Oral evidence: Future of the Green Investment Bank, HC 536Wednesday 28 October 2015
Oral evidence, 28 October 2015.
Witnesses
Richard Howard, Head of Environment and Energy, Policy Exchange, and Ingrid Holmes, Director, E3G, gave evidence.
Chair
Good afternoon and welcome to our second panel in this evidence session. We welcome Ingrid Holmes, director of E3G, and Richard Howard, head of environment and energy from Policy Exchange. Thank you both very much for joining us. Are you happy if we go straight into our inquiry questions?
Richard Howard
Yes.
Chair
In that case can I turn to Margaret, if you would like to kick off?
Margaret Greenwood
Ingrid Holmes to begin with: in its first three years of operation, how well do you think the Green Investment Bank has done in fulfilling its goals and its purpose?
Ingrid Holmes
I think it has done a great job. The first thing to say is the GIB is a huge success story. It had wide cross-party support. NGOs were behind it. The private sector, importantly, was behind it. I know there was some nervousness in the first instance of the institution being created that it would be crowding out rather than crowding in capital, so I think the fact that that support remains demonstrates it has been doing a great job. There is more to be done, for sure.
Margaret Greenwood
Would you like to add anything, Mr Howard?
Richard Howard
I would reiterate the same position. I think they have done a good job. As well as doing deals in the sectors that they have been active in, I think they have also done a lot of strategic work to understand those sectors and also to move understanding of those sectors along more generally in other organisations. I agree, they have done a good job.
Chair
Good. That is a good start on their third birthday. They are doing a good job, excellent.
Peter Aldous
The Green Investment Bank believe that privatisation will lead to a number of key benefits to them. Two of these are, first, unlocking new equity capital to finance their growth and, secondly, giving the bank the ability to borrow. What are both your views on those two points?
Richard Howard
On the capital side, the capital raising, I think one thing that we should not forget is the Government has basically agreed to invest up to £3.8 billion in the bank and the GIB has allocated a lot of that capital already. Including the deals that we have heard about today, that takes them up to—I think the number is—£3 billion. So a lot of that money has already been allocated to projects. The other thing is that this £3.8 billion was to be committed by the end of next March. I think we need to remember the counterfactual to any privatisation. What is the counterfactual that GIB’s allocation of capital will have been spent or used by the end of this financial year? The bank does need to do something, and clearly there is one option for Government to put in more money. There is also the option to bring in external equity or debt, but the bank needs to find some money from somewhere. As Shaun said in the previous session, the bank is allocating £800 million to £1 billion per year so there is a need to find that scale of money from somewhere. That is where I think we have got into this debate about the future of the bank.
Ingrid Holmes
I will pick up on that as well. I think there are other potential solutions and where we are in this discussion, there is an increasingly compelling case to take a breath and pause and think about what we are trying to achieve in terms of the Government’s aims and what is the best route to doing that. We have a thing called the EFSI, the European Fund for Strategic Investment. This is off balance sheet capital that has been put together in Brussels that is available to the UK Government. We have, I think, pitched around 600 billion in off balance sheet investment, but we do not actually have an intermediary to get that to the market. Many other member states are using their public finance institution to do that, so there is a clear opportunity for the GIB. Similarly, we could be thinking about engaging with some of the devolved Administrations about a potential equity stake, given this is a UK-wide institution with UK-wide benefits. Those are both routes that we, in the haste to move this agenda forward, really have not properly explored. Finally, on borrowing, I would say when we were engaging with institutional investors at the beginning of the discussion about creation of the GIB, there was a huge amount of excitement at the idea that the GIB could be created and be issuing bonds to the market. As you may be aware, the green bond market has been growing, but we need a larger pipeline of good quality bond issuances. The GIB with its ability to source that pipeline of transformational projects and to achieve scale was a big part of the selling point. The idea that we now wouldn’t really use that facility and go to the capital markets I think will be disappointing for many of our large institutional investors in the UK that were looking to the UK Government to facilitate that.
Peter Aldous
Thank you for that. A risk of remaining in Government ownership is the uncertainty of medium to long-term financial and political support. In light of that, do you think that privatisation could increase the bank’s stability and durability?
Richard Howard
I would go back to my previous comment. The bank wants to do a certain number of deals per annum to which it has allocated £1 billion a year, just in simple terms. That money has come from Government to date. If there was an uncertainty about where that money is coming from in the future or any future investment by the Government, that would make it difficult for the bank to do business. That may be one of the drivers from the bank’s perspective of why they would like to diversify their sources of funding. You can see from their point of view why that would make a lot of sense. I would agree with Ingrid’s point that there are lots of potential pots of money that we could be looking at. It is not a case that the only option here is to put the money fully into private hands. I think there are lots of shades of grey between where we are and that position and it could be about other public bodies investing or other European sources of funds. There are all sorts of possibilities that could be looked at further, but I do not think we need to paint this as black and white.
Ingrid Holmes
I would add to that that the institution may endure but will its original purposes and objectives endure? Again, going back to the beginning, this institution was created as a means to risk-share between the public and private sectors, focus on addressing market failures, accelerate investment into the low carbon economy, and it has been doing that. It has been doing a lot of innovative deals, new technologies, new business models that without that handholding by a public bank that was explicitly backed by the UK Government may well have not happened. I think it is that, really, that it puts in jeopardy in terms of fulfilling that function if we go down this rushed privatisation route and that that we need to look at again.
Peter Aldous
Finally, and you have both touched on this, if not privatisation what would each of your preferred models be so as to allow the Green Investment Bank to both expand and also to have a secure long-term future? Both of you, your ideal.
Ingrid Holmes
I do not think there is one specific answer to this question, but there are lots of routes that we can explore. I think it is probably too late, unfortunately, to turn back the clock on this aspiration to privatise, so the question is how do we get to the same outcome. Absolutely exploring equity injections from devolved Administrations should be part of that. Another option could be an investment by the European Investment Bank; direct investment there. That has happened elsewhere. We could be looking at citizens’ finance. Something that people got very excited about a few years ago was the idea of green ISAs. Could we have a GIB green ISA? Then, of course, we could look at, with that broader continued public backing, borrowing from the capital markets with an implicit guarantee. Finally, we have a debate right now about amalgamating local pension funds. That could be a good source of capital—patient capital that would work with the bank in its intended way.
Richard Howard
As I said, I think there are lots of grey areas on a sliding scale from where we are to a full privatisation with no Government involvement. If you take baby steps from where we are and say, “What if we had some other public sector investors, some other private sector investors?” whether that is insurance funds, pension funds, infrastructure funds, I think that would be a helpful addition. You are bringing new money into the institution, allowing it to continue to grow. The tipping point comes, and a lot of the discussion that was already had today, around what point does Government cease to have a control over the green mission of the bank and are there ways of safeguarding that while allowing Government to reduce its share.
Chair
We will come to that in a moment.
Richard Howard
Absolutely.
Chair
If you have further thoughts, by the way, on those additional models, we would be grateful if you communicated with the Committee subsequently, both of you. Peter, you wanted to come in on a supplementary.
Peter Heaton-Jones
Ingrid, you used the phrase just now about this being a rushed privatisation, but I want to be absolutely clear. E3G think there should be no privatisation at all whether it is rushed or not rushed, is that right?
Ingrid Holmes
That would be our preferred option, because it is about confidence building; it is public-private risk sharing; it is skin in the game. That explicit public ownership is a key part of that but there are other ways we could look at achieving the same outcome.
Peter Heaton-Jones
Okay, so when you describe it as, “Rushed privatisation” it would not help if it was slowed down? You just do not want any privatisation at all.
Ingrid Holmes
No, I am saying that the Government has a long-term objective to move to a minority ownership structure. There are other forms of patient, publicly focussed capital out there that we could look at constructing a new shared ownership structure from, but if we are going to move forward to closing this deal in the next three, four, five months there is going to be no time to have that dialogue to put that constructive deal together. I think it is just about slowing it down now and considering options.
Peter Heaton-Jones
Thank you.
Caroline Ansell
One of the benefits that has been identified by the GIB around privatisation is freedom from state aid restrictions and then the ability to invest in a wider green sector environment. Do you believe this could be a positive reason to privatise given that you are against privatisation?
Ingrid Holmes
I think it is a complete red herring in actual fact. State aid is there to ensure that public money is not given an undue advantage over private sector organisations where private capital could perfectly adequately undertake the financing operations. The GIB is not working in those spaces. Every single state aid application it has put in it has got through. It is an irritation to have to go through that process, but what I would argue for is a more aggressive stance on state aid, so going into DG Competition and arguing for a broader framework exemption for the institution given that it does specifically have this mandate to invest in areas with market failures. That is exactly what some of the sister banks in Europe do. KfW and CDC in France would not mess around in this stuff, so we just need a more aggressive stance.
Caroline Ansell
I do not think their concern was around time inefficiencies around application, it was restriction to sector, so that requirement on the GIB to make 80% of its investments in three key sectors then, do you not see that that might have undermined its capabilities and then its longer term sustainability?
Ingrid Holmes
Again, I just go back to I do not think it has been refused any application it made. As I understood, the political—
Caroline Ansell
Is it not restricted in the applications it can make by virtue of state aid restrictions to specified sectors?
Ingrid Holmes
But it would only not be applying for state aid clearance for two reasons. One is it was not given a mandate to look at those areas and another is because there is no need for a public bank to be deploying its capital there.
Caroline Ansell
Is its mandate too narrow perhaps then for longer term viability?
Ingrid Holmes
I do not think so. It does not have that much money under management given the broad range of things we need to do and the scale of capital needed, so I think it makes sense to focus on a few key areas. It was given a steer specifically by the Government to look to offshore wind and energy efficiency and so on because that was where it was felt there was a market need. A lot of that direction of travel has been provided by Government rather than from the bank itself.
Caroline Ansell
Do you see there are any other sectors where there might be a market need for them to invest in or do you think it is—
Ingrid Holmes
I think there are lots of other very interesting areas the GIB could be moving into, not least carbon capture and storage. It would be much more effective to see GIB engaged in dialogue with industry to see how public funds could be deployed to support that area. I think the other area that is in desperate need of support is the technical assistance piece to build city-level decentralised energy and energy efficiency projects. That is something that is missing at the moment.
Chair
Do you have a view on this?
Richard Howard
I kind of disagree with a lot of what has just been said. I think the state aid probably has been quite restrictive on GIB. The way I have understood this process, GIB had to put together an enormous amount of information and evidence to go to the Commission at the point where the Government wanted to put in £3 billion. The way this works, the state aid clearance was granted and it relates to the money that Government put into GIB, but then restricts what GIB can do. It is not that GIB went to the Commission and asked if they could do offshore wind. The process was more, “Can Government put in £3 billion?” “Yes, but only if you invest in certain sectors in certain ways.” They may not have been turned down for anything, but that may be because they have not asked the question because it is so much hassle. Which other banks have to go through this sort of rigmarole to decide to invest in a sector? As Shaun said, it has not exactly been fleet of foot and these sectors move quickly. GIB has itself given some examples of sectors it would like to invest in, which it is probably not allowed to at the moment, and that I guess is indicative of what would change if the state aid thing went away.
John Mc Nally
Thank you; very interesting answers. Probably building on from them, the Government plans to remove the public sector controls from the legislation governing the bank in order to ensure that it is no longer classified as a public sector body. Do you believe that the bank will be able to maintain its green purposes when they are no longer laid out in statute?
Ingrid Holmes
I think it is going to be not necessarily a challenge under the current management. We all heard Shaun’s answer to that question earlier. Going forward, we are going to have different people involved at the senior level of the bank. We are going to have a potentially different shareholder structure and that will inevitably put the green measures at risk. This is one area we do need to dig down into and explore a bit more. Is the current proposal to just completely repeal all of the GIB legislation really necessary or could we look at some kind of hybrid response where we kept a lock on the green purposes and there is the parliamentary scrutiny of, after all, what will still be public money in the bank?
John Mc Nally
What mechanism do you think the bank should use to ensure the green focus does not change in any way?
Ingrid Holmes
We need to retain the statutory requirement for the green purposes, the overall ones in legislation now. We need to retain the parliamentary reporting, oversight and scrutiny, and maybe we could introduce, in addition, some kind of external advisory body that provides strategic long-term advice on where to focus the bank’s activities as an alternative to the current shareholder relationship and arrangement.
Richard Howard
With all this, let us remember why we are talking about this. If the Government wants to sell a minority stake and keep GIB on balance sheet, then none of this is relevant. A part privatisation, bringing in some capital, could be achieved without unwinding any of this. The place where this has got difficult is if the Government wants GIB to be off balance sheet completely it has to take its share down to 30%.
Chair
That is what the speculation is, yes.
Richard Howard
That is what the speculation is. Let us assume that that is the case, and also has to meet these other ONS requirements. The issue that you raised earlier around challenging those requirements could be one way forward. Also, GIB’s suggestions of trying to maintain those green credentials in other ways, contractually, those sorts of things could be explored if the Government wishes to take its stake down that low, to 30%. It is a case of saying what does the Government want to achieve here? Does it wish to divest a minority stake or a majority stake? If so, then there is a whole set of questions that trickle down from that. One other thing to think about is who would want to invest in GIB and what would they want to do to it once they are involved? I think Shaun put it quite well. They already have some partnerships with various different funds, whether that is pension funds, infrastructure funds or sovereign wealth funds. Those funds have got involved with GIB precisely because GIB has a track record in these areas. You are not going to get someone come along and invest in the Green Investment Bank and then ask it to invest in something completely different. I cannot imagine why someone would want to do that because what they are buying into is a pool of expertise in investing in green projects.
John Mc Nally
Are you saying that the legislation does pose a risk to its purpose?
Richard Howard
What I am saying is the legislation may not be needed to maintain that green focus because the person investing—
John Mc Nally
Wait, it may? You have to be a bit more precise than “may”.
Richard Howard
Okay. I guess what I am saying is if you remove that legislation—this is a scenario—and you allowed someone to invest in the bank, I think that investor would come along and invest because they were interested in what GIB is doing.
John Mc Nally
It could compromise their goals or purpose.
Richard Howard
Sorry?
John Mc Nally
It could compromise the bank’s purpose and aims.
Richard Howard
No. I am saying it probably would not. Let’s say a pension fund or infrastructure fund invested in GIB, they would probably want GIB to continue doing what they are doing anyway. Otherwise, why would they invest in GIB?
Chair
Ms Holmes, do you have a view? It seems to me what we are not dancing about on, because it is quite a fundamental thing, at least in law you have the phrase that we are used to as parliamentarians seeing in legislation, “You shall do”. Here we are talking about, “They may do” with a few locks in the corporate mission that they have and so on, and I can see all of that, but it is the difference between “shall” and “may”. Ms Holmes, do you have a view?
Ingrid Holmes
I think it all hinges on the definition of green, which is a fluxing thing. In some countries green would be doing energy-efficient coal-fired power stations, for example. That is not a great use of public money. That is something we would ideally not like to see at all and, if it were to happen, it should be a private sector-led initiative. Given this is a multi-decade transition, with lots of different technologies and business models, we need to keep a tight focus on how the bank is interpreting that. It is going to constantly change. It is going to be a constant tension between just simply getting money out there quickly and doing this more innovative, difficult-to-do kind of deal, which I would put the energy efficiency bit of the GIB’s remit into that. We need scrutiny, we need oversight, and we need a legislative lock on that and proper structures in place to enable that conversation to unfold over the decade. The final thing to say, just to back up and support that point, is one of the early investments that the GIB made was in the conversion of the Drax power station into a biomass unit. I understand why the GIB may have done that. They needed to get money out of the door quickly. There were not a huge number of things available for it to do, so it was good for upticks, but long term is that really the kind of transformational financing we want the GIB to be doing? That needs to be watched.
Chair
Mr Howard, you are itching to come in on that.
Richard Howard
There is a really interesting thing here. These green credentials that we are talking about, it is worth looking at what those are. There is a list of five things. The bank must invest in things that tick one of a number of boxes. One is reduce greenhouse gas emissions, one is protect biodiversity, and so on. They are very, very broad statements. You could do just about anything that is vaguely green and tick one of those boxes and that would be allowed. You are challenging a project there that met the credentials but you still do not like it.
Chair
Could investment in unconventional gas be part of that as the gas transition to a decarbonised future?
Richard Howard
Yes, that would tick one of the boxes. Could an energy-efficient coal power station? Yes, it would tick one of the boxes. I think we have to remember what these credentials are.
Peter Heaton-Jones
I asked Shaun Kingsbury in the last session about the timing of the privatisation process, and whether in his view it was too fast or too slow or about right. He coined the wonderful phrase that he thinks it is a Goldilocks. It is just about right, he said. Do you agree, Mr Howard?
Richard Howard
So this is about the timing of the—
Peter Heaton-Jones
The timing of the process of the privatisation, yes, the speed and the timing of it.
Richard Howard
Shaun’s observation, could they have done it earlier, I would probably agree that they could not have done it much earlier because the bank was not mature enough. It did not have flow of deals. It has now got to a mature size of institution that would allow it to privatise. I do not think it could have been any earlier. Could it be left until later? I guess the thing you are butting up against there is, as I said before, the need to bring in some money from somewhere soon, as in for the next financial year the bank needs to know where its capital is coming from. I think the timing is probably about right in terms of the Green Investment Bank. There would probably be questions around the wider policy environment around that and whether it is the right timing in that respect, but from GIB’s point of view, it is probably about the right timing.
Peter Heaton-Jones
You are not surprised to hear Mr Kingsbury say it is about right?
Richard Howard
No, I am not surprised at that.
Ingrid Holmes
I would say, if I was working for the GIB right now, I would want us to move fast. Just on a personal level, there is real uncertainty about what some of the staff members will be doing next year if no new money is coming through. That affects morale and it also affects the credibility around the institution. There are concerns if this process drags out for too long it will not be seen as a credible going concern. That will impede its prospects for a sell-off and we could end up with a fire sale, which would be the worst of all worlds. I used to work in financing, in a fund manager. I know how long deals take to put together. They take time. This is a fantastic institution with real value and we do need to pause it now. We need to create some time and space for a conversation about how we can achieve the Government’s objectives. That will require some strong leadership in saying there is a plan. We have bridging opportunities, as I said, through drawing down on European funding, through the EFSI and various others. Rushing now is just going to get us not necessarily to the place we want to, either from the GIB’s perspective or from the public’s.
Peter Heaton-Jones
You used the word “rushed” earlier—rushed privatisation. Your view now is that there should be a pause—the whole process should be paused.
Ingrid Holmes
Absolutely, with a clear plan for how we are going to unravel some of these complex issues around legislation, doing the proper consultation among a wide range of different potential owners, thinking about the green ISA offer and so on, but putting in place clear steps for a plan going forward, maybe revisiting this in 12 months or so.
Peter Heaton-Jones
Far be it for me ever to seek to create difficulties; I will try to resist the temptation, Mr Chairman. Mr Kingsbury is simply wrong, in your view, when he says that the timing is about right, is he?
Ingrid Holmes
I can understand why he is saying that, but I have to disagree.
Peter Heaton-Jones
That is a very interesting answer. Thank you.
Chair
One of the answers you touched on earlier it might be a good idea to try to get a fairly direct answer on, so I am going to pass to Carolyn here, who has a very specific question.
Carolyn Harris
Mr Kingsbury shared with us in the earlier session that if privatised GIB would welcome the Government as a stakeholder. I suspect I am going to get two completely different answers here, but what I would like to add to that is from wherever you come on this, do you feel the uniqueness of the kinds of investment they make would benefit or not from a Government safety net?
Ingrid Holmes
Okay. I am going to try to unpick what I think this question is about. Why do we want majority public ownership—51% or more—which is not what the Government is after? It is about skin in the game at the end of the day. We have seen a lot of unnerving changes in policy support for the green economy. That is affecting investor confidence. We have heard about job losses and investments that have been shelved. To then privatise the institution that was created as a risk-sharing structure with the private sector does further damage to that. That is one piece to this. The other piece to this is the GIB has done a lot of fairly easy-to-finance deals—I put Drax in that bucket; that is fine—but it has also spent a lot of time putting together some much harder-to-do investments, particularly around non-domestic energy efficiency, complex projects that, quite frankly, any private sector investor would just say, “Too hard, I am going to move on to something that is easier to do, something it is easier to get through my credit committee”. My fear is that with a majority private share ownership, the shift will be on getting money out the door as quickly as possible for the highest rates of return possible, and that will mean inevitably doing the stuff that is easier to do and perhaps lower value than the stuff that is really transformative. I think we need a mixture of both and having that majority public ownership structure is our best chance of achieving that.
Richard Howard
I guess I have mixed views on this one. I think having some Government involvement is probably helpful. Does it need to be 100%? No, I do not think so. There is benefit in bringing in other investors into this vehicle. GIB does do some innovative, unique deals. It has done the first money into construction-stage offshore wind in the UK, and so on. It has done some unique things. Would it continue to do some unique things? I think it would, precisely because it has the expertise to do so and nobody else does. I do not think you would necessarily lose that uniqueness or skill or expertise, because private money is coming in. It would continue to do good work either way. Is it helpful to have some sort of skin in the game? Probably yes. But does the Government need to control it through legislation? Probably not. That is not a very direct answer, is it, but I am just talking around the issues. Irrespective of where this ends up, whether it is fully Government or fully privatised or somewhere in between, I think GIB has the capability to do good work and continue to do that just purely because of the team it has, basically, and the expertise. It is unparalleled. I do not think Shaun probably stressed that enough. There is nobody else doing this work in the UK, so I think if the institution continues it will carry on doing really good projects regardless of who is funding it. It is helpful for the Government to retain some ownership. As we get used to the idea of other money coming into this institution, we might relax about that. Imagine a set-up where we have UK pension funds investing in it, local authorities investing in it, maybe the public investing in it, having a much more pluralised investment in this vehicle. We might all get quite comfortable with that as a way of funding this body to carry on doing what it is doing. I do not see the bringing in of private money as a bad thing. I see it as a good thing, essentially.
Carolyn Harris
Are you concerned that with legislation—and I mentioned this to Mr Kingsbury—where we see legislation stalling or temporarily putting projects on hold, do that that would not encourage private investors to put their money into the Green Investment Bank?
Richard Howard
Which legislation are you referring to?
Carolyn Harris
Onshore wind farms, contracts for difference, the kinds of big projects that may no longer be or will be on hold.
Richard Howard
For where GIB is right now, it is involved in a huge number of offshore wind projects that are coming to that point where they need finance. I think there are about 10, which is an absolutely enormous funding requirement, and GIB is very well placed to deal with those projects precisely because it has done a load already. It is in a fantastically good place with a huge potential pipeline of projects to work through over the next two to three years. It is the renewables obligation projects, contract for difference projects, and so on. Those projects are all happening right now in terms of their funding, so it is in a good place to do that. Beyond that, there is perhaps a lack of clarity about exactly what GIB would be funding, say, in three to five years’ time, and that is partly due to some of the changes in policy that have taken place. It is also partly because of the lead time of projects that are going on and it is also because of what GIB is involved in. It is not involved in offshore wind or solar PV at all. Onshore wind, sorry; it is involved in the community-scale stuff, so just to correct that, but it is not involved in solar PV at all. Those changes that you are referring to will not have impacted on GIB at all.
Caroline Lucas
Many apologies for missing your earlier presentations and so forth; I had a meeting I could not miss. I wanted to go back to the question that I put to Shaun Kingsbury about market failure. Do you believe that a privatised Green Investment Bank will be able to retain its capability to address market failure in a low carbon economy?
Ingrid Holmes
The market failures have not gone away. We created a public bank because the private sector was not working in areas where there was market failure. With a largely privatised institution, if that is what we end up with, I am left wondering what is the point. If you are going to do that, maybe you just get rid of the whole thing.
Caroline Lucas
Shaun Kingsbury referred to market failure. He was redefining it in terms of a knowledge gap rather than a risk issue. Would you agree with him on that?
Ingrid Holmes
I would say it is knowledge. Some of it definitely is knowledge, so that plays into a debate about patient capital and the fact that the GIB is prepared to put the time into constructing the deals that they can then move into finance, which other private sector players will not do. Again, the issue around that is will a private owner allow them that space to do those deals to address those market failures? A lot of innovation around the offshore wind sector will be around new technology. The GIB was a key player in financing of DONG Energy’s latest offshore wind project using new wind turbines. That technology risk may not have been taken by other financiers without the public sector player in there. It is questionable whether those kinds of deals might go ahead and, if so, at what cost. I am just not sure that we will see the volume of capital continue to flow to some of these more innovative projects in the way we have if the GIB is majority privatised.
Richard Howard
I would differ slightly on that. GIB is involved in some of those projects not because it is Government backed but because it has a better understanding. I would agree entirely with Shaun’s point that it is about knowledge and capability. If you think why would a pension fund or infrastructure fund not do it themselves, get involved in a construction stage offshore wind farm, it is probably because they have a handful of people who do these sorts of deals in total in their fund. They just do not have the capability to get inside these deals. The Green Investment Bank has 100 people and it has real specialists in all of the different areas around these deals, including the technology, including all sorts of aspects. GIB is a good channel through which to put money. There are still market failures. For example, in offshore wind construction projects, a normal bank or fund will not touch them, but GIB will, not because it is Government backed but because it has the expertise to do it.
Caroline Lucas
Are we confident that it will retain that expertise once its legal requirement to put investment into certain green areas has been ripped up?
Ingrid Holmes
Exactly.
Richard Howard
This is probably going over some of the ground again but—
Caroline Lucas
I am sorry.
Richard Howard
No, no, absolutely. Shaun was clear that that is their intention, is to continue doing those things.
Caroline Lucas
Intentions are 10 a penny, aren’t they?
Richard Howard
But the unique selling point if someone has come along and invested in the Green Investment Bank is because it has that expertise.
Caroline Lucas
I am sorry, I am using the word “risk” too many times. Is there a risk that it would be more risk averse? Would you at least concede that?
Richard Howard
I do not think it is the opposite of risk averse at the moment, whatever that would be.
Caroline Lucas
Reckless?
Richard Howard
Well, reckless, yes. It is not reckless at the moment, so I do not think it becomes—
Caroline Lucas
No, but it takes different judgments, doesn’t it?
Richard Howard
I don’t think so. Remember it has to lend on purely commercial terms at the moment, so it is almost by definition—
Caroline Lucas
But there is a difference even between commercial and profit maximising, surely. There is more of a spectrum here than you are making it sound. It is not like it is either reckless or it is risk averse. There is the amount of time that Ingrid was talking about in terms of how long it might take you to put together a sustainable—
Richard Howard
I think Green Investment Bank has always been one step ahead of a lot of other people. It has built up expertise on offshore wind before other people were doing it and now a lot of other people are involved. For operational offshore wind projects there are loads of other banks getting involved in those deals. The Green Investment Bank was doing that a few years ago. There are still some market failures around big construction-stage projects. Would the Green Investment Bank carry on doing that? I am sure they would because they are one of the few who really understand how to do those projects.
Caroline Lucas
In your model of what the Green Investment Bank might become, do you think there is a risk of it crowding out other investment?
Richard Howard
No, I think the opposite. It will be a vehicle to put private money into the sector that may not have otherwise come there, so it is probably the opposite. It is bringing in money.
Caroline Lucas
What do you think?
Ingrid Holmes
I am just thinking about the European Investment Bank, which has 2,000 people in there, and pre-financial crisis it was criticised as being slow and laborious and not needed in the market, there was so much money available. Post-financial crisis, everyone loves it because they have done their due diligence, they are in those projects. If the EIB is in there, it brings in a load of other private sector investors, but it is an expensive institution. It has a lot of people. That is not the private sector model. The GIB is a similar kind of institution. It is a UK-dedicated entity that will dig around in these deals, do the technical due diligence, and it is almost like a stamp of quality assurance that other private sector investors can come in. You look at how many people there are in that institution, it is multiples of what you would see in a private sector entity managing the same volume of funding. I think it is deeply questionable that it would continue in the same way.
Luke Hall
We have touched on this a little bit in other questions so I apologise, but I wonder if you could perhaps just tell us whether you foresee this decision to sell a majority stake, potentially up to 70%, in the GIB impacting on investor confidence in the low carbon economy. The decision to sell this bank, privatising this bank by up to 70%, is that going to impact, do you think, on investor confidence generally in the low carbon economy?
Ingrid Holmes
It does not help. How likely is it we are going to see money flow into the sectors that the GIB invests in? We have seen withdrawing of funds from onshore wind and solar and job losses in the solar and energy efficiency businesses. The GIB is not operating in those spaces. We are still okay for the areas it does focus on, like onshore wind, so fingers crossed, investor sentiment and support for these sectors will continue. I think removing that public risk-sharing partner in the space will not help in this. One other thing, just a point of information. The only British bank investing in offshore wind at the moment in the UK is the GIB. There are no private sector banks operating in this space.
Chair
Mr Howard?
Richard Howard
In response to that question?
Chair
Yes.
Richard Howard
If you look at what GIB does, it gets involved in projects when they are about to get to financial close, so at that point a lot of the policy risk has effectively been taken away. You know what the project is going to look like at that stage. Will GIB continue to be able to do these sorts of projects? I would have thought so because—Shaun gave very much the same response—that is the stage of work that they are doing, so I do not think it will impact on them. As I said, some of the other changes that have been going on in policy are in sectors they are not even involved in, like solar. I think the perception in the media of this policy to privatise the Green Investment Bank has been conflated with 10 other things. You can go and find articles in the papers that give you a list of all the different policy changes that have been made, so it has been conflated with those other policy changes, which is not helpful. But in itself, I do not see it as such a major issue.
Chair
In the couple of minutes remaining, I just want to give you the opportunity to say any other points that you think we might not have covered. We very much focused on the structural and potentially statutory changes that the Government are proposing. Anything else that you want to add that we might not have covered so far?
Richard Howard
One other point I would make is around the scope of GIB. At the moment, GIB is involved in I think 50% of the deals in its sectors, which suggests to me it is not saturating the market but it is not—could it do much more in its narrowly defined sectors? Maybe not. By broadening it out, there might be benefit, as was said before, in tapping into other parts of the green economy that do not have a GIB at the moment. I think there is a benefit in that that we should not overlook.
Chair
Thank you for that. Ms Holmes?
Ingrid Holmes
I would just reiterate my point that there was broad support for this institution when it was created. The value case for it has not changed. It is needed more than ever. I do not believe there has been a sufficient debate around the need for doing it, the route to achieving it. A lot of it is driven by Treasury ideology, which stems right back to the creation of the bank and the idea that by having a public bank that could borrow from the capital markets we would create a second hub for capital markets raising for the UK. We have seen lots of other attempts at trying to connect capital to the real economy. Pensions infrastructure platform guarantees, for example, have not been a huge success. The GIB, on the other hand, has. If we look forward at our infrastructure investment over the next couple of decades, 70% of that is green or green enabling. If we want to accelerate capital market interest in the UK we have an institution standing ready to do that, so we need to let the constraints off and enable it to expand its activities, not just shift to privatising it and hoping for the best.
Chair
I do not want to prolong this, and I want to bring Caroline back in, but on that point can I bring you back to an earlier comment that you made and perhaps invite Mr Howard to respond as well? In response to Peter’s earlier point, you suggested we should pause, look at that entirety of how we should be getting this level of investment through different mechanisms, perhaps some overlapping, some complementary as well. But you also said that we are in a position where the Government has made clear its intentions. If this does proceed at a pace, both in terms of privatisation in whatever share but also in terms of statutory unwinding, then—perhaps I can put this question to you, Mr Howard—those points that Ms Holmes made about the wider investment portfolio, including perhaps tying in with the Government’s devolution agenda as well and releasing powers but also funding through devolution, devolution in cities and regions as well as nations and so on, would you agree that we are missing a trick in that wide portfolio of investment opportunities that go beyond shareholder and investor communities and pension funds?
Richard Howard
I will make a couple of points. One point is I do not think we can do nothing. If you do nothing and do not look at privatisation or other sources of funding at all, then the GIB grinds to a halt in March because it does not have any more Government money to allocate and it stops functioning. That is the worst. That is not helpful to anyone. The Government does need to do something. I do not think it can pause for six months or 12 months because you are at the end of the financial year at that point. It does need to get on with something. I do not think it needs to move to a 30% stake overnight, so you could take some more baby steps towards that, bring in some external money, look at some of the other public sources and private sources. You can do all of that, but you do need to make some progress. You cannot just stop and wait for six months.
Chair
Interesting.
Caroline Lucas
You may well have covered this already, but I was just going to go back to fundamentals because you were reminding me about the original vision for the bank. Given that the Treasury’s concern has always been not to have its figures on the balance sheet, it has to be off balance sheet, can you remind us are there examples in other EU countries where they have publicly owned banks that are development banks that are real players in not necessarily the green area but in similar kinds of areas? Are we getting overly fixated about the balance sheet?
Ingrid Holmes
I think pretty much all the other ones are off balance sheet, so we are exceptional in being very rigorous in applying these rules.
Caroline Lucas
Is there scope to do it differently if we wanted to?
Ingrid Holmes
Yes, absolutely. It is a political discussion between the ONS and the Treasury and possibly the OBR about what figures on and off balance sheet. The infrastructure guarantees that the Government are providing or trying to provide are all off balance sheet, so there is absolutely no reason why the GIB cannot be, too.
Caroline Lucas
I just thought I would remind us. Thank you.
Chair
Do you want to add to that?
Richard Howard
I do not know any more, but there are lots of other examples of public institutions that do similar things to GIB, like KfW in Germany, which is a massive institution. Some people look to KfW and think, “Wouldn’t it be nice if GIB was like that?” but we are talking a different order of magnitude of size of institution and that is not realistically where we are going. The points about on balance sheet, off balance sheet and all this classification stuff with ONS, are probably a good area for the Committee to look into further.
Chair
Very good. Thank you very much. Can I thank you both and extend to you the invitation I say to all people who give evidence to us? If there are other thoughts that come to you after leaving today, please write to us immediately with them. Thank you very much for your time and your thoughts in a very interesting session. We will now close the session. Thank you. Oral evidence: Future of the Green Investment Bank, HC 536 16