On 29 June 2010 the Green Investment Bank Commission, established by George Osborne in November 2009, published its report "Unlocking investment to deliver Britain's low carbon future."
The Commission, chaired by Bob Wigley – a former investment banker and current Chairman of Yell Group plc – recommends that Government should seek to establish a Green Investment Bank within six months.
The case for intervention
The Commission argues that the establishment of a Green Investment Bank (GIB) is necessary due to:
- the unprecedented scale of investment, estimated at £550 billion between now and 2020, required to meet UK climate change and renewable energy targets.
- market failures and investment barriers impeding the financing of low carbon infrastructure, which mean that the UK's low carbon targets are unlikely to be achieved without intervention. In particular the Commission highlighted:
- market investment capacity limits and limited utility balance sheet capacity;
- political and regulatory risks arising from a history of policy changes affecting investor returns;
- a lack of investor confidence resulting from technology risks, lack of transparency in Government policy and high capital requirements for commercial scale projects; and
- the need to make large numbers of small, low carbon investments attractive to institutional investors.
- the need to:
- ensure energy security and future growth;
- reduce exposure to high and volatile fuel prices;
- create a large number of businesses and new jobs; and
- address underlying externalities and market failures.
The GIB's mandate
The Commission recommends that the GIB be mandated to address market failures and to manage existing Government resources more efficiently. The Commission recommends that the GIB should be established as an independent institution by Act of Parliament.
Funding the GIB
The Commission favours the initial capitalisation of the GIB by:
- forcing conventional banks to subscribe for equity as a part of the recent levy announced on banks, or as part-payment of the one-off tax on bank bonuses, or by forcing State-owned banks to subscribe for equity in the new bank;
- using part of the revenue from the Emissions Trading Scheme; or
- selling Government-owned assets, such as the Dartford crossing and High Speed 1.
The Commission identifies four sources of funds for the financing of the GIB's on-going operations:
- the budgets of nine existing Government agencies (including the Carbon Trust);
- the issuance of Green Bonds and Green Individual Savings Accounts (ISAs);
- a debt fund; or
- a levy on energy bills (for example, by the imposition of a new levy or by replacing the Carbon Emissions Reduction Target when it is phased out in 2012-13).
Operational structure and management
The Commission envisages the GIB having two main operating divisions; a UK Fund for Green Growth and a Banking Division. The UK Fund would administer grants and extend low-interest loans; make equity investments; provide venture capital for technological development; and also advise public and private sector bodies. The Banking Division would offer a secondary market for conventional banks to syndicate or trade green infrastructure loans.
The Commission recommends that Government should not have a role in either the long-term or day-to-day management of the GIB so that its balance sheet is not included within public sector finances (per IAS 28). The Commission recommends that key stakeholders (including ministers) be represented on an "advisory council" (in practice this may be similar to Network Rail's "Members"). A board of directors would have responsibility for long-term management and below the board would be a management team which would run the GIB on a day-to-day basis. To ensure that the general corporate policy of the GIB is not set by Government, the Commission specifically recommends that ministers should not be given the power to appoint the board or senior management of the GIB.
Over time, the Commission recommends that the GIB develop a product range featuring grant funding for pre-commercial projects; pari passu co-investment with the private sector; structured finance (collateralisation of existing loans) and loan syndication; intermediate/mezzanine funding; and risk-management by underwriting a floor price for carbon. The Commission also considers that the GIB could have a role in offering insurance on a commercial basis to cover green investment projects.
Expediting the establishment of the GIB
Finally, the Commission sets a target recommending that the GIB should be established within 6 months of its report being published. To expedite the process, the Commission recommends that a shadow GIB board should be established to oversee the merging of the various quangos and funds and lay the ground work for the new bank pending the introduction of any new Act which would establish the GIB itself. The Commission also recommends that a parallel shadow authority should be established to oversee the work of the agencies whose budgets the GIB will take over when it is up and running.
The Commission was established with the support of the then Shadow Chancellor (now Chancellor) George Osborne and received contributions from a wide range of organisations and notable individuals, and that backing lends considerable weight to the report. That said, it is a body which was established by the Conservatives when they were in opposition without formal support from the departments which will be responsible for implementing the recommendations (principally the Treasury and the Department for Energy and Climate Change).
The Commission's recommendations are unlikely to be implemented without further work. At the moment there have been contradictory announcements about whether the Treasury or DECC will sponsor the bill establishing the GIB, as both James Sassoon (Commercial Secretary to the Treasury) and Chris Huhne (Secretary of State for Energy and Climate Change) have claimed ownership. It is currently uncertain whether the GIB will be established under the Energy Security and Green Economy Bill as was suggested in the Queen's Speech earlier this year or under a separate Act of Parliament. If a separate Act of Parliament is made to establish the GIB, it is likely to be preceded by a White Paper and formal public consultation.
Given the need to arrange a substantial amount of initial capital alongside a significant on-going source of working capital for the GIB, it appears unlikely that a formal announcement will be made by Government before the Spending Review, which is due to be held on 20 October 2010. It also remains to be seen how the Treasury, and other parts of Government, will react to the establishment of what would in effect be a State-backed entity given that, under the structure proposed by the Commission, it would not have direct control over the GIB's investment decisions and its management and operations. Nonetheless, the publication of the Commission's report indicates that the establishment of the GIB remains high on the Coalition Government's list of priorities.
The full Commission report is available here.