By the end of the year there will be another new bank in the UK. But this won’t be a bank that will fiddle the Libor rate, mis-sell payment protection products or buy bad debt. It will be the country’s first public bank. And it will be the world’s first bank dedicated to greening the economy.
Public banks are nothing new – many countries in the developed world have had them for decades. But here in the UK twitchy civil servants nervous of losing control of public finances have so far managed to keep them at bay.
Now, huge investments are needed to meet the challenges of transforming the electricity sector to meet emission reduction targets and secure supply. The government cannot stump up the necessary funds alone. So the idea is that the public bank will invest in low-carbon projects to kickstart the industry.
Coal-fired power plants will soon be closing and new nuclear stations will not be up and running until the end of the decade at the earliest, leaving a gap in supply that will be plugged with renewables. Charles Hendry, minister at the Department for Energy and Climate Change, says: “We constantly measure how much spare supply there is over demand and, as we move into the second part of this decade, it is getting a bit too tight. As we move into 2020 it’s very tight.” He adds that the UK needs to invest £100 billion in the low-carbon sector to meet future electricity needs.
Private banks are under pressure from regulators, shareholders and the government to take fewer risks in the aftermath of the financial crisis. This has caused them to pull back on long-term investments such as infrastructure projects, according to Ian Noble, development director of UK Green Investments at the Department for Business, Innovation and Skills. The plan is that, once the new bank has made investments from the public purse, private investors will find these projects less risky and will be more willing to get on board. So the Green Investment Bank (GIB), as it will be known, will help to accelerate investment in the infrastructure needed for a low-carbon economy.
Once up and running, the bank will operate at arm’s length from the government and be funded to the tune of £3 billion between 2012 and 2015. The government believes that this initial £3 billion will attract a further £15 billion from private banks, giving a total investment of £18 billion by 2015.
The scheme is waiting for the state-aid approval from the European Commission that will enable it to function as a bank. That is expected to come in the autumn. But since April, a precursor team working under the banner of Green Investments UK has begun to invest some of the scheme’s capital in projects that will transfer to the bank in due course.
Investments will be made in these priority sectors: offshore wind, commercial and industrial waste, energy from waste, and non-domestic energy efficiency. Noble says: “The priority sectors are very important to the government meeting its renewable and sustainability targets, but they are difficult to finance at the best of times, let alone in the current state of the capital markets.”
By pumping money from the GIB into these sectors it is hoped that they will soon be seen as mainstream investment opportunities. But the money is not enough to solve all the problems of financing these projects, and the GIB will not be simply taking on risks that no one else will touch.
Noble says that the fund will be protected and managed in a similar way to the endowment of the Wellcome Trust, a charitable foundation that has supported medical research for 75 years, or those of Yale and Harvard Universities, which are designed to fund the institutions in perpetuity. Part of the strategy for the GIB is to create a long-lasting institution.
The bank will steer clear of investing in sectors that are less developed, such as marine and tidal power, and carbon capture and storage. Even though these sectors may play an important part in the green economy in the future, the bank will not get involved in research and development projects, or the demonstration stages of renewable technology schemes. Noble says: “Our mandate is an infrastructure fill mandate, it’s not a venture capital mandate.”
But crucially, even though the GIB is a bank, it will not be able to borrow any money until 2015 at the earliest. Ed Matthew, director of Transform UK, a campaign group dedicated to encouraging investment in the low-carbon economy, says that the ability to borrow money against the bank’s capital would give it six times more to invest. He says: “If it’s got £3 billion, it could borrow something like £18 billion to directly invest. With that it could then leverage five times that value from the private sector. So with the £3 billion it’s got, without giving it any more money, it could leverage £100 billion into the low-carbon economy.”
The Treasury will only allow the bank to borrow in 2015 once the national debt is under control. Any money borrowed by the GIB is likely to be viewed as national debt and, at a time when the Treasury is prioritising deficit reduction, additional debt is not welcome. The trigger for lifting the borrowing embargo is once national debt is declining as a percentage of GDP. But, as Matthew explains, this is not likely to happen by 2015. Current estimates suggest it will happen in 2016-17 at the earliest, he says. Delaying the bank’s ability to borrow money will “severely hold back” the scheme’s potential, he argues.
“Not all borrowing is the same,” explains Matthew. “The argument against the delay is that infrastructure investment is the best way to grow the economy and get rid of our debt.” He adds that there are deeper reasons for the Treasury’s hesitancy over the bank’s ability to borrow money: “The Treasury don’t want to lose control over borrowing – they are really nervous of a public bank.”
He goes on: “Some of the senior civil servants are opposed to the idea. They see it as a bit too interventionist in the economy, and have resisted doing this for over a century. An ideological battle has been carried out behind the scenes.” It’s a battle that Matthew and many others say the bank should win. The list of those supporting the GIB’s ability to borrow includes many from industry, think-tanks, the CBI and ministers.
Despite this support, Matthew says that there is a genuine risk that the bank may never be able to borrow money. Even if borrowing is approved but delayed there will be implications for economic growth, he says. It will also affect the country’s ability to meet carbon, greenhouse gas and renewable energy targets. He says: “It’s not the scale of the investment into the low-carbon economy that needs to be achieved, it’s the speed.”
Aside from debate over the bank’s ability to borrow, Matthew believes that the biggest challenge is to build a credible team of green financial experts to run it. The Department for Business, Innovation and Skills recently appointed Lord Smith of Kelvin, the chairman of Scottish and Southern Energy and the Weir Group, to become chairman of the bank.
Matthew says: “He is good news. He is very experienced in energy, engineering and finance, and will have ambitious goals for the institution.”
Taking the risk out of investing
The Green Investment Bank will leverage funding from the private sector in several ways. It can undertake co-investments, where the money put forward by the public bank is matched by the private sector.
Arrangements can be made so that, if there is a problem with a project, the bank can take the first hit to reduce the risk for any private investors.
The green bank could also develop insurance products for investors to make low-carbon projects more appealing to private banks.
Keeping up with Germany
Germany’s public bank, KFW, was set up after the Second World War to help provide the investment needed to rebuild the country’s infrastructure. Last year it invested ¤24 billion in low-carbon infrastructure.
Ed Matthew, director of Transform UK, says: “They didn’t have any problem investing that money last year, which gives you an insight into the potential of the market that could be generated in the UK.
“If we want to compete with Germany in the transition to a low-carbon world and the development of green technologies, we have to invest on that scale. Our public bank needs to be investing on that scale from year one.”