Birth of a green bank
The Green Investment Bank is meant to kickstart the transition to a low-carbon economy. But will it be allowed to borrow enough?
- Published in Features.
GIB will not take on risks that no one else will touch
But crucially, even though the GIB is a bank, it will not be able to borrow any money until 2015 at the earliest. Ed Matthew, director of Transform UK, a campaign group dedicated to encouraging investment in the low-carbon economy, says that the ability to borrow money against the bank’s capital would give it six times more to invest. He says: “If it’s got £3 billion, it could borrow something like £18 billion to directly invest. With that it could then leverage five times that value from the private sector. So with the £3 billion it’s got, without giving it any more money, it could leverage £100 billion into the low-carbon economy.”
The Treasury will only allow the bank to borrow in 2015 once the national debt is under control. Any money borrowed by the GIB is likely to be viewed as national debt and, at a time when the Treasury is prioritising deficit reduction, additional debt is not welcome. The trigger for lifting the borrowing embargo is once national debt is declining as a percentage of GDP. But, as Matthew explains, this is not likely to happen by 2015. Current estimates suggest it will happen in 2016-17 at the earliest, he says. Delaying the bank’s ability to borrow money will “severely hold back” the scheme’s potential, he argues.
“Not all borrowing is the same,” explains Matthew. “The argument against the delay is that infrastructure investment is the best way to grow the economy and get rid of our debt.” He adds that there are deeper reasons for the Treasury’s hesitancy over the bank’s ability to borrow money: “The Treasury don’t want to lose control over borrowing – they are really nervous of a public bank.”
He goes on: “Some of the senior civil servants are opposed to the idea. They see it as a bit too interventionist in the economy, and have resisted doing this for over a century. An ideological battle has been carried out behind the scenes.” It’s a battle that Matthew and many others say the bank should win. The list of those supporting the GIB’s ability to borrow includes many from industry, think-tanks, the CBI and ministers.
Despite this support, Matthew says that there is a genuine risk that the bank may never be able to borrow money. Even if borrowing is approved but delayed there will be implications for economic growth, he says. It will also affect the country’s ability to meet carbon, greenhouse gas and renewable energy targets. He says: “It’s not the scale of the investment into the low-carbon economy that needs to be achieved, it’s the speed.”
Aside from debate over the bank’s ability to borrow, Matthew believes that the biggest challenge is to build a credible team of green financial experts to run it. The Department for Business, Innovation and Skills recently appointed Lord Smith of Kelvin, the chairman of Scottish and Southern Energy and the Weir Group, to become chairman of the bank.
Matthew says: “He is good news. He is very experienced in energy, engineering and finance, and will have ambitious goals for the institution.”
Taking the risk out of investing
The Green Investment Bank will leverage funding from the private sector in several ways. It can undertake co-investments, where the money put forward by the public bank is matched by the private sector.
Arrangements can be made so that, if there is a problem with a project, the bank can take the first hit to reduce the risk for any private investors.
The green bank could also develop insurance products for investors to make low-carbon projects more appealing to private banks.
Keeping up with Germany
Germany’s public bank, KFW, was set up after the Second World War to help provide the investment needed to rebuild the country’s infrastructure. Last year it invested ¤24 billion in low-carbon infrastructure.
Ed Matthew, director of Transform UK, says: “They didn’t have any problem investing that money last year, which gives you an insight into the potential of the market that could be generated in the UK.
“If we want to compete with Germany in the transition to a low-carbon world and the development of green technologies, we have to invest on that scale. Our public bank needs to be investing on that scale from year one.”