Green Investment Bank to be set up by UK Government

By Ian Youngman - 26 Nov 2010 7:30:1 GMT
Green Investment Bank to be set up by UK Government

The UK government has promised to set up a green investment bank. But as it was a Labour idea originally, will it ever happen? The government recently backtracked on a firm promise to set up the Post Office Bank, another Labour idea.

The bank is part of a much wider initiative, the UK's first ever infrastructure plan, identifying the major economic investment needed to underpin sustainable growth in the UK over the coming decades.

Lord Sassoon of the Treasury explains, ''For the economy to flourish, people, goods and information must move freely. Reliable infrastructure: energy, water, transport, digital communications and waste disposal networks and facilities, are essential to achieve this. The government has committed over £40 billion to infrastructure projects. The plan includes investing in a new low carbon economy, including a Green Investment Bank and up to £1 billion for one of the world's first commercial scale carbon capture and storage demonstration projects.''

The National Infrastructure Plan has been developed by Infrastructure UK (IUK), a division of HM Treasury, focused on enabling greater private sector investment in infrastructure. The Treasury's Justine Greening MP explains, ''There is a real need to mobilise private capital. It is vital to have a transparent policy framework that clearly shows the direction that domestic climate change policy is heading. Without this it is difficult to attract private finance. As the returns from investment become uncertain, and the risks of backing new low carbon projects, when compared to more traditional assets, becomes too great''.

The government recognizes it cannot fund every initiative that could help the environment in the long term. So it needs the support and investment of the private sector. Most low carbon technologies are new and worry investors. So there is a need to use government support to help generate this finance. Ever changing subsidy driven by political will, and short-term arrangements have both been tried and found wanting. Frequent changes to policy holds back private finance. Uncertainty is no use, as investors will only back long-term ideas if the rewards from investing tomorrow are likely to be greater than the rewards from investing today.

If you carefully study government documents, it is clear that the idea of establishing a Green Investment Bank, although often quoted as a certainty, is actually only an option. The bank would not be in the business of subsidising ventures that would happen anyway, nor of replacing the private sector. The focus would be on working with the market, intervening where the market fails and not duplicating where it works.

If created, a UK-wide Green Investment Bank will be funded by a £1 billion spending allocation and additional proceeds from the sale of government owned assets. The bank will encourage significant additional investment in green infrastructure, including at least an additional £250 million for investment in Scotland, subject to the Scottish Government agreeing. Former Chancellor of the Exchequer Alistair Darling launched the idea for a green bank focused on investing in environmental schemes in his final Budget. Darling said it would be a £2 billion project with £1 billion provided from the sale of government assets, and £ 1 billion from private investors. While politicians have been busy claiming credit for the concept, they forget that the original proposals for the GIB actually came from a group of experts led by Bob Wigley, former chairman of investment bank Merrill Lynch.

Government examples give an idea of the type of project it would like the bank to support. The North East, North West, Yorkshire and Humber, and East of England have each established world leading offshore wind farm technology. But this illustrates why the bank may not happen, private investors have happily supported this sector anyway.

Banks have shown little interest so far in being involved, preferring to back the headline grabbing community investment project, the Big Society Bank. Others in financial services have been muted, as at present it is just an idea with no more substance than wispy clouds.

Stephen Hine, head of responsible development at EIRIS, a provider of independent investment research into the environmental, social, governance and ethical performance of companies, says, ''We welcome the plans to set up a Green Investment Bank though there remain uncertainties as to how it would be funded. We see Green ISAs as a key component of that funding even if it is a relatively small proportion of the whole. This would involve the public in the setting up of the bank and provide a boost to retail sustainable investment in the UK.''

Paul Luen of Martek Marine, the green technology specialists, likes the concept and suggests that GIB could fund major infrastructure projects such as wind farms and nuclear power stations, and also put money towards less dramatic but equally green initiatives such as enhancing the energy efficiency of homes.

Funding the energy efficiency of homes has caused a difference of opinion between the Treasury, the Department of Energy and domestic energy companies. The Treasury insists that GIB is only for major commercial infrastructure developments, energy companies want to use it for home improvement, and Energy is stuck between the two. Government departments also seem at odds on where the money is coming from. If it is from Energy where are they going to get £1 billion? After Ireland's problems the Treasury are now very reluctant to fund it with government backed bonds. Other departments argue that funding it with the sale of government assets is not simple, as these buildings, organizations and land are not owned by some central government pot, but each belong to a specific government department who have taken such sales into account in their budgets.

Some politicians expect it to be a fund, while others say it is a bank. Amused Treasury officials point out that a bank would have to comply with all the new regulatory rules on funds and reserves, annual government funding would not meet their own rules!

If it is set up, we will not see GIB before 2012.

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