Pressure for full green bank grows as government remains divided

An autonomous, well-funded Green Investment Bank is central to the coalition’s climate policy and green growth agenda as unemployment rises sharply. But the Treasury is holding out to limit its perceived impact on public borrowing.

Business and NGOs have launched a campaign to break the deadlock between the Treasury and the business (BIS) and energy and climate (DECC) departments, over the role, structure and scale of the planned Green Investment Bank (GIB).

BIS, tasked with leading on creating the new financial institution, has said it will set out details of the GIB in May 2011 at the earliest and the bank will start backing projects in 2012. Without it, funding for Britain’s transition to a decarbonised electricity infrastructure by 2030 would seem out of reach (ENDS Report December 2010).

But a decision on whether the bank should be a powerful autonomous entity using government backing to deploy large amounts of private capital, or something nearer to a government fund with very limited borrowing powers, must be made soon, in time for a clear statement on its future by the time of the Budget in March.

Most, including BIS, agree the bank needs to be deploying billions of pounds per annum by 2015-16 to have a serious role in financing the huge investment needed in Britain’s energy infrastructure.

On their own, government’s plans for electricity market reform and a carbon floor price are not up to the task (ENDS Report December 2010).

A report by Ernst & Young in October 2010 revealed the scale of the challenge. At least £450bn will need to be invested by 2025 compared with just £11bn in the entire 1990s ‘dash for gas’ that transformed the UK’s liberalised energy market.

An independent GIB Commission of finance experts and consultants, set up by George Osborne when shadow chancellor, reported in June 2010 that only a commercially independent bank with early government backing could help close the funding gap.

Ernst & Young concluded it could be largely closed if the UK’s wider managed fund base of £4trn could be tapped into.

But there is still no agreement between the Treasury, BIS and DECC over the form and powers of the proposed bank.

ENDS understands a meeting on 10 February was attended by deputy prime minister Nick Clegg and the BIS and DECC secretaries of state, Vince Cable and Chris Huhne. But the Treasury was represented by Justine Greening, economic secretary to the Treasury, rather than the chancellor Mr Osborne.

A wide range of business and other stakeholders are campaigning for a powerful GIB capable of facilitating the huge levels of private sector investment needed to meet the UK’s binding carbon budgets.

The coalition is under pressure to show it can secure sustained economic and employment growth, and rapidly cut the deficit in public finances. Notably it came under a blistering attack from outgoing CBI director general Sir Richard Lambert in January.

The government says it will deliver a “Budget for growth” in March. Proponents of a powerful, autonomous GIB say the bank, along with “green” economic growth, should be at the heart of it. They believe the tide is turning in their favour.

In February, more than 50 businesses, consultancies, utilities and NGOs supporting full bank status for the GIB ran a press advertising campaign through umbrella campaign group TransformUK, in the hope of breaking the deadlock.

Real bank

They called for “a real bank, and not just a fund”, with at least £4bn of initial government capitalisation “and the power to raise revenue by issuing its own green bonds”.

That was followed by an open letter from senior executives of seven investment funds, managing assets of £500bn, to prime minister David Cameron on 9 February, the day before the cabinet level meeting.1

The firms included Aviva, Co-operative Financial Services, F&C Investments, Jupiter and Henderson Global Investors. Their letter called for government to “explicitly support”, or guarantee, some of the securities issued by the GIB from the outset.

“This will lead to a larger funding base, cheaper funding costs for the new institution and access to huge sources of [private sector] capital that could otherwise be unable to participate in the funding efforts,” they wrote.

“Such government support is particularly important at the beginning of the new institution’s existence, but will become less so as the bank develops its own rating.”

The seven said they would be willing to invest in GIB securities.

Andrew Raingold, executive director of Aldersgate Group, an environmental business and finance coalition that was an early backer of a GIB, told ENDS it must be a fully functional, state-owned bank rather than private to benefit from government guarantee. Without this, it would push up the cost of capital.

Ed Matthew, programme director for TransformUK, founded the GIB campaign two years ago. He says no stakeholder, other than the Treasury, has shown interest in a GIB stripped to a simple fund.

Borrowing concerns

ENDS understands senior civil servants at the Treasury oppose full bank status. The Treasury is concerned that a wider GIB role in raising capital could count as increased government borrowing, when the priority is to reduce liabilities.

The Treasury went as far as offering £3bn before the 2010 comprehensive spending review in exchange for accepting the principle of a fund, ENDS understands. But this was rejected by BIS because it would have prevented the GIB from leveraging more private sector capital in the longer term.

In the event, the spending review announcement (ENDS Report October 2010) saw chancellor George Osborne committing only £1bn in public funds for the bank over the period up to 2014/15, with potentially £1bn more from sale of public assets. This was far lower than the £4-6bn capitalisation recommended by Ernst & Young.

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