Position Paper on the Green Investment Bank

Currently, a series of market failures prohibit sufficient investment in low and zero carbon projects. Investment in the low carbon economy is necessary to achieve the Government’s emission reduction targets for 2020 and 2050. The lack of funds for SMEs restrains their ability to invest in low carbon technology. Large scale projects also face market investment capacity limits. The lack of available funds restrains both business types and represents a market failure. The Government should encourage further investment in the low carbon sector by establishing a GIB.
 

The GIB has to address two different aspects of the market failure. On the one hand large scale infrastructure projects, e.g. offshore wind and tidal energy, face a lack of debt and equity funding because these projects have large risks attached which create uncertainty, such as changes in energy demand and regulation. On the other hand, early stage and pre-market companies, as well as SMEs do not receive sufficient funding, because often the scale of the investment is seen as too small and/or too risky for investors. The GIB should invest in existing investment structures in place for SMEs that may currently be unable to attract investment themselves. Furthermore, SMEs face a long due diligence phase which is very time and resource consuming. It has been suggested that it will be difficult to combine the role in one organisation for the smaller number of big infrastructure investments with the large number of SME investment needs. This balance requires further consideration.

This new institution should be established by the end of this year. While thorough consultation is encouraged, fast action is necessary to enable sufficient market growth. The Government and the opposition agree that a GIB should be established and this momentum should be used to proceed in the creation process. Steps should be taken this year to address some of the problems in the market while establishing a positive reputation for the GIB. However a balance between the tight time frame and thorough consultation has to be found.

The initial capitalisation of the GIB is an important basis for the development of more detailed plans. The exact structure, products and methods to raise further funds depend largely on the amount of the initial capitalisation. Until the Government’s plans are published it will be difficult to develop and justify further financing options, as well as financial products. The initial capitalisation has to be sufficiently large to achieve the GIB’s objectives.
 

One method of initial capitalisation that has been suggested is to combine quasi non-governmental organisations (quangos). This option could result in a challenging and time-consuming debate which would lead to a delay in the creation process. The Government should therefore choose an alternative capitalisation method. The Green Investment Bank Commission has identified other initial capitalisation methods, including the use of bank levy, a tax on bonuses, the sale of government assets or the UK revenues from the EU Emissions Trading Scheme (EU ETS) auctions.
 

For the GIB to effectively raise private sector capital it needs to have a certain level of independence from government policy. Corporate and private investors need certainty to reduce their investment risk. The risk for large scale infrastructure investment could be reduced through the independence of the GIB. However, the exact level of independence needs to be analysed further to gauge the balance of public and private sector investment.
 

Political and regulatory risks can play a role in investment decisions across the whole spectrum of low and zero carbon projects. Whilst the GIB should function as an independent institution, it could play an advisory role to the government in framing policies and procedures to facilitate private sector investment in low carbon projects.

The GIB should not compete with private sector investors, but encourage private sector investment. This measure would restrict the independence of the GIB, which should only invest when funding from private investors is not available. The GIB should act as co-investor for private companies, and not as sole investor, save in scenarios where no private investment solution exists e.g. for early stage investment. As a general principle, the GIB should only invest if there is a lack of private sector funding, or where a situation exists such that investment is necessary to facilitate such private sector funding. This approach needs to ensure that private investors do not take advantage of this mechanism by pushing risk towards the GIB. There is a contention between the need for the relative independence of the GIB and the importance of not crowding out the private sector.

The GIB needs a clear goal that defines its operating field. The mission statement of the GIB is an important part of the creation process, as it sets a general direction for senior management. Clear goals would define potential funding options for companies and thereby create certainty in the market. However, a balance has to be established between the independence of the GIB and the government’s interest to define targets.

As previously mentioned, a compromise has to be reached between the independence of the GIB and its accountability for the funds received from government. The accountability of the GIB will be increased through a clearly defined benchmarking process. This would increase the accountability of the GIB, as it would help to determine the GIB’s rate of success. As a completely independent institution the GIB would establish benchmarks based on its goals. However, the government could influence the structure and function of the GIB by setting benchmarks to account for the GIB's funding.

An additional challenge will be the determination of remuneration for the management of the GIB. On the one hand the remuneration has to be attractive to qualified employees with experience in what is a highly competitive area where the private sector offers significant returns to its top performers. On the other hand, it should not exceed an acceptable level for an institution that receives public funding. It will be necessary to clarify who would be responsible to define the remuneration structure. If the GIB acts as an independent institution then it should set its own remuneration levels. Should the GIB be structured in such a way that the government determines or influences remuneration, careful thought, research and consultation would be required to identify an appropriate remuneration structure.