, the first instance, may be really focusing on whether it's future mobility or clean growth, or, again, something around health, but the framing of it really involves lots of different sectors. That's what I would advise. And so taking that first, almost experiment of a first mission with the bank really seriously, you know, when we use the word moonshot, going to the moon and back again in a generation, which, of course, is the 50th year that's being celebrated in this world this year, required like 12 different sectors. It wasn't just aeronautics. It was also investments in nutrition, investments in textiles, materials. You couldn't eat a hamburger and wear jeans and a t-shirt up in the moon. And so that's what we mean. And also there was 300 different projects that got us there, which most failed. And so that willingness to take risks and to experiment is really important. And so the way that the bank, again, understands risk, failure, but also doesn't just socialize risks, but also socializes rewards, those issues are really, really key to get right. So I would agree that maybe formulating an initial mission that's really cross-sectoral to work out some of these obligations would make sense. So learning by doing. Yeah, and maybe just one thing to add to that if possible. Obviously the benefits of an institution like this is not just about the volume of investment, which is also important on the rate of investment. It's about the direction of investment. I think the key thing for the first for the success of the bank is to make sure that it is doing things that wouldn't otherwise happen. I think there is a risk that after the initial phases, the bank is set up and think, so we just want some quick wins. Let's just shovel money into this thing here that was probably going to happen anyway. And it's not generating that kind of additionality, which is really the kind of point of the bank. So I think that you really want to focus on making sure that that money that is there would be much better if there was more. It's always better if there was more. Wouldn't the money that is there that is making sure that it's used in a way which is actually generating that additionality isn't just kind of giving money to things that would have happened anyway if we were honest about it. And many different policies do that. Many failed policies just basically are taking the place of something that would have happened. The example I often give is the patent box policy, which was lobbied for by the pharmaceutical industry reduces government revenue, but doesn't actually create a net increase in the investment of the pharmaceutical industry. It just raises their profits. SME financing, it might be fine for full-bloric reasons, but there's very little evidence that it increases net job creation unless you really direct that finance to the kind of 6% of SMEs that we've been trying to innovate and invest more in new areas. So how you devise the instruments really really matters? Okay, thanks. Thank you. Colin Beattie. Thank you, convener. Professor, the mission statement states that missions must be widely perceived to be legitimate and of high societal importance. Obviously, this is to ensure that they survive the political changes that inevitably happened from time to time. How should the Scottish Government and the bank ensure that the missions are legitimate and of high societal importance? Okay. Again, that's a really important question because the moonshot was very top-down. It might have been inspirational. It did all these great things. Everything in our smart products basically is a spillover from that era, but it was top-down. It was the Kennedy machine, whereas one thing that we often highlighted is that recently in the German situation, the end of the Bende mission that they have, which is really cross-sectoral. It's led to the steel industry transforming itself through repurposed reuse, recycled lowering, its material content. That would never have happened without the green movement, which for 30 years fought for bringing sustainability to the fore of the political discourse. So what we are currently, again, doing in our missions work across the world, including with the UN, is trying to think through does the public sector have the capability, the capacity, the training that I would call empathy 101, which is how do you actually engage with movements? How do you listen? How do you not fear conflict? How do you create safe spaces for debate, which I think is almost the definition of a public space, a place where you're safe to contest? So we have, for example, Charlie Ledbetter in the Institute write paper for us called Movements Behind Missions. And so if you think about the different movements out there around social care, around, of course, the climate crisis, bringing those voices around the table in a genuine, not tokenistic way in order for these missions to be set with different voices is really important. And this would include trade unions. Globally, trade unions, labour unions are thinking about things like what's called the just transition. And it's all about, you know, if you move from a fossil fuel based economy to one based on clean energy, widely understood to be not just about energy, but again, how we think about production, distribution and consumption, some workers will be left behind. Now that way of thinking, even though I completely support it, it's kind of too late. Those trade unions should be at the table in the first place when we think about the green transition. There should be public actors, private actors, social enterprises that you were talking about before, civil society organisations at the table thinking about the missions. And that's much easier said than done. But I would argue that that's really important in order to also bring resilience, not just legitimacy, resilience to these missions so they're not easily wiped away when a new minister comes on board and wants his or her pet project to be mission X. Clearly you're talking about finding a means to engage civic society in prioritising these matters that are of high societal importance. Is the proposed advisory group the right vehicle for that? Would it be effective in that? Can it be effective in that? Well, who's on the advisory group would really matter because you can't bring hundreds of people around the table, but making sure that those who are around the table are genuinely representing different voices in a non-idiosyncratic way. It can't be, oh, let's bring together Siemens and then a pharmaceutical company and a digital, kind of high tech, cool little SNE and some public and civil society actors here and there. They should ideally be representing different types of voices each. So if you had a care omission, making sure you had social care workers and nurses at the table would be obvious to me. But again, this is something I think that really has to be decided by your political process. I don't know, what do you think about the advisory group? Yeah, the other thing is just to make sure that when the advisory group is set up that it is not seen to just be tokenistic in the sense that it's there to provide that kind of cover of this without having any real meaningful kind of agency to shape things. So I think that certainly the rationale for the advisory group in the implementation plan I think was the right one was about how do you bring in this wider voices into the process of setting the mission, but I think the devil will be in the detail of how that actually operates and functions as to whether it's something that is meaningful and is not seen to be something tokenistic. I think it's important to consider that people feel really not just left behind economically, there's plenty of statistics on that, but in the political process, you know, that it's this notion of the elite, whether it's academic elite or business elite or government elite, this could be an opportunity for rethinking how we run democracies and again Scotland being at the fore of experimenting in that process. It's hard, by the way, there's no blueprint for this, but you know, that should be seen as something quite exciting and being willing to learn from your mistakes. You might mess up as long as you have a process of learning by doing and what are the milestones where you stopped. One of the most mission-oriented agencies in the history of capitalism was, you know, the kind of DARPA type agency in the US. It wasn't only good at funding innovation, it was also very good at knowing when to turn the tap off, knowing when to turn the tap off. Cato, I'm conscious of time, so a number of members of the committee would like to ask questions as well, so apologies for interrupting you at that point on that example, but I'd just like to try and get these other questions in if we may. First of all, Tom Mason. Thank you, Professor. You recommend that the investment should be done in an ethical way. What do you mean by that? I mentioned what's nice about your country is that you have Scotland's national performance framework, so making sure that you have ways to translate this framework into targets through which you would measure this concept of additionality, right? We talked about additionality, making sure things happen that wouldn't happened anyway. Well, those things might be bad things. Just making things happen in and of itself is not a good event. Trump's wall is additionality. It wasn't happening before he came along, so making sure that these new things that are being simulated by the bank's activity which present private finance are also meeting the goals that the country has set itself through the national performance framework, which you might remember looks very much like the sustainable development goals color chart, but turns it into a macroeconomic target setting. The more you can work on this to make it real, the better. I would say ethical in that sense. Otherwise, ethical is up to someone to think that we have different ethics in different walls, but having concrete metrics through which you judge whether you're achieving your objectives around inclusive growth, sustainable growth, which have concrete targets, that's what we mean. Thank you. We'll come to John Mason now. Thanks, convener. Following on from the point that you just made about monitoring and monitoring frameworks, my understanding is that you're suggesting that the monitoring frameworks should be dynamic and not too fixed. Is it possible for the public sector to do that, because the public sector likes measuring things that are easy to measure? Yes. One of the reasons why I set up this institute at UCL, Institute for Innovation and Public Purpose, is precisely because I personally do not think that the public sector globally has these capabilities. If you look at how the Treasury, you know, which is used to evaluate public investments, it continues to be very much determined by net present value and cost-benefit type calculations, which really would have stopped any mission from day one. You know, the moonshot would never have happened had they done a cost-benefit analysis of it, but that doesn't mean you have no metrics. So having more dynamic efficiency versus allocate to the efficiency kind of metrics is something we're working very closely with the Treasury with here. We have a workshop tomorrow, coincidentally, but also when I said knowing that to turn the tap off, you want to be long-term, but you might realize, you know, halfway through that it's just not working. You're not getting anywhere. You should know how to pivot, how to question your, you know, behavior and why it is such things are succeeding, and it might have to be, you know, flexible, adaptable. And those are skills, though. If you go to any business school, managers are trained to be flexible, adaptable to think out of the box. We really need to think through the curriculum, the training for civil servants to think in a mission-oriented way, to act. Thank you. And finally, Angela Constance. Thank you, convener. Good morning, Professor. I wondered if you had any views about the bank's renumeration policy. The committee has received evidence. Some people are arguing that terms and conditions should be on a par with the public sector civil service. Other people are arguing that the renumeration packages should be on a par with the Edinburgh financial services sector. So, I just wondered what your thoughts were. So, I think the answer is somewhere in the middle, but again, there's no blueprint for this, but, you know, one of, so I've been working on this concept of missions for more than a decade, and one of the things I used to write about was that there's this concept of mission mystique, an honour to work for a mission-oriented agency. When Obama had his post-crisis fiscal stimulus of 800 billion, he said he was going to have a mission to use that to really create a green economy, and he was able to bring in a Nobel Prize-winning physicist, Steve Choo, to direct the Department of Energy, and he thought it was an honour to do that. He left Stanford University. It wasn't to create a carbon tax or to simply come in and to fix the market failure. It was to help the government to kind of really have a transition. So, we need to remember that because that's, if you really are a mission-oriented bank, I believe you will attract people who, you know, want to make a difference in the world. Having said that, if you pay them peanuts, you won't. So, I don't think you need to match the, what I find often, absurd salaries in the banking sector, but I also don't think you're going to attract, you know, people who really have that investment and sectoral and scientific expertise if you're underpaying them, and unfortunately, many public sector workers, I would argue, are underpaid, but you don't have to go into that. That would be a whole other conversation, but I guess the answer is you don't have to match the bankers' salaries, but you do then have to make sure that the remit of the bank is really ambitious. It's going to be an honour to work inside that bank, and historically, that has served quite well in bringing in high-level expertise to government organisations. What I was talking about before is when you have a curriculum, a training of public servants, which is wed to this idea that you're just there to fix a market failure, well, would you rather go take risks and be a creative actor creating value or just facilitating enabling and fixing market failures? You probably choose the first, so we need to reframe what the public sector is for to really attract some of the top, you know, talent that we have in our societies. Okay, thank you. Sorry, you're wanting perhaps to make one last point. No, I was just saying that the bank is a wonderful experiment in Scotland precisely to see what it's like to transform our imagination of what the public sector is for. All right. Well, thank you very much, Professor Mazzacato and Laurie McFarlane. We'll conclude this session there. Thank you. Two on our agenda is a decision by the committee to take items 3, 4, 5 and 6 in private. Are we agreed to do so? Yes. Thank you. In that case, I will suspend the meeting and move to private session.