Jan 14 2011
Green Investment Bank: Q&A
By Ed Matthew
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1. Why is the GIB needed?
An investment of £750 billion is needed by 2025 to help decarbonise the UK economy. The Green Investment Bank (GIB) is required to help secure this investment. It can achieve this at least cost to the taxpayer and can act as a catalyst for green growth.
2. How would the GIB work?
It should work with the market to identify and address market failures that limit private investment in low carbon infrastructure and businesses. It would do this by providing financial advice to Government, technical advice to projects/businesses, and by developing financial products to share risk and lever in private capital.
3. Why can’t the private sector deliver the low carbon investment needed without the GIB?
The risks involved (technology- and policy-related) combined with the scale of capital required over a relatively short time period compared to the balance sheets of the traditional finance providers (including banks and utility companies) mean the capital needed to decarbonise the UK will not be forthcoming.
Analysis by Ernst and Young indicates that for the energy sector, for example, only 10−20 percent of the capital required to 2025 will be secured without a GIB to facilitate capital flows.
4. Why not create another fund or quango?
Government has a long track record of developing a variety of ad hoc responses to investment challenges such as the CCS Competition, the UK Innovations Investment Fund, TIFU − that have failed to effectively address the underlying issues. Some stand-alone initiatives have also failed at very significant cost to the public purse, for example, the Metronet PPP, which was bailed out by the Government to the tune of ~£2bn in 2008.
Infrastructure UK’s National Infrastructure Plan supports this view noting that for the last few decades the Government’s approach to infrastructure investment has been “timid, uncoordinated, incremental and wasteful” and that this must change.
A GIB fund or quango also can’t reach the scale needed because it can’t issue bonds to leverage its capital base (see next point). A fund or quango would also lack the range of professional expertise required to address uncertainty in the investment challenges that lie ahead. The low carbon transition will be a multi-decade process of change delivered through the deployment of new assets that carry significant risks. It will also occur over several business cycles through which we can expect to see contractions in capital availability, while momentum is still needed. A permanent and responsive capability in the form of the GIB is needed to build on our learning from (Public Finance Institute) PFI and public-private partnerships structures and ensure greater value for money for the taxpayer is delivered in future.
5. How much private sector capital could the GIB leverage?
The GIB could leverage many times its capital base. There are no fixed rules about how much private sector capital could be leveraged by the GIB. However, using existing public banks as examples, using shareholder capital:
Caixa Geral de Depositos in Portugal (equity of €7.16bn) leverages x17.
ICO in Spain (equity of €2.38bn) leverages x22.
KfW Bankengruppe in Germany (equity of €13.1bn) leverages x31.
France’s Caisse De Depots et Consignations (equity of €23.5bn) leverages x10.
All these organisations then achieve a further round of leverage through co-investment in projects with the private sector.
To illustrate, assuming the GIB leverages £4−5bn provided by the Government as equity by ~ x20 over the first 10 years it will raise ~£80bn in bonds from private sector investors and lever in an additional ~£260bn in private capital through co-investments. This will go a long way to closing the low carbon energy finance gap.
6. Does the GIB need to raise its own bonds?
Yes. Requiring all the capital to be channelled from Government funds is inefficient and unwieldy − it also compromises the operational independence of the GIB from Government. Bonds are an efficient way for the GIB to access the vast pools of lower cost institutional investors capital; other European public banks regularly use such bond issuances to back their investment plans. To help close the low carbon investment gap the GB must have the power to issue its own bonds.
7. Will GIB bonds compete with gilts?
Once it is fully established and has its own Statute defining its day to day operational independence from Government, the GIB is expected to carry an AA or A rating. This lower rating means GIB bonds will not be competing with AAA-rated gilts, appealing instead to investors looking for investment grade products with slightly higher yields.
In the early years, however, it will be desirable for very modest issuances of GIB bonds (a few billion) to carry a statutory guarantee to establish them in the marketplace: in this case they will be AAA rated. Any conflict that may arise between issuances of GIB bonds and gilts can be managed through the Government’s Debt Management Office (which issues gilts) being contracted by the GIB to raise GIB bonds for it. This will ensure a coordination of UK debt issuances and offer cost savings to the GIB via outsourcing this function to experts.