The Green Investment Bank: Parliamentary Panel Discussion and Reception

  

Janice Munday took the opportunity to outline what stage of planning the Green Investment Bank is currently at and where responsibility for taking it forward lies. In her speech at the panel discussion she said the Green Investment Bank is a cross department initiative and whilst it can be hard to understand how it is being managed, Vince Cable is currently the minister charged with delivering it. However, this involves working closely with Chris Huhne at DECC, Caroline Spellman at DEFRA,  George Osborne and Justine Greening at the Treasury, and at a wider level also working with the Department for Transport and the Department for Communities and Local Government.

  

Janice outlined that whilst on the face of it the words Green Investment Bank appear straight forward there are innumerable definitions and ideas over what it should be. In order to solve many of the questions surrounding the Green Investment Bank Janice urged that we go back to basic principals, to examine what the market failure is, if the government should be involved at this time of fiscal restraint and how it should be involved. What is significant is the £1bn investment from Government announced in the Comprehensive Spending Review, as this demonstrates the commitment the Government is making to the plans. However, she said there is as yet no announcement on the form of the Green Investment Bank. 

 

We are currently at the stage where market analysis has showed we need to unlock £50bn of spending to green the economy and we need to explore why markets are not functioning and generating this funding. This indicates a role for government to intervene and to kick start this process. Janice continued to explain the kinds of investments we are talking about with the Green Investment Bank, for example ones with guaranteed revenues, over time. These are the types of investments that ought to be attractive to a wide array of people but at this early stage we face the problem of a gap, with no money coming in and high levels of uncertainty. 

  

Further uncertainty remains over the later stages of the GIB, if government involvement starts here with filling this gap, does it end here also, what is the next stage? Janice said, we are currently at a stage where we have identified the problem and the need to deal with it at an early stage but are still uncertain about what market failures surround the later stages. We have agreement the bank is needed, we have the funding and plans of what asset sales will be made for further funding. But we need to understand, the extent of ambitions.

 

  

Majid Haquani outlined that one for the key issues with the GIB is the apportioning of risk and where responsibility will lie. From an industry perspective he urged that people were keen to see what is going to happen in terms of the law and protecting people with regard to changes in the law; as industry is feeling very nervous about what will happen with investments five years down the line. Further to this people are still waiting for information on access to the GIB. Will it be aimed at small, medium or large investors, will this access be related to the risk of a project or will it based on what normal investors do not have an appetite for? With the uncertainty surrounding the specifics of the bank every one is asking the same questions, with the key one being when?

 

Alice Chapple, Director of Sustainable Financial Markets, Forum for the Future
 

Alice Chapple started by explaining that from the view of Forum for the Future, the GIB is crucial for making the investments necessary to deliver a sustainable future, with the risks being shared between the public and the private sector. She said it is clear that climate change and resource depletion creates enormous risk for society but it is not taken into account in the way investors see risk throughout their portfolios. Investors see risk in a very short term way whilst society is facing risk over the long term. It is for this reason that the GIB is needed. Alice outlined three key areas for discussion, these being risk, scope and new business models. With regard to risk there is a wide array of risk involved with this project including construction, market and performance risks, some of which the financial sector is well equipped to take on and some it is not; but the key risk the project faces is that of regulatory risk. In a market that is currently defined largely by government intervention, investors need the comfort of knowing that the Government is committing funds alongside them. 

 

With regard to scope there has been a lot of discussion surrounding big industry and infrastructure, but there must also be discussion of community energy schemes and how they are to be involved. How these types of projects can be scaled up to participate, and deliver change from the community level.
 

At present there are many new business models being discussed, whilst some of these are half baked at the moment, there is real potential in scaling up and aggregating household energy efficiency projects so that they become of interest to investors. 

 

Dr Steve Mahon, Chief Investment Officer, Low Carbon Accelerator 
 

Steve Mahon offered the perspective from an early stage company trying to translate its project into the marketplace. Steve stressed that the role of the GIB should be to bridge the gap between innovation and infrastructure and highlighted three key areas. Firstly, clean energy is an area that can be quite capital intensive and the key problem for new projects is getting funding for the first or second commercial installation, as it is difficult to acquire funding without a commercially proven product. The Green Investment Bank should have a role in providing high risk debt to fund the first few commercial demonstration projects. Secondly, whilst companies can use invoice discounting to finance capital needs, there is often a restriction on how much you can borrow on each customer, which poses significant problems for young companies with a small number of large customers. Lastly, the retail investor has a large appetite for green investment and several good schemes already exist (such as EIS and VCT’s).  These present a real opportunity to leverage a large amount of capital into the low carbon sector if the Government provides certainty to these schemes.

 

Rajaram Jamadagni, Assistant Director, Environment and Infrastructure Advisory Group, Ernst & Young 

 

Rajaram Jamadagni outlined that the role of the Green Investment Bank should be to correct current market failures and gaps. Whilst it is a common view that money will flow into the low carbon economy once regulatory issues are sorted out, Mr Jamadagni stressed that the GIB has a crucial role to play in ensuring institutional capital flows into the sector over the next 4 to 5 years.   

 

There is a current market gap as banks are no longer in a position to provide the long term capital to the infrastructure sector, that they were before the financial crisis. There is a clear need for the GIB to address this market gap between capital need and sources of long term capital.

 

Mr Jamadagni also highlighted that the GIB will not be in a position to issue green bonds in the way the European Investment Bank or World Bank can, since these institutions have very different credit profiles and balance sheet to that expected of the GIB.

 

Furthermore, whilst retail offers a very important source of capital for the low carbon sector it is not yet fully comfortable investing in this area and the GIB can serve to facilitate retail getting more involved in this market. 

 
Q & A  

  

The panel took a number of questions from the floor. These covered a wide range of issues from structure and timeline for the bank, to whether it should be a profit making institution.

  

 

Examples offered included off shore wind which has a long development period before revenues come on stream, compared to waste management projects which involve quicker revenue streams but face different risks in terms of planning risks.

 

One type of risk the panel identified as effecting investors is technology risk as innovations are fast changing; investors want to be sure that their investment won’t be outdated very quickly. An example of this was given with bio-fuels, which had more secondary impacts than initially anticipated. 

 

There was agreement across the panel on the importance of involving specialists able to suitably measure and price the risk involved with investments.

 

 

 

The panel drew attention to the fact that private firms have withdrawn from this insurance market, leaving a market gap. However, doubt was raised over whether private companies would move back into this market, or whether the market failure would remain, leaving room for government to intervene and operate in this area; concluding it could go either way at the moment.

  

Further attention was drawn to work conducted by some of the panel participants which specifically looked at different structures for the GIB including a whole sale bank and a monoline insurer. 

  

 

The panel were asked to give their thoughts on whether there was a sense that the bank would focus on the more established proto-technologies, or whether it would be able to cover a breadth of investment requirements right the way through to leading edge. Also would there be complimentary policy to the GIB, where by government would provide guarantees for commercial banks to cover areas not covered by the GIB. 

 

The panel said something under analysis at this stage of the planning is how the GIB could incorporate both established and leading edge investment and technologies. Getting the specialists who are able to assess and price the risks associated with these would require two very different sets of skills from different markets. It is yet to be decided how the GIB could operate in these simultaneously. 
 

It is also important to consider how the GIB would interact with other Government initiatives, such as the technology innovation incentive.

 

Other views expressed from the panel felt it would be a missed opportunity if the GIB did not get involved with the smaller scale or community schemes. Whilst these may be harder to engage with they need not be pursued immediately and the GIB could start out with the bigger, easier to engage with projects whilst it is established, but aim to move into a much wider scope. 

 

 

The panel were asked what the current timeline for implementation of the bank is and whether it is moving fast enough. 

 

It was recommended that the time line for the GIB is now available in the Business Innovation and Skills business plan published on Monday 8th November.

 

 

There was general consensus across the panel that the GIB should be making money. A number of justifications were given for this including, private investors should not be making money out of this if the GIB is not and the public sector should not be subsidising private profits through the GIB. Since the GIB will sit on the public balance sheet it is not appropriate to set up an institution that will drain money. Whilst not every investment can be expected to be profit making and profit expectations should not be large, a positive and certainly not negative profit should be expected