Examination of Witnesses (Questions 60-79)
DEPARTMENT FOR
ENVIRONMENT, FOOD
AND RURAL
AFFFAIRS & THE
CARBON TRUST
5 DECEMBER 2007
Q60 Mr Curry: They get quite excited
about share options schemes of late, do they not?
Mr Delay: Yes.
Q61 Mr Curry: Some of the institutional
investors are becoming quite interested in the incentive schemes
and bonus schemes and that sort of thing. How can you make energy
saving as sexy a subject as the chief executive's share option
scheme?
Mr Delay: The first point is that
the investor hiMrself has to recognise the business opportunity.
He is not going to push the management of a company to take a
more proactive stance unless he believes that it is in the long
term shareholder value equation to his benefit, so an investor
needs to believe that this is the right thing for a business.
The interesting thing is that even two years ago most businesses
would see climate change as a risk, a compliance risk, a physical
risk to many of their assets and a business risk in terms of reputation.
Today an increasing number of businesses are actually seeing the
opportunity in handling those risks better and in developing new
products and services; almost 20% of businesses are now looking
at new products and services that are related to climate change
and can work off that premise.
Q62 Mr Curry: In terms of payback
for investments at your suggestion, have you got a broad bracket
of what is a reasonable payback time for a business that they
should be interested in?
Mr Delay: Yes, the recommendation
we make on the basis of our advisory work is that investment should
have a payback of three years or less. There are cases where you
look at, for instance, investment in on-site renewables which
will give quite a certain return today, but a return over a longer
period. One of the companies which was actually quoted in the
Report as a case study, Huntsman, actually did not implement a
biofuels recommendation because they had issues with the supply
chain; that is just typical of as it were the more stretching
recommendations that we put in. We are not surprised that businesses
will only ever uptake probably 40% to 50% of the recommendations
that we put forward to them because we are deliberately putting
forward stretching recommendations, either in terms of payback
or in terms of actually going into new areas such as biofuels
and renewables.
Q63 Mr Curry: At the design stage
of a new business, a new enterprise, are you involved there to
design a plant which is built with the maximum energy efficiency?
Are you looking to do that or is somebody else doing that?
Mr Delay: We do in buildings,
we actually have a design advice service that is specifically
there to get involved at the very, very early stages of specifying
new commercial buildings to ensure that that specification has
all the elements of energy efficiency built into it from the start.
We do not have at the moment that offering for industrial process,
but we do have it for buildings.
Q64 Mr Curry: We will eventually
see the carbon-free industrial estates go along with the Government's
new carbon-free homes, will we?
Mrs Ghosh: Indeed.
Q65 Mr Curry: Or carbon zero homes.
Mrs Ghosh: Indeed, and some of
those buildings have already been built of course in the Government
estate, which was the subject of one of your previous hearings
that I appeared in front of.
Q66 Mr Dunne: Can I follow up Mr
Curry's line of questioning about whether your activity is sitting
in the right place in terms of the Government and private sector.
I note in paragraph 2.15, starting with the basic consultancy
services that you provide, you are paying for consultants at the
rate of between £435 for the most standard service to £700
a day to consultants to provide advice to clients. These are consultants,
presumably, whom you are contracting in, they are not employed
by you, you are employing them from other advisory firms.
Mr Delay: That is right. When
we started off as the Carbon Trust we took over the Energy Efficiency
Best Practice programme that had an element of consultancy provision
built within it. We looked long and hard at the service that was
offered and we had a number of concerns that we decided we would
address. The first was the relatively long time taken for consultants
to actually do the work and get a Report out to the clients—at
that point it was 95 days on average which we felt was inappropriate
for a customer-led organisation. The second was the quality of
some of the advice that was not always consistent and third, which
I think is crucial, is the fact that in terms of an investment
cycle you need to be there at the right point in time to be able
to provide the right advice, so if a retail chain is going to
refurbish all its stores on a five-yearly cycle, you need to be
around at the right point in that cycle to be able to provide
useful advice. On the basis of those three measures, we actually
introduced a system of account management and we now have 38 direct
account managers, 14 contract account managers, who basically
deal with all of our customers—
Q67 Mr Dunne: These people are employees.
Mr Delay: They are, and these
people are the interface between the customer and the Carbon Trust.
They have the relationship with the customer and on the basis
of their understanding of that customer's needs they will then
find the right consultant, the right technical specialists and,
increasingly, our customers are looking for technical specialists
and not simply general advisers, and send them in to do the job
at the rates that you have heard quoted. So we do have, as it
were, a significant key account management team who provide the
direct interface and of course provide the relationship over a
period of years so that it is not just a case of what are you
going to implement in year one—we know that is around 22%—but
are you seriously going to implement this over the next three
years, what can we do to make the business case to your board
to get the investment cycle on so we follow the investment and
recommendations through from year to year.
Q68 Mr Dunne: Do you add value to
this process or are you merely a clearing-house for people to
come to to get the best consultants available?
Mr Delay: We believe we add very
significant value. The 95 days I quoted has come down to 45 days,
the proportion of good work is still maintained, there is no issue
in terms of quality. There is a lot of evidence suggesting that
our advice is now more timely and the fact that we have a relationship
that is ongoing over a number of years allows people to phase
through their investments and their implementations in line with
our recommendations in a more businesslike way, following the
business cycle of investment.
Q69 Mr Dunne: I am interested in
the sentence in the following paragraph where the NAO point out
that although the energy advice market is growing at 20% a year
there are very few new entrants to the market; could that be because
you actually are acting as a block to new companies being established
because of your presence in the market?
Mr Delay: I would not say that
at all. One of the other issues that we found was that consultants
were not always clearly following the recommendations that were
set down in terms of `this is the kind of offer that we are making
to this company', so we have now got our own consultant accreditation
scheme, we have increased the number of consultants on that scheme
from about the 330 mentioned in the Report to over 400 today,
and in terms of the high end, the carbon management advice, that
started off with 11 consultants being accredited and that is up
to 62. On the contrary, therefore, I think we are very much growing
the market for professional consultancy in this sector, but we
are adding value by having that independent interface that our
customers tell us they value, and indeed there is a paragraph
in the Report suggesting that both the CBI and the NAO confirm
that the independence the Carbon Trust brings to that relationship
is valued by the customer.
Q70 Mr Dunne: Following up that in
relation to independence, I notice from page 11, table 4, that
10% of your expenditure goes on Salix which is described as an
independent company, but the activities of Salix which are set
out and briefly referred to in paragraph 1.15 show that that company
exists to provide finance to public sector bodies, so you again
are acting effectively as a clearing-house it seems to me, on
this occasion to public sector bodies.
Mr Delay: This is a slightly different
situation. Salix is a company that we created as the Carbon Trust
as a result of work that we had done with the public sector. We
identified that just as SMEs have need for interest-free loans
to make investments in energy efficiency, so the public sector
needs to have access to ring-fenced funds to invest in energy
efficient measures. We designed a scheme of invest-to-save measures
that we would roll out across local authorities and other public
sector bodies; we then took the view that the best way of managing
that investment was through an independent company that would
do nothing but develop invest-to-save schemes in energy efficiency
for the public sector. We created Salix as an independent company;
we now simply take the funding, we look at how it is being deployed,
we obviously assure ourselves that it is getting the kind of cost
savings and returns that we are looking for in terms of outcomes
and we pass the funding on. There is no management overhead per
se in managing Salix.
Q71 Mr Dunne: Who owns Salix?
Mr Delay: Salix is another company
limited by guarantee that is grant-funded by the Carbon Trust
on the basis of funding provided to us by Defra, so again it is
a similar company to the Carbon Trust itself.
Q72 Mr Dunne: Its shareholders are
who?
Mr Delay: Its shareholders would
be a number of members.
Mrs Ghosh: Presumably a microcosm
of the shareholders in the Carbon Trust as a whole.
Mr Delay: No, they are independent.
Mrs Ghosh: We will give you a
note on that.[1]
Mr Delay: Teresa Graham is the
chairman of Salix as a company, John Edmonds of the Carbon Trust
board is also on the board of Salix, along with two other directors.
Q73 Mr Dunne: Does it pay dividends
or have the ability to pay its own bonuses to its own staff?
Mr Delay: It would have the ability
to pay bonuses to its staff as the Carbon Trust would, but it
is a not for dividend company as we are, so it would have no ability
to pay a dividend to a third party.
Q74 Mr Dunne: Do you have management
oversight of Salix in any way—you describe it as totally
independent so it sounds as though you do not.
Mr Delay: We treat Salix as indeed
Defra would regard us in terms of we look at the outcomes that
Salix delivers; we need to be assured that they are actually delivering
the kind of outcomes that we believe they can as a company in
providing invest-to-save schemes, yes, but they are an independent
company and we provide them with a funding line against a business
plan they propose to us.
Q75 Mr Dunne: Where is the accountability
for the funding that Salix deploys, where does that lie? If Salix
said: "We got £10 million out of the Carbon Trust last
year, we would like £20 million next year" they would
come to you for you to sign that off, would they, or would they
have to go to anybody else as well?
Mr Delay: They would come to us
and they would put to us a business plan for £20 million.
At that point we would also be having discussions with Defra about
the availability of funds for invest-to-save schemes in the public
sector.
Q76 Mr Dunne: All of their funding
comes from you or can they seek funding from other sources as
well?
Mr Delay: I believe they are at
the moment seeking funding, and are likely to get funding, from
some other public sector funding sources as well.
Q77 Mr Dunne: Could I suggest, Sir
John, that although they are receiving 10% of the funding here
and £10 million is not an enormous sum, there are only two
references to Salix in the entire document, which is something
that perhaps we ought to return to for a mini investigation another
time. Would you consider that?
Sir John Bourn: We will certainly
do that, Mr Dunne, yes.
Q78 Mr Dunne: Thank you. Can I then
go back to the investment side of the activities of the Trust?
Dr Pugh was talking about the role of CT Investment Partners and
I think this is the first occasion that I have been able to identify
a public sector entity acting as a private equity firm in government.
I note that you are setting up Chinese walls between that investment
activity and the grant-making activity; can you describe how those
work and explain the function of the investment management team,
if they are not to piggyback off the grants that are being made.
Mr Delay: I am going to answer
the last point first, if I may. The function of the investment
management team is to make investments using our funding in an
area where there is an acknowledged market failure at the very
small, early stage end of the technology company market, so typically
making investments in the £250,000 to £2 million range,
that very early stage which is acknowledged as a market failure.
Their purpose is not to piggyback off Carbon Trust innovations
and the know-how within the Carbon Trust, it is to make investments
in an area where there is a market failure. The Chinese walls
in essence are that the Carbon Trust Investments team are in a
completely separate part of the organisation. The employees of
Carbon Trust Investments, the two people we have already mentioned,
who would be part of that team are not party to any of the investment
decisions that we make in terms of R&D grant funding to low
carbon technology businesses generally, so there is a clear separation
between the investment committee that considers R&D funding
and the investment committee situations that consider investments
as venture capital. The people are not the same.
Q79 Mr Dunne: Thank you. How does
the incubators group, set out in chart 12, page 23, fit? I assume
that the investments are announced within CT Investment Partners,
but you might clarify that. Where does incubators sit and do you
regard 33 out of 45 investments having come to an end as a fair
return on the money invested in incubation?
Mr Delay: The incubator activity
is a publicly funded activity, it is not part of the investment
portfolio per se. It is an activity that is very much part
of the continuum of innovation support that the Carbon Trust provides.
We go right from R&D through applied research and directed
research where we actually specify what we are seeking, into incubation
services, helping spin-out companies become investor ready. The
figures there suggest that a whole number of companies that have
been through the incubator programme have indeed raised their
part of funding, from VCs typically, and are off and on their
way.
1 Ev 17 Back
| 
