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Scottish National Investment Bank looks hardwired for failure – here's why – The Conversation UK

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Scotland is a step closer to launching the UK’s first national investment bank after the Scottish parliament passed plans to create this new source of funding for Scottish businesses. The bank, due to open in late 2020, is the SNP administration’s flagship programme to stimulate the Scottish economy to help address its chronic underperformance.

Bank of Nicola.
Twocoms

The Scottish government has earmarked £2 billion of capital for the bank’s first ten years – considerable for a nation the size of Scotland. It has also invested significant political capital, with the first minister, Nicola Sturgeon, calling the bank a “truly transformative” project.

State-owned investment banks offer grants, soft loans, credit guarantees and co-investments to companies to drive economic development. Examples include Germany’s KfW bank, the Nordic Investment Bank and Italy’s Cassa Depositi e Prestiti. In this tradition, the Scottish National Investment Bank’s main role will be to provide “innovative, high-growth Scottish firms” with long-term patient finance.

Mission impossible?

The bank will offer funding in pursuit of certain “missions”. It is not entirely clear what these will be, though an advisory report listed three priorities: mitigating climate change, the ageing population and promoting economic inclusion. There has also been reference to the UN Sustainable Development Goals and the Scottish government’s 81 national performance indicators, so those could play a part, too.

The idea of a mission-oriented industrial policy dates back years. The American Apollo space programme, which made huge public funding available, is often cited as one of the earliest examples. The approach has become very fashionable lately, possibly driven by the green agenda and the idea of using enterprise funding to back science and tech companies that have IP that might help tackle climate change.

‘Andy did you hear about this one?’
Lorna Roberts

The evangelist for this approach is the economist Mariana Mazzucato, a professor at University College London, who has been advising everyone from the UK government to the European Investment Bank. She was commissioned by the Scottish government to develop a blueprint for its bank.

It is a very “fuzzy” idea that will appeal to politicians and policymakers, but my research has identified various potential problems in relation to state-owned banks. The Scottish government has said the bank will play a strong role in helping to commercialise university research. This is squarely in line with the whole missions-oriented ethos and sounds laudable, but funding for commercialising academic research is notoriously ineffective at producing new and growing firms – as successive Scottish policy intiatives amply testify.

There are also plenty of instruments to fund university spin-outs in Scotland already. This helps explain why university research and development expenditure across the UK is in the OECD’s top quartile, while corporate R&D is fairly dismal. Better to try to improve the corporate variety to address weak productivity among Scotland’s smaller businesses (SMEs).

The bank also looks likely to prioritise deals where it matches an investment in a company from an angel investor and they both take a shareholding in exchange. This is the traditional funding route for tech companies, so again it’s a good fit for the missions ethos. Yet Scotland does this already through economic development agency Scottish Enterprise. It excludes lots of small businesses in other sectors who want loans and not equity deals – in other words, most SMEs.

I also wonder how viable the bank’s missions are in practice. For example, economic inclusion could be incompatible with tackling the UK’s notorious productivity problem to help economic growth. Suppose you had the opportunity to improve productivity by investing in automation. One recent US study estimated that half of all jobs could be lost to automation in the next decade, so which priority wins out?

The vagueness of the missions is another worry. If you don’t delineate them clearly at the outset, mission drift is highly likely. And since the SNP administration has tended to be quite interventionist, myself and others see a real risk that the bank will become a strategic vehicle for propping up lame ducks. The government has spent more than £40 million since buying Prestwick airport in the west of Scotland, for example.

A different way forward

I have sketched out an alternative approach to avoid some of these pitfalls. Realistically, most Scottish companies are not Silicon Valley-style gazelles waiting to be transformed with publicly matched equity funding. They are solid small businesses in sectors such as food and drink, engineering, textiles and oil and gas. Their productivity could often be greatly improved with relatively small bank loans to modernise production lines or to buy new factory equipment and train staff to use it properly.

Old tech with just a touch of water.
Callum Rafferty

So instead of just focusing on high-tech start-ups, the bank should seek established firms with growth potential. It should help them identify ways to become more innovative and productive. This is sometimes known as “diffusion-orientation” in that it focuses on diffusing good practice as widely as possible – similar to how GTS Institutes in Denmark operates, for instance.

It makes more sense to invest smaller amounts of capital in lots of companies than larger amounts into only a few. Plus, while most development agencies tend to offer “blank cheques” to firms, the new bank could attach “competitiveness clauses” to funding. These would require companies to meet innovation or productivity targets to unlock extra money – similar to retail banking covenants that specify what a loan should be spent on.

Other radical ideas the bank should consider include a bespoke new venture capital fund for scale-ups, similar to the world-famous Yozma Fund in Israel. Set up to address the lack of big-ticket venture capital funding available in Israel, Yozma brings in match funding from other parts of the world.

It is easy to be drawn towards fashionable academic concepts, but it’s more important to shape an economic development policy customised for the economy in question. A mission-oriented approach may work well in some areas, such as London or the Cambridge Norwich Tech Corridor in the east of England, but one size definitely doesn’t fit all. And if this is true in Scotland, it may well be true in many other parts of the world, too.

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Huawei-built data centre a ‘failed investment,’ Papua New Guinea says – The Globe and Mail

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A surveillance camera is seen in front of a Huawei logo in Belgrade, Serbia on Aug. 11, 2020.

MARKO DJURICA/Reuters

A Huawei-built data centre in Papua New Guinea is a “failed investment,” that country’s government says, after a technical review found serious security vulnerabilities in what was designed to be an important piece of the country’s digital infrastructure.

Dated encryption technology and the placement of some devices in the centre meant that “data flows could be easily intercepted,” according to a review commissioned by Papua New Guinea’s National Cyber Security Centre and obtained by The Globe and Mail. The security centre receives funding from Australia’s Department of Foreign Affairs and Trade. Canberra was given a copy of the report, whose findings were first reported by the Australian Financial Review.

The report details numerous technical deficiencies in the National Data Centre, including firewall devices “with basic settings for defence”; the use of 3DES, a 1995-era encryption standard “considered openly broken since 2016”; and the installation of core switches outside firewalls, which means “remote access would not be detected.” The physical configuration of the data centre was different from the schematics for its design, and the differences made it more vulnerable to hacking.

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The data centre was financed by a US$53-million loan from the Export-Import Bank of China and designed by engineers from Huawei Technologies Co. Ltd. Its deficiencies have renewed questions about the trustworthiness of Huawei technology at a time when Ottawa and other Western capitals are mulling whether to allow equipment from the Chinese company in 5G networks.

“To some extent, we can conclude that it truly is a failed investment,” Timothy Masiu, Papua New Guinea’s Minister for Information and Communication Technology, said in a statement on Thursday. He suggested looking instead to cloud storage from companies like Amazon.comInc. and Microsoft Corp., before cautioning against geopolitical point-scoring over digital infrastructure. “Our national issues are our business, and must not be used to fit any other narrative,” he said.

Outside Papua New Guinea, however, the problems with the data centre add to concerns about the security of technology made by a company headquartered in China, where the law compels organizations and citizens to “support, assist and co-operate” with the country’s intelligence apparatus.

The United States, the U.K. and Australia have to varying degrees banned Huawei’s 5G technology.

Last year, the UK’s Huawei Cyber Security Evaluation Centre oversight board faulted Huawei more broadly for problems with “basic engineering competence and cyber security hygiene that give rise to vulnerabilities that are capable of being exploited by a range of actors.” In April, 2019, Ian Levy, the technical director of the National Cyber Security Centre in the U.K., told the BBC that “the security in Huawei is like nothing else – it’s engineering like it’s back in the year 2000 – it’s very, very shoddy.”

Huawei was also the main digital supplier to the Chinese-built African Union headquarters, where, for five years, data were transferred to servers in Shanghai, according to reports in Le Monde Afrique and The Financial Times. Officials have denied such problems existed, and Huawei has said that if any data leaked, it wasn’t from the company’s equipment.

Still, such problems point to “a relatively immature … security culture in the company,” said Christopher Parsons, a senior research associate at The Citizen Lab, which specializes in communications and security studies at the Munk School of Global Affairs and Public Policy.

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In Papua New Guinea, “some of the issues being raised are not particularly advanced problems to have identified and then remediated,” Mr. Parsons said. “The fact they weren’t is unfortunate, and speaks poorly of the security culture that Huawei has.”

Huawei did not offer an on-record response to detailed questions about the Papua New Guinea data centre from The Globe. It told the Australian Financial Review: “This project complies with appropriate industry standards and the requirements of the customer.”

Huawei has a deep foothold in Papua New Guinea. The company built 4G networks for the country, a high-speed broadband network, and a network of submarine cables to connect coastal settlements. At least one local community complained that excavators used to lay underwater cable broke reefs.

Huawei was also the contractor for a national identity project that includes an electronic identification (e-ID) system backed by a database. That database, service for which has occasionally been interrupted for days, is at the National Data Centre.

The company’s importance to Papua New Guinea means trouble with the data centre is “a very sensitive issue,” the Ministry of Information and Communication Technology said in a chat message.

In Beijing, foreign ministry spokesman Zhao Lijian said the “Chinese government always requires Chinese companies, in their overseas operations, to strictly follow international regulations.” But, he said, the Chinese government firmly opposes “some foreign media’s malicious discussions about the data centre.”

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In Papua New Guinea, security vulnerabilities have become less of a concern than disrepair. The data centre has a slow internet connection, and some of its components – including backup batteries and an e-mail server – are broken. Software licences have expired, and the report says local authorities do not have enough funds to properly maintain the centre.

As a result, it “is not currently used by a significant portion of the government of PNG,” the report found. “It is assessed that a full rebuild would need to occur to modernize the facility.”

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When is the right time to start investing? Plus, the importance of patience and a growing disconnect between markets and the economy – The Globe and Mail

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If we waited for an ideal time to start a lifetime of investing, few of us would ever get into the stock market at all.

The March crash was a great time, in retrospect. But a lot of investors held back because they worried about worse losses ahead as the pandemic spread globally. Stocks have powered back from their lows with a vengeance, which brings a new set of complications. If the economic recovery from the pandemic disappoints, stocks could fall again.

We have two vastly different sets of market conditions in March and August, but a common sense of caution about whether it’s a good time to start investing. I offer this up as context for a recent question from a reader in Toronto: “My 27-year-old has never invested and is asking is this a good time to start? She is thinking of using a robo-adviser and has about $50,000 to invest. What would you suggest about timing and robo investment?”

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First off, thumbs up to the idea of using a robo-adviser. It’s a cost-effective way for investing newcomers to instantly start building a well-diversified portfolio of exchange-traded funds with a risk level tied to their personal needs.

Is now a good time to start investing through a robo-adviser or any other channel? Any time is a good time, if you handle it right.

This reader’s daughter should consider a plan to have a preset amount transferred electronically to the robo account and invested every time she gets paid. As for the $50,000, she should give some thought to a staggered approach. Maybe invest $10,000 right now and an additional $5,000 each month for the next eight months. This would be in addition to those regular contributions from her paycheque.

Invest the entire $50,000 now and she runs the risk of getting hit by a nasty market pullback that shears off 20 per cent or 30 per cent of her investment in short order. Hold off on investing the $50,000 until after a crash and she runs the risk of missing the rally that follows all market downturns. It’s asking a lot for an investing rookie to put $50,000 into a stock market that seems to be falling off a cliff.

— Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

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The Rundown

Stay patient if the pandemic’s get-rich-quick phase has you feeling left out

Who knew five months ago that the pandemic would be such a money-making opportunity? Stocks are flying, the housing market is surging, gold has popped and bitcoin’s on a tear. Did you miss the memo about pivoting from financial self-preservation to aggressive speculation? Feeling left out because you played it safe while others were daring?, writes Rob Carrick (for Globe subs)

How can Wall Street be so healthy when Main Street isn’t?

The stock market is not the economy. Rarely has that adage been as clear as it is now. An amazing, months-long rally means the S&P 500 is roughly back to where it was before the coronavirus slammed the U.S., even though millions of workers are still getting unemployment benefits and businesses continue to shutter across the country. The Associated Press reports (for Globe subs)

Trading in securities could jeopardize your CERB benefits

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As CERB benefits end, the Canada Revenue Agency’s review of Canadians who received the benefit will move into high gear. There are some recipients who may mistakenly think they’re entitled to CERB, but the taxman might disagree and ask for repayment. I’m talking about frequent traders in securities, including day traders. Tim Cestnick explains (for Globe subs)

Others (for subscribers)

Insiders continue their contrarian buying at Corus Entertainment

The week’s most oversold and overbought stocks on the TSX

Friday’s analyst upgrades and downgrades

Friday’s Insider Report: CEO invests nearly $1-million in this beaten-down stock

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Thursday’s analyst upgrades and downgrades

Ten U.S.-listed technology companies with solid earnings growth

Nine global equity ETFs to augment your portfolio and reduce home-country bias

Investors in Belarus face ‘dictator dilemma’, Putin may hold the key

Others (for everyone)

Biden victory? Disputed election? Wall Street prices in November outcomes

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Impasse! World market themes for the week ahead

Commodity traders face rising finance costs as big banks pull out

Globe Advisor

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Ask Globe Investor

Question: I would like to get some technology exposure for my portfolio. What do you recommend?

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Answer: Unless you have a deep understanding of the technology space, I would not recommend buying individual tech stocks. A low-cost exchange-traded fund that provides diversified exposure is a better bet because it will help to control your risk. I’ll discuss a few worthy candidates among the dozens available.

The iShares Core S&P U.S. Growth ETF (IUSG) isn’t specifically a technology fund, but nearly 40 per cent of its weighting is in tech stocks such as Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Facebook Inc. (FB) and Alphabet Inc. (GOOG). You’ll also find plenty of non-tech growth stalwarts such as Johnson & Johnson (JNJ) and Procter & Gamble Co. (PG), which increases diversification and may enhance stability. IUSG’s management expense ratio is a rock-bottom 0.04 per cent and the fund pays a modest dividend yield of about 1.4 per cent.

For a pure-play tech fund, consider the Vanguard Information Technology ETF (VGT), which has an MER of 0.1 per cent. If you’re investing in IUSG, VGT or any of the dozens of other U.S.-listed growth or technology ETFs, keep in mind that you’ll need to buy them in U.S. dollars. This exposes you to currency conversion costs and exchange-rate volatility. If you want to eliminate or at least minimize such currency impacts, consider a Canadian-listed ETF such as the BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ), which has about half of its assets in technology stocks and charges an MER of 0.39 per cent.

— John Heinzl

What’s up in the days ahead

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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Ontario Supports Municipalities with Critical Infrastructure Investments – Government of Ontario News

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Priority Projects will help Create Jobs and Support Growth as the Province Safely Reopens after COVID-19

TORONTO – The Ontario government is investing more than $4.2 million through the Regional Development Program to support important infrastructure projects in the County of Simcoe, the Town of Tillsonburg and the City of Sarnia. These investments will help attract local investment and create jobs as the province starts down the path to renewal, growth and economic recovery.

“As the province continues to safely and gradually reopen and we turn our attention to growth and recovery, we are helping local communities and local municipalities create jobs,” said Vic Fedeli, Minister of Economic Development, Job Creation and Trade. “These projects will make a significant impact in facilitating economic growth for the communities of Simcoe, Tillsonburg and Sarnia-Lambton. They will enable long-term measurable outcomes, including private sector investments, job creation, and growth of the regions.” 

Ontario is providing $1.5 million for the County of Simcoe to invest in the widening of the Lake Simcoe Regional Airport runway from 100 ft to 150 ft. With Ontario’s support, the widening will increase safety, improve a key municipal asset and position Simcoe County for private-sector investment. The widening of the runway is a regional priority for the County and is considered a critical piece of infrastructure for future business opportunities and economic benefits.

“The Lake Simcoe Regional Airport is a gateway to our community, and this expansion provides an opportunity for significant growth and increased economic activity right here in Oro-Medonte,” said Doug Downey, MPP for Barrie-Springwater-Oro-Medonte. “I appreciate that the Ministry of Economic Development has seen the great value in this project, and understands the significant impacts it will bring to rural Ontario. I thank them for partnering with the County to help ensure shovels will soon hit the ground!”

Ontario is providing more than $1.2 million for the Town of Tillsonburg to build and develop the Van Norman Innovation Park, which will give the region a competitive advantage in attracting new investment. With Ontario’s support, the town will invest in critical infrastructure, including sewers, watermains and roads to make the innovation park investment ready. This will also encourage the growth of high-tech manufacturing cluster with a focus on the advanced manufacturing, automotive and agri-food processing sectors.

“Since taking office, our government has sent a clear message that Ontario is open for business and open for jobs,” said Ernie Hardeman, MPP for Oxford. “We’re creating an environment where businesses can focus on what they do best — developing great products and services and building successful companies. It’s great to see the Town of Tillsonburg invest in the infrastructure that will help to attract and retain those businesses here in Oxford.”

Ontario is providing $1.5 million for the City of Sarnia to build an oversized load corridor that will increase capacity of the Port of Sarnia and surrounding road networks. The oversized load corridor will facilitate the transportation of oversized loads from local industrial fabricators and manufacturers to national and overseas markets, addressing the costly and cumbersome process of transporting products. With Ontario’s support, the City will invest in infrastructure improvements including overhead utility crossings, municipal roadways, and the deep-water Port of Sarnia.

“As a community we have been working on getting the funding for this project for nearly a decade,” said Robert Bailey, MPP for Sarnia—Lambton. “This investment by the Ontario government is coming at just the right time as the economy starts to reopen. This project will help to support our world class fabrication shops and local industry by making it easier to move large industrial components and machinery to and from Sarnia Harbour.”

To support regional priorities and challenges, the RDP provides cost-shared funding to municipalities and economic development organizations to help communities attract investment, diversify their economies, and plan for long-term sustainability. Provincial and local leaders will be joining together at the first virtual AMO 2020 Conference from August 17 to 19 to share experiences, build understanding, and plan for a strong future.

Quick Facts

  • The government launched the Regional Development Program for eastern and southwestern Ontario in November 2019. Businesses and municipalities can get financial support through the Eastern Ontario Development Fund (EODF) and Southwestern Ontario Development Fund (SWODF) and guided access to a range of complementary services and supports.

Additional Resources

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